Canada: The WTO Decision – What It Means For Ontario FIT 1.0 And 2.0 Projects

Background

The Government of Ontario enacted the Green Energy and Green Economy Act, 2009 (Green Energy Act) in the fall of 2009 to attract investment to the province, create “green” jobs and better protect the environment. Ontario’s Feed-in Tariff (FIT) program was developed pursuant to the Green Energy Act to procure energy from renewable energy sources. One of several features of the FIT program was the requirement that projects developed under it achieve a minimum domestic content level, i.e., have a certain percentage of a project’s costs come from Ontario goods or labour sourced from the Province of Ontario. To date, over 4600 MW have been awarded and over 2013-2015 it is expected that the vast majority of the renewable energy infrastructure associated with these projects will be built, resulting in a fundamental shift to Ontario’s electricity supply mix.

Context

In September of 2010, the Government of Japan lodged a complaint regarding the Ontario FIT domestic content provisions to the World Trade Organization (WTO), arguing that the provisions are inconsistent with Canada’s obligations under the General Agreement on Tariffs and Trade 1994 (GATT 1994), the Agreement on Trade Related Investment Measures (TRIMs Agreement), and the Agreement on Subsidies and Countervailing Measures (SCM Agreement). The European Union and United States asked to join the consultations, a request to which Canada conceded. In August 2011, the European Union initiated a similar complaint regarding the domestic content provisions of Canada’s FIT program.

In separate complaints before the WTO, Japan and the EU argued that the minimum domestic content level provisions are laws, regulations or requirements according less favourable treatment to imported equipment compared to local Ontario equipment, are trade-related investment measures, and are akin to a subsidy conferring a benefit.

On December 19, 2012, panels appointed by the WTO’s Dispute Settlement Body (DSB) issued their reports in both disputes in the form of a single document, finding that the FIT program domestic content provisions are trade-related investment measures that accord preferential treatment to domestic products over imported products, and therefore violate Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT 1994. The DSB dismissed Japan’s and the EU’s claims that the domestic content measures constitute subsidies.

Canada appealed the decisions, and the WTO’s Appellate Body (Appellate Body) released its reports in both disputes in the form of a single document on May 6, 2013. In its reports, the Appellate Body confirmed that the FIT program domestic content requirements are inconsistent with Canada’s obligations under GATT 1994 and TRIMs Agreement. The Appellate Body recommended that the DSB request Canada to amend its minimum domestic content level provisions so as to conform to Canada’s obligations under GATT 1994 and TRIMs Agreement. 

Impact of Appellate Body Decision

The DSB has 30 days within which it must accept or reject (by consensus) the reports of the Appellate Body. If the reports are accepted, WTO members will expect Canada to promptly comply with the Appellate Body’s recommendations, and Canada must state its intention to do so at a DSB meeting held within 30 days of the acceptance of the Appellate Body’s report. If it is Canada’s intention to adopt the Appellate Body’s recommendations, Canada may submit that immediate compliance is impractical, in response to which the DSB may provide to Canada a “reasonable period of time” within which it must comply.

If Canada decides not to adopt the Appellate Body’s recommendations, its next option would be to enter into negotiations with the complaining countries, i.e., Japan and the European Union to decide upon mutually acceptable compensation (e.g. tariff reductions) that Canada could offer to the complainants. If mutually acceptable compensation is not agreed upon within 20 days from start of negotiations, Japan and the European Union could ask the DSB for permission to impose limited trade sanctions against Canada.

What This Means for FIT 1.0 Projects

There is no mention in the decisions of the DSB and Appellate Body of any requirement to amend existing contracts under the FIT program to ensure compliance with GATT 1994 and TRIMs Agreement. The FIT 1.0 rules contemplate that the FIT program, rules and contract may be amended from time to time. Amendments that are the result of a “Scheduled Program Review” initiated by the Ontario Power Authority would not affect executed contracts. The FIT Rules and FIT Contract terms leave some uncertainty as to how amendments resulting from changes in laws and regulations will affect executed contracts.

If the Ontario government is to adopt the recommendation of the WTO, it is likely that it will do so only with respect to future versions of the FIT program, and that such amendment therefore will constitute an amendment arising from a Scheduled Program Review as opposed to a change in law or regulation. Assuming that any amendment to the FIT Contract terms as a result of the WTO decisions arise from a Scheduled Program Review, FIT 1.0 projects with existing contracts will continue on their current contract terms and should not be affected by the amendment.

What This Means for FIT 2.0 Projects

It is difficult to assess how the WTO decision will affect FIT 2.0 projects. On the one hand, if the Ontario government implements the WTO decisions by removing or reducing domestic content requirements, applicants who have submitted small FIT 2.0 applications earlier this year and are awaiting offers may benefit from the amendment in that the final contracts may contain less stringent requirements with respect to domestic content. On the other hand, if the recommendations of the Appellate are adopted, the Ontario government may be reluctant to offer high contract prices for renewable energy generated since the contracts would no longer contain the domestic content requirements that helped to make the contracts attractive to the Ontario Government. Lower prices in turn, may make the projects potentially less attractive for the project owners and prospective acquirers or investors.

The Federal-Provincial Interplay - Next Steps

The WTO decisions were issued against Canada, not Ontario, since the WTO only deals with nations, not regional governments. Nonetheless, Canada has an obligation to ensure that regional governments comply with WTO rules and cannot avoid the imposition of trade sanctions on the basis that the impugned program is not under federal jurisdiction. Since this is the first time that a WTO decision involving Canada has been targeted towards actions under the exclusive jurisdiction of a regional government, the Canadian government is working closely with the Ontario government to determine how to respond to the decisions. Ontario’s energy minister, Bob Chiarelli, has announced that Ontario had no immediate plans to amend the Green Energy Act. While adopting the WTO’s recommendation would not necessarily result in an abandonment of Ontario’s FIT Program, it could have a significant impact on the contract prices offered to future FIT contract holders and upon the nascent renewable energy industry supply chain which has developed as a result of the FIT Program since 2009.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.