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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.
97.
The Solar Levy was originally set at 26% and 28% for payments to solar energy producers respectively under the FiT system and under the Green Bonuses system. It was withheld by the grid operator who paid the FiT or Green Bonuses to the RES producers for the electricity produced.
98.
Act 310/2013 set the Solar Levy at 10% for FiTs and 11% for Green Bonuses.
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).
152.
On October 13, 2010 (as the Deputy Industry and Trade Minister reported to the Coordination Committee on October 15, 2010) the Government approved proposals to reduce the impact of RES on the price of electricity by a combination of three solutions, namely: (1) "The introduction of a withholding tax on sales of electricity from photovoltaic power plants"; (2) "Change of rates for alienation of land from the agricultural land fund"; and (3) "Include the revenues from the sale of emission permits, including derogative, in the financing of RES Support"90. The first solution eventually became the Solar Levy.
153.

First Deputy Environmental Minister Bízková is recorded as having said:

... it is necessary to find a formally correct mechanism for reduction of the support of RES from photovoltaic power plants, such that it cannot be legally contested.

and Mr J Firt was noted as declaring that the ERO fully supported "the legally strong variant, which shall ensure the reduction of the contribution to the PVPPs [photovoltaic power producers]."91

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

175.
The Respondent contends that "[t]he Tribunal does not have jurisdiction over Claimants' [ECT] claims that pertain to taxation" by reason of Article 21 of the ECT, which excludes "Taxation Measures" from the scope of the ECT.110
176.

Article 21 of the ECT provides, in relevant part:

(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.

[…]

(2) Article 10(2) and (7) [Most favourable and national treatment] shall apply to Taxation Measures of the Contracting Parties other than those on income or on capital.

[…]

(5) (a) Article 13 [Expropriation] shall apply to taxes.

[…]

(7) For the purposes of this Article: (a) The term "Taxation Measures" includes: (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. […]111

177.
According to the Respondent, all of the Respondent's amendments to the Incentive Regime, i.e., the installation and the extension of the Solar Levy and the repeals of the Tax Exemption and the Shortened Depreciation Period constituted taxation measures for the purpose of Article 21(1) of the ECT.112 The Respondent notes that the Claimants do not object to the tax measure applicability as to the repeals of the Tax Exemption and the Shortened Depreciation Period.113 Accordingly, the tax carve-out becomes at issue only in relation to the introduction and the prolongation of the Solar Levy.114
178.
The Respondent asserts that the determination of whether a measure is characterized as a Tax Measure should be based on the plain text of Article 21(7) of the ECT and in accordance with the VCLT.115 Article 31 VCLT provides, inter alia, that "[a] special meaning shall be given to a term if it is established that the parties so intended".116 The Respondent then submits that under Article 21(7)(a) the contracting State Parties intended to give a special meaning to the term "Taxation Measures" by defining them as including "any provision relating to taxes of the domestic law of the Czech Republic."117 Accordingly, any provision relating to tax measures under domestic law is carved-out pursuant to Article 21(7) of the ECT.118
179.
According to the Respondent, such a reference to domestic law is consistent with arbitral practice where "tribunals have not hesitated to apply domestic law when expressly instructed to do so."119 This is also supported by the drafters' intent to "preserve State autonomy over taxation matters, rather than wrest it from the State's hands".120 The Respondent objects to the Claimants' assertion that this interpretation allows a host State to evade an ECT obligation by categorizing its measure as tax, noting that the ultimate authority to decide the tax applicability belongs to a tribunal, instead of a host State.121 The Respondent also objects to the Claimants' allegation that the reference to domestic law is contrary to the purpose of the ECT, stating that they do not provide an adequate explanation.122
180.
The Respondent rejects the Claimants' argument that taxes must be "imposed in good faith" in order for the Article 21 carve-out to apply.123 The Respondent notes that the Energy Charter Secretariat's 2015 publication on "Taxation of Foreign Investments under International Law"— to which the Claimants refer—does not indicate that any such requirement applies.124 The passage cited by the Claimants for support discusses various merits issues relating to a State's power to tax which the Respondent deems inappropriate for the determination of whether there is jurisdiction over the dispute.125
181.
In any event, the Respondent submits that the Claimants' allegation that the Respondent deliberately camouflaged the Solar Levy as a tax in order to evade international liability under the treaties, and thus, acted in bad faith, is without merit.126 The Respondent contends that, as found by the tribunal in Tza Yap Shum v. Peru, the conduct of tax authorities ought to be examined "under an assumption of good faith".127 According to the Respondent, the Claimants should have, but failed, to provide evidence to overcome this presumption by showing that the purpose of the introduction of the Solar Levy was one "'entirely unrelated' to taxation, 'such as the destruction of a company or the elimination of a political opponent'."128 Furthermore, several tribunals have ruled that a State cannot be deemed to have acted in bad faith simply because it did not pursue what a tribunal (in hindsight) believes would have been a better way of accomplishing an objective.129
182.
The Respondent maintains that the Solar Levy can meet the definition adopted in Yukos v. Russia, in which the tribunal defined taxation measures as "actions that are motivated by the purpose of raising general revenue for the State".130 This is primarily based upon the Respondent's expert's analysis that "there is no obligation for the Government to use the funds that it receives pursuant to the Solar Levy to finance any specific purpose."131 The Respondent adds that its good faith is supported by the fact that it was looking for a lawful measure under domestic law, instead of simply reducing the FiT.132
183.
The Respondent invokes the fact that the Solar Levy applied to all solar producers whose plants were put into operation in 2009 and 2010, irrespective of whether the solar producer could invoke an investment treaty or of whether that investment treaty contained a tax-carve out.133 The Respondent rejects the Claimants' argument that the Tribunal read "bad faith" into the Deputy Environment Minister's contention that it was "necessary to find a formally correct mechanism for reduction of the support of RES from photovoltaic power plants, such that it cannot be legally contested" noting that it is the "essence of good faith" to find a lawful way to achieve a policy objective.134
184.
The Respondent describes that it did not choose to reduce the FiT because such a FiT reduction would have been (1) "[i]nsufficient by itself to compensate all budget support costs (unless FIT reduced by 50%); (2) "[l]ess suited to addressing temporary problem affecting only some producers of one source of RES"; (3) "[i]mpossible to implement before year-end (given need to amend multiple levels of laws/regulations)"; and (4) "[r]equire more radical revision of RES support framework".135
185.
The Respondent contends that the Solar Levy is a tax under Czech domestic law.
186.
The Respondent submits that the Tribunal must determine whether the amendment measures constituted taxes under domestic law "in accordance to evidence presented to it as to the content of the law and the manner in which the law would be understood and applied by the municipal courts"136 and there is "overwhelming evidence" that the Czech legal system overall treats the Solar Levy as a tax, and the Solar Levy has been "understood and applied" as such by the Czech municipal courts.137
187.
The Respondent notes that, like any tax, the Solar Levy has a rate, a base, and a taxpayer.138 Therefore, the Czech legislator has provided for its collection by the tax authorities as revenue for the general State budget.139
188.
The Respondent asserts that "the Czech legislation specifically designates the Solar Levy as a tax".140 The Solar Levy meets the definition of "tax" under the Tax Administration Law, a central instrument of Czech tax law, and is accounted for and reported as a tax in accordance with Czech accounting law and budgetary procedure, and listed as a tax in the reports of international organizations that use their own autonomous definitions of tax (OECD and Eurostat).141 The Respondent submits that the Solar Levy has never been classified as anything other than a tax in accounting legislation.142 Indeed, the Respondent emphasizes that the Claimants' own financial statements also describe the Solar Levy as a "solar tax".143
189.
The Respondent states that nothing in the ECT suggests that Article 21 only refers to taxes in a "narrow" or "theoretical" sense; on the contrary, the Energy Charter Secretariat's publication on Article 21 indicates that the ECT "envisaged all kinds of special domestic taxes, including taxes to reduce excessive profits".144 Furthermore, there is no provision of the ECT requiring that "domestic law" provide a "general definition" of tax.145 It only requires that the relevant provisions be provisions "relating to taxes of domestic law".146 In the Respondent's view, the relationship between the Solar Levy and the Czech domestic tax system is direct and unequivocal, given that (1) the Solar Levy is directly transferred to the general State budget; (2) the Solar Levy does not impact gross revenues; and (3) the accounting practice categorizes the Solar Levy as a tax expense.147
190.
The Respondent notes further that the Czech judiciary overwhelming refers to the Solar Levy as a tax.148 The Czech Constitutional Court unequivocally refers to the Solar Levy as "a tax or fee" for the purposes of Article 11(5) of the Czech Republic's Charter of Fundamental Rights and Freedoms and satisfies the provision's requirement that "taxes and fees should be levied only on the basis of the law".149 On the other hand, the Czech Supreme Administrative Court decision of July 10, 2014, on which the Claimants rely, is unpersuasive given that (1) the issue of nonequivalence had never been argued during the proceedings; (2) no other Czech court or scholar have cited this decision; and (3) no oral hearing was held and only two briefs were submitted.150
191.
The Respondent addresses the six features of taxation proposed by the Claimants: "(a) obligatory, (b) non-refundable and (c) non-equivalent payment (d) introduced by law, (e) intended to serve as income of the state budget for the financing of society-wide needs and (f) paid for no specific purpose."151 According to the Respondent, contrary to the Claimants' statements, the Solar Levy is "non-equivalent" and was not "paid for a specific purpose" since the proceeds are deposited into the general treasury account of the Ministry of Finance and serve to finance general government liabilities.152
192.
The Respondent further submits that the Solar Levy can also meet the autonomous criteria most frequently invoked by tribunals to determine whether a measure is a tax.153 According to the Respondent, the Solar Levy meets the requirement that "there is a law, which imposes a liability on classes of persons to pay money to the State for public purposes", as expressed by several tribunals including EnCana v. Ecuador, Burlington v. Ecuador, and Duke Energy Electroquil v. Ecuador.154
193.
The Respondent also contends that, considering that French and Italian versions of the ECT employ the term of "fiscal measures", instead of "taxation measures", the scope of carve-out may go beyond taxation measures and include any fiscal measures.155 In this context, the Respondent submits that the Czech Constitutional Court decision of May 15, 2012 and the Supreme Administrative Court decision of July 9, 2015 have confirmed the Solar Levy as a fiscal measure.156 The Respondent further submits that the Claimants also confirmed it in stating that the Solar Levy was intended to cover the additional State subsidy and avoid an increase in the State deficit.157
194.
Lastly, pointing out that the Claimants' experts are not tax lawyers, but tax advisors, the Respondent observes that its expert Dr Kotáb has more credibility.158

2. The Claimants' position

195.

According to the Claimants, the ECT tax carve-out should be interpreted in accordance with the rules of interpretation of international treaties, regardless of its reference to domestic law.159 Such rules are contained in the Vienna Convention on the Law of Treaties (the "VCLT"), and notable in Article 31(1), which provides:

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.160

196.
The Claimants find support for the importance of the "good faith" principle, "context" and "object and purpose" in treaty interpretation in the commentary of the International Law Commission, the writings of several authors and decisions of arbitral tribunals.161
197.

Under these criteria, the tax carve-out in Article 21(1) ECT should not exclusively depend on a host State's domestic tax legislation, because such an interpretation enables the host State to evade international liability by arbitrary categorizing its measure as tax.162 Rather, the good faith interpretation requires taxation measures to be legitimate or bona fide in order for the tax carve-out to apply.163 The Energy Charter Secretariat's own publication on Article 21 could not be more clear about the standard for what constitutes legitimate taxation as follows:

Whilst, States have a wide latitude of discretion in imposing and enforcing tax laws, taxes shall be imposed in good faith. Taxation measures shall not be confiscat[ory], prevent, or unreasonably interfere with, nor unduly delay effective enjoyment of a foreign investor's property or its removal from the State's territory.164

198.

The Claimants note that the tribunal in Yukos confirmed this interpretation concluding that good faith is required in order for Article 21 to apply:

1430. [...] the Tribunal concludes that it has jurisdiction to rule on Claimants' claims under Article 13 of the ECT due to the fact that the Article 21 carve-out does not apply to the Russian Federation's measures because they are not, as the Tribunal has concluded above, on the whole, a bona fide exercise of the Russian Federation's tax powers.

1431. This accords with Claimants' view that Article 21 of the ECT can apply only to bona fide taxation actions, i.e., actions that are motivated for the purpose of raising general revenue for the State. By contrast, actions that are taken only 'under the guise' of taxation, but in reality aim to achieve an entirely unrelated purpose [...] cannot qualify for exemption from the protection standards of the ECT under the taxation carve-out in Article 21(1)".165

199.
The Claimants thus aver that both case law and good treaty interpretation mandate that in order for the Article 21(1) ECT tax carve-out to apply, taxes must be imposed in good faith. Referring to the 2014 Yukos awards, the Claimants note that the ECT tax carve-out mandates that the State's power be exercised in a legitimate or bona fide way and it cannot be relied on when the Contracting States hides an action unfavourable to foreign investors "under the guise of taxation".166 Nor can the exception apply where the power to tax has been exercised in an abusive manner as was pronounced by the Quasar v. Russia tribunal, which noted that, absent such a standard, "international law would likely become an illusion, as states would quickly learn to avoid responsibility by dressing up all adverse measures […] as taxation".167
200.
In the present case, the Claimants allege that the Solar Levy is not a bona fide taxation measure under the Yukos standard.168
201.
The Claimants observe that the Yukos standard is not limited to "extreme circumstances such as the destruction of a company or the elimination of a political opponent" since the purpose of the standard is not to allow a host State from evading international liability by "disguising a measure as a tax".169 Even if such an extreme circumstance is necessary for the Yukos standard, this criterion can be met by the fact that the Respondent introduced the Solar Levy only for the purpose of evading international liability.170 The Claimants submit that if the Respondent truly had intended to mitigate the burden on consumers, it would have simply reduced the FiT level.171
202.
The Claimants contend that the Solar Levy was introduced for the purpose of "offset[ing] the introduction of the support from the State budget to pay the FiT", instead of raising the State's revenue.172 This is confirmed by the three indicators.173 First, the Solar Levy was introduced in a retroactive manner, targeting a very narrow group, i.e., photovoltaic plants commissioned in 2009 and 2010.174 Second, the Czech Republic introduced the Solar Levy in order to avoid international liability that would arise out of a simple reduction of the FiT amounts.175 Third, the Supreme Administrative Court has decided in its decision of July 10, 2014, that the Solar Levy was not a tax.176 The Czech Constitutional Court also has confirmed that the Solar Levy in substance reduced the FiT support level in its decisions of May 15, 2012, February 6, 2014 and January 13, 2015.177
203.
The Claimants contend that the Solar Levy is not a tax even under Czech domestic tax law for the following reasons.178
204.
As a threshold matter, the Tax Administration Law does not provide a general definition of tax.179 The definition in Article 2(3) of the Tax Administration Law applies only for administration and collection of payments.180 The Respondent's reliance on this definition is misplaced.181
205.
The Claimants contend that whether the Solar Levy is a tax should be analysed in accordance with the common academic theory, according to which a tax generally has six features: "(a) obligatory, (b) non-refundable and (c) non-equivalent payment (d) introduced by law, (e) intended to serve as income of the state budget for the financing of society-wide needs and (f) paid for no specific purpose."182
206.
According to the Claimants, the Solar Levy lacks at least two of these six features, namely: (c) non-equivalent payment; and (f) paid for no specific purpose.183
207.
The Solar Levy is paid for a specific purpose, because it was introduced to "reduc[e] the burden on electricity consumers without negatively impacting on the Respondent's State deficit".184
208.
The Solar Levy does not involve the non-equivalent payment feature, which is found "when the taxpayer receives no direct consideration from the State for paying the tax."185 Under the financing mechanism introduced by the Act No. 402/2010, the State collected the Solar Levy from the solar energy producers, and used the amount for the compensation to the grid operators, who paid the FiT to the producers.186 Because the collected Solar Levy constituted a source of FiT, which the solar energy producers received, the Claimants allege that the producers received direct consideration by the payment of the Solar Levy.187
209.
This conclusion is confirmed by the Czech Supreme Administrative Court decision of July 10, 2014, which concluded the Solar Levy did not meet the requirement of non-equivalence and was a de facto reduction of the FiT, finding that "the state use[d] the levy to lower the support it calculated and provided."188 According to the Claimants, this is a key and the only judgement in which the Czech court analysed the nature of the Solar Levy.189 The Court carefully examined the nature of the Solar Levy since the issue was whether the Solar Levy and the corporate income tax constituted double taxation on the same income.190 The Claimants observe that this ruling was confirmed at least four times by the Constitutional Court and the Grand Chamber of the Supreme Administrative Court.191
210.
The Claimants submit that all of the Czech court decisions cited by the Respondent are irrelevant to the issue of whether the Solar Levy is a tax for the purposes of Article 21(1) ECT.192 The Supreme Administrative Court's decisions of Ref. No. 1 Afs 80/2012-40 and Ref. No. 5 Afs 126/2013-34 did not analyse the nature of the Solar Levy.193 The Grand Chamber of the Supreme Administrative Court decision of Ref. No. 1 Afs 76/2013-57 merely confirmed that the Solar Levy was a tax for the purpose of the Tax Administration Law, which does not provide a general definition of tax, and rather found that "introducing the solar power levy de facto results in decreasing the level of government support".194 The Czech Constitutional Court decision of Ref. No. US 2216/14, which indicated that the Solar Levy was a "tax or fee", did not provide a precise characterization of the Solar Levy.195
211.
The Claimants submit that further aspects indicate the non-taxation nature of the Solar Levy.196 First, the legislative process of the Act No. 402/2010 was atypical for a tax. The bill was prepared by the Ministry of Industry and Trade, instead of the Ministry of Finance, which governs taxation measures.197 Second, both the extremely limited scope of application and the unusual association with non-tax parameters in identifying the payers of the Solar Levy make it even harder to classify the Solar Levy as a tax measure.198 Third, the temporariness of the Solar Levy was unprecedented.199 The Solar Levy was initially introduced only for a three-year period from January 1, 2011 to December 31, 2013.200 Fourth, the use of the term "levy", instead of "tax", indicates the Czech Parliament's awareness of not imposing a tax.201 Finally, the Czech courts found that the Solar Levy may have had "strangling effects", which violates a proportionality test under which a tax should not lead a tax payer to liquidation.202
212.
In the Claimants' view, the Solar Levy is a deduction of the FiT, instead of a tax.203 This is confirmed by the statement of Mr Kocourek, then Minister of Industry and Trade, which described the Solar Levy as "a new source of income" for the Czech Republic to provide budgetary support for the RES support mechanism.204 The Claimants submit that, as Mr Kotáb also accepts, the Czech Constitutional Court decision of May 15, 2012, and the Czech Supreme Administrative Court decisions of July 10, 2014 and December 17, 2013 have considered the Solar Levy as a de facto reduction of the FiT.205 The Claimants observe that nevertheless the Respondent choose not to simply reduce the FiT in order to mitigate arbitration risks.206
213.
The Claimants allege that the wording of Article 21(7) of the ECT, "' relating to' taxes of domestic law", was not meant to widen the scope of the carve-out beyond mere domestic taxation measures.207 The Claimants observe that the Respondent's focus on these words suggests the Respondent's admission that the amendment measures cannot be considered as tax under Czech domestic law.208
214.
The Claimants object to the Respondent's assertion that Italian and French versions of the ECT employ the language of "fiscal measures", instead of "taxation measures".209 The Claimants submit that the Italian and French words of "misura fiscale" and "mesure fiscale" have the same meaning of "taxation measures" in the English version.210 Indeed, the Spanish and German versions employ "medida impositiva" and "steuerliche MaBnahme", both of which correspond to the English "taxation measures".211

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.
241.
The Tribunal therefore considers the conclusions reached by the Czech Administrative Court, inter alia in its December 17, 2013 and April 18, 2014 decisions, of incidental relevance to the characterization of the Solar Levy as, in its nature, a tax. Those decisions do not affect the persuasive force of the Supreme Administrative Court's July 10, 2014 decision, especially in light of the decisions of the Constitutional Court and other decisions of the Supreme Administrative Court finding that the Solar Levy was in substance a reduction of FiTs.
242.
Given the foregoing decisions, the Tribunal is unwilling to adopt a different conclusion as to the proper characterization of the Solar Levy under Czech law. The Tribunal does not consider it decisive that, in the Czech legal system, judicial decisions (or decisions of the Supreme Administrative Court) are arguably not regarded as sources of law.252 That is true in many legal systems. The essential point is that, in determining how the Solar Levy is characterized in the Czech domestic legal system, the decisions of the Supreme Administrative Court (and the other decisions noted above) are the best available guidance, regardless of their formal status as a source of law. In the Tribunal's view, these decisions are entitled to substantial weight in determining the characterization of the Solar Levy as a matter of Czech law.
243.
The conclusion reached by the Czech Supreme Administrative Court in its 10 July 2014 decision, i.e. that the Solar Levy does not constitute a tax in substance, finds further support in the evidentiary record. Firstly, the Respondent itself argued, through its Ministry of Finance, that the Solar Levy was materially not a tax in proceedings before the Czech Constitutional Court. In those proceedings, the Finance Ministry formally took the position that, "from the material perspective, the introduced measures [of the Solar Levy] are considered a reduction of subsidy,"253 which is "aimed to decrease the economic feed-in tariffs..."254 Secondly, the legislative history of the Solar Levy also supports this conclusion as the Czech Government stated in connection with the measure's enactment that it was "necessary to find a formally correct mechanism for reduction of the support of RES from photovoltaic plants, such that it cannot be legally contested."255 In the Tribunal's view, these characterizations - issued by the Czech Government itself - are precisely consistent with the holding of the Supreme Administrative Court that the Solar Levy was - rather than a tax - in substance a reduction of the FiT, a conclusion also reached by the Constitutional Court and the Grand Chamber of the Supreme Administrative Court in various decisions.
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.
250.
It is true that one purpose of the Solar Levy was to raise revenue of the State budget (as one of the sources to cover the cost of subsidies to solar investors). Critically, however, the Solar Levy was structured as it was - covering only a certain class of solar energy producers and being calculated as a percentage of the FiT - in order to alter the level of the FiT rather than to raise revenue. That is confirmed, in the Tribunal's view, by the narrow class of persons subject to the Solar Levy (thereby limiting the revenue raised), the method of calculating the Solar Levy (which had the effect of reducing the FiT) and the method of collection and payment of the FiT (which involved withholding of amounts from the FiT paid to solar energy investors). In these respects, the Solar Levy's principal purpose was to reduce the FiT for certain investors.
251.
As discussed above, both the Czech Supreme Administrative Court and the Czech Constitutional Court, as well as the Czech Ministry of Finance in its submissions to the Constitutional Court, concluded that the Solar Levy was in essence a reduction of the FiTs payable to certain solar energy producers. The Respondent's expert Mr Kotáb accepted that the characterization that the Solar Levy is, in substance, a reduction of the FiTs is now well established in Czech law, although in his view this did not necessary mean that the Solar Levy was not a tax.257 At the Hearing he admitted that the characterisation of the Solar Levy as a reduction of the FiTs "has been expressed repeatedly by courts, including Constitutional Court, so we may stick to the idea expressed here, in essence or in substance, this includes the reduction of a FiT...."258 This was further evidenced by both government statements made during the measure's enactment and the structure of the measure.259 In the Tribunal's view, the evidence in the record, including expert testimony, confirms that the essence of the Solar Levy was the reduction of certain FiTs.
252.
In light of this principle, the Tribunal concludes that the Solar Levy does not fall within the scope of Article 21 of the ECT. In this regard are of particular importance statements made in connection with the enactment of the Solar Levy, including the statements of the Minister of Industry and Trade on November 2, 2010 at meetings of the Economic Committee of the Chamber of Deputies.260 These statements clearly show that the Solar Levy's principal objective was a reduction in the level of the FiTs payable to certain solar investors, and not the raising of revenue; they also show that the Solar Levy was structured, in many respects, as a tax in order to reduce the risk of claims against the Czech Republic under international law.
253.
By finding that the Respondent formulated the structure of the Solar Levy - resembling, in many respects, a tax - principally for the purpose of taking the reduction in the FiTs outside the protections accorded by several international investment treaties, including the ECT, the Tribunal does not imply that the Respondent was acting in bad faith. The Respondent might very well have attempted to reduce the FiTs in a manner that would be consistent with its legal obligations, including its investment protection obligations. The Tribunal merely finds that these attempts, including making the Solar Levy subject to the procedures set out in the Tax Administration Law, cannot change the fact the Solar Levy is, in substance, a measure whose objective was a reduction in the level of the FiTs payable to certain class of solar investors, and not the raising of revenue for the State.

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.
The Claimants provide a more specific analysis of the promises contained in Section 6 of the Act on Promotion.300 First, Section 6(1)(b)(2) provided a guarantee that "once it is established, the feed-in-tariffs cannot be reviewed for a given period of time, except for an increase, according to inflation."301 Second, Section 6(4) provided a guarantee of the 5% Break-Out Rule.302
275.
The Claimants allege that these expectations were strengthened by the purpose and context of the Incentive Regime.303 The Explanatory Report on the bill of the Act on Promotion evidences that the Act on Promotion was enacted to meet the 8% EU target for 2010 under the EU policy of promoting RES.304 The importance of the achievement of 8% target is evidenced by Mr Firt's statement that "it was not only [the] ERO that was interested but also the Ministry of Industry and Trade."305 Dr Gode also testifies in his written statement that "the essential drive [to invest in the Czech Republic] was the Czech incentive system and its expected reliability, especially as to the long-term price guarantee for the electricity produced by solar operators. As known to solar producers, the energy sale price is in fact fundamental to the economics of a solar investment".306 The Claimants emphasize that it was the guarantee of the long-term stable FiT which was integral to deciding to invest in RES.307 The importance of the stable FiT is evidenced by the fact that the investments in photovoltaic plants were up-front.308
276.
According to the Claimants, the Explanatory Report shows that the Income Tax Exemption and the Shortened Depreciation Period constituted essential part of the Incentive Regime, in stating that "the support system is based [...] on maintaining the tax reliefs to the extent set out in the Act[s] on Income Tax".309 In addition, the fact that the Act on Promotion did not mention the Income Tax Exemption is immaterial.310 This was simply because the Income Tax Exemption was already established by the Act on Income Tax when the bill of the Act on Promotion was being discussed.311
277.
The evidentiary value of the Explanatory Report is not decreased, say the Claimants, by the facts that the Report itself was not a legal source and that the Report was not specifically addressed to the Claimants.312 The Report shows significant insight of the legislative process and the purpose of the Act on Promotion.313 An individualized promise is not necessary in invoking the protection of legitimate expectations.314
278.
The Claimants then contend that these general promises provided by the Act on Promotion and the Act on Income Tax were converted into specific promises by going through the licensing process and gaining required permissions to build and operate photovoltaic power plants.315
279.
The Claimants further submit that answers shown on the Q&A tool of the ERO website as well as the 2010 Action Plan prepared by the Czech Ministry of Industry and Trade on the duration of the stable FiT can be characterized as specific promises to photovoltaic investors.316
280.
The Claimants contend that a promise contained in the Act on Promotion was not limited to the 15-year simple payback and the 7% WACC.317 A promise of 15-year simple payback would contradict to the purpose of the Act on Promotion, since such a payback was insufficient to attract enough investors in order to achieve the EU targets.318 WACC was a mere non-binding indicator for the ERO to set a FiT.319 Indeed, the Act on Promotion did not contain reference to WACC.320
281.
According to the Claimants, had it not been for the guarantee that the Incentive Regime should be granted and maintained, investors like the Claimants would not have invested in photovoltaic energy production in the Czech Republic.321 This is because investors in the long-term RES business based their investment decisions on guarantees of stability derived from the purpose of the Incentive Regime.322
282.
The Claimants make clear that in reliance on the legal framework set up by the Czech Republic and its commitments contained therein, they acquired or established SPVs, obtained the licences for energy production and invested a significant amount of money in their photovoltaic plants.323 In particular, the Claimants point out that they based their assessment of profitability on the analysis of the investment and operating costs to set up and operate the solar plants.324
283.
The Claimants contend that their reliance on the promises provided for by the Incentive Regime was reasonable.
284.
The Claimants maintain that their reliance was reasonable as it was predicated on the guarantees contained in the Incentive Regime and its "declared purpose".325 According to the Claimants, "[the] system was designed precisely to attract the investments that the Czech Republic needed to comply with its EU law obligations."326
285.
The Claimants refer to both Czech and EU law to support the contention that their reliance was reasonable. With regard to Czech law, "the correctness of the Claimants' understanding of the Incentive Regime was primarily confirmed by the ERO's presentations on that matter and by the personal consultation that Dr Gode had with the Czech law firm, [REDACTED] in Prague..."327 As to EU law, "the compatibility of the Incentive Regime with EU state law was assessed both before the adoption of the Act on Promotion and after its implementation."328
286.
In addition, the Claimants submit that widespread beliefs among the photovoltaic market that the Incentive Regime would not be retroactively repealed provide support for the reasonableness of the Claimants reliance.329 As the tribunal in CMS v. Argentina stated, this is because "[i]t is not credible that so many companies and governments and their phalanxes of lawyers could have misunderstood the meaning of the guarantees offered in a manner that allowed for their reversal within a few years".330 The Czech local banks financed solar projects for plants to be commissioned in 2010.331 This is confirmed by the fact that on July 30, 2010, the head of KPMG's Transaction and Acquisition Department confirmed that banks were interested in photovoltaic plants as long as they were commissioned by the end of 2010.332 Such a belief was also shared by energy experts licensed by the Czech Ministry of Industry and Trade, who conducted energy audits before banks approved loans for solar projects.333
287.
The Claimants emphasize that the Respondent repeatedly reassured that the amendments to the Incentive Regime would not affect plants commissioned before 2011.334 A Czech Republic's report of November 2009 still indicated the need of attracting investors in order to achieve the 8% EU target for 2010.335 The abolishment of the 5% Break-Out Rule in March 2010 only affected plants commissioned from January 1, 2011 due to the political decision to keep providing the same support level to plants commissioned by the end of 2010.336 Mr Jones, the Respondent's expert, also accepted that the ERO's letter of September 8, 2009, the Government's bill of November 16, 2009, the Ministry of Industry's press release of the same date, and the Government's bill of September 15, 2010, strengthened the investors' expectations that the upcoming change would not affect plants connected in 2010.337
288.
The Claimants allege that the Czech Republic kept providing such reassurances during 2010.338 None of the Claimants' plants was affected by the moratorium on new applications for grid connections, because all of their plants obtained the capacity reservations before the moratorium started in February 2010.339 The 2010 Action Plan reaffirmed that the fixed FiT would be available for 20 years.340 Act No. 330/2010, which abolished all incentives for plants over 30kWp, only applied installations commissioned from March 1, 2011, and its Explanatory Report of September 15, 2010 provided that the existing investors would keep enjoying the incentives.341 Both the 2010 Action Plan and the ERO's 2010 Report indicated that the future amendments to the Incentive Regime would not affect the existing investors.342 Importantly, Dr Gode's last investment was made in the summer of 2010, when the Respondent still kept providing such reassurances.343
289.
The Claimants submit that the 2010 Action Plan provided a strong reassurance.344 First, the Plan confirmed that the Income Tax Exemption was integral part of the Incentive Regime, by listing it as available financial support together with FiT and Green Bonuses.345 Second, the Plan did not suggest that the FiT level was not maintainable.346 Third, the Plan confirmed that the FiT would be stable for 20 years in stating that "[the] tariffs are guaranteed according to the following table [photovoltaic power plants 20 years]" and that no cap existed for RES support.347
290.
The Claimants also submit that another strong reassurance was given by the Explanatory Report to Draft Act No. 330/2010 dated on September 15, 2010, which abolished all of the support for large photovoltaic plants as of March 1, 2011.348 The Report provided that "[p]hotovoltaic power plants already connected to the electric power system will have their right to claim support preserved under existing conditions."349
291.
In the Claimants' view, the Respondent gave these reassurances in order to (1) provide sufficient time for investors to prepare for the upcoming scheme change; and (2) achieve the EU target for 2010 by means of contribution from photovoltaic plants.350
292.
The Claimants allege that, in 2009 and 2010, it was impossible for photovoltaic investors to expect that the amendment measures would be introduced in a retroactive manner.351 The Claimants submit that a number of documents published in 2009 and 2010 provided repeated reassurances, instead of warnings.352 This was also supported by the fact that even CEZ, a company controlled by the Czech Republic, kept investing in the photovoltaic market during the period.353 The Claimants observe that indeed the introduction of the Solar Levy had not been an option for the Czech Government until October 14, 2010, when it suddenly changed its policy.354
293.
The Claimants observe that although the Respondent could have repealed the 5% Break-Out Rule or required grid operators to stop issuing new binding statements as soon as it had recognized the problem, it had chosen not to do so.355 In the Claimant's view, this political decision conveyed a clear message to investors that the FiT level would remain stable for plants commissioned in 2009 and 2010.356
294.
In this vein, the Claimants contend that the existence of the Fischer caretaker government during May 2009 and July 2010 is irrelevant.357 It did not amount to a political crisis that might have affected an investor's legitimate expectations.358 As shown in its policy statement that it was prepared to take responsibility to manage the country, the caretaker government had authority to deal with the increase of the solar installations.359 Indeed, the caretaker government made the important decision to repeal the 5% Break-Out Rule.360
295.
Similarly, the Claimants object to the Respondent's assertion that the postponement of the abolishment of the 5% Break-Out Rule was the result of solar investors' lobbying and threats of arbitration.361 No evidence shows that such an activity existed. In any event, legitimate lobbying activity does not excuse a host State from not addressing a problem in a timely manner.362
296.
The Claimants contend that their reliance on the Income Tax Exemption was equally reasonable.363 The repeal of the Income Tax Exemption is distinguished from an ordinary increase of income tax rate, because the Income Tax Exemption contained a promise of duration as an essential part of the Incentive Regime.364 This position is confirmed, according to the Respondent, by an expert opinion that the Czech Republic could repeal the Income Tax Exemption only in a non-retroactive manner.365
297.
Furthermore, the Claimants submit that Dr Gode's team was formed by experienced experts including bankers and a Czech lawyer.366 While Dr Gode did not conduct a specific due diligence before his investment, his team provided sufficient expertise.367 In any event, given the small size of photovoltaic investments, a sophisticated due diligence should not have been required.368
298.
The Claimants provide that "Dr Gode made the majority of his investment in the Czech Republic only after having obtained 'a direct confirmation of the reliability of the Czech environment in general and of the FiT regime in particular'".369 Indeed, Dr Gode made his second investment after having confirmed that his first solar plant became operational under the FiT scheme.370
299.
The Claimants submit that the Respondent violated its obligation to accord "full protection and security" ("FPS") set out in Article 10(1) of the ECT and Articles 2(3) and 4(1) of the BIT by failing to provide a stable and predictable legal framework as to the Claimants' investment.371
300.
The Claimants submit that the scope of FPS extends beyond physical protection to legal security. To this extent, FPS and FET substantially overlap, and jointly require a host State to provide a stable and predictable legal framework.372 In the present case, the Claimants contend that the FPS standard was violated by reason of the facts giving rise to a breach of the FET standard.373
301.
The Claimants allege that, by dismantling the Incentive Regime, the Respondent violated the prohibition of arbitrary or discriminatory measures ("Non-Impairment Standard") set out in Article 10(1) of the ECT and Article 2(2) of the BIT.374
302.
In response to the Respondent's argument that the Non-Impairment Standard requires an investor's impairment to be significant, the Claimants submit that, referring to Saluka, "any negative impact or effect" caused by a host State's measure satisfies the impairment requirement.375
303.
The Claimants then submit that in any event their investments were significantly impaired, referring to Dr Gode's statement that "the Czech Republic's retroactive measures greatly impacted on the economics of [his] investment".376 Dr Gode expected a return of EUR [REDACTED] (before taxation) for his investment, but, after the introduction of the Solar Levy, the Claimants' internal forecasts now point to EUR [REDACTED] 377
304.
The Claimants define an unreasonable measure as referring to "a measure that imposes excessive burdens on foreign investors not commensurate to the aims pursued or to the results achieved by the measures."378
305.
The Claimants submit that the determination of whether a measure is reasonable or not requires analysis of "whether (i) the state pursued a rational policy and (ii) acted reasonably in pursuit of such policy", relying on the AES and Micula cases.379 A State' policy is rational if it is taken "following a logical (good sense) explanation and with the aim of addressing a public interest matter".380 A State acts reasonably if there is "an appropriate correlation between the state's policy objective and the measure adopted to achieve it."381 Under the proportionality test, since the Respondent's measures destroyed the Claimants' investments, the Respondent must prove that "the maintenance of the Incentive Regime, and the allegedly attendant high electricity prices, would have entailed the catastrophic consequences for the Czech economy that are invoked, in terms of layoffs, plant shut downs and dramatic drops in the tax revenues."382
306.
The Claimants contend that "the Czech Republic's dismantling of the Incentive Regime was neither adopted in furtherance of a rational policy, nor were the Czech Republic's measures reasonable in the pursuit of such a policy, because the adverse impact on the Claimants' investment did not outweigh the policy's benefits."383
307.
The Claimants reject the Respondent's assertion that it aimed "to counter soaring electricity prices and to address alleged 'windfall profits' of solar investors."384
308.
With regard to the "high electricity prices" case, the Claimants assert that "there is no indication that such a risk was in any way concrete nor that the investors and the Incentive Regime would be responsible for it."385 Rather, the extra costs of RES support, including the tariffs on consumers, and electricity prices in Czech Republic were lower than those in other EU countries.386
309.
Moving on to "the alleged windfall profits of the investors", the Claimants deny the presence of such profits.387 Rather, the rates of return provided for by the Incentive Regime at 10-15 % were in line with those in other EU Member States.388 The Claimants deny that any profit over the rate of 7% should be considered a windfall, considering that a return rate at the level of 7% would not have attracted sufficient investment to achieve the 8% EU target for 2010.389
310.
According to the Claimants, the Respondent's policy is irrational as "withdrawing benefits that [the Respondent] had used to induce investors into its solar market" dramatically reduces prospects for future investment by negatively signalling future investors and making it extremely difficult for it to attain its target of increasing electricity from solar energy by 2020.390
311.
The Claimants contend that the Respondent's amendment measures were unreasonable.
312.
The Claimants submit that a host State's measures are reasonable only if "its adverse effects on foreign investments are limited to what is strictly necessary to achieve the public interest and the public interest outweighs the negative impact on the rights of foreign investors in the specific case."391 In the Claimants' view, proportionality is required not only between the policy objectives and the measures, but also between the benefits to the host State and the impact on investors.392
313.
In the present case, the Claimants allege that "the Solar Levy is unreasonable because the results it achieved are completely out of proportion with respect to the harm it caused to solar investors."393 According to the Claimants, the fact that "the end price of electricity continued to increase even after the introduction of the Solar Levy" confirms the assumption that "the effects of the Solar Levy on electricity prices were minimal and it did very little […] to shield households and industries from purportedly soaring electricity prices."394 The Claimants assert that this lack of proportionality was exacerbated by the abrupt legislative process without appropriate reflection.395
314.
The Claimants contend that the repeals of the Income Tax Exemption and the Shortened Depreciation Period were irrational, pointing out that "there is no explanation as to how the repeal of the tax exemption can mitigate the increase in electricity prices".396
315.
The Claimants submit that the unreasonableness of the amendment measures was also criticized by the EU Commissioners, who expressed their concern as to the amendment measures in its letter of January 11, 2011. The EU Commission in its Communication of 2013 stated that "[a] need to make changes in regulatory conditions in response to developments in the market does not justify applying such changes retroactively to investments already made in situations where the need arises because of failures on the part of the public authorities to correctly predict or adapt to such developments in a timely manner."397
316.
The Claimants contend that the Czech Constitutional Court decision of May 15, 2012 is not helpful because "domestic courts cannot provide absolution from violation of international law."398 The Claimants further submit that the decision is irrelevant to the present case because the Court (1) employed domestic, instead of international, standards; (2) employed an approach which was similar to that of expropriation; and (3) was silent as to whether the Czech Republic violated its obligation towards investors.399
317.
In the Claimants' view, the return rates above 7% WACC, which the amendment measures targeted, should be considered as reasonable, instead of excessive.400 The Claimants find support in the EU Commission's 2016 Decision, which confirmed the return rates between 6.3% and 10.6% as reasonable.401 The Claimants add that while the EU Commission referred the 10.6% rate regarding biogas, the 10.6% rate is also relevant to solar, given that the 7% WACC was set for the entire RES including both solar and biogas.402 The [REDACTED] % return rate of Osecná plant also can be seen as reasonable, considering that the EU Commission approved up to 12 to 13% of return rates in relation to other EU Member States.403
318.
The Claimants make four further allegations as to the unreasonableness of the Respondent's measures.404 First, the measures were intrinsically irrational, because the Respondent repealed the essential features of the Incentive Scheme.405 In this regard, the Charanne decision, in which the tribunal found that the changes to the FiT level and period did not amount to an alternation of the essential characteristics, is to be distinguished from the present case, because the alleged period, i.e., 30 to 50 years, was unrealistic for the plants' lifetime.406 Second, the measures were by definition unreasonable, because the Respondent repealed its clear undertaking to RES investors, which it had made in exchange for their investment.407 Third, the Respondent acted inconsistently in relation to the investors and its policy goal.408 The Respondent repeatedly announced that the amendments to the Incentive Regime would only affect new plants commissioned after 2011, nevertheless repealed the incentives provided for plants commissioned in 2009 and 2010.409 The amendment measures made it difficult for the Respondent to achieve its long-term policy goal of promoting RES by undermining the Respondent's reputation among investors.410 Fourth, the Respondent cannot claim the reasonableness of its responses to the alleged solar boom, because the solar boom was caused by its own mismanagement.411 The ERO repeatedly drew attention to the rise of solar installations at least from 2008, nevertheless the Respondent did not address this issue until the end of 2010. As a result, the Respondent repealed the incentives in a retroactive manner, which was unprecedented among the EU Member States.412 In the Claimants' view, Article 25.2(b) of the Draft articles on Responsibility of States for Internationally Wrongful Acts (the "ILC Draft Articles"), by which a State is precluded from invoking the necessity defence when the State contributed to the situation of necessity, supports this assertion.413

2. The Respondent's position

319.
The Respondent contends that, in the absence of stabilization clause, a State may change its legislation without violating investment treaty obligations.414 In other words, no legitimate expectations as to stability of legal framework may arise in the absence of a stabilization arrangement.415 Such a stabilization clause can be either legislative or contractual, but a clear language of prohibiting legislative or regulatory change is required.416 However, in the present case, no evidence shows such an explicit arrangement.417
320.
As to the alleged stabilization of the FiT level, the Respondent alleges that a simple use of the word "stable", as found in the ERO's report of 2009, is not sufficient to grant a promise of stabilization.418 The Respondent denies that the Claimants' assertion that the Respondent admits that an obligation of stabilization may arise in the absence of stabilization clause in stating that the Act on Promotion and the ERO regulations provided for a 15-year simple payback and a 7% rate of return.419 Because the Respondent keeps providing the payback and the rate of return, the stabilization of these incentives is not an issue of the present case.420
321.
Regarding the Income Tax Exemption, the Respondent calls into doubt the evidentiary value of the 2003 Explanatory Report on the Bill of the Act on Promotion on which the Claimants seem to base their argument that the Respondent promised that the Income Tax Exemption "would forever be available to [the] Claimants".421 According to the Respondent, "the 2003 Explanatory Report does not have the force of law and is not a source of legal rights."422 In addition, the Respondent notes that "the language in the 2003 Explanatory Report does not look anything like the type of language that States typically use when entering into a stabilization arrangement."423
322.
The Respondent provides that the ECT does not create such a stabilization despite of its Article 10, which provides that "Each Contracting Party shall [...] encourage and create stable conditions".424 In the Respondent's view, this does not purport to stabilize a legal framework for the duration of investment.425 The Respondent also notes that the BIT does not contain such a language.426
323.
The Respondent further notes that Article 19(d) of the Act on Income Tax does not contain a "promise" of stabilization, but rather that there would be an exemption from corporate income tax for "income from the operation of […] solar installations […] in the calendar year in which they were first commissioned and in the immediately following five year period".427 In the Respondent's view, the tax exemption's limitation in time to five years is not a guarantee that such exemption could not be abolished for five years or that the temporary benefit could not be subject to legislative amendment or a "grandfathering" rule for existing projects.428
324.
The Respondent alleges that a stabilization clause generates an international obligation, despite that it is embodied in domestic legislation.429 For instance, legislative acts adopted by Nigeria and Timor-Leste contain stabilization clauses, under which an investor may file an international arbitration if the government has violated the stabilization assurance.430
325.
The Respondent points to the Charanne v. Spain award which addressed a similar issue to that arising in this case, namely, the issue of whether governmental statements issued in connection with the regulatory framework could support a stabilization guarantee.431 Noting that the Charanne tribunal "concluded that there was no evidence at all [...] of any stabilization guarantee," the Respondent submits that in the present case, where the Claimants cite only an explanatory report to a preliminary draft of legislation, there is even less basis for the allegation of a "guarantee of stabilization" as to the tax exemption.432
326.
According to the Respondent, Section 6 of the Act on Promotion was only meant to provide a 15-year simple payback, i.e., "full return of capital, but without any element of profit".433 Nevertheless, in order to attract investors, the ERO decided in its Technical Regulation to provide them with "an adequate return on invested capital", which was later set as 7% WACC.434 In the Respondent's view, this 7% WACC should be considered as a reasonable return rate,435 and as Mr Firt testified, well known to public.436 The Respondent points out that Dr [REDACTED] Claimants' expert, also accepts that profits above WACC is theoretically "supernormal".437 Noting that the 15-year simple payback and the 7% WACC "w[ere] not legislatively guaranteed" without a stabilization arrangement, the Respondent submits that in any event the amendment measures have not affected these parameters.438 This being the case, the Respondent submits that the Claimants' investment "has not suffered any adverse effect that is actionable under the ECT or the BIT" due to the Solar Levy.439
327.
The Respondent points out that the Solar Levy has not changed the amounts of FiT and "affected the Claimants' after-tax profits".440 Accordingly, what the Claimants claim in this arbitration is not a promise of stable FiT but a promise of profitability.441 However, the Incentive Regime did not contain any guarantee of such profitability.442
328.
The Respondent contends that, referring to Arif v. Moldova, a legitimate expectations claim "must proceed from the exact identification of the origin of the expectation alleged, so that its scope can be formulated with precision".443 Therefore, legitimate expectations derived from legislation must be strictly based on provisions in the legislation in question.444 However, the original Act on Promotion did not contain any provision that FiTs would not be subject to taxation measures such as the Solar Levy.445
329.
The Respondent contends that it had never promoted solar investments in order to achieve the 8% EU target.446 The ERO's report of November 2009, on which the Claimants rely, merely listed solar power as one of several RES sources for the achievement.447 Rather, the Report described the rapid increase in solar installations as "significant problem" and "disadvantaging other [] RES sources and adversely affecting consumers".448
330.
According to the Respondent, "there is certainly no evidence that the Claimants 'relied' on the 2003 Explanatory Report or any other document, statement, or communication by the Czech Republic relating to [the tax exemption]..."449 To support this, the Respondent notes that "the Claimants effectively admit that [the Income Tax Exemption] was not a determining factor in the decision to invest [by asserting that] 'the purpose of the Incentive Regime would be frustrated if investors could rely only on the FiT support and not on the guarantees already in place and set out in the Act on Income Tax, which were evidently not sufficient by themselves to attract investments in the Czech Solar business.'"450 The Respondent asserts that conclusive effect should be given to the fact that "the Claimants actually were aware that Czech taxation law might change."451
331.
The Respondent avers that the Claimants knew, or should have known, that the RES regime was based on the principle of minimum cost and reasonable (but not excessive) return, as defined by WACC and required under EU State aid law.452 Furthermore, the Claimants were "almost certainly aware that the market they were entering was a bubble and that the FiT regime for solar installations was considered by the Czech authorities to be out of balance."453
332.
The Respondent alleges that the Claimants' reliance on the assurances was unreasonable.
333.
The Respondent contends that the Claimants knew or should have known that Czech RES support scheme was structured "based on the principle of minimum cost and reasonable (but not excessive) return, as defined by the WACC" because the Czech RES market was a regulated market.454 Accordingly, the Claimants' reliance on the alleged promises by which investors would have received more than the WACC was not reasonable.455 This is supported by the decisions in AES v. Hungary and Electrabel v. Hungary, in which the tribunals affirmed Hungary's measures that reduced the tariff rates to the WACC level.456
334.
The Respondent also alleges that the Claimants should have expected that "where the government expressly warn[ed] that returns [of the photovoltaic producers were] contrary to the intent of existing law, […] some claw-back of such excessive profits [would be] possible."457 In late 2009, the ERO already expressed that the 2010 FiT would provide excessive returns to photovoltaic producers.458 The Respondent finds support for this in a Master's thesis at the London School of Economics, which provides that "[i]nvestors should anticipate that overgenerous FiTs at public expense could well result in 'retroactive' adjustments to support regime."459
335.
The Respondent contends that it did not provide the alleged reassurances that FiTs would not be repealed in relation to plants commissioned by the end of 2010. According to the Respondent, the fact that the abolition of the 5% Break-Out Rule was once postponed from 2009 to 2010 cannot be considered as a reassurance from the Czech Republic that the upcoming modification to the Incentive Scheme would not affect plants commissioned by the end of 2010.460 The Respondent submits that the 1-year postponement was meant to avoid damaging ongoing projects at that time, i.e., September 2009, and that it did not purport to protect new projects starting after that moment.461
336.
Similarly, the fact that abolishment of 5% Break-Out Rule only affected plants commissioned as of March 2011 cannot be seen as such a reassurance.462 The Respondent provides that the adoption of less drastic measures "cannot be understood as a promise that more drastic measures would not be required if the situation deteriorated further."463 The Solar Levy was installed in such a context that solar installations were unexpectedly increased after the mid of 2010.464
337.
The Respondent also contends that the moratorium period cannot be considered as a reassurance.465 Although the moratorium period had a particular scope, this did not mean that no other measures would be introduced.466 Rather, in the Respondent's view, the moratorium conveyed a clear message that the government did not want further photovoltaic installations.467
338.
The Respondent further contends that the 2010 Action Plan did not provide the message that the FiT level would be stable for 20 years.468 Although the Plan simply summarized the existing framework, it did not give a promise that such a framework would remain unchanged.469 Indeed, an article published in September 2010 stated that the 2010 Action Plan "would basically exterminate the development of solar energy".470 In this vein, the Respondent alleges that no reassurance had been given especially after July 2010.471 This is when the Necas government was established and the Prime Minister stated that the government was considering to introduce a solar tax.472
339.
The Respondent also alleges that Act No. 330/2010, which abolished all of the photovoltaic support for large plants as of March 1, 2011, was not a reassurance.473 While the explanatory report on the Act provided that the plants commissioned before March 2011 would enjoy the existing conditions, it did not mean that other changes would not apply to these plants.474 The Respondent describes that Act as having been originally planned to be part of single legislation to introduce State budgetary support for RES scheme and later separated and became an independent Act.475 Accordingly, the introduction of the Act was not a sudden policy change of the Respondent.476
340.
The Respondent reacted to the Claimants' assertion that it could have taken other less harmful measures.477 According to the Respondent, the issue in the present arbitration should be whether the amendment measures constitute violations of the treaty standards based on the circumstances when they were introduced, instead of whether alternative methods were available.478 The Respondent observes that in any event the Claimants failed to demonstrate the existence of such alternatives.479 The Respondent did not abolish the 5% Break-Out Rule as of 2010, because it purported to minimize the impact on existing investors.480 The Respondent did not tax on other sectors because they had not received excessive profits from the RES support.481 The moratorium period could not have been introduced earlier than February 2010, because it would have been illegal under Czech and EU law.482
341.
The Respondent argues that the investor that completes an investment after a measure is announced cannot claim that at the time of the investment, it had legitimate expectations that such a measure would not be adopted.483 In the present case, however, the power purchase agreements of Úsilné, Mozolov, and Osecná operations were signed on [REDACTED] and [REDACTED] all of which were even after the adoption of the amendment measures.484 Furthermore, the Respondent rejects the Claimants' characterization that they had a "contractual" relationship under which the Respondent provided a promise of stability as a bargain, stating that the Claimants did not incur any legal obligation to make investment in the Czech Republic.485 It is the Respondent's view that the FET and FPS claims fail for these reasons.486
342.
The Respondent contends that Dr Gode made his investment decision without familiarizing himself with the Czech photovoltaic legal framework, pointing out that during the hearing he could not remember whether he had reviewed the Technical Regulation.487
343.
The Respondent, referring to AES v. Hungary and Electrabel v. Hungary, contends that a violation of the non-impairment standard "requires the impairment caused by the discriminatory or unreasonable measure to be significant"488 a high bar that, according to the Respondent, "cannot be met by the mere imposition of a tax, or the simple denial of a tax exemption."489
344.
The Respondent submits that, in the present case, the Claimants have not demonstrated any effect or impact that rises to the level of "impairment" citing Perenco for support. The Respondent notes that, as in Perenco, the Claimants remain free to use, and have in fact used, the so-called "investments" to generate substantial revenues.490 In fact, the Claimants' investment "continues to earn returns that are above the benchmark of 'adequate return' established under the Act on Promotion, and Claimants have failed to demonstrate that such returns are inadequate for a regulated investment such as theirs".491 The fact that the Claimants may have desired greater profits than they have obtained does not in and of itself demonstrate "impairment".492 The Respondent submits that "investment treaties do not guarantee that every business projection will be met" for "a State cannot be held liable for every single measure that might adversely affect an investment's value".493
345.
Additionally, the Respondent argues that even if the Claimants could demonstrate "impairment", they would have to also prove that such impairment "relates to the management, maintenance, use, enjoyment, or disposal of the purported investments".494 According to the Respondent, this follows from both the plain text of the relevant ECT and BIT provisions as well as the interpretative principles of effet utile and expressio unius est exclusio alterius.495 The Respondent notes that the Claimants do not attempt to argue that the amendment measures impaired any of these activities.496 The Respondent submits that the Claimants' contention that as a result of these measures, their purported investments suffered "negative effects" is not sufficient.497 Neither does the Respondent find convincing the Claimants' argument that the measures reduced the solar plants' respective rates of return as such reduction has nothing to do with the investment's management, maintenance, use, enjoyment, or disposal.498
346.
The Respondent submits that a host State's policy is rational "if it had been adopted 'following a logical (good sense) explanation and with the aim of addressing a public interest matter'" as the AES tribunal stated.499
347.
The Respondent notes that "tribunals have been reluctant to question a State's 'discretionary exercise of a sovereign power' or to find a BIT violation simply because of a flaw in a given law or a shortcoming in its implementation."500 In the Respondent's words, "tribunals have found a wide range of policy objectives to be 'rational'.501
348.
In the present case, the Respondent maintains that its "objectives of reducing excessive profits, balancing the budget, and sheltering consumers from excessive electricity price rises are eminently rational".502
349.
The Respondent rejects the Claimants' assertion as to the "rationality" requirement that "[i]t is […] incumbent upon [the Respondent] to prove that the maintenance of the Incentive Regime, and the allegedly attendant high electricity prices, would have entailed the catastrophic consequences for the Czech economy that are invoked, in terms of layoffs, plant shut downs and dramatic drops in the tax revenues."503 The Claimants' position would require the Respondent to "prove that near-calamitous consequences would have occurred but for the State's intervention."504 According to the Respondent, "tribunals have found policy objectives to be 'rational' without considering whether the circumstances meet a certain threshold of risk to the State, or of overall gravity, in the absence of measures to address such policies."505
350.
The Respondent contends that the amendment measures were reasonable.
351.
Referring to the AES award, the Respondent submits that "if there is 'an appropriate correlation between the state's public policy objective and the measure adopted to achieve it'", "a State measure is deemed 'reasonable'".506 The burden "is on the Claimants to prove every element of its claim that the Respondent has acted 'unreasonably' in violation of its non-impairment obligation."507 The Respondent adds that "there is 'a presumption of validity in favour of legislative measures adopted by a State'", relying on the El Paso award.508
352.
In particular, with regard to a tax or fiscal measure at issue, the Respondent takes the view that "several tribunals have held that a State's imposition of a tax or other fiscal measure for the purpose of regulating windfall profits is not 'unreasonable' under the non-impairment clause of a BIT", referring to Paushok v. Mongolia and AES v. Hungary.509
353.
The Respondent submits that the Claimants' approach to the "reasonableness" element of the non-impairment standard distorts the "reasonableness" test and its second prong of proportionality.510 The Respondent maintains that "tribunals are concerned not with the precise magnitude of harm to the investor vis-a-vis the magnitude of benefit to the state, but rather with whether the state measure is appropriate and justifiable in light of the public policy interest being pursued".511
354.
In relation to the Claimants' contention that "a state measure is only reasonable if, in addition to pursuing a rational policy, its adverse effects on foreign investments are limited to what is strictly necessary to achieve the public interest […]", the Respondent states that the Claimants distorted the test as a strict scrutiny test and newly invented the phrase "strictly necessary".512 The Respondent finds support for this in the AES and Micula decisions, which only required "'an appropriate correlation' between the state's public policy objective and the measure adopted to achieve it" for the host States' measures to be considered as reasonable.513
355.
The Respondent asserts that it "acted reasonably at all times […] by imposing appropriate and proportional measures to correct the disequilibrium in the RES support regime" in response to "an unforeseen influx of investment in the photovoltaic industry [and] "an unforeseen drop in solar panel costs."514 According to the Respondent, in response to the unprecedented rise in PV capacity and generation and the resulting increase in the RES subsidies and the final electricity price, "it was entirely rational for the Czech Republic to craft measures aimed at correcting the system and easing the burden on consumers."515 In addition, the Respondent submits that "the Czech Republic also acted reasonably to rectify the good-faith mistake that had been made in the mechanism established to calibrate the RES subsidies."516
356.
The Respondent contends that the reasonableness and proportionality of the measures in question was confirmed by the Czech courts after careful scrutiny.517
357.
The Respondent contends that it "carefully and selectively recalibrated the RES support system by targeting only the sector that was garnering a disproportionate percentage of the RES subsidy, and, within that sector, only those producers that were enjoying the greatest amount of excessive profits."518 The Respondent adds that "this approach was not only eminently reasonable, but also consistent with the Czech Republic's binding obligations under EU state aid law to ensure that RES subsidies do not provide the beneficiaries with more than a 'normal return on capital'".519
358.
The Respondent emphasizes that the amendment measures only have decreased the Claimants' after-tax returns by [REDACTED] %, i.e., [REDACTED] % to [REDACTED] %.520 Accordingly, the Claimants' allegation that the amendment measures have deprived the fundamental guarantee of the Incentive Regime is without merit.521
359.
The Respondent addresses the Claimants' other arguments as to the reasonableness of the amendment measures as follows.522 First, the Respondent did not withdraw the essential features of the Incentive Regime, because it continues to provide the FiT for the lifetime of the plants.523 The introduction of the Solar Levy was meant to restore a direct relationship between investments and expected return, which should have been embedded from the beginning as an essential feature of the regime.524 Second, the Respondent rejects the Claimants' theory that the Czech Republic's repeal of the "consideration" to the investors provided a basis of the unreasonableness.525 Such a theory uplifts every contractual breach of a host State to a treaty violation.526 Third, the solar boom was not caused by the Respondent's mismanagement, but by investors' behaviour of rushing into the photovoltaic market toward the end of 2010.527 Even if there had been a better solution, a State is not liable only because "circumstances develop in a less-than-ideal way."528 Article 25.2(b) of the ILC Draft Articles, which the Claimants cite, is irrelevant to the present case, since the Respondent does not plead a defence of necessity.529 Fourth, the amendment measures were not unprecedented bad practice.530 Rather, the measures were comparable to those taken in other EU Member States.531 In any event, whether a host State's measures are novel or whether there was a better solution is irrelevant to the unreasonableness analysis.532 Fifth, the Respondent asserts that it addressed the solar boom in a speedy manner.533 In any event, measures cannot be unreasonable just because they were introduced quickly.534

3. The Tribunal's analysis

A. The Principles

361.

In Micula v Romania the tribunal said:

525.... [F]or a state's conduct to be reasonable, it is not sufficient that it be related to a rational policy; it is also necessary that, in the implementation of that policy, the state's acts have been appropriately tailored to the pursuit of that rational policy with due regard to the consequences imposed on investors.

669. There must be a promise, assurance or representation attributable to a competent organ or representative of the state, which may be explicit or implicit. The crucial point is whether the state, through statements or conduct, has contributed to the creation of a reasonable expectation, in this case, a representation of regulatory stability. It is irrelevant whether the state in fact wished to commit itself; it is sufficient that it acted in a manner that would reasonably be understood to create such an appearance. The element of reasonableness cannot be separated from the promise, assurance or representation, in particular if the promise is not contained in a contract or is otherwise stated explicitly. Whether a state has created a legitimate expectation in an investor is thus a factual assessment which must be undertaken in consideration of all the surrounding circumstances.

672. The Claimants must also have relied on that expectation when they made their investments. However, it is not necessary for the entire investment to have been predicated solely on such expectation. Businessmen do not invest on the basis of one single consideration, no matter how important. In the Tribunal's view, that expectation must be a determining factor in an investor's decision to invest, or in the manner or magnitude of its investments.

362.
The FPS standard reflects the traditional obligation under international law to protect aliens from acts of non-state parties,549 although a minority of awards treats FET and FPS as the same or similar or related concepts.550
363.
As will be apparent from the Tribunal's factual analysis and the narrow basis of its holding, the precise ambit of, and the relationship between, the propositions set out above does not call for decision in these proceedings. It will be equally apparent that, contrary to the dissenting opinion,551 the Tribunal's decision is not based on all of those propositions, but on the ambit of the legitimate expectation on the facts of the case.

B. Promise of stability

364.
The first question is whether the Claimants made their investments in 2010 through a legitimate and reasonable expectation based on an explicit or implicit representation by the Respondent that the value of their investment would not be diminished in the way that it was.552
367.
The documents which establish this have already been referred to, and it is only necessary to mention that the Czech Ministry of Industry and Trade, when submitting the bill to Parliament, stated that one of the main objectives of the Act on Promotion was to establish a secure, stable and predictable regime; the 2003 Explanatory Report on the Act on Promotion stated that the support system was based "on providing a guarantee to investors";555 the former Minister of Environment stated that the most important principle of the law was the guarantee of a stable FiT for a 15 year period;556 the Respondent in the 2005 UN Report described the purpose of Section 6(1)(b)(2) as: "providing guarantees to the investors and owners. that. revenue.will be maintained for a period of 15 years."557; and the ERO described the Act on Promotion as "bringing a guarantee of long-term and stable promotion..." including a "guarantee of revenues. for a period of 15 years."558

C. Knowledge of the issues arising out of the solar boom

368.
Nor can there be any doubt that investors such as the Claimants would have been well aware of the political and economic issues which arose from the solar boom, and the history has been set out above.559
369.
This phase culminated in the press release on August 24, 2009 in which the Ministry stated 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,"560 i.e. in January 2010.
370.
As the Claimants accept,561 rumours of an intention to reduce incentives began in the summer of 2009, and that many officials, including current and former ministers, issued statements about the problems of the solar boom.
371.
On June 19, 2009, a major Czech newspaper reported in an article entitled "The state wants to stop solar power plants boom" that "[s]olar energy support is starting to cause problems for the state, which therefore wants to stop the ongoing solar boom. The solar electricity feed-in-tariff has gone in some instances economically beyond the limit... ERO is therefore seeking ways to reduce the solar energy feed-in tariff dramatically. It is indeed extraordinarily attractive...". Mr Firt was quoted as saying that the FiT had gone economically beyond the limit. The ERO was trying to agree an amendment to the 5% cap on decreases with the Government and members of Parliament, but the change would probably not come in 2009 because it would have to be debated in Parliament, which would not be able to make a decision before autumn, when ERO had to announce the tariffs for 2010.562
372.
On June 24, 2009, an online article entitled "ERO is preparing purchase price reductions!" reported that: "The Energy Regulatory Office (ERO) is preparing to dramatically reduce the purchase prices of electricity produced from the sun by solar power plants. The reason for this is the exceedingly high price of the sun's energy... Pursuant to the regulations in effect ERO cannot decrease the RES electricity price by more than 5 % per year. Hence, ERO is seeking a way together with the government to amend the existing regulations."563
373.
In a presentation of June 25, 2009 the Prague office of the law firm Schonherr referred to "efforts to increase the percentage of decrease".564
374.
In an interview published on August 13, 2009, Mr Kunz, Chairman of the Board of Energy 21, referred to the 5% limit and said: "if the legislation changes, we must be ready for that. We cannot have too many projects in which we work on the assumption that nothing will change. Nevertheless, I don't think the support will end entirely."565
375.
On August 25, 2009, following the press release of August 24, 2009, an article under the headline "Ministry of Industry and Trade wants to reduce support of solar power plants," made reference to "Business without any risk and with a state guarantee, and said that purchase prices were guaranteed for 15 years while "thanks to current technologies, in some cases the payback period of the investment is only about five years, the [Ministry of Trade and Industry] says."566
376.
On September 3, 2009, an article by P Gabal567 highlighted the Ministry's statement that there were 28 solar power plants in the Czech Republic in 2007, whereas there were 2,230 as at August 1, 2009, and reported that the Ministry wanted to change the 5% limit, ideally from January 1, 2010. Mr Kunz, the Chairman of Energy 21, was again quoted as counselling against abrupt changes in the law because of investments already committed.
377.
On November 2, 2009 under the heading "Additional payments for solar energy reached three billion; the state may curtail their boom",568 it was said "... it seems now that solar power plants will not be so lucrative anymore. The amendment being prepared by the Ministry of Finance and planned to come into force early next year will likely not include the limit which allows a decrease of the purchase price by not more than 5% every year."