An investor-state arbitration tribunal published its final ruling last week in the row between a US-based wind energy company, Windstream, and the Canadian government. The award brought an end to a dispute that was filed four years ago under the investment chapter of the North American Free Trade Agreement (NAFTA).
Windstream complained about a moratorium on offshore wind energy generation projects imposed in 2011 by the Canadian province of Ontario and its effects on the company’s offshore wind farm project in Lake Ontario. According to Windstream, the measures were discriminatory and arbitrary, while causing an indirect expropriation of the investment.
Hearings were held in Toronto in February this year and the NAFTA tribunal reached a final decision in late September. The award was made publicly available in early December. (See Bridges Weekly, 18 February 2016)
The tribunal rejected most of the company’s claims but found that the Canadian government had acted “unfairly” and “inequitably” – referring specifically to the government not taking the necessary steps to clarify promptly the “regulatory uncertainty” that resulted from the moratorium – and thus was in breach of its NAFTA obligations.
It awarded Windstream damages of about C$25.2 million (US$19.1 million) and C$$2.9 million (US$2.2 million) in legal costs.
In 2003, the Government of Ontario started an initiative to promote renewable energy development, aiming to prevent electricity shortages in the province. One year later, it adopted the Electricity Restructuring Act, establishing the Ontario Power Authority (OPA), which was put in charge of electricity procurement programmes.
In 2009, the OPA launched a feed-in tariff (FIT) Program in the province, which set up a procurement scheme that featured standardised rules and long-term fixed-priced contracts for projects generating electricity exclusively from renewable energy sources.
Windstream and the OPA entered into a 20-year FIT contract in 2010 for a proposed windfarm project with approximately 100 wind turbines capable of generating 300 MW of electricity in Lake Ontario near Wolfe Island. The agreement required the project to come into commercial operation by May 2015.
Ontario later decided to defer offshore wind development, claiming that there was a lack of scientific research and that an “adequately informed policy framework” was not yet in place. Meanwhile, Windstream also served a notice to the OPA which said that due to the “lack of regulatory assistance” from Ontario, it would not be able to reach commercial operation under the previously agreed deadline. This is known in contractual terms as a force majeure notice, referring to unavoidable or extraordinary circumstances beyond the parties’ control.
During the notice period, which excuses the energy company from meeting its deadline, Windstream cannot withdraw its C$6 million security deposit for the project. The OPA and Windstream unsuccessfully attempted to renegotiate the terms of the contract. The energy company later initiated legal proceedings under NAFTA in 2012.
Windstream claimed that Ontario had unlawfully expropriated the company’s investment, arguing that the moratorium and the provincial government’s move not to exempt the energy company from it essentially rendered that investment “substantially worthless.”
The tribunal dismissed the claim, stating that despite the force majeure status, the FIT contract is still formally in force and the C$6 million security payment remains in place. In addition, the company did not invest in the project an amount of money which exceeded the level of the security deposit. Overall, the tribunal deemed that Windstream was not deprived of the value of its investment.
The tribunal also rejected the company’s claims of a breach of NAFTA’s most-favoured nation (MFN) and national treatment provisions. These rules prohibit Canada from discriminating against investors or investments of another party relative to a domestic party or NAFTA party equivalent, insofar as they are in “like circumstances.”
The tribunal pointed out that the relevant investors and investments – TransCanada, based domestically, and South Korean company Samsung – are not in “like circumstances” with Windstream. The former two, said the tribunal, did not participate in the FIT programme and did not apply for Crown land for offshore wind development. The tribunal also noted that as a result of the moratorium, Windstream was the only holder of a FIT contract, while all offshore wind projects were cancelled. The tribunal therefore disagreed that Windstream was discriminated against after evaluating how other prospective developers were treated.
Nonetheless, the tribunal faulted the government’s inaction after enacting the moratorium.
“The failure of the Government of Ontario to take the necessary measures, including when necessary by way of directing the OPA, within a reasonable period of time after the imposition of the moratorium to bring clarity to the regulatory uncertainty surrounding the status and the development of the Project created by the moratorium,” said the tribunal. This “was unfair and inequitable,” in breach of its NAFTA obligations.
Windstream director David Mars welcomed the ruling, calling it “an appropriate first step at remedying the challenges [the company has] faced” in a press release in October, shortly after the outcome was first circulated privately. The company said that it is prepared to meet its contractual obligations and wants to go forward with the project.
The Ontario government, for its part, welcomed the dismissal of the majority of claims brought by Windstream and continues to stand by its moratorium. A spokesperson for the Ontario Ministry of Energy told Bloomberg BNA that the province will continue to take “a cautious approach to offshore wind,” but intends to finalise the required scientific research.
Past FIT energy disputes
Ontario’s feed-in tariff programme has also been the subject of trade cases elsewhere, including at the World Trade Organization, though for different reasons. In 2010, Japan (DS412) and the EU (DS426) challenged the programme’s domestic content requirements, which obliged companies applying for a FIT contract to use a defined percentage of equipment from within Ontario.
The WTO Appellate Body ruled in May 2013 that requirements to use local products discriminate against foreign competitors and are in violation of WTO rules. The following year, Canada announced it had complied with the ruling, withdrawing the domestic content requirements from large renewable electricity procurements and significantly lowering them for small and micro-FIT procurement of wind and solar electricity. (See Bridges Weekly, 8 May 2013)
The FIT programme was also featured in another NAFTA investment arbitration case, filed by Mesa Power Group LLC, in 2011. The US-based corporation claimed that it was put at a disadvantage while trying to apply for a beneficial FIT contract.
This past March, the tribunal ruled that the FIT programme constitutes procurement by a party or a state enterprise within the meaning of a NAFTA provision – therefore being exempted from non-discrimination obligations. The tribunal ultimately dismissed the company’s claims. (See Bridges Weekly, 4 May 2016)
ICTSD reporting; “NAFTA Panel Awards Energy Company $21 Million for Blocked Project,” BLOOMBERG BNA, 14 October 2016; “Huge free trade penalty against Canada,” RADIO CANADA INTERNATIONAL, 14 October 2016.