Procedural Posture

This document is the final Award in ICSID Case No. ARB/15/34 between Cavalum SGPS, S.A. and the Kingdom of Spain. The Award follows the Tribunal’s Decision on Jurisdiction, Liability and Directions on Quantum dated 31 August 2020, wherein the Tribunal found by majority that Spain breached the fair and equitable treatment (FET) standard under Article 10(1) of the Energy Charter Treaty (ECT). Specifically, the Tribunal held that Spain's enactment of a New Regulatory Regime undermined the Claimant’s legitimate expectations to the extent that the return on its photovoltaic (PV) investments fell short of a reasonable rate of return. The present Award determines the quantum of compensation owed to the Claimant.

Principal Legal and Procedural Issues

The primary issues before the Tribunal concerned the calculation of the post-tax reasonable rate of return (RRR) based on the weighted average cost of capital (WACC) as of 30 June 2014, and the actual internal rates of return (IRR) for the Claimant’s seven PV plants. The Tribunal was required to resolve expert disagreements regarding the appropriate methodology for calculating damages, specifically whether to utilize actual investment costs or standard investment costs, how to account for the "claw-back" effect of the new regime, the compensability of losses related to three abandoned projects, and the applicable rates for pre- and post-award interest.

Parties' Positions

The Claimant, relying on FTI Consulting, argued for a 7.8% RRR and asserted that damages should be calculated using standard investment costs to reward developer efficiency. The Claimant also sought compensation for sunk costs in three abandoned projects, arguing their abandonment was a direct consequence of Spain's breach of the stability obligation. The Respondent, relying on Accuracy, proposed a 5.5% to 6.5% RRR and maintained that actual investment costs must be used. Spain further contended that the abandonment of the projects was a voluntary business decision that did not flow from the regulatory changes.

Tribunal's Analysis and Findings

The Tribunal determined that the appropriate post-tax RRR is 7%, comprising a 6% WACC plus a 1% efficiency premium. By majority, the Tribunal rejected the Claimant's reliance on standard investment costs. Applying the customary international law standard of full reparation articulated in Chorzów Factory, the Tribunal held that actual damages must be calculated using actual investment costs rather than hypothetical standard costs. Applying the 7% RRR to the actual investment costs, the Tribunal found that only two of the seven PV plants fell short of a reasonable return, resulting in €5.6 million in damages. Furthermore, the Tribunal accepted the Claimant's claim for €1.8 million in wasted expenditure for the abandoned projects, concluding that their abandonment was a reasonable mitigation response to the instability caused by Spain's breach.

Dispositive Ruling

The Tribunal ordered Spain to pay the Claimant €7.4 million in compensatory damages, comprising €5.6 million for the operational plants and €1.8 million for the abandoned projects. Spain was directed to pay pre- and post-award interest on these amounts at the 1-year Euribor rate plus 1%, compounded annually. Additionally, the Tribunal ordered Spain to pay €1.5 million towards the Claimant's legal fees, with the costs of the arbitration to be borne equally by the Parties.