In the World Trade Organization CANADA MEASURES RELATING TO THE FEED-IN TARIFF PROGRAM (DS426)

Transcription

1 In the World Trade Organization CANADA MEASURES RELATING TO THE FEED-IN TARIFF PROGRAM 's Opening Oral Statement at the First Meeting with the Panel Geneva, 27 March 2012

2 TABLE OF CONTENTS I. INTRODUCTION... 1 II. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH ARTICLES 3.1(B) AND 3.2 OF THE SCM AGREEMENT... 3 A. THE FIRST ELEMENT OF THE DEFINITION OF SUBSIDY IS MET: INCOME/PRICE SUPPORT OR FINANCIAL CONTRIBUTION... 3 B. THE SECOND ELEMENT OF THE DEFINITION OF SUBSIDY IS MET: BENEFIT... 9 C. CONCLUSION III. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE NOT COVERED BY ARTICLE III:8 OF THE GATT IV. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH ARTICLE 2.1 OF THE TRIMS AGREEMENT, IN CONJUNCTION WITH PARAGRAPH 1(A) OF ITS ANNEX V. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH ARTICLE III:4 OF THE GATT...17 VI. CONCLUDING REMARKS i-

3 TABLE OF CASES Short Title EC and certain member States Large Civil Aircraft Full Case Title and Citation Appellate Body Report, European Communities and Certain Member States Measures Affecting Trade in Large Civil Aircraft, WT/DS316/AB/R, adopted 1 June 2011 Philippines Distilled Spirits Appellate Body Reports, Philippines Taxes on Distilled Spirits, WT/DS396/AB/R / WT/DS403/AB/R, adopted 20 January 2012 US Large Civil Aircraft (2 nd complaint) Appellate Body Report, United States Measures Affecting Trade in Large Civil Aircraft (Second Complaint), WT/DS353/AB/R, circulated to WTO Members 12 March 2012, adopted 23 March ii-

4 Mr. Chairman, distinguished Members of the Panel. I. INTRODUCTION 1. The ("EU") would first like to thank you all for agreeing to be Members of this Panel. Our objective in these proceedings is to assist the Panel in the exercise of its judicial functions, and in the search for an effective resolution to this dispute. 2. Today, we intend to be brief and avoid repetition 1 in our opening statement since Japan has already elaborated on many fundamental issues which are identical in this dispute and, in general terms, we support the considerations made by Japan. More concretely, in this oral statement the EU will comment on Canada's first written submission and will provide some preliminary responses to the questions posed by the Panel on 16 March Starting with your Question 11, the EU would like to confirm the Panel's understanding that we are challenging the FIT and microfit Programs as such (as evidenced by all the measures listed in our Panel Request and in paragraph 14 of our first written submission) and as applied (pursuant to the executed FIT and microfit contracts). More concretely, we are targeting a specific aspect of the FIT Program and its related contracts, which is the domestic content requirements with respect to wind and solar PV energy generation facilities. To be clear, we are not taking any issue with the legitimate goal of promoting the generation of electricity from renewable sources. 4. In today's statement, the EU will follow the same order of analysis of the different claims we already made in our first written submission. In response to your Question 24, we believe that the Panel should follow the same order as much as possible. In this respect, we note that in EC Bananas III the Appellate Body enunciated the test to be applied in order to decide the panel's order of analysis where two or more provisions from different covered agreements appear a priori to apply to the measure in question. According to the Appellate Body, the provision from the agreement that "deals specifically, and in detail" with the 1 Panel's Working Procedures, para

5 measures at issue should be analysed first. 2 In the present case, the domestic content requirements contained in the FIT Program in its related contracts are in the nature of financial incentives to encourage the use of domestic over imported products. Thus, the most specific provisions in this respect are Articles 3.1(b) and 3.2 of the SCM Agreement. The SCM Agreement also foresees "in detail" the remedies in cases of Article 3 violations. 3 Then, the EU considers that the covered agreement dealing specifically and in detail with measures such as the domestic content requirements contained in the FIT Program and its related contracts is the TRIMs Agreement. Specifically, paragraph 1(a) of the Annex to the TRIMs Agreement captures the type of measures affecting investment (i.e., TRIMs) that are before you in the present case. We consider that the measures at issue also fall under the more general scope of Article III:4 of the GATT In any event, regardless of the order the Panel chooses in its analysis, the EU requests the Panel to make findings and recommendations with respect to all claims brought by the EU. In our view, only by making findings and recommendations with respect to both our claims against prohibited subsidies and our claims on the breach of national treatment obligations under the TRIMs Agreement and the GATT 1994, would the Panel be "giving the rulings provided for in the covered agreements" in accordance with the aim of the dispute settlement mechanism "to secure a positive solution to a dispute" Consequently, in today's oral opening statement, the EU will start by making comments on Canada's defence under the SCM Agreement. Then, the EU will address Canada's arguments with respect to the application of Article III:8(a) of the GATT 1994 in the present dispute. The EU observes that Canada's argument under Article III:8(a) of the GATT 1994 is its only defence against our claims under the TRIMs Agreement and Article III:4 of the GATT Thus, should the Panel find that Article III:8(a) of the GATT 1994 does not apply in the present dispute, the Panel should necessarily find that the FIT Program and its related Appellate Body Report, EC Bananas III, para SCM Agreement, Article 4.7. EU's first written submission, paras. 8 and DSU, Articles 3.3, 3.7 and

6 contracts are inconsistent with Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT II. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH ARTICLES 3.1(B) AND 3.2 OF THE SCM AGREEMENT 7. The EU observes that in its first written submission Canada does not contest that the domestic content requirements contained in the FIT Program and its related contracts are "contingent upon the use of domestic over imported goods" in the sense of Article 3.1(b) of the SCM Agreement. Instead, Canada argues that the measures at issue amount to a "financial contribution" because they are purchases of goods by the Government of Ontario. In Canada's view, a measure that is properly characterised as a purchase of goods cannot simultaneously be treated as a "direct transfer of funds" or a form of "income or price support". 6 Thus, Canada's defence entirely revolves around the absence of benefit in the present case. According to Canada, an appropriate market benchmark should reflect the cost of producing renewable electricity and none of the four alternative benchmarks put forward by the EU is, in Canada's views, addressing that point. Moreover, Canada attempts to discredit the use of the MCP/HOEP as market benchmark in this case. In this respect, Canada asserts that the MCP/HOEP is not the result of the "market forces" since the prices offered within the IESO-administered wholesale electricity market do not reflect the true cost of generation The EU submits that Canada's arguments are inapposite and fail to rebut the prima facie case made by the EU that the measures at issue are subsidies under Article 1.1 of the SCM Agreement. The EU will turn now into the different elements of the definition of "subsidy" to explain how the FIT Program and its related contracts fall under such definition. A. The first element of the definition of "subsidy" is met: income/price support or financial contribution 9. The EU has shown that the first element of the definition of "subsidy" is met in the present case, since the FIT Program and its related contracts as administered by 6 7 Canada's first written submission, para. 53. Canada's first written submission, paras

7 the Government of Ontario amount to a "form of income or price support in the sense of Article XVI of the GATT 1994", 8 or to a "financial contribution" by the government In this respect, contrary to what Canada asserts, 10 the EU observes that the use of the term "or" between paragraphs (1) and (2) in Article 1.1(a) of the SCM Agreement does not exclude the possibility that a measure can fall at the same time under one or the other sub-element. It merely provides for a choice or alternative characterisations to meet the first element of the definition of "subsidy". 11 This contrasts with the use of the term "and" in between the first and second subparagraphs (a) and (b) in Article 1.1, which require that the first (in any of the alternatives) and second elements (i.e., benefit) be present for the definition to be met. 11. The very terms of Article 1.1(a)(2), which covers "any form" of income or price support also confirms the negotiators' intention to provide for non-excluding alternatives. Interpreting that provision in a way that would exclude from its scope income or price support provided in the form of (potential) direct transfers of funds, or of government purchases, would deprive the terms "any form" of their meaning, against the rules of treaty interpretation. The EU also notes that Article 1.1(a)(2) of the SCM Agreement, and the terms "any form", are also capable of addressing the case of domestic programmes involving a combination of various forms of financial contribution, bundled together with other features. 12. To illustrate our views with an example. If a government provides payments to milk producers in order to guarantee a minimum income or price per litre of milk sold on the market, in the sense that milk producers will obtain the agreed payments if the market price is below the guaranteed price, the payments made by the government would amount to a "direct transfer of funds" in the sense of Article 1.1(a)(1)(i) of the SCM Agreement. At the same time, the same support scheme SCM Agreement, Article 1.1(a)(2). SCM Agreement, Article 1.1(a)(1). Canada's first written submission, para. 60. EU's first written submission, para

8 would amount to a form of "income or price support" falling under Article 1.1(a)(2) of the SCM Agreement Consequently, the EU maintains that the definition of "subsidy" in Article 1.1 comprises two elements, the first of which is stated in an alternative (and thus not excluding) manner. And we note that in EC and Certain Member States Large Civil Aircraft, the Appellate Body has recently confirmed this alternative, but not excluding interpretation In the present case, the EU primarily submits that the measures at issue amount to a form of income or price support for the FIT Generators. Through the FIT Program, the Government of Ontario is regulating the supply of electricity in that market. In this respect, the underlying economic reality embedded in the FIT Program should be understood from the perspective of a market regulator as opposed to a purchaser or operator involved in the electricity market which guarantees a minimum income or price for the FIT Generators. 15. In particular, through the FIT Program, the OPA guarantees rates for the electricity produced and supplied into the grid by the FIT Generators if the market (i.e., the payments made by the distributors or other buyers at the HOEP) cannot provide those rates. Indeed, the OPA settlements generally cover the difference between the guaranteed rates and the HOEP and, in some cases, there are income support payments for electricity that is not even generated and supplied. In the EU's view, these features are the most central to the measures at issue. 14 In this sense, the measures at issue in the present dispute function in a similar manner to a typical income or price support scheme in the context of agricultural products. In those cases, governments may not purchase commodities but ensure that the supported producers obtain a guaranteed price that the market otherwise would not have provided. Then, the actual buyers and users of the commodity (e.g., cheese producers in cases of guaranteed prices for milk) may have to pay (i) the full See also EU's first written submission, footnote 36. See also Appellate Body Report, EC and certain Member States Large Civil Aircraft, footnote 1634 ("We note that, pursuant to Articles 1.1(a)(2) and 1.1(b), a subsidy shall also be deemed to exist if 'there is any form of income or price support in the sense of Article XVI of the GATT 199' and 'a benefit is thereby conferred') (emphasis added). Appellate Body Report, US Large Civil Aircraft, para

9 guaranteed price (and thus bear the cost of the government measure), or (ii) the actual market price, followed by supplemental payments made by the government to cover the agreed difference by the government. This is precisely the type of situations Article 1.1(a)(2) was meant to cover by referring to income or price support in the sense of Article XVI of the GATT In response to your Question 20, we believe that "in the sense of Article XVI of GATT 1994" in Article 1.1(a)(2) of the SCM Agreement in relation to the concept of "income or price support" does not carry with it the requirement of a finding of "serious prejudice" referred to in the second sentence in Article XVI:1. Article 1.1 of the SCM Agreement is not concerned with effects arising from subsidies, but only with the concept (that is, the "definition") of subsidies. The terms "in the sense" (that is, "in the meaning") confirm that the reference to Article XVI of GATT 1994 is limited to the concept of income or price support, as a scope/definitional issue, not to the applicable disciplines. Subsidies are subject to obligations under the SCM Agreement insofar as they cause the specific effects foreseen in Articles 3 and 5 of the SCM Agreement. The requirement to show effects within this sub-element in the definition of "subsidy" would be to anticipate the exercise which is meant to be done in other Parts of the SCM Agreement. Thus, the incorporation of any form of income or price support "in the sense of Article XVI of the GATT 1994" in Article 1.1(a)(2) of the SCM Agreement did not imply that the specific effects contemplated, inter alia, in Article XVI:1 of the GATT 1994 and with respect to which there were particular obligations on notification and consultation, were automatically brought into the definition of "subsidy". 17. Importantly, and in response to Question 12(b), the EU observes that, should the Panel agree that the measures at issue amount to "income or price support" under Article 1.1(a)(2) of the SCM Agreement, the characterisation of the actions of the OPA as a situation where the government "purchases goods" or not would be irrelevant. Indeed, as already stressed, Article 1.1(a)(2) covers "any form of" income or price support, i.e., regardless of whether there is an actual purchase or not by the government. The Panel can then proceed with its analysis of the -6-

10 existence of benefit on the basis of the market value of the product for which the Government of Ontario guarantees specific rates. 18. In addition, the EU considers that the measures at issue amount to a "financial contribution" as they are "direct transfers of funds". In view of the Appellate Body's considerations in US Large Civil Aircraft, the EU is of the view that it is not necessary for the Panel to label the measures at issue as "grants" but generally as a "direct transfer of funds". 15 Indeed, what is relevant in this case is that there is a contractual obligation for the FIT Generator to supply its electricity into the grid in order to obtain the payment of the rates guaranteed by the OPA (with the exception of the cases referred to in Question 21 of the Panel). In other words, the recipient (the FIT Generator) assumes obligations to the government (i.e., to deliver the electricity into the grid or to refrain from so doing in certain cases) in exchange for the funds provided and for which the OPA is ultimately liable. 16 This perfectly tallies with the considerations made by the Appellate Body in that case as to the meaning of "direct transfer of funds" "In the alternative", 18 that is, should the Panel consider that the measures at issue are not "direct transfers of funds", we maintain that the Panel can find that the measures at issue amount to a "potential direct transfer of funds"; or it could find that there are "purchases [of] goods" if Canada's views on that specific point were to prevail. The Panel may also find that the measures at issue fall under several sub-headings within Article 1.1(a)(1) of the SCM Agreement, following what the Appellate Body has observed in US Large Civil Aircraft. 19 In para. 620, the Appellate Body explicitly reversed and declared moot and with no legal effect the paragraphs of the panel report in US Large Civil Aircraft on which Canada relied in its first written submission to support its argument that a measure which is a Appellate Body Report, US Large Civil Aircraft, para. 623 ("We recall that, under subparagraph (i), there is a financial contribution where 'a government practice involves a direct transfer of funds'. Several examples of direct transfers of funds are provided. These examples are not exhaustive") (emphasis added). Panel's Questions 13 and 19. Appellate Body Report, US Large Civil Aircraft, paras Panel's Question 12(a). Appellate Body Report, US Large Civil Aircraft, footnote 1287("The structure of that provision does not expressly preclude that a transaction could be covered by more than one subparagraph. There is, for example, no 'or' included between the subparagraphs"). -7-

11 "purchase of goods" cannot be, at the same time, a "direct transfer of funds". 20 As a result, the Panel can find that the measures at issue in this case can fall under multiple sub-headings in Article 1.1(a)(1) of the SCM Agreement. And indeed, the EU invites the Panel to make alternative findings in this respect In any event, to be clear, we consider that the facts of this case do not show that the measure at issue can be characterised as "purchases of goods" by the government since the most relevant features of the measures at issue show a picture of the government intervening on the market as a regulator, not as an operator purchasing electricity. However, should the Panel agree with Canada's characterisation of the measure as a government purchase of goods, the EU submits that the first element of the subsidy definition will be met and, as a result, the validity of the claim advanced by the EU concerning the breach of Article 3 of the SCM Agreement would not be affected. 21. In sum, we request the Panel to make factual and legal findings that the FIT Program and its related contracts, as administered by the Government of Ontario, meet the first element of the definition of "subsidy" as they amount to a form of "income or price support in the sense of Article XVI of the GATT 1994". Furthermore, the EU observes that there is no disagreement between the parties in this dispute that the measures at issue amount to a "financial contribution" in the sense of Article 1.1(a)(1) of the SCM Agreement (even though the EU prefers to describe the situation as one involving income or price support in the form of a financial contribution). The disagreement between the parties focuses on the legal characterisation of the measures at issue as a "direct transfer of funds", "potential direct transfer of funds" or a situation where the government "purchases goods". Since the aim of the dispute settlement system is to secure a positive solution, 22 we also request the Panel to make factual and legal findings that the FIT Program and its related contracts amount to a "financial contribution", in particular, as a "direct Canada's first written submission in DS426, para. 55. Appellate Body Report, China Auto-Parts, para. 208 ("We note that none of the participants have appealed the Panel's decision to make these alternative findings, or suggested that the Panel acted inappropriately in doing so. It is not unprecedented for panels to make alternative findings, and indeed this may be useful in resolving a dispute, particularly when, on appeal, the Appellate Body reverses other findings made by a panel"). DSU, Article

12 transfer of funds". In the alternative, 23 should the Panel disagree with the legal characterisation suggested by the EU, the EU submits that the measures at issue amount to a "financial contribution" as a "potential direct transfer of funds" or, in the last resort, as a situation where the government "purchases goods", as an alternative argument, if Canada's views on that issue were to prevail. B. The second element of the definition of "subsidy" is met: benefit 22. Moving on to the second element in the definition of "subsidy", the EU submits that 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. As mentioned before, pursuant to the FIT Contract, the FIT Generators secure a guaranteed rate for the generation of their electricity that the OPA commits to pay if the HOEP is lower. This is one of the inherent characteristics and the reason for the existence of the measures at issue, as Canada acknowledges Contrary to Canada's view, the EU considers that an appropriate market benchmark in this case does not have to reflect the cost of producing renewable electricity. Rather, the relevant question in identifying the appropriate market benchmark in this case is what is the market value of the product for which the FIT Program and its related contracts provide long-term, guaranteed rates. Such market value is an appropriate market benchmark regardless of the characterisation of the measures at issue as a form of income or price support, or as a financial contribution in the form of purchases of goods by the government, as Canada claims. 25 It is undisputed that "but for" the long-term, guaranteed rates provided by the FIT Program, the FIT Generators would only be able to supply their electricity into the grid at the wholesale electricity market price, that is, at the MCP/HOEP. 26 Or, at most, the FIT Generators would be able to sell their electricity through bilateral contracts to large "embedded" industrial users, retailers, or local Panel's Question 12(a). See Canada's first written submission, para. 22; and Hogan Report, Exhibit CDA-2, pp. 1, 16-18, 25, 31 and 36. Appellate Body Report, EC and certain Member States Large Civil Aircraft, paras

13 distributors for sale to the final consumers, in this latter case at regulated rates. Put simply, absent the FIT Program, a producer of electricity from wind or solar sources, like the FIT Generator, would have to become a market participant under the IESO market rules and supply its electricity within the wholesale electricity market, or attempt to sell its electricity directly to retailers of electricity or final consumers at competitive prices. Thus, under any of the alternative market benchmarks suggested by the EU, 27 the Panel may find that a benefit is conferred in the present case, regardless of its quantum, which is irrelevant in this case. 24. Moreover, contrary to what Canada claims, 28 in the EU's view, the fact that the product supplied into the grid is electricity produced from particular renewable sources (wind and solar) is irrelevant to identify the proper market benchmark in this case. Electricity produced by means of any energy source (renewable or not) is physically alike in all respects, and in any event there is a competitive relationship between electricity produced by different sources. 29 In this respect, the EU observes that Canada has not demonstrated that there is a separate product market with respect to electricity produced by particular sources of renewable energy in Ontario. 25. In addition, Canada claims that the MCP/HOEP is not the result of the "market forces" since the prices offered within the IESO-administered wholesale electricity market do not reflect the true cost of generation. 30 The EU would like to stress again that the "costs" borne by producers are not the determining factor for the establishment of market prices. Production costs will affect the supply curve, for sure, but market prices are determined by the interaction between supply and demand. The EU notes in this context that some large consumers in Ontario pay only the MCP/HOEP (plus any applicable market service charges and transmission charges) for the electricity they purchase Appellate Body Report, EC and certain Member States Large Civil Aircraft, para. 705 ("[W]hether a 'benefit' has been 'conferred' requires a panel to determine whether the recipient has been made 'better off' than it would have been absent the financial contribution"). 's first written submission, para. 80. Canada's first written submission, para. 66. Appellate Body Report, Philippines Distilled Spirits, paras , , Canada's first written submission, paras

14 26. Furthermore, Canada readily admits that around 8% of the electricity produced in Ontario is not supported by any regulated price, and the sole remuneration of generators is the MCP/HOEP. In other words, Canada confirms that a share of the electricity supplied by generators in Ontario is remunerated at rates determined by the competitive market, where supply and demand result in the determination of the MCP/HOEP. 31 By definition the MCP/HOEP has to capture the true cost of generating electricity by those generators falling within that 8% since, otherwise, they will disappear from the unregulated market or from the market at all. Further, Canada also confirms that the HOEP alone is paid to "hydroelectric generating stations". 32 That is, Canada confirms that the electricity produced from a renewable source (hydroelectric generating stations) receives the HOEP. In the EU's view, Canada's confirmation of the facts underlying the electricity market in Ontario reinforces our argument about the appropriateness of the HOEP as the market benchmark in this case. 27. Finally, and also importantly, the EU would like to stress once more the element of "long-term guarantee" which is behind this scheme. The FIT Program provides for guaranteed rates to FIT Generators over a 20-year period, including price escalation clauses, which no private entity acting pursuant to commercial considerations would provide. 33 Canada does not contest this fact. Thus, the risk involved in the business operations of the FIT Generators is thereby drastically reduced if not eliminated all together, without the payment of any additional premium that the market would require otherwise. C. Conclusion 28. Consequently, the EU requests the Panel to find that the FIT Program and its related contracts are subsidies in accordance with Article 1.1 of the SCM Agreement; and that they are prohibited under Articles 3.1(b) and 3.2 of the SCM Agreement. III. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE NOT COVERED BY ARTICLE III:8 OF THE GATT Canada's first written submission, para. 72. Canada's first written submission, para. 77. 's first written submission, para

15 29. Before addressing the EU's claims under the TRIMs Agreement and the GATT 1994, the EU considers that the Panel should examine Canada's defence according to which Article III:8(a) of the GATT 1994 applies in the present case since this is important from the view point of the EU's claims particularly under Article III:4 of the GATT In response to your Question 14, the EU considers that if a measure falls under Article III:8(a), the provisions of Article III of the GATT 1994 or Article 2.1 of the TRIMs Agreement do not apply to such measure. 34 A different question is whether, should the Panel consider that the measures at issue fall under paragraph 1(a) of the Annex to the TRIMs Agreement, an analysis under Article III:8(a) is required at all. Indeed, one may take the view that the situations listed in the paragraph 1 of the Annex to the TRIMs Agreement reflected the negotiators' understanding that those requirements would never fall under Article III:8(a) of the GATT 1994 because they are completely disconnected to the product that is procured by the government. We consider that this view is also consistent with the proposition in your Question 22, which we will address later on in our statement. We also note that Article 2.2 of the TRIMs Agreement refers to measures that "are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994" and such inconsistency necessarily implies that Article III:8 does not apply. 31. Also, in reply to your Question 23, the EU observes that for a measure to fall under Article III:8(a) of GATT 1994 a number of different conditions have to be met, the existence of "procurement" (which indeed implies "products purchased") being only one of them. In this respect, the Panel may find that the measures at issue do not fall under Article III:8(a) of the GATT 1994 in view of any of the other distinct elements in that provision. Thus, like in the context of our claims and arguments under the SCM Agreement, where the Panel may well find that there is a prohibited subsidy in this case without the need to decide whether there is a "purchase of goods" within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement, the Panel may focus on other elements in Article III:8(a) to make its findings in the present case. In any event, should the Panel find that the -12-

16 measures at issue cannot be characterised as purchase of goods by the government, the EU considers that the Panel should equally find that Canada's defence under Article III:8(a) of the GATT 1994 is without merit. 32. That being said, as stated in our first written submission, the EU submits that the FIT Program and its related contracts do not fall under Article III:8(a) of the GATT The EU will not repeat those reasons in full today; rather, we will make some comments on the issues raised by Canada on this point and will address some of your questions in this respect. 33. First, Canada refers to how it considers the measures at issue from its domestic perspective and provides several references to support its contention that the OPA "procures" or "purchases" electricity under the FIT Program. 36 The EU considers those references inapposite. As Japan has recalled in today's opening statement in DS412, the references to "procurement" or "purchase" in the text of the domestic measures at issue are not dispositive of the actual characterisation of those measures for the purpose of examining their consistency with the covered agreements. 34. In any event, the EU observes that one of the statutory powers of the OPA, as described in Ontario's Electricity Act, is to "enter into contracts relating to the procurement of reductions in electricity demand". 37 In other words, the Government of Ontario employs the term "procurement" also in cases involving payments to operators not to consume energy. Similarly, and in response to your Question 21, the EU notes that, under the FIT Contract, the FIT Generators may also receive payments for not producing electricity. In this sense, the EU fails to see what is the good that the OPA procures or purchases in those cases. These examples support the EU's view that the FIT Program and its related contracts do not involve any procurement or purchase by the government in the sense of Article III:8(a) of the GATT As explained before, the EU regards the measures at issue as regulatory in nature, as opposed to a purchase or procurement of goods by the government 's first written submission, para 's first written submission, paras Canada's first written submission, paras

17 35. Moreover, Canada's attempt to point to language in the FIT Contracts supporting its views that the OPA purchases electricity is unavailing. 38 In particular, even if there are references to the electricity as being "sold", the FIT Contracts do not specify to whom the electricity is "sold" or who the buyer is. In the same vein, the fact that the OPA commits to pay sales taxes on the supply of electricity by the FIT Generators does not necessarily imply that the OPA is the actual buyer. It is an issue of tax autonomy to decide the operations subject to taxation or the most efficient methods of tax collection. 36. Second, Canada argues that Article III:8(a) of the GATT 1994 covers situations where the government procures or purchases products "for governmental purposes", and interprets those terms in a manner that includes the accomplishment of the "aims of the government" insofar as such aims are contained in legislation, regulations, policies or executive directions. 39 With all due respect, this interpretation cannot stand. According to Canada's argument, it would be perfectly consistent with Article III:8(a) that a government identifies "the protection and encouragement of its domestic industry" as a policy or governmental purpose in its legislation to escape from the national treatment obligation under Article III:4 of the GATT, engaging in purchases of any type of domestic goods simply for industrial policy reasons and regardless of whether such goods are to respond to a genuine need of the public authorities ("las necesidades de los poderes públicos" or "les besoins des pouvoirs publics", in the Spanish and French versions of GATT 1994). In the EU's view, that cannot be the correct interpretation of the scope of Article III:8(a). 37. In other words, it is not the stated "aims of the government" what is relevant in the present case. In the EU's view, the key point in this dispute is the disconnection between the stated pursued policy and the object of the alleged procurement, on the one hand, and the ultimate protectionist goal behind the measures at issue, on the other hand. Indeed, the EU fails to understand why "in order to secure a sufficient and reliable supply of electricity from clean sources" the Government of Ontario limits the FIT Program to FIT Generators that comply with specific Electricity Act, 1998, Section 25(2)(5)(d) (Exhibit JPN-005) (emphasis added). Canada's first written submission, paras

18 domestic content requirements as to the generating equipment and components. The EU considers that this is manifestly a situation where the object and purpose of Article III:4 would be circumvented, should Canada's interpretation of Article III:8(a) prevail. 38. Third, Canada argues that the OPA procures or purchases electricity "not with a view to commercial resale". According to Canada, the terms "commercial resale" require "a resale with an underlying intent to profit" and the OPA does not aim to profit and recovers the cost of purchasing the electricity through the Global Adjustment. 40 The EU disagrees with the legal interpretation posited by Canada. The terms "commercial resale" do not require a resale aim to profit. In this respect, the intention of the government (whether to make a profit or not from the specific transactions) is totally irrelevant for the characterisation of a sale as "commercial". Otherwise, the very same operation could be characterised as commercial in one case and not commercial in another case simply because of the stated aim pursued by the public authority, or depending on the market circumstances when the sale by the government takes place. Thus, for the purposes of Article III:8(a) there is nothing within the terms "commercial resale" requiring "a resale with an underlying intent to profit". 39. Rather, those terms should be properly understood as introducing the goods procured by the government into commerce, by means of resale with a profit or not. In other words, the determining factor is whether the goods are sold on the market place, where other similar goods are traded. The EU recalls in this regard that the French text of Article III:8(a) refers to products "revendus dans le commerce". Contextually, the EU also considers that the terms "not with a view to commercial resale" should be contrasted with the term "products purchased for governmental purposes" in the same provision. In this respect, products purchased by the government "not with a view to commercial resale" is meant to cover situations where the government purchase is not intended to be reintroduced immediately into commerce, thereby circumventing the national treatment obligation under Article III:4 of the GATT Canada's first written submission, paras Canada's first written submission, paras. 39 and

19 40. Fourth, Canada argues that, by referring to products purchased "not with a view to use in the production of goods for commercial sale", Article III:8(a) includes only production of goods by the government, and not other operators. 41 As explained in our first written submission, we believe that such an interpretation is too narrow. Article III:8(a) does not say "use by the government", as Canada intends to read this provision. Rather, it employs the term "use" in general, without specifying the actual user. In view of the underlying anti-circumvention nature of these terms, the EU considers that the correct interpretation should encompass situations where the government purchase is made with a view to anyone subsequently using the product in the production of goods for commercial resale. And Canada does not contest, as a matter of fact, that the electricity supplied into the grid by the FIT Generators is used by entities in Ontario in the production of goods for commercial purposes. 41. Finally, in response to your Question 22, in the circumstances of the present case we agree with the proposition that the domestic content requirements are not within the scope of Article III:8(a) because it is not the equipment that is being procured by the government. In the present case, the good being procured or purchased (if any) by the Government of Ontario would be the electricity produced by the FIT Generators. The domestic content requirements relate to different products (i.e., the electricity generation equipment and components), the sourcing of which does not add anything to and is completely disconnected with the basic nature of the product procured or purchased. In other words, the domestic content requirements imposed by the Government of Ontario do not "govern" the alleged procurement of electricity, within the meaning of Article III:8(a), because they are not requirements related to the subject-matter of the procurement, which is electricity. Those requirements "govern" a "feature" of the equipment for the generation of electricity which has no rational link to the attributes of the electricity and the object of the alleged procurement. This notwithstanding, the EU would nevertheless invite the Panel to comprehensively address the arguments concerning the absence of "procurement" "for governmental purposes" and "not 41 Canada's first written submission, para

20 with a view to commercial resale or with a view to use in the production of goods for commercial sale", with a view to securing a positive solution to the dispute. 42. In sum, the EU does not see any merit to Canada's argument under Article III:8(a) of the GATT The FIT Program and its related contracts, as administered by the Government of Ontario, do not fall under the scope of such provision. IV. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH ARTICLE 2.1 OF THE TRIMS AGREEMENT, IN CONJUNCTION WITH PARAGRAPH 1(A) OF ITS ANNEX 43. Since in any event the measures at issue are not covered by Article III:8(a) of the GATT, the EU reiterates, for the reasons mentioned in our first written submission, that they are inconsistent with Article 2.1 of the TRIMs Agreement. The domestic content requirements contained in the FIT Program and its related contracts squarely fall within the type of measures included in paragraph 1(a) of the Annex to the TRIMs Agreement, to be considered as inconsistent with Article III:4 of the GATT. Thus, the measures at issue, as TRIMs, are inconsistent with Canada's obligations under Article 2.1 of the TRIMs Agreement. V. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH ARTICLE III:4 OF THE GATT 44. At the same time, consequently or following a separate analysis, the EU submits that the domestic content requirements included in the FIT Program and its related contracts are inconsistent with Article III:4 of the GATT The EU observes that Canada does not dispute this in its submissions. VI. CONCLUDING REMARKS 45. To conclude, we would like to recall that in today's oral statement we have limited ourselves to respond to some of the main issues raised by Canada in its first written submission. Silence on any issue should not be understood as agreement with Canada's views as we intend to provide more detail argumentation in our subsequent submissions. Moreover, following the Panel's direction, we have attempted to incorporate to the greatest extent possible our preliminary responses to the Panel's questions in our statement. However, we intend to provide more detailed answers to all questions in writing in due course. -17-

21 46. We thank you for your attention and remain ready to answer any further questions you may have. -18-