PCA CASE Nº 2014-01
IN THE MATTER OF AN ARBITRATION
- pursuant to –
THE ENERGY CHARTER TREATY
- and –
THE AGREEMENT BETWEEN THE FEDERAL REPUBLIC OF GERMANY AND
THE CZECH AND SLOVAK FEDERAL REPUBLIC
ON THE PROMOTION AND RECIPROCAL PROTECTION OF
INVESTMENTS SIGNED ON OCTOBER 2, 1990, IN FORCE AS OF OCTOBER 2, 1992
- between (1)
ANTARIS GMBH (GERMANY)
(2) DR MICHAEL GÖDE (GERMANY)
(the “Claimants”)
- and THE
CZECH REPUBLIC
(the “Respondent”, and together with the Claimants, the “Parties”)
_____________________________________________________
AWARD
_________________________________________________________
ARBITRAL TRIBUNAL:
Lord Collins of Mapesbury (Presiding Arbitrator)
Mr Gary Born
HE Judge Peter Tomka
REGISTRY:
The Permanent Court of Arbitration
2 May 2018
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CONTENTS
I. Introduction....................................................................................................................... 5
A. The Treaties....................................................................................................................... 5
B. The Parties......................................................................................................................... 5
C. Overview of the dispute...................................................................................................... 7
II. Procedural history ............................................................................................................................ 8
A. Written Procedure .............................................................................................................. 9
B. Hearing............................................................................................................................ 15
C. Post-hearing Proceedings.................................................................................................. 16
III. The Parties’ requests for relief...................................................................................................... 17
A. The Claimants.................................................................................................................. 17
B. The Respondent ............................................................................................................... 19
IV. The incentive regime .................................................................................................................... 20
A. The Act on Income Tax 586/1992 ..................................................................................... 20
B. The Act on Promotion 180/2005........................................................................................ 20
C. ERO Regulations.............................................................................................................. 21
V. State aids ........................................................................................................................................ 22
VI. The changes to the Incentive Regime........................................................................................... 23
A. Abolition of 5% rule for plants connected to the grid from 2011.......................................... 23
B. Adoption of Solar Levy .................................................................................................... 23
C. Amendment of Act on Income Tax.................................................................................... 24
D. Repeal of Act on Promotion.............................................................................................. 24
E. Extension of Solar Levy.................................................................................................... 24
F. Subsequent developments.................................................................................................. 24
VII. The background and history........................................................................................................ 25
A. Development of the incentives .......................................................................................... 25
B. The solar boom and proposals for change: 2009-2010 ............................................................. 29
C. The changes............................................................................................................................... 35
VIII. Jurisdictional/admissibility issues.............................................................................................. 41
A. Whether the Solar Levy is a tax for the purposes of Energy Charter Treaty, Art 21(1)........... 41
1. The Respondent’s position......................................................................................................... 41
2. The Claimants’ position............................................................................................................. 47
3. The Tribunal’s conclusion ......................................................................................................... 53
B. Whether the Claimants complied with the notice requirements under the BIT and the ECT
with regard to the claims arising out of the extension of the Solar Levy by Act 310/2013..... 67
1. The Respondent’s position......................................................................................................... 67
2. The Claimants’ position............................................................................................................. 67
3. The Tribunal’s conclusion ......................................................................................................... 68
C. Whether the Claimants’ alleged misrepresentations in obtaining the operating licence for the
Mozolov plant bar their claims in relation to the plant........................................................ 68
D. Whether the Claimants have made a prima facie showing of a violation of the BIT and ECT
in relation to the Holýšov plant ........................................................................................ 68
IX. The substantive claims: legitimate expectation and arbitrary or unreasonable behaviour............ 68
1. The Claimants’ position............................................................................................................. 68
2. The Respondent’s position......................................................................................................... 84
3. The Tribunal’s analysis.............................................................................................................. 97
A. The Principles................................................................................................................. 97
B. Promise of stability......................................................................................................... 100
C. Knowledge of the issues arising out of the solar boom ...................................................... 102
D. Dr Göde’s evidence........................................................................................................ 105
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E. Overall conclusions ........................................................................................................ 109
(i) The investments .............................................................................................................. 110
(ii) Non-retroactivity of the FiT changes............................................................................. 111
(iii) The Solar Levy.............................................................................................................. 114
X. Other issues.................................................................................................................................. 120
XI. Costs ........................................................................................................................................... 120
XII. Operative part............................................................................................................................ 121
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LIST OF DEFINED TERMS
5% Break-Out Rule Rule established by Section 6(4) of the Act on Promotion under which the
FiT set by the ERO in a given year may not drop by more than 5% of the
value of the FiT in the previous year
2001 Directive Directive 2001/77/EC of the European Parliament and of the Council of
September 27, 2001 on the promotion of electricity produced from
renewable energy sources in the internal electricity market
2003 Treaty of
Accession
Treaty of Accession to the European Union of the Czech Republic,
Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and
Slovakia of April 16, 2003
2005 UN Report The Fourth National Communication of the Czech Republic on the UN
Framework Convention on Climate Change of 2005
2009 Directive Directive 2009/28/EC of the European Parliament and of the Council of
April 23, 2009 on the Promotion of the Use of Energy from Renewable
Sources Amending and Subsequently Repealing Directive 2001/77/EC
and 2003/30/EC
2010 Action Plan “National Renewable Energy Action Plan” which the Ministry of Industry
and Trade published in July 2010
Act on Income Tax The Act on Income Tax of 1992 (The Act No. 586/1992)
Act on Promotion The Act for the Promotion and Use of Renewable Sources (Act No.
180/2005 Coll.)
Antaris Antaris GmbH
Antaris AG Antaris Solar AG
Antaris ZNL Antaris Solar GmbH, Zweigniederlassung Kreuzlingen
BIT The Agreement between the Federal Republic of Germany and the Czech
and Slovak Federal Republic on the Promotion and Reciprocal Protection
of Investments Signed on October 2, 1990, in force as of October 2, 1992
Counter-Memorial Respondent’s Counter-Memorial dated January 29, 2016
Czech SPVs Special Purpose Vehicle Companies, which were incorporated or of which
the shares were purchased by the Claimants, all of which operated
Photovoltaic Power Installations in the Czech Republic
Dr Göde Dr Michael Göde
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ECT Energy Charter Treaty
ERO Energy Regulatory Office
EU Commission European Commission
EU Commission
Submission
EU Commission written amicus curiae submission dated February 2, 2015
EU Commission’s
2016 Decision
Decision of the EU Commission in case SA.40171 (2015/NN) — Czech
Republic Promotion of electricity production from renewable energy
sources
First Report Expert report of dated April 15, 2016
First Report Expert report of dated October 19, 2015
First Gӧde Statement Witness statement of Michael Gӧde dated October 21, 2015
First Jones Report Expert report of Wynne Jones (Frontier Economics) dated January 29,
2016
First Peer Report Expert report of Michal Peer dated January 29, 2016
First Report Expert report of dated October 23, 2015
Fiřt Statement Witness statement of Josef Fiřt dated January 25, 2016
FiT Feed-in tariff established by the Act on Promotion
FET Fair and equitable treatment
FPS Full protection and security
Report Expert report of dated January 27, 2016
Holýšov FVE Holýšov I s.r.o.
ILC Draft Articles Draft articles on Responsibility of States for Internationally Wrongful Acts
Income Tax
Exemption
Article 19(1) of the Act on Income Tax, exempting the income from
photovoltaic power plants from income tax during the prescribed period
Kotáb Report Expert Report of Petr Kotáb dated August 29, 2016
Memorial Claimants’ Memorial dated October 23, 2015
Minčič Statement Witness Statement of Ladislav Minčič dated August 26, 2016
Mozolov FVE Mozolov s.r.o.
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Osečná FVE Osečná s.r.o.
PCA Permanent Court of Arbitration
Pricing Regulation ERO Regulation No. 140/2009 Coll.
Report Expert report of dated May 9, 2016
Rejoinder Respondent’s Rejoinder dated August 30, 2016
Reply Claimants’ Reply dated May 16, 2016
RES Renewable energy sources
Second Bacon Report Expert report of Kelyn Bacon QC dated August 16, 2016
Second
Report
Expert report of dated April 6, 2017
Second Report Expert report of dated April 21, 2016
Second Gӧde
Statement
Witness statement of Michael Gӧde dated May 15, 2016
Second Jones Report Expert report of Wynne Jones dated August 30, 2016
Second Peer Report Expert report of Michael Peer dated August 29, 2016
Second
Report
Expert report of dated May 16, 2016
Shortened
Depreciation Period
A shorter depreciation period (5 to 10 years) under the Act on Income Tax,
pertaining to photovoltaic power plants with certain technological
components
Solar Levy The levy revenues generated by photovoltaic power plants stipulated in
Section 7(a) of the Act on Promotion amended by Act 402/2010
Solar Levy Extension
Claim
Claimants’ claim as to the Extension of the Solar Levy by the Act No.
310/2013 Coll
and
Report
Expert report of and dated March 31, 2016
Stříbro FVE Stříbro s.r.o.
Supplemental
Report
Supplemental report of dated April 6, 2017
Taurus TCS Taurus Service s.r.o.
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Technical Regulation ERO Regulation No. 475/2005 Coll.
Third Report Expert Report of dated April 6, 2017
TFEU Treaty on the Functioning of the European Union
UNCITRAL Rules Arbitration Rules of the United Nations Commission on International
Trade Law
Úsilné FVE Úsilné s.r.o.
VCLT Vienna Convention on the Law of Treaties, done in Vienna, done in Vienna
on the 23 May 1969, 1155 U.N.T.S. 331
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I. Introduction
A. The Treaties
1. Article 10(1) of the Energy Charter Treaty (the “ECT”) provides:
Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and
create stable, equitable, favourable and transparent conditions for Investors of other
Contracting Parties to make Investments in its Area. Such conditions shall include a
commitment to accord at all times to Investments of Investors of other Contracting Parties
fair and equitable treatment. Such Investments shall also enjoy the most constant protection
and security and no Contracting State shall in any way impair by unreasonable or
discriminatory measures their management, maintenance, use, enjoyment or disposal …1
2. Articles 2(1), 2(2) and 2(3) of the Agreement between the Federal Republic of Germany and the
Czech and Slovak Federal Republic on the Promotion and Reciprocal Protection of Investments
signed on October 2, 19902
(the “BIT”) provides that:
Article 2
(1) Each Contracting Party shall in its territory promote as far as possible investments by
investors of the other Contracting Party and admit such investments in accordance with
its legislation. Each Contracting Party shall in all cases accord investments fair and
equitable treatment. …
(2) Neither Contracting Party shall in any way impair by arbitrary or discriminatory
measures the management, maintenance, use, or enjoyment of investments in its territory
by investors of the other Contracting Party
(3) Investments and returns from investment and, in the event of their reinvestment, the
returns therefrom shall enjoy full protection under this Treaty.
and Article 4(1) provides
Investments by investors of either Contracting Party shall enjoy full protection and security
in the territory of the other Contracting Party.
B. The Parties
3. The first Claimant in the present arbitration is Antaris GmbH (“Antaris”), a German company.
Its registered address is Am Heerbach 5, D-63857 Waldaschaff, Germany. Prior to a change of
name on July 16, 2013, Antaris was previously called Antaris Solar GmbH. The Second Claimant
1
The ECT was negotiated on the basis of the European Energy Charter which envisaged the formulation of
“stable and transparent legal frameworks creating conditions for the development of energy resources”.
Title III (“Implementation”) of the European Energy Charter provided: “In order to promote the
international flow of investments, the signatories will at national level provide for a stable, transparent
legal framework for foreign investments, in conformity with the relevant international laws and rules on
investment and trade. They affirm that it is important for the signatory States to negotiate and ratify legally
binding agreements on promotion and protection of investments which ensure a high level of legal security
and enable the use of investment risk guarantee schemes.”
2
The BIT entered into force on August 2, 1992. By exchange of Notes of December 18, 1992 and January
1, 1993 respectively, the Federal Republic of Germany and the Czech Republic have agreed that the BIT
should remain in force between the two States after the dissolution of Czechoslovakia.
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in this arbitration is Dr Michael Göde (“Dr Göde”, together with Antaris, the “Claimants”), a
German national. His address is
4. Antaris is the ultimate parent company of Antaris Solar AG (“Antaris AG”), a Swiss company,
which owns FVE Úsilné s.r.o. (“Úsilné”), FVE Mozolov s.r.o. (“Mozolov”), FVE Stříbro s.r.o.
(“Stříbro”) and FVE Holýšov I s.r.o. (“Holýšov”). Antaris AG is wholly owned by Antaris Solar
GmbH, Zweigniederlassung Kreuzlingen (“Antaris ZNL”), the Swiss branch of Antaris.
5. TCS Taurus Service s.r.o. (“Taurus”), which is owned by Dr Göde and Antaris ZNL, purchased
100 % of the shares in FVE Osečná s.r.o. (“Osečná”). These s.r.o. companies (the “Czech
SPVs”) are special purpose vehicle companies incorporated in the Czech Republic.
6. Antaris is owned by Göde Holding GmbH & Co. KG, which is owned by Dr Göde.
7. The Claimants are represented in these proceedings by:
8. The Respondent in the present arbitration is the Czech Republic (the “Respondent”). Its address
is Ministry of Finance of the Czech Republic, Letenská 15, 118 10 Prague 1, Czech Republic.
9. The Respondent is represented in these proceedings by:
Ministry of Finance
Marie Talašová
Head of Department of International Legal Services
Letenská 15
11810 Praha 1
Czech Republic
Ms. Karolína Horáková
Weil, Gotshal & Manges s.r.o.
Advokátní kancelář
Charles Bridge Center
Krizovnicke nam. 193/2
Prague
Czech Republic
From July 17, 2015, the Respondent has been represented by:
Paolo Di Rosa
Arnold & Porter Kaye Scholer LLP
601 Massachusetts Avenue NW
Washington DC 20001-3743
United States
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Dmitri Evseev
Arnold & Porter Kaye Scholer (UK) LLP
Tower 42
25 Old Broad Street
London EC2N 1HQ
United Kingdom
Until July 16, 2015, the Respondent was represented by
David Alexander
Squire Sanders (US) LLP
2000 Huntington Center
41 South High Street
Columbus, Ohio 43215
United States
Stephen P. Anway
Squire Sanders (US) LLP
30 Rockefeller Plaza
New York, New York 10112
United States
Rostislav Pekař
Mária Lokajová
Squire Sanders
Václavské náměstí 57/813
110 00 Prague 1
Czech Republic
Prof. Zachary Douglas
Matrix Chambers
Rue de Candolle 9
1205 Geneva
Switzerland
C. Overview of the dispute
10. The Claimants submit that the Respondent breached its obligations under the ECT and the BIT
by repealing incentive arrangements to attract investors in photovoltaic power generation
contrary to its guarantees.
11. The Respondent asserts that the Tribunal is not competent to hear the claims under the ECT. It
further submits that the Tribunal has no jurisdiction over the claims relating to the Mozolov plant
because its operating licence was acquired “through improper means” and the Holýšov plant
because the “Claimants have failed to establish a prima facie case in support of their claims
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relating to that plant”.3
On the merits, the Respondent submits that the measures did not violate
either the ECT or the BIT on the grounds that “(a) the Czech Republic never made [a]
stabilization commitment to the Claimants, (b) the Czech Republic did not otherwise violate any
legitimate expectations, and (c) the measures were reasonably tailored to achieve appropriate and
rational state objectives.”4
II. Procedural history
12. On May 8, 2013, the Claimants, together with eight other claimants, served upon the Respondent
a Notice of Arbitration, with accompanying evidence5
, pursuant to Article 26 of the ECT, Article
10 of the BIT and Article 3 of the Arbitration Rules of the United Nations Commission on
International Trade Law (“UNCITRAL Rules”).
13. In their Notice of Arbitration, the Claimants appointed Mr Doak Bishop as arbitrator.
14. By letter dated June 10, 2013, in response to the Notice of Arbitration, the Respondent objected
to the Claimants’ consolidation of their claims with those of the eight other claimants and
appointed Judge Tomka as arbitrator only in the proceeding involving the Claimants.
15. On June 24, 2013, the Claimants invited the Respondent to appoint a single arbitrator for all the
claimants listed in the Notice of Arbitration.
16. By letter dated July 5, 2013, the Claimants requested that the Secretary-General of the Permanent
Court of Arbitration (the “PCA”) designate an appointing authority on the grounds that the
Respondent had failed to appoint an arbitrator for all the claimants listed in the Notice of
Arbitration as required by the UNCITRAL Rules. By letter dated July 9, 2013, the Respondent
objected to the Claimants’ request, noting that “there is no single arbitration agreement in
existence that could possibly give a single arbitral tribunal authority over all the 10 claimants”.
In a letter dated July 22, 2013, the Claimants objected to the Respondent’s position.
17. On August 13, 2013, the Secretary-General of the PCA rejected the Claimants’ request, holding
that “the Respondent ha[d] actively participated and responded to the Notice of Arbitration […]
in a timely manner by appointing the second arbitrator in accordance with the procedure foreseen
in each of the investment treaties invoked by the Claimants”.
3
Rejoinder, para 443.
4
Counter-Memorial, para 9.
5
Exhibits C-1-C-60.
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18. On December 20, 2013, Mr Bishop and Judge Tomka jointly appointed Lord Lawrence Collins
of Mapesbury PC, FBA as the presiding arbitrator after consultation with the Parties.
19. On August 1, 2014, Mr Bishop tendered his resignation as arbitrator.
20. On September 24, 2014, the Claimants informed the Tribunal that they had appointed Mr Gary
Born as arbitrator to replace Mr Bishop.
A. Written Procedure
21. By letter dated January 10, 2014, the Tribunal proposed to the Parties draft Terms of
Appointment, which included a proposed term concerning the place of arbitration, and invited
the Parties’ comments on the draft by January 17, 2014.
22. By letter dated January 17, 2014, the Claimants proposed that Geneva, Switzerland be the place
of arbitration, as proposed in the Notice of Arbitration dated May 8, 2013, and stated that they
would welcome the opportunity to provide “more ample reasons for their position on this point”.
23. By letter dated January 17, 2014, the Respondent proposed that the seat of the arbitration be Paris,
France, and stated the reasons for that proposal.
24. The Terms of Appointment were agreed between the Parties and were adopted on January 31,
2014. Paragraph 6.1 of the Terms of Appointment provides: “[p]ursuant to Article 16 of the
Rules, the Tribunal will determine the place of arbitration having regard to the circumstances of
the case, after consultation with the Parties”.
25. By letter dated February 6, 2014, the Tribunal inter alia (i) invited the Claimants to confirm
whether they agreed that their Statement of Claim was contained in their Notice of Arbitration;
and (ii) proposed to decide on the place of arbitration in advance of the first procedural meeting
on the basis of written submissions and invited the Claimants to provide their further comments
on the place of arbitration.
26. By letter dated February 12, 2014, the Claimants confirmed that the Notice of Arbitration
included their Statement of Claim and presented their “Submission on the Seat of Arbitration” of
the same date.
27. By letter dated February 21, 2014, the Respondent contended that the Notice of Arbitration was
not specific enough to be treated as Statement of Claim and submitted its comments in reply to
the Claimants’ Submission on the Seat of Arbitration, in which it provided reasoning in support
of its proposal of Paris as the seat.
28. By letter dated March 10, 2014, the Tribunal invited the Respondent to clarify whether it intended
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to object to the Tribunal’s jurisdiction on the grounds that such did not extend to disputes between
EU investors and EU Member States.
29. In the same letter, the Tribunal directed the Claimant to serve within 28 days a full Statement of
Claim including, in particular, details of (a) their investments in the Czech companies; (b) the
manner in which the alleged measures affected the investments; and (c) the financial
consequences thereof, including the quantum of their alleged losses.
30. By letter dated March 17, 2014, the Respondent stated that it did not intend to object to the
Tribunal’s jurisdiction in this matter on the grounds that such does not extend to disputes between
EU investors and EU Member States.
31. By letter dated March 26, 2014, the Tribunal fixed The Hague, The Netherlands, as the place of
the arbitration.
32. On April 7, 2014, the Claimants submitted their Statement of Claim with accompanying
evidence.6
33. By letter dated April 17, 2014, the Tribunal directed the Respondent to submit its Statement of
Defense by June 17, 2014; directed that “the Tribunal shall conduct a procedural hearing in early
July for the future timetabling of those matters which are not agreed”; and invited the Parties to
indicate whether they agreed to these directions by April 28, 2014.
34. By letter dated April 23, 2014, the Respondent reserved the right to seek additional time to file
its Statement of Defense in the event that the Claimants produced the expert reports referred to
in its Statement of Claim but not annexed thereto.
35. On June 24, 2014, the Respondent submitted its Statement of Defense with accompanying
evidence.7
36. On July 11, 2014, the European Commission (the “EU Commission”) submitted an Application
for Leave to Intervene as a Non-disputing party, requesting the opportunity to present its views
inter alia on the jurisdiction of the Tribunal.
37. On July 28, 2014, upon invitation by the Tribunal, each of the Parties submitted their comments
on the Application for Leave. The Claimants requested inter alia that the Tribunal reject the
Application for Leave and that in the alternative intervention by the EU Commission be limited
6
Exhibits C-61-C-110.
7
Exhibits R-1-R-33; Legal Authorities RLA-1-RLA-52.
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to written submissions and that the EU Commission must bear its own costs and reimburse those
of the Parties. The Respondent stated that it did not oppose the EU Commission’s Application
for Leave.
38. On December 4, 2014, the Tribunal issued Procedural Order No. 1 (EC Intervention and
Place of Arbitration), granting the EU Commission leave for its amicus curie submission and
changing the place of arbitration from The Hague to Geneva. In Procedural Order No. 1, the
Tribunal ruled inter alia as follows:
(1) the European Commission is granted leave to intervene as amicus curiae (subject to the
condition in (6) below) in the present proceedings by way of one set of written
submissions only;
(2) the European Commission shall, by 19 January 2015, file its written amicus curiae
submission on the three points of law set forth in the EC Commission Application for
Leave: (i) “The Tribunal is invited to decline jurisdiction”; (ii) “As a matter of fact, the
Czech Republic, by adopting the contested measure, may have merely complied with its
obligation under European Union State Aid law”; and (iii) “The enforcement of a
possible award may amount itself to State aid, and in that case would only be possible
after an authorization by the EU Commission”
[…]
(6) the European Commission should be required to undertake, prior to consideration of its
submission, to pay in full the reasonable costs of both parties resulting from the
submissions[.]
(7) the place of arbitration shall be Geneva, Switzerland.
39. On February 2, 2015, the EU Commission filed its written amicus curiae submission (the “EU
Commission Submission”). By letter of the date accompanying the EU Commission
Submission, the EU Commission stated that it “cannot undertake to pay in full the reasonable
costs of both Parties resulting from the submissions and would respectfully ask the Tribunal to
reconsider its decision on this point”.
40. By letter dated February 3, 2015, the Claimants requested that the Tribunal decline to accept the
EU Commission Submission unless the EU Commission accepted the undertaking set forth at
paragraph 30(6) of Procedural Order No. 1.
41. On February 13, 2015, the Tribunal issued Procedural Order No. 2 (EC Intervention), in which
it ruled that the EU Commission “may apply to vary Procedural Order No. 1, upon its undertaking
to pay the reasonable costs of the Parties resulting from such application if so determined by the
Tribunal” by February 27, 2015. The Tribunal did not receive any such application from the EU
Commission.
42. By letter dated March 5, 2015, the Tribunal informed the EU Commission that, pursuant to
paragraph 30(6) of Procedural Order No. 1, the Tribunal would not consider the EU Commission
Submission on the ground that the EU Commission did not undertake to pay in full the reasonable
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costs of the Parties resulting from the Submission.
43. By letter dated March 12, 2015, the Tribunal circulated a draft Procedural Order No. 3, which
included proposed procedural directions, and invited the Parties to provide their comments.
44. By e-mail dated March 27, 2015, the Claimants provided the Tribunal with the Parties’ joint
proposal as to the draft Procedural Order No. 3, including an agreed procedural timetable. By email
of the same date, the Respondent confirmed its agreement on the proposal.
45. On May 22, 2015, the Claimants submitted their completed Redfern Schedule, setting out nine
document production requests to which the Respondent had objected and requesting a ruling from
the Tribunal regarding those disputed requests. On the same day, the Respondent filed its
application for document production attaching the completed Redfern Schedule, requesting “the
Tribunal to issue an order that the Claimants produce all documents responsive to Respondent’s
requests”.
46. On June 9, 2015, the Tribunal issued its decision on the documents requested by the Parties.
47. On June 12, 2015, the Parties informed the Tribunal that they had agreed to alter the existing
schedule of the proceedings.
48. On July 6, 2015, the Tribunal issued Procedural Order No. 3 (Procedural Directions), setting
forth inter alia the agreed amended schedule of further proceedings.
49. On October 23, 2015, the Claimants submitted their Memorial with accompanying evidence.8
50. By their Memorial of October 23, 2015, the Claimants requested the production of all
correspondence and documentation exchange between the European Commission (the “EU
Commission”) and the Czech Republic and waiver of the confidentiality related to the State aid
proceedings pending before the EU Commission.9
The Claimants alleged that the Tribunal had
granted such a production in relation to no. 13 of the Claimants’ document request of May 22,
2015, on which the Tribunal decided that “[p]roduction ordered but limited to Solar RES” in its
order of June 9, 2015. Nevertheless, according to the Claimants, the Respondent failed to comply
this order, raising objections based on confidentiality.
8
Exhibits C-111-C-209; Legal authorities CLA-1-CLA-60; Expert report of dated
October 23, 2015 (“First Report”), Expert report of dated October 19, 2015
(“First Report”), Witness statement of Michael Gӧde dated October 21, 2015 (“First Gӧde
Statement”).
9
Memorial, paras 91-103.
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51. On January 29, 2016, the Respondent submitted its Counter-Memorial with accompanying
evidence.10
52. On May 16, 2016, the Claimants submitted its Reply with accompanying evidence.11
53. On August 30, 2016, the Respondent submitted its Rejoinder with accompanying evidence.12
54. On October 28, 2016, the Parties jointly requested that the hearing, which was scheduled to take
place from November 14 to 18, 2016, be re-scheduled
By e-mail of the same date, the Tribunal confirmed the postponement of
the hearing.
55. By e-mail dated November 1, 2016, the Tribunal proposed to set the new dates for hearing as
May 2 to 5, 2017. The Claimants and the Respondent confirmed their availability for the
proposed dates by e-mails of November 11 and 14, 2016, respectively.
56. By e-mails dated November 2 and 11, 2016, the Claimants requested that the Tribunal and the
Respondent confirm that all non-refundable costs arising from the cancellation of the November
hearing would be charged exclusively and entirely to the Respondent, stating, among others, that
their agreement to the postponement had been made under such an assumption.
57. By e-mail dated November 14, 2016, the Respondent suggested that submissions concerning the
final allocation of such costs should be deferred until the end of the proceeding.
58. By e-mail dated November 16, 2016, the Tribunal informed the Parties that it would address this
issue following submissions to be made at or after the adjourned hearing.
10
Exhibits R-34-R-254; Legal authorities RLA-53-RLA-186; Expert report of Wynne Jones (Frontier
Economics) dated January 29, 2016 (“First Jones Report”), Expert report of Kelyn Bacon QC dated
January 26, 2016 (“First Bacon Report”), Expert report of Michal Peer dated January 29, 2016 (“First
Peer Report”), Expert report of dated January 27, 2016 (“ Report”); Witness
statement of Josef Fiřt dated January 25, 2016 (“Fiřt Statement”).
11
Exhibits C-210-C-267; Legal authorities CLA-61-CLA-117; Expert report of dated April
15, 2016 (“ Report”), Expert report of and dated March 31, 2016
(“ and Report”), Expert report of dated May 9, 2016 (“
Report”), Expert report of dated April 21, 2016 (“Second Report”), Expert report
of dated May 16, 2016 (“Second Report”); Witness statement of Michael
Gӧde dated May 15, 2016 (“Second Gӧde Statement”).
12
Exhibits R-255-R-365; Legal authorities RLA-188-RLA-245; Witness Statement of Ladislav Minčič dated
August 26, 2016 (“Minčič Statement”), Expert report of Wynne Jones dated August 30, 2016 (“Second
Jones Report”), Expert report of Kelyn Bacon QC dated August 16, 2016 (“Second Bacon Report”),
Expert report of Petr Kotáb dated August 29, 2016 (“Kotáb Report”), Expert report of Michael Peer dated
August 29, 2016 (“Second Peer Report”).
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59. By e-mail dated January 31, 2017, the Respondent informed the Tribunal that the Parties had
agreed and jointly requested to submit (1) the EU Commission’s decision in case “SA.40171
(2015/NN) — Czech Republic Promotion of electricity production from renewable energy
sources” of November 28, 2016 (the “EU Commission’s 2016 Decision”) into the record of the
present cases as exhibit R-366; and (2) each Party’s written comments on the Decision. By email
of the same date, the Tribunal accepted and authorized the submissions as requested.
60. On February 15, 2017, the Claimants submitted their Comments on the EU Commission’s 2016
Decision and accompanying documents.13
At paragraph 6 of their Comments, the Claimants
renewed their document production request of October 23, 2015, requesting that the Tribunal
order that the Respondent produce all missing documents responsive to the Claimants’ document
request no. 13 of May 22, 2015.
61. On the same date, the Respondent submitted its Comments on the EU Commission’s 2016
Decision.
62. By letter of March 28, 2017 the Claimants requested that they be given an opportunity to submit
an additional Rejoinder on Jurisdiction on the ground that the Respondent in its Rejoinder of
August 30, 2016 “surprisingly addressed the ECT carve-out with the aid of an opinion on Czech
law prepared by a new expert, Mr Kotáb”. The Claimants further requested the exclusion of
Mr report from the record pursuant to paragraph 7.8 of Procedural Order No. 3. They
further requested a leave for filing “a short ‘Supplemental Report’ on quantum.”
63. In letter of March 29, 2017 the Respondent raised objections to the above requests.
64. The Claimants addressed the Respondent’s objections in their letter of March 31, 2017.
65. On March 31, 2017 the Tribunal informed the Parties of its decision on the Claimants’ requests.
The Tribunal denied the requests to file further pleadings, with further reports, as being too late.
However, it granted the Claimants’ request to file “the same reports on quantum and Czech tax
law as in the parallel matters”. The Tribunal further ruled that Mr report would not be
excluded, but that it would take into account, in weighing its utility, that he did not appear.
66. On the same day the Respondent requested that it be authorized to file its own expert report
responding to the Claimants’ supplemental quantum expert report.
67. On April 4, 2017 the Tribunal informed the Parties that the Respondent’s request was granted.
13
Exhibits C-268 and C-269; CLA-118.
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PCA Case No. 2014-01
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68. By e-mail dated April 6, 2017, Claimants submitted, in accordance with the Procedural Order
No. 3 (Procedural Directions), a letter to the Tribunal enclosing three additional expert reports.14
69. By email of April 26, 2017 the Respondent submitted, as authorized by the Tribunal, a letter to
the Tribunal with a supplemental expert report.15
70. By Respondent’s email of April 27, 2017 the Tribunal was informed that the Parties had agreed
to add to the record a number of new or amended exhibits and legal authorities.16
B. Hearing
71. The Hearing was held at the Peace Palace in The Hague from May 2 to 5, 2017 and was attended
by the following persons.
Arbitral Tribunal
Lord Collins of Mapesbury (Presiding Arbitrator)
Mr Gary Born
H E. Judge Peter Tomka
Claimants Respondent
Mr
Mr o
Mr
Ms.
Ms.
Mr
Mr
Dr Michael Göde
Witness
Client representative
Mr - Ernst & Young CZ
Mr - Compass Lexecon
Ms. Anna Bilanová
Mr Tomáš Munzar
Ministry of Finance of the Czech Republic
Mr Paolo Di Rosa, Partner
Mr Dmitri Evseev, Partner
Ms. Mallory Silberman, Associate
Mr Peter Nikitin, Consultant
Mr Bart Wasiak, Associate
Mr John Muse-Fisher, Associate
Ms. Aimee Kneiss, Senior Legal Assistant II
Mr Eugenio Cruz Araujo, Legal Assistant
Mr Nathaniel Castellano (On Friday 5 May
only)
Arnold & Porter Kaye Scholer (UK) LLP
Ms. Karolina Horáková, Partner
Mr Libor Morávek, Partner
Mr Pavel Kinnert, Associate
Weil, Gotshal & Manges s.r.o. Advokátní
Kancelář
Mr Josef Fiřt
14
Expert report of dated April 6, 2017 (“Third Report”), Expert report of
dated April 6, 2017 (“Second Report”), Supplemental report of
dated April 6, 2017 (“Supplemental Report”).
15
Expert report of Michael Peer, dated April 26, 2017 (“Third Peer Report”).
16
Exhibits C-223a ; C-270-C-286 ; CLA-119-CLA-122 ; R-32a, R-296a, R-367-R-388 ; RLA-5a ;
RLA-246-RLA-249.
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PCA Case No. 2014-01
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Dr
Mr - Compass Lexecon
Mr - Charles River
Associates
Mr - Charles River Associates
(non-testifying colleague of Mr
Experts
Mr Ladislav Minčič
Witnesses
Mr Wynne Jones, Frontier Economics Ltd.
Mr Petr Kotáb, Dentons Europe CS LLP
Mr Michael Peer, KPMG Česká republika,
s.r.o.
Mr Jiří Urban, KPMG Česká republika, s.r.o.
(non-testifying colleague of Mr Peer)
Experts
Permanent Court of Arbitration
Ms. Legal Counsel
Mr , Assistant Legal Counsel
Mr Intern
Interpreters
Ms. b
Ms.
Ms.
Dr
Court Reporter
Mr
C. Post-hearing Proceedings
72. On May 8, 2017, pursuant to the Tribunal’s request at the hearing, the Parties submitted electronic
copies of their presentation slides and demonstratives. On June 16, 2017, the Parties submitted
their Submissions on Costs.
73. On March 13, 2018 the Respondent made an application to the Tribunal to admit the judgment
of the Court of Justice of the European Union in Slovak Republic v Achmea BV, March 6, 2018,
into the record and to establish a schedule for its jurisdictional objection. On March 15, 2018, the
Tribunal refused the Respondent’s application on the basis that it was too late, since in its
Counter-Memorial, paragraph 472, it had waived any objection on the EU jurisdictional point,
when it stated: “Accordingly, the Czech Republic does not pursue the jurisdictional objection
articulated by the Commission before this Tribunal.”
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III. The Parties’ requests for relief
A. The Claimants
74. The Claimants’ Statement of Claim requested that the Tribunal:
(a) Declare that the Respondent’s actions and, in particular, the progressive dismantling
of the Incentive Regime:
(i) constitute unfair and inequitable treatment in violation of the ECT and the
Germany BIT;
(ii) were implemented through unreasonable and arbitrary measures which
impaired the maintenance, use, enjoyment and disposal of the Claimants’
investments in violation of the ECT and the Germany BIT;
(iii) potentially amount to indirect or creeping expropriation in violation of the
ECT and the Germany BIT; and
(iv) constitute a failure to observe the Respondent’s obligations in relation to the
Claimants’ investments in violation of the umbrella clauses contained in the
ECT and the Germany BIT.
(b) Order the Czech Republic to:
(i) compensate the Claimants for all losses caused to them by the Czech
Republic’s breaches, in an amount that will be determined more precisely
during the proceedings, but that shall not be less than EUR
(ii) pay to the Claimants pre-award and post-award interest on any amount of
damages awarded; and
(iii) reimburse the Claimants for all costs and expenses of this arbitration,
including legal and expert fees, the fees and expenses of any experts
appointed by the Tribunal, the fees and expenses of the Tribunal, and all other
costs of the arbitration.17
75. In their Memorial, the Claimants requested that the Tribunal:
(a) Declare that the Respondent’s actions:
(i) constitute unfair and inequitable treatment and violate the obligation to
provide full protection and security in breach of the ECT and the Germany
BIT;
(ii) were implemented through unreasonable and arbitrary measures which
impaired the maintenance, use, enjoyment and disposal of the Claimants’
investment in violation of the ECT and the Germany BIT;
(b) Order the Czech Republic to:
17
Statement of Claim, para 178.
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PCA Case No. 2014-01
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(i) compensate the Claimants for all losses caused to them by the Czech
Republic’s breaches, in an amount of not less than CZK (inclusive
of pre-award interest);
(ii) pay to the Claimants post-award interest on any amount of damages awarded,
from the date of the final award until its full payment; and
(iii) reimburse the Claimants for all costs and expenses of this arbitration,
including legal and expert fees, the fees and expenses of any experts
appointed by the Tribunal, the fees and expenses of the Tribunal, and all other
costs of the arbitration, including any expenses arising from the participation
of third parties. 18
76. In their Reply, the Claimants requested that the Tribunal:
(a) Dismiss the jurisdictional objections raised by the Respondent;
(b) Declare that the Respondent’s actions:
(i) constitute unfair and inequitable treatment and violate the obligation to
provide full protection and security in breach of the ECT and the Germany
BIT;
(ii) were implemented through unreasonable and arbitrary measures which
impaired the maintenance, use, enjoyment and disposal of the Claimants’
investment in violation of the ECT and the Germany BIT;
(c) Order the Czech Republic to:
(i) compensate the Claimants for all losses caused to them by the Czech
Republic’s breaches, in an amount of not less than CZK
(inclusive of pre-award interest and tax gross-up);
(ii) pay to the Claimants post-award interest on any amount of damages awarded,
from the date of the final award until its full payment; and
(iii) reimburse the Claimants for all costs and expenses of this arbitration,
including legal and expert fees, the fees and expenses of any experts
appointed by the Arbitral Tribunal, the fees and expenses of the Arbitral
Tribunal, and all other costs of the arbitration, including any expenses arising
from the participation of third parties.19
77. In their letter dated April 6, 2017, the Claimants adjusted their request for the relief of
compensation from CZK (inclusive of pre-award interest and tax gross-up) to
CZK 306.53 million (inclusive of pre-award interest and tax gross-up).20
18
Memorial, para 563.
19
Reply, para 950.
20
Claimants’ letter to the Tribunal dated April 6, 2017, pp. 3-4.
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B. The Respondent
78. The Respondent’s Statement of Defense requested that the Tribunal:
(a) Declare that the Tribunal does not have jurisdiction over Claimants’ claims
regarding taxation measures under the ECT;
(b) Declare that the Tribunal does not have jurisdiction over the Solar Levy Extension
Claim;
(c) Declare that the Tribunal does not have jurisdiction over Claimants’ claims as they
fail to disclose a prima facie case on the merits;
(d) Declare that the Czech Republic did not violate the ECT;
(e) Declare that the Czech Republic did not violate the Treaty;
(f) Dismiss Claimants’ claims in their entirety;
(g) Order that Claimants pay the costs of these arbitral proceedings, including the cost
of the Tribunal and the legal and other costs incurred by the Czech Republic, on a
full indemnity basis; and
(h) Order Claimants to pay interest on any costs awarded to the Czech Republic, in an
amount to be determined by the Tribunal.21
79. In its Counter-Memorial, the Respondent requested that the Tribunal:
(a) Declare Claimants’ ECT and BIT claims barred for lack of jurisdiction;
(b) With respect to any claims over which the Tribunal concludes that it has jurisdiction,
declare that the Czech Republic did not breach any of its obligations under either
the ECT or the BIT;
(c) In the event that it exercises jurisdiction over any of Claimants’ claims and finds the
Czech Republic liable, declare that Claimants are not entitled to damages;
(d) Order Claimants to pay all costs of the arbitration, including the totality of the Czech
Republic’s legal and expert fees and expenses, and the fees and expenses of the
Tribunal, as well as the costs charged by the PCA; and
(e) Award to the Czech Republic such additional relief as it may consider just and
appropriate.22
80. In its Rejoinder, the Respondent stated its request for a declaration of lack of jurisdiction as
following:: Declare Claimants’ ECT claims, and their claims (under either treaty) in respect of
the Mozolov and Holýšov plants, barred for lack of jurisdiction.23
21
Statement of Defense, para 229.
22
Counter-Memorial, para 608.
23
Rejoinder, para 589.
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IV. The incentive regime
A. The Act on Income Tax 586/1992
81. In 1992, following the conclusion of the 1992 United Nations Framework Convention on Climate
Change, the Czech Republic implemented two tax incentives through Act 586/1992 (the “Act on
Income Tax”).24
Section 19(1)(d) provided an exemption from income tax for the year in which
solar facilities were put into operation and the following five calendar years (the “Income Tax
Exemption”). Section 30, with Annex I, provided an accelerated depreciation period (between 5
to 10 years) for specific categories of electrical equipment and components for photovoltaic
installations, such as solar panels, inverters, switchboards, fuse boxes, cut-out boxes and security
camera systems (the “Shortened Depreciation Period”).25
B. The Act on Promotion 180/2005
82. So far as is material the Act on the Promotion of Energy Production from Renewable Energy
Sources, which was adopted on March 31, 2005 and entered into force on August 1, 2005 (the
“Act on Promotion”),26
provided that
(1) investors would have a connection to the grid on a preferential basis (Section 4(1));
(2) investors would have a period of 15 years for recovery of their investment through the
feed-in tariff (the “FiT”) (Section 6(1)(b)(1));
(3) the level of revenues per unit of electricity from renewable sources would be maintained,
as a minimum, with promotion by FiT, for a period of 15 years from the year of putting
the plant into operation, taking into account the price index of industrial products (Section
6(1)(b)(2));
(4) As from 2007, the FiT set by the Energy Regulatory Office (the “ERO”) for the subsequent
calendar year was not to be lower than 95% of the value of the FiT valid in the year during
which a decision was made on their new values (Section 6(4)), the effect of which was that
the FiT granted to photovoltaic plants put into operation in any given year could not be
24
C-18, Section 19 of Act on Income Tax.
25
C-18, Section 19 of Act on Income Tax. The Claimants make no claim for repeal of this advantage: Reply,
para 67. The reason is that the SPVs were financed through sale and lease back agreements with UC
Leasing providing for a monthly rent, which accounted for depreciation and therefore excluded a direct
impact of changes to the depreciation period on the SPVs’ business: First Göde Statement, para 36.
26
C-26, Act No. 180/2005 Coll. on the promotion of electricity production from renewable energy sources
and amending certain acts, March 31, 2005.
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reduced by more than 5% with respect to the FiT granted to photovoltaic plants put into
operation in the previous year (the “5% Break-Out Rule”).
83. The Explanatory Report on a November 2003 draft of the Bill of the Act on Promotion also stated
that the “support system is based: … On maintaining the tax reliefs to the extent set out in the
Acts on Income Tax …”.27
C. ERO Regulations
84. Section 4 of ERO Regulation 475/2005 (the “Technical Regulation”) provided28
In order for the 15-year pay-back period to be assured through the support by Purchasing
Prices [FiT] of electricity produced from renewable sources, technical and economic
parameters of an installation producing electricity from renewable sources must be satisfied,
where the producer of electricity from renewable sources shall achieve, with the given level
of Purchasing Prices
(a) an adequate return on invested capital during the total life of the installation, such return
to be determined by the weighted average cost of capital (WACC), and
(b) the net present value of the cash flows after tax over the total life of the installation, using
a discount rate equal to WACC, at least equal to zero.
85. In May 2005, the ERO made available on its website its “Report on the procedure of specification
of basic parameters of the regulatory formula and price specification for the 2nd
regulatory period
in the field of electrical energy.” In the section “Subsidy for Electrical Generation From
Renewables” the Report stated:29
Minimum purchase prices of electricity from individual renewable resources are specified in
relation to the amounts of investment and operation costs of the individual categories of
resources. The calculation was based on the method of net present value of the generated
project cash flows (NPV CF) for the period of the given technology life equal to zero at the
discount rate of 7%. …
86. The weighted average cost of capital (“WACC”) was defined by the Technical Regulation as:
… weighted average of the expected interest rate on lending for investment in projects
designed for using renewable sources for electricity generation and the expected return on
equity of an investor in a project designed for using renewable sources for electricity
generation.
27
C-120, Explanatory Report on the bill of the Act on Promotion of November 12, 2003 (extended version),
p 4.
28
C-28, ERO Regulation No. 475/2005 Coll.; R-6, The Technical Regulation, Section 4(1).
29
R-365, ERO Report on the procedure of specification of basic parameters of the regulation formula and
price specification for the 2nd regulatory period in the field of electrical energy, May 2005, para 5.6.1.
There is a dispute between the Parties on whether there was a 7% cap on the rate of return for investors.
The Claimants say that neither the Act on Promotion nor the subsequent implementing regulations
contained any provision on the profitability or rate of return of RES investments, and that the 7% “discount
factor” was simply one of many indicative parameters used by the ERO as a benchmark to establish the
initial level of FiT.
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87. The Technical Regulation was subsequently amended by ERO Regulations 364/2007 and
409/2009,30
which modified the technical and economic parameters and fixed the estimated
lifetime of new photovoltaic plants at 20 years.
88. Article 2(9) of ERO Regulation 140/2009 (the “Pricing Regulation”) provided that (1) FiTs
would be applied throughout the estimated lifetime of plants (i.e. 20 years); and (2) the FiT was
to increase each year by between 2% and 4% taking into account the inflation price index for
industrial producers throughout the lifetime of the plant. The FiT was to be set by the end of
November for the following year.
V. State aids
89. State aid concerns over the incentive regime were raised on December 16, 2003 in a complaint
filed with the EU Commission by the Czech Society of Wind Energy and the European
Association for Renewable Energies (EUROSOLAR), alleging that the draft Act on Promotion
contravened the Czech Republic’s obligations under EU state aid law. On July 27, 2004, the EU
Commission informed the complainants that it did not consider the incentives foreseen by the
Act on Promotion to constitute State aid, but invited the Czech Republic to inform the EU
Commission of any new particulars which might demonstrate the existence of State aid.
90. The EU Commission did not take the matter further until the Czech Republic amended the Act
on Promotion in 2010, when the funding mechanism was changed from a consumer-funded one
to a hybrid one involving direct use of State resources. On November 18, 2011 the EU
Commission expressed the concern that the proposed amendments might constitute State aid.
91. On May 30, 2012 Act 165/2012 was enacted, which replaced the Act on Promotion as of January
1, 2013. On June 11, 2014 the EU Commission authorized the support scheme for electricity
produced from RES by installations commissioned as of January 1, 2013 as compatible State aid.
92. On December 11, 2014 the Czech Republic notified to the EU Commission, the support scheme
for electricity production from RES by installations commissioned between January 1, 2006 and
December 31, 2012.
93. On November 28, 2016 the EU Commission ruled that Act 180/2005 constituted State aid under
Article 107(1) of the Treaty on the Functioning of the European Union (“TFEU”), and that by
implementing Act 180/2005 on January 1, 2006, before a final EU Commission decision, the
30
C-29, ERO Regulation No. 364/2007 Coll.; C-30, ERO Regulation No. 409/2009 Coll.
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Czech Republic had breached the stand-still obligation in Article 10(3) TFEU, but that no
objection to the aid would be made because it was compatible with the internal market pursuant
to Article 107(3)(c) TFEU. But it also said (para 150):
… the Commission recalls that any compensation which the Arbitral Tribunals were to grant
would constitute in and of itself State aid. However the Arbitral Tribunals are not competent
to authorise the granting of State aid. That is an exclusive competence of the Commission. If
they were to award compensation, they would violate Article 108(3) TFEU, and any such
award would not be enforceable, as that provision is part of public order.
VI. The changes to the Incentive Regime
A. Abolition of 5% rule for plants connected to the grid from 2011
94. Act 137/2010 entered into force on May 20, 2010.31
It repealed Section 6(4) of the Act on
Promotion pursuant to which the FiT could not decrease the FiT by more than 5% per year. It
abolished the 5% rule only for those solar plants connected to the grid from 2011 onwards.
95. The four plants in question were constructed and commissioned after the Act came into force but
were connected to the grid before the critical date of 2011.
B. Adoption of Solar Levy
96. Act 402/2010 entered into force on January 1, 2011 introducing Sections 7(a)-(i) in the Act on
Promotion, establishing a levy on revenues generated by photovoltaic power plants (the “Solar
Levy”). It applied from January 1, 2011 to December 31, 2013 to revenues generated by
photovoltaic power plants put into operation between January 1, 2009 and December 31, 2010.
It was extended beyond December 31, 2013 by Act 310/2013 for photovoltaic power plants put
into operation between January 1, 2010 and December 31, 2010.
97. The Solar Levy was originally set at 26% and 28% for payments to solar energy producers
respectively under the FiT system and under the Green Bonuses system. It was withheld by the
grid operator who paid the FiT or Green Bonuses to the RES producers for the electricity
produced.
98. Act 310/2013 set the Solar Levy at 10% for FiTs and 11% for Green Bonuses.
99. Article I(2) of Act 310/2013 also cancelled all incentives for electricity generated by solar power
plants placed into service after January 1, 2014.
31
C-36, Act No. 137/2010 Coll.
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C. Amendment of Act on Income Tax
100. Act 346/2010,32
which entered into force on January 1, 2011, amended the Act on Income Tax
by repealing the Income Tax Exemption for RES producers, and the favourable depreciation
allowances. Although it was prospective, it had the effect of removing tax exemptions and
depreciation allowances which would otherwise have accrued.
D. Repeal of Act on Promotion
101. Act 165/201233
on Promoted Power Sources” which partly entered into force on January 1, 2013
and partly upon its publication on May 30, 2012 repealed the Act on Promotion. It left in place
the method for determining FiT and Green Bonuses, as amended at the end of 2010, for plants
put into operation before January 1, 2013, and introduced new rules for plants put into operation
thereafter. It confirmed the Solar Levy and contained several provisions which the Claimants
say negatively affected RES producers that put their plants into operation before January 1, 2013
(including the Claimants).34
E. Extension of Solar Levy
102. Act 310/201335
was adopted on September 13, 2013, and extended the Solar Levy beyond
December 31, 2013, at a new decreased 10% rate (but only applying to 2010 PV plants and for
the entire lifetime) and 11% levy on Green Bonuses. It also imposed new obligations concerning
disclosure of major shareholders and conversion of shares only on foreign joint stock companies
producing electricity from RES. It cancelled RES support for PV plants commissioned after
January 1, 2014.
F. Subsequent developments
103. On November 19, 2015, the ERO issued Price Decision 5/2015, which set the FiT applicable as
of January 1, 2016 only to plants commissioned from 2013 to 2015, but not to plants put into
operation from 2006 to 2012, thereby in effect removing the FiT. But on December 28, 2015, the
Czech Government adopted Regulation 402/2015,36
which overruled Price Decision 5/2015 and
32
C-38, Act No. 346/2010 Coll.
33
C-39, Act No. 165/2012 Coll.
34
See Reply, paras 240-241.
35
C-107, Act No. 310/2013 Coll.
36
C-249, Government Regulation No. 402/2015 Coll. of December 21, 2015.
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provided that the incentives to RES plants commissioned before 2013 must be paid, pending any
decision by the EU Commission on their compliance with EU State aid law. On December 29,
2015 the ERO issued Price Decision 9/2015 setting FiT and Green Bonuses for RES plants
commissioned since 2006, including the Claimants’ plants.37
VII. The background and history
A. Development of the incentives
104. In 1997, following the 1997 Kyoto Protocol, the EU Commission released its White Paper for
Community Strategy and Action Plan, which aimed to encourage governmental measures
supportive of the development of Renewable Energy Sources (“RES”).38
105. On March 30, 2000, the European Parliament adopted its resolution on Electricity from
renewable energy sources and the internal electricity market, in which it, among others, requested
that the EU Commission submit a proposal of a Directive to “establish a suitable and stable legal
framework for renewable energies to underpin the rapid development of these energy sources.”39
106. It was followed by the Directive 2001/77/EC of the European Parliament and of the Council on
the promotion of electricity produced from renewable energy sources in the internal electricity
market (the “2001 Directive”), which invited Member States to “take appropriate steps to
encourage greater consumption of electricity produced from renewable energy sources in
conformity with the national indicative target.”40
The indicative targets for the consumption of
electricity produced from RES which had to be attained by 2010 were laid down in the Annex to
the 2001 Directive.41
107. On May 1, 2004 the Czech Republic became a Member State of the EU pursuant to the Treaty of
Accession to the European Union of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania,
Hungary, Malta, Poland, Slovenia and Slovakia of April 16, 2003 (the “2003 Treaty of
37
C-251, ERO Price Decision No. 9/2015 of December 29, 2015.
38
C-212, EU Commission, White Paper for a Community Strategy and Action Plan COM(97)599, para 1.1.3.
39
C-214, European Parliament’s Resolution on Electricity from renewable energy sources and the internal
electricity market, March 30, 2000, para R(3).
40
C-20, Directive 2001/ 77/EC of the European Parliament and of the Council on the promotion of electricity
produced from renewable energy sources in the internal electricity market, September 27, 2001, Art. 3(1).
41
C-20, Directive 2001/ 77/EC of the European Parliament and of the Council on the promotion of electricity
produced from renewable energy sources in the internal electricity market, September 27, 2001, Annex.
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Accession”).42
Annex II to the 2003 Treaty of Accession fixed at 8% the Czech Republic’s
national target for the contribution of electricity produced from RES to the gross electricity
consumption by 2010.43
108. Following a proposal made in November 200344
the Act on Promotion (Act 180/2005)45
was
adopted on March 31, 2005 and entered into effect on August 1, 2005.
109. Section 1(2) stated that the purpose of the Act was in the interest of protection of the climate and
protection of the environment, (inter alia) to promote the use of RES, and renewable energy
sources (hereinafter referred to as “renewable sources”) and create conditions for fulfilment of
the indicative target for the share of electricity from RES in the gross consumption of electricity
in the Czech Republic amounting to 8 % in 2010, and for further increase of this share after 2010.
110. Section 6 provided under the heading “Amounts of Prices for Electricity from Renewable Sources
and Amounts of Green Bonuses”
(1) The Office sets, one calendar year in advance, the purchasing prices for electricity from
Renewable Sources (the “Purchasing Prices”), separately for individual kinds of Renewable
Sources, and sets green bonuses, so that
(a) the conditions are created for the achievement of the indicative target so that the share of
electricity produced from Renewable Sources accounts for 8% of gross electricity
consumption in 2010 and
(b) for facilities commissioned
1. after the effective date of this Act, there is attained, with the Support consisting of the
Purchasing Prices, a fifteen year payback period on capital expenditures, provided technical
and economic parameters are met, such parameters consisting of, in particular, cost per unit
of installed capacity, exploitation efficiency of the primary energy content in the Renewable
Source, and the period of use of the facility, such parameters being stipulated in an
implementing legal regulation,
2. after the effective date of this Act, the amount of revenues per unit of electricity from
Renewable Sources, assuming Support in the form of Purchasing Prices, is maintained as the
minimum [amount of revenues], for a period of 15 years from the commissioning year of the
facility, taking into account the industrial producer price index; the commissioning of a
facility is also deemed to include cases involving the completion of a rebuild of the
42
C-21, Treaty of Accession to the European Union of the Czech Republic, Estonia, Cyprus, Latvia,
Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia, 2003.
43
C-22, Annex II to Treaty of Accession to the European Union of the Czech Republic, Estonia, Cyprus,
Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia, 2003 - Energy, Part A.
44
The 2003 Explanatory Report stated that the support system was based “on providing a guarantee to
investors … ensuring that the amount of revenue per unit of electricity produced from renewable sources
acquired by producers from the support will be maintained for 15 years from placing the facility in service”:
C-120, Explanatory Report on the bill of the Act on Promotion of November 12, 2003 (extended version),
p.4.
45
R-5, (Respondent’s translation) and C-26 (Claimants’ translation), Act No. 180/2005 Coll. on the
promotion of electricity production from renewable energy sources and amending certain acts, March 31,
2005.
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technological part of existing equipment, a change of fuel, or the completion of
modernization that raises the technical and ecological standard of an existing facility,
3. prior to the effective date of this Act, there is maintained for a period of 15 years the
minimum amount of Purchasing Prices set for the year 2005 in accordance with the legal
regulations to date and taking into account the industrial producer price index.
(2) When setting the amounts of green bonuses, the Office also takes into account a
heightened degree of risk associated with off-taking electricity from Renewable Sources in
the electricity market.
(3) When setting Purchasing Prices and green bonuses, the Office proceeds on the basis of
differing costs for the acquisition, connection and operation of individual types of facilities,
including the development thereof [the development of such costs] over time.
(4) Purchasing Prices set by the Office for the following calendar year shall not be less than
95% of the Purchasing Prices in effect in the year for which the setting decision is made. This
provision shall be used for the prices set for 2007.
111. During its passage, the Minister of Environment was quoted as describing the Act as “a step
towards a more stable environment,”46
and on June 1, 2005 Mr Martin Bursík, former Minister
of Environment (described by the Claimants as one of the co-authors of the Act) published an
article stating that the most important principle of the law for producers was the guarantee of a
stable FiT for a 15 year period, thereby removing the risk that the ERO would reduce the FiT on
a year on year basis and that the producers’ cash flow and ability to repay loans would be
threatened.47
112. Pursuant to Section 6(1)(b)(1) of the Act on Promotion, the ERO was to adopt implementing
regulations to determine the technical and economic parameters for the Incentives for each RES
technology.
113. These parameters were set by the Technical Regulation (ERO Regulation 475/2005).48
By
Section 4 of the Technical Regulation:
(1) In order for the 15-year pay-back period to be assured through the support by Purchasing
Prices of electricity produced from renewable sources, technical and economic
parameters of an installation producing electricity from renewable sources must be
satisfied, where the producer of electricity from renewable sources shall achieve, with
the given level of Purchasing Prices
a) an adequate return on invested capital during the total life of the installation,
such return to be determined by the weighted average cost of capital (WACC),
and
b) the net present value of the cash flows after tax over the total life of the
installation, using a discount rate equal to WACC, at least equal to zero.
46
C-25, “The state is to support renewable power resources,” Newspaper article in “Ihned.cz”, February 23,
2005.
47
C-32, Newspaper article in “Moderniobec.cz”, June 1, 2005.
48
C-28, ERO Regulation No. 475/2005 Coll.
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(2) Indicative values of technical and economic parameters, separately for individual
supported categories of renewable sources and selected technologies allowing to meet
the required economic criteria under subsection (1) in electricity production from
renewable sources, are listed in Annex No. 3 hereto.49
114. Annex 3 of the Technical Regulation proceeded on the basis that photovoltaic power plants had
an expected lifetime of 15 years. It was amended by ERO Regulation 364/2007 which increased
the expected lifetime to 20 years.
115. In the 2005 Fourth National Communication of the Czech Republic on the UN Framework
Convention on Climate Change (the “2005 UN Report”), the Czech Republic described the
purpose of Section 6(1)(b)(2) of the Act on Promotion as:50
providing guarantees to the investors and owners of installations, producing electricity from
renewable sources who are subject to support pursuant to the Act, that the amount of revenue
per unit of produced electricity from renewable sources acquired by the producers from the
support will be maintained for a period of 15 years from bringing the installation into
operation (or for a period of 15 years for installations that were brought into operation prior
to the date of effect of the Act)
116. In accordance with Articles 4 and 8 of the 2001 Directive, on December 7, 2005 the EU
Commission issued a Communication addressing the progress made by each Member State in
achieving the targets, and suggesting a way forward.51
The Commission said:
Member States shall optimize and fine tune their support schemes by:
Increasing legislative stability and reducing investment risk. One of the main concerns
with national support schemes is any stop-and-go nature of a system. Any instability in the
system creates high investment risks, normally taking the form of higher costs for consumers.
Thus, the system needs to be regarded as stable and reliable by the market participants in the
long run in order to reduce the perceived risks. Reducing investment risk and increasing
liquidity is an important issue, notably in the green certificate market. The design of a support
mechanism must minimise unnecessary market risk. Increased liquidity could improve the
option of long term contracts and will give a clearer market price.52
.
117. In this period the Czech Government promoted the scheme abroad.53
118. On April 23, 2009 the European Parliament and the Council of the EU adopted Directive
2009/28/EC (the “2009 Directive”), which repealed the 2001 Directive and fixed new mandatory
targets for the contribution of electricity produced from RES by 2020. The Czech Republic’s new
49
Translation in R-6, The Technical Regulation, Section 4(1).
50
C-72, Fourth National Communication of the Czech Republic on the UN Framework Convention on
Climate Change of 2005, p 35.
51
C-216, EC’s Communication of December 7, 2005, The support of electricity from renewable energy
sources.
52
C-216, EC’s Communication of December 7, 2005, The support of electricity from renewable energy
sources, para 8.2.
53
For Germany see C-230, ERO presentation of October 9, 2008 by Mr. Stanislav Trávníček.
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target was set at 13% by 2020 (Annex I, Part A). The Recitals to the 2009 Directive emphasized
(paras 14 and 25) that the main purpose of mandatory national targets was to provide certainty
for investors and that Member States had to guarantee national support schemes to maintain
investor confidence.
119. On May 11, 2009 the ERO adopted the Pricing Regulation (ERO 140/2009), Article 2(9) of which
provided as follows:
Feed-in tariffs and Green bonuses stipulated by the Act on Promotion are applied throughout
the estimated lifetime of plants determined by the regulation implementing some provisions
of the Act on Promotion. The Feed-in tariffs increase annually throughout the lifetime of the
plant classified in the respective category depending on the type of the renewable resource
used and the date of launch into operation with respect to the industrial producers’ price index
by a minimum of 2% and maximum of 4%, with the exception of biomass and bio gas burning
plants.
B. The solar boom and proposals for change: 2009-2010
120. Initially investment in solar power was not especially attractive because of the relatively high
price of PV panels and the relatively poor irradiation profile of the Czech Republic. No significant
volume of PV plants was installed prior to 2009.54
The significant drop in the price of PV panels
began in 2008 and accelerated in 2009. In early 2009 the ERO learned that the electricity
transmission and distribution companies began receiving a significantly increasing number of
preliminary applications for connection to the grid for solar installations. It took the view that an
uncontrolled increase in solar energy would be highly undesirable because (1) it would increase
the price of RES support paid by consumers; (2) it would lead to significantly higher profits for
solar investors compared with other RES producers; and (3) it would threaten the stability of the
grid because of the unpredictable and volatile nature of solar electricity production.55
121. On January 29, 2009 Mr Fiřt, the then Chairman of the ERO, alerted the Prime Minister to these
problems and to the need to amend the Act on Promotion to remove the 5% cap.56
122. On March 1, 2009 the European Photovoltaic Industry Association published a study predicting
8% annual decrease in PV system prices for 2009, and a halving of costs every 8 years.57
123. The ERO Report on the Fulfilment of the Indicative Target for Electricity Production from
Renewable Energy Sources for 2008 (prepared in 2009) said that in a year-on-year comparison,
54
R-8, The ERO Yearly Report on the Operation of the Czech Electricity Grid for 2012, Chapter 7 (Electricity
generation from renewable energy sources (RES) since 2004), section 8.
55
Fiřt Statement, paras 11-14.
56
Fiřt Statement, para 15.
57
C-36, Act No. 137/2010 Coll., p 16.
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2007/2008 recorded an almost ten-fold rise in installed capacity of PV systems in the Czech
Republic, which had been caused in particular by a fall in the prices of photovoltaic panels by
over 40% and the retention of very favourable prices. It went on:
The massive interest shown by investors in photovoltaic systems is already causing
significant problems both in the form of disadvantaging the other categories of RES or the
speculative blocking of connection capacities at grid level and also a significant increase in
ancillary costs for RES, which are subsequently transferred to the final prices of electricity
for consumers.58
124. But it recognized that the Act on Promotion brought a guarantee of long-term and stable
promotion necessary for decision-making by businesses, a guarantee of revenues per unit of
electricity produced for a period of 15 years from the date it is put into operation, and retention
of the level of purchase prices for equipment already in operation for a period of 15 years, and a
maximum year-on-year fall in purchase prices of electricity for new equipment of 5%.59
125. The Prime Minister told Mr Fiřt that he would take steps to amend the Act on Promotion in
accordance with Mr Fiřt’s recommendation,60
but following a vote of censure, in March 2009 the
Government had to resign and elections were fixed for October 2009 (postponed by decision of
Constitutional Court on September 10, 2009 to May 2010). In May 2009 the Fischer caretaker
government was formed.
126. According to Mr Fiřt, in mid-2009 many banks temporarily suspended the financing of new solar
installations, anticipating a possible change in legislation.61
127. On July 1, 2009 Mr Fiřt wrote to the Minister of Industry and Trade and to the Minister of
Environment pointing to the “fairly dramatic” rise in preliminary connection requests for
photovoltaic installations and urging the Government to abolish the 5% Break-Out Rule so that
the ERO could reduce the incentives for investments made in 2010.62
The letter said:
I am writing to you with an urgent request concerning Act No. 180/2005 Coll., on promotion
of production of power generated from renewable energy sources.
The Energy Regulatory Office is responsible for promotion of power generated from
renewable energy sources under the law. The situation with regard to requests for connecting
new sources to the grid (primarily photovoltaic plants) is currently fairly dramatic. The
growth in installed capacity for photovoltaic plants between 2007 and 2008 amounted to
nearly 1,500% (starting at 3.4 MW and finishing at 54.29 MW). The installed capacity hit 77
MW at the end of June this year. Regional distribution system operators predict that at least
58
C-230, ERO presentation of October 9, 2008 by Mr. Stanislav Trávníček, para 3.6.2.
59
C-230, ERO presentation of October 9, 2008 by Mr. Stanislav Trávníček, para 5.1.
60
Fiřt Statement, para 15.
61
Fiřt Statement, para 19.
62
C-200, Letter of July 1, 2009 from Mr. Fiřt (Chairman of the ERO) to Mr. Tošovský (Minister of Industry
and Trade).
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another 250 MW will be connected and put into operation by the end of 2009.
At the same time, photovoltaic plants have seen a sharp decline in specific investment costs
by approx. 30%. However, the Energy Regulatory Office cannot respond to this situation
with the appropriate decrease in the feed-in tariff for power generated from these sources,
which puts investors in this area at an unprecedented advantage over investors and producers
of other types of renewable resources.
This situation also leads to a speculative block of connection capacities at the level of the
distribution systems. For this reason it is no longer possible to grant a request for connection
for any applicant in a large part of the Czech Republic for the foreseeable future. This applies
not only to renewable resources, but also to sources for combined power and heat production.
The provisions of Section 6(4) need to be amended, because at present they are making it
impossible for the Energy Regulatory Office to lower the feed-in tariff on power from
renewable resources by more than 5% year-on-year.
I would also like to stress the financial and social aspect of this problem, since the current
uncontrollable growth in photovoltaic plants already means that all customers in the Czech
Republic, including households, will be making a contribution of more than CZK 3 billion
in 2010 just for new photovoltaic plants, while the total fund for promoting all types of
renewable resources for 2008 was CZK 2.658 billion. In simplified terms, all customers in
the Czech Republic will pay about CZK 50/MWh more for power just due to the growth in
photovoltaics.
For the reasons stated above, the Energy Regulatory Office proposes that Section 6(4) of Act
No. 180/2005 Coll. should be repealed. This will make it possible to adjust the feed-in tariff
for photovoltaics to match the actual situation.
In my opinion the issue described in this letter is extremely serious. I am also sending this
letter to the Minister for the Environment as the co-sponsor of Act No. 180/2005 Coll. I will
be happy to meet in person to discuss the issue, if needed.
128. On July 22, 2009 the Minister of Environment replied to Mr Fiřt to agree that the current market
situation was unsustainable and that it was necessary to decrease a disproportionate economic
profit of large-scale outdoor photovoltaic systems which these installations currently had
compared to other renewable sources. But he disagreed with the proposal to amend Section 6(4)
of the Act on Promotion, because it was necessary to preserve the trust of investors. 63
129. On July 29, 2009, the Minister of Industry and Trade replied to Mr Fiřt stating that the
Government would “indeed make efforts to amend [Section 6(4)] as soon as possible.”64
130. On August 10, 2009 the ERO’s Vice Chairman, Mr Němeček, wrote to the Acting Director of
the Electric Power Department in the Ministry of Industry and Trade calling for the repeal of
Section 6(4) to “make it possible to adjust the purchase price for photovoltaics to match the actual
situation.”65
131. On August 24, 2009 the Ministry issued a press release stating that “the grant policy from the
63
R-306, Letter from L. Miko to J. Fiřt (Czech Original and English translation), July 22, 2009.
64
R-135, Letter from V. Tošovský to J. Fiřt (Czech original and English translation), July 29, 2009.
65
R-136, Letter from B. Němeček to R. Portužák, August 10, 2009.
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part of the state has ceased to fulfil its primary function, because support for solar power stations
has shifted from an area of necessary state support for its existence to the position of a branch
where profit is guaranteed regardless of the situation on the market,” that it was “planning to
change the maximum 5% limit by which the ERO can reduce the purchase price of electricity
from renewable energy sources annually” and that it was “trying to ensure that the new act comes
into force on 1 January next year.”66
The press release read:
Ministry of Industry and Trade equalises support for renewable energy sources
The Ministry of Industry and Trade is preparing an amendment to Act No 180/2005 Coll.,
concerning support for electricity generation from renewable energy sources. The Ministry
of Industry and Trade is planning to change the maximum 5% limit by which the Energy
Regulation Office can reduce the purchase price of electricity from renewable energy sources
annually. The system for support of renewable energy sources must guarantee a fair
competition environment for all renewable sources, it must respect the realistic technical—
economic parameters of the individual types of RES, and it must also ensure a commensurate
attractiveness for investors. The Ministry of Industry and Trade is trying to ensure that the
new act comes into force on 1 January next year.
The reason for the amendment of the act is primarily the situation in the area of photovoltaic
devices, where the grant policy from the part of the state has ceased to fulfil its primary
function, because support for solar power stations has shifted from an area of necessary state
support for its existence to the position of a branch where profit is guaranteed regardless of
the situation on the market.
Between the years 2007 and 2008 the installed capacity of solar power stations grew by
almost 1500 % from an original 3.4 MW to 54.29 MW. By the end of June this year the
installed capacity had risen to 80 MW.
The ongoing reduction in the prices of photovoltaic panels is leading to the uncontrolled
development of solar power stations. Whereas technological advances have reduced the price
of photovoltaic panels by more than 40%, by law the Energy Regulation Office can only
reduced the purchase price of electricity for new renewable sources by 5% per year. So at
present a significant advantage is being provided to newly built photovoltaic power stations
compared to other sources of renewable energy.
Given the current parameters, customers in the Czech Republic, including households, will
contribute more than CZK 3 billion in support of electricity generation from new photovoltaic
sources alone in 2010. If the law were to remain unchanged, in the years to come the
contribution for photovoltaic devices would rise dramatically.
Put simply, if the current state were maintained the price for the delivery of electricity would
rise by more than CZK 50/MWh for all customers in the Czech Republic just as a result of
increase in photovoltaic devices. In 2011 the price for customers would be even higher.
The purchase prices for electricity from photovoltaic devices are guaranteed for 15 years, but
thanks to new technology in certain cases the return on the investment is a mere 5 years. The
level of the purchase price for electricity from a photovoltaic device is almost CZK 13/kWh,
whereas the market price for electricity is around CZK 2/kWh.
132. On August 28, 2009, the Acting Director of the Department in the Ministry of Industry and Trade
wrote, in reply to Mr Němeček’s letter of August 10, 2009:
66
R-138, “Ministry of Industry and Trade will equalize the support of renewable energy sources,” Ministry
of Industry and Trade Press Release (www.mpo.cz), August 24, 2009.
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I … believe that the preferential treatment of investors and potentially adverse impact on the
regulated part of electricity price mentioned by you are hardly sustainable in the future.
On the other hand, it is appropriate to realize that the goal of section 6(4) … was to ensure
the investors in renewable sources certainty of payback of their investments, transparency
and predictability. A simple cancellation could thus entail a risk of suits filed by investors
against the Czech Republic on grounds of lost investments.67
133. On September 8, 2009 in an open letter to the Chairman of the Economic Committee of the
Chamber of Deputies Mr Fiřt again proposed an amendment to the Act on Promotion to enable
the ERO to lower the incentives, subject to ensuring “a reasonable vacatio legis period” whereby
the change would take effect only from 2011, so that “Investors will be able to prepare
sufficiently in advance for the change in the conditions for investing which should eliminate
entirely the risk of possible lawsuits in the Czech Republic regarding protection of
investments.”68
134. ERO made presentations dealing with the solar boom issue. In an October 2009 presentation,
ERO said that “the economic return [for solar investors] at the current prices is in conflict with
the guaranteed return pursuant to the law and is almost half [of the original 15-year period].”
ERO drew attention to the technical parameters specified in the Technical Regulation and
explained that an appropriate drop in the 2010 FiT to reflect cost developments would amount to
29.5%.69
135. In November 2009, the ERO adopted Regulation 409/2009, which modified the technical and
economic parameters of the Technical Regulation.70
The expected lifetime for photovoltaic
plants was kept as 20 years, as set out in Regulation 364/2007.
136. In the same month, the ERO issued its Report, in which it said that “the construction of installed
capacity in biomass (around 352 MW), wind (around 269 MW), photovoltaics (around 131 MW)
and biogas (around 70 MW) [was] of key importance for the fulfilment of the [8%] indicative
target [for 2010].”71
67
R-145, Letter from Mr Portužák to Mr Němeček, August 28, 2009.
68
C-201, Letter of September 8, 2009 from Mr. Fiřt (Chairman of the ERO) to Mr. Vojiř (Chairman of the
Economic Committee of the Chamber of Deputies), p. 2.
69
R-156, Legislative environment and the promotion of the electricity produced from photovoltaic power
plants in 2009,” ERO Presentation, October 15, 2009, p. 14.
70
C-30, ERO Regulation No. 409/2009 Coll.
71
C-203, “Report on the Fulfilment of the Indicative Target for Electricity Production from Renewable
Energy Sources for 2008” of November 2009, prepared by the Ministry of Industry and Trade.
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137. On November 16, 2009 the Government put forward a proposal to amend Act 180/2005.72
The
Explanatory Report says that the aims of the legislation were to adjust the prices for solar power
as of January 1, 2011, to eliminate the current discrimination against other types of renewable
sources and repeating Mr Fiřt’s formula about investors preparing in advance so as to eliminate
the risk of potential lawsuits against the Czech Republic.
138. During a press conference on the same day,73
the Minister of Industry and Trade, Mr Vladimír
Tošovský, said that reduction of the promotion from 2011 was chosen to avoid changing the
terms and conditions under which existing investors had invested.
139. On November 23, 2009, the ERO issued Price Decision 5/2009, which set the FiT for 2010
plants.74
140. The Tribunal was referred to many published articles from June 2009 onwards recording that the
Government wanted to end the boom,75
and reporting opposition to its plans.76
141. In this period there was a geometric increase in installed solar capacity, as many investors (most
of them domestic rather than foreign) took advantage, according to Mr Fiřt, of what was widely
perceived as an opportunity to earn very high profits.77
142. As a result of the rise in the number of applications to connect new solar installations, from
February 2010 the national transmission system operator and the regional distribution system
operators started to limit the issuance of “binding statements”, i.e. the preliminary agreements
which assured investors that their plants would be connected to the grid upon completion. The
national moratorium on new applications was widely announced and reported.78
72
R-147, Explanatory Report to Draft Act No. 137/2010 Coll., November 16, 2009.
73
C-197, Czech Government’s press conference of November 16, 2009, p. 2.
74
R-49, The ERO Price Decision No. 5/2009, November 23, 2009.
75
R-363, “State wants to stop solar power plants boom,” Mladá fronta; R-364, “ERO is preparing purchase
price reductions” (greensolar.webnode.cz), June 24, 2009; R-143, M. Petříček, “Solar boom is slightly
excessive,” Hospodářské Noviny, August 13, 2009; R-139, Právo, “Ministry of Industry and Trade wants
to reduce support of solar power plants”, August 25, 2009; R-140, “Is there any danger of reduction of
support for solar power plants”, Radio Praha, September 3, 2009; R-181, “Additional payments for solar
energy reached three billion; the state may curtail their boom” (Novinky.cz), November 2, 2009; R-155,
“Solar energy 2010: no solution to the crisis in sight” (nazeleno.cz), March 24, 2010.
76
, R-144, “We will pay dearly for the sun, Ekonom, October 7, 2009; R-362, “What is the adequate decrease
of photovoltaic electricity purchase prices?”, oze.tzb-info.cz, October 19, 2009.
77
Fiřt Statement, para 22.
78
Press releases: R-225, “CEPS calls for the suspension of connections for new renewable energy sources,”
AF Power press release, February 10, 2010; R-224, “CEZ Distribuce responds to CEPS’s demand,” CEZ
press release, February 16, 2010; R-230, “Boom development of solar power plants must be balanced with
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143. On March 12, 2010 the three regional distribution companies wrote an open letter to Parliament
urging it to adopt the amendment to the Act on Promotion to curtail “excessive profits” of solar
generators.79
144. On March 17, 2010 the Chamber of Deputies approved Act 137/2010, which entered into force
on May 20, 2010.80
This measure abolished the 5% rule for plants connected to the grid from
January 1, 2011 onwards (Article II).
145. The Czech Republic published its 2010 National Renewable Energy Action Plan in July 2010
(the “2010 Action Plan”).81
It stated that, in relation to solar plants, the “fixed tariffs” (including
the FiT set for 2010) were guaranteed for a period of 20 years and that there was no cap “on the
total volume of electricity produced per year or of installed capacity that is entitled to the tariff”82
.
In the 2010 Action Plan, the Income Tax Exemption was listed together with the FiT and Green
Bonuses as available financial support for RES.83
146. In July 2010 the Nečas Government was sworn in, following elections in May 2010, and held
office until July 2013.
147. There was a series of newspaper articles between July and September 2010 suggesting that the
Government might resort to taxation measures to deal with the solar boom.84
C. The changes
148. On September 15, 2010 a bill (which became Act 330/2010) was introduced to eliminate all
the stability of the grid and distribution network,” E.ON press release, February 2010; R-229, “New solar
power plants are out of luck, ČEZ and E.ON will no longer connect them to the grid” (Novinky.cz),
February 17, 2010.
79
R-152, Letter from electricity companies (ČEZ, E.ON and PRE) to the Chamber of Deputies, March 12,
2010.
80
C-36, Act No. 137/2010 Coll.
81
C-73, National Renewable Energy Action Plan of July 2010 published by the Ministry of Industry and
Trade.
82
C-73, National Renewable Energy Action Plan of July 2010 published by the Ministry of Industry and
Trade, pp 58-59.
83
C-73, National Renewable Energy Action Plan of July 2010 published by the Ministry of Industry and
Trade, pp 50-51.
84
R-162, “Solar boom will cost us dearly”, iDes.cz, July 22, 2010; R-31, “Minister of Environment Wants
to Tax Solar Power Plants,” Mladá Fronta Dnes, July 23, 2010; R-185, “Solar boom is over”, E15 July 30,
2010; R-186, “Nečas for HN: We will slow down the process of electricity price increases and maybe even
reverse it,” iHNed.cz, August 27, 2010.
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support for large solar plants commissioned on or after March 1, 2011.85
The Explanatory Report
stated:
It is a legislative change of claim for the support of production of electricity from renewable
energy sources. Photovoltaic power plants already connected to the electric power system
will have their right to claim support preserved under existing conditions. Facilities not yet
connected to the electric power system but which started operation before January 1, 2011
will have 12 months to be connected to the electric power system. If they do so, then their
right to claim support will be preserved. The extent of support will correspond to the
guaranteed support for the respective facility as of the time of its connection to the electric
power system.
…
It is proposed that this Bill comes into effect from January 1, 2011. From March 1, 2011 the
only supported facilities will be photovoltaic power plants with the installed power output of
less than 30 kWp that are located on roofs and constructions of buildings. To this date it is
also guaranteed that photovoltaic power plants already connected to the electric power system
will have their right to claim support preserved under existing conditions”.86
149. On September 22, 2010 the Czech Government instructed the Ministers of Industry and Trade
and of Environment to form a Coordination Committee to evaluate the impact of support for RES
on electricity and energy prices.87
150. The Committee’s tasks88
included the preparation of specific analyses on the impact of RES
support on prices and the preparation of a draft amendment to the Act on Promotion.
151. On October 13, 2010 a draft of legislation to amend the Act on Promotion was re-submitted.89
The draft maintained support under existing legal regulations for sources commissioned prior to
the effective date of the Act and connected to the grid by December 31, 2011 (Article II).
152. On October 13, 2010 (as the Deputy Industry and Trade Minister reported to the Coordination
Committee on October 15, 2010) the Government approved proposals to reduce the impact of
RES on the price of electricity by a combination of three solutions, namely: (1) “The introduction
of a withholding tax on sales of electricity from photovoltaic power plants”; (2) “Change of rates
for alienation of land from the agricultural land fund”; and (3) “Include the revenues from the
85
R-172, Explanatory Report to Draft Act No. 330/2010 Coll. (Czech original and partial English
translation).
86
R-172, Explanatory Report to Draft Act No. 330/2010 Coll. (Czech original and partial English
translation), p. 8.
87
R-189, Resolution of the Government of the Czech Republic No. 681, September 22, 2010.
88
R-190, Minutes of the 1st Meeting of the Coordination Committee for the assessment of the impact of
support of renewable energy sources on electricity prices, September 23, 2010.
89
R-299, Government Document No. 145/10, Government proposal of an act amending the Act on
Promotion, October 13, 2010.
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sale of emission permits, including derogative, in the financing of RES Support”90
. The first
solution eventually became the Solar Levy.
153. First Deputy Environmental Minister Bízková is recorded as having said:
… it is necessary to find a formally correct mechanism for reduction of the support of RES
from photovoltaic power plants, such that it cannot be legally contested.
and Mr J Fiřt was noted as declaring that the ERO fully supported “the legally strong variant,
which shall ensure the reduction of the contribution to the PVPPs [photovoltaic
power producers].”91
154. On October 20, 2010, the Government resolved to approve the introduction of “the levy on
production of electricity from solar radiation from the facilities put into operation in 2009 and
2010.”92
155. At a meeting on October 20, 2010, the Minister of Finance explained the Solar Levy as follows:
Mechanism to reduce the surge increase of the prices of electricity consists in translation of
support for RES to the prices for the final consumers only to a limited extent. The
Government shall provide the operators of the transmission and distribution system (grid
operators) with additional funding to cover the increase of the contribution to RES. …
For the operators of the systems, the price shall be compensated from the state budget ….
The necessary securing of budget resources on the part of the state budget is realised by
increase of the revenues from the title of adoption of three measures:
1. Increasing the levy from removal of land from the Agricultural Land Fund …;
2. The introduction of a levy on the production of electricity from solar radiation from plants
commissioned into service in 2009 and 2010 …;
3. The introduction of gift tax on emission allowances …93
156. On October 26, 2010 the Government introduced a draft of Act 346/2010 amending the Act on
Income Tax by repealing the Income Tax Exemption and abolishing the Shortened Depreciation
Period as from January 1, 2011.94
157. The Explanatory Report to the draft Act stated:
The proposed changes are in response to the need to eliminate all legal means for the indirect
90
C-198, Minutes of the third meeting of the Coordination Committee held on October 15, 2010, para 3.
91
C-198, Minutes of the third meeting of the Coordination Committee held on October 15, 2010, pp. 4-5.
92
R-307, Resolution of the Government of the Czech Republic No. 757 on the issue of solution to the increase
in electric energy prices caused by the promotion of renewable energy sources, October 20, 2010.
93
Annex 5 to First Report, Ministry of Finance presentation for government meeting,
October 20, 2010, p. 3.
94
R-114, Explanatory Report to Draft Act No. 346/2010 Coll., October 26, 2010.
37
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support of electric power generation from renewable resources (mainly solar power plants)
that is no longer justified …Taxpayers will be able to take advantage of this tax relief for the
last time for the tax period that began in 2010. This means among other things that the change
will also apply to taxpayers who put environmentally friendly power plants and facilities in
operation before this amendment took effect.
…
This proposed effectiveness date [January 1, 2011] does not create a risk of true retroactivity,
since it is not a revision of legal relationships that had already arisen, but is an adjustment of
relationships for the future …95
158. At the session of October 29, 2010 the bill to amend the Act on Promotion was assigned to the
Economic Committee of the Chamber of Deputies for review.
159. On November 2, 2010 a new draft was submitted to Parliament, introducing the Solar Levy (for
3 years).96
160. In debate before the Economic Committee on November 2, 2010 the Government was asked
whether the Ministry of Industry and Trade was not afraid of losing arbitrations, and the answer
was that tax regimes were a matter for each country, and changes in tax rates should not be
challenged in arbitration. The Minister of Industry and Trade, Mr Kocourek, said:
The issue of arbitrations in general is absolutely erratic. … I declare that it will reduce the
amount of intended support to make it bearable for the Czech Republic and for electricity
consumers in the Czech Republic. This method – through the withholding tax – it is not just
a retroactive correction of support. One may argue as to whether or not this is retroactive.
Nevertheless, it is a similar situation as if you changed the conditions for investors by
increasing the income tax. From the arbitration perspective, they will strive to advocate the
principle on which the support for RES has been based, i.e. their 15-year payback period …
the rest is the question of tax regimes – this is the responsibility of each country, and changes
in tax rates should not be challenged in arbitrations.97
161. On November 8, 2010, the ERO issued Price Decision 2/2010, in which it set the FiTs for 2011
plants. The FiTs for plants with capacity of over 30kW commissioned in 2011 were set at lower
than 50% of those for plants commissioned in 2010.98
162. On November 12, 2010 the Czech Parliament approved Act 346/2010, which entered into force
on January 1, 2011.99
95
R-114, Explanatory Report to Draft Act No. 346/2010 Coll., October 26, 2010, pp 4-5.
96
R-300, Chamber of Deputies of the Parliament of the Czech Republic, Chamber print no. 145/1 of 2010,
November 2, 2010.
97
C-208, Minutes of meeting of the Economic Committee of the Chamber of Deputies of November 2, 2010,
p. 5.
98
R-50, The ERO Price Decision No. 2/2010.
99
R-32, The Act 346/2010.
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163. In this period, according to Mr Minčič, who was then the First Deputy Minister of
Finance,investors rushed in to obtain the high FiTs, which had the effect of accelerating the boom
in new solar installations, with the result that there would be electricity price increases of 12.7%
for households and 18.4% for industrial consumers.100
164. In the debate on the amendment to the Act on Promotion on November 29, 2010 the First Deputy
Minister of Finance, Mr Minčič said that the solar boom might or would trigger an increase in
electricity prices for business by 17% or more, and such an abrupt increase would almost liquidate
a significant proportion of Czech industry. He also discussed the legal issues, including
constitutional challenges based on the “quasi-retroactivity” of the Act, issues relating to the
principle of legitimate expectations under EU law, and to undertakings which result from treaties
protecting and supporting foreign investments. He accepted that there was a risk of arbitrations.101
165. The Minister of Industry and Trade made similar points at the Senate session of December 8,
2010.102
The Minister acknowledged the risk of investment arbitrations brought by aggrieved
solar investors against the State, but referred to an opinion by a law firm, Advokátní kancelář
Kříž a Bělina, which “concluded that from the general perspective, the Czech Republic should
be able to defend the proposed solutions.”103
166. In the debate Senator Jiří Čunek criticized the Government officials who failed to monitor the
development of the solar market and said:
However, what does our law say? Our law says that this is false retroactivity, that
international arbitrations cannot be excluded in view of claims regarding the protection of
investments, and that the taxation of emissions credits is legally contestable, since the
decision of the state body is not a gift and is inconsistent with EU law. That means that we
are in a very unconventional situation.
167. Senator Čunek also endorsed a proposal by the President of the Czech Republic to limit the Solar
Levy to one year, so as to avoid payment of damages. As an alternative he proposed to raise funds
for RES support by introducing a tax on the production of nuclear energy, as done in Germany.104
In his opinion, that solution would have been consistent with the promotion of RES and would
not have caused legal problems.
100
Minčič Statement, paras 8, 11.
101
C-235, Transcript of the Senate session of November 29, 2010, p. 3-5.
102
C-236, Transcript of the Senate session of December 8, 2010.
103
C-236, Transcript of the Senate session of December 8, 2010, p. 2; C-237, Advokátní kancelář Kříž a
Bělina’s Opinion of December 6, 2010.
104
C-236, Transcript of the Senate session of December 8, 2010, pp. 4-5.
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168. The Chairman of the Economic Committee, Senator Jan Hajda, warned about the likelihood of
arbitrations and said that the only honourable course would be to reject the bill.105
169. After the discussion, the Senate refused to approve the bill and none of the amendments proposed
at the discussion were adopted. But Act 402/2010106
passed on December 14, 2010, in accordance
with Article 46(3) of the Czech Constitution pursuant to which a bill is considered adopted if the
Senate takes no action within 30 days of its submission.
170. Sections 7(a)-(i) introduced the Solar Levy, which applied to power generated by solar radiation
from January 1, 2011 to December 31, 2013 in a plant put into operation between January 1, 2009
and December 31, 2010. The levy rate was 26% on FiTs and 28% on Green Bonuses.
171. According to the Respondent, the levy rate of 26% was calculated in order to ensure that investors
continued to have a guarantee of return of investment within 15 years and a return on capital of
at least 7% per annum on average over the lifetime of their investment.107
172. Act 330/2010, which came into force on January 1, 2011 amended Section 3(5) of the Act on
Promotion and abolished all incentives related to photovoltaic plants with installed output
exceeding 30 kWp commissioned after March 1, 2011.
173. On January 11, 2011 the European Commissioners for Energy and Climate Action expressed
“serious concerns” about the retroactive character of the amendment to the Act on Promotion.108
174. Act 165/2012109
repealed the Act on Promotion as of January 1, 2013. The Act established a new
funding mechanism under which, inter alia, the Czech Electricity and Gas Market Operator
(OTE) paid (i) Green Bonuses directly to the RES producers; and (ii) the difference between the
FiT and the market price to the “mandatory purchasers”. The Act also introduced the “negative
hourly price”, which was designed to be paid to the “mandatory purchasers” by RES operators
entitled to the FiT or to be deducted from the payable FIT by the “mandatory purchasers” when
the price of electricity on the daily market had a negative value. Pursuant to the transitional
provisions set out in Section 54, all of the Claimants’ plants have been receiving the same amount
105
C-236, Transcript of the Senate session of December 8, 2010, p. 6. See also Senator Jan Horník, at p 9.
106
R-173 (Respondent’s translation) and C-37 (Claimant’s translation), Act No. 402/2010 Coll., amending
the Act on Promotion, by introducing the Solar Levy and Government subsidies for partial financing of the
RES Scheme, December 14, 2010.
107
Minčič Statement, para 17.
108
C-205, Letter of January 11, 2011 from Ms. Hedegaard and Mr. Oettinger (Commissioners of the EC) to
Mr. Kocourek (Czech Minister of Trade and Industry).
109
C-39, Act No. 165/2012 Coll.
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of FiTs provided for under the Act on Promotion as amended in 2010.
VIII. Jurisdictional/admissibility issues
A. Whether the Solar Levy is a tax for the purposes of Energy Charter Treaty, Art 21(1)
1. The Respondent’s position
175. The Respondent contends that “[t]he Tribunal does not have jurisdiction over Claimants’ [ECT]
claims that pertain to taxation” by reason of Article 21 of the ECT, which excludes “Taxation
Measures” from the scope of the ECT.110
176. Article 21 of the ECT provides, in relevant part:
(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.
[…]
(2) Article 10(2) and (7) [Most favourable and national treatment] shall apply to Taxation
Measures of the Contracting Parties other than those on income or on capital.
[…]
(5) (a) Article 13 [Expropriation] shall apply to taxes.
[…]
(7) For the purposes of this Article: (a) The term “Taxation Measures” includes: (i) any
provision relating to taxes of the domestic law of the Contracting Party or of a political
subdivision thereof or a local authority therein; and (ii) any provision relating to taxes
of any convention for the avoidance of double taxation or of any other international
agreement or arrangement by which the Contracting Party is bound. […]111
177. According to the Respondent, all of the Respondent’s amendments to the Incentive Regime, i.e.,
the installation and the extension of the Solar Levy and the repeals of the Tax Exemption and the
Shortened Depreciation Period constituted taxation measures for the purpose of Article 21(1) of
the ECT.112
The Respondent notes that the Claimants do not object to the tax measure
applicability as to the repeals of the Tax Exemption and the Shortened Depreciation Period.113
Accordingly, the tax carve-out becomes at issue only in relation to the introduction and the
110
Statement of Defense, paras 85-91.
111
Statement of Defense, paras 87-88; RLA-5, the ECT.
112
Statement of Defense, paras 92-97.
113
Rejoinder, para 339; Reply, paras 507; Memorial, paras 323-325.
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prolongation of the Solar Levy.114
178. The Respondent asserts that the determination of whether a measure is characterized as a Tax
Measure should be based on the plain text of Article 21(7) of the ECT and in accordance with
the VCLT.115
Article 31 VCLT provides, inter alia, that “[a] special meaning shall be given to
a term if it is established that the parties so intended”.116
The Respondent then submits that under
Article 21(7)(a) the contracting State Parties intended to give a special meaning to the term
“Taxation Measures” by defining them as including “any provision relating to taxes of the
domestic law of the Czech Republic.”117
Accordingly, any provision relating to tax measures
under domestic law is carved-out pursuant to Article 21(7) of the ECT.118
179. According to the Respondent, such a reference to domestic law is consistent with arbitral practice
where “tribunals have not hesitated to apply domestic law when expressly instructed to do so.”119
This is also supported by the drafters’ intent to “preserve State autonomy over taxation matters,
rather than wrest it from the State’s hands”.120
The Respondent objects to the Claimants’
assertion that this interpretation allows a host State to evade an ECT obligation by categorizing
its measure as tax, noting that the ultimate authority to decide the tax applicability belongs to a
tribunal, instead of a host State.121
The Respondent also objects to the Claimants’ allegation that
the reference to domestic law is contrary to the purpose of the ECT, stating that they do not
provide an adequate explanation.122
180. The Respondent rejects the Claimants’ argument that taxes must be “imposed in good faith” in
order for the Article 21 carve-out to apply.123
The Respondent notes that the Energy Charter
Secretariat’s 2015 publication on “Taxation of Foreign Investments under International Law”—
to which the Claimants refer—does not indicate that any such requirement applies.124
The
114
Rejoinder, para 339.
115
Counter-Memorial, paras 487-8.
116
RLA-125, Vienna Convention on the Law of Treaties, Art. 31(1) and (4).
117
Counter-Memorial, para 488; Rejoinder, para 342.
118
Rejoinder, para 343.
119
Rejoinder, para 346.
120
Rejoinder, para 347.
121
Rejoinder, para 349.
122
Rejoinder, para 348.
123
Rejoinder, para 421; Reply, para 526.
124
Rejoinder, para 421.
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passage cited by the Claimants for support discusses various merits issues relating to a State’s
power to tax which the Respondent deems inappropriate for the determination of whether there
is jurisdiction over the dispute.125
181. In any event, the Respondent submits that the Claimants’ allegation that the Respondent
deliberately camouflaged the Solar Levy as a tax in order to evade international liability under
the treaties, and thus, acted in bad faith, is without merit.126
The Respondent contends that, as
found by the tribunal in Tza Yap Shum v. Peru, the conduct of tax authorities ought to be
examined “under an assumption of good faith”.127
According to the Respondent, the Claimants
should have, but failed, to provide evidence to overcome this presumption by showing that the
purpose of the introduction of the Solar Levy was one “‘entirely unrelated’ to taxation, ‘such as
the destruction of a company or the elimination of a political opponent’.”128
Furthermore, several
tribunals have ruled that a State cannot be deemed to have acted in bad faith simply because it
did not pursue what a tribunal (in hindsight) believes would have been a better way of
accomplishing an objective.129
182. The Respondent maintains that the Solar Levy can meet the definition adopted in Yukos v. Russia,
in which the tribunal defined taxation measures as “actions that are motivated by the purpose of
raising general revenue for the State”.130
This is primarily based upon the Respondent’s expert’s
analysis that “there is no obligation for the Government to use the funds that it receives pursuant
to the Solar Levy to finance any specific purpose.”131
The Respondent adds that its good faith is
supported by the fact that it was looking for a lawful measure under domestic law, instead of
simply reducing the FiT.132
125
Rejoinder, para 421.
126
Rejoinder, para 433.
127
Respondent’s Rejoinder, para 423; Tza Yap Shum v. Peru (Kessler, Fernandez-Armesto, Otero), ICSID
Case No. ARB/07/6 (Laudo, July 7, 2011), para 125.
128
Counter-Memorial, para 506; Yukos Universal Limited (Isle of Man) v. The Russian Federation (Fortier,
Poncet, Schwebel), UNCITRAL, Award, 18 July 2014, para 1407.
129
Rejoinder, para 427; Invesmart B.V. v. Czech Republic (Pryles, Thomas, Bernardini), UNCITRAL, Award
(Redacted), 26 June 2009, paras 430, 484 and 501; ECE Projektmanagement International GmbH et al v.
Czech Republic (Berman, Bucher, Thomas), PCA Case No. 2010-5, Award, 19 September 2013, para
4.764; Saluka Investments BV v. Czech Republic (Watts, Fortier, Behrens), UNCITRAL, Award, 17 March
2006, para 411.
130
Counter-Memorial, para 505; Yukos Universal Limited v. Russia (Fortier, Poncet, Schwebel), UNCITRAL,
PCA Case No. AA 227, Final Award, 18 July 2014, para 1407.
131
Counter-Memorial, para 505; Report, para 50. Rejoinder, para 387 citing Kotáb Report, paras 56,
57.
132
T/1/148.
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183. The Respondent invokes the fact that the Solar Levy applied to all solar producers whose plants
were put into operation in 2009 and 2010, irrespective of whether the solar producer could invoke
an investment treaty or of whether that investment treaty contained a tax-carve out.133
The
Respondent rejects the Claimants’ argument that the Tribunal read “bad faith” into the Deputy
Environment Minister’s contention that it was “necessary to find a formally correct mechanism
for reduction of the support of RES from photovoltaic power plants, such that it cannot be legally
contested” noting that it is the “essence of good faith” to find a lawful way to achieve a policy
objective.134
184. The Respondent describes that it did not choose to reduce the FiT because such a FiT reduction
would have been (1) “[i]nsufficient by itself to compensate all budget support costs (unless FIT
reduced by 50%); (2) “[l]ess suited to addressing temporary problem affecting only some
producers of one source of RES”; (3) “[i]mpossible to implement before year-end (given need to
amend multiple levels of laws/regulations)”; and (4) “[r]equire more radical revision of RES
support framework”.135
185. The Respondent contends that the Solar Levy is a tax under Czech domestic law.
186. The Respondent submits that the Tribunal must determine whether the amendment measures
constituted taxes under domestic law “in accordance to evidence presented to it as to the content
of the law and the manner in which the law would be understood and applied by the municipal
courts”136
and there is “overwhelming evidence” that the Czech legal system overall treats the
Solar Levy as a tax, and the Solar Levy has been “understood and applied” as such by the Czech
municipal courts.137
187. The Respondent notes that, like any tax, the Solar Levy has a rate, a base, and a taxpayer.138
Therefore, the Czech legislator has provided for its collection by the tax authorities as revenue
for the general State budget.139
133
Rejoinder, para 422.
134
Rejoinder, para 423
135
T/1/142; Respondent’s opening statement, Slide 63; Rejoinder, paras 122-124.
136
Rejoinder, para 352; Emmis International Holding, B.V. et al. v. Hungary (McLachlan, Lalonde, Thomas),
ICSID Case No. ARB/12/2 (Award, 16 April 2014), para 175.
137
Rejoinder, para 353.
138
Rejoinder, para 354 citing RLA-212, A. Miller, L. Oats, Principles of International Taxation (2012), p. 4
(“Every tax has three essential elements, a base, a rate of tax and someone to pay it, a tax payer”); Kotáb
Report, para 14.
139
Rejoinder, para 354 citing R-5, Act on Promotion (as amended by Act 402/2010), Sections 7h, 7i; Minčič
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188. The Respondent asserts that “the Czech legislation specifically designates the Solar Levy as a
tax”.140
The Solar Levy meets the definition of “tax” under the Tax Administration Law, a central
instrument of Czech tax law, and is accounted for and reported as a tax in accordance with Czech
accounting law and budgetary procedure, and listed as a tax in the reports of international
organizations that use their own autonomous definitions of tax (OECD and Eurostat).141
The
Respondent submits that the Solar Levy has never been classified as anything other than a tax in
accounting legislation.142
Indeed, the Respondent emphasizes that the Claimants’ own financial
statements also describe the Solar Levy as a “solar tax”.143
189. The Respondent states that nothing in the ECT suggests that Article 21 only refers to taxes in a
“narrow” or “theoretical” sense; on the contrary, the Energy Charter Secretariat’s publication on
Article 21 indicates that the ECT “envisaged all kinds of special domestic taxes, including taxes
to reduce excessive profits”.144
Furthermore, there is no provision of the ECT requiring that
“domestic law” provide a “general definition” of tax.145
It only requires that the relevant
provisions be provisions “relating to taxes of domestic law”.146
In the Respondent’s view, the
relationship between the Solar Levy and the Czech domestic tax system is direct and unequivocal,
given that (1) the Solar Levy is directly transferred to the general State budget; (2) the Solar Levy
does not impact gross revenues; and (3) the accounting practice categorizes the Solar Levy as a
Statement, para 14.
140
Rejoinder, para 359.
141
Rejoinder, para 355; Counter-Memorial, paras 495-496, 504; Reply, paras 546-547; Kotáb Report, note 7,
paras 28, 29.
142
Rejoinder, para 361; Second Report, para 18; Kotáb Report, para 26, 28; R-297, European System
of Accounts ESA 2010, p. 92, para 4.14; R-284, Revenue Statistics—OECD countries: Details of Tax
Revenue—Czech Republic (https://stats.oecd.org/), rows 77, 88, R-283; OECD Revenue Statistics 2014,
Annex A: The Interpretative Guide, para 60; R-279, FVE Úsilné s.r.o. financial statements as of 31
December 2015, p. 6; R-280, FVE Stříbro s.r.o. financial statements as of 31 December 2015, p. 5; R-281,
FVE Osečná financial statements as of 31 December 2015, p. 6; R-282, FVE Mozolov financial statements
as of 31 December 2015, p. 6; Counter-Memorial, para 504, note 957; Kotáb Report, paras 24, 34, 48;
Annex 3 to Report, R. Boháč, Pojem daň v daňových zákonech, p. 14 of the English translation
(Boháč, The Term “Tax” in Tax Laws).
143
Rejoinder, para 355 citing R-279, FVE Úsilné s.r.o. financial statements as of 31 December 2015, p. 6; R-
280, FVE Stříbro s.r.o. financial statements as of 31 December 2015, p. 5; R-281, FVE Osečná financial
statements as of 31 December 2015, p. 6; R-282, FVE Mozolov financial statements as of 31 December
2015, p. 6.
144
Respondent’s Rejoinder, para 363 citing CLA-74, Ugur Erman Ozgur, Taxation of Foreign Investments
under International Law: Article 21 of the Energy Charter Treaty in Context (2015) [“Ozgur, Taxation of
Foreign Investments under International Law”], p. 56.
145
Rejoinder, para 364; ECT Article 21(7).
146
Rejoinder, para 364; ECT Article 21(7).
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tax expense.147
190. The Respondent notes further that the Czech judiciary overwhelming refers to the Solar Levy as
a tax.148
The Czech Constitutional Court unequivocally refers to the Solar Levy as “a tax or fee”
for the purposes of Article 11(5) of the Czech Republic’s Charter of Fundamental Rights and
Freedoms and satisfies the provision’s requirement that “taxes and fees should be levied only on
the basis of the law”.149
On the other hand, the Czech Supreme Administrative Court decision of
July 10, 2014, on which the Claimants rely, is unpersuasive given that (1) the issue of nonequivalence
had never been argued during the proceedings; (2) no other Czech court or scholar
have cited this decision; and (3) no oral hearing was held and only two briefs were submitted.150
191. The Respondent addresses the six features of taxation proposed by the Claimants: “(a) obligatory,
(b) non-refundable and (c) non-equivalent payment (d) introduced by law, (e) intended to serve
as income of the state budget for the financing of society-wide needs and (f) paid for no specific
purpose.”151
According to the Respondent, contrary to the Claimants’ statements, the Solar Levy
is “non-equivalent” and was not “paid for a specific purpose” since the proceeds are deposited
into the general treasury account of the Ministry of Finance and serve to finance general
government liabilities.152
192. The Respondent further submits that the Solar Levy can also meet the autonomous criteria most
147
Rejoinder, para 364; T/1/143-144.
148
Rejoinder, paras 393-406; Report, paras 47-48; R-38, Constitutional Court Judgement, paras 46,
59, 60, 64; Annex 13 to First Report, Decision of the Grand Chamber of the Czech Supreme
Administrative Court (Case No. 1 Afs 76/2013-57), December 17, 2013, paras 36, 50; Annex 18 to First
Report, Decision of the Czech Supreme Administrative Court (Case No. 1 Afs 256/2014-28),
March 25, 2015, para 42; R-39, Decision of the Czech Supreme Administrative Court (Case No. 1 Afs
80/2012-44), December 20, 2012, para 19; Annex 21 to Second Report, Decision of the Czech
Supreme Administrative Court (Case No. 5 Afs 126/2013-34), May 7, 2014, paras 6, 40; R-291, Decision
of the Supreme Administrative Court (Case No. Afs 66/2012-38), July 24, 2013, p. 4; Annex 14 to First
Report, Decision of the Czech Constitutional Court (Case No. II. US 2216/14), January 13, 2015,
paras 14, 19, 20, 29; R-286, Decision of the Regional Court of České Budějovice (Case No. 10 Af
257/2011-43), December 5, 2012, paras 14, 16; R-287, Judgement of the Supreme Administrative Court
(Case No. 8 Afs 3/2014-39, April 18, 2014, para 29.
149
Rejoinder, para 356 citing Annex 14 to First Report, Decision of the Czech Constitutional Court
(case No. 2216/14), January 13, 2015, para 33 (“[The] Constitutional Court emphasizes that the option to
levy taxes and fees is directly contained in Article 11(5) of the Charter and the “solar levy” can surely be
considered such a tax or fee”); Report, paras 47-48.
150
T/151-152; T/4/755-756.
151
Respondent’s Rejoinder, para 373.
152
Respondent’s Rejoinder, paras 374, 386.
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frequently invoked by tribunals to determine whether a measure is a tax.153
According to the
Respondent, the Solar Levy meets the requirement that “there is a law, which imposes a liability
on classes of persons to pay money to the State for public purposes”, as expressed by several
tribunals including EnCana v. Ecuador, Burlington v. Ecuador, and Duke Energy Electroquil v.
Ecuador.154
193. The Respondent also contends that, considering that French and Italian versions of the ECT
employ the term of “fiscal measures”, instead of “taxation measures”, the scope of carve-out may
go beyond taxation measures and include any fiscal measures.155
In this context, the Respondent
submits that the Czech Constitutional Court decision of May 15, 2012 and the Supreme
Administrative Court decision of July 9, 2015 have confirmed the Solar Levy as a fiscal
measure.156
The Respondent further submits that the Claimants also confirmed it in stating that
the Solar Levy was intended to cover the additional State subsidy and avoid an increase in the
State deficit.157
194. Lastly, pointing out that the Claimants’ experts are not tax lawyers, but tax advisors, the
Respondent observes that its expert Dr Kotáb has more credibility.158
2. The Claimants’ position
195. According to the Claimants, the ECT tax carve-out should be interpreted in accordance with the
rules of interpretation of international treaties, regardless of its reference to domestic law.159
Such
rules are contained in the Vienna Convention on the Law of Treaties (the “VCLT”), and notable
in Article 31(1), which provides:
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.160
153
Counter-Memorial, paras 511-4.
154
Counter-Memorial, para 511; EnCana Corporation v. Ecuador (Crawford, Grigera Naón, Thomas), LCIA
Case No. UN3481, Award, 3 February 2006, para 142; Burlington Resources Inc. v. Republic of Ecuador
(Kaufmann-Kohler, Stern, Orrego Vicuña), ICSID Case No. ARB/08/5 (Decision on Jurisdiction, June 2,
2010), para 165; Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador (KaufmannKohler,
Gómez Pinzón, van den Berg), ICSID Case No. ARB/04/19, Award, 18 August 2008, para 174.
155
T/1/165-167.
156
T/1/167; Respondent’s opening statement, Slide 108.
157
T/1/167-168; Respondent’s opening statement, Slide 109.
158
T/4/755.
159
Reply, para 512.
160
Vienna Convention on the Law of Treaties, Art. 31(1) (emphasis added by Claimants).
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196. The Claimants find support for the importance of the “good faith” principle, “context” and
“object and purpose” in treaty interpretation in the commentary of the International Law
Commission, the writings of several authors and decisions of arbitral tribunals.161
197. Under these criteria, the tax carve-out in Article 21(1) ECT should not exclusively depend on a
host State’s domestic tax legislation, because such an interpretation enables the host State to
evade international liability by arbitrary categorizing its measure as tax.162
Rather, the good faith
interpretation requires taxation measures to be legitimate or bona fide in order for the tax carveout
to apply.163
The Energy Charter Secretariat’s own publication on Article 21 could not be
more clear about the standard for what constitutes legitimate taxation as follows:
Whilst, States have a wide latitude of discretion in imposing and enforcing tax laws, taxes
shall be imposed in good faith. Taxation measures shall not be confiscat[ory], prevent, or
unreasonably interfere with, nor unduly delay effective enjoyment of a foreign investor’s
property or its removal from the State’s territory.164
198. The Claimants note that the tribunal in Yukos confirmed this interpretation concluding that good
faith is required in order for Article 21 to apply:
1430. […] the Tribunal concludes that it has jurisdiction to rule on Claimants’ claims under
Article 13 of the ECT due to the fact that the Article 21 carve-out does not apply to the
Russian Federation’s measures because they are not, as the Tribunal has concluded above,
on the whole, a bona fide exercise of the Russian Federation’s tax powers.
1431. This accords with Claimants’ view that Article 21 of the ECT can apply only to
bona fide taxation actions, i.e., actions that are motivated for the purpose of raising
general revenue for the State. By contrast, actions that are taken only ‘under the guise’ of
taxation, but in reality aim to achieve an entirely unrelated purpose […] cannot qualify for
exemption from the protection standards of the ECT under the taxation carve-out in Article
21(1)”.165
199. The Claimants thus aver that both case law and good treaty interpretation mandate that in order
for the Article 21(1) ECT tax carve-out to apply, taxes must be imposed in good faith. Referring
to the 2014 Yukos awards, the Claimants note that the ECT tax carve-out mandates that the State’s
161
Reply, paras 515-517; CLA-70, International Law Commission Draft Articles on the Law of Treaties,
1966, p. 221, para 12; CLA-71, R. K. Gardiner, Treaty Interpretation, 2nd ed., 2015, Oxford, pp. 197, 211;
CLA-72, J. Romesh Weeramantry, Treaty Interpretation in Investment Arbitration, Oxford, 2012, para
3.38; Phoenix Action Ltd v. The Czech Republic (Stern, Bucher, Fernández-Armesto), ICSID Case No.
ARB/06/5 (Award, April 15, 2009), para 107.
162
Reply, para 519-524.
163
Reply, para 525.
164
Reply, para 525 citing CLA-74, Uğur Erman Özgür (for the Energy Charter Secretariat), Taxation of
Foreign Investments under International Law: Article 21 of the Energy Charter Treaty in Context, p. 29
(emphasis added by Claimants).
165
Reply, para 526; Yukos Universal Limited (Isle of Man) v. The Russian Federation (Fortier, Poncet,
Schwebel), PCA Case No. 2005-4/AA 227, Final Award, 18 July 2014, paras 1430-1431 (emphasis added
by Claimants).
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power be exercised in a legitimate or bona fide way and it cannot be relied on when the
Contracting States hides an action unfavourable to foreign investors “under the guise of
taxation”.166
Nor can the exception apply where the power to tax has been exercised in an abusive
manner as was pronounced by the Quasar v. Russia tribunal, which noted that, absent such a
standard, “international law would likely become an illusion, as states would quickly learn to
avoid responsibility by dressing up all adverse measures […] as taxation”.167
200. In the present case, the Claimants allege that the Solar Levy is not a bona fide taxation measure
under the Yukos standard.168
201. The Claimants observe that the Yukos standard is not limited to “extreme circumstances such as
the destruction of a company or the elimination of a political opponent” since the purpose of the
standard is not to allow a host State from evading international liability by “disguising a measure
as a tax”.169
Even if such an extreme circumstance is necessary for the Yukos standard, this
criterion can be met by the fact that the Respondent introduced the Solar Levy only for the
purpose of evading international liability.170
The Claimants submit that if the Respondent truly
had intended to mitigate the burden on consumers, it would have simply reduced the FiT level.171
202. The Claimants contend that the Solar Levy was introduced for the purpose of “offset[ing] the
introduction of the support from the State budget to pay the FiT”, instead of raising the State’s
revenue.172
This is confirmed by the three indicators.173
First, the Solar Levy was introduced in
a retroactive manner, targeting a very narrow group, i.e., photovoltaic plants commissioned in
2009 and 2010.174
Second, the Czech Republic introduced the Solar Levy in order to avoid
166
Reply, para 526 citing Yukos Universal Limited (Isle of Man) v. The Russian Federation (Fortier, Poncet,
Schwebel), PCA Case No. 2005-4/AA 227, Final Award, 18 July 2014, para 1431; Hulley Enterprises
Limited (Cyprus) v. The Russian Federation (Fortier, Poncet, Schwebel), PCA Case No. AA 226, Final
Award, July 18, 2014, para 1431; Veteran Petroleum Limited (Cyprus) v. The Russian Federation (Fortier,
Poncet, Schwebel), PCA Case No. AA 228, Final Award, July 18, 2014, para 1431.
167
Reply, para 528 citing Quasar de Valors SICAV S.A. et al. (Formerly Renta 4 S.V.S.A et al.) v. The Russian
Federation (Brower, Landau, Paulsson), SCC Case No. 24/2007, Award, July 20, 2012, para 179;
RosInvestCo UK Ltd. v. The Russian Federation (Böckstiegel, Steyn, Berman), SCC Case No. 079/2005,
Final Award, September 12, 2010, para 628; Memorial, paras 278-280.
168
Reply, para 529.
169
Reply, paras 531-533.
170
Reply, paras 534-535.
171
Reply, paras 536-542.
172
T/1/61.
173
T/1/64.
174
T/1/64.
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international liability that would arise out of a simple reduction of the FiT amounts.175
Third, the
Supreme Administrative Court has decided in its decision of July 10, 2014, that the Solar Levy
was not a tax.176
The Czech Constitutional Court also has confirmed that the Solar Levy in
substance reduced the FiT support level in its decisions of May 15, 2012, February 6, 2014 and
January 13, 2015.177
203. The Claimants contend that the Solar Levy is not a tax even under Czech domestic tax law for
the following reasons.178
204. As a threshold matter, the Tax Administration Law does not provide a general definition of
tax.179
The definition in Article 2(3) of the Tax Administration Law applies only for
administration and collection of payments.180
The Respondent’s reliance on this definition is
misplaced.181
205. The Claimants contend that whether the Solar Levy is a tax should be analysed in accordance
with the common academic theory, according to which a tax generally has six features: “(a)
obligatory, (b) non-refundable and (c) non-equivalent payment (d) introduced by law, (e)
intended to serve as income of the state budget for the financing of society-wide needs and (f)
paid for no specific purpose.”182
206. According to the Claimants, the Solar Levy lacks at least two of these six features, namely: (c)
non-equivalent payment; and (f) paid for no specific purpose.183
207. The Solar Levy is paid for a specific purpose, because it was introduced to “reduc[e] the burden
on electricity consumers without negatively impacting on the Respondent’s State deficit”.184
175
T/1/64-65.
176
T/1/654.
177
T/4/746-747; Claimants’ closing statement, Slide 64; CLA-16, Czech Constitutional Court, Decision (case
No. Pl. ÚS 17/11), May 15, 2012, para 45; Annex 16 to First Report, Decision of the Czech
Constitutional Court (case No. 3211/13), February 6, 2014, para 5; Annex 14 to First Report, Czech
Constitutional Court, Judgment 2216/14, January 13, 2015, para 25.
178
Memorial, para 343.
179
Reply, para 546.
180
Reply, paras 547-549.
181
Reply, para 550.
182
Reply, para 551-556.
183
Reply, para 556.
184
Reply, paras 567.
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208. The Solar Levy does not involve the non-equivalent payment feature, which is found “when the
taxpayer receives no direct consideration from the State for paying the tax.”185
Under the
financing mechanism introduced by the Act No. 402/2010, the State collected the Solar Levy
from the solar energy producers, and used the amount for the compensation to the grid operators,
who paid the FiT to the producers.186
Because the collected Solar Levy constituted a source of
FiT, which the solar energy producers received, the Claimants allege that the producers received
direct consideration by the payment of the Solar Levy.187
209. This conclusion is confirmed by the Czech Supreme Administrative Court decision of July 10,
2014, which concluded the Solar Levy did not meet the requirement of non-equivalence and was
a de facto reduction of the FiT, finding that “the state use[d] the levy to lower the support it
calculated and provided.”188
According to the Claimants, this is a key and the only judgement in
which the Czech court analysed the nature of the Solar Levy.189
The Court carefully examined
the nature of the Solar Levy since the issue was whether the Solar Levy and the corporate income
tax constituted double taxation on the same income.190
The Claimants observe that this ruling
was confirmed at least four times by the Constitutional Court and the Grand Chamber of the
Supreme Administrative Court.191
210. The Claimants submit that all of the Czech court decisions cited by the Respondent are irrelevant
to the issue of whether the Solar Levy is a tax for the purposes of Article 21(1) ECT.192
The
Supreme Administrative Court’s decisions of Ref. No. 1 Afs 80/2012-40 and Ref. No. 5 Afs
126/2013-34 did not analyse the nature of the Solar Levy.193
The Grand Chamber of the Supreme
Administrative Court decision of Ref. No. 1 Afs 76/2013-57 merely confirmed that the Solar
Levy was a tax for the purpose of the Tax Administration Law, which does not provide a general
definition of tax, and rather found that “introducing the solar power levy de facto results in
decreasing the level of government support”.194
The Czech Constitutional Court decision of Ref.
185
Reply, para 569.
186
Reply, para 570.
187
Reply, paras 571-572.
188
Reply, para 572.
189
Reply, para 587.
190
Reply, paras 573-574.
191
Reply, paras 575-578.
192
Reply, paras 580-581.
193
Reply, paras 582.
194
Reply, para 583; Annex 13 to First Report, Decision of the Grand Chamber of the Czech Supreme
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No. US 2216/14, which indicated that the Solar Levy was a “tax or fee”, did not provide a precise
characterization of the Solar Levy.195
211. The Claimants submit that further aspects indicate the non-taxation nature of the Solar Levy.196
First, the legislative process of the Act No. 402/2010 was atypical for a tax. The bill was prepared
by the Ministry of Industry and Trade, instead of the Ministry of Finance, which governs taxation
measures.197
Second, both the extremely limited scope of application and the unusual association
with non-tax parameters in identifying the payers of the Solar Levy make it even harder to classify
the Solar Levy as a tax measure.198
Third, the temporariness of the Solar Levy was
unprecedented.199
The Solar Levy was initially introduced only for a three-year period from
January 1, 2011 to December 31, 2013.200
Fourth, the use of the term “levy”, instead of “tax”,
indicates the Czech Parliament’s awareness of not imposing a tax.201
Finally, the Czech courts
found that the Solar Levy may have had “strangling effects”, which violates a proportionality test
under which a tax should not lead a tax payer to liquidation.202
212. In the Claimants’ view, the Solar Levy is a deduction of the FiT, instead of a tax.203
This is
confirmed by the statement of Mr Kocourek, then Minister of Industry and Trade, which
described the Solar Levy as “a new source of income” for the Czech Republic to provide
budgetary support for the RES support mechanism.204
The Claimants submit that, as Mr Kotáb
also accepts, the Czech Constitutional Court decision of May 15, 2012, and the Czech Supreme
Administrative Court decisions of July 10, 2014 and December 17, 2013 have considered the
Solar Levy as a de facto reduction of the FiT.205
The Claimants observe that nevertheless the
Respondent choose not to simply reduce the FiT in order to mitigate arbitration risks.206
Administrative Court, December 17, 2013 (Case No. 1 Afs 76/2013-57), para 28.
195
Reply, para 584-585.
196
Reply, para 588.
197
Reply, para 589.
198
Memorial, para 346; Reply, para 590.
199
Reply, para 591.
200
Reply, para 591.
201
Reply, para 592.
202
Reply, para 593.
203
Memorial, paras 349-351.
204
Memorial, para 350.
205
T/1/48; T/4/704.
206
Memorial, paras 356-358.
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213. The Claimants allege that the wording of Article 21(7) of the ECT, “‘relating to’ taxes of
domestic law”, was not meant to widen the scope of the carve-out beyond mere domestic taxation
measures.207
The Claimants observe that the Respondent’s focus on these words suggests the
Respondent’s admission that the amendment measures cannot be considered as tax under Czech
domestic law.208
214. The Claimants object to the Respondent’s assertion that Italian and French versions of the ECT
employ the language of “fiscal measures”, instead of “taxation measures”.209
The Claimants
submit that the Italian and French words of “misura fiscale” and “mesure fiscale” have the same
meaning of “taxation measures” in the English version.210
Indeed, the Spanish and German
versions employ “medida impositiva” and “steuerliche Maßnahme”, both of which correspond
to the English “taxation measures”.211
3. The Tribunal’s conclusion
215. The Parties do not agree whether the Tribunal has jurisdiction over the Claimants’ claims under
the ECT. As summarized above, the Respondent contends that all of the Respondent’s
amendments to the Incentive Regime – the introduction and extension of the Solar Levy, the
repeal of both the Income Tax Exemption and the Shortened Depreciation Period – qualify as
“Taxation Measures” under of Article 21 of the ECT and therefore are excluded from the scope
of the ECT.212
Article 21(1) of the ECT provides:
(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.
Article 21(7)(a) of the ECT describes the term “Taxation Measures” as including:
(i) any provision relating to taxes of the domestic law of the Contracting Party or of a political
subdivision thereof or a local authority therein; and
(ii) any provision relating to taxes of any convention for the avoidance of double taxation or
of any other international agreement or arrangement by which the Contracting Party is bound.
207
T/1/66-67; Rejoinder, para 364; ECT Article 21(7) (emphasis by the Respondent).
208
T/1/66-67.
209
T/4/744-745.
210
T/4/745.
211
T/4/745.
212
Statement of Defense, paras 92-97.
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Paragraph (7) of Article 21 further specifies:
(b) There shall be regarded as taxes on income or on capital all taxes imposed on total income,
on total capital or on elements of income or of capital, including taxes on gains from the
alienation of property, taxes on estates, inheritances and gifts, or substantially similar taxes,
taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital
appreciation.
(c) A “Competent Tax Authority” means the competent authority pursuant to a double
taxation agreement in force between the Contracting Parties or, when no such agreement is
in force, the minister or ministry responsible for taxes or their authorised representatives.
(d) For the avoidance of doubt, the terms “tax provisions” and “taxes” do not include customs
duties.
216. As summarized above,213
the Respondent contends that the Tribunal does not have jurisdiction
to entertain any of Claimants’ ECT claims because its jurisdiction under Article 26(1) of the ECT
is limited to “disputes ‘concern[ing] an alleged breach of an obligation’ set out in Articles 10 to
17 of the ECT.”214
According to the Respondent, “’[t]he measures challenged by the Claimants
in this arbitration, namely: the introduction of the Solar Levy, the repeal of the Income Tax
Exemption and the prolongation of the Solar Levy’ are all ‘Taxation Measures’ within the
meaning of the ECT;”215
accordingly, they are excluded from the scope of Article 26’s dispute
settlement provision.
217. The Claimants have abandoned their claim concerning the depreciation measures216
and stated
explicitly that they do not dispute that the repeal of the Income Tax Exemption constitutes a
“Taxation Measure” under Article 21(7) of the ECT.217
The Respondent emphasized this at the
Hearing interpreting this as an “admission by Claimants that they do not contest that their ECT
claims based on the repeal of the Income Tax exemption are barred by the Article 21 carve out,”
and the Claimants did not comment on it.218
The Tribunal agrees. It cannot be disputed that the
repeal of the Income Tax Exemption constitutes a “Taxation Measure” for the purposes of the
ECT. The Tribunal therefore concludes that it has no jurisdiction to entertain the Claimants’
claims arising out of this measure.
218. Regarding the Solar Levy, however, the Claimants contend that it cannot be characterized as a
213
See above, para 168.
214
Counter-Memorial, para 484 citing RLA-5, ECT Art. 26; Rejoinder, para 338.
215
Rejoinder, para 338(d) citing Reply, p. 4.
216
Reply, para 67 and note 222.
217
Reply, note 577 (“As correctly noted by the Respondent (Counter Memorial, para 485), the Claimants do
not deny that the Income Tax Exemption provided for by the Act on Income Tax are ‘taxation measures’
for the purposes of the ECT.”).
218
T/1/161.
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“Taxation Measure” for the purpose of Article 21(7) of the ECT. According to the Claimants, the
ECT tax carve-out and its reference to domestic law should be interpreted in accordance with the
rules of interpretation of international treaties contained in the VCLT.219
According to Article
31(1)’s general rule of interpretation, the Claimants assert, “the definition of ‘taxation measure’
of Article 21(7) and the relevance of the reference to domestic law must be interpreted ‘in good
faith’ and bearing in mind the ‘context’ of the relevant expressions and the ‘object and purpose’
of the ECT.”220
The ordinary meaning of a term contained in an international treaty is to be
identified in the light of its object and purpose.221
Exclusively relying on the host state’s domestic
legislation to define the scope of the ECT’s tax carve-out, as the Respondent argues, would allow
the host state “to escape its international obligations under the ECT by simply labelling a measure
as a tax.”222
That however would be at odds with the purpose of the ECT which, the Claimants
assert, is “to promote long-term cooperation in the energy field.”223
219. The Claimants contend that the ECT’s tax carve-out must be limited to taxes imposed in good
faith.224
Applying this principle, the Claimants follow the approach taken by the tribunals in the
Yukos and the parallel Hulley and Veteran cases225
and conclude that the relevant standard for
determining whether a particular regulatory measure qualifies as a “Taxation Measure” under
Article 21(7) of the ECT is “whether it comes within the definition of ‘bona fide taxation actions,
i.e., actions that are motivated by the purpose of raising general revenue for the State.’”226
The
Claimants argue that the Solar Levy does not meet this bona fide standard, regardless how the
measure might be sought to be characterized under Czech law.227
In any event, according to the
Claimants, the Respondent’s characterization of the Solar Levy as a tax under both Czech Law
and the autonomous standard applied by certain non-ECT tribunals is incorrect: the Solar Levy
219
Reply, paras 512-513.
220
Reply, para 514.
221
Reply, paras. 516-517 citing CLA-71, R. K. Gardiner, Treaty Interpretation, pp. 197, 211 and CLA-72, J.
Romesh Weeramantry, Treaty Interpretation in Investment Arbitration, Oxford, 2012, para 3.38.
222
Reply, para 520.
223
Reply, para 520 citing ECT, RLA-5, Article 2.
224
Reply, paras 525-526.
225
Memorial, paras. 333-335 citing Yukos Universal Limited (Isle of Man) v. The Russian Federation (Fortier,
Poncet, Schwebel), PCA Case No. AA 227, Final Award, July 18, 2014; Hulley Enterprises Limited
(Cyprus) v. The Russian Federation (Fortier, Poncet, Schwebel), PCA Case No. AA 226, Final Award,
July 18, 2014; Veteran Petroleum Limited (Cyprus) v. The Russian Federation (Fortier, Poncet, Schwebel),
PCA Case No. AA 228, Final Award, July 18, 2014.
226
Memorial, para 341 (footnote omitted).
227
Memorial, para 342; Reply, para. 508.
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neither constitutes a tax under Czech law228
nor under the autonomous standard applied by certain
tribunals operating under the US-Ecuador and Canada-Ecuador BITs.229
220. The Tribunal agrees that Article 21 of the ECT as a whole must be interpreted in accordance with
the VCLT. The applicable provision here is the general rule of treaty interpretation in Article 31,
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.”
221. Article 21(7) of the ECT sets forth no self-standing definition of “Taxation Measures.” Instead
Article 21(7)(a) of the ECT provides that such measures include “any provision relating to taxes
of the domestic law of the Contracting Party or of a political subdivision thereof or a local
authority therein” as well as “any provision relating to taxes of any convention for the avoidance
of double taxation or of any other international agreement or arrangement by which the
Contracting Party is bound.”
222. The Tribunal notes that, unsurprisingly, neither of the Parties has suggested that the Solar Levy
qualifies as a “Taxation Measure” under the second subparagraph of Article 21(7)(a) of the ECT,
(i.e. under an applicable international instrument), but that the Parties have centred all their
arguments on the first subparagraph of Article 21(7)(a) referring to the domestic law of a
Contracting Party
223. The Parties disagree on how this provision should be interpreted, the Claimants arguing that its
explicit reference to domestic law does not reduce “the interpretation of the ECT tax carve-out
to an exercise in Czech law.”230
According to the Claimants, the definition of “Taxation Measure”
according to Article 21(7) and the relevance of the reference to domestic law must be interpreted
in accordance with the general rule of treaty interpretation in Article 31(1) of the VCLT and
“therefore be interpreted ‘in good faith’ and bearing in mind the ‘context’ of the relevant
expressions and the ‘object and purpose’ of the ECT.”231
The Respondent contends, in turn, that
the Tribunal need only consider whether the Czech legislative provisions that introduced and
later extended the Solar Levy constitute provisions relating to taxes of the domestic law of the
Czech Republic in order to determine whether these measures fall in the scope of the ECT’s tax
228
Reply, para 595.
229
Reply, paras 597-604.
230
Reply, para 511.
231
Reply, paras 513-514.
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carve-out.232
Because, according to the Respondent, the Solar Levy constitutes a tax under Czech
Law, it qualifies under the ECT’s tax carve-out.233
224. The Tribunal takes the view that in order to ascertain whether a putative tax measure qualifies
under Article 21 of the ECT a two-step analysis is required: a characterization under domestic
law followed by an application of Article 21’s inherent limits.
225. The starting point of such analysis must be the characterisation of the putative tax measure by
the State relying on the tax carve-out. In the Respondent’s words “it must look to the domestic
law of the Czech Republic” to determine whether the Solar Levy qualifies as a “provision relating
to taxes” under Article 21 of the ECT. 234
The Tribunal accepts that, in order for Article 21 of the
ECT to apply, the domestic law of the host state must characterize the measure as a tax in nature
and substance. That is clear from the text of Article 21(7)(a)(i) of the ECT, which is directed to
“any provision relating to taxes of the domestic law” of the state in question. As the Respondent
observes, this language focuses inquiry directly on the domestic law of the state relying on Article
21 of the ECT.
226. This interpretation is consistent with the need to interpret the ECT, including Article 21, in
accordance with the VCLT and applicable rules of international law, which the Respondent
explicitly recognizes.235
Interpreting Article 21 of the ECT in accordance with the VCLT requires
that effect be given to the ordinary meaning of Article 21(7)’s reference to the domestic law of
the state relying on the ECT’s tax carve-out.
227. In addition to requiring an interpretation of treaty-terms according to their “ordinary meaning,”
Article 31(1) of the VCLT also requires the Tribunal to interpret the terms of Article 21 of the
ECT in the light of the ECT’s object and purpose. This interpretation is also consistent with the
objective of Article 21, which was to permit, within the limits of Article 21, contracting states to
exclude specific measures from certain of the ECT’s international protections. Put simply, the
terms of Article 21, interpreted in accordance with Article 31(1) of the VCLT, require reference
to the domestic law of the state adopting a particular measure, in order to determine whether that
measure constitutes a tax measure under the domestic law of that state. The result, a contrario,
is that unless a measure constitutes a tax measure as a matter of its domestic law, Article 21’s
purposes are not applicable. Article 21 applies only to those measures which a contracting state
232
Counter Memorial, para 487.
233
Counter Memorial, para 503.
234
Rejoinder, para 345; see also Counter Memorial, para 487.
235
Rejoinder, para 341.
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to the ECT characterizes as tax measures within its domestic legal system (or within applicable
international conventions).
228. If the putative taxation measure is found to constitute a taxation measure under the host state’s
domestic law, then, as discussed below, in a second step, an interpretation of the scope of the
ECT’s tax carve-out in accordance with Article 31(3) of the VCLT requires to consider the limits
which Article 21 of the ECT imposes on those measures. However, before those limits become
potentially relevant, a putative taxation measure must first constitute a tax measure as a matter of
domestic law.
229. The Tribunal takes the view that when analyzing whether a certain measure is to be characterized
as a taxation measure under domestic law, considerations of substance should prevail over a
formalistic approach. In that sense although the Tribunal attaches some importance to the fact
that the Solar Levy was titled just that – the Solar “Levy” – not the Solar “Tax” or some other
type of tax, it is hesitant to assign decisive weight to a formal element as is the denomination of
the measure. As the Respondent’s expert, Mr Petr Kotáb, argues, in Czech law “the term ‘levy’
is very frequently used to designate payments that are more properly classified as ‘taxes’ or
‘fees’.”236
As discussed below, however, there are other significant considerations arguing
against, not only a formal but also substantial, characterization of the measure as a tax under
Czech law. The Tribunal heard considerable expert and other evidence on this point. The Parties’
experts mainly focused on the definition of “tax” under Czech tax theory and on the position of
Czech courts, namely the Supreme Administrative Court and the Constitutional Court, on the
question whether the Solar Levy qualifies as a tax under Czech law.
230. Preliminarily, the Tribunal takes the view that reliance on the fact that the Solar Levy is
administered by the Tax Administration Law is not dispositive of the question whether the Solar
Levy constitutes a tax in substance. The “definition” of tax contained in the Tax Administration
Law extends to many payments which by their nature are not taxes; reliance on the Tax
Administration Law is therefore unsuitable to give a conclusive answer as to whether or not a
payment it governs is in nature a tax. This was not contradicted by Respondent’s expert Mr. Petr
Kotáb at the Hearing.237
236
Kotáb Report, para. 35. However, the same consideration applies, a contrario, to the Respondent’s
contention that the fact that “Claimants’ financial statements also describe the Solar Levy as a ‘solar tax’”
has decisive weight on the characterisation of the Solar Levy as a tax. See Rejoinder, para. 355 referring
to R-279, FVE Úsilné s.r.o. financial statements as of December 31, 2015, p. 6; R-280, FVE Stříbro s.r.o.
financial statements as of December 31, 2015, p. 5; R-281, FVE Osečná financial statements as of 31
December 2015, p. 6; R-282, FVE Mozolov financial statements as of December 31, 2015, p. 6.
237
T/2/415-416 (“Q. In any case, just to be clear, on any analysis, the definition of ‘tax’ under the TAL extends
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231. Likewise, the Tribunal accepts the Respondent’s argument that academic literature, in these
particular circumstances, does not provide substantial guidance as to whether or not the Solar
Levy is “legally a tax.”238
There is very little commentary addressing the characterization of the
Solar Levy under Czech law and that commentary which does exist does not address many of the
Czech judicial decisions referenced by the Parties.
232. In these circumstances, the Tribunal concludes that the decisions of the Czech Courts are of
particular relevance for the characterization of the Solar Levy. In this regard, the Tribunal notes
that Czech Courts have, at least prima facie, come to divergent characterization of the Solar Levy.
While some court decisions refer to the Solar Levy as a tax, others come to the opposite result,
finding that the Solar Levy is not a tax in substance. However, the former primarily addressed
the issue of whether the Solar Levy qualified formally as a tax, in particular for purposes of the
Tax Administration Law rather than addressing the issue of whether the Solar Levy constitutes a
tax in substance. This applies to the decision of the Grand Chamber of the Supreme
Administrative Court of December 17, 2013, cited by the Respondent as evidence that the Solar
Levy was a tax for purposes of Czech law.
233. The Tribunal concludes instead that the Czech Supreme Administrative Court decision of July
10, 2014 – and the various other Czech court decisions – are authoritative on the issue of the
characterisation of the Solar Levy. In that case, the Czech Court made the finding that the Solar
Levy is not a tax for purposes of the prohibition against double taxation under Czech law. The
Supreme Administrative Court expressly addressed the question whether, in combination with
the corporate income tax, the Solar Levy would have been an improper instance of double
taxation and rejected that conclusion, holding that the Solar Levy was paid for a specific
consideration, “the government subsidy,” and therefore not a tax, whose “common essential
feature … is their non-equivalence,” but a de facto reduction of the FiTs and Green Bonuses.
234. In its decision, the Supreme Administrative Court stated in paragraph 19:
The Supreme Administrative Court notes with regard to the petitioner’s argumentation
regarding the nature of the levy as a tax that the nature of any tax in the taxation system
involves the government requiring funds from tax payers without immediate compensation.
It can thus be stated that a common essential feature of all taxes is their non-equivalence.
The subject of the levy collected under the Renewable Energy Sources Act is the amount
resulting from the consideration of stipulating the amount of government support for this type
to a great many payments that are clearly not taxes. A. It extends to many payments which are not labeled
as taxes, and also to payments which by their nature are not taxes. Q. In short, the TAL just cannot give us
a conclusive answer as to whether or not a payment that it governs is in nature a tax? A. I would tend to
agree that it cannot or it does not give us a conclusive answer, although I would say it gives us certain
indication or direction.”).
238
Rejoinder, paras 368-369.
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of economic activity. Unlike collecting income tax on income resulting from the activities of
the entity subject to the tax without any performance from the state at the time of taxation,
the state uses the levy to lower the support it calculated and provided. The levy was therefore
correctly not included under Section 36 of the Income Taxes Act among the income subject
to the withholding tax and that is not included in the tax base, for the reasons consisting of
the differing natures of a levy and a tax. Despite the fact that the levy uses the same collection
mechanism as for withholding taxes on certain types of income, the levy does not have the
nature of a tax. (Emphasis added)
235. In the Court’s view, the essential feature of a tax was that of non-equivalence, i.e. that taxes are
paid without concrete consideration. Since the Court considered the subsidies in form of FiTs
and Green Bonuses a “performance from the state” directly linked to the collection of the Solar
Levy, it found that the Solar Levy lacked the characteristic of “non-equivalence” and hence “does
not have the nature of a tax” and “is in nature a decrease in government subsidy and not a tax.”239
Accordingly, the Court concluded that the Solar Levy “as introduced by Act No. 402/2010 Coll.
is in nature a decrease in government subsidy and not a tax, where the basic criterion is non-
equivalence.”240
236. The Tribunal accepts that, as conceded by the Claimants’ expert Mr in the hearing,
there “might be differences in the definitions” of taxes in Czech academic literature.241
However,
the Tribunal notes that it is undisputed that the element of non-equivalence is an essential feature
to distinguish taxes from fees under Czech law – in both case-law and academic doctrine.242
Whether the Solar Levy lacked or not the distinguishing feature of non-equivalence was heavily
disputed between the Parties’ experts. In that regard, the Tribunal is also mindful of the
Respondent’s contention that Czech academic literature, in particular Mr Radim Boháč in a 2013
publication, has described the Solar Levy as non-equivalent. However, in his analysis, Mr Boháč
concedes that with regard to the Solar Levy one could “speak of … some form of material and
remote equivalence.”243
This analysis is essentially consistent with Mr characterisation
239
Annex 11 to First Report, Decision of the Czech Supreme Administrative Court of July 10, 2014,
paras 19-20.
240
Annex 11 to First Report, Decision of the Czech Supreme Administrative Court of July 10, 2014,
para 20.
241
T/2/377 (
242
See, e.g., T/2/404-405 (Kotáb); T/2/369 ( Annex 4 to First Report, BAKEŠ, Milan et al.
– Finanční právo. 6. aktualiz. vyd Praha: C. H. Beck, 2012, pages 92, 93 and 154 English title translation:
“Section 3. Taxes, fees, customs duty”, p. 1.
243
R-318, R. Boháč, “Tax Revenues of Public Budgets in the Czech Republic”, p. 10. This reading was
confirmed by Mr. at the hearing: T/2/384 “My reading of [Mr. Boháč’s] conclusion is that,
particular for non equivalence and specific purpose, he says that there is material sort of material is not
equivalent, and materially there is a specific purpose. And then he basically makes a conclusion that he
would rather sort of prefer the formal side, the way it was designed, and makes a conclusion on rather on
the formal grounds than the substance and the materiality, but clearly accepts that there is materially like
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of the Solar Levy as being “formally non-equivalent,” but materially bearing a direct causal link
to the payment of the FiTs.244
237. The Tribunal also notes that Mr Boháč’s analysis precedes the July 10, 2014 Supreme
Administrative Court judgment and that the Respondent failed to submit evidence that Mr Boháč
maintains his analysis in view of the Supreme Court’s contrary conclusion.245
The Tribunal does
not consider that it should attach the same weight to this analysis, as to the July 10, 2014 decision
of the Supreme Administrative Court. This decision is directly relevant to the question whether
the Solar Levy was characterized as a tax for purposes of Czech law. The Czech Supreme
Administrative Court specifically concluded that the Solar Levy could not be treated as a tax in
substance, and thus could not provide the basis for a finding of double taxation. In the Tribunal’s
view, that conclusion directly addresses the proper characterization of the Solar Levy under
Czech law.
238. The Supreme Administrative Court received argument on these questions and rendered a
considered decision, in its July 10, 2014 judgment, expressly addressing the characterization of
the Solar Levy. Moreover, this characterization was a significant and necessary element in the
Court’s holding (that the tax payers were not entitled to protection against double taxation). As
Mr Kotáb conceded, that decision has neither been overturned nor otherwise criticized in later
judgments by Czech Courts.246
Importantly, other judgments of Czech courts, including the
Constitutional Court, have likewise ruled that the Solar Levy is not a tax, but in substance a
reduction of the FiT.247
239. The Tribunal is not persuaded that similar weight should be attached to the various decisions
of non equivalence, and there is materially a specific purpose.” (
244
First report, para 30; Second Report, paras. 60-61; T/2/384:13-21 (
245
T/2/446 (“Q. Just looking at the academic analyses of taxes you have accepted that a non equivalence is a
mandatory feature of a tax, but let's just look at another point of academic law that you have referred to.
You rely on Mr. Boháč's book and his analysis in tax revenues of public budgets; that's right, isn't it? A.
That's right. Q. Now, that book was published in October 2013, wasn't it? A. That's correct. Q. And so,
that was nine months before the July 2014 Judgment, and, of course, it had no opportunity to consider that
judgment, did it? A. It would appear so.”) (Kotáb).
246
T/2/445 (“Q. And it's fair to say also that the July 2014 Judgment has never been itself subject to a
reference to the Grand Chamber or otherwise judicially criticized or overturned. A. Well, not that I know.
Neither it has been cited, but in following Supreme Administrative Court decisions, including those which
repeatedly referred to the Solar Levy as a tax.”).
247
See, e.g., Annex 15 to First Report, Decision of the Czech Constitutional Court of May 15, 2012
(case 220/2012 Coll.), para 45; Annex 14 to First Report, Czech Constitutional Court, Judgment
2216/14, January 13, 2015, para 25; Annex 16 to First Report, Decision of the Czech Constitutional
Court of February 6, 2014 (case No. 3211/13), para 5.
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cited by the Respondent as evidence that the Solar Levy was a tax for purposes of Czech law.
These decisions principally involve determinations that the Solar Levy is subject to the
procedural and administrative provisions of the Tax Administration Law and is a “tax or fee”
within the meaning of Article 11(5) of the Czech Republic’s Charter of Fundamental Rights and
Freedoms (“Charter”).248
This was reiterated by Claimant’s expert Mr at the Hearing.249
240. As outlined above, the Tax Administration Law applies to a wide range of fiscal payments,
including fees and other charges250
which are not generally regarded as taxes under Czech (or
other) law; likewise, Article 11(5) of the Charter applies not only to taxes, but also fees. The
Tribunal does not consider that these authorities establish more than that the Solar Levy was
administered in accordance with general procedures and fairness requirements, applicable to both
taxes and other fiscal charges, under Czech law.251
This, however, is of no weight as the issue
before the Tribunal is not whether the Solar Levy is administrated in accordance with procedures
that apply to taxes (and fees) but whether the Solar Levy is a tax in substance.
241. The Tribunal therefore considers the conclusions reached by the Czech Administrative Court,
inter alia in its December 17, 2013 and April 18, 2014 decisions, of incidental relevance to the
characterization of the Solar Levy as, in its nature, a tax. Those decisions do not affect the
persuasive force of the Supreme Administrative Court’s July 10, 2014 decision, especially in
light of the decisions of the Constitutional Court and other decisions of the Supreme
Administrative Court finding that the Solar Levy was in substance a reduction of FiTs.
242. Given the foregoing decisions, the Tribunal is unwilling to adopt a different conclusion as to the
proper characterization of the Solar Levy under Czech law. The Tribunal does not consider it
decisive that, in the Czech legal system, judicial decisions (or decisions of the Supreme
248
First Report, para 61.
249
T/2/363 ( (“How does that correspond to the many other cases that referred to the levy as a tax?
Actually, I find them perfectly compatible because many of them deal with the strangling effect, and are
simply in the area of the tax administration law, whereas this 10th of July case is the only one dealing with
the substance and addressing the substance question.”).
250
First Report, para 38.
251
This is particularly evident as regards the decision of the Grand Chamber of the Czech Supreme
Administrative Court of December 17, 2013, to which Respondent attaches particular importance. When
the Court states that “the solar power levy is actually a tax,” it explicitly links that finding to an earlier
finding in that same decision, that the Solar Levy qualified as a tax “pursuant to Section 2(3)(b) of the [Tax
Administration Law],” and that it was “administered by local financial authorities, which proceed pursuant
to the [Tax Administration Law].” See Annex 13 to First Report, Decision of the Grand Chamber
of the Czech Supreme Administrative Court (case No. 1 Afs 76/2013-57), December 17, 2013, paras 23-
25.
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Administrative Court) are arguably not regarded as sources of law.252
That is true in many legal
systems. The essential point is that, in determining how the Solar Levy is characterized in the
Czech domestic legal system, the decisions of the Supreme Administrative Court (and the other
decisions noted above) are the best available guidance, regardless of their formal status as a
source of law. In the Tribunal’s view, these decisions are entitled to substantial weight in
determining the characterization of the Solar Levy as a matter of Czech law.
243. The conclusion reached by the Czech Supreme Administrative Court in its 10 July 2014 decision,
i.e. that the Solar Levy does not constitute a tax in substance, finds further support in the
evidentiary record. Firstly, the Respondent itself argued, through its Ministry of Finance, that the
Solar Levy was materially not a tax in proceedings before the Czech Constitutional Court. In
those proceedings, the Finance Ministry formally took the position that, “from the material
perspective, the introduced measures [of the Solar Levy] are considered a reduction of
subsidy,”253
which is “aimed to decrease the economic feed-in tariffs.”254
Secondly, the
legislative history of the Solar Levy also supports this conclusion as the Czech Government stated
in connection with the measure’s enactment that it was “necessary to find a formally correct
mechanism for reduction of the support of RES from photovoltaic plants, such that it cannot be
legally contested.”255
In the Tribunal’s view, these characterizations – issued by the Czech
Government itself – are precisely consistent with the holding of the Supreme Administrative
Court that the Solar Levy was – rather than a tax – in substance a reduction of the FiT, a
conclusion also reached by the Constitutional Court and the Grand Chamber of the Supreme
Administrative Court in various decisions.
244. Moreover, and independently of the question of whether or not it qualifies as a taxation measure
under Czech law, the Solar Levy cannot be considered to qualify as a “Taxation Measure” within
the meaning of Article 21(7) of the ECT. The Tribunal is convinced that a measure will only be
exempted from the ECT’s coverage if it falls within the meaning of a “Taxation Measure” as
contemplated by its Article 21. The Tribunal has no doubt that Article 21 imposes limits on those
measures which may be invoked by a Contracting Party under the ECT. Article 21 is, of course,
252
T/2/405 (Kotáb).
253
Annex 22 to Second Report, Detailed opinion of Ministry of Finance provided Constitutional Court
in 2011 the proceedings that led decision 220/2012 Coll., p. 39.
254
Annex 22 to Second Report, Detailed opinion of Ministry of Finance provided Constitutional Court
in 2011 the proceedings that led decision 220/2012 Coll., p. 17.
255
See, e.g., C-198, Minutes of the third meeting of the Coordination Committee, October 15, 2010, pp. 4-5,
(“1st
Deputy Environmental Minister Bízková stated that it is necessary to find a formally correct
mechanism for reduction of the support of RES from photovoltaic plants, such that it cannot be legally
contested.”).
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a provision in an international treaty, subject to interpretation under the VCLT and international
law more generally. It would ignore the ECT’s text, and the specific reference to tax-related
measures in Article 21(7)(a)(ii), to decline to give international content to these terms.
245. Moreover, a contrary result, in which the reference to “Taxation Measures” in Article 21 had no
international content, would permit Contracting Parties unilaterally to define those measures
which were, and were not, subject to the ECT. In the Tribunal’s view, there is nothing to suggest
that such a view of Article 21 of the ECT was contemplated. It would contradict the purposes of
the ECT, aiming at the establishment of uniform international standards, contrary to the text of
Article 21, which specifically limits the scope of the provision to tax measures. Article 21 clearly
imposes limits on what constitute tax measures which are excluded from the ECT’s coverage.
246. In that context, the Tribunal finds the Respondent’s assertion, that the language used in the
equally authentic French and Italian versions of the ECT supports a broad scope of the ECT’s tax
carve-out – going beyond taxation measures and including any fiscal measure – unpersuasive.
Article 33(4) of the VCLT provides that “when a comparison of the authentic texts discloses a
difference of meaning which the application of articles 31 and 32 does not remove, the meaning
which best reconciles the texts, having regard to the object and purpose of the treaty, shall be
adopted.”
247. As noted above, Article 21 of the ECT does not itself provide an express international definition
of tax measures to which the provision applies. In the Tribunal’s view, there is also no need, in
this arbitration, to comprehensively define what are, and what are not, tax measures for purposes
of Article 21’s limits. Rather, it is sufficient to address one aspect of these limits, which in the
Tribunal’s view is applicable to the Solar Levy.
248. Similarly situated tribunals have limited the application of Article 21 of the ECT to state actions
directed at raising general revenue for the state. The Yukos tribunal declared that “Article 21
applies only to actions that are motivated for the purpose of raising general revenue for the
State.”256
The Tribunal is persuaded that Article 21 was not intended to encompass measures
which had principal objectives other than the raising of revenue, but rather to exempt measures
256
Yukos Universal Limited (Isle of Man) v. The Russian Federation (Fortier, Poncet, Schwebel),
UNCITRAL, PCA Case No. AA 227, Final Award, July 18, 2014, paras 1430-31 (Article 21 of the ECT
applies only to “actions that are motivated for the purpose of raising general revenue for the State”; actions
taken “to achieve an entirely unrelated purpose” are not within Article 21). See also Quasar de Valors
SICAV S.A. et al. (Formerly Renta 4 S.V.S.A et al.) v. The Russian Federation (Brower, Landau, Paulsson),
SCC Case No. 24/2007, Award, July 20, 2012, para. 179 (“international law would likely become an
illusion, as states would quickly learn to avoid responsibility by dressing up all adverse measures … as
taxation”).
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which formed part of a Contracting Party’s general tax regime, aimed principally at raising
revenue.
249. If an ECT tribunal were to consider only the form of the measure rather than its substance, it
would provide the scope for abuse of the ECT’s tax carve-out, as the contracting states would be
able to escape their obligations under Part III of the ECT, and thus liability from their violations
thereof, simply by labelling governmental actions as “taxation” measures. There is no indication
in the ECT that an ECT tribunal’s jurisdiction does not encompass the determination of whether
a particular measure constitutes a “Taxation Measure” for the purpose of Article 21 of the ECT.
An ECT tribunal must therefore make a substantive determination of the measure in light of the
relevant facts rather than simply adopting the contracting state’s own, formal characterization of
that measure.
250. It is true that one purpose of the Solar Levy was to raise revenue of the State budget (as one of
the sources to cover the cost of subsidies to solar investors). Critically, however, the Solar Levy
was structured as it was – covering only a certain class of solar energy producers and being
calculated as a percentage of the FiT – in order to alter the level of the FiT rather than to raise
revenue. That is confirmed, in the Tribunal’s view, by the narrow class of persons subject to the
Solar Levy (thereby limiting the revenue raised), the method of calculating the Solar Levy (which
had the effect of reducing the FiT) and the method of collection and payment of the FiT (which
involved withholding of amounts from the FiT paid to solar energy investors). In these respects,
the Solar Levy’s principal purpose was to reduce the FiT for certain investors.
251. As discussed above, both the Czech Supreme Administrative Court and the Czech Constitutional
Court, as well as the Czech Ministry of Finance in its submissions to the Constitutional Court,
concluded that the Solar Levy was in essence a reduction of the FiTs payable to certain solar
energy producers. The Respondent’s expert Mr Kotáb accepted that the characterization that the
Solar Levy is, in substance, a reduction of the FiTs is now well established in Czech law, although
in his view this did not necessary mean that the Solar Levy was not a tax.257
At the Hearing he
admitted that the characterisation of the Solar Levy as a reduction of the FiTs “has been expressed
repeatedly by courts, including Constitutional Court, so we may stick to the idea expressed here,
in essence or in substance, this includes the reduction of a FiT … .”258
This was further evidenced
by both government statements made during the measure’s enactment and the structure of the
257
T/2/443 (Kotáb).
258
T/2/443 (Kotáb).
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measure.259
In the Tribunal’s view, the evidence in the record, including expert testimony,
confirms that the essence of the Solar Levy was the reduction of certain FiTs.
252. In light of this principle, the Tribunal concludes that the Solar Levy does not fall within the scope
of Article 21 of the ECT. In this regard are of particular importance statements made in
connection with the enactment of the Solar Levy, including the statements of the Minister of
Industry and Trade on November 2, 2010 at meetings of the Economic Committee of the
Chamber of Deputies.260
These statements clearly show that the Solar Levy’s principal objective
was a reduction in the level of the FiTs payable to certain solar investors, and not the raising of
revenue; they also show that the Solar Levy was structured, in many respects, as a tax in order to
reduce the risk of claims against the Czech Republic under international law.
253. By finding that the Respondent formulated the structure of the Solar Levy – resembling, in many
respects, a tax – principally for the purpose of taking the reduction in the FiTs outside the
protections accorded by several international investment treaties, including the ECT, the Tribunal
does not imply that the Respondent was acting in bad faith. The Respondent might very well have
attempted to reduce the FiTs in a manner that would be consistent with its legal obligations,
including its investment protection obligations. The Tribunal merely finds that these attempts,
including making the Solar Levy subject to the procedures set out in the Tax Administration Law,
cannot change the fact the Solar Levy is, in substance, a measure whose objective was a reduction
in the level of the FiTs payable to certain class of solar investors, and not the raising of revenue
for the State.
259
Annex 5 to First Report, Draft Government resolution on the problem of electricity price increases
due to RES support presented by Ministry of Finance for Government session of 20 October 2010, p. 3.
260
See. e.g., Minutes of Session of the Economic Committee of the Chamber of Deputies of November 2,
2010, Annex 6 to First Report, p. 5 (Mr. Kocourek, Minister of Industry and Trade: “The issue of
arbitrations in general is absolutely erratic. … I declare that it will reduce the amount of intended support
to make it bearable for the Czech Republic and for electricity consumers in the Czech Republic. This
method – through the withholding tax – is not just a retroactive correction of support. One may argue as
to whether or not this is retroactive. Nonetheless, it is a similar situation as if you changed the conditions
for investors by increasing the income tax. From the arbitration perspective, they will strive to advocate
the principle on which the support for RES has been based, i.e., their 15-year payback period… the rest is
the question of tax regimes – this is the responsibility of each country, and changes in tax rates should not
be challenged in arbitrations.”).
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B. Whether the Claimants complied with the notice requirements under the BIT and the
ECT with regard to the claims arising out of the extension of the Solar Levy by Act
310/2013
1. The Respondent’s position
254. In its Statement of Defense the Respondent contended that the Claimants’ claim as to the
Extension of the Solar Levy by the Act No. 310/2013 Coll. (the “Solar Levy Extension Claim”)
failed to satisfy the requirements of the prior written notification and the cooling-off period under
Article 10(2) of the BIT and Article 26(2) of the ECT.261
The Respondent alleged that even
though the Claimants had ample opportunities to raise the Solar Levy Extension Claim after the
adoption of the Act of September 13, 2013, the Claimants had not done so until the Statement of
Claim of April 7, 2014.262
255. Article 10 of the BIT provides:
(1) Disputes relating to investments between either Contracting Party and an investor of the
other Contracting Party should as far as possible be settled amicably between the parties
in dispute.
(2) If a dispute cannot be settled within six months of the date when it was notified by one
of the parties in dispute, it shall, at the request of the investor of the other Contracting
Party, be submitted to arbitration.263
256. Article 26 of the ECT provides:
(1) Disputes between a Contracting Party and an Investor of another Contracting Party
relating to an Investment of the latter in the Area of the former, which concern an alleged
breach of an obligation of the former under Part III shall, if possible, be settled amicably.
(2) If such disputes cannot be settled according to the provisions of paragraph (1) within a
period of three months from the date on which either party to the dispute requested
amicable settlement, the Investor party to the dispute may choose to submit it for
resolution […].264
2. The Claimants’ position
257. The Claimants took the view that the Solar Levy Extension Claim, i.e. the claim in respect of the
prolongation of the Solar Levy, could not be characterized as a new dispute requiring an extra
written notification and a new waiting period.265
The notice of dispute dated June 10, 2011
261
Statement of Defense, paras 110-114.
262
Statement of Defense, para 111
263
Statement of Defense, para 101; BIT, Article 10(2).
264
Statement of Defense, para 102; ECT, Article 26.
265
Memorial, paras 360-4.
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referred to the adoption of Act No. 204/2010 concerning the introduction of the Solar Levy, and
the Solar Levy Extension Claim concerns only the extension of the Solar Levy.266
On this basis,
the Claimants contended that the Solar Levy Extension Claim was the same dispute in substance
as that contained in the notice of dispute and thus did not require a separate notification and
cooling-off period from the original claims.267
3. The Tribunal’s conclusion
258. The Respondent did not pursue this objection in its Rejoinder, or during the hearing, but did not
formally withdraw it.
259. The notice of dispute dated June 10, 2011 referred to Act 402/2010, which introduced the Solar
Levy. The Solar Levy was extended by Act 310/2013.
260. The Tribunal is satisfied that the Claimants’ argument is right. The claim relating to the Solar
Levy extension is the same dispute in substance as that contained in the notice of dispute and
does not require a separate notification and cooling-off period from the original claims.
C. Whether the Claimants’ alleged misrepresentations in obtaining the operating licence
for the Mozolov plant bar their claims in relation to the plant
D. Whether the Claimants have made a prima facie showing of a violation of the BIT and
ECT in relation to the Holýšov plant
261. These issues partially concern the merits of the claim, and will be disposed of below.
IX. The substantive claims: legitimate expectation and arbitrary or unreasonable
behaviour
1. The Claimants’ position
262. As a threshold matter, the Claimants observe that their ECT claims should be maintained even if
their ECT claims are “almost identical” to their BIT claims.268
The Claimants describe that this
is because (1) the ECT is “more specific in protecting investments in the energy sector”; and (2)
“[s]ince the EU is a contracting party to the ECT, there will be more grounds to oppose
266
Memorial, para 362.
267
Memorial, para 364.
268
T/4/743.
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interference of the European Commission in relation to the enforcement of an eventual award.”269
263. The Claimants contend that the Respondent violated an obligation to provide a stable and
predictable legal framework by modifying the Incentive Regime.270
264. According to the Claimants, the obligation to provide a stable and predictable investment
framework may be distinguished from the obligation to protect an investor’s legitimate
expectations.271
The former concerns investors’ basic expectations as to stability of an investment
framework, while the latter requires an analysis of individual investors’ expectations.272
In the
Claimants’ view, the obligation to provide a stable and predictable investment framework arose
from (1) “the Incentive Regime’s intrinsic attribute of stability”; and (2) “the specific treaties
invoked by the Claimants in this case”.273
265. As for “the Incentive Regime’s intrinsic attribute of stability”, the Claimants submit that the
Incentive Regime was established to attract investments in the photovoltaic sector by providing
long-term incentives.274
This inherent nature of the Incentive Regime created basic expectations
and a promise that the Czech Republic would not modify the Incentive Regime, which are
protected under the standard of “fair and equitable treatment” (“FET”).275
266. The Claimants submit that the requirements of protection of the investors’ basic expectations as
to stability are essential elements of the FET standard.276
This is confirmed by the tribunal in
Tecmed and other subsequent tribunals.277
The tribunal in Bayindir v. Pakistan further elaborated
269
T/4/743-744; Claimants’ closing statement, Slide 60.
270
Reply, para 643.
271
Reply, paras 637, 639.
272
Reply, para 643.
273
Reply, pars. 643, 673.
274
Reply, para 643.
275
Reply, para 643.
276
Reply, para 665.
277
Reply, paras 665-671; Tecnicas Medioambientales Tecmed S.A. v. The United Mexican States (Grigera
Naón, Fernandez Rozas, Bernal Verea), ICSID Case No. ARB (AF)/00/2, Award, May 29, 2003, para 154;
MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile (Rigo Sureda, Lalonde, Oreamuno), ICSID
Case No. ARB/01/7, Award, May 25, 2004, para 114; Occidental Exploration and Production Company
v. Republic of Ecuador (Orrego Vicuña, Brower, Barrera Sweeney), LCIA Case No.UN3467, Final Award,
July 1, 2004, paras 191, 183; CMS Gas Transmission Co. v. Argentina (Orrego Vicuña, Lalonde, Rezek),
ICSID Case No. ARB/01/8, Award, May 12, 2005, paras 275, 276, 134; LG&E Energy Corp. LG&E
Capital Corp. and LG&E International Inc. v. The Argentine Republic (de Maekelt, Rezek, van den Berg),
ICSID Case No. ARB/02/1, Decision on Liability, October 3, 2006, para 124; Enron Corp. Ponderosa
Assets L.P. v. Argentine Republic (Orrego Vicuña, van den Berg, Tschanz), ICSID Case No. ARB/01/3,
Award, May 22, 2007, paras 259-260.
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that a host State’s policy change may lead to a violation of the FET standard.278
This is
particularly relevant to the present case, where the Czech Republic changed its policy towards
the photovoltaic investors.279
267. The Claimants contend that the obligation to provide a stable and predictable legal framework
also derives from specific treaties invoked by the Respondent, i.e., the BIT and the ECT.280
These
treaties share the purpose to promote investment between contracting States by establishing a
stable investment environment.281
268. The Claimants allege that a promise of stability may arise in the absence of a stabilization
clause.282
The Respondent is said to have accepted this when stating that the Act on Promotion
provided a promise of a 15-year simple payback and a 7% rate of return, even if the Act did not
contain a stabilization clause.283
Such a payback and a rate of return, are undeniably a form of
stability, with limited scope.284
The Claimants contend further that a contractual stabilization
clause is unnecessary, considering that, in the circumstances of the RES sector, the host State
does not enter a contractual relationship with individual investors.285
In the Claimant’s view, the
cases that the Respondent relies on, including Parkerings v. Lithuania,286
are distinguishable
from the case at hand, because in those cases the tribunals found no basic or specific promise of
stability by host States.287
269. The Claimants further contend that a stabilization clause is irrelevant to the issue of whether a
host State owes an international obligation not to amend its legal framework.288
In the Claimant’s
view, a stabilization clause only generates an obligation under domestic law, and accordingly it
278
Reply, para 671; Bayindir Insaat Turizm Ticaret Ve, Sanayi AS v. Islamic Republic of Pakistan (KaufmannKohler,
Berman, Böckstiegel), ICSID Case No. ARB/03/29, Decision on Jurisdiction, November 14, 2005,
para 240.
279
Reply, para 672.
280
Reply, para 673.
281
Reply, paras 674-677.
282
Reply, para 644.
283
Reply, paras 645-649.
284
Reply, paras 645-649.
285
Reply, para 650-664.
286
Parkerings-Compagniet AS v. Republic of Lithuania (Lew, Lalonde, Lévy), ICSID Case No. ARB/05/8,
Award, September 11, 2007.
287
T/1/71-72.
288
T/4/710-712.
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does not constrain a host State’s authority to change its domestic legislation.289
This view is
supported by the tribunal in Oxus Gold v. Uzbekistan, which provided that “a [stabilization]
clause in a law or a general regulation does not give a vested right to the investor, as the State
can always modify its laws and general regulations.”290
270. The Claimants argue that the Respondent violated the Claimants’ legitimate expectations with
reference to the Incentive Regime, so as to satisfy the three prongs of the test applied by most
arbitral tribunals, including, in particular, the Micula tribunal: “(a) the Respondent made a
promise, assurance or representation of regulatory stability; (b) the Claimants relied on such
promise, assurance or representation; and (c) such reliance was reasonable.”291
The Claimants
observe that the doctrine of legitimate expectations is irrelevant to the reasonableness of a host
State’s measure.292
271. The Claimants contend that they had legitimate expectations that “(i) the FiT level would remain
stable over the lifetime of the project (i.e. 20 years), and (ii) the Income Tax Exemption would
last for 6 years (i.e. the first calendar year of operation of the plant plus the following five
ones)”.293
272. According to the Claimants, because the FET standard does not expressly provide which types
of investors’ expectations can be considered as legitimate, and accordingly “one has to determine
whether, in the specific circumstances, the State’s behaviour gave rise to an expectation that its
legislative framework would not change to the detriment of the investors”.294
The Claimants then
submit that the specific circumstances in the present case was that the Respondent intended to
attract investors by providing long and stable incentives through the Incentive Regime.295
273. The Claimants submit that domestic legislation can be treated as promises to foreign investors,
referring to several legal authorities.296
Based on this proposition, the Claimants take the view
289
T/4/711.
290
T/4/711; Oxus Gold v. Uzbekistan (Tercier, Lalonde, Stern), UNCITRAL, Final Award, December 17,
2015, p.332.
291
Memorial, paras 439-40; Ioan Micula, Viorel Micula and others v. Romania (Lévy, Alexandrov Abi-Saab),
ICSID Case No. ARB/05/20, Award, December 11, 2013, note 176, para 178.
292
T/1/69; T/1/79-80; CLA-121, Decision of the German Constitutional Court (1 BvR 2821/11, 1 BvR
1456/12, 1 BvR 321/12), December 6, 2016.
293
Reply, para 690.
294
T/4/712-713.
295
T/4/713-714.
296
Memorial, para 448; Enron Corp. Ponderosa Assets L.P. v. Argentina Republic (Orrego Vicuña, van den
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that the Czech Republic made explicit promises of stability to the investors throughout its
legislation including the Act on Income Tax and the Act on Promotion.297
In this vein, the recent
decision in Charanne v. Spain, in which the tribunal found an individual commitment was
necessary for investors to enjoy legitimate expectations as to stability of investment framework,
can be distinguished on the facts.298
In that case, the claimants invoked unreasonably long period
of stability, i.e., 30 to 50 years.299
274. The Claimants provide a more specific analysis of the promises contained in Section 6 of the Act
on Promotion.300
First, Section 6(1)(b)(2) provided a guarantee that “once it is established, the
feed-in-tariffs cannot be reviewed for a given period of time, except for an increase, according to
inflation.”301
Second, Section 6(4) provided a guarantee of the 5% Break-Out Rule.302
275. The Claimants allege that these expectations were strengthened by the purpose and context of the
Incentive Regime.303
The Explanatory Report on the bill of the Act on Promotion evidences that
the Act on Promotion was enacted to meet the 8% EU target for 2010 under the EU policy of
promoting RES.304
The importance of the achievement of 8% target is evidenced by Mr Fiřt’s
statement that “it was not only [the] ERO that was interested but also the Ministry of Industry
and Trade.”305
Dr Göde also testifies in his written statement that “the essential drive [to invest
in the Czech Republic] was the Czech incentive system and its expected reliability, especially as
Berg, Tschanz), ICSID Case No. ARB/01/3, Award, May 22, 2007, paras 264-266; LG&E Energy Corp.
et al v. The Argentina Republic (de Maekelt, Rezek, van den Berg), ICSID Case No. ARB/02/1, Decision
on Liability, October 3, 2006, paras 130, 133; Reply, paras 699-706; CLA-35, R. Dolzer and C. Schreuer,
Principles of International Investment Law, Oxford, 2008, pp. 134-135; Electrabel S.A. v. Hungary
(Kaufmann-Kohler, Stern, Veeder), ICSID Case No. ARB/07/19, Award, November 25, 2015, para 155;
CMS Gas Transmission Co. v. Argentina (Orrego Vicuña, Lalonde, Rezek), ICSID Case No. ARB/01/8,
Award, May 12, 2005, para 443; Binder v. Czech Republic (Danelius, Creutzig, Gaillard), UNCITRAL,
Ad Hoc Arbitration, Award, July 15, 2011, para 443; CLA-89, M. Téllez, Conditions and Criteria For The
Protection of Legitimate Expectations Under International Investment Law, in ICSID Review, Vol. 27,
No. 2, 2012, p. 436; CLA-85, Fair and Equitable Treatment, UNCTAD Series on Issues in International
Investment Agreements II, 2012, p. 69.
297
Memorial, paras 447, 449.
298
Reply, para 697, citing Charanne and Construction Investments v. The Kingdom of Spain, SCC Case No.
062/2012, Final Award, January 21, 2016 (Mourre, Santiago Tawil, von Wobeser).
299
Reply, para 698.
300
T/1/26.
301
T/1/26-27.
302
T/1/27.
303
Reply, para 708.
304
Reply, para 709.
305
T/4/700-701; T/2/262-263.
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to the long-term price guarantee for the electricity produced by solar operators. As known to solar
producers, the energy sale price is in fact fundamental to the economics of a solar investment”.306
The Claimants emphasize that it was the guarantee of the long-term stable FiT which was integral
to deciding to invest in RES.307
The importance of the stable FiT is evidenced by the fact that
the investments in photovoltaic plants were up-front.308
276. According to the Claimants, the Explanatory Report shows that the Income Tax Exemption and
the Shortened Depreciation Period constituted essential part of the Incentive Regime, in stating
that “the support system is based […] on maintaining the tax reliefs to the extent set out in the
Act[s] on Income Tax”. 309
In addition, the fact that the Act on Promotion did not mention the
Income Tax Exemption is immaterial.310
This was simply because the Income Tax Exemption
was already established by the Act on Income Tax when the bill of the Act on Promotion was
being discussed.311
277. The evidentiary value of the Explanatory Report is not decreased, say the Claimants, by the facts
that the Report itself was not a legal source and that the Report was not specifically addressed to
the Claimants.312
The Report shows significant insight of the legislative process and the purpose
of the Act on Promotion.313
An individualized promise is not necessary in invoking the protection
of legitimate expectations.314
278. The Claimants then contend that these general promises provided by the Act on Promotion and
the Act on Income Tax were converted into specific promises by going through the licensing
process and gaining required permissions to build and operate photovoltaic power plants.315
279. The Claimants further submit that answers shown on the Q&A tool of the ERO website as well
as the 2010 Action Plan prepared by the Czech Ministry of Industry and Trade on the duration of
306
Memorial, para 450; First Göde Statement, para 23.
307
Memorial, para 450.
308
T/1/78.
309
Reply, para 711; C-120, Explanatory Report on the bill of the Act on Promotion of November 12, 2003
(extended version), p. 4.
310
Reply, para 712.
311
Reply, para 712.
312
Reply, paras 712-713.
313
Reply, para 712.
314
Reply, para 713.
315
Memorial, para 453; First Göde Statement, paras 18-20.
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the stable FiT can be characterized as specific promises to photovoltaic investors.316
280. The Claimants contend that a promise contained in the Act on Promotion was not limited to the
15-year simple payback and the 7% WACC.317
A promise of 15-year simple payback would
contradict to the purpose of the Act on Promotion, since such a payback was insufficient to attract
enough investors in order to achieve the EU targets.318
WACC was a mere non-binding indicator
for the ERO to set a FiT.319
Indeed, the Act on Promotion did not contain reference to WACC.320
281. According to the Claimants, had it not been for the guarantee that the Incentive Regime should
be granted and maintained, investors like the Claimants would not have invested in photovoltaic
energy production in the Czech Republic.321
This is because investors in the long-term RES
business based their investment decisions on guarantees of stability derived from the purpose of
the Incentive Regime.322
282. The Claimants make clear that in reliance on the legal framework set up by the Czech Republic
and its commitments contained therein, they acquired or established SPVs, obtained the licences
for energy production and invested a significant amount of money in their photovoltaic plants.323
In particular, the Claimants point out that they based their assessment of profitability on the
analysis of the investment and operating costs to set up and operate the solar plants.324
283. The Claimants contend that their reliance on the promises provided for by the Incentive Regime
was reasonable.
284. The Claimants maintain that their reliance was reasonable as it was predicated on the guarantees
contained in the Incentive Regime and its “declared purpose”.325
According to the Claimants,
“[the] system was designed precisely to attract the investments that the Czech Republic needed
316
Memorial, paras 456-7; First Göde Statement, para 27; Annex II to First Göde Statement, Q&A tool
available on the ERO's website in 2009.
317
T/1/15:5-6.
318
Memorial, para 450.
319
T/1/29.
320
T/1/15.
321
Memorial, para 446.
322
Memorial, paras 444-6; First Göde Statement, paras 24-27.
323
Memorial, paras 459-60.
324
Memorial, para 460; First Göde Statement, paras 21, 28.
325
Memorial, para 462.
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to comply with its EU law obligations.”326
285. The Claimants refer to both Czech and EU law to support the contention that their reliance was
reasonable. With regard to Czech law, “the correctness of the Claimants’ understanding of the
Incentive Regime was primarily confirmed by the ERO’s presentations on that matter and by the
personal consultation that Dr Göde had with the Czech law firm,
in Prague.”327
As to EU law, “the compatibility of the Incentive Regime with EU state law was
assessed both before the adoption of the Act on Promotion and after its implementation.”328
286. In addition, the Claimants submit that widespread beliefs among the photovoltaic market that the
Incentive Regime would not be retroactively repealed provide support for the reasonableness of
the Claimants reliance.329
As the tribunal in CMS v. Argentina stated, this is because “[i]t is not
credible that so many companies and governments and their phalanxes of lawyers could have
misunderstood the meaning of the guarantees offered in a manner that allowed for their reversal
within a few years”.330
The Czech local banks financed solar projects for plants to be
commissioned in 2010.331
This is confirmed by the fact that on July 30, 2010, the head of
KPMG’s Transaction and Acquisition Department confirmed that banks were interested in
photovoltaic plants as long as they were commissioned by the end of 2010.332
Such a belief was
also shared by energy experts licensed by the Czech Ministry of Industry and Trade, who
conducted energy audits before banks approved loans for solar projects.333
287. The Claimants emphasize that the Respondent repeatedly reassured that the amendments to the
Incentive Regime would not affect plants commissioned before 2011.334
A Czech Republic’s
report of November 2009 still indicated the need of attracting investors in order to achieve the
8% EU target for 2010.335
The abolishment of the 5% Break-Out Rule in March 2010 only
affected plants commissioned from January 1, 2011 due to the political decision to keep providing
326
Memorial, para 463.
327
Memorial, para 466; First Göde Statement, paras 24, 27.
328
Memorial, para 468.
329
T/1/74.
330
T/1/74; CMS Gas Transmission Co. v. Argentina (Orrego Vicuña, Lalonde, Rezek), ICSID Case No.
ARB/01/8, Award, May 12, 2005, para 137.
331
Memorial, paras 473, 474, 476.
332
T/1/74.
333
T/1/74.
334
Reply, para 731.
335
Reply, paras 733-734.
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the same support level to plants commissioned by the end of 2010.336
Mr Jones, the Respondent’s
expert, also accepted that the ERO’s letter of September 8, 2009, the Government’s bill of
November 16, 2009, the Ministry of Industry’s press release of the same date, and the
Government’s bill of September 15, 2010, strengthened the investors’ expectations that the
upcoming change would not affect plants connected in 2010.337
288. The Claimants allege that the Czech Republic kept providing such reassurances during 2010.338
None of the Claimants’ plants was affected by the moratorium on new applications for grid
connections, because all of their plants obtained the capacity reservations before the moratorium
started in February 2010.339
The 2010 Action Plan reaffirmed that the fixed FiT would be
available for 20 years.340
Act No. 330/2010, which abolished all incentives for plants over
30kWp, only applied installations commissioned from March 1, 2011, and its Explanatory Report
of September 15, 2010 provided that the existing investors would keep enjoying the
incentives.341
Both the 2010 Action Plan and the ERO’s 2010 Report indicated that the future
amendments to the Incentive Regime would not affect the existing investors.342
Importantly, Dr
Göde’s last investment was made in the summer of 2010, when the Respondent still kept
providing such reassurances.343
289. The Claimants submit that the 2010 Action Plan provided a strong reassurance.344
First, the Plan
confirmed that the Income Tax Exemption was integral part of the Incentive Regime, by listing
it as available financial support together with FiT and Green Bonuses.345
Second, the Plan did
not suggest that the FiT level was not maintainable.346
Third, the Plan confirmed that the FiT
would be stable for 20 years in stating that “[the] tariffs are guaranteed according to the following
336
Reply, para 736; T/1/34.
337
T/3/561-568; T/2/705; C-201, Letter from Mr Fiřt (Chairman of the ERO) to Mr Vojíř (Chairman of the
Economic Committee of the Chamber of Deputies), September 8, 2009; R-147, Explanatory Report to
Draft Act No. 137/2010 Coll., November 16, 2009; C-197, Czech Government’s press conference,
November 16, 2009; R-172, Explanatory Report to Draft Act No. 330/2010 Coll., September 15, 2010.
338
T/1/34.
339
Reply, para 736.
340
Reply, paras 736, 193.
341
Reply, paras 736, 199.
342
Reply, paras 736, 737.
343
T/4/723-724.
344
T/1/36.
345
T/1/36.
346
T/1/36.
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table [photovoltaic power plants 20 years]” and that no cap existed for RES support.347
290. The Claimants also submit that another strong reassurance was given by the Explanatory Report
to Draft Act No. 330/2010 dated on September 15, 2010, which abolished all of the support for
large photovoltaic plants as of March 1, 2011.348
The Report provided that “[p]hotovoltaic power
plants already connected to the electric power system will have their right to claim support
preserved under existing conditions.”349
291. In the Claimants’ view, the Respondent gave these reassurances in order to (1) provide sufficient
time for investors to prepare for the upcoming scheme change; and (2) achieve the EU target for
2010 by means of contribution from photovoltaic plants.350
292. The Claimants allege that, in 2009 and 2010, it was impossible for photovoltaic investors to
expect that the amendment measures would be introduced in a retroactive manner.351
The
Claimants submit that a number of documents published in 2009 and 2010 provided repeated
reassurances, instead of warnings.352
This was also supported by the fact that even ČEZ, a
company controlled by the Czech Republic, kept investing in the photovoltaic market during the
period.353
The Claimants observe that indeed the introduction of the Solar Levy had not been an
option for the Czech Government until October 14, 2010, when it suddenly changed its policy.354
293. The Claimants observe that although the Respondent could have repealed the 5% Break-Out Rule
or required grid operators to stop issuing new binding statements as soon as it had recognized the
problem, it had chosen not to do so.355
In the Claimant’s view, this political decision conveyed
a clear message to investors that the FiT level would remain stable for plants commissioned in
2009 and 2010.356
294. In this vein, the Claimants contend that the existence of the Fischer caretaker government during
347
T/1/36-37; C-73, National Renewable Energy Action Plan of July 2010 published by the Ministry of
Industry and Trade, July 2010, pp.58-60.
348
T/1/38.
349
T/1/38.
350
T/1/38-39.
351
T/1/49-50.
352
T/1/49-50.
353
T/1/49-50.
354
T/4/702.
355
T/4/728-729.
356
T/4/729.
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May 2009 and July 2010 is irrelevant.357
It did not amount to a political crisis that might have
affected an investor’s legitimate expectations.358
As shown in its policy statement that it was
prepared to take responsibility to manage the country, the caretaker government had authority to
deal with the increase of the solar installations.359
Indeed, the caretaker government made the
important decision to repeal the 5% Break-Out Rule.360
295. Similarly, the Claimants object to the Respondent’s assertion that the postponement of the
abolishment of the 5% Break-Out Rule was the result of solar investors’ lobbying and threats of
arbitration.361
No evidence shows that such an activity existed. In any event, legitimate lobbying
activity does not excuse a host State from not addressing a problem in a timely manner.362
296. The Claimants contend that their reliance on the Income Tax Exemption was equally
reasonable.363
The repeal of the Income Tax Exemption is distinguished from an ordinary
increase of income tax rate, because the Income Tax Exemption contained a promise of duration
as an essential part of the Incentive Regime.364
This position is confirmed, according to the
Respondent, by an expert opinion that the Czech Republic could repeal the Income Tax
Exemption only in a non-retroactive manner.365
297. Furthermore, the Claimants submit that Dr Göde’s team was formed by experienced experts
including bankers and a Czech lawyer.366
While Dr Göde did not conduct a specific due diligence
before his investment, his team provided sufficient expertise.367
In any event, given the small
size of photovoltaic investments, a sophisticated due diligence should not have been required.368
298. The Claimants provide that “Dr Göde made the majority of his investment in the Czech Republic
only after having obtained ‘a direct confirmation of the reliability of the Czech environment in
357
T/4/732-733.
358
T/4/731-732.
359
T/4/733.
360
T/4/733.
361
T/4/733-734.
362
T/4/734.
363
Reply, para 729.
364
Reply, para 729.
365
Reply, para 730; C-222, Professor JUDr Aleš Gerloch, CSc’s Opinion of December 3, 2010, pp. 10-11.
366
T/1/226; T/4/724.
367
T/4/724.
368
T/4/724.
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general and of the FiT regime in particular’”.369
Indeed, Dr Göde made his second investment
after having confirmed that his first solar plant became operational under the FiT scheme.370
299. The Claimants submit that the Respondent violated its obligation to accord “full protection and
security” (“FPS”) set out in Article 10(1) of the ECT and Articles 2(3) and 4(1) of the BIT by
failing to provide a stable and predictable legal framework as to the Claimants’ investment. 371
300. The Claimants submit that the scope of FPS extends beyond physical protection to legal security.
To this extent, FPS and FET substantially overlap, and jointly require a host State to provide a
stable and predictable legal framework.372
In the present case, the Claimants contend that the
FPS standard was violated by reason of the facts giving rise to a breach of the FET standard.373
301. The Claimants allege that, by dismantling the Incentive Regime, the Respondent violated the
prohibition of arbitrary or discriminatory measures (“Non-Impairment Standard”) set out in
Article 10(1) of the ECT and Article 2(2) of the BIT. 374
302. In response to the Respondent’s argument that the Non-Impairment Standard requires an
investor’s impairment to be significant, the Claimants submit that, referring to Saluka, “any
negative impact or effect” caused by a host State’s measure satisfies the impairment
requirement.375
303. The Claimants then submit that in any event their investments were significantly impaired,
referring to Dr Göde’s statement that “the Czech Republic’s retroactive measures greatly
impacted on the economics of [his] investment”.376
Dr Göde expected a return of EUR
(before taxation) for his investment, but, after the introduction of the Solar Levy, the
Claimants’ internal forecasts now point to EUR 377
369
Memorial, para 479; First Göde Statement, para 29.
370
Memorial, para 479.
371
Memorial, para 379.
372
Memorial, paras 386-388, 400.
373
Memorial, para 400.
374
Memorial, paras 496-498; Memorial, paras 402-408. According to the Claimants, the Respondent’s
unreasonable and discriminatory measure also violated the FET standard. While the Claimants also invokes
the FET standard as the basis for the prohibition of arbitrary or discriminatory measures, they provide their
arguments in the context of the Non-Impairment Standard.
375
Reply, para 761; Saluka Investments B.V. v. The Czech Republic (Watts, Fortier, Behrens), UNCITRAL,
Partial Award, March 17, 2006, para 458.
376
Memorial, para 522 citing First Göde Statement, para 37.
377
Memorial, para 523.
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304. The Claimants define an unreasonable measure as referring to “a measure that imposes excessive
burdens on foreign investors not commensurate to the aims pursued or to the results achieved by
the measures.”378
305. The Claimants submit that the determination of whether a measure is reasonable or not requires
analysis of “whether (i) the state pursued a rational policy and (ii) acted reasonably in pursuit of
such policy”, relying on the AES and Micula cases.379
A State’ policy is rational if it is taken
“following a logical (good sense) explanation and with the aim of addressing a public interest
matter”.380
A State acts reasonably if there is “an appropriate correlation between the state’s
policy objective and the measure adopted to achieve it.”381
Under the proportionality test, since
the Respondent’s measures destroyed the Claimants’ investments, the Respondent must prove
that “the maintenance of the Incentive Regime, and the allegedly attendant high electricity prices,
would have entailed the catastrophic consequences for the Czech economy that are invoked, in
terms of layoffs, plant shut downs and dramatic drops in the tax revenues.”382
306. The Claimants contend that “the Czech Republic’s dismantling of the Incentive Regime was
neither adopted in furtherance of a rational policy, nor were the Czech Republic’s measures
reasonable in the pursuit of such a policy, because the adverse impact on the Claimants’
investment did not outweigh the policy’s benefits.”383
307. The Claimants reject the Respondent’s assertion that it aimed “to counter soaring electricity
prices and to address alleged ‘windfall profits’ of solar investors.”384
378
Memorial, para 499; LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. The
Argentina Republic (de Maekelt, Rezek, van den Berg, ICSID Case No. ARB/02/1, Decision on Liability,
October 3, 2006), para 158; Saluka Investments B.V. v. The Czech Republic (Watts, Fortier, Behrens),
UNCITRAL, Partial Award, March 17, 2006, para 307; AES Summit Generation Limited and AES-Tisza
Erőmű Kft. v. Republic of Hungary (von Wobeser, Stern, Rowley), ICSID Case No. ARB/07/22, Award,
September 23, 2010, para 10.3.7; Ioan Micula, Viorel Micula and others v. Romania (Lévy, Alexandrov,
Abi-Saab), ICSID Case No. ARB/05/20, Award, December 11, 2013, para 525.
379
Memorial, para 501; AES Summit Generation Limited and AES-Tisza Erőmű Kft. v. Republic of Hungary
(von Wobeser, Stern, Rowley), ICSID Case No. ARB/07/22, Award, 23 September 2010, paras 10.3.8 and
10.3.9; Ioan Micula, Viorel Micula and others v. Romania (Lévy, Alexandrov, Abi-Saab), ICSID Case
No. ARB/05/20, Award, December 11, 2013, para 525.
380
Memorial, para 501; AES Summit Generation Limited and AES-Tisza Erőmű Kft. v. Republic of Hungary
(von Wobeser, Stern, Rowley), ICSID Case No. ARB/07/22, Award, 23 September 2010, paras 10.3.8.
381
Memorial, para 501; AES Summit Generation Limited and AES-Tisza Erőmű Kft. v. Republic of Hungary
(von Wobeser, Stern, Rowley), ICSID Case No. ARB/07/22, Award, 23 September 2010, paras 10.3.9.
382
Memorial, para 506.
383
Memorial, para 503.
384
Memorial, para 504; Statement of Defense, para 45.
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308. With regard to the “high electricity prices” case, the Claimants assert that “there is no indication
that such a risk was in any way concrete nor that the investors and the Incentive Regime would
be responsible for it.”385
Rather, the extra costs of RES support, including the tariffs on
consumers, and electricity prices in Czech Republic were lower than those in other EU
countries.386
309. Moving on to “the alleged windfall profits of the investors”, the Claimants deny the presence of
such profits.387
Rather, the rates of return provided for by the Incentive Regime at 10-15 % were
in line with those in other EU Member States.388
The Claimants deny that any profit over the
rate of 7% should be considered a windfall, considering that a return rate at the level of 7% would
not have attracted sufficient investment to achieve the 8% EU target for 2010.389
310. According to the Claimants, the Respondent’s policy is irrational as “withdrawing benefits that
[the Respondent] had used to induce investors into its solar market” dramatically reduces
prospects for future investment by negatively signalling future investors and making it extremely
difficult for it to attain its target of increasing electricity from solar energy by 2020.390
311. The Claimants contend that the Respondent’s amendment measures were unreasonable.
312. The Claimants submit that a host State’s measures are reasonable only if “its adverse effects on
foreign investments are limited to what is strictly necessary to achieve the public interest and the
public interest outweighs the negative impact on the rights of foreign investors in the specific
case.”391
In the Claimants’ view, proportionality is required not only between the policy
objectives and the measures, but also between the benefits to the host State and the impact on
investors.392
313. In the present case, the Claimants allege that “the Solar Levy is unreasonable because the results
it achieved are completely out of proportion with respect to the harm it caused to solar
385
Memorial, para 507.
386
Reply, para 784
387
Memorial, para 509.
388
Reply, para 783.
389
Reply, para 783.
390
Memorial, para 510.
391
Memorial, para 502.
392
Reply, para 787.
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investors.”393
According to the Claimants, the fact that “the end price of electricity continued to
increase even after the introduction of the Solar Levy” confirms the assumption that “the effects
of the Solar Levy on electricity prices were minimal and it did very little […] to shield households
and industries from purportedly soaring electricity prices.”394
The Claimants assert that this lack
of proportionality was exacerbated by the abrupt legislative process without appropriate
reflection.395
314. The Claimants contend that the repeals of the Income Tax Exemption and the Shortened
Depreciation Period were irrational, pointing out that “there is no explanation as to how the repeal
of the tax exemption can mitigate the increase in electricity prices”.396
315. The Claimants submit that the unreasonableness of the amendment measures was also criticized
by the EU Commissioners, who expressed their concern as to the amendment measures in its
letter of January 11, 2011. The EU Commission in its Communication of 2013 stated that “[a]
need to make changes in regulatory conditions in response to developments in the market does
not justify applying such changes retroactively to investments already made in situations where
the need arises because of failures on the part of the public authorities to correctly predict or
adapt to such developments in a timely manner.”397
316. The Claimants contend that the Czech Constitutional Court decision of May 15, 2012 is not
helpful because “domestic courts cannot provide absolution from violation of international
law.”398
The Claimants further submit that the decision is irrelevant to the present case because
the Court (1) employed domestic, instead of international, standards; (2) employed an approach
which was similar to that of expropriation; and (3) was silent as to whether the Czech Republic
violated its obligation towards investors.399
317. In the Claimants’ view, the return rates above 7% WACC, which the amendment measures
targeted, should be considered as reasonable, instead of excessive.400
The Claimants find support
393
Memorial, para 517.
394
Memorial, para 517.
395
Reply, para 790.
396
Memorial, para 518.
397
T/1/53-54; C-221, EC’s Communication, Delivering the internal electricity market and making the most
of public intervention, November 5, 2013, p.12.
398
T/1/88.
399
T/1/88-89.
400
T/4/735.
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in the EU Commission’s 2016 Decision, which confirmed the return rates between 6.3% and
10.6% as reasonable.401
The Claimants add that while the EU Commission referred the 10.6%
rate regarding biogas, the 10.6% rate is also relevant to solar, given that the 7% WACC was set
for the entire RES including both solar and biogas.402
The % return rate of Osečná plant also
can be seen as reasonable, considering that the EU Commission approved up to 12 to 13% of
return rates in relation to other EU Member States.403
318. The Claimants make four further allegations as to the unreasonableness of the Respondent’s
measures.404
First, the measures were intrinsically irrational, because the Respondent repealed
the essential features of the Incentive Scheme.405
In this regard, the Charanne decision, in which
the tribunal found that the changes to the FiT level and period did not amount to an alternation
of the essential characteristics, is to be distinguished from the present case, because the alleged
period, i.e., 30 to 50 years, was unrealistic for the plants’ lifetime.406
Second, the measures were
by definition unreasonable, because the Respondent repealed its clear undertaking to RES
investors, which it had made in exchange for their investment.407
Third, the Respondent acted
inconsistently in relation to the investors and its policy goal.408
The Respondent repeatedly
announced that the amendments to the Incentive Regime would only affect new plants
commissioned after 2011, nevertheless repealed the incentives provided for plants commissioned
in 2009 and 2010.409
The amendment measures made it difficult for the Respondent to achieve
its long-term policy goal of promoting RES by undermining the Respondent’s reputation among
investors.410
Fourth, the Respondent cannot claim the reasonableness of its responses to the
alleged solar boom, because the solar boom was caused by its own mismanagement.411
The ERO
repeatedly drew attention to the rise of solar installations at least from 2008, nevertheless the
401
T/4/735-736; R-366, European Commission’s decision in State aid case SA.40171 (2015/NN) – Czech
Republic (Promotion of electricity production from renewable energy sources), November 28, 2016.
402
T/4/737-738.
403
T/4/738-739; Compass Lexecon presentation, Slide 20.
404
Reply, paras 763, 765, 773, 791.
405
Reply, para 765.
406
Reply, paras 766-772; Charanne and Construction Investments v. Spain (Mourre, Santiago Tawil, von
Wobeser), SCC, Final Award, January 21, 2016, para 529.
407
Reply, para 763.
408
Reply, para 773.
409
Reply, para 774-776.
410
Reply, para 777-779.
411
Reply, para 791.
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Respondent did not address this issue until the end of 2010. As a result, the Respondent repealed
the incentives in a retroactive manner, which was unprecedented among the EU Member
States.412
In the Claimants’ view, Article 25.2(b) of the Draft articles on Responsibility of States
for Internationally Wrongful Acts (the “ILC Draft Articles”), by which a State is precluded from
invoking the necessity defence when the State contributed to the situation of necessity, supports
this assertion.413
2. The Respondent’s position
319. The Respondent contends that, in the absence of stabilization clause, a State may change its
legislation without violating investment treaty obligations.414
In other words, no legitimate
expectations as to stability of legal framework may arise in the absence of a stabilization
arrangement.415
Such a stabilization clause can be either legislative or contractual, but a clear
language of prohibiting legislative or regulatory change is required.416
However, in the present
case, no evidence shows such an explicit arrangement.417
320. As to the alleged stabilization of the FiT level, the Respondent alleges that a simple use of the
word “stable”, as found in the ERO’s report of 2009, is not sufficient to grant a promise of
stabilization.418
The Respondent denies that the Claimants’ assertion that the Respondent admits
that an obligation of stabilization may arise in the absence of stabilization clause in stating that
the Act on Promotion and the ERO regulations provided for a 15-year simple payback and a 7%
rate of return.419
Because the Respondent keeps providing the payback and the rate of return, the
stabilization of these incentives is not an issue of the present case. 420
321. Regarding the Income Tax Exemption, the Respondent calls into doubt the evidentiary value of
the 2003 Explanatory Report on the Bill of the Act on Promotion on which the Claimants seem
to base their argument that the Respondent promised that the Income Tax Exemption “would
412
Reply, paras 307, 795; T/1/48-49.
413
Reply, para 791-794.
414
Rejoinder, para 454.
415
Counter-Memorial, para 550.
416
Rejoinder, para 455.
417
Rejoinder, para 457.
418
Rejoinder, para 458.
419
Rejoinder, para 460.
420
Rejoinder, paras 461-462.
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forever be available to [the] Claimants”.421
According to the Respondent, “the 2003 Explanatory
Report does not have the force of law and is not a source of legal rights.”422
In addition, the
Respondent notes that “the language in the 2003 Explanatory Report does not look anything like
the type of language that States typically use when entering into a stabilization arrangement.”423
322. The Respondent provides that the ECT does not create such a stabilization despite of its Article
10, which provides that “Each Contracting Party shall […] encourage and create stable
conditions”.424
In the Respondent’s view, this does not purport to stabilize a legal framework for
the duration of investment.425
The Respondent also notes that the BIT does not contain such a
language.426
323. The Respondent further notes that Article 19(d) of the Act on Income Tax does not contain a
“promise” of stabilization, but rather that there would be an exemption from corporate income
tax for “income from the operation of […] solar installations […] in the calendar year in which
they were first commissioned and in the immediately following five year period”.427
In the
Respondent’s view, the tax exemption’s limitation in time to five years is not a guarantee that
such exemption could not be abolished for five years or that the temporary benefit could not be
subject to legislative amendment or a “grandfathering” rule for existing projects.428
324. The Respondent alleges that a stabilization clause generates an international obligation, despite
that it is embodied in domestic legislation.429
For instance, legislative acts adopted by Nigeria
and Timor-Leste contain stabilization clauses, under which an investor may file an international
arbitration if the government has violated the stabilization assurance.430
325. The Respondent points to the Charanne v. Spain award which addressed a similar issue to that
421
Counter-Memorial, para 549-50.
422
Counter-Memorial, para 551.
423
Counter-Memorial, para 553.
424
T/4/787-788; ECT, Article 10.
425
T/4/787-788.
426
T/4/788-789.
427
Respondent’s Rejoinder, para 472 citing R-61, Act 586/1992 Coll., on Income Tax (Excerpts), p. 1, Section
19(d) (as effective from January 1, 2014 to December 31, 2010).
428
Respondent’s Rejoinder, paras 472-3 citing Crawford, Treaty and Contract, p. 369.
429
T/4/788-789.
430
T/4/788-789; Nigerian LNG (Fiscal Incentives, Guarantees and Assurances) Act of 1990 (as amended in
1993), 1993; Law No. 4/2003 on the Petroleum Development of Timor Sea (Tax Stability), 2003.
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arising in this case, namely, the issue of whether governmental statements issued in connection
with the regulatory framework could support a stabilization guarantee.431
Noting that the
Charanne tribunal “concluded that there was no evidence at all […] of any stabilization
guarantee,” the Respondent submits that in the present case, where the Claimants cite only an
explanatory report to a preliminary draft of legislation, there is even less basis for the allegation
of a “guarantee of stabilization” as to the tax exemption.432
326. According to the Respondent, Section 6 of the Act on Promotion was only meant to provide a
15-year simple payback, i.e., “full return of capital, but without any element of profit”.433
Nevertheless, in order to attract investors, the ERO decided in its Technical Regulation to provide
them with “an adequate return on invested capital”, which was later set as 7% WACC.434
In the
Respondent’s view, this 7% WACC should be considered as a reasonable return rate, 435
and as
Mr Fiřt testified, well known to public.436
The Respondent points out that Dr Claimants’
expert, also accepts that profits above WACC is theoretically “supernormal”.437
Noting that the
15-year simple payback and the 7% WACC “w[ere] not legislatively guaranteed” without a
stabilization arrangement, the Respondent submits that in any event the amendment measures
have not affected these parameters.438
This being the case, the Respondent submits that the
Claimants’ investment “has not suffered any adverse effect that is actionable under the ECT or
the BIT” due to the Solar Levy.439
327. The Respondent points out that the Solar Levy has not changed the amounts of FiT and “affected
the Claimants’ after-tax profits”.440
Accordingly, what the Claimants claim in this arbitration is
431
Counter-Memorial, para 554; Charanne B.V. and Construction Investments S.A.R.L. v. Kingdom of Spain
(Mourre, Tawil, von Wobeser), SCC Case No 062/2012 (Final Award and Dissenting Opinion, 21 January
2016).
432
Counter-Memorial, para 554; Charanne B.V. and Construction Investments S.A.R.L. v. Kingdom of Spain
(Mourre, Tawil, von Wobeser), SCC Case No 062/2012 (Final Award and Dissenting Opinion, January
21,2016), para 490.
433
Counter-Memorial, para 37.
434
Counter-Memorial, para 38; R-6, The Technical Regulation, Section 4(1), November 30, 2005, Section
4(1)(a).
435
T/4/756.
436
T/1/254-256; T/4/753.
437
T/3/487; T/4/757.
438
Counter-Memorial, para 535.
439
Counter-Memorial, para 535.
440
Counter-Memorial, paras 534-535.
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not a promise of stable FiT but a promise of profitability.441
However, the Incentive Regime did
not contain any guarantee of such profitability.442
328. The Respondent contends that, referring to Arif v. Moldova, a legitimate expectations claim “must
proceed from the exact identification of the origin of the expectation alleged, so that its scope can
be formulated with precision”.443
Therefore, legitimate expectations derived from legislation
must be strictly based on provisions in the legislation in question.444
However, the original Act
on Promotion did not contain any provision that FiTs would not be subject to taxation measures
such as the Solar Levy.445
329. The Respondent contends that it had never promoted solar investments in order to achieve the
8% EU target.446
The ERO’s report of November 2009, on which the Claimants rely, merely
listed solar power as one of several RES sources for the achievement.447
Rather, the Report
described the rapid increase in solar installations as “significant problem” and “disadvantaging
other [] RES sources and adversely affecting consumers”.448
330. According to the Respondent, “there is certainly no evidence that the Claimants ‘relied’ on the
2003 Explanatory Report or any other document, statement, or communication by the Czech
Republic relating to [the tax exemption].”449
To support this, the Respondent notes that “the
Claimants effectively admit that [the Income Tax Exemption] was not a determining factor in the
decision to invest [by asserting that] ‘the purpose of the Incentive Regime would be frustrated if
investors could rely only on the FiT support and not on the guarantees already in place and set
out in the Act on Income Tax, which were evidently not sufficient by themselves to attract
investments in the Czech Solar business.’”450
The Respondent asserts that conclusive effect
441
Counter-Memorial, para 535.
442
Counter-Memorial, para 535.
443
Respondent’s Rejoinder, para 476; Franck Charles Arif v. Moldova (Cremades, Hanotiau, Knieper),
ICSID Case No. ARB/11/23 (Award, April 8, 2013), para 535.
444
Rejoinder, para 476.
445
Rejoinder, para 476.
446
T/4/763-764.
447
T/4/763-764.
448
T/4/764; C-203, “Report on the Fulfilment of the Indicative Target for Electricity Production from
Renewable Energy Sources for 2008” of November 2009, prepared by the Ministry of Industry and Trade,
p. 17.
449
Counter-Memorial, para 564.
450
Counter-Memorial, para 565.
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should be given to the fact that “the Claimants actually were aware that Czech taxation law might
change.”451
331. The Respondent avers that the Claimants knew, or should have known, that the RES regime was
based on the principle of minimum cost and reasonable (but not excessive) return, as defined by
WACC and required under EU State aid law.452
Furthermore, the Claimants were “almost
certainly aware that the market they were entering was a bubble and that the FiT regime for solar
installations was considered by the Czech authorities to be out of balance.” 453
332. The Respondent alleges that the Claimants’ reliance on the assurances was unreasonable.
333. The Respondent contends that the Claimants knew or should have known that Czech RES support
scheme was structured “based on the principle of minimum cost and reasonable (but not
excessive) return, as defined by the WACC” because the Czech RES market was a regulated
market.454
Accordingly, the Claimants’ reliance on the alleged promises by which investors
would have received more than the WACC was not reasonable.455
This is supported by the
decisions in AES v. Hungary and Electrabel v. Hungary, in which the tribunals affirmed
Hungary’s measures that reduced the tariff rates to the WACC level.456
334. The Respondent also alleges that the Claimants should have expected that “where the government
expressly warn[ed] that returns [of the photovoltaic producers were] contrary to the intent of
existing law, […] some claw-back of such excessive profits [would be] possible.”457
In late 2009,
the ERO already expressed that the 2010 FiT would provide excessive returns to photovoltaic
producers.458
The Respondent finds support for this in a Master’s thesis at the London School of
Economics, which provides that “[i]nvestors should anticipate that overgenerous FiTs at public
451
Counter-Memorial, para 566.
452
Respondent’s Rejoinder, para 477.
453
Respondent’s Rejoinder, para 478.
454
Rejoinder, para 477.
455
Rejoinder, para 477.
456
Rejoinder, para 482; AES Summit Generation Limited and AES-Tisza Erömü Kft v. The Republic of
Hungary (von Wobeser, Stern, Rowley), ICSID Case No. ARB/07/22, Award, September 23, 2010, paras
10.3.20, 10.3.31, 10.3.44; Electrabel S.A. v. Republic of Hungary (Kaufmann-Kohler, Stern, Veeder),
ICSID Case No. ARB/07/19, Award, November 25, 2015, paras 8.33-8.34.
457
T/1/132-133; Respondent’s opening statement, Slide 45.
458
T/4/765; R-156, “Legislative environment and the promotion of the electricity produced from photovoltaic
power plants in 2009”, ERO Presentation, October 15, 2009.
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expense could well result in ‘retroactive’ adjustments to support regime.”459
335. The Respondent contends that it did not provide the alleged reassurances that FiTs would not be
repealed in relation to plants commissioned by the end of 2010. According to the Respondent,
the fact that the abolition of the 5% Break-Out Rule was once postponed from 2009 to 2010
cannot be considered as a reassurance from the Czech Republic that the upcoming modification
to the Incentive Scheme would not affect plants commissioned by the end of 2010.460
The
Respondent submits that the 1-year postponement was meant to avoid damaging ongoing projects
at that time, i.e., September 2009, and that it did not purport to protect new projects starting after
that moment.461
336. Similarly, the fact that abolishment of 5% Break-Out Rule only affected plants commissioned as
of March 2011 cannot be seen as such a reassurance.462
The Respondent provides that the
adoption of less drastic measures “cannot be understood as a promise that more drastic measures
would not be required if the situation deteriorated further.” 463
The Solar Levy was installed in
such a context that solar installations were unexpectedly increased after the mid of 2010.464
337. The Respondent also contends that the moratorium period cannot be considered as a
reassurance.465
Although the moratorium period had a particular scope, this did not mean that no
other measures would be introduced.466
Rather, in the Respondent’s view, the moratorium
conveyed a clear message that the government did not want further photovoltaic installations.467
338. The Respondent further contends that the 2010 Action Plan did not provide the message that the
FiT level would be stable for 20 years.468
Although the Plan simply summarized the existing
framework, it did not give a promise that such a framework would remain unchanged.469
Indeed,
an article published in September 2010 stated that the 2010 Action Plan “would basically
459
T/1/133; Respondent’s opening statement, Slide 46.
460
T/1/132.
461
T/1/132; Respondent’s opening statement, Slide 45.
462
T/1/132; Respondent’s opening statement, Slide 45.
463
T/1/132; Respondent’s opening statement, Slide 45.
464
T/1/132; Respondent’s opening statement, Slide 45.
465
T/4/765-766.
466
T/4/766.
467
T/4/766.
468
T/4/766-767.
469
T/4/766.
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exterminate the development of solar energy”.470
In this vein, the Respondent alleges that no
reassurance had been given especially after July 2010.471
This is when the Nečas government
was established and the Prime Minister stated that the government was considering to introduce
a solar tax.472
339. The Respondent also alleges that Act No. 330/2010, which abolished all of the photovoltaic
support for large plants as of March 1, 2011, was not a reassurance.473
While the explanatory
report on the Act provided that the plants commissioned before March 2011 would enjoy the
existing conditions, it did not mean that other changes would not apply to these plants.474
The
Respondent describes that Act as having been originally planned to be part of single legislation
to introduce State budgetary support for RES scheme and later separated and became an
independent Act.475
Accordingly, the introduction of the Act was not a sudden policy change of
the Respondent.476
340. The Respondent reacted to the Claimants’ assertion that it could have taken other less harmful
measures.477
According to the Respondent, the issue in the present arbitration should be whether
the amendment measures constitute violations of the treaty standards based on the circumstances
when they were introduced, instead of whether alternative methods were available.478
The
Respondent observes that in any event the Claimants failed to demonstrate the existence of such
alternatives.479
The Respondent did not abolish the 5% Break-Out Rule as of 2010, because it
purported to minimize the impact on existing investors.480
The Respondent did not tax on other
sectors because they had not received excessive profits from the RES support.481
The moratorium
period could not have been introduced earlier than February 2010, because it would have been
470
T/4/767; R-162, “Solar business will slow down, yet the price of electricity will soar,” Mlada Fronta Dnes,
September 16, 2010.
471
T/4/768.
472
T/4/767-768.
473
T/4/768.
474
T/4/768-769.
475
T/4/769.
476
T/4/769-770.
477
T/4/772.
478
T/4/772.
479
T/4/772.
480
T/4/773; Respondent’s closing statement, Slide 15.
481
T/4/773-774.
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illegal under Czech and EU law.482
341. The Respondent argues that the investor that completes an investment after a measure is
announced cannot claim that at the time of the investment, it had legitimate expectations that
such a measure would not be adopted.483
In the present case, however, the power purchase
agreements of Úsilné, Mozolov, and Osečná operations were signed on
, and , all of which were even after the adoption of the
amendment measures.484
Furthermore, the Respondent rejects the Claimants’ characterization
that they had a “contractual” relationship under which the Respondent provided a promise of
stability as a bargain, stating that the Claimants did not incur any legal obligation to make
investment in the Czech Republic.485
It is the Respondent’s view that the FET and FPS claims
fail for these reasons.486
342. The Respondent contends that Dr Göde made his investment decision without familiarizing
himself with the Czech photovoltaic legal framework, pointing out that during the hearing he
could not remember whether he had reviewed the Technical Regulation.487
343. The Respondent, referring to AES v. Hungary and Electrabel v. Hungary, contends that a
violation of the non-impairment standard “requires the impairment caused by the discriminatory
or unreasonable measure to be significant”488
a high bar that, according to the Respondent,
“cannot be met by the mere imposition of a tax, or the simple denial of a tax exemption.”489
344. The Respondent submits that, in the present case, the Claimants have not demonstrated any effect
or impact that rises to the level of “impairment” citing Perenco for support. The Respondent
482
T/2/283; T/4/753; T/4/775.
483
Rejoinder, para 484; Ulysseas, Inc. v. Ecuador (Bernardini, Pryles, Stern), UNCITRAL, Final Award, June
12, 2012, para 252.
484
Rejoinder, para 485, note 998.
485
Rejoinder, para 486.
486
Rejoinder, para 474.
487
T/4/752.
488
Counter-Memorial, para 572; AES Summit Generation Limited and AES-Tisza Erőmű Kft. v. Republic of
Hungary (von Wobeser, Stern, Rowley), ICSID Case No. ARB/07/22, Award, September 23, 2010, para
10.3.3; Electrabel S.A. v. Hungary (Kaufmann-Kohler, Stern, Veeder), ICSID Case No. ARB/07/19,
Decision on Jurisdiction, Applicable Law and Liability, November 30, 2012, para 7.152.
489
Respondent’s Rejoinder, para 495; Occidental v. Ecuador (Orrego Vicuña, Brower, Barrera Sweeney),
LCIA Final Award, July 1, 2004, paras 2-3, 161; Perenco v. Ecuador (Tomka, Kaplan, Thomas), ICSID
Case No. ASRB08/6, Decision on Remaining Issues of Jurisdiction and Liability, September 12, 2014,
paras 596-99.
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notes that, as in Perenco, the Claimants remain free to use, and have in fact used, the so-called
“investments” to generate substantial revenues.490
In fact, the Claimants’ investment “continues
to earn returns that are above the benchmark of ‘adequate return’ established under the Act on
Promotion, and Claimants have failed to demonstrate that such returns are inadequate for a
regulated investment such as theirs”.491
The fact that the Claimants may have desired greater
profits than they have obtained does not in and of itself demonstrate “impairment”.492
The
Respondent submits that “investment treaties do not guarantee that every business projection will
be met” for “a State cannot be held liable for every single measure that might adversely affect an
investment’s value”.493
345. Additionally, the Respondent argues that even if the Claimants could demonstrate “impairment”,
they would have to also prove that such impairment “relates to the management, maintenance,
use, enjoyment, or disposal of the purported investments”.494
According to the Respondent, this
follows from both the plain text of the relevant ECT and BIT provisions as well as the
interpretative principles of effet utile and expressio unius est exclusio alterius.495
The Respondent
notes that the Claimants do not attempt to argue that the amendment measures impaired any of
these activities.496
The Respondent submits that the Claimants’ contention that as a result of
these measures, their purported investments suffered “negative effects” is not sufficient.497
Neither does the Respondent find convincing the Claimants’ argument that the measures reduced
the solar plants’ respective rates of return as such reduction has nothing to do with the
investment’s management, maintenance, use, enjoyment, or disposal.498
346. The Respondent submits that a host State’s policy is rational “if it had been adopted ‘following
a logical (good sense) explanation and with the aim of addressing a public interest matter’” as
490
Rejoinder, para 496.
491
Rejoinder, para 496.
492
Rejoinder, para 496.
493
Rejoinder, para 496.
494
Rejoinder, para 497.
495
Respondent’s Rejoinder, para 497 citing Perenco v. Ecuador (Tomka, Kaplan, Thomas), ICSID Case No.
ASRB08/6, Decision on Remaining Issues of Jurisdiction and Liability, September 12, 2014, para 596;
RLA-161, K. J. Vandevelde, Bilateral Investment Treaties (Oxford University Press, 2010) p. 215; ECT,
Art. 10(1); R-204, UNTS Translation of the BIT, Art. 2(2).
496
Respondent’s Rejoinder, para 498.
497
Respondent’s Rejoinder, para 498.
498
Respondent’s Rejoinder, para 498.
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the AES tribunal stated.499
347. The Respondent notes that “tribunals have been reluctant to question a State’s ‘discretionary
exercise of a sovereign power’ or to find a BIT violation simply because of a flaw in a given law
or a shortcoming in its implementation.”500
In the Respondent’s words, “tribunals have found a
wide range of policy objectives to be ‘rational’.501
348. In the present case, the Respondent maintains that its “objectives of reducing excessive profits,
balancing the budget, and sheltering consumers from excessive electricity price rises are
eminently rational”.502
349. The Respondent rejects the Claimants’ assertion as to the “rationality” requirement that “[i]t is
[…] incumbent upon [the Respondent] to prove that the maintenance of the Incentive Regime,
and the allegedly attendant high electricity prices, would have entailed the catastrophic
consequences for the Czech economy that are invoked, in terms of layoffs, plant shut downs and
dramatic drops in the tax revenues.”503
The Claimants’ position would require the Respondent
to “prove that near-calamitous consequences would have occurred but for the State’s
intervention.”504
According to the Respondent, “tribunals have found policy objectives to be
‘rational’ without considering whether the circumstances meet a certain threshold of risk to the
State, or of overall gravity, in the absence of measures to address such policies.”505
350. The Respondent contends that the amendment measures were reasonable.
351. Referring to the AES award, the Respondent submits that “if there is ‘an appropriate correlation
499
Rejoinder, para 506; AES Summit Generation Limited and AES-Tisza Erömü Kft. v. Republic of Hungary
(von Wobeser, Stern, Rowley), ICSID Case No. ARB/07/22, Award, September 23, 2010, para 10.3.8.
500
Counter-Memorial, para 576; S.D. Myers Inc. v. Canada (Hunter, Schwartz, Chiasson), UNCITRAL,
Partial Award, November 13, 2000, para 261; Electrabel S.A. v. Hungary (Kaufmann-Kohler, Stern,
Veeder), ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, November
30, 2012, para 8. 35.
501
Counter-Memorial, para 576; AES Summit Generation Limited and AES-Tisza Erőmű Kft. v. Republic of
Hungary (von Wobeser, Stern, Rowley), ICSID Case No. ARB/07/22, Award, September 23, 2010, para
10.3.31; Ioan Micula, Viorel Micula and others v. Romania (Lévy, Alexandrov, Abi-Saab), ICSID Case
No. ARB/05/20, Award, December 11, 2013, para 825; Paushok and others v. Mongolia (Lalonde, Grigera
Naón, Stern), UNCITRAL, Award on Jurisdiction and Liability, April 28, 2011, paras 319-21.
502
Respondent’s Rejoinder, para 510.
503
Counter-Memorial, para 587; Memorial, para 506.
504
Counter-Memorial, para 587.
505
Counter-Memorial, para 588; AES Summit Generation Limited and AES-Tisza Erőmű Kft. v. Republic of
Hungary (von Wobeser, Stern, Rowley), ICSID Case No. ARB/07/22, Award, September 23, 2010, paras
10.3.31., 10. 3. 34.
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between the state’s public policy objective and the measure adopted to achieve it’”, “a State
measure is deemed ‘reasonable’”.506
The burden “is on the Claimants to prove every element of
its claim that the Respondent has acted ‘unreasonably’ in violation of its non-impairment
obligation.”507
The Respondent adds that “there is ‘a presumption of validity in favour of
legislative measures adopted by a State’”, relying on the El Paso award.508
352. In particular, with regard to a tax or fiscal measure at issue, the Respondent takes the view that
“several tribunals have held that a State’s imposition of a tax or other fiscal measure for the
purpose of regulating windfall profits is not ‘unreasonable’ under the non-impairment clause of
a BIT”, referring to Paushok v. Mongolia and AES v. Hungary.509
353. The Respondent submits that the Claimants’ approach to the “reasonableness” element of the
non-impairment standard distorts the “reasonableness” test and its second prong of
proportionality.510
The Respondent maintains that “tribunals are concerned not with the precise
magnitude of harm to the investor vis-à-vis the magnitude of benefit to the state, but rather with
whether the state measure is appropriate and justifiable in light of the public policy interest being
pursued”.511
354. In relation to the Claimants’ contention that “a state measure is only reasonable if, in addition to
pursuing a rational policy, its adverse effects on foreign investments are limited to what is strictly
necessary to achieve the public interest […]”, the Respondent states that the Claimants distorted
the test as a strict scrutiny test and newly invented the phrase “strictly necessary”.512
The
Respondent finds support for this in the AES and Micula decisions, which only required “‘an
506
Counter-Memorial, para 577; AES Summit Generation Limited and AES-Tisza Erőmű Kft. v. Republic of
Hungary (von Wobeser, Stern, Rowley), ICSID Case No. ARB/07/22, Award, September 23, 2010, para
10.3.9.
507
Counter-Memorial, para 578.
508
Counter-Memorial, para 578; El Paso Energy International Company v. Argentine Republic (Caflisch,
Bernardini, Stern), ICSID Case No. ARB/03/15, Award, October 31, 2011, para 290.
509
Counter-Memorial, paras 579-81; Paushok and others v. Mongolia (Lalonde, Grigera Naón, Stern),
UNCITRAL, Award on Jurisdiction and Liability, April 28, 2011, paras 321; AES Summit Generation
Limited and AES-Tisza Erőmű Kft. v. Republic of Hungary (von Wobeser, Stern, Rowley), ICSID Case
No. ARB/07/22, Award, September 23, 2010, para 10.3.34.
510
Counter-Memorial, paras 582-583. Respondent’s Rejoinder, para 511.
511
Counter-Memorial, paras 583-584; Ioan Micula, Viorel Micula and others v. Romania (Lévy, Alexandrov,
Abi-Saab), ICSID Case No. ARB/05/20, Award, December 11, 2013, para 525; AES Summit Generation
Limited and AES-Tisza Erőmű Kft. v. Republic of Hungary (von Wobeser, Stern, Rowley), ICSID Case
No. ARB/07/22, Award, September 23, 2010, paras 10.3.9.-13.
512
Counter-Memorial, paras 585-6; Memorial, para 502.
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appropriate correlation’ between the state’s public policy objective and the measure adopted to
achieve it” for the host States’ measures to be considered as reasonable.513
355. The Respondent asserts that it “acted reasonably at all times […] by imposing appropriate and
proportional measures to correct the disequilibrium in the RES support regime” in response to
“an unforeseen influx of investment in the photovoltaic industry [and] “an unforeseen drop in
solar panel costs.”514
According to the Respondent, in response to the unprecedented rise in PV
capacity and generation and the resulting increase in the RES subsidies and the final electricity
price, “it was entirely rational for the Czech Republic to craft measures aimed at correcting the
system and easing the burden on consumers.”515
In addition, the Respondent submits that “the
Czech Republic also acted reasonably to rectify the good-faith mistake that had been made in the
mechanism established to calibrate the RES subsidies.”516
356. The Respondent contends that the reasonableness and proportionality of the measures in question
was confirmed by the Czech courts after careful scrutiny.517
357. The Respondent contends that it “carefully and selectively recalibrated the RES support system
by targeting only the sector that was garnering a disproportionate percentage of the RES subsidy,
and, within that sector, only those producers that were enjoying the greatest amount of excessive
profits.”518
The Respondent adds that “this approach was not only eminently reasonable, but also
consistent with the Czech Republic’s binding obligations under EU state aid law to ensure that
RES subsidies do not provide the beneficiaries with more than a ‘normal return on capital’”.519
358. The Respondent emphasizes that the amendment measures only have decreased the Claimants’
after-tax returns by %, i.e., % to %.520
Accordingly, the Claimants’ allegation that the
amendment measures have deprived the fundamental guarantee of the Incentive Regime is
513
Counter-Memorial, para 586; Ioan Micula, Viorel Micula and others v. Romania (Lévy, Alexandrov, AbiSaab),
ICSID Case No. ARB/05/20, Award, December 11, 2013, para 525; AES Summit Generation
Limited and AES-Tisza Erőmű Kft. v. Republic of Hungary (von Wobeser, Stern, Rowley), ICSID Case
No. ARB/07/22, Award, September 23, 2010, paras 10.3.9.
514
Counter-Memorial, para 591.
515
Counter-Memorial, paras 592-593.
516
Counter-Memorial, para 593.
517
Counter-Memorial, para 594; R-38, Decision of the Constitutional Court of the Czech Republic, May 15,
2012, Ref. No. Pl. ÚS 17/11, para 72.
518
Counter-Memorial, para 595.
519
Counter-Memorial, para 595.
520
T/1/141.
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without merit.521
359. The Respondent addresses the Claimants’ other arguments as to the reasonableness of the
amendment measures as follows.522
First, the Respondent did not withdraw the essential features
of the Incentive Regime, because it continues to provide the FiT for the lifetime of the plants.523
The introduction of the Solar Levy was meant to restore a direct relationship between investments
and expected return, which should have been embedded from the beginning as an essential feature
of the regime.524
Second, the Respondent rejects the Claimants’ theory that the Czech Republic’s
repeal of the “consideration” to the investors provided a basis of the unreasonableness.525
Such
a theory uplifts every contractual breach of a host State to a treaty violation.526
Third, the solar
boom was not caused by the Respondent’s mismanagement, but by investors’ behaviour of
rushing into the photovoltaic market toward the end of 2010.527
Even if there had been a better
solution, a State is not liable only because “circumstances develop in a less-than-ideal way.”528
Article 25.2(b) of the ILC Draft Articles, which the Claimants cite, is irrelevant to the present
case, since the Respondent does not plead a defence of necessity.529
Fourth, the amendment
measures were not unprecedented bad practice.530
Rather, the measures were comparable to those
taken in other EU Member States.531
In any event, whether a host State’s measures are novel or
whether there was a better solution is irrelevant to the unreasonableness analysis.532
Fifth, the
Respondent asserts that it addressed the solar boom in a speedy manner.533
In any event,
measures cannot be unreasonable just because they were introduced quickly.534
521
T/1/141.
522
Rejoinder, para 515.
523
Rejoinder, para 516.
524
Rejoinder, para 516.
525
Rejoinder, para 517.
526
Rejoinder, para 517.
527
Rejoinder, para 520.
528
Rejoinder, para 520.
529
Rejoinder, paras 518-519.
530
Rejoinder, para 521.
531
Rejoinder, para 522.
532
Rejoinder, paras 522-525.
533
Rejoinder, para 526.
534
Rejoinder, para 527.
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3. The Tribunal’s analysis
A. The Principles
360. As is usual in these cases, the Parties have adduced many published awards (in this case more
than 50) on the interpretation or application of the FET (“fair and equitable treatment”) standard,
and the FPS (“full protection and security”) and non-impairment standards. Most of them are
well-known, and, although formulations of the principles differ in detail, it is only necessary to
summarize the present state of international law and practice in these general propositions
(several of which overlap with each other):
(1) There will be a breach of the FET standard where legal and business stability or the
legal framework has been altered in such a way as to frustrate legitimate and
reasonable expectations or guarantees of stability.535
(2) A claim based on legitimate expectation must proceed from an identification of the
origin of the expectation alleged, so that its scope can be formulated with
precision.536
(3) A claimant must establish that (a) clear and explicit (or implicit)537
representations
were made by or attributable to the state in order to induce the investment, (b) such
representations were reasonably relied upon by the Claimants, and (c) these
representations were subsequently repudiated by the state.538
(4) An expectation may arise from what are construed as specific guarantees in
legislation.539
535
Tecnicas Medioambientales Tecmed SA v United Mexican States (Grigera Naón, Fernandez Rozas, Verea),
May 29, 2003, para 154; Duke Energy Electroquil Partners v Republic of Ecuador (Kaufmann-Kohler,
Gomez Pinzon, van den Berg), August 18, 2008, para 340; Bayindir v. Pakistan (Kaufmann-Kohler,
Berman, Böckstiegel), August 27, 2009, para 179; Electrabel SA v Hungary (Kaufmann-Kohler, Stern,
Veeder), November 30, 2012, para 7.74; El Paso v Argentina (Caflisch, Bernardini, Stern), October 31,
2011, para 348; Philip Morris Brands SÀRL v Uruguay (Bernardini, Born, Crawford), July 8, 2016, para
320. Some awards suggest that there is a free-standing and independent requirement to provide a stable
and predictable legal order: see Binder v. Czech Republic (Danelius, Creutzig, Gaillard), July 15, 2011,
para 446 (and awards cited there).
536
Arif v Republic of Moldova (Cremades, Hanotiau, Knieper), April 8, 2013, para 535.
537
See Parkerings-Compagniet AS v Lithuania (Lew, Lalone, Lévy), September 11, 2007, para 331; see
Dolzer and Schreuer, Principles of International Investment Law, p 134.
538
Mobil Investments Canada Inc v Canada (van Houtte, Janow, Sands), May 22, 2012, para 154.
539
Enron Corp v Argentina (Orrego Vicuña, van den Berg, Tschanz), May 22, 2007, paras 264-266; LG&E
Energy Corp v Argentina (de Maekelt, Rezek, van den Berg), October 3, 2006, paras 162-163.
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(5) A specific representation may make a difference to the assessment of the investor’s
knowledge and of the reasonableness and legitimacy of its expectation, but is not
indispensable to establish a claim based on legitimate expectation which is
advanced under the FET standard.540
(6) Provisions of general legislation applicable to a plurality of persons or a category
of persons, do not create legitimate expectations that there will be no change in the
law; and given the State’s regulatory powers, in order to rely on legitimate
expectations the investor should inquire in advance regarding the prospects of a
change in the regulatory framework in light of the then prevailing or reasonably to
be expected changes in the economic and social conditions of the host State.541
(7) An expectation may be engendered by changes to general legislation, but, at least
in the absence of a stabilization clause, they are not prevented by the fair and
equitable treatment standard if they do not exceed the exercise of the host State’s
normal regulatory power in the pursuance of a public interest and do not modify
the regulatory framework relied upon by the investor at the time of its investment
outside the acceptable margin of change.542
(8) The requirements of legitimate expectations and legal stability as manifestations of
the FET standard do not affect the State’s rights to exercise its sovereign authority
to legislate and to adapt its legal system to changing circumstances.543
(9) The host State is not required to elevate the interests of the investor above all other
considerations, and the application of the FET standard allows for a balancing or
weighing exercise by the State and the determination of a breach of the FET
standard must be made in the light of the high measure of deference which
international law generally extends to the right of national authorities to regulate
matters within their own borders.544
540
Electrabel SA v Hungary (Kaufmann-Kohler, Stern, Veeder), November 30, 2012, para 7.78; Electrabel
SA v Hungary (Kaufmann-Kohler, Stern, Veeder), November 25, 2015, para 15.
541
Philip Morris Brands SÀRL v Uruguay (Bernardini, Born, Crawford), July 8, 2016, paras 426-427.
542
cf. Micula v Romania (Levy, Alexandrov, Abi-Saab), December 11, 2013, para 529: Philip Morris Brands
SÀRL v Uruguay (Bernardini, Born, Crawford) July 8, 2016, para 423.
543
Philip Morris Brands SÀRL v Uruguay (Bernardini, Born, Crawford), July 8, 2016, para 422, citing many
earlier awards.
544
Saluka Investments BV v Czech Republic (Watts, Fortier, Behrens) March 17, 2006, paras 305-306; Arif v
Republic of Moldova (Cremades, Hanotiau, Knieper), April 8, 2013, para 537; Electrabel SA v Hungary
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(10) Except where specific promises or representations are made by the State to the
investor, the latter may not rely on an investment treaty as a kind of insurance policy
against the risk of any changes in the host State’s legal and economic framework.
Such expectation would be neither legitimate nor reasonable.545
(11) Protection from arbitrary or unreasonable behaviour is subsumed under the
FET standard.546
(12) It will also fall within the obligation not to impair investments by “unreasonable
… measures” (Article 10(1), ECT) or “arbitrary ... measures (Article 2(2), Czech
Republic/Germany BIT).547
(13) The investor is entitled to expect that the State will not act in a way which is
manifestly inconsistent or unreasonable (i.e. unrelated to some rational policy).548
361. In Micula v Romania the tribunal said:
525. … [F]or a state’s conduct to be reasonable, it is not sufficient that it be related to
a rational policy; it is also necessary that, in the implementation of that policy, the state’s acts
have been appropriately tailored to the pursuit of that rational policy with due regard to the
consequences imposed on investors.
…
669. There must be a promise, assurance or representation attributable to a competent
organ or representative of the state, which may be explicit or implicit. The crucial point is
whether the state, through statements or conduct, has contributed to the creation of a
(Kaufmann-Kohler, Stern, Veeder), November 25, 2015, para 165.
545
EDF (Services) Ltd v Romania (Bernardini, Derains, Rovine), October 8, 2009, para 219, approved in
Philip Morris Brands SÀRL v Uruguay (Bernardini, Born, Crawford), July 8, 2016, para 424.
546
Oxus Gold v Uzbekistan (Tercier, Lalonde, Stern), December 17, 2015, para 323; Tecmed v Mexico
(Grigera Naón, Fernandez Rozas, Verea), May 29, 2003, para 154; CMS Gas Transmission Co v Argentina
(Orrego Vicuña, Lalonde, Rezek), May 12, 2005, para 290; cf Bayindir v. Pakistan (Kaufmann-Kohler,
Berman, Böckstiegel), August 27, 2009, para 178.
547
See LLC AMTO v Hungary (Cremades, Runeland, Söderlund), March 26, 2008, para 74.
548
Saluka Investments BV v Czech Republic (Watts, Fortier, Behrens), March 17, 2006, para 309, approved
in Philip Morris Brands SÀRL v Uruguay (Bernardini, Born, Crawford), July 8, 2016, para 322; Sempra
Energy International v Argentina (Orrego Vicuña, Lalonde, Rico), September 28, 2007, para 318 (not for
the tribunal to decide whether measures adopted “might have been good or bad”: there must be some
important manifest impropriety); Plama Consortium Ltd v Republic of Bulgaria (Salans, van den Berg,
Veeder), August 27, 2008, para 184; AES Summit Generation Ltd v Hungary (von Wobeser, Stern,
Rowley), September 23, 2010, para 10.3.7 (“the existence of a rational policy; and the reasonableness of
the act of the state in relation to the policy”); Binder v Czech Republic (Danelius, Creutzig, Gaillard), July
15, 2011, para 447; Micula v Romania (Levy, Alexandrov, Abi-Saab), December 11, 2013, paras 520, 525
(“in the implementation of that policy, the state’s acts have been appropriately tailored to the pursuit of
that rational policy with due regard for the consequences imposed on investors”); Electrabel SA v Hungary
(Kaufmann-Kohler, Stern, Veeder), November 25, 2015, para 155 (“a legitimate policy objective,
necessary for that objective, and not excessive considering the relative weight of each interest involved”).
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reasonable expectation, in this case, a representation of regulatory stability. It is irrelevant
whether the state in fact wished to commit itself; it is sufficient that it acted in a manner that
would reasonably be understood to create such an appearance. The element of reasonableness
cannot be separated from the promise, assurance or representation, in particular if the promise
is not contained in a contract or is otherwise stated explicitly. Whether a state has created a
legitimate expectation in an investor is thus a factual assessment which must be undertaken
in consideration of all the surrounding circumstances.
…
672. The Claimants must also have relied on that expectation when they made their
investments. However, it is not necessary for the entire investment to have been predicated
solely on such expectation. Businessmen do not invest on the basis of one single
consideration, no matter how important. In the Tribunal’s view, that expectation must be a
determining factor in an investor’s decision to invest, or in the manner or magnitude of
its investments.
362. The FPS standard reflects the traditional obligation under international law to protect aliens from
acts of non-state parties,549
although a minority of awards treats FET and FPS as the same or
similar or related concepts.550
363. As will be apparent from the Tribunal’s factual analysis and the narrow basis of its holding, the
precise ambit of, and the relationship between, the propositions set out above does not call for
decision in these proceedings. It will be equally apparent that, contrary to the dissenting
opinion,551
the Tribunal’s decision is not based on all of those propositions, but on the ambit of
the legitimate expectation on the facts of the case.
B. Promise of stability
364. The first question is whether the Claimants made their investments in 2010 through a legitimate
and reasonable expectation based on an explicit or implicit representation by the Respondent that
the value of their investment would not be diminished in the way that it was.552
549
Saluka Investments BV v Czech Republic (Watts, Fortier, Behrens), March 17, 2006, paras 483-484; El
Paso v. Argentina (Caflisch, Bernardini, Stern), October 31, 2011, para 522; Electrabel SA v. Hungary
(Kaufmann-Kohler, Stern, Veeder), November 30, 2012, para 7.83; Oxus Gold v Uzbekistan (Tercier,
Lalonde, Stern), 17 December 2015, para 353; Spyridon Roussalis v. Romania (Giardina, Reisman,
Hanotiau), December 7, 2011, para 321. See also; Binder v. Czech Republic (Danelius, Creutzig, Gaillard),
July 15, 2011, para 477.
550
E.g. CME Republic BV v Czech Republic (Kühn, Schwebel, Handl), September 13, 2001, para 613; Azurix
Corp v Argentine Republic (Sureda, Lalonde, Martins), July 14, 2006, para 408.
551
See paragraph 5.
552
For the sake of completeness, the Tribunal should mention, in relation to renewable energy subsidies, that
the Stockholm Chamber of Commerce majority awards in Charanne and Construction Investments v Spain,
January 21, 2016 (Mourre, Santiago Tawil, von Wobeser) and Isolux Infrastructure Netherlands BV v
Spain, July 12, 2016 (Derains, Santiago Tawil, von Wobeser) (no legitimate expectation); the PCA Award
in Wirtgen v Czech Republic, October 11, 2017 (Kaufman-Kohler, Born, Tomka) (no legitimate
expectation); and the ICSID awards in Blusun SA v Italy, December 27, 2016 (Crawford, Alexandrov,
Dupuy) (no legitimate expectation) and Eiser Infrastructure Ltd v Spain, May 4, 2017 (Crook, Alexandrov,
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365. The Tribunal does not accept that it should approach this question simply on the basis of the
Claimants’ argument553
that there is a free-standing obligation to provide a stable and predictable
investment framework. Nor does it accept the Respondent’s suggestion that no legitimate
expectations as to stability can arise in the absence of a legislative or contractual stabilization
arrangement.554
366. The Tribunal accepts that promises or representations to investors may be inferred from domestic
legislation in the context of its background, including official statements. It is not essential that
the official statements have legal force. There can be no doubt that both the Respondent and the
ERO described the incentive regime in terms of a guarantee or promise of stability, and that the
Czech Government actively promoted the new regime at home and abroad, and described its main
element in terms of a guarantee.
367. The documents which establish this have already been referred to, and it is only necessary to
mention that the Czech Ministry of Industry and Trade, when submitting the bill to Parliament,
stated that one of the main objectives of the Act on Promotion was to establish a secure, stable
and predictable regime; the 2003 Explanatory Report on the Act on Promotion stated that the
support system was based “on providing a guarantee to investors”;555
the former Minister of
Environment stated that the most important principle of the law was the guarantee of a stable FiT
for a 15 year period;556
the Respondent in the 2005 UN Report described the purpose of Section
6(1)(b)(2) as: “providing guarantees to the investors and owners … that … revenue …will be
maintained for a period of 15 years …”557
; and the ERO described the Act on Promotion as
“bringing a guarantee of long-term and stable promotion …” including a “guarantee of revenues
… for a period of 15 years.”558
McLachlan) (legitimate expectation) depend on their facts, and not on any point of principle.
553
Reply, paras 637, 639, 674-677.
554
Counter-Memorial, para 550.
555
C-120, Explanatory Report on the bill of the Act on Promotion of November 12, 2003 (extended version),
p. 4.
556
C-32, Newspaper article in “Moderní obec.cz”, June 1, 2005.
557
C-72, Fourth National Communication of the Czech Republic on the UN Framework Convention on
Climate Change of 2005, p. 35.
558
C-203, “Report on the Fulfilment of the Indicative Target for Electricity Production from Renewable
Energy Sources for 2008” of November 2009, prepared by the Ministry of Industry and Trade, p. 22,
para 5.1.
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C. Knowledge of the issues arising out of the solar boom
368. Nor can there be any doubt that investors such as the Claimants would have been well aware of
the political and economic issues which arose from the solar boom, and the history has been set
out above.559
369. This phase culminated in the press release on August 24, 2009 in which the Ministry stated that
it was “planning to change the maximum 5% limit by which the ERO can reduce the purchase
price of electricity from renewable energy sources annually” and that it was “trying to ensure that
the new act comes into force on 1 January next year,”560
i.e. in January 2010.
370. As the Claimants accept,561
rumours of an intention to reduce incentives began in the summer of
2009, and that many officials, including current and former ministers, issued statements about
the problems of the solar boom.
371. On June 19, 2009, a major Czech newspaper reported in an article entitled “The state wants to
stop solar power plants boom” that “[s]olar energy support is starting to cause problems for the
state, which therefore wants to stop the ongoing solar boom. The solar electricity feed-in-tariff
has gone in some instances economically beyond the limit ... ERO is therefore seeking ways to
reduce the solar energy feed-in tariff dramatically. It is indeed extraordinarily attractive ...”. Mr
Fiřt was quoted as saying that the FiT had gone economically beyond the limit. The ERO was
trying to agree an amendment to the 5% cap on decreases with the Government and members of
Parliament, but the change would probably not come in 2009 because it would have to be debated
in Parliament, which would not be able to make a decision before autumn, when ERO had to
announce the tariffs for 2010.562
372. On June 24, 2009, an online article entitled “ERO is preparing purchase price reductions!”
reported that: “The Energy Regulatory Office (ERO) is preparing to dramatically reduce the
purchase prices of electricity produced from the sun by solar power plants. The reason for this is
the exceedingly high price of the sun’s energy ... Pursuant to the regulations in effect ERO cannot
559
See especially C-200, Letter of July 1, 2009 from Mr. Fiřt (Chairman of the ERO) to Mr. Tošovský
(Minister of Industry and Trade); R-306, Letter from L. Miko to J. Fiřt (Czech Original and English
translation), July 22, 2009; R-135, Letter from V. Tošovský to J. Fiřt (Czech original and English
translation), July 29, 2009; R-136, Letter from B. Němeček to R. Portužák (Czech original and English
translation), August 10, 2009; R-145, Letter from Mr Portužák to Mr Němeček, August 28, 2009.
560
R-138, “Ministry of Industry and Trade will equalize the support of renewable energy sources,” Ministry
of Industry and Trade Press Release (www.mpo.cz), August 24, 2009.
561
Reply, para 175.
562
R-363, “State wants to stop solar power plants boom,” Mladá fronta.
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decrease the RES electricity price by more than 5 % per year. Hence, ERO is seeking a way
together with the government to amend the existing regulations.”563
373. In a presentation of June 25, 2009 the Prague office of the law firm Schönherr referred to “efforts
to increase the percentage of decrease”.564
374. In an interview published on August 13, 2009, Mr Kunz, Chairman of the Board of Energy 21,
referred to the 5% limit and said: “if the legislation changes, we must be ready for that. We cannot
have too many projects in which we work on the assumption that nothing will change.
Nevertheless, I don’t think the support will end entirely.”565
375. On August 25, 2009, following the press release of August 24, 2009, an article under the headline
“Ministry of Industry and Trade wants to reduce support of solar power plants,” made reference
to “Business without any risk and with a state guarantee, and said that purchase prices were
guaranteed for 15 years while “thanks to current technologies, in some cases the payback period
of the investment is only about five years, the [Ministry of Trade and Industry] says.”566
376. On September 3, 2009, an article by P Gabal567
highlighted the Ministry’s statement that there
were 28 solar power plants in the Czech Republic in 2007, whereas there were 2,230 as at August
1, 2009, and reported that the Ministry wanted to change the 5% limit, ideally from January 1,
2010. Mr Kunz, the Chairman of Energy 21, was again quoted as counselling against abrupt
changes in the law because of investments already committed.
377. On November 2, 2009 under the heading “Additional payments for solar energy reached three
billion; the state may curtail their boom”,568
it was said “… it seems now that solar power plants
will not be so lucrative anymore. The amendment being prepared by the Ministry of Finance and
planned to come into force early next year will likely not include the limit which allows a
decrease of the purchase price by not more than 5% every year.”
563
R-364, “ERO is preparing purchase price reductions” (greensolar.webnode.cz).
564
R-30, Schönherr v.o.s., “Legal Aspects of Photovoltaic Power Plant Implementation”, June 25, 2009.
565
R-143, M. Petříček, “Solar boom is slightly excessive,” Hospodářské Noviny, August 13, 2009.
566
R-139, Právo, “Ministry of Industry and Trade wants to reduce support of solar power plants”, August 25,
2009.
567
R-140, “Is there any danger of reduction of support for solar power plants”, Rádio Praha, September 3,
2009.
568
R-181, “Additional payments for solar energy reached three billion; the state may curtail their boom”
(Novinky.cz), November 2, 2009.
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378. ERO made presentations dealing with the issue. In an October 2009 presentation, ERO said that
“the economic return [for solar investors] at the current prices is in conflict with the guaranteed
return pursuant to the law and is almost half [the 15-year period].” ERO drew attention to the
technical parameters specified in the Technical Regulation and explained that an appropriate drop
in the 2010 FIT to reflect cost developments would amount to 29.5%.569
379. As a result of the rise in the number of applications to connect new solar installations, there was
a widely announced and reported national moratorium on new applications in February 2010.570
The Respondent says that the Claimants made three of their five investments in the solar sector
when the moratorium was in force.571
The Claimants respond that they obtained the capacity
reservations for their SPVs between and well before the
moratorium came into force.572
But the Respondent says573
that the binding statements for the
Claimants’ 2010 installations had been issued to third parties and assigned to the Claimants in
and 574
380. It was reported that at a conference entitled Solar Energy in the Czech Republic 2010 “all
conference participants agree that it is necessary to limit the speed at which the installed capacity
of solar power plants has been growing but they are of fairly different opinions on how to do it.”
The author said: “I think that in the fall when ERO will determine new electricity purchase prices
for the year 2011, a quite stormy discussion will take place around it.”575
569
R-156, Legislative environment and the promotion of the electricity produced from photovoltaic power
plants in 2009,” ERO Presentation, October 15, 2009, p. 14.
570
Press releases: R-225, “CEPS calls for the suspension of connections for new renewable energy sources,”
AF Power press release, February 10, 2010; R-224, “CEZ Distribuce responds to CEPS’s demand,” CEZ
press release, February 16, 2010; R-230, “Boom development of solar power plants must be balanced with
the stability of the grid and distribution network,” E.ON press release, February 2010; R-229, “New solar
power plants are out of luck, ČEZ and E.ON will no longer connect them to the grid” (Novinky.cz),
February 17, 2010.
571
Counter-Memorial, para 103.
572
Reply, para 736, note 857.
573
Rejoinder, para 160.
574
C-81, Úsilné - Binding Statement; C-172,
C-101,
C-96, Osečná - Binding Statement;
C-183,
C-184, Simplified share purchase agreement of September 1, 2010 between, inter
alia, Ms. Denisa Rašková, as seller, and Taurus, as buyer.
575
R-155, K. Murtinger, Solar energy 2010: no solution to the crisis in sight” (nazeleno.cz), March 24, 2010.
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D. Dr Göde’s evidence
381. Dr Göde’s evidence was that he was personally involved in the investment in the Czech Republic.
In 2008 he had started contemplating entry into the energy market in the Czech Republic by
constructing photovoltaic installations. He first heard from specialized periodical magazines
dedicated to photovoltaic energy about the FiT incentive system implemented in the Czech
Republic in 2005, which was based on the earlier German experience with FiT.
382. After having made due inquiries, including many personal consultations with the Czech law firm
in Prague, he acquired extensive knowledge of the legal
framework of the incentive system, in particular of the Act on Promotion and of its implementing
regulations issued by the ERO. The fundamental incentive of that system was the fixed FiT
payable to renewable energy operators for the electricity produced over the expected lifetime of
the plant, which, in case of solar installations, was originally fixed by the ERO in 15 years and
then – by ERO Regulation 364/2007 – adjusted to 20 years. There was to be a stable FiT, subject
only to yearly increase in the range 2-4% based on the inflation index for industrial producers.
The Act on Promotion also provided that FiT payable to photovoltaic plants put into operation in
any given year could not be more than 5% lower than those granted to photovoltaic plants put
into operation in the previous year.
383. He said576
that he was told by that the fundamental innovation
and guarantee of the system was the long-term stability of the FiT level, as compared with the
previous system. He went through every piece of legislation, but does not remember receiving
any written advice, although he spent days discussing the Czech legal framework. During those
consultations he was assured that once put into operation a solar panel would receive the FiT set
for that year by the ERO for its lifetime, and he was reassured that the plant would benefit from
a tax holiday in the year in which it was put into operation and for the following five years. He
was never advised of a risk that the Czech Republic could have reneged on its commitments by
introducing retroactive measures affecting the guaranteed 6 year tax vacation.
384. In addition577
he recalled an intensive promotion of the system by Czech officials, and there were
many articles in local newspapers and the specialized press explaining the fundamental pillars of
the promotion and showing that the new system from 2008 was capable of attracting the RES
investments needed by the Czech Republic. He refers to a Report prepared by the Ministry of
576
Second Göde Statement, paras 13-17.
577
First Göde Statement, paras 18-20.
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Industry and the ERO578
which stated that the Act on Promotion provided a “guarantee of longterm
and stable promotion” and referred to “the guarantee of revenues per unit of electricity
produced.”579
He says that he received clear reassurances from documents produced by the ERO
which he studied at the time, including a “Q&A tool” available in German on the ERO’s website,
which stated that the FiT had to remain stable for the expected lifetime of solar plants.580
The
Q&A has a Question 9: for what period are FiTs “guaranteed”? The table gives 20 years for
photovoltaic plants.581
385. He was equally aware of the incentives in the Act on Income Tax and relied on them when he
took the final decision to invest in the Czech Republic.
386. At the time of his investment, he did not doubt the reliability of the incentive system because he
was aware that the Czech Republic needed RES investments to reach the EU targets. In addition,
the State Energy Policy of the Czech Republic, prepared by the Ministry of Industry and Trade
and approved by the Czech Government in March 2004, confirmed the Czech Republic's
favourable attitude to attract RES investments setting a long-term goal of 15-16% of energy
production from RES by 2030. The Act on Promotion purported to establish a stable and
predictable investment scenario for RES producers.
387. He remembered that the Ministry of Industry and Trade and the ERO engaged in a strong
promotion of the Czech RES system with the aim of attracting investments. Between 2006 and
2009, the ERO's website published several presentations on the incentive regime confirming his
understanding of it.
388. Based on the estimates of the costs to set up solar plants and on the guarantees under the incentive
regime, primarily the FiT one, he made the calculations to assess the profitability of the solar
investment in the Czech Republic.
389. Before constructing the second plant, he had extensive practical knowledge of the incentive
system. Before making further investments he wanted to obtain (and obtained) a direct
confirmation of the reliability of the Czech environment in general and of the FiT regime in
particular.
578
C-203, “Report on the Fulfilment of the Indicative Target for Electricity Production from Renewable
Energy Sources for 2008” of November 2009, prepared by the Ministry of Industry and Trade.
579
He does not say that he read it at the time.
580
Annex II to First Göde Statement.
581
There is a similar statement in the 2010 Action Plan relied on in the Reply, para 27: C-73, National
Renewable Energy Action Plan of July 2010 published by the Ministry of Industry and Trade, pp 54, 58.
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390. Dr Göde was aware of the discussions about the possibility of adjusting the RES support system,
and the level of FiT. Those discussions, however, focused exclusively on prospective changes
for new investors in the market and, in particular, on the possibility of removing the 5% limit on
the ERO's power to set the level of FiT. The final outcome of those discussions was the change
in legislation, which was adopted in May 2010 and targeted exclusively investors setting up
photovoltaic plants after January 1, 2011. To the best of his knowledge, no one had ever
contemplated amendments to the FiT system affecting the level of incentives granted to
existing investors.
391. From an investor perspective, therefore, the legislative amendment in May 2010 did not put into
question the reliability of the RES incentive system because it introduced modifications for new
investors only. It was a simple evolution of the Czech law supporting RES investments.
392. From Dr Göde’s point of view, it was perfectly conceivable that the Czech Republic could decide
to amend the then existing level of incentive for newcomers in the market. Conversely, it was
completely unpredictable to contemplate the adoption by the Czech Republic of measures
impacting on investments already made. The forward-looking legislative amendment of May
2010 precisely pointed to the Czech Republic's intention not to alter the system for existing
investors, as it was absolutely reasonable to expect.
393. Following the May 2010 amendment, Dr Göde was encouraged to complete the pending projects
within the deadline for obtaining subsidies under the original incentive system, i.e. December 31,
2010. Had the Czech Republic spelled out clearly that the original incentives could be modified
also for photovoltaic plants connected in 2009 and 2010, he would have abandoned the ongoing
projects, seeking simply to recover the expenses already incurred.
394. In cross-examination Dr Göde said that at the time of his investment he read through the entire
Act on Promotion, and the Q&A in German on the ERO website (which was the most important
for him582
). He could not recall whether he had read the Technical Regulation.583
395. He did not ask any questions of the ERO before making the investment about any aspect of the
regime because once there was an Act he was not going to ask for an interpretation.584
He did
not commission any due diligence because he relied on his staff (Mr , who had been
a banker and had been working in the solar industry, and Mr who used to work for a Czech
582
T/1/216.
583
T/1/217.
584
T/1/224.
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bank) and his lawyer.585
He was aware that the Czech Republic was experiencing a boom in solar
installations; he read articles about the solar boom, and continued after the initial investment was
made to monitor the press for developments in the Czech solar industry.586
He was aware of a
press article in June 2009587
stating that the State wanted to stop the solar boom and that the solar
FiT was extraordinarily attractive and that amendments to the legal regime were being
contemplated.588
He had a close look at the developments.589
They were a bit insecure about
investing. But in October-November 2009 there was a declaration made by the ERO or the Czech
Government and an interview with the Minister of Industry, in which the 5% reduction would
only be done as of January 1, 2011. If it had changed by October 2010 they would not have
continued investing.590
In re-examination he was shown the proposal in November 2009 for
amendment. He had read it and it made clear that their investment would be secure until 2011. It
gave them comfort that the product line could remain the way it was.591
396. He knew that they could only invest in 2010 because in 2011 it was unknown how high the tariffs
would be, because the 5% rule would cease to exist. He did everything to complete the 4 plants
by the end of 2010.592
397. Counsel for the Claimants accepted that Dr Göde did not do specific due diligence.593
398. But they say that investors were reassured by the 2010 Action Plan issued in July 2010. In 2009
and 2010 a prudent investor would have had reason to believe that the Czech Government was
able and willing to uphold the commitments.594
They rely especially on (1) Mr Fiřt’s open letter
of September 8, 2009 to the Chairman of the Economic Committee of the Chamber of Deputies,
in which he said: “Investors will be able to prepare sufficiently in advance for the change in the
conditions for investing which should eliminate entirely the risk of possible lawsuits in the Czech
Republic regarding protection of investments”;595
(2) The Explanatory Report on the November
585
T/1/226.
586
T/1/227.
587
R-363, “State wants to stop solar power plants boom,” Mladá fronta.
588
T/1/227.
589
T/1/229.
590
T/1/229-230.
591
T/1/243-244.
592
T/1/235.
593
T/4/724.
594
and Report, para 7.49.
595
C-201, Letter from Mr Fiřt (Chairman of the ERO) to Mr Vojíř (Chairman of the Economic Committee of
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16, 2009 proposal to amend the Act on Promotion,596
which emphasized that among the aims of
the legislation were that investors might prepare sufficiently in advance for amendment of the
conditions for investment; (3) statements made by the Minister for Industry and Trade at a press
conference on the same day;597
(4) the removal in March 2010 of the 5% limit only for
connections to the grid from January 1, 2011; (5) the July 2010 Action Plan,598
which referred to
the guarantee of FiT for 20 years; and (6) the proposal in September 2010 to eliminate support
for plants commissioned from March 1, 2011.599
The Claimants rely on the point that the
Respondent’s expert witness, Mr Jones, accepted in evidence that the documents in 2009 and
2010 (especially the open letter of September 8, 2009; the draft Act of November 16, 2009, and
the interview of the same day; and the draft Act of September 15, 2010) did give the impression
that the incentives would remain the same for 2010 investments.600
E. Overall conclusions
399. As already indicated, the Tribunal accepts the Claimants’ case that to establish a legitimate
expectation, there is no requirement that there be an express stabilisation provision, and that it is
sufficient for the Claimants to establish an express or implied promise giving rise to a legitimate
and reasonable expectation of stability.
400. The essential question is whether the combination of (1) the promotion of the Incentive Regime
in its early days as a guarantee and (2) the deliberate non-retroactivity of the abolition of the 5%
cap by Act 137/2010 for solar plants connected to the grid from 2011 and the abolition of the
support by Act 330/2010 from March 1, 2011, gave rise to a legitimate expectation by solar
investors in 2010 that there would be no other changes which would affect their investment. For
this purpose, for the reasons given above, the imposition of the Solar Levy is to be treated as such
a change.
the Chamber of Deputies), September 8, 2009, p. 2.
596
R-147, Explanatory Report to Draft Act No. 137/2010 Coll., November 16, 2009. See also the July 2010
Action Plan: C-73, National Renewable Energy Action Plan of July 2010 published by the Ministry of
Industry and Trade.
597
C-197, Czech Government’s press conference of November 16, 2009.
598
C-73, National Renewable Energy Action Plan of July 2010 published by the Ministry of Industry and
Trade.
599
R-172, Explanatory Report to Draft Act No. 330/2010 Coll., September 15, 2010.
600
T/3/562-566.
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(i) The investments
401. It is important to have in mind the dates when the plants were built and commissioned. The
Holýšov plant was commissioned on December 18, 2008. It was not affected by the Solar Levy
or the repeal of the tax incentives. But the Claimants maintain a claim in respect of the plant on
the basis that the Respondent’s measures increased uncertainty in the solar energy investment
environment, which indirectly caused a negative impact on the Holýšov SPV’s enterprise
value.601
402. The effective dates for the EPC contracts for the other four plants were: (1) Stříbro plant:
(commissioned ); (2) Úsilné plant: (commissioned
(3) Mozolov plant: (commissioned
); (4) Osečná plant: (commissioned .602
403. The Respondent says that the claim in respect of the Mozolov plant is not maintainable because
its operating licence was obtained in bad faith after submitting falsified reports, and was annulled
by the Czech administrative courts.603
404. The details are as follows. On October 29, 2008, Antaris AG purchased 100% shares in Holýšov
for CZK 200,000. On Holýšov executed a contract with for the
construction of a MW 1.244 solar power plant. On , Holýšov “entered into a
CZK agreement with for the acquisition of land plots on
which the solar plant would be built including, inter alia, the building permit to develop the plant
and the right to connection to the grid granted by the grid operator On
, lent EUR to for the construction of the
solar plant and the purchase of land plots. Consequently, the investment by the Claimants in the
power plant project was (i) CZK 200,000 (acquisition of Holýšov); and EUR
(loan to .
405. On July 29, 2009, Antaris AG purchased 100% shares in Stříbro for CZK 200,000.
bought the project rights “for the development of the Stříbro solar plant and, on
sold the project rights to for CZK On executed a
contract with for the construction of a MW 1.000 solar power plant. On
loaned EUR to for the construction of the solar plant
601
Reply, para 626.
602
Memorial, para 176.
603
Counter-Memorial, paras 521-523. Similar claims in relation to the other plants are no longer maintained:
Rejoinder, paras 430-433.
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and the acquisition of the project rights. Consequently, the Claimants’ investment in the Stříbro
power plant was (i) CZK 200,000 (acquisition of Stříbro); and (ii) EUR (loan to
.
406. On February 25, 2010, Antaris AG set up Úsilné with CZK 200,000 in capital. Úsilné acquired
the project rights for the development of the Úsilné power plant from for
EUR On executed a contract with for the
construction of a MW 1.242 solar power plant. The Claimants’ affiliated companies paid the
expenses incurred throughout 2010. Consequently, the Claimants’ investment in the
Úsilné power plant was (i) CZK 200,000 (payment of the registered capital of Úsilné); (ii) EUR
(construction contract); and (iii) EUR (acquisition of project rights and
payment of various expenses).
407. On Antaris AG set up Mozolov with CZK 200,000 in capital. Mozolov
acquired the project rights for the development of the Mozolov power plant from
for CZK On executed a contract with for
the construction of a MW 1.658 solar power plant. On December 30, 2010, loaned
EUR to for the construction of the solar plant and the acquisition of the
project rights. Consequently, the Claimants’ investment in the Mozolov power plant was (i) CZK
200,000 (payment of the registered capital of Mozolov); and (ii) EUR (loan to
Mozolov).
408. On June 26, 2008, Dr Göde established Taurus with CZK 200,000 in capital. On September 1,
2010, Taurus purchased 100% shares in Osečná for CZK In 2010 as a variety of
expenses mainly arising out of operating and maintaining solar power plants.
409. On executed a contract with for the construction of a
MW 3.029 solar power plant. On , loaned EUR
to to cover the construction contract and other expenses. Consequently, the Claimants’
investment in the Osečná power plant was (i) CZK 200,000 (payment of the registered capital of
Osečná); (ii) EUR (loan to ); and (iii) EUR (loan to ).
(ii) Non-retroactivity of the FiT changes
410. The legislation to abolish the 5% cap was originally proposed, as has been seen, in 2009 and was
originally intended to apply to solar plants commissioned from 2010, but eventually adopted by
Act 137/2010 and applied only to plants commissioned from 2011. The complete abolition was
effected by Act 330/2010, and took effect from March 1, 2011.
411. There can be no doubt that from 2009 the Respondent was entitled to take the view that the price
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of energy was seriously distorted by the solar boom, and it was clear, or should have been clear,
to any informed observer that it was common currency in the trade press and elsewhere that the
Respondent wished to take steps to reduce the FiT, and that the original plan announced in the
press release of August 24, 2009 was to reduce it from 2010.604
412. Subsequently, when the proposals to amend the Act on Promotion were crystallized, the
Government made it clear that it was not to be retroactive, so that investors could prepare in
advance, and thus the risk of lawsuits against the Government would be minimized.
413. On September 8, 2009 in an open letter to the Chairman of the Economic Committee of the
Chamber of Deputies Mr Fiřt proposed an amendment to the Act on Promotion to enable the
ERO to lower the incentives, subject to “ensuring a reasonable vacatio legis period in the form
of an interim provision which shall read: “The Office shall proceed for the first time in accordance
with Clause 6, paragraph 4 … when setting the purchase prices for 2011.” The proposed
amendment pursued the following aim (among others): “Investors will be able to prepare
sufficiently in advance for the change in the conditions for investing which should eliminate
entirely the risk of possible lawsuits in the Czech Republic regarding protection of
investments.”605
414. On November 16, 2009 the Government put forward a proposal to amend Act 180/2005.606
The
Explanatory Report said, in line with Mr Fiřt’s proposal, that the aims of the legislation were
as follows:
● The proposed wording would enable the Office to adjust the prices for solar power to
bring them in line with the principles used for other types of renewable resources as of
1 January 2011, which will eliminate the current discrimination against other types of
renewable sources.
● Investors may prepare sufficiently in advance for amendment of the conditions for
investment, which should entirely eliminate the risk of potential lawsuits against the
Czech Republic related to protection of investments.
● In the soonest upcoming period (2011), overpayment for solar power from end
customers will be limited.
● After the purchase prices become more realistic, the operators of distribution systems
and the operator of the grid will have relevant requirements for investments into the
power network. Today’s exorbitant requirements are leading to investments of tens of
billions of CZK, which have been reflected in regulated prices for end customers.
604
R-138, “Ministry of Industry and Trade will equalize the support of renewable energy sources,” Ministry
of Industry and Trade Press Release (www.mpo.cz), August 24, 2009.
605
C-201, Letter from Mr Fiřt (Chairman of the ERO) to Mr Vojíř (Chairman of the Economic Committee of
the Chamber of Deputies), September 8, 2009, p. 2.
606
R-147, Explanatory Report to Draft Act No. 137/2010 Coll., November 16, 2009.
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415. During a press conference on the same day,607
the Minister of Industry and Trade, Mr Vladimír
Tošovský, said that: “The change consists of the ERO having an option to adjust the feed-in tariff
so that it would reflect the costs and the required return from 2011, which is important” and “the
promotion stays as it is for 2010.” He was asked by Czech Television: “You mentioned reduction
of the promotion from 2011. Why 2011?”, to which he replied:
It is because some projects are currently under way and the investors or bank have already
invested in them. If we did this, it would mean changing the terms and conditions under
which they invested in the course of the development, which could pose a threat to their
investment. That is why it is 2011.
416. The point that investment in 2010 would not be affected was taken up by specialists. In a German
language article of December 16, 2009 entitled “An ‘all-clear’ for Investors” by members of the
Renewable Energy team at the Czech law firm Ueltzhöffer Balada, it was said:
Investors in the photovoltaic industry can thus largely be given the “all-clear”. The proposed
new provision changes nothing for facilities that connect to the network before the end of
2010. For those facilities, the prices of 23 November 2009, set by the regulator, will still
apply. In subsequent years of operation, the reduction in feed-in tariffs will remain limited to
5 percent as before. There is thus about a year left to complete and connect a project in order
to benefit from the already fixed prices.
…
From the point of view of both investors and lawyers, the proposed law sends a positive
signal in terms of investment and protection of legitimate expectations. The current tariffs,
which are still very high, will not bring investors much in the long term if they are highly
controversial and so create a permanent risk of a change in the law. With this bill, the
government has finally made a clear statement regarding the future development possibilities
for photovoltaics in the Czech Republic.608
417. The Respondent now says that the main reason for postponing abolition of the 5% limit until
2011 was to avoid harming projects that were already in progress (but could not be completed in
2009) — not to give licence for even more investors (like the Claimants) to pile in.
418. The Respondent says that solar investors, including the Claimants, took advantage of the nonretroactivity
of the change in the Act on Promotion, and used the delay to commission an
unexpectedly massive number of new solar installations, with the result that more than half of
the solar generation capacity in the Czech Republic today was brought online in the last three
months of 2010.609
419. Mr Jones’ evidence was that “approximately 1,200 MW of capacity was commissioned in the
607
C-197, Czech Government’s press conference of November 16, 2009, p. 2.
608
R-234, L. Klett, P. Chmelíček, “An “all-clear” for investors,” Prager Zeitung, December 16, 2009.
609
Second Jones Report, para 7.11.
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last three months of 2010 alone.”610
He says that this development could not have been predicted
with accuracy before mid-2010: “[T]he fact that most of the installed capacity was commissioned
at the very end of 2010 suggests that the ERO did not receive the relevant license applications
until relatively late in 2010 and so the Government could not have been certain, even in mid-
2010, as to the amount of installed capacity that would be commissioned in 2010. I therefore
completely disagree with Claimant’s suggestion that it would have been straightforward to
calculate the financial impact of the solar boom prior to the end of the year.”611
(iii) The Solar Levy
420. There is no doubt that the mechanism of a tax was introduced to avoid claims by investors,
especially foreign investors. Thus the minutes of the meeting of October 15, 2010 of the
Coordination Committee promoted by the Czech Ministry of Industry and Trade sate: “1st
Deputy
Environmental Minister Ms Bízková stated that is necessary to find a formally correct mechanism
for reduction of the support of RES from photovoltaic power plants, such that it cannot be legally
contested. … Chairman of ERO Mr J Fiřt declared that the ERO fully supports the legally strong
variant, which shall ensure the reduction of the contribution to the PVPPs [photovoltaic
power producers].”612
421. As already indicated, the point that investment in 2010 would not be affected was taken up by
specialists, with the result that in a German language article of December 16, 2009 entitled “An
‘all-clear’ for Investors”613
by members of the Renewable Energy team at the Czech law firm
Ueltzhöffer Balada, it was said that “there is thus about a year left to complete and connect a
project in order to benefit from the already fixed prices.”
422. The Government was obviously concerned about the prospect of lawsuits, including claims by
foreign investors under investment treaties, as was the Coordination Committee.614
423. In his September 8, 2009 open letter to the Chairman of the Economic Committee of the Chamber
of Deputies Mr Fiřt said: “Investors will be able to prepare sufficiently in advance for the change
in the conditions for investing which should eliminate entirely the risk of possible lawsuits in the
610
Second Jones Report, para 7.11.
611
Ibid.
612
C-198, Minutes of the third meeting of the Coordination Committee held on October 15, 2010, p. 4-5.
613
R-234, L. Klett, P. Chmelíček, “An “all-clear” for investors,” Prager Zeitung, December 16, 2009.
614
R-190, Minutes of the 1st Meeting of the Coordination Committee for the assessment of the impact of
support of renewable energy sources on electricity prices, September 23, 2010.
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Czech Republic regarding protection of investments.”615
The Government’s proposal of
November 16, 2009616
to amend the Act on Promotion said that one of its aims was to eliminate
the risk of investor protection litigation.
424. It does not follow that any such claims would have succeeded, but it is clear that fear of them did
lead the Government to adopt the device of the Solar Levy.
425. It was clear from mid-2010 that the Government might resort to taxation measures to deal with
the solar boom, and statements to that effect by the Prime Minister, Minister of Industry and
Trade, and the Minister of Environment were widely reported.
426. On July 23, 2010, the Minister of Environment was quoted in article entitled “The Minister of
Environment wants to tax solar power plants” as saying: “The only instrument we have for the
existing contracts is the fiscal instrument. I can imagine in these circumstances that some form
of taxation could help to make the purchasing prices realistic … This issue must be solved as a
matter of urgency, because it is over economic means of this country and its citizens.”617
427. On July 30, 2010, a newspaper reported under the headline “Solar boom is over” that the
speculative sale of solar power plant projects was over, and that there was speculation in the
market concerning a 30% reduction in the support and a special tax.618
428. On August 27, 2010 the Prime Minister was quoted in an article as saying that “We must suppress
the solar business. Also with the help of taxes …” The State would intervene effectively but
“primarily has to avoid arbitrations and litigations” but the government would try to reduce the
attractiveness of the photovoltaic business: “The range of steps includes also tax considerations.
I deem it fundamental to say that we do not want to neglect it.” 619
429. On September 16, 2010, the Minister of Industry and Trade was quoted in an article which began
“The government is still obscure on how to restrict solar power plants this year. The fairest idea
is to tax them” and saying, after a reference to the option to tax the producers: “If we [were] to
tax the contribution, the support represented in the price of electricity will remain the same for
615
C-201, Letter from Mr Fiřt (Chairman of the ERO) to Mr Vojíř (Chairman of the Economic Committee of
the Chamber of Deputies), September 8, 2009, p. 2.
616
R-147, Explanatory Report to Draft Act No. 137/2010 Coll., November 16, 2009.
617
R-147, Explanatory Report to Draft Act No. 137/2010 Coll., November 16, 2009.
618
R-185, T. Zavadilová, “Solar boom is over,” E15, July 30, 2010.
619
R-186, “Nečas for HN: We will slow down the process of electricity price increases and maybe even
reverse it”, iHNed.cz, August 27, 2010.
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the consumer.”620
430. The Tribunal accepts that the Solar Levy was a transparent device to avoid what the Respondent
had been advised might cause investor claims. That is clear from the minutes the Coordination
Committee.621
But, in common with the Czech Constitutional Court,622
and the European
Commission’s Decision on state aid,623
the Tribunal does not consider that the modifications to
the support scheme and the tax measures were retroactive, and considers that they did not violate
the principle of legitimate expectation.
431. The Tribunal’s view is that Dr Göde was essentially an opportunistic investor who saw a window
of opportunity and who was aware, or should have been aware, that dealing with the solar boom
was a fast-moving and controversial political issue.
432. The Tribunal accepts the Respondent’s case that there is no evidence of any real due diligence
by Dr Göde. The only documentary evidence of advice from
are some invoices (totalling approximately EUR , none of which specifies the nature of
legal services provided, and originate from the law firm and lawyer (Ms
responsible for the Claimants’ commercial transactions during the relevant period.
433. He of course knew of, and endeavoured to take advantage of, the fact that the 5% limit had been
removed only from 2011. But he was also aware that the Czech Government had been deeply
concerned about the effect of the solar boom from 2009 and should have been aware that other
legislative changes, especially with regard to tax, were in the air. The Claimants had avoided the
February 2010 moratorium by taking assignments of the binding statements in relation to three
of their largest projects.
434. The Tribunal accepts the Respondent’s case that the market which the Claimants were entering
was a bubble and that the Czech Government considered that the FiT regime was out of balance
and that would have been obvious to anyone who participated in industry discussions, or paid
attention to warnings by specialist professionals, or read the local press.
435. The Tribunal considers that Dr Göde’s actions were essentially opportunistic, and that the
investment protection regime was never intended to promote and safeguard those who, in the
620
R-162, “Solar boom will cost us dearly”, iDes.cz, July 22, 2010.
621
C-198, Minutes of the third meeting of the Coordination Committee held on October 15, 2010, p. 4-5.
622
May 15, 2015.
623
R-366, European Commission’s decision in State aid case SA.40171 (2015/NN) – Czech Republic
(Promotion of electricity production from renewable energy sources), November 28, 2016, para 135.
116
PCA Case No. 2014-01
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words of the Respondent, “pile in” to take advantage of laws which they must know may be in a
state of flux caused essentially by investors of that type. In the words of the Respondent, the
Claimants had “a speculative hope – as opposed to an internationally-protected expectation.”624
436. The abolition of the tax exemption is not at the forefront of the Claimants’ case, since the material
on which the claim of legitimate expectation is based is very thin, and consists of little more than
a statement in the Explanatory Report in November 2003 of an early draft of the Act on
Promotion that the promotion system was based on maintaining (inter alia) “the tax reliefs to the
extent set out in the Acts on Income Tax …”.625
It is true that an expert appointed by the Czech
Government, Professor Dr Gerloch gave an opinion626
that under Czech law the removal of the
exemption would be regarded as retrospective and unlawful, but the Czech Constitutional Court
subsequently upheld the withdrawal of the tax exemption.627
In the view of the Tribunal, the
Respondent is right to argue that investors did not have a legitimate expectation that the 5-year
tax exemption was a guarantee that it could not be subject to legislative amendment within that
period.
437. Investors know that the legislative framework may change and evolve in the light of
circumstances and of political developments. It is not every change which gives rise to a claim
based on breach of legitimate expectation.
438. It is also necessary to mention the Respondent’s argument that in any event the Claimants had no
expectation of a WACC in excess of 7%. There is a dispute as to the significance of the 7%
figure. According to the Respondent, until the end of 2010, the WACC level used by the ERO in
calculating the FiTs for the purpose of section 4 of the Technical Regulation was 7% per
annum, 628
and it shows that the Claimants could only have expected to achieve a 15-year payback
period for capital expenditures and a 7% rate of return.629
439. The Claimants accept that the Respondent did respect the 15-year simple payback and the 7%
return, but say that this is irrelevant because the fact that the ERO used 7% as an internal method
624
Counter-Memorial, para 5(k).
625
C-120, Explanatory Report on the bill of the Act on Promotion of November 12, 2003 (extended version),
p 4.
626
C-222, Professor JUDr. Aleš Gerloch, CSc’s Opinion of December 3, 2010.
627
R-38, Decision of the Constitutional Court of the Czech Republic, May 15, 2012, Ref. No. Pl. ÚS 17/11,
paras 83–84.
628
Counter-Memorial, para 44; Reply, para 103.
629
Counter-Memorial, para 574.
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(or benchmark) for calculating the FiTs cannot be invoked to assess what profits investors were
promised and were entitled to receive, and the crucial figures are the levels of FiT set each year.630
The Respondent accepts that the return level did not operate as a cap on profits, but functioned
as the baseline assumption applicable to setting the FiT.631
440. The Tribunal is of the view that an informed investor who had undertaken proper diligence would
have been aware of the use by the ERO of the 7% benchmark. A presentation by the Prague office
of the regional law firm Schönherr entitled “Legal Aspects of Photovoltaic Power Plant
Implementation” was aimed at solar investors and explained that the tariffs “reflect typical
investment and operating costs of the projects and lifetime of the installations so that the revenues
cover the expenditures + bring 7% profit . . .”632
Press reports in 2009 discussed excessive rates
of return for solar installations and cited 7% as the ERO benchmark.633
But in the light of the
Tribunal’s main conclusion, it is not necessary to come to a final conclusion on the effect of the
Claimants’ knowledge that the ERO’s policy was to use a 7% WACC.
441. In the view of the Tribunal, the Claimants’ complaint of impairment by arbitrary and
unreasonable conduct also fails.
442. The Claimants accept that there was an undesired expansion of RES plants in many countries,
but they say634
that the Czech measures were unreasonable and arbitrary and that some EU
Member States were able to limit the undesired expansion of RES investments by means of sound
regulatory and non-retroactive practices which did not betray the legitimate expectations of RES
investors, especially Germany, Portugal, France, Austria, Denmark, The Netherlands, and
Slovenia. They argue that the retrospective changes were “regulatory opportunism”, consisting
in reducing regulated payments after the initial investments are already made. The burden of the
incentive regime was not higher than that of similar regimes in other EU Member States. In any
event, even if hypothetically the increase in the cost of electricity were viewed as excessive, that
increase was easily predictable and was simply the price that the Respondent committed to pay
630
Reply, paras 20, 104.
631
Rejoinder, para 16(c).
632
R-30, Legal Aspects of Photovoltaic Power Plant Implementation, Schönherr v.o.s., The Czech
Association of Scientific and Technical Societies, June 25, 2009.
633
R-362, “What is the adequate decrease of photovoltaic electricity purchase prices?” (oze.tzb-info.cz),
October 19, 2009, p. 3, 5 (“ERO calculations set the return to 7% with a 15-year payback for all renewable
sources (RES)”); R-156, “Legislative environment and the promotion of the electricity produced from
photovoltaic power plants in 2009,” ERO Presentation, October 15, 2009, p. 15 (“Purchasing prices are
calculated with the income of 7% (WACC) for all RES categories, nevertheless, for PVPP the income is
more than twofold”).
634
Memorial, paras 496 et seq; Reply, paras 259 et seq.
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PCA Case No. 2014-01
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to reach the 8% target fixed by the EU.
443. The Tribunal accepts that the Solar Levy was designed (unnecessarily, in the view of the
Tribunal) to disguise abolition of the 5% limit. But it was adopted as part of a package of
measures which (1) introduced a State budget subsidy to limit the rise in consumer electricity
prices caused, in large part, by the solar boom, and (2) sought to offset this new budget
expenditure with new tax revenues. The Solar Levy was specifically targeted at those solar
installations that received a FiT which was excessive. The Tribunal accepts the Respondent’s
case that for purposes of the reasonableness analysis, it does not matter whether a tribunal
believes that a particular course of action is “good” or “bad,” that a different solution might have
been “better,” or that a State could have done “more,” or that other States took different measures.
444. The Tribunal accepts that the Respondent had the rational objective of reducing excessive profits
and sheltering consumers from excessive electricity price rises, and that its actions were not
arbitrary or irrational. There was an appropriate correlation between the Respondent’s objectives
and the measures it took. There is nothing irrational or unreasonable about the imposition of a
charge to regulate what the Respondent reasonably regarded as windfall profits and to reduce the
impact on consumers, and the measures, which applied only to the most recent installations and
therefore the ones able to earn the profits as a result of the decline in PV costs, were not
disproportionate.
445. The measures dealt with a pressing problem caused by the late entry of many investors (mainly
domestic) seeking to take advantage of an incentive regime which was bound to change. All that
the measures did was to reduce the rate of return to a level which the State had originally intended.
It is true in this context also that the Respondent resorted to the device of the Solar Levy instead
of a change to the 5% limit in the FiT, but in the view of the Tribunal that does not alter the
essential fact that the measures were rational and proportionate. The effect on the Claimants was
that they would have an investment payback in years and a rate of return of between %
and %.635
On Dr Göde’s original calculations, the effect was a reduction in profits from
euros to euros over the life of the investment.636
446. Consequently, in the view of the Tribunal, there was neither an impairment of the investment,
nor the use of unreasonable or irrational or arbitrary measures.
635
First Peer Report, para 2.2.2; Second Peer Report, paras 2.2.4, 2.2.8. Mr said that he had no basis
to dispute the mathematics of Mr Peer’s payback period and rate of return assessment: T/3/621. The
Respondent described the effect as an average decrease from % to %: T/1/141-142; T/4/798.
636
First Göde Statement, para 39.
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X. Other issues
447. In the light of the Tribunal’s conclusions on the merits, it follows that these issues do not arise:
(1) whether compliance by the Respondent with an award of the Tribunal would be a state aid;
(2) whether illegality barred the claim in relation to the Mozolov plant; (3) whether there was a
prima facie case in relation to the Holýšov plant; and (4) the quantum of damages.
448. The claims are therefore dismissed.
XI. Costs
449. The effect of Articles 10(2) and 9(5) of the BIT and Article 40 of the UNCITRAL 1976 Rules is
that the costs of arbitration are in principle to be borne by the unsuccessful party, but the Tribunal
may apportion costs between the parties if it determines that apportionment is reasonable, taking
into account the circumstances of the case.
450. The Claimants have prevailed on one important issue, namely the ECT tax carve-out objection,
but have failed on the merits.
451. The Claimants claimed their costs in the amount of € including their share of the
fees and expenses of the Tribunal and the PCA.637
452. The Respondent claimed its costs of $ and in addition its share of the fees and expenses
of the Tribunal and the PCA.638
453. Accordingly, in very broad terms the Claimants claim $ million and the Respondent claims $
million.
454. In the light of the Tribunal’s conclusion that the Claimants succeeded on the issue of the tax
carve-out but failed on the merits, the Claimants’ primary submission is that they should be
awarded the costs of this arbitration, relating to the Respondent’s objections to the jurisdiction,
but should not bear any of the Respondent’s costs relating to the merits because the Claimants
brought bona fide claims, while the Respondent, among others, raised the unnecessary EU State
aid issue.
455. As regards quantum, the Claimants say that they ran the case with a small legal team (much
smaller than the Respondent’s team), relied upon expert evidence only where strictly necessary,
637
Claimants’ Schedule of Costs, Annexed to the Claimants’ Submission on Costs.
638
Respondent’s Submission on Costs, para 1.
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PCA Case No. 2014-01
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and, divided essentially all costs with the other eight Claimants with which it sought to bring a
single multi-party arbitration. The Claimants say that if the Respondent’s legal costs exceed
those of the Claimants, such an amount would not be “reasonable”, given that the Claimants bore
the burden of proof as to most of the issues.
456. The Respondent submits that the costs should be allocated in accordance with the principle that
the costs follow the event, and that its costs were reasonable. It should be entitled to its costs even
if the Claimants were to prevail on some of the issues, because the Claimants caused an
unnecessary aggravation of costs.
457. The Claimants have requested that the Tribunal order the Respondent to bear the costs occasioned
by the postponement of the hearing 639
The Respondent
says that no special order is required because it was an unforeseen event outside the Respondent’s
control.640
458. The Parties deposited with the PCA a total of GBP (GBP by the Claimant; GBP
by the Respondent) to cover the costs of arbitration.
459. The fees of Mr Gary Born, the arbitrator appointed by the Claimants, amount to GBP
His expenses amount to GBP . The fees of Judge Peter Tomka, the arbitrator appointed
by the Respondent, amount to GBP The fees of Lord Collins, the presiding
arbitrator, amount to GBP His expenses amount to GBP .
460. Pursuant to the Terms of Appointment and the agreement of the Parties, the International Bureau
of the PCA was designated to act as Registry in this arbitration. The PCA’s fees for registry
services amount to GBP Other Tribunal costs, including court reporters, interpreters,
travel, bank charges, and all other expenses relating to the arbitration proceedings, amount to
GBP
461. Based on the above figures, the combined Tribunal costs, comprising the items covered in
Article 38 (a), (b) and (c) of the UNCITRAL Arbitration Rules, as enumerated above, are fixed
at a total of GBP
462. Finally, under Article 38(e), the Tribunal finds the costs claimed by the successful Party, the
Respondent, to be reasonable in amount and proportionate to the nature and complexity of the
639
E-mail from the Claimants dated November 11, 2016: “the Claimants would like to receive confirmation
from the Tribunal and the Respondent that all non-refundable costs arising from the cancellation of the
November hearing will be charged exclusively and entirely to the Respondent.”
640
E-mail from the Respondent dated November 14, 2016.
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matter.
463. In the exercise of its discretion in the light of Article 40 of the UNCITRAL Rules, the Tribunal
takes these matters into account: (1) the Respondent prevailed on the merits; (2) the Claimants
succeeded on the issue of the tax carve-out; (3) it is reasonable to make some allowance for the
Claimants’ costs in relation to the adjournment.
464. In the light of all these considerations, the Tribunal’s conclusion on legal and arbitration costs is
that the Respondent should be awarded US$ in legal costs, and that the Claimants
should bear three-quarters of the arbitration costs.
XII. Operative part
465. The Claimants’ claims are dismissed.
466. The Claimants shall pay to the Respondent within 28 days of delivery of this award the sum of
US$1.75 million and GBP 178,125.50.
467. The arbitration costs are assessed at GBP , and any balance held by the PCA shall be
remitted in equal shares to the Parties in accordance with Article 41(5) of the UNCITRAL Rules.
122
DISSENTING OPINION OF MR GARY BORN
1. I agree with many aspects of the Tribunal’s conclusions in this arbitration. I concur with the
Tribunal’s conclusions regarding its jurisdiction under the Treaty between the Federal Republic
of Germany and the Czech and Slovak Federal Republic on Encouragement and Reciprocal
Protection of Investments (the “Germany BIT”) and the Energy Charter Treaty (the “ECT,” when
referred to jointly with the Germany BIT, the “Treaties”). I also concur with the Tribunal’s
conclusion that the Czech Republic did not violate its obligations under Article 2(1) of the
Germany BIT or Article 10(1) of the ECT when it amended the Act on Income Tax by repealing
the Income Tax Exemption for renewable energy producers.
2. I am, however, unable to join the Tribunal’s conclusion that the Czech Republic did not breach
its fair and equitable treatment and non-impairment obligations under the Treaties to the
claimants in this arbitration – Antaris GmbH, a German commercial company, and Dr. Michael
Göde (the “Claimants”) – when it imposed a levy that reduced the tariffs payable to certain
renewable energy sources, including the Claimants’ solar plants (the “Solar Levy”).1
Given the
significance of the legal issues involved, and notwithstanding my deep respect for my colleagues
on the Tribunal, I am compelled to address these issues in this separate opinion.
3. Before addressing these issues, it is useful to summarize the essential elements of the Tribunal’s
reasoning. The Tribunal centers its analysis of the Claimants’ fair and equitable treatment and
non-impairment claims on the following questions:
“The essential question is whether the combination of (1) the promotion of the Incentive
Regime in its early days as a guarantee and (2) the deliberate non-retroactivity of the abolition
of the 5% cap by Act 137/2010 for solar plants connected to the grid from 2011 and the
abolition of the support by Act 330/2010 from March 11, 2011, gave rise to a legitimate
expectation by solar investors in 2010 that there would be no other changes which would
affect their investment. For this purpose, for the reasons given above, the imposition of the
Solar Levy is to be treated as such a change.”2
4. The Tribunal begins its analysis by relying on a selection of formulations of fair and equitable
treatment and non-impairment standards from prior arbitral awards which it “summarize[s as]
the present state of international law and practice” in the following “general propositions:”3
(1) “An expectation may arise from what are construed as specific guarantees in legislation.
(2) A specific representation may make a difference to the assessment of the investor’s
1
Regarding the four plants commissioned before 1 January 2011 (see Claimants’ Opening Presentation,
slides 47-50), but excepting the Holýšov plant, which was commissioned in 2008 and not affected by the
Solar Levy. In my dissenting opinion, I have not considered the Respondent’s allegations regarding
irregularities surrounding the Mozolov plant.
2
Award, para. 400.
3
Ibid., paras. 360-362.
1
knowledge and of the reasonableness and legitimacy of its expectation, but is not
indispensable to establish a claim based on legitimate expectation which is advanced under
the FET standard.
(3) Provisions of general legislation applicable to a plurality of persons or a category of
persons, do not create legitimate expectations that there will be no change in the law; and
given the State’s regulatory powers, in order to rely on legitimate expectations the investor
should inquire in advance regarding the prospects of a change in the regulatory framework
in light of the then prevailing or reasonably to be expected changes in the economic and
social conditions of the host State.
(4) An expectation may be engendered by changes to general legislation, but, at least in the
absence of a stabilization clause, they are not prevented by the fair and equitable treatment
standard if they do not exceed the exercise of the host State’s normal regulatory power in the
pursuance of a public interest and do not modify the regulatory framework relied upon by the
investor at the time of its investment outside the acceptable margin of change.
(5) The requirements of legitimate expectations and legal stability as manifestations of the
FET standard do not affect the State’s rights to exercise its sovereign authority to legislate
and to adapt its legal system to changing circumstances.
(6) The host State is not required to elevate the interests of the investor above all other
considerations, and the application of the FET standard allows for a balancing or weighing
exercise by the State and the determination of a breach of the FET standard must be made in
the light of the high measure of deference which international law generally extends to the
right of national authorities to regulate matters within their own borders.
(7) Except where specific promises or representations are made by the State to the investor,
the latter may not rely on an investment treaty as a kind of insurance policy against the risk
of any changes in the host State’s legal and economic framework. Such expectation would
be neither legitimate nor reasonable.
(8) Protection from arbitrary or unreasonable behaviour is subsumed under the FET standard.
(9) It will also fall within the obligation not to impair investments by ‘unreasonable …
measures’ (Article 10(1), ECT) or ‘arbitrary ... measures (Article 2(2), Czech
Republic/Germany BIT).
(10) The investor is entitled to expect that the State will not act in a way which is manifestly
inconsistent or unreasonable (i.e. unrelated to some rational policy).”4
5. Based on those “propositions,” the Tribunal considers, and rejects the claim, that the Czech
Republic breached the fair and equitable treatment and non-impairment protections under the
Treaties when it imposed the Solar Levy.5
Regarding the Claimants’ legitimate expectations, the
Tribunal states that:
“The Tribunal accepts that the Solar Levy was a transparent device to avoid what the
Respondent had been advised might cause investor claims. That is clear from the minutes the
Coordination Committee. But, in common with the Czech Constitutional Court, and the
European Commission’s Decision on state aid, the Tribunal does not consider that the
modifications to the support scheme and the tax measures were retroactive, and considers
that they did not violate the principle of legitimate expectation.”6
6. Likewise, the Tribunal concludes that the Solar Levy was not an arbitrary or unreasonable change
to the Czech Republic’s legislative framework for renewable energy:
4
Ibid., para. 360 (footnotes omitted).
5
Ibid., paras. 430, 441-446.
6
Ibid., para. 430 (footnotes omitted).
2
“The Tribunal accepts that the Solar Levy was designed (unnecessarily, in the view of the
Tribunal) to disguise abolition of the 5% limit. But it was adopted as part of a package of
measures which (1) introduced a State budget subsidy to limit the rise in consumer electricity
prices caused, in large part, by the solar boom, and (2) sought to offset this new budget
expenditure with new tax revenues. The Solar Levy was specifically targeted at those solar
installations that received a FiT which was excessive. The Tribunal accepts the Respondent’s
case that for purposes of the reasonableness analysis, it does not matter whether a tribunal
believes that a particular course of action is ‘good’ or ‘bad,’ that a different solution might
have been ‘better,’ or that a State could have done ‘more,’ or that other States took different
measures.”7
7. I disagree with the Tribunal’s conclusion that the Czech Republic did not, by enacting the Solar
Levy, violate the Treaties’ fair and equitable treatment and non-impairment protections. In my
view, the evidentiary record shows that the Czech Republic enacted legislation that provided
specific and unambiguous guarantees to investors in the renewable energy sector and that these
commitments guaranteed that specified minimum tariffs would be payable for electricity
produced by renewable energy sources for a period of 15 years. The Claimants relied on these
specified tariffs in making substantial investments in the Czech Republic but, thereafter, despite
its statutory guarantees, the Czech Republic adopted the Solar Levy, which materially reduced
the tariffs that would be paid to certain renewable energy sources, including the Claimants’ plants.
In my view, that breach of the Czech Republic’s previous guarantees is a violation of both the
Germany BIT and the ECT.
8. More specifically, in my view, this case requires that three questions be addressed: (a) whether
Section 6(1) of the Act No. 180/2005 Coll. of 31 March 2005 on the promotion or electricity
production from renewable energy sources and amending certain acts (the “Act on Promotion”
or the “Act”) provided statutory guarantees to investors and, if so, whether these guarantees were
breached by the Czech Republic’s imposition of the Solar Levy; (b) whether breaches of statutory
guarantees of specified treatment to particular classes of investors are capable of triggering fair
and equitable treatment or non-impairment responsibility under the Treaties; and (c) whether the
Claimants in this arbitration could rely on any breaches by the Czech Republic of its statutory
guarantees.
9. In my view, all three questions must be answered affirmatively. In the following sections, I
briefly address the points on which I disagree with the Tribunal’s reasoning and conclusions.
Since in my view the Czech Republic, by enacting the Solar Levy frustrated the Claimants’
legitimate expectations, I find it unnecessary to address the second question considered by the
Tribunal – that is, whether the Czech Republic changed its regulatory framework in an arbitrary
or unreasonable manner.
7
Ibid., para. 443.
3
I. The Czech Republic guaranteed that it would maintain feed-in tariffs for
renewable energy sources at fixed minimum levels for 15 years
10. In my view, it is clear that the Czech Republic guaranteed the Claimants and other investors that
it would maintain feed-in tariffs (“FiTs” or “Purchasing Prices”) for renewable energy sources at
fixed minimum levels for a defined period (15 years) from the date of commissioning of such
sources. It is also clear that the Czech Republic subsequently breached this undertaking by
imposing the Solar Levy on renewable energy sources that had already been commissioned,
thereby reducing the guaranteed FiTs for electricity produced by these sources.
11. The Tribunal accepts that the Act on Promotion guaranteed specified treatment to renewable
energy producers and that the Czech Republic then actively promoted the Act’s guarantee of
stability to investors:
“There can be no doubt that both the Respondent and the ERO described the incentive regime
in terms of a guarantee or promise of stability, and that the Czech Government actively
promoted the new regime at home and abroad, and described its main element in terms of a
guarantee.
The documents which establish this have already been referred to, and it is only necessary to
mention that the Czech Ministry of Industry and Trade, when submitting the bill to
Parliament, stated that one of the main objectives of the Act on Promotion was to establish a
secure, stable and predictable regime; the 2003 Explanatory Report on the Act on Promotion
stated that the support system was based ‘on providing a guarantee to investors’; the former
Minister of Environment stated that the most important principle of the law was the guarantee
of a stable FiT for a 15 year period; the Respondent described the purpose of Section
6(1)(b)(2) as: ‘providing guarantees to the investors and owners … that … revenue …will be
maintained for a period of 15 years …’; and the ERO described the Act on Promotion as
‘bringing a guarantee of long-term and stable promotion …’ including a ‘guarantee of
revenues … for a period of 15 years’.”8
12. I agree with that conclusion. In my view, however, the Czech Republic provided more than an
abstract promise of stability: Section 6 of the Act on Promotion contains a statutory guarantee
that specified minimum FiTs would be paid for fixed time periods to defined renewable energy
sources. This conclusion is crystal clear from the Act’s language and its object and purposes, and
was publicly confirmed by the Czech Republic in numerous statements.
13. Section 6 of the Act is titled “Amounts of Prices for Electricity from Renewable Sources and
Amounts of Green Bonuses.” The purpose of this provision was to prescribe the “amounts of
prices” that would be payable for electricity produced from a defined category of sources
(specifically, certain renewable energy sources).9
The Act guaranteed these prices – which were
8
Award, paras. 366-367 (footnotes omitted).
9
Respondent’s translation of the Act on Promotion (R-5).
4
different from the prices for other categories of electricity in the Czech Republic – for a vitallyimportant
purpose. That purpose was to encourage the production and use of electricity from
renewable energy sources and thereby achieve environmental protection objectives and satisfy
commitments by the Czech Republic to the European Union regarding renewable energy.10
14. It is also clear that renewable energy installations generally require substantial initial capital
investments, in often newly-developed technologies.11
Absent a guarantee of fixed FiTs for
electricity produced by renewable energy sources, it appears highly unlikely that investors would
have constructed such sources or that lenders would have agreed to finance these investments.12
15. The Act on Promotion provides two separate, but critical, guarantees to investors in renewable
energy: (i) a guarantee that the ERO will establish FiTs providing for individual categories of
renewable energy sources commissioned in specific calendar years, at least a “fifteen year
payback period;” and (ii) a guarantee that the FiTs established by the ERO for renewable energy
sources commissioned in particular calendar years will not be reduced for 15 years (later extended
to 20 years). Both of these guarantees are clear from the Act’s text and history.
16. First, Section 6(1)(b)(1) of the Act provides that the FiTs established by the ERO for particular
sources in particular years would allow a return of an investor’s capital investment in 15 (later
20) years. In the words of Section 6(1)(b)(1),
“The Office [or the “ERO”] sets, one calendar year in advance, the purchasing prices for
electricity from Renewable Sources (the ‘Purchasing Prices’), separately for individual kinds
of Renewable Sources, and sets green bonuses, so that […] (b) for facilities commissioned
[…] [1] after the effective date of this Act, there is attained, with the Support consisting of
10
See statements by the Czech Minister of Environment regarding the implementation of Directive
2001/77/EC, Stenographic record of the meeting of the Chamber of Deputies, dated 13 February 2004
(“However, the 8% share of renewable resources in gross power consumption in 2010, which we undertook
in the [accession treaty to the European Union], forces us to draft a bill which would facilitate private
investment in this field, because it is impossible to fund it entirely from the Czech Energy Agency fund or
from the State Environmental Fund. Since the energy market is still very deformed not just by the existence
of obsolete power plants built under different economic conditions with material support of the state but
mainly as a result of the insufficient internationalisation of external costs incurred by the power generation
in classical power stations, the government proceeded to draft the bill, which should implement EP and EC
Directive 2001/77/EC.”) (C-24).
11
and Report, para. 1.13 (“Investment in RES involves a fundamental asymmetry between
relatively large upfront, irreversible costs (‘sunk costs’), and high revenue uncertainty given that generation
can, in general, vary significantly depending on the availability of the renewable resource (e.g., sunlight,
wind or rainfall). As a consequence, most support schemes attempt to provide for substantial revenue
certainty so as to make renewable projects bankable.”).
12
Newspaper article in “Ihned.cz”, pp. 4-5 (“Once the plants’ owners will have the first 15 years of operation
guaranteed, they will have an opportunity to draw funds from non-governmental sectors. According to Mr
Ambrozek, this is the only way to meet EU requirements.”) (C-25); and Report, para. 3.26
(“If a regulatory framework does not offer investors a sufficient degree of predictability, investors will
demand a higher rate of return or will directly choose to invest elsewhere. Similarly, lenders will not be
willing to finance investors or will demand very high interest rates. This is more than theory: the negative
impact of regulatory uncertainty on investment has been shown to be significant in the case of RES.”).
5
the Purchasing Prices, a fifteen year payback period on capital expenditures, provided
technical and economic parameters are met […] .”13
Section 6(1)(b)(1) thus provided for the ERO to establish on an annual basis specified FiTs, for
every category of renewable energy sources, which would apply to all such sources
commissioned in that calendar year.
17. Second, and separately, Section 6 of the Act also very clearly and intentionally guaranteed that
the FiTs established by the ERO would be maintained as a minimum for a certain period of time.
Section 6(1)(b)(2) did so when it provided that
“[the ERO] sets, one calendar year in advance, the purchasing prices for electricity from
Renewable Sources (the ‘Purchasing Prices’), separately for individual kinds of Renewable
Sources, and sets green bonuses, so that […] (b) for facilities commissioned […] [2] after the
effective date of this Act, the amount of revenues per unit of electricity from Renewable
Sources, assuming Support in the form of Purchasing Prices, is maintained as the minimum
[amount of revenues] [14]
, for a period of 15 years from the commissioning year of the facility,
taking into account the industrial producer price index.”15
18. Section 6(1)(b)(2) is unequivocal. It provides that the ERO will establish, one year in advance,
the “Purchasing Prices” for electricity produced from specified renewable energy sources, and
then guarantees that these “Purchasing Prices” established by the ERO, and the “revenues per
unit of electricity” from the specified energy sources, will be “maintained as the minimum for a
period of 15 years” from the date of commissioning of each source. The provision required that
the FiTs for electricity produced from renewable energy sources commissioned in a particular
year be fixed by the ERO, one year in advance, and then for these FiTs to be maintained (as a
minimum) for a 15-year period following commissioning of a source – that is, “for a period of
15 years from the commissioning year of the facility.” These fixed minimum “Purchasing Prices”
and “revenues per unit of electricity” are subject only to the possibility of upward (not downward)
adjustment under Section 6 for inflation.
19. Thus, Section 6 of the Act unambiguously guarantees that the FiTs for electricity produced from
specified renewable energy sources will be fixed in advance and then maintained for 15 (later 20)
years from the date of commissioning of the source. As discussed above, this long-term
guarantee of a specific minimum FiT for each renewable energy source, following the date of its
commissioning, was essential to the Act’s structure and purposes.16
13
Act on Promotion, Section 6(1). Respondent’s translation of the Act on Promotion (R-5).
14
Text in parentheses appears in the Czech Republic’s original translation.
15
Act on Promotion, Section 6(1). Respondent’s translation of the Act on Promotion (R-5) (emphasis added).
16
See para. 14 above.
6
20. Importantly, the guarantee of minimum FiTs provided in Section 6(1)(b)(2) of the Act is a
separate guarantee of an absolute level of revenue, in addition to Section 6(1)(b)(1)’s guarantee
of a 15-year payback of capital expenses per year over 15 (later 20) years. Pursuant to Section
6(1) of the Act, the Czech Republic not only guaranteed that the FiTs payable for electricity
produced by renewable energy sources would allow a return of capital investment in 15 (later 20)
years – Section 6(1)(b)(1) – but also that the FiTs established by the ERO for energy sources
commissioned in a particular year would be maintained, as a minimum, for 15 (later 20) years –
Section 6(1)(b)(2).
21. This is confirmed by Section 6(4) of the Act. Section 6(4) established a so-called “5% brake
rule,” requiring the FiTs established by the ERO for a particular year to be no less than 5% lower
than the FiTs that had been set for the preceding year.17
This 5% brake rule provided that
“Purchasing Prices set by the Office for the following calendar year shall not be less than 95%
of the Purchasing Prices in effect in the year for which the setting decision is made.”18
Section
6(4) inevitably meant that the FiTs set by the ERO for a particular year (“the Purchasing Prices”)
would provide a higher rate of return than that specified in Section 6(1)(b)(1).19
Indeed, this was
the sole purpose of Section 6(4)’s brake rule – namely, to guarantee FiTs that were higher than
those prescribed by Section 6(1)(b)(1).
22. Despite this, the Respondent asserts that Section 6(1)(b) only maintains FiTs at the level
prescribed by Section 6(1)(b)(1)’s guarantee of a return of investment in 15 years.20
That reading
is impossible to reconcile with either the language or the purpose of Section 6 of the Act.
23. As noted above, Section 6(1)(b)(2) could not be clearer in requiring payment of fixed minimum
FiTs, prescribed for sources commissioned in a particular year. Likewise, Section 6(4)
necessarily meant that there would be cases where the FiTs established by the ERO for a
particular year were higher than those provided by Section 6(1)(b)(1)’s 15-year return of
investment period. By interpreting Section 6(1)(b)(2) as guaranteeing only FiTs that provided a
15-year return on investment, the Respondent ignores not only the plain language of Section
6(1)(b)(2), but also reads Section 6(4) out of the Act. That reading is not only impossible to
square with the Act’s language, but also contradicts the Respondent’s own acknowledgment that
17
Act on Promotion, Section 6(4). Respondent’s translation of the Act on Promotion (R-5).
18
Ibidem.
19
Respondent’s Rejoinder, para. 309 (“ERO calculated the WACC for the RES sector as being equal to a
post-tax rate of 7%. This rate was then used in setting the FIT for solar RES in all years except 2009 and
2010, when the 5% Limit prevented ERO from doing so.”) (footnote omitted).
20
Respondent’s Counter-Memorial, para. 5(j).
7
“Claimants are correct that the prospect of a simple return of investment, without a profit element,
is normally insufficient to induce investment, even in relatively safe assets.”21
24. The Respondent’s interpretation of Section 6 also ignores the Czech Republic’s own consistent
descriptions of Section 6 and the Act on Promotion as providing a guarantee of minimum FiTs
or Purchasing Prices for a 15-year period to investors in renewable energy sources, including the
Czech Republic’s statements in this arbitration.
a. In June 2005, shortly after the implementation of the Act on Promotion, Mr. Martin Bursík,
Minister of Environment from 2007 to 2009, authored a newspaper article declaring that “[t]he most
important principle of the law for producers is the guarantee of a stable feed-in tariff for a 15-year
period following the launch of the power station into operation. In practice, this means that the
valid feed-in tariff stipulated by the price assessment of the ERO in a year in which the producer
supplies the first kWh into the grid remains preserved for 15 years and, moreover, will be adjusted
based on the index of prices of industrial producers. This principle removes the greatest weakness
of the existing promotion of renewable resources - i.e. the risk that the ERO will reduce the feed-in
tariffs on a year on year basis and the producer’s cash flow and ability to repay loans will be
threatened.”22
b. In a report submitted by the Czech Republic to the European Commission in 2005, the Czech
Republic explained that the Act on Promotion “now provides previously missing guarantees for the
long-term stability of the support needed for commercial decision-making,” 23
i.e. “an
unprecedented system of support in the form of fixed purchase (feed-in) prices and, where necessary,
supplements to market prices for electricity, and also guarantees a level of return on each unit of
electricity produced for a period of 15 years.”24
The Czech Republic’s statements were directed
specifically to the guaranteed FiTs, over a 15-year period, and not on “return of investment” or
payback period.
c. In a report submitted by the Czech Republic to the United Nations in 2006, the Czech Republic
stated that “[t]he system of support [under Section 6 of the Act on Promotion] is based particularly
on … providing guarantees to the investors and owners of installations, producing electricity from
renewable sources who are subject to support pursuant to the Act, that the amount of revenue per
unit of produced electricity from renewable sources acquired by the producers from the support
will be maintained for a period of 15 years from bringing the installation into operation (or for a
period of 15 years for installations that were brought into operation prior to the date of effect of the
Act).” 25
The report also said that “Act No. 180/2000 Coll. newly introduced a fifteen-year
guarantee of minimum purchase prices from the date of bringing the installations into
operation…”26
Again, the Czech Republic’s statements specifically described the Act’s guaranteed
“revenue” and “minimum purchase prices” for a 15-year period, not a “return of investment” or
payback period.
d. The ERO made presentations to investors both inside and outside of the Czech Republic,
including presentations in Prague and Augsburg. These included powerpoint presentations that
stated that the Act on Promotion provided a 15-year guarantee of fixed minimum FiTs.27
21
Respondent’s Rejoinder, para 62.
22
Newspaper article in “Moderniobec.cz” (Czech original and English translation), pp. 10-11 (C-32).
23
2004 Report on the Achievement of the Indicative Target for Renewable Electricity, p. 18 (R-165).
24
Ibid., p. 3 (R-165) (emphasis added).
25
Fourth National Communication of the Czech Republic on the UN Framework Convention on Climate
Change, p. 35 (C-72) (emphasis added).
26
Ibid., p. 41 (C-72) (emphasis added).
27
Lecture by ERO at the conference “Energy from the Sun,” Prague, 26 January 2006 (C-34); ERO
presentation by Mr. Stanislav Trávníček, Augsburg, 9 October 2008 (C-230).
8
i. In a 2006 presentation in Prague, the ERO stated that “[p]romotion of power generation
from renewable resources pursuant to Act no. 180/2005 Coll.” included “economic return –
15 years” and “preservation of promotion for 15 years while, taking into account the
industrial producers price index (in feed-in tariffs).”28
ii. Two years later in a presentation in Augsburg entitled “Support of Renewable
Electricity in the Czech Republic,” the ERO reiterated that the Act on Promotion “guaranteed”
a “15 years (sic) payback period of investments.”29
Similarly, the Czech Energy Agency
stated in a presentation given in a 2006 workshop in Beroun that the Act on Promotion
provided “Guaranteed prices for 15 years (ERO price assessment).”30
e. The Czech Republic said in a 2006 Report on the Act that: “Act No 180/2005 on the promotion
of electricity produced from renewable energy sources, which guaranteed the long-term, stable
support required for business decisions, entered into effect on 1 August 2005. As of 1 January 2006
this Act introduced a new support system, the key features of which are: … the guarantee of revenue
per unit of electricity produced over a 15-year period as of the date a plant is put into operation
[and] the preservation of the level of feed-in tariffs for 15 years for plants already in operation.”31
Once more, the Czech Republic’s statements focused on the guaranteed FiTs (or “revenue” and
“feed-in tariffs”), over a 15-year period, and not on “return of investment” or payback period.
f. An Action Plan, submitted by the Czech Republic to the European Union in July 2010,
addressed the question “how long is the fixed tariff guaranteed,” by stating “[t]ariffs are guaranteed
according to the following table,” listing a “Feed-in price guarantee (in years)” for photovoltaic
sources as “20 [years].”32
The 2010 Action Plan also stated, in answering a question whether “any
tariff adjustment [is] foreseen in the scheme,” that “Feed-in prices for new production installations
are calculated on an annual basis, taking into account current investment costs. For existing sources,
i.e. production installations already in operation, the prices are increased by 2 to 4 percent
according to the development of the industrial producer price index.”33
The Action Plan said
specifically that there were no caps or ceilings on the volume of electricity that was eligible for the
guaranteed minimum tariffs.34
As with the Czech Republic’s statements quoted above, the Action
Plan referred to guaranteed “tariffs” and “feed-in-prices,” not “return of investment.”
g. A “Questions & Answers” section on the ERO’s website quotes, both in English and German,
the provisions of Decree No. 150/2007, including the statements that the “Purchase Price and
Green Bonus are claimed according to Regulation No. 150/2007 coll. on the lifespan of facilities
generating electricity” and that the “Purchase Prices … will increase annually considering the price
index of industrial manufacturers by 2 % minimum and 4 % maximum - with the exception of those
facilities incinerating biomass and biogas.”35
The website also addresses the question whether “it
[is] true that lifespan and pertinent payment of Purchase Prices was extended for photovoltaic power
plants” stating “Purchase Price and Green Bonus for photovoltaic plants with a start-up of
operations on or after 1 January 2008 can be claimed for a term of 20 years.”36
Once again, the
references are to guaranteed “Purchase Prices,” not “return of investment.”
28
Lecture by ERO at the conference “Energy from the Sun,” Prague, 26 January 2006, p. 12 (C-34) (emphasis
added).
29
ERO presentation by Mr. Stanislav Trávníček in Augsburg on 9 October 2008, p. 4 (C-230).
30
Lecture by ERO on support of renewable energy sources, 26 October 2006, p. 13 (C-35) (emphasis added).
31
“2006 Report on the Achievement of the Indicative Target for Renewable Electricity”, p. 19 (R-259)
(emphasis added).
32
National Renewable Energy Action Plan of July 2010 published by the Ministry of Industry and Trade,
pp. 58-59 (C-73) (emphasis added).
33
Ibid., p. 59 (emphasis added).
34
Ibid., p. 58.
35
Q&A tool available on the ERO’s website in 2009, pp. 4-5, Göde FWS, Annex II (emphasis added).
36
Ibid., p. 11 (emphasis added).
9
25. One of the Czech Republic’s principal fact witnesses in this arbitration, Mr. Josef Fiřt, also
expressly conceded that Section 6(1)(b)(2) of the Act provided a statutory guarantee of fixed
minimum FiTs for the statutorily prescribed 15-year period: “The Act on Promotion required that,
provided the investment met technical and economic benchmarks, the Subsidy level would be
sufficient to receive a payback of the investment costs within 15 years. To accomplish this
objective, the Subsidy for each installation was to be fixed at the date of commissioning for a
period of at least 15 years, subject to an annual adjustment for inflation.”37
26. In my view, these statements by the Czech Republic leave no doubt, as the Tribunal correctly
recognizes, that the Czech Republic affirmatively described the Act on Promotion to investors as
a guarantee of stability. In addition, however, these statements also leave no doubt that Section
6(1)(b)(2) means just what it says – “minimum purchasing prices,” “feed-in tariffs,” “revenue,”
or “Purchasing Prices” for electricity from renewable energy sources would be “maintained as
the minimum for a period of 15 years.” These statements unequivocally assured investors, and
their lenders, that fixed minimum FiTs were guaranteed for a period of 15 (later, 20) years from
the date of commissioning of a solar energy installation. There is no other plausible interpretation
of these unambiguous statements, made repeatedly and uniformly over a number of years, by
numerous different representatives of the Czech Republic.
27. These statements by the Czech Republic were not limited, as suggested by the Tribunal,38
to the
early days of the Act on Promotion. Rather, as the quotations in paragraph 24 make clear, they
were made consistently, from 2005 until 2010 (including in 2008, 2009 and 2010).
28. Finally, it is clear, as the Tribunal acknowledges, that the Solar Levy reduced the level of the
FiTs payable to the Claimants and other investors in solar power plants. In the Tribunal’s words,
“the essence of the Solar Levy was the reduction of certain FiTs.”39
Likewise, the Respondent
also concedes its imposition of the Solar Levy reduced the level of FiTs payable under the Act to
the Claimants and other investors in the solar energy sector.40
These acknowledgments are
plainly correct: the Solar Levy indisputably was intended to, and did, reduce the level of the FiTs
payable to investors under Section 6 the Act.
II. The treaties’ fair and equitable treatment clauses require the Czech Republic to
honor its stabilization commitments to foreign investors
37
Josef Fiřt Witness Statement, para. 6 (emphasis added).
38
Award, para. 400.
39
Award, para. 251.
40
Transcript, Day 1, page 208, lines 3-5.
10
29. In my view, the Czech Republic’s largely undisputed refusal to honor its unambiguous
undertaking in Section 6 of the Act to maintain fixed minimum FiTs for 15 (later, 20) years is an
unmistakable violation of the Treaties’ guarantees of fair and equitable treatment. None of the
Tribunal’s efforts to justify the Czech Republic’s breach of its undertakings is either supported
by the Treaties’ text or international law and, on the contrary, contradicts both.
30. As the Tribunal observes, the Treaties provide unambiguous guarantees of fair and equitable
treatment. Article 2(1) of the Germany BIT provides in relevant part that “Each Contracting
Party shall in all cases accord investments fair and equitable treatment,” while Article 10(1) of
the ECT provides that “Each Contracting Party shall, in accordance with the provisions of this
Treaty, encourage and create stable, equitable, favourable and transparent conditions for
Investors of other Contracting Parties to make Investments in its Area. Such conditions shall
include a commitment to accord at all times to Investments of Investors of other Contracting
Parties fair and equitable treatment.”
31. Unlike the terms of some investment protection treaties, the guarantees of fair and equitable
treatment in the Treaties are unqualified. They assure investors fair and equitable treatment “in
all cases”41
and “at all times.”42
32. It is clear that fair and equitable treatment and non-impairment protections, like those in the
Treaties, apply even in circumstances in which a state has not provided express assurances of
stability or other specified treatment to investors: “there is certainly an obligation not to alter the
legal and business environment in which the investment has been made,” 43
and “stable and
equitable conditions are clearly part of the fair and equitable treatment standard under the
ECT.” 44
Or, as another tribunal reasoned, “the Claimant’s reasonable expectations to be entitled
to protection under the Treaty need not be based on an explicit assurance [from a government].”45
Other arbitral awards by other investment tribunals are to the same effect, holding in multiple
41
Germany BIT, Article 2(1) (C-1) (emphasis added).
42
ECT, Article 10(1) (emphasis added).
43
Occidental Exploration and Production Company v. The Republic of Ecuador, UNCITRAL Final Award,
1 July 2004, para. 191 (CLA-38).
44
Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008,
para. 173 (RLA-2).
45
Saluka Investments BV (The Netherlands) v. The Czech Republic, Partial Award, 17 March 2006, para.
329, (RLA-16).
11
circumstances that a state’s frustration of an investor’s legitimate expectations gives rise to
liability under a fair and equitable treatment obligation. 46
33. Importantly, however, if a state does provide an express or implied assurance of specified
treatment to investors, that state’s failure to honor its undertakings constitutes a denial of fair and
equitable treatment, giving rise to liability under international law. In particular, as detailed
below, where a state undertakes to provide an investor with specified treatment, protections or
rights, regardless if it does so by contract, statute, or otherwise, then the state’s subsequent denial
of that treatment or those rights will generally constitute a denial of fair and equitable treatment.
34. The foregoing principles are non-controversial and are acknowledged expressly by the Tribunal:
“The Tribunal does not […] accept the Respondent’s suggestion that no legitimate
expectations as to stability can arise in the absence of a legislative or contractual stabilization
arrangement.”47
“The Tribunal accepts that promises or representations to investors may be inferred from
domestic legislation in the context of its background, including official statements. It is not
essential that the official statements have legal force.”48
46
See International Thunderbird Gaming Corporation v. The United Mexican States, Award, 26 January
2006, para. 147 (“where a Contracting Party’s conduct creates reasonable and justifiable expectations on
the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the NAFTA
Party to honour those expectations could cause the investor (or investment) to suffer damages.”) (CLA-
56); CME Czech Republic B.V. v. The Czech Republic, Partial Award, 13 September 2001, para. 611
(“breached its obligation of fair and equitable treatment by evisceration of the arrangements in reliance
upon which the foreign investor was induced to invest.”) (CLA-44); Waste Management, Inc. v. The United
Mexican States, ICSID Case No. ARB(AF)/00/3, Award 30 April 2004, para. 98 (“it is relevant that the
treatment is in breach of representations made by the host State which were reasonably relied on by the
claimant.”) (RLA-179); El Paso Energy International Company v. The Argentine Republic, ICSID Case
No. ARB/03/15, Award, 31 October 2011, para. 364 (“the legitimate expectations of a foreign investor can
only be examined by having due regard to the general proposition that the State should not unreasonably
modify the legal framework or modify it in contradiction with a specific commitment not to do so”) (RLA-
39); LG&E Energy Corp et al v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, 3
October 2006, para. 125 (“the stability of the legal and business framework in the State party is an essential
element in the standard of what is fair and equitable treatment”) (CLA-51); Suez, Sociedad General de
Aguas de Barcelona, S.A. and Vivendi Universal, S.A. v. Argentine Republic, ICSID Case No. ARB/03/19,
UNCITRAL Decision on Liability, 30 July 2010, paras. 222-223 (“When an investor undertakes an
investment, a host government through its laws, regulations, declared policies and statements creates in the
investor certain expectations about the nature of the treatment that it may anticipate from the host State.
The resulting reasonable and legitimate expectations are important factors that influence initial investment
decisions and afterwards the manner in which the investment is to be managed. The theoretical basis of
this approach no doubt is found in the work of the eminent scholar Max Weber, who advanced the idea
that one of the main contributions of law to any social system is to make economic life more calculable
and also argued that capitalism arose in Europe because European law demonstrated a high degree of
‘calculability.’ An investor’s expectations, created by law of a host country, are in effect calculations about
the future. Where a government through its actions subsequently frustrates or thwarts those legitimate
expectations, arbitral tribunals have found that such host government has failed to accord the investments
of that investor fair and equitable treatment.”) (RLA-19).
47
Award, para. 365 (footnote omitted).
48
Ibid., para. 366.
12
Similarly, the Czech Republic itself recognized these well-settled principles in this arbitration.49
In my view, these acknowledgements are correct and reflect basic rules of international law: it is
well-settled that a state may, under international law, make a binding commitment to foreign
investors in its legislation.
35. This principle follows from the basic character of fair and equitable treatment protections, which
focus on the legal framework of a state, which seek to ensure “fair,” “equitable,” and “just”
conduct by states,50
and which protect the legitimate expectations of investors.51
The decisive
issue is not the form of a state’s undertaking (as a contract, statute, decree or regulation) to
investors, but whether the statements and actions of the state provide a sufficiently clear
commitment regarding future treatment to give rise to legal rights or legitimate expectations on
the part of an investor.
36. It is well-settled that a state may make binding commitments to foreign investors through the
medium of statutes or other legislative acts. That principle is affirmed by authorities too
numerous to fully recite:
a. “[S]tability means that the investor’s legitimate expectations based on this legal
framework and on any undertakings and representations made explicitly or implicitly by the
host state will be protected. The investor may rely on that legal framework as well as on
49
Respondent’s Counter-Memorial, para. 544 (“If a State wishes to “stabilize” its legislation — i.e., to render
the legislation immutable and to make any changes to the legislation actionable — a particular process or
procedure must typically be followed by the relevant State under its law.”).
50
RUDOLF DOLZER, Fair and Equitable Treatment: Today’s Contours, 12 SANTA CLARA J. INT'L L. 7 (2014),
p. 12 (“The acceptance of the standard is directly linked to the fundamental moral and legal grounding of
the notion of fairness, anchored in a universally accepted sense of justice, but also in classic rules of
customary law governing the protection of foreign nationals and companies.”) (CLA-43); STEPHAN W.
SCHILL, Fair and Equitable Treatment, the Rule of Law, and Comparative Public Law in INTERNATIONAL
INVESTMENT LAW AND COMPARATIVE PUBLIC LAW 151 (Stephan W. Schill ed. 2010), p. 159 (“[M]ore
recent arbitral jurisprudence increasingly converges in its application of fair and equitable treatment. It
uses the standard to restrict the exercise of sovereign powers by host states, thus interpreting fair and
equitable treatment as a public law concept.”). See also MARC JACOB & STEPHAN W. SCHILL, Fair and
Equitable Treatment: Content, Practice, Method, in INTERNATIONAL INVESTMENT LAW: A HANDBOOK 700
(Marc Bungenberg et al. eds. 2015), p. 761 (“[T]he [FET] standard can be understood as an embodiment
of the rule of law as it is familiar to numerous domestic and international legal regimes.”).
51
Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Award, 25 November 2015, para.
7.78 (“Fairness and consistency must be assessed against the background of information that the investor
knew and should reasonably have known at the time of the investment and of the conduct of the host State.
While specific assurances given by the host State may reinforce the investor’s expectations, such an
assurance is not always indispensable .... Specific assurances will simply make a difference in the
assessment of the investor’s knowledge and of the reasonability and legitimacy of its expectations.”) (CLA-
88).
13
representations and undertakings made by the host state including those in legislation,
treaties, decrees, licenses, and contracts.”52
b. “Legitimate expectations may follow from explicit or implicit representations made by
the host state, or from its contractual commitments. The investor may even sometimes be
entitled to presume that the overall legal framework of the investment will remain stable.”53
c. “What the investor may legitimately expect must be evaluated in the light of all
circumstances in each given case. The expectations may relate not only to the existing
contractual or other relations between the investor and the host state, but may also concern
the general legal framework in the host state.” 54
d. “[A]n investor may derive legitimate expectations either from (a) specific commitments
addressed to it personally, for example in the form of a stabilization clause, or (b) rules that
are not specifically addressed to a particular investor but which are put in place with a
specific aim to induce foreign investments and on which the foreign investor relied in making
his investment.”55
37. These conclusions are also eminently sensible. In today’s market economies, it is essential for
states to have the ability to provide undertakings to private parties by way of “general” legislative
or regulatory instruments. Modern states cannot negotiate contracts with large numbers of private
actors, but as a practical matter must instead regulate the conduct of private actors through
legislation. This is a common and distinguishing feature of an economic system based on the
52
Frontier Petroleum Services Ltd. v. The Czech Republic, UNCITRAL Final Award, 12 November 2010,
para. 285. See also Binder v. The Czech Republic, UNCITRAL Final Award, 15 July 2011, para. 443
(CLA-42); CMS Gas Transmission Company v. The Argentine Republic, Award, ICSID Case No.
ARB/01/8, 12 May 2005, para. 275 (CLA-48); EDF (Services) Limited v. Romania, ICSID Case No.
ARB/05/13, 8 October 2009, para. 217 (“Except where specific promises or representations are made by
the State to the investor, the latter may not rely on a bilateral investment treaty as a kind of insurance policy
against the risk of any changes in the host State’s legal and economic framework. Such expectation would
be neither legitimate nor reasonable.”) (RLA-175).
53
Toto Costruzioni Generali S.P.A v. Republic of Lebanon, Award, ICSID Case No ARB/07/12, 7 June 2012,
para. 159 (RLA-41).
54
Binder v. The Czech Republic, UNCITRAL Final Award, 15 July 2011, para. 443 (CLA-42).
55
UNCTAD, FAIR AND EQUITABLE TREATMENT, UNCTAD Series on Issues in International Investment
Agreement II (2012), p. 69 (footnotes omitted) (CLA-85). See also RUDOLF DOLZER & CHRISTOPH
SCHREUER, PRINCIPLES OF INTERNATIONAL INVESTMENT LAW (2d ed. 2012), p. 145 (“The investor’s
legitimate expectations are based on the host state’s legal framework and on any undertakings and
representations made explicitly or implicitly by the host state.”) (CLA-35); MARC JACOB & STEPHAN W.
SCHILL, Fair and Equitable Treatment: Content, Practice, Method, in INTERNATIONAL INVESTMENT LAW:
A HANDBOOK 700 (Marc Bungenberg et al. eds. 2015), p. 748 (“[W]hen a foreign investor merely relies
on the general legal framework without any specific commitments on behalf of the host State to attract
foreign investor those concepts [of legitimate expectations predictability, and legal stability] may only have
a more marginal scope of application. They might still come into play, however, especially with respect to
legislation with retroactive effect.”) (emphasis added). See also BG Group Plc. v. The Republic of
Argentina, UNCITRAL Ad Hoc Arbitration, Final Award, 24 December 2007, para. 343 (“Thus,
withdrawal of undertakings and assurances given in good faith to investors as an inducement to their
making an investments (sic) is by definition unreasonable.”) (RLA-123); Sempra Energy International v.
The Argentine Republic, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 298 (“The essence
of the protection sought was well explained in Tecmed, where the tribunal held in the light of the good
faith requirement that under international law, the foreign investment must be treated in a manner such that
it ‘will not affect the basic expectations that were taken into account by foreign investor to make the
investment.’ This requirement becomes particularly meaningful when the investment has been attracted
and induced by means of assurances and representations, as has been established in the jurisprudence that
the Claimant has invoked.”) (RLA-234).
14
rule of law, where legislative provisions, rather than individual governmental commands or
directives, govern private conduct. It would gravely obstruct a state’s governance and regulation,
and undermine the rule of law, to deny states the power to make binding commitments to private
parties, including investors, by way of legislative (or regulatory) guarantees.
38. Put simply, the members of the Tribunal and the Respondent agree that international law
generally recognizes and gives binding effect to the authority of states to make binding,
internationally-enforceable commitments to private actors that are capable of giving rise to the
investor’s legitimate expectations that the state will not renege on that commitment. Despite this,
however, the Tribunal suggests that “[p]rovisions of general legislation applicable to a plurality
of persons or a category of persons” are incapable of giving rise to legitimate expectations on the
part of those persons “that there will be no change in the law.”56
39. The Tribunal apparently takes the view that when a state makes a commitment to investors in
“general legislation applicable to a plurality of persons or a category of persons” – as opposed to
by a contract or (individual) administrative act – that commitment is incapable of creating
legitimate expectations that the law will remain unchanged. Relying on the award in Philip
Morris Brands SÀRL v. Uruguay, the Tribunal says that “the State’s rights to exercise its
sovereign authority to legislate and to adapt its legal system to changing circumstances [remains
unaffected]” if those legislative changes “do not exceed the exercise of the host State’s normal
regulatory power in the pursuance of a public interest and do not modify the regulatory
framework relied upon by the investor at the time of its investment outside the acceptable margin
of change.“57
In short, the Tribunal holds that if a state makes undertakings to a class of investors
through the medium of “general legislation,” the investor’s legitimate expectations that the law
will remain unchanged will be limited to changes that do not modify the regulatory framework
for the investment beyond “an acceptable margin of change.”
40. Similarly, citing awards in Saluka Investments BV v. Czech Republic, Electrabel SA v. Hungary,
and Arif v. Republic of Moldova, the Tribunal also says that [t]he application of the FET standard
allows for a balancing or weighing exercise by the State and the determination of a breach of the
FET standard must be made in the light of the high measure of deference which international law
generally extends to the right of national authorities to regulate matters within their own
borders.”58
56
Award, para. 360, no. 1.
57
Ibid., para. 360, nos. 7 and 8.
58
Ibid., para. 360, no. 9 (emphasis added).
15
41. References to “an acceptable margin of change,” a “balancing or weighing exercise by the State”
and “a high measure of deference … to the [state’s] right to regulate” appear to parallel the
“margin of appreciation doctrine.” The margin of appreciation, as summarized by one
commentator, “is most famously a doctrine of deference employed by the [European Court of
Human Rights (“ECtHR”)] for resolving a state’s compliance with its obligations under the
[European Convention on Human Rights (“ECHR”)]. The basic idea is that the state is entitled
to a certain ‘space for maneuver,’ within which its conduct is exempt from fullfledged review.”59
Paralleling this analysis, the Tribunal appears to conclude that the state retains a margin of
discretion to balance the investor’s expectations against public policy objectives and that only
exercise of regulatory power exceeding that margin can constitute a breach of that state’s
obligations under the Treaties’ fair and equitable treatment and non-impairment standards, even
where an undertaking to investors has been made.
42. I disagree fundamentally with the Tribunal’s analysis. The fact that a state makes an undertaking
to investors in general legislation does not “limit” the legitimate expectations of investors nor
afford the state with a margin of appreciation to refuse to honor the commitments it has made
(whether by statute, treaty, contract or otherwise). As discussed above, the principle that
legitimate expectations may arise from general legislation, i.e. “rules that are not specifically
addressed to a particular investor but which are put in place with a specific aim to induce foreign
investments”60
is affirmed by numerous authorities. In my view, unless the language of the
investment protection treaty says otherwise, there is no room for the proposition that states retain
a margin of discretion to modify or disregard undertakings given to investors through “general
legislation.”
43. The Tribunal’s suggestion that, absent specific commitments, general legislation is only capable
of giving rise to “limited” legitimate expectations of stabilization (here, of tariff levels) is, in my
view, contrary to the basic character of a state’s obligation to accord investments fair and
equitable treatment. This obligation ensures fairness, equity, basic justice and rule of law; it is
not directed towards formalities or technicalities.61
44. As a consequence, where a state is found to have provided undertakings or commitments to a
class of investors of specified treatment, for a prescribed period of time, in its general legislation,
obligations of fair and equitable treatment apply no less than where the state has made a specific
59
JULIAN ARATO, The Margin of Appreciation in International Investment Law, 54 VA. J. INT'L L. 545 (2013-
2014), pp. 549-550.
60
UNCTAD, FAIR AND EQUITABLE TREATMENT, UNCTAD Series on Issues in International Investment
Agreement II (2012), p. 69 (footnotes omitted) (CLA-85).
61
See paras. 32-37 above.
16
stabilization commitment to an individual investor. Fairness, justice and the rule of law apply no
less to democratically-enacted laws than to a state’s contractual commitments or executive
declarations. As discussed above, the focus is not on artificial or arbitrary distinctions between
“statutory” and “contractual” undertakings or “general legislation” and “specific assurances,” but
on whether the state’s actions and statements have provided undertakings to investors which it
would be unfair or inequitable for the state to dishonor.62
45. Similarly, the fair and equitable treatment doctrine is directed towards the protection of the
legitimate expectations of investors. There is no requirement that those expectations arise only
from contractual instruments, or “specific” representations;63
indeed, as noted above, fair and
equitable treatment analysis focuses on a state’s overall legal framework. The decisive question
is not the form of a state’s representations but whether the content and character of those
representations is sufficiently clear to give rise to legitimate investor expectations that the state
will abide by its commitments.
46. As discussed in detail above, that is plainly what the Czech Republic did in Section 6 of the Act:
it unambiguously guaranteed investors in renewable energy fixed minimum FiTs for a 15 (later
20) year period. As a consequence, investors who made investments in compliance with the Act
on Promotion’s requirements could legitimately expect that the Czech Republic would honor its
undertaking to maintain the fixed minimum FiTs for the specified time period. The fact that the
Czech Republic made this guarantee to a number of investors, not just one investor, is irrelevant
to the question whether that guarantee must be honored: as detailed above, it is well-settled that
a state may make binding commitments through statutes and legislative acts, as well as otherwise.
47. Similarly, in my view, the Tribunal’s reliance on a “margin of discretion” or “margin of change”
in the context of a state’s breaches of statutory or contractual guarantees of specified treatment
to investors is fundamentally contrary to the text, objects and purposes of the Treaties and to the
weight of well-reasoned authority on the topic. Indeed, in applying a “margin of discretion” or
“margin of change” to a state’s breach of its own guarantee of treatment to investors, the Tribunal
adopts an unprecedented and, in my view, indefensible position.
62
See para. 33 above.
63
Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Award, 25 November 2015, para.
7.78 (“Fairness and consistency must be assessed against the background of information that the investor
knew and should reasonably have known at the time of the investment and of the conduct of the host State.
While specific assurances given by the host State may reinforce the investor’s expectations, such an
assurance is not always indispensable .... Specific assurances will simply make a difference in the
assessment of the investor’s knowledge and of the reasonability and legitimacy of its expectations.”) (CLA-
88) (emphasis added).
17
48. First, I disagree with the Tribunal’s suggestion that the proposition that a state is entitled to a
“margin of appreciation” or some kind of margin of discretion in all circumstances reflects the
“present state of international law and practice.”64
The application of a margin of appreciation
to a state’s fair and equitable treatment obligations under investment treaties is not a generally
accepted principle of international law.65
On the contrary, outside the specific ECHR context,
the decisive weight of international authority correctly rejects application of a margin of
appreciation as a general principle of international law:
a. The International Court of Justice refused to apply a margin of discretion in Oil Platforms.66
Instead, the Court held that “the requirement of international law that measures taken avowedly in
self-defence must have been necessary for that purpose is strict and objective, leaving no room for
a ‘measure of discretion’.”67
b. The International Military Tribunal for the Nuremberg trials refused to afford a margin of
appreciation to decisions by German authorities in World War II, holding instead that “whether the
action taken under the claim of self-defense was in fact aggressive or defensive must ultimately be
subject to investigation and adjudication if international law is ever to be enforced.”68
c. An investment tribunal in Pezold v. Zimbabwe rejected the application of a margin of
appreciation in the following terms: “[D]ue caution should be exercised in importing concepts from
other legal regimes (in this case European human rights law) without a solid basis for doing so.
Balancing competing (and non-absolute) human rights and the need to grant States a margin of
appreciation when making those balancing decisions is well established in human rights law, but
the Tribunal is not aware that the concept has found much support in international investment law.
… This is a very different situation from that in which margin of appreciation is usually used. Here,
the Government has agreed to specific international obligations and there is no ‘margin of
appreciation’ qualification within the BITs at issue. Moreover, the margin of appreciation doctrine
has not achieved customary status. Therefore the Tribunal declines to apply this doctrine.”69
d. In Quasar de Valors, another investment tribunal rejected the application of a margin of
appreciation outside the context of human rights protections: “For one thing, human rights
conventions establish minimum standards to which all individuals are entitled irrespective of any
act of volition on their part, whereas investment-protection treaties contain undertakings which are
explicitly designed to induce foreigners to make investments in reliance upon them. It therefore
makes sense that the reliability of an instrument of the latter kind should not be diluted by precisely
the same notions of ‘margins of appreciation, that apply to the former.”70
64
Award, para. 360.
65
See JULIAN ARATO, The Margin of Appreciation in International Investment Law, 54 VA. J. INT'L L. 545
(2013-2014), p. 554.
66
Oil Platforms (Islamic Republic of Iran v. United States of America), Judgement, 2003 ICJ REP. 161.
67
Ibid., para. 73.
68
International Military Tribunal (Nuremberg), Judgment and Sentences, 1 October 1946, 1 AMERICAN
JOURNAL OF INTERNATIONAL LAW 172 (1947), p. 207.
69
Bernhard von Pezold and Others v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Award, 28 July
2015, paras. 465-466. The tribunal went further, noting at paras. 467-468: “In any case, the Claimants
have noted that neither the “margin of appreciation” nor the proportionality doctrine can be used to justify
illegal conduct, such as a breach of an obligation erga omnes, by engaging in racial discrimination … there
is ample evidence that the Claimants were targeted in the present case on the basis of skin colour.
Accordingly, the Respondent’s arguments relating to the margin of appreciation are also dismissed.”
70
Quasar de Valors SICAV S.A. and others (formerly Renta 4 S.V.S.A and others) v. Russian Federation,
SCC Case No. 24/2007, Award, 20 July 2012, para. 22 (CLA-15).
18
49. In my view, these authorities are clearly correct. The awards cited by the Tribunal are outliers,
which are neither well-considered nor reflective of the weight of authority on the topic.71
There
is certainly no basis, given these authorities, for concluding that the application of a margin of
discretion represents the present state of international law and practice.
50. Second, there is no reference to any “margin of discretion” or analogous standard of deference in
either of the Treaties providing a textual basis for the Tribunal’s decision to abstain from a
meaningful review of the Czech Republic’s acts under the Treaties and, in particular, there is no
reference to any such margin in either of the Treaties’ fair and equitable treatment or nonimpairment
protections. On the contrary, as noted above, both Treaties provide the investors
unqualified protections of fair and equitable treatment.72
51. Third, the Tribunal’s reliance on a margin of discretion is even less justifiable – and is instead
deeply flawed – where a state has made specific promises or representations to investors, as is
the case here. As discussed above, the Respondent enacted statutory provisions guaranteeing
investors not only general stability of the legal framework applicable to renewable energy but
that specified minimum FiTs would be paid for electricity produced by renewable energy sources
for a period of 15 (later 20) years. In these circumstances, application of a margin of discretion
under the Treaties is wholly unjustifiable.
52. Most fundamentally, application of a margin of discretion (or change) in cases involving state
guarantees of specified treatment to investors directly contradicts both the terms and purposes of
such guarantees and, by extension, of fair and equitable treatment protections. The whole point
of a state’s guarantee of specified treatment – like fixed minimum tariffs for a defined time period
– is to exclude the possibility of later legislative change in breach of these guarantees. Applying
a “margin of discretion” in this context fundamentally contradicts the basic purposes of state
guarantees and, in turn, fair and equitable treatment protections.
71
The different tribunals’ formulations of, or references to, a margin of appreciation on which the Tribunal
relies differ widely in both the underlying rationale for the application of such a doctrine as well as in the
degree of deference adopted vis-à-vis the state actions. JULIAN ARATO, The Margin of Appreciation in
International Investment Law, 54 VA. J. INT'L L. 545 (2013-2014), p. 551. Commentators have identified
a variety of rationales for deference in investor-state arbitration, see, e.g., CAROLINE HENCKELS, Balancing
investment protection and the public interest: the role of the standard of review and the importance of
deference in investor-state arbitration 4 JOURNAL OF INTERNATIONAL DISPUTE SETTLEMENT 197 (2013),
pp. 203 et seq.
72
This is particularly evident in the case of the ECT, which narrowly circumscribes in Article 24 the nonprecluded
measures applicable to Article 10(1). That provision does not contain a general “margin of
appreciation” or public policy exception, the ECT instead sets forth very specific exceptions relating to
human and animal health, security interests and public order (not pleaded by the Respondent and plainly
not applicable here). See ALEXANDER REUTER, Die nachträgliche Kürzung der Förderung erneuerbarer
Energien auf dem Prüfstand völkerrechtlicher Investitutionsschutzabkommen [Retrospective Cuts to
Renewable Energy Support on the Test Bench of International Investment Protection Treaties], 1-2 RECHT
DER INTERNATIONALEN WIRTSCHAFT (RIW) 43 (2014), p. 49.
19
53. This has been uniformly recognized in those awards addressing this issue. As the tribunal held
in BG Group v. Argentina:
“withdrawal of undertakings and assurances given in good faith to investors as an inducement
to their making an investments (sic) is by definition unreasonable.”73
Similarly, the tribunal in EDF v. Romania, on whose findings the Tribunal relies, held that
“[e]xcept where specific promises or representations are made by the State to the investor, the
latter may not rely on a bilateral investment treaty as a kind of insurance policy against the risk
of any changes in the host State’s legal and economic framework.”74
54. On the Tribunal’s reasoning, a state’s contractual and other stabilization commitments to
investors would apparently be subject to a “margin of discretion.” These commitments would
not mean either what they said or what the state promised: they would only mean what the state
later appreciated, in the exercise of its discretion. In my view, that betrays the expectations of
investors, denies states the power to make internationally binding commitments and contradicts
basic principles of international law.
55. Finally, finding that the state has made undertakings through general legislation does not mean
that it is stripped of its regulatory power and put under the obligation to “crystallize” its regulatory
framework. On the contrary, I agree with the Tribunal’s observation that “[t]he requirements of
legitimate expectations and legal stability as manifestations of the FET standard do not affect the
State’s rights to exercise its sovereign authority to legislate and to adapt its legal system to
changing circumstances”75
– but despite maintaining its freedom to regulate the state is under the
obligation to redress the damage suffered by an investor whose expectations were frustrated.76
56. When a state undertakes, by contract, legislation or otherwise, to provide particular treatment to
a foreign investor, that undertaking will be given effect under international law, and violations of
that undertaking will give rise to claims for compensation by the investor under commitments to
73
BG Group Plc. v. The Republic of Argentina, UNCITRAL Ad Hoc Arbitration, Final Award, 24 December
2007, para. 343 (RLA-123).
74
EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, 8 October 2009, para. 217 (RLA-175)
(emphasis added).
75
Award, para. 360, no. 8.
76
Charanne and Construction Investments v. Spain, SCC Case No. V 062/2012, Guido Santiago Tawil’s
Partial Dissenting Opinion, 21 December 2015, para. 11 (RLA-156).
20
provide fair and equitable treatment.77
In doing so, international law does not constrain the
autonomy of states, but rather gives effect to it, by enabling states to provide enforceable
commitments to private actors, in order to obtain valuable investments or other benefits from
those actors.
57. As discussed in detail above, the Czech Republic unequivocally guaranteed specified minimum
FiTs for a fixed statutory time period (of 15, later 20 years): Section 6(1)(b)(2) guarantees that
the “revenues per unit of electricity,” and the “Purchasing Prices” for electricity, produced from
specified renewable energy sources will be “maintained as the minimum for a period of 15 years,”
subject only to the possibility of upward (not downward) adjustment of the price for inflation.
That legislative guarantee, which was, as also discussed above, repeatedly reaffirmed in
governmental statements, provided investors with an enforceable right to, and legitimate
expectation of, stabilized FiTs for 15 (later 20) years – an expectation that the Czech Republic
frustrated when it reduced those FiTs by imposing the Solar Levy.
58. That conclusion suffices to establish a violation of the Treaties’ fair and equitable treatment
protections, entitling the Claimants to compensation. As discussed in detail above, international
law, as well as Article 2(1) of the Germany BIT and Article 10(1) of the ECT, recognizes and
gives effect to the power of the Czech Republic to make binding, internationally enforceable
commitments to private parties.78
Where the Czech Republic makes, and then breaches, such a
commitment, it violates the Treaties’ fair and equitable treatment guarantees and international
law. Here, the Czech Republic provided, and then breached, guarantees of fixed minimum FiTs
for the electricity produced by the Claimants’ solar plants for a 15 (later 20) year period. That
violates the Treaties’ guarantees of fair and equitable treatment entitling the Claimants to
compensation.
77
The same conclusion follows under the Treaties’ non-impairment guarantees. Article 2(2) of the Germany
BIT (C-1) provides that “Neither Contracting Party shall in any way impair by arbitrary or discriminatory
measures the management, maintenance, use, or enjoyment of investments in its territory by investors of
the other Contracting Party,” and Article 10(1) of the ECT provides that “Each Contracting Party shall, in
accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and
transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such
conditions shall include a commitment to accord at all times to Investments of Investors of other
Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant
protection and security and no Contracting State shall in any way impair by unreasonable or discriminatory
measures their management, maintenance, use, enjoyment or disposal.”
78
See paras. 29-38 above.
21
III. The Claimants had no reason to expect the Czech Republic to withdraw these
guarantees retrospectively
59. Although the Tribunal acknowledges that the Czech Republic adopted and repeatedly referred to
the Act on Promotion as a guarantee of stability, the Tribunal also denies that this guarantee gave
rise to a legitimate expectation by solar investors in mid-2010 that there would be no reductions
in Section 6’s minimum FiTs. I do not believe that the evidence can be reconciled with this
conclusion.
60. The Tribunal’s Award accepts the Respondent’s argument that, by mid-2010, the Claimants
should have expected that further changes in the regulatory framework were likely. The Award
states:
“It was clear from mid-2010 that the Government might resort to taxation measures to deal
with the solar boom, and statements to that effect by the Prime Minister, Minister of Industry
and Trade, and the Minister of Environment were widely reported.”79
“The Tribunal accepts that the Solar Levy was a transparent device to avoid what the
Respondent had been advised might cause investor claims. That is clear from the minutes the
Coordination Committee. But, in common with the Czech Constitutional Court, and the
European Commission’s Decision on state aid, the Tribunal does not consider that the
modifications to the support scheme and the tax measures were retroactive, and considers
that they did not violate the principle of legitimate expectation.”80
61. The Tribunal also concludes that:
“Dr Göde was essentially an opportunistic investor who saw a window of opportunity and
who was aware, or should have been aware, that dealing with the solar boom was a fastmoving
and controversial political issue.”81
“He of course knew of, and endeavoured to take advantage of, the fact that the 5% limit had
been removed only from 2011. But he was also aware that the Czech Government had been
deeply concerned about the effect of the solar boom from 2009 and should have been aware
that other legislative changes, especially with regard to tax, were in the air. The Claimants
had avoided the February 2010 moratorium by taking assignments of the binding statements
in relation to three of their largest projects.”82
62. The Tribunal therefore holds that the Claimants had “a speculative hope – as opposed to an
internationally-protected expectation.”83
The Tribunal bases this conclusion on two principal
categories of evidence: statements made by representatives of the Czech Republic in 2010 and
the asserted lack of specific due diligence by Dr. Göde. In my view, none of this evidence, nor
the other evidence in the record, supports the Tribunal’s conclusions.
79
Award, para. 425.
80
Ibid., para. 430 (footnotes omitted).
81
Ibid., para. 431.
82
Ibid., para. 433.
83
Ibid., para. 435 citing Respondent’s Counter-Memorial, para 5(k).
22
63. First, it is in my view highly important to consider carefully what the Czech Republic said and
did during the relevant time period (from mid-2009 to late 2010). In doing so, it is essential to
have regard to the fact that most of the Claimants’ investments were made prior to or during the
summer of 2010.84
During this time, the Czech Republic said and did the following:
a. On 24 August 2009, the Czech Ministry of Industry and Trade announced for the first
time its intention to seek amendments to the Act on Promotion to reduce incentives for solar
energy. The Ministry made this proposal because of concerns that an excessive number of
solar plants were being planned by potential investors and that construction of these plants
would result in an undue financial burden on the Czech Republic (which, as discussed above,
had guaranteed the FiTs payable to these plants). Importantly, in considering a possible
reduction in incentives for solar energy, the Ministry directed its attention only to the socalled
5% brake rule in Section 6(4) of the Act on Promotion, which the Ministry proposed
abolishing prospectively (in January 2010), while also making it clear that the proposed
changes would not affect the 15-year assurance of minimum FiTs for existing solar
facilities.85
Thus, while addressing imbalances in the renewable energy sector, the Ministry’s
proposal was directed only to the level of guaranteed minimum FiTs for future solar
installations, not for existing solar installations which had already been commissioned.
b. The day after the Ministry of Industry and Trade’s 24 August announcement, the
Ministry’s press department clarified the scope of the proposed changes in an interview
published in a Czech newspaper (Právo). The Ministry explained that “the payback period
of the investment will be guaranteed, specifically by a guarantee which is already included
in the law saying that the investment in the solar system has to be paid off within 15 years.”86
There was again no suggestion by the Ministry that the guaranteed FiTs under Section
6(1)(b)(2) for existing solar installations would be affected.
c. A letter from the Ministry of Industry and Trade to the ERO on 28 August 2009 confirmed
the Ministry’s intention to preserve the treatment of existing solar installations which had
already been commissioned, explaining that this was due in part to concerns about claims by
existing renewable energy investors. The Ministry stated: “the goal of section 6(4) … was
to ensure the investors in renewable sources certainty of payback of their investments,
transparency, and predictability. A simple cancellation could thus entail a risk of suits filed
by investors against the Czech Republic on grounds of lost investments.”87
Again, the
Ministry emphasized that existing projects would not be affected by any amendments to the
Act, which would entail only a prospective amendment to Section 6(4)’s 5% brake rule.
d. In September 2009, the ERO wrote an open letter to the Czech Chamber of Deputies,
citing delays in the introduction of legislative changes to Section 6(4)’s 5% brake rule and
again stating that any amendments to the Act’s guaranteed FiTs would only affect new
84
The Claimants’ expectations that the Czech Republic would not reduce the FiTs of installations
commissioned before 1 January 2011 are limited to those investments made prior to the Czech
government’s decision to adopt the Solar Levy (20 October 2010). Here, all four plants affected by the
Solar Levy were commissioned before 1 January 2011 (Stříbro plant on Úsilné plant on
Osečná plant on Mozolov plant on ). Moreover,
the capital for these plants was, in most cases, committed well before these dates (and long before summer
2010 and the press reports cited by the Tribunal). The only apparent exception involves loans made by the
Claimants to and on (see Award, paras. 407, 409).
85
“Ministry of Industry and Trade will Equalize the Support of Renewable Energy Sources,” Ministry of
Industry and Trade Press Release (mpo.cz) (Czech and English original), p. 1 (“The Ministry of Industry
and Trade is planning to change the maximum 5% limit by which the Energy Regulation Office can reduce
the purchase price of electricity from renewable energy sources annually. … The Ministry of Industry and
Trade is trying to ensure that the new act comes into force on 1 January next year.”) (R-138).
86
“Ministry of Industry and Trade wants to reduce support of solar power plants,” Pravo (Czech original and
English translation), p. 1 (R-139) (emphasis added).
87
Letter from R. Portužak to B. Němeček, 28 August 2009. p. 1 (R-145) (emphasis added).
23
sources commissioned after “1 January 2011.”88
The ERO explicitly stated that this delay
would enable solar investors that were already in the process of completing investments “to
prepare sufficiently in advance for the change in the conditions for investing which should
eliminate entirely the risk of possible lawsuits in the Czech Republic regarding protection of
investments.”89
e. Adopting the ERO’s recommendations, the Czech government proposed an amendment
to the Act on Promotion in November 2009. The Explanatory Report to that Draft Act
137/2010 once more confirmed the Czech government’s commitment to preserving the
statutorily-guaranteed treatment of solar installations that had already been commissioned.
The Report stated that one of the aims of “[t]he proposed wording …[was to] enable the
[ERO] to adjust the prices for solar power … as of 1 January 2011.”90
The Report repeated
the explanation, provided in the ERO’s earlier statements, that the prospective character of
the amendment was intended to provide “[i]nvestors ... [to] prepare sufficiently in advance
for amendment of the conditions for investment, which should entirely eliminate the risk of
potential lawsuits against the Czech Republic related to protection of investments.”91
f. The amendment to the Act on Promotion was approved by the Chamber of Deputies on
17 March 2010 and came into force on 20 May 2010.92
The amendment provided only for
the prospective elimination of Section 6(4)’s 5% brake rule for solar facilities commissioned
after 1 January 2011 (not for facilities commissioned after January 2010).93
The proposed
amendment did not alter the guaranteed FiTs under Section 6(1)(b)(2) for existing solar
installations that had already been commissioned or that would be commissioned prior to 1
January 2011. As Mr. Vladimír Tošovský, the Czech Minister of Industry and Trade,
explained at a press conference on 16 November 2009, the decision to apply the elimination
of the 5% brake rule only to solar plants commissioned after 1 January 2011 was deliberately
taken to protect existing investments and investors’ expectations: “It is because some projects
are currently under way and the investors or banks have already invested in them. If we did
this, it would mean changing the terms and conditions under which they invested in the course
of the development, which could pose a threat to their investment. That is why it is 2011.”94
g. In February 2010, TSO and DSOs agreed on a moratorium refusing “new connection
requests” for photovoltaic installations.95
The moratorium was intended to address the
predicted regulatory imbalance in the solar energy sector, but it only affected new
installations, not existing investments. This was confirmed by the representatives of the
Czech Republic.96
h. In July 2010, the Czech Republic’s 2010 Action Plan (submitted to the EU) stated that
“[t]ariffs are guaranteed according to the following table,” listing a “Feed-in price guarantee
(in years)” for photovoltaic sources as “20 [years].”97
The same document contained various
88
Letter from J. Fiřt to O. Vojíř, p. 2 (C-201) (“The proposed wording will enable the Office with effect from
1st January 2011 to adjust the prices for photovoltaics in harmony with the principles used for other types
of renewable resources thus removing the current discrimination against other types of renewable
resources.”).
89
Ibidem.
90
Explanatory Report to Draft Act No. 137/2010 Coll., p. 5 (R-147) (emphasis added).
91
Ibidem (emphasis added).
92
Respondent’s Statement of Defense, para 56.
93
See Article II of Act No. 137/2010 Coll., p. 27 (R-5).
94
Czech Government’s press conference (Czech original and English translation), p. 2 (C-197).
95
Respondent’s Counter-Memorial, para. 101 (emphasis added).
96
Josef Fiřt Witness Statement, para. 21 (“Around the same time, the Czech transmission system operator,
fearing for the stability of the electricity grid, insisted that the distribution companies observe a moratorium
on issuing new grid connection approvals for new solar and wind plants.”).
97
National Renewable Energy Action Plan, published by the Ministry of Industry and Trade, pp. 58-59 (C-
73) (emphasis added).
24
further assurances to existing solar investors.98
There was no suggestion of any sort in the
2010 Action Plan, or any associated documents that the FiTs which had been previously
established and guaranteed for existing solar plants would be changed, notwithstanding the
Czech government’s awareness of imbalances in the renewable energy sector.
i. In September 2010, the Czech government again considered legislation that would have
reduced the financial costs of subsidies for renewable energy. In connection with proposed
legislation, an Explanatory Report confirmed again that changes to FiTs for solar plants
would only take effect with respect to solar installations commissioned after “1 January 2011.”
The Report also made clear that the proposed legislation would not be applicable to
“[p]hotovoltaic power plants already connected to the electric power system” and that the
investors’ “right to claim support [would be] preserved under existing conditions.” 99
Furthermore, the government explicitly stated that “[f]acilities not yet connected to the
electric power system but which started operation before January 1, 2011 will have 12
months to be connected to the electric power system” and would also have “their right to
claim support … preserved.”100
64. At the Hearing, the Respondent’s expert acknowledged that these statements and regulatory
actions gave investors in solar projects in the Czech Republic further comfort that plants
commissioned in 2010 would not be affected by the changes.101
He confirmed that in his view
investors could draw comfort from the September 2010 legislative amendment that no changes
would be implemented for plants commissioned in 2010:
“[Counsel for Claimants:] Now, this is September 15, 2010, so, by now, I think that they
should have known very well what was going to happen in September 2010. This is a
Government proposal which abolished all incentives related to large PV plants, from March
2011, and which was eventually approved by the Parliament on 3 November 2010.
Now, may I take you to the last page, when there are some interim provisions. And it says
to – Section 2 –, it says: – It is a legislative change of claim for the support of production of
electricity from Renewable Energy Sources, – ‘photovoltaic power plants already connected
to the electric power system will have the right to claim support preserved under existing
conditions.’
Now, don’t you think that, from an investor perspective again, this gave further comfort that
no changes would have been implemented for the existing plants, for plants already
connected in 2010?
[Mr. Wynne Jones]: I think that’s probably a fair comment.”102
98
See para. 24(f) above.
99
Explanatory Report to Draft Act No. 330/2010 Coll. (Czech original and partial English translation), p. 6
(R-172) (emphasis added).
100
Ibidem (emphasis added).
101
Transcript, Day 3, page 530, lines 6-22 (“[Counsel for Claimants]: Now, may I take you to Tab 21 in your
bundle. And, this is actually this is the actual Government proposal for the Act that eventually amended
the 5% Rule, and it's dated 16 November 2009. If we go at Page 5, you can find at the bottom of the page
exactly the same wording that was used by Mr. Fiřt in its letter. So, the Government transposed Mr. Fiřt’s
proposal and wording into an Act of the Government, proposed to the Parliament. Now, don’t you think
that this proposal, coming directly from the Government of the Czech Republic, provided an even stronger
reassurance to PV investors that investments, or PV plants connected in 2000 by the end of 2010, they
would have received that feed in tariffs for 20 years? A. Well, I think it's probably more important that the
Government gives that assurance than the Regulator proposes it. So, in that sense, yes.”); Transcript, Day
3, page 567, line 19 to page 568, line 11.
102
Transcript, Day 3, page 567, line 19 to page 568, line 11 (emphasis added).
25
65. As noted above, it is undisputed that virtually all of the investments made by the Claimants which
are at issue in this arbitration were made during the foregoing time period (with Dr. Göde’s last
investment being made in summer 2010).103
Thus, virtually all of the Claimants’ investments
were made at a time (i) when Section 6(1)(b)(2) of the Act explicitly guaranteed fixed minimum
FiTs, (ii) when the Czech Republic had repeatedly reiterated that guarantee in its public
statements and (iii) when steps had been taken to adopt prospective changes in order to address
concerns about expected imbalances in the renewable energy sector, but without in any way
questioning the rights of existing solar energy plants under Section 6(1)(b)(2) (or otherwise). On
the contrary, the Czech Government had repeatedly assured investors that only future plants,
commissioned in later years, would be affected by any legislative changes, and that plants
commissioned in 2009 and 2010 would not be affected.
66. In these circumstances, it is in my view impossible to see why the Claimants were not entitled,
prior to late 2010, to rely on the Czech Republic’s legislative, regulatory and other assurances
guaranteeing the levels of FiTs for their investments. All of the proposals for change during this
time period involved only prospective changes for solar plants commissioned in future years and
carefully preserved the rights of plants that had already been commissioned within the existing
statutory time-limits.
67. It was only subsequently, in late October 2010, months after the Claimants had made virtually
all of their investments,104
that the Czech government abruptly changed its regulatory policy and,
for the first time, proposed a “Solar Levy” that would reduce the FiTs for existing solar
installations that had already been commissioned.105
68. Despite this, the Tribunal cites four articles published in Czech newspapers between late July and
mid-September 2010, which supposedly suggested that changes in FiTs were a possibility.106
In
my view, these articles clearly indicate only that the Czech government was aware of the
103
See note 85 above.
104
Ibidem.
105
The earliest discussion of a potentially retroactive levy apparently occurred at a meeting of the
“Coordination Committee for the assessment of the impact of support of renewable energy sources on
electricity prices” on 4 October 2010. The minutes of the meeting were not, however, made public and the
first draft of Act 402/2010 submitted by the Czech government to the Chamber of Deputies on 14 October
2010 did not contain potentially retrospective provisions, see Minutes of the 2nd Meeting of the
Coordination Committee for the assessment of the impact of support of renewable energy sources on
electricity prices (Czech original and English translation), pp. 7-8 (R-235); Czech Constitutional Court,
Judgment Pl. ÚS 17/11, 15 May 2012, para. 15 (R-248). The Solar Levy was only subsequently introduced
for the first time in the legislative draft of Act 402/2010, see “Government against rapid price hikes on
electricity,” pp. 1-2 (R-270). The Czech Republic enacted that Solar Levy two months later. See Article
1 of Act 402/2010 (C-37).
106
Award, paras. 426-429.
26
imbalances in the renewable energy sector and was considering different mechanisms to reduce
the FiTs. In particular, none of the sources cited by the Tribunal states that reductions of FiTs
which might be adopted would apply to facilities commissioned before the end of 2010.
69. On the contrary, as Czech Prime Minister Nečas said, the Czech Republic had repeatedly stated
that it ”cannot interfere with the pending administrative periods, from the constitutional point of
view … [t]he Czech Republic may face arbitrations.”107
While it is clear that rumors of a possible
reduction in incentives to renewable energy producers had begun circulating in mid-2009,108
the
Tribunal reads into the governmental statements of the Czech Republic during the decisive time
period a meaning which simply is not there and which contradicts the express assurances by the
Czech Republic at the relevant time.
70. In my judgment, a careful review of the evidentiary record demonstrates the opposite of what the
Tribunal asserts in this regard. That record instead shows that the Czech government was aware
of the expected imbalances in the renewable energy sector, but repeatedly reiterated from mid-
2009 until October 2010 that the FiTs for sources, which had already been commissioned, would
not be changed and that changes to address the regulatory imbalances would be directed
prospectively only to renewable energy sources that were commissioned in the future.109
71. Contrary to the Tribunal’s suggestion, none of the Czech Republic’s statements or actions should
have led the Claimants to believe that the guaranteed FiTs for solar plants that had already been
commissioned (or would be commissioned before 1 January 2011) would be reduced or otherwise
affected. In fact, the Czech government had repeatedly said exactly the opposite – namely, that
steps had been taken to address excess solar capacity in the future, but that guaranteed minimum
FiTs for existing facilities would be maintained.
72. Second, the Tribunal criticizes Mr. Göde’s due diligence, asserting that “there is no evidence of
any real due diligence by Dr. Göde” and that his “actions were essentially opportunistic, and that
the investment protection regime was never intended to promote and safeguard those who …
107
“Solar business will slow down, yet the price of electricity will soar,” Mlada Fronta Dnes (Czech original
and English translation), p. 1 (R-162).
108
Claimants’ Reply, para. 175. See also Award, para. 370.
109
One of the Respondent’s experts, explained why the Czech government could have wished not to disclose
its intentions of applying tariff adjustments to existing renewable installations: “If [policymakers and
regulators] attempt to introduce prospective reductions to the feed in tariff or a tariff mechanism that
automatically responds to installed capacity, this will cause PV investors to rush in to qualify their projects
under the existing scheme, thereby exacerbating the very problem that the change is trying to solve.
Policymakers and regulators simply do not have the option of implementing a smooth adjustment to tariffs
or telling investors in advance.” See Wynne Jones First Report, p. 59, para. 5.50.
27
‘pile in’ to take advantage of laws which they must know may be in a state of flux caused
essentially by investors of that type.”110
In my view, this analysis is unpersuasive.
73. In my view, it is not the role of the Tribunal to pass abstract judgment on the quality of the Dr.
Göde’s due diligence. Due diligence is only relevant in a case such as this if it would have
provided the Claimants with information that contradicted their asserted expectations. If due
diligence inquiries by Dr. Göde would only have confirmed the fixed minimum FiTs that Section
6 of the Act, and the other governmental statements outlined above, guaranteed, then the failure
of Dr. Göde to have conducted that due diligence is irrelevant.
74. Due diligence is not a condition to protection of an investment under international law, whether
under the fair and equitable treatment standards prescribed by the Treaties or more generally.
What is sometimes referred to as an obligation to conduct due diligence is relevant only where
particular inquiries would have led an investor to alter its expectations about national law
protections. 111
An investor is under no abstract duty to conduct due diligence.
75. The principle that an investor has no abstract duty to conduct a legal due diligence prior to making
an investment was made clear by a recent investment award:
“[A]n investor cannot be required to conduct an extensive legal investigation. To determine
whether the expectations invoked by the investor are reasonable, key elements are what every
prudent investor needs to know about the regulatory framework before investing and the
actual information held by an investor […]. In particular, a legitimate investor expectation
cannot be induced by a regulatory framework when the investor’s actual information allowed
him to foresee and anticipate the unfavorable development of this regulatory framework
before making the investment. In order to breach the legitimate expectations of the investor,
the new regulatory measures should not have been foreseeable, either by a prudent investor
or by an investor who, by reason of his personal situation, had specific reasons to foresee
those measures.” 112
76. In this case, as discussed above, further due diligence on the part of Dr. Göde would have
revealed nothing different from what Section 6(1)(b)(2) of the Act on Promotion, and the Czech
Republic’s representations, made clear: solar plants commissioned in 2010 would receive the
FiTs prescribed for plants commissioned in 2010 by the ERO. As also discussed above, a
careful review of the Czech government’s statements between January 2009 and October 2010
would have provided no reasons to doubt the Czech Republic’s commitments. As a
110
Award, paras. 432, 435.
111
Churchill Mining and Planet Mining Pty Ltd v. Republic of Indonesia, ICSID Case No. ARB/12/14 and
12/40, Award, 6 December 2016, para. 506 (“The scope of the due diligence depends on the particular
circumstances of each case, such as the general business environment, and includes ensuring that a
proposed investment complies with local laws, as well as investigating the reliability of a business partner
and that partner’s representations before deciding to invest.”).
112
Isolux Netherlands, BV v. Kingdom of Spain, SCC Case V2013/153, Final Award, 17 July 2016, para. 781
(free translation).
28
consequence, the Tribunal’s conclusions about Dr. Göde’s due diligence are irrelevant as a
matter of principle.
77. In any event, the Tribunal’s assessment of Dr. Göde’s due diligence fails to take into account
the factual context of their investments. The Claimants’ investments were not particularly
large by the standards of many cross-border investments – involving an aggregate amount of
some euros spread across several different installations.113
Moreover, the Claimants
were investing in a Member State of the European Union, in a legal environment promising
certainty, stability and the rule of law.114
International law protects small investments as well
as large ones; equally, neither international law nor the drafters of investment treaties condition
investment protection on unrealistic or uncommercial requirements. Any criticism of Dr.
Göde’s due diligence must take both the nature of his investments, and the clarity of the Czech
government’s commitments, into account.115
78. The Tribunal also refers in passing to a 2012 judgment of the Czech Constitutional Court116
and
a 2016 Decision on State Aid of the European Commission,117
assertedly also reaching the
decision that the modifications to the support scheme, including the Solar Levy, did not violate
the principle of legitimate expectation:
“The Tribunal accepts that the Solar Levy was a transparent device to avoid what the
Respondent had been advised might cause investor claims. That is clear from the minutes the
Coordination Committee. But, in common with the Czech Constitutional Court, and the
European Commission’s Decision on state aid, the Tribunal does not consider that the
modifications to the support scheme and the tax measures were retroactive, and considers
that they did not violate the principle of legitimate expectation.”118
113
Award, paras. 404-409.
114
The Copenhagen criteria set out in 1993, now embodied in Arts. 2 and 49 of the Treaty on European Union,
explicitly require for European Union membership “that the candidate country has achieved stability of
institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of
minorities, the existence of a functioning market economy as well as the capacity to cope with competitive
pressure and market forces within the Union.” See Copenhagen European Council – 21-22 June 1993,
Conclusions of the Presidency, p. 13, available at http://www.consilium.europa.eu/media/21225/72921.pdf
(last visited 25 January 2018). In accordance with the commitment to the rule of law that it requires from
its Member States, the European Union stated in its 2013 “European Commission guidance for the design
of renewables support schemes” that “Member States have introduced several unannounced measures that
caught investors by surprise, altered expected returns, and diminished confidence in the entire energy
sector,” and recommended “no unannounced interim changes” and “[c]lear commitments to avoid changes
that alter the return on investments already made and undermine investors’ legitimate expectations.”
(Second Report, Exhibit 2.2).
115
Churchill Mining and Planet Mining Pty Ltd v. Republic of Indonesia, ICSID Case No. ARB/12/14 and
12/40, Award, 6 December 2016, para. 506.
116
Czech Constitutional Court, Judgment Pl. ÚS 17/11 (R-248).
117
European Commission’s decision in State aid case SA.40171 (2015/NN) – Czech Republic (Promotion of
electricity production from renewable energy sources) dated November 28, 2016 and made public on
January 23, 2017 (R-366).
118
Award, para. 430 (footnotes omitted).
29
79. These decisions of the Czech Constitutional Court and European Commission are not decisive in
determining whether Section 6(1)(b)(2) of the Act provided a guarantee of a minimum FiT for
purposes of the Treaties’ fair and equitable treatment protections. Rather, the Tribunal has an
independent mandate, and obligation, under international law to apply the Treaties in light of the
Act’s provisions.119
80. The Czech Constitutional Court did not conclude, as the Tribunal suggests, that the Solar Levy
was not retroactive, much less that the Solar Levy was not retroactive, or otherwise wrongful, for
purposes of the fair and equitable treatment protections of the Treaties. Instead, the
Constitutional Court held that the enactment of the Solar Levy was indeed quasi-retroactive,120
but that – as a matter of Czech constitutional law – the expectations of renewable energy suppliers
for fixed minimum FiTs for a 15-year period did “not attain the intensity of a constitutional-law
issue.”121
81. Thus, the Constitutional Court’s opinion states that the issue presented to, and decided by, that
Court “involve[d] a challenge of the constitutionality of a law, a law that does not interfere with
constitutionally-guaranteed rights and freedoms but which has the effect of reducing the state
support stipulated in an earlier law … .”122
In response to this question, the Constitutional Court
concluded that “although the enactment of the challenged provisions reduced the support
provided to operators of PVPP, … this did not constitute interference that would cause a breach
119
See ZACHARY DOUGLAS, THE INTERNATIONAL LAW OF INVESTMENT CLAIMS (2009), p. 81 (“The law
applicable to the issue of liability for a claim upon an investment treaty obligation is the investment treaty
as supplemented by general international law. … Investment treaty obligations are formulated as general
concepts of minimum investment protection standards. Those concepts are not controversial because they
are formulated at such a general level of abstraction. In defending an investor’s claim based upon the fair
and equitable treatment, a state does not insist that foreign investments should be treated unfairly and
inequitably. There is, in other words, no dispute that the state must conform to a fair and equitable standard
of treatment in its conduct in respect of the foreign investment. The concept itself is not controversial:
rather, it is the application of that concept to the circumstances of the specific case. What the parties argue
about, and what the tribunal must ultimately decide, is the particular conception of the fair and equitable
standard of treatment that must be applied to the case. … [I]n arriving at a conception of the investment
treaty protection standards, the tribunal must inevitably have recourse to general international law and
conventional international law for otherwise it would be interpreting the legal standards in a void.”) (RLA-
124).
120
Czech Constitutional Court, Judgment Pl. ÚS 17/11, para. 48 (“In this regard, the Constitutional Court
notes that the provisions of Sections 7a to 7i of the challenged act in essence bring forth the effects of
pseudo retroactivity, since in consequence of such provisions, for those electricity producers for whom the
fifteen year guaranteed period pursuant to Section 6(1) of Act No. 180/2005 Coll. began to run before Act
No. 402/2010 Coll. entered into effect the amount of support ends up being reduced in the future by the
amount of the levy.”) (R-248).
121
Ibid., para. 87.
122
Ibid., para. 77 (emphasis added).
30
of the constitutionally-guaranteed rights of the affected entities.”123
In the Court’s opinion, “a
simple payback period on investment of 15 years” does not violate the Czech Constitution. 124
82. The Tribunal also refers to the interpretation of the Act on Promotion in the European
Commission’s State Aid Decision.125
In that decision the European Commission stated that
“according to the case-law [of the CJEU], traders are not protected against future changes to an
on-going situation, and the immediate application of the new rule is the general rule for the
application in time of new rules. Therefore, the Commission takes the view – just like the Czech
Constitutional Court – that the modifications to the support scheme and the tax measures were
not retroactive, and did not violate the principle of legitimate expectation.”126
These conclusions
are of no relevance for the purpose of determining the Act’s guarantees for purposes of the
Treaties’ fair and equitable treatment protections.
83. The European Commission’s assessment – which is currently on appeal to the General Court of
the European Union127
‒ that the amendments to the Act on Promotion, including the Solar Levy,
did not violate the principle of legitimate expectations is limited to the general principle of
legitimate expectations under EU law. That is of no material relevance to the interpretation of
the Treaties in this arbitration.
84. Furthermore, the Commission was permitted to make amicus curiae submissions in this
proceeding only on limited issues of EU law (where the Commission has special expertise), not
on other issues, such as Czech law (where the Commission has no such expertise). The Tribunal
decided not to consider the amicus curiae submission of the European Commission as it refused
to bear the reasonable costs of the Parties resulting from the submission. In these circumstances,
I see no basis for according weight to the Commission’s observations about Czech municipal law.
I also note that, unlike this Tribunal, the Commission conducted no adjudicative proceedings,
and sought no specialized expertise, in arriving at its observations about Czech law. In these
circumstances, there is no reason to give the Commission’s apparent views about the content of
Czech law any material weight.
* * * * * *
123
Ibid., para. 90 (emphasis added).
124
Ibid., para. 71.
125
Award, para. 430.
126
European Commission’s decision in State aid case SA.40171 (2015/NN) – Czech Republic (Promotion of
electricity production from renewable energy sources) dated November 28, 2016 and made public on
January 23, 2017, para. 135 (R-366).
127
FVE Holýšov I and Others v Commission (Case T-217/17), Action brought on 3 April 2017.
31
DECLARATION OF JUDGE TOMKA
1. I agree with the Tribunal’s decision and most of its reasoning. In my view, it is important that
the Tribunal considered the Claimants’ claims in relation to the Respondent’s obligations both
under the BIT and the ECT and found no breach.
2. The Tribunal dealt with the Respondent’s objection that it does not have jurisdiction over the
claims based on the ECT. In the Respondent’s view, the Solar Levy is a tax, and therefore,
under Article 21 of the ECT it does not come within the Tribunal’s jurisdiction. The Tribunal
rejected this objection and upheld its jurisdiction over the ECT claims. While I do not disagree
with this outcome, I am not convinced that the Decision of 10 July 2014 rendered by the 9th
(three-member) Chamber of the Czech Supreme Administrative Court in which it concluded
that the Solar Levy is not a tax, is decisive and authoritative. That Decision is the main basis
for the Tribunal’s conclusion.
3. The nature of the Solar Levy under the Czech law is disputed and the Czech legal doctrine and
jurisprudence of Czech courts are far from unanimous. In my understanding, however, the
predominant view is that the Solar Levy is a tax. The leading Czech constitutional expert,
Professor Dr. Aleš Gerloch, PhD., wrote in his opinion of 3 December 2010 on the
amendment, then under consideration, of Act No. 180/2005 on the support of the generation
of electricity from renewable sources of electricity:
“[i]t is without a doubt that the instituted concept of a levy [in Czech: odvod] has all the
signs of being a tax since it represents a payment levied into the state budget from a certain
base. It matters not at all that the instituted concept is called a “levy”; from the point of
view of its content it is a payment that must fulfill the criteria of the provisions of
Article 11, paragraph 5 of the Charter of Rights and Freedoms according to which taxes
and fees may only be imposed on the basis of the law.”1
In his conclusions, Professor Gerloch is unequivocal:
“in reality, this levy represents a tax and, therefore, it must fulfill the criteria that are set
down in the Constitutional Order regarding the imposition of tax liabilities.”2
4. The expert on Czech financial law, and in particular on taxes, levies and fees, Associate
Professor Dr. Radim Boháč, PhD, from Charles University Law School, in his monograph Tax
1
C-222, p.2 (Czech original), p. 3 (in the English translation supplied by the Claimants).
2
C-222 p. 8 (Czech original), p. 11 (in the English translation supplied by the Claimants). In the English
translation the original Czech term “odvod” is imprecisely translated as “deduction”. The correct
English term for “odvod” is “levy”.
- 2 Revenues
of Public Budgets in the Czech Republic,3
analyses “whether individual levies in the
contemporary legal system of the Czech Republic have the nature of taxes or fees.”4
After a
detailed examination of the Solar Levy, he concludes that “the levy on electricity from solar
radiation has all the obligatory (basic) theoretical features of a tax”5
. He further states that
“from the theoretical point of view” there are no important enough reasons justifying “the
designation of the levy on electricity from solar radiation as ‘levy’ and not as a ‘tax’”6
. Finally,
he adds that “[u]nfortunately, professional views do not always prevail, ceding ground to
political views that are capable of present implementation and realization in the short term.”7
5. The 9th
Chamber of the Supreme Administrative Court, after a brief consideration, concluded
that “the levy does not have the nature of a tax.”8
It was of the view that the levy does not
fulfill “the basic criterion” or “a common essential feature of all taxes”, namely
“non-equivalence”.9
It understood non-equivalence as subjecting an entity by the State to a tax
“without any performance from the State at the time of taxation”.10
In its view, “the [S]tate
uses the levy to lower the support it calculated and provided”.11
6. I am not sure whether the Chamber properly understood the non-equivalence in Czech
financial law. As the leading Czech expert in this field of law, Professor Dr. Milan Bakeš,
DrSc., writes in his textbook, “taxes are mostly non-equivalent payments for which no direct
quid pro quo is provided.”12
Associate Professor Radim Boháč considers the Solar Levy as
“non-equivalent, due to the absence of an immediate, direct and concrete consideration in
return on the part of public authority.”13
He explains that “the State does not provide anything
to the payers of the levy on electricity from solar radiation in return for this levy; the fact that
these payers benefit from financial support and subsidy on the basis of provisions of
3
R-318, R. Boháč, Daňové příjmy veřejných rozpočtů v České republice, Wolters Kluwer, Praha 2013.
This monograph was submitted to the Scientific Council of Charles University Law School as his
Habilitationsschrift. In addition to his academic position, Dr. Boháč has been since 2011 the Deputy
Director of the Tax Legislation Department of the Czech Ministry of Finance, having served earlier in
2010 as the Head of its Division for the Coordination of Tax Legislation.
4
Ibid., p. 221, Section 9.2.
5
Ibid., p. 225.
6
Ibid, p. 226
7
Ibid, pp. 226-227.
8
Judgment of 10 July 2014, para. 19, Annex 11 to First Report.
9
Ibid, para. 19 and 20.
10
Ibid, para. 19.
11
Ibid.
12
M. Bakeš et al. Finanční právo, 6th updated edition, C.H. Beck, Praha 2012, p. 93, Annex 4 to First
Report.
13
R. Boháč, op.cit. supra fn 3, p. 225.
- 3 Sections
28 and 29 of the Act on Promoted Sources of Energy . . . does not have any impact
on this.”14
In my understanding, no direct quid pro quo is provided by the State to the solar
electricity producers. Their entitlement to the payment of the feed-in-tariffs (FiT) under the
Act on Promotion is not subject to the condition of paying the levy.
7. It is to be noted that, despite the view expressed by the 9th
Chamber of the Supreme
Administrative Court, the Czech courts treated the Solar Levy as a tax in several subsequent
judgments.
8. Thus, another Chamber of the same Supreme Administrative Court in its Judgment of
25 March 2015 stated that “should the solar electricity producer become affected by individual
liquidating effects associated with the payment of this tax [i.e., the Solar Levy], such producer
may apply for deferral of payment of another tax”.15
9. The Czech Constitutional Court in its Decision of 13 January 2015 expressed the view that
“the ‘solar levy’ can surely be considered such a tax”.16
10. The Solar Levy was a device to reduce de facto the State subsidies to the solar plant operators
without formally altering the FiT to which they were legally entitled. At the same time, the
Solar Levy was one of the three necessary sources of new income for the State Budget in order
to provide funding for the support of electricity production from renewable sources.17
11. Article 21 of the ECT refers the Tribunal to the domestic law of a Contracting Party, when
considering a measure which is presented as a taxation measure. However, whether it
constitutes a tax for the purposes of the ECT is in the end a matter of treaty interpretation.
12. The Solar Levy was purposefully construed as “a withholding tax”18
so that “it cannot be
legally contested”19
, particularly in international arbitration proceedings.20
In view of this aim,
I am convinced that the contested measure (the Solar Levy) should not escape the legal scrutiny
14
Ibid.
15
Judgment of the Chamber of the Supreme Administrative Court of March 25, 2015, para. 42. Annex 18
to First Report. It is to be noted that the English translation, supplied by the Claimant, is slightly
imprecise when it translates the words in the Czech original “této danĕ” as “such tax”. Also the word
“payment” in relation to deferral, although appearing in the Czech original [s úhradou], is missing from
the translation.
16
Judgment of the Senate of the Czech Constitutional Court (11.ÚS 2216/14) of 13 January 2015,
para. 33. Annex 14 to the First Report.
17
See Award, para. 155.
18
See C-198, Minutes of the third meeting of the Coordination Committee held on October 15, 2010,
para. 3, quoted in the Award, para. 152.
19
Ibid., quoted in the Award, para. 153.
20
C-208, Minutes of meeting of the Economic Committee of the Chamber of Deputies of
November 2, 2010, Statement of the Minister of Industry and Trade, quoted in the Award, para. 160.