On 16 May 2018, an ICSID Arbitral Tribunal ordered Spain to pay €64.5 million in compensation to an Abu-Dhabi-owned Dutch investor (Masdar) for the loss of value of its investments in three Concentrated Solar Power (CSP) plants in Spain.
In November 2008 and July 2009, Masdar (the Claimant) invested in three CSP plants in Spain. Under Spanish Royal Decree RD661/2007 in force at the time, the energy produced by registered plants could be sold to the network for a regulated feed-in tariff (FIT) for their operational lifetime. The plants started operating around 2011. After limited regulatory changes in 2010, Spain enacted more drastic changes in 2013 and a new remuneration regime on 20 June 2014 with retroactive effect at 1 January 2013. According to Masdar, the new regime amounted to reducing the tariff by 72%.
Masdar claimed compensation from Spain (the Respondent) for unfair and inequitable treatment on the basis of the Energy Charter Treaty (ECT).
Position of the parties
The Claimant claimed €179 million, which included lost historical cash flows in the period of retroactivity (27 December 2012 to 20 June 2014) and the loss of fair market value of the investment thereafter. The Claimant also claimed pre-award and post-award interest.
The Parties disagreed on the valuation date and the appropriate method to calculate the loss of fair market value. The Claimant used the discounted cash flow (DCF) method while the Respondent favoured an asset-based valuation (ABV).
On liability the Tribunal found in favour of the Claimant. This article considers the quantum aspects.
The Claimant calculated the loss of value of its investment using the DCF method as the difference between what it would have earned had it continued to receive the long-term tariff in force in 2007 for the 40-year lifetime of the plants (but-for scenario) and what it earned after the change in regulatory regime (actual scenario).
The Claimant used the DCF method as the CSP plants had a history of five years of operation and had stable and predictable revenues for their lifetime.
The Claimant considered the valuation date to be 20 June 2014 when Spain enacted its new remuneration regime.
The Respondent considered that the DCF method was speculative, complex and based on unpredictable factors such as market energy prices, and was invalidated by the long timeframe of predictions (until 2051). In addition the Respondent’s experts considered that the plants had a maximum useful life of 25 years, as shown by due diligence and other contemporaneous documents on the plants. The Respondent suggested using a valuation method based on the cost of the assets, and at a valuation date of December 2012.
Approach taken by the Tribunal
The majority of the Tribunal concluded that the DCF method should be the default valuation method in the absence of persuasive reasons to the contrary. In this particular case, the Claimant had a simple business model and both income and costs were relatively predictable. Whilst the plants had been operating for a relatively short period of time (five years), it was sufficient to generate adequate information for the calculation of future income with“reasonable certainty”. The calculation of damages necessarily involves assumptions about events that did not occur, and these assumptions can be appropriate bases for valuation as long as they can be rationally justified.
The Tribunal used a valuation date at 20 June 2014 as it allowed for more consistent use of hindsight in calculating losses.
The Tribunal awarded €64.5 million to the Claimant (based on a 25-year useful life) plus interest at a rate of 1.6% compounded monthly. The Tribunal favoured a 25-year useful life primarily because this was the useful life implied by the Claimant’s own contemporaneous projections.
This case illustrates the relevance of the DCF method to assess damages in a regulated environment where income streams are stable and predictable. The majority of the Tribunal considered that the DCF method should be the default method of assessing the loss of value of an investment in the absence of persuasive arguments to the contrary.