On 31 May 2019, an ICSID Arbitral Tribunal ordered Spain to pay €290.6 million in compensation to two Dutch-incorporated investors for the loss of value of their investment in two concentrated solar power (CSP) plants following changes to Spain’s feed-in-tariff regime.
NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. (NextEra or the Claimants), who were incorporated in the Netherlands, invested around €750 million in the construction of two CSP plants in Spain (the Termosol Plants).
Under Spanish Royal Decree RD661/2007 and RD1614/2010, the energy produced by the plants benefitted from a ‘Special Regime’, which guaranteed ‘a reasonable return on their investment’ by enabling the energy producer to sell electricity to the grid for feed-in-tariffs applicable for their entire operational lifetime. After limited regulatory changes in 2010, in 2012 and 2013, the Kingdom of Spain (Spain or the Respondent) enacted various laws that altered the remuneration regime from 20 June 2014 onwards. The Termosol plants were ‘substantially complete’ when Spain amended the applicable remuneration regime.
The Claimants claimed compensation from Spain for unfair and inequitable treatment based on the Energy Charter Treaty (ECT).
Position of the parties
The Claimants claimed €393.6 million for lost historical cash flows and the loss of fair market value of their investment. The Claimants also presented an alternative loss calculation of €357.6 million based on a ‘reasonable return’ on their investment. In both scenarios, the Claimants claimed pre and post-award interest.
The Respondent considered that an appropriate method would be one based on the cost of the assets.
The Tribunal rendered its decision on Jurisdiction, Liability and Quantum on 12 March 2019 in favour of the Claimants. This article considers the quantum aspects.
In their calculation, the Claimants claimed the difference between the value of their investment after the regulatory changes and its value before the changes plus the historical losses prior to the valuation date. The Claimants chose a valuation date of 30 June 2014, when the last of the ‘cumulative measures’ was enacted by Spain. The calculation was subsequently updated to 30 June 2016.
The Claimants used the ‘regularly adopted’ discounted cash flow (DCF) method stating that the CSP technology was commercially proven and the revenue and cost projections could be reliably predicted. The Claimants assumed a 30-year operational life for the Termosol Plants and calculated the revenues that would have been earned prior to the changes to the remuneration regime.
The Claimants also presented an alternative damages calculation based on the capitalised costs of the assets to which they applied a fixed rate of return based on the WACC of the Termosol Plants plus 300 basis points (bps), which had been identified by Spain as a reasonable return under the regulatory framework.
The Respondent considered that the DCF method was inappropriate and speculative. The Respondent argued there was a lack of historical financial records, the cash flows were dependent on unpredictable elements, and the useful life of the Termosol Plants (20 to 25 years) contradicted the forecast period of 30 years.
The Respondent considered that an asset-based method would be more appropriate. However, it contended that the Claimants’ alternative cost-based calculation erred in several ways, including the costs of the assets, the application of a fixed rate of return and the premium of 300bps.
Approach taken by the Tribunal
The Tribunal determined the appropriate method for quantifying damages was the capitalised costs of the assets plus a reasonable return. The Tribunal considered that the alternative damages calculation proposed by the Claimants was ‘not dissimilar’ to the asset-based approach proposed by the Respondent, although the parties disagreed on the application.
The Tribunal accepted the Claimants’ arguments on the valuation of assets. However, it rejected the arguments on the premium of 300bps as it did not consider the premium proposed under the regulatory framework to be appropriate for the damages calculation.
The Claimants were awarded damages based on the capitalised value of their assets as of 30 June 2016 plus a return corresponding to the WACC of the Termosol Plants plus a premium of 200bps. The Tribunal also awarded pre- and post-award interest based on five-year Spanish sovereign bonds compounded monthly.
While the Tribunal recognised that the DCF method is frequently used, it did not consider there was ‘a sufficient basis for the application of the DCF method' as the Termosol Plants had been in operation for less than one year. In this case, the Tribunal considered that a calculation based on the capitalised costs of the assets plus a reasonable return was an appropriate method to quantify the loss.