On May 6, the World Trade Organization (WTO) Appellate Body released its ruling on Japan and the European Union’s claims against Canada regarding Ontario’s feed-in tariff program (FIT Program). The Appellate Body largely upheld the earlier decision of the Dispute Settlement Panel (the Panel) formed by the WTO’s Dispute Settlement Body, which found that the FIT Program violates certain of Canada’s WTO obligations. The Province of Ontario has indicated it plans to comply with the WTO’s decision, yet some issues remain unresolved.

THE DISPUTE

The Province of Ontario uses the FIT Program to allow certain renewable energy producers to lock into fixed-price electricity purchase contracts at premium rates over the long term, in exchange for feeding into the grid. The objectives of the FIT Program include increasing renewable electricity supply and spurring “clean-tech” investment in Ontario.

On December 19, 2012, the Panel ruled that by conditioning FIT Program eligibility on the use of locally produced materials, the FIT Program discriminates against foreign goods and is in violation of Canada’s WTO obligations. The complaining parties alleged the FIT Program violates two fundamental rules of international trade law: “national treatment” (the obligation to treat imported goods no less favourably than “like” domestic goods), and an “actionable subsidy” (the provision of a financial contribution by the government that confers a benefit to a specific recipient). Specifically, the EU and Japan claims alleged that Canada was in violation of three WTO obligations: Article III:4 of the General Agreement on Tariffs and Trade (GATT), Article 2.1 of the Trade-Related Investment Measures (TRIMs), and Articles 3.1(b) and 3.2 of the Subsidies and Countervailing Measures (SCM) Agreement.

The Panel first considered the two issues pertaining to Canada’s national treatment obligations. The Panel ruled that the FIT Program did discriminate against foreign manufacturers, in direct contravention of Canada’s obligations under GATT and TRIMs. First, the Panel found that Canada had not established that it was entitled to be protected by Article III:8(a) of GATT, which excuses national treatment obligations with regard to procurement by governmental agencies of products for governmental use, as Ontario’s electricity procurements were made “with a view to commercial resale.” Having ruled out such a protection, the Panel agreed with the complainants that the FIT Program breached Canada’s obligations under Article 2.1 of TRIMs and Article III:4 of GATT.

With regard to the complaint concerning the application of the SCM Agreement, the Panel found that, while the FIT Program constitutes a “financial contribution,” the complainants failed to demonstrate that this confers a “benefit” on FIT Program electricity producers. The Panel asserted that due to the significant levels of government intervention, the Ontario electricity market is not an open market suitable for use as a benchmark to determine whether the FIT Program inequitably benefits its recipients. As such, the Panel concluded that there was no basis to uphold the complainants’ subsidization arguments.

THE APPEAL

The Appellate Body upheld the Panel’s decision regarding the first two complaints, stating that the FIT Program’s domestic content requirements were incompatible with Canada’s national treatment obligations. It maintained that Canada could not rely on Article III:8(a) but made its ruling on different grounds than the Dispute Settlement Panel. Whereas the Panel’s decision hinged on the FIT Program’s commercial implications, the Appellate Body differentiated between the product procured (electricity) and the product being discriminated against in violation of  national treatment obligations (the equipment used to generate electricity). As such, the Appellate Body upheld the ruling that Article III:8(a) did not protect the FIT Program from being found inconsistent with Article III:4 of GATT and Article 2.1 of TRIMs.

With respect to the appeal relating to the SCM Agreement, the Appellate Body reversed the Panel’s finding, holding that the Panel had erroneously conducted the “benefit” analysis. The Appellate Body asserted that proper analysis of conferred benefits begins with the definition of a relevant market. In this case, it was relevant that the market in which electricity generators compete is fundamentally shaped by the Ontario government’s definition of the energy supply mix (which definition in and of itself cannot be considered as conferring a benefit). The Appellate Body distinguished between existing markets where competitive forces are simply distorted by government programs and those markets that exist only because of government intervention.

With this in mind, the Appellate Body turned to the prices of renewable energy supply contracts awarded through competitive bidding in Ontario, prior to the implementation of the FIT Program. The Appellate Body found that such prices are appropriate benchmarks for a benefit comparison in this case and also suggest that the FIT Program may indeed confer undue benefits to its recipients. Nevertheless, the Appellate Body declined to reach a conclusion on the FIT Program’s compliance with the SCM Agreement. The Appellate Body decided that as the Panel had not fully explored the issue, and as there was insufficient undisputed factual evidence on the record, it could not properly complete the legal analysis with respect to the subsidies issue.

LOCAL AND GLOBAL IMPLICATIONS

WTO rules stipulate that the complained-of party (in this case Canada) must promptly comply with the Appellate Body’s report. However, in most cases this is impractical, such as where amending legislation must be passed to address the non-compliant measure. In practice, some reasonable period of time is determined within which the complained-of party is expected to comply. In this connection, a guideline of 15 months is specified, but the actual implementation period may be more or less than this guideline. This is the first time that Canada has received a ruling from the WTO with regard to a wholly provincial policy, and ultimately, Canada’s federal system and constitutional division of powers serve to complicate the matter. Despite the fact that matters of international trade law are within the purview of the federal government, the Province of Ontario has the sole legislative authority to remedy the violation of Canada’s WTO obligations.

On June 12, 2013, Ontario’s Energy Minister Bob Chiarelli issued a direction to the Ontario Power Authority (OPA), which stated, among other things, that the Ministry of Energy intends to pursue the necessary legislative and other steps to bring the FIT Program into compliance with the WTO’s rulings. The Minister also announced that Ontario will not be offering any additional FIT contracts for generation projects with a capacity over 500 kW, and Ontario intends to develop a new procurement for such projects.

In the meantime, it is not yet clear how Ontario intends to deal with the domestic content requirement that was included as a contractual term in all of the FIT contracts issued by the OPA prior to May 24, 2013. This may create political tensions in Ontario and will likely serve to exacerbate the already intense climate surrounding the provincial government’s energy policies.

Despite the fact that the Appellate Body declined to rule on the subsidy issue, the impact of its findings on government-supported renewable energy projects will likely be felt by other major and emerging markets. India and the United States are embroiled in a dispute with respect to energy policies, with the U.S. having registered a complaint in February, and India filing its complaint over unfair subsidy and incentive programs (at both the federal and state levels) with the WTO in April. As at least eight of the top 30 global energy markets maintain programs that contain some variation of domestic content requirements. The Appellate Body’s ruling with regard to Canada’s regime may be the harbinger for a global debate on these issues.