NAFTA Tribunal Issues Ruling in Mesa Power-Canada Case

4 May 2016

An investor-state arbitration tribunal under the North American Free Trade Agreement (NAFTA) recently released its decisions in a dispute brought by a US corporation, Mesa Power Group LLC. At issue in the case, which dates back to 2011, was the awarding of power purchase agreements under the Canadian province of Ontario’s feed-in-tariff programme (FIT programme) for renewable energy.

Mesa challenged Canada under NAFTA’s investment chapter, which sets out a framework of rules and disciplines that aims to provide investors from participating countries – Canada, Mexico, and the US – with a predictable, rules-based investment climate, along with describing how such investor-state disputes should proceed.

The company claimed that Canada adopted discriminatory measures, imposed minimum domestic content requirements (DCRs), and failed to provide the company with a minimum standard of treatment, in violation of NAFTA’s investment provisions. Furthermore, the US company said, these violations resulted in losses and damages for Mesa.

A three-member tribunal was set up in July 2012 to hear the case, with the Permanent Court of Arbitration (PCA) acting as the administering institution. The tribunal closed the proceedings in late March of this year. With a dissenting opinion from one member, the tribunal dismissed Mesa’s claims and found that Canada was in line with its NAFTA obligations.

The tribunal also decided that Mesa should bear all the costs of the arbitration as well as a portion of Canada’s legal defence costs, worth nearly C$3 million.

The FIT programme

In 2004, the Government of Ontario created the Ontario Power Authority (OPA), which was tasked with promoting the diversification of the province’s electricity supply with a particular focus on renewable energy, among other objectives.

Five years later, the Ontarian government directed the agency to develop and implement a feed-in tariff programme focused on boosting renewable energy generation and consumption.

Under the FIT programme, projects generating electricity exclusively from one or more sources of renewable energy can apply for a fixed, long-term power purchase agreement (FIT contract) with a guaranteed price for electricity delivered into the Ontario system. These would also need to meet certain domestic content requirements.

Applications after 30 November 2009 were ranked solely on the basis of their timing, with those received beforehand able to advance their ranking on the basis of their “shovel-readiness.” Projects with the highest rankings would be awarded contracts, provided that there was sufficient transmission capacity to connect the project to the grid.

Mesa’s applications

Through unlimited liability corporations incorporated in Canada and owned by Mesa, the company filed two applications on 25 November 2009, and four others in May 2010, all based in the Bruce region of Ontario.

Between April 2010 and July 2011, the Ontario agency offered FIT contracts through three rounds. In the first two rounds, due to transmission constraints, no contracts were awarded to projects located in the Bruce region, including those by Mesa. Those constraints required the building of a new high-voltage transmission line out of Bruce.

Meanwhile, in light of the rapid changes being seen in the electricity market, as well as the quick advances being made towards its renewable energy targets, Ontario deemed it necessary to slow down the pace of its procurement.

In the third round, Ontario allocated 750 megawatts (MW) to the Bruce region for the awarding of FIT contracts. Each application was to be given an opportunity, within five days stating on 6 June 2011, to select its connection point outside Bruce and build transmission lines from their generation facility to the connection point.

One month later, the OPA offered 14 FIT contracts, none of which went to Mesa projects.

In January 2010, Ontario and the Korea Electric Power Corporation entered into the Green Energy Investment Agreement (GEIA), which gave the Korean company guaranteed priority access to 2,500 MW of transmission capacity in Ontario. Accordingly, the OPA was directed in September 2010 to reserve 500 MW of transmission capacity in the Bruce region.

Previous FIT related disputes

This is not the first time that elements of Ontario’s renewable energy initiatives have fallen under international legal scrutiny.

In cases filed by the EU and Japan, the WTO’s Appellate Body ultimately found in 2013 that the domestic content requirements prescribed under the FIT programme and related contracts were in violation of Canada’s national treatment obligations under the Trade-Related Investment Measures (TRIMs) Agreement and the General Agreement on Tariffs and Trade (GATT) 1994. (See Bridges Weekly, 8 May 2013)

Another ongoing NAFTA investment dispute also has FIT elements. Specifically, that case concerns Ontario’s deferral of offshore wind development because of public concerns and scientific uncertainties about the health, safety, and environmental effects of offshore wind projects, and the alleged negative effect of the deferral on the operation of Windstream’s FIT contract.

In this case, issues such as whether acts of OPA are attributable to Canada, and whether the investment measures qualify for procurement exemption under NAFTA, are under debate between the disputing parties. (See Bridges Weekly, 18 February 2016)

Jurisdiction question

NAFTA’s investment chapter features various requirements for submitting a claim to arbitration, including by limiting a tribunal’s jurisdiction to disputed measures that are “relating to” investors or their investments.

The Mesa tribunal agreed with Canada’s claim that an investor cannot challenge pre-existing measures, and said that since the domestic content requirements were part of the FIT programme before Mesa’s projects were incorporated, the arbitrators did not have jurisdiction over them.

Canada agreed that acts of the Government of Ontario are attributable to it, however, not those of OPA and two other entities of Ontario electricity system – therefore do not fall into the tribunal’s jurisdiction.

Mesa referred, among other things, to the WTO judges’ 2013 finding that the OPA is a “public body,” and argued that the OPA is an organ of Canada. The tribunal disagreed, saying that the WTO findings was made in a different context, specifically in relation to the global trade body’s Agreement on Subsidies and Countervailing Measures (SCM Agreement).

While finding that the OPA is not an organ of Canada, the tribunal ultimately deemed that it is a state enterprise, and that its acts are nonetheless attributable to Canada, “since they were all done in exercising of regulatory, administrative or other governmental authority.”

Procurement exception

Under the NAFTA investment chapter, if a measure constitutes procurement by a party or a state enterprise, a number of obligations do not apply, including national treatment, most favoured nation treatment, and a ban on using domestic content requirements.

The tribunal noted that this exception was designed to ensure that NAFTA parties kept the ability to exercise nationality-based preference in cases of procurement, and rejected Mesa’s claims, deeming that the term “procurement” does not require the acquisition to be for the government’s own use.

Mesa also argued that Canada cannot rely on the procurement exception since it has not demonstrated that there is a link between the FIT contract and the challenged measures under the NAFTA investment chapter’s non-discrimination provisions.

The tribunal said that Mesa’s claim appears to arise from arguments raised in a WTO dispute on the feed-in tariff’s local content requirements, and said that these are of limited use in the present case.

In the WTO case, the government procurement exemption under the General Agreement on Tariffs and Trade (GATT) was found not to apply, given that Ontario was procuring electricity, but discriminating against electricity generation equipment due to its origin.

For the NAFTA tribunal, the existence of such a link is “irrelevant” given that the investment provision under the trilateral pact is broader than the GATT provision examined in the WTO case. Furthermore, the arbitrators said that Mesa’s non-discrimination claim involves the acts of the Ontario government and the OPA, and thus it has a “direct nexus” with the FIT programme.

The majority of the tribunal’s members concluded that the FIT programme is indeed procurement, and is implemented by the Ontarian government through the OPA state enterprise; therefore, the provincial government’s actions cannot be challenged under the NAFTA investment chapter’s non-discrimination provisions.

Minimum standard of treatment

Under NAFTA, hosting countries must treat foreign investors’ investments in line with international law, “including fair and equitable treatment and full protection and security.”

The tribunal reviewed the various components which make up this standard, such as arbitrariness and gross unfairness, while noting the high threshold for a breach of the “minimum standard treatment” obligation. The arbitrators deemed that there was not enough evidence to establish that the OPA’s implementation of the FIT programme involved collusion or unfair preference.

The tribunal also disagreed with Mesa’s claim that the Green Energy Investment Agreement allowed Ontario to “unjustifiably” provide an advantage to the Korean investors “at the expense” of FIT applications.

Furthermore, the arbitrators dismissed the company’s objections over Ontario’s process in allocating transmission capacity in the Bruce region. In particular, the tribunal said that the allocation process adopted in the third round for the area was based on “rational considerations,” given the context at that time.

Ultimately, the majority of the arbitrators concluded that Canada’s conduct did not violate NAFTA’s minimum standard of treatment requirement.

Responses

The Canadian government welcomed the outcome, while the Mesa Power Group issued a statement saying “while we respect the tribunal and its process, we do think they got this one wrong," and "we are reviewing the decision, and the dissenting opinion, and will be evaluating our options.”

There are around 700 known treaty-based investor-state arbitrations recorded on the UN Conference on Trade and Development’s (UNCTAD) investment policy hub, with an increasing tendency of foreign investors to resort to investor-state dispute settlement (ISDS). The actual total number can be higher, as under most international investment agreements (IIAs), arbitrations can be conducted confidentially in full.

Investor-state disputes are coming under increasing scrutiny, particularly in the context of trade agreements. Last year’s UNCTAD World Investment Report called for reforming this type of dispute settlement, and explained that, among other issues, the current ISDS system runs the risk of causing a “regulatory chill on legitimate government policy making.”

While some countries or country groups, such as the EU, have backed the creation of a multilateral investment court and other reforms to help address some of the current concerns about the ISDS system, this idea is still in the early stages. (See Bridges Weekly, 3 March 2016)

ICTSD reporting.

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