Newsletter - Arbitration on Photovoltaic against the Czech Republic
We would like to inform all our clients and partners about the legal steps which we are about to adopt on behalf of our clients against the Czech Republic with regards to the amendments to the Act no. 185/2006 Coll., on Subventions of Producing Energy of Renewable Resources.
In these legal steps, we are co-operating with Ondřej Sekanina, leading Czech expert in the field of international arbitration. He was involved, inter alia, in the following cases: Saluka Investments v. Czech Republic, Phoenix Action v. Czech Republic, and Sergei Paushok et. al. v. Mongolia. Currently, he is is representing Mr. Peter Franz Vöcklinghaus in an investment arbitration against the Czech Republic and provides advice on investment protection issues under various bilateral investment treaties to numerous other clients. In addition, Ondřej Sekanina teaches investment arbitration at the Faculty of Social Sciences of Charles University. He is also an arbitrator at the Arbitration Court attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic.
In the course of the past year, Ondřej Sekanina published several papers addressing the possibilities of protection of photovoltaic investors and of legal actions against the Czech Republic. In particular, his article "Who Will Win the Photovoltaic Arbitration" has appeared in a recent issue of Hospodářské noviny (15th December 2010). Below is reproduced a translation of certain passages of this article describing our viewpoint on this issue.
The new Czech withholding tax on the sales of electricity produced by solar power plants is already a reality. An amendment to Act No. 180/2005 introducing the tax has passed both Chambers of the Czech Parliament and it is expected to become effective in January 2011. The withholding tax affects solar power plants that started operation from January 1, 2009 to December 31, 2010. The rate of the tax is 26% and 28%, respectively, depending on the form of the applicable state subsidy, and it is deducted from revenues, not from profits generated by solar power plants. As a result, its impact on operators of solar power plants will be quite burdensome.
Foreign investors can seek protection against the withholding tax under the Energy Charter Treaty and, in dependence on the company's ownership structure, under respective bilateral investment treaties, if applicable.
We have analyzed the recent award in the case AES v. Hungary, which dealt with a situation that was, at first sight, very similar to the situation created by the Czech withholding tax. In AES, Hungary reintroduced regulated prices for which producers sold electricity. This new regime was introduced as a result of public outrage caused by supposedly exorbitant electricity prices. The arbitration tribunal dismissed AES's claims. However, we believe that this ruling will not affect the outcome of arbitrations against the Czech Republic caused by the withholding tax. The most important aspect which distinguishes the situation of AES from the Czech context is the fact that AES made its investment at the time when the electricity prices were regulated in a manner similar to the one that gave rise to the arbitration. Only after AES made its investment, a more favorable regulatory framework was introduced. As investors' "legitimate expectations," which is one of key concepts of international investment law, are created at the time an investment is made, AES was not protected against the dismantling of a regulatory framework that did not exist at the time it made its investment. In other words, AES's legitimate expectations did not protect it against the changes of this later more favorable regulatory framework, as long as its modifications did not result in a situation less favorable than the one that existed at the time the investment was made. In strong contrast, investors that invested in solar power plants in the Czech Republic relied, at the time they made their investments, on specific inducements to invest contained in Act No. 180/2005, which are neutralized by the withholding tax.
Future arbitration tribunals, while evaluating the Czech withholding tax, will carry out a "balancing test," weighing the impacts on individual investors on the one hand, and Czech Republic's legitimate regulatory goals on the other hand. As a result, the Czech Republic will have an opportunity to argue e.g. that the subsidies granted to photovoltaic power generation were the highest in the EU and were untenable in the long run; that continuous high electricity prices would have negative macroeconomic impacts on the Czech Republic; that the capacity of the transmission grid and the reserve gas power plants were not sufficient to offset fluctuations in the inflow of electricity generated in photovoltaic power plants due to changing weather conditions; etc. However, as long as we will be able to show that the impact on the investor's company is sufficiently burdensome, we believe that such arguments by the Czech Republic will be found to have no merit and will not prevent the arbitration tribunal from granting relief.
As a measure significantly driving down the costs of your investment arbitration, we hereby offer our clients to join a class action arbitration for which we already have several similarly affected photovoltaic investors lined up.
Should you be interested in joining the class action, please do not hesitate to contact either of the following attorneys at our law firm:
Michaela Jorgensen
jorgensen@smedjorgensen.com
(English, Czech)
Massimiliano Pastore
pastore@smedjorgensen.com
(English, Italian)
Should you desire any ulterior information regarding the activities and expertise of Ondřej Sekanina, please refer to: www.sekaninalegal.eu.