All claims dismissed by ICSID tribunal in energy investor’s ECT case against Italy

Belenergia S.A. v. Italian Republic, ICSID Case No. ARB/15/40

An ICSID tribunal has dismissed the ECT case initiated by Luxembourg-incorporated Belenergia S.A. (Belenergia) against Italy. Belenergia contested Italy’s changes to the legal regime governing investments in the photovoltaic (PV) sector.

Background and claims

Through Legislative Decree No. 387/2003 and five successive schemes (Energy Accounts), Italy provided incentives for the generation of energy from PV plants. The PV plant owner could request the state-owned energy regulatory agency Gestore dei Servizi Energetici (GSE) to purchase electricity at a minimum price to feed directly into the grid.

Between September 2011 and December 2013, Belenergia invested in 10 Italian special purpose vehicles (SPVs) operating 20 PV plants in Italy. These SPVs concluded conventions with the GSE on feed-in tariffs (FITs) and on minimum prices under the applicable Energy Account regime.

Italy repealed the minimum price incentives on December 23, 2013, by Legislative Decree No. 145/2013 (Destinazione Italia Decree), and reduced the FITs applying to all PV plants with a capacity above 200 kW by Legislative Decree No. 91/2014 (Spalma Incentivi Decree) on June 24, 2014.

Belenergia initiated ICSID arbitration on August 7, 2015, claiming that the two decrees frustrated its legitimate expectation based on those incentives. According to Belenergia, Italy breached its obligations under the ECT, including the FET standard, the umbrella clause, the most constant protection and security obligation, and provisions prohibiting unreasonable and discriminatory measures. Belenergia sought damages of around EUR 18 million.

Tribunal dismisses Italy’s jurisdictional and admissibility objections

Italy first objected to the tribunal’s jurisdiction to hear intra-EU disputes. Relying on VCLT Article 30 and an alleged practice of EU member states objecting to the jurisdiction of ECT tribunals, Italy argued that the EU’s 2009 Lisbon Treaty prevails over the ECT to the extent of any incompatibility.

In the tribunal’s view, the two treaties did not have the same subject matter, which is required in order for VCLT Article 30 to apply. It also held that the CJEU’s decision in Achmea and its interpretation by EU member states were matters for the EU legal order and could not be transposed to the ECT regime.

Secondly, Italy argued that the broad terms of the choice of forum clause under the GSE conventions triggered the fork-in-the-road provision under ECT Articles 26(2) and 26(3), which provides for an exception to investor–state arbitration for some states, in cases where a dispute settlement procedure had been previously agreed to with the investor. Alternatively, Italy relied on SGS v. Philippines and BIVAC v. Paraguay to submit that the choice of forum clause precluded Belenergia’s umbrella clause claim under ECT Article 10(1).

The tribunal clarified that the fork-in-the-road clause applied only to disputes already submitted to a different forum. In any event, it noted that only Belenergia’s SPVs (and not Belenergia itself) were parties to the GSE conventions and held that the clause would not apply absent identity of parties. The tribunal also disagreed with the approach in SGS v. Philippines, which would deprive the ECT’s umbrella clause of its meaning, because any contract would be subject to domestic courts based on default rules on conflicts of jurisdiction. Instead, it endorsed the SGS v. Paraguay approach that umbrella clause claims could not be presumed to be co-extensive with contract claims, finding that Belenergia’s umbrella clause claim was admissible.

Belenergia also complained of Italy’s measures imposing “imbalance costs” on PV plant owners to compensate for costs incurred by the electricity grid due to the difference between the electricity amount planned to be injected into the grid by PV plant owners and the amount actually injected. The tribunal upheld Italy’s jurisdictional objection to this claim, holding that it was covered by the ECT’s tax carve-out in Article 21.

No violation of the FET standard

Belenergia argued that Italy breached the ECT’s FET standard, specifying that it made its investments with the legitimate expectation that the FITs and the minimum prices had become acquired rights and could not be modified in relation to existing PV plants.

Relying on the findings in Electrabel v. Hungary assessing “the amount of information that the investor knew and should reasonably have known at the time of the investment” (para. 583), the tribunal held that the GSE conventions on FITs merely referred to the various incentives provided by the general legislation and did not amount to any commitments addressed specifically to Belenergia.

The tribunal also found that the GSE conventions on minimum prices were subject to a maximum one-year duration and provided for possible amendments, such that Belenergia could not have any expectation that this scheme would not be amended.

Finally, the tribunal’s review of Italian laws and regulations showed that PV investors should have expected reductions in PV incentives, thus dismissing Belenergia’s FET claim.

Tribunal rejects umbrella clause, and protection and security claims

Belenergia argued that irrespective of their contractual nature, the GSE conventions constituted commitments undertaken by Italy protected by the ECT’s umbrella clause. The tribunal disagreed with Belenergia that the GSE conventions on FITs and minimum prices contained specific commitments entered into with Belenergia; the amount and duration of the FITs and the minimum prices were already set forth in Italian legislation and merely replicated in the GSE Convention.

The tribunal relied on Isolux v. Spain to hold that the Italian legal and regulatory framework before the Spalma Incentivi and Destinazione Italia Decrees was addressed to national and foreign investors and could not be interpreted as creating obligations specifically “entered into with” Belenergia.

While the tribunal agreed with Belenergia that the ECT Article 10(1) standard could extend beyond the protection of physical security in certain situations, it held that the standard could not protect investments against the state’s right to regulate in a manner that negatively affects them. Belenergia’s claim in this regard was dismissed.

No unreasonable or discriminatory measures found

Italy objected to Belenergia’s claim of unreasonable and discriminatory measures, arguing that it overlapped with the FET claim and that ECT Articles 10(2) and (3) applied only to establishing or acquiring new or additional investments as defined in ECT Article 1(8).

The tribunal agreed with Italy’s treaty interpretation and dismissed the claim. Belenergia failed to satisfy its burden of proving that the alleged discriminatory character of the measures affected the establishment or acquisition of new or additional investments in the PV sector.

The changes to Italy’s regulatory framework were not found to be unreasonable, disproportionate or unpredictable. While Belenergia argued that Italy’s measures lacked public interest goals, such as environment or public health protection, and a “rational policy,” the tribunal found that it sufficed that the true purpose of the measures was to reduce the cost of subsidies.

The tribunal also dismissed Belenergia’s argument that the regulatory differentiation linking the reduction of FITs to the nominal capacity of PV plants discriminated against medium-sized and large PV plants. The differentiation was based on legitimate and objective grounds, and the special protection of smaller plants was justifiable insofar as it sought to guarantee free competition in the energy sector.

Decision and costs

Therefore, the tribunal dismissed all claims on the merits. It ordered both parties to bear the costs of the arbitration equally, and each party to bear its own legal costs and expenses.

Notes: The tribunal was composed of Yves Derains (president, French national), Bernard Hanotiau (claimant’s appointee, Belgian national) and José Carlos Fernández Rozas (respondent’s appointee, Spanish national). The award, dated August 6, 2019, is available at https://www.italaw.com/sites/default/files/case-documents/italaw10759.pdf

Trishna Menon is an Associate at Clarus Law Associates, New Delhi, India.