PV investors and the Energy Charter Treaty

When I started writing my thesis, back in 2010, I could not imagine that its main subject, the then little known Energy Charter Treaty (ECT), could gain, in a very short time, quite of a momentum in Europe and especially in the country where I live now, namely Spain.

In 2011 a group of international funds decided to invoke the ECT to defend their investments in this country, following retroactive cuts in feed-in tariffs to photovoltaic energy established by RD 1565/2010 and RDL 14/2010.

Furthermore, another group of foreign investors, this time with interests in thermosolar energy, is now preparing a letter, which will allow them, after a cooling off period of three months (art. 26 ECT), to start a proceeding within the international arbitration mechanism provided by the ECT.

In this post I will briefly answer to questions that may arise about the ECT and the arbitration proceeding that is now underway.

1. Brief introduction about the ECT and its role in the claims against Spain

The Energy Charter Treaty, signed in Lisbon in 1994, had as its main objective to ensure investment from the EU countries, big energy consumers and capital rich, in the countries of Middle East and Central Asia, with huge energy resources but lacking  capital to use them. Therefore the strongest part of the regulatory body of the ECT is the protection of investments by investors of a Contracting Party in the territory of other Contracting Party and the mechanisms for the resolution of the disputes that may arise from these investments, with the most important of them being the international arbitration procedure described in art. 26 of the ECT.

Until now, more than 30 proceedings have started under the ECT but due to the confidential nature of international arbitration we can easily assume that they have been more.

At first defendants were mainly Eastern Europe countries like Ukraine, Latvia, Georgia and others. Especially noteworthy is the Yukos case, due to the fact that the expropriation of this energy company led to a huge claim against Russia arising to almost 100 billion, the biggest to date in the history of international commercial arbitration. Nevertheless in the recent past European countries also began to appear as defendants. 

In the case of Spain, the country had become, since the establishment of the legal framework of the RD 661/2007, the world leader in solar photovoltaic energy and attracted investments from many international funds. However when in 2010 the Spanish government decided to reduce the duration of the feed-in tariffs (RD 1565/2010) and at the same time introduce a cap in the number of yearly hours eligible to feed-in tariff (RDL 14/2010), these funds hired Allen & Overy (perhaps the most experienced firm in controversies regarding the ECT) in order to prepare its defense against these retroactive cuts.

As it probably seemed unlikely to find effective remedy in national courts (which is also an option provided by art. 26 ECT) they decided to access directly to the international arbitration tool. 

2. Possible infringements of the ECT

Regarding the standing capacity to appeal and the court's jurisdiction, we can presume that the claimants investments are covered by the scope of application of the ECT (Art. 1 (6)) and therefore international funds can qualify themselves as investors entitled to appeal (Art . 1 (7)).

The official website of ECT does not include the articles of the Treaty in which the PV investors claim is based. Anyway there is no doubt that Articles 10.1, promotion, protection and treatment of investments, and 13, expropriation, actually constitute the core of their pretentions. 

First of all Article 10 provides that Contracting Parties shall encourage and create "stable conditions" and ensure a "fair and equitable treatment". Furthermore “investments shall also enjoy the most constant protection and security” while “unreasonable or discriminatory measures” are strictly forbidden. 

Finally the last sentence of the first paragraph of Article 10 contains an umbrella clause that generally entails a commitment to respect every contractual obligation:

“Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party”

Secondly, article 13 provides that an investment “shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation” except where this expropriation is: for a purpose which is in the public interest; not discriminatory; carried out under due process of law; and accompanied by the payment of prompt, adequate and effective compensation. 

The concept of "measures having effect equivalent to nationalization or expropriation" is the most relevant here because nowadays the most common kind of expropriation is in fact an indirect expropriation also called “creeping expropriation” which is defined as a hidden expropriation operated continuously through rates, regulations and legislative changes that actually deprives the investors of a substantial part of their investment. Although expropriation has been recognized only in one case during the short life of the ECT (Kardassopoulos v. Georgia) it seems to correspond exactly with the situation that has occurred in Spain.

3. What would happen if PV investors win? 

It is not possible to foresee when the decision will be rendered, although some newspapers are now anticipating that the award could be ready within next summer.

However, the process is confidential and this means that the funds may go in search of an agreement with the government. At the same time, an award favorable to one of the parties, could remain confidential too.

Funds ask for an amount of money that has never been granted in proceedings under the ECT. Although claimants often asked for many billions, a sum of this magnitude has never been awarded until now.

Considering the situation in which the award is rendered, Spain could choose to refund the claimants directly.  Especially in the case in which the amount is limited, it is very possible that Spain will quickly in order to preserve its international image.

If Spain refuses to pay, the PV investors will have to enforce the award and the New York Convention of 1958 permits the enforcement of arbitral awards in the tribunals of any of the countries that signed the convention (at the moment almost all relevant countries in the world did). So, hypothetically speaking, the funds could then seize Spanish properties that are located in those countries.

4. How the decision of the arbitral tribunal would affect Spanish investors?

Although the legal basis which resulted in the ECT is called the European Energy Charter, it is not European law at all.  On the contrary the claims of our clients, as the ones of many other lawyers, are mainly based on EU law.

Consequently the legal grounds in the two claims are very different and the two proceedings have to be understood as totally independent from each other to the extent that a favorable award will most likely not affect in any way Spanish investors.

That is because the award  displays its effect only inter partes and because the ECT is not aimed to protect national investors (Art. 1(7) and Art. 17 ECT).

Consequently, although normally investment protection treaties are aimed to avoid discrimination between national of the international investors (including NT and MFNT clauses, article 10(6) of the ECT) the situation in Spain is a bit unusual, at least for an OECD country, as foreign investors could be significantly more protected than Spanish investors. 

What we are doing here at Holtrop S.L.P. is working to guarantee to Spanish PV investors, who often don’t have the resources of international funds, the same level of protection.