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TWN Info Service on WTO and Trade Issues (Jan13/04)
23 January 2013
Third World Network


Canadian measures on renewable energy held WTO-illegal
Published in SUNS #7507 dated 24 December 2012

Geneva, 21 Dec (Kanaga Raja) -- A dispute panel of the World Trade Organisation (WTO) has ruled certain measures imposed by Canada relating to the feed-in tariff (FIT) programme established by its province of Ontario that affects the country's renewable energy generation sector to be inconsistent with its WTO obligations.

In a ruling issued on 19 December, the Panel - in its overall conclusions and recommendations, issued separately for Japan and the European Union (the complainants) - concluded that both Japan and the EU have established that the "Minimum Required Domestic Content Level" prescribed under the FIT Programme, and implemented through the individual FIT and microFIT Contracts executed since the FIT Programme's inception, places Canada in breach of its obligations under Article 2.1 of the TRIMs Agreement and Article III: 4 of the GATT 1994.

On the other hand, the Panel concluded that both Japan and the EU had failed to establish that the FIT Programme, and the individual solar PV (photovoltaic) and wind-power FIT and microFIT Contracts executed since the FIT Programme's inception, constitute subsidies, or envisage the granting of subsidies, within the meaning of Article 1.1 of the SCM Agreement, and thereby that Canada has acted inconsistently with Articles 3.1(b) and 3.2 of the SCM Agreement.

[The Panel ruling on the "benefit" question in relation to the "subsidy" complaint under the SCM agreement is by a majority. The majority has held that the complaint has not been established on the issue of subsidy, while the dissenting member has held the programme provides a benefit, and thus constitutes a subsidy in terms of the SCM agreement.

[According to a post by Simon Lester on IELP, a web-log run by US trade lawyers, it's not easy to summarise the "benefit" issue in the dispute. It summarises what it says are nuanced views in the report, and says that the majority view is that "electricity markets are so distorted" that the "benefit" can't be examined by using those markets alone, but using other markets. However, there wasn't enough evidence to reach a conclusion. The post summarises the dissenter's view as, "basically, buying energy from wind and solar producers at prices they could not have otherwise obtained in the market confers a benefit."]

The Panel concluded that to the extent Canada has acted inconsistently with Article 2.1 of the TRIMs Agreement and Article III: 4 of the GATT 1994, Canada has nullified or impaired benefits accruing to Japan and the EU. It recommended that Canada bring its measures into conformity with its obligations under the TRIMs Agreement and the GATT 1994.

Providing some background to the dispute, the reports of the Panels noted that on 13 September 2010, Japan requested consultations with Canada pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), Article XXII: 1 of the General Agreement on Tariffs and Trade 1994 (GATT 1994), Article 8 of the Agreement on Trade-Related Investment Measures (TRIMs Agreement), and Articles 4.1 and 30 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement). On 11 August 2011, the European Union requested consultations with Canada pursuant to the same, above-mentioned provisions.

In both complaints, the consultations concerned certain measures relating to domestic content requirements in the feed-in tariff programme (the FIT Programme), established by the Canadian Province of Ontario.

These measures included the following: (i) the Electricity Act of 1998; (ii) the Green Energy and Green Economy Act of 2009; (iii) the Electricity Restructuring Act of 2004; (iv) the Ontario Regulation 578/05; (v) the Independent Electricity System Operator (the "IESO") Market Manual; (vi) the IESO Market Rules; (vii) the FIT direction dated 24 September 2009 from the Deputy Premier and Minister of Energy and Infrastructure; (viii) individual FIT and microFIT Contracts executed by the Ontario Power Authority (the "OPA"); (ix) the FIT Rules and microFIT Rules issued by the OPA; (x) the FIT and microFIT Contracts issued by the OPA; (xi) the FIT Application Form and the online microFIT Application issued by the OPA; (xii) the FIT and microFIT Price Schedules issued by the OPA; (xiii) the FIT Programme Interpretations of the Domestic Content Requirements; and (xiv) any amendments or extensions of the foregoing, any replacement, renewal, implementing or related measures.

Consultations were held between Japan and Canada on 25 October 2010, and between the European Union and Canada on 7 September 2011. These consultations failed to resolve the disputes. Japan and the European Union each requested, respectively on 1 June 2011 and 9 January 2012, the establishment of a panel, and at its meetings on 20 July 2011 and 20 January 2012, the DSB established two Panels pursuant to Japan's request (in document WT/DS412/5), and the European Union's request (in WT/DS426/5).

On 6 October 2011, at the request of Japan, the Director-General composed the Panel. With respect to the EU's dispute, following the agreement of the parties, the Panel was composed with the same persons on 23 January 2012. Following consultations with the parties, the Panels in the two disputes decided to harmonise their timetables to the greatest extent possible.

According to the Panel reports, these disputes concern the domestic content requirements attached to the FIT and microFIT Contracts, granted under the FIT Programme established by the Canadian Province of Ontario, for certain wind and solar photovoltaic (PV) electricity generation projects.

The complainants have brought these disputes against Canada in order to challenge the WTO-consistency of the "Minimum Required Domestic Content Level" prescribed under the FIT Programme adopted by the Government of the Province of Ontario in 2009, as well as all individual FIT and microFIT Contracts implementing this requirement since the FIT Programme's inception.

According to the complainants, the "Minimum Required Domestic Content Level" renders the FIT Programme, and all relevant FIT and microFIT Contracts involving electricity generation projects using solar PV or wind-power technology, measures incompatible with Article III: 4 of the General Agreement on Tariffs and Trade 1994 ("GATT 1994"), trade-related investment measures ("TRIMs") inconsistent with Article 2.1 of the Agreement on Trade-Related Investment Measures ("TRIMs Agreement"), and prohibited subsidies under the terms of Articles 3.1(b) and 3.2 of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement").

The Panel noted that throughout these proceedings, however, the complainants have emphasised that in contesting the WTO-consistency of the challenged measures, they do not question the legitimacy of the objectives pursued by the Government of Ontario through the FIT Programme of reducing carbon emissions and promoting the generation of electricity from renewable energy sources.

In particular, Japan has explained that "Japan does not take issue with Ontario's stated goal of enhancing renewable energy generation" or "the government's intervention as such to internalize the positive externalities of renewable energy generation technologies". Likewise, the European Union does not "contest the general purpose of the FIT Program, as helping to promote electricity supply from renewable energy sources", highlighting that "[s]uch a purpose is legitimately valid and ... WTO Members can and should actively support it".

What the complainants call into question is limited to the alleged trade-distortive element of the challenged measures, which they identify to be the "Minimum Required Domestic Content Level" given effect through the FIT Programme and the FIT and microFIT Contracts. According to the complainants, this aspect of the challenged measures affords a form of WTO-inconsistent protection to producers of certain types of equipment used to generate electricity from solar and wind energy ("renewable energy generation equipment") that are based in Ontario to the detriment of competing industries in other WTO Members, and should therefore be eliminated. Thus, as Japan has declared, these disputes cannot be properly characterised as "trade and environment" disputes, but rather, they should be thought of as "trade and investment" disputes.

On the issue of whether Canada acted inconsistently with Article 2.1 of the TRIMs Agreement and Article III: 4 of the GATT 1994, the Panel first found that the FIT Programme, and the FIT and microFIT Contracts, to the extent they envisage and impose a "Minimum Required Domestic Content Level", constitute TRIMs within the meaning of Article 1 of the TRIMs Agreement.

The Panel went on to make conclusions with respect to whether the challenged measures fall outside the scope of Article III: 4 of the GATT 1994 by virtue of the operation of Article III: 8(a) of the GATT 1994.

"We have concluded ... that: (i) the Government of Ontario's purchases of electricity under the FIT Programme constitute ‘procurement', within the meaning of that term in Article III: 8(a); (ii) the ‘Minimum Required Domestic Content Level' prescribed under the FIT Programme, and effected through the FIT and microFIT Contracts, is one of the ‘requirements governing' the Government of Ontario's ‘procurement' of electricity; and (iii) the Government of Ontario's ‘procurement' of electricity under the FIT Programme is undertaken ‘with a view to commercial resale'. In the light of this latter conclusion, we find that the measures at issue are not covered by the terms of Article III: 8(a), and that consequently, Canada cannot rely on Article III: 8(a) of the GATT 1994 to exclude the application of Article III: 4 of the GATT 1994 to the ‘Minimum Required Domestic Content Level' that the complainants challenge."

In coming to this conclusion, "we express no opinion about the legitimacy of the Government of Ontario's objective of promoting the use of renewable energy in the production of electricity through the FIT Programme. Our conclusion that the Government of Ontario purchases electricity under the FIT Programme ‘with a view to commercial resale', within the meaning of Article III: 8(a), must be understood only as a judgement about the extent to which Canada is entitled to rely upon Article III: 8(a) of the GATT 1994 to maintain a measure that is alleged to discriminate against imported products under the terms of Article III: 4."

Having found that the challenged measures are not removed from the obligations prescribed under Article III: 4 by virtue of the operation of Article III: 8(a), the Panel said that it follows that they must also be subject to the obligations in Article
2.1 of the TRIMs Agreement, as elaborated and informed by Article 2.2 and the Illustrative List contained in the Annex to the TRIMs Agreement.

On whether the measures at issue are inconsistent with Article III: 4 of the GATT 1994, and thereby also Article 2.1 of the TRIMs Agreement, by virtue of the operation of Article 2.2 of the TRIMs Agreement and Paragraph 1(a) of the Illustrative List in the Annex to the TRIMs Agreement, the Panel said that on the basis of the foregoing analysis, it finds that compliance with the "Minimum Required Domestic Content Level" not only involves the "purchase or use" of products from a domestic source, within the meaning of Paragraph 1(a) of the Illustrative List, but also that such compliance "is necessary" for electricity generators using solar PV and wind-power technologies to participate in the FIT Programme, and thereby "obtain an advantage", within the meaning of Paragraph 1 of the Illustrative List.

"We are therefore satisfied that the challenged measures are TRIMs falling within the scope of Paragraph 1(a) of the Illustrative List, and that in the light of Article 2.2 and the chapeau to Paragraph 1(a) of the Illustrative List, they are inconsistent with Article III: 4 of the GATT 1994, and thereby also inconsistent with Article 2.1 of the TRIMs Agreement".

On whether the challenged measures constitute subsidies within the meaning of Article 1.1 of the SCM Agreement, the Panel concluded that the appropriate legal characterization to be given to the FIT Programme, and the FIT and microFIT Contracts, is as "government purchases [of] goods" under Article 1.1(a)(1)(iii) of the SCM Agreement. Although it recognized that the challenged measures exhibit some of the basic features of certain forms of "direct transfer[s] of funds", in that they involve an exchange of rights and obligations which includes the payment of money, the Panel did not agree with the complainants that this means they can also be legally characterized as such for the purposes of the SCM Agreement.

Having found that the challenged measures should be legally characterized as "government purchases of goods", and thereby rejecting that they amount to "direct transfer[s] of funds", the Panel also found that they cannot be "potential direct transfers of funds". Equally, to the extent that Japan and the European Union may have argued that the challenged measures could be legally characterized as a form of "financial contribution" involving government entrustment or direction within the meaning of Article 1.1(a)(1)(iv) of the SCM Agreement, "we also reject this argument".

On the challenged measures as a form of income or price support, the Panel noted that both complainants in these proceedings have advanced essentially parallel arguments focused around the wholesale market for electricity to substantiate their assertions concerning the existence of "benefit", irrespective of whether the challenged measures are legally characterized under Articles 1.1(a) or 1.1(a)(2) of the SCM Agreement.

In its analysis, the Panel majority rejects the entirety of the complainants' "benefit" arguments as they relate to Article 1.1(a)(1)(iii). It follows that the complainants' subsidy claims must also fail regardless of whether the Panel majority agrees with their contentions that the FIT Programme, and the FIT and microFIT Contracts, constitute a form of "income or price support" within the meaning of Article 1.1(a)(2) of the SCM Agreement.

The Panel did not believe that it is necessary, for the purpose of satisfactorily resolving the complainants' subsidy claims, to also decide whether the FIT Programme, and the FIT and microFIT Contracts, amount to "income or price support" under the terms of Article 1.1(a)(2) of the SCM Agreement.

"Therefore, on the grounds of judicial economy, we make no findings in respect of the complainants' allegations that the challenged measures may be legally characterized as ‘income or price support' under Article 1.1(a)(2) of the SCM Agreement."

On whether the challenged measures confer a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement, the Panel first put forward some conclusions concerning the wholesale electricity market as the relevant focus of the benefit analysis. It recalled that Article 14(d) of the SCM Agreement provides useful guidance for determining whether "financial contribution[s]" in the form of "government purchases [of] goods" confer a benefit for the purpose of claims made under Part III of the SCM Agreement.

According to this guidance, one way the challenged measures may be found to confer a benefit is by demonstrating that the remuneration obtained by FIT generators operating on the basis of wind-power and solar PV technology under the FIT Programme is "more than adequate" compared with the remuneration the same generators would receive on the relevant "market" for electricity in Ontario, in the light of the "prevailing market conditions". Throughout these proceedings, the complainants' principal argument has been that the benchmark for "adequate remuneration" should be found in the allegedly competitive wholesale electricity market that exists in Ontario or four out-of-Province jurisdictions.

"However, for the reasons we have explained above, the evidence before us indicates that the wholesale electricity market that currently exists in Ontario is not a market where there is effective competition. Rather, Ontario's wholesale electricity market is perhaps better characterized as a part of an electricity system that is defined in almost all aspects by the Government of Ontario's policy decisions and regulations pertaining to the supply mix needed to ensure that Ontario has a safe, reliable and long-term sustainable supply of electricity, as well as how the costs of that system will be recuperated."

The Panel added: "We have little doubt that the HOEP [Hourly Ontario Electricity Price] results from the operation of forces of supply and demand that are significantly affected by government intervention in a way that renders it an inappropriate benchmark to conduct the present benefit analysis. In the light of the benefit standard that has thus far been applied in WTO disputes, we find that the HOEP and all of the HOEP-derivatives that the complainants have advanced, cannot serve as appropriate benchmarks for the purpose of the benefit analysis."

"Importantly, the complainants have not convinced us of the premise underlying their two main lines of benefit arguments, namely, that in the absence of the FIT Programme, the FIT generators would be faced with having to operate in a competitive wholesale electricity market. The evidence before us indicates that competitive wholesale electricity markets, although a theoretical possibility, will only rarely operate in a way that remunerates the mix of generators needed to secure a reliable electricity system with enough revenue to cover their all-in costs, let alone a system that pursues human health and environmental objectives through the inclusion of facilities using solar PV and wind technologies into the supply-mix."

In the specific context of Ontario, the 2002 market opening experience illustrates this point. Although intended to operate as a "classical" competitive market where generators would sell electricity at spot prices equal to marginal costs, the conditions of supply and demand that existed at that time made it impossible for the market to attract the investment in generation capacity needed to secure a reliable system of electricity supply.

Noting that the complainants have referred to examples of what they consider to be competitive wholesale markets existing outside of Ontario, the Panel said: "However, as we have explained, the evidence before us suggests that because of, at least in part, the particular conditions of supply and demand that were forecast in 2003 for Ontario up to 2020, the ECSTF [Electricity Conservation and Supply Task Force] found that the Alberta experience could not be reproduced in Ontario with the same degree of success. Given the significant volume of generating capacity (around 43%) that it is projected will need to be renewed, replaced or added to Ontario's electricity system by 2030, and in the light of the limitations that are inherent to competitive wholesale electricity markets, the complainants' benefit arguments fail to convince us that the recommendations of the ECSTF do not also hold true today."

The Panel further noted that all parties to these proceedings agree that FIT generators using solar PV and wind-power technology would be unable to conduct viable operations on the basis of the equilibrium prices that could be achieved in a competitive wholesale electricity market. However, Canada has also suggested that there would be unacceptable risks to the reliability of Ontario's electricity system if the structure of Ontario's supply-mix were left to be settled by competitive forces of supply and demand.

"We tend to agree. Given the technical complexities of electricity systems, the inherent limitations of competitive wholesale electricity markets, and recalling, in particular, Ontario's failed 2002 market-opening experience, as well as the current and projected conditions of supply and demand in Ontario, we are not convinced that a reliable supply of electricity could be secured at present in Ontario solely through the operation of a competitive wholesale electricity market."

In the Panel's view, the application of a competitive wholesale market standard in the circumstances of the present disputes would not only insufficiently respond to the considerable challenges faced by electricity systems that are caused by the specific properties of electricity, but it would also overlook the particular situation in Ontario. Importantly, it would ignore the evidence indicating that the prevailing conditions of supply and demand in Ontario suggest that a competitive wholesale electricity market would fail to attract the degree of investment in generating capacity needed to secure a reliable supply of electricity, and that, at present, this goal can only be achieved by means of government intervention in what would otherwise be unacceptable competitive market outcomes.

"In these circumstances, and given the critical importance of electricity to all facets of modern life, we cannot accept that it would be appropriate to determine whether the FIT Programme and the FIT and microFIT Contracts confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement by comparing the terms and conditions of participation in the FIT Programme with those that would be available to generators participating in a wholesale electricity market where there is effective competition."

The Panel concluded that: "(a) the HOEP is a price set through the interaction of supply and demand forces that in many critical aspects are significantly influenced by the supply-mix and pricing policy decisions and regulations of the Government of Ontario, and therefore, the HOEP and all of the related HOEP-derivatives the complainants have submitted as appropriate benchmarks for the purpose of the benefit analysis cannot be accepted; (b) the complainants have failed to convince us that, in the absence of the FIT Programme, the FIT generators would be faced with having to operate in a competitive wholesale electricity market because: (i) the economics of competitive wholesale electricity markets suggest that they will only rarely attract the degree of investment in the generation capacity needed to secure a reliable electricity system; and (ii) the weight of the evidence before us indicates that, at present, a competitive wholesale electricity market would fail to achieve this outcome in Ontario; and (c) in the light of our conclusions in (a) and (b), and given the critical importance of electricity to all facets of modern life, we find that the question whether the challenged measures confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement cannot be resolved by applying a benchmark that is derived from the conditions for purchasing electricity in a competitive wholesale electricity market."

The Panel found that none of the alternatives that have been advanced by the complainants (or Canada) may be used as appropriate benchmarks against which to measure whether the FIT Programme and the FIT and microFIT Contracts confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement.

In particular, it had determined that the HOEP would not be the only option available to potential generators using solar PV and wind-power technology in the absence of the FIT Programme. The HOEP cannot therefore be used to test whether the FIT and microFIT Contract Prices confer a benefit upon FIT Programme generators. The two other alternatives advanced by the complainants (electricity import and export prices, and Regulated Price Plan prices) are both inherently connected to the HOEP and, thereby, the electricity pricing policy decisions and regulations of the Government of Ontario. Therefore, these alternatives also cannot be relied upon to determine whether the FIT Programme confers a benefit.

Finally, the Panel found that there is no evidence to support the existence in Ontario of a separate wholesale market for electricity that is generated solely from solar PV and wind-power technology. There is therefore no factual basis to support Canada's contention that the existence of benefit could have been determined in the present disputes by comparing FIT and microFIT Contract Prices with the prices established in such a market.

In its final conclusions and observations on the existence of benefit, the Panel said it had carefully reviewed the parties' legal and factual arguments in the light of the legal standard for determining the existence of benefit that has to date been applied in WTO dispute settlement.

"In the particular circumstances of these disputes, we have concluded that determining whether the challenged measures confer a benefit on the basis of a benchmark derived from a competitive wholesale electricity market, would mean that the FIT and microFIT Contracts could be legally characterized as subsidies by means of a comparison with a market standard that has not been demonstrated to actually exist nor one that could be reasonably achieved in Ontario - a market standard that the complainants have not contested will only rarely, if at all, attract sufficient investment in generation capacity to secure a reliable system of electricity supply even outside of Ontario."

In the Panel's view, such an outcome would fail to reflect the reality of modern electricity systems, which by their very nature need to draw electricity from a range of diverse generation technologies that play different roles and have different costs of production and environmental impacts.

As the Panel has emphasised on a number of occasions, it is only in exceptional circumstances that the generation capacity needed from all such technologies will be attracted into a wholesale market operating under the conditions of effective competition. Thus, the competitive wholesale electricity market that is at the centre of the complainants' main submissions cannot be the appropriate focus of the benefit analysis in these disputes.

"Furthermore, for the reasons we have outlined above, the alternatives to the wholesale electricity market that have been presented to us also cannot stand as appropriate benchmarks against which to measure whether the challenged measures confer a benefit. There is therefore no basis to uphold the complainants' benefit arguments."

In coming to this conclusion, the Panel noted that the complainants have asked the Panel not to limit its analysis to rejecting the benchmarks proposed by the parties, inviting the Panel to "find the appropriate benchmark to make a finding on the existence or absence of benefit" and "identify the proper benchmark to complete the benefit analysis".

Indeed, according to the European Union, the Panel is under an obligation to do so. "We do not share the European Union's conviction. In our view, there is no authority in WTO law that compels us to review the merits of the complainants' prohibited subsidy claims on the basis of arguments that they have not themselves advanced," said the Panel.

The Panel went on to highlight its own observations on one approach to the question of benefit that it believed could have been validly pursued in these disputes.

"Because we have found that the very existence of a reliable electricity supply in Ontario at present requires comprehensive government intervention in the wholesale electricity market, one way we believe it is possible to evaluate whether the challenged measures confer a benefit, that at the same time maintains a market-based discipline, is by evaluating the commercial nature of the FIT and microFIT Contracts against the actions of private purchasers of electricity in a wholesale market where the conditions of supply and demand mirror those that currently exist in Ontario."

One way to determine whether the challenged measures confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement would involve testing them against the types of arm's length purchase transactions that would exist in a wholesale electricity market whose broad parameters are defined by the Government of Ontario.

In the present set of circumstances, this could be done by comparing the terms and conditions of the challenged FIT and microFIT Contracts with the terms and conditions that would be offered by commercial distributors of electricity acting under a government-imposed obligation to acquire electricity from generators operating solar PV and wind-power plants of a comparable scale to those functioning under the FIT Programme.

The Panel said it is attracted by such an approach because not only does it take into account the complexities of electricity markets and the particular conditions of supply and demand that currently exist in Ontario, but it also evaluates the Government of Ontario's actions against a commercial benchmark.

It was of the view that one approach to determining whether the challenged measures confer a benefit could be to compare the rate of return obtained by the FIT generators under the terms and conditions of the FIT and microFIT Contracts with the average cost of capital in Canada for projects having a comparable risk profile in the same period. In its view, such a comparison would allow for an immediate and clear determination of whether FIT generators are being overcompensated, and thereby subsidised within the terms of the SCM Agreement.

It is therefore possible to determine whether the purchases of electricity effected by the Government of Ontario under the FIT Programme confer a benefit by examining whether the rates of return associated with the FIT and microFIT Contracts are significantly above the average cost of capital in Canada for projects having a comparable risk profile. Were this to be the case, it could be concluded that the Government of Ontario was overcompensating FIT Programme generators, relative to what they could expect to achieve under supply contracts with private distributors acting under a government instruction to purchase electricity from solar PV and wind-power plants (including small-scale generators) on the basis of commercial considerations, thereby conferring a benefit upon such generators under the terms of the SCM Agreement.

The Panel however said it appears that the record of these disputes does not contain any appropriate information that can be used to determine the average cost of capital in Canada for projects with a comparable risk profile to the challenged FIT and microFIT projects during the relevant period.

Thus, while the Panel believed that a comparison between the relevant rates of return of the challenged FIT and microFIT Contracts with the relevant average cost of capital in Canada would be a useful way to determine, on the basis of the benefit standard it has outlined, whether the challenged measures confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement, a number of important questions and factual issues would need to be explored and resolved in order for any such analysis to be undertaken.

In its overall conclusions with respect to the claims of subsidisation, the Panel said that: (i) the FIT Programme, and the FIT and microFIT Contracts, amount to government purchases of goods within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement; and (ii) Japan and the European Union have failed to establish that the challenged measures confer a benefit, within the meaning of Article 1.1(b) of the SCM Agreement.

There was a dissenting opinion of one Panel member with respect to whether the challenged measures confer a benefit within the meaning of Article 1.1 (b) of the SCM Agreement.

According to the dissenting Panel member, the Panel majority has undertaken a long and careful evaluation of the parties' arguments concerning the question whether the challenged measures confer a benefit, ultimately concluding that the complainants have failed to establish the existence of subsidisation.

"While I agree with parts of the Panel majority's benefit analysis, I respectfully disagree with certain key aspects of its reasoning and ultimate findings. In essence, the Panel majority has found that the circumstances of ensuring a reliable supply of electricity that achieves certain objectives sought by the Government of Ontario justifies the rejection of the competitive wholesale electricity market as the relevant focus of the benefit analysis. The Panel majority has furthermore suggested that, in these circumstances, the existence of benefit could be determined by focusing upon the rate of return associated with the FIT and microFIT Contracts and comparing this with the average cost of capital in Canada for projects having a comparable risk profile.

"I respectfully disagree with these findings and the alternative benefit test. The wholesale electricity market that currently exists in Ontario is recognizable as a market for the buying and selling of electricity. It is undeniable that the supply of electricity, its price and competition between electricity generators - in particular, market entry - are very heavily regulated and conditioned in the market by the Government of Ontario. The wholesale electricity market that currently exists in Ontario is therefore not the kind of market where price is determined by the unconstrained forces of supply and demand. The regulatory impacts on the market are not simply in the nature of framework regulation, within which those forces may operate. The Government of Ontario (through Hydro One) and the municipal governments (through Local Distribution Companies) account for almost all purchases of electricity made at the wholesale level. The same product, which in this case is electricity, is purchased by these entities at different prices depending upon its method of generation or particular status in the Government of Ontario's electricity supply policy, including under the FIT Programme."

In these circumstances, the complainants have expressed their concern that an advantage is being given to the market participants that are receiving the highest prices for the electricity they produce, namely generators using solar PV and wind-power technologies operating under the FIT Programme. The Panel's task is to test that concern according to the disciplines of the SCM Agreement.

According to the dissenting member, the relevant question that a Panel in a case such as this must address is whether a benefit is conferred on the recipient of the financial contribution. The wholesale electricity market in Ontario does not allow for the discovery of a single market-clearing price established through the unconstrained forces of supply and demand. In that market the Government of Ontario and the municipal governments are the chief buyers of the goods concerned. In these circumstances the Panel must consider whether there is some appropriate frame of reference for determining if a benefit is conferred in the provision of that financial contribution.

In the dissenting member's view, the competitive wholesale market for electricity that could exist in Ontario is the appropriate focus of the benefit analysis. "Furthermore, I am of the view that facilitating the entry of certain technologies into the market that does exist - such as it is - by way of a financial contribution can itself be considered to confer a benefit. In the light of these considerations, it follows from the arguments and evidence presented by the complainants, as well as Canada's own statements, that the challenged measures confer a benefit, within the meaning of Article 1.1(b) of the SCM Agreement."

The dissenting Panel member said that by contracting to purchase electricity produced from solar PV and wind-power technologies under the FIT Programme at a price intended to provide for a reasonable return on the investment associated with a "typical" project, the Government of Ontario ensures that qualifying generators are remunerated at a level that allows them to recoup the entirety of their "very high" capital costs.

As the complainants argue and Canada accepts, such levels of remuneration would never be achieved through the unconstrained forces of supply and demand in a competitive wholesale electricity market in Ontario. Nor could they be achieved within the constrained forces of supply and demand which actually do operate within the wholesale electricity market in Ontario, without an intervention which remunerates the facilities which generate power from solar PV and wind-power technologies at a higher rate than is paid in respect of electricity generated by the other technologies.

"It follows that by bringing these high cost and less efficient electricity producers into the wholesale electricity market, when they would otherwise not be present, the Government of Ontario's purchases of electricity from solar PV and wind-power generators under the FIT Programme clearly confer a benefit upon the relevant FIT generators, within the meaning of Article 1.1(b) of the SCM Agreement," said the dissenting member. +

 


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