September 12, 2019

Solar Wars Part XI: The EC Strikes Back

Solar Wars Part X considered the continued willingness of arbitral tribunals to accept jurisdiction to hear claims under the Energy Charter Treaty (ECT) by EU investors against EU Member States, despite the judgment of the Court of Justice of the European Union in Slovak Republic v Achmea (Case C-284/16), which held that an arbitration clause in bilateral investment treaty (BIT) between two EU states contravened EU law. As a result, Spain was on the receiving end of five awards made May – August 2019. However, not all Member States which reformed their renewable incentive schemes are in the same situation; and the European Commission (EC) is taking steps to reduce the prospect of future claims by demanding the reform the ECT itself.

Italy's success

Also on 7 August it was reported that Italy defeated a €19 million ECT claim brought by Luxembourg company Belenergia (Belenergia SA v Italian Republic (ICSID Case No. ARB/15/40)). Belenergia claimed it had invested in a renewables project in Italy with the legitimate expectation that Italy's renewable incentive scheme in place at the time would continue. In fact, in 2014 a parliamentary decree reduced state incentives in the renewable energy sector, requiring investors to accept one of: a cut to feed-in tariffs of 6%-8% under 20-year agreements; the spreading of subsidies over a longer period of 24 years; or a new agreement providing a reduced tariff incentive for an initial period and a higher incentive in a later period.

Italy's Achmea-based objection to jurisdiction was rejected, on similar grounds to Cube Infrastructure Fund v Spain. However, on the merits the tribunal went on to hold that a prudent investor should have noted that Italy’s incentive system was more generous than those offered by other European states; and should have envisaged the reduction of tariffs and the prohibition on the possibility of combining incentives.  Consequently, Belenergia did not have legitimate expectations as to the continuance of the incentive scheme which had been unreasonably defeated by Italy's reforms.

Reforming the ECT

The EC's opposition to EU investors bringing arbitral claims against Member States has been explored in previous Solar Wars articles. The recent series of defeats suffered by Spain in ECT arbitrations, and arbitral tribunals' continued rejection of the Achmea decision as a basis to refuse jurisdiction over such claims, would appear to have strengthened the EC's resolve to lessen investors' ability to pursue such claims.

In May the EC announced that it had adopted a proposal to authorise negotiations to "modernise" the ECT. The EC's starting position is that the ECT was intended to develop the energy potential of central and eastern European countries and ensure the security of energy supply for the EU. However, in the EC's view, the ECT’s investment protection provisions are "outdated" and no longer "correspond to modern standards”, as reflected in the EU’s “reformed approach” to investment protection in recent investment agreements with third countries such as Canada, Singapore, Vietnam and Mexico, all of which have replaced BIT arbitrations with standing "investment courts".  The EC argues that the ECT should be "modernised" in view of “growing legal and political concerns” about the ECT.

The EC wants standards of protection and other provisions to be clarified (e.g. most-favoured nation treatment; the right to regulate; fair and equitable treatment and expropriation). In particular, the EC wants an explicit right of contracting states to legislate to achieve "legitimate public policy objectives" and provisions on state aid. The EC also wants to introduce provisions on sustainable development and corporate social responsibility. Finally, the EC wants to reform the treaty the ECT's provisions governing transit of energy as they are “not fully in line with…liberalised energy markets in the EU”.

Interestingly, though, the EC has not sought to replace the ECT's provisions on dispute resolution – yet. The EC says that reform of the ECT's dispute resolution provisions should await "ongoing multilateral initiatives on the reform of dispute settlement at ICSID [the International Centre for the Settlement of Investment Disputes] and before UNCITRAL [the United Nations Commission on International Trade Law]".

It is true that the EC is proposing that all investor-state disputes should be determined by a standing "multinational investment court", and would want the reformed ECT to reflect a multinational consensus in this regard. However, it is surprising that the EC has not sought to at least amend the ECT arbitration provisions to specifically exclude intra-EU claims. In January 2019 22 EU Member States issued a declaration pursuant to which they and the EC agreed to discuss what additional steps are necessary “to draw all the consequences from Achmea in relation to the intra-EU application of the Energy Charter Treaty” (see Solar Wars Part VIII). It is possible that, given that not all Member States signed up to this declaration, the EC wanted to avoid dealing with such a thorny issue, and hopes that wider agreement on phasing out investor-state arbitration will overtake the need to deal with this at ECT level.

Investors winning the battle but losing the war?

The events of the last three months would lead one to conclude that investors are in the ascendency in the numerous ECT claims brought against EU Member States arising out of the reform of renewable incentive schemes. However, the EC appears to be taking the long view: since attempts to procedurally bar such claims haven't worked, they have shifted their attention to amending the very instrument giving rise to these claims – the ECT - and reduce the substantive protections upon which these awards are based. Meanwhile, the EC is attempting to reform the very basis of investor-state dispute resolution through ICSID and UNCITRAL. To use an analogy, those commanding the Death Star don't need to worry about the swarms of X-Wing Fighters causing it superficial damage when it can destroy the planet on which they are based. It remains to be seen whether investors have a Luke Skywalker who could prevent the inevitable from happening…

This article was first published by Energy Voice.