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LIST OF DEFINED TERMS
5% Break-Out Rule Rule established by Section 6(4) of the Act on Promotion under which the FiT set by the ERO in a given year may not drop by more than 5% of the value of the FiT in the previous year
2001 Directive Directive 2001/77/EC of the European Parliament and of the Council of September 27, 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market
2003 Treaty of Accession Treaty of Accession to the European Union of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia of April 16, 2003
2005 UN Report The Fourth National Communication of the Czech Republic on the UN Framework Convention on Climate Change of 2005
2009 Directive Directive 2009/28/EC of the European Parliament and of the Council of April 23, 2009 on the Promotion of the Use of Energy from Renewable Sources Amending and Subsequently Repealing Directive 2001/77/EC and 2003/30/EC
2010 Action Plan "National Renewable Energy Action Plan" which the Ministry of Industry and Trade published in July 2010
Act on Income Tax The Act on Income Tax of 1992 (The Act No. 586/1992)
Act on Promotion The Act for the Promotion and Use of Renewable Sources (Act No. 180/2005 Coll.)
Antaris Antaris GmbH
Antaris AG Antaris Solar AG
Antaris ZNL Antaris Solar GmbH, Zweigniederlassung Kreuzlingen
BIT The Agreement between the Federal Republic of Germany and the Czech and Slovak Federal Republic on the Promotion and Reciprocal Protection of Investments Signed on October 2, 1990, in force as of October 2, 1992
Counter-Memorial Respondent's Counter-Memorial dated January 29, 2016
Czech SPVs Special Purpose Vehicle Companies, which were incorporated or of which the shares were purchased by the Claimants, all of which operated Photovoltaic Power Installations in the Czech Republic
Dr Gode Dr Michael Gode
ECT Energy Charter Treaty
ERO Energy Regulatory Office
EU Commission European Commission
EU Commission Submission EU Commission written amicus curiae submission dated February 2, 2015
EU Commission's2016 Decision Decision of the EU Commission in case SA.40171 (2015/NN) — Czech Republic Promotion of electricity production from renewable energy sources
First [REDACTED] Report Expert report of [REDACTED] dated April 15, 2016
First [REDACTED] Report Expert report of [REDACTED] dated October 19, 2015
First Gode Statement Witness statement of Michael Gode dated October 21, 2015
First Jones Report Expert report of Wynne Jones (Frontier Economics) dated January 29, 2016
First Peer Report Expert report of Michal Peer dated January 29, 2016
First [REDACTED] Report Expert report of [REDACTED] dated October 23, 2015
Firt Statement Witness statement of Josef Firt dated January 25, 2016
FiT Feed-in tariff established by the Act on Promotion
FET Fair and equitable treatment
FPS Full protection and security
[REDACTED] Report Expert report of [REDACTED] dated January 27, 2016
Holysov FVE Holysov I s.r.o.
ILC Draft Articles Draft articles on Responsibility of States for Internationally Wrongful Acts
Income TaxExemption Article 19(1) of the Act on Income Tax, exempting the income from photovoltaic power plants from income tax during the prescribed period
Kotáb Report Expert Report of Petr Kotáb dated August 29, 2016
Memorial Claimants' Memorial dated October 23, 2015
Mincic Statement Witness Statement of Ladislav Mincic dated August 26, 2016
Mozolov FVE Mozolov s.r.o.
Osecná FVE Osecná s.r.o.
PCA Permanent Court of Arbitration
Pricing Regulation ERO Regulation No. 140/2009 Coll.
[REDACTED] Report Expert report of [REDACTED] dated May 9, 2016
Rejoinder Respondent's Rejoinder dated August 30, 2016
Reply Claimants' Reply dated May 16, 2016
RES Renewable energy sources
Second Bacon Report Expert report of Kelyn Bacon QC dated August 16, 2016
Second [REDACTED] Report Expert report of [REDACTED] dated April 6, 2017
Second [REDACTED] Report Expert report of [REDACTED] dated April 21, 2016
Second GodeStatement Witness statement of Michael Gode dated May 15, 2016
Second Jones Report Expert report of Wynne Jones dated August 30, 2016
Second Peer Report Expert report of Michael Peer dated August 29, 2016
Second [REDACTED] Report Expert report of [REDACTED] dated May 16, 2016
ShortenedDepreciation Period A shorter depreciation period (5 to 10 years) under the Act on Income Tax, pertaining to photovoltaic power plants with certain technological components
Solar Levy The levy revenues generated by photovoltaic power plants stipulated in Section 7(a) of the Act on Promotion amended by Act 402/2010
Solar Levy ExtensionClaim Claimants' claim as to the Extension of the Solar Levy by the Act No. 310/2013 Coll
[REDACTED] and[REDACTED] Report Expert report of [REDACTED] and [REDACTED] dated March 31, 2016
Stríbro FVE Stríbro s.r.o.
Supplemental[REDACTED] Report Supplemental report of [REDACTED] dated April 6, 2017
Taurus TCS Taurus Service s.r.o.
Technical Regulation ERO Regulation No. 475/2005 Coll.
Third [REDACTED] Report Expert Report of [REDACTED] dated April 6, 2017
TFEU Treaty on the Functioning of the European Union
UNCITRAL Rules Arbitration Rules of the United Nations Commission on International Trade Law
Úsilné FVE Úsilné s.r.o.
VCLT Vienna Convention on the Law of Treaties, done in Vienna, done in Vienna on the 23 May 1969, 1155 U.N.T.S. 331

I. Introduction

A. The Treaties

1.

Article 10(1) of the Energy Charter Treaty (the "ECT") provides:

Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting State shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal.1

2.

Articles 2(1), 2(2) and 2(3) of the Agreement between the Federal Republic of Germany and the Czech and Slovak Federal Republic on the Promotion and Reciprocal Protection of Investments signed on October 2, 19902 (the "BIT") provides that:

Article 2

(1) Each Contracting Party shall in its territory promote as far as possible investments by investors of the other Contracting Party and admit such investments in accordance with its legislation. Each Contracting Party shall in all cases accord investments fair and equitable treatment..

(2) Neither Contracting Party shall in any way impair by arbitrary or discriminatory measures the management, maintenance, use, or enjoyment of investments in its territory by investors of the other Contracting Party

(3) Investments and returns from investment and, in the event of their reinvestment, the returns therefrom shall enjoy full protection under this Treaty.

and Article 4(1) provides

Investments by investors of either Contracting Party shall enjoy full protection and security in the territory of the other Contracting Party.

B. The Parties

3.
The first Claimant in the present arbitration is Antaris GmbH ("Antaris"), a German company. Its registered address is Am Heerbach 5, D-63857 Waldaschaff, Germany. Prior to a change of name on July 16, 2013, Antaris was previously called Antaris Solar GmbH. The Second Claimant in this arbitration is Dr Michael Gode ("Dr Gode", together with Antaris, the "Claimants"), a German national. His address is [REDACTED]
4.
Antaris is the ultimate parent company of Antaris Solar AG ("Antaris AG"), a Swiss company, which owns FVE Úsilné s.r.o. ("Úsilné"), FVE Mozolov s.r.o. ("Mozolov"), FVE Stríbro s.r.o. ("Stríbro") and FVE Holysov I s.r.o. ("Holysov"). Antaris AG is wholly owned by Antaris Solar GmbH, Zweigniederlassung Kreuzlingen ("Antaris ZNL"), the Swiss branch of Antaris.
5.
TCS Taurus Service s.r.o. ("Taurus"), which is owned by Dr Gode and Antaris ZNL, purchased 100 % of the shares in FVE Osecná s.r.o. ("Osecná"). These s.r.o. companies (the "Czech SPVs") are special purpose vehicle companies incorporated in the Czech Republic.
6.
Antaris is owned by Gode Holding GmbH & Co. KG, which is owned by Dr Gode.
7.

The Claimants are represented in these proceedings by:

[REDACTED]

8.
The Respondent in the present arbitration is the Czech Republic (the "Respondent"). Its address is Ministry of Finance of the Czech Republic, Letenská 15, 118 10 Prague 1, Czech Republic.
9.

The Respondent is represented in these proceedings by:

Ministry of Finance
Marie Talasová
Head of Department of International Legal Services
Letenská 15
11810 Praha 1
Czech Republic

Ms. Karolína Horáková
Weil, Gotshal & Manges s.r.o.
Advokátní kancelár
Charles Bridge Center
Krizovnicke nam. 193/2
Prague
Czech Republic

From July 17, 2015, the Respondent has been represented by:

Paolo Di Rosa
Arnold & Porter Kaye Scholer LLP
601 Massachusetts Avenue NW
Washington DC 20001-3743
United States

Dmitri Evseev
Arnold & Porter Kaye Scholer (UK) LLP
Tower 42
25 Old Broad Street
London EC2N 1HQ
United Kingdom

Until July 16, 2015, the Respondent was represented by

David Alexander
Squire Sanders (US) LLP
2000 Huntington Center
41 South High Street
Columbus, Ohio 43215
United States

Stephen P. Anway
Squire Sanders (US) LLP
30 Rockefeller Plaza
New York, New York 10112
United States

Rostislav Pekar
Mária Lokajová
Squire Sanders Václavské námestí 57/813
110 00 Prague 1
Czech Republic

Prof. Zachary Douglas
Matrix Chambers
Rue de Candolle 9
1205 Geneva
Switzerland

C. Overview of the dispute

10.
The Claimants submit that the Respondent breached its obligations under the ECT and the BIT by repealing incentive arrangements to attract investors in photovoltaic power generation contrary to its guarantees.
11.
The Respondent asserts that the Tribunal is not competent to hear the claims under the ECT. It further submits that the Tribunal has no jurisdiction over the claims relating to the Mozolov plant because its operating licence was acquired "through improper means" and the Holysov plant because the "Claimants have failed to establish a prima facie case in support of their claims relating to that plant".3 On the merits, the Respondent submits that the measures did not violate either the ECT or the BIT on the grounds that "(a) the Czech Republic never made [a] stabilization commitment to the Claimants, (b) the Czech Republic did not otherwise violate any legitimate expectations, and (c) the measures were reasonably tailored to achieve appropriate and rational state objectives."4

II. Procedural history

12.
On May 8, 2013, the Claimants, together with eight other claimants, served upon the Respondent a Notice of Arbitration, with accompanying evidence5, pursuant to Article 26 of the ECT, Article 10 of the BIT and Article 3 of the Arbitration Rules of the United Nations Commission on International Trade Law ("UNCITRAL Rules").
13.
In their Notice of Arbitration, the Claimants appointed Mr Doak Bishop as arbitrator.
14.
By letter dated June 10, 2013, in response to the Notice of Arbitration, the Respondent objected to the Claimants' consolidation of their claims with those of the eight other claimants and appointed Judge Tomka as arbitrator only in the proceeding involving the Claimants.
15.
On June 24, 2013, the Claimants invited the Respondent to appoint a single arbitrator for all the claimants listed in the Notice of Arbitration.
16.
By letter dated July 5, 2013, the Claimants requested that the Secretary-General of the Permanent Court of Arbitration (the "PCA") designate an appointing authority on the grounds that the Respondent had failed to appoint an arbitrator for all the claimants listed in the Notice of Arbitration as required by the UNCITRAL Rules. By letter dated July 9, 2013, the Respondent objected to the Claimants' request, noting that "there is no single arbitration agreement in existence that could possibly give a single arbitral tribunal authority over all the 10 claimants". In a letter dated July 22, 2013, the Claimants objected to the Respondent's position.
17.
On August 13, 2013, the Secretary-General of the PCA rejected the Claimants' request, holding that "the Respondent ha[d] actively participated and responded to the Notice of Arbitration […] in a timely manner by appointing the second arbitrator in accordance with the procedure foreseen in each of the investment treaties invoked by the Claimants".
18.
On December 20, 2013, Mr Bishop and Judge Tomka jointly appointed Lord Lawrence Collins of Mapesbury PC, FBA as the presiding arbitrator after consultation with the Parties.
19.
On August 1, 2014, Mr Bishop tendered his resignation as arbitrator.
20.
On September 24, 2014, the Claimants informed the Tribunal that they had appointed Mr Gary Born as arbitrator to replace Mr Bishop.

A. Written Procedure

21.
By letter dated January 10, 2014, the Tribunal proposed to the Parties draft Terms of Appointment, which included a proposed term concerning the place of arbitration, and invited the Parties' comments on the draft by January 17, 2014.
22.
By letter dated January 17, 2014, the Claimants proposed that Geneva, Switzerland be the place of arbitration, as proposed in the Notice of Arbitration dated May 8, 2013, and stated that they would welcome the opportunity to provide "more ample reasons for their position on this point".
23.
By letter dated January 17, 2014, the Respondent proposed that the seat of the arbitration be Paris, France, and stated the reasons for that proposal.
24.
The Terms of Appointment were agreed between the Parties and were adopted on January 31, 2014. Paragraph 6.1 of the Terms of Appointment provides: "[p]ursuant to Article 16 of the Rules, the Tribunal will determine the place of arbitration having regard to the circumstances of the case, after consultation with the Parties".
25.
By letter dated February 6, 2014, the Tribunal inter alia (i) invited the Claimants to confirm whether they agreed that their Statement of Claim was contained in their Notice of Arbitration; and (ii) proposed to decide on the place of arbitration in advance of the first procedural meeting on the basis of written submissions and invited the Claimants to provide their further comments on the place of arbitration.
26.
By letter dated February 12, 2014, the Claimants confirmed that the Notice of Arbitration included their Statement of Claim and presented their "Submission on the Seat of Arbitration" of the same date.
27.
By letter dated February 21, 2014, the Respondent contended that the Notice of Arbitration was not specific enough to be treated as Statement of Claim and submitted its comments in reply to the Claimants' Submission on the Seat of Arbitration, in which it provided reasoning in support of its proposal of Paris as the seat.
28.
By letter dated March 10, 2014, the Tribunal invited the Respondent to clarify whether it intended to object to the Tribunal's jurisdiction on the grounds that such did not extend to disputes between EU investors and EU Member States.
29.
In the same letter, the Tribunal directed the Claimant to serve within 28 days a full Statement of Claim including, in particular, details of (a) their investments in the Czech companies; (b) the manner in which the alleged measures affected the investments; and (c) the financial consequences thereof, including the quantum of their alleged losses.
30.
By letter dated March 17, 2014, the Respondent stated that it did not intend to object to the Tribunal's jurisdiction in this matter on the grounds that such does not extend to disputes between EU investors and EU Member States.
31.
By letter dated March 26, 2014, the Tribunal fixed The Hague, The Netherlands, as the place of the arbitration.
32.
On April 7, 2014, the Claimants submitted their Statement of Claim with accompanying evidence.6
33.
By letter dated April 17, 2014, the Tribunal directed the Respondent to submit its Statement of Defense by June 17, 2014; directed that "the Tribunal shall conduct a procedural hearing in early July for the future timetabling of those matters which are not agreed"; and invited the Parties to indicate whether they agreed to these directions by April 28, 2014.
34.
By letter dated April 23, 2014, the Respondent reserved the right to seek additional time to file its Statement of Defense in the event that the Claimants produced the expert reports referred to in its Statement of Claim but not annexed thereto.
35.
On June 24, 2014, the Respondent submitted its Statement of Defense with accompanying evidence.7
36.
On July 11, 2014, the European Commission (the "EU Commission") submitted an Application for Leave to Intervene as a Non-disputing party, requesting the opportunity to present its views inter alia on the jurisdiction of the Tribunal.
37.
On July 28, 2014, upon invitation by the Tribunal, each of the Parties submitted their comments on the Application for Leave. The Claimants requested inter alia that the Tribunal reject the Application for Leave and that in the alternative intervention by the EU Commission be limited to written submissions and that the EU Commission must bear its own costs and reimburse those of the Parties. The Respondent stated that it did not oppose the EU Commission's Application for Leave.
38.

On 4 December 2014, the Tribunal issued Procedural Order No. 1 (EC Intervention and Place of Arbitration), granting the EU Commission leave for its amicus curie submission and changing the place of arbitration from The Hague to Geneva. In Procedural Order No. 1, the Tribunal ruled inter alia as follows:

(1) the European Commission is granted leave to intervene as amicus curiae (subject to the condition in (6) below) in the present proceedings by way of one set of written submissions only;

(2) the European Commission shall, by 19 January 2015, file its written amicus curiae submission on the three points of law set forth in the EC Commission Application for Leave: (i) "The Tribunal is invited to decline jurisdiction"; (ii) "As a matter of fact, the Czech Republic, by adopting the contested measure, may have merely complied with its obligation under European Union State Aid law"; and (iii) "The enforcement of a possible award may amount itself to State aid, and in that case would only be possible after an authorization by the EU Commission"

[...]

(6) the European Commission should be required to undertake, prior to consideration of its submission, to pay in full the reasonable costs of both parties resulting from the submissions[…]

(7) the place of arbitration shall be Geneva, Switzerland.

39.
On February 2, 2015, the EU Commission filed its written amicus curiae submission (the "EUCommission Submission"). By letter of the date accompanying the EU Commission Submission, the EU Commission stated that it "cannot undertake to pay in full the reasonable costs of both Parties resulting from the submissions and would respectfully ask the Tribunal to reconsider its decision on this point".
40.
By letter dated February 3, 2015, the Claimants requested that the Tribunal decline to accept the EU Commission Submission unless the EU Commission accepted the undertaking set forth at paragraph 30(6) of Procedural Order No. 1.
41.
On February 13, 2015, the Tribunal issued Procedural Order No. 2 (EC Intervention), in which it ruled that the EU Commission "may apply to vary Procedural Order No. 1, upon its undertaking to pay the reasonable costs of the Parties resulting from such application if so determined by the Tribunal" by February 27, 2015. The Tribunal did not receive any such application from the EU Commission.
42.
By letter dated March 5, 2015, the Tribunal informed the EU Commission that, pursuant to paragraph 30(6) of Procedural Order No. 1, the Tribunal would not consider the EU Commission Submission on the ground that the EU Commission did not undertake to pay in full the reasonable costs of the Parties resulting from the Submission.
43.
By letter dated March 12, 2015, the Tribunal circulated a draft Procedural Order No. 3, which included proposed procedural directions, and invited the Parties to provide their comments.
44.
By e-mail dated March 27, 2015, the Claimants provided the Tribunal with the Parties' joint proposal as to the draft Procedural Order No. 3, including an agreed procedural timetable. By email of the same date, the Respondent confirmed its agreement on the proposal.
45.
On May 22, 2015, the Claimants submitted their completed Redfern Schedule, setting out nine document production requests to which the Respondent had objected and requesting a ruling from the Tribunal regarding those disputed requests. On the same day, the Respondent filed its application for document production attaching the completed Redfern Schedule, requesting "the Tribunal to issue an order that the Claimants produce all documents responsive to Respondent's requests".
46.
On June 9, 2015, the Tribunal issued its decision on the documents requested by the Parties.
47.
On June 12, 2015, the Parties informed the Tribunal that they had agreed to alter the existing schedule of the proceedings.
48.
On July 6, 2015, the Tribunal issued Procedural Order No. 3 (Procedural Directions), setting forth inter alia the agreed amended schedule of further proceedings.
49.
On October 23, 2015, the Claimants submitted their Memorial with accompanying evidence.8
50.
By their Memorial of October 23, 2015, the Claimants requested the production of all correspondence and documentation exchange between the European Commission (the "EU Commission") and the Czech Republic and waiver of the confidentiality related to the State aid proceedings pending before the EU Commission.9 The Claimants alleged that the Tribunal had granted such a production in relation to no. 13 of the Claimants' document request of May 22, 2015, on which the Tribunal decided that "[p]roduction ordered but limited to Solar RES" in its order of June 9, 2015. Nevertheless, according to the Claimants, the Respondent failed to comply this order, raising objections based on confidentiality.
51.
On January 29, 2016, the Respondent submitted its Counter-Memorial with accompanying evidence.10
52.
On May 16, 2016, the Claimants submitted its Reply with accompanying evidence.11
53.
On August 30, 2016, the Respondent submitted its Rejoinder with accompanying evidence.12
54.
On October 28, 2016, the Parties jointly requested that the hearing, which was scheduled to take place from November 14 to 18, 2016, be re-scheduled [REDACTED] By e-mail of the same date, the Tribunal confirmed the postponement of the hearing.
55.
By e-mail dated November 1, 2016, the Tribunal proposed to set the new dates for hearing as May 2 to 5, 2017. The Claimants and the Respondent confirmed their availability for the proposed dates by e-mails of November 11 and 14, 2016, respectively.
56.
By e-mails dated November 2 and 11, 2016, the Claimants requested that the Tribunal and the Respondent confirm that all non-refundable costs arising from the cancellation of the November hearing would be charged exclusively and entirely to the Respondent, stating, among others, that their agreement to the postponement had been made under such an assumption.
57.
By e-mail dated November 14, 2016, the Respondent suggested that submissions concerning the final allocation of such costs should be deferred until the end of the proceeding.
58.
By e-mail dated November 16, 2016, the Tribunal informed the Parties that it would address this issue following submissions to be made at or after the adjourned hearing.
59.
By e-mail dated January 31, 2017, the Respondent informed the Tribunal that the Parties had agreed and jointly requested to submit (1) the EU Commission's decision in case "SA.40171 (2015/NN) — Czech Republic Promotion of electricity production from renewable energy sources" of November 28, 2016 (the "EU Commission's 2016 Decision") into the record of the present cases as exhibit R-366; and (2) each Party's written comments on the Decision. By email of the same date, the Tribunal accepted and authorized the submissions as requested.
60.
On February 15, 2017, the Claimants submitted their Comments on the EU Commission's 2016 Decision and accompanying documents.13 At paragraph 6 of their Comments, the Claimants renewed their document production request of October 23, 2015, requesting that the Tribunal order that the Respondent produce all missing documents responsive to the Claimants' document request no. 13 of May 22, 2015.
61.
On the same date, the Respondent submitted its Comments on the EU Commission's 2016 Decision.
62.
By letter of March 28, 2017 the Claimants requested that they be given an opportunity to submit an additional Rejoinder on Jurisdiction on the ground that the Respondent in its Rejoinder of August 30, 2016 "surprisingly addressed the ECT carve-out with the aid of an opinion on Czech law prepared by a new expert, Mr Kotáb". The Claimants further requested the exclusion of Mr [REDACTED] report from the record pursuant to paragraph 7.8 of Procedural Order No. 3. They further requested a leave for filing "a short 'Supplemental Report' on quantum."
63.
In letter of March 29, 2017 the Respondent raised objections to the above requests.
64.
The Claimants addressed the Respondent's objections in their letter of March 31, 2017.
65.
On March 31, 2017 the Tribunal informed the Parties of its decision on the Claimants' requests. The Tribunal denied the requests to file further pleadings, with further reports, as being too late. However, it granted the Claimants' request to file "the same reports on quantum and Czech tax law as in the parallel matters". The Tribunal further ruled that Mr [REDACTED] report would not be excluded, but that it would take into account, in weighing its utility, that he did not appear.
66.
On the same day the Respondent requested that it be authorized to file its own expert report responding to the Claimants' supplemental quantum expert report.
67.
On April 4, 2017 the Tribunal informed the Parties that the Respondent's request was granted.
68.
By e-mail dated April 6, 2017, Claimants submitted, in accordance with the Procedural Order No. 3 (Procedural Directions), a letter to the Tribunal enclosing three additional expert reports.14
69.
By email of April 26, 2017 the Respondent submitted, as authorized by the Tribunal, a letter to the Tribunal with a supplemental expert report.15
70.
By Respondent's email of April 27, 2017 the Tribunal was informed that the Parties had agreed to add to the record a number of new or amended exhibits and legal authorities.16

B. Hearing

71.

The Hearing was held at the Peace Palace in The Hague from May 2 to 5, 2017 and was attended by the following persons.

Arbitral Tribunal

Lord Collins of Mapesbury (Presiding Arbitrator)
Mr Gary Born
H E. Judge Peter Tomka

Claimants 

[REDACTED]
Mr [REDACTED]
Mr [REDACTED]
Mr [REDACTED]
Ms. [REDACTED]
Ms. [REDACTED]

Mr [REDACTED]
[REDACTED]

Dr Michael Gode
Witness

[REDACTED]
Client representative

Mr [REDACTED] - Ernst & Young CZ
Mr [REDACTED] - Compass Lexecon
Dr [REDACTED]
Mr [REDACTED] - Compass Lexecon 
Mr [REDACTED] - Charles River Associates
Mr [REDACTED] - Charles River Associates (non-testifying colleague of Mr [REDACTED]
Experts

Respondent

Ms. Anna Bilanová
Mr Tomás Munzar
Ministry of Finance of the Czech Republic

Mr Paolo Di Rosa, Partner
Mr Dmitri Evseev, Partner
Ms. Mallory Silberman, Associate
Mr Peter Nikitin, Consultant
Mr Bart Wasiak, Associate
Mr John Muse-Fisher, Associate
Ms. Aimee Kneiss, Senior Legal Assistant II
Mr Eugenio Cruz Araujo, Legal Assistant
Mr Nathaniel Castellano (On Friday 5 May only)
Arnold & Porter Kaye Scholer (UK) LLP

Ms. Karolina Horáková, Partner
Mr Libor Morávek, Partner
Mr Pavel Kinnert, Associate
Weil, Gotshal & Manges s.r.o. Advokátní Kancelár

Mr Josef Firt
Mr Ladislav Mincic
Witnesses

 

Mr Wynne Jones, Frontier Economics Ltd.
Mr Petr Kotáb, Dentons Europe CS LLP
Mr Michael Peer, KPMG Ceská republika, s.r.o.
Mr Jin Urban, KPMG Ceská republika, s.r.o. (non-testifying colleague of Mr Peer)
Experts

Permanent Court of Arbitration

Ms. [REDACTED] Legal Counsel
Mr [REDACTED] , Assistant Legal Counsel
Mr [REDACTED] Intern

Interpreters

Ms. [REDACTED]
Ms. [REDACTED]
Ms. [REDACTED]
Dr [REDACTED]

Court Reporter

Mr [REDACTED]

C. Post-hearing Proceedings

72.
On May 8, 2017, pursuant to the Tribunal's request at the hearing, the Parties submitted electronic copies of their presentation slides and demonstratives. On June 16, 2017, the Parties submitted their Submissions on Costs.

III. The Parties' requests for relief

A. The Claimants

74.

The Claimants' Statement of Claim requested that the Tribunal:

(a) Declare that the Respondent's actions and, in particular, the progressive dismantling of the Incentive Regime:

(i) constitute unfair and inequitable treatment in violation of the ECT and the Germany BIT;

(ii) were implemented through unreasonable and arbitrary measures which impaired the maintenance, use, enjoyment and disposal of the Claimants' investments in violation of the ECT and the Germany BIT;

(iii) potentially amount to indirect or creeping expropriation in violation of the ECT and the Germany BIT; and

(iv) constitute a failure to observe the Respondent's obligations in relation to the Claimants' investments in violation of the umbrella clauses contained in the ECT and the Germany BIT.

(b) Order the Czech Republic to:

(i) compensate the Claimants for all losses caused to them by the Czech Republic's breaches, in an amount that will be determined more precisely during the proceedings, but that shall not be less than EUR [REDACTED]

(ii) pay to the Claimants pre-award and post-award interest on any amount of damages awarded; and

(iii) reimburse the Claimants for all costs and expenses of this arbitration, including legal and expert fees, the fees and expenses of any experts appointed by the Tribunal, the fees and expenses of the Tribunal, and all other costs of the arbitration.17

75.

In their Memorial, the Claimants requested that the Tribunal:

(a) Declare that the Respondent's actions:

(i) constitute unfair and inequitable treatment and violate the obligation to provide full protection and security in breach of the ECT and the Germany BIT;

(ii) were implemented through unreasonable and arbitrary measures which impaired the maintenance, use, enjoyment and disposal of the Claimants' investment in violation of the ECT and the Germany BIT;

(b) Order the Czech Republic to:

(i) compensate the Claimants for all losses caused to them by the Czech Republic's breaches, in an amount of not less than CZK [REDACTED] (inclusive of pre-award interest);

(ii) pay to the Claimants post-award interest on any amount of damages awarded, from the date of the final award until its full payment; and

(iii) reimburse the Claimants for all costs and expenses of this arbitration, including legal and expert fees, the fees and expenses of any experts appointed by the Tribunal, the fees and expenses of the Tribunal, and all other costs of the arbitration, including any expenses arising from the participation of third parties.18

76.

In their Reply, the Claimants requested that the Tribunal:

(a) Dismiss the jurisdictional objections raised by the Respondent;

(b) Declare that the Respondent's actions:

(i) constitute unfair and inequitable treatment and violate the obligation to provide full protection and security in breach of the ECT and the Germany BIT;

(ii) were implemented through unreasonable and arbitrary measures which impaired the maintenance, use, enjoyment and disposal of the Claimants' investment in violation of the ECT and the Germany BIT;

(c) Order the Czech Republic to:

(i) compensate the Claimants for all losses caused to them by the Czech Republic's breaches, in an amount of not less than CZK [REDACTED] (inclusive of pre-award interest and tax gross-up);

(ii) pay to the Claimants post-award interest on any amount of damages awarded, from the date of the final award until its full payment; and

(iii) reimburse the Claimants for all costs and expenses of this arbitration, including legal and expert fees, the fees and expenses of any experts appointed by the Arbitral Tribunal, the fees and expenses of the Arbitral Tribunal, and all other costs of the arbitration, including any expenses arising from the participation of third parties.19

77.
In their letter dated April 6, 2017, the Claimants adjusted their request for the relief of compensation from CZK [REDACTED] (inclusive of pre-award interest and tax gross-up) to CZK 306.53 million (inclusive of pre-award interest and tax gross-up).20

B. The Respondent

78.

The Respondent's Statement of Defense requested that the Tribunal:

(a) Declare that the Tribunal does not have jurisdiction over Claimants' claims regarding taxation measures under the ECT;

(b) Declare that the Tribunal does not have jurisdiction over the Solar Levy Extension Claim;

(c) Declare that the Tribunal does not have jurisdiction over Claimants' claims as they fail to disclose a prima facie case on the merits;

(d) Declare that the Czech Republic did not violate the ECT;

(e) Declare that the Czech Republic did not violate the Treaty;

(f) Dismiss Claimants' claims in their entirety;

(g) Order that Claimants pay the costs of these arbitral proceedings, including the cost of the Tribunal and the legal and other costs incurred by the Czech Republic, on a full indemnity basis; and

(h) Order Claimants to pay interest on any costs awarded to the Czech Republic, in an amount to be determined by the Tribunal.21

79.

In its Counter-Memorial, the Respondent requested that the Tribunal:

(a) Declare Claimants' ECT and BIT claims barred for lack of jurisdiction;

(b) With respect to any claims over which the Tribunal concludes that it has jurisdiction, declare that the Czech Republic did not breach any of its obligations under either the ECT or the BIT;

(c) In the event that it exercises jurisdiction over any of Claimants' claims and finds the Czech Republic liable, declare that Claimants are not entitled to damages;

(d) Order Claimants to pay all costs of the arbitration, including the totality of the Czech Republic's legal and expert fees and expenses, and the fees and expenses of the Tribunal, as well as the costs charged by the PCA; and

(e) Award to the Czech Republic such additional relief as it may consider just and appropriate.22

80.
In its Rejoinder, the Respondent stated its request for a declaration of lack of jurisdiction as following:: Declare Claimants' ECT claims, and their claims (under either treaty) in respect of the Mozolov and Holysov plants, barred for lack of jurisdiction.23

IV. The incentive regime

A. The Act on Income Tax 586/1992

81.
In 1992, following the conclusion of the 1992 United Nations Framework Convention on Climate Change, the Czech Republic implemented two tax incentives through Act 586/1992 (the "Act on Income Tax").24 Section 19(1)(d) provided an exemption from income tax for the year in which solar facilities were put into operation and the following five calendar years (the "Income Tax Exemption"). Section 30, with Annex I, provided an accelerated depreciation period (between 5 to 10 years) for specific categories of electrical equipment and components for photovoltaic installations, such as solar panels, inverters, switchboards, fuse boxes, cut-out boxes and security camera systems (the "Shortened Depreciation Period").25

B. The Act on Promotion 180/2005

82.

So far as is material the Act on the Promotion of Energy Production from Renewable Energy Sources, which was adopted on March 31, 2005 and entered into force on August 1, 2005 (the "Act on Promotion"),26 provided that

(1) investors would have a connection to the grid on a preferential basis (Section 4(1));

(2) investors would have a period of 15 years for recovery of their investment through the feed-in tariff (the "FiT") (Section 6(1)(b)(1));

(3) the level of revenues per unit of electricity from renewable sources would be maintained, as a minimum, with promotion by FiT, for a period of 15 years from the year of putting the plant into operation, taking into account the price index of industrial products (Section 6(1)(b)(2));

(4) As from 2007, the FiT set by the Energy Regulatory Office (the "ERO") for the subsequent calendar year was not to be lower than 95% of the value of the FiT valid in the year during which a decision was made on their new values (Section 6(4)), the effect of which was that the FiT granted to photovoltaic plants put into operation in any given year could not be reduced by more than 5% with respect to the FiT granted to photovoltaic plants put into operation in the previous year (the "5% Break-Out Rule").

83.
The Explanatory Report on a November 2003 draft of the Bill of the Act on Promotion also stated that the "support system is based:... On maintaining the tax reliefs to the extent set out in the Acts on Income Tax...".27

C. ERO Regulations

84.

Section 4 of ERO Regulation 475/2005 (the "Technical Regulation") provided28

In order for the 15-year pay-back period to be assured through the support by Purchasing Prices [FiT] of electricity produced from renewable sources, technical and economic parameters of an installation producing electricity from renewable sources must be satisfied, where the producer of electricity from renewable sources shall achieve, with the given level of Purchasing Prices

(a) an adequate return on invested capital during the total life of the installation, such return to be determined by the weighted average cost of capital (WACC), and

(b) the net present value of the cash flows after tax over the total life of the installation, using a discount rate equal to WACC, at least equal to zero.

85.

In May 2005, the ERO made available on its website its "Report on the procedure of specification of basic parameters of the regulatory formula and price specification for the 2nd regulatory period in the field of electrical energy." In the section "Subsidy for Electrical Generation From Renewables" the Report stated:29

Minimum purchase prices of electricity from individual renewable resources are specified in relation to the amounts of investment and operation costs of the individual categories of resources. The calculation was based on the method of net present value of the generated project cash flows (NPV CF) for the period of the given technology life equal to zero at the discount rate of 7%..

86.

The weighted average cost of capital ("WACC") was defined by the Technical Regulation as:

... weighted average of the expected interest rate on lending for investment in projects designed for using renewable sources for electricity generation and the expected return on equity of an investor in a project designed for using renewable sources for electricity generation.

87.
The Technical Regulation was subsequently amended by ERO Regulations 364/2007 and 409/2009,30 which modified the technical and economic parameters and fixed the estimated lifetime of new photovoltaic plants at 20 years.
88.
Article 2(9) of ERO Regulation 140/2009 (the "Pricing Regulation") provided that (1) FiTs would be applied throughout the estimated lifetime of plants (i.e. 20 years); and (2) the FiT was to increase each year by between 2% and 4% taking into account the inflation price index for industrial producers throughout the lifetime of the plant. The FiT was to be set by the end of November for the following year.

V. State aids

89.
State aid concerns over the incentive regime were raised on December 16, 2003 in a complaint filed with the EU Commission by the Czech Society of Wind Energy and the European Association for Renewable Energies (EUROSOLAR), alleging that the draft Act on Promotion contravened the Czech Republic's obligations under EU state aid law. On July 27, 2004, the EU Commission informed the complainants that it did not consider the incentives foreseen by the Act on Promotion to constitute State aid, but invited the Czech Republic to inform the EU Commission of any new particulars which might demonstrate the existence of State aid.
90.
The EU Commission did not take the matter further until the Czech Republic amended the Act on Promotion in 2010, when the funding mechanism was changed from a consumer-funded one to a hybrid one involving direct use of State resources. On November 18, 2011 the EU Commission expressed the concern that the proposed amendments might constitute State aid.
91.
On May 30, 2012 Act 165/2012 was enacted, which replaced the Act on Promotion as of January 1, 2013. On June 11, 2014 the EU Commission authorized the support scheme for electricity produced from RES by installations commissioned as of January 1, 2013 as compatible State aid.
92.
On December 11, 2014 the Czech Republic notified to the EU Commission, the support scheme for electricity production from RES by installations commissioned between January 1, 2006 and December 31, 2012.
93.

On November 28, 2016 the EU Commission ruled that Act 180/2005 constituted State aid under Article 107(1) of the Treaty on the Functioning of the European Union ("TFEU"), and that by implementing Act 180/2005 on January 1, 2006, before a final EU Commission decision, the Czech Republic had breached the stand-still obligation in Article 10(3) TFEU, but that no objection to the aid would be made because it was compatible with the internal market pursuant to Article 107(3)(c) TFEU. But it also said (para 150):

... the Commission recalls that any compensation which the Arbitral Tribunals were to grant would constitute in and of itself State aid. However the Arbitral Tribunals are not competent to authorise the granting of State aid. That is an exclusive competence of the Commission. If they were to award compensation, they would violate Article 108(3) TFEU, and any such award would not be enforceable, as that provision is part of public order.

VI. The changes to the Incentive Regime

A. Abolition of 5% rule for plants connected to the grid from 2011

94.
Act 137/2010 entered into force on May 20, 2010.31 It repealed Section 6(4) of the Act on Promotion pursuant to which the FiT could not decrease the FiT by more than 5% per year. It abolished the 5% rule only for those solar plants connected to the grid from 2011 onwards.
95.
The four plants in question were constructed and commissioned after the Act came into force but were connected to the grid before the critical date of 2011.

B. Adoption of Solar Levy

96.
Act 402/2010 entered into force on January 1, 2011 introducing Sections 7(a)-(i) in the Act on Promotion, establishing a levy on revenues generated by photovoltaic power plants (the "Solar Levy"). It applied from January 1, 2011 to December 31, 2013 to revenues generated by photovoltaic power plants put into operation between January 1, 2009 and December 31, 2010. It was extended beyond December 31, 2013 by Act 310/2013 for photovoltaic power plants put into operation between January 1, 2010 and December 31, 2010.
99.
Article I(2) of Act 310/2013 also cancelled all incentives for electricity generated by solar power plants placed into service after January 1, 2014.

C. Amendment of Act on Income Tax

100.
Act 346/2010,32 which entered into force on January 1, 2011, amended the Act on Income Tax by repealing the Income Tax Exemption for RES producers, and the favourable depreciation allowances. Although it was prospective, it had the effect of removing tax exemptions and depreciation allowances which would otherwise have accrued.

D. Repeal of Act on Promotion

101.
Act 165/201233 on Promoted Power Sources" which partly entered into force on January 1, 2013 and partly upon its publication on May 30, 2012 repealed the Act on Promotion. It left in place the method for determining FiT and Green Bonuses, as amended at the end of 2010, for plants put into operation before January 1, 2013, and introduced new rules for plants put into operation thereafter. It confirmed the Solar Levy and contained several provisions which the Claimants say negatively affected RES producers that put their plants into operation before January 1, 2013 (including the Claimants).34

E. Extension of Solar Levy

102.
Act 310/201335 was adopted on September 13, 2013, and extended the Solar Levy beyond December 31, 2013, at a new decreased 10% rate (but only applying to 2010 PV plants and for the entire lifetime) and 11% levy on Green Bonuses. It also imposed new obligations concerning disclosure of major shareholders and conversion of shares only on foreign joint stock companies producing electricity from RES. It cancelled RES support for PV plants commissioned after January 1, 2014.

F. Subsequent developments

103.
On November 19, 2015, the ERO issued Price Decision 5/2015, which set the FiT applicable as of January 1, 2016 only to plants commissioned from 2013 to 2015, but not to plants put into operation from 2006 to 2012, thereby in effect removing the FiT. But on December 28, 2015, the Czech Government adopted Regulation 402/2015,36 which overruled Price Decision 5/2015 and provided that the incentives to RES plants commissioned before 2013 must be paid, pending any decision by the EU Commission on their compliance with EU State aid law. On December 29, 2015 the ERO issued Price Decision 9/2015 setting FiT and Green Bonuses for RES plants commissioned since 2006, including the Claimants' plants.37

VII. The background and history

A. Development of the incentives

104.
In 1997, following the 1997 Kyoto Protocol, the EU Commission released its White Paper for Community Strategy and Action Plan, which aimed to encourage governmental measures supportive of the development of Renewable Energy Sources ("RES").38
105.
On March 30, 2000, the European Parliament adopted its resolution on Electricity from renewable energy sources and the internal electricity market, in which it, among others, requested that the EU Commission submit a proposal of a Directive to "establish a suitable and stable legal framework for renewable energies to underpin the rapid development of these energy sources."39
106.
It was followed by the Directive 2001/77/EC of the European Parliament and of the Council on the promotion of electricity produced from renewable energy sources in the internal electricity market (the "2001 Directive"), which invited Member States to "take appropriate steps to encourage greater consumption of electricity produced from renewable energy sources in conformity with the national indicative target."40 The indicative targets for the consumption of electricity produced from RES which had to be attained by 2010 were laid down in the Annex to the 2001 Directive.41
107.
On May 1, 2004 the Czech Republic became a Member State of the EU pursuant to the Treaty of Accession to the European Union of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia of April 16, 2003 (the "2003 Treaty ofAccession").42 Annex II to the 2003 Treaty of Accession fixed at 8% the Czech Republic's national target for the contribution of electricity produced from RES to the gross electricity consumption by 2010.43
108.
Following a proposal made in November 200344 the Act on Promotion (Act 180/2005)45 was adopted on March 31, 2005 and entered into effect on August 1, 2005.
109.
Section 1(2) stated that the purpose of the Act was in the interest of protection of the climate and protection of the environment, (inter alia) to promote the use of RES, and renewable energy sources (hereinafter referred to as "renewable sources") and create conditions for fulfilment of the indicative target for the share of electricity from RES in the gross consumption of electricity in the Czech Republic amounting to 8 % in 2010, and for further increase of this share after 2010.
110.

Section 6 provided under the heading "Amounts of Prices for Electricity from Renewable Sources and Amounts of Green Bonuses"

(1) The Office sets, one calendar year in advance, the purchasing prices for electricity from Renewable Sources (the "Purchasing Prices"), separately for individual kinds of Renewable Sources, and sets green bonuses, so that

(a) the conditions are created for the achievement of the indicative target so that the share of electricity produced from Renewable Sources accounts for 8% of gross electricity consumption in 2010 and

(b) for facilities commissioned

1. after the effective date of this Act, there is attained, with the Support consisting of the Purchasing Prices, a fifteen year payback period on capital expenditures, provided technical and economic parameters are met, such parameters consisting of, in particular, cost per unit of installed capacity, exploitation efficiency of the primary energy content in the Renewable Source, and the period of use of the facility, such parameters being stipulated in an implementing legal regulation,

2. after the effective date of this Act, the amount of revenues per unit of electricity from Renewable Sources, assuming Support in the form of Purchasing Prices, is maintained as the minimum [amount of revenues], for a period of 15 years from the commissioning year of the facility, taking into account the industrial producer price index; the commissioning of a facility is also deemed to include cases involving the completion of a rebuild of the technological part of existing equipment, a change of fuel, or the completion of modernization that raises the technical and ecological standard of an existing facility,

3. prior to the effective date of this Act, there is maintained for a period of 15 years the minimum amount of Purchasing Prices set for the year 2005 in accordance with the legal regulations to date and taking into account the industrial producer price index.

(2) When setting the amounts of green bonuses, the Office also takes into account a heightened degree of risk associated with off-taking electricity from Renewable Sources in the electricity market.

(3) When setting Purchasing Prices and green bonuses, the Office proceeds on the basis of differing costs for the acquisition, connection and operation of individual types of facilities, including the development thereof [the development of such costs] over time.

(4) Purchasing Prices set by the Office for the following calendar year shall not be less than 95% of the Purchasing Prices in effect in the year for which the setting decision is made. This provision shall be used for the prices set for 2007.

111.
During its passage, the Minister of Environment was quoted as describing the Act as "a step towards a more stable environment,"46 and on June 1, 2005 Mr Martin Bursík, former Minister of Environment (described by the Claimants as one of the co-authors of the Act) published an article stating that the most important principle of the law for producers was the guarantee of a stable FiT for a 15 year period, thereby removing the risk that the ERO would reduce the FiT on a year on year basis and that the producers' cash flow and ability to repay loans would be threatened.47
112.
Pursuant to Section 6(1)(b)(1) of the Act on Promotion, the ERO was to adopt implementing regulations to determine the technical and economic parameters for the Incentives for each RES technology.
113.

These parameters were set by the Technical Regulation (ERO Regulation 475/2005).48 By Section 4 of the Technical Regulation:

(1) In order for the 15-year pay-back period to be assured through the support by Purchasing Prices of electricity produced from renewable sources, technical and economic parameters of an installation producing electricity from renewable sources must be satisfied, where the producer of electricity from renewable sources shall achieve, with the given level of Purchasing Prices

a) an adequate return on invested capital during the total life of the installation, such return to be determined by the weighted average cost of capital (WACC), and

b) the net present value of the cash flows after tax over the total life of the installation, using a discount rate equal to WACC, at least equal to zero.

(2) Indicative values of technical and economic parameters, separately for individual supported categories of renewable sources and selected technologies allowing to meet the required economic criteria under subsection (1) in electricity production from renewable sources, are listed in Annex No. 3 hereto.49

114.
Annex 3 of the Technical Regulation proceeded on the basis that photovoltaic power plants had an expected lifetime of 15 years. It was amended by ERO Regulation 364/2007 which increased the expected lifetime to 20 years.
115.

In the 2005 Fourth National Communication of the Czech Republic on the UN Framework Convention on Climate Change (the "2005 UN Report"), the Czech Republic described the purpose of Section 6(1)(b)(2) of the Act on Promotion as:50

providing guarantees to the investors and owners of installations, producing electricity from renewable sources who are subject to support pursuant to the Act, that the amount of revenue per unit of produced electricity from renewable sources acquired by the producers from the support will be maintained for a period of 15 years from bringing the installation into operation (or for a period of 15 years for installations that were brought into operation prior to the date of effect of the Act)

116.

In accordance with Articles 4 and 8 of the 2001 Directive, on December 7, 2005 the EU Commission issued a Communication addressing the progress made by each Member State in achieving the targets, and suggesting a way forward.51 The Commission said:

Member States shall optimize and fine tune their support schemes by:

Increasing legislative stability and reducing investment risk. One of the main concerns with national support schemes is any stop-and-go nature of a system. Any instability in the system creates high investment risks, normally taking the form of higher costs for consumers. Thus, the system needs to be regarded as stable and reliable by the market participants in the long run in order to reduce the perceived risks. Reducing investment risk and increasing liquidity is an important issue, notably in the green certificate market. The design of a support mechanism must minimise unnecessary market risk. Increased liquidity could improve the option of long term contracts and will give a clearer market price.52.

117.
In this period the Czech Government promoted the scheme abro ad.53
118.
On April 23, 2009 the European Parliament and the Council of the EU adopted Directive 2009/28/EC (the "2009 Directive"), which repealed the 2001 Directive and fixed new mandatory targets for the contribution of electricity produced from RES by 2020. The Czech Republic's new target was set at 13% by 2020 (Annex I, Part A). The Recitals to the 2009 Directive emphasized (paras 14 and 25) that the main purpose of mandatory national targets was to provide certainty for investors and that Member States had to guarantee national support schemes to maintain investor confidence.
119.

On May 11, 2009 the ERO adopted the Pricing Regulation (ERO 140/2009), Article 2(9) of which provided as follows:

Feed-in tariffs and Green bonuses stipulated by the Act on Promotion are applied throughout the estimated lifetime of plants determined by the regulation implementing some provisions of the Act on Promotion. The Feed-in tariffs increase annually throughout the lifetime of the plant classified in the respective category depending on the type of the renewable resource used and the date of launch into operation with respect to the industrial producers' price index by a minimum of 2% and maximum of 4%, with the exception of biomass and bio gas burning plants.

B. The solar boom and proposals for change: 2009-2010

120.
Initially investment in solar power was not especially attractive because of the relatively high price of PV panels and the relatively poor irradiation profile of the Czech Republic. No significant volume of PV plants was installed prior to 2009.54 The significant drop in the price of PV panels began in 2008 and accelerated in 2009. In early 2009 the ERO learned that the electricity transmission and distribution companies began receiving a significantly increasing number of preliminary applications for connection to the grid for solar installations. It took the view that an uncontrolled increase in solar energy would be highly undesirable because (1) it would increase the price of RES support paid by consumers; (2) it would lead to significantly higher profits for solar investors compared with other RES producers; and (3) it would threaten the stability of the grid because of the unpredictable and volatile nature of solar electricity production.55
121.
On January 29, 2009 Mr Firt, the then Chairman of the ERO, alerted the Prime Minister to these problems and to the need to amend the Act on Promotion to remove the 5% cap.56
122.
On March 1, 2009 the European Photovoltaic Industry Association published a study predicting 8% annual decrease in PV system prices for 2009, and a halving of costs every 8 years.57
123.

The ERO Report on the Fulfilment of the Indicative Target for Electricity Production from Renewable Energy Sources for 2008 (prepared in 2009) said that in a year-on-year comparison, 2007/2008 recorded an almost ten-fold rise in installed capacity of PV systems in the Czech Republic, which had been caused in particular by a fall in the prices of photovoltaic panels by over 40% and the retention of very favourable prices. It went on:

The massive interest shown by investors in photovoltaic systems is already causing significant problems both in the form of disadvantaging the other categories of RES or the speculative blocking of connection capacities at grid level and also a significant increase in ancillary costs for RES, which are subsequently transferred to the final prices of electricity for consumers.58

124.
But it recognized that the Act on Promotion brought a guarantee of long-term and stable promotion necessary for decision-making by businesses, a guarantee of revenues per unit of electricity produced for a period of 15 years from the date it is put into operation, and retention of the level of purchase prices for equipment already in operation for a period of 15 years, and a maximum year-on-year fall in purchase prices of electricity for new equipment of 5%.59
125.
The Prime Minister told Mr Firt that he would take steps to amend the Act on Promotion in accordance with Mr Firt's recommendation,60 but following a vote of censure, in March 2009 the Government had to resign and elections were fixed for October 2009 (postponed by decision of Constitutional Court on September 10, 2009 to May 2010). In May 2009 the Fischer caretaker government was formed.
126.
According to Mr Firt, in mid-2009 many banks temporarily suspended the financing of new solar installations, anticipating a possible change in legislation.61
127.

On July 1, 2009 Mr Firt wrote to the Minister of Industry and Trade and to the Minister of Environment pointing to the "fairly dramatic" rise in preliminary connection requests for photovoltaic installations and urging the Government to abolish the 5% Break-Out Rule so that the ERO could reduce the incentives for investments made in 2010.62 The letter said:

I am writing to you with an urgent request concerning Act No. 180/2005 Coll., on promotion of production of power generated from renewable energy sources.

The Energy Regulatory Office is responsible for promotion of power generated from renewable energy sources under the law. The situation with regard to requests for connecting new sources to the grid (primarily photovoltaic plants) is currently fairly dramatic. The growth in installed capacity for photovoltaic plants between 2007 and 2008 amounted to nearly 1,500% (starting at 3.4 MW and finishing at 54.29 MW). The installed capacity hit 77 MW at the end of June this year. Regional distribution system operators predict that at least another 250 MW will be connected and put into operation by the end of 2009.

At the same time, photovoltaic plants have seen a sharp decline in specific investment costs by approx. 30%. However, the Energy Regulatory Office cannot respond to this situation with the appropriate decrease in the feed-in tariff for power generated from these sources, which puts investors in this area at an unprecedented advantage over investors and producers of other types of renewable resources.

This situation also leads to a speculative block of connection capacities at the level of the distribution systems. For this reason it is no longer possible to grant a request for connection for any applicant in a large part of the Czech Republic for the foreseeable future. This applies not only to renewable resources, but also to sources for combined power and heat production.

The provisions of Section 6(4) need to be amended, because at present they are making it impossible for the Energy Regulatory Office to lower the feed-in tariff on power from renewable resources by more than 5% year-on-year.

I would also like to stress the financial and social aspect of this problem, since the current uncontrollable growth in photovoltaic plants already means that all customers in the Czech Republic, including households, will be making a contribution of more than CZK 3 billion in 2010 just for new photovoltaic plants, while the total fund for promoting all types of renewable resources for 2008 was CZK 2,658 billion. In simplified terms, all customers in the Czech Republic will pay about CZK 50/MWh more for power just due to the growth in photovoltaics.

For the reasons stated above, the Energy Regulatory Office proposes that Section 6(4) of Act No. 180/2005 Coll. should be repealed. This will make it possible to adjust the feed-in tariff for photovoltaics to match the actual situation.

In my opinion the issue described in this letter is extremely serious. I am also sending this letter to the Minister for the Environment as the co-sponsor of Act No. 180/2005 Coll. I will be happy to meet in person to discuss the issue, if needed.

128.
On July 22, 2009 the Minister of Environment replied to Mr Firt to agree that the current market situation was unsustainable and that it was necessary to decrease a disproportionate economic profit of large-scale outdoor photovoltaic systems which these installations currently had compared to other renewable sources. But he disagreed with the proposal to amend Section 6(4) of the Act on Promotion, because it was necessary to preserve the trust of investors.63
129.
On July 29, 2009, the Minister of Industry and Trade replied to Mr Firt stating that the Government would "indeed make efforts to amend [Section 6(4)] as soon as possible."64
130.
On August 10, 2009 the ERO's Vice Chairman, Mr Nemecek, wrote to the Acting Director of the Electric Power Department in the Ministry of Industry and Trade calling for the repeal of Section 6(4) to "make it possible to adjust the purchase price for photovoltaics to match the actual situation."65
131.

On August 24, 2009 the Ministry issued a press release stating that "the grant policy from the part of the state has ceased to fulfil its primary function, because support for solar power stations has shifted from an area of necessary state support for its existence to the position of a branch where profit is guaranteed regardless of the situation on the market," that it was "planning to change the maximum 5% limit by which the ERO can reduce the purchase price of electricity from renewable energy sources annually" and that it was "trying to ensure that the new act comes into force on 1 January next year."66 The press release read:

Ministry of Industry and Trade equalises support for renewable energy sources

The Ministry of Industry and Trade is preparing an amendment to Act No 180/2005 Coll., concerning support for electricity generation from renewable energy sources. The Ministry of Industry and Trade is planning to change the maximum 5% limit by which the Energy Regulation Office can reduce the purchase price of electricity from renewable energy sources annually. The system for support of renewable energy sources must guarantee a fair competition environment for all renewable sources, it must respect the realistic technical— economic parameters of the individual types of RES, and it must also ensure a commensurate attractiveness for investors. The Ministry of Industry and Trade is trying to ensure that the new act comes into force on 1 January next year.

The reason for the amendment of the act is primarily the situation in the area of photovoltaic devices, where the grant policy from the part of the state has ceased to fulfil its primary function, because support for solar power stations has shifted from an area of necessary state support for its existence to the position of a branch where profit is guaranteed regardless of the situation on the market.

Between the years 2007 and 2008 the installed capacity of solar power stations grew by almost 1500 % from an original 3.4 MW to 54.29 MW. By the end of June this year the installed capacity had risen to 80 MW.

The ongoing reduction in the prices of photovoltaic panels is leading to the uncontrolled development of solar power stations. Whereas technological advances have reduced the price of photovoltaic panels by more than 40%, by law the Energy Regulation Office can only reduced the purchase price of electricity for new renewable sources by 5% per year. So at present a significant advantage is being provided to newly built photovoltaic power stations compared to other sources of renewable energy.

Given the current parameters, customers in the Czech Republic, including households, will contribute more than CZK 3 billion in support of electricity generation from new photovoltaic sources alone in 2010. If the law were to remain unchanged, in the years to come the contribution for photovoltaic devices would rise dramatically.

Put simply, if the current state were maintained the price for the delivery of electricity would rise by more than CZK 50/MWh for all customers in the Czech Republic just as a result of increase in photovoltaic devices. In 2011 the price for customers would be even higher.

The purchase prices for electricity from photovoltaic devices are guaranteed for 15 years, but thanks to new technology in certain cases the return on the investment is a mere 5 years. The level of the purchase price for electricity from a photovoltaic device is almost CZK 13/kWh, whereas the market price for electricity is around CZK 2/kWh.

132.

On August 28, 2009, the Acting Director of the Department in the Ministry of Industry and Trade wrote, in reply to Mr Nemecek's letter of August 10, 2009:

I... believe that the preferential treatment of investors and potentially adverse impact on the regulated part of electricity price mentioned by you are hardly sustainable in the future.

On the other hand, it is appropriate to realize that the goal of section 6(4)... was to ensure the investors in renewable sources certainty of payback of their investments, transparency and predictability. A simple cancellation could thus entail a risk of suits filed by investors against the Czech Republic on grounds of lost investments.67

133.
On September 8, 2009 in an open letter to the Chairman of the Economic Committee of the Chamber of Deputies Mr Firt again proposed an amendment to the Act on Promotion to enable the ERO to lower the incentives, subject to ensuring "a reasonable vacatio legis period" whereby the change would take effect only from 2011, so that "Investors will be able to prepare sufficiently in advance for the change in the conditions for investing which should eliminate entirely the risk of possible lawsuits in the Czech Republic regarding protection of investments..."68
134.
ERO made presentations dealing with the solar boom issue. In an October 2009 presentation, ERO said that "the economic return [for solar investors] at the current prices is in conflict with the guaranteed return pursuant to the law and is almost half [of the original 15-year period]." ERO drew attention to the technical parameters specified in the Technical Regulation and explained that an appropriate drop in the 2010 FiT to reflect cost developments would amount to 29.5%.69
135.
In November 2009, the ERO adopted Regulation 409/2009, which modified the technical and economic parameters of the Technical Regulation.70 The expected lifetime for photovoltaic plants was kept as 20 years, as set out in Regulation 364/2007.
136.
In the same month, the ERO issued its Report, in which it said that "the construction of installed capacity in biomass (around 352 MW), wind (around 269 MW), photovoltaics (around 131 MW) and biogas (around 70 MW) [was] of key importance for the fulfilment of the [8%] indicative target [for 2010]."71
137.
On November 16, 2009 the Government put forward a proposal to amend Act 180/2005.72 The Explanatory Report says that the aims of the legislation were to adjust the prices for solar power as of January 1, 2011, to eliminate the current discrimination against other types of renewable sources and repeating Mr Firt's formula about investors preparing in advance so as to eliminate the risk of potential lawsuits against the Czech Republic.
138.
During a press conference on the same day,73 the Minister of Industry and Trade, Mr Vladimír Tosovsky, said that reduction of the promotion from 2011 was chosen to avoid changing the terms and conditions under which existing investors had invested.
139.
On November 23, 2009, the ERO issued Price Decision 5/2009, which set the FiT for 2010 plants.74
140.
The Tribunal was referred to many published articles from June 2009 onwards recording that the Government wanted to end the boom,75 and reporting opposition to its plans.76
141.
In this period there was a geometric increase in installed solar capacity, as many investors (most of them domestic rather than foreign) took advantage, according to Mr Firt, of what was widely perceived as an opportunity to earn very high profits.77
142.
As a result of the rise in the number of applications to connect new solar installations, from February 2010 the national transmission system operator and the regional distribution system operators started to limit the issuance of "binding statements", i.e. the preliminary agreements which assured investors that their plants would be connected to the grid upon completion. The national moratorium on new applications was widely announced and reported.78
143.
On March 12, 2010 the three regional distribution companies wrote an open letter to Parliament urging it to adopt the amendment to the Act on Promotion to curtail "excessive profits" of solar generators.79
144.
On March 17, 2010 the Chamber of Deputies approved Act 137/2010, which entered into force on May 20, 2010.80 This measure abolished the 5% rule for plants connected to the grid from January 1, 2011 onwards (Article II).
145.
The Czech Republic published its 2010 National Renewable Energy Action Plan in July 2010 (the "2010 Action Plan").81 It stated that, in relation to solar plants, the "fixed tariffs" (including the FiT set for 2010) were guaranteed for a period of 20 years and that there was no cap "on the total volume of electricity produced per year or of installed capacity that is entitled to the tariff"82. In the 2010 Action Plan, the Income Tax Exemption was listed together with the FiT and Green Bonuses as available financial support for RES.83
146.
In July 2010 the Necas Government was sworn in, following elections in May 2010, and held office until July 2013.
147.
There was a series of newspaper articles between July and September 2010 suggesting that the Government might resort to taxation measures to deal with the solar boom.84

C. The changes

148.

On September 15, 2010 a bill (which became Act 330/2010) was introduced to eliminate all support for large solar plants commissioned on or after March 1, 2011.85 The Explanatory Report stated:

It is a legislative change of claim for the support of production of electricity from renewable energy sources. Photovoltaic power plants already connected to the electric power system will have their right to claim support preserved under existing conditions. Facilities not yet connected to the electric power system but which started operation before January 1, 2011 will have 12 months to be connected to the electric power system. If they do so, then their right to claim support will be preserved. The extent of support will correspond to the guaranteed support for the respective facility as of the time of its connection to the electric power system.

It is proposed that this Bill comes into effect from January 1, 2011. From March 1, 2011 the only supported facilities will be photovoltaic power plants with the installed power output of less than 30 kWp that are located on roofs and constructions of buildings. To this date it is also guaranteed that photovoltaic power plants already connected to the electric power system will have their right to claim support preserved under existing conditions".86

149.
On September 22, 2010 the Czech Government instructed the Ministers of Industry and Trade and of Environment to form a Coordination Committee to evaluate the impact of support for RES on electricity and energy prices.87
150.
The Committee's tasks88 included the preparation of specific analyses on the impact of RES support on prices and the preparation of a draft amendment to the Act on Promotion.
151.
On October 13, 2010 a draft of legislation to amend the Act on Promotion was re-submitted.89 The draft maintained support under existing legal regulations for sources commissioned prior to the effective date of the Act and connected to the grid by December 31, 2011 (Article II).
154.
On October 20, 2010, the Government resolved to approve the introduction of "the levy on production of electricity from solar radiation from the facilities put into operation in 2009 and 2010."92
155.

At a meeting on October 20, 2010, the Minister of Finance explained the Solar Levy as follows:

Mechanism to reduce the surge increase of the prices of electricity consists in translation of support for RES to the prices for the final consumers only to a limited extent. The Government shall provide the operators of the transmission and distribution system (grid operators) with additional funding to cover the increase of the contribution to RES..

For the operators of the systems, the price shall be compensated from the state budget..

The necessary securing of budget resources on the part of the state budget is realised by increase of the revenues from the title of adoption of three measures:

1. Increasing the levy from removal of land from the Agricultural Land Fund.;

2. The introduction of a levy on the production of electricity from solar radiation from plants commissioned into service in 2009 and 2010.;

3. The introduction of gift tax on emission allowances.93

156.
On October 26, 2010 the Government introduced a draft of Act 346/2010 amending the Act on Income Tax by repealing the Income Tax Exemption and abolishing the Shortened Depreciation Period as from January 1, 2011.94
157.

The Explanatory Report to the draft Act stated:

The proposed changes are in response to the need to eliminate all legal means for the indirect support of electric power generation from renewable resources (mainly solar power plants) that is no longer justified.Taxpayers will be able to take advantage of this tax relief for the last time for the tax period that began in 2010. This means among other things that the change will also apply to taxpayers who put environmentally friendly power plants and facilities in operation before this amendment took effect.

...

This proposed effectiveness date [January 1, 2011] does not create a risk of true retroactivity, since it is not a revision of legal relationships that had already arisen, but is an adjustment of relationships for the future.95

158.
At the session of October 29, 2010 the bill to amend the Act on Promotion was assigned to the Economic Committee of the Chamber of Deputies for review.
159.
On November 2, 2010 a new draft was submitted to Parliament, introducing the Solar Levy (for 3 years).96
160.

In debate before the Economic Committee on November 2, 2010 the Government was asked whether the Ministry of Industry and Trade was not afraid of losing arbitrations, and the answer was that tax regimes were a matter for each country, and changes in tax rates should not be challenged in arbitration. The Minister of Industry and Trade, Mr Kocourek, said:

The issue of arbitrations in general is absolutely erratic.. I declare that it will reduce the amount of intended support to make it bearable for the Czech Republic and for electricity consumers in the Czech Republic. This method - through the withholding tax - it is not just a retroactive correction of support. One may argue as to whether or not this is retroactive. Nevertheless, it is a similar situation as if you changed the conditions for investors by increasing the income tax. From the arbitration perspective, they will strive to advocate the principle on which the support for RES has been based, i.e. their 15-year payback period. the rest is the question of tax regimes - this is the responsibility of each country, and changes in tax rates should not be challenged in arbitrations.97

161.
On November 8, 2010, the ERO issued Price Decision 2/2010, in which it set the FiTs for 2011 plants. The FiTs for plants with capacity of over 30kW commissioned in 2011 were set at lower than 50% of those for plants commissioned in 2010.98
162.
On November 12, 2010 the Czech Parliament approved Act 346/2010, which entered into force on January 1, 2011.99
163.
In this period, according to Mr Mincic, who was then the First Deputy Minister of Finance,investors rushed in to obtain the high FiTs, which had the effect of accelerating the boom in new solar installations, with the result that there would be electricity price increases of 12.7% for households and 18.4% for industrial consumers.100
164.
In the debate on the amendment to the Act on Promotion on November 29, 2010 the First Deputy Minister of Finance, Mr Mincic said that the solar boom might or would trigger an increase in electricity prices for business by 17% or more, and such an abrupt increase would almost liquidate a significant proportion of Czech industry. He also discussed the legal issues, including constitutional challenges based on the "quasi-retroactivity" of the Act, issues relating to the principle of legitimate expectations under EU law, and to undertakings which result from treaties protecting and supporting foreign investments. He accepted that there was a risk of arbitrations.101
165.
The Minister of Industry and Trade made similar points at the Senate session of December 8, 2010.102 The Minister acknowledged the risk of investment arbitrations brought by aggrieved solar investors against the State, but referred to an opinion by a law firm, Advokátní kancelár Kríz a Belina, which "concluded that from the general perspective, the Czech Republic should be able to defend the proposed solutions."103
166.

In the debate Senator Jirí Cunek criticized the Government officials who failed to monitor the development of the solar market and said:

However, what does our law say? Our law says that this is false retroactivity, that international arbitrations cannot be excluded in view of claims regarding the protection of investments, and that the taxation of emissions credits is legally contestable, since the decision of the state body is not a gift and is inconsistent with EU law. That means that we are in a very unconventional situation.

167.
Senator Cunek also endorsed a proposal by the President of the Czech Republic to limit the Solar Levy to one year, so as to avoid payment of damages. As an alternative he proposed to raise funds for RES support by introducing a tax on the production of nuclear energy, as done in Germany.104 In his opinion, that solution would have been consistent with the promotion of RES and would not have caused legal problems.
168.
The Chairman of the Economic Committee, Senator Jan Hajda, warned about the likelihood of arbitrations and said that the only honourable course would be to reject the bill.105
169.
After the discussion, the Senate refused to approve the bill and none of the amendments proposed at the discussion were adopted. But Act 402/2010106 passed on December 14, 2010, in accordance with Article 46(3) of the Czech Constitution pursuant to which a bill is considered adopted if the Senate takes no action within 30 days of its submission.
170.
Sections 7(a)-(i) introduced the Solar Levy, which applied to power generated by solar radiation from January 1, 2011 to December 31, 2013 in a plant put into operation between January 1, 2009 and December 31, 2010. The levy rate was 26% on FiTs and 28% on Green Bonuses.
171.
According to the Respondent, the levy rate of 26% was calculated in order to ensure that investors continued to have a guarantee of return of investment within 15 years and a return on capital of at least 7% per annum on average over the lifetime of their investment.107
172.
Act 330/2010, which came into force on January 1, 2011 amended Section 3(5) of the Act on Promotion and abolished all incentives related to photovoltaic plants with installed output exceeding 30 kWp commissioned after March 1, 2011.
173.
On January 11, 2011 the European Commissioners for Energy and Climate Action expressed "serious concerns" about the retroactive character of the amendment to the Act on Promotion.108
174.
Act 165/2012109 repealed the Act on Promotion as of January 1, 2013. The Act established a new funding mechanism under which, inter alia, the Czech Electricity and Gas Market Operator (OTE) paid (i) Green Bonuses directly to the RES producers; and (ii) the difference between the FiT and the market price to the "mandatory purchasers". The Act also introduced the "negative hourly price", which was designed to be paid to the "mandatory purchasers" by RES operators entitled to the FiT or to be deducted from the payable FIT by the "mandatory purchasers" when the price of electricity on the daily market had a negative value. Pursuant to the transitional provisions set out in Section 54, all of the Claimants' plants have been receiving the same amount of FiTs provided for under the Act on Promotion as amended in 2010.

VIII. Jurisdictional/admissibility issues

A. Whether the Solar Levy is a tax for the purposes of Energy Charter Treaty, Art 21(1)

1. The Respondent's position

2. The Claimants' position

3. The Tribunal's conclusion

215.

The Parties do not agree whether the Tribunal has jurisdiction over the Claimants' claims under the ECT. As summarized above, the Respondent contends that all of the Respondent's amendments to the Incentive Regime - the introduction and extension of the Solar Levy, the repeal of both the Income Tax Exemption and the Shortened Depreciation Period - qualify as "Taxation Measures" under of Article 21 of the ECT and therefore are excluded from the scope of the ECT.212 Article 21(1) of the ECT provides:

(1) Except as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties. In the event of any inconsistency between this Article and any other provision of the Treaty, this Article shall prevail to the extent of the inconsistency.

Article 21(7)(a) of the ECT describes the term "Taxation Measures" as including:

(i) any provision relating to taxes of the domestic law of the Contracting Party or of a political subdivision thereof or a local authority therein; and

(ii) any provision relating to taxes of any convention for the avoidance of double taxation or of any other international agreement or arrangement by which the Contracting Party is bound.

Paragraph (7) of Article 21 further specifies:

(b) There shall be regarded as taxes on income or on capital all taxes imposed on total income, on total capital or on elements of income or of capital, including taxes on gains from the alienation of property, taxes on estates, inheritances and gifts, or substantially similar taxes, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

(c) A "Competent Tax Authority" means the competent authority pursuant to a double taxation agreement in force between the Contracting Parties or, when no such agreement is in force, the minister or ministry responsible for taxes or their authorised representatives.

(d) For the avoidance of doubt, the terms "tax provisions" and "taxes" do not include customs duties.

216.
As summarized above,213 the Respondent contends that the Tribunal does not have jurisdiction to entertain any of Claimants' ECT claims because its jurisdiction under Article 26(1) of the ECT is limited to "disputes 'concern[ing] an alleged breach of an obligation' set out in Articles 10 to 17 of the ECT."214 According to the Respondent, "'[t]he measures challenged by the Claimants in this arbitration, namely: the introduction of the Solar Levy, the repeal of the Income Tax Exemption and the prolongation of the Solar Levy' are all 'Taxation Measures' within the meaning of the ECT;"215 accordingly, they are excluded from the scope of Article 26's dispute settlement provision.
217.
The Claimants have abandoned their claim concerning the depreciation measures216 and stated explicitly that they do not dispute that the repeal of the Income Tax Exemption constitutes a "Taxation Measure" under Article 21(7) of the ECT.217 The Respondent emphasized this at the Hearing interpreting this as an "admission by Claimants that they do not contest that their ECT claims based on the repeal of the Income Tax exemption are barred by the Article 21 carve out," and the Claimants did not comment on it.218 The Tribunal agrees. It cannot be disputed that the repeal of the Income Tax Exemption constitutes a "Taxation Measure" for the purposes of the ECT. The Tribunal therefore concludes that it has no jurisdiction to entertain the Claimants' claims arising out of this measure.
218.
Regarding the Solar Levy, however, the Claimants contend that it cannot be characterized as a "Taxation Measure" for the purpose of Article 21(7) of the ECT. According to the Claimants, the ECT tax carve-out and its reference to domestic law should be interpreted in accordance with the rules of interpretation of international treaties contained in the VCLT.219 According to Article 31(1)'s general rule of interpretation, the Claimants assert, "the definition of 'taxation measure' of Article 21(7) and the relevance of the reference to domestic law must be interpreted 'in good faith' and bearing in mind the 'context' of the relevant expressions and the 'object and purpose' of the ECT."220 The ordinary meaning of a term contained in an international treaty is to be identified in the light of its object and purpose.221 Exclusively relying on the host state's domestic legislation to define the scope of the ECT's tax carve-out, as the Respondent argues, would allow the host state "to escape its international obligations under the ECT by simply labelling a measure as a tax."222 That however would be at odds with the purpose of the ECT which, the Claimants assert, is "to promote long-term cooperation in the energy field."223
219.

The Claimants contend that the ECT's tax carve-out must be limited to taxes imposed in good faith.224 Applying this principle, the Claimants follow the approach taken by the tribunals in the Yukos and the parallel Hulley and Veteran cases225 and conclude that the relevant standard for determining whether a particular regulatory measure qualifies as a "Taxation Measure" under Article 21(7) of the ECT is "whether it comes within the definition of bona fide taxation actions, i.e., actions that are motivated by the purpose of raising general revenue for the State.'"226 The Claimants argue that the Solar Levy does not meet this bona fide standard, regardless how the measure might be sought to be characterized under Czech law.227 In any event, according to the Claimants, the Respondent's characterization of the Solar Levy as a tax under both Czech Law and the autonomous standard applied by certain non-ECT tribunals is incorrect: the Solar Levy neither constitutes a tax under Czech law228 nor under the autonomous standard applied by certain tribunals operating under the US-Ecuador and Canada-Ecuador BITs .229

220.
The Tribunal agrees that Article 21 of the ECT as a whole must be interpreted in accordance with the VCLT. The applicable provision here is the general rule of treaty interpretation in Article 31, which provides that "[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."
221.
Article 21(7) of the ECT sets forth no self-standing definition of "Taxation Measures." Instead Article 21(7)(a) of the ECT provides that such measures include "any provision relating to taxes of the domestic law of the Contracting Party or of a political subdivision thereof or a local authority therein" as well as "any provision relating to taxes of any convention for the avoidance of double taxation or of any other international agreement or arrangement by which the Contracting Party is bound."
222.
The Tribunal notes that, unsurprisingly, neither of the Parties has suggested that the Solar Levy qualifies as a "Taxation Measure" under the second subparagraph of Article 21(7)(a) of the ECT, (i.e. under an applicable international instrument), but that the Parties have centred all their arguments on the first subparagraph of Article 21(7)(a) referring to the domestic law of a Contracting Party
223.
The Parties disagree on how this provision should be interpreted, the Claimants arguing that its explicit reference to domestic law does not reduce "the interpretation of the ECT tax carve-out to an exercise in Czech law."230 According to the Claimants, the definition of "Taxation Measure" according to Article 21(7) and the relevance of the reference to domestic law must be interpreted in accordance with the general rule of treaty interpretation in Article 31(1) of the VCLT and "therefore be interpreted 'in good faith' and bearing in mind the 'context' of the relevant expressions and the 'object and purpose' of the ECT."231 The Respondent contends, in turn, that the Tribunal need only consider whether the Czech legislative provisions that introduced and later extended the Solar Levy constitute provisions relating to taxes of the domestic law of the Czech Republic in order to determine whether these measures fall in the scope of the ECT's tax carve-out.232 Because, according to the Respondent, the Solar Levy constitutes a tax under Czech Law, it qualifies under the ECT's tax carve-out.233
224.
The Tribunal takes the view that in order to ascertain whether a putative tax measure qualifies under Article 21 of the ECT a two-step analysis is required: a characterization under domestic law followed by an application of Article 21's inherent limits.
225.
The starting point of such analysis must be the characterisation of the putative tax measure by the State relying on the tax carve-out. In the Respondent's words "it must look to the domestic law of the Czech Republic" to determine whether the Solar Levy qualifies as a "provision relating to taxes" under Article 21 of the ECT.234 The Tribunal accepts that, in order for Article 21 of the ECT to apply, the domestic law of the host state must characterize the measure as a tax in nature and substance. That is clear from the text of Article 21(7)(a)(i) of the ECT, which is directed to "any provision relating to taxes of the domestic law" of the state in question. As the Respondent observes, this language focuses inquiry directly on the domestic law of the state relying on Article 21 of the ECT.
226.
This interpretation is consistent with the need to interpret the ECT, including Article 21, in accordance with the VCLT and applicable rules of international law, which the Respondent explicitly recognizes.235 Interpreting Article 21 of the ECT in accordance with the VCLT requires that effect be given to the ordinary meaning of Article 21(7)'s reference to the domestic law of the state relying on the ECT's tax carve-out.
227.
In addition to requiring an interpretation of treaty-terms according to their "ordinary meaning," Article 31(1) of the VCLT also requires the Tribunal to interpret the terms of Article 21 of the ECT in the light of the ECT's object and purpose. This interpretation is also consistent with the objective of Article 21, which was to permit, within the limits of Article 21, contracting states to exclude specific measures from certain of the ECT's international protections. Put simply, the terms of Article 21, interpreted in accordance with Article 31(1) of the VCLT, require reference to the domestic law of the state adopting a particular measure, in order to determine whether that measure constitutes a tax measure under the domestic law of that state. The result, a contrario, is that unless a measure constitutes a tax measure as a matter of its domestic law, Article 21's purposes are not applicable. Article 21 applies only to those measures which a contracting state to the ECT characterizes as tax measures within its domestic legal system (or within applicable international conventions).
228.
If the putative taxation measure is found to constitute a taxation measure under the host state's domestic law, then, as discussed below, in a second step, an interpretation of the scope of the ECT's tax carve-out in accordance with Article 31(3) of the VCLT requires to consider the limits which Article 21 of the ECT imposes on those measures. However, before those limits become potentially relevant, a putative taxation measure must first constitute a tax measure as a matter of domestic law.
229.
The Tribunal takes the view that when analyzing whether a certain measure is to be characterized as a taxation measure under domestic law, considerations of substance should prevail over a formalistic approach. In that sense although the Tribunal attaches some importance to the fact that the Solar Levy was titled just that - the Solar "Levy" - not the Solar "Tax" or some other type of tax, it is hesitant to assign decisive weight to a formal element as is the denomination of the measure. As the Respondent's expert, Mr Petr Kotáb, argues, in Czech law "the term 'levy' is very frequently used to designate payments that are more properly classified as 'taxes' or 'fees'."236 As discussed below, however, there are other significant considerations arguing against, not only a formal but also substantial, characterization of the measure as a tax under Czech law. The Tribunal heard considerable expert and other evidence on this point. The Parties' experts mainly focused on the definition of "tax" under Czech tax theory and on the position of Czech courts, namely the Supreme Administrative Court and the Constitutional Court, on the question whether the Solar Levy qualifies as a tax under Czech law.
230.
Preliminarily, the Tribunal takes the view that reliance on the fact that the Solar Levy is administered by the Tax Administration Law is not dispositive of the question whether the Solar Levy constitutes a tax in substance. The "definition" of tax contained in the Tax Administration Law extends to many payments which by their nature are not taxes; reliance on the Tax Administration Law is therefore unsuitable to give a conclusive answer as to whether or not a payment it governs is in nature a tax. This was not contradicted by Respondent's expert Mr. Petr Kotáb at the Hearing.237
231.
Likewise, the Tribunal accepts the Respondent's argument that academic literature, in these particular circumstances, does not provide substantial guidance as to whether or not the Solar Levy is "legally a tax."238 There is very little commentary addressing the characterization of the Solar Levy under Czech law and that commentary which does exist does not address many of the Czech judicial decisions referenced by the Parties.
232.
In these circumstances, the Tribunal concludes that the decisions of the Czech Courts are of particular relevance for the characterization of the Solar Levy. In this regard, the Tribunal notes that Czech Courts have, at least prima facie, come to divergent characterization of the Solar Levy. While some court decisions refer to the Solar Levy as a tax, others come to the opposite result, finding that the Solar Levy is not a tax in substance. However, the former primarily addressed the issue of whether the Solar Levy qualified formally as a tax, in particular for purposes of the Tax Administration Law rather than addressing the issue of whether the Solar Levy constitutes a tax in substance. This applies to the decision of the Grand Chamber of the Supreme Administrative Court of December 17, 2013, cited by the Respondent as evidence that the Solar Levy was a tax for purposes of Czech law.
234.

In its decision, the Supreme Administrative Court stated in paragraph 19:

The Supreme Administrative Court notes with regard to the petitioner's argumentation regarding the nature of the levy as a tax that the nature of any tax in the taxation system involves the government requiring funds from tax payers without immediate compensation. It can thus be stated that a common essential feature of all taxes is their non-equivalence. The subject of the levy collected under the Renewable Energy Sources Act is the amount resulting from the consideration of stipulating the amount of government support for this type of economic activity. Unlike collecting income tax on income resulting from the activities of the entity subject to the tax without any performance from the state at the time of taxation, the state uses the levy to lower the support it calculated and provided. The levy was therefore correctly not included under Section 36 of the Income Taxes Act among the income subject to the withholding tax and that is not included in the tax base, for the reasons consisting of the differing natures of a levy and a tax. Despite the fact that the levy uses the same collection mechanism as for withholding taxes on certain types of income, the levy does not have the nature of a tax. (Emphasis added)

235.
In the Court's view, the essential feature of a tax was that of non-equivalence, i.e. that taxes are paid without concrete consideration. Since the Court considered the subsidies in form of FiTs and Green Bonuses a "performance from the state" directly linked to the collection of the Solar Levy, it found that the Solar Levy lacked the characteristic of "non-equivalence" and hence "does not have the nature of a tax" and "is in nature a decrease in government subsidy and not a tax."239 Accordingly, the Court concluded that the Solar Levy "as introduced by Act No. 402/2010 Coll. is in nature a decrease in government subsidy and not a tax, where the basic criterion is non-equivalence."240
236.
The Tribunal accepts that, as conceded by the Claimants' expert Mr [REDACTED] in the hearing, there "might be differences in the definitions" of taxes in Czech academic literature.241 However, the Tribunal notes that it is undisputed that the element of non-equivalence is an essential feature to distinguish taxes from fees under Czech law - in both case-law and academic doctrine.242 Whether the Solar Levy lacked or not the distinguishing feature of non-equivalence was heavily disputed between the Parties' experts. In that regard, the Tribunal is also mindful of the Respondent's contention that Czech academic literature, in particular Mr Radim Bohác in a 2013 publication, has described the Solar Levy as non-equivalent. However, in his analysis, Mr Bohác concedes that with regard to the Solar Levy one could "speak of. some form of material and remote equivalence."243 This analysis is essentially consistent with Mr [REDACTED] characterisation of the Solar Levy as being "formally non-equivalent," but materially bearing a direct causal link to the payment of the FiTs.244
237.
The Tribunal also notes that Mr Bohác's analysis precedes the July 10, 2014 Supreme Administrative Court judgment and that the Respondent failed to submit evidence that Mr Bohác maintains his analysis in view of the Supreme Court's contrary conclusion.245 The Tribunal does not consider that it should attach the same weight to this analysis, as to the July 10, 2014 decision of the Supreme Administrative Court. This decision is directly relevant to the question whether the Solar Levy was characterized as a tax for purposes of Czech law. The Czech Supreme Administrative Court specifically concluded that the Solar Levy could not be treated as a tax in substance, and thus could not provide the basis for a finding of double taxation. In the Tribunal's view, that conclusion directly addresses the proper characterization of the Solar Levy under Czech law.
239.
The Tribunal is not persuaded that similar weight should be attached to the various decisions cited by the Respondent as evidence that the Solar Levy was a tax for purposes of Czech law. These decisions principally involve determinations that the Solar Levy is subject to the procedural and administrative provisions of the Tax Administration Law and is a "tax or fee" within the meaning of Article 11(5) of the Czech Republic's Charter of Fundamental Rights and Freedoms ("Charter").248 This was reiterated by Claimant's expert Mr [REDACTED] at the Hearing.249
240.
As outlined above, the Tax Administration Law applies to a wide range of fiscal payments, including fees and other charges250 which are not generally regarded as taxes under Czech (or other) law; likewise, Article 11(5) of the Charter applies not only to taxes, but also fees. The Tribunal does not consider that these authorities establish more than that the Solar Levy was administered in accordance with general procedures and fairness requirements, applicable to both taxes and other fiscal charges, under Czech law.251 This, however, is of no weight as the issue before the Tribunal is not whether the Solar Levy is administrated in accordance with procedures that apply to taxes (and fees) but whether the Solar Levy is a tax in substance.
244.
Moreover, and independently of the question of whether or not it qualifies as a taxation measure under Czech law, the Solar Levy cannot be considered to qualify as a "Taxation Measure" within the meaning of Article 21(7) of the ECT. The Tribunal is convinced that a measure will only be exempted from the ECT's coverage if it falls within the meaning of a "Taxation Measure" as contemplated by its Article 21. The Tribunal has no doubt that Article 21 imposes limits on those measures which may be invoked by a Contracting Party under the ECT. Article 21 is, of course, a provision in an international treaty, subject to interpretation under the VCLT and international law more generally. It would ignore the ECT's text, and the specific reference to tax-related measures in Article 21(7)(a)(ii), to decline to give international content to these terms.
245.
Moreover, a contrary result, in which the reference to "Taxation Measures" in Article 21 had no international content, would permit Contracting Parties unilaterally to define those measures which were, and were not, subject to the ECT. In the Tribunal's view, there is nothing to suggest that such a view of Article 21 of the ECT was contemplated. It would contradict the purposes of the ECT, aiming at the establishment of uniform international standards, contrary to the text of Article 21, which specifically limits the scope of the provision to tax measures. Article 21 clearly imposes limits on what constitute tax measures which are excluded from the ECT's coverage.
246.
In that context, the Tribunal finds the Respondent's assertion, that the language used in the equally authentic French and Italian versions of the ECT supports a broad scope of the ECT's tax carve-out - going beyond taxation measures and including any fiscal measure - unpersuasive. Article 33(4) of the VCLT provides that "when a comparison of the authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not remove, the meaning which best reconciles the texts, having regard to the object and purpose of the treaty, shall be adopted."
247.
As noted above, Article 21 of the ECT does not itself provide an express international definition of tax measures to which the provision applies. In the Tribunal's view, there is also no need, in this arbitration, to comprehensively define what are, and what are not, tax measures for purposes of Article 21's limits. Rather, it is sufficient to address one aspect of these limits, which in the Tribunal's view is applicable to the Solar Levy.

B. Whether the Claimants complied with the notice requirements under the BIT and the ECT with regard to the claims arising out of the extension of the Solar Levy by Act 310/2013

1. The Respondent's position

254.
In its Statement of Defense the Respondent contended that the Claimants' claim as to the Extension of the Solar Levy by the Act No. 310/2013 Coll. (the "Solar Levy Extension Claim") failed to satisfy the requirements of the prior written notification and the cooling-off period under Article 10(2) of the BIT and Article 26(2) of the ECT.261 The Respondent alleged that even though the Claimants had ample opportunities to raise the Solar Levy Extension Claim after the adoption of the Act of September 13, 2013, the Claimants had not done so until the Statement of Claim of April 7, 2014.262
255.

Article 10 of the BIT provides:

(1) Disputes relating to investments between either Contracting Party and an investor of the other Contracting Party should as far as possible be settled amicably between the parties in dispute.

(2) If a dispute cannot be settled within six months of the date when it was notified by one of the parties in dispute, it shall, at the request of the investor of the other Contracting Party, be submitted to arbitration.263

256.

Article 26 of the ECT provides:

(1) Disputes between a Contracting Party and an Investor of another Contracting Party relating to an Investment of the latter in the Area of the former, which concern an alleged breach of an obligation of the former under Part III shall, if possible, be settled amicably.

(2) If such disputes cannot be settled according to the provisions of paragraph (1) within a period of three months from the date on which either party to the dispute requested amicable settlement, the Investor party to the dispute may choose to submit it for resolution […].264

2. The Claimants' position

257.
The Claimants took the view that the Solar Levy Extension Claim, i.e. the claim in respect of the prolongation of the Solar Levy, could not be characterized as a new dispute requiring an extra written notification and a new waiting period.265 The notice of dispute dated June 10, 2011 referred to the adoption of Act No. 204/2010 concerning the introduction of the Solar Levy, and the Solar Levy Extension Claim concerns only the extension of the Solar Levy.266 On this basis, the Claimants contended that the Solar Levy Extension Claim was the same dispute in substance as that contained in the notice of dispute and thus did not require a separate notification and cooling-off period from the original claims.267

3. The Tribunal's conclusion

258.
The Respondent did not pursue this objection in its Rejoinder, or during the hearing, but did not formally withdraw it.
259.
The notice of dispute dated June 10, 2011 referred to Act 402/2010, which introduced the Solar Levy. The Solar Levy was extended by Act 310/2013.
260.
The Tribunal is satisfied that the Claimants' argument is right. The claim relating to the Solar Levy extension is the same dispute in substance as that contained in the notice of dispute and does not require a separate notification and cooling-off period from the original claims.

C. Whether the Claimants' alleged misrepresentations in obtaining the operating licence for the Mozolov plant bar their claims in relation to the plant

D. Whether the Claimants have made a prima facie showing of a violation of the BIT and ECT in relation to the Holysov plant

261.
These issues partially concern the merits of the claim, and will be disposed of below.

IX. The substantive claims: legitimate expectation and arbitrary or unreasonable behaviour

1. The Claimants' position

262.
As a threshold matter, the Claimants observe that their ECT claims should be maintained even if their ECT claims are "almost identical" to their BIT claims.268 The Claimants describe that this is because (1) the ECT is "more specific in protecting investments in the energy sector"; and (2) "[s]ince the EU is a contracting party to the ECT, there will be more grounds to oppose interference of the European Commission in relation to the enforcement of an eventual award."269
263.
The Claimants contend that the Respondent violated an obligation to provide a stable and predictable legal framework by modifying the Incentive Regime.270
264.
According to the Claimants, the obligation to provide a stable and predictable investment framework may be distinguished from the obligation to protect an investor's legitimate expectations.271 The former concerns investors' basic expectations as to stability of an investment framework, while the latter requires an analysis of individual investors' expectations.272 In the Claimants' view, the obligation to provide a stable and predictable investment framework arose from (1) "the Incentive Regime's intrinsic attribute of stability"; and (2) "the specific treaties invoked by the Claimants in this case".273
265.
As for "the Incentive Regime's intrinsic attribute of stability", the Claimants submit that the Incentive Regime was established to attract investments in the photovoltaic sector by providing long-term incentives.274 This inherent nature of the Incentive Regime created basic expectations and a promise that the Czech Republic would not modify the Incentive Regime, which are protected under the standard of "fair and equitable treatment" ("FET").275
266.
The Claimants submit that the requirements of protection of the investors' basic expectations as to stability are essential elements of the FET standard.276 This is confirmed by the tribunal in Tecmed and other subsequent tribunals.277 The tribunal in Bayindir v. Pakistan further elaborated that a host State's policy change may lead to a violation of the FET standard.278 This is particularly relevant to the present case, where the Czech Republic changed its policy towards the photovoltaic investors.279
267.
The Claimants contend that the obligation to provide a stable and predictable legal framework also derives from specific treaties invoked by the Respondent, i.e., the BIT and the ECT.280 These treaties share the purpose to promote investment between contracting States by establishing a stable investment environment.281
268.
The Claimants allege that a promise of stability may arise in the absence of a stabilization clause.282 The Respondent is said to have accepted this when stating that the Act on Promotion provided a promise of a 15-year simple payback and a 7% rate of return, even if the Act did not contain a stabilization clause.283 Such a payback and a rate of return, are undeniably a form of stability, with limited scope.284 The Claimants contend further that a contractual stabilization clause is unnecessary, considering that, in the circumstances of the RES sector, the host State does not enter a contractual relationship with individual investors.285 In the Claimant's view, the cases that the Respondent relies on, including Parkerings v. Lithuania,286 are distinguishable from the case at hand, because in those cases the tribunals found no basic or specific promise of stability by host States.287
269.
The Claimants further contend that a stabilization clause is irrelevant to the issue of whether a host State owes an international obligation not to amend its legal framework.288 In the Claimant's view, a stabilization clause only generates an obligation under domestic law, and accordingly it does not constrain a host State's authority to change its domestic legislation.289 This view is supported by the tribunal in Oxus Gold v. Uzbekistan, which provided that "a [stabilization] clause in a law or a general regulation does not give a vested right to the investor, as the State can always modify its laws and general regulations."290
270.
The Claimants argue that the Respondent violated the Claimants' legitimate expectations with reference to the Incentive Regime, so as to satisfy the three prongs of the test applied by most arbitral tribunals, including, in particular, the Micula tribunal: "(a) the Respondent made a promise, assurance or representation of regulatory stability; (b) the Claimants relied on such promise, assurance or representation; and (c) such reliance was reasonable."291 The Claimants observe that the doctrine of legitimate expectations is irrelevant to the reasonableness of a host State's measure.292
271.
The Claimants contend that they had legitimate expectations that "(i) the FiT level would remain stable over the lifetime of the project (i.e. 20 years), and (ii) the Income Tax Exemption would last for 6 years (i.e. the first calendar year of operation of the plant plus the following five ones)".293
272.
According to the Claimants, because the FET standard does not expressly provide which types of investors' expectations can be considered as legitimate, and accordingly "one has to determine whether, in the specific circumstances, the State's behaviour gave rise to an expectation that its legislative framework would not change to the detriment of the investors".294 The Claimants then submit that the specific circumstances in the present case was that the Respondent intended to attract investors by providing long and stable incentives through the Incentive Regime.295
273.
The Claimants submit that domestic legislation can be treated as promises to foreign investors, referring to several legal authorities.296 Based on this proposition, the Claimants take the view that the Czech Republic made explicit promises of stability to the investors throughout its legislation including the Act on Income Tax and the Act on Promotion.297 In this vein, the recent decision in Charanne v. Spain, in which the tribunal found an individual commitment was necessary for investors to enjoy legitimate expectations as to stability of investment framework, can be distinguished on the facts.298 In that case, the claimants invoked unreasonably long period of stability, i.e., 30 to 50 years.299
274.