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

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.

The Claimants are represented in these proceedings by:

[REDACTED]

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

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.

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]

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

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

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

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

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

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").

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.

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%..

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.

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.

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.

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

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)

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.

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.

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

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.

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.

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

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

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

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

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

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

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.

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

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

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

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

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.

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

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)

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

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

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.