A turn in Spanish Jurisprudence on retroactivity?

In earlier posts on this blog we mentioned the Spanish Jurisprudence on retroactivity in feed in tariffs. In our article on RD1565/2010 we explained retroactivity in Spanish Jurisprudence in general, and in a more recent article we expressed our doubt with regard to the compatibility of this jurisprudence with European Law.

Syntax

I am a government, I have signed up for renewable energy targets in the European Union, but don't have the money to build the required installations myself. I ask the private sector to do this for me, in order to get them to do this, I will come up with an incentives scheme to convince them to invest their money in achieving my goals. As soon as they have built the installations I will change the conditions, and still have the installations, but for less money. If I had told this on the outset, nobody would have invested their money. But no worries, I can tell them now, because the judges in my country will tell them it's their own fault.

Analysis

Let's have a closer look at the Spanish jurisprudence. My first impression is a certain hostility towards market parties. After reflecting on the importance of the legal certainty principle in its sentence STS1653/2007, the court continues to argue that this principle does not imply that laws cannot be modified whatsoever. The court does this rather sweepingly, without distinguishing between actors with acquired rights, and actors with future expectations.

1. It continues analysing the argument of justified expectations: "La misma consideración es aplicable al principio de confianza legítima, creciente e indebidamente aducido como argumento descalificador de no pocas modificaciones normativas que algunos agentes económicos reputan más o menos perjudiciales para sus intereses."

Without specifying, it speaks with dedain about "some economic actors" using this principle to attack regulatory changes which "more or less" are against their interests. To start its reasoning, the court finds it necessary to place the plaintiffs in the same paragraph with an unspecified collective of scroungers. Always good to start with an "argumentum ad hominem" if you want to downgrade the

value of the justified legal expectations of a plaintiff. Yes, in general people may have justified legal expectations, but not you, you scrounger.

 

2. After this rather vague mention to an unspecified collective of economic free loaders it rephrases the allegation of the plaintiff

"Aducen las recurrentes que sus inversiones en la actividad de producción de energía eléctrica de régimen especial se hicieron en un determinado momento "confiando en que la Administración no cambiará las condiciones jurídicas que fueron determinantes para que [...] decidieran construir las instalaciones", premisa de la que deducen que la minoración de las primas posteriores al Real Decreto 2351/2004 respecto de las fijadas en el Real Decreto 435/2004 sería contraria a aquel principio."

The court quotes plaintiff's explanation that it decided to invest money in a project under specific legal conditions, trusting the government would not change these conditions which were decisive for their investment. The court then continues that apparently plaintiff thinks that a reduction of the premium he was to receive under the legislation applicable at the time of the investment decision would be against the principle of justified legal expectations.

3. In its next paragraph, the court says that "Tal razonamiento, referido a un mecanismo incentivador como es el de las primas en cuestión, no puede ser compartido";

the reasoning of the plaintiff cannot be followed in the underlying case of an incentive mechanism. It is put plainly by the court here: Maybe the principle of legitimate legal expectations can be followed in other cases, but not in this case. Interesting. Why? The court will explain this later, in number 5 - 7, after a build-up in numbers 3 and 4:

4. The court's reasoning goes on: "Mientras no sea sustituida por otra, la regulación legal antes reseñada (artículo 30 de la Ley del Sector Eléctrico ) permite a las empresas correspondientes aspirar a que las primas incorporen en su fijación como factor relevante el de obtener "unas tasas de rentabilidad razonables con referencia al coste del dinero en el mercado de capitales" o, por decirlo una vez más con palabras del preámbulo del Real Decreto 436/2004 , "una retribución razonable para sus inversiones".

As long as the LSE (Electricity Sector Law) is in force, the companies in this market may aspire that a "reasonable return on investment, with reference to the price of money in the capital markets" will be a relevant factor in the determination of the premiums. Until here it would still sound reasonable if we were talking about future expectations: We have a general framework Law, and various Royal Decrees from the Government, putting these laws in practice in the different periods of time. All these different periods have in common that on their outset the applicable Royal Decree should guarantee as a minimum the a "reasonable return on investment, with reference to the price of money in the capital markets". Fair enough for your installation which is still to be built, you wait until there's certainty on the retribution scheme for a period in question, and you decide to benefit or not from this scheme. But as we will see in number 5 to 7, the court doesn't mean it like this.

To the contrary, according to the Court, the incentives scheme analysed by the court does not guarantee intangibility of a determinate level of benefits or returns to the owner of  of the installations in the scheme. It doesn't guarantee this in relation to benefits obtained in earlier years, nor the indefinite permanence of the applied formulas. Here the Court's reasoning becomes seemingly unreasonable, because it is applied to installations with acquired rights. It treats parties with acquired rights as if they had only future expectations for further development of installations. How does the Court motivate this? It tries to do so in numbers 6 and 7:

In the following paragraph, the court reasons:"Del mismo modo que en función de factores de política económica de muy diverso signo (relativos al fomento de las energías renovables pero también a la planificación de las redes de los sectores de electricidad, además de otras consideraciones de ahorro y eficiencia energética) las primas e incentivos para la producción de energía eléctrica en régimen especial pueden aumentar de un año para otro, podrán también disminuir cuando esas mismas consideraciones así lo aconsejen. Siempre que, insistimos, se mantengan las variaciones dentro de los límites legales que disciplinan esta modalidad de fomento, el mero hecho de que la actualización o la significación económica de la prima ascienda o descienda no constituye de suyo motivo de nulidad ni afecta a la confianza legítima de sus destinatarios."

6. For reasons which can be numerous, the premiums and incentives for the production of renewable energy may increase or decrease from one year to the other, if circumstances should recommend so. The only constant factor in this scheme are the aforementioned legal limits applicable to these incentives [reasonable return on investment, with reference to the price of money in the capital markets]. These de- and increases of the incentive allegedly can never lead to nullity of the regulation, nor can it affect the justified legal expectations of the addressees. This is a mere statement: The court repeats the formula of the LSE and says, in other words, that all sector regulation in the form of Royal Decrees is worthless. The formula of article 30 of the LSE is the only guideline.

The court finalises its reasoning with:"Las empresas que libremente deciden implantarse en un mercado como el de generación de electricidad en régimen especial, sabiendo de antemano que es en gran parte dependiente de la fijación de incentivos económicos por las autoridades públicas, son o deben ser conscientes de que éstos pueden ser modificados, dentro de las pautas legales, por dichas autoridades. Uno de los "riesgos regulatorios" a que se someten, con el que necesariamente han de contar, es precisamente el de la variación de los parámetros de las primas o incentivos, que la Ley del Sector Eléctrico atempera -en el sentido antes dicho- pero no excluye."

7. The companies that have freely decided to enter the special regime of electricity production from renewable sources, knowing that they will depend on the determination of incentives by the public authorities, are or should be aware that such incentives may be modified at any time, by these authorities. This is a regulatory risk which they take, it is the variation of the premiums or incentives which the LSE moderates, but not excludes.

The court started with an "argumentum ad hominem", and finalizes with an " argumentum culpa in causa", stating that the because of the incentives, this part of the electricity sector comes with a high regulatory risk in which the LSE is only a general guideline to moderate the effects of regulatory changes. The fact that this part of the sector is benefiting from an incentive is used as an argument not to apply the principle of legitimate legal expectations in this sector. This is an informal fallacy of the "Non causa pro causa" group: "cum hoc, ergo propter hoc". Translated: With this, and therefore because of this. Also: "The Texas sharpshooter fallacy" The Texas sharpshooter is a fabled marksman who fires his gun randomly at the side of a barn, then paints a bullseye around the spot where the most bullet holes cluster. The court takes a fact for an argument: Because you receive an incentive, you shall not be protected by the principle of legitimate legal expectations. If you were not receiving an incentive, you would be protected by the principle of legitimate legal expectations. The court does not quote any legal principle, law, doctrine or international treaty to give this statement any foundation. With all respect to the court: this reasoning is not objective. There is no objective justification to blame the sector participants for the regulatory risk caused by the government while striving to comply with its renewable energy obligations.

Though one. I need to let this sink in a bit. In my opinion, there's a conceptual misunderstanding of the court in its reasoning: The court does not distinguish between a market party with an operational installation, and a market party with an installation which is still to be built. The latter has a regulatory risk, he may start developing a new power plant, but never knows whether it will be operating under present regulation, or under regulation coming into force just on the moment the new installation acquires its final authorisation. The first should never have a regulatory risk. If the government wanted these installations to run such a risk, it should advise so in the applicable regulation.

There is no logic in this non causa pro causa argument, because the marketparties are not the cause of the regulatory risk. The regulatory risk is also not depicted in the various regulations, quite to the contrary: Most preambles of recent Spanish regulation of these incentives allude regulatory stability as a key objective.

The sentences we mentioned in earlier posts in one or another way are all repetitions or re phrasings of this sentence. This sentence is the centrepiece of Spanish Jurisprudence on retro-activity.

European Law

The purpose of the incentives is not to subsidise any market party, but to obtain private investments in installations for the production of electricity from renewable sources in order to achieve the Spanish policy goals in the European Union. Do all countries in the European Union have the same regulatory risk? No, the regulatory risk only emerges when member states are not able to do their homework right at once.

In its article 3.2, directive 2009/28/EC put it this way: Member States shall introduce measures effectively designed to ensure that the share of energy from renewable sources equals or exceeds that shown in the indicative trajectory set out in part B of Annex I. In paragraph 3 of the same article, it includes support schemes, and in article 2 of the directive, the definitions of support schemes include feed in tariffs and premiums.

In its article 13 (d) the directive obliges the member states to take the appropriate steps to ensure that the rules governing authorization, certification and licensing are objective, transparent, proportionate, do not discriminate between applicants and take fully into account the particularities of individual technologies.

How does this influence the appeals of Spanish PV installations against L14/2010? According to the European Law Doctrine, the Courts of the Member State are also addressed by this directive. The Spanish Court is obliged to apply the Directive and change its jurisprudence if this jurisprudence were against the Directive.

The Spanish jurisprudential rule that you shall not be protected by the principle of legitimate legal expectations because you receive an incentive is not compatible with the obligation that the rules governing authorization, certification and licensing are objective and transparent and proportionate. The rule is not objective because it is based on a non causa pro causa fallacy, as shown hereinbefore. The rule is not transparent, because the Royal Decrees regulating the incentives never mentioned this rule. As said, rather to the contrary: generally preambles of recent Spanish regulation of these incentives allude regulatory stability as a key objective. The rule is not proportionate, because a market party cannot be expected to bear the regulatory risk for the achievement of a public policy goal. I define regulatory risk here as retroactive application of remuneration schemes to installations which obtained their authorisation under a previous remuneration scheme.

Just to be clear, I am not advocating unmodifiable laws. Of course the legislator should be able to improve the quality of regulation, and adapt it to technical requirements. I am advocating stability in the remuneration schemes of renewable energies. Regulatory risks should be limited to installations that have not yet obtained the corresponding authorisations, and even there, the government should do everything in its power to avoid such risk.

In Spain renewable energies are currently financed with private funds, and paid for with private means. The government merely regulates the feed in tariff, but does not pay it with public funds. The feed in tariff is a fixed cost of the electricity system and proportionally paid for by its users. The alternatives would be not to offer incentives for renewable energies at all, and see if Spain would achieve its policy goals that way, or for the public treasury to finance renewable energies with public means, and thus have the taxpayers bear the regulatory risk.

Here's an interesting Commission working document discussing administrative barriers in its paragraph 5: "However good a support scheme is, its effectiveness is hindered by a host of non cost barriers. The major role that administrative, physical, social and financial barriers play in discouraging the development of renewable energy is well known. Article 6 of Directive 2001/77/EC highlights several key barriers and exhorts Member States to take action to reduce them. COM(2006)627 assessed the (inadequate) progress made in reducing these barriers in most Member States and made five precise recommendations. These were for Member States to establish:

– One-stop authorisation agencies to take charge of processing authorisation applications and providing assistance to applicants.

– Clear guidelines for authorization procedures with a clear attribution of responsibilities. As the case law of the Court of Justice states, authorisation procedures must be based on objective, non-discriminatory criteria which are known in advance to the undertakings concerned, in such a way as to circumscribe the exercise of the national authorities' discretion, so that it is not used arbitrarily." The case law the commission is referring to has been codified in Directive 2009/28/EC, the "known in advance" criterion is codified in the transparency obligation in article 13 (d) of the directive.

Who's going to U-turn?

To decide whether the non causa pro causa regulator risk argument of the Spanish Jurisprudence is compatible with the the "known in advance" criterion of the jurisprudence from the Court of Justice of the European Union, either the Spanish Supreme Court or the Court of Justice of the European Union shall make a jurisprudential U-turn. I suggest the Spanish Supreme Court to make that U-turn, because I don't see any logical argument which would allow the Court of Justice of the European Union to do so.

We will analyse the case law of the Court of Justice of the European Union mentioned by the European Commission in the quoted working document in one of our next posts.

Our firm is preparing litigation against L14/2010, if you are interested in this, please do not hesitate to contact us at: recursoRDL@holtropslp.com