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Spain Loses First Arbitration Case, Proof of Cosmic Karma

Spain has lost its first arbitration case against foreign investors in its renewable energy market. This is the first of 19 arbitration cases to have been resolved and while no monetary amount has been set for the damages, conservative estimates run into the billions of euros[1].

investors

These disputes arose because, in the 2000’s, Spain decided to become a leader in renewable energy and began offering high lucrative “fixed profit” deals in order to attract both Spanish and foreign investors. The Spanish electricity companies were also legally obligated to purchase a fixed and growing percentage of their total from renewable sources. Thus the Spanish government – and ultimately the Spanish taxpayer – was being hit on both ends, with subsidies to the generators and subsidies to the distributors. The renewable subsidies quickly ballooned to billions of euros per year as over-investment caused by these market distortions created a massive glut of renewable capacity. These deficits were only part of the overall “electrical tariff deficit”[2] as it became known, which included the above subsidies as well as subsidies to the consumer in the form of regulated prices below the mandated cost of production[3].

electricaldeficit

Yes, Spain’s electricity market is a disaster.

In 2011, finally facing the reality of the rapidly deteriorating economic situation in Spain, the Socialist government of Rodrigues Zapatero decided to cut the subsidies to renewables as a way of slowing the growth of the burgeoning budget deficits. The 30% cut in the subsidy saved the government an estimated 2.22 billion euros over three years[4]; the policy was continued under the subsequent Popular government of Mariano Rajoy Brey.

Domestic investors immediately took the government to court, but that process remains in the judicial mire and might not be decided for years. Meanwhile, foreign investors and some Spanish companies that managed to have local plants held by their foreign subsidiaries were able to use the dispute resolution mechanism of the United Nations Commission on International Trade Law[5]. This involves arbitration where each party selects one arbiter from an approved list and the arbitration body then assigns a third person as the President and tie-breaker, also from the approved list. The list is composed of “noted jurists whose international reputations rest on the perception of their impartiality.”

uncitral

I have two positive and one negative reflections to make on this case:

  1. I’m happy to see Spain’s disregard for legal securities finally come back to bite it. The country has a nasty habit of changing the rules of the game, often to favor national champions, though not in this particular case. For example:
  • In 2006, German energy giant E.ON made a “white knight” unsolicited bid to buy Spanish electric company Endesa: the government was not keen on seeing a foreign company buy so large a Spanish company and stepped in to change the rules of the game to E.ON’s disadvantage, bringing with it a condemnation by the European Commission for anti-competitive practices[6];
  • In 2013, the Spanish Treasury announced that it would start issuing “preventative fines”[7] on those multinationals that aggressively plan their cash flows and legal residences in order to minimize their tax exposure to any given market, such as Spain. This is a highly controversial practice – but it is perfectly legal. Rather than closing tax loopholes legislatively and working with international partners to share information and reform tax treaties, the Spanish government decided to proceed by executive fiat. Fines could reach 150% of the assessed value of the lost tax revenue; an assessment made by the Spanish Treasury itself – good luck appealing those judgments;
  • That was followed in 2014 by the reform of the Spain’s digital copyright law, which already extended copyright protection to all news media. The new reform made the copyright inalienable, which means that the copyright holder cannot wave the attached dues even if they want to. This was another open attack on the Google business model, which acts as a news aggregator not a content generator. Other European nations have also given copyright protection to their news outlets[8], but none other than Spain has made them inalienable; despite the fact that many Spanish media outlets protested the change in the legislation. Google closed their offices in Spain the month prior to the law entering into effect and refuses to link to Spanish news stories anymore[9]. This is also the reason I no longer provide links to Spanish news articles on my own website.

mncs

  1. I find it a sort of cosmic justice in the fact that one of the key defenses used by the Spanish attorneys is the “democratic legitimacy of the legislature.” You will recall that Spain’s governmenthas been denying the “”democratic legitimacy of the elections” to the Greeks, whohave been attempting to renegotiate the terms of their contract with creditors. One of Finance Minister de Guindos’ favorite English phrases appearsto be “Greece must pay what it owes.”Karma is indeed a bitch Mr. de Guindos, because the arbiters seem to have heard you and decided that Spain must also pay what it owes.

deguindos

On the negative side:

  1. I’m wholly in favor of contracts being honored and debts being paid, with the Greek case presenting numerous exceptions on political, practical and moral levels[10]. The Spanish government was very foolish to enter into such contracts in the first place; it was very foolish in the whole structure of the electricity market. Now it is paying the price, a price which it finds hard to bear while cutting social services and running a 6% fiscal deficit. Furthermore, the government could have resorted to other means to reduce the cash hemorrhage, such as negotiating a buyout of the principal operators that would compensate them at a fair market value for the loss of future profits: in 2012, Spain still had room in its national debt for such a move.

All of the preceding notwithstanding, I’m not particularly enamored of foreign companies being able to resort to arbitration panels to seek damages from sovereigns. Arbitration panels are neither transparent nor bound by any set of laws or limited by any national or international bodies. They are responsible to no one and utterly unaccountable, even when they work well. They epitomize the old boys’ network, the “go along to get along” philosophy of closed circles of corporate elites. They are the antithesis of open democracy.

From all that I have NOT read of TPP and TTIP, this sort of arbitration would become far more prevalent in the future under those regimes, and there would be nothing anyone could do about it.

The dispute settlement system of the World Trade Organization, on the other hand, has a substantial and growing body of jurisprudence to guide its rulings, which are open, consultative, prompt and definitive. What is lacking is additional funding: the WTO Appellate Body is already groaning under its case load and more money from members is necessary if it is to continue to work properly and as intended. It is nonetheless a much preferable mechanism to the current arbitration regimes.

This should serve as a cautionary tale on many levels.


Sources and Notes

[1] Rafael Méndez and Miguel Jiménez, “Primer revés a España en el arbitraje por el recorte a las renovables,” El País, 22 June 2015

[2] These were begun in 1997 under the “market liberal” government of José María Aznar of the Partido Popular (Ley 54/1997)

[3] Part of this deficit is due to subsidies still being paid out to plants whose building costs have already been amortized. It is, in other words, a yearly hand-out from the Spanish government to its business cronies.

[4] See Note 1

[5] UNCITRAL Arbitration Rules

[6] “El Tribunal de la UE sentencia que España violó la ley al no retirar las condiciones a E.ON,” El País, 06 March 2008

[7] Mercedes Serraller, “Hacienda multará la ingeniería fiscal de multinacionales como Google”, Expansión, 14 December 2013

[8] When Germany passed its law in 2013, the largest editorial group in the country Axel Springer decided to hold out on Google. They requested to return to Google after only a year when they saw their internet traffic fall 40% and their news visits fall by 80%. “Axel Springer volverá a Google News tras perder el 80% de sus visitas,” El Confidencial, 07 November 2014

[9] Enrique Dans, “A Sorry Tale: Google News Closes Its Spain Service,” The Huffington Post, 15 December 2014

[10] I’ve argued this many times in my “Grexit” series on Common Sense, so I will not reproduce the arguments here.

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Discussion

3 Responses to “Spain Loses First Arbitration Case, Proof of Cosmic Karma”

  1. Spain’s pretended reliance on “democratic legitimacy of the legislature” is contradicted not only by their attitude towards Greek economic self-determination but that of a certain parliamentary democracy on its Mediterranean coast that is under its power. It denies to Catalonia even basic expression of opinion about its future at the polls and unashamedly despoils it economically.

    Posted by Roger Evans | June 23, 2015, 11:16
    • Hola Fernando, soy uno de esos sufridos españoles que padecemos el desastre eléctrico que comentas en tu artículo. No pongo en duda ninguna de las cosas que comentas, solo decir que tu artículo destila un cierto aroma a animadversión por España y los españoles, lo cual me hace sospechar que alguna exageración hay en tus juicios. No se exactamente a qué te refieres con eso de cambiar las reglas del juego para favorecer a los campeones locales, me lo podrías explicar (simple curiosidad). Aunque me lo imagino, la verdad, seguro que Roger Evans por ejemplo lo sabe y comparte tu animadversión… pero quizás si fueses más claro, todo el mundo lo entendería, aunque entonces quedarían más patentes tus antipatías…muchas gracias! Un saludo desde España

      Posted by Angel Talamanca | June 25, 2015, 20:10
      • Estimado Sr. Talamanca,

        Estoy casada con una española y vivo en Madrid hace 11 años, así que la respuesta a su primera comentarío es “no”.

        No conozco al Sr. Evans igual que no lo conozco a Vd. Es un lector que ha dejado un comentario, nada más. Tiene el mismo derecho que Vd. de expresar su opinión.

        Me da la impresión que no ha leído el artículo completo, o si lo ha leído ha sido de manera muy superficial. Si lo hubiera leído detenidamente, hubiera visto los cuatro ejemplos claros que doy de “cambios a las reglas de juego” incluyendo el ejemplo titular.

        De todos modos, me da la impresión que le importa muy poco lo que escriba o no como justificantes de mi opinión. Da la impresión que simplemente está molesto que yo, un extranjero, esté criticando a su país (aunque en realidad estoy criticando al gobierno, no al país). Eso yo lo entiendo; pero como soy americano y nadie se corta en criticar a mi país (teniendo o no una buena justificación) quizá estoy más acostumbrado. Su comentario tiene un cierto aroma a orgullo ofendido y eso es algo que con lo que no le puedo ayudar.

        Le digo algo más. Las normas del debate civilizado nos exigen: escuchar (o leer) atentamente; criticar los supuestos errores de los puntos expuestos con pruebas o lógica; y acompañar las críticas con propuestas propias. El recurso a sentimentalismo o la impugnación de los motivos del contrario son dignos de las tertulias que pasan en la televisión; carecen de seriedad.

        Gracias por leer mí página y dejar una opinión.

        Un saludo desde Madrid,

        Fernando

        Posted by fdbetancor | June 26, 2015, 10:59

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