Italian Constitutional Court Backs Feed-in Tariff Cuts – What's Next? - McDermott Will & Emery

Italian Constitutional Court Backs Feed-in Tariff Cuts – What’s Next?



On 24 January 2017, the Italian Constitutional Court published decision no. 16/2017 confirming the constitutional legitimacy of the so-called spalma incentivi law, which reduced the feed-in tariffs for photovoltaic plants with retrospective effect. The decision is disappointing. On the bright side, however, the reasoning behind the decision is so weak that it opens new opportunities for other legal remedies.

In Depth

On 24 January 2017, the Italian Constitutional Court published decision no. 16/2017, which declared unfounded the questions raised concerning the constitutional legitimacy of Article 26, para 2 and 3 of Law Decree no. 91 of 24 June 2014, converted with amendments by law no. 116 of 11 August 2014 (the so-called spalma incentivi). The spalma incentivi introduced a reduction of the feed-in tariffs (FiTs) applicable to photovoltaic (PV) plants with retrospective effect and in derogation of previous regulations, incentive concessions and private contracts.

Questions regarding the constitutional legitimacy of the spalma incentivi had been referred to the Constitutional Court by the regional administrative court (TAR) Lazio in 63 cases between 23 June and 1 September 2015. The oral hearing before the Constitutional Court took place on 6 December 2016. On 7 December, the Court announced the rejection of the questions raised by the TAR Lazio. The Constitutional Court has now published the reasons for its decision.

Reasoning of the Constitutional Court

The Constitutional Court did not find a violation of Articles 3, 41 and 117, section 1, of the Italian Constitution, or of Article 1 of the First Protocol to the European Convention of Human Rights (ECHR). It rejected the arguments that the TAR Lazio had raised in connection with

  • The retrospective change of contractually fixed, long term relationships between private operators and the State-owned company granting the FiTs, the Gestore dei Servizi Energetici (GSE).
  • The frustration of the private operators’ legitimate reliance on the certainty of the incentive scheme.
  • The violation of the right to free entrepreneurial initiative and of private property rights.

The Constitutional Court argued that these rights, although generally protected by the Italian Constitution, do not prevent the legislature from making changes to long term relationships, as long as those changes are made in the legitimate public interest and are neither unpredictable, unreasonable, nor disproportionate.

According to the Constitutional Court, the spalma incentivi provisions pursue the general purpose of rebalancing the goals of favouring renewable energy investments, with reducing the financial burden on consumers, who finance the incentive schemes through an extra charge on their electricity bills. The Constitutional Court considered this rebalancing legitimate in times of economic recession, on the one hand, and increased efficiency and reduced cost of technology, on the other.

The Court argued that the legislative corrections of the incentive scheme were not unpredictable, but had instead been anticipated by previous laws and regulations. According to the Court,

  • Legislative Decree 28/2011 had established a combined goal of a stable incentive scheme and reduced costs for end consumers.
  • The Third Conto Energia expressly acknowledged the necessity of adjusting the FiT amounts to the reduced investment costs in the PV market.
  • The standard FiT agreements under the Fourth Conto Energia contained a clause allowing the GSE to make unilateral changes to the agreement that might become necessary owing to changes in law or regulation.

Finally, the Constitutional Court did not find the measures unreasonable or disproportionate. In fact, the Court claimed that a tariff reduction of between 6 and 8 per cent is to be considered “not excessive”, particularly as investors had the alternative option of trading a (more substantial) reduction of the FiT for a fully compensating extension of the incentive period, and the law provided for specific financing mechanisms to cover the incentives gap.

Weak Line of Argument

The Constitutional Court uses the correct criteria in verifying the constitutional legitimacy of the spalma-incentivi provisions. Its line of argument is, however, questionable.

While it is true that technology has become more efficient and less costly, its development has no impact on existing investments and can only justify a reduction of incentives for those—new—investments that are made at a lower cost and for higher efficiency. For this reason, the legislature and regulator have issued a sequence of five Conto Energia, with a constant reduction of incentives that lead to their complete abolition. The passage in the Third Conto Energia quoted by the Constitutional Court is an adequate explanation for the reduction of incentives introduced by the Third Conto Energia for new investments, but it does not justify the retrospective reduction of incentives granted for past investments.

If it were true that a clause in the standard FiT agreement under the Fourth Conto Energia should have warned investors of subsequent modifications to the FiT, then it certainly cannot be argued that investors under the First, Second and Third Conto Energia could have anticipated them. The Constitutional Court has erroneously looked at the predictability of the FiT reductions at the time of the spalma-incentivi provisions, rather than at the time of investment.

Finally, it is formalistic to argue that investors have been fairly compensated by a variety of options, including the trade of an immediate tariff reduction against a future extension of the incentive period. As can be seen from the fact that the vast majority of plants owners did not take up that option, it was not actually an economically viable alternative. In addition, the financing mechanisms anticipated by the spalma-incentivi law and quoted by the Constitutional Court exist only on paper; they have never been fully implemented.

What’s Next?

The Constitutional Court’s decision is disappointing, but the weakness of its arguments may encourage investors to seek justice through other avenues. There are three options open to them: a referral to the European Court of Justice (ECJ), an application to the European Court of Human Rights (ECHR), and international investment arbitration.

Referral to the European Court of Justice

Appellants can request that the administrative courts seek a preliminary ruling from the ECJ under article 267 of the Treaty on the Functioning of the European Union (TFEU).

The procedure is similar to the referral to the Italian Constitutional Court, except that the standard would be the correct interpretation of the European Treaties and the acts of the European Union’s institutions plus, of course, the ruling body is the ECJ. It would therefore be sufficient if only a few appellants managed to convince the TAR Lazio or the highest administrative court, the Consiglio di Stato, to refer to the ECJ the question of the compatibility of the spalma incentivi with European law. All other appeals currently pending before the TAR Lazio or the Head of the State would then remain de facto suspended, as was the case during the referral to the Constitutional Court.

To be realistic, there is only a moderate chance that the TAR Lazio itself would follow such a request, after having received a negative answer from the Italian Constitutional Court on its referral. Claimants could, however, appeal the decision of the TAR Lazio and then submit the same request of referral to the Consiglio di Stato, which may have more difficulty in turning down the request. Unlike for lower instance courts, where the referral is discretionary, Article 267 of the TFEU provides that

Where any such question is raised in a case pending before a court or tribunal of a Member State against whose decisions there is no judicial remedy under national law, that court or tribunal shall bring the matter before the Court.

The Consiglio di Stato has, in the past, expressed that it wishes to avoid parties abusing the request for a preliminary ruling by the ECJ as a means of overruling an Italian Constitutional Court decision. Recently, the Consiglio di Stato submitted to the ECJ the question of whether or not, despite Article 267 of the TFEU, a national court could legitimately refuse a referral to the ECJ for a preliminary ruling where the question had already been finally decided by the domestic Constitutional Court on the basis of the same issues on which an ECJ interpretation is requested.

Application to the European Court of Human Rights

The second option is an application to the ECHR under Article 1 of Protocol no. 1 to the Convention on Human Rights, entitled “Protection of property”. Article 1 provides that

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The ECHR has refrained from offering a general definition of the terms “possession” and “property”, but it has adopted a broad concept of property in its case law.

Clearly, the standard established in Article 1 is less tailored to the frustration of legitimately expected returns on investments than the specific provisions of international investment protection treaties. In addition, the ECHR tends to grant applicants only a financial “satisfaction”, rather than full compensation for damages.

The ECHR has established rigid case law with respect to the conditions of admissibility, which will be a difficult hurdle to clear. Appellants must have previously challenged the violation of the European Convention on Human Rights in the national courts, and an application to the ECHR is only admissible after all legal remedies available in the relevant State have been exhausted.

Despite these factors, an application to the ECHR may still be a cost-effective way to force the Italian government to the negotiation table. In the case of Italian domestic investors, it is, in fact, the only available remedy, as those investors are not protected by international investment protection treaties.

International Investment Arbitration

Only foreign investors have the third option of suing Italy in front of an independent tribunal and claiming damages for Italy’s violation of its obligations under applicable investment treaties.

Investment treaties provide investors with protection against discrimination and expropriation without compensation, and secure the right to fair and equitable treatment. In general, the host state will also agree to honour comparable commitments, such as contractual commitments.

Italy is party to more than 90 bilateral investment protection and promotion agreements, commonly known as bilateral investment treaties (BITs).

In addition, there are multilateral investment treaties, such as the Energy Charter Treaty (ECT), which protects European investors in the energy sector. Although the Italian Government withdrew from the ECT in January 2015, the provisions of the ECT continue to apply to investments made in Italy before that date for a period of another 20 years.

Under Article 10(1) ECT, “Each Contracting Party shall encourage and create […] stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area”. According to Article 10(1)(2) ECT, these conditions must include a commitment to accord investors from other contracting parties “At all times […] fair and equitable treatment”.

The scope of the obligation to provide fair and equitable treatment has been subject to many arbitral decisions over recent years. While disagreement persists with regard to certain issues relating to this standard, arbitral tribunals have generally held that it requires the host state to act transparently, predictably and consistently, and that the host state’s actions must not frustrate the legitimate expectations of the investor at the time that it made its investment.

In addition, Article 10(1)(5) ECT provides that “Each Contracting Party shall observe any obligations it has entered into with an Investor, or an Investment of an Investor of any other Contracting Party,” (the “umbrella clause”). This obligation is based on the principle of pacta sunt servanda (agreements must be kept). It could be argued that the original incentivising regime qualifies as an obligation “entered into” by Italy.

Finally, article 13 ECT provides that investments may only be expropriated or subjected to measures that have an effect equivalent to expropriation, where the expropriation or measure having an equivalent effect is

  • For a purpose is in the public interest
  • Not discriminatory
  • Carried out under due process of law
  • Accompanied by the payment of prompt, adequate and effective compensation.

The ECT has already been invoked against Italy by a number of foreign investors in relation to the spalma incentivi law, and it is reasonable to expect that new claimants will now follow as a result of the Italian Constitutional Court disappointing hopes of obtaining protection in the domestic courts.

These claimants will have to overcome Italy’s reservation (under Article 26(3)(b)(i) ECT in conjunction with Annex ID, No. 12) not to arbitrate disputes that have been previously submitted to the domestic courts (the “fork-in-the-road” clause), but there is a good chance that this can be done successfully, as long as the currently pending appeals are not formally rejected by the TAR Lazio or the Head of the State.