In the World Trade Organization CANADA MEASURES RELATING TO THE FEED-IN TARIFF PROGRAM (DS426) Second Written Submission by the European Union

Transcription

1 In the World Trade Organization CANADA MEASURES RELATING TO THE FEED-IN TARIFF PROGRAM by the Geneva, 26 April 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... 1 III. IV. A. THE FIT PROGRAM AND ITS RELATED CONTRACTS CAN BE CHARACTERISED AS A "FINANCIAL CONTRIBUTION" OR AS A FORM OF "INCOME OR PRICE SUPPORT"... 2 B. THE FIT PROGRAM AND ITS RELATED CONTRACTS CAN BE CHARACTERISED AS A FINANCIAL CONTRIBUTION UNDER MULTIPLE SUB-HEADINGS UNDER ARTICLE 1.1(A)(1) OF THE SCM AGREEMENT... 6 C. SUGGESTED ANALYTICAL STEPS TAKEN BY THE PANEL... 7 D. MOST RELEVANT FEATURES OF THE FIT PROGRAM AND ITS RELATED CONTRACTS... 8 E. LEGAL CHARACTERISATION OF THE FIT PROGRAM AND ITS RELATED CONTRACTS Income or price support in the sense of Article XVI of the GATT Financial contribution F. THE FIT PROGRAM AND ITS RELATED CONTRACTS CONFER A BENEFIT UNDER ARTICLE 1.1(B) OF THE SCM AGREEMENT Article 14(d) of the SCM Agreement is not applicable in the present case and, in any event, Canada's suggested benchmark is inappropriate The existence of benefit under Article 1.1(b) of the SCM Agreement has to be determined by reference to the marketplace The proper market benchmark should relate to the market conditions for electricity in Ontario, regardless of how it is generated The proper market benchmark should not be identified by referring to cost of production and, in any event, the structure of the FIT Program leads to payments in excess of costs The HOEP is an appropriate benchmark in this case Any of the other alternative benchmarks show the existence of benefit (a) The weighted average wholesale rate received by all generators in Ontario other than FIT and RESOP generators (b) The "commodity charge" portion of retail prices for electricity in Ontario (c) The average wholesale rate for electricity in competitive wholesale markets outside of Ontario Even if the FIT rates were to be found not to confer a benefit, the long-term guarantee nature of the FIT rates would support a determination of benefit Concluding remarks as to the existence of "benefit" G. CONCLUSION THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE NOT COVERED BY ARTICLE III:8(A) OF THE GATT A. ARTICLE III:8(A) OF THE GATT 1994 COVERS REQUIREMENTS DIRECTLY RELATING TO THE PRODUCT PURCHASED BY THE GOVERNMENT B. THE FIT PROGRAM DOES NOT INVOLVE A "PURCHASE" (OR PROCUREMENT) C. THE FIT PROGRAM DOES NOT INVOLVE A PURCHASE "FOR GOVERNMENTAL PURPOSES" D. ANY ALLEGED PURCHASE OF ELECTRICITY THROUGH THE FIT PROGRAM IS WITH A VIEW TO COMMERCIAL RESALE E. ANY ALLEGED PURCHASE OF ELECTRICITY THROUGH THE FIT PROGRAM IS WITH A VIEW TO BEING USE IN THE PRODUCTION OF GOODS FOR COMMERCIAL SALE F. CONCLUSIONS 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 VI. CONCLUSIONS i-

3 TABLE OF CASES Short Title Canada Aircraft Canada Wheat Exports and Grain Imports China Auto Parts EC Countervailing Measures on DRAM Chips EC and Certain Member States Large Civil Aircraft Japan Alcoholic Beverages II Japan DRAMs (Korea) Mexico Taxes on Soft Drinks US Anti-Dumping and Countervailing Duties (China) US Countervailing Measures on Certain EC Products US FSC (Article 21.5 EC II) US Large Civil Aircraft (2 nd complaint) US Line Pipe US Softwood Lumber IV US Softwood Lumber IV Full Case Title and Citation Appellate Body Report, Canada Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377 Panel Report, Canada Measures Relating to Exports of Wheat and Treatment of Imported Grain, WT/DS276/R, adopted 27 September 2004, upheld by Appellate Body Report WT/DS276/AB/R, DSR 2004:VI, 2817 Appellate Body Reports, China Measures Affecting Imports of Automobile Parts, WT/DS339/AB/R / WT/DS340/AB/R / WT/DS342/AB/R, adopted 12 January 2009 Panel Report, European Communities Countervailing Measures on Dynamic Random Access Memory Chips from Korea, WT/DS299/R, adopted 3 August 2005, DSR 2005:XVIII, 8671 Appellate Body Report, European Communities and Certain Member States Measures Affecting Trade in Large Civil Aircraft, WT/DS316/AB/R, adopted 1 June 2011 Appellate Body Report, Japan Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97 Panel Report, Japan Countervailing Duties on Dynamic Random Access Memories from Korea, WT/DS336/R, adopted 17 December 2007, as modified by Appellate Body Report WT/DS336/AB/R, DSR 2007:VII, 2805 Panel Report, Mexico Tax Measures on Soft Drinks and Other Beverages, WT/DS308/R, adopted 24 March 2006, as modified by Appellate Body Report WT/DS308/AB/R, DSR 2006:I, 43 Appellate Body Report, United States Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WT/DS379/AB/R, adopted 25 March 2011 Appellate Body Report, United States Countervailing Measures Concerning Certain Products from the European Communities, WT/DS212/AB/R, adopted 8 January 2003, DSR 2003:I, 5 Appellate Body Report, United States Tax Treatment for "Foreign Sales Corporations" Second Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW2, adopted 14 March 2006, DSR 2006:XI, 4721 Appellate Body Report, United States Measures Affecting Trade in Large Civil Aircraft (Second Complaint), WT/DS353/AB/R, adopted 23 March 2012 Appellate Body Report, United States Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea, WT/DS202/AB/R, adopted 8 March 2002, DSR 2002:IV, 1403 Appellate Body Report, United States Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, WT/DS257/AB/R, adopted 17 February 2004, DSR 2004:II, 571 Panel Report, United States Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, WT/DS257/R and Corr.1, adopted 17 February 2004, as modified by Appellate Body Report WT/DS257/AB/R, DSR 2004:II, 641 -ii-

4 Short Title US Textiles Rules of Origin US Upland Cotton Full Case Title and Citation Panel Report, United States Rules of Origin for Textiles and Apparel Products, WT/DS243/R and Corr.1, adopted 23 July 2003, DSR 2003:VI, 2309 Appellate Body Report, United States Subsidies on Upland Cotton, WT/DS267/AB/R, adopted 21 March 2005, DSR 2005:I, 3 -iii-

5 EXHIBITS Number EU-20 European Wind and Energy Association, The Economics of Wind Energy (March 2009) (extracts) Title EU-21 EU-22 EU-23 EU-24 EU-25 Intergovernmental Panel on Climate Change, Renewable Energy Sources and Climate Change Mitigation (2012) (extracts) Definition of "Necesidad", Real Academia Española Definition of "Besoin", Le Petit Robert Defintion of "Dans le commerce", Le Petit Robert Definition of "Comercio", Real Academia Española -iv-

6 I. INTRODUCTION 1. At the outset, the would like to repeat again its views that the measures at issue in the present dispute relate to "trade and investment". In fact, contrary to what Canada posits, 1 the domestic content requirements included in the FIT Program and its related contracts are measures against the interest of the environment since they increase prices for wind and solar electricity. Indeed, without the domestic content requirements at issue, the FIT Generators could import generation equipment and components at lower prices which in turn would reduce their cost of production, resulting in cheaper prices for electricity generated from those renewable sources of energy (i.e., wind and solar). Thus, the domestic content requirements embedded in the FIT Program and its related contracts go against the alleged core objectives of increasing the production of electricity from renewable sources and helping protect the environment. 2. In the present submission, the will address and rebut Canada's defence in the present case as outlined in Canada's first written submission and in Canada's oral statements at the first meeting with the Panel. First, the European Union will discuss the claims under the SCM Agreement. Second, the European Union will address Canada's defence under Article III:8(a) of the GATT The has shown that the measures at issue in the present case are not covered by Article III:8(a) of the GATT 1994 and that, in any event, the Panel may make findings under Article 2.1 of the TRIMs Agreement, in conjunction with paragraph 1(a) of its Annex, without examining such provision. Thus, the submits that the FIT Program and its related contracts are also contrary to those provisions of the TRIMs Agreement as well as 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 3. The submits that Ontario's FIT Program (including the microfit Program) as well as individual contracts executed pursuant to that Program are subsidies inconsistent with Canada's obligations under Articles 3.1(b) and 3.2 of the SCM Agreement insofar as they include domestic content requirements. 4. Canada does not dispute the fact that the FIT Program and its related contracts are contingent upon the use of domestic over imported products. Rather, Canada's defence in the present case with respect to the EU's claims under the SCM Agreement revolves around two issues: first, the proper legal characterisation of the measures at issue as meeting the first element of the definition of "subsidy" in Article 1.1(a) of the SCM Agreement; and, second, the existence of "benefit" under Article 1.1(b) of the SCM Agreement. In particular, Canada maintains that the measures at issue can only be characterised as "purchases of goods" by the OPA, and that there is no benefit conferred because the OPA's purchase of wind and solar electricity under the FIT Program is not for more than adequate remuneration. The will address below each of these arguments in detail. 1 See Canada's first written submission in DS412, para. 4; and Canada's first written submission, para

7 A. The FIT Program and its related contracts can be characterised as a "financial contribution" or as a form of "income or price support" 5. Canada agrees with the that some transactions not covered by the concept of "financial contribution" could be covered by the concept of "income or price support". 2 However, Canada argues that a measure can only be characterised as either a "financial contribution" or as a form of "income or price support". If the measure at issue amounts to a financial contribution in the form of purchases of goods by the government, according to Canada, it cannot at the same time be covered by the concept of "income or price support". In other words, Canada maintains that any measure can only be characterised as "financial contribution" or "income/price support", each having its own (mutually exclusive) scope of application. Canada supports its argument on the following Appellate Body's statement in US Softwood Lumber IV: An evaluation of the existence of a financial contribution involves consideration of the nature of the transaction through which something of economic value is transferred by a government. A wide range of transactions falls within the meaning of "financial contribution" in Article 1.1(a)(1). According to paragraphs (i) and (ii) of Article 1.1(a)(1), a financial contribution may be made through a direct transfer of funds by a government, or the foregoing of government revenue that is otherwise due. Paragraph (iii) of Article 1.1(a)(1) recognizes that, in addition to such monetary contributions, a contribution having financial value can also be made in kind through governments providing goods or services, or through government purchases. Paragraph (iv) of Article 1.1(a)(1) recognizes that paragraphs (i) (iii) could be circumvented by a government making payments to a funding mechanism or through entrusting or directing a private body to make a financial contribution. It accordingly specifies that these kinds of actions are financial contributions as well. This range of government measures capable of providing subsidies is broadened still further by the concept of "income or price support" in paragraph (2) of Article 1.1(a). 6. According to Canada, the fact that Article 1.1(a)(2) broadens still further the range of government measures capable of providing subsidies implies that, whatever a form of "income or price support" might be, it is a category of government action that cannot, at the same time, be considered "financial contributions" Canada misreads the Appellate Body's statement. The Appellate Body was confirming that there may be other measures that, even if they did not fall under the scope of "financial contribution", as defined in the SCM Agreement, would amount to "subsidies" under the SCM Agreement if they fall under Article 1.1(a)(2) (and Article 1.1(b)) of the SCM Agreement). This does not imply that the two alternatives in Article 1.1(a) are mutually exclusive. It merely confirms that the universe of measures capable of falling within the first element in the definition 2 3 Canada's first written submission, para. 60. Canada's Opening Oral Statement, First Meeting with the Panel, para

8 of "subsidy" does not end at the "financial contribution" level; rather, measures can still fall under the first element if they are a form of "income or price support". In EC and Certain Member States Large Civil Aircraft, the Appellate Body similarly noted 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 1994' and 'a benefit is thereby conferred'" To illustrate this with a drawing. Canada perceives Article 1.1(a) of the SCM Agreement as follows: Drawing 1 C Financial Contribution A Income or Price Support B where Measure A can only be deemed as "financial contribution"; Measure B as "income or price support"; and Measure C as not falling under any of these categories. 9. However, the Appellate Body's statement can also be read as follows: Drawing 2 Drawing 3 C Financial Contribution A Income or Price Support B Financial Contribution A B Income or Price Support C where Measure A falls under both categories; Measure B falls only under "income or price support"; and Measure C does not fall under either of them. The only difference between drawings 2 and 3 is that under drawing 2 there are measures which are capable of falling under the category of "financial contribution" but not under "income or price support", whereas in drawing 3 all measures falling within "financial contribution" would also fall under "income or price support". 10. Each of these three drawings shows that the category of "income or price support" expands the notion of "subsidy", as the Appellate Body stated. However, the fact that the category of "income or price support" expands the notion of "subsidy" does not say anything as to whether those categories are mutually exclusive. That is an interpretative question which requires examining the terms in Article See also Appellate Body Report, EC and Certain Member States Large Civil Aircraft, footnote 1634 (emphasis added). -3-

9 11. The considers 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 category. It merely provides for a choice or alternative characterisations to meet the first element of the definition of "subsidy". This contrasts with the use of the term "and" in between the first and second subparagraphs (a) and (b) in Article 1.1, which requires that the first (in any of the alternatives) and second elements (i.e., benefit) be present for the definition to be met. In other words, the structure of Article 1.1 is A "or" B "and" C = D, or put in other terms, A or B + C = subsidy, thus indicating the different possibilities for a measure to qualify as a "subsidy" under the SCM Agreement. 12. The very terms of Article 1.1(a)(2), which covers "any form" of income or price support, also confirm 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 e.g., direct transfers of funds, or of government purchases, would deprive the terms "any form" of their meaning, against the rules of treaty interpretation. Likewise, the term "or" between "income" and "price support" does not imply that a measure can only be characterised as income "or" price support. A program protecting producers from market fluctuations and ensuring minimum selling prices in cases where the market cannot provide those prices will also provide income support to those producers as a result of higher revenue from their sales. 13. The 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. Thus, for the sake of simplicity, a Member may choose to identify the main features of the scheme in question and characterise it as an income or price support without having to specify in more detail which parts of the scheme amount to any of the different categories of financial contribution listed in Article 1.1(a)(1) of the SCM Agreement. 14. To illustrate our views with a simple example. If a government sets up a program whereby it 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 would amount to a form of "income or price support" falling under Article 1.1(a)(2) of the SCM Agreement since the measure would be maintaining or supporting the income or prices of milk producers against the market fluctuations. A more complex support scheme could involve direct payments to producers and other incentives or directions by the government (e.g. to processors) to build stocks and support prices, depending on the situation. A Member may decide to challenge all those features as part of a single income or price support scheme, rather than as separate financial contributions (and in -4-

10 addition to features of income or price support schemes which would not amount to financial contribution) Consequently, contrary to what Canada argues, the submits 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. 16. The observes that, for the purpose of this case, the Panel does not need to decide which of the drawings 2 or 3 is the correct one. In the case at hand, Ontario's measures are clearly "A" measures in the drawings that is, the measures are inside both the "financial contribution" circle and the "income or price support" circle. In any event, in view of the Appellate Body's statement that the category of income or price support broadens the definition of "subsidy", the considers that for a scheme to fall under the category of "income or price support" there is no need for the scheme to also amount to a "financial contribution" in the sense of Article 1.1(a)(1) of the SCM Agreement. In other words, the correct interpretation of the scope of both categories cannot result in the following drawing: Drawing 4 Financial Contribution Income or Price Support 17. Thus, the scope of both categories cannot fully coincide. Otherwise, the category "income or price support" would not add to the category "financial contribution", contrary to the Appellate Body's finding that such category "broadens" the type of government measures capable of being subsidies. 18. For the purpose of this dispute, the considers that the Panel does not need to explore in detail which types of measures fall under what category in general terms. It is undisputed that the FIT Program and its related contracts involve a form of financial commitment by the government (i.e., the OPA pays and is ultimately liable for the guaranteed rates). Since both categories are not mutually exclusive, 6 the Panel may characterise the measure as "income or price support", as 5 6 E.g., income or price support schemes may include some element of border protection aimed at isolating the domestic market from the international market; other possible features may include temporary measures to increase demand for a commodity to maintain prices, or to reduce supply, such as requirements to build stocks or set aside land for harvesting such a commodity. In short, the operation of an income or price support scheme may rest on a combination of measures, not all of which may necessarily be in the form of a "financial contribution". The also notes that panels and the Appellate Body have found in other contexts that the use of the term "or" does not provide for options that are mutually exclusive. For instance, in US Line Pipe, the Appellate Body interpreted "or" between "cause or threaten to cause serious injury" in Article 2.1 of the Agreement on Safeguards noting that both categories are not mutually exclusive, and observing that the "serious injury" includes the concept of "threat" and exceeds it (Appellate Body Report, US Line Pipe, paras ). Likewise, in US FSC (Article 21.5 II EC), the -5-

11 a "financial contribution", or both. And indeed the requests the Panel to make findings under both categories. B. The FIT Program and its related contracts can be characterised as a financial contribution under multiple sub-headings under Article 1.1(a)(1) of the SCM Agreement 19. Canada maintains that the FIT Program and its related contracts amount to a "financial contribution" in the form of purchase of goods by the OPA. In this respect, Canada disagrees with any other legal characterisation of the measures at issue in the form of "financial contribution" arguing that "a proper examination of the nature of the transaction between the OPA and FIT generators discloses that these transactions are 'purchases of goods' and fall within the scope of subparagraph (iii) of Article 1.1(a)(1) of the SCM Agreement". 7 In particular, Canada considers that all purchases of goods necessarily involve a payment and that this does not mean that they should be considered as "direct transfer of funds" or forms of "income or price support". 8 In sum, Canada considers that the measures at issue are best characterised as "purchases of goods" under Article 1.1(a)(1)(iii) of the SCM Agreement, and that the same measure cannot be characterised at the 7 8 Appellate Body interpreted the "or" between "existence" and "consistency" in Article 21.5 of the DSU noting that "an Article 21.5 panel may be called upon to examine either the 'existence' of 'measures taken to comply' with DSB recommendations and rulings, or, when such measures exist, the 'consistency' of those measures with the covered agreements, or a combination of both" (Appellate Body Report, US FSC (Article 21.5 II EC), para. 60). Similarly, in the case of subsidies either the four items in Article 1.1(a)(1) of the SCM Agreement or the existence of "income or price support" under Article 1.1(a)(2) of the SCM Agreement, or a combination of both, when combined with a "benefit" under Article 1.1(b), may give rise to a claim under the SCM Agreement. In Mexico Taxes on Soft Drinks, the panel interpreted the provision of Article XXIII:2 of the GATT. The relevant clause provides that, upon having a dispute referring to them, "CONTRACTING PARTIES shall promptly investigate any matter so referred to them and shall make appropriate recommendations to the contracting parties which they consider to be concerned, or give a ruling on the matter, as appropriate". The Panel stated that "Mexico also claims support for its arguments from the use of the word 'or' that connects the two options open to the CONTRACTING PARTIES: to make recommendations, and to give a ruling. The Panel is not aware of any authoritative interpretation of the term 'ruling'. However, it does not find that in this context the word 'or' indicates that the two options are mutually exclusive. The term most likely includes a panel's conclusion that the respondent Member's measures are inconsistent with particular WTO obligations. Such a conclusion would invariably be accompanied by a recommendation. Consequently, whether in relation to the Panel in making proposals to the DSB, or to the DSB itself, this use of the word merely serves to present a list of the actions that may be taken. It does not indicate that the Panel has the flexibility that is claimed by Mexico" (Panel Report, Mexico Soft Drinks, para ). Likewise, the use of the word "or" between Articles 1.1(a)(1) and 1.1(a)(2) of the SCM Agreement "merely serves to present a list" of the requisites that will lead, in conjunction with a benefit, to the characterisation of a measure as a "subsidy". Another formulation of the same idea is found in the Panel Report in US Textiles Rules of Origin. In this dispute, the panel interpreted Article 2(c) of the Agreement on Rules of Origin, which provides that "rules of origin shall not themselves create restrictive, distorting, or disruptive effects on international trade". In particular, the panel noted that "turning to the prohibited effects i.e., 'restrictive, distorting, or disruptive effects' the Panel notes that these effects constitute alternative bases for a claim" (Panel Report, United States Textiles Rules of Origin, para ). Similarly, the different provisions in Article 1.1(a) of the SCM Agreement "constitute alternative bases for a claim". Canada's opening oral statement, first meeting with the Panel, para. 91. Canada's opening oral statement, first meeting with the Panel, para

12 same time as a purchase of goods by the government and as a direct transfer of funds or income or price support. 20. The observes that Canada's argument that the same measure cannot be characterised under several sub-headings in Article 1.1(a)(1) of the SCM Agreement has already been rejected by several panels and the Appellate Body. Notably, the panel in Japan DRAMs (Korea) noted that: "[W]e do not exclude that certain of the relevant transactions might be covered simultaneously by different sub-paragraphs of Article 1.1(a)(1)". 9 In so stating, the panel referenced the Appellate Body's suggestion from US Countervailing Measures on Certain EC Products that "an income tax concession could, in certain circumstances, be treated both as a direct transfer of funds and as revenue foregone". 10 More recently, in US Large Civil Aircraft, the Appellate Body noted that: "The structure of [Article 1.1(a)(1) of the SCM Agreement] does not expressly preclude that a transaction could be covered by more than one subparagraph" Consequently, contrary to what Canada argues, the submits that there is no legal impediment for the Panel to characterise the FIT Program and its related contracts as falling under two or more of the subheadings in Article 1.1(a)(1) of the SCM Agreement. C. Suggested analytical steps taken by the Panel 22. At the outset, the observes that Canada does not dispute that the first element of the definition of "subsidy" in Article 1.1(a) of the SCM Agreement is met, in the form of "purchases of goods" by the government. The European Union invites the Panel to note that undisputed characterisation by Canada in its report (i.e., that Canada does not dispute that the measures at issue amount to a form of "financial contribution"). However, the requests the Panel not to stop its analysis there and make an objective assessment of the matter as required under Article 11 of the DSU. 23. In particular, the requests the Panel to follow the Appellate Body's guidance in US Large Civil Aircraft: Panel Report, Japan DRAMs (Korea), para Panel Report, Japan DRAMs (Korea), note 613, citing Appellate Body Report, US Countervailing Measures on Certain EC Products, para Appellate Body Report, US Large Civil Aircraft, para. 613, footnote

13 The Appellate Body has said that a "panel must thoroughly scrutinize the measure before it, both in its design and in its operation, and identify its principal characteristics", and that, "{i}n making its objective assessment of the applicability of specific provisions of the covered agreements to a measure properly before it, a panel must identify all relevant characteristics of the measure, and recognize which features are the most central to that measure itself, and which are to be accorded the most significance for purposes of characterizing the relevant {measure} and, thereby, properly determining the discipline(s) to which it is subject under the covered agreements". The Appellate Body has therefore clarified that a proper determination of which provision of the WTO agreements applies to a given measure must be grounded in a proper understanding of the measure's relevant characteristics. In this regard, we note that the classification of a transaction under municipal law is not "determinative" of whether that measure can be characterized as a financial contribution under Article 1.1(a)(1) of the SCM Agreement. ( ) We consider that the Panel should first have examined the measures to determine their relevant characteristics, and then considered whether, in the light of a proper interpretation of Article 1.1(a)(1), these measures, properly characterized, fall within the scope of that provision Thus, in the 's view, the Panel should first examine the measures before it, both in their design and in their operation, and identify which features are the most central to those measures and which are to be accorded the most significance for purposes of characterising them under Article 1.1(a) of the SCM Agreement. In so doing, the Panel should remember that a measure may fall under multiple sub-headings within Article 1.1(a)(1) of the SCM Agreement. D. Most relevant features of the FIT Program and its related contracts 25. The considers the following features as the most central in the present case First, the measures at issue are in the form of a program (i.e., the FIT Program), rather than ad-hoc or separate measures. The program involves an element of continuity in time and of standardisation, which permits operators to obtain the benefits under the program provided they meet certain stated criteria. The program is designed to promote renewable electricity generation that would not otherwise exist in Ontario's market. The program is executed in the form of individual contracts with generators (FIT Contracts). The program is administered by the Ontario Power Authority (OPA), a government agency, which signs the FIT Contracts Appellate Body Report, US Large Civil Aircraft, paras. 586 and 589 (footnotes omitted). See Japan's first written submission in DS412, paras

14 27. Second, the FIT Program is designed to "encourage and promote greater use of renewable energy sources including wind and solar (PV) for electricity generating projects in Ontario". 14 The fundamental objective of the FIT Program is "to facilitate the increased development of Renewable Generating Facilities of varying sizes, technologies and configurations via a standardized, open and fair process". 15 Thus, the FIT Program is not a typical procurement program where operators compete on prices in order to allocate their production to the government. In other words, contrary to previous programs implemented by the Government of Ontario, 16 in the current FIT Program there is no bidding process by generators in order to establish a competitive price for electricity on the basis of which the Government of Ontario, through the OPA, can allocate contracts. Put simply, neither the OPA is purchasing electricity from renewable sources, nor it is allocating contracts on the basis of the best price offered. Rather, the FIT Program aims at offering a standard mechanism, where rates are publicly available, in order to incentivise the use of renewable energy sources for electricity generating projects in Ontario. 28. Third, the mechanism chosen by the FIT Program consists of (i) guaranteed rates for the electricity generated by the FIT Generators (ii) for a long-term period (e.g., 20 years), (iii) with price escalation, and (iv) other favourable conditions depending on the location of the FIT Facility (aboriginal and community projects). The guaranteed rates are standardised, established through a formula that is said to utilise the cost of generating energy plus a sufficient profit margin for a reasonable return, and publicly contained in the FIT Pricing Schedule. 29. Fourth, in order to join the FIT Program and thus obtain a FIT Contract, the FIT Generator has to comply with certain requirements, including domestic content requirements. At the same time, the FIT Generators have the connection to the electricity grid and the delivery of all the electricity produced fully ensured during the whole period. In other words, transmission and distribution operators must allow for the FIT Generators to have access and thus connect to their grids. This ensures that any (potential) FIT Generator willing to make the necessary investments will have access to the electricity system in Ontario through the FIT Program. 30. Fifth, "[t]o participate in the FIT Program, Applicants must be willing to make necessary investments in their facilities and enter into a FIT Contract with the OPA pursuant to which the OPA will pay the Supplier for Electricity delivered from its generating facility for a long-term payment period, in accordance with the terms of the FIT Contract". 17 Thus, in order to compensate for their investment and operating costs, the OPA commits to pay the FIT Generators the agreed rates in the FIT Contracts in exchange of the supply or injection of their electricity into the FIT Rules, Section 1.1 (Exhibit EU-4, Exhibit JPN-119). FIT Rules, Section 1.1 (Exhibit EU-4, Exhibit JPN-119). In this sense, the observes that the predecessors of the FIT Program, i.e., RES I, II and III, were administered based on the best prices offered by generators through a bidding process. One of the leading features of the FIT Program is that it provides for a standardisation of the financial conditions so that any generator meeting the requirements under the FIT Program can benefit from a FIT Contract (See Hogan Report, Exhibit CDA-2, pp. 31 and 32). FIT Rules, Section 1.2 (Exhibit EU-4, Exhibit JPN-119). -9-

15 grid. Regardless of how settlement payments are made, the OPA is ultimately liable for all payments vis-à-vis the FIT Generators. 18 In this respect, the government provides payments in exchange of the obligation undertaken by the FIT Generators to deliver its electricity into the grid (i.e., to transmission or distribution operators), to be sold, in most cases, by distribution operators to final consumers. 31. In sum, in the 's view, the central features of the FIT Program and its related contracts is that the Government of Ontario, through the OPA, commits to pay long-term, guaranteed rates in exchange of the delivery of electricity by the FIT Generators into Ontario's grid in order to promote greater use of electricity generated from renewable sources. In so doing, the FIT Program imposes domestic content requirements on wind and solar generating facilities, which are at the centre of this dispute. The FIT Program is also placed in a context where the competent regulatory authorities in Ontario ensure that the FIT Generators will not find any obstacles in delivering the electricity generated into the grid. E. Legal characterisation of the FIT Program and its related contracts 32. The considers that these features perfectly fall under the notion of "income or price support" in Article 1.1(a)(2) of the SCM Agreement. The also considers that the FIT Program and its related contracts can be characterised as a "direct transfer of funds" under Article 1.1(a)(1)(i) of the SCM Agreement. For the reasons explained below, in addition to those already mentioned in our previous submissions, the considers that the FIT Program and its related contacts cannot be characterised as a purchase of goods by the government under Article 1.1(a)(1)(iii) of the SCM Agreement. The European Union will address Canada's arguments in this respect. In any event, as mentioned before, the considers that the Panel can also make, in the alternative, a finding that the measures at issue amount to a "financial contribution" in the form of "purchases of goods" by the government. Under any approach, the first element of the definition of "subsidy" will be met in the present case, leaving the existence of benefit as the only defence put forward by Canada in the present case. 1. Income or price support in the sense of Article XVI of the GATT The considers that the central features of the FIT Program and its related contracts fall under the notion of "income or price support" in Article 1.1(a)(2) of the SCM Agreement. 34. The most central feature of the FIT Program is to provide long-term, guaranteed rates to the FIT Generators. The FIT Program does so by proving a standard model so that any investor has the necessary price and regulatory security to make the necessary investments on the wind and solar generation facilities. The very reason 18 FIT Rules, Section 8.4 (Exhibit EU-4, Exhibit JPN-119). -10-

16 for the existence of the FIT Program is to encourage the generation of electricity through renewable sources which, on normal market conditions, does not take place in large volumes since the costs are still too high when compared to other technologies, thereby proving it impossible to obtain an appropriate market return. 19 In other words, no renewable energy generator would operate in Ontario absent the FIT Program, as Canada readily admits. 20 Thus, the FIT Program and its related contracts provide an incentive, in the form of guaranteed or "supported" rates for the electricity produced by the FIT Generators that the market would not provide otherwise. Further, the FIT Program and its related contracts guarantee a secure income stream for FIT Generators, for a long-term period of 20 years. During that period, the rates that FIT Generators get for their supplies and, consequently, their income is supported against any market risk. The OPA (i.e., the Government of Ontario) assumes any market risks for such a long period without getting any premium or indeed anything in return, because that is the OPA's statutory duty. 35. As explained in our first written submission, "any form of income or price support" is about government action, in any way or any manner, which operates to sustain the income received by someone or the prices of products. 21 In the present case, the FIT Program and its related contracts are designed to maintain a level of electricity prices received by the FIT Generators above what the market would provide. At the same time, the FIT Program and its related contracts contribute to maintaining the income of the FIT Generators by guaranteeing the access to the grid of the electricity they supply, and for which they receive above-market prices which are shielded for a period of 20 years against any market risks (i.e., the FIT Generators can produce as much electricity as they can within the contracted capacity and obtain the guaranteed rates, at the agreed price escalation terms). 36. Moreover, the FIT Program and its related contracts amount to income or price support "in the sense of Article XVI of the GATT 1994". Such a reference was meant to incorporate, within the notion of "subsidy" in the SCM Agreement, what was already considered as falling within that notion since the GATT Indeed, Article XVI of the GATT 1947 (which is now Article XVI:1 of the GATT 1994) contained disciplines with respect to "any subsidy, including any form of income or price support". Such provision borrowed the language of Article 25 of the Havana Charter, which also referred to "any subsidy, including any form of See Japan's opening oral statement, first meeting with the Panel (DS412), para. 31 ("Because electricity consumers cannot exclusively enjoy the positive environmental effects of any renewable electricity they purchase, they have no incentive to pay for these effects, and thus, these effects are considered to be externalities and are not reflected in the market price. To promote renewable energy generation, therefore, a number of governments, including the Governments of Ontario and Japan, have had to introduce various measures including FIT programs that 'internalize' the positive environmental externalities of renewable energy generation through the provision of above-market FIT rates. Again, Japan does not challenge this governmental intervention as such, but rather the domestic content requirement in Ontario's FIT Program, which has no relevance to this 'internalization'). See Hogan Report, Exhibit CDA-2, pp. 1 ("The structure of the Ontario wholesale electricity market alone would not support a market for renewable electricity") and 25 ("The OPA's procurement contracts for new generation must pay a premium over spot wholesale electricity prices because wholesale electricity prices in Ontario are too low to incentivize the construction of new generation"). 's first written submission, paras. 35 and 36. 's first written submission, para

17 income or price support". 23 Similarly, Article 27 of the Havana Charter referred to "[a] system for the stabilization of the domestic price or of the return to domestic producers of a primary commodity [affecting export prices]" as a form of income or price support (now Article VI:7 of the GATT 1994). Both the Havana Charter and the GATT 1947, as evolved in 1955, included certain disciplines (such as obligations to notify subsidies and discuss the possibility of limiting the subsidisation) in cases where the subsidies caused particular effects on the market. The structure of the SCM Agreement follows a different approach. The SCM Agreement starts by defining its scope in Article 1, by defining the notion of "subsidy" and by bringing within the scope of the subsidy disciplines subsidies that are specific. Then, Parts II and III of the SCM Agreement contain disciplines by reference to certain categories of prohibited subsidies (where negative effects are presumed) and to certain adverse effects. The considers that the reference to "in the sense of Article XVI of the GATT 1994" does not intend to bring within the notion of "subsidy" the effects which are contemplated in Article XVI:1 of the GATT 1994 (such as import or export displacement). Rather, those terms are a cross-reference to the meaning of "income or price support" in that provision, which "any form of" also included systems "for the stabilization of the domestic price or of the return to domestic producers of a primary commodity [affecting export prices]". In other words, the cross-reference to the GATT 1994 in Article 1.1(a)(2) of the SCM Agreement refers to the definitional aspect in Article XVI:1 of the GATT 1994, covering subsidies, "including any form of income or price support". 37. At most, the considers that, should the reference "in the sense of Article XVI of the GATT 1994" be understood as incorporating the effects mentioned in that provision, it would not make any sense to require showing actual import or export displacement as it would be required, for instance, under Articles 6.3(a) and 6.3(b) of the SCM Agreement. Potential effects that can derive automatically from the design, architecture and purpose of the measure, as well as the specific circumstances of a particular case, could also suffice for a particular measure to fall under Article 1.1(a)(2) of the SCM Agreement. In the present case, the domestic content requirements contained in the FIT Program and its related contracts would satisfy such a potential effect test since, by their own nature, they reduce or even eliminate imports of equipment and components for renewable energy generation facilities in Ontario. 38. In sum, the submits that the FIT Program and its related contracts provide a form of income or price support to the FIT Generator through long term, guaranteed, above-market rates in the sense of Article 1.1(a)(2) of the SCM Agreement. 23 Article 25 of the Havana Charter ("If any Member grants or maintains any subsidy, including any form of income or price support, which operates directly or indirectly to maintain or increase exports of any product from, or to reduce, or prevent an increase in, imports of any product into, its territory, the Member shall notify the Organization in writing of the extent and nature of the subsidization, of the estimated effect of the subsidization on the quantity of the affected product or products imported into or exported from its territory and of the circumstances making the subsidization necessary. In any case in which a Member considers that serious prejudice to its interests is caused or threatened by any such subsidization, the Member granting the subsidy shall, upon request, discuss with the other Member or Members concerned, or with the Organization, the possibility of limiting the subsidization"). -12-

18 2. Financial contribution 39. As explained in our first written submission, the also considers that the FIT Program and its related contracts amount to a "financial contribution" in the form of "direct transfer of funds". 24 Through the FIT Program and its related contracts the OPA unconditionally commits to pay the agreed rates upon the FIT Generator delivering the electricity to the grid. In other words, there is a payment by the government in exchange of certain obligations undertaken by the FIT Generator (i.e., complying with a set of requirements, including domestic content requirements, and delivering the electricity into the grid). 40. Canada argues that the measures at issue amount to a purchase of goods, as opposed to a direct transfer of funds. In essence, Canada's argument is premised on the fact that there is an "exchange" between the OPA and the FIT Generators. In particular, Canada maintains that the OPA always pays money in exchange for the renewable electricity that is produced. 25 According to Canada, the Panel has to examine the whole nature of the transaction which not only includes payments to the FIT Generators, but more precisely payments made in consideration for a good. 26 In other words, according to Canada, the key issue in order to distinguish between a direct transfer of goods and a situation where the government purchases goods is that a payment is made as a remuneration for a good, regardless of whether the good is provided to the government or to somebody else. 41. The considers that Canada's arguments are flawed. 42. First, Canada's emphasis on the "exchange" between the OPA and the FIT Generators as a critical element in order to characterise the FIT operations as a purchase of goods under Article 1.1(a)(1)(iii) of the SCM Agreement is misplaced. The key feature for a measure to be characterised as a purchase of goods by the government is that goods are provided to the government. 27 The same applies to the opposite scenario, where the government provides goods, where the key feature is that the goods are provided by the government. 28 In contrast, in the present case, the electricity produced by the FIT Generators is not provided to the government, but delivered into the grid (i.e., provided to the transmission and distribution operators) for sale to and use by electricity users. In the 's view, the facts of this case are better characterised as a direct transfer of funds since "the recipient assumes obligations to the government in exchange for the funds provided", 29 i.e., the FIT Generator assumes, inter alia, 30 the obligation to inject the electricity into the grid, for which it will receive the agreed payment 's first written submission, paras See Canada's Opening Oral Statement, First Meeting with the Panel, paras. 12 and 14. See Canada's Opening Oral Statement, First Meeting with the Panel, paras Thus, for instance, in a procurement context electricity can be provided to the government by delivering it to government buildings or to public infrastructure. Appellate Body Report, US Large Civil Aircraft, para. 619 ("With respect to the second sub-clause of subparagraph (iii) where a government 'purchases goods' we note that the goods are provided to the government by the recipient, in contrast to the first sub-clause of that paragraph, where the goods are provided by the government"). Appellate Body Report, US Large Civil Aircraft, para. 617 ("It is clear from the examples in subparagraph (i) that a direct transfer of funds will normally involve financing by the government to -13-

19 43. Second, in US Large Civil Aircraft, the Appellate Body considered that there are certain commonalities between "direct transfer of funds" and "provision/purchase of goods", in the sense that these can be done in exchange for remuneration. Thus, the fact that there is a payment made to the government in consideration for a good that is provided to someone else does not make such payment a purchase of goods by the government under Article 1.1(a)(1)(iii) of the SCM Agreement. The key distinguishing feature between a direct transfer of funds and a purchase of goods by the government is that something is provided to the government in exchange of remuneration. If what is provided to the government is a good, then, such measure would fall under Article 1.1(a)(1)(iii) of the SCM Agreement, as a purchase of goods. In contrast, in situations where a payment is made in exchange of an obligation assumed by the recipient (such as to deliver its electricity into the grid, like the present case), even if such obligation relates to a good, 31 then such a measure is better characterised as a "direct transfer of funds". 44. Third, in the present case, there is evidence that the OPA pays or intends to pay something in exchange for not receiving anything (i.e., in cases where FIT Generators are instructed not to produce electricity). 32 The considers that this fact supports the conclusion that the FIT Program and its related contracts amount to a "direct transfer of funds" in exchange of some obligations undertaken by the FIT Generators and, thus, fall under Article 1.1(a)(1)(i) of the SCM Agreement. Indeed, in those cases nothing is provided to the government. Instead, the FIT Generator assumes an obligation to the government in exchange of the funds provided. 45. Consequently, the considers that the fact that under the FIT Program and its related contracts money is paid in exchange of the electricity that is produced is not sufficient to characterise them as "purchases of goods" by the government. The key issue is that there is a payment by the government in exchange of a set of obligations undertaken by the FIT Generators, including the generation of electricity in compliance with the domestic content requirements; and, ultimately, the FIT Generators do not have the obligation to provide the electricity to the government but rather to inject it into the grid. 46. Canada also refers to several factual elements to support its conclusion that the OPA actually purchases electricity through the FIT Program and its related contracts. 33 None of those elements are determinative or necessarily show that the OPA actually purchases anything the recipient. In some instances, as in the case of grants, the conveyance of funds will not involve a reciprocal obligation on the part of the recipient. In other cases, such as loans and equity infusions, the recipient assumes obligations to the government in exchange for the funds provided. Thus, the provision of funding may amount to a donation or may involve reciprocal rights and obligations"). The FIT Generators also assume the obligation to comply with the domestic content requirements. Without such compliance, no contract can be signed and no rates can be guaranteed under the FIT Program. Indeed, arguably, any direct transfer of funds would always be made in consideration for a good ultimately, since the SCM Agreement covers subsidies in relation to goods. See FIT Contract, Exhibit B, Article 1.5 (Exhibit EU-5, Exhibit JPN-127). Canada's opening oral statement, first meeting with the Panel, paras