by Clifford J. Hendel, Araoz & Rueda Abogados

Until three or four years ago, both the Energy Charter Treaty in general and arbitration based on it were essentially unknown in Spain. Investment arbitration itself was a rarified specialty, known only to a handful of intrepid companies and a small cadre of advisors. The experience of the few Spanish practitioners who had any typically involved claims brought by Spanish entities against recalcitrant (and often belligerently recalcitrant) states such as Venezuela and Argentina. For so long as ECT and investment arbitration involving Spain was limited to one or two exceptional cases, rather than the “typical” case in which the Spanish party was the investor claiming denial of its treaty rights, the Spanish press paid little or no attention to the issue and the Spanish public remained blithely ignorant. The recently raging debate over ISDS drew little attention in Spain.

Times have changed. The pigeons have come to roost, some have said: Spain is the new Venezuela or Argentina, others have chimed in. An avalanche of ECT cases (24, as of this writing) has been filed against the country in the past few years; ten of these were filed with ICSID in the year ending June 30, 2015. Legal and financial advisors are falling over each other in order to get in on the action. The Spanish government has created (à la Argentina) a specialized internal team of experts to coordinate the defense against these claims, rather than relying (except in the very first cases) on outside counsel.

None of the cases has reached a decision on the merits. Given the amounts at stake, the time inherent in processing claims of this sort, the jurisdictional issues typically raised and the not uncommon practice of bifurcating liability and damages, this is not surprising.

But the older cases are nearing their end, and jurisdictional objections in some of them have reportedly been rejected. The first decisions on the merits are expected during the course of 2016. Before that shoe drops, it is worth taking a look back to see how it happened that Spain has become such a frequent target of ECT claims.

In the past two decades, Spain adopted a clear and concerted policy favorable to the development of renewable energies of all types. The lynchpin of the then-government’s Renewable Energy Plan 2005-2010 was a series of incentives to long-term investment including especially a generous guaranteed feed-in tariff. The policy worked: investment in Spain renewable energies grew spectacularly, and Spain and a number of Spanish companies became leaders in the field.

But it may have worked too well: the amount of investment attracted was excessive and long-term maintenance of the feed-in tariff and generally generous remuneration system seemed a practical impossibility causing government officials to conclude after the financial crisis of 2008 hit that the country could not afford to maintain the remuneration system in place: for a variety of reasons (many having nothing to do with renewable energy and the renewable remuneration system) a gaping “tariff deficit” had opened, with revenues generated by electricity sales being vastly outweighed by the associated costs. So starting in 2010, Spanish governments (of both stripes) have had a consistent policy – evidenced in a bevy of legal and regulatory measures which have the industry up in arms, accusing the government of creating legal uncertainty and damaging the attractiveness of Spain to foreign investors – of limiting payments to renewable investors and investments so as to reduce and (finally) eliminate the tariff deficit.

An essential and highly-controversial aspect of the reforms is the implementation of a new remuneration scheme for electricity generation, based on assuring “reasonable profitability” (linked to the yield of Spanish government bonds) for renewable plants.

Countless challenges to these measures have been filed in the Spanish courts by domestic investors. But the Spanish Supreme Court’s jurisprudence in the area seems to cast a cloak of immunity on the State in its regulatory (or “re-regulatory”) activity, essentially concluding that sophisticated investors should be aware of the inherent regulatory risk involved in their investments, thus shutting the door on their claims, so long as a reasonable return was provided and subsidies or benefits already granted were not required to be returned.

The recourse of foreign investors, though, is not limited to the Spanish courts. So, what began as a trickle in late 2011 with an ECT claim brought under UNCITRAL by a series of international investors in the Spanish photovoltaic sector, has now become a barrage, with at last report twenty ECT cases pending against Spain under ICSID and three being administered under the Stockholm Chamber of Commerce, in addition to the initial UNCITRAL claim, and involving all types of renewable energy.

It remains to be seen if the arbitral panels will be as dismissive as the Spanish courts (and the Spanish government) have been in casting aside the foreign investors’ ECT-based complaints of denial of fair and equitable treatment, creeping expropriation and improperly retroactive changes in the playing field. Arguments that the reforms were necessary, that they do not discriminate versus international investors and the like may not cut the mustard (i.e., be persuasive or even particularly relevant) before arbitral tribunals with the ECT in hand as much as they do before Spanish courts with Spanish Supreme Court jurisprudence in hand.

From what can be gleaned from press reports, it would seem that Spain has failed in at least one case to have the ECJ declared as the competent body to hear these disputes, rather than (as a national newspaper reported the words of an unidentified government source) “three guys meeting in a hotel in Paris”.

Speculating on the outcome of pending cases is always a difficult exercise. This is particularly true when one has only very limited knowledge of the facts and arguments of each case.

But a reasonable and reasonably sophisticated Spanish taxpayer and consumer of electricity may have very good reason to be concerned that one, another or a whole series of the pending arbitrations may be decided adversely to Spain. If that point is reached, and before a new and even larger wave of similar claims is filed, the Spanish government may have a very difficult decision to make: find a way to “settle” with an entire industry (or, indeed, set of industries), comprising both foreign investors who have filed arbitrations and Spanish investors who cannot, without planting the seeds for the growth of a new tariff deficit; or follow Argentina’s path of resisting enforcement of adverse awards until the bitter end.

This second path seems entirely impossible. Yet the first seems to be a veritable political and economic Rubik’s Cube. The temptation for the government will be to kick the ball down the road for as long as possible. But the road may be getting shorter and shorter. The day of reckoning is fast approaching. The other shoe may be about to drop.