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The Guide to Energy Arbitrations - Second Edition

Arbitration Involving Renewable Energy

Introduction

The past five years have seen a dramatic increase in the amount of electricity generated from renewable resources, principally wind and solar. Figures just released by the US Federal Energy Regulatory Commission indicate that renewables now account for 17 per cent of operating generating capacity in the United States but over 65 per cent of new capacity. Goals and mandates for renewable energy continue to grow. The goal is 100 per cent in Hawaii by 2045; 75 per cent in Vermont by 2032; and 50 per cent in California by 2030. Elsewhere, Germany has set itself a target of 80 per cent by 2050.

Investment in wind and solar energy has been driven by government incentive programmes. In Canada, this was largely undertaken by the province of Ontario, which established a widespread feed-in tariff (FIT) programme under the Green Energy and Green Economy Act, 2009.[1] Under the FIT contracts, the government offered a 20-year supply contract at prices substantially above market value. To further complicate matters, the Ontario programme had a substantial minimum domestic content requirement. That requirement was successfully challenged by Japan and Europe in WTO cases requiring amendments to the programme.

Another challenge was the action taken by the government of Ontario to cancel some of these programmes. The province discovered there was excess capacity on the network at night when there was less demand for the energy and the wind generally blows harder. As a result, the province ended up paying American customers to take energy off the grid. The 2011 cancellation of all offshore wind projects and the 2009 decision to drop the rates for ground mounted solar from 80 cents to 59 cents per kilowatt hour led to further disputes.[2] At year end there were two NAFTA tribunals hearing claims involving cancelled Ontario renewable projects and one action in the Ontario courts concerning another cancellation.

In both the UK and Canada investors have challenged changes to the solar incentive programmes in the local courts. In the UK that has been successful,[3] in Canada less so.[4]

In Canada investors have also challenged reductions in support programmes in two widely publicised NAFTA proceedings.[5] Recently, one of those resulted in very substantial victory for the investors. In the other, the investor lost, but that decision is under appeal.

The greatest potential for litigation lies in Europe, particularly Spain, where 27 investment treaty arbitrations have been filed, along with seven cases against the Czech Republic and five cases against Italy. Virtually all of those are under the Energy Charter Treaty (ECT).

The first European decision was the Charanne case in 2016,[6] which is discussed in this chapter. There, the investor was not successful. The majority dismissed all claims but most commentators believe the litigation is far from over. Charanne involved relatively minor adjustments to the incentive programme, which were followed by more extreme adjustments by the Spanish authorities, some of which clearly look to be retroactive. Retroactivity as the courts outlined in the Friends of the Earth decision can be a ‘hard-edged question’.

The first decision to deal with the later Spanish reforms was Eiser Infrastructure,[7] where an ICSID panel in May 2017 ruled that Spain must pay €128 million to British-based Eiser Infrastructure Limited and its affiliates. That may create a precedent for the 30 claims that Spain is still facing with respect to the solar incentives including those launched by a sovereign fund from Abu Dhabi, various German municipalities and a Canadian civil service pension fund. Unlike Charanne, Eiser was a unanimous opinion of an ICSID panel.

The development of renewable energy is shifting away from Europe. In the UK the amount of solar power installed in 2016 fell from the previous year as a result of the drastic cuts in incentives that the government initiated, including the end of subsidies for large-scale solar farms. However, the UK still led Europe in solar growth with 29 per cent of new capacity followed by Germany with 21 per cent and France with 8.3 per cent. Across Europe the total amount of solar now exceeds 100 gigawatts.

Attention in world solar markets is shifting to the United States, which in 2016 nearly doubled its annual installation rate to 15,000 megawatts (MW) of solar compared to less than half that in 2015. For the first time solar ranks as the number one source of new electricity generating capacity United States accounting for 35 per cent of new capacity additions across all fuel types.

The American market, unlike the UK, Canada and Europe, is less dependent on FIT contracts and has relied to a greater degree on solar investment tax credits. Since their introduction in 2006, these credits have been relatively stable. In the last decade solar in the United States has experienced an annual compound growth rate of more than 60 per cent. Particularly interesting in the United States is the increased dominance of utility-scale solar, which now represents two-thirds of the market.

The changing market dynamics will influence the world of dispute resolution. In the past, disputes involving renewable energy have centred on FIT contracts and other incentive schemes that governments designed to develop the market. Today, subsidies are becoming less and less necessary.

The cost of large-scale solar projects continues to rapidly decline falling by 11 per cent in 2016 and 85 per cent since 2009. This makes new solar projects competitive with natural gas power plants in many regions of the US, even before federal investment tax credits. In many United States markets wind projects are the lowest-cost option among all energy technologies. The cost of rooftop residential solar technology is down almost 26 per cent and the median cost of electricity through offshore wind generation has declined approximately 22 per cent.

Recent decisions

The first three awards in international arbitrations dealing with government decisions to cut back incentive programmes established to increase investments in renewable energy. were handed down in 2016. The first was Charanne[8] in January 2016, a claim against Spain under the ECT. This was followed by Mesa Power[9] in May of 2016 and Windstream Energy[10] in December 2016, both of which were arbitrations under NAFTA against Canada.

The NAFTA claims involving amendments to renewable energy incentive programmes adopted by the province of Ontario under the province’s Green Energy Act. In both Charanne and Mesa Power the complainants were unsuccessful although there was a dissent in both cases. In the last case, Windstream Energy, the complainant was successful and received an award of C$25 million, the largest Canadian NAFTA award to date.

Charanne

The first decision involving solar incentives in Europe was Charanne, where the majority dismissed entirely the claims of a Dutch company and Luxembourg company that had jointly invested in solar generation based on an incentive programme established by the Spanish government. As in Ontario, the Spanish programme consisted of feed-in tariffs for a 25-year period. Aside from the attractive rate for the power, the programme allowed the claimants to distribute all of the energy produced to the grid. Subsequently the Spanish government amended the programme to limit the amount of electricity that could be supplied and added a new charge for grid access.

The claimants argued that the amendments reduced their return on investment and expropriated part of the value of their investment in breach of Article 13 of the ECT. They also argued that the amendments violated the standard of fair and equitable treatment and denied their legitimate expectations as investors contrary to ECT Article 10(1) and (12).

A majority dismissed all of the claims. The claim for indirect expropriation was dismissed on the ground that the claimants had failed to show that the investor had been deprived of all or part of its investment. This claim failed because the programme remained in place, as did the contracts, although the rate of return was reduced.

The majority also held that the government actions did not breach the investors legitimate expectations because the claimants had not received any specific promises or commitments from Spain. The programme did not create commitments to specific individuals and investors. The tribunal found that a commitment to a group of investors did not amount to a commitment to an individual investor, noting that to find otherwise would amount to an excessive limitation on the power of the state to regulate the economy in accordance with the public interest.

In support of this conclusion, the tribunal also noted that the materials provided to the investors in 2007 did not say that the feed-in tariff would stay in place for the regulatory lives of the solar plants. To decide otherwise, the tribunal stated, would mean that any modification of the tariff would be a violation of international law, a principle the tribunal was not prepared to accept.

There is another rationale to the decision that might find its way into other decisions. The majority concluded that to exercise the right of legitimate expectations the claimants must show that they had first made a diligent analysis of the legal framework for the investment. The tribunal found that if the claimant had done that, it would have discovered that amendments to the feed-in tariff programme were permitted under established Spanish domestic law.

But is domestic law the right test? The dissenting arbitrator disagreed with the majority concluding that legitimate expectations can arise where states grant incentives to a specific category of persons in exchange for their investment. The dissenting arbitrator found that regardless of the state’s regulatory power under domestic law, a breach of an investor’s legitimate expectations should result in compensation.

Eiser Infrastructure

The government of Spain was not as fortunate in the second decision relating to Spanish renewable energy incentives. On 5 May 2017 an ICSID panel in the unanimous decision ordered Spain to pay €128 million to Eiser Infrastructure Limited and its affiliate Energía Solar Luxembourg. The panel ruled that the Spanish government had violated Article 10 of the Energy Charter Treaty, depriving the company of fair and equitable treatment.

The original claim, which was filed in 2013, was for €300 million. Nonetheless the decision is a major setback for Spain, which is facing dozens of similar cases. 

Eiser partnered with Elecnor in Spain, and engineering firm Aries. Together the three partners invested over €935 million in 2007 in three thermal solar plants in Spain. The Eiser case differs materially from the Charanne case discussed above. Charanne, which was decided two years earlier, related to amendments to the incentive programme Spain first introduced in 2010 to the feed-in tariff regime. Eiser relates to the later reforms made between 2012 and 2013 to address a €26 billion electricity tariff deficit the government was then facing.

 There are still 30 claims outstanding in Spain relating to the 2013 reforms that Eiser considered. The Spanish government in a statement noted that the tribunal only partly upheld Eiser’s claims and the panel’s decision did not question the state’s right to take appropriate regulatory measures. The Spanish government also indicated that it is considering an appeal against the decision. However, unlike Charanne, Eiser was a unanimous decision of the ICSID panel.

Windstream Energy

In October 2012, Windstream filed a claim against the government of Canada in the amount of C$475 million. Following a 10-day hearing in February 2016, a panel of three arbitrators issued an award of C$26 million, resulting from Ontario’s decision in 2011 to suspend all offshore wind development.

The panel accepted Windstream’s argument that the government’s decision frustrated Windstream’s ability to obtain the benefits of the 2010 contract it had signed with the Ontario Power Authority.

In November 2009, Windstream had submitted 11 FIT applications for wind power projects, including an application for a 300MW 130 turbine offshore wind project near Wolfe Island in Lake Ontario. The Ontario Power Authority (OPA) offered Windstream a FIT contract in May 2010, which Windstream signed in August of that year. Under the contract, the OPA would pay Windstream a fixed price for power for 20 years. In total, the contract was worth C$5.2 billion.

During this period, the Ontario government was conducting a policy review to develop the regulatory framework for offshore wind projects, including a proposed 5 kilometre shoreline exclusion zone. The policy review ceased on 11 February 2011, when the government of Ontario decided to suspend all offshore wind development until further research was completed.

The main ground for the Windstream claim was that the Ontario decision was arbitrary and was based on political concerns that the wind contracts would increase electricity rates. Windstream argued that the government really had no intention of pursuing scientific research.

Canada, in response, said that Ontario was entitled to proceed with caution on offshore wind development and that NAFTA does not prohibit reasonable regulatory delays.

Windstream made a number of claims under the NAFTA. The most important (and the only one that succeeded) was a breach of Article 1105(1) (the minimum-standard-of-treatment provision), which reads: ‘Each Party shall accord to investments of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.’

In finding that there was a breach, the tribunal questioned whether the real rationale for the moratorium was the need for more scientific research. Just as important was the tribunal finding that Ontario made little, if any, efforts to accommodate Windstream, and seemed to deliberately keep Windstream in the dark. This is best set out in the decision at paragraphs 366 and 367:

The Tribunal notes that following the signing of the FIT Contract on 20 August 2010, the position of the Government of Ontario grew gradually more ambiguous towards the development of offshore wind. Thus, while the Government appears to have envisaged still in August 2010 that the relevant regulatory framework, including the setback requirements, would be in place possibly . . . its position started changing in the fall of 2010. This change appears to have coincided with the receipt and analysis of the information generated through the EBR posting of 25 June 2010, which indicated an increasing resistance to the development of offshore wind. . . . It does not appear from the evidence that the various options that were being considered and the related concerns were communicated to Windstream, either at the meetings between the government officials and Windstream representatives or otherwise. On 10 December 2010, Windstream delivered a force majeure notice to the OPA, effective from 22 November 2010, stating that MNR’s failure to proceed with the permitting process, in particular the site release process, and MOE’s failure to take steps to implement its policy proposal to create an exclusion zone, had prevented Windstream from progressing the Project in accordance with the FIT Contract.

The tribunal concluded at paragraph 380:

The Tribunal concludes that the failure of the Government of Ontario to take the necessary measures, including when necessary by way of directing the OPA, within a reasonable period of time after the imposition of the moratorium to bring clarity to the regulatory uncertainty surrounding the status and the development of the Project created by the moratorium, constitutes a breach of Article 1105(1) of NAFTA It was indeed the Government of Ontario that imposed the moratorium, not the OPA, so it cannot be said that the resulting regulatory and contractual limbo was a result of the Claimant’s own failure to negotiate a reasonable settlement with the OPA. The regulatory and contractual limbo in which the Claimant found itself in the years following the imposition of the moratorium was a result of acts and omissions of the Government of Ontario, and as such is attributable to the Respondent. The Tribunal therefore need not consider whether the conduct of the OPA during the relevant period must also be considered attributable to the Respondent.

There was a further claim by Windstream that Ontario had violated Article 1102 of NAFTA by granting Windstream less favourable treatment than was accorded to other entities in similar circumstances. It was argued that the treatment of Windstream was less favourable than the treatment Ontario granted to TransCanada.

Both TransCanada and Windstream were parties to power purchase agreements with the OPA that guaranteed a fixed price for electricity. Both contracts were terminated. However, when Ontario terminated the TransCanada contract, Ontario awarded TransCanada a new project and compensated it for the costs of the cancellation. In contrast, Ontario failed to do the same for Windstream following the offshore moratorium.

The tribunal rejected Windstream’s argument, noting that Article 1102 deals with national treatment and most-favoured nation treatment. However, the tribunal concluded that TransCanada was not in like circumstances. Unlike TransCanada, Windstream had a FIT contract for offshore wind.

There is no question that the TransCanada project was different from the Windstream project. TransCanada had a contract with the OPA to build a gas generation plant in Mississauga, near Toronto. The local residents were not happy with this, and the Liberal government cancelled the project in the heat of the provincial election. To keep TransCanada happy, the OPA negotiated an agreement that reimbursed them for their costs and gave them a new contract in another area.

The circumstances were different and so was the government’s response. In TransCanada there was extensive negotiation, whereas in Windstream there was none. The tribunal concluded that the two projects were totally different and, therefore, did not result in like circumstances. TransCanada does not even provide renewable energy, which is the basis of all FIT contracts.

Accordingly, the tribunal ruled that the moratorium and related measures did not apply to TransCanada in the first place. TransCanada was not affected by the moratorium on offshore wind. Moreover, the tribunal ruled that the moratorium was not applied in a discriminatory manner because it resulted in the cancellation of all offshore wind projects. Windstream had the only contract for offshore wind and the tribunal therefore concluded that it could not agree that Windstream had been treated less favourably than other developers of offshore wind.

Mesa Power

The decision of the NAFTA panel in Mesa Power was very different to that in Windstream Energy. It also involved claims under Article 1105 of the NAFTA.

On 24 September 2009 the Ontario Minister of Energy directed the Ontario Power Authority to create the FIT programme including the FIT rules, which established the eligibility criteria as well as the criteria for evaluating applications, the deadlines for commercial operation and the domestic content requirements. Those were originally set at 25 per cent but increase later to 50 per cent. The domestic content requirements were subsequently challenged under another regulatory regime.[11]

The FIT programme offered 20- or 40-year power purchase agreements with the OPA, under which the generator was a guaranteed a fixed price per kilowatt hour for electricity delivered to the Ontario grid. Contracts were available for projects located in Ontario that generated electricity exclusively from renewable energy. Applicants also had to establish that the project could be connected to the electricity grid through a distribution system or transmission system. That proved to be a particular problem for Mesa Power.

In 2011, Mesa Power Group, a US corporation owned by Texas oil tycoon T Boone Pickens, filed a C$775 million claim against Canada relating to the province of Ontario’s policy of awarding power purchase agreements under the Ontario feed-in tariff programme for the supply renewable energy.

Mesa claimed that Canada adopted discriminatory measures, imposed minimum domestic content requirements and failed to provide Mesa with the minimum standard treatment, in violation of NAFTA’s investment provisions. In the end, the tribunal dismissed all of Mesa’s claims and ordered Mesa to bear the cost of the arbitration as well as a portion of Canada’s legal costs of nearly C$3 million.

Mesa argued that the reason it did not receive any FIT contracts was that the programme was mismanaged and Mesa was discriminated against when Ontario granted unwarranted preferences to two other applicants. Windstream really turned on the legitimacy of the moratorium issued by Ontario to defer all offshore wind generation and the conduct of the Ontario government following the announcement of that moratorium.

The OPA launched the FIT programme in October 2009. During the first round of contacts, it reviewed 337 applications and granted 184 contracts for a total of 2,500MW of capacity. The second round of contracts took place in February 2011. Forty FIT contracts for a total of 872MW were issued. The third round of contracting took place in July 2011, resulting in 14 contracts totalling 749MW.

Mesa Power filed six applications under the FIT programme but was unsuccessful in all three rounds of contracting. The problem was that all the MESA projects were located in Bruce County. To obtain a contract all applicants had to demonstrate that they had the right to connect to the transmission system. Mesa was unable to obtain transmission connection because of the transmission constraints in Bruce County.

Mesa argued that the failure to acquire transmission access was because of flaws in the contracting process and preferences granted to two other parties, namely Next ERA Energy (an affiliate of Florida Light and Power) and the Korean Consortium led by Samsung.

Mesa argued that this conduct amounted to a breach of Article 1105(1) of NAFTA.

Before the tribunal could determine if Canada had failed to grant Mesa Power fair and equitable treatment, the tribunal had to define that term. The panel relied on the often quoted standard set out in Waste Management:

the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety – as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. In applying this standard it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant.[12]

The tribunal in Mesa Power went on to state:

On this basis, the Tribunal considers that the following components can be said to form part of Article 1105: arbitrariness; ‘gross’ unfairness; discrimination; ‘complete’ lack of transparency and candor in an administrative process; lack of due process ‘leading to an outcome which offends judicial propriety’; and ‘manifest failure’ of natural justice in judicial proceedings. Further, the Tribunal shares the view held by a majority of NAFTA tribunals 38 that the failure to respect an investor’s legitimate expectations in and of itself does not constitute a breach of Article 1105, but is an element to take into account when assessing whether other components of the standard are breached.[13]

The tribunal rejected all three claims that Mesa made that Canada had breached the fair and equitable treatment provisions of Article 1105 of NAFTA.

The tribunal rejected the allegation that the OPA had mismanaged the programme and did not treat all applicants fairly, noting that the OPA had retained an independent monitor to administer the FIT programme.

The tribunal also discounted the charge that NextEra had met with government officials, noting that this was common practice in the industry and there was no evidence of any preference. NextEra was given access to transmission facilities in Bruce County at one point, but apparently Mesa was also offered the opportunity.

The most contentious part of the Mesa allegations related to the Korean Consortium agreement. Mesa had argued that the agreement between Ontario and the Korean Consortium
unfairly diminished the prospects for other investors including Mesa that were already participating in the renewable energy programme by setting aside transmission capacity for the Korean Consortium that was intended for FIT applicants.

Mesa also argued that Ontario was less than transparent in negotiating the agreement, and issued inaccurate and incomplete information. Canada responded that there was nothing manifestly arbitrary or unfair when a government enters into an investment agreement that grants advantages to an investor in exchange for investment commitments.

There were two points of dissent in Mesa made by the Honourable Charles N Brower. Canada had argued that its obligations under NAFTA Articles 1102 and 1106 did not apply because the investment under the FIT programme was procurement under Article 1108. The majority concluded that the FIT programme did constitute procurement and dismissed the claims under Article 1102. Judge Brower dissented from the finding that the FIT agreement did not constitute procurement.

Judge Brower did agree with the majority that any breach of Article 1105 should be defined by the test in Waste Management,[14] which required a finding of gross unfairness, complete lack of transparency, and lack of due process leading to an outcome that offends judicial propriety. The majority, however, did not believe that the evidence supported that conclusion. In addition, the majority found that states should be given a high level of deference in deciding how to regulate their affairs. Judge Brower dissented from that finding, stating that Canada had breached Article 1105 by the grotesque preference given to the Korean Consortium:

The nub of what I see as Ontario’s, hence Canada’s, violation of Article 1105 is that it torpedoed the Feed-In Tariff (‘FIT’) program as offered at large, including in relation to Claimant’s Arran and TTD projects, to the extent of the 500 megawatts (‘MW’) committed to the Korean Consortium on 17 September 2010 in implementation of the Green Energy Investment Agreement . . . . Up until then Claimant’s projects, as well as all other FIT applicants, had been competing for capacity that had been 500 MW or greater. Moreover, – and this can only be characterized as grotesque – as it actually happened, the Korean Consortium was thereby enabled to acquire low-ranked FIT applicants in order to fill its allotted 500 MW, thereby jumping clear losers in the FIT Program over higher-ranked, but ultimately unsuccessful FIT applicants, due to the reduced available megawattage. This effectively stood the FIT Program on its head, turned it upside down. Thus the Government of Ontario acted arbitrarily, grossly unfairly, unjustly, idiosyncratically, discriminated against the FIT applicants and in favor of the Korean Consortium, and acted with a complete lack of transparency and candor.[15]

The right to regulate

Much of the analysis in NAFTA cases centres on the rights of the investor, the definitions of legitimate expectations and indirect expropriation. These issues were canvassed in the last section. But what about the state’s right to regulate?

The state must have a right to regulate; it certainly has responsibilities to regulate. The
difference is that the scope of this right is greater in the case of domestic investors than foreign investors protected by NAFTA.

One thing is clear: NAFTA states cannot discriminate against foreign investors. They must be treated the same as domestic investors. That means the law must be general in application and there must be a level playing field. Once legislation targets specific parties, there is a problem. That problem exists even in the case of domestic investors. It is also widely recognised that the new regulations and legislation cannot be arbitrary or developed without due process. That principle applies to domestic investors as well.

There is nothing wrong with states giving additional protections to foreign investors compared to domestic investors. That goes to the heart of investor–state treaties. The purpose of the treaty is to attract investment.

It is generally recognised that the states enjoy police powers to provide essential services necessary to protect the public interest. These would include matters relating to security, the environment and public health.

Few would object to states exercising this jurisdiction provided the states act in good faith, and do not discriminate or expropriate private property without fair compensation. The NAFTA decisions in Methanex[16] and Chemtura[17] seem to support this proposition.

In Chemtura, a US manufacturer of lindane, an agricultural insecticide moderately hazardous to human health and the environment, claimed a breach of NAFTA by Canada’s prohibition of its sale. The tribunal rejected the claim, stating:

Irrespective of the existence of a contractual deprivation, the Tribunal considers in any event that the measures challenged by the Claimant constituted a valid exercise of the Respondent’s police powers. As discussed in detail in connection with Article 1105 of NAFTA, the PMRA took measures within its mandate, in a non-discriminatory manner, motivated by the increasing awareness of the dangers presented by lindane for human health and the environment. A measure adopted under such circumstances is a valid exercise of the State’s police powers and, as a result, does not constitute an expropriation.[18]

A state runs into problems under NAFTA where a specific promise is made to a specific investor, the investor relies on the promised undertakings as a condition of making the investment, and then the state rescinds the promise. However, to qualify for this rule, the promise must usually be made to a specific investor.

Legislation is always changing. Very few pieces of legislation have sunset clauses that declare when they end, and no legislation or set of regulations lasts forever. Laws necessarily change with changing circumstances.

These concepts are not unique to NAFTA. Set out below are a number of decisions under different treaties that set out these same principles.

In Continental Casualty[19] the tribunal stated:

It would be unconscionable for a country to promise not to change its legislation as time and needs change, or even more to tie its hands by such a kind of stipulation in case of crisis of any type or origin arose. Such an implication as to stability in the BIT’s Preamble would be contrary to an effective interpretation of the Treaty; reliance on such an implication by a foreign investor would be misplaced and, indeed, unreasonable.

Similarly in EDF v. Romania[20] the tribunal held:

The idea that legitimate expectations, and therefore FET, imply the stability of the legal and business framework, may not be correct if stated in an overly-broad and unqualified formulation. The FET might mean the virtual freezing of the legal regulation of economic activities, in contrast with the State’s normal regulatory power and the evolutionary character of economic life. Except where specific promises or representation are made by the State to the investor, the latter may not rely on a bilateral investment treaty as a kind of insurance policy against the risk of any changes in the host State’s legal and economic framework. Such expectation would be neither legitimate nor reasonable.

In Total v. Argentina[21] the tribunal stated:

In the absence of some ‘promise’ by the host State or a specific provision in the bilateral investment treaty itself, the legal regime in force in the host country at the time of making the investment is not automatically subject to a ‘guarantee’ of stability merely because the host country entered into a bilateral investment treaty with the country of the foreign investor.

And in El Paso v. Argentina[22] the tribunal reminded us that:

Under a FET clause, a foreign investor can expect that the rules will not be changed without justification of an economic, social or other nature. Conversely, it is unthinkable that a State could make a general commitment to all foreign investors never to change its legislation whatever the circumstances and it would be unreasonable for an investor to rely on such a freeze.

The problem is that, ultimately, these things may come down to what is fair or reasonable. There is no bright-line but arbitrators will look for red flags; for example, giving undertakings that investors rely on and later rescinding them, obvious breaches of due process or situations where states claim that the new regulatory policies are for one purpose, such as the need for more scientific research, when that is not the real purpose. That situation has emerged in the renewable energy cases discussed in the concluding section of this chapter.

Deference to legislators

Deference is an important concept. In Canada and the United States courts routinely grant deference to both arbitrators[23] and regulators.[24] In investor–state arbitrations, arbitrators grant deference to governments, particularly where those governments are carrying out a regulatory function where the public interest is the dominant test.

In Mesa Power[25] the tribunal pointed to the deference that NAFTA Chapter 11 tribunals usually grant to governments when it comes to assessing how governments regulate and manage their affairs. The tribunal stated:

In reviewing this alleged breach, the Tribunal must bear in mind the deference which NAFTA Chapter 11 tribunals owe a state when it comes to assessing how to regulate and manage its affairs. This deference notably applies to the decision to enter into investment agreements. As noted by the S.D. Myers tribunal, ‘[w]hen interpreting and applying the “minimum standard”, a Chapter Eleven tribunal does not have an open-ended mandate to second-guess government decision-making.’ The tribunal in Bilcon, a case which the Claimant has cited with approval, also held that ‘[t]he imprudent exercise of discretion or even outright mistakes do not, as a rule, lead to a breach of the international minimum standard.’[26]

In addition to the references in SD Myers and Bilcon pointed out by the Mesa Power tribunal, we can add the tribunal’s comments in Thunderbird at paragraph 127 that the state ‘has a wide discretion with respect to how it carries out such policies by regulation and administrative conduct.’[27]

There are two subcategories of the deference principle when it comes to international arbitration. First, tribunals have taken the position that they should defer to scientific findings states make on a non-discriminatory and non-arbitrary basis in accordance with due process. The conflict between the rights of investors and states often arises in the context of environmental issues. A number of those cases have been referred to in this chapter. Environmental cases invariably turn on scientific evidence.

In Chemtura, the tribunal noted that ‘[i]t is not within the scope of its task to second-guess the correctness of the science-based decision-making of highly specialised national regulatory agencies.’[28] This is identical to the principle that US and Canadian courts apply when they defer to government regulators.[29]

The second subcategory of the deference principle is a long-standing international law principle called ‘police powers’. The principle is that certain state action is beyond compensation for expropriation under international law because states enjoy wide latitude to regulate within the realm of their police powers.

Police powers are often defined to include municipal planning, safety, health and environmental issues, as well as areas involving serious fines and penalties. In Chemtura the tribunal held that Canada’s regulations phasing out the use of lindane constituted a valid exercise of Canada’s police powers and did not constitute expropriation.[30] In summary, the deference principle routinely used by NAFTA arbitrators is not unique. It parallels the deference courts use in deferring to regulators. Deference is particularly appropriate where the regulatory agency is a specialised one with particular expertise in dealing with complex evidence of a scientific nature. However, it goes without saying that both courts and arbitrators will wade into the fight if there is an abuse of process.

Domestic investors

Consider the cases involving the Ontario ban on wind generation. An American company, Windstream, obtained a C$25 million judgment from a NAFTA panel. when Ontario cancelled the programme. Trillium Power, a Canadian company with the same complaint, was out of luck in the Ontario courts.[31] The same thing happened in SkyPower.[32] There the judge remarked: ‘While it may seem unfair when rules are changed in the middle of a game, but that is the nature of the game when one is dealing with government programs.’

Trillium Power Wind Corporation, a Toronto-based developer building offshore wind turbines in Lake Ontario, had applied to lease provincial land under Ontario’s wind power policy and had been granted applicant-of-record status by the Ministry of Natural Resources.

That status gave Trillium three years to test the wind power. After that, the company could proceed with an environmental assessment and obtain authorisation to operate the wind farm.

Trillium subsequently notified the Ontario Ministry of Natural Resources that the company intended to close a C$26 million financing for the project. On the same day the government of Ontario issued a moratorium on offshore wind development including developers like Trillium that had applicant-of-record status. The government issued a press release stating that the projects were cancelled pending further scientific research.

Trillium brought a number of claims against the Ontario government seeking C$2 billion in damages. The claims included breach of contract, unjust enrichment, negligent misrepresentation, misfeasance in public office and intentional infliction of economic harm.

The province brought a motion to strike the Trillium statement of claim on the basis that it did not disclose a reasonable cause of action. The motion was successful. The motion judge found that the government decision to close the wind farms was a policy decision and therefore immune from suit.

The motion judge also found that the fact that Trillium had been granted applicant-of-record status did not amount to a contractual relationship between Trillium and the government. The motion judge concluded that the claim should be struck because it was plain and obvious that the claim could not succeed at trial.

Trillium appealed on two grounds: first, misfeasance in public office was a tenable claim as a matter of law; and second, the claim had been adequately pleaded. The Ontario Court of Appeal agreed. It was not clear that the claim of misfeasance in public office would necessarily fail. Moreover, Trillium had properly pleaded that the province’s actions were taken in bad faith for improper purpose. The Court also found that the government’s decision was made to harm Trillium specifically. While the Court of Appeal did agree with the motions judge that a government decision involving political factors was immune, there was an exception for irrational acts of bad faith.

The facts in this case were unique. It was clear that Trillium’s announcement disclosing new financing triggered the government action. And, as the court concluded, the government specifically targeted Trillium.

This is an important case for wind developers. Government contracting for wind is now common. And it is not unusual for governments to change these programmes. Nor is it unusual for developers to incur substantial costs in processing their applications.

Successful claims against governments that cancel projects are rare but may increase.

This is the first time the tort of misfeasance in public office has found its way into the energy sector. The principle was not clearly defined until the House of Lords decision in Three Rivers District Council v Bank of England in 2000.[33] The tort came to Canada in 1959 in Roncarelli v Duplessis[34] but was rarely used until the Supreme Court of Canada decision in Odhavji Estate v. Woodhouse in 2003.[35]

Two recent decisions in 2008, one by the Federal Court[36] and the other by the Ontario Court of Appeal,[37] suggest the tort may be successful where a tort of negligence would fail. In addition, malice and reckless indifference are difficult concepts making it hard to strike out these claims at the pleading stage.

In O’Dwyer, the Ontario Court of Appeal found that liability could exist where officials are ‘recklessly indifferent or wilfully blind as to the illegality of their actions and their potential to harm the plaintiff.’ This is a broad principle that places a real constraint on questionable government action.

The Trillium Power case is still before the Canadian courts. A number of investor cases have also come before the Spanish courts. None of them have been successful, however, as summarised by Professor Carmen Otero.[38]

To summarise, both the Supreme and the Constitutional Courts, in their respective spheres of action, have considered that cuts to the incentives do not entail any violation of the
constitutional principles of legal certainty, legitimate expectations, and the prohibition on retroactivity. They have ruled that cuts respond to a public interest duly justified by the legislator and in particular, that the cuts constituted the public authority’s reaction to the renewable energies technology evolution and were required to fight the tariff deficit and guarantee sustainability of the electricity system. Therefore, the measures could not be considered an arbitrary use of public power.[39]

Investors have been more successful in English courts, however. In Friends of the Earth[40] investors challenged the restrictions the UK government made in the incentives under the FIT programme created to encourage solar energy.

The government reduced both the tariff term and the rate but in addition provided that the lower rate would be effective prior to the enactment of the new regulations. The plaintiffs attacked that provision on the ground that it was retroactive.

The High Court granted the challenge stating that legislation had on his terms of no retroactive intent and without a specific provision the new regulation was invalid. The Court of Appeal upheld the decision[41] and the Supreme Court denied leave to hear any further appeal.

This is an important distinction between the UK case and the Spanish cases. Charanne did not involve any claim of retroactivity. There are, however, Spanish cases currently before arbitrators that do involve retroactivity. The result may be different in those cases.

Retroactivity is also an important concept in North America. Virtually all of the renewable energy companies are regulated by regulatory agencies. All prohibit retroactive rates. This is true in both Canada[42] and the United States.[43] Domestic investors in North America will likely have a remedy if the incentive schemes are modified in a fashion that has retroactive effect without specific authorisation in the statute.

Conclusion

There are a limited number of renewable energy decisions to date. But they will increase dramatically in the near future. By 2020 most industrial countries will obtain more than 50 per cent of their new energy requirements from renewable sources.

The nature of the disputes will change. Most of the disputes to date concern government incentive programmes and changes to them. By now most of those programmes have been phased out. For the most part, significant cost reductions in the new technology have eliminated the need for incentives. However, the combination of wind, solar and storage along with local gas-fired generation will lead to a very substantial investment in most countries. An investment of this magnitude will require an effective dispute resolution process.

Notes


[1]    Green Energy and Green Economy Act, 2009, SO 2009, c12, Sched A.

[2]    Trillium Power Wind Corp v. Ontario, 2013 ONCA 6083; Capital Solar Power Corp v. Ontario Power Generation, 2015 ONSC 2116; Carhoun and Sons v. Canada, 2015 BCCA 163.

[3]    Secretary of State for Energy and Climate Change v. Friends of the Earth et al [2011] EWHC 3575.

[4]    2013 ONCA 683, 117, OR (3d) 721; SkyPower v. Ministry of Energy, [2012] OJ No. 4458 at para 84.

[5]    Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March 2016; Windstream Energy LLC v. Government of Canada, PCA Case No. 2013-22, 27 September 2016.

[6]    Charanne B.V. and Construction Investments v. Spain, SCC Arb. No.062/2012.

[7]    Eiser Infrastructure Limited and Energia Solar Luxembourg v Kingdom of Spain, ICSID Case No. ARB/13/36.

[8]    Charanne B.V. and Construction Investments v. Spain, SCC Arb. No.062/2012.

[9]    Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March 2016.

[10]   Windstream Energy LLC v. Government of Canada, PCA Case No. 2013-22, 27 September 2016.

[11]   That requirement was successfully challenged by Japan and Europe in WTO cases reporting amendments to the programme. WTO, Canada – Measures relating to the Feed-In Tariff Program (WT/DS 426/AB/R).

[12]   Waste Management Inc v. United Mexican States, ICSID No. ARB(AF)00/3, Award, 30 April 2004, at section 99.

[13]   Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March 2016, at paragraph 502.

[14]   See, for instance, Waste Management Inc v. United Mexican States (ICSID No. ARB(AF)00/3), Award, 30 April 2004 at section 96; Cargill, supra note 13 at section 296.

[15]   Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March 2016. Concurring and dissenting opinion of Judge Charles N. Brower at paragraph 4.

[16]   Methanex Corp v. United States, Decision on Amici Curiae 15 January 2001; UPS v. Canada, Decision on Amici Curiae, 17 October 2001.

[17]   Chemtura Corporation v. Canada, Award, (UNCITRAL, 2 August 2010).

[18]   Id. at paragraph 266.

[19]   Continental Casualty v. Argentine Republic, ICSID Case No. ARB/03/9, Award (5 September 2008) paragraph 258.

[20]   EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award (8 October 2009) paragraph 217.

[21]   Total SA v. Argentine Republic, ICSID Case No. ARB/04/01, Decision on Liability (27 December 2010) paragraphs 128–30.

[22]   El Paso Energy International Company v. Argentine Republic, ICSID Case No. ARB/03/15, Award (31 October 2011) paragraph 372.

[23]   Moses H Cane Memorial Hospital v. Mercury Construction, 460 US 1(1983) at 24; Dell Computer Corp v. Union des consommateurs, 2007 SCC 34, [2007] 2 SCR 801; Ontario Hydro v. Dominion Mines Ltd, (1992 OJ 2848).

[24]   Mclean v. British Columbia Securities Commission, 2013 SCC 67, [2013] 3 SCR 895; Chevron v. Natural Resource Def Council, 467 US 837; Walton v. Alberta Securities Commission, 2014 ABCA 273 at paragraph 17.

[25]   Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March, 2016.

[26]   Id. at paragraph 553 (footnote omitted).

[27]   International Thunderbird Gaming Corp v. United Mexican States, at paragraph 127, Award, (UNCITRAL 26 January 2006).

[28]   Cemtura Corp v. Canada, at paragraph 134, Award, (UNCITRAL 2 August 2010).

     Mclean v. British Columbia Securities Commission, 2013 SCC 67, [2013] 3 SCR 895; Chevron v. Natural Resource Def Council,467 US 837; Walton v. Alberta Securities Commission, 2014 ABCA 273 at paragraph 17.

[29]   Mclean v. British Columbia Securities Commission, 2013 SCC 67, [2013] 3 SCR 895; Chevron v. Natural Resource Def Council,467 US 837; Walton v. Alberta Securities Commission, 2014 ABCA 273 at paragraph 17.

[30]   Cemtura Corp v. Canada, at paragraph 266, Award, (UNCITRAL 2 August 2010).

[31]   2013 ONCA 683, 117, OR (3d) 721.

[32]   SkyPower v. Ministry of Energy, [2012] OJ No. 4458 at paragraph 84.

[33]   Three Rivers District Council v Bank of England [2000] 2 WLR 1220 (HL).

[34]   Roncarelli v. Duplessis, [1959] SCR121.

[35]   Odhavji Estate v Woodhouse (2003) SCJ No 74.

[36]   McMaster v. The Queen 2009 FC 937.

[37]   O’Dwyer v Ontario Racing Commission (2008) 293 DLR (4th) 559 (Ont CA) at paragraph 42.

[38]   Carmen Otero Garcia-Castrillon, ‘Spain and Investment Arbitration: The Renewable Energy Explosion’, November 2016, Centre for International Governance Innovation (CIGI).

[39]   Id. at page 10.

[40]   Secretary of State for Energy and Climate Change v. Friends of the Earth et al [2011] EWHC 3575.

[41]   [2012] EWCA 28.

[42]   Northwestern Utilities Ltd. v. Edmonton,[1979] 1 SCR 684; Bell Canada v. Canada Radio Television and Telecommunications Commission, [1989] SCJ No.68 at 708.

[43]   Associated Gas Distributors v. FERC, 898 F2d 809 (DC Circuit.1990); San Diego Gas and Electric v. Sellers of Energy, 127 FERC 61,037 (2009).

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