INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT
DISPUTES
In the arbitration proceeding between
CAVALUM SGPS, S.A.
Claimant
and
KINGDOM OF SPAIN
Respondent
ICSID Case No. ARB/15/34
Members of the Tribunal
Lord Collins of Mapesbury, LL.D., F.B.A., President of the Tribunal
Mr. David R. Haigh K.C., Arbitrator
Sir Daniel Bethlehem K.C., Arbitrator
Secretary of the Tribunal
Mr. Francisco Grob, ICSID (until 3 June 2022)
Ms. Anna Toubiana, ICSID (as of 3 June 2022)
Date of dispatch to the Parties: 29 September 2022
[Page i]
|
Representing Cavalum SGPS, S.A.: Mr. Kenneth R. Fleuriet |
Representing the Kingdom of Spain: Ms. María del Socorro Garrido Moreno |
[Page ii]
[Page 1]
1. This case concerns a dispute submitted to the International Centre for Settlement of Investment Disputes (“ICSID” or the “Centre”) on the basis of the Energy Charter Treaty, which entered into force for the Kingdom of Spain and Portugal on 16 April 1998 (the "ECT"), and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force on 14 October 1966 (the “ICSID Convention").
2. The claimant is Cavalum SGPS S.A. (“Cavalum” or the “Claimant"), a company incorporated under the laws of Portugal. The respondent is the Kingdom of Spain (“Spain” or the "Respondent”). The Claimant and the Respondent are collectively referred to as the “Parties.” The Parties' representatives and their addresses are listed above on page (i).
3. The dispute relates to measures implemented by the government of Spain, which modified the regulatory and economic regime of renewable energy projects.
4. By its Decision on Jurisdiction, Liability and Directions on Quantum dated 31 August 2020 (“Decision on Jurisdiction and Liability"), the Tribunal (inter alia) (1) by majority, declared that by enacting and applying the New Regulatory Regime, Spain had undermined the Claimant's legitimate expectations implicit in the FET obligation in Article 10(1) of the Convention to the extent (if any) that the return on its investments fell short of a reasonable return by reference to the cost of money in the capital markets; (2) directed the Parties to endeavour to agree within 28 days of notification of the Decision (or such later date as may be agreed or directed) a timetable for reaching agreement on (a) a post-tax reasonable rate of return based on WACC as at 30 June 2014; (b) an agreed post-tax IRRs for the Claimant's plants; and (c) to the extent that (b) fell short of (a), the compensation which would be due from Spain to the Claimant; (3) directed the Parties that the timetable should include the provision to the Tribunal within 28 days thereafter (or such later date as might be agreed or directed) by the experts of a joint memorandum indicating the areas of agreement, and (if any) the areas of disagreement, together with reasons, and any proposals for a procedural timetable for further submissions thereon; (4) directed the Parties that the joint memorandum
[Page 2]
should include a joint model to enable the Tribunal to make the necessary calculations flowing from its determination of disputed issues; (5) directed the Parties to notify the Tribunal, upon expiry of the 28-day period from notification of the Decision, of the agreed timetable.
5. The Decision on Jurisdiction and Liability is hereby incorporated by reference into this Award.
6. On 24 September 2020, the Parties requested an extension to submit an agreed calendar until 6 October 2020, which was granted by the Tribunal on 29 September 2020.
7. On 6 October 2020, the Parties notified the Tribunal that they had agreed that by 10 November 2020, the Parties' experts would exchange their positions, and that, in consultation with counsel, the Parties' experts would work together to prepare a joint memorandum by 18 December 2020.
8. By letter dated 17 December 2020, the Claimant sought clarification regarding the scope of further submissions and the procedure envisaged by the Tribunal's Decision. The Claimant further informed the Tribunal of the Parties' agreement to extend the time for submission of the joint memorandum until 22 January 2021 (subject to further extension, if necessary, for the Tribunal to resolve the application made in that letter).
9. By letter of 22 December 2020, Spain confirmed its agreement to the deadline extension and presented its observations on the Claimant's request for clarification.
10. On 18 January 2021, the Tribunal issued Procedural Order No. 5. The Tribunal decided that (1) the Claimant may submit one brief witness statement addressing the construction cost issue, without prejudice to its ultimate relevance; (2) Spain may submit a brief witness statement in reply; (3) either Party may apply to the Tribunal for permission to cross-examine and/or to make oral submissions on the new evidence, unless otherwise agreed by the Parties; and (4) no further evidence could be submitted without prior approval by the Tribunal. The Parties were invited to confer on a timetable and report to the Tribunal by 29 January 2021 (or any other later date as agreed by the Parties). The costs of that application were reserved.
[Page 3]
11. By letter of 20 January 2021, Spain submitted to the Tribunal that granting the Claimant authorisation to introduce new evidence on construction costs through Procedural Order No. 5 breached its right for due process under Article 52(1)(d) of the ICSID Convention. Spain also sought an order that the Claimant bear all costs arising out of or in connection with the introduction of new evidence.
12. By letter of 29 January 2021, the Claimant replied to Spain's letter to say that the admission of additional evidence did not prejudice Spain and that its objections to the introduction of new evidence lacked merit.
13. Through separate communications on 29 January 2021, the Parties communicated to the Tribunal their agreement on a procedural calendar. The Claimant was to submit one brief witness statement addressing the construction cost issue by 12 February 2021, followed by Spain's brief witness statement in reply by 26 February 2021. Both Parties could apply to the Tribunal for permission to cross-examine and/or make oral submission on the new evidence no later than 5 March 2021 and submit a joint model and memorandum by 26 March 2021.
14. On 12 February 2021, the Claimant filed the Third Witness Statement of Ms. Maria Helena Brandão, addressing the development costs of the Claimant's PV plants (“CWS-MHB3”).
15. On 26 February 2021, Spain filed the Witness Statement of Mr. Jorge Servert del Rio in reply to Ms. Brandão's Third Witness Statement (“RWS-JSR1”).
16. By email of 5 March 2021 to the Tribunal, the Claimant requested an opportunity to cross-examine Spain's witness, Mr. Jorge Servert del Rio.
17. On the same date, Spain requested that no cross-examination and/or oral submissions be directed.
18. On 17 March 2021, the Tribunal granted the Parties a further round of written evidence from their respective witness, deferring the decision on cross-examination until after the submission of the joint memorandum, model and the second round of written evidence.
[Page 4]
19. By email of 24 March 2021, the Parties informed the Tribunal of their agreement to a schedule on the submission of another round of written evidence, the joint memorandum and model, as well as simultaneous addenda to the joint memorandum (if any).
20. On 7 April 2021, the Parties informed the Tribunal on their agreement to a deadline extension on the reply and rebuttals to the witness statements and the joint memorandum and model.
21. On 9 April 2021, the Claimant filed the Fourth Witness Statement of Ms. Maria Helena Brandão (“CWS-MHB4”).
22. On 22 April 2021, Spain filed the Second Witness Statement of Mr. Jorge Servert del Rio (“RWS-JSR2").
23. Following the directions of the Tribunal in the Decision on Jurisdiction and Liability, on 29 April 2021, the Parties submitted the Joint Memorandum (“Joint Memorandum") and Joint Model (“Joint Model”) prepared by FTI (the Claimant's expert) and Accuracy (the Respondent's expert).
24. On the same day, Spain also filed its Addendum to the Experts' Joint Memorandum, commenting on Ms. Brandão's Third and Fourth Witness Statements (“Addendum”).
25. By letter of 30 April 2021, Spain informed the Tribunal that the Claimant had objected to Spain's filing of a separate Addendum to the Experts' joint memorandum commenting on the Third and Fourth Witness Statements, and Spain stated that the Parties had agreed to submit the Addenda.
26. Upon the Tribunal's invitation, the Claimant confirmed that it had no objection to Spain's submission of its Expert Addenda, which was then circulated by the Secretary of the Tribunal, on 15 May 2021.
27. By letter dated 10 August 2021, the Tribunal provided a schedule for the Parties to make further submissions regarding the legal aspects of the cost of the abandoned projects. The Tribunal informed the Parties of its decision not to grant the Claimant's request to cross-examine Mr. Jorge Servert, but that it would permit FTI to comment on Accuracy's
[Page 5]
Addendum by 27 August 2021. The Tribunal further invited the Parties to submit their views on the Claimant's request for a pre- and post-award compound interest at the highest lawful rate from the Date of Assessment until Spain's full and final satisfaction of the Award, by 27 August 2021. Finally, the Tribunal invited the Parties to agree on a timetable for their respective costs statements.
28. By email of 11 August 2021, Spain stated that, pursuant to the Parties' agreement of 7 April 2021, the Parties' respective experts were to make any comments on Ms. Brandão's Third and Fourth Witness Statements simultaneously by 29 April 2021 in the form of an addendum to the Joint Memorandum. According to Spain, allowing the Claimant's experts to submit their comments would violate the Parties' agreement and due process, providing the Claimant's experts with an unfair advantage. Spain therefore requested that FTI not be allowed to file comments on Accuracy's Addendum or, subsidiarily, that Accuracy be allowed to respond to FTI's comments on Accuracy's Addendum within three weeks thereof. Spain, expressing its difficulty to submit its comment on pre- and post-award interests due to previously scheduled commitments, requested an extension of such deadline until 15 September 2021.
29. On the same date, the Claimant reacted to Spain's email reaffirming the Tribunal's authority to request additional submissions and informing the Tribunal of its attempt to reach an agreement with Spain regarding FTI's comments on Accuracy's Addendum, including affording Spain the opportunity to respond to such submission. In light of pre-existing commitments, the Claimant requested an alternative pleading schedule.
30. On 13 August 2021, the Tribunal reaffirmed its invitation for FTI to comment on Accuracy's memorandum. The Tribunal noted that, in asking for comments from FTI on Accuracy's memorandum, the Tribunal was simply seeking assistance from the experts. It would have done the same if both Accuracy and FTI had submitted simultaneous memoranda. The Tribunal also provided the Parties with a revised pleading schedule.
31. Pursuant to the Tribunal's revised pleading schedule of 13 August 2021, on 24 September 2021, Spain filed its “Submission on Pre- and Post-Award,” together with legal authorities RL-103 to RL-105.
[Page 6]
32. On the same date, the Claimant presented its “Submission in Response to Tribunal Instructions dated August 10, 2021,” including its comments on the consequences of the breach of the obligation of stability and on pre- and post-award interest.
33. Also on 24 September 2021, the Claimant informed the Centre that the Claimant had requested, and Spain had agreed, an extension of the deadline for the submission of FTI’s comments on the Accuracy memorandum until 28 September 2021, with a corresponding extension of the deadline for Accuracy's response to 26 October 2021. Spain confirmed its agreement on the same date and the Tribunal subsequently granted the extension on 27 September 2021.
34. On 28 September 2021, the Claimant filed FTI's Response to Accuracy's Addendum to the Joint Memorandum (“FTI's Comments").
35. On 4 October 2021, Spain submitted its “Petition of Reconsideration regarding the intra-EU Objection on the basis of the CJEU Decision in the Case C-741/19, Republic of Moldavia, ECLI:EU:C:2021:655." Spain applied for the reconsideration of the Tribunal's Decision on Jurisdiction and Liability in the light of the judgment issued on 2 September 2021 by the CJEU in Case C-741/19, Republic of Moldova v. Komstroy LLC ("Komstroy"). The application was accompanied by legal authorities RL-0090, RL-0106, and RL-0107 (“Request for Reconsideration”).
36. On 22 October 2021, Spain submitted its comments on the breach of the obligation of stability (“Comments on Stability").
37. On 26 October 2021, Spain submitted Accuracy's response to FTI's submission of 28 September 2021.
38. On 27 October 2021, the Claimant filed its “Response to Spain's Petition for Reconsideration” urging the Tribunal to reject Spain's Request for Reconsideration. The submission was accompanied by legal authorities CL-228 through CL-237.
39. On 9 December 2021, the Claimant wrote to the Tribunal to draw its attention to (a) a Decision on Spain's Request for Reconsideration of the Tribunal's Decision dated 19 April
[Page 7]
2021 in Mathias Kruck v. Kingdom of Spain (ICSID Case No. ARB/15/23); and (b) an article by S. Perry in Global Arbitration Review discussing Landesbank Baden-Württemberg v. Kingdom of Spain, ICSID Case No. ARB/15/45, an unpublished decision rejecting a request from Spain to reconsider a 2019 decision on jurisdiction.
40. On 17 December 2021, Spain submitted its comments on the Claimant's Response to Spain's Petition for Reconsideration of 28 October 2021, and the Claimant's communication of 9 December 2021, together with an updated list of exhibits and legal authorities.
41. On 10 January 2022, the Tribunal issued its decision on Spain's Request for Reconsideration. The Tribunal considered that there was nothing in the reasoning in Komstroy which had not been anticipated by the Tribunal in its Decision on Jurisdiction and Liability, or by the Parties in their submissions in advance of the Tribunal's Decision on Jurisdiction and Liability. Accordingly, the Tribunal rejected Spain's Request for Reconsideration and reserved the costs (the “Decision on the Kingdom of Spain's Request for Reconsideration").
42. In a letter dated 14 January 2022, Spain stated that it “reserve[d] its rights with respect to potential grounds for seeking annulment of the eventual Award.”
43. On 4 April 2022, the Tribunal declared the proceeding closed and invited the Parties to agree on a timetable for their statements on the incidence and quantum of costs.
44. On 13 May 2022, the Claimant and Spain filed their costs submissions.
45. On 3 June 2022, the ICSID Secretariat informed the Parties that Ms. Anna Toubiana, ICSID Legal Counsel, would act as Tribunal Secretary due to Mr. Grob's departure from the Centre.
46. On 28 June 2022, the Respondent filed a request to reopen the proceeding pursuant to ICSID Arbitration Rule 38(2); for the Tribunal to decide on the admissibility of new evidence; and for the reconsideration of the Tribunal's decisions of 31 August 2020 and 10 January 2022.
[Page 8]
47. On 14 July 2022, pursuant to Rule 46 of the ICSID Arbitration Rules, the Tribunal informed the Parties of its decision to extend the period to draw up and sign the award by a further 60 days.
48. On 7 September 2022, the Tribunal issued Procedural Order No. 6 on Spain's Request for Reconsideration of the Tribunal's Decisions on Jurisdiction of 31 August 2020 and 10 January 2022, rejecting Spain's request.
49. On 9 September 2022, the Tribunal invited the Parties to file their updated costs submissions by 15 September 2022.
50. On 15 September 2022, Spain confirmed it had no updated costs submission to file. On the same date, the Claimant filed its updated costs submission.
51. Following the Tribunal's Decision on Jurisdiction and Liability, the Claimant submitted a Third Witness Statement by Ms. Brandão, in which she addresses the calculation of the investment costs of the PV plants, and which can be summarised as follows.
52. Recalculating these costs was necessary so as to "[...] include all expenses incurred by the investors."1 A significant portion of such costs were borne by either parent or partner companies, or are intermingled between different development processes, making it impossible to reflect them under one single line in the financial accounts of the project companies.2
1 Third Witness Statement of Ms. Maria Helena Brandão, 12 February 2021 (“CWS-MHB3”), para. 2. ↩
2 Id., paras. 3-5. ↩
[Page 9]
53. Unlike most investors, the Claimant carried out the necessary development work in-house.3 In addition, some expenses such as taxes and fees of PV plants were borne by the shareholders directly instead of the project company.4
54. The price for some of the Claimant's engineering, procurement and construction (“EPC”) contracts was lower because of its prior in-house functions. That was not the case for Riosalido and La Roda, two of the PV plants acquired from Bosques Solares. As Bosques Solares performed more administrative work than the Claimant's usual in-house services, these two EPC contracts were a more accurate reflection of project development prices.5
55. As a result of prior discussions with the Claimant's valuation expert, damages were assessed based on a calculation of returns of a standard plant. Due to the Claimant's efficiency level in comparison to other PV plant investors, any calculations based on the actual plant development costs would reflect a reduced return.6
56. Ms. Brandão submitted new estimates based on her recreation of the Claimant's personnel contribution to each project for the purposes of calculating the Claimant's in-house contributions. According to these calculations, the total of the Claimant's estimated value of in-house contributions is 5.3% of the investment costs, approximately €5 million.7
57. In response to Ms. Brandão's Witness Statement, Spain submitted a Witness Statement by Mr. Jorge Servert, an industrial engineer with experience in the development, design, and construction of renewable energy plants.
58. In his statement, Mr. Servert emphasised that the costs in which a company incurs developing its activity must be properly documented and the purpose of each cost properly identified, and, if Cavalum generated any costs related to the PV plants, the costs should
3 Id., paras. 7-9. ↩
4 Id., para. 10. ↩
5 Id., para. 12. ↩
6 Id., para. 18. ↩
7 Id., para. 20. ↩
[Page 10]
be documented either through payslips, notes of expenses or invoices.8 The alleged shareholders' contributions had not been documented.9 The costs should have been calculated, not estimated, by reviewing the real costs that must be properly documented, and if any cost must be shared among projects, the method must be as objective and explicit as possible.10 He concluded that Ms. Brandão's statements on development costs were groundless: (i) the costs were not associated with development activities; (ii) the Claimant's contribution was computed based on unsupported estimations rather than payrolls or other evidence; and (iii) Valsolar's development contribution was appraised by reference to a contract with another contractor and from a different period.11
59. In her Fourth Statement, Ms. Brandão questioned the basis of Mr. Servert's evidence on document retention, internal controls and accounting, stressing his lack of experience or knowledge of the Claimant's management method.12 Her observations were as follows.
60. In 2006, the Claimant stored its accounting records in hard copy. As the expenses in issue were mainly incurred during 2006-2008, some of the documents might no longer be available due to the Claimant's document retention policy, even though other documentary evidence on development costs was included in Exhibit MHB-7.13
61. All activities involved in bringing the PV plants into operation are accounted towards the development costs. The uncompensated contributions from the Claimant's in-house expertise of their managers also added to the cost calculations.14
62. The Valsolar contracts were not turn-key contracts, under which the Claimant did not have any task or responsibility in the development and construction of the plants. The Claimant was responsible for and bore the engineering and procurement responsibilities of the PV
8 Witness Statement of Mr. Jorge Servert del Rio in reply to Ms. Brandão's Third Witness Statement, 26 February 2021, paras 5, 9. ↩
9 Id., para. 12. ↩
10 Id., para. 22. ↩
11 Id., para. 29. ↩
12 Fourth Witness Statement of Ms. Maria Helena Brandão, 9 April 2021 (“CWS-MHB4"), para. 2. ↩
13 Id., para. 8. ↩
14 Id., paras. 10-11. ↩
[Page 11]
plants with the Valsolar contracts.15 The Claimant prepared design documents and performance simulations for the Don Alvaro plant before the Valsolar contract was executed.16
63. The costs evidenced in Ms Brandão's Third Witness Statement were linked to development activities. Limited resources were available when reconstructing expenses. All activities included in the reconstruction formed part of a PV plant development cycle.17
64. Ms. Brandão also drew attention to the difference between Spain's cost references for an efficient, well-managed project and the Claimant's lower development costs. Bearing in mind the Claimant's in-house advantage, the return analysis should take into account the "the true costs of the plants (capturing the value that any other investor in the market would have had to pay for). "18
65. In his Second Witness Statement, Mr. Servert expressed his opinion that Ms. Brandão's definition of “development costs" did not match the one adopted by the renewables industry.19 Five of the PV plants were actually developed by Valsolar. Citing extracts from agreements signed between Valsolar and the Claimant on 23 November 2007, he noted that when the Claimant bought the shares in these project companies, the development costs had already been accounted for by Valsolar through the pre-development and development stages.20
15 Id., paras. 18-19. ↩
16 Id., para. 20. ↩
17 Id., para. 28. ↩
18 Ibid. ↩
19 Second Witness Statement of Mr. Jorge Servert del Rio, 22 April 2021 (“RWS-JSR2"), para. 8. ↩
20 Id., paras. 10-13. ↩
[Page 12]
66. Valsolar constructed the PV plants through turn-key contracts with the project companies.21 The procurement responsibilities rested with Valsolar while the Claimant was involved simply in a support capacity.22
67. In any event, the amount of work claimed by Ms. Brandão was not corroborated by the corresponding evidence.23
68. Accuracy made a number of observations on Ms. Brandão's evidence. First, it contended that Ms. Brandão had failed to provide any evidence that would substantiate the “Relevant costs"24 incurred by the Claimant or Valsolar. Further, the costs in Ms. Brandão's report on the Claimant's financial accounts were intermingled with many other projects and companies25 and there was no documentary evidence on the existence of personnel costs, their amount, and their connection with the plants.26
69. Second, Ms. Brandão's estimates were filled with “(i) arithmetical errors, (ii) unreasonable assumptions that clearly invalidate her result, and (iii) the inclusion of items that were not a cost to Cavalum."27
70. Third, Ms. Brandão applied a €200 “hourly fee” for all employees irrespective of the scope of work for each employee, leading to an overvaluation of €1,956,350 for development works.28 The amount of time calculated for some employees was above a standard
21 Id., para. 14, in reference to EPC Agreement entered into between Parque Fotovoltaico Don Alvaro, S.L.U. and Valsolar 2006, S.L., 18 October 2007, C-202_SP; EPC Agreement entered into Parque Fotovoltaico La Albuera, S.L. and Parque Fotovoltaico Fuente de Cantos, S.L., and Valsolar 2006, 23 November 2007, C-209_SP;EPC Agreement entered into between Parque Fotovoiltaico Talarubias and Valsolar 2006, S.L., 11 May 2009, C-229_SP. See also RWS-JSR2, para. 16. ↩
22 RWS-JSR2, paras. 19-20. ↩
23 Id., paras. 58-59. ↩
24 Spain's Addendum to the Experts' Joint Memorandum, commenting on Ms. Brandão's Third and Fourth Witness Statements, 29 April 2021 (“Addendum"), para. 6, in reference to Ms. Brandão's definition of Relevant Costs in para. 2 of CWS-MHB3. ↩
25 Addendum, paras. 7, 10. ↩
26 Id., para. 12-14. ↩
27 Id., para. 17. ↩
28 Id., para. 19. ↩
[Page 13]
threshold29 and the estimated development works did not reconcile with the Claimant's annual accounts.30
71. Fourth, whatever contributions the Claimant's shareholders gave, they should have been registered under the plants. In any event, “the shareholders' alleged contributions cannot form part of the investment cost of the Plants in this case."31
72. Accuracy also criticises the decision to pass on investment costs incurred with the abandoned projects, emphasising that the Claimant and Valsolar did not do so for the costs incurred in the other PV Plants.32 In addition, the Claimant did not invoice all its costs in relation to its other partner, a practice which, according to Accuracy, “is contrary to the standard practice observed in the market.”33
73. The alleged costs of the Claimant and Valsolar were neither recorded in the SPV34 nor supported by evidence.35 In addition, Valsolar was the original project developer, and the budgetary data came from it rather than from an independent third party. As a result, Accuracy concludes that “Ms. Brandão's exercise lack independent market benchmarks that would allow a proper quantification of the alleged cost contribution of Valsolar's partner in the Plants.”36
74. Licensing costs of the projects were already accounted for by the Claimant's €88.1 million investment costs.37 Therefore, including it in Valsolar's cost contribution would amount to double-counting.38
29 Id., para. 24. The experts refer to 1.760 hours as a typical number of working hours in a year. ↩
30 Id., paras. 27-30. ↩
31 Id., para. 33. ↩
32 Id., para. 39. ↩
33 Id., para. 40. ↩
34 Id., para. 44. ↩
35 Id., para. 45. ↩
36 Id., para. 47. ↩
37 Id., para. 49. ↩
38 Id., para. 50. ↩
[Page 14]
75. Addressing Accuracy's Addendum, FTI states that the investment costs recorded by the Claimant were materially lower than the investment amounts considered efficient by Spain as indicated in the table below.39
Table 1-1: Investment costs of the Spanish Plants
| Plant name | IT code | Capacity | Recorded cost | Recorded cost per MW | Standard cost per MW | Diff |
|---|---|---|---|---|---|---|
| (MW) | (EUR m) | (EUR m) | (EUR m) | (%) | ||
| La Albuera | IT-00058 | 2.0 | 14.2 | 7.1 | 8.8 | (19%) |
| Don Alvaro | IT-00058 | 1.5 | 10.3 | 6.9 | 8.8 | (21%) |
| Fuente de Cantos | IT-00058 | 4.0 | 26.4 | 6.6 | 8.8 | (25%) |
| La Roda | IT-00058 | 2.0 | 15.2 | 7.6 | 8.8 | (13%) |
| Riosalido | IT-00048 | 1.5 | 10.7 | 7.1 | 7.1 | 1% |
| Talarrubias | IT-00529 | 1.9 | 8.1 | 4.3 | 5.2 | (18%) |
| Solarwell | IT-00488 | 2.5 | 3.1 | 1.3 | 1.6 | (22%) |
| Total | 88.1 |
Note: With the exception of Riosalido and La Roda, which were built by a third party, the Spanish Plants were developed and built by Cavalum and Valsolar.
Sources: Exhibit RE-3. Cavalum projects summary; and MO 1045/2014: Annex VIII, pages 314, 324, 754 and 795.
76. FTI criticises Spain's emphasis on the Standard Facilities as coming with the benefit of hindsight. It is unlikely that investment costs for these facilities were systematically and significantly overstated, and the Claimant cannot be categorised as a large organisation that can expect to leverage its purchasing power. The Claimant's performance is, for the most part, better than standard plants and it seems unlikely that the Claimant “cut corners” in construction or component quality.40
77. Since the remuneration of PV plants in Spain does not rely on the amounts actually spent on building the plants, the differences between reported costs and standard investment costs “are consistent with Cavalum (and Valsolar) recording some but not all of their investment
39 FTI's Response to Accuracy's Addendum to the Joint Memorandum, 28 September 2021 (“FTI's Comments”), paras. 1.2-1.3. ↩
40 Id., para. 1.4. ↩
[Page 15]
costs."41 It is not surprising, therefore, that the Claimant did not record all of its staff and owners' activities as this was not required under the regulatory framework in place at the time.
78. A firm does not need to measure its performance by keeping track of its investment costs, particularly if it is majority-owned and controlled by its management but can use alternative methods of measuring profitability or financial performance without calculating the return on investment.42 The Plants' remuneration did not depend on the costs of investment, but these would rather be compensated through tariffs that were fixed for their operating lives.43
79. Regarding Accuracy's claim that there is no documentary evidence on costs which provides information on their existence, amount and link to the Plants, FTI comments that detailed time-reporting of this sort is only required for justification purposes, as is typically the case with third-party contractors' invoices. The Claimant did not consider it necessary, nor did it have a system for recording time accurately. It conducted monthly meetings with Valsolar to discuss the tasks performed and the progress of the projects. Since a large portion of these personnel costs were incurred 13 or more years ago, it is not surprising that detailed accounts of these costs are unavailable after such a long period of time.44
80. As regards Accuracy's argument that Ms. Brandão's estimates of development costs “contain several mathematical and assumption errors,” FTI agrees that the calculation contains an arithmetical error and correcting for this error reduces the Claimant's development costs by €1,957,350 to €3,066,650.45
81. In relation to Accuracy's assertion that the hourly rates adopted in the calculation are "unbelievably high,” FTI disagrees with Accuracy's view that a mark-up cannot explain the hourly rates. According to FTI, “it would be perfectly reasonable to allocate costs associated with these employees over and above their salaries (such as taxes or social
41 Id., para. 1.5. ↩
42 Id., paras. 2.2-2.3. ↩
43 Id., para. 2.4. ↩
44 Id., para. 2.5. ↩
45 Id., paras. 2.6-2.7. ↩
[Page 16]
security costs, and potentially bonuses), as well as other costs of operating the company, to the development of the plants,” and the total cost of employment is usually well above the salary costs, particularly if office-running costs are also allocated.46
82. FTI further asserts that Accuracy's assertion that the time incurred by several employees is "simply illogical” is based on the comparison of the hours worked by individual employees and the “typical” number of working hours in a year of 1,760, which is based on an assumed 40-hour working week with one month of holiday. Accuracy's typical working hours are understated, and correcting for that error results in 1,906 working hours per year.47 In addition, three employees seem to have worked approximately 50 hours, 52 hours, and 58 hours on average each week, respectively. These long hours were associated with work performed to complete projects under RD 661/2007 by the September 2008 deadline and involved some employees working seven days a week and well over 40 hours a week over extended periods of time.
83. With regard to Accuracy's assertion that the cost of the development works estimated by the Claimant are significantly higher than the total costs recorded by the Claimant in its financial statements for the years 2007, 2008, and 2009, the Claimant's shareholders did not charge the project companies for their work, nor did they receive a salary from the Claimant.48 There is no reason for costs relating to the Claimant's shareholders' contributions to be excluded from the assessment of total development costs, as it understands from the Claimant that “the engineering expertise contributed by Cavalum's shareholders was essential to the development of the plants, and the associated cost of that time could have been charged to the plants (via a management charge for example) but was not."49
84. FTI criticises Accuracy's statement that it is contradictory that all of the investment costs relating to the abandoned projected were invoiced and recorded to the SPVs, whereas not all of the investment costs were recorded to the SPVs of the completed projects. The €1.8
46 Id., para. 2.8. ↩
47 Id., para. 2.10. ↩
48 Id., para. 2.13. ↩
49 Id., para. 2.14. ↩
[Page 17]
million figure understates the full investment made by the Claimant since the contributions made by its staff to the development of these projects were not included. The method of recording investment costs for the abandoned projects was thus identical to the one used for the completed projects, which were “amounts paid to third parties for the right to the projects, the rights to use the land, local fees, and professional fees, such as technical studies and legal fees.”50
85. In reaction to Valsolar's contributions, FTI understands from the Claimant that “there was an understanding between the two partners (Cavalum and Valsolar) that their contributions to developing and building the Spanish Plants were balanced and this was reflected in their shareholdings" and that “there was not a detailed accounting exercise undertaken to verify their contributions, either at the time or subsequently."51 Ms. Brandão's estimates regarding Valsolar's unrecorded contributions are based on her experience developing the plants in question.52
86. With respect to Accuracy's allegation that the 2007 Independent Proposal upon which Ms. Brandão bases her estimate of Valsolar's contribution was prepared by Valsolar and not by an independent third party, with an independent third party acting only as an intermediary,53 FTI says that it is its understanding that, having sought an estimate of third-party costs from Acción Solar, the Claimant had no reason to consider these estimates to be biased. Recorded costs of building Riosalido and La Roda, which were the two plants built by a third-party contractor, were closer to Standard Costs.54
87. FTI did not have sufficient information to address Accuracy's assertion that Ms. Brandão's calculations double-counted licensing costs as they are included in both Valsolar's contributions and the costs already recorded in the amount of €88.1 million, but FTI
50 Id., paras. 2.15-2.16. ↩
51 Id., para. 2.18. ↩
52 Ibid. ↩
53 Id., para. 2.17(3). ↩
54 Id., para. 2.19. ↩
[Page 18]
indicates its understanding from the Claimant that no costs have been double-counted in Ms. Brandão's analysis.55
88. In response to FTI’s comments, Accuracy reiterates the seven issues that it had identified in Ms. Brandão's Third Witness Statement, namely:
a) The absolute lack of supporting documentation, even for basic items such as employees hourly costs;
b) The admitted impossibility to identify the actual costs incurred at the Claimant's level;
c) The inexplicably high hourly rates used Ms. Brandão's, which result in costs of, for instance, €32,000 per month for a manager;
d) The errors in the worked hours, which result in employees working more hours than available in a year;
e) The inclusion of costs from Carlos Cardoso and Jose Pereira da Cunha which were admittedly not charged to the Claimant, and thus cannot be included in costs in this arbitration;
f) The fact that Ms. Brandão's statements lead to an obvious contradiction: Valsolar was able to pass on the costs associated with abandoned projects but not for successful projects; and
g) The fact that Valsolar's investment costs is not based on a third-party cost estimate (Acción Solar), but on a Valsolar own cost estimate.56
89. According to Accuracy, FTI has addressed most of these issues, sometimes accepting Accuracy's conclusions and in other instances “vaguely counter arguing them, but never providing any factual evidence that would justify the cost increase.”57
55 Id., paras. 2.17(4), 2.20. ↩
56 Accuracy's response to FTI's submission of 28 September 2021, 26 October 2021 (“Accuracy's Response"), para. 3 (emphasis in original). ↩
57 Id., para. 4. ↩
[Page 19]
90. FTI claims that the difference between standard costs and actual investment costs are due to unrecorded development costs contradict Mr. Edwards' and the Claimant's statements during the proceedings.58 Mr. Edwards' Second Report argues that the difference is due to "efficiencies."59
91. Accuracy says further that "[i]t is only now,” six months after the Decision on Jurisdiction and Liability that the Claimant is raising the idea of “relevant costs” that “are not found in the accounts of the project company at all, because the costs were incurred by the parent companies."60 Since the investment base is one of the key drivers of the quantification of damages, this explains why the alleged "construction savings” and “efficiencies” are now qualified by the Claimant as “unrecorded development.” This is because a higher investment base would signify higher damages. Accuracy expresses a concern whether "other data or information provided by Claimant to its expert was not reliable.”61
92. Mr. Edwards' statements regarding the difference between the actual investment costs and the Standard investment costs have been contradictory. Accuracy recalls that, during the hearings, Mr. Edwards stated that the construction savings were “reasonable 'because they were able to build their plants, using their engineering know-how, materially cheaper than the subsequently determined efficient build cost.”62
93. In relation to record-keeping, Accuracy contends that Mr. Edwards ignores accounting standards and tax obligations that “clearly establish” the obligation to allocate and correctly record revenues and costs in the SPVs, making the lack of such requirements under RD 661/2007 1578/2008 “irrelevant.”63 The size of the Claimant “is not an excuse to fail to comply with tax and accounting obligations” and, since the Claimant is an audited entity, Accuracy finds it “unlikely” that an auditor would not have raised any kind of qualification in their report, if the unrecorded development costs existed.64
58 Id., para. 5. ↩
59 Id., para. 6. ↩
60 Id., para. 7. ↩
61 Id., para. 8. ↩
62 Id., paras. 10-11, citing FTI' Comments, paras. 1.2, 1.4. ↩
63 Accuracy's Response, para. 13. ↩
64 Ibid. ↩
[Page 20]
94. Accuracy further contends that Mr. Edwards ignores the statement made by his colleagues Dr. Moselle and Dr. Grunwald regarding the importance of calculating the internal rate of return in any investment. But this is necessary for purposes of assessing accurately the investment amount since it is the key input in the formula. For that reason, it is nonsensical for Mr. Edwards to affirm that the Claimant would have invested without (a) accurately assessing the investment amount, and (b) calculating the internal rate of return of the project.65
95. It is unconvincing for Mr. Edwards to assert that time-reporting is only required when the time must be justified to someone else, which he understands was not the case, since the Claimant conducted monthly meetings with Valsolar.66 The Claimant worked in many projects with different investment partners, making these monthly meetings with Valsolar not sufficient for the Claimant to be able to control internally the amount of time spent by its staff in each project.67
96. Concerning the arithmetical errors in Ms. Brandão's estimates, Accuracy notes that Mr. Edwards accepts a 64% overestimation (i.e., €1,957,350 in excess), as raised by Accuracy.68
97. As far as the disagreement regarding the hourly rates is concerned, there is no documentation attached to Mr. Edwards' memorandum, nor have any invoices been provided to Accuracy. Additionally, the fact that other projects have similar hourly rates does not validate Ms. Brandão's assumptions since the staff involved, services rendered, projects and time may be completely different, and therefore the projects are not comparable,69 making the hourly rates used in Ms. Brandão's estimates "unsupported, unfounded and unreasonably high."70 Ms. Brandão's estimate of the amount of time incurred by personnel is “overestimated, unsupported, and results in overstated costs.”71
65 Id., para. 17. ↩
66 Id., para. 18. ↩
67 Id., para. 19. ↩
68 Id., para. 22. ↩
69 Id., para. 26. ↩
70 Id., para. 27. ↩
71 Id., para. 33. ↩
[Page 21]
98. Regarding the alleged services rendered by the Claimant's shareholders charged neither to the Plants nor to the Claimant, Accuracy reiterates its previous conclusions contained in its Memorandum stating that, according to the Claimant's annual accounts, which were audited, in 2007 and 2008 there was no activity held between the Claimant and its management, making Ms. Brandão's statement contradictory. Further, if the company's shareholders decided not to charge their contributions, then these did not form part of the costs to the Claimant nor to the Plants, and therefore, could not be considered as part of the Claimant's investment costs.72
99. As regards the abandoned projects, FTI's statements that the costs of the abandoned projects were included in the amounts paid to third parties, but that the personnel contributions were not, are unsupported and contradict Ms. Brandão's First Witness Statement that the abandoned projects were already developed and ready to build and her Second Witness Statement that all the investment costs, including the Claimant and Valsolar, had been invoiced to the SPVs.73
100. Concerning Valsolar's costs estimates, Ms. Brandão recognised the fact that she was not provided with any documentation that could allow her to estimate Valsolar's contributions and therefore could not provide any evidence to the Tribunal regarding the time and money Valsolar spent on project development, nor does FTI include any additional supporting evidence, but rather bases its argumentation on Mr. Edwards” “understanding” and Ms. Brandão's experience in developing the plants in question.74
101. The only source on which Ms. Brandão based her analysis is an alleged independent proposal prepared by Acción Solar. This methodology would be potentially acceptable had this proposal really been independent, but Acción Solar was not an EPC contractor but was hired by the Claimant to search for investment opportunities in Spain in 2007. In that capacity Acción Solar identified Valsolar-developed plants and communicated these costs
72 Id., para. 34. ↩
73 Id., paras. 38-39. ↩
74 Id., para. 41. ↩
[Page 22]
to the Claimant. Therefore, the alleged benchmark is “a comparison between Valsolar actual and Valsolar budget, and not a comparison with a third party."75
102. Mr. Edwards ignores this point in his statement that the Claimant had no reason to consider that Acción Solar's estimates were biased since, according to Accuracy, there are no third-party costs.76 Since Ms. Brandão assumed that Valsolar's contributions were similar in value to those of the Claimant, and since Mr. Edwards has accepted that the Claimant's alleged contributions are overestimated by €1.9 million due to arithmetical errors, “it follows that Valsolar's alleged contributions estimated by Ms Brandão are also equally overestimated."77
103. In response to FTI's statement that it does not have sufficient information to comment on the double-counting of licensing costs, Accuracy maintains that, in the absence of any evidence from Ms. Brandão and Mr. Edwards proving the contrary, “Ms. Brandão's estimate of the alleged Valsolar's cost contributions is double counting the licensing of the projects, already recorded in the investment costs of the Plants.”78
104. Pursuant to the Tribunal's instructions of 31 August 2020,79 the Parties submitted the Joint Memorandum accompanied by the Joint Model. In the Joint Memorandum, the Parties' experts indicated areas of agreement and disagreement, and set out their arguments regarding the following matters:
(A) Post-tax reasonable rate of return (“RRR”) based on WACC as at 30 June 2014;
(B) Post-tax actual returns (“IRR”) for the Claimant's plants;
(C) To the extent that (B) falls short of (A), the compensation which would be due from Spain to the Claimant; and
(D) Losses on the abandoned projects.
75 Id., paras. 43-44. ↩
76 Id., para. 45. ↩
77 Id., para. 46. ↩
78 Ibid. ↩
79 Decision on Jurisdiction, Liability and Directions on Quantum, 31 August 2020 ("Decision on Jurisdiction and Liability"), para. 706. ↩
[Page 23]
105. FTI and Accuracy agree that the post-tax RRR based on WACC should be calculated as at 30 June 2014. However, they differ on two issues: (1) the post-tax WACC figure as at that date; and (2) the premium to be applied over WACC, if any.
106. FTI considers that a 6% post-tax WACC should be used as the basis of calculation of the post-tax RRR as of 30 June 2014.80 FTI comes to this figure using its initial 5.3% WACC estimation and adding a 0.7% risk premium to the post-tax WACC to reflect the alleged increased level of risk that the New Regulatory Regime entails.81
107. Initially, Accuracy had calculated an overall post-tax WACC of 5.8%. In the Joint Memorandum, Accuracy states that it would be agreeable to using the 5.5% post-tax WACC figure relied upon by FTI in one of Mr. Edwards' early reports, but with no added risk premium. Accuracy contends that there is no lack of predictability in the counterfactual scenario that can justify adding such a premium and notes that FTI did not follow the same rationale in its RRR damages calculations. Accuracy also takes issue with the references used by FTI to add a 0.7% risk premium, which Accuracy considers irrelevant for the purposes of calculating the base WACC in this case.82
108. In FTI's opinion, a premium should be added to the WACC for the purposes of calculating the post-tax RRR. This is needed to reflect the scope for investors to create value by earning returns above the cost of capital. Referencing a CNE study and Dr. Moselle and Dr. Grunwald' calculations, FTI's proposes adding a 1.8% premium, which it says is in line with the premium embedded in RD 661/2007 and RD 1578/2008 over the 7.0% benchmark.83
80 Joint Memorandum of Mr. Richard Edwards, Mr. Eduard Saura, Mr. Christophe Schmit, and Mr. Stephane Perrotto Matters in relation to the Tribunal's directions on quantum, 29 April 2021 (“Joint Memorandum"), p. 5, para. A. ↩
81 Id., pp. 13-14, Opinion of Mr. Edwards. ↩
82 Id., pp. 13-14, Opinion of Mr. Saura, Mr. Schmit and Mr. Perrotto. ↩
83 Id., pp. 16-18, Opinion of Mr. Edwards. ↩
[Page 24]
109. Accuracy considers that a lower premium of 1% may be added to remunerate efficiencies, but only to the extent that the Claimant's actual costs are taken into account; otherwise, Accuracy alleges that it would not be justified. Consequently, Accuracy rejects FTI's proposal to add a 1.8% premium. Moreover, Accuracy considers that an “embedded" premium runs contrary to the Tribunal's findings on liability, which found that the Claimant did not have a vested right to the level of incentives under RD 661/2007 and RD 1578/2008.84
110. Even if a premium is added, Accuracy says, it could only apply to investments prior to 2007 and, in any case, not to plants built under RD 1578/2008, which provided for lower tariffs. Accuracy also refutes FTI's contention that RD 661/2007 and 1578/2008 allowed for a premium, underscoring that cost of capital over WACC was a sufficient incentive in itself for investors. Accuracy points out that a 1.8% premium is a self-serving estimation based on FTI's own views rather than a CNE calculation.85
111. The experts agree that the IRRs for the Claimant's plants should be assessed individually for each plant (and not on an aggregate basis) based on an operating life of 30 years. The experts also agree on the historical and forecast cash flows of the Claimant's plants, excluding the calculation of investment remuneration in future periods.86
112. They disagree, however, on: (1) the methodology of calculating the post-tax IRRs for the Claimant's plants; (2) the type of investment cost that one should use (i.e., whether actual or standard); (3) the measure of actual investment costs; (4) the approach to calculating investment costs at 30 June 2014; (5) the relevant cash flows (i.e., whether those flowing from the standard plants or the actual plants); and (6) the approach to calculating investment remuneration in future periods.
84 Id., p. 17. ↩
85 Id., pp. 17-18, Opinion of Mr. Saura, Mr. Shmit and Mr. Perrotto. ↩
86 Id., p. 20, Section B. ↩
[Page 25]
113. On the first issue, FTI maintains that “when considering whether project returns are reasonable by reference to a cost of capital (or WACC) calculated on a given date [here, 30 June 2014], only returns after that date should be considered.”87 In its view, a similar approach is also used by Spain when it resets the RRR in the current regulatory regime. Otherwise, it says, any returns that had been earned in years prior to this date would be “in some sense ‘excess returns' and would count against the Claimant as they would lift the calculated IRR and lower any assessment of loss."88 This is therefore "conceptually equivalent to the claw-back mechanism.”89
114. Alternatively, FTI says that, if the Claimant's returns prior to June 2014 are to be considered, the IRR should be calculated on the investment date (i.e., 2007-2008) and compared to a RRR based on the cost of capital at the time of the investment.90 This rate, FTI contends, should be 8.8% as noted above (i.e., 7% + 1.8%).
115. Finally, FTI criticises Spain's reading of the Tribunal's Decision on Jurisdiction and Liability on the claw-back effects. In its view, Accuracy's approach is not accurate, as it would find no compensation due despite there being losses suffered by the Claimant.91
116. Accuracy disagrees with FTI on what the actual IRR as of 30 June 2014 implies. In Accuracy's view, the calculation of an IRR entails “the original Actual investment, the past Actual cash-flows until the valuation date and the projection of the estimated Actual cash-flows from there onwards considering the new regulatory regime."92
117. First, Accuracy argues that any other calculation would mean a shift from the initial assessment submitted by FTI in this arbitration. Second, Accuracy maintains that it is perfectly correct to compare the Actual IRR of the plants considering the original investment and past cash-flows with a RRR set at a later point in time (i.e., 30 June 2014).
87 Id., pp. 20-21, Opinion of Mr. Edwards (emphasis omitted). ↩
88 Joint Memorandum, p. 23, Opinion of Mr. Edwards. ↩
89 Ibid. ↩
90 Id., pp. 22-23, Opinion of Mr. Edwards. ↩
91 Id., p. 25, Opinion of Mr. Edwards. ↩
92 Id., p. 21, Opinion of Mr. Saura, Mr. Schmit and Mr. Perrotto. ↩
[Page 26]
Third, Accuracy points out that the Tribunal decided that the claw-back effects should be excluded "in determining the but-for IRR,”93 not the actual IRR as FTI now seeks to do. Fourth, Accuracy rejects FTI's attempt to distinguish the calculation ordered by the Tribunal from FTI’s alternative calculation of damages. Accuracy contends that there is not much difference other than that the target return ordered by the Tribunal must be calculated based on a WACC as of June 2014, and not based on an 8% or 7% return.
118. If the Tribunal were to consider the Claimant's returns prior to June 2014 to calculate the Actual IRR of the plants, FTI restates its position on the RRR, namely that the Tribunal should compare the actual IRR based on investment costs at the date of investment with an RRR based on the cost of capital also at the time of the investment (i.e., 2007-2008).94 As noted above, FTI estimates this RRR at 8.8% (i.e., 7% + 1.8%).
119. Accuracy agrees that the actual IRR should be calculated based on investment costs at the date of investment but rejects FTI's estimation of the RRR at 8.8%. As noted above, Accuracy's position is that the RRR should be set at 5.5% as the midpoint between FTI’s original 5.3% and Accuracy's initial 5.8%, but it would accept an efficiency premium of 1% if actual plant construction costs are taken into account.
120. FTI considers that the appropriate investment cost should be the investment costs of the standard facilities corresponding to each of the Claimant's plants and not the actual investment costs. In its view, calculations based on the actual build cost would favour inefficient developers, while efficient developers such as the Claimant would be “less likely to be deemed to have suffered a loss as a result of the Regulatory Changes."95
121. FTI also opposes the proposal of Accuracy to add a premium to the RRR only in the situation of actual investment costs. In FIT's opinion, unless the RRR as at 30 June 2014
93 Decision on Jurisdiction and Liability, paras. 657(12) and 685. ↩
94 Joint Memorandum, pp. 22-23, Opinion of Mr. Edwards. ↩
95 Id., p. 27, Opinion of Mr. Edwards. ↩
[Page 27]
is uniformly applied to all PV plants, it loses its purpose. This way, the incentive component of the allowed returns for efficient developers would be reinforced.96
122. Accuracy objects to the use of standard investment costs, arguing that the Tribunal directed the Parties to calculate the actual costs of each plant. In addition, Accuracy contends that FTI proposes an approach that would result in an artificial expansion of damages. Responding to FTI's remarks about losses and efficient developers, Accuracy notes that they have offered to accept a premium to account for efficiency when calculating investment costs under the counterfactual scenario.
123. If the Tribunal were to use the actual investment costs of the Claimant's Plants instead of the standard costs, FTI asserts that the correct figure should be the updated costs of €97.3 million quantified by Ms. Brandão. This sum reflects the additional development costs of the Claimant and Valsolar's “in-house” contributions, as illustrated by Ms. Brandão's statements.97
124. Accuracy objects to the additional costs, elaborating its position further in its Addendum, which is summarised below.98 It contends that the actual investment costs recorded in the audited financial statements and used during the proceedings by both experts are €88.1 million. This is the figure that, Accuracy says, “must be used in (i) assessing Plants' IRR and (ii) in calculating the But-For scenario."99
125. FTI reiterates its position that the Actual IRR calculation date should be the same as the one of the RRR.100 This means that if the RRR is to be assessed at 30 June 2014, the IRRs of the plants should also be assessed on that date using cash flows after June 2014 only. This involves an assessment of the investment costs on that date.
96 Id., p. 27, Opinion of Mr. Edwards. ↩
97 In reference to CWS-MHB3 and CWS-MHB4. ↩
98 See Section IV below. ↩
99 Joint Memorandum, p. 29, Opinion of Mr. Saura, Mr. Schmit and Mr. Perrotto. ↩
100 Id., p. 32, Opinion of Mr. Edwards. ↩
[Page 28]
126. FTI considers that it is possible to calculate the investment costs as at 30 June 2014 based on the formula set out in the new RD 413/2014, and to remove the effect of the claw-back by assuming a different rate of return over the period from the date of investment to 30 June 2014. FTI considers that the appropriate rate of return for that period should be the pre-tax IRR implicit in the RD 661 and RD 1578, amended to include the effects of the measures considered lawful by the Tribunal (i.e., the temporary and permanent caps, the 7% tax, and the access toll).
127. FTI further observes that "[b]ecause the 7.398% pre-tax rate is lower than the actual returns of the plants during the period to 30 June 2014, using it would depress the adjusted investment cost (or asset base) as at 30 June 2014. This works against the Claimant in two ways. First, it lifts the calculated IRR as at 30 June 2014, making a determination of loss less likely. Second, it reduces the level of counterfactual cash flows after 30 June 2014 required to meet the RRR. This would result in a lower counterfactual valuation and therefore a lower damages calculation.”101
128. By contrast, Accuracy proposes what it calls a "straight-forward approach,"102 which consists of a "combination of (i) actual investment costs and (ii) actual operating cash-flows (past and expected) over their entire lifetime (30 years according to Tribunal's Decision)."103
129. Accuracy says that this is the approach that both Parties' experts followed during the merits phase of the arbitration to calculate the plants' IRRs, and there is no reason to depart from it now. The claw-back of the new regime should be removed from the But-for IRR to neutralise its effects, and that is what Accuracy has done by not off-setting past earnings against prospective damages,104 but this has nothing to do with the assessment of the IRR of the Claimant's plants under the Actual scenario.
130. If the Tribunal adopts FTI's IRR calculation methodology, Accuracy submits that (a) the net asset value of the Claimant's investment should be calculated using the new regime's
101 Id., p. 36, Opinion of Mr. Edwards. ↩
102 Id., p. 31, Opinion of Mr. Saura, Mr. Schmit and Mr. Perrotto. ↩
103 Id., p. 31, Opinion of Mr. Saura, Mr. Schmit and Mr. Perrotto. ↩
104 Id., pp. 10, 51. ↩
[Page 29]
target rate of return (i.e., 7.398% pre-tax) to capitalise returns105 and not the rate of return that FTI considers to be implicit in the RD 661/2007 (i.e., 7.8% after tax); and (b) FTI’s approach would otherwise lead to the untenable result that the net value of the plants as of June 2014 (i.e., about 7 years after starting operations) is higher than the initial investment value (i.e., €88.1 million vs €88.7 million) as if the plants had made no profits in all these years. Accuracy claims that its proposed correction results in a more realistic estimation of the Claimant's net asset value as of June 2014 (i.e., €68.7 million).106
131. FTI considers that the appropriate cash flows should be the ones of the corresponding standard facilities.107 Consistent with this approach on investment costs, FTI argues that using actual operating costs penalises the most efficient developers.
132. Accuracy maintains that, just as the investment costs should be based on real costs, the Actual IRR should likewise be calculated on the basis of real cash flows.108
133. FTI believes that the investment remuneration rate used to calculate the investment remuneration in future regulatory periods should be modelled to reflect expected changes in the yields on Spanish bonds. The new regulation provides for the investment remuneration rate to be adjusted in subsequent regulatory periods based on the average yield on 10-year Spanish government bonds over the two-year period prior to each readjustment. As at 30 June 2014, bond yields were significantly lower than the historical 10-year average. Consequently, investors would have expected the remuneration rate to be adjusted downwards from 2020.
134. Accuracy submits that a fixed remuneration rate should be used. First, it argues that predicting the evolution of the Spanish bond yield for the next twenty years is impossible.
105 Id., p. 51, Opinion of Mr. Saura, Mr. Schmit and Mr. Perrotto ("If the Tribunal adopted FTI's methodology in calculating the Plants' IRR, the correct capitalisation rate must be 7.398%, as used by RD 413/2014 NAV calculation. Otherwise, the result will not reflect the Plants' IRR under the Actual scenario."). ↩
106 Id., Opinion of Mr. Saura, Mr. Schmit and Mr. Perrotto, pp. 34-35. ↩
107 Id., p. 38, Opinion of Mr. Edwards. ↩
108 Id., p. 38, Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto. ↩
[Page 30]
Second, it states that FTI was proven wrong: “[i]n the second regulatory period, Spain did not pass on the reduction in interest rates to the remuneration of the Plants.”109 Third, it rejects FTI's unsupported assumption that an investor would necessarily have expected remuneration to be adjusted. Fourth, it claims that FTI wrongly assumes that the regulator would have maintained the spread above the Spanish bond (300bps) despite the alleged decrease of the Spanish bond. Fifth, it submits that by including a 0.5% in the rate of return, Accuracy is contemplating a risk of a review of the remuneration rate.
135. To the extent that the post-tax IRR of a plant is lower than the RRR, the Parties' experts agree that the compensation due to the Claimant should be calculated as the latter's share on the (i) present value of the cash flows in the counterfactual (or But-For) position on 30 June 2014; less (ii) the present value of the cash flows in the actual position on 30 June 2014.110
136. In addition, the experts agree that: “the cash flows in the counterfactual position should be calculated as the cash flows that yield a rate of return equal to the RRR on the investment cost over the period from: (i) 30 June 2014 to the end of the plant's operating life to the extent that the IRRs are calculated according to FTI's approach; or (ii) the date of investment to the end of the plant's operating life to the extent that the IRRs are calculated according to Accuracy's approach.” They further agree that the cash flows in both actual position and those used to calculate the IRRs of the plants should be the same, with the assumption of a 30-year life for the purposes of calculations.111
137. However, the experts disagree as regards (1) the approach to calculating the compensation which would be due from Spain to the Claimant; (2) the appropriate cost of capital to be used to discount cash flows in the actual position; and (3) the appropriate cost of capital to be used to discount cash flows in the counterfactual position.
109 Id., p. 39, Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto (emphasis omitted). ↩
110 Id., p. 42, Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto. ↩
111 Id., p. 42, Areas of agreement. ↩
[Page 31]
138. According to FTI, should the Tribunal consider that the IRR must be calculated based on the cash flows over the entire life of a project, then, for the reasons set out in sections B(1) and B(4) above, such IRR should be compared to the RRR based on the WACC as at the investment date (i.e., 2007-2008). If the IRR of a plant falls short of the RRR, then damages should be assessed as noted in section [B(4)] above – based on the net present value of cash flows from 1 July 2014 onwards.
139. Accuracy submits that one should compare the RRR based on WACC and the Actual IRRS of the plants, both as at 30 June 2014. This gives the fair market value of the plants in the counterfactual (RRR) scenario and the fair market value in the Actual scenario. A plant would be eligible for damages if the latter is lower than the former. They further state that using the RRR at the date of the investment would be contrary to the Tribunal's Decision on Jurisdiction and Liability (at paragraph 706) and the agreement of the experts. Accuracy argues that “since the RRR constitutes Claimant's legitimate expectation, and in order to ensure that the But for scenario offers this RRR to the Claimant, the capitalisation rate of past cash flows must be the RRR.”112
140. According to FTI, the cost of capital used to discount cash flows in the actual position should be 12% to reflect the increased risk existing as at 30 June 2014. To estimate that rate, FTI contends that one should rely on rates of return being used by investors in Spanish PV plants on the date of assessment, an offer Claimant received in November 2014 and Mr. Kirkpatrick's expert report.
141. If, however, the Tribunal finds that market conditions as at 30 June 2014 should not be reflected in an assessment of the actual value of the investments, FTI agrees that a cost of capital of 6.0% (the same as the cost of capital in the counterfactual position) should be used to discount cash flows in the actual position.113
112 Id., p. 55, Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto. ↩
113 Id., pp. 46-47, Opinion of Mr. Edwards. ↩
[Page 32]
142. Accuracy says that the discount rate in the actual position should be 5.5%. This is the same as their WACC figure as of 30 June 2014, although they agree that a 0.5% regulatory risk premium should be added to reflect a residual risk in the current framework. They otherwise reject FTI's position, which they considered to be based on “an ad-hoc report prepared by a colleague of the restructuring department of FTI, Mr Kirkpatrick."114 In their view, “[u]sing a 12% discount simply seeks to reduce the value of the Actual scenario artificially, thereby increasing damages."115
143. FTI considers that the cost of capital used to discount the cash flows in the counterfactual position should be the same as the WACC, i.e., 5.3% plus 0.7% equal 6.0%. FTI claims that it would be incorrect to include an additional 1.8% premium in the cost of capital used to discount the cashflows of the Claimant's plants simply because the RRR is being applied to investment costs based on standard facilities. To do so “would lead to a cost of capital that is too high, and that is no longer reflective of the risks associated with the with the cash flows it is used to discount.”116
144. Accuracy submits that, if the Tribunal selects actual investment costs (€88.1 million), or standard investment costs with no premium over the WACC as RRR, the discount rate in the But-For scenario should be 5.5%. But Accuracy accepts that a regulatory risk premium can be added in case any other combination is chosen, bringing the discount rate to 6.0%.117
145. The Parties' experts disagree on the Claimant's entitlement to compensation for the abandoned projects.
114 Id., p. 45, Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto (emphasis omitted). ↩
115 Id., p. 46, Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto. ↩
116 Id., p. 50, Opinion of Mr. Edwards. ↩
117 Id., pp. 46-47. ↩
[Page 33]
146. FTI contends that to the extent that the Tribunal finds that the Clamant has suffered loss, the loss on the abandoned projects should also be accounted for in damages to a total of €1.8 million, including the €600,000 owed to Valsolar.118
147. According to Accuracy, the Claimant may only claim for what it has spent, which in their view is limited to €1.2 million. Further, Accuracy states that it would be unreasonable for the Claimant to receive 100% of this amount where not all its plants are found to fall short of a RRR. Thus, Accuracy proposes an approach on allocation based on “the specific weight in installed capacity (MW) of the eligible plants in damages over the total portfolio,"119 which reduces damages accordingly.
148. FTI concludes that the compensation due from Spain to the Claimant is €41.2 million, assuming a 12% discount rate in the actual position and €23.0 million assuming the same 6% discount rate is applied in both scenarios.
149. By contrast, Accuracy concludes that only two plants, i.e., Riosalido and La Roda, fall short of a RRR. Accordingly, the compensation due to the Claimant is €4 million, plus €0.3 million for the abandoned projects.
150. In its submission of 24 September 2021 on the breach of the stability obligation, the Claimant argues that its losses on the abandoned projects flow directly from that breach.
151. The Claimant contends that the ECT contains no lex specialis regarding the appropriate remedy for a breach of the stability obligation, and thus this issue is governed by general principles of compensation under customary international law.120 Citing Chorzów Factory and Amoco v. Iran, it argues that customary international law establishes the remedy as a
118 Id., p. 58. ↩
119 Id., p. 58, Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto. ↩
120 Claimant's Submission in Response to Tribunal Instructions Dated August 10, 2021, 24 September 2021 ("Claimant's Submission"), paras. 2-3. ↩
[Page 34]
restitution in kind if possible, and if not, compensation for damages incurred to wipe out the financial consequences of the breach.121
152. According to the Claimant, Spain's breach of the obligation of stability cannot be remedied through an “in kind” restitution for multiple reasons.
153. First, Spain has the right to establish its own regulatory framework, subject to the obligation to pay compensation if its framework violates the rights of investors.
154. Second, no institutional authority exists outside Spain that could enforce an award obliging Spain to nullify the 2012 moratorium on new renewable energy projects which forced the Claimant to abandon the Fotovoltaica Lobon, Solar Lobon, and Solar de Botoa projects. Such an award could only be enforced by Spanish courts, and even so, according to the Claimant, it is unclear whether domestic courts could force the Spanish government to admit new projects into the remuneration framework, whereas an award of monetary damages is enforceable in any country member of the ICSID Convention and, according to the Claimant, “is a primary reason why investment treaty tribunals almost exclusively grant monetary damages in lieu of restitutionary relief.”122
155. Third, the Claimant notes that even if the Tribunal's award could force Spain to admit new projects into the remuneration framework, the Claimant would have to develop “wholly new projects from the ground up” based on an “entirely different cost basis,” which would raise difficult questions about the fair compensation of these projects once enrolled in the remuneration framework.123
156. There is limited precedent available regarding whether damages are an appropriate remedy for breach of the stability obligation as ECT awards which have concluded that stability is a stand-alone obligation in the ECT have further found that Spain has breached other obligations and thus do not explicitly address this issue. However, the Claimant contends that it is not aware of any case law indicating that damages are not an appropriate remedy nor any other provision in the ECT or in customary international law indicating that such
121 Id., paras. 3-4. ↩
122 Id., paras. 5-6. ↩
123 Id., para. 7. ↩
[Page 35]
a breach should be subject to an alternative remedy analysis, while, according to the Claimant, there is “a plethora of authority indicating that 'full compensation' is the appropriate standard for any breach of any provision of an investment treaty.”124
157. Finally, regarding the Claimant's sunk costs on the abandoned projects, the Claimant, citing Ms. Brandão's First Witness Statement, concludes that the three projects would have very likely been completed in 2012, at which point they would have enrolled in the Special Regime pursuant to RD 1578/2008 and would be able to recover their investment costs either through the tariffs set out in RD 1578/2008 (as the Claimant contends) or through sufficient remuneration to provide a reasonable return on investment costs (as Spain and the Tribunal argue). At any rate, according to the Claimant, Spain's breach of the obligation of stability precluded the Claimant from recovering investment costs and losses incurred due to that breach.125
158. In its Comments on Stability presented on 22 October 2021, Spain maintains that the breach of the obligation of stability does not give rise to compensation for damages.
159. First, Spain argues that the since the stability provision is also part of the FET standard, only a compensation for damages derived from a breach of the FET standard, if any, would be appropriate.126 No additional remedy would be appropriate, according to Spain, as the damages awarded for a breach of the FET obligation, if any, would already take into consideration the remuneration received under the previous and current regime after a claw-back effect.127
160. Spain agrees with the Claimant that, in the absence of a lex specialis on the appropriate remedy for breaches of Article 10(1) of the ECT, customary international applies. It further recognises that the principle of full reparation is a well-established principle of international law, which includes restitution in kind, if possible, and if not, compensation
124 Id., para. 8. ↩
125 Id., para. 9. ↩
126 Respondent's Comments on Stability, 22 October 2021, paras. 4-5. ↩
127 Id., para. 7. ↩
[Page 36]
for damages incurred. However, Spain contends that this principle “must not mean that Claimant is put in in a better-off position or over-compensated."128
161. Second, Spain argues that past remuneration granted to the Claimant's Plants under the previous regime had been taken into account under the new regime and, thus, the claw-back effect caused no damages to the Claimant since the regulatory framework in place at the time of its investment offered a reasonable rate of return throughout the useful life of the plants.129 Specifically, Spain submits that the claw-back effect implied that, in order to achieve a reasonable rate of return, the remuneration under the new regulatory framework would be slightly lower, which was beneficial for the Claimant's plants because “from a financial standpoint, it is always better to receive amounts sooner rather than later in time."130
162. Third, Spain notes that damages could only arise should Spain fail to provide a reasonable rate of return to the Claimant's plants throughout their useful life, while the order of cash flows received from Spain to achieve this is irrelevant. Thus, the fact that the Claimant's plants received higher cash flows at the beginning of their useful life does not only cause no damage, according to Spain, but it is also financially more beneficial for the Claimant.
163. Regarding the losses incurred on the abandoned projects, Spain concludes that these do not flow from the breach of the obligation of stability as abandoning them “was a business decision within the sphere of free will of the Claimant who in execution of their investment project made such a decision."131 Such a decision, according to Spain, has nothing to do with subsidy distribution over time in order for the plants to reach a reasonable rate of return.
128 Id., paras. 8-9. ↩
129 Id., paras. 10-12. ↩
130 Id., para. 13. ↩
131 Id., paras. 16-17. ↩
[Page 37]
164. In its submission of 24 September 2021, the Claimant argues that, in the absence of a lex specialis in the ECT regarding the appropriate interest rate applicable to damages awarded to compensate for treaty violations, the issue is governed by general principles of compensation under customary international law, which establish full compensation as the compensatory standard for such violations and includes the award of interest as an integral part of the compensation itself.132
165. According to the Claimant, the purpose of the interest is compensatory, it should reflect the value of the injury it is compensating. As such, the best measure of the Claimant's opportunity cost associated with its inability to use the funds that are subject of the principal amount of the award is its cost of capital (i.e., WACC), which represents the Claimant's expected return on investment in the sector in which it operates, adjusted for risk and is equal, according to Mr. Edwards, to 5.3%.133
166. The Claimant criticises Spain's view that the interest should be awarded at a risk-free rate, arguing that first, “a risk-free rate does not accurately reflect Claimant's opportunity cost because Claimant is in the business of developing and operating PV plants, not investing in risk-free government bonds”134 and that its opportunity cost is associated with its inability to deploy its funds for profit in its business, not merely to reinvest them in risk-free government bonds. Although the Claimant recognises that re-investment opportunities are not risk-free and are thus not guaranteed to be successful, it also argues that its returns on such opportunities may exceed its cost of capital if the risks of investment resolve in Claimant's favour. According to the Claimant, its cost of capital represents a generic expected return on investment which takes into account possible variations due to risk.135
132 Claimant’s Submission, para. 11. ↩
133 Id., para. 12. ↩
134 Id., para. 13. ↩
135 Ibid. ↩
[Page 38]
167. Second, the Claimant argues that most of the damages it claims concern cash flows that the Claimant’s projects would have earned but for Spain’s illegal measures. These future cash flows are discounted to present value as of the Date of Assessment and, thus, their nominal value is higher than the damages that the Claimant seeks. As such, an award of interest “serves to replicate the amount of damages that Claimant would receive if the future cash flows had been discounted to the date on which an award is ultimately paid rather than the Date of Assessment in Mr. Edwards’ DCF valuation.”136
168. The appropriate interest rate to be applied is within the Tribunal’s broad discretion on issues of quantum and references several ECT cases on record where the tribunals have awarded interest at a rate between a risk-free rate and the Claimant’s cost of capital.137
169. Regarding the post-award interest rate, the Claimant requests the Tribunal to apply an interest rate higher than the pre-award premium so as to incentivise prompt payment of the Award.138
170. The overwhelming majority practice in investor-state jurisprudence includes compounding the rate of interest awarded as a “the most accepted and appropriate method of making a claimant whole in compliance with the full compensation standard under customary international law.”139
171. According to the Claimant, Compañia del Desarrollo de Santa Elena v. Costa Rica shows that compound interest serves two distinct goals: (i) to ensure that the claimant receives “the full present value of the compensation that it should have received at the time of the taking,” and (ii) to prevent “the State [from being] unjustly…enrich[ed]…by reason of the fact that the payment of compensation has been long delayed.”140 Wena Hotels v. Egypt, Middle East Cement v. Egypt and Siag and Vecchi v. Egypt show that compound interest is the most common and appropriate standard of international law, including, according to
136 Id. para. 14. ↩
137 See id., para. 15. ↩
138 Id., para. 16. ↩
139 Id., para. 17. ↩
140 Id., para. 18. ↩
[Page 39]
the Claimant, nearly every tribunal which has awarded damages in an ECT case involving renewable energy assets141.
172. As relates to the starting date, the Claimant argues that because interest is designed to compensate for loss of opportunity to use funds, interest should run from the date that the injured party would have received the funds but for the State’s breach, which, according to the Claimant, is the Date of Assessment used in Mr. Edwards’ quantum valuation (i.e., 30 June 2014) because: (i) Spain’s measures reduced the cash flows that the plants would have received over a lengthy period of time, losses as of the Date of Assessment were calculated by discounting future losses to that date; and (ii) this approach simulates the amount of compensation that Spain would have to pay to the Claimant on the Date of Assessment to fully compensate the Claimant for the harm cause to its operating plants in the future.142
173. The same approach does not apply to the abandoned project since FTI did not calculate damages for those projects as of the Date of Assessment, but rather, the Claimant argues, considers the €1.8 million is the amount of sunk costs which the Claimant incurred when it was forced to cancel those projects as a result of Spain’s measure, without discounting for the time value of money in either direction. These projects were abandoned as “a direct result” of Spain’s updated regime enacted on 27 January 2012. Accordingly, the appropriate date to commence interest on damages related to the abandoned projects is the Date of Assessment, i.e., 27 January 2012, since that is the date when Spain should have compensated the Claimant for stranded costs incurred as a result of the moratorium.143
174. In its Submission of 24 September 2021, Spain maintains that the appropriate rate should be the yield of Spanish Government bonds.
175. Citing Accuracy, Spain argues that the object of the interest is to compensate the Claimant for the delay between the date of assessment of damage and the payment of the Award, thus compensating the Claimant for the risk of default which is associated with the
141 Id., paras. 18-20. ↩
142 Id., para. 21. ↩
143 Id., para. 22. ↩
[Page 40]
borrowing rate of Spain. Similarly, post-award interest aims at bringing the compensation established as of the date of the award to the date of payment.144
176. Accuracy and FTI are in agreement regarding the principle of bringing the compensation until the payment date of the award, but Spain cannot assess whether there is agreement between the experts on the interest rates to be used, as FTI did not propose a method of calculating pre- or post-award interest.145
177. According to Spain, the Tribunal has to decide on three items: (i) the reference debt instrument; (ii) the maturity of the instrument; and (iii) whether interest should be simple or compound.146
178. The unsecured borrowing rate should be used since Spain is a sovereign State and not a corporation, making the yield of Spanish Government bonds “the most appropriate proxy of an ‘unsecured borrowing rate.’”147 This position is shared by both Accuracy and a number of experts.148
179. As regards to the maturity of the instrument, Spain contends that the Spanish Government bond which should be used should be a short-term one, in line with the period between the date of valuation and the date of the Award for the pre-award interest, and the period between the date of the Award and the date of payment for the post-award interest, as indicated in the figure below:149
144 Respondent’s Submission on Pre- and Post-Award Interest, 24 September 2021, paras. 4-9. ↩
145 Id., para. 10. ↩
146 Id., para. 11. ↩
147 Id., paras. 12, 14. ↩
148 Id., paras. 12-13. ↩
149 Id., paras. 15, 17. ↩
[Page 41]
Illustrative example – pre-award interest (PrAI) and post-award interest
(PoAI) references according to Respondent
| DoV | DoA | DoP | ||
| 2014 | 2021 | ? | ||
| Damages (in €m) | ||||
| (X)? | PrAI (%) 1 |
(Y)? | PoAI (%) 2 |
(Z)? |
| Spain's cost of debt (7Y) as at June 2014 |
Short-term Spain's cost of debt as at June 2021 |
|||
Source: own elaboration for illustrative purposes
180. Certain pre- and post-award interest rates should not be accepted by the Tribunal, including ones based on: (i) Claimant’s parameters (such as return on investment, the cost of capital or the cost of debt); (ii) any interest rate that is independent of both the Claimant and Spain; and (iii) punitive post-award interests (i.e., higher than the pre-award interest rate reference).150
181. First, using the Claimant’s parameters, such as the return on investment, the cost of capital or the cost of debt, should be rejected for the following reasons: (i) such a reference point would suggest that because of Spain, the Claimant was not able to successfully invest in alternative opportunities, which, in turn, would require that the Claimant prove that real opportunities existed, that they were successful and that Claimant had no other option but to forgo such opportunities; (ii) by using the cost of capital or the cost of debt as a basis, the Tribunal would be condemning Spain to compensate the Claimant for a risk not associated with the arbitration, suggesting that the compensation relies on the capital structure of the Claimant, which, according to Spain, is not the case; and (iii) such an approach would also suggest that the amount of compensation varies depending on the claimant, its capital structure and its cost of debt. As such, using Claimant’s cost of debt as a reference would remunerate for additional risks not related to the damages awarded but
[Page 42]
rather related only to the Claimant’s decisions. The Claimant’s experts have defended the use of cost of debt of either the claimant or the respondent in other similar cases.151
182. Second, references that are independent of both the Claimant and Spain should not be accepted by the Tribunal as Spain’s default risk is not connected to changes of the Euribor, for example, and could result in overcompensating or undercompensating the Claimant without any legal or economic justification.152
183. Third, quoting the ILC Articles on State Responsibility, Spain argues that the Tribunal should also reject any proposal of a post-award interest of punitive nature as they are considered inappropriate.153 The Micula v. Rumania and National Grid v. Argentina tribunals followed a similar approach.154
184. Both pre- and post-award interest should be simple and not compound. The period elapsed between the date of valuation and the date of the Award is mainly conditioned by the timing of the Request for Arbitration and the duration of these proceedings, neither of which could be reduced by Spain. Applying a compound interest would imply that Spain has to pay not only interest accrued by the damages calculated as of the date of valuation, but also for additional interest, thus unfairly penalising Spain.155
185. Citing Santa Elena v. Costa Rica, Spain contends that simple interest should be applied, taking into account considerations of fairness, which require that, while the Claimant should be compensated, Spain should not be over-penalised.156
186. As regards the date from which the interest should run, the pre-award premium for a Spanish Government bond of a seven-year maturity, i.e., from the date of valuation (2014) to the date of the Award (2021), should be 1.85% as at 30 June 2014 according to Bloomberg.157
151 Id., para. 20. ↩
152 Id., para. 21. ↩
153 Id., paras. 22-23. ↩
154 Id., paras. 24-25. ↩
155 Id., paras. 26-27. ↩
156 Id., paras. 28-29. ↩
157 Id., para. 30. ↩
[Page 43]
187. Regarding post-award interest, maturity should correspond to the period between the date of the Award and the date of payment. Since the period between the two would not be long, Spain proposes using the yields of Spanish Government bonds with maturities from one to five years, and refers the Tribunal to Appendix 2 containing the yield of the Spanish bonds as at 30 June 2021 for different maturities.
188. The Tribunal recalls that, in its Decision on Jurisdiction and Liability, it emphasised that in approaching the damages issues, it had in mind the long-settled principle of the Permanent Court of International Justice in the Chorzów Factory case, now commonly accepted to be applicable beyond inter-State disputes, that “reparation must, as far as possible, wipe out all the consequences of the illegal act.”158 In a well-known passage, the Permanent Court said:
The essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals – is that reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it – such are the principles which should serve to determine the amount of compensation due for an act contrary to international law.159
189. Neither Party has suggested that restitution is an appropriate remedy in this case, and Cavalum has accepted expressly that “restitution or some other form of remedy ‘in kind’ is impossible...”160
158 Decision on Jurisdiction and Liability, para. 659. ↩
159 Case Concerning the Factory at Chorzow (Claim for Indemnity) (Merits), Judgment No. 13, P.C.I.J., Series A – No. 17, 13 September 1928, at p. 47. This passage was recently recalled by the International Court of Justice in its 9 February 2022 Judgment in Armed Activities on the Territory of the Congo (Democratic Republic of the Congo v. Uganda), at para. 106. ↩
160 Claimant’s Submission, paras. 5-8. ↩
[Page 44]
190. Accordingly, the Tribunal’s object is to determine the difference (if any) between (a) what would be the post-tax reasonable rate of return (“PTRRR”) on the plants (“But-for position”) and (b) the actual internal rate of return (“Actual IRR”“Actual position”). If the Actual IRR falls short of a PTRRR, compensation would be due to the Claimant.
191. On FTI’s figures, all 7 plants fall short of the PTRRR, resulting in a total loss for the Claimant of €41.2 million.
192. On Accuracy’s figures, 2 plants fall short of the PTRRR, resulting in a total loss for the Claimant of €4.3 million.
193. Accordingly, it is necessary for the Tribunal to address (A) the PTRRR in the But-for position; (B) the Actual IRR of the plants; (C) the compensation due, if any; and (D) the losses (if any) on the abandoned projects.
194. The relevant elements in the calculation of the PTRRR and the Actual IRR on which the experts disagree, are as follows.
195. In the But-for analysis: the WACC as of 30 June 2014, and the premium to be added, if any.
196. In the Actual IRR analysis: (1) whether the IRR calculation should consider cash flows over the entire life of the plants or only after 30 June 2014, and, if so, how this should be done; (2) whether standard costs or actual investment costs should be used and, if actual investment costs are used, whether the Claimant’s revised figure (now, after correction, €92.3 million), as against the original €88.1 million, should be accepted; (2) whether cash flows should be of analogous facilities or rather based on the real cash-flows of the plants; (3) whether investment remuneration in future regulatory periods should be modelled to reflect expected changes in the yields on Spanish Bonds.
197. The experts agree that the PTRRR based on WACC should be calculated as at 30 June 2014; the IRRs of the Claimant’s plants should be assessed separately and not on an aggregate basis; the IRRs of the Claimant’s plants should be based on an operating life of 30 years; and they also agree, with the exception of the calculation of investment
[Page 45]
remuneration in future periods, the historical and forecast cash flows of the plants in the Actual position.
198. As indicated above, FTI and Accuracy agree that the PTRRR based on WACC should be calculated as at 30 June 2014. They disagree, however, on the correct WACC figure and premium.
199. FTI’s original figure for WACC was 5.3%.161 That was based on Mr. Edwards’ view that there was a high predictability of cash flows in a scenario in which the tariffs were guaranteed. Because, according to FTI, the cash flows are now less predictable since they can be adjusted every 3 years by reference to a subjective parameter (premium over Government bond yields), FTI adds 0.7% regulatory risk premium.
200. FTI also adds a 1.8% premium “to reflect the scope for investors to create value by earning returns above the cost of capital,”162 Mr. Edwards bases the 1.8% figure on the evidence of Dr. Moselle and Dr. Grunwald163 that RD 661/2007 and RD 1578/2008 offered returns of 8.8% (1.8% above the benchmark) or more based on the CNE’s original calculations. Mr. Edwards’ position is that the premium is the same whether the calculation is based on standard investment costs or actual investment costs.164 Spain’s object was to attract investment quickly, and knew that it was offering returns above the cost of capital of efficient investors.
201. FTI’s position results in a PTRRR of 7.8% as of 30 June 2014.165
161 First Report of Richard Edwards, 22 July 2016, Appendix 6-1. ↩
162 Joint Memorandum, pp. 5, 16. ↩
163 Accuracy’s Second Economic Report on the Claimant and its Claim, 29 May 2017, Section 3. ↩
164 Joint Memorandum, p. 17. ↩
165 Id., p. 5 (“In my view, therefore, a RRR assessed on 30 June 2014 would have been 7.8%”) (emphasis omitted). ↩
[Page 46]
202. Accuracy says that, although the experts’ approach to determination of the cost of capital is somewhat different, the results are similar and therefore it accepts Mr. Edwards’ initial figure of 5.5% as the midpoint between FTI’s initial 5.3% and Accuracy’s initial 5.8%.166
203. Accuracy rejects the addition of a regulatory risk premium, because (a) FTI did not apply it in its reports, and (b) it is inconsistent with a scenario based on the predictability of cash flows based on fixed returns.167
204. Accuracy’s position is that it would accept an efficiency premium of 1% if actual plant construction costs (i.e., €88.1 million on the Claimant’s original case) are taken into account on the basis of special efficiency. But, according to Accuracy, it is contrary to principle to apply a premium of 1.8% allegedly embedded in RD 661/2007 (and RD 1578/2008) tariffs, because (inter alia) the Tribunal has found that the Claimant did not have a vested right to the tariffs, and RD 661/2007 and RD 1578/2008 did not specify target returns; and the cost of capital/WACC was sufficient incentive. No premium was therefore needed. In any event, the data on returns to PV plants under RD 661/2007 by Dr Moselle and Dr Grunwald, and by CNE, were based on 32 installations with an installed capacity of 5KW, which are not comparable with plants having a capacity of 100KW in terms of investment and operating costs.
205. Consequently, Accuracy’s position results in a PTRRR of 6.5% as of 30 June 2014 on the basis of 5.5% cost of capital and 1% efficiency premium.168
166 Id., Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto, p. 8 ↩
167 Id., Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto, p. 13. ↩
168 Id., Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto, p. 9 (“In our view, therefore, the correct and fair base RRR assessed on 30 June 2014 is 5.5%. In case actual building costs of €88.1 million are used (which we understand is what the Tribunal has already decided on) then a premium up to 1% could be added, reaching up to 6.5% RRR.”) (emphasis omitted). ↩
[Page 47]
206. FTI and Accuracy agree that the PTRRR based on WACC should be calculated as at 30 June 2014. However, they differ on two issues: (1) the post-tax WACC figure as at that date; and (2) the premium to be applied over WACC, if any.
207. The Tribunal considers that FTI is right in principle to come to the 6% figure by taking an initial 5.3% WACC estimation and adding a 0.7% risk premium to the post-tax WACC to reflect the increased level of risk that the New Regulatory Regime entails.169 It also agrees with FTI that a premium should be added to the WACC to calculate the post-tax RRR in order to reflect the scope for investors to create value by earning returns above the cost of capital. But the Tribunal prefers Accuracy’s alternative figure of 1%, on the basis that it would reflect investors’ expectations, rather than FTI’s 1.8%, because there is no principled basis for FTI’s reliance, for the 1.8% figure, on the returns under RD 661/2007 since (as Accuracy says) the Tribunal has found that the Claimant had no vested right to those returns.
208. Accordingly, the Tribunal finds that the PTRRR should be 7%, i.e. FTI’s WACC figure of 6% plus Accuracy’s figure of a 1% premium, to be applied to the actual investment costs as determined below.
209. The experts agree that the IRRs for the Claimant’s plants should be assessed individually for each plant (and not on an aggregate basis) based on an operating life of 30 years. The experts also agree on the historical and forecast cash flows of the Claimant’s plants, excluding the calculation of investment remuneration in future periods.170 They disagree, however, on the following issues.
210. FTI says that only returns after the valuation date (i.e., 30 June 2014, as agreed) should be considered. Otherwise, any returns earned by the Claimant’s plants in years prior to June
169 Id., pp. 13-14. ↩
170 Id., p. 20, Section B. ↩
[Page 48]
2014 would be “in some sense ‘excess returns’ and would count against the Claimant as they would lift the calculated IRR [in the Actual scenario] and lower any assessment of loss.”171 This would be “conceptually equivalent to the claw-back mechanism.”172
211. To calculate an adjusted capital base or investment cost for each plant on 30 June 2014, FTI assumes that prior to June 2014 the Claimant’s plants would have earned the pre-tax IRR implicit in the RD 661/2007 and RD 1578/2008 regimes, amended to include the effects of the measures considered lawful by the Tribunal (i.e., the temporary and permanent caps, the 7% tax, and the access toll). FTI estimates this rate at 7.8%, before the adjustments are made. FTI says that “[t]his approach is the same as the approach taken by Spain to calculate the regulated asset base at the start of each regulatory period. However, by replacing the 7.4% with the rates of return implicit in the regulatory regime in place prior to the introduction of the new regime, it removes the clawback element [...].”173
212. Accuracy says that the IRR must consider “the original Actual investment [i.e., 2007-2008], the past Actual cash-flows until the valuation date [i.e., 30 June 2014] and the projection of the estimated Actual cash-flows from there onwards considering the new regulatory regime.”174 According to Accuracy, this is the approach which both Parties’ experts followed during the merits phase of this arbitration to calculate the plants’ IRRs and there is no reason to depart from it now. The claw-back in the new regime should be removed from the But-for IRR to neutralise its effects, and that is what Accuracy has done by not off-setting past earnings against prospective damages,175 but this has nothing to do with the assessment of the IRR of the Claimant’s plants under the Actual scenario.
213. If the Tribunal adopts FTI’s IRR calculation methodology, Accuracy submits that (a) the net asset value of the Claimant’s investment should be calculated using the new regime’s target rate of return (i.e., 7.398% pre-tax) to capitalise returns176 and not the rate of return
171 Id., Opinion of Mr. Edwards, p. 23. ↩
172 Ibid. ↩
173 Id., Opinion of Mr. Edwards, p. 35. ↩
174 Id., Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto. p. 21. ↩
175 Id., pp. 10, 51. ↩
176 Id., Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto, pp. 34-35, 54-55 (“If the Tribunal adopted FTI’s methodology in calculating the Plants’ IRR, the correct capitalisation rate must be 7.398%, as used by RD 413/2014 NAV calculation. Otherwise, the result will not reflect the Plants’ IRR under the Actual scenario.”). ↩
[Page 49]
which FTI considers to be implicit in the RD 661/2007 and RD 1578/2008, adjusted for the temporary and permanent caps, the 7% tax, and the access toll (i.e., 7.8% after tax less the impact of such measures); and (b) FTI’s approach would otherwise lead to the untenable result that the net value of the plants as of June 2014 (i.e., about 7 years after starting operations) would be higher than the initial investment value (i.e., €88.1 million compared with €88.7 million), as if the plants had made no profits in all these years. Accuracy claims that its proposed correction results in a more realistic estimation of the Claimant’s net asset value as of June 2014 (i.e., €68.7 million).177
214. The Tribunal’s view is that the appropriate comparator for cash-flows is after the 30 June 2014 Valuation date. FTI’s position on the calculation period is correct and is consistent with the Tribunal’s approach to the claw-back issue, since otherwise, as FTI says, Accuracy’s approach would be a claw-back mechanism in a different guise.
215. As regards the capitalisation rate, the Tribunal’s view is that Accuracy’s approach based on the current regime is correct, because no principled basis has been established by FTI for an approach based on the prior regime.178
216. FTI’s position179 is that it is appropriate to base the IRR analysis on the investment costs incurred by efficient operators, i.e., standard investment costs as defined by Spain. To base the calculations on actual investment costs would be to suggest that the more inefficient the operator, the more likely it is to be entitled to compensation as a result of reduced remuneration under the current regime. Taking actual investment costs would favour inefficient producers, while efficient producers would be less likely to have suffered a loss as a result of the regulatory changes. Through their efficiency they are actually earning higher returns than inefficient investors. Conversely, inefficient developers (those that spent more than the efficient build cost) would be more likely to be deemed to have suffered
177 Id., Opinion of Mr. Saura, Mr. Schmit, and Mr. Perrotto, pp. 34-35. ↩
178 Id., pp. 34-35. ↩
179 Id., pp. 6, 26-28, 34; Second Report of Richard Edwards, 28 March 2017, paras. 4.13-4.15; 4.30-4.40. ↩
[Page 50]
a loss and, because of the low returns they are actually earning due to their inefficiency, due compensation – in effect a refund of the amount they overspent. It would be an economically perverse result to compensate only inefficient investors for a change to the regulatory regime that was applied to all investments equally.
217. Accuracy’s position is that it has followed the Tribunal’s instructions to calculate the Plants’ IRR based on real cash-flows (both investment and operating cash-flows). The plants are efficient compared to the standard facilities in capex (€88.1 million compared with €107.8 million), which means that under the current scheme the plants will be receiving a return exceeding the standard facilities. By proposing standard costs in the Actual IRR calculation, FTI artificially reduces the return of the plants, and increases the number of plants eligible for damages.
218. The Tribunal’s conclusion, by majority, is that FTI’s approach is wrong in principle. The Tribunal’s task is, in accordance with general principles of the law of damages (reflected in the Chorzów Factory case, at paragraph 47, and Article 31 of the Articles on State Responsibility) to calculate the actual damages suffered by the Claimant, and for that purpose the only principled approach is to take actual investment costs, and not standard costs.
219. On the basis that if actual (rather than standard) costs are to be taken, the Claimants revised the figure of €88.1 million in the audited accounts, and used in the proceedings, to a figure of €97.3 million based on the evidence of Ms. Brandão. As noted above, and developed below, as a result of criticisms by Spain’s experts, the figure was reduced by about €2 million to about €95.3 million.180
220. It appears from Ms. Brandão’s Third Witness Statement that (a) some of the relevant costs are included in the accounts for each project company, but other costs are not included
180 The revised figures have been the subject of substantial discussion: Third and Fourth Witness Statements of Ms. Brandão: 12 February 2021 and 9 April 2021 (for the Claimant); Witness Statements of Mr. Severt: 26 February 2021 and 22 April 2021 (expert for Spain); Accuracy Memoranda: 29 April 2021 and 26 October 2021; FTI’s Comments, 28 September 2021. ↩
[Page 51]
because they were incurred by the parent companies (the Claimant or Valsolar); (b) the costs recorded in the accounts of the Claimant are intermingled between several development processes and are not attributable to particular plants at issue in this arbitration; (c) for the projects which were co-developed with Valsovar, Valsovar contributed all the administrative work to advance and license the project, including at parent company level, which is not reflected in the accounts of each project company; (d) most project developers do not do this work in-house, but the Claimant did so; (e) the Claimant and Valsovar were responsible for equipment and financing, and taxes etc in connection with obtaining authorisations; (f) the work performed at the project company level is reflected in the accounts of the project companies, but not the work done “in-house” by the Claimant’s shareholders.
221. In her Fourth Witness Statement, Ms. Brandão says that her estimates were based on a manual review of the Claimant’s general ledger; some of the supporting documents will not have been retained because of the Claimant’s normal document retention practices; the documents exhibited by her were only examples and not meant to be complete, since that would involve hundreds or thousands of documents; it is legitimate to take account of unremunerated work by investors.
222. Ms. Brandão produced a spreadsheet based on her experience to reflect the work performed in-house and to estimate the costs which were not segregated by project (and included other unrelated projects under development). She estimated the in-house contribution to be about €5 million.181
223. This was not included in the Claimant’s Memorial because (a) she understood that the investment costs were only relevant as general background and not important to FTI’s calculation of damages which was based on the decline in cash flows and not affected by development costs; (b) it is possible that FTI did not understand that there were significant additional costs at the shareholder level which were not reflected in the summary she prepared of the details for each plant; (c) she did point out to FTI, when the Claimant’s Reply was being prepared, that the Claimant achieved efficiencies compared with other PV
181 The figures are not uniform across the plants: see CWS-MHB3, para. 21. ↩
[Page 52]
investors because it was able to do much of the project development itself and with Valsovar at lower costs than other project developers; (d) but it was decided not to conduct the difficult exercise of identifying the costs attributable to each project because “Mr Edwards indicated that he did not believe the actual plant development costs were logical to consider at all” because the correct way was to look at standard costs;182 (e) until the Tribunal’s Decision of 31 August 2020 she did not “believe that Mr Edwards and Cavalum’s counsel fully understood these issues ... perhaps due in part to the difficulty of communicating on these complex issues across languages.”183
224. In response to Ms. Brandão’s Witness Statements, Mr. Jorge Servert, in his two Witness Statements, made these principal points in criticism: (a) Ms Brandão’s estimated development costs were not linked to development activities; (b) the costs were not documented properly (or at all); (c) the costs were estimated according to inadmissible criteria; and in particular five of the plants were actually developed by Valsovar through turn-key contracts with the project companies. The procurement responsibilities rested with Valsolar while the Claimant was involved simply in a support capacity.
225. This issue was the subject of extensive memoranda by Accuracy and FTI. Mr. Edwards of FTI made these principal points: (a) the scale and consistency of the differences between reported costs and standard costs were consistent with the Claimant (and Valsovar) recording only some of their investments costs; (b) there was no incentive or requirement for them to record the entirety of their investment costs on a project by project basis; (c) detailed time recording was not necessary; (d) he accepted that there were errors in Ms. Brandão’s calculations, which would reduce the Claimant’s development costs by €1,957,350 to €3,066,650.
226. Accuracy emphasised Ms. Brandão’s failure to provide any evidence which would substantiate the costs incurred by the Claimant or Valsolar. The costs in Ms. Brandão’s statement were intermingled with many other projects and companies. There was double-counting of costs already accounted for by the Claimant’s €88.1 million investment costs.
182 Id., para. 18. ↩
183 Id., para. 19. ↩
[Page 53]
Accounting standards and tax obligations required the allocation and recording of costs, and to determine the attractiveness of an investment, costs would have had to have been accurately recorded. The estimated hourly rates were unsupported and disproportionate, and the estimate of hours worked was unrealistic. There was no basis for including charges by the Claimant’s shareholders. In the hearing on the merits,184 FTI’s position had been that the Claimant had made construction costs savings because it was able to build the plants materially more cheaply than standard costs.
227. Although this issue has loomed large in the exchanges, it does not make a substantial difference to the figures after the reduction of about €2 million.185 But as a matter of principle, the Tribunal, by majority,186 considers that it would be wrong to allow figures to be revised at such a late stage in the proceedings. It is accepted by the Claimant that it was decided not to identify the costs attributable to each project because “Mr Edwards indicated that he did not believe the actual plant development costs were logical to consider at all,” the correct way being to look at standard costs187 and that the defect was in part at least due to misunderstandings by, or between, the Claimant, its experts and its counsel.
228. FTI says that the cash flows should be of the corresponding standard facilities, and Accuracy says that the actual IRR should be calculated on the basis of real cash-flows. FTI argues that using actual operating costs penalises the most efficient developers.
229. This is essentially the same point discussed above in relation to investment costs. The view of the Tribunal is that Accuracy’s position is correct because the issue relates to the actual losses suffered by the Claimant.
184 Tr. Day 4, p. 189. ↩
185 Prior to the reduction, the Joint Model produced a difference of €2.3 million. ↩
186 In Arbitrator Haigh’s opinion, given that the Claimant’s reconstructed figures are not accepted by the majority, he would agree with Mr. Edwards that standard investment costs, as defined by Spain, should be the basis for determining rates of return. ↩
187 CWS-MHB3, para. 18. ↩
[Page 54]
230. FTI says that because the new regime is linked to yields on Spanish bonds, account should be taken of the fact that investors would have expected the remuneration rate to be adjusted downwards from 2020.188 Under the new regime the investment remuneration rate is to be adjusted in subsequent regulatory periods based on the average yield on 10-year Spanish government bonds over the two-year period prior to each readjustment. As at 30 June 2014, bond yields were significantly lower than the historical 10-year average. Consequently, investors would have expected the remuneration rate to be adjusted downwards from 2020.
231. Accuracy says that a fixed remuneration should be used because (among other reasons) it is impossible to predict bond yields over 20 years and in the second period Spain did not pass on the reduction in interest rates;189 there is no basis for FTI’s assumption that an investor would necessarily have expected remuneration to be adjusted, or that the regulator would have maintained the spread above the Spanish bond (300bps) despite the alleged decrease in the Spanish bond.190
232. The Tribunal considers that a downward adjustment should be applied in accordance with, and for the reason given by, FTI, namely that investors would have expected the remuneration rate to be adjusted downwards from 2020.
233. The most important variables in the above analysis are the investment costs and the capitalisation rate. According to the Joint Model, the result of the findings above is that 2 out of the 7 plants fall short of a reasonable rate of return:
188 Joint Memorandum, pp. 38-39. ↩
189 Ibid. ↩
190 Id., pp 39-40. ↩
[Page 55]
| Assessment of whether a loss has been suffered by each of the Spanish Plants | |||
|---|---|---|---|
| Plant | Post-tax IRRs for the Claimant's plants |
Post-tax reasonable rate of return (“RRR”) based on WACC |
Loss suffered? |
| [A] | [B] Is [B] less than [A]? | ||
| La Albuera | 10.4% | 7.0% | No |
| Don Alvaro | 10.2% | 7.0% | No |
| Fuente de Cantos | 11.7% | 7.0% | No |
| La Roda | 6.8% | 7.0% | Yes |
| Riosalido | 4.7% | 7.0% | Yes |
| Talarrubias | 7.8% | 7.0% | No |
| Solarwell | 9.7% | 7.0% | No |
234. Consequently, compensation needs to be assessed in respect of these plants, which will be the difference between the post-tax RRRs and post-tax IRRs for the relevant plants.
235. As will appear, the only area of dispute which makes a significant difference is the discount rate to reach the values as at 30 June 2014.
236. On the basis that the IRR is to be calculated based on cash flows from 30 June 2014 onwards, FTI says that the Tribunal should capitalise historical But-for cash flows using the rate of return implicit in the RD 661/2007 and RD 1578/2008 regimes.191 Doing otherwise, FTI says, has the effect of embedding the claw-back in the loss calculations.
237. Accuracy argues that “since the RRR constitutes Claimant’s legitimate expectation, and in order to ensure that the But for scenario offers this RRR to the Claimant, the capitalisation rate of past cash flows must be the RRR.”192
191 Id., p. 51. ↩
192 Id., p. 55. ↩
[Page 56]
238. The Tribunal considers that Accuracy’s position is consistent with an appropriate approach to compensation, namely that historical But-for cash flows should be capitalised using a RRR (expressed in pre-tax terms).
239. FTI says that the cost of capital to discount the cash flows should be 12% to reflect the increased risk existing at 30 June 2014. To estimate that rate, FTI relies on rates of return being used by investors in Spanish PV plants on the date of assessment, an offer the Claimant received in November 2014, and Mr. Kirkpatrick’s expert report.193
240. If, however, the Tribunal finds that market conditions as at 30 June 2014 should not be reflected in an assessment of the actual value of the investments, FTI agrees that a cost of capital of 6.0% (the same as the cost of capital in the But-for position) should be used to discount cash flows in the Actual position.194
241. Accuracy says that the discount rate should be 5.5%. This is the same as their WACC figure as of 30 June 2014, although they agree to add a 0.5% regulatory risk premium to reflect a residual risk in the current framework, bringing the discount rate to 6.0%. They otherwise reject FTI’s position, which they considered to be based on “an ad-hoc report prepared by a colleague of the restructuring department of FTI, Mr Kirkpatrick.” In their view, “[u]sing a 12% discount simply seeks to reduce the value of the Actual scenario artificially, thereby increasing damages.”195
242. The view of the Tribunal is that rates of return relied on by the Claimant are not reliable evidence, and accordingly that the discount rate should be 6%, as Accuracy would concede.
243. FTI says that the cost of capital used to discount the cash flows in the But-for position should be the same as the WACC, i.e., 5.3% plus 0.7%, to equal 6.0%. FTI says that it would be incorrect to include an additional 1.8% premium in the cost of capital used to
193 Id., p. 45. ↩
194 Id., pp. 46-47. ↩
195 Id., pp. 45-46. ↩
[Page 57]
discount the cash flows of the Claimant’s plants because that “would lead to a cost of capital that is too high, and that is no longer reflective of the risks associated with the with the cash flows it is used to discount.”196
244. Accuracy says that, if the Tribunal selects actual investment costs (€88.1 million) or standard investment costs with no premium over the WACC as RRR, the discount rate in the But-for scenario should be 5.5%. But Accuracy accepts that a regulatory risk premium can be added in case any other combination is chosen, bringing the discount rate to 6.0%.197
245. There is no real dispute on this point.
246. On the basis of the above, the damages figure (apart from the losses on the abandoned projects, dealt with below) is €5.6 million, with 2 plants falling below the PTRRR:
| Cavalum's loss on the Spanish Plants (EUR million) | ||||||
|---|---|---|---|---|---|---|
| Plant | Loss suffered? | Actual value | Counterfactual value |
Loss/(gain) | Cavalum shareholding | Cavalum's loss/(gain) |
| La Roda | Yes | 13.5 | 15.8 | 2.3 | 100% | 2.3 |
| Riosalido | Yes | 9.0 | 12.3 | 3.3 | 100% | 3.3 |
| Total | 22.5 | 28.1 | 5.6 | 5.6 | ||
247. FTI contends that to the extent that the Tribunal finds that the Claimant has suffered loss, the loss on the abandoned projects should also be accounted for in damages to a total of €1.8 million, on the basis of the Tribunal’s decision that, if the new Regulatory Regime did not provide a reasonable rate of return, the Claimant would be entitled to its wasted expenditure, including the €600,000 owed to Valsolar.198
196 Id., pp. 49-50. ↩
197 Id., pp. 46-47. ↩
198 Id., p. 57. ↩
[Page 58]
248. Accuracy’s original position was that the €600,000 should be excluded (but without giving reasons).199
249. Accuracy raised a more fundamental point not dealt with by FTI. The Tribunal’s Decision on Jurisdiction and Liability did not address the possibility that some plants might achieve the PTRRR and others might not. Consequently, it did not address the possibility that some of the abandoned plants might have achieved a PTRRR. Accuracy says that it would be unreasonable for the Claimant to receive 100% of the costs where not all its plants are found to fall short of a PTRRR, and proposes an approach on allocation based on “the specific weight in installed capacity (MW) of the eligible plants in damages over the total portfolio,”200 which reduces damages accordingly. FTI did not address this question.
250. In response to the Tribunal’s direction to address the remedy (if any) for breach of the obligation of stability, the Claimant argued that its losses on the abandoned projects flow directly from that breach, to which it was entitled by an award of damages according to general principles of international law.201 There was no effective remedy under Spanish law. If there had been no breach of the obligation of stability, the Claimant would not have been forced to abandon them, and would have been able to recover its investment costs.202
251. Spain did not accept that its breach of the obligation of stability gives rise to compensation for damages separate from breach of the FET standard, if any.203 Spain argued that losses incurred on the abandoned projects did not flow from the breach of the obligation of stability. Abandoning them was a voluntary business decision, which had nothing to do with the change in the regulatory regime.
252. In the view of the Tribunal, there is no reason in principle why breach of the obligation of stability should not give rise to an award of damages under international law if actual damage has flowed from the breach. The abandonment of the plants was a reasonable response to the instability caused by what the Tribunal has found to be Spain’s breach of
199 Ibid. ↩
200 Ibid. ↩
201 Claimant’s Submission, paras. 3-4. ↩
202 Id., para. 9. ↩
203 Respondent’s Comments on Stability, 22 October 2021, paras. 4-5. ↩
[Page 59]
the obligation of stability. Irrespective of the hypothetical nature of Accuracy’s point about some plants achieving the PTRRR and others not reaching it, the Claimant acted reasonably, in reacting to the breach of the obligation of stability by virtue of the circumstances of the change in the tariff system, by abandoning the projects. The most reliable measure of its damage is the wasted expenditure on the plants, namely €1.8 million.
253. The Claimant is entitled to (a) €5.6 million in compensation for the 2 plants which do not achieve a PTRRR, and (b) €1.8 million for wasted expenditure, totalling €7.4 million
| Assessment of whether a loss has been suffered by each of the Spanish Plants | |||
|---|---|---|---|
| Plant | Post-tax IRRs for the Claimant's plants |
Post-tax reasonable rate of return ("RRR") based on WACC |
Loss suffered? |
| [A] | [B] Is [B] less than [A]? | ||
| La Albuera | 10.4% | 7.0% | No |
| Don Alvaro | 10.2% | 7.0% | No |
| Fuente de Cantos | 11.7% | 7.0% | No |
| La Roda | 6.8% | 7.0% | Yes |
| Riosalido | 4.7% | 7.0% | Yes |
| Talarrubias | 7.8% | 7.0% | No |
| Solarwell | 9.7% | 7.0% | No |
| Cavalum's loss on the Spanish Plants (EUR million) | ||||||
|---|---|---|---|---|---|---|
| Plant | Loss suffered? | Actual value | Counterfactual value |
Loss/(gain) | Cavalum shareholding | Cavalum's loss/(gain) |
| La Roda | Yes | 13.5 | 15.8 | 2.3 | 100% | 2.3 |
| Riosalido | Yes | 9.0 | 12.3 | 3.3 | 100% | 3.3 |
| Total | 22.5 | 28.1 | 5.6 | 5.6 | ||
| Loss on abandoned projects | 100% % of the compensation | 1.8 | ||||
| Total loss | 7.4 | |||||
254. The issues between the Parties for both pre- and post-award interest is (a) the rate of interest, and (b) whether interest should be compounded.
255. As regards the rate, the Claimant’s position is that the purpose of an award of interest is compensatory, and so it should reflect the value of the injury it is compensating. The best measure of the Claimant’s opportunity cost associated with its inability to use the funds is
[Page 60]
its cost of capital (i.e., WACC), which represents the Claimant’s expected return on investment in the sector in which it operates, adjusted for risk and is equal to 5.3%. The risk-free rate proposed by Spain does not accurately reflect the Claimant’s opportunity cost because the Claimant is in the business of developing and operating PV plants, not investing in risk-free government bonds. Most of the damages it claims concern cash flows which the Claimant’s projects would have earned but for Spain’s illegal measures.
256. For the post-award interest rate, the Claimant requests the Tribunal to apply an interest rate higher than the pre-award premium so as to incentivise prompt payment of the Award.
257. The Claimant says that the overwhelming majority practice in investor-state jurisprudence includes compounding the rate of interest awarded as the most accepted and appropriate method in compliance with the full compensation standard under customary international law.
258. Interest should run from the valuation date (30 June 2014), except in relation to the abandoned projects, where it should run from 27 January 2012, because they were abandoned as a direct result of the new regime on 27 January 2012.
259. Spain’s position is that the appropriate rate should be the unsecured borrowing rate on short-term yield on Spanish Government bonds. The objective is to compensate the Claimant for the delay between the date of valuation of a damage and the payment of the Award, thus compensating the Claimant for the risk of default which is associated with the borrowing rate. Post-award interest aims at bringing the compensation established as of the date of the award to the date of payment.
260. Spain says that the Claimant’s suggestion of such criteria as the cost of capital or cost of debt is wrong in principle. It would suggest that as a result of Spain’s breach the Claimant was not able to successfully invest in alternative opportunities, which, in turn, would prove that the Claimant would have been able to take advantage of such opportunities and had been deprived of the opportunity. Interest payable does not vary with the claimant, its
[Page 61]
capital structure and its cost of debt. Nor is it appropriate to take a rate which is independent of both the Claimant and Spain such as change in the Euribor.
261. A higher punitive rate for post-award interest should be rejected: Micula v Rumania;204 National Grid plc v Argentine Republic.205
262. Both pre- and post-award interest should be simple and not compound. The period between the date of valuation and the date of the Award is mainly conditioned by the timing of the Request for Arbitration and the duration of the proceedings, neither of which could be reduced by Spain. Simple interest should be applied taking into account considerations of fairness, compensating the Claimant without over-penalising Spain.
263. Accordingly, the pre-award rate should be based on a Spanish Government bond of a seven-year maturity, from the date of valuation (2014) to the date of the Award, i.e., 1.85% as at 30 June 2014.
264. As regards post-award interest, the maturity should correspond to the period between the date of the Award and the date of payment. Since Spain estimates that the period between the two would not be long, it proposes using the yields of Spanish Government bonds with maturities from one to five years.
265. The Tribunal’s conclusions are these. The Claimant recognised206 that the appropriate rate is a matter within the Tribunal’s broad discretion and that most tribunals in investment treaty arbitrations have awarded interest at a rate between a risk-free rate and the claimant’s cost of capital. The Claimant supplied a table with examples of the rates awarded by other tribunals in ECT cases. The Tribunal considers that a rate based on Euribor would be appropriate, plus a margin to recognise that this is an interbank rate. In accordance with common practice, it considers that interest should be compounded, but that a higher rate
204 Ioan Micula et al. v. Romania, ICSID Case No ARB/05/20, Award, 11 December 2013, CL-014. ↩
205 National Grid P.L.C. v. Argentine Republic, UNCITRAL ad hoc, Award, 3 November 2008, CL-125. ↩
206 Claimant’s Submission, para. 15. ↩
[Page 62]
for post-award interest would not be appropriate because the object of reparations is to compensate, not to penalise, for non-payment.
266. The Tribunal therefore considers that a fair rate of interest, consistent with the purpose of compensating the Claimant, would be the 1-year Euribor rate, plus 1%, compounded annually, payable (a) from 30 June 2014 to the date of actual payment in the case of the €5.6 million compensation for the 2 plants which do not achieve a PTRRR, and (b) from 27 January 2012 to the date of actual payment in the case of €1.8 million for wasted expenditure, totalling €7.4 million.
267. The Claimant filed its submission on costs on 13 May 2022 (the “Claimants’ Cost Submission”) and updated it on 25 September 2022.
268. The Claimant contends that it is entitled to “full compensation for all the consequences of Spain’s breaches of the ECT.”207 According to the Claimant, such compensation, in order to “wipe out as far as possible the consequences of Spain’s illegal acts,” should not only cover compensation for the damages resulting from the losses of their investment but also the Claimants’ arbitration costs.208
269. The Claimant states that it incurred the following costs, fees, and expenses in connection with this arbitration:
207 Claimants’ Cost Submission, 13 May 2022, para. 5. ↩
208 Ibid. ↩
[Page 63]
| CATEGORY | AMOUNT |
| King & Spalding's Legal Fees13 | € 3,294,449.00 |
| Expert Fees & Expenses | |
|
€ 967,513.47 |
|
€ 25,326.45 |
|
€ 45,000.00 |
| Claimant's Costs & Expenses | € 214,000.59 |
| ICSID Payments | US$ 800,000.00 |
| TOTAL | € 4,546,289.51 PLUS US$ 800,000.00 |
270. In its updated Cost Submission of 15 September 2022, the Claimant indicated that it had incurred “additional fees in the amount of €22,296 relating to its response to Spain’s ‘Request to Reopen the Proceedings, to Introduce of a New Legal Authority into the Record, and to Reconsider Two Prior Decisions.’”209
271. Accordingly, the Claimant requests that the Tribunal exercise its discretion under Article 61(2) of the ICSID Convention and Rule 28(1) of the ICSID Arbitration Rules to order Spain to pay the entirety of costs, fees, and expenses incurred by Claimant in this arbitration, in the amounts of €4,568,585.51 and US$800,000.00.
209 Claimant’s updated Costs Submission, 15 September 2022, p. 1. ↩
[Page 64]
272. Spain filed its Cost Submission on 13 May 2022 (“Spain’s Cost Submission”). On 15 September 2022, Spain confirmed it had no update to its Cost Submission of 13 May 2022.
273. Spain requests the Tribunal to order the Claimants “to pay all costs and expenses derived from this arbitration, including ICSID administrative expenses, arbitrators’ fees, and the arbitrators’ fees and the fees of the legal representatives of the Kingdom of Spain, their experts and advisors, as well as any other cost or expense that has been incurred, all of this including a reasonable rate of interest from the date on which these costs are incurred and the date of their actual payment.”210
274. Spain states that it incurred €904,390 in legal fees, plus €702,373.98 as payments made to ICSID as its share of the advances in respect of this case. In addition, Spain claims €527,154.10 in expert fees and expenses; €39,492.82 for translations, €40,807.81 for editing services, €1,402.16 for courier services, and €23,535.72 for travelling expenses.
275. Accordingly, Spain requests that the Tribunal order the Claimant to pay the entirety of its costs, fees, and expenses in this arbitration, in the amount of €2,239,156.59 (which includes its payments on advance of ICSID costs).
276. Article 61(2) of the ICSID Convention provides:
In the case of arbitration proceedings the Tribunal shall, except as the parties otherwise agree, assess the expenses incurred by the parties in connection with the proceedings, and shall decide how and by whom those expenses, the fees and expenses of the members of the Tribunal and the charges for the use of the facilities of the Centre shall be paid. Such decision shall form part of the award.
277. This provision gives the Tribunal discretion to allocate all costs of the arbitration, including legal fees and other costs, between the Parties as it deems appropriate.
210 Respondent’s Submission on Costs, 13 May 2022, para. 10 (citing Spain’s Rejoinder on the Merits). ↩
[Page 65]
278. The Tribunal takes these matters into account: (1) on the jurisdictional issues, the Claimant succeeded in relation to the intra-EU issue but substantially failed on the TVPPE issue, and Spain failed in its application for reconsideration of the intra-EU issue; (2) the Claimant failed by a majority in its claim that it had a legitimate expectation that the RD 661/2007 and RD 1578/2008 regime would remain unaltered, but the Tribunal decided that the Claimant had a legitimate expectation of a reasonable rate of return; (3) the Claimant failed in its expropriation claim; (4) the quantum claimed by the Claimant was originally €58.2 million (Memorial, paragraph 458), which was revised to €57.4 million (Reply, paragraph 608), in respect of the PV plants, and €1.8 million in respect of the Abandoned Projects, a revised total of €59.2 million; (5) following the Decision on Jurisdiction and Liability, the Claimant’s expert concluded in the Joint Memorandum that the compensation for the PV plants was €41.2 million, which amounted to a total claim of €43 million; (6) the Tribunal has decided that the Claimant is entitled to (a) €5.6 million in compensation for the 2 PV plants which do not achieve a PTRRR, and (b) €1.8 million for wasted expenditure, totalling €7.4 million.
279. Although the Claimant succeeded in substantial part on jurisdiction and liability, it achieved only a small proportion of the sums it claimed by way of remedy because its principal argument on liability failed. In these circumstances the Tribunal considers that an award to the Claimant of €1.5 million towards its costs would be just and appropriate, and that the fees and expenses of the members of the Tribunal and the charges for the use of the facilities of the Centre should be borne equally between the Parties.
280. The costs of the arbitration, including the fees and expenses of the Tribunal, ICSID’s administrative fees and direct expenses, amount to (in US$):211
Arbitrators’ fees and expenses
Lord Collins of Mapesbury, LL.D., F.B.A. 506,438.27 Mr. David R. Haigh K.C. 239,793.18 Sir Daniel Bethlehem K.C. 111,593.22
211 The ICSID Secretariat will provide the Parties with a detailed Financial Statement of the case account once all invoices are received and the account is final. ↩
[Page 66]
| ICSID’s administrative fees | 274,000.00 |
| Direct expenses (estimated) | 216,542.39 |
| Total | 1,348,367.06 |
281. The above costs have been paid out of the advances made by the Parties in equal parts.212 As a result, each Party’s share of the costs of arbitration amounts to US$674,183.53.
282. The Tribunal makes the following Award:
(1) Paragraphs 706(1), (2) and (7) of the Tribunal’s Decision on Jurisdiction and Liability dated 31 August 2020 are hereby incorporated into this Award.
(2) Spain shall pay to the Claimant by way of compensatory damages an amount of €7.4 million, being €5.6 million for the two plants which do not achieve a reasonable rate of return, and €1.8 million for the Abandoned Projects.
(3) Spain shall pay interest on the amount of €5.6 million at the 1-year Euribor rate, plus 1%, established and compounded annually, payable from 30 June 2014 to the date of actual payment.
(4) Spain shall pay interest on the amount of €1.8 million at the 1-year Euribor rate, plus 1%, established and compounded annually, payable from 27 January 2012 to the date of actual payment.
(5) Spain shall pay the Claimant an amount of €1.5 million towards the Claimant’s legal fees, together with interest at the 1-year Euribor rate, plus 1%, established and compounded annually, from the date of notification of this Award until the date of actual payment.
212 The remaining balance will be reimbursed to the Parties in proportion to the payments that they advanced to ICSID. ↩
[Page 67]
(6) The fees and expenses of the members of the Tribunal and the charges for the use of the facilities of the Centre, paid from the Parties’ advance costs contributions, shall be borne equally between the Parties.
[Page 68]
|
Signature Mr. David R. Haigh K.C. Arbitrator Date: 26 September 2022 |
Sir Daniel Bethlehem K.C. Arbitrator Date: |
|
Lord Collins of Mapesbury, LL.D., F.B.A. President of the Tribunal Date: |
|
[Page 69]
|
Mr. David R. Haigh K.C. Arbitrator Date: |
Signature Sir Daniel Bethlehem K.C. Arbitrator Date: 26 September 2022 |
|
Lord Collins of Mapesbury, LL.D., F.B.A. President of the Tribunal Date: |
|
[Page 70]
|
Mr. David R. Haigh K.C. Arbitrator Date: |
Sir Daniel Bethlehem K.C. Arbitrator Date: |
|
Signature Lord Collins of Mapesbury, LL.D., F.B.A. President of the Tribunal Date: 26 September 2022 |
|