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July 27, 2017 Practice Points

Charanne: A New Extension of States' Regulatory Powers

By Maria Puppo Martinez

With a worldwide increased need to develop alternative energy resources, the Energy Charter Treaty (ECT) has become the most important instrument for investor protection in the international energy industry. The protections afforded to international investors under the ECT are similar to those present in bilateral investment treaties (BITs): Under the ECT, investors are given protections against expropriation of their property without proper compensation. The creation of such rights has given rise to a new trend of claims against states; this, in turn, has created doubts in the international investment arbitration community regarding the regulatory powers of states and the strength of the assurances provided to investors under the ECT.

In this regard, Spain has become the center of attention. In 2005, Spain passed legislation (the Renewable Energy Plan) to incentivize foreign investors to invest in its alternative-energy sector. The legislation sought to create a more favorable tariff regime for investors, encouraging capital flow and also allowing the Spanish government to meet the European Union targets for the renewable-energy sector. Notwithstanding these efforts, the Renewable Energy Plan could not sustain itself and, as a result, Spain was forced to withdraw most of the promises it made to investors. Over time, many investors filed claims before international tribunals alleging that the drastic change in the regulatory regime that lured them into investing in Spain constituted an expropriation and, thus, a breach of the ECT.

Spain is now battling at least a dozen claims that originate from the aforementioned scenario. So far, only one dispute has reached a final award: Charanne (Charanne B.V. and Construction Investments v. Kingdom of Spain, SCC 062/2012). The award came out in early January 2016 but it was not what most people expected. The facts are quite clear. Spain made promises and granted tariff cuts to induce investors to invest in its territory. As time went by, this “tax haven” became unsustainable, Spain withdrew its promises, increased tariffs, and the expected value of the investments was significantly reduced. Some commentators considered it a textbook expropriation case.

To the surprise of many, the Spanish Constitutional Court ruled in favor of Spain, holding that: (1) No expropriation had occurred because, given that the plants were still profitable, investors had only been partially deprived of their property; and (2) the Renewable Energy Plan did not contain any specific promises or commitments that would infringe upon the legitimate expectations of investors, and finding otherwise would constitute an “excessive limitation on the power of States to regulate their economy” (Charanne at para. 493).

Although the Charanne decision has no binding effect, it is, nonetheless, persuasive authority for all other tribunals that are currently hearing claims of similarly situated investors. The award might be the first of many to recognize strong regulatory powers for states. In that event, there is a concern that expropriation clauses in BITs, as well as the ECT, may mean little to nothing unless the tribunal finds a complete disregard of investors’ rights on the part of the state.

Given the obvious benefits of arbitration and the globalized nature of investment, arbitral tribunals ought to seek to strike a balance between public and private interests. Hopefully future disputes will create such a balance and thereby continue to encourage international investment in energy production.

Maria Puppo Martinez, is a 2017 J.D. candidate at De Paul University College of Law in Chicago, Illinois.

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