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Lawyers, other representatives, expert(s), tribunal’s secretary

Decision on Jurisdiction, Liability and Directions on Quantum

I. INTRODUCTION AND PARTIES

1.
This case concerns a dispute submitted to the International Centre for Settlement of Investment Disputes ("ICSID" or the "Centre") on the basis of the Energy Charter Treaty, which entered into force on 16 April 1998 with respect to the Grand Duchy of Luxembourg, the Kingdom of Sweden and the Kingdom of Spain (the "ECT"), and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force on 14 October 1966 (the "ICSID Convention").
2.
The claimants are Hydro Energy 1 S.à r.l. ("Hydro Energy"), a private limited company (société à responsabilité limitée) incorporated under the laws of Luxembourg, and Hydroxana Sweden AB ("Hydroxana"), a private limited liability company (Aktiebolag) incorporated under the laws of Sweden (together, the "Claimants").
3.
The respondent is the Kingdom of Spain ("Spain" or the "Respondent").
4.
The Claimants and the Respondent are collectively referred to as the "Parties". The Parties’ representatives and their addresses are listed above on page (i).
5.
This dispute relates to measures implemented by the Respondent that modified the regulatory and economic regime applicable to producers of hydropower generation energy, which allegedly negatively impacted the Claimants’ investment (equity and debt interests) in various Spanish companies that own and operate thirty-three hydropower generation plants in Spain with a total installed production capacity of 106,788 megawatts ("MW").
6.
The Claimants allege that Spain has breached its obligations under Article 13 of the ECT by means of the indirect expropriation of their investment. They also submit that the Respondent has failed to comply with the following obligations under Article 10(1) of the ECT: (a) to accord fair and equitable treatment ("FET"), (b) not to impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of the Claimants’ investment, and (c) to accord the most constant protection and security ("MCPS"). The Claimants seek compensation for damage caused as a result of the Respondent’s violations of the ECT amounting to EUR 132.1 million.

II. PROCEDURAL HISTORY

7.
On 13 October 2015, ICSID received a request for arbitration dated 5 October 2015 from the Claimants against Spain, accompanied by exhibits C-0001 to C-0016 (the Request for Arbitration").
8.
On 19 October 2015, the Secretary-General of ICSID registered the Request for Arbitration in accordance with Article 36(3) of the ICSID Convention and notified the Parties of the registration. In the Notice of Registration, the Secretary-General invited the Parties to proceed to constitute an arbitral tribunal as soon as possible in accordance with Rule 7(d) of ICSID’s Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings.
9.
In accordance with Article 37(2)(a) of the ICSID Convention, the Parties agreed to constitute the Tribunal as follows: three arbitrators, one to be appointed by each Party, and the third, presiding arbitrator, to be appointed by agreement of the Parties. Pursuant to the Parties’ agreed method of constitution, failing an agreement of the Parties on the presiding arbitrator, she or he would be appointed by the Secretary-General of ICSID following a blind ‘strike-and-rank’ procedure, without limitation to the ICSID Panel of Arbitrators. Under this procedure, each Party struck candidates from a list of names and ranked the remaining ones by order of preference. The nominated candidate was the one, out of those not struck-out by either Party, who obtained the lowest score adding both parties’ points.
10.
The Tribunal is composed of Lord Collins of Mapesbury, a national of the United Kingdom, President, appointed by agreement of the Parties; Mr Peter Rees, a national of the United Kingdom, appointed by the Claimants; and Professor Rolf Knieper, a national of Germany, appointed by the Respondent.
11.
On 3 May 2016, the Secretary-General, in accordance with Rule 6(1) of the ICSID Rules of Procedure for Arbitration Proceedings (the "Arbitration Rules"), notified the Parties that all three arbitrators had accepted their appointments and that the Tribunal was therefore deemed to have been constituted on that date. Mr Gonzalo Flores, ICSID Team Leader/Legal Counsel, was designated to serve as Secretary of the Tribunal, assisted by Ms Ana Constanza Conover Blancas, ICSID Legal Counsel.
12.
On 22 June 2016, Ms Conover was designated to serve as Secretary of the Tribunal, replacing Mr Flores.
13.
In accordance with ICSID Arbitration Rule 13(1), the Tribunal held a first session with the Parties on 27 June 2016, by telephone conference.
14.
Following the first session, on 12 July 2016, the Tribunal issued Procedural Order No. 1 recording the agreement of the Parties on procedural matters and the decision of the Tribunal on disputed issues. Procedural Order No. 1 provided, inter alia, that the applicable Arbitration Rules were those in effect from 10 April 2006, that the procedural languages were English and Spanish, and that the place of proceeding was Washington, DC. Procedural Order No. 1 also set out the procedural calendar for this arbitration.
15.
In accordance with Procedural Order No. 1, on 4 November 2016, the Claimants filed a Memorial on the Merits (the "Claimants’ Memorial"); accompanied by exhibits C-0017 to C-0128; legal authorities CL-0001 to CL-0091; two witness statements, by Mr Luis Quiroga and Mr Jaume Margarit; and two expert reports, one by Mr Carlos Solé of KPMG Asesores S.L. ("KPMG") and the other by Professor Pablo Spiller and Mr Santiago Dellepiane Avellaneda of Compass Lexecon.
16.
On 24 February 2017, the Respondent filed a Counter-Memorial on the Merits and a Memorial on Jurisdiction (the "Respondent’s Counter-Memorial"); accompanied by exhibits R-0001 to R-0238; legal authorities RL-0001 to RL-0067; a witness statement of Ms Carmen López (or "Ms López"); and an expert report of Dr Daniel Flores of Econ One Research, Inc.
17.
On 30 March 2017, with the purpose of reducing the volume of hard copies in the proceeding, the Parties proposed amendments to Procedural Order No. 1 for the Tribunal’s consideration. On 3 April 2017, the Tribunal issued Procedural Order No. 2, concerning the submission of hard copies in the proceeding.
18.
On 4 May 2017, following exchanges between the Parties, the Parties filed a request for the Tribunal to decide on production of documents in a Redfern Schedule format. On 16 May 2017, the Tribunal issued Procedural Order No. 3, concerning the production of documents. Regarding documents 1 to 7 of the Respondent’s document production requests, the determination of these requests was adjourned, and the Tribunal directed the Claimants to file a statement from a responsible officer stating whether such documents existed.
19.
On 19 June 2017, pursuant to the Tribunal’s Procedural Order No. 3, the Claimants submitted a Second Witness Statement of Mr Luis Quiroga dated 16 June 2017.
20.
On 7 July 2017, in view of the evidence adduced by Mr Quiroga in his Second Witness Statement, the Tribunal made no order on items 1 to 7 of the Respondent’s document production requests of 4 May 2017.
21.
On 24 August 2017, the Tribunal proposed amendments to Procedural Order No. 1 concerning the filing of hard copies of pleadings and supporting documents and invited the Parties to submit any comments concerning the proposal by 31 August 2017. On 5 September 2017, having received the Parties’ observations on the proposed modifications to Procedural Order No. 1, the Tribunal issued Procedural Order No. 4, concerning the number of copies and method of filing of the Parties’ presentations.
22.
On 9 October 2017, the Claimants filed a Reply on the Merits and a Counter-Memorial on Jurisdiction (the "Claimants’ Reply"); accompanied by exhibits C-0129 to C-0185 and a consolidated index of Claimants’ factual exhibits; legal authorities CL-0092 to CL-0134 and a consolidated index of the Claimants’ legal authorities; a Third Witness Statement of Mr Luis Quiroga; a Second Expert Report of Mr Carlos Solé of KPMG, and a Second Expert Report of Professor Pablo Spiller and Mr Santiago Dellepiane Avellaneda of Compass Lexecon.
23.
On 19 February 2018, the Respondent filed a Rejoinder on the Merits and Reply on Jurisdiction (the "Respondents’ Rejoinder"); accompanied by exhibits R-0239 to R-0378 and a consolidated list of the Respondent’s factual exhibits; legal authorities RL-0068 to RL-0104 and a consolidated list of the Respondent’s legal authorities; a Second Witness Statement of Ms Carmen López; and a Second Expert Report of Dr Daniel Flores of Econ One Research, Inc.
24.
On 28 February 2018, the Parties notified the Tribunal of the witnesses and experts to be cross-examined at the oral hearing.
25.
On 9 March 2018, following a pre-hearing organizational meeting held between the Tribunal and the Parties by telephone conference on 6 March 2018, the Tribunal issued Procedural Order No. 5 on procedural matters pertaining to the organization of the hearing.
26.
On 12 March 2018, the Claimants filed a Rejoinder on Jurisdictional Objections (the "Claimants’ Rejoinder"), accompanied by exhibit C-0186 with a consolidated list of factual exhibits; and legal authorities CL-0135 to CL-0145 with a consolidated list of legal authorities.
27.
On 15 March 2018, the Respondent requested to submit corrected versions of its Rejoinder on the Merits, a corrected consolidated list of legal authorities, and revised translations of certain documents. Absent any objections from the Claimants, the Tribunal authorized the Respondent to file such documents into the record of the case.
28.
On 16 March 2018, the Respondent filed a request for the Tribunal to decide on the admissibility of new documents. On 23 March 2018, the Claimants filed observations on the Respondent’s request of 16 March 2018.
29.
On 23 March 2018, the Claimants informed the Tribunal and the Respondent of the inability of one of their fact witnesses, Mr Jaume Margarit, to attend the hearing. The Claimants requested that Mr Margarit be excused from participation in the hearing under Procedural Order No.l and Article 4.7 of the IBA Rules on the Taking of Evidence.
30.
On 23 March 2018, following instructions from the Tribunal, the Parties submitted a joint expert memorandum on regulatory issues prepared by the Claimants’ expert, Mr Carlos Solé of KPMG and the Respondent’s expert, Dr Daniel Flores of Econ One Research, Inc.
31.
On 26 March 2018, the Tribunal decided on the Respondent’s request of 16 March 2018 to incorporate new documents into the record of the case.
32.
By communications of 27 and 28 March 2018, the Parties exchanged views on the consequences that Mr Margarit’s absence at the hearing should have with respect to his written evidence.
33.
On 28 March 2018, following authorization from the Tribunal, the Respondent submitted legal authorities RL-0105 to RL-0109.
34.
On 28 March 2018, the Tribunal informed the Parties of its decision not to remove the witness statement of Mr Jaume Margarit from the record in view of all the circumstances and indicated that the Tribunal would give it such weight as it considered appropriate, inter alia, in the light of all the evidence and submissions.
35.
On 28 March 2018, following instructions from the Tribunal, the Parties submitted a joint expert memorandum on quantum issues prepared by the Claimants’ experts, Messrs. Spiller and Dellepiane of Compass Lexecon, and the Respondent’s expert, Dr Daniel Flores of Econ One Research, Inc.
36.
A hearing on jurisdiction, merits and quantum was held in Paris, France from 2 to 5 April 2018 (the "Hearing"). The following persons were present throughout the Hearing:

Tribunal :
Lord Collins of Mapesbury President
Professor Rolf Knieper Arbitrator
Mr Peter Rees Arbitrator

ICSID Secretariat:
Ms Ana C. Conover Blancas Secretary of the Tribunal

For the Claimants :
Dr Gaëtan Verhoosel Three Crowns LLP
Ms Carmen Martínez López Three Crowns LLP
Mr Manish Aggarwal Three Crowns LLP
Mr Simon Maynard Three Crowns LLP
Mr Maanas Jain Three Crowns LLP
Ms Holly Pelham-Stewart Three Crowns LLP
Ms Inés Vázquez García Gómez-Acebo & Pombo Abogados, S. L. P.
Mr Luigi Pettinicchio
Ms Emma Tinker
Mr Olivier Delpon de Vaux
Mr Rafael Cruz
Ms Rebeca Quiroga
Mr Luis Quiroga
Mr Carlos Solé KPMG
Ms Marta Serrano KPMG
Mr Samuel Vázquez KPMG
Dr Pablo Spiller Compass Lexecon
Mr Santiago Dellepiane Compass Lexecon
Mr Julian Delamer Compass Lexecon
Mr Jack Ghaleb Compass Lexecon

For the Respondent:
Mr Javier Torres Gella Abogacía General del Estado
Mr José Manuel Gutiérrez Delgado Abogacía General del Estado Mr Antolín Fernández Antuña Abogacía General del Estado
Mr Javier Castro López Abogacía General del Estado
Mr Roberto Fernández Castilla Abogacía General del Estado
Mr Juan Rodríguez de la Rúa Puig Abogacía General del Estado
Mr Antonio García García IDAE
Ms Carmen López Ocón IDAE
Dr Daniel Flores Econ One Research, Inc.
Mr Jordan Heim Econ One Research, Inc.
Ms Bridget Richardson Econ One Research, Inc.

Court Reporters:
Mr Trevor McGowan
Elizabeth Cicoria DR-Esteno
Luciana Sosa DR- Esteno

Interpreters:
Mr Jesús Getan Bornn
Ms Roxana Dazin
Ms Anna-Sophia Chapman

37.
The following persons were examined during the Hearing:

On behalf of the Claimants :
Fact Witness
Mr Luis Quiroga

Expert Witnesses
Mr Carlos Solé
Mr Pablo Spiller
Mr Santiago Dellepiane

On behalf of the Respondent :
Fact Witness
Ms Carmen López Ocón

Expert Witness
Dr Daniel Flores

38.
Having discussed Mr Margarit’s absence at the Hearing with the Parties and following the Claimants’ withdrawal of Mr Margarit’s evidence on 4 April 2018, the Tribunal indicated on 5 April 2018 that it would not rely on references to Mr Margarit’s evidence in the Parties’ written pleadings1 or in the oral submissions or in the oral evidence. In addition, the Tribunal allowed the Respondent to file a short note on the passages from Mr Margarit’s evidence of which the Tribunal should not take notice. The Respondent submitted this note to the Tribunal on 25 April 2018.
39.
On 27 April 2018, the Parties submitted agreed corrections to the hearing transcripts.
40.
On 23 May 2018, the Claimants filed a request for the Tribunal to decide on the admissibility of a new document. Absent objections from the Respondent, the Tribunal admitted the requested document into the record.
41.
On 31 May 2018, the Parties filed simultaneous post-hearing briefs; the Claimants’ post hearing brief was accompanied by legal authority CL-0146 with a consolidated list of legal authorities.
42.
On 25 June 2018, the Claimants filed a request for the Tribunal to decide on the admissibility of a new document, together with a written submission commenting on the relevance of such document. On 26 June 2018, the Tribunal informed the Parties that, unless the Respondent objected, the Claimants would be authorized to submit the requested document together with a written submission by 12 July 2018, and the Respondent would be authorized to respond to the Claimants’ submission within 14 days of its receipt. Absent objections from the Respondent, on 12 July 2018, the Claimants submitted the document as legal authority CL-0147 together with a written submission. On 1 August 2018, the Tribunal took note that no response had been submitted by the Respondent to the Claimants’ submission of 12 July 2018.
43.
On 5 September 2018, the Claimants filed a request for the Tribunal to decide on the admissibility of a new document, together with a written submission commenting on the relevance of such document. On 6 September 2018, the Tribunal informed the Parties that, unless the Respondent objected within seven days, the Claimants would be authorized to submit the requested document, and the Parties would be invited to agree on a timetable for the submission of observations regarding the relevance of such document.
44.
On 11 September 2018, the Respondent informed the Tribunal that it had no objection to the introduction of the requested document into the record and filed a request for the Tribunal to decide on the admissibility of a new document. On 13 September 2018, the Tribunal informed the Parties that, unless the Claimants objected within seven days, the Respondent’s request would be granted. On 17 September 2018, the Claimants notified the Tribunal that they had no objection to the introduction of the document requested by the Respondent subject to an opportunity to file a written submission commenting on the relevance of such document.
45.
On 17 September 2018, the Tribunal authorized the Parties to introduce into the record the documents requested on 5 and 11 September 2018, together with a written submission commenting on their relevance. On 5 October 2018, the Parties filed their respective submissions. The Claimants’ written submission was accompanied by legal authority CL-0148 and the Respondent’s submission was accompanied by legal authority RL-0110 with a consolidated list of legal authorities.
46.
On 16 October 2018, the European Commission filed an "Application for Leave to Intervene as a Non-Disputing Party" pursuant to ICSID Arbitration Rule 37(2), with accompanying documentation. ICSID transmitted a copy of the application to the Tribunal on the same date. On 17 October 2018, ICSID transmitted a copy of the application to the Parties and the Tribunal invited the Parties to provide observations on the application. On 7 November 2018, the Parties submitted their respective observations on the application.
47.
By letter of 19 November 2018, the Tribunal decided on the European Commission’s application of 16 October 2018. The Tribunal considered that the requirements of ICSID Arbitration Rule 37(2) were satisfied in this case, and that it would be assisted by receiving a written submission from the European Commission. The Tribunal allowed the European Commission to intervene only in writing, without access to the record of the case and subject to conditions, including that the submission be no longer than twenty pages, and that the European Commission should not append copies of documents or authorities to its submission. The Tribunal did not consider it necessary to require the European Commission to provide an undertaking on costs as a condition for its intervention and therefore rejected the Claimants’ request in this regard.
48.
On 3 December 2018, the European Commission filed a written submission under ICSID Arbitration Rule 37(2) which exceeded the twenty-page limit imposed by the Tribunal. Following instructions from the Tribunal, on 4 December 2018, the Secretary of the Tribunal transmitted a copy of the European Commission’s written submission to the Parties and the Tribunal, and informed the Parties that, rather than requiring the European Commission to re-submit its intervention submission, the Tribunal directed that the Parties’ observations could be up to a similar length.
49.
On 18 December 2018, each Party filed observations on the European Commission’s submission pursuant to ICSID Arbitration Rule 37(2) ("Comments on EC Submission"). The Claimants’ observations were accompanied by legal authority CL-0149.
50.
On 28 January 2019, the Respondent filed a request for the Tribunal to decide on the admissibility of a new document, together with a written submission commenting on the relevance of such document. On 4 February 2019, the Claimants filed observations on the Respondent’s request. On 5 February 2019, the Tribunal granted the Respondent’s request of 28 January 2019.
51.
On 12 February 2019, following authorization from the Tribunal, the Respondent submitted new legal authorities RL-0111, RL-0112 and RL-0113 with a consolidated list of legal authorities and its observations on those documents. On 19 February 2019, the Claimants submitted their observations on the three new documents and on the Respondent’s written submission of 12 February 2019.
52.
On 14 March 2019, the Respondent filed a request for the Tribunal to decide on the admissibility of a new document, together with a written submission commenting on the relevance of such document. On 16 March 2019, the Tribunal informed the Parties that, subject to any objection from the Claimants by 22 March 2019, the Respondent’s request would be granted.
53.
On 18 March 2019, the Claimants submitted objections to the Respondent’s request of 14 March 2019. On 19 March 2019, having considered the Parties’ observations, the Tribunal granted the Respondent’s request of 14 March 2019.
54.
On 1 and 2 April 2019, the Respondent filed the new document into the record as legal authorities RL-0114 and RL-0115, together with a consolidated list of legal authorities and its observations on the relevance of such document. On 12 April 2019, the Claimants filed a reply to the Respondent’s observations of 1 April 2019.
55.
On 17 and 18 April 2019, the Respondent and the Claimants, respectively, submitted their statements of costs. The Claimants’ submission was accompanied by two documents labelled as CL-0150 and CL-0151. On 20 April 2019, the Tribunal received the Respondent’s statement of costs, admitted the Claimants’ statement of costs and its two accompanying documents into the record, and allowed the Respondent to reply to the Claimants’ statement of costs. On 10 May 2019, the Respondent submitted its comments on the Claimants’ submission on costs of 18 April 2019.
56.
On 4 December 2019, the Respondent filed a request for the Tribunal to decide on the admissibility of two new documents. On 6 December 2019, the Claimants submitted objections to the Respondent’s request of 4 December 2019. On 9 December 2019, having considered the Parties’ observations, the Tribunal authorized the Respondent to introduce the two new legal authorities into the record of the case.
57.
On 20 December 2019, the Respondent proposed the disqualification of Mr. Peter Rees, in accordance with Article 57 of the ICSID Convention and ICSID Arbitration Rule 9 (the "Disqualification Proposal"). On the same date, the Centre informed the Parties that the proceeding had been suspended until the other Members of the Tribunal, Lord Collins and Professor Knieper (the "Unchallenged Arbitrators") ruled on the proposal, in accordance with Article 58 of the ICSID Convention and ICSID Arbitration Rule 9.
58.
On 13 January 2020, the Respondent filed a Supplementation on the Disqualification Proposal of Mr. Peter Rees. On 14 January 2020, the Claimants filed observations in response to the Respondent’s Disqualification Proposal. On 20 January 2020, Mr Rees furnished his explanations on the Disqualification Proposal as envisaged by ICSID Arbitration Rule 9(3). Both Parties were allowed to submit additional observations on the Disqualification Proposal by 27 January 2020. No additional observations were received from either Party by that date.
59.
On 17 February 2020, the Claimants requested leave to introduce a new document into the record. The request was rejected by the Unchallenged Arbitrators on the same date.
60.
On 17 February 2020, having received observations from both Parties and Mr Rees, the Unchallenged Arbitrators rejected the Disqualification Proposal. The proceeding was resumed on the same date, pursuant to ICSID Arbitration Rule 9(6).

III. FACTUAL BACKGROUND

A. The Claimants

61.
The Claimants are part of the HgCapital LLP group ("HgCapital"), a private equity enterprise.
62.
The Claimants’ small-hydro investments consist of two portfolios:

(1) The Xana Portfolio, consisting of 14 plants with a total installed capacity of approximately 53,675 MW, which the Claimants acquired in May 2011; and

(2) The Ondina Portfolio, consisting of 19 plants with a total installed capacity of approximately 53,113 MW, which the Claimants acquired in December 2011.

63.
In 2009 and 2010 HgCapital had invested in photovoltaic ("PV") plants in Spain.2

(1) Xana Portfolio

64.
The Claimants paid EUR 26.3 million for a 100% equity interest in Hidro Xana S.L.U. ("Hidro Xana"). As part of this transaction, a shareholder loan from Naturener Hidro S.L.U. (the company that subsequent to its acquisition by Rinlantium changed its name to Hidro Xana S.L.U) to Grupo Naturener S.A. (i.e. the sellers of Hidro Xana) in the amount of EUR 23.9 million was re-assigned from Grupo Naturener S.A. to Rinlantium S.L. (a wholly-owned subsidiary of Hydroxana).
65.
The bank debt held by Hidrodata S.A. ("Hidrodata") was refinanced in September 2015.
66.
The bank debt held by Hidro Xana was refinanced in March 2017.
67.
The Xana Portfolio comprises 14 hydropower plants located in Galicia, Extremadura, Castilla y León and Castilla La Mancha. Thirteen of the plants have an installed capacity of less than 10 MW, while the remaining one has an installed capacity of 17,474 MW.

(2) Ondina Portfolio

68.
The Claimants paid EUR 46.0 million for a 100% equity interest in Hidrodata. As part of the Claimants’ acquisition of Hidrodata, Hydroxana made a debt investment in Hidrodata of EUR 7.8 million in the form of a mezzanine loan in January 2012. The mezzanine loan was transferred from Hydroxana to Hydro Energy, i.e. within the Claimants, on 30 December 2012.
69.
The Ondina Portfolio consists of 19 hydropower plants located in Catalonia (where the majority are located) and Aragon. Eighteen of the plants have an installed capacity of less than 10 MW, while the remaining one has an installed capacity of 13.5 MW.

B. The Position when the Claimants Acquired the Plants in 2011

70.
This section will consider the Spanish regulatory framework against the background of European Union ("EU") policy. Spanish legislation for this purpose consists of Laws (or Acts) approved by the legislature; Royal-Decree Laws ("RD-L") which are enacted by the executive, but subject to legislative approval; and Royal Decrees ("RD"), which implement RD-Ls.
71.
It is important to emphasise at this stage that an RD-L is enacted by the executive, and is subject to the Law or Act under which it is promulgated. This is accepted by the Claimants as a matter of Spanish law.3
72.
In the 1992 United Nations Framework Convention on Climate Change industrialised States (including Spain) committed to a reduction in greenhouse gases and to allocate resources to deal with climate change.
73.
Energy Act 40/19944 and RD 2366/1994:5 Act 82/1980, on Energy Conservation,6 promoted the adoption of renewable energies, among them hydroelectric power, establishing a legal framework for the construction, expansion, or adaptation of small hydroelectric power plants. RD 1217/19817 dealt with the promotion of hydroelectric production in small power plants. Facilities commissioned after 1981 were to be remunerated on the basis of a regulated payment per unit of energy produced.8
74.
Under the Energy Act 40/1994 and RD 2366/1994 small-hydro facilities were automatically incorporated into the economic regime of RD 2366/1994,9 with the aim of establishing an economic regime that contemplated the "necessary balance between adequate profitability of the project and a cost for the electrical system that would not involve increased tariffs."10 The Ordinary Regime was applicable to conventional generation facilities (i.e. non-renewable sources such as coal-fired plants), and it required producers to sell their electricity output in the wholesale electricity market at the pool price (i.e. the market price). Qualifying renewable energy producers, whose installed capacity was below a certain threshold, became subject to the "Special Regime" and its more favourable feed-in remuneration regime. Small-hydro facilities under the RD 1217/1981 regime were automatically incorporated into the economic regime of RD 2366/1994, which required renewable producers to register their installations in a new Registro Administrativo de Instalaciones de Producción en Régimen Especial ("RAIPRE"), after establishing that the facility complied with certain administrative requirements.
75.
Electricity Act 54/1997:11 The Electricity Act 54/1997 liberalised the Spanish electricity sector and set out the general principles and objectives for its implementation. It provided that by 2010 the contribution of renewable sources of energy to Spain’s gross energy consumption should reach 12%. Qualifying electricity generators using renewable sources of energy as primary energy, and with an installed capacity of less than 50 MW, became subject to a "Special Regime" (Article 27). The Special Regime generators were entitled to receive the market price of electricity plus a supplementary premium (the amount of which was to be fixed in statutory terms by governmental regulations). Ordinary Regime traditional generation plants received remuneration from the wholesale price of electricity. The overall object was to secure the supply of energy at low cost for consumers.
76.
Electricity Act 54/1997 gave small-hydro plants commissioned before RD 1217/1981 the possibility of joining the incentive scheme for the rest of their operational life, so that small-hydro facilities with more than 20 years of operation (previously excluded from the Special Regime established in 1994) were entitled to the same feed-in remuneration as new facilities.
77.
Article 30(4) of the Electricity Act 54/1997 provided:

The determination of premiums will take account of the voltage level of the delivery of energy to the network, the effective contribution to the improvement of the environment, the primary energy savings and energy efficiency, the production of economically justifiable useful heat and the investment costs incurred, in order to achieve reasonable profitability rates with reference to the cost of the money on the capital markets.12

78.
All energy producers were required to be registered in the RAIPRE.
79.
The Electricity Act 54/1997 was implemented by a series of Royal Decrees, following Spain’s signature in April 1998 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which required the contracting parties to reduce greenhouse gas emissions and set binding emission targets to achieve reduction.13
80.
RD 2818/1998:14 RD 2818/1998 implemented the Special Regime, and provided that Special Regime generators who had been duly registered in the RAIPRE were entitled to remuneration consisting of the market price plus a premium. RD 2818/1998 classified the qualifying Special Regime renewable generators into categories and groups according to, inter alia, the generation technologies used. It classified small-hydro generation installations into (1) group b.4, comprising hydropower installations whose installed capacity was not higher than 10 MW; and (2) group b.5, comprising hydropower installations whose installed capacity was higher than 10 MW but less than 50 MW. Group b.4 installations were entitled to a premium of 5.45 pesetas/kWh (a FiP) or in the event the facilities chose not to apply the premium, to a regulated tariff of 11.20 pesetas/kWh (a FiT). The premium for group b.5 installations was calculated by applying a specific formula to the premium payable to group b.4 based on the relevant facility’s installed capacity.
81.
Installations which had been registered in the RAIPRE before the entry into force of the Electricity Act 54/1997 could choose between remuneration based on: (a) RD 2818/1998; or (b) RD 2366/1994, until 1 June 2007.
82.
The premiums set out in RD 2818/1998 were subject to revision every four years, based on the evolution of the price of electricity on the market, the participation of Special Regime facilities in coverage of demand, and their impact on the technical management of the electricity system (Article 32). According to the Claimants,15 this involved a lack of predictability and stability regarding the applicable premiums and made investment under the RD 2818/1998 regime less attractive for private investors, and Spain realised that it needed to revise its legal and economic framework to provide more stable, sufficient, and predictable economic incentives to attract private capital into renewable projects, including increasing the role of project finance debt.
83.
The Development Plan for Renewable Energies 2000-2010 ("1999 PER"):16 The 1999 PER was prepared by the Instituto para la Diversificación y Ahorro de la Energía ("IDAE") and approved by the Council of Ministers in December 1999. It set the targets for implementation of renewable energies for a baseline scenario of an annual increase in electricity demand at 2%. The plan recognised that small-hydro was among the technologies which had reached "very high levels of maturity."17
84.
The 1999 PER determined standard facilities, different benchmarks were established for each (cost of investment, operating cost, useful life of the plant, production hours subject to a premium, market price), which would allow each plant, within a certain period of time (useful life), to reach a reasonable rate of return according to the cost of money on the capital markets. The return of the standard projects was estimated at "7% with own resources, before financing and after tax."18
85.
EU Directive 2001/77/EC:19 In 2001, the EU adopted Directive 2001/77/EC on the Promotion of Electricity Produced from Renewable Energy Sources in the Internal Electricity Market, in order to comply with the Kyoto Protocol.20
86.
The Directive recited that the need for support schemes in favour of renewable energy sources was recognised in the Community guidelines for State aid for environmental protection.21 The Directive obliged all EU Member States to "take appropriate steps to encourage greater consumption of electricity produced from renewable energy sources" in order to "meet Kyoto targets more quickly", and required "all Member States... to set national indicative targets for the consumption of electricity produced from renewable sources", and to report regularly to the EU on their progress in meeting those targets.22 Spain’s indicative target was to draw 29.4% of its electricity from renewable sources by 2010. The Directive required Spain to enact implementing legislation by 27 October 2003.23
87.
RD 436/2004:24 RD 436/2004 was enacted to implement the 1999 PER and replace RD 2818/1998. The Economic Report on RD 436/2004 prepared by the Ministry of Energy stated:

Parameter A [Production cost: the investment, operating and maintenance costs for each technology] has a significant weighting in establishing the amount of the regulated tariff for sale to distributors. This way, any plant in Spain in the special regime, provided it is equal to or better than the standard (the standardised plant) for its group, will obtain reasonable return.

... it is assumed, in all cases, that 100% of the funding will come from equity. The leverage and percentage between equity and other sources of funding are independent decisions in each project and for each promoter that, when made wisely, should provide better ratios than those estimated in this report.25

88.
RD 436/2004 repealed RD 2818/1998, and adapted the feed-in system to the new average or reference electricity tariff (tarifa eléctrica media o de referenda or "TMR")26 methodology. Its preamble stated:

The goal is to continue down the path begun by Royal Decree 2818/1998... with the added benefit of being able to simultaneously take advantage of the stability brought to the system as a whole by Royal Decree 1432/2002... to provide those who have decided or decide in the near future to make a commitment to the special regime of a long-lasting, objective and transparent regulatory framework.

Whatever remuneration mechanism is chosen, the Royal Decree guarantees the owners of the facilities under the special regime a reasonable remuneration for their investments and it guarantees electricity consumers a reasonable allocation of the costs attributable to the electric system...27

89.
RD 436/2004 gave qualifying renewable energy producers the right to choose, on an annual basis, between: (a) a fixed tariff, calculated as a specific percentage of the TMR, defined as a single flat rate and, where applicable, a supplement for reactive energy ("regulated tariff option"); and (b) the pool price plus a premium and an incentive for participating in the market, and, where applicable, a supplement for reactive energy ("pool price plus premium option"). Premium, incentive and supplement were all calculated by reference to the TMR as a fixed percentage.
90.
RD 436/200428 maintained RD 2818/1998’s classification of hydropower installations into category "b", and further into group "b.4" (hydropower installations whose installed capacity was no more than 10 MW) and group "b.5" (hydropower installations whose installed capacity was higher than 10 MW but less than 50 MW) in Article 2. It also provided for tariffs, premiums and incentives, calculated as percentages of the TMR, for the operational lifespan of such installations (Article 36).
91.
Pursuant to the transitional provisions of RD 436/2004, existing Special Regime installations which were previously under RD 2818/1998 could choose: (a) to benefit from the economic regime established in RD 436/2004 from the date RD 436/2004 entered into force (28 March 2004); or (b) to continue to be subject to RD 2818/1998’s remuneration regime until 31 December 2006, and thereafter migrate to the RD 436/2004 regime automatically from 1 January 2007 (later extended to 31 May 2007).29
92.
Article 40(1) of RD 436/2004 contemplated revisions to the regulated tariff, premiums and incentives stipulated therein, every four years starting from 2006, based on the costs associated with each of the renewable technologies, their degree of participation in the Special Regime in demand coverage and their impact on the technical and economic management of the system.
93.
Article 40 provided:

Article 40. Revision of tariffs, premiums, incentives and supplements for new installations.

1 In 2006, in view of the findings of the monitoring reports on the degree of compliance with the Renewable Energies Promotion Plan, the tariffs, premiums, incentives and supplements defined in this Royal Decree will undergo revision, taking into account the costs associated with each one of these technologies, their degree of participation in the special regime in demand coverage and their impact on the technical and economic management of the system. Every four years, beginning in 2006, a new revision shall take place.30

3 The tariffs, premiums, incentives and supplements resulting from any of the revisions provided for in this section shall apply solely to the facilities that commence operations subsequent to the date of the entry into force referred to in the section above and shall not be effective retroactively on any previous tariffs and premiums.31

94.
RD 436/2004 was an improvement to the incentive scheme under RD 2818/1998, but Spain became dissatisfied with RD 436/2004’s progress in attracting investment to the Spanish renewable industry. Since the feed-in scheme under RD 436/2004 was based on the TMR, which changed on a yearly basis, there were inevitably fluctuations in the tariffs, premiums and incentives that investors would receive. The Claimants submit that "[t]hese fluctuations meant a lack of predictability, as it was difficult for investors to foresee what actual income might be consistently received over the long term. This lack of predictability and stability made investment under [RD 436/2004] more risky and... less attractive to lenders than it might otherwise have been".32
95.
2005-2010 Renewable Energy Promotion Plan ("2005-2010 PER"):33 The 2005-2010 PER was prepared by IDAE and approved by the Council of Ministers in August 2005. The aim of the 2005-2010 PER was to provide recommendations which would assist in further increasing investment in renewable energy in Spain as RD 436/2004 had not resulted in the expected increase in installed renewable capacity.34
96.
Spain concluded that it would need to attract investments amounting to approximately EUR 24 billion into the Spanish renewable energy sector to achieve its policy targets. The Plan recognised the fundamental importance of ensuring that renewable projects be both attractive to investors and palatable to lending institutions (i.e. capable of supporting project finance): "... it is essential to place the various technologies in a position to be of financial performance, thereby making them attractive to investors, as well as to facilitate access to bank financing."35
97.
In relation to hydropower generation, the 2005-2010 PER Summary stated that "[h]ydroelectricity is one of Spain’s main sources of electricity" and that, "[g]iven the level of resources available, it has a long history in Spain, and as a result the sector is mature and consolidated" and noted that small-scale (i.e. less than 10 MW) hydropower generation was "advancing more slowly than envisaged", and recommended the further development of the hydropower sector. It recommended installation of additional generation capacity of: (a) 450 MW of small-scale (i.e. less than 10 MW) hydropower capacity, to reach a total of 2,199 MW of installed capacity by 2010; and (b) 360 MW of other hydropower capacity (between 10 to 50 MW), to reach a total of 3,257 MW of installed capacity by 2010.36
98.
The 2005-2010 PER Summary also said:

In order to bring the targets set out here to fruition, a detailed evaluation has been made of the investment envisaged over the period as a whole, the nature of this investment and the public aid necessary to meet the targets. This analysis, based on the specific features of each technology, such as its degree of maturity and contribution to the overall target, rests on a balance between all the factors, such that a return is achieved from on public and private investments, and the necessary resources are mobilised to ensure the envisaged investments are made.37

99.
The 2005-2010 PER established the following conception of return of standard projects: "Return on Project Type : calculated on the basis of maintaining an Internal Rate of Return (IRR), measured in legal tender and for each standard project, around 7%, on equity (before any financing) and after taxes."38
100.
RD-L 7/2006:39 RD-L 7/2006 adopted urgent measures for the energy sector. It suspended the remuneration’s revisions for renewable energy technologies until a new remuneration scheme dissociated from the TMR was developed. According to the Respondent,40 the reason for RD-L 7/2006 was that the majority of the facilities opted for remuneration according to the market price plus the premium, thereby earning much higher remuneration than had been forecast by the regulator. According to the Claimants this only had the intention of temporarily freezing the feed-in remuneration paid to renewable energy facilities under RD 436/2004 until Spain could de-couple them from the TMR.41
101.
In February 2007 the Spanish Comisión Nacional de Energia ("CNE") reported that a majority of its Board considered that the need to make what became RD 661/2007 retroactive had not been sufficiently justified, and emphasised that RD 436/2004 had "a very significant quality, which is regulatory stability."42
102.
RD 661/2007:43 The objective of RD 661/2007 was to create enhanced incentives. It stated in its preamble:

The creation of the special regime electricity generation was an important milestone in our country’s energy policy. The targets for the promotion of renewable energies and combined heat and power, are collected in 2005-2010 Renewable Energies Plan and the Strategy of Energy Saving and Efficiency in Spain (E4), respectively. In view thereof it is found that although experienced by all the special arrangements for electricity generation has been remarkable growth in certain technologies, the objectives are still far from being achieved.

... the activity of electricity production in the special regime is characterized by the possibility that its remuneration is supplemented by charging a premium on the terms established by regulation, the determination of which takes into account factors such as the voltage level of the power delivery grid, contribution to the improvement of the environment, the primary energy savings, energy efficiency and investment costs that are incurred.

A change to the economic and legal framework governing the special regime in force to date is necessary for several reasons: Firstly, the growth experienced by the special regime in recent years, coupled with the experience gained during the implementation of Royal Decrees 2818/1998, of December 23, and 436/2004, of March 12, has revealed the need to regulate certain technical aspects in order to contribute to the growth of these technologies, safeguarding security in the electrical system and ensuring quality in the delivery of the same, and also to minimize restrictions on the production of said generation. The economic regime established by Royal Decree 436/2004, of March 12, owing to the changes experienced by market prices, which in recent times have been more greatly affected by certain variables not considered in the above remuneration scheme of the special regime, makes modification of the remuneration scheme necessary, separating it from the Average or Benchmark Electricity Tariff, used to date. Finally, the regulatory changes resulting from European legislation, as well as the Royal Decree-Act 7/2006, of June 23, must be included, by means of which urgent measures were adopted in the energy sector, introducing significant changes regarding the legal regime of the combined heat and power activity.

The present Royal Decree replaces Royal Decree 436/2004, of March 12, which defined the methodology for updating and the systematization of the legal and economic framework for electricity production activity under the special regime, while maintaining the basic structure of the regulations therein.

The economic framework established in this Royal Decree implements the principles contained in Act 54/1997, of November 27, on the Electricity Sector, guaranteeing owners of facilities in the special regime a reasonable return for their investment and the consumers of electricity an allocation of the costs attributable to the electrical system that is also reasonable, while participation is encouraged in the market, since it is considered that under this framework, government intervention on the pricing of electricity will be reduced, as well as better more efficient and allocation of costs arising from the system, especially with regard to the handling of deviations and additional services. (Emphasis added)

103.
RD 661/2007 implemented a remuneration regime pursuant to which a qualifying Special Regime generator could choose between selling its electricity output at either: (a) a fixed regulated tariff (in euro cents per kWh) at the same rate for all scheduling periods (i.e. a FiT option) (Article 24(1)(a)); or (b) the pool price plus a fixed premium payment (in euro cents per kWh) over and above the pool price (i.e. a FiP option) (Article 24(1)(b)). The generators could choose between these two options - the "regulated tariff’ or the "pool price plus premium" on an annual basis (Article 24(4)). The Special Regime producers were entitled to obtain the regulated tariff or the pool price plus premium for all of their electricity output (measured in kWh), without any limit on production.
104.
By contrast with RD 436/2004, the fixed regulated tariff and premium under RD 661/2007 were not calculated by reference to annual TMR values. It disassociated subsidies from the TMR and updated them annually based on an adjusted CPI.
105.
In relation to the "pool price plus premium" option, RD 661/2007 introduced a cap and floor mechanism, by establishing upper and lower limit values for the sum of the hourly market price plus a "reference" premium, so that the actual premium for each hour could be limited by reference to those values. Pursuant to this mechanism, when the hourly pool prices were excessively low, installations were guaranteed a minimum level of remuneration (the lower limit or "floor"). When the pool prices reached, or exceeded, the defined upper limit or "cap", the actual hourly premium payable was zero (thereby imposing no extra burden on the electricity system) (explanatory preamble).
106.
Hydropower installations had the right to receive the feed-in remuneration for their operational life, either at the regulated tariff or the pool price plus premium - at a particular rate during its first 25 years of operation, after which the feed-in remuneration would continue for the lifetime of the installation, but at a lower rate.
107.
RD 661/2007 also provided for an inflation adjustment mechanism pursuant to which the values of the regulated tariff, premium, and lower and upper limits provided for in RD 661/2007 were to be updated on a yearly basis to reflect increases in the Spanish CPI (Article 44(1)). For the installations in category "b" (including hydropower installations in groups b.4 and b.5), this was to be done by reference to the increase in the CPI, less 25 basis points up to 31 December 2012 and 50 basis points thereafter (Article 44(1)).
108.
Pursuant to its First Transitional Provision, Special Regime installations previously subject to the incentive scheme set out in RD 436/2004 and which entered into commercial operations before 1 January 2008 were granted the right to choose between: (1) benefiting from the remuneration regime in RD 661/2007 from the date it entered into force (1 June 2007); or (2) applying the prior remuneration regime of RD 436/2004, subject to certain conditions and in some cases during a transitional period. Under choice (2), there were two further options: (i) if the RD 436/2004 option chosen was "regulated tariff’, then the regulated tariff regime of RD 436/2004 would apply for the remainder of the installation’s lifetime; or (ii) if the installation chose the "market price plus premium and incentive" option, the economic regime for that option would apply until 31 December 2012, after which (from 1 January 2013) the feed-in remuneration scheme under RD 661/2007 (with a right to choose annually between the regulated tariff and the pool price plus premium options) was to apply.
109.
The Claimants say that most of the Claimants’ hydropower installations chose option (2)(ii) under the RD 436/2004 regime (except two installations in the Xana Portfolio which chose option (1), to benefit from the RD 661/2007 feed-in remuneration regime from the date RD 661/2007 entered into force). Those installations which chose option (2)(ii) were remunerated under the "market price plus premium and incentive" of RD 436/2004 until 31 December 2012, and from 1 January 2013, were expected to start receiving the feed-in remuneration of RD 661/2007 (i.e. either the "regulated tariff’ or the "pool price plus premium").
110.
Article 44(3) contemplated a review of the tariffs, premiums and lower and upper limits every four years, starting from 2010, to determine whether those incentives still reflected a particular technology’s costs, market participation and a reasonable return for the investor. It provided (according to the Claimants’ translation44):

3. During 2010, in view of the results of the monitoring reports on the degree of compliance with the 2005-2010 Renewable Energies Plan (PER), and of the Energy Efficiency and Savings Strategy in Spain (E4), together with such new targets as may be included in the subsequent Renewable Energies Plan for the period 2011-2020, there will be a revision of the tariffs, premiums, supplements and lower and upper limits defined in this Royal Decree, considering the costs associated with each of these technologies, the degree of participation of the Special Regime in covering the demand and its impact upon the technical and economic management of the system, always guaranteeing reasonable rates of return with reference to the cost of money in the capital markets. Thereafter, every four years, a new revision shall be performed, maintaining the same criteria as previously.

The revisions of the regulated tariff and the upper and lower limits indicated in this section shall not affect facilities for which the commissioning certificate had been granted prior to January 1 of the second year following the year in which the revision had been performed.

111.
RD 1578/2008:45 RD 1578/2008 put in place a new remuneration regime applicable to PV facilities that were not registered by the deadline for RD 661/2007. RD 1578/2008 offered lower tariffs than RD 661/2007. It also provided that the tariffs fixed each quarter would remain in force for "a maximum period of twenty-five years" (Article 11(5)) and would be updated as "provided for in Article 44.1 of Royal Decree 661/2007" (Article 12).
112.
RD-L 6/2009:46 RD-L 6/2009 amended the Electricity Act 54/1997. Its preamble stated that (a) the growing tariff deficit was causing serious problems which, in the context of the current international financial crisis, was having a deep effect on the system and jeopardising not only the financial situation of electricity sector companies but the very sustainability of the system itself; (b) the imbalance was unsustainable; (c) the trend of these technologies might put at risk the sustainability of the system in the short term, both from the economic point of view and its impact on the electricity tariff, as well as from the technical point of view, compromising the economic feasibility of the installations already finished, whose working depended on the suitable balance between manageable and non-manageable generation; and (d) it had become necessary to adopt an urgent measure to guarantee the necessary legal security for those who have made investments, and to lay the foundation to establish new economic schemes which afforded fulfilment of the intended objectives: the fulfilment of some power targets by technology at a reasonable cost to the consumer and their technological evolution which allowed a gradual reduction of their costs and therefore of their competition with the conventional technologies.
113.
RD-L 6/2009 was aimed at eliminating the tariff deficit by 1 January 2013. It provided that enrolment (which was subject to conditions) on a "pre-assignment of payment register" established by the Decree-Law would be necessary to obtain the right to take advantage of the Special Regime under RD 661/2007. It also allowed Spain to introduce restrictions on the number of registered installations which could begin operating if renewable energy targets were exceeded (Article 4(2)).
114.
EU Directive 2009/28/EC:47 The Directive on the promotion of the use of energy from renewable sources repealed Directive 2001/77/EC and increased the EU’s communitywide target for total energy from renewable sources from 12% by 2010 to 20% by 2020, and a minimum target of 10% for each Member State. Member States were required to adopt a National Action Plan for the implementation of the Directive and its targets.
115.
2010 Renewable Energy Promotion Plan, 30 June 2010 ("2011-2020 PER"):48 The 2011-2020 PER stated that the then-existing remuneration framework for renewable energies was "stable, predictable, flexible, controllable and secure for developers and the electricity system";49 electrical energy production under the special procedure was founded on three basic principles, namely "legal certainty, feasibility and regulatory stability";50 and any present or future economic remuneration system to support the generation of electricity from renewable sources would be based on those principles. It also stressed that the system was intended to guarantee a reasonable return (emphasis added):

Royal Decree 661/2007 of 26 May 2007 regulating electrical energy production under the special regime, implements the Electricity Sector Act Law 54/1997 and defines the legal and economic regime for electrical energy and cogeneration plants and plants that use renewable energies and waste as raw material, with the overarching objective of establishing a stable and predictable system that guarantees a reasonable return on electrical energy production under the special regime.51

The economic framework, currently implemented by Royal Decree 661/2007 of 25 May 2007 regulating electrical energy production under the Special Regime, and Order ITC/3519/2009 of 28 December 2009 reviewing access fees as from 01 January 2010 along with the tariffs and premiums corresponding to special regime installations, provide for electricity generation remuneration levels that afford a reasonable return on investment. In determining those levels, account is taken of the specific technical and economic aspects of each technology, installed capacity and the date operation commenced, in all cases using criteria of system economic sustainability and efficiency.52

Royal Decree 661/2007 provides for reviews of remuneration amounts every four years, which may be modified on the basis of technological developments within the sectors, market behaviour, degree of compliance with renewable energy targets, percentage of demand covered by special regime facilities and their effect on the technical and economic management of the system, while always guaranteeing reasonable rates of return. In any event, these reviews take account of cost trends associated with each technology with three objectives in mind: to see that renewable technologies become as competitive as possible with Ordinary Regime generation, to foster a technological development balance and to see that the remunerative scheme moves in the direction of minimising socio-economic and environmental costs.53

Technical parameters and investment costs incurred will be considered in determining remuneration with a view to providing a reasonable rate of return referenced to the cost of money on the capital market in accordance with the provisions of the Electricity Sector Act.

Also, effective administrative supervision is required to assure that gains from the development of these technologies in terms of relative cost competitiveness are passed on to society, thus minimising the speculative risks posed in the past by excessive rates of return, which not only hurts consumers but is also damaging to the industry in general in terms of the perception people have of it. Therefore, it will be necessary to devise sufficiently flexible and transparent systems that permit the issue and reception of economic and market signals so as to minimise the risks associated with investment and its remuneration and those caused by fluctuations in the energy markets.54

116.
From 2010 there was a fall in electricity demand, which increased the tariff deficit. As the International Energy Agency said later:

The tariff deficit, which had been accumulating since 2001, began to spiral out of control after 2005. From 2005 to 2013, the costs in the electricity system grew by 221% while revenues increased by only 100%. Subsidies for renewable electricity are the single largest cost element. By 2012, the accumulated debt in the system had reached more than EUR 20 billion and was set to expand by billions every year unless action was taken. In 2012, the government temporarily eliminated subsidies for new installations. It also reduced remuneration for transmission and distribution network activities, increased access tariffs, and introduced a 7% tax on electricity generation (22% for hydropower). Nevertheless, the deficit grew to EUR 26 billion by the end of 2012.55

117.
RD 1565/2010:56 RD 1565/2010 capped the quantity of electricity produced by PV plants (inter alia) which was eligible to receive incentive tariffs and eliminated the tariffs after 25 years of operation, which was later extended to 28 years and then to 30 years (by RD-L 14/2010 and Act 2/2011). RD 1565/2010 also imposed a reduction in the tariff rate available to certain facilities enrolling in the RD 1578/2008 regime.
118.
RD 1614/2010:57 RD 1614/2010 affected only wind and concentrating solar power ("CSP") facilities. Its preamble stated that the legal regime must be adapted, safeguarding the legal security of investments and "the principle of reasonable return", to maintain a necessary and sufficient support which was coherent with market conditions and strategic energy objectives on energy to contribute to the transfer to society of the benefits from the suitable evolution of these technologies.
119.
RD 1614/2010 reduced premium values under RD 661/2007, although it provided for a transitional period according to which qualifying installations could remain under the prior regulatory regime until the end of 2012. It also limited the number of hours of operation amenable to premium if certain caps were surpassed.
120.
RD-L 14/2010:58 RD-L 14/2010 introduced urgent measures to correct the tariff deficit. The preamble stated:

Since the adoption of [RD-L 6/2009], there have been a series of supervening circumstances that have had a direct impact on the anticipated tariff deficit in the electricity system and it has been determined that the capped ex ante deficit limits, as established in the aforementioned Twenty-First Additional Provision, have been largely overcome. The impact of the global crisis, which traverses the Spanish economy, has led to a significant decline in the demand for electric energy, however, supply has been impacted by aspects such as the evolution of the price of fuels on the international markets during the current year, 2010 and the favourable climatic conditions that have led to increased electric energy production from renewable sources. The current economic situation has not had symmetrical consequences in all electric power sectors: while the ordinary regime (traditional electric power plants) have seen a reduction in their operating hours and income, due to the decline in wholesale market prices, however, producers under the special regime are found to be in a different circumstance, as this specific regime ensures the sale of generated electricity at preferential rates within the system.

121.
The preamble also stated that it was enacted "in consideration of the rate of growth of photovoltaic installations" and that the PV sector was a major contributor to the regulated costs of the electricity system as a consequence of the objectives being exceeded. It imposed a temporary three-year cap on the number of operating hours during which PV installations were entitled to the RD 661/2007 tariff, in exchange for a three-year extension of the 25-year tariff term (which was later extended by a further two years by Act 2/2011). It also imposed an access fee (of EUR 0.50/MWh) on all producers (including small-hydro installations) for access to transmission and distribution networks.
122.
Act 2/2011 on Sustainable Economy:59 Act 2/2011 (March 2011) outlined the need to undertake a reform in energy regulation in general and the incentives for the Special Regime in particular. Section 78(1) set a minimum national goal of 20% for the participation of renewable energies in gross energy consumption for the year 2020; and the target was to be attained with an energy quota from renewable energies in all kinds of transmission by 2020 that was equivalent to at least 10% of the final energy consumption in the transmission sector.

C. Supreme Court Decisions Prior to the Claimants’ Investment60

123.
15 December 2005:61 The Supreme Court, in a challenge against RD 436/2004, said that: "No legal obstacle exists for the Government, in the exercise of the regulatory power and the large authorisations which it has in a heavily regulated field such as electricity, to modify a particular compensation system...".
124.
25 October 2006:62 The Supreme Court, in a challenge against RD 2351/2004, ruled:

the owners of electrical energy production facilities under the special regime do not have an "unmodifiable right" to maintain unchanged the way in which the collection of premiums is governed. This regime actually attempts to promote the use of renewable energies by means of an incentive mechanism which, like any of this kind, is not guaranteed to be retained without amendments in the future... In the same way that, according to factors of economic policy... the premiums and incentives for the production of electric energy under the special scheme can increase from one year to the next, they can also decrease when those same considerations make it advisable. As long as, we repeat, the variations are kept within the legal limits that govern this mode of promotion, the mere fact that the updating or financial significance of the premium may increase or decrease does not constitute, by itself, reason for nullity, nor does it affect the legitimate expectations of the recipients."63

125.
The Supreme Court also said:

legal certainty is not incompatible with the regulatory changes from the perspective of the validity of the latter... The same consideration applies to the principle of legitimate expectations... The appellants argue that their investments in the activity of production of electrical energy under the special regime were made at a given time "trusting that the Administration will not change the legal conditions that were decisive for... them to decide to build the facility," a premise from which they infer that the reduction of premiums subsequent to RD 2351/2004 regarding those established in RD 435/2004 would be contrary to that principle. Such reasoning, based on an incentive mechanism as that of the premiums in question, cannot be shared...

Until it is replaced by another one, the aforementioned Act (Article 30 of Electricity Sector Act) enables the corresponding companies to pursue premiums that include, as a relevant factor, the achievement of "reasonable rate of return with reference to the cost of money on the capital market" or, to once again use the words of the preamble to RD 436/2004, "fair remuneration for their investments". The remuneration regime which we examine does not guarantee, on the contrary, holders of facilities under special regime the inviolability of a certain level of returns or income in relation to those obtained in past years, nor the indefinite permanence of formulas used for fixing premiums.64

126.
20 March 200765 (a decision on amendments to RD 2818/1998) and 9 October 200766 (a challenge to RD 1454/2005): the Supreme Court confirmed that there is no vested right to receive a specific subsidy in the future.
127.
3 December 200967 and 9 December 2009:68 These were challenges to the replacement of RD 436/2004 by RD 661/2007. In the former decision the Supreme Court stated:

the prescriptive content of Act 54/1997... does not envisage the petrifaction or freezing of the remunerative regime of owners of electricity facilities under the special regime, nor any recognition of the right of producers under the special regime to the unmodifiability of that regime, given that the Government, as intended by the legislator, possesses a discretion power to determine the energy remunerations that are offered... taking into account, in the exercise of its regulatory powers the evident and essential general interests implied in the proper functioning of the system of production and distribution of electricity, and, in particular, the rights of users.69

128.
There was no breach of the principle of legal certainty because:

it is not deduced that said regulation [RD 661/2007] does not respond to the demands of the principle of legal certainty, which does not include any right to freezing of the existent legal order...

[T]here are no grounds for challenging Transitory provision one, section 4 of the RD contested, of infringing the principle of legitimate expectations, given that the mercantile companies appealing, as companies that operate in the electricity production business... do not have a right for the remunerative regime of the electricity sector to remain unaltered.... as we upheld in the Judgement of this Chamber of Contentious-Administrative Matters of the Supreme Court of 15 December 2005, "there is no legal obstacle to prevent the Government, in the exercise of regulatory powers and broad entitlements that it has in such a strongly regulated matter as electricity, from modifying a specific system of remuneration providing that this remains within the framework established through the Electricity Sector Act".70

129.
In relation to legitimate expectation, the Court said: "The principle of legitimate expectations does not guarantee the perpetuation of the existing situation; which can be modified at the discretion of the institutions and public authorities to impose new regulations taking into account the needs of the general interest."71
130.
In the second decision, 9 December 2009, on two challenges against RD 661/2007, the Court said:

... [The Claimant] does not pay sufficient attention to the case-law of this Chamber issued specifically in relation to the principles of legitimate expectations and non-retroactivity applied to successive incentives regimes for electricity generation. These are the considerations expressed in our Ruling of 25 October 2006 and reiterated in that of 20 March 2007, inter alia, on the legal status of the owners of facilities producing electricity under the special regime, for whom it is not possible to recognise pro futuro an ‘unalterable right’ to the maintenance of the remuneration framework approved by the holder of regulatory power, provided that the prescriptions of the LSE regarding the reasonable rate of return of the investments are respected.72

131.
The Court also said:

Any companies that freely choose to enter a market such as the special regime electricity production market, knowing in advance that it is largely dependent upon economic incentives established by public authorities, are or must be aware that these may be modified, within legal guidelines, by these authorities. One of the "regulatory risks" to which they are subject, which they must necessarily take into account, is precisely the variation of the parameters of the premiums or incentives, which the Electricity Sector Act - in the sense above - tempers but does not exclude...

It should be noted that the establishment of the economic regime for facilities operating under the special electricity production regime, proposed by RD 661/2007, of 25 March, cannot be described as arbitrary, since it is conditional upon the objective of ensuring reasonable rate of return throughout the useful life of these facilities, so that the Government, pursuant to Article 15.2 of Act 54/1997, of 27 November, of the Electricity Sector, is authorised to approve the methodology for calculating and updating the remuneration of said activity with objective, transparent and non-discriminatory objectives...73

132.
Later decisions: There are judgments rendered after the Claimants’ investment in the same sense. They cannot affect the Claimants’ expectations, but they confirm the earlier decisions of which the Claimants and their advisers were, or should have been, aware.74

D. The Disputed Measures

133.
On 7 March 2012, the CNE issued Report 2/2012 recommending measures to address the tariff deficit.75 It said:

The Spanish electrical system has recorded a structural deficit in the revenues from regulated activities (tariff deficit) for a decade, due to the fact that the costs that have been recognised for the various regulated activities and costs have been (and continue to be) higher than the revenues obtained from the regulated prices paid by consumers.

... the current situation is unsustainable. The introduction of regulatory measures, as requested by the document of the SEE, is called for with immediate effect in the short term, in order to eliminate the deficit of the system, mitigate the cost of funding the yet unsecuritised debt and clearly define the access costs that will be assumed by electricity consumers, in order to determine their access tariffs in a satisfactory and stable manner.76

134.
On 20 July 2012 Spain and the EU signed a Memorandum of Understanding, in which Spain committed to "address the electricity tariff deficit in a comprehensive way."77
135.
RD-L 1/2012:78 RD-L 1/2012 eliminated feed-in remuneration under RD 661/2007 for new plants, and suspended new RAIPRE registrations.79 Facilities which, at the time of the entry into force of RD-L 1/2012, had been finally registered in the RAIPRE were excluded from its scope of application. The preamble restated the efforts made by RD-L 6/2009 and RD-L 14/2010 to address the tariff deficit, and stated that (a) the measures adopted so far had not been sufficient, and the final purpose of eliminating the tariff deficit as from 2013 was still in jeopardy; (b) it was therefore considered appropriate to withdraw the economic incentives for certain special regime facilities and for certain ordinary regime facilities using similar technologies, as well as to suspend the remuneration pre-allocation procedures established for them, in order to address the problem of the electricity sector high tariff deficit in a more favourable environment; (c) by adopting this measure, the Government had chosen to limit its scope to special regime facilities not yet registered, except where such condition was due to the Administration’s failure to comply with the relevant time limit for making a decision; and (d) it had been decided to limit the scope of the measure in order to prevent it from affecting investments already made with regard to ordinary regime facilities, not subject to the pre-allocation scheme.
136.
Act 15/2012:80 Act 15/2012 (27 December 2012) on tax measures for energy sustainability introduced a 7% tax on all revenue received from the generation of electricity ("TVPEE"), whether from conventional or renewable sources. The preamble stated that this measure was introduced to address tariff imbalance and to meet environmental concerns: "The purpose of this act is to harmonize our fiscal system with more efficient and environmentally-respectful use and sustainability, which are the values that have inspired this fiscal reform, and as such, in line with the basic principles that govern the fiscal, energy, and of course environmental policy of the European Union."
137.
By Article 1: "The tax on the value of electric power generation is a tax of direct and real nature that charges the performance of activities of production and incorporation of electric power into the electrical system, measured in power plant busbars, through each one of the facilities indicated in Article 4 of this Act."
138.
By Article 4(1): "The taxable event is the production and incorporation into the electrical system of electrical power measured at the busbars..."
139.
Act 15/2012 provided that an amount equal to that collected through the TVPEE would be allocated to finance the costs of the Electricity System (Second Additional Provision). It also created three additional taxes, which are not in issue: (i) a tax on production of spent nuclear fuel and radioactive waste, (ii) a tax on storage of spent nuclear fuel and radioactive waste, and (iii) a levy on use of continental waters for electricity production.
140.
Act 15/2012 inserted a new provision, Article 112 bis, in RD-L 1/2001 (the Spanish Water Act), imposing a new levy on hydropower concessionaires (i.e. hydropower producers) for using the inland public hydraulic domain to produce electricity (the "Water Levy"). The rate applicable to small-hydro facilities with an installed capacity equal to or less than 50 MW (which includes all hydropower installations in which the Claimants hold investments) was 2.2% of the economic value of all hydroelectricity produced using the public hydraulic domain in each annual period.
141.
Act 17/2012:81 Act 17/2012 on the general state budget supplemented Act 15/2012 and earmarked an amount equivalent to the tax collected under Act 15/2012 to fund the costs of the electricity system related to promotion of renewable energy.
142.
RD-L 2/2013 and MO IET/221/2013 implementing RD-L 2/2013:82 The preamble of RD-L 2/2013 recognised "the dual objective of guaranteeing reasonable profitability for these facilities and, at the same time, avoid their over-remuneration" and said:

The information provided by [CNE] indicates new variations in the estimates for costs and revenues for 2012 and 2013 year end due to various factors which, in the current economic environment, would make it practically impossible to cover them with a charge to the electricity tariffs and to the categories envisaged in the General State Budgets.

These variations are due in large part to a significant rise in the cost of the special regime due to the operating hours increasing more than anticipated and due to an increase in the remuneration values due to their indexation to the Brent price, and a decrease in revenues from tolls due to the sharp drop in demand this year.

The alternative proposed would be a new increase in the access tolls which pay electricity consumers. This measure would directly affect household economies and the competitiveness of companies which are both in a delicate situation due to the current economic situation.

Faced with this scenario, in order to mitigate the situation, the government has contemplated adopting certain urgent cost reduction measures which prevent putting new strain on consumers, allowing them, through consumption and investment, to also collaborate in the economy’s recovery.

143.
RD-L 2/2013 effectively eliminated the premium under the "pool price plus premium" option under RD 661/2007 and replaced the CPI-linked updating index in RD 661/2007 with a lower index: (1) it ascribed a new value" of "zero" per kWh to the reference premiums (and caps and floors) applicable to Special Regime installations (including small-hydro) under RD 661/2007; (2) if a Special Regime facility opted to sell electricity under the "pool price" option (without premium), it would no longer be entitled to choose the regulated tariff option during the remainder of its operational life; and (3) with effect from 1 January 2013, it replaced the CPI used for making the annual updates in RD 661/2007 with a "CPI at constant tax rates and excluding unprocessed foods and energy products", the effect of which was that any annual updates to the feed-in remuneration would no longer reflect any variations in the tax rates or inflation in relation to the prices of unprocessed foods and energy products.
144.
On 14 February 2013, Spain implemented several of these changes through the approval of Order 221/2013,83 which dealt with the access tolls, tariffs and premiums for Special Regime facilities.
145.
RD-L 9/2013:84 RD-L 9/2013, effective as of 14 July 2013, repealed RD 661/2007. It eliminated the regime of fixed tariffs and premiums both for new and existing installations, and substituted a system providing for "specific remuneration" based on "standard" costs per unit of installed power, plus standard amounts for operating costs.
146.
The preamble stated:

... for a decade the Spanish electric system has been generating a tariff deficit which, over time, has become structural due to the fact that the real costs associated with the regulated activities and the functioning of the electric sector are higher than the revenues from the tariffs set by the state and which consumers pay.

Between 2004 and 2012 the electric system’s revenues from tolls on consumers increased 122%, while the increase in the system’s regulated costs in the aforementioned period was 197%. Of the costs which have contributed to the largest extent to said increase, the special regime premiums and the annuities of accumulated deficits stand out as costs which have multiplied by six and by nine respectively over the aforementioned period.

According to the most recent data available from the Spanish National Commission for Energy [CNE] the cumulative debt balance amounted to €26,062.51 million at May 10, 2013. As a supplement to the calculation of the electric system’s debt, the CNE points out that from 2003 and until May 10, 2013, the amount to be paid to finance the electric system’s deficit through the annuities included in the access tolls on consumers, at updated prices for each year, amounts to €11,823 million.

These figures show the unsustainable nature of the electric sector’s deficit and the need to adopt urgent measures effective immediately which bring this situation to an end.85

147.
Article 1 substituted a new Article 30(4) in the Electricity Act 54/1997:

In addition and under the terms which are determined in a regulatory manner by royal decree of the Council of Ministers, the remuneration for the sale of energy generated valued at market price, the facilities may receive a specific remuneration composed by a term per unit of installed capacity which covers, where applicable, the investment costs for a standard facility that cannot be recovered through the sale of energy and a term to the operation which covers, if applicable, the difference between the operating costs and the revenues from this standard facility participating in the market.

To calculate said specific remuneration for a standard facility throughout its regulatory useful life and based on the activity performed by an efficient and well-managed company, the following will be taken into account:

a) The standard revenues from the sale of energy generated valued at the production market price.

b) The standard operating costs.

c) The standard value of the initial investment.

For these purposes, under no circumstances will costs or investments which are determined by regulations or administrative actions which are not applicable throughout Spain be taken into account. Similarly, only the costs and investments which correspond exclusively to the activity of producing electric energy will be taken into account.

This remuneration regime will not exceed the minimum level necessary to cover the costs which allow the facilities to compete on equal footing with the other technologies on the market and which allow a reasonable profitability to be obtained with reference to the standard facility applicable in each case. Notwithstanding the foregoing, the remuneration regime may exceptionally also include an investment and execution incentive within a specific period when the facility represents a significant reduction of costs in island and nonmainland systems.

This reasonable profitability will be based on the average yield in the secondary market of ten-year government bonds applying the appropriate spread, before taxes.

The parameters of the remuneration regime may be reviewed every six years.86

148.
The reasonable profitability provision was as follows:

First additional provision. Reasonable profitability of the production facilities with the right to a premium economic regime.

Pursuant to that envisaged in the second-to-last paragraph of article 30.4 of Electricity Act 1997, for facilities which, upon the entry into force of this royal decree-law, had the right to a premium economic regime, a profitability before taxes is established based on the average yield over the last ten years in the secondary market of ten-year government bonds, increased by 300 basis points, all of the foregoing without prejudice to the review envisaged in the last paragraph of said article.

149.
Details were left to be determined by implementing decrees.
150.
Act 24/2013:87 Act 24/2013, December 2013, superseded the Electricity Act 54/1997. It removed the distinction between Ordinary and Special Regimes under RD 661/2007. According to the preamble:

... a crucial factor in this reform has been the accumulation of annual imbalances between revenues and costs for the electric system over the last decade, resulting in a structural deficit.

This imbalance is due to excessive growth in certain costs as a result of energy policy decisions, with no guarantee of revenues for the system. This situation has been exacerbated by the absence of growth in demand for electricity, due for the most part to the economic crisis.

... Such is this imbalance that the electric system as a whole has debts of more than twenty-six thousand million euros, a structural deficit of ten thousand million euros a year, and a failure to correct the imbalance has resulted in the prospect of the electric system going bankrupt.

Act 54/1997, of November 27, has proven insufficient to ensure the financial equilibrium of the system due, among other reasons, to the fact that the system for the remuneration of regulated activities has not had the flexibility required to adapt to important changes in the electric system or changes in the economy.

Thus, the experience of the last decade has revealed that the economic and financial instability of the electric system the result of the tariff deficit has made it impossible to guarantee the stable regulatory framework needed for the correct development of a highly investment-intensive activity such as electricity production.

Thus, the economic unsustainability of the electric system, together with the constant evolution of the sector over the last sixteen years, has forced the legislature to adapt Act 54/1997, of November 27, on the Electric Power Sector on a number of occasions, often via the approval of urgent measures by Royal Decree-Law. At present, there is a degree of normative dispersion that is undesirable in such an important sector of the economy.

In short, constant rule changes have significantly distorted the normal operation of the electric system, a distortion that must be corrected via action by the legislature that provides the regulatory stability required for electricity production. This regulatory security, together with the need to undertake the reforms required in order to ensure the sustainability of the system in the long-term and to resolve the aforementioned problems in the operation of the system, warrant approval for a reform of the sector as a whole, based on a new regime of revenue and expenditure for the electric system designed to return to the system a financial sustainability it lost long ago, and which it has not been possible to restore to date via the adoption of partial measures.

The remuneration regime for renewable energies, cogeneration, and recycling waste will be based on the necessary participation of these facilities in the market, with market revenue to be topped up with a specific level of regulated remuneration that allows these technologies to compete on a level playing field with all other technologies on the market. This specific additional remuneration will be sufficient to cover costs that, unlike conventional technologies, these technologies cannot recover from the market, and will enable them to achieve a reasonable return by reference to the standard facility applicable in each case.88

151.
The object of the new regime of revenue and expenditure for the electric system was (Article 1(1)): "to establish regulations for the electric power sector, in order to guarantee electricity supplies and adapt them to the needs of consumers in terms of security, quality, efficiency, objectivity, and transparency, at the lowest possible minimum cost."
152.
Act 24/2013 eliminated the distinction between the Ordinary and Special Regimes, on the basis that renewables producers were on the same footing as conventional power generators, except as expressly provided. It provided for a special payment remuneration scheme subject to revision every six years, with the base line predictions reviewed every three years.
153.
Pending implementing regulations (RD on renewable production, subsequently RD 413/2014; and Ministerial Order on remuneration parameters, subsequently MO IET/1045/201489) were to apply from their date of enactment to 14 July 2013.
154.
RD 413/2014:90 RD 413/2014 established the new regime, and MO IET/1045/2014 gave details of the new compensation formulas. Together, RD-L 9/2013, Law 24/2013, RD 413/2014, and MO IET/1045/2014 comprised the "New Regime".
155.
RD 413/2014 stated in Article 1 that its purpose was "to provide a legal and economic framework for the electricity generation activity from renewable energy sources..." It was to apply "to facilities from renewable energy sources which [did] not reach the minimum level to cover those costs that allow[ed] them to compete on equal terms with the other technologies in the market obtaining a reasonable profitability in the standard facility applicable in each case" (Article 11(2)).
156.
To determine the specific remuneration scheme applicable in each case, every facility depending on its features was to have an assigned standard facility, and the remuneration for each facility was to be obtained from the remuneration parameters for the standard facility and the features of the actual facility (Article 11(4), (5)). By Article 19, reasonable profitability for the standard facility was to be calculated as the average yield of ten-year Spanish bonds in the secondary market during the 24 months prior to May of the year before the regulatory period increased by one differential. It was to be based on a standard installation with an operational life of 25 years.
157.
Tariff payments received prior to the inception of the New Regime were to be counted towards the total remuneration which an installation might receive over its deemed operational life, to determine whether the plant had received a reasonable return. If the installation surpassed the "reasonable return" (7,398%), it would not receive further subsidies.
158.
MO IET/1045/2014:91 This Ministerial Order (consisting of some 1760 pages) also referred in its preamble to a remuneration model which "ensur[es] the facilities’ reasonable profitability." It set the remuneration parameters for "standard" facilities, including the estimated "standard costs" applied under the new regulatory regime, and the criteria for "standard installations" for different types of renewable. Under Annex III of the Order, the target rate of return for renewable energy producers is set at 7,398% pre-tax. This value will apply until 31 December 2019 (until the end of the first regulatory period running from 12 July 2013), and is then subject to discretionary reviews for subsequent regulatory periods.92 Order 1045 limits payment of the specific remuneration for small-hydro installations to the regulatory useful life of a hydropower plant, which has been set at 25 years, after which projects will receive no specific remuneration.
159.
MO IET/1168/2014:93 MO IET/1168/2014, 3 July 2014 determined the automatic registration date for certain facilities on the Specific Remuneration Regime Registry regulated in Title V of RD 413/2014.
160.
MO IET/1344/2015:94 MO IET/1344/2015 modified MO IET/1045/2014 to reduce the period of regulatory useful life of certain hydropower facilities.
161.
RD 198/2015:95 RD 198/2015, 23 March 2015 further developed Article 112 bis of the Spanish Water Act, and limited the scope of application of the Water Levy to hydropower plants located in inter-regional river basins. As with the TVPEE, the Water Levy is applied on the gross value (i.e. the total amount in euros) to be received by the hydropower producer, and was aimed at increasing the electricity system’s revenues at the expense of hydroelectric producers. It also has a disproportionate impact on hydropower plants.
162.
The overall effect was to eliminate the Special Regime generators’ entitlement to the regulated tariff. The only option now available to renewable energy generators is to sell their entire electricity output at market prices, with the possibility "under exceptional circumstances"96 of receiving from the State an additional specific remuneration, which may include one or both of the following elements: (1) a "remuneration to investment" (investment incentive) (RIN), per MW of installed capacity, seeking, in theory, to cover the hypothetical investment costs of a "standard facility" that cannot be met by market prices; and (2) a "remuneration to operation" (operating incentive) (ROP), per MWh of electricity produced, seeking to cover the hypothetical operating costs of a "standard facility" (a hypothetical efficient plant) which cannot be met by market prices. (1) is calculated on the basis of standard historical values of the operation and performance of a "standard facility" throughout its regulatory lifespan, so that it theoretically reaches a target return; and (2) is only received by facilities which have not exceeded a certain number of years of operation (25 years, in the case of small-hydro). Remuneration parameters (including the rate of return) may be revised every three or six years, including for existing facilities. The use of CPI as an index to inflation is abandoned. There are no transitional provisions (no grandfathering for existing facilities).97
163.
If the return before July 2013 exceeded the target return, the installation will not be entitled to the regulated revenue even though the scheme did not then exist, as if the scheme had then been in existence. If the installation passed the "reasonable return" test (7,398%) it will not receive further subsidies.98

IV. THE PARTIES’ REQUESTS FOR RELIEF

164.
In their Rejoinder, the Claimants request that the Tribunal issue an Award:

a. DECLARING that the Tribunal has jurisdiction over Claimants’ claims in the present arbitration;

b. DECLARING that Spain has breached its obligations under Articles 10 and 13 of the ECT;

c. ORDERING that Spain:

(a) compensate Claimants in full for all losses suffered as a result of Spain’s breaches of the ECT, and in particular:

1) damages for the lost income to Claimants as a result of Spain’s wrongful measures between 1 January 2013 and the date of the Tribunal’s Award, in an amount determined as at the date of the Tribunal’s Award;

2) damages in an amount equal to the diminution in the fair market value of Claimants’ debt and equity investments, determined as at the date of the Tribunal’s Award;

(b) pay, on a full indemnity basis, all of the costs and expenses of these arbitration proceedings, including, without limitation, the fees and expenses: (1) of the members of the Tribunal; (2) of ICSID; (3) relating to Claimants’ legal representation (including attorney fees and disbursements); and (4) of any experts or consultants appointed by Claimants (or the Tribunal);

(c) pay post-award interest on sums awarded pursuant to (b)(i) and b(ii) above, at a rate equal to the cost of equity for a hydro plant portfolio in Spain as at the date of the Tribunal’s Award plus an additional 2%, compounded annually, from the date of the award until full payment thereof; and

d. DECLARING the Tribunal’s Award is made net of all Spanish taxes, and that Spain may not impose any tax on Claimants arising from the Tribunal’s Award;

e. DECLARING that Spain indemnify Claimants for the amount of any additional tax liability in Luxembourg and/or Sweden in relation to the compensation awarded in the Tribunal’s Award that is attributable to Spain’s breaches; and

f. ORDERING any such other and further relief that the Tribunal may deem appropriate in the circumstances.99

165.
In its Rejoinder, the Respondent requests the Tribunal to:

a) declare its lack of jurisdiction to hear the claims of the Claimant[s], or if applicable their inadmissibility, in accordance with what is set forth in Section III of the present Memorial, referring to Jurisdictional Objections; and

b) Subsidiarily, in the event that the Arbitral Tribunal decides that it has jurisdiction to hear this dispute, to dismiss all the Claimants’ claims regarding the Merits, as the Kingdom of Spain has not breached the ECT in any way, pursuant to Sections IV and V herein, referring to the Facts and the Merits, respectively;

c) Secondarily, to dismiss all the Claimant[s’] claims for damages as the [Claimants have] no right to compensation, in accordance with Section V herein; and

d) Order the Claimant[s] to pay all costs and expenses derived from this arbitration, including ICSID administrative expenses, arbitrators’ fees, and the fees of the legal representatives of the Kingdom of Spain, their experts and advisers, as well as any other cost or expense that has been incurred, all of this including a reasonable rate of interest from the date on which these costs are incurred until the date of their actual payment.100

V. SUMMARY OF THE PARTIES’ CLAIMS ON JURISDICTION

166.
The Respondent has raised two objections to jurisdiction in this case.
167.
First, the Respondent submits that the Claimants are not "investors of another Contracting Party" as required under Article 26 of the ECT because the Claimants are incorporated in EU Member States and the Respondent is also an EU Member State. Given that Spain has not consented to the arbitration of disputes involving an EU Member State and nationals of other EU Member States ("intra-EU disputes"), the Claimants cannot be considered as protected investors and the Tribunal therefore lacks jurisdiction ratione personae.101
168.
Second, concerning the TVPEE and the Water Levy, the Respondent argues that the Tribunal lacks jurisdiction to consider (a) breaches of Article 10(1) of the ECT because of the taxation carve-out in Article 21 of the ECT; and (b) breaches of other standards of protection, given the inapplicability of the Most Favored Nation ("MFN") treatment standard of Article 10(7) of the ECT in this case.102 The Respondent acknowledges that the Tribunal has jurisdiction to hear an alleged violation of Article 13 of the ECT in relation to the TVPEE and the Water Levy.103
169.
The Claimants request the Tribunal to dismiss the Respondent’s jurisdictional objections. First, they submit that the Tribunal has jurisdiction ratione personae under the ECT.104Second, the Claimants argue that the Tribunal has jurisdiction to hear claims concerning the TVPEE and the Water Levy because (a) as non-genuine bona fide measures, they do not fall within the tax carve-out of Article 21 of the ECT; and (b) even if they were considered genuine bona fide taxes, they would be taxes for which Spain must comply with its MFN obligation of Article 10(7) of the ECT.105

A. First Objection: Lack of Jurisdiction over an Intra-EU Dispute

170.
The Respondent’s jurisdictional objection concerning the alleged inapplicability of Article 26 of the ECT to intra-EU disputes was first raised in its Counter-Memorial and in its Rejoinder.106 On 6 March 2018, the Court of Justice of the European Union ("CJEU") rendered a ruling in the Achmea case.107 At the Hearing, the Respondent focused its jurisdictional arguments on the Achmea ruling.108 The Claimants did not address the Respondent’s jurisdictional objections at the Hearing and referred the Tribunal to their written submissions in this regard.109 The Parties subsequently submitted post-hearing briefs and additional submissions which included their positions on this objection. A brief summary of the Parties’ positions regarding the "intra-EU" objection is provided below.

(1) The Respondent’s Position

171.
The Respondent objects to the Tribunal’s jurisdiction ratione personae arguing that the Claimants are not "investors of another Contracting Party" as required under Article 26 of the ECT because they are incorporated in Luxembourg and Sweden which are EU Member States and the Respondent is also an EU Member State; besides, Luxembourg, Sweden and Spain were members of the EU at the time they entered into the ECT.110 In the Respondent’s view, the ECT does not apply to disputes relating to "intra-EU" investments.111
172.
In its Counter-Memorial, the Respondent raised three main arguments in support of this objection: (a) the EU system confers particular protection upon the EU-national investor, which is of preferential application over the provisions of the ECT;112(b) the prevalence of EU law among EU Member States is reflected in the literal interpretation, context and purpose of the ECT;113 and (c) commentators also support the Respondent’s position.114
173.
First, the Respondent submits that the ECT is not applicable in this case because the EU system confers particular and preferential protection upon the EU-national investors within the framework of the Internal Market in Electricity of the EU.115 According to the Respondent, the Claimants’ investments were made within the EU’s integral system for intra-EU investments, which guarantees promotion and protection of those investments through its institutional and judicial framework.116
174.
To decide this arbitration, the Respondent claims that the Tribunal would have to deliver an opinion on the rights of intra-EU investors as regards Spain and the Internal Market in Electricity, which would interfere with the competence of the EU judicial system.117 The Respondent argues that the EU investor protection system prevails over any other national or international law to regulate intra-EU investments, and therefore this system is "of preferential application over the provisions of the ECT" in this case.118 The Respondent argues that prior arbitral tribunals have agreed that in case of conflict between the ECT and EU law, the latter shall prevail over the former.119
175.
Second, the Respondent argues that the prevalence of EU law among EU Member States is supported by the text, context and purpose of the ECT.120
176.
Concerning the text of the ECT, the Respondent draws attention, inter alia, to: (a) Article 1(2), which includes Regional Economic Integration Organisations ("REIO") such as the EU under the definition of the "Contracting Parties" and Article 1(3), which recognizes the binding nature of competences conferred to the EU by its member states;121(b) Article 16 establishing the rules of compatibility between the ECT and other treaties, including EU treaties, which prevail over the ECT in intra-EU relations;122(c) Article 25 which prevents the applicability of the EU’s system of preferential treatment to other ECT Contracting Parties that are not EU Member States via the MFN clause;123(d) Article 36(7), which provides REIOs with votes equivalent to the number of its member states which are Contracting Parties to the ECT when voting on matters over which it has competence;124 and (e) Article 26(6) that requires disputes to be resolved "in accordance with this Treaty and applicable rules and principles of International law" and means that the Tribunal must interpret the dispute settlement provision of Article 26 of the ECT in accordance with EU law, which is applicable international law.125
177.
Pursuant to Article 26(6) of the ECT, the Respondent submits that the Tribunal should consider Article 344 of the Treaty on the Functioning of the European Union ("TFEU"), the application of which prevents Spain from submitting any matters relating to the EU’s Internal Market in Electricity (such as this dispute) to any dispute settlement method other than the EU judicial system.126
178.
Regarding the context of the ECT, the Respondent mentions that at the time the ECT was signed, the Member States of the then European Community were unable to contract obligations between them as regards the Internal Market (as it is an area in which they had transferred their sovereignty to the then European Community) and for this reason the EU is a Contracting Party to the ECT. Therefore, Article 26 of the ECT does not generate obligations between the EU Member States.127
179.
According to the Respondent, the object and purpose of the ECT confirms its intra-EU dispute objection because admitting intra-EU disputes within the scope of the ECT’s application would mean that the EU and its Member States promoted the ECT to cover intra-EU investments which had been already regulated by EU law in a superior manner.128 The Respondent contends that such interpretation and application would take away competencies from the CJEU and lead to mistrust of the EU’s protection system.129
180.
Third, the Respondent claims that its position with regard to the exclusion of intra-EU disputes from the ECT dispute settlement mechanism is also endorsed by doctrine.130
181.
In its Rejoinder, the Respondent introduced two further arguments in support of its "intra-EU" objection: (i) under the "principle of primacy" of EU law in intra-EU relations, it is EU law and not the ECT which must be applied to resolve this dispute;131 and (ii) the Tribunal lacks jurisdiction under the ICSID Convention in view of the Claimants’ dual nationality.132
182.
First, the Respondent argues that pursuant to the principle of primacy established by the ECJ in the ruling in 1964 in Costa v ENEL, EU law applies to intra-EU relations in preference to any other law, "displacing any other national or international provision".133 According to the Respondent, the principle of primacy implies that the obligations of EU Member States vis-à-vis international treaties are subsidiary to their obligations to the EU.134 Therefore, for the ECT to be interpreted in conformity with EU law, the principle of primacy prevents the ECT from incorporating an offer to arbitrate intra-EU disputes.135
183.
Among other arguments, the Respondent submits that: (a) Articles 25 and 26 of the ECT recognise the primacy of EU law in the context of intra-EU relations (to the extent that Article 25 refers to "preferential treatment" applicable between the parties to an economic integration agreement and Article 26 requires the application of EU law to the dispute as it forms part of the rules and principles of international law applicable to the Parties’ dispute under Article 26(6));136 and (b) EU law, not the ECT, should apply because this dispute affects essential elements of EU law such as State aid.137
184.
In relation to its argument about the principle of primacy of EU law, the Respondent submits that EU law constitutes part of public international law and thus "applicable rules and principles of international law" under Article 26(6) of the ECT.138 Also, it considers that "the ECT is part of Union law". Thus, an arbitral tribunal must necessarily take into account EU law in its jurisdictional review.139
185.
Second, the Respondent argues that the Tribunal lacks jurisdiction under Article 25 of the ICSID Convention because the Claimants hold dual Luxembourg-European and Swedish-European nationality. According to the Respondent: (a) Article 20 of the TFEU establishes that all citizens of an EU Member State simultaneously hold European nationality; (b) the EU and the Member States made an express declaration regarding Article 25 of the ECT to clarify that that legal persons incorporated in accordance with the legislation of any Member State should be treated in the same way as natural persons who are nationals of the Member States; and (c) Article 25(2)(a) of the ICSID Convention precludes natural persons with dual nationality from filing an arbitration claim.140 Therefore, the Respondent argues that because the Claimants hold "dual nationality", they do not meet the jurisdictional requirement of Article 25(2)(a) of the ICSID Convention.141
186.
At the Hearing and during the post-hearing submissions, the Respondent focused its jurisdictional arguments on the Achmea ruling.142 The Respondent submits that this ruling applies in the context of the ECT and confirms the Respondent’s intra-EU objection in this case.143
187.
The Respondent refers to paragraph 60 of the Achmea ruling which reads as follows:

Articles 267 and 344 TFEU must be interpreted as precluding a provision in an international agreement concluded between Member States... under which an investor from one of those Member States may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept.144

188.
Concerning the relevance of this decision the Respondent mentions, inter alia, the following: (i) the findings of the ruling are not a novelty but reflect consolidated case law that dates back to 1991;145(ii) the ruling’s scope of application is not limited to BITs but it extends to any international treaty, including the ECT;146(iii) the ruling is applicable in this case because it concerns an intra-EU dispute in which the Tribunal is obliged to apply EU law;147 and (iv) given that the Tribunal does not form part of the EU judicial system and therefore cannot make a question for a preliminary ruling to the CJEU under Article 267 of the TFEU, the Tribunal lacks jurisdiction over this intra-EU dispute.148
189.
First, the Respondent claims that the CJEU applied a consolidated case law referring to multilateral treaties that dates back to 1991. According to this case law, the Respondent notes that th e Achmea ruling endorses the following principles: (a) pursuant to Article 344 of the TFEU, an international agreement "cannot affect the allocation of powers fixed by the Treaties in the EU legal system"; (b) EU law has primacy over the laws of the Member States; (c) pursuant to Article 19 of TFEU, it falls on the national courts and the CJEU to "ensure the full application of EU law" in order to maintain consistency and uniformity in the interpretation of EU law; (d) the preliminary ruling system established in Article 267 of the TFEU aims to secure the uniform interpretation of EU law and ensure its consistency; and (e) EU law is both part of the law of each EU Member State and also derives from an international agreement between the Member States.149
190.
According to the Respondent, the CJEU concluded that these principles were not fulfilled in Achmea because: (a) the investment arbitration tribunal established may be called upon to interpret or apply EU law as international applicable law or national law; (b) the tribunal was not part of the EU judicial system; (c) the tribunal did not meet the classification of a court of a Member State under the Article 267 of the TFEU and therefore could not make reference to the CJEU for a preliminary ruling; (d) the tribunal’s decision was final and judicial review by national courts was limited; (e) the dispute involved investment arbitration and commercial arbitration case law could not be applied; and (f) the States involved established a dispute resolution method that could prevent the disputes from being resolved ensuring the full effectiveness of EU law, even though the dispute may concern application or interpretation of EU law.150
191.
The Respondent argues that the above-mentioned principles and conclusions should apply to the disputes under the ECT involving interpretation or application of EU law.151
192.
Second, the Respondent contends that the Achmea ruling refers to any "international agreement", including the ECT, and therefore it does not limit its effects to BITs.152 In this regard, the Respondent submits that the grounds of the Achmea ruling are not formalistic (i.e. based on the bilateral nature of the treaty at issue), but substantive because they refer to the nature and characteristics of the arbitral jurisdiction faced with EU law.153
193.
Third, relying on the above observations, the Respondent concludes that the reasoning in Achmea is applicable in the present case because the Tribunal may be called upon to interpret and apply EU law given that "the core of the dispute affects [a] key institution of EU Law, such as State Aid, which was created by EU Law to ensure the efficiency of the internal market of the EU."154
194.
Fourth, because the Tribunal does not form part of the EU judicial system and cannot request a preliminary ruling to the CJEU under Article 267 of the TFEU, the Respondent concludes that this Tribunal lacks jurisdiction to hear the present dispute.155
195.
In addition, the Respondent disputes the Claimants’ reliance on prior tribunals constituted under the ECT which upheld their jurisdiction despite an intra-EU objection. For instance, the Respondent argues that the Masdar v Spain award is inconsistent with paragraphs 31 to 57 of the Achmea ruling which refer to both bilateral and multilateral treaties;156 and that the reasoning in Vattenfall v Germany157 was inadequate as the tribunal started its analysis from flawed premises under international law and did not actually address the relevance of Achmea.
196.
Finally, with regard to the declarations made by EU Members States on 15 and 16 January 2019 regarding the Achmea ruling, the Respondent considers, inter alia, that the declaration adopted by the majority of Member States "confirms that Article 26 of the ECT cannot be considered a valid consent to arbitration in the case of intra-EU disputes for it would be incompatible with the autonomy and primacy of EU law."158

(2) The Claimants’ Position

197.
The Claimants submit that they meet the jurisdictional requirements of Article 26 of the ECT and Article 25 of the ICSID Convention.159 They request the Tribunal to dismiss the Respondent’s "intra-EU" jurisdictional objection, which has been rejected by numerous Tribunals.160
198.
In their Memorial, the Claimants set forth the jurisdictional bases for their claims under the ECT and the ICSID Convention. Concerning the ECT, the Claimants submit that: (a) Spain is a "Contracting Party" to the ECT, as the ECT entered into force with respect to Spain on 16 April 1998;161(b) each of the Claimants is an "investor of another Contracting Party", as they are companies incorporated under the laws of Luxembourg (Hydro Energy) and Sweden (Hydroxana), States for which the ECT entered into force on 16 April 1998;162(c) the dispute relates to an "investment" in the area of Spain, as the Claimants hold shareholding and debt interests in Spanish companies that own and operate hydropower generation installations, as well as interests in those installations, claims to money, and rights conferred by law (including those conferred by RD 661);163(d) the Parties have consented to the arbitration of this dispute under the ECT, as Spain has given its "unconditional consent to the submission of a dispute to international arbitration" pursuant to Article 26(3) of the ECT and the Claimants have consented in writing to this arbitration by filing their Request for Arbitration pursuant to Article 26(4) of the ECT;164 and (e) the Claimants sought to resolve the dispute by negotiation before commencing arbitration, consistent with Article 26(1) of the ECT.165
199.
The Claimants further argue that the jurisdictional requirements of Article 25 of the ICSID Convention have been met in this case, as they submit a legal dispute between a Contracting State and nationals of other Contracting States arising out of their investments in the hydropower generation sector in Spain, which they and Spain have consented in writing to submit to the Centre.166
200.
In their Reply, the Claimants address the "intra-EU" objection raised by the Respondent in its Counter-Memorial and request the Tribunal to find that it has jurisdiction ratione personae under the ECT on the basis that: (i) the argument that the ECT is incompatible with EU law is irrelevant because the Claimants do not base their claims on breaches of EU law and, in any event, non-EU courts and tribunals are not precluded from applying or interpreting EU law;167(ii) nothing in the text, context or purpose of the ECT suggests the exclusion of intra-EU disputes;168 and (iii) the commentators cited by the Respondent are of no assistance to its position.169
201.
First, the Claimants submit that the Respondent’s argument of incompatibility between EU law and the ECT is misguided because it is based on the wrong assumption that the Claimants’ claims are based on breaches of EU law.170 The Claimants submit that their claims in this case concern their rights under the ECT, not their rights in the EU’s Internal Market in Electricity. The Tribunal is therefore not required to analyse the Claimants’ rights under the EU’s integral system and, accordingly, the matter does not hinder the competence of the EU.171
202.
The Claimants rely on the findings of prior tribunals to assert that, notwithstanding the "intra-EU" nature of a dispute, tribunals constituted pursuant to the ECT or intra-EU BITs have jurisdiction over investment-treaty claims because "such claims are not based on a breach of EU Law but rather on a violation of the investment treaty in question."172 Hence, the Claimants argue that the question of incompatibility of the ECT with EU law is not relevant in this case because there is no such conflict presented.173 In other words, "the ECT (not EU law) is the applicable law to determining the Tribunal’s jurisdiction."174
203.
The Claimants further contend that the Respondent’s argument is irrelevant since the application of EU law by an arbitral tribunal does not jeopardise the uniform application of EU law. In this regard, the Claimants refer to the findings of a prior tribunal in support that non-EU courts and tribunals are not precluded from applying or interpreting EU law.175
204.
Second, the Claimants dismiss the Respondent’s interpretation of the ECT provisions and submit that nothing in the text, context or purpose of the ECT suggests the exclusion of intra-EU disputes.176
205.
Regarding the text of the ECT, the Claimants argue that: (a) Article 1(3) of the ECT does not imply any limitation on the consent to arbitration of Contracting Parties to the ECT which belong to the same REIO;177(b) Article 16 provides that the provisions of another agreement cannot derogate from the provisions of the ECT where a provision of the ECT is more favourable to the investor;178(c) Article 25 does not preclude REIO members to agree to other obligations under a different treaty regime, in this case the ECT;179(d) the voting provision under Article 36(7) has no bearing on Spain’s argument regarding an alleged allocation of competences at the time of the ECT’s conclusion;180 and (e) Article 26 does not exclude intra-EU disputes.
206.
With respect to Article 26, the Claimants argue that nothing in its text or context, nor in the object of the ECT provides any basis for an exclusion of intra-EU ECT disputes.181 For instance, the Claimants contend that the ECT does not contain any disconnection clause in respect of intra-EU disputes and if the ECT Contracting Parties wished to exclude intra-EU disputes from the treaty’s scope, they would have included such clause.182 In addition, the Claimants argue that the fact that the EU was an initial party to the ECT (together with its Member States, including Spain) reinforces their argument as it implies that the EU and its Member States, at the time of the ECT’s ratification, "had both the competence and the intention to enter into and create obligations between themselves".183
207.
The Claimants also dismiss the Respondent’s reliance on Article 344 of the TFEU. They note that Article 344 of the TFEU concerns inter-State disputes concerning the EU founding treaties (which are not at issue in this case), not disputes between a Contracting Party and an Investor of another Contracting Party.184 In other words, "there is no conflict between the ECT and EU law in this regard, because Articles 267 and 344 TFEU do not concern the same subject matter as Part III or Part V of the ECT".185
208.
The Claimants also distinguish arbitral decisions relied on by the Respondent; for instance, they state that the tribunal in Electrabel v Hungary concluded that there was "no material inconsistency between the ECT and EU law" and that EU law was not an obstacle to its jurisdiction.186 Instead, they point to the decisions of other tribunals which have shared the Claimants’ interpretation.187
209.
Third, the Claimants submit that the commentators cited by the Respondent are of no assistance to its position.188
210.
In their Rejoinder, the Claimants further claim that: (i) Spain’s reliance on the primacy of EU law is misguided;189 and (ii) the Claimants are not ‘dual’ corporate nationals nor precluded from bringing a claim under Article 25(2)(a) of the ICSID Convention.190
211.
First, the Claimants argue that the Respondent’s reference to the Costa v ENEL judgment is inapposite because that case concerned a finding that a subsequent, unilateral measure by an EU Member State could not conflict with existing EU relations. As such, that case is irrelevant in this context because it concerned only the national law of a Member State (not international treaties, such as the ECT), and because the ECT (unlike the measure at issue in that case) is not a unilateral act but an international treaty.191
212.
The Claimants also reject the Respondent’s argument that the ECT itself expressly recognises the primacy of EU law in the context of intra-EU relations. In their view, this argument is at odds with several provisions of the ECT, particularly Article 16(2).192 According to this provision, if a Contracting Party to the ECT has entered into an agreement prior to the ECT concerning the same subject matter, the provisions of the prior agreement cannot derogate from the provisions of the ECT where a provision of the ECT is more favorable to the investor.193 Given that the EU treaties do not contain substantive or procedural protections equivalent to Articles 10(1), 13 and 26 of the ECT, the provisions of the ECT (which are more favorable to the investor in accordance with Article 16(2)) should prevail.194
213.
In addition, the Claimants submit that the Respondent’s argument that EU law, not the ECT, should apply because this dispute affects essential elements of EU law should be rejected, inter alia, as the Claimants’ claims only concern their rights under the ECT and not any issues of State aid.195
214.
Moreover, the Claimants refer to the findings of the Eiser v Spain tribunal which dismissed Spain’s argument that Article 26(6) of the ECT precludes the jurisdiction of an ECT tribunal because it would imply introducing "a major, if unwritten, exception into the coverage of the ECT on the back of a somewhat intricate argument regarding choice of law" and disagreed "that the drafters of the ECT either intended or accomplished this result".196
215.
Second, the Claimants reject the Respondent’s argument that the Claimants are "dual" corporate nationals of both their home EU Member States as well as of the EU, in contravention of Article 25(2)(a) of the ICSID Convention.197
216.
The Claimants submit that the Respondent’s argument is wrong as a matter of fact because the concept of "EU nationality" does not exist. While Article 20 of the TFEU establishes citizenship of the EU, it does not establish EU nationality and instead acknowledges that nationality and citizenship are different concepts. In fact, the EU is composed of citizens who by definition do not share the same nationality.198
217.
The Claimants argue that the Respondent’s submission is also wrong as a matter of law because the Claimants are not natural persons but companies, and as such they qualify as "juridical persons" for purposes of Article 25(2)(b) of the ICSID Convention which does not contain any stipulation against dual corporate nationality.199
218.
In its post-hearing submissions, the Claimants submit that the Achmea ruling is not applicable to the context of the ECT.200
219.
The Claimants argue that the Achmea ruling does not apply to the ECT.201 The Claimants dispute the Respondent’s reliance on the ruling for two main reasons: (i) the CJEU stated in clear terms that its ruling in Achmea does not apply to the ECT, and Spain has acknowledged this;202 and (ii) an ECT tribunal is obliged to uphold its "constitutional" instrument, namely the ECT.203
220.
First, the Claimants submit that prior to the Achmea ruling, the Respondent acknowledged that such ruling would have no bearing on the present case under the ECT.204 In addition, the Claimants highlight that the Achmea case concerned a BIT dispute and the CJEU stated expressly that the ruling had no bearing on a treaty such as the ECT.205 The Claimants cite in this regard paragraphs 57 through 58 of the Achmea ruling which read:

It is true that, according to settled case-law of the Court, an international agreement providing for the establishment of a court responsible for the interpretation of its provisions and whose decisions are binding on the institutions, including the Court of Justice, is not in principle incompatible with EU law. The competence of the EU in the field of international relations and its capacity to conclude international agreements necessarily entail the power to submit to the decisions of a court which is created or designated by such agreements as regards the interpretation and application of their provisions, provided that the autonomy of the EU and its legal order is respected...

In the present case, however, apart from the fact that the disputes falling within the jurisdiction of the arbitral tribunal referred to in Article 8 of the BIT may relate to the interpretation both of that agreement and of EU law, the possibility of submitting those disputes to a body which is not part of the judicial system of the EU is provided for by an agreement which was concluded not by the EU but by Member States.206

221.
The Claimants draw support for their argument from the award in Masdar v Spain, the first investment treaty tribunal to decide on the implications of the Achmea ruling, and the tribunal’s decision in the Vattenfall v Germany case.207 For instance, the Claimants state that the tribunal in Masdar v Spain affirmed that the Achmea ruling cannot be applied to multilateral treaties including the ECT and "pertains only to BITs concluded between EU Member States".208 The Claimants agree with this reasoning and add that the tribunal in that case noted that the wording of the question submitted to the CJEU for a preliminary ruling specifically refers to "bilateral investment protection agreement between Member States of the European Union".209
222.
The Claimants further disagree with the Respondent’s argument that, prior to Achmea, the incompatibility of arbitration provisions in multilateral agreements to which the EU is a signatory with EU law had been already established.210 In the Claimants’ view, the CJEU took into account relevant and recent authorities in reaching its conclusions at paragraphs 57 and 58 quoted above.211
223.
Second, the Claimants maintain that in the event of contradiction between the ECT and EU law, the Tribunal has to "uphold the application of its ‘constitutional’ instrument - the ECT - on which its jurisdiction is founded".212 For the Claimants, this argument is also supported by Article 16 of the ECT, which provides that the ECT prevails over any other norm.213 It is the Claimants’ submission, therefore, that EU law does not prevail over the ECT nor can it trump public international law.214
224.
Finally, with regard to the declarations made by EU Members States on 15 and 16 January 2019 regarding the Achmea ruling, the Claimants consider that the political nature of such declarations "cannot have any legal bearing on the ECT or in relation to arbitration being heard thereunder".215
225.
For the reasons above, the Claimants argue that the Tribunal has jurisdiction to hear this dispute.

B. Second Objection: Lack of Jurisdiction in View of the Taxation Carve-out in Articles 21 and 10(7) of the ECT

(1) The Respondent’s Position

226.
The Respondent submits that the Tribunal lacks jurisdiction over the Claimants’ claims relating to the alleged violation of the Respondent’s obligations under the ECT arising out of measures introduced by Act 15/2012, namely the TVPEE and the Water Levy.216
227.
In particular, the Respondent objects to the Tribunal’s jurisdiction to hear: (i) breaches of Article 10(1) of the ECT given the taxation carve-out in Article 21 of the ECT; and (ii) breaches of other standards of protection (FET, MCPS, and non-impairment standards), in view of the inapplicability of the MFN treatment standard of Article 10(7) of the ECT that the Claimants seek to import to this case.217

a. Applicability of the taxation carve-out set out in Article 21 of the ECT with regard to breaches concerning Article 10(1) of the ECT

228.
The Respondent argues that: (a) Article 10(1) of the ECT does not generate obligations regarding taxation measures in this case;218(b) the TVPEE and the Water Levy are taxation measures for purposes of the ECT;219(c) it is not appropriate to conduct an additional analysis on the good faith of the TVPEE and the Water Levy;220 and (d) even if such additional analysis was undertaken, in any case the TVPEE and the Water Levy are bona fide taxation measures.221
229.
First, the Respondent contends that it has not given consent to submit claims concerning the TVPEE and the Water Levy to arbitration because: (a) Article 26 of the ECT only concerns claims relating to breaches of obligations under Part III of the ECT; and (b) pursuant to Article 21 of the ECT, Article 10 of the ECT does not generate any obligations with respect to taxation measures of the Contracting Parties, although it is located in Part III of the ECT.222 Article 21(1) of the ECT reads as follows:

Article 21. Taxation

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.223

230.
The Respondent explains that "if no obligation derived from Part III of the ECT exists, there cannot be an alleged breach of it and thus, there is no consent of the Contracting Party to resort to arbitration".224 The Respondent notes that although Article 21 of the ECT contains a general exclusion of taxation measures from the scope of ECT’s application with a few stipulated exceptions, none of those exceptions refers to Article 10(1) of the ECT.225 Accordingly, the Respondent argues, Article 10(1) of the ECT does not impose any obligations with respect to taxation measures in this case.226
231.
Second, the Respondent argues that the TVPEE and the Water Levy are taxation measures within the meaning of Article 21(7)(a) of the ECT, which includes "any provision relating to taxes of the domestic law of the Contracting Party".227 The Respondent first contends that both domestic law and international law are possible applicable laws in determining whether a measure relates to taxes, and further argues that the measures at issue are taxation measures under either interpretation.228
232.
Under domestic law, the Respondent notes that the Spanish Constitutional Court has ratified the TVPEE as a tax.229 The Respondent also cites Article 1 of Act 15/2012, which defines the TVPEE as a direct tax levied on the performance of the "activities of production and incorporation into the electricity system of electric energy" in the Spanish electrical system.230 The Respondent mentions that the TVPEE has a defined taxable base, a tax rate and a tax period, and that its payment is made through a tax form.231 The Respondent further submits that the TVPEE is a deductible from corporate tax, which is confirmed by the General Directorate of Taxation.232 With respect to the Water Levy, the Respondent argues that Article 29 of Act 15/2012 confirms the taxation nature of the measure, as set out in Article 2 of Act 58/2003 on General Taxation.233 The Respondent notes that the Water Levy, as in the case of the TVPEE, has a defined taxable base, a taxable period and a tax rate, that it is paid through a levy form, and it is a deductible from corporate tax.234
233.
Under international law, the Respondent argues that the TVPEE and the Water Levy are taxes according to the concept of tax adopted by prior arbitral tribunals.235 Specifically, the Respondent contends that the concept of tax developed by different tribunals has defining characteristics, all of which are met with respect to both measures because: (a) the measures are established by law (Act 15/2012); (b) the measures impose obligations on a class of people (the TVPEE is applied to anyone that produces and incorporates electrical energy into the Spanish electricity system, and the Water Levy is levied on water concessionaires for the use and exploitation of continental waters for the production of electric energy); and (c) such obligations involve paying money to the State for public purposes.236 The Respondent further submits that, with respect to the TVPEE, the European Commission has confirmed the taxation nature of the measure and its conformity with EU law.237
234.
Furthermore, the Respondent submits that both the TVPEE and the Water Levy were measures introduced by Act 15/2012, which is a part of the domestic law of Spain, a Contracting Party to the ECT.238 The Respondent notes that Act 15/2012 was passed by the Parliament in accordance with relevant legislative procedure and its Constitution.239
235.
Third, the Respondent submits that, in determining whether the TVPEE and the Water Levy are taxation measures, additional good faith or economic effects analysis is not appropriate.240 The Respondent argues that the Claimants’ reference to the Yukos v Russia award is inapposite as the analysis used in that case is not applicable to this dispute.241 The Respondent also highlights that the tribunal in the case of EnCana v Ecuador found that the question of whether something is a taxation measure is primarily a question of its "legal operation, not its economic effect".242
236.
Finally, the Respondent contends that, in any event, the TVPEE and the Water Levy are bona fide taxation measures.243
237.
The Respondent submits that the TVPEE is a bona fide taxation measure on the basis that:

(a) it is not discriminatory in terms of its application and repercussion as it covers both renewable and conventional energy producers, granting the same treatment to all taxpayers;244(b) its general application is linked to the environmental nature of the tax;245 and (c) if conventional producers passed on the cost of the TVPEE to the market price of electricity, renewable energy producers would also benefit, as they would also obtain that increased market price.246

238.
The Respondent argues that the Water Levy is a bona fide taxation measure on the basis that: (a) its establishment is a legitimate exercise of the State legislator without discriminatory effect;247 and (b) if hydroelectric power producers who are not part of the special regime passed on the cost of the Water Levy to the market price of electricity, other hydroelectric power producers would also benefit, as they would also obtain that increased market price.248
239.
The Respondent further argues that both measures were adopted for the legitimate public purpose of raising income for Spain.249 The Respondent also points out that the tribunals in Isolux v Spain and Eiser v Spain upheld objections to jurisdiction over claims of alleged breaches of Article 10(1) of the ECT with respect to the TVPEE. While the Respondent acknowledges that the tribunals in these cases considered only the TVPEE, it argues that the reasoning in these awards can be extended to the Water Levy because Claimants’ arguments are similar with respect to both measures.250
240.
In light of the above, the Respondent concludes that the Tribunal lacks jurisdiction to hear claims concerning the alleged violation of Article 10(1) of the ECT as a result of the TVPEE and Water Levy enacted under Act 15/2012.251

b. Inapplicability of the MFN clause set out in Article 10(7) of the ECT, in accordance with Article 21(3) of the ECT

241.
The Respondent rejects the Claimants’ subsidiary argument set out in their Reply that, if the Tribunal considered that the TVPEE and the Water Levy are bona fide taxation measures (thus excluded from protection under Article 10(1) of the ECT), the Claimants may invoke breaches of substantive standards of protection contained in other international treaties with regard to these measures, by means of the MFN clause set out in Article 10(7) of the ECT.252
242.
The Respondent contends that the Claimants’ arguments should be dismissed because: (a) the MFN clause set out in Article 10(7) of the ECT does not apply to taxes on income or on capital, only to indirect taxes; (b) the disputed measures are direct taxes and therefore fall outside the scope of the MFN clause; and (c) in any event, Article 21(3)(a) of the ECT prohibits applying the MFN clause of Article 10(7) as the Claimants intend.253
243.
First, Article 10(7) of the ECT contains an MFN clause by which ECT Contracting Parties shall accord to investments in their territories "treatment no less favourable than that which it accords to Investments of its own Investors or of the Investors of any other Contracting Party or any third state".254 In turn, Article 21(3) of the ECT provides that Article 10(7) "shall apply to Taxation Measures of the Contracting Parties other than those on income or on capital".255 The Respondent relies on a document from the ECT Secretariat to assert that the exclusion of taxation measures on income or capital "remains, in general, applicable with regard to indirect taxes".256 The Respondent therefore concludes that the MFN clause in Article 10(7) may only apply to indirect taxes (i.e. those which can be legally passed on to another person).257
244.
Second, according to the Respondent, both the TVPEE and the Water Levy are direct taxes, levied "on income or on capital" for the purposes of the ECT and therefore, Article 10(7) is not applicable to these measures.258 The Respondent rejects the Claimants’ argument that the measures are not taxes on income because they are levied on gross income and not on net income.259 For the Respondent, a tax on income under the ECT does not require it to be a tax on net income.260 The Respondent argues that the Claimants have acknowledged that the measures are taxes on income because, inter alia, they stated in their Reply that the measures are levied on gross revenues.261
245.
Finally, the Respondent contends that, in any case, Article 21 (3)(a) of the ECT prevents the application of the MFN clause as it provides that:

3. Article 10[7]... shall not apply to:

a) Impose most favoured nation obligations with respect to advantages accorded by a Contracting Party pursuant to the tax provisions of any convention, agreement o arrangement described in subparagraph (7)(a)(ii)[…]262

246.
The Respondent relies on Article 21 (7)(a)(ii) of the ECT, which refers to "international agreement or arrangement by which the Contracting Party is bound", and argue that the BITs invoked by the Claimants are encompassed by this provision.263
247.
Therefore, the Respondent concludes that Article 10(7) of the ECT cannot be applied so as to impose MFN obligations, as intended by the Claimants.264

(2) The Claimants’ Position

248.
The Claimants submit that the Tribunal has jurisdiction over breaches of the Respondent’s obligations under the ECT arising out of the TVPEE and the Water Levy.265
249.
The Claimants request the Tribunal to dismiss the Respondent’s objection given that: (i) the TVPEE and the Water Levy do not fall within the taxation carve-out at Article 21 of the ECT because they are not bona fide taxation measures;266 and (ii) alternatively, the Claimants may invoke breaches of standards of protection (FET, MCPS, and the non-impairment obligation) found in a number of BITs entered into by Spain with third countries, in view of the MFN clause of Article 10(7) of the ECT.267

a. Inapplicability of the taxation carve-out set out in Article 21 of the ECT with regard to breaches concerning Article 10(1) of the ECT

250.
There is no dispute between the Parties that the TVPEE and the Water Levy are taxes imposed by Spanish domestic law and therefore constitute taxation measures as defined in Article 21 (7)(a) of the ECT.268 The Claimants argue, however, that (a) the taxation carve-out set out in Article 21(1) of the ECT only applies to bona fide taxation measures; (b) neither the TVPEE nor the Water Levy are bona fide taxation measures; and (c) accordingly, the Tribunal has jurisdiction to hear claims concerning these measures.269
251.
First, the Claimants submit that Article 21(1) of the ECT carves out only genuine bona fide taxation measures from the scope of protection of Part III of the ECT. They refer in this regard to the definition of bona fide taxes found in the Yukos v Russia award (i.e. "those ‘that are motivated by the purpose of raising general revenue for the State’"), which excludes actions carried out under the guise of taxation that in reality aim to achieve an unrelated purpose.270
252.
The Claimants dismiss the Respondent’s criticisms to the Yukos v Russia award and note that the key finding of that tribunal, which is fully applicable in this case, is that the ECT’s taxation carve-out can only apply to bona fide measures.271
253.
Second, the Claimants maintain that the TVPEE and the Water Levy are not bona fide taxes for the purpose of Article 21 of the ECT, but "disguised, discriminatory tariff cuts, introduced for the specific purpose of addressing Spain’s self-inflicted tariff deficit".272
254.
Among other arguments, the Claimants contend that the TVPEE and the Water Levy are not bona fide taxation measures because they: (a) did not tax the value of electricity as purported, but instead reduced the value of the feed-in remuneration granted to the Claimants in a manner that was not tied to income, operating costs or profitability;273(b) had a disproportionate and discriminatory impact on different electricity producers (i.e. renewable energy producers and conventional power producers) and therefore they were not taxes of general application;274(c) did not raise any general revenue for the State (as the amounts collected must be used to finance the costs of the electricity system);275 and (d) did not serve the purported purpose of raising general revenues for the State nor did they serve any environmental aim.276
255.
Concerning the TVPEE, the Claimants further argue that: (a) before the New Regime applied, the effect of this measure on the Claimants’ hydro installations was discriminatory because the installations only received the RD 661/2007 regulated tariff (i.e. a fixed payment per k Wh, detached from the market price) and after the New Regime generators may not be able to recover the 7% levy if their production is below the standard operating hours set by the Respondent;277(b) the Respondent’s reference to a judgment of its Constitutional Court upholding the taxation nature of the TVPEE is irrelevant as the question before the Tribunal is not whether the TVPEE was contrary to Spanish law but whether it is a bona fide taxation measure under international law;278(c) by passing on to producers costs over which they have no control (i.e. electricity generation), the TVPEE fails to comply with its alleged environmental purpose;279 and (d) the Respondent’s reliance on the findings of the Isolux v Spain and the Eiser v Spain tribunals do not assist its position because in Isolux v Spain the tribunal agreed that only bona fide taxation measures can benefit from the tax carve-out in Article 21(1) of the ECT, and in Eiser v Spain the claimants accepted and the tribunal thus assumed without analysis that the TVPEE had all the characteristics of a legitimate tax.280
256.
With regard to the Water Levy, the Claimants further argue that: (a) it did not raise general revenue for the State because, unlike all other fees collected under the Water Law concerning the use of public waters, only 2% of the revenue collected by the Water Levy is remitted to the relevant "Watershed agency" while the remaining 98% is allocated to cover the costs of the Spanish electricity system;281 and (b) the Respondent’s argument that the pass-through of the Water Levy to the market price by big hydro-producers will also benefit the Claimants’ hydro installations is misguided because before the New Regime entered into force the Claimants’ facilities only received the RD 661/2007 regulated tariff which was detached from the market price, and after the New Regime entered into force the Water Levy can only be passed on to consumers by a small subsector of renewable producers with a limited impact on the market price.282
257.
Moreover, according to the Claimants, the Respondent’s reliance on domesic and international law to categorize the TVPEE and the Water Levy as taxation measures is not sufficient.283 The Claimants argue that: (a) investment treaty tribunals have confirmed that domestic law is not determinative in classifying a purported taxation measure; and (b) the defining characteristics of a tax under international law suggested by the Respondent are inadequate because they ignore the bona fide criterion established by the Yukos v Russia tribunal and in any case the measures fail to serve a legitimate "public purpose", and thus they do not meet the test proposed by the Respondent.284
258.
Third, in view of the above, the Claimants conclude that the Tribunal has jurisdiction to hear breaches of the Respondent’s obligations under the ECT concerning the TVPEE and the Water Levy.

b. Applicability of the MFN clause set out in Article 10(7) of the ECT, in accordance with Article 21(3) of the ECT

259.
The Claimants submit that, if the TVPEE and the Water Levy were considered bona fide taxes for the purposes of Article 21 of the ECT, (a) they should be considered as taxes "other than those on income or on capital" within the meaning of Article 21(3) of the ECT; and accordingly (b) the Respondent must comply with its MFN obligation set forth in Article 10(7) of the ECT.285
260.
First, the Claimants note that Article 21(3) of the ECT introduces an exception to the tax carve-out at Article 21(1) of the ECT for taxes other than those on income or capital.286 Article 21 (7)(b) of the ECT, in turn, defines taxes on income and capital as those "imposed on total income, on total capital or on elements of income or of capital".287
261.
In support of their argument that the measures are not a tax on income or capital, the Claimants note that: (a) the TVPEE and the Water Levy are imposed on gross revenues;288 and (b) the ordinary meaning of the term "taxes on income" refers to taxes on net income (not on gross revenues).289 The Claimants argue that the definition of "taxes on income" in the OECD Model Tax Convention, which mirrors the definition under the Article 21(7)(b) of the ECT, does not include charges on "gross revenues".290 According to the Claimants, their argument is also confirmed by Article 2 of the OECD Model Tax Convention and commentators’ interpretations which refer to net amounts, not gross amounts.291
262.
The Claimants reject the Respondent’s argument that to benefit from the exception at Article 21(3) of the ECT, a taxation measure must not only be a tax "other than those on income and capital" but must also be an "indirect" tax. The Claimants maintain that the only criterion for the application of Article 21(3) of the ECT is that the taxes are not "on income and capital".292 Among other arguments, the Claimants submit that there is no textual basis for the Respondent’s assertion as Article 21 (7)(b) of the ECT says nothing about indirect taxes.293 Also, they argue that the Respondent misquoted the excerpt from the ECT Secretariat on which it allegedly bases its position.294 Therefore, whether the TVPEE and the Water Levy are direct or indirect taxes is irrelevant.295
263.
Contrary to the Respondent’s submission, the Claimants highlight that there is nothing contradictory in their submissions as they have "nowhere characterized either the TVPEE or Water Levy as direct or indirect taxes".296 The Claimants refer to specific passages of their prior pleadings and contend that the Respondent has partially quoted them to misrepresent their position.297
264.
Second, the Claimants argue that, because the TVPEE and the Water Levy are taxes "other than those on income and capital", the Respondent is obliged under Article 10(7) of the ECT to accord the Claimants the same treatment with respect to these measures as it accords to other foreign investors under relevant BITs.298
265.
The Claimants reject the Respondent’s argument that, because Article 21 (7)(a)(ii) of the ECT -concerning the definition of the term "Taxation Measure" for the purpose of Article 21- refers to "any provision relating to taxes... of any other international agreement or arrangement by which the Contracting Party is bound", then the BITs entered into by Spain from which the Claimants seek to import other investment protections are international agreements by which Spain is bound, and the FET, MCPS and non-impairment obligations of those BITs are "tax provisions".299
266.
The Claimants argue that the FET, MCPS and non-impairment provisions invoked do not relate to taxes and it would be untenable to consider them as "taxation measures" for the purposes of the ECT. These provisions concern substantive standards of treatment that the Respondent must afford, as host State, to investments by investors of the home State, under the relevant BITs. In the Claimants’ view, the fact that in certain circumstances these provisions may be applied in respect of taxation measures adopted by the host State "cannot transform them into provisions that relate to taxes. To put it another way, the use to which the provisions may be put cannot define their nature".300
267.
Lastly, the Claimants maintain that, in any event, the Tribunal has jurisdiction to decide on the Claimants’ claim that the TVPEE and the Water Levy form part of a series of measures constituting a creeping expropriation of their investments in breach of Article 13 of the ECT. This is so because Article 21(5)(a) of the ECT provides that Article 13 on expropriation shall apply to taxes, and Spain explicitly states that it does not assert a jurisdictional objection against this claim.301

VI. SUMMARY OF THE PARTIES’ CLAIMS ON LIABILITY

268.
The Claimants submit that the Respondent has breached its obligations under the Articles 13 and 10(1) of the ECT, based on four main claims.
269.
First, the Claimants claim that the Respondent violated Article 13 of the ECT by subjecting the Claimants’ investments to measures having an effect that is equivalent to expropriation.302 The Claimants further allege that these measures did not abide by the ECT requirements of lawful expropriation.303 The Respondent maintains that the Claimants’ investments have not been expropriated and that the challenged measures are regulatory acts that do not generate an obligation to compensate.304
270.
Second, the Claimants assert that the Respondent breached the FET standard under Article 10(1) of the ECT. Specifically, the Claimants argue that the Respondent frustrated the Claimants’ legitimate expectations; failed to provide a stable legal and business framework for the Claimants’ investments; failed to act in a transparent manner and respect the Claimants’ due process rights; and acted in a manner that was arbitrary, unreasonable, disproportionate, and discriminatory.305 The Respondent claims that it did not violate the Claimants’ legitimate expectations; provided a stable legal and business framework for the Claimants’ investments; acted in a transparent manner without infringing upon the Claimants’ due process rights; and that the measures adopted were reasonable, proportionate, and non-discriminatory.306
271.
Third, the Claimants argue that the Respondent has impaired, by unreasonable and discriminatory measures, the management, use and enjoyment of the Claimants’ investments in violation of Article 10(1) of the ECT.307 The Respondent claims that the measures were reasonable and non-discriminatory, ensuring a "reasonable rate of return" for the Claimants’ investments.308
272.
Finally, the Claimants submit that the Respondent breached the standard of MCPS as a result of dismantling the legal framework on which the Claimants’ investments relied.309 The Respondent argues that the measures at issue were reasonable and in accordance with the given circumstances, and therefore, it has provided full protection and security to the Claimants’ investments.310

A. Alleged Unlawful Expropriation in Breach of Article 13 of the ECT

(1) Introduction

273.
The Claimants assert that the Respondent indirectly expropriated the value of Claimants’ equity and debt investments through measures that did not meet the requirements provided under Article 13(1) of the ECT.311
274.
The Respondent argues that it has not expropriated the Claimants’ investments either directly or indirectly.312 The Respondent also asserts that the disputed measures are regulatory acts that do not generate the obligation to compensate because they were reasonable and proportional.313

(2) The Applicable Legal Standard

275.
The text of Article 13 of the ECT is as follows:

ARTICLE 13

EXPROPRIATION

(1) Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as "Expropriation") except where such Expropriation is:

(a) for a purpose which is in the public interest;

(b) not discriminatory;

(c) carried out under due process of law; and

(d) accompanied by the payment of prompt, adequate and effective compensation....314

a. The Claimants’ Position

276.
The Claimants submit that the protection in Article 13(1) of the ECT extends to indirect expropriation, which results from "measures having effect equivalent to... expropriation".315 The Claimants state that indirect expropriation may take the form of "creeping expropriation", that is "a series of acts and/or omissions over time that cumulatively result in expropriation even if each individual measure would not constitute an expropriation standing alone".316
277.
The Claimants argue that the "equivalent effect" or "actual effect" of the measures on the investments is the touchstone in all cases of indirect expropriation, not whether the State intended an expropriation.317
278.
The Claimants submit that an essential factor for finding that an expropriation has occurred is whether there has been a substantial deprivation of the value or economic benefits of the investment, "irrespective of whether ownership, control or management rights are also directly affected".318
279.
The Claimants further rely on arbitral precedents to assert that States may carry out indirect expropriations through regulatory measures.319
280.
In addition, the Claimants argue that a State has an obligation to compensate investors for the destruction of their investments in case of expropriation, irrespective of whether such destruction was due to the State’s bona fide exercise of its police powers.320 In any event, the purpose of a State measure does not affect the State’s obligation to compensate the expropriated investor.321
281.
With respect to the lawfulness of an expropriation, the Claimants assert that failure to comply with any of the subparagraphs (a) through (d) of Article 13 of the ECT entails a breach of the provision.322

b. The Respondent’s Position

282.
The Respondent asserts that the definition of expropriation requires the existence of an "asset".323 The Respondent further argues that this definition requires the Claimants to prove that it has ownership over the allegedly expropriated asset and that there is a causal relationship between the measures and their effect on the ownership of said asset.324
283.
Regarding indirect expropriation, the Respondent refers to the findings of prior arbitral tribunals to assert that, for governmental measures to be equivalent to expropriation, such measures must prevent the investor from continuing to operate its investment or from using it, or otherwise entail a substantial, radical, severe and devastating deprivation of the investment.325
284.
Concerning the lawfulness of an expropriation, the Respondent argues that tribunals have considered whether the contested measures are reasonable or in proportion with the intended objective or public interest sought.326

(3) The Claim

a. The Claimants’ Position

285.
The Claimants submit that the Respondent breached its obligation under the ECT by subjecting the Claimants’ investments to measures having effect equivalent to expropriation, and that such measures were unlawful.327 Each of these main arguments is summarized below.

(i) Indirect Expropriation

286.
The Claimants argue that the Respondent’s measures had an effect that was "equivalent to expropriation" on their investments. The Claimants assert that Spain substantially deprived them of the value and economic benefits of their equity and debt investments through a series of wrongful measures, thus resulting in an indirect, creeping expropriation.328 The Claimants submit three main arguments in this regard.
287.
First, the Claimants state that their investments in Spain are protected investments within the meaning of the ECT and capable of being expropriated. The Claimants argue that the Respondent miscategorised the Claimants’ future lost income as the Claimants’ investment.329 The Claimants emphasize that their investments are the equity and debt interests in Spanish companies, and consequently, such shareholding and debt investments are protected "investments" under Article 1(6) the ECT.330
288.
The Claimants also reject the Respondent’s reliance in the case Nations Energy v Panama, which the Respondent cited to argue that measures that only apply to the future without affecting any acquired rights cannot amount to expropriation.331 The Claimants emphasize that the facts in the present case are different.332 Specifically, the Claimants argue that in this case the Respondent conferred vested rights to the Claimants by providing express guarantees that the feed-in remuneration regime would last for "the full operating lifetime of qualifying facilities" and that any adverse future changes would not apply to installations already in existence.333
289.
Second, the Claimants dispute the Respondent’s justification that the challenged measures are regulatory acts not subject to compensation. The Claimants submit that the nature and purpose of the Respondent’s measures are relevant to their legality (per the wording of Article 13(1) of the ECT), but do not affect their characterisation as expropriation or excuse compensation.334 The Claimants further argue that, in any event, the Respondent has not shown that the measures were taken for a bona fide public purpose nor that the regulations were reasonable or proportional.335
290.
Finally, the Claimants contend that the Respondent’s measures deprived the value and economic benefits of their investments in a manner that is equivalent to expropriation.336 The Claimants mention that the market prices in the small-hydro sector are insufficient to service the installations’ project financing debt obligations and to generate a return on the Claimants’ equity and debt investments. Therefore, "[t]he economic benefits of these investments have... disappeared, and those investments have thus been rendered essentially worthless".337
291.
As evidence of the deprivation of value and benefit on their investments, the Claimants mention, inter alia, that the measures have reduced the fair market value of their equity investments from EUR 130.2 million (in the but-for scenario) to EUR 19 million (in the actual scenario), and the value of their debt investments from EUR 9.4 million (in the but-for scenario) to EUR 1.8 million (in the actual scenario).338

(ii) Unlawfulness of the Measures

292.
The Claimants argue that the Respondent violated each of the four cumulative requirements for a lawful expropriation under Article 13 of the ECT.339
293.
The Claimants first claim that the measures at issue did not serve any legitimate public purpose. Among other arguments, the Claimants submit that: the tariff deficit that Spain allegedly aimed at reducing was a consequence of its own actions; there is no reasonable or proportional relationship between the State measures concerning the small-hydro sector and Spain’s aim of reducing the tariff deficit given that the feed-in remuneration to small-hydro contributed the lowest amount towards the electricity system’s regulated costs; Spain failed to adopt other less restrictive means to fulfil its stated objective of reducing the tariff deficit; and, in any event, a State has no right to expropriate only for financial purposes.340
294.
The Claimants then submit that the measures at issue were also discriminatory;341 not carried out under due process of law;342 and not accompanied by any prompt, adequate and effective compensation (instead, the regulatory changes "were purposefully designed to create the appearance of providing a ‘reasonable return’ and thus deny the existence of a damage or the need to compensate the Claimants").343
295.
Based on the above, the Claimants conclude that the Respondent has unlawfully expropriated their investment, and therefore, breached Article 13 of the ECT.344

b. The Respondent’s Position

296.
The Respondent submits that there has been neither direct nor indirect expropriation.345 The Respondent further claims that the measures cannot be considered expropriatory as they are reasonable and lawful.346 Each of these arguments is summarized below.

(i) Lack of Direct or Indirect Expropriation

297.

The Respondent first considers that future returns, or loss of future income or revenues, are not an asset subject to expropriation under the ECT, Spanish law or otherwise under international law.347 In particular, the Respondent notes that both Spanish law and international law require the rights to be vested or acquired in order for their deprivation to be compensable.348 The Respondent contends that the facts of this case only establish the Claimants’ acquired right to the remuneration under RD 661/2007 with respect to the energy already sold, but not to future returns.349 The Respondent, citing Nations Energy v Panama as an illustrative case, further argues that measures that do not affect acquired rights (as in this case, which concerns future returns) cannot be considered equivalent to expropriation.350

298.
Furthermore, the Respondent emphasizes that the Tribunal is required to refer to domestic legislation, in this case Spanish law, in determining which rights are subject to expropriation.351 The Respondent claims that based on Royal Legislative Decree 1/2010 concerning Spanish corporations law, and Supreme Court case law, the Claimants’ ownership of shares grant them, at most, the expectation to receive dividends and to oversee the management of the administrative body, but under no circumstance a right to receive dividends nor a right to the direct management of the plants in which they hold shares.352
299.
Therefore, the Respondent concludes that the Claimants’ investment is not an asset subject to expropriation since the shares and subordinated debt held in the Xana Plants and in the Ondina Plants do not imply the right to manage such companies or the right to receive dividends, as protected under Article 13(1) of the ECT.353
300.
The Respondent further contends that the challenged measures do not constitute an indirect expropriation because: (a) the Claimants continue to control their shares in the plants; (b) the plants continue to operate; and (c) the Claimants continue to obtain a reasonable rate of return from the plants.354 In short, the Respondent argues that neither the Respondent has prevented the Claimants from continuing with the operations of their plants, nor the effects of the challenged measures on the Claimants’ investments meet the required threshold for "substantial deprivation" to be considered expropriatory.355

(ii) Lawfulness of the Measures

301.
The Respondent claims that the measures adopted are "non-discriminatory regulatory adaptations that were enacted in good faith for the purpose of protecting public interest in a proportionate manner to the objective they were intended to achieve and in compliance with due process".356
302.
Accordingly, the Respondent asserts that the challenged measures are regulatory acts that do not generate the obligation to compensate.357 Specifically, the Respondent argues that the challenged measures consist of macroeconomic control measures which were adopted to serve a public purpose, including resolving the tariff deficit.358 Furthermore, the Respondent argues that the measures were reasonable as the Claimants can recover the costs associated with their investments as well as a "reasonable rate of return".359 The Respondent also argues that the measures were applied to all operators in the Spanish energy system, and therefore, they are not discriminatory.360
303.
In its Rejoinder, the Respondent maintains that the Claimants failed to meet their burden of proof in showing that the measures at issue were not in the public interest.361 The Respondent argues that the disputed measures have been accepted as necessary and reasonable macroeconomic control measures, and consequently, admissible as a public interest policy.362 The admissibility of reforms arising from a rational policy, the Respondent argues, has been supported by several prior tribunals.363
304.
Moreover, the Respondent reiterates that the disputed measures are proportionate,364 compliant with due process requirements (e.g. without any irregularities in the legislative process),365 and highlight that the competent Spanish tax authorities have confirmed that the TVPEE and the Water Levy do not amount to an expropriation.366
305.
Based on the above, the Respondent concludes that it has not unlawfully expropriated the Claimants’ investment, and therefore, has not breached Article 13 of the ECT.367

B. Alleged Breach of the Fair and Equitable Treatment Obligation of Article 10(1) of the ECT

(1) Introduction

306.
The Claimants submit that the measures at issue violate the Respondent’s obligations under the FET standard of the ECT. As part of their analysis, the Claimants argue that the Respondent’s treatment of the Claimants’ investments: (a) failed to provide stability to the Claimants’ investments; (b) failed to protect the Claimants’ legitimate expectations; (c) was not transparent and failed to respect the Claimants’ due process rights; and (d) was unreasonable, disproportionate, arbitrary, and discriminatory.368
307.
The Respondent argues that it has complied with the FET standard of the ECT. Specifically, the Respondent submits that: (a) it respected its duty to provide stable and transparent conditions;369(b) it did not violate the Claimants’ expectations; (c) the measures were carried out in a transparent manner and following due process; and (d) its treatment of the Claimants’ investments was reasonable, proportional, non-arbitrary, and non-discriminatory.370

(2) The Applicable Legal Standard

308.
Article 10(1) of the ECT requires Contracting Parties to "encourage and create stable, equitable, favourable and transparent conditions for Investors[, including] a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment".371
309.
Both Parties agree that the FET standard must be considered in the light of the object and purpose of the ECT.372 The Parties also agree that the FET standard of the ECT includes the duty to provide stable conditions for foreign investors,373 to refrain from acting in a disproportionate manner,374 to respect investors’ legitimate expectations at the time of their investment,375 to act transparently and in accordance with due process,376 and to refrain from acting unreasonably or discriminatorily.377

a. The Claimants’ Position

310.
The Claimants agree with the Respondent that the protection standards of the ECT, including FET, must be analysed in accordance with the objective of the ECT. However, they reject the Respondent’s argument that the ECT’s objective is to ensure national treatment or non-discrimination.378 Instead, the Claimants maintain that:

the fundamental objectives of the ECT are to require the Contracting States to maintain a stable and transparent legal and regulatory framework for energy sector investments, and to provide substantive protections (which include, but are not limited to, national treatment) and the procedural mechanism of investor-State dispute settlement, with a view to reducing political and regulatory risks and thus facilitate investments in the energy sector.379

311.
The Claimants argue that FET is an autonomous legal standard of protection, which is higher than the customary international law minimum standard for the treatment of aliens.380
312.
The Claimants submit that under the ECT, the Respondent has an obligation: (a) to respect investors’ legitimate expectations and to provide a stable legal and business framework for their investments; (b) to act in a transparent manner and in accordance with due process; and (c) to refrain from acting disproportionately, arbitrarily, unreasonably or discriminatorily.381
313.
First, the Claimants argue that the provision of a stable legal and business environment is encompassed in the protection of investors’ legitimate and reasonable expectations, such protection being a core element of the FET standard.382 The Claimants note that this is of particular importance in the energy sector because of the heavy reliance investors have on a stable legal and business environment when committing a substantial amount of capital for generating long-term returns.383 The Claimants further argue that this reliance can be derived from laws and regulations, as well as other indirect undertakings of a host State.384
314.
Second, the Claimants note that the FET standard requires a State to act in a manner that is transparent and in accordance with investors’ due process rights.385 The Claimants submit that transparency requires the absence of administrative ambiguity or opacity, which is closely related to respecting "procedural propriety and due process".386 The Claimants also highlight the investors’ right to receive information and be heard on important decisions, in a fair and prior hearing.387
315.
Third, the Claimants argue that the FET standard encompasses a protection against disproportionate, arbitrary, unreasonable or discriminatory measures.388
316.
Concerning the proportionality principle, the Claimants argue that it applies equally to administrative acts and to the enactment of legislation.389 The Claimants refer to a four-stage test adopted by the Occidental v Ecuador tribunal for assessing the proportionality of a State measure, as follows:

(a) the legitimacy of the State’s aim; (b) whether the measure adopted by the State was suitable and/or reasonably connected to the objective it pursued; (c) whether the measure adopted by the State was necessary (i.e., was it the least restrictive measure available to achieve the State’s aim); and (d) whether the effects of the measure were disproportionate or excessive in relation to the interests involved, i.e., whether the benefit of realising the State’s aim exceeded the harm to the relevant rights of investors.390

317.
The Claimants add that these four elements are cumulative and the State’s failure to comply with any of them will result in breach of the FET standard.391
318.
To determine whether measures are arbitrary, the Claimants refer to a fourfold classification developed by Professor Schreuer, on whether the measures at issue: (a) inflict damage upon investors without serving any apparent legitimate purpose; (b) are based on "discretion, prejudice or personal preference" instead of acceptable legal standards; (c) are adopted for reasons other than those put forward by the State; and (d) are taken in wilful disregard of due process and proper procedure.392 In their Reply, the Claimants dismiss the Respondent’s assertion that protection against arbitrariness is not a part of the FET standard and submit there is a "well-settled jurisprudence finding States to be in breach of the FET standard where they act in an arbitrary manner".393
319.
In determining the reasonableness of the measures at issue, the Claimants submit that it must be shown that the measures were taken in pursuance of a rational policy goal and were tailored to achieve that goal.394
320.
Finally, the Claimants consider that unjustifiable or arbitrary regulatory distinctions made without justification between things that are alike (e.g. between similarly situated groups of people or categories), may amount to discriminatory treatment proscribed by the ECT.395

b. The Respondent’s Position

321.
The Respondent considers that the protection standards of the ECT, including FET, must be analysed in accordance with the objective of the ECT, which is to ensure the principle of national treatment or non-discrimination.396 In this regard, the ECT does not limit nor prevents the adoption of macroeconomic control measures on grounds of general interest.397 In its Rejoinder, the Respondent also maintains that a number of precedents have allowed reasonable and proportionate regulatory changes on the grounds of public policy.398 Accordingly, the protection afforded to investors under the FET standard is not absolute, nor can it amount to an "insurance policy" in favour of the investor in a strategic and highly regulated sector such as the energy sector.399
322.
The Respondent agrees with the Claimants that in examining the FET standard, tribunals must assess the legitimate expectations that an investor had at the time of its investment.400 The Respondent maintains that the standard of providing stable conditions under the ECT does not extend to providing a "predictable" regulatory framework, since the wording of Article 10(1) of the ECT does not contain such term. Moreover, the Respondent argues that the ECT does not guarantee the predictability of the regulatory framework of the Contracting States unless there is a specific commitment by the State in this regard.401
323.
The Respondent submits that investors’ expectations must be reasonable and objective in relation to the existing regulatory framework, and therefore, tribunals must assess whether investors knew and understood the framework applicable to their investments, as well as the risk associated with it.402
324.
With respect to the duty to provide stable conditions, the Respondent rejects the Claimants’ interpretation of "retroactivity", and submits that retroactive measures must affect acquired rights in accordance with international and national precedents.403
325.
Regarding the interpretation of the principle of transparency under the ECT, the Respondent refers to the tribunals’ decisions in the cases of Tecmed v Mexico, Electrabel v Hungary, and Plama v Bulgaria.404 Concerning due process, the Respondent refers to the interpretation of this concept by a number of arbitral tribunals.405
326.
In assessing compliance with the FET standard, the Respondent notes that the prohibition of arbitrary measures is not an independent standard but is encompassed within the ECT protection against impairment of investments by unreasonable or discriminatory measures.406 The Respondent submits that an analysis of whether the measures in dispute are discriminatory or unreasonable under an analysis of the FET standard is only necessary when there has been an impairment of the investment.407

(3) The Claim

a. The Claimants’ Position

327.
The Claimants argue that the Respondent’s treatment of their investments is in breach of the FET standard because the Respondent: (i) failed to provide a stable legal and business framework for their investment; (ii) frustrated the Claimants’ legitimate expectations; (iii) failed to act in a transparent manner and to respect the Claimants’ due process rights; and (iv) acted in a manner that was arbitrary, unreasonable, disproportionate, and discriminatory.

(i) Respondent Failed to Provide a Stable Legal and Business Framework for Claimants’ Investments

328.
The Claimants maintain that the Respondent failed to provide a stable legal and economic framework for their investments because it overhauled the RD 661/2007 feed-in remuneration regime that was in place at the time of their investments, thus dismantling the legal framework upon which Claimants’ investments were premised.408 The Claimants refer, inter alia, to the tribunal’s decision in Eiser v Spain to illustrate that the drastic and abrupt change to the RD 661/2007 regime amounts to a violation of the FET standard.409
329.
In particular, the Claimants identify six main changes between the RD 661/2007 feed-in remuneration regime and the New Regime through which the value of their investments was allegedly eviscerated.410
330.
First, the RD 661/2007 regime was based on maximization of production while the New Regime establishes a completely new remuneration framework applicable to existing installations that is not production-oriented.411 For instance, through the enactment of RD-2/2013 the Respondent eliminated the premium under the "pool price plus premium" option that was afforded by RD 661/2007 and replaced the Consumer Price Index ("CPI")- linked updating index in RD 661/2007 with a lower index, resulting in lower revenue growth.412
331.
Second, the RD 661/2007 regime was not subject to any cap on renewable installations’ feed-in remuneration or investors’ level of profitability (by reference to an alleged principle of "reasonable rate of return" or otherwise) while the New Regime subjects existing installations to a cap by reference to a "target rate of return" on assumed costs.413 The Claimants argue, inter alia, that the "target rate of return" is retroactive and backward looking in the calculation of the return.414
332.
Third, the RD 661/2007 regime entitled the Claimants’ hydropower installations to feed-in remuneration for their entire operational lifetimes while the New Regime limits payment of the new feed-in incentive to 25 years from the deemed dates of installations’ commissioning without regard to their actual remaining useful life.415 The Claimants note that this 25-year period has either already expired or will come to an end shortly for most of the Claimants’ plants.416
333.
Fourth, the RD 661/2007 regime was based on kWh of electricity produced by each individual plant and thus driven by actual plant-specific variables as determined by the investor, while the New Regime sets arbitrary and unreasonable new remuneration parameters derived from hypothetical standard installations as set by Spain.417 This change drastically reduced the level of feed-in remuneration enjoyed by existing installations.418 As a result of the Respondent’s measures, the Claimants submit that their plants are now only entitled to market price for their electricity.419
334.
Fifth, the RD 661/2007 regime contained express commitments that adverse future changes to the statutorily applicable feed-in remuneration would not affect existing installations, while the New Regime enables Spain to unilaterally vary the ex-post target return and update the new remuneration parameters for both existing and new installations in regulatory periods with limited scrutiny.420
335.
Finally, the RD 661/2007 regime was based on, and driven by, Spain’s desire to increase its installed capacity base for different technologies to meet its renewable energy targets by assigning specific Government targets to each technology, while the New Regime abandons these targets and seeks to reduce the remuneration to renewables.421

(ii) Respondent Frustrated Claimants’ Legitimate Expectations

336.
The Claimants argue that the Respondent made a number of representations to foreign investors with the specific aim of inducing investment in the small-hydro sector.422 In particular, the Claimants submit that, at the time of their investments, they had legitimate expectations that: the small-hydro plants they had acquired would be entitled to benefit from the RD 661/2007 feed-in remuneration regime during their entire operational lives in amounts pre-established in RD 661/2007, that any changes to that remuneration regime would be unlikely and that, in any event, such changes would not adversely impact existing small-hydro facilities nor would they fundamentally alter the essential characteristics of the regulatory framework on the basis of which they invested.423
337.
The Claimants claim that their expectations were legitimate based on the express guarantees set out in RD 661/2007 and representations attributable to the Respondent (e.g. through a press release issued by the Ministry of Energy, a statement issued by the Council of Ministers, and presentations for investors given by personnel of the CNE and InvestinSpain), which induced the Claimants’ investment by guaranteeing that facilities registered by the legal deadline would not be subject to retroactive changes to the feed-in tariff.424 In this case, all 33 of the hydropower plants in which the Claimants invested were registered before the legal deadline and hence were eligible for and relied upon the guaranteed feed-in tariff ("FiT") under RD 661/2007.425
338.
The Claimants also submit that their expectations were legitimate, as they were the result of the Claimants’ due diligence prior to making their investment.426 The results of the due diligence showed, inter alia, the following: (a) that for over 30 years the Respondent had consistently updated and improved the regulatory regime of the small-hydro sector without adverse, retroactive regulatory changes; (b) that small-hydro was the safest and most "bankable" from among other renewable energy sectors in Spain (e.g. due to its negligible contribution to the regulated costs of the Spanish electricity system and since several small-hydro assets in Spain were owned by semi-public entities and large Spanish utilities); (c) IDAE was looking to expand its portfolio of small-hydro assets; (d) according to IDAE representatives, the small-hydro sector was sheltered from any future adverse regulatory changes; (e) major utilities and foreign infrastructure funds had demonstrated acquisitiveness in the Spanish small-hydro sector; and (f) lenders continued to fund small-hydro projects.427
339.
The Claimants, relying on Masdar v Spain, dismiss the Respondent’s allegation that there was any Supreme Court case law that could have constituted a warning to the Claimants of the possibility of regulatory changes.428 The Claimants submit that (a) the first group of case law upon which the Respondent relies did not concern the regime established under RD 661/2007;429(b) the second group of case law from December 2009 do not support the Respondent’s contention that the government had unlimited authority to make sweeping changes to the regulatory framework for the small-hydro sector;430 and (c) the third group of case law are post-investment judgments that could not have put the Claimants on notice - at the time of their investment - about Spain’s upcoming regulatory changes, nor could they have an effect on the legitimacy of their expectations.431
340.
The Claimants submit that, because Spain is unable to engage with this record, the Respondent has mischaracterized the regulatory regime applicable at the time of the Claimants’ investments.432 The Claimants argue that, contrary to the Respondent’s assertions: (a) renewable electricity generation was not a regulated activity under the Electricity Act 54/1997;433(b) there was no overriding principle of "economic sustainability" or "financial self-sufficiency" within Spanish regulation at the time of the Claimants’ investments;434(c) Article 44(3) of RD 661/2007 contained an unambiguous and unequivocal guarantee of non-retroactivity to specific facilities -i.e. those that were commissioned by a particular date;435 and (d) under the regulatory regime existing at the time of the Claimants’ investments, brownfield projects had the same rights and received the same feed-in remuneration as greenfield projects.436
341.
In response to the Respondent’s contention that the Claimants were or should have been aware of surrounding circumstances and relevant regulations, the Claimants assert that the facts, laws and case law invoked by the Respondent do not undermine the Claimants’ legitimate expectations.437 Specifically, the Claimants argue that the Respondent is estopped from relying on the tariff deficit which pre-existed the commitments it made under RD 661/2007, and in any case, the Claimants could not have expected, at the time of their investments, that the tariff deficit could affect their feed-in remuneration to the small-hydro sector, which accounted for only a fraction of the regulated costs to the Spanish electricity system.438
342.
The Claimants submit that they were not on notice of potential adverse changes despite the evolution of the regulatory framework.439 On the contrary, RD 661/2007 provided guarantees against adverse, retroactive regulatory changes and provided investors with greater predictability.440 Even the regulatory changes introduced by Spain in 2010 to the PV sector are said to reinforce this conclusion precisely because they were PV-specific, since the PV sector was a major contributor to the regulated costs of the electricity system (while small-hydro’s contribution was negligible).441
343.
Accordingly, the Claimants argue that the measures introduced by Spain in 2010 were not comparable to the 2013 measures as they had a limited impact on the PV sector and were not relevant to the small-hydro sector.442
344.
In addition, the Claimants dismiss case law cited by the Respondent, noting that the vast majority of those cases were issued after the Claimants’ investments in 2011 and involve facts distinguishable from the present case.443 Similarly, with respect to the Respondent’s reliance on decisions by the Charanne v Spain and Isolux v Spain tribunals, the Claimants argue that those cases are not relevant as they involved a different renewable energy sector (PV, as opposed to small-hydro) and concerned different facts.444 Moreover, neither media reports nor the Claimants’ transaction documents demonstrate knowledge of future changes to the RD 661/2007 regime.445
345.
The Claimants further argue that, at the time of their investments in 2011, the Respondent had expressly indicated that existing investments made under RD 661/2007 would not be affected by any adverse future changes, and that this understanding was confirmed by government institutions such as IDAE, financial institutions, and other market participants.446
346.
With regard to supporting documents that the Respondent introduced on the record in its rejoinder to allege that other market participants were aware that Spain could revoke RD 661/2007, the Claimants argue that: (a) the Respondent quoted the documents misleadingly and selectively; (b) none of the documents concerned the small-hydro sector; (c) a number of the documents introduced were post-investment; and (d) none of the documents could have put an investor on notice of the possibility of revocation of RD 661/2007.447
347.
Finally, the Claimants highlight that their position "is not (and has never been) that they expected that Spain would ‘petrify’ its regulatory framework... Claimants’ case is that Spain cannot modify its laws in a manner that is inconsistent with its specific promises and representations, and resulting legitimate expectations, as to how it would modify its laws in the future with respect to existing investments".448
348.
Based on the above, the Claimants conclude that the Respondent’s disputed measures frustrated the Claimants’ legitimate expectations at the time of their investments by repealing the RD 661/2007 regime in its entirety, in breach of the FET standard.449

(iii) Respondent Failed to Act in a Transparent Manner and to Respect Claimants’ Due Process Rights

349.
The Claimants argue that the Respondent failed to act in a transparent manner and to respect the Claimants’ due process rights.450 The Claimants arguments in support of this assertion include the following:
350.
First, the disputed measures were contrary to the Respondent’s Renewable Plans of 2005-2010 and 2011-2020 which noted that the small-hydro sector required further development.451
351.
Second, the ability of affected parties to participate in the design of the new regulatory framework was very limited.452 The Claimants submit that the Respondent failed to give them "meaningful opportunity" to participate in adopting the disputed measures or disclose reports the remuneration parameters were allegedly based on.453 According to the Claimants, they became aware of RD-L 9/2013 only a day before the measure was adopted, which limited the Claimants’ ability to intervene in the design of the new regulatory framework.454
352.
Third, during the eleven months following the enactment of RD-L 9/2013, the Respondent failed to provide any information as to which remuneration any qualifying plant would be entitled to. Therefore, the Claimants argue that the Respondent failed to provide predictability and legal certainty to the Claimants’ investment.455 Moreover, even after the enactment of the implementing measures of June 2014, the Respondent failed to define the precise economic regime that was to apply to qualifying installations.456
353.
Fourth, the current regime provides no certainty regarding the applicable remuneration parameters since all but two of them can be changed by the Government through regulatory periods of six years (which are in turn divided into two periods of three years each).457
354.
Finally, according to the Claimants, the Respondent also failed to disclose the technical reports on which the remuneration parameters were allegedly based, despite multiple requests.458 The Claimants argue that the Respondent’s subsequent explanations with respect to these reports corroborate Claimants’ arguments because they reflect arbitrariness of the methodology used and raise doubts as to what extent the Respondent relied on the findings of the report.459

(iv) Respondent’s actions were arbitrary, unreasonable, disproportionate, and discriminatory

355.
The Claimants submit that the Respondent also violated the FET standard because the measures at issue were (i) arbitrary or (ii) unreasonable, (iii) disproportionate, and (iv) discriminatory.
356.
First, concerning the arbitrariness of the Respondent’s measures, the Claimants argue that the sudden and retroactive change in the Respondent’s policy with regard to the small-hydro sector, as well as the constant changes to the regulatory framework applicable to the Claimants’ investments, were arbitrary.460
357.
In addition, the Claimants consider that the New Regime is itself arbitrary, inter alia, because: it limits payment of the specific remuneration to a maximum period of 25 years of operation, far shorter than the operational life of hydro plants and the length of hydro-energy concessions; the new remuneration parameters do not reflect the circumstances of actual renewable facilities but are instead based on "standard" hypothetical categories of installations unilaterally defined by Spain; the Respondent has imposed a cap for all renewable technologies to ensure that the specific remuneration does not go beyond an arbitrarily defined "ex post target return" of 7,398% pre-tax; and it allows the Respondent to unilaterally modify at regular intervals the ex-post target return and the new remuneration parameters for both existing and new facilities.461
358.
Second, with respect to the alleged unreasonable nature of the measure, the Claimants apply Professor Christoph Schreuer’s fourfold test and maintain that the Respondent’s actions were arbitrary because they: (a) lacked a legitimate purpose; (b) were not based on acceptable legal standards; (c) were taken for reasons different from purported reasons; and (d) wilfully disregarded due process and proper procedure.462
359.
In addition, the Respondent’s measures do not satisfy the reasonableness test because they were not taken to pursue a rational policy goal nor were they tailored to achieve such goal. The Claimants highlight that the measures were enacted to cure the result of the Respondent’s own "regulatory malfeasance".463 The Claimants argue that the application of the 7% TVPEE and the Water Levy were unreasonable since the TVPEE was ineffective to meet its alleged environmental purpose and the Water Levy imposed a tax that was already paid by the Claimants in existing hydraulic concession royalties.464 Moreover, the Claimants rely on BG v Argentina to assert that a unilateral withdrawal of undertakings given by States in good faith to investors is by definition unreasonable. Accordingly, the Respondent’s unlawful modification of its regulatory regime was "patently unreasonable".465
360.
Third, the Claimants argue that the Respondent’s measures against the small-hydro sector were disproportionate and in breach of the FET standard because: (a) they did not pursue a legitimate aim nor were they reasonably connected to the Respondent’s stated objective;466(b) the Respondent failed to consider available, less restrictive, alternative measures for reducing the tariff deficit, for instance by disregarding a National Energy Commission’s Report which contained 24 alternative measures;467 and (c) the harm inflicted on the small-hydro sector by the disputed measures far exceeds the purported benefit of the Respondent’s objective to reduce the tariff deficit. For instance, under the current regime 85% of the small-hydro facilities no longer receive any remuneration above the market price and the share of savings extracted from the small-hydro sector was about four times higher than the share of its contribution to the costs of the Special Regime, while the feed-in remuneration to small-hydro accounted for only a fraction of the regulated costs to the Spanish electricity system.468
361.
The Claimants add that the Respondent has not provided any evidentiary support for its assertion that the disputed measures were proportionate.469 In fact, contrary to the Respondent’s assertion, neither Spanish court decisions nor international institutions or the markets have endorsed the proportionality of the Respondent’s disputed measures.470 For instance, with regard to an alleged "renewable boom" in the market, the Claimants submit that the vast majority of transactions from 2013 onwards consist of distressed sales at prices materially below the original value of the investment.471
362.
In addition, the Claimants submit that the regime in which they invested never gave rise to any concerns of State aid (e.g. there is no finding by any EU institution that the RD 661/2007 feed-in remuneration regime constituted incompatible EU state aid law), and therefore the Respondent errs in arguing that an investor should have known that the Special Regime could constitute illegal State aid and therefore would have to be repealed.472
363.
Finally, the Claimants argue that the Respondent’s treatment of other conventional power and renewable energy producers reflects the Respondent’s discriminatory treatment against the Claimants’ investments.473 In their Reply, for example, the Claimants maintain that the small-hydro facilities experienced a 92.6% cut in the revenues, which is almost six times the average cut of 17.85% across all other technologies in the Special Regime.474 In addition, the Claimants note that the Water Levy only applied to hydropower producers and not to other renewable energy and conventional power producers.475 Moreover, the TVPEE was discriminatory since renewable energy producers were unable to pass through the additional costs imposed by this tax to consumers while conventional power producers could.476
364.
Based on the above, the Claimants conclude that the Respondent breached the FET clause of the ECT.

b. The Respondent’s Position

365.
The Respondent submits that it complies with the FET standard of the ECT for the following reasons: (i) the Respondent did not violate the Claimants’ expectations and respected the duty to create stable conditions set forth in the ECT; (ii) the Respondent acted in a transparent manner without infringing upon the Claimants’ due process rights; and (iii) the measures adopted by the Respondent were reasonable, proportionate, non-arbitrary, and non-discriminatory. Each of these arguments is analysed below.

(i) Respondent did not Breach Claimants’ Legitimate Expectations nor its Duty to Create Stable and Equitable Business Framework

366.
The Respondent submits that it did not breach the FET standard because it did not violate the Claimants’ legitimate expectations, and it respected the duty to create stable conditions set forth in the ECT.
367.
The Respondent rejects that the Claimants had legitimate expectations because there is no evidence that the Claimants performed an exhaustive analysis of the applicable legal framework.477 For instance, the Claimants failed to establish that they had examined Spanish case law regarding the rights of renewable energy investor in Spain, prior to making their investments.478 The Claimants’ lack of due diligence means that their intended expectations cannot be deemed to be real and objective.479
368.
Moreover, even if a due diligence had been performed by the Claimants, the Respondent argues that it has not breached the FET standard because: (a) there were no specific commitments in the Spanish regulatory framework on the future immutability of the framework of RD 661/2007 in favour of renewable energy facilities;480(b) the Claimants’ expectations are not reasonable in light of the regulatory framework actually in place in Spain, nor can they have arisen out of alleged statements of Spain aimed at attracting investment;481(c) the Respondent has respected the duty to create stable conditions set forth in the ECT;482 and (d) no retroactive measures in breach of the ECT have been adopted.483
369.
First, the Respondent maintains that RD 661/2007 does not provide any guarantee or commitment to freeze the Respondent’s framework in favour of the Claimants or their investment.484 The Respondent argues that the regulatory framework only guaranteed a reasonable rate of return, which is a "level playing field" with ordinary power plants.485 The Respondent draws attention to multiple case law that examined the Spanish regulatory framework, which, contrary to the Claimants’ assertions, denied that RD 661/2007 granted investors reasonable expectations that the regulatory framework would remain unchanged.486
370.
Second, the Respondent argues that the Claimants’ expectations are not objective nor reasonable with respect to the regulatory framework in place and all relevant circumstances.487 The Respondent asserts that the Claimants knew or should have known essential principles of Spain’s regulatory framework, including, inter alia, the following: that subsidies to the special regime are a cost of the Spanish electricity system; the principle of a reasonable rate of return within the framework of a sustainable Spanish electricity system; that the subsidies were determined according to the evolution of the demand and other basic economic data; and that the successive regulatory changes adopted by the Respondent were motivated by the need to correct situations of over-remuneration and guarantee the sustainability of the system.488
371.
Also, the Respondent claims that the Claimants could not have been unaware of the limits to subsidies for renewable energies derived from EU law and therefore the Claimants could not have expectations that they had acquired a right to receive public subsidies.489
372.
Moreover, the Respondent submits that the Claimants’ argument is based on insufficient evidence. The Respondent rejects the Claimants’ reliance on alleged statements of Spain aimed at attracting investment, including presentations made by CNE workers (which were in Spanish and not targeted at foreign investors), a presentation by InvestSpain (an advertising brochure uncapable of creating objective expectations for diligent investors), informal conversations with IDAE employees, and a press release announcing the future publication of RD 661/2007.490
373.
The Respondent points to other public statements and behaviours made during the time of the Claimants’ investments that provided warnings for possible changes to the regulatory frame in cases of over-remuneration or possible unsustainability of the market.491 In addition, the Respondent notes that the Claimants’ expectations were not shared by other relevant investors, which evidences that the Claimants’ assertion is based on the Claimants’ own subjective expectations.492 The Respondent considers that the Claimants were aware or should have been aware of these circumstances.493