NAFTA wind energy dispute ramps up
The three-year dispute between the US-based Windstream Energy company and the Canadian government ramped up this week, as representatives from both sides gathered in Toronto to make their case before an investor-state arbitration tribunal under the North American Free Trade Agreement (NAFTA).
The case concerns a moratorium imposed in 2011 by the Canadian province of Ontario on offshore wind energy generation projects, and the subsequent consequences for Windstream and the company’s alleged investment in Ontario, including its freshwater offshore wind farm project under an earlier signed power purchase agreement with the Ontario Power Authority (OPA).
The dispute started in October 2012 with a Notice of Intent filed by Windstream, followed by a Notice of Arbitration in January 2013. Windstream claimed that the Government of Ontario acted in an expropriatory, arbitrary, and discriminatory manner when it deferred offshore wind development, resulting in between US$357.5 to US$568.5 million, without interest, in damages.
Following an exchange of pleadings, the hearing is scheduled to last for two weeks so that the tribunal can hear issues relating to jurisdictions, merits, and damages.
Feed-in tariff programme
Since 2003, the Government of Ontario has undertaken several initiatives to spur the creation of new electricity supply and capacity, including the potential use of alternative and renewable electricity sources, such as solar, wind, biomass, biogas, and hydro-electric.
Part of this effort included establishing the Ontario Power Authority under the 2004 Electricity Restructuring Act, for the “procurement of electricity supply and capacity.”
In 2009, as part of Canada’s largest renewable electricity initiative, the Ontario government directed the OPA to develop a feed-in-tariff (FIT) programme, a renewable energy procurement scheme with standardised rules, contract prices designed to reflect energy generation costs, and economic incentives for renewable energy producers.
That same year, Windstream through its Canadian subsidiary, Windstream Wolfe Island Shoals (WWIS), applied to build a 300-megawatt, 130-turbine offshore wind project in Lake Ontario, off Wolfe Island, near Kingston. The company signed the FIT contract with the OPA in August 2010, agreeing on fixed-pricing for power generated over a 20-year period so long as the WWIS brought the project into commercial operation by May 2015.
The standard FIT contract contains a “force majeure”clause that can excuse the electricity supplier from performing contractual obligations, including on time frames, because of factors outside their control. The clause also allows the supplier to terminate the contract after certain period of “force majeure”status. FIT contract holders must include a minimum level of domestically-sourced content when building their projects.
Citing public concerns and scientific uncertainties about the health, safety, and environmental effects of offshore wind projects, the Ontario government decided in February 2011 to defer offshore wind development to conduct further scientific research and establish an “adequately informed policy framework.” The WWIS project has been on hold ever since.
Following this deferral, the OPA entered into negotiations with Windstream on issues involving the FIT contract’s status, the project’s progress, and the OPA’s right to terminate the contract given the delay.
The 22-year old NAFTA trade and investment pact between the US, Canada, and Mexico sets out under its investment chapter, Chapter 11, a framework of rules and disciplines that aim to provide investors from participating countries with a predictable, rules-based investment climate.
The chapter also outlines how dispute settlement procedures should work between investors and a NAFTA party government.
At the outset, in responding to Windstream’s NAFTA claims, Canada argued that the challenged investment measures – the deferral, along with the failure to lift it in time for Windstream to meet its FIT contract timelines, and failure to insulate Windstream from the deferral’s effects – are those of the Government of Ontario, not the OPA. Canada therefore claims that it is irrelevant for the Tribunal to consider whether the OPA’s actions can be attributed to Ottawa for the purposes of Chapter 11.
Moreover, Canada pointed out that the OPA is a state enterprise and was not acting in the exercise of delegated governmental authority, nor has Windstream successfully proven otherwise. According to Ottawa, the tribunal should reject the Windstream arguments regarding the attribution of the OPA’s actions to Canada, meaning that these actions would essentially lie outside the arbitration tribunal’s jurisdiction.
Regarding Windstream’s allegation under NAFTA’s most-favoured nation (MFN) and national treatment provisions, Canada challenged whether these apply, arguing that the investment measures involve procurement exempted by the trilateral pact.
The NAFTA investment chapter requires treatment no less favourable to investors/investments of another party relative to a domestic counterpart, in like circumstances, both when establishing an investment and afterward. Chapter 11 also requires such treatment for investors/investments of another NAFTA party relative to a counterpart from any other country.
The chapter also outlines reservations and exceptions to these obligations, one of which exempts the NAFTA party’s non-discrimination obligations for procurement by a party or a state enterprise.
Windstream cited Ontario’s treatment of TransCanada – a Canadian energy infrastructure company, who had a gas generation plant project in contract with the OPA, which was later cancelled by Ontario – that kept the latter whole and gave it a new contract, a new project and reimbursed its costs, claiming that the provincial government chose two drastically different solutions to identical problems, while Windstream received no compensation.
Canada claims that Windstream inappropriately compared the treatment accorded in its case after the offshore wind project’s deferral to that accorded to TransCanada. According to Ottawa, TransCanada is not an investor in “like circumstances,” as it did not participate in the FIT programme, and operated a gas-fired plant under a regulatory regime that was different to that applicable to renewable energy projects.
Windstream also claimed that Canada violated its NAFTA obligation by expropriating its investments, with the moratorium rendering worthless the company’s investments in the offshore wind project, the WWIS, and the FIT contract. In response, Canada claimed that the FIT contract’s revenue stream is not an investment capable of being expropriated, and that the decision to defer offshore wind development was a non-discriminatory measure of general application, taken to meet a legitimate public welfare objective and therefore not an expropriation.
Windstream also argued that Canada failed to give its investments “fair and equitable treatment” – a charge which Ottawa disagreed with, arguing that in particular the energy company failed to prove that customary international law protects against treatment breaching the investor’s legitimate expectations, is “arbitrary or grossly unfair,” or is “discriminatory.”
Canada also argued that Windstream was well aware that the regulatory framework for the approval of offshore wind projects was unfinished when it signed the FIT contract; therefore, the alleged expectations at the time that the company could process through the regulatory framework for offshore wind was baseless. For Canada, Windstream alone bore the project’s development risks.
Canada also requested the tribunal to deny the Windstream’s claim of damages, arguing that the company did not suffer losses, as the project has no material value on the marketplace.
The NAFTA case is not the first time that elements of Ontario’s renewable energy initiatives have fallen under international legal scrutiny, with the FIT scheme also the subject of high-profile WTO cases lodged by the EU and Japan five years ago.
The WTO’s Appellate Body in May 2013 ultimately found that the domestic content requirements prescribed under the FIT programme and related contracts violate 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)
In reaching these findings, the Appellate Body considered whether the FIT measures constitute government procurement activities purchasing the domestic product in a competitive relationship with the foreign product, and might therefore be exempted from GATT national treatment obligations. Ultimately, the WTO judges deemed that the exemption was not applicable, given that the government was procuring electricity, but discriminating against electricity generation equipment due to origin.
Regarding subsidies, the Appellate Body upheld a previous panel’s finding that the government made a financial contribution to electricity suppliers in the FIT programme through “purchase of goods” – specifically by the combined actions of the OPA and two other public bodies, demonstrating that the Ontario government purchases electricity.
The Appellate Body however was not able to complete the analysis as to whether the FIT programme and related contracts confer a benefit within the meaning of Article 1.1(b) of the Subsidies and Countervailing Measures (SCM) Agreement and whether the measure constituted subsidies that are provided contingent upon the use of domestic over imported goods, which are prohibited under WTO subsidy rules.
The following year, Canada declared that it had complied with the rulings and recommendations by removing the domestic content requirements for large renewable electricity procurements and significantly lowering the domestic content requirements for small and micro-FIT wind and solar energy procurement.