Silver Ridge Power BV v Italian Republic - ICSID Case No. ARB/15/37 - Award and Dissenting Opinion by Arbitrator O. Thomas Johnson - 26 February 2021
Country
Year
2021
Summary
Reproduced from www.worldbank.org/icsid with permission of ICSID.
TABLE OF CONTENTS
I. INTRODUCTION AND PARTIES
II. PROCEDURAL HISTORY
III. FACTUAL AND REGULATORY BACKGROUND
A. The Claimant's Investments in Italy
B. Elements and Evolution of the Italian Incentivization Regime for Photovoltaic Energy.............
(1) European Union legislation
(2) Italy's legislative and regulatory framework
C. The Challenged Measures
IV. REQUESTS FOR RELIEF
V. JURISDICTION
A. The "Intra-EU Objection"
(1) The Parties' Positions
a) Respondent's Position
b) Claimant's Position
c) The European Commission's Position
(2) The Tribunal's Analysis
a) EU Law as Law to be Applied by Investment Tribunals
b) ECT or EU Law as the Prevailing Law
c) Relevance of EU Law for the Interpretation of the ECT, notably Article 26. . 55
d) Modification of the ECT, notably Article 26
e) Relevance of the Enforceability of the Award
f) Conclusion
B. Lack of Consent due to Exclusive Jurisdiction Clauses in the GSE Conventions. . 63
(1) The Parties' Positions
a) Respondent's Position
b) Claimant's Position
(2) The Tribunal's Analysis
C. Lack of Prior Request for Amicable Solution Regarding the Romani Decree
(1) The Parties' Positions
a) Respondent's Position
b) Claimant's Position
(2) The Tribunal's Analysis
D. Taxation "Carve-out" regarding the Administrative Fee imposed by the Fifth Energy Account
(1) The Parties' Positions
a) Respondent's Position
b) Claimant's Position
(2) The Tribunal's Analysis
E. Conclusion
VI. LIABILITY
A. The Spalma-Incentivi Decree
(1) The Parties' Positions
a. Claimant's Position
(i) Umbrella clause
(ii) Fair and equitable treatment
b. Respondent's Position
(i) Umbrella clause
(ii) Fair and equitable treatment
(2) The Tribunal's Analysis
a. Umbrella clause
(i) GSE conventions
(ii) Legislative Decree No. 387/2003, the Romani Decree, the Second, Third,
Fourth and Fifth Energy Accounts and the GSE tariff recognition letters
(iii)Conclusion
b. Fair and equitable treatment
(i) Applicable legal standard
(ii) Existence of legitimate expectations
(iii)Reliance of the Claimant on legitimate expectations
(iv)Frustration of legitimate expectation of the Claimant
(v) Conclusion
(3) Conclusion
B. Project Vega and the Adoption of the Romani Decree and the Fourth Energy Account
(1) The Parties' Positions
a. Claimant's Position
b. Respondent's Position
(2) The Tribunal's Analysis
(3) Conclusion
C. The Frosinone Plants and the Adoption of the Fifth Energy Account
(1) The Parties' Positions
a. Claimant's Position
b. Respondent's Position
(2) The Tribunal's Analysis
a. The fair and equitable treatment claim regarding the Frosinone plants. 177
(i) Reasonableness
(ii) Foreseeability
(iii)Proportionality
(iv)Conclusion
b. The indirect expropriation claim regarding the Frosinone plants
c. Introduction of an administrative management fee by the Fifth Energy Account and its amendment by the Spalma-incentivi Decree
(3) Conclusion
D. Conclusion
VII. COSTS
A. Claimant's Submission on Costs
B. Respondent's Submission on Costs
C. The Tribunal's Decision on Costs
VIII. AWARD
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 (the "ECT"), dated 17 December 1994, which entered into force for the Italian Republic and the Kingdom of the Netherlands on 16 April 1998,1 and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force for the Italian Republic and the Kingdom of the Netherlands on 28 April 1971 and 14 October 1966, respectively (the "ICSID Convention").
2. The Claimant is Silver Ridge Power BV ("Silver Ridge" or the "Claimant"), a private limited liability company incorporated in the Kingdom of the Netherlands.
3. The Respondent is the Italian Republic ("Italy" or the "Respondent").
4. The Claimant and the Respondent are collectively referred to as the "Parties". The Parties' representatives and their addresses are listed above on page (i).
5. In the present dispute, the Claimant challenges a series of measures taken by the Respondent between 2011 and 2014 as constituting violations by the Respondent of Articles 10 and 13 of the ECT.
PROCEDURAL HISTORY
6. On 29 July 2015, ICSID received a request for arbitration of the same date from Silver Ridge against Italy (the "Request").
7. On 11 August 2015, the Secretary-General of ICSID registered the Request 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.
...
VIII. AWARD
639. For the reasons set forth above, the Tribunal decides as follows:
(1) The Tribunal unanimously rejects all of the Respondent's jurisdictional objections and sees no reason to refrain from exercising its jurisdiction in the present case.
(2) The Tribunal, by majority, rejects the Claimant's claim that, by the adoption of the Spalma incentivi Decree in 2014, the Respondent breached Article 10(1), first, second and/or last sentences, of the ECT.
(3) The Tribunal unanimously rejects all other of the Claimant's liability claims to the effect that, by the Respondent's actions and omissions, notably by the adoption of the Romani Decree, the Fourth and the Fifth Energy Accounts, the Respondent breached Article 10(1), first, second and/or last sentences, of the ECT and/or Article 13(1) of the ECT.
(4) The Tribunal unanimously orders each Party to bear half of the costs of the arbitration. Apart from that, both Parties' requests for an award of costs are denied.
...
[Signed]
Dissenting Opinion of Judge O. Thomas Johnson
1. Article 10(1) of the ECT obliges Respondent "to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment." Respondent thus was, and is, under a treaty obligation to treat Claimant's investments fairly. I write this separate opinion because, unlike my two colleagues, I have concluded that Respondent did not treat Claimant's investments fairly when, through the Spalma Incentivi Decree, it unilaterally revised the terms of the Third, Fourth and Fifth Energy Accounts so as to deny to those investments some of the benefits to which they were entitled under the terms of those Accounts.
I. Introduction
2. I begin with a hypothetical case. A father observes that the house he shares with his children (assume he is a single parent) has become rather untidy. He approaches his young daughter and son and asks if they would like to assist in cleaning the house, suggesting that they might begin by putting away all of the toys that are strewn around their respective rooms. When neither steps forward, he makes them the following offer: if you help me to achieve my goal of living in a tidy house by putting away all of your toys before dinner time, I will give each of you for desert two scoops of ice cream. The daughter complies, and does so before dinner. (The son is slow off the mark.)
3. After dinner the father gives his daughter a dish with only one scoop of ice cream. When the daughter reminds her father that he had promised two scoops of ice cream the father replies: "That was this morning, and since then I have concluded that this family is spending too much money on ice cream, so I decided, exercising my undoubted authority to take whatever action I deem appropriate for the good of the family, to give you only one scoop of ice cream, even though you cleaned up your room exactly as I asked." To which the precocious daughter replies: "I do not doubt your authority as my father to give me less ice cream than you said you would, and I have no doubt that you believe you are acting in the best interests of the family as a whole, still, THIS IS NOT FAIR." Whatever a father in this situation might say in response, one cannot imagine that it would include an assertion that his treatment of his daughter was fair. The father might argue that he acted out of some economic necessity, or that the daughter was eating too much ice cream, or that he just changed his mind and, after all, he did not radically and fundamentally change his commitment because he did give her one scoop of ice cream. But it would not dawn on a father in this situation to argue to his daughter that her judgment was wrong, that she in fact had been treated fairly; it certainly would not occur to him to tell her that she could not legitimately have expected him to do as he said he would do.
4. The claim before this Tribunal concerning Respondent's reduction of benefits to which the Claimant's investments were entitled under the various energy accounts is every bit as simple and easy to evaluate as my ice cream hypothetical: whatever justifications might be offered for the reduction, one cannot say that it was fair. Yet my colleagues say just that.
I shall examine their reasoning below. I can, however, summarize that reasoning in terms of my hypothetical as follows: Because the daughter in my example knew that her father had the authority to give her less than two scoops of ice cream, and because the father had not given his daughter a separate promise that he would not exercise that authority, the daughter had no "legitimate expectation" that her father would comply with his commitment to give her two scoops of ice cream and, thus, was treated fairly when given only one scoop of ice cream.1
II. The Pertinent Facts
5. Italy implemented the EU's First Renewables Directive through Legislative Decree No. 387/2003, which delegated to the Minister of Economic Activities the authority "to adopt one or more decrees by which the criteria for encouraging the production of electricity from solar source are defined."2 Pursuant to this authority, a series of so-called "energy accounts" ("conti energia") were established by ministerial decree. These accounts stated the terms and conditions of the incentive tariff regime that would apply to PV plants for a stated period of time.3 Each account provided that any investor that developed a PV plant of a given capacity and connected it to the grid within a given time frame would be paid a given rate for the electricity that it produced for a period of 20 years.4 In 2014, Italy enacted Legislative Decree No. 91/2014,5 the so-called "Spalma-incentivi Decree", which modified the terms of the existing energy accounts by reducing the rates payable to existing investors by anywhere from six to twenty-five percent over the remainder of the terms to which they were entitled under their energy accounts. (Claimant's reduction was between six and eight percent.)
6. In other words, the Italian government agreed to provide a very specific benefit to investors who helped Italy achieve its EU-mandated renewables goals by making specified investments within specified time periods and, after investors -- including Claimant -- made the required investments and had begun to receive the promised benefits, the Italian government reduced the benefits below the promised level. I do not believe that either of my colleagues would disagree with this characterization of the situation that we are called upon to measure against the ECT's requirement that Italy treat Claimant's investments fairly and equitably.
III. Fair and Equitable Treatment, and Specific Commitments
7. The award's discussion of fair and equitable treatment begins sensibly enough. It notes at the outset the agreement of the Parties that "the general obligation of a State to grant foreign investors fair and equitable treatment. .. notably includes the protection of the legitimate expectations of these investors."6 Some paragraphs later the award takes note of the further agreement of the Parties "that `specific commitments' by a State may give rise to legitimate expectations of investors protected under the fair and equitable treatment standard. ..."7 The award even resolves (to my mind, correctly) the Parties' dispute over whether a "specific commitment" can arise only from an agreement between the host State and the investor that precedes the investment. After quoting the dissent in Jürgen Wirtgen and others. v. Czech Republic with approval,8 the award states the following conclusions in successive paragraphs:
[T]he Tribunal does not derive from the existing arbitral jurisprudence on the matter that, in order for a specific commitment to create legitimate expectations, it is indispensable that there exists an individual agreement between the host State and a specific investor.9
[A] State may make specific commitments to investors also by virtue of legislative or regulatory acts which are not addressed to particular individuals, provided that these acts are sufficiently specific regarding their content and their object and purpose. In this context, the Tribunal considers the creation of legitimate expectations more likely where a State has adopted legislative or regulatory acts "with a specific aim to induce ... investments."10
The award subsequently goes on to determine:
- that the energy accounts, combined with their legislative authorization, were "detailed and specific";11
- that the Italian strategy of "successively building one energy account upon the other, all containing the same type of commitment, presents itself to the Tribunal, in the terms used by the El Paso Energy v. Argentina tribunal, as `a reiteration of the same type of commitment in different types of general statements,' justifying qualifying it as `a specific behaviour of the State, the object and purpose of which is to give the investor a guarantee on which it can justifiably rely'";12 and
- quoting Respondent's expert with approval) that "`[t]he purpose of providing incentive tariffs was of course to incentivize investment in the photovoltaic sector, because, as we know, photovoltaic energy was costly to produce, it was below market price; with no incentive, there would have not been investment.'"13
All of which leads the majority to conclude that "the pertinent Italian legal framework on the incentivization of PV energy. .. has indeed given rise to specific commitments of the Respondent, thus creating legitimate expectations upon which the Claimant could rely."14
8. All of this strikes me as plainly correct. The energy accounts offered clear and specific benefits to investors who complied with clear and specific conditions. The accounts were legislatively authorized. The accounts were promulgated solely for the purpose of incentivizing investment in the solar-power sector and created legitimate expectations on which investors, including Claimant, relied in making their investments. One might wonder what more the majority requires before finding that Respondent has breached its obligation to treat Claimant's investments fairly? The answer comes in the sentence immediately following the language quoted at the end of the preceding paragraph: "Yet, nowhere in the pertinent legislative or regulatory framework did the Respondent commit itself to leave this legal framework untouched for twenty years."15
9. It is hard to know where to begin in replying to this. In the first place, it is not, in any meaningful sense, true; one of Respondent's specific commitments in the energy accounts was that investors who qualified would enjoy the benefits stated in the Accounts for 20 years. It is, of course true that Respondent never gave a separate promise that it would not violate the terms of its specific commitment. The obvious response to this true statement is: so what! Can it really be "fair" to break a promise unless one has separately promised not to break the promise? A full and careful reading of the award's discussion of fair and equitable treatment leaves the reader with no doubt that my colleagues believe exactly this. Their last word on the subject is the following: "the Tribunal finds that the Respondent did not make any specific commitment in the pertinent legislative decrees or energy accounts that it would maintain the amount or the duration of incentive payments exactly at the level originally laid down in the applicable energy accounts."16 One must view the word "fair" in the manner of Humpty Dumpty to conclude that the lack of a promise to keep a promise renders it fair to break the original promise.17
10. I speculate that the source of my colleagues' error is what might be called a category mistake. They are applying the concept of a contractual stabilization clause - that is, a clause in a contract with a sovereign in which the sovereign explicitly surrenders its sovereign authority to unilaterally modify its contracts - in a context to which the concept has no application. A sovereign's authority to modify its contracts would be relevant to our consideration of Claimant's claims under the ECT's umbrella clause, but it has nothing to do with whether Italy acted fairly when it unilaterally modified the energy accounts on which Claimant had relied. If, as my colleagues have concluded, Italy's solar-power incentives were specific commitments that created "legitimate expectations upon which the Claimant could rely," frustration of those expectations cannot be rendered fair by the lack of a parallel commitment from Italy not to change its mind. To go back to my ice cream hypothetical, my colleagues' reliance on the lack of a stabilization clause has about the same persuasive appeal as would a statement from my hypothetical father to his displeased hypothetical daughter that, while he had promised to give her two scoops of ice cream, he has treated her fairly because he never promised not to give her less.
11. There is a second possible source of my colleague's error, which also would be a category mistake, and that is that they may view the degree to which Italy reduced incentives below the committed level as sufficiently modest to remain within the range of Claimant's legitimate expectations. This reason is nowhere stated explicitly in the award, but there are suggestions. For example, in paragraph 437 (quoted above), the majority says that Italy did not make a commitment that it would leave incentives "exactly at the level originally laid down in the applicable energy accounts." (Italics added.) And in paragraph 431 (also quoted above), the majority says "nowhere. .. did the Respondent commit itself to leave [the incentives] untouched for twenty years." (Italics added.) If the majority in fact means that unilateral reductions in promised benefits are fair if the reductions are small, the obvious answer is that the magnitude of the reductions goes to damages, not liability. A modest reduction of benefits will cause investors less damage than would a greater reduction of benefits, all else remaining equal. But to contend that it is fair for a state to breach a specific commitment if it does so only modestly is nonsense. That no doubt is why the majority does not actually make this contention. (My hypothetical father would be in less trouble with his hypothetical daughter if he gave her one and one-half scoops of ice cream instead of only one, but he would still be in trouble.)
12. The jurisprudence concerning specific commitments and fair and equitable treatment is, to say the least, inconsistent. The award, I think, does an admirable job of applying clear thinking to this jurisprudence. On the important contentious issues (see paragraph 7, above), the award describes the differing views and comes out on what I believe to be the right side of the debate, accompanied by cogent and persuasive reasoning. Having gotten so much right in the award, I have great trouble understanding why my colleagues have reached a conclusion that not only, in my view, is wrong but cannot be reconciled with their correct conclusions concerning the preliminary questions. It simply cannot be true that the provisions of Respondent's energy accounts are specific commitments on which Claimant justifiably relied and also be true that Respondent treated Claimant fairly when it modified those commitments to Claimant's detriment. And this logical impossibility is not remedied by observing that Respondent never promised that it would keep its specific commitment. That may be sufficient to avoid liability under the ECT's umbrella clause, but it has nothing to do with whether Respondent has complied with its obligation to treat Claimant's investments fairly.
IV. Conclusion
13. Lawyers - perhaps particularly international lawyers - are inclined to treat as difficult issues that strike the layman as simple. This inclination, I fear, is evident in the award's discussion of fair and equitable treatment. As is recognized in the Award, the starting point for any exercise in treaty construction is Article 31(1) of the Vienna Convention on the Law of Treaties, which provides that "[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."18 Applying the ordinary meaning of "fair and equitable" can be difficult if one is assessing the effects of changes to a general regulatory regime, such as revisions to environmental, worker-safety, or land-use regulations. It is not difficult, however, when one is dealing with specific commitments, as we are in this case.19 To be in compliance with Article 10(1) of the ECT, Respondent's treatment of Claimant's investments must have been both "fair" and "equitable". It is not possible to fit Respondent's revisions of the specific commitments it made to Claimant's investments within the ordinary meaning of the word "fair," and there is nothing in the context of Article 10(1) or in the object and purpose of the ECT that can change that inescapable fact. My hypothetical father could not fairly give his daughter less ice cream than he promised to encourage her to help clean the house, and Italy cannot fairly give Claimant less-valuable benefits than it promised to encourage Claimant to expand Italy's solar-power capacity. It really is as simple as that.
[Signed]
[1] See Award at paras. 431, 434-437.
[2] Legislative Decree No. 387 of 29 December 2003, G.U. of 31 January 2004, n. 25, Recital 1 as well as Article 1 (CL-075). See Award at para. 116.
[3] See Award., para. 119.
[4] See id., para. 120.
[5] Legislative Decree No. 91/2014 of 24 June 2014, converted into law by Law No. 116/2014 of 11 August 2014, Disposizioni urgenti per il settore agricolo, la tutela ambientale e l'efficientamento energetico dell'edilizia scolastica e universitaria, il rilancio e lo sviluppo delle imprese, il contenimento dei costi gravanti sulle tariffe elettriche, neaonché per la definizione immediate di adempimenti derivanti dalla normative europea, G.U. of 20 August 2014 (CL-085=R-030) (hereinafter: "Spalma-incentivi Decree").
[6] Award, para. 390.
[7] Id., para. 402.
[8] "The decisive issue is not whether a state's undertaking is `specific' or `general', or statutory or contractual, but whether the statements and actions of the state provide a sufficiently clear commitment to give rise under international law to legitimate expectations or legal rights on the part of the investor". Award, para. 406, quoting Jürgen Wirtgen and others. v. Czech Republic, PCA Case No. 2014-03, Dissenting Opinion of Gary Born, 11 October 2017, para. 12.
[9] Award, para. 407.
[10] Id., para. 408 (footnotes omitted).
[11] Id., para. 425.
[12] Id., para. 426 (footnotes omitted).
[13] Id., para. 429, quoting Professor Rojas (Transcript, Day 3, 37:25-38:1-4).
[14] Id., para. 431.
[15] Id.
[16] Id., para. 437.
[17] "'When I use a word,' Humpty Dumpty said in a rather scornful tone,`it means just what I choose it to mean, neither more nor less.'" Lewis Carrol, Through the Looking Glass 94 (1872).
[18] Award, para. 392.
[19] At the beginning of the hearing, counsel for Claimant made the following quite apt observation:
[I]n finding its path through the jurisprudence relied on by the parties, die Tribunal will find it
helpful to keep in mind a fundamental distinction. The measures at issue here are not regulatory
measures. Regulatory measures define what conduct by market actors is or is not permissible.
* * * *
That is not what the measures at issue here do. They do not say what is or is not permissible. Instead.
the Energy Accounts define the terms of a promise made by the state to investors.
Tr. Day 1, pp. 7-8.