A dispute between Antaris GmbH and Dr. Michael Göde against the Czech Republic relates to certain measures undertaken by the Czech Republic in the renewable energy sector and alleged breaches of international obligations under the Energy Charter Treaty and the BIT concluded between the Federal Republic of Germany and the Czech and Slovak Federal Republic on the Promotion and Reciprocal Protection of Investments (PCA Case No. 2014-01).
Regardless of incompatibility of investor-state dispute settlement (ISDS) with EU law declared by the Court of Justice of the EU in the judgment Achmea v. Slovakia (in March 2018), a tribunal constituted under the PCA composed of Lawrence Antony Collins, Gary Born and Peter Tomka found that it had jurisdiction to hear the intra-EU investment dispute (the investor incorporated in the EU member state against another EU member state). In the award issued on 2 May 2018, the tribunal dismissed claimant’s claims.
Antaris GmbH is a company incorporated in Germany and Dr. Michael Göde is a German national. They argued that the Czech Republic breached its obligations under the ECT and the BIT by repealing incentive arrangements to attract investors in photovoltaic power generation contrary to its guarantees.
At the EU level, Directive 2001/77/EC on the Promotion of Electricity Produced from Renewable Energy Sources in the Internal Electricity Market and later Directive 2009/28/EC on the Promotion of the Use of Energy from Renewable Sources recognized the need for public support in favour of renewable energy sources, including mechanisms such as green certificates, investment incentives, tax exemptions or reductions, etc. These measures were expected to encourage investment in renewable energy projects and significantly contribute towards achieving EU energy and climate objectives.
In this context, the Czech Republic adopted, inter alia, Act No. 180/2005 Coll. on the promotion of electricity production from renewable energy sources providing renewable energy producers with either feed-in tariffs or green bonuses. The act allowed renewable energy producers to sell electricity on a priority basis to the grid operator for the prices set yearly by the Czech Regulatory Office, and laid down a 15-years period for return on investment. In addition, the purchase prices set by the Energy Regulatory Office for the subsequent year could not be reduced by more than 5% compared to the purchase price in the year when this price decision was made (so-called 5% rule).
However, since new technologies significantly reduced the costs of development, support schemes set by the Czech Republic became extremely attractive. Amount of investments made the operation of support schemes unsustainable and led to rising of electricity prices. In 2010, the Czech Republic took legislative measures designed to mitigate these negative effects. 2010 reform encompassed a series of amendments to the legal framework, including the abolition of the 5% rule, the adoption of a levy of 26% on the feed-in tariffs and 28% on the green bonuses and the abolition of all support for PV plants with installed output exceeding 30 kWp.
As regards the intra-EU character of the dispute, the Czech Republic made an application to the tribunal to admit the judgment of the Court of Justice of the European Union in Slovak Republic v Achmea BV, March 6, 2018, into the record and to establish a schedule for its jurisdictional objection. The tribunal refused the application on the basis that it was too late, since in Czech Republic’s Counter-Memorial, paragraph 472, it had waived any objection on the EU jurisdictional point, when it stated: “Accordingly, the Czech Republic does not pursue the jurisdictional objection articulated by the Commission before this Tribunal.”
With regard to the tribunal’s jurisdiction, it was necessary to determine whether the Solar Levy is a tax for the purposes of the Energy Charter Treaty. In particular, the Czech Republic contended that the tribunal did not have jurisdiction over the claimant’s claims that pertain to taxation by reason of Article 21 of the ECT, which excludes “Taxation Measures” from the scope of the ECT. The Czech Republic noted that the Solar Levy was a tax under Czech domestic law, it met the definition of “tax” under the Tax Administration Law, a central instrument of Czech tax law, and was listed as a tax in the reports of international organizations that use their own autonomous definitions of tax (OECD and Eurostat). In addition, the Solar Levy has never been classified as anything other than a tax in accounting legislation.
The claimant asserted that the Czech Republic introduced the Solar Levy only for the purpose of evading international liability. Since the Solar Levy was introduced for the purpose of “offsetting the introduction of the support from the State budget to pay the FiT”, instead of raising the State’s revenue, it should not be considered as a tax measure for the purposes of the Energy Charter Treaty.
According to the tribunal, in order to ascertain whether a putative tax measure qualifies under Article 21 of the ECT a two-step analysis is required: a characterization under domestic law followed by an application of Article 21’s inherent limits. In the tribunal’s view, the essential feature of a tax was that of non-equivalence, i.e. that taxes are paid without concrete consideration. The tribunal held that the ECT’s Article 21 carve-out could only be invoked for tax measures whose principle objective is to raise state revenue, and not to reduce payable FiTs. Since the Solar Levy was in essence a reduction of the FiTs payable to certain solar energy producers, the Tribunal concluded that the Solar Levy did not fall within the scope of Article 21 of the ECT.
As regards claimant’s claims on merits, Antaris GmbH and Dr. Michael Göde argued that the Czech Republic violated an obligation to provide a stable and predictable legal framework, protected under the standard of “fair and equitable treatment” set out in Article 10 of the ECT. The Czech Republic contested that the continuance of FiTs for the lifetime of the projects, the existence of a reasonable rate of return and the public purpose had precluded its regulatory measures from being found as unreasonable or disproportionate.
The tribunal concluded that to establish a legitimate expectation, an express stabilisation provision was not required. An express or implied promise is sufficient to create legitimate and reasonable expectation of stability. However, investors could prepare in advance, and thus the risk of lawsuits against the government would be minimized. The tribunal found claimants “to be opportunistic investors who saw a window of opportunity and who were aware, or should have been aware, that dealing with the solar boom was a fast-moving and controversial political issue”. In this context, the tribunal stated: “The market which the Claimants were entering was a bubble and that the Czech Government considered that the FiT regime was out of balance and that would have been obvious to anyone who participated in industry discussions, or paid attention to warnings by specialist professionals, or read the local press.” Investors know that the legislative framework may change and evolve in the light of circumstances and of political developments. The tribunal concluded that not every change gives rise to a claim based on breach of legitimate expectation and dismissed claimant’s claims.
It is worth mentioning that the claimant-appointed arbitrator Gary Born issued a dissenting opinion. He argued that legitimate expectations could arise out of the general regulatory framework. In his opinion, “to deny states the power to make binding commitments to private parties, including investors by way of legislative or regulatory guarantees, would undermine the rule of law.