Reproduced from www.worldbank.org/icsid with permission of ICSID.
INTRODUCTION AND PARTIES
This case has been submitted to the International Centre for Settlement of Investment Disputes ("ICSID" or the "Centre") under the Energy Charter Treaty, which entered into force for the Kingdom of Spain and the Federal Republic of Germany on 16 April 1998 (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").
The Claimants are BayWa r.e. Renewable Energy GmbH ("BayWa RE")1 and BayWa r.e.
Asset Holding GmbH ("BayWa AH"),2 companies incorporated under the laws of Germany (together, the "Claimants").
The Respondent in this case is the Kingdom of Spain ("Spain" or the "Respondent").
The Claimants and the Respondent are collectively referred to as the "Parties". The Parties' representatives and their addresses are listed above on page (i).
(A) THE CLAIMANTS' POSITION
594. The Claimants argue that they are entitled to full reparation for the harm suffered because of the Disputed Measures. They claim reparation for a breach of their rights under the ECT.823 To assess the damage the Tribunal must take into account the date on which the Disputed Measures entered into force.824 In doing so, it must use a discounted cash flow (DCF) analysis.825 This method has often been applied in ECT disputes by international tribunals.826
595. Under the full reparation standard, according to the Claimants, their damages consist of two different parts. First there are Past Damages, which are calculated by comparing the value of the free cash flows under an Actual and a But-For scenario until 31 December 2015. Second, the Claimants claim Future Damages, which consist of the difference in value of the Claimants' investment under the Actual and the But-For scenarios.827 In the Actual Scenario the experts project how the Claimants' investment would have performed if the Disputed Measures applied with full force. In the But-For scenario, the experts assume that BayWa has the right to receive payments under RD 661/2007.828
596. Moreover, the Claimants argue that the DCF method is the relevant method for the quantification of their damages. Two facts render the method particularly appropriate for the quantification of damages in ECT arbitrations. First, La Muela is a fully developed project that has been operating for more than a decade. Second, La Muela has a clear and established track record.829
597. To quantify Past Damages, the Claimants' expert calculated "the free cash flows denied to the Project Companies from the date in which the Respondent's measures came into effect (January 1, 2013) until the valuation date (December 31, 2015)."830 In total, Past Damages amount to EUR 16,303,851.831
598. To quantify Future Damages, the Claimants' experts apply a DCF analysis to quantify the impact of the Disputed Measures on the investment. To do so, they calculate the difference between the Claimants' investment under the Actual scenario and a But-For scenario. To this end, the experts take into account two periods. The first period runs from 2016 until 2027, which constitutes the lifetime of the plants. The second period runs from 2028 until 2043 and takes into account reduced tariffs under RD 661/2007 and higher market prices as of 2022.832 In total, Future Damages amount to EUR 45,627,673.833
599. At the November 2017 Hearing, KPMG updated the total amount of damages on 30 September 2017 taking into account new data. Based on this report, BayWa claims losses, exclusive of interest, of EUR 70,734,037.834
600. In addition, the Claimants argue that, if the Tribunal held that the Claimants were not entitled to any more than a "reasonable return", they would nonetheless be entitled to damages.835 This is because the project IRR under the Disputed Measures of wind farms in Spain is 7.08%, whereas the estimated reasonable rate of return for RE producers is 9.40%. Consequently, the financial damage in terms of IRR is 2.33%.836
601. Finally, the Claimants claim post-award interest. The basis of claim is Article 13.1 of the ECT, which allows for interest to be applied at a "commercial rate established on a market basis". In addition, a punitive moratorium component of 2% must be added to ensure prompt payment of the award.837
602. In total, the Claimants' damages claim amounts to EUR 74 million as of 30 September 2017.838
(B) THE RESPONDENT'S POSITION
603. The Respondent argues that the Claimants have not suffered any damage. Accordingly, the result of their quantum analysis is that the Claimants cannot claim any compensation.839 Further, Spain maintains its argument that the Claimants' quantification is wholly speculative.840 Moreover, the DCF analysis is not an adequate method to quantify the Claimants' damage, even assuming they suffered damage.841
604. First, the Respondent criticises the calculation method chosen by KPMG. In Spain's view the alleged damage has not been proven, which renders the claimed damages speculative and hypothetical. Moreover, the Spanish Supreme Court has rendered more than one hundred judgements rejecting the speculative quantification methods used by the Claimants. According to the Supreme Court that method "lacks [the] necessary rigour and certainty".842
605. Furthermore, Spain argues that the DCF method is inappropriate and that the Tribunal should adopt an asset-based method. In its view, the following circumstances render the DCF method inadmissible:
(a) is a capital-intensive business with an important asset base.
Virtually the whole of its costs are investment costs in tangible infrastructures. There are no relevant intangibles to asses.
(b) The high dependence of the cash flows on volatile and unpredictable exogenous elements, such as the price of the pool, inter alia.
(c) The financial weakness of the Project Finance structures without recourse agreed, that excessively levered the wind farms, compromising and conditioning their viability.843
606. Taken together, these circumstances lead to the conclusion that the DCF method is inapplicable. As a result, the Tribunal must apply an asset-based quantification method taking into account the profitability and book value of the investment.844
607. Moreover, Spain argues that the Claimants' returns have been higher than the reasonable rate of return. On Econ One's calculation, the Claimants' average IRR after the enactment of the Disputed Measures amounts to 8.88% before taxes. Compared to the return before taxes under the Disputed Measures, which is 7.398%, or the reasonable returns calculated by Econ One, there is no negative impact. As a result, BayWa is not entitled to any damages.845
608. Nonetheless, Econ One performs a subsidiary DCF analysis to show that there has not been any negative impact on the Claimants' investment. To compare the Actual Scenario with a But-For Scenario, Econ One applies similar criteria to KPMG. However, it uses a lower risk in the Actual Scenario. As to the But-For Scenario, Econ One changes the parameters of the analysis, taking into account (i) the initial investment, (ii) cash flows generated by the Projects and (iii) a reasonable return on the initial investment, reaching a different result compared to KPMG's analysis. According to Econ One's DCF analysis, there is no negative impact of the Disputed Measures on the Claimants' investment as the value of the investment has increased by EUR 23.6 million.846
609. The Respondent does not object to the application of pre-award interest. However, it is necessary to distinguish between pre- and post-award interest. Spain argues that the pre- award interest rates identified by KPMG are inappropriate and must follow a "risk-free short term rate" as calculated by Econ One.847 The post-award interest claimed is punitive in character and is not allowed under international law. Spain refers to paragraph 4 of the Commentaries of Article 36 of the Articles on the Responsibility of States for Internationally Wrongful Acts, which expressly states that:
[...] Compensation corresponds to the financially assessable damage suffered by the injured State or its nationals. It is not concerned to punish the responsible State, nor does compensation have an expressive or exemplary character [...]
Hence the Claimants may not claim a punitive post-award interest.848
610. Finally, Spain maintains that the tax gross-up claim is inadmissible and unjustified. This is for three reasons. First, Article 21 of the ECT contains a tax carve-out, which does not allow the Claimants to seek compensation for any hypothetical taxes they may have to pay. Furthermore, the imposition of the tax cannot be attributed to the Respondent under the ILC Articles on State Responsibility, as the tax is applied to the Respondent by a third State. It is not an act of the Respondent, and cannot be attributed to Spain. Second, the Claimants have not submitted any proof as to their obligation to pay taxes on the award in Germany, where the award would fall under a principle called "participation exemption". This exemption allows for the tax-free distribution of profits between parent companies and their subsidiaries within the EU. Third, this renders the claim "speculative, contingent and ambiguous". This conclusion is supported by the fact that the Claimants have neither submitted any legal grounds for the hypothetical taxation, nor any reports by tax experts.849
611. As a result, the Claimants are not entitled to claim any damages.
(C) THE TRIBUNAL'S ANALYSIS
612. It follows from the Tribunal's decisions on jurisdiction and liability that none of the primary claims of the Parties as to quantum can be accepted.
613. In terms of jurisdiction, the Claimants' primary claim includes an amount on account of TVPEE, which claim the Tribunal has held to be outside its jurisdiction.
614. In terms of substance, the Claimants' experts value the claim on the basis of the "prevailing regulation at the time when the projects were acquired by BayWa". In other words, KPMG takes as its base the regulatory framework as reflected in RD 661/2007 as amended in 2010.850 The majority of the Tribunal has however held that the Claimants' investments had no right to subsidies at the level of RD 661/2007, and no legitimate expectation to such subsidies either. Moreover, even if there had been such an expectation, the but-for situation would not have been, as the Claimants argue, RD 661/2007, with or without modification, but something more indeterminate.
615. It is not, however, necessary to pursue these issues further. The Tribunal has held that the breach of Article 10.1, first and second sentences, of the ECT is limited to the retroactive reduction in the allowed return. The question is how to value that amount.
616. Like the RREEF tribunal, the present Tribunal has not been able, despite its best efforts, to quantify the amount of this retroactive reduction on the basis of the expert reports and supporting work papers filed by the Parties' respective experts. It is, however, satisfied that the Parties' experts are qualified and have sufficient knowledge of the case and that the different results obtained by both experts are a result of the different calculation methods which they applied. Consequently, the Tribunal decides (by majority) that the Parties, with the assistance of their experts, shall seek to reach an agreement on the impact of the unlawful retroactive application of the Disputed Measures, assuming a 25-year regulatory life for wind plants, but otherwise on the basis that those measures were consistent with the ECT.
617. If the Parties do not, within 3 months of the date of this Decision, reach agreement on the amount payable in this respect, either Party may request the Tribunal to decide the outstanding issues in dispute, in accordance with a prompt briefing schedule. If the Parties do reach agreement on the amount due, they should report this to the Tribunal in order to enable it to issue an Award incorporating this Decision and dealing with any residual issues identified, including costs, thereby terminating the proceedings.
(D) THE TAX GROSS-UP CLAIM
618. One matter of quantum that can be resolved at this stage is the tax gross-up claim, which the Tribunal has already held admissible. It remains to consider the merits of that claim.
619. The Claimants seek compensation for the hypothetical payment of taxes in Germany so that it can receive full reparation.851 The Respondent rejects the claim on the ground that it cannot be held liable to pay for tax measures implemented by a third State.
620. At the November 2017 Hearing, in response to a question from the Tribunal, the Claimants briefly mentioned the tax gross-up claim.852 During his cross-examination, Mr. Solé Martin, the Claimants' expert, admitted that he was not a tax expert.853
621. The Tribunal agrees with the Respondent that, on the evidence now available, there is uncertainty as to the legal position on damages and taxation.854 It is unclear at what point the damages awarded would have been taxed in the normal course and remitted in whole or in part to BayWa RE Germany. In this context, it is significant that there appears to be no precedent for the award of a tax gross-up involving taxation of a third State. In three cases tribunals have rejected such claims.
622. In Eiser the tribunal noted that it:
[...] received no evidence to show whether or in what amount any tax might actually be due on a future award and only limited argument regarding the issues raised by this claim. Given these circumstances, the Tribunal can make no decision as to whether or when a tax "gross-up" of the kind claimed here might be appropriate. Accordingly, this portion of Claimants' damages claim must fail.855
623. In Masdar the tribunal concluded that:
[...] Claimant failed to provide sufficient evidence for an actual future obligation imposed by its home jurisdiction to pay taxes on an award paid by a foreign government. The `Tax Advice' on which Brattle bases the inclusion of a tax gross-up in its calculations does not give a categorical answer to the `question [...] whether an award granted for the loss in value of shares in Torresol might be exempt from Dutch tax under the Dutch participation exemption.'856
624. In Antin the tribunal stated that:
[...] it is for the Claimants to prove whether or in what amount any tax on compensation determined by a future award may be due.
There is no evidence on the record to prove the type and amount of tax that may be due on an award of compensation and whether such tax would be affected by the regime to which the Claimants as taxpayers are subjected in the given jurisdiction(s). Under these circumstances, the Tribunal is not in a position to determine whether there would be a specific tax impact that requires a tax gross-up like the one claimed by the Claimants. Therefore, this portion of the Claimants' damages claim must fail.857
625. The situation in the present case is complicated by uncertainty as to the German tax position.
626. In the Tribunal's view, the Claimants did not substantiate their claim to a tax gross-up. It is accordingly unnecessary to decide whether in principle such an award could be justified.
627. For these reasons the Tribunal rejects the Claimants' claim for a tax gross-up.
628. As to pre- and post-award interest, this can be left to be agreed by the Parties or determined in a final award. The Tribunal will simply observe at this stage that, in accordance with established principle, awards of interest cannot contain a punitive element, but are purely compensatory.
629. For these reasons, the Tribunal finds, by majority:
(a) that the European state aid regime and the ECT apply concurrently to the investment and form part of the applicable law;
857 Antin v. Spain (Award), para. 673, CL-0234.
(b) that the Claimants did not have a legitimate expectation that the Special Regime subsidies, notably in terms of RD 661/2007, would continue to be paid for the lifetime of its Plants;
(c) that in the circumstances, the clawing back by Spain, in and after 2013, of subsidies earlier paid at levels in excess of the amounts that would have been payable under the Disputed Measures, had they been in force in previous years, was in breach of the obligation of stability under Article 10.1, first and second sentences, of the ECT;
(d) that there was no other breach of the ECT;
(e) that all other claims must be rejected.
630. The Parties shall seek to reach agreement on the impact of the unlawful retroactive application of the Disputed Measures, on the basis that those measures were otherwise consistent with the ECT.
631. If the Parties do not, within 3 months of the date of this Decision, reach agreement on the amount payable in this respect, either of them may request the Tribunal to decide the outstanding issues in dispute, in accordance with a prompt briefing schedule. If the Parties do reach agreement on the amount due, they should report this to the Tribunal in order to enable it to issue an Award incorporating this Decision and dealing with any residual issues identified, including costs, thereby terminating the proceedings. The Tribunal will deal with costs issues in that Award.
632. Mr. Grigera Naón disagrees with these conclusions, insofar as they hold Spain not responsible for full compensation for the New Regime. In his view, Spain breached Article 10.1, first and second sentence, of the ECT, in 2013 by imposing that regime upon the Claimants' Wind Farms, which were already well established and had legitimate expectations as to the maintenance of the Special Regime. A statement of the reasons for this dissent is attached.
Dr. Horacio A. Grigera Naón (Subject to the attached Dissenting Opinion)
Ms. Loretta Malintoppi
Judge James R. Crawford
Dissenting Opinion Horacio A. Grigera Naón
BayWa r.e. Renewable Energy GmbH and BayWa r.e. Asset Holding GmbH and Kingdom of Spain (ICSID CASE No. ARB/15/16)
1. This dissenting opinion is limited only to findings and conclusions in the Majority Decision on Jurisdiction, Liability and Directions on Quantum (the "Decision") starting at the Decision's para. 456 regarding the Claimants' claim based on the fair and equitable standard (the "FET") under Article 10.1 of the Energy Charter Treaty (the "ECT"). More specifically, I dissent with the Decision's reasons and determinations according to which the Claimants are only entitled to damage compensation for what the Decision characterizes as "...the retroactive reduction in the allowed return....", and not to full compensation for the life of the Claimants' facilities, and the basis to establish such compensation. Therefore, I also disagree with the analysis, conclusions and way forward on quantum of damages set forth in paras. 612-617 of the Decision.