Ontario FiT domestic content subsidy dispute heard by WTO

International Centre for Trade and Sustainable Development
The legality of government support for renewable energy initiatives took centre stage in Geneva this week, with a landmark case against Canada being heard at the WTO. A three person dispute panel heard opening arguments in cases launched by Japan and the EU – DS412 and DS426, respectively – over the Canadian province of Ontario’s local content requirements in its feed-in tariff (FIT) scheme.

In a highly welcome move, the parties had decided to allow the public to attend the first part of the 27-28 March hearing, which is the stage where parties read out their statements. However, the second part, where parties respond to panel questions, was closed to the public.

The Ontario programme in question aims at increasing the share of renewable energy in the province’s electricity mix by insulating green energy producers from risks, and facilitating investments that would otherwise be costly. While Ottawa maintains that the programme is necessary to incentivise clean energy generation, Brussels and Tokyo are concerned over the programme’s subsidising effect.

The main thrust of both complaints is that Ontario’s renewable energy feed-in tariff programme unfairly discriminates against foreign renewable energy products through its “domestic content” clause.

“Through these measures, the Government of Ontario provides subsidies contingent upon the use of domestic over imported goods,” said the Japanese delegation in its statement. “This discriminatory measure is designed to promote the production of renewable energy generation equipment in Ontario rather than to promote the generation of renewable energy.”

The provisions require most renewable energy suppliers to use a minimum level of equipment produced in Ontario – 25 percent for wind and 60 percent for solar projects – in order to qualify for price guarantees and grid access under the FIT (see Bridges Trade BioRes Review, April 2011).

Due to the domestic content requirements, Japan and the EU argue that the FIT is a prohibited subsidy that directly violates the Agreement on Subsidies and Countervailing Measures (SCM Agreement). They also argue that the measures violate the national treatment requirements of the General Agreement on Tariffs and Trade (GATT) and are inconsistent with the Agreement on Trade-Related Investment Measures (TRIMs Agreement).

FIT as government procurement

In this week’s meeting, Canada countered that the FIT programme is a form of government procurement designed to ensure the affordable generation of clean energy in Ontario. As such, the programme would be shielded from both GATT national treatment requirements and the TRIMS Agreement provisions being cited in the case. Government procurement is also exempt from the WTO subsidies agreement, provided that it is not conferring a benefit.

The only WTO agreement that specifically addresses such governmental purchases is the plurilateral Government Procurement Agreement (GPA). While Canada is a party to the GPA, the Ontario Power Authority (OPA) – the agency that implements Ontario’s FIT programme – is not covered by Canada’s concessions in the plurilateral pact. As a result, Ontario is under no obligation to grant access to its energy procurement market.

However, Tokyo and Brussels were unwilling to give ground on any FIT-as-procurement argument, instead arguing that the programme constitutes a subsidy in the form of the transfer of a fund or price support.

“The defining aspect of FIT contracts is that they ensure renewable energy generators payments in excess of those that they would receive but for the FIT Program,” argued Tokyo when rebutting Ottawa’s claim that the programme was government procurement.

This is not about a purchase, Japan added. “The OPA or the Government of Ontario never has possession of or exercises control over obtaining of the electricity supplied under the FIT Program.”

Conferring a benefit?

Brussels and Tokyo further claim that the measure – whether a governmental purchase or a transfer of funds – confers a benefit. “The FIT Program and its related contracts confer a benefit to the FIT Generators since the OPA guarantees above-market rates for the supply of electricity,” the EU argued before the panel.

“That excess is best confirmed by examining the difference between the FIT rates and HOEP [Hourly Ontario Energy Price], as HOEP represents the entire rate that these generators would have received” under normal market conditions, Japan added.

The difference between government procurement and subsidies in the form of governmental purchases involves the benefits provided by the latter to contractors. When purchases confer a benefit by granting better conditions than what is normally available on the market – for instance by paying higher prices or granting longer contract terms –  they cannot be shielded from the WTO’s SCM Agreement by being deemed a form of government procurement.

Ottawa denies the existence of such benefits. Countering Tokyo’s and Brussels’ claims regarding the HOEP, it argued that that HOEP was an inappropriate benchmark and that “the focus of any benefit analysis must be on the recipients of the benefit – wind and solar energy producers – not consumers.”

The question would then be whether Ontario wind and solar energy producers receive better contract terms and whether that translates into an economic benefit relative to their competitors. The calculation of a benefit, however, is highly controversial under current subsidy rules.

Next steps

The panel has requested the parties to submit their written rebuttal submissions by the end of April; the panel will then hold a second oral hearing. Canada can be expected to bring new arguments at that stage, given that it already changed its statements in this week’s hearing on short notice after listening to Brussels’ and Tokyo’s statements.

An interim report may be submitted to the parties on a confidential basis as early as July of this year. A public ruling, however, is not expected before late October.

ICTSD Reporting.

2 thoughts on “Ontario FiT domestic content subsidy dispute heard by WTO

  1. iT is a sad fact the CANADA has to argue on behalf of the mess Ontario made. Should Canada send McGuinty the legal bills? Why not simply allow the FIT program to die at this point — Canada should not lose face, but hope WTO rules against FIT since McGuinty ignores all expert advice and keep the program running to everyone’s detriment.

    • Sad?….lol…..I contacted the fed’s when this issue became known….their reply was one of ignorance….they could not comprehend that FIT issues and the WTO lands in their backyard.

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