THE END OF DOMESTIC CONTENT REQUIREMENT MAY BE NEAR – WTO DECISION EXPECTED IN NOVEMBER 2012

Canada’s feed-in tariff program (the “FIT-Program”) for renewable energy investments has recently been involved in a series of claims by foreign investors under investment treaties. The domestic content requirements in Canada’s FIT-Program are currently being challenged at the World Trade Organization (WTO) by the United States, Japan and the European Union on the basis that they are contrary to Canada's free trade obligations under the General Agreement on Tariffs and Trade, 1994 (GATT). The WTO is expected to rule on this matter in November of 2012 and it is possible that the Ontario Power Authority (OPA) will be forced to eliminate the domestic content requirements from the FIT contract in the future. This article will provide a general overview of the underlying WTO dispute, the enforceability of a WTO decision, and the process associated with a possible elimination of the OPA’s domestic content requirements.

The FIT-Program

The FIT-Program was established to foster increased production of renewable energy in Ontario. Administered by the OPA, the program offers long-term, premium fixed-price FIT contracts for the purchase of energy from renewable energy producers. Domestic content requirements of the FIT-Program were designed to stimulate job creation in Ontario’s renewable energy sector. Investors are therefore required to ensure that a specified minimum of the goods used and services performed in respect of each renewable energy project originate from Ontario in order to be eligible to receive the benefits of the policy. The percentage of qualifying domestic content is calculated based on a prescribed list of designated activities set out in Exhibit D of the FIT contract. For example, Ontario’s FIT-Program requires the “Minimum Required Domestic Content Level” to be in the range of 25-50 % for wind projects over 10kW and 50-60 % for solar projects over 10 kW.

Summary of the WTO dispute

On September 13, 2010 Japan requested consultation with Canada regarding Canada’s measures relating to domestic content requirements in the FIT-Program, asserting that the domestic content requirements of the FIT program:

  • accord less favourable treatment to imported equipment than that accorded to like products originating in Ontario, in violation of Article III:.4 of GATT;
  • constitute "quantitative regulation" that favours domestic suppliers., in violation of Article III:5 of GATT;
  • appear to be trade-related investment measures that violate Article III of GATT, in violation of Article 2.1 of the Agreement on Trade-Related Investment Measures (TRIMs Agreement); and
  • offer financial contribution or a form of income or price support that is contingent upon the use of domestic over imported goods, in violation of Article 3.1(b) and 3.2 of the Agreement on Subsidies and Countervailing Measures (SCMA).

Canada has responded in defence of the program that the OPA’s FIT-Program is consistent with WTO rules and claims that the program does not differ from comparable feed-in tariffs developed by other WTO members.

Upon request Japan accepted the United States and the European Union to join the consultations. The WTO Dispute Settlement Body (DSB) established a panel on July 20, 2011. Australia, China, The European Union, Honduras, Korea, Norway, Chinese Taipei and the United States, and, subsequently, Brazil, El Salvador, India, Mexico and Saudi Arabia reserved their third-party rights.

Originally the final report of the panel was to be issued in September 2012, but due to the complexities of the dispute, the work could not be completed within the allotted six month time-frame. The report is now expected by the end of November 2012.

Enforcement of WTO rulings in Ontario / Process associated with eliminating the domestic content requirements

If the WTO rules in favor of Japan, the United States and the European Union and determines that Canada has violated an obligation under a WTO agreement, the OPA might be forced to eliminate the domestic content requirements from the FIT contract. The process associated with eliminating them would force Canada to bring the OPA FIT Program and its related contracts into conformity with its WTO obligations (or the previously mentioned agreements) as required by Article 19.1 of the WTO’s Dispute Settlement Understanding (DSU).

Canada, if defeated at the panel, may appeal the panel’s ruling to the WTO Appellate Body (AB), which has authority to “uphold, modify or reverse” the panel’s decision.

Yet, the final report of either the panel or the AB goes to the WTO member for adoption within a reasonable period of time (DSU suggests a limit of 15 months from the date of a report’s release). Adoption of the final report occurs according to a “reverse rule”: adoption occurs automatically, unless the membership decides by consensus to reject the report (Article 16.4 / 17.14 DSU). But there is one issue complicating Canada’s position in the dispute, which is Canada’s federal nature and Ontario’s role as the implementing province. The FIT program, its establishment and administration, falls exclusively under provincial jurisdiction by virtue of section 92(13) of the Constitution Act (1867). However, all matters relating to Trade and Commerce fall under the jurisdiction and control of the federal government under section 91(2). As a result, the WTO claim must be brought against Canada at the federal level, but the measures that give rise to the claims are entirely within the legislative control of Ontario at the provincial level. If Canada loses or settles the claim, it will be up to Ontario to adjust its policies, but Canada will have to ensure compliance with the WTO ruling. Therefore the federal government of Canada would have to “strongly suggest” to the provincial government of Ontario to implement the WTO’s decision in order for it to become effective in the province of Ontario.

Compliance may then be achieved by withdrawing the WTO-inconsistent measure or, alternatively, by issuing a revised measure that modifies, amends or replaces it.

If a member (or Canada) fails to comply with the final ruling in the dispute, the prevailing party would be entitled to seek remedial relief either by means of remedies or by retaliation, which consist of the suspension of concession or other obligations (Article 22.1, 22.2 DSU). Retaliation must be equivalent to the complaining member’s loss and relate to the same economic sector as the original violation. If the offending member would object to the proposed level of retaliation or to the proposed sector, the matter would go to arbitration. The remedial relief can continue until the offending member implements the WTO’s decision, for example, by changing the laws.

Conclusion

Unfortunately there is no way to predict what the findings of the DSB’s panel will be with respect to the future of Canada’s domestic content requirements under the FIT Program. Those governments currently implementing or re-designing their FIT programs will eagerly anticipate this decision, but it may be of relevance to a much broader group of countries wishing to further support the generation of electricity through renewable energies.

FIT policies are an important tool to promote renewable energy investments and domestic content requirements are designed to stimulate job creation in Ontario’s renewable energy sector. Yet, domestic content requirements within a FIT Program for renewable energy are particularly vulnerable to an investor’s challenge if the country’s investment treaties, including those of Canada, contain an express prohibition on performance requirements. There will be, as in the present dispute, clear inconsistencies between the climate-related policy and the investment treaties. Either way it will be a great challenge for the government to re-think the implementation of investment rules, such as those designed to stimulate the job market in Ontario’s renewable energy sector, resulting from the upcoming decision in November 2012.

Only time will tell what changes, if any, Ontario will have to make to its domestic content requirement for its FIT Program.

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Sven Walker is a Partner at Dale & Lessmann LLP, a Toronto, Ontario, Canada-based full service law firm specializing in renewable energy law and in particular solar, wind and biogas energy law. Sven is a legal counsel to a number of industry equipment and technology manufacturers, suppliers and installers, as well as investors, developers, purchasers, contractors, consultants and financing entities. To speak with Sven, please call 416-369-7848 or email him at swalker@dalelessmann.com.