Canada — certain measures affecting RE generation sector

SWITZERLAND: On 13 September 2010, Japan requested consultations with Canada regarding Canada's measures relating to domestic content requirements in the feed-in tariff program (the FIT Program).

Japan claimed that the measures are inconsistent with Canada's obligations under Article III:4 and III:5 of the GATT 1994 because they appear to be laws, regulations or requirements affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of equipment for renewable energy generation facilities that accord less favorable treatment to imported equipment than that accorded to like products originating in Ontario; that the measures could be internal quantitative regulations relating to the mixture, processing or use of a specified amount or proportion of equipment for renewable energy generation facilities which require that equipment for renewable energy generation facilities be supplied from Ontario sources; and that the measures appear to require the mixture, processing or use of equipment for renewable energy generation facilities supplied from Ontario in specified amounts or proportions, being applied so as to afford protection to Ontario production of such equipment, contrary to the principles of Article III:1 of the GATT 1994.

Japan also claimed that the measures appear to be inconsistent with Article 2.1 of the TRIMs Agreement because they appear to be trade-related investment measures that are inconsistent with the provisions of Article III of the GATT 1994.

Finally, Japan alleged that it appears that a subsidy is granted under the measures because there would be a financial contribution or a form of income or price support, and a benefit is thereby conferred.  It is also claimed that the subsidy would be a prohibited subsidy under Articles 3.1(b) and 3.2 of the SCM Agreement because it appears to be provided “contingent … upon the use of domestic over imported goods”, namely contingent upon the use of equipment for renewable energy generation facilities produced in Ontario over such equipment imported from countries such as Japan.

On 24 September 2010, the United States requested to join the consultations.  On 27 September 2010, the European Union requested to join the consultations.  Subsequently, Canada informed the DSB that it had accepted the requests of the European Union and the United States to join the consultations.

On 1 June 2011, Japan requested the establishment of a panel.  At its meeting on 17 June 2011, the DSB deferred the establishment of a panel.


Panel and appellate body proceedings
At its meeting on 20 July 2011, the DSB established a panel.  Australia, China, the European Union, Honduras, Korea, Norway, Chinese Taipei and the United States reserved their third-party rights.  Subsequently, Brazil, El Salvador, India, Mexico and Saudi Arabia reserved their third-party rights. On 26 September 2011, Japan requested the Director-General to determine the composition of the panel.  On 6 October 2011, the Director-General composed the panel.

On 2 March 2012, the chairman of the panel informed the DSB that the panel would not be able to issue its report within six months.  The timetable adopted by the panel after consultations with the parties envisaged that the final report would be issued to the parties by September 2012.  The panel expected to conclude its work within that time-frame.  On 13 June 2012, the Chairman of the panel informed the DSB that due to the complexities of the dispute, it would not be possible for the panel to complete its work within the time-frame mentioned above.  The panel now expects to complete its work by the end of November 2012.

On 19 December 2012, the panel report was circulated to Members.

Summary of key findings
The dispute concerns the domestic content requirements that certain generators of electricity utilizing solar photovoltaic and windpower technology must comply with in the design and construction of electricity generation facilities in order to qualify for guaranteed prices offered under the Feed-In Tariff Programme, adopted by the Government of the Province of Ontario, as well as all individual FIT and microFIT Contracts implementing these requirements since the FIT Programme's inception in 2009.

Japan claimed that the domestic content requirements provided for and implemented under the challenged measures place Canada in violation of: (i) the national treatment obligation under Article III:4 of the GATT 1994; (ii) the prohibition that is set out in Article 2.1 of the TRIMs Agreement on the application of any trade-related investment measures that are inconsistent with Article III of the GATT 1994; and (iii) the prohibition on import substitution subsidies prescribed in Articles 3.1(b) and 3.2 of the SCM Agreement.

The Panel upheld Japan's claims under Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT 1994. After noting that the trade-related investment measures described in paragraph 1(a) of the Illustrative List found in the Annex to the TRIMs Agreement are considered to be inconsistent with Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT 1994, subject to the operation of inter alia Article III:8(a) of the GATT 1994, the Panel set about determining: (i) whether Canada could rely upon Article III:8(a) of the GATT 1994 to remove the challenged measures from the operation of Article 2.1 of the TRIMs Agreement; and if not, (ii) whether the challenged measures were of the kind described in paragraph 1(a) of the Illustrative List.

The Panel found that Canada had not established it was entitled to rely upon Article III:8(a) of the GATT 1994 because the Government of Ontario's procurement of electricity under the FIT Programme was undertaken “with a view to commercial resale”. The Panel furthermore found that the challenged measures fell within the scope of paragraph 1(a) of the Illustrative List.  The Panel thereby concluded that Japan had demonstrated that the challenged measures were inconsistent with Canada's obligations under Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT 1994.

As regards Japan's prohibited subsidy claims under Articles 3.1(b) and 3.2 of the SCM Agreement, the Panel delivered a divided ruling.

The Panel majority dismissed Japan's allegations on the grounds that Japan had failed to establish the existence of a subsidy. Among the Panel majority's key findings in support of this assessment was that the Hourly Ontario Electricity Price (“HOEP”) that was at the centre of Japan's main benefit arguments could not serve as an appropriate benchmark against which to determine whether the challenged measures confered a “benefit” within the meaning of Article 1.1(b) of the SCM Agreement, because:

(i) the HOEP did not result from the operation of a competitive wholesale electricity market, but rather a market that was significantly influenced by government regulation;

(ii) the economics of competitive wholesale electricity markets in general suggest that they will rarely attract the degree of investment in generation capacity needed to secure a reliable electricity system; and

(iii) the prevailing conditions of supply and demand in Ontario suggest that a competitive wholesale electricity market would fail to achieve this outcome in Ontario. Thus, the Panel majority concluded that there was no basis to uphold Japan's subsidization arguments.

After having rejected Japan's arguments, and in response to Japan's specific requests, the Panel majority set out its own observations on one approach it considered could have been validly pursued in these disputes to determine the existence of “benefit” under the terms of Article 1.1(b) of the SCM Agreement.

The Panel majority described the approach it contemplated as one that would involve making a comparison between the relevant rates of return of the challenged FIT and microFIT Contracts with the average cost of capital in Canada for projects having a comparable risk profile to the FIT and microFIT projects. The Panel majority went on to explain that, while this comparison would have been useful for the “benefit” analysis, it would have been necessary to explore a number of important questions and factual issues in order to apply it.

Finally, one member of the Panel expressed a dissenting opinion on Japan's subsidization claims, finding that Japan had demonstrated that the challenged measures conferred a “benefit” under the terms of Article 1.1(b) of the SCM Agreement.  For this member of the Panel, the challenged measures were subsidies because the pricing offered to relatively high cost and less efficient FIT and microFIT generators under the FIT and microFIT Contracts enabled them to enter the wholesale electricity market, when they would otherwise not have been able to in the absence of the FIT Programme implemented by the Government of the Province of Ontario.

On 5 February 2013, Canada notified the DSB of its decision to appeal to the Appellate Body certain issues of law covered in the panel report and certain legal interpretations developed by the panel.  On 11 February 2013, Japan notified the DSB of its decision to appeal to the Appellate Body certain issues of law covered in the panel report and certain legal interpretations developed by the panel. On 4 April 2013, the Chair of the Appellate Body informed the DSB that due to the time required for completion and translation of the Appellate Body reports, it would not be able to circulate its reports within 60 days.  It was estimated that the Appellate Body reports would be circulated no later than 6 May 2013.