RWE Innogy v. Spain

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 for Germany and the Kingdom of Spain (the "ECT or "Treaty") 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").

The Tribunal refers to section IV of its Decision on Jurisdiction, Liability, and Certain Issues of Quantum, dated 30 December 2019 (the "Decision"), for the legal and factual background of the case.

"For the reasons set out above, the Tribunal decides as follows:

(1) That it lacks jurisdiction to hear the claims of breach of Article 10(1) ECT with respect to the two Taxation Measures introduced by Law 15/2012 of 27 December 2017, but that the jurisdictional objections of the Respondent are otherwise rejected.

(2) That the Respondent has breached Article 10(1) ECT (i) to the extent that it has procured repayment by the Claimants of sums previously paid by the Respondent under the regime in place prior to adoption of the Disputed Measures, and (ii) the disproportionate nature of the new measures that it has adopted, with specific respect to Urano, Grisel II, Bancal I and II, Siglos I and II, and Cepeda.

(3) All other claims and requests of the Parties are dismissed.

(4) The Parties are directed to attempt to reach an agreement on the amount of compensation to be paid by the Respondent to the Claimants in respect of its breaches of its obligations as identified in paragraph (2), in accordance with the Tribunal’s findings. In a first phase, the Parties are invited to agree by January 23, 2020 on a reasonable schedule within which to attempt to reach agreement. If the Parties are unable to agree on such a schedule, such will be fixed by the Tribunal through further directions.

(5) Insofar as the Parties fail to reach an agreement in accordance with (4) above, the Tribunal will, following consultation with the Parties, fix a calendar for further submissions of the Parties on the damages due to the Claimants.

(6) The decision on the final determination of the damages due is thus reserved and will be fixed in the Award, along with the Tribunal’s decisions as to interest, tax and costs.¹

On 6 February 2020, pursuant to sub-paragraph 748(4) of the Decision, and following the Tribunal’s granting of a two-week extension, the Parties communicated to the Tribunal their agreement on the schedule within which to attempt to reach agreement on the amount of compensation. The Parties proposed to do so in the form of a joint expert report, and included a proposed schedule for the preparation and submission of the experts’ joint report.

The Tribunal refers to paragraphs 685 and 729-747 of the Decision. As noted there, the Tribunal has found a breach of Article 10(1) ECT so far as concerns -

i. the procurement of repayment of any sums already paid to the Claimants in the period between the adoption of RDL 9/2013 and Order IET 1025/2014;

ii. disproportionality with respect to certain of the Claimants’ plants, i.e. the wind plants Urano, Grisel II, Bancal I and II, Siglos I and II, and the hydro plant Cepeda.

As to breach (i), the Tribunal found at paragraph 731 of the Decision that: "the Claimants say that EUR 19.4 million had to be repaid, which has not been challenged. All that is required is verification and precise quantification of amounts paid."

As to breach (ii), the Tribunal found at paragraphs 732-746 of the Decision that it is compensation with respect to the breach concerning the disproportionate impacts to Urano, Grisel II, Bancal I and II, Siglos I and II, and Cepeda that the Tribunal must assess, using as a base Table 10 to the second report of Compass Lexecon and the spreadsheet that underlies it.

As regards the Claw-back, the Claimants further submit, first, that the Claw-back is a violation of the ECT, as has been found not only by this Tribunal, but also by the RREEF, BayWa, Watkins, PV Investors and Hydro Energy tribunals when considering the same Disputed Measures.⁴

This, submit the Claimants, would be in line with the findings by the Hydro Energy, RREEF, NextEra and PV Investors tribunals that Spain was required to ensure that investors would receive a reasonable rate of return.³⁰

a) Damages of EUR 58.55 million, applying a 7% post-tax return, and a 7.61% discount rate;

b) Damages of EUR 48.55 million, applying 7.398% pre-tax return, and a 6.06% discount rate; and

c) Damages of EUR 47.19 million, applying a 7.398% pre-tax return, and a 7.61% discount rate.³⁷

Regarding the appropriateness or not of the return, and the margin of appreciation to be allowed to the Respondent in accordance with the Tribunal's Decision, the Respondent submits that the Claimants' reliance on the RREEF and PV Investors⁷² benchmarks is inapposite.⁷³

"Those decisions [seven determinations on jurisdiction and liability in the Decision of 3 September 2013 on Jurisdiction and the Merits] in accordance with practice are to be incorporated in the Award. It is established as a matter of principle and practice that such decisions that resolve points in dispute between the Parties have res judicata effect. 'They are intended to be final and not to be revisited by the Parties or the Tribunal in any later phase of their arbitration proceedings.'"⁸⁵

"Do the provisions of the Convention and Rules to which the Respondent referred make any difference to that position? The Tribunal does not think so, for two reasons. The first is that those provisions are about procedural matters. Article 44 of the ICSID Convention makes explicit the tribunal's powers to address procedural issues not dealt with in the Convention or the Rules. And ICSID Arbitration Rule 38(2) has a much more limited function. Their essentially procedural character appears from the cases on which the Respondent relied. Those concerning Article 44 were about stay, allowing amicus curiae submissions and participation of counsel. Article 44, it is frequently said, is designed to enable gaps in the procedure to be filled. It cannot be seen as conferring a broad unexpressed power of substantive decision.

That gap filling character of the provision relates to the second reason for the Tribunal's conclusion that those procedural provisions cannot be the source of a power to reconsider. The overall structure and the detailed provisions of the ICSID Convention were plainly designed to provide for review or actions in respect of decisions of a tribunal only once the Award was rendered. There is no gap to be filled by the power proposed here. Section 3 of Part IV of the ICSID Convention sets out the Powers and Functions of the Tribunal, with nothing among its provisions even hinting at such a power. Section 4 deals succinctly with the Award itself. And it is only in Section 5 that powers are conferred on the Tribunal to interpret and revise the Award and on an ad hoc Committee to annul an Award on prescribed grounds. It is in those ways and those alone that decisions such as that in September 2013 can be questioned, changed or set aside. Those various post-award remedies are, of course, available to both Parties. Those provisions and that structure exclude the possibility of the proposed powers of reconsideration being read into the Convention. That reading of the Convention is also supported by the drafting history mentioned above (paragraph 18)."⁸⁶

"[313] Decisions of tribunals are of course binding within the scope of the proceedings, but this does not make them res judicata. That is so with procedural orders and provisional measures as pointed out earlier. An essential feature of res judicata is that the judgment in question produces effects on the parties outside the proceedings in which it is granted. But decisions of tribunals only have effect within the proceedings until they have been incorporated into the final award.

[314] This conclusion is supported by the structure and architecture of the ICSID Convention itself. Contracting States have an obligation to recognize only an award as binding (Art. 54(1)); recognition and enforcement is contemplated only in respect of an award (Art. 54(2)); only awards can be challenged through annulment proceedings (Art. 52). The proper inference to be drawn from these provisions is that only the Contracting State that is a party to the proceedings is under an obligation to recognize decisions of a tribunal as binding. Thus, decisions cannot have legal consequences outside the ICSID proceedings in which they are issued (i.e. they cannot be recognized and enforced and they cannot be challenged through annulment). Indeed, if decisions were res judicata before incorporation in the final award, then the requirement of incorporation into the final award under Article 48(3) would be redundant....

[318] The Tribunal is of the view that it is incorrect to characterize the decisions of ICSID tribunals, as opposed to their awards, as res judicata. They are binding within the scope of the proceedings but do not impose obligations upon the parties or other Contracting States outside the proceedings as is the case with awards that are res judicata."⁸⁹

"In the words of the second Amco Asia tribunal, the approach is stated as a general principle "that a right, question, or fact distinctly put in issue and distinctly determined cannot be disputed". Whatever the justification, these tribunals express the opinion that an issue resolved once in the course of an arbitration should in principle not be revisited in the same proceedings. Irrespective of res judicata, the rationale for this opinion is obvious: a contrary view would defeat the purpose of efficient dispute settlement, entailing constant re-litigation of issues already resolved, with unavoidable adverse consequences in terms of increased costs and length of proceedings. In addition, the possibility of re-litigating issues would jeopardize legal certainty and ultimately undermine the confidence of the users in the system."⁹⁰

The Tribunal has not been referred to the Standard Chartered Bank and Burlington Resources cases and, in the current case, it does not see the slightly different approach there adopted as material. While the Tribunal notes the conclusion reached by the tribunals in Standard Chartered Bank and Burlington Resources that it may be appropriate for an ICSID tribunal to re-open a decision in exceptional circumstances such as, by analogy, where the circumstances would justify revision under Article 51 of the Convention,⁹¹ no such circumstances have been put before the Tribunal.

"the Respondent has breached Article 10(1) ECT (i) to the extent that it has procured repayment by the Claimants of sums previously paid by the Respondent under the regime in place prior to adoption of the Disputed Measures;...."⁹²

Consistent with basic principle, this must be understood in light of the Tribunal's reasoning on this issue. In this respect, at paragraphs 620-621 of the Decision, the Tribunal found:

"As to the contention that EUR 19.4 million was paid by the ten plants that do not receive a Special Payment under the new regime in the period between the adoption of RDL 9/2013 and Order IET 1025/2014, and that this sum subsequently had to be repaid, the Tribunal considers this to be of a different order. This contention was made in the Reply and in oral opening and closing, while the only response has been to accept the principle that there could be no recovery of sums already paid, as follows:

"Something is forbidden in the international law, that is the idea of claiming excessive premiums already received. Those cannot be claimed and cannot be received by law.

If it did happen, then these can be recouped and proceedings may be entered before the Supreme Court."

The Tribunal does consider that it would be a subversion of the prior legal regime, and in breach of the FET standard in Article 10(1), for the Respondent to require repayment of sums already paid, including in the period between the adoption of RDL 9/2013 and Order IET 1025/2014. The Claimants say that EUR 19.4 million nonetheless had to be repaid. That fact has not been challenged. It follows that, subject to verification and precise quantification of the amount paid, there has been a breach of Article 10(1) ECT, and the Claimants are entitled to return of all sums repaid."

It is this conclusion to which the Tribunal referred at paragraphs 729(i) and 731 of the Decision where it stated:

"(...) The Tribunal has found a breach of Article 10(1) in this case, but this is a breach so far as concerns only -

(i) the procurement of repayment of any sums already paid to the Claimants in the period between the adoption of RDL 9/2013 and Order IET 1025/2014; (...)

As to breach (i) identified above, the Claimants say that EUR 19.4 million had to be repaid, which has not been challenged. All that is required is verification and precise quantification of amounts paid."

"The June 2014 Order which sets out the details is then applied as if it were there from July 2013, so however you define retroactive, I think that probably ticks the box! And this required RWE to pay back some 19 million in revenues, €19.4 million in revenues, because they continued to pay under 661 in that period of uncertainty, and then once the June Order comes in, it’s treated as if it were there from July 2013, obviously there is a big cut, and RWE then had to pay back, just for that 11-month period, €19.4 million. You can see this in the second Compass report, paragraph 149."

"Thus, the Claimants’ plants were issued negative invoices totalling EUR 31,564,458. This matches the figure for the Claw-back amount payable excluding the impact of the coverage ratio calculated by BDO and Compass Lexecon and set out in Table 3 of the Joint Report.

The negative invoices issued to each plant had to be settled by repayments being made to the CNMC. This transfer of money to the CNMC was effected by the CNMC appropriating the cash that the plants were entitled to receive from the sale of the electricity they had produced in the months following June 2014. This was even applied to the 10 plants no longer entitled to receive any incentive under the New Regime. There can be no question that power plants in Spain are entitled to receive payment for the electricity they sell at the market price on the open market. However, instead of allowing the 10 plants to keep the cash earned for the electricity sold, the CNMC appropriated up to half of the revenues earned by the Claimants each month to satisfy the repayment obligation imposed by the New Regime."⁹⁷

"Following the enactment of 2013 Electricity Law (Article 19), starting in 2014 a deferred payment system was introduced under which the revenues accrued by renewable energy source (RES) generators, including all of Claimants’ Plants, were to be paid gradually and with a delay rather than upon demand. Under this system, the regulated revenues accrued in a month are received in successive monthly instalments. The amount of the accrued revenues paid up to any particular point in time is driven by the so called "coverage ratio" ("coeficiente de cobertura" in Spanish).The coverage ratio is calculated on a monthly basis as the ratio of accumulated costs and the accumulated revenues of the Spanish Electricity System (SES) over the year. This ratio reflects that there is a lag between the moment regulated revenues of the SES are accrued and when such revenues are collected by the SES. Over a year, as the SES collects revenues, the coverage ratio increases eventually reaching 100% (at such point in time RES generators finish collecting 100% of their accrued revenues).

At the time the calculations of the claw-back amounts were made, June 2014, the coverage ratio was 60%. That is, RES producers, including Claimants’ Plants, had received only 60% of the regulated revenues they had accrued between January 2014 and May 2014 (both inclusive)."

"The Tribunal considers excessive and disproportionate the burden on the Claimants’ Investments to the extent that even the 7.398% pre-tax return figure is not reached so far as concerns the projected returns of actual plants."

"Compass has made its DCF analysis following two approaches: A free cash flows to firm (FCFF) approach, which is the cash flow available to the company, based on revenues over the life of the project after deducting all operating expenses, expenditures in working and fixed capital, discounted at a rate that reflects the cost of raising capital, both equity and debt for a similar company; and a free cash flow to equity (FCFE) approach, which also deducts all debt interests and net debt capital payments, discounted at the rate that reflects the cost of raising equity capital for a similar project."¹²²

"In the case of arbitration proceedings the Tribunal shall, except as the parties otherwise agree, assess the expenses incurred by the parties in connection with the proceedings, and shall decide how and by whom those expenses, the fees and expenses of the members of the Tribunal and the charges for the use of the facilities of the Centre shall be paid. Such decision shall form part of the award."

For the reasons stated in its Decision on Jurisdiction, Liability and Certain Issues of Quantum of 30 December 2019 and the body of this Award, the Tribunal hereby declares, orders and decides:

a) The Respondent shall pay to the Claimants a sum of EUR 28,080,000 as compensation for the damages resulting from its wrongful acts as determined in the Tribunal's Decision on Jurisdiction, Liability and Certain Issues of Quantum.

b) The Respondent shall pay interest on the sum awarded above from 30 June 2014 to the date of payment in full of all sums due pursuant to this Award at a rate of 2.07%, compounded monthly.

c) The Respondent shall bear 100% of the costs of the arbitration. The Respondent shall thus pay the Claimants USD 623,886.96 for the expended portion of the Claimants’ advances to ICSID.

d) The Respondent shall reimburse the Claimants EUR 2,373,909.24 in respect of the Claimants’ legal fees and other costs and expenses incurred in connection with the jurisdiction and liability phase.

e) Subject to paragraph c) above, each Party shall bear the legal fees and other costs and expenses which it incurred in connection with the quantum phase.

f) All other claims and requests of the Parties are dismissed.

(See separate opinion¹⁴⁵)