Friday, January 11, 2013

Analysis of the Canadian FiT case: Part III

The Canadian FiT case is the first instance wherein renewable energy FiTs have been challenged at the WTO dispute settlement mechanism. It raises important issues of domestic content provisions in renewable energy programs as well as the existence of a subsidy that can be challenged under WTO law.

This post explores the issue of a subsidy under the ASCM and how the Panel has interpreted the provisions of the ASCM to come to finding that while it does constitute a "financial contribution" no "benefit" however exists in this case.The analysis of the existence of a benefit involved a detailed understanding of the peculiar nature and status of the electricity market in Canada. Was the understanding of the existence of a benefit highly influenced by the nature of the good ie. electricity?
"7.320 We have 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 Ontario624. In our view, such an outcome would fail to reflect the reality of modern electricity ystems, 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 we have emphasized 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."
The Panel majority declined to accept that there was a benefit conferred on the Fit renewable energy producers though a financial contribution did exist. the Panel, however, did not go into the analysis of whether it amounted to a price or income support ( for another day in the Appellate Body?) since benefit was not conclusively established.

I was curious about the minority opinion in the case of existence of a benefit:

"9.2 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 windpower technologies operating under the FIT Programme. The Panel's task is to test that concern according to the disciplines of the SCM Agreement. 
9.3 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 my 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 conclusion of the minority view summarizes the contention that a benefit is conferred by an FiT that guarantees a minimum tariff for renewable energy sources in order to encourage renewable energy production as well as address the high capital costs involved:
"9.23 Thus, by contracting to purchase electricity produced from solar PV and windpower 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 windpower technologies at a higher rate than is paid in respect of electricity generated by the other technologies663. 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 windpower 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."
As Simon Lester commented in IELP
"Basically, buying energy from wind and solar producers at prices they could not have otherwise obtained in the market confers a benefit. End of story."
Perhaps the Appellate Body would clarify in this case? 2013 would perhaps engage us with the intersection of renewable energy programs, international trade law and some interesting disputes!

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