Wednesday, February 27, 2013

Canada appeals WTO ruling on renewable energy feed-in-tariffs in Ontario: Canada argues GATT government procurement exclusion and "no actual market" in Ontario

Canada has appealed a recent World Trade Organization (WTO) dispute panel finding that local content requirements for renewable energy generation in Ontario violate international trade rules. Despite the favourable outcome, the EU and Japan - who had tabled the WTO challenge - responded last week with cross-appeals of their own, aimed at other aspects of the panel report with which they disagree.

The province’s feed-in tariff (FIT) scheme aims to support renewable energy by guaranteeing electricity generators above-market rates on certain renewable sources of energy, such as wind and solar. The global trade arbiter on December 19, 2012 announced that the local content requirement of the scheme - obliging participants to source up to 60 percent of their equipment from Ontario - was a trade barrier that discriminated against foreign companies.

Canada focuses on procurement argument

In its appeal, Canada insists that the Ontario scheme qualifies for an exemption from certain trade rules relating to government procurement under the General Agreement on Tariffs and Trade (GATT).

Under the government procurement exclusion, a country can exempt itself from GATT requirements if the regulation or program involves a government making purchases for its own needs and not for commercial resale.

The panel had found that the program does involve government procurement, but that because the Government of Ontario buys and then sells the electricity in the consumer market, it was “with a view to commercial resale.” This means that the program is not exempt from the other trade rules at issue.

Canada argues that the resale of electricity through the FIT program is not commercial in nature, challenging the panel’s characterisation of the electricity market and its program. According to the panel, however, Ontario purchased electricity that was fed into the grid and sold on the market in competition with private sector retailers of electricity. This effectively means Canada is not purchasing electricity solely for government purposes, even if Ontario is not profiting directly from the resale of the electricity.

One argument that Canada is relying on is that Ontario’s electricity system should not be thought of as an open competitive market where supply and demand freely meet. Instead, a functioning and stable electricity market in Ontario relies on government subsidies and regulations. Thus, Ottawa argues, there is no commercial resale because there is no actual market in the Ontario electricity system.

Canada also insists that electricity purchased through the FIT programme is not resold because it is directly injected by way of renewable energy generators into the grid and pooled with other sources of electricity. It has asked the WTO’s Appellate Body to reconsider this argument, which was rejected in the initial panel report.

Japan, EU cross-appeal

The panel found that the FIT program also violated the Trade Related Investment Measures (TRIMs) Agreement and that Ontario did not qualify for the government procurement exception.  However, the EU’s cross-appeal contends that the government procurement exception should never apply to the TRIMs Agreement, and that regardless of whether the programme qualifies as government procurement, Canada is responsible for bringing the program into alignment with the TRIMs Agreement by eliminating the local content requirement.

While the panel found that the local content requirement violated certain WTO rules, it separately found that the FIT programme was a subsidy under the Subsidies and Countervailing Measures (SCM) Agreement, but that it did not violate the agreement because Japan and the EU failed to establish that the program conferred a benefit to electricity producers.

In order to determine whether a subsidy is illegal, the recipient of the subsidy must be measurably better off than without the subsidy. This measurement requires a benchmark to establish the position of the recipient without the subsidy.

The panel did not accept the heavily subsidised and regulated Ontario electricity market as an appropriate benchmark because it is not an open, competitive market. However, Japan and the EU both argue that without the subsidy, these FIT generators would not exist, and that this should count as a measureable benefit under the SCM Agreement.

The legal status of Ontario’s FIT program will remain unclear until the Appellate Body issues its ruling. The Appellate Body will be able to revise aspects of law - such as legal interpretation - but may not revisit the facts of the case.

Source: International Centre for Trade and Sustainable Development, Bridges Weekly Trade News Digest - Volume 17 - Number 6 - February 20, 2013

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