*AS DELIVERED* In the World Trade Organisation Panel Proceedings EUROPEAN UNION AND ITS MEMBER STATES CERTAIN MEASURES RELATING TO THE ENERGY SECTOR First Panel Hearing Opening by the Geneva 5 September 2016 TABLE OF CONTENTS
1. INTRODUCTION...1 2. CLAIMS RELATING TO UNBUNDLING...2 2.1 THE UNBUNDLING REQUIREMENT, AS IMPLEMENTED IN THE LAWS OF CROATIA, HUNGARY AND LITHUANIA, IS CONSISTENT WITH THE EU'S MARKET ACCESS COMMITMENTS UNDER ARTICLE XVI OF THE GATS...3 2.1.1 SUB-PARAGRAPH (E) OF ARTICLE XVI:2 OF THE GATS...3 2.1.2 SUB-PARAGRAPH (A) OF ARTICLE XVI:2 OF THE GATS...5 2.1.3 SUB-PARAGRAPH (F) OF ARTICLE XVI:2 OF THE GATS...6 2.2 THE PUBLIC BODY SPECIFICATION IN ARTICLE 9(6) OF DIRECTIVE 2009/73/EC DOES NOT VIOLATE THE NATIONAL TREATMENT OBLIGATION IN ARTICLE XVII OF THE GATS...6 2.3 THE UNBUNDLING MEASURE DOES NOT VIOLATE THE MOST FAVOURED NATION OBLIGATION IN ARTICLE II:1 OF THE GATS...8 2.4 THE UNBUNDLING MEASURE DOES NOT VIOLATE THE NATIONAL TREATMENT OBLIGATION IN ARTICLE III:4 OF THE GATT 1994 AND MFN OBLIGATION IN ARTICLE I:1 OF THE GATT 1994... 10 2.5 THE TREATMENT OF LNG FACILITIES AND UPSTREAM PIPELINE BY DIRECTIVE 2009/73/EC DOES NOT VIOLATE ARTICLES I:1 AND III:4 OF THE GATT 1994... 12 3. CLAIMS RELATING TO THIRD COUNTRY CERTIFICATION... 14 3.1 ARTICLE XVII OF THE GATS... 15 3.2 ARTICLE II:1 OF THE GATS... 17 3.3 ARTICLE III:4 OF THE GATT 1994... 18 3.4 ARTICLE VI:1 OF THE GATS... 19 3.5 ARTICLE VI:5 OF THE GATS... 20 4. CLAIMS RELATING TO INFRASTRUCTURE EXEMPTIONS... 21 4.1 THE ALLEGED EXEMPTION FOR UPSTREAM PIPELINE NETWORKS... 21 4.2 THE EXEMPTION FOR NEW MAJOR INFRASTRUCTURE... 22 4.2.1 ARTICLE X:3(A) OF THE GATT 1994... 22 4.2.2 ARTICLE I:1 OF THE GATT 1994... 24 4.2.3 ARTICLE II:1 OF THE GATS... 26 4.2.4 ARTICLE XI:1 OF THE GATT 1994... 27 5. CONCLUSION... 27 -ii-
Short Title Argentina Financial Services Chile Alcoholic Beverages China Electronic Payment Services China Publications and Audiovisual Products TABLE OF CASES Full Case Title and Citation Panel Report, Argentina Measures Relating to Trade in Goods and Services, WT/DS453/R and Add.1, circulated to WTO Members 30 September 2015 Appellate Body Report, Chile Taxes on Alcoholic Beverages, WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000, DSR 2000:I, p. 281 Panel Report, China Certain Measures Affecting Electronic Payment Services, WT/DS413/R and Add.1, adopted 31 August 2012, DSR 2012:X, p. 5305 Panel Report, China Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/R and Corr.1, adopted 19 January 2010, as modified by Appellate Body Report WT/DS363/AB/R, DSR 2010:II, p. 261 EC Selected Customs Matters Appellate Body Report, European Communities Selected Customs Matters, WT/DS315/AB/R, adopted 11 December 2006, DSR 2006:IX, p. 3791 US Stainless Steel (Korea) Panel Report, United States Anti-Dumping Measures on Stainless Steel Plate in Coils and Stainless Steel Sheet and Strip from Korea, WT/DS179/R, adopted 1 February 2001, DSR 2001:IV, p. 1295 -iii-
LIST OF ABBREVIATIONS Abbreviation Full Name ECA EEAA GATS GATT ISO ITO LNG MFN NRA SoS TEN TSO VIU Economic Cooperation Agreement The Agreement on the European Economic Area General Agreement on Trade in Services General Agreement on Tariffs and Trade Independent system operator Independent transmission operator Liquefied natural gas Most favoured nation National Regulatory Authority Security of energy supply Trans-European Transport Network Transmission system operator Vertically Integrated Undertaking -iv-
Mr. Chairman, distinguished Members of the Panel, ladies and gentlemen. 1. INTRODUCTION 1. The ("EU") would like to thank the Chairman and the Members of the Panel for serving in this dispute. We also thank the Secretariat for its support throughout these proceedings. 2. In this dispute, the Russian Federation ("Russia") challenges several aspects of the 's legal framework relating to gas, as well as the implementation of this legal framework in some of the EU Member States. From Russia's arguments, it appears that its challenge is in particular meant to safeguard the possibility for integrated gas production and transmission companies already in existence to exclude potential competitors from the market. This stands in direct conflict with the free and fair competition principles that underlie the EU's energy policy. 3. The EU's policy indeed seeks to create a well-interconnected and competitive EU gas market to the benefit of consumers and market players. Gas producers and suppliers can expand their activities by being able to use, under equal and nondiscriminatory terms, the infrastructure. Operators of gas transport pipelines and of other gas infrastructure (e.g. storage or LNG facilities) must offer access to the infrastructure to all interested users; and finally gas consumers benefit from a wider choice and better prices as a result of competition. 4. A well-functioning gas market also contributes to the security of gas supply in the. It guarantees that even in events of serious gas disruptions, gas can easily reach those who are in need, via diversified sources and routes of gas supply. 5. Finally, an integrated and competitive gas market also allows equal possibilities for all potential sources of gas supply internal and external to reach consumers. With nearly 66% of the gas consumed in the being from imports, the gas market is open to all external sources of gas supply. The framework does not neither de jure nor de -1-
facto exclude or restrict any route or source of supply, or any supplier of a particular origin. It does precisely the opposite: it seeks to ensure equal access to the gas market of all potential sources of supply and to provide ample and equal opportunities for competition amongst them. 6. As explained in our first written submission, all of Russia's claims are unfounded. They are based on an intentional misrepresentation of the EU legal framework and reveal Russia's intent to find avenues to distort equal competitive opportunities for, and thus trade in, gas of different origins in the EU market. Russia's claims are also based on an incorrect understanding of the WTO obligations. 7. In this opening statement, the EU will focus on some major flaws in Russia's arguments. The EU will respond in more detail to all of Russia's submissions in its second written submission. 8. We note that the Panel has also sent a list of advance questions to the Parties on 26 August 2016. Given the length of the list, and the detailed factual nature of many of these questions, we will address these questions orally later during the hearing. 9. Hereinafter, we will first address Russia's arguments relating to unbundling (Section 2). Next, we will focus on the claims regarding third country certification (Section 3). Thereafter, we address the infrastructure exemptions (Section 4) and finally, we turn to Russia's arguments regarding projects of common interest (Section 5). 2. CLAIMS RELATING TO UNBUNDLING 10. Turning first to Russia's claims relating to unbundling, we recall that Russia makes several claims relating to the unbundling requirement, as implemented in the domestic laws of Croatia, Hungary and Lithuania, under the General Agreement on Trade in Services ("GATS") and the General Agreement on Tariffs and Trade ("GATT"). Russia's first claims concerns market access; whereas Russia's other claims are discrimination claims. -2-
2.1 THE UNBUNDLING REQUIREMENT, AS IMPLEMENTED IN THE LAWS OF CROATIA, HUNGARY AND LITHUANIA, IS CONSISTENT WITH THE EU'S MARKET ACCESS COMMITMENTS UNDER ARTICLE XVI OF THE GATS 11. In its first written submission, Russia first argues that the unbundling requirement, as implemented in the laws of Croatia, Hungary and Lithuania, is inconsistent with the EU's market access commitments for "pipeline transmission services" under Article XVI of the GATS in respect of these countries. 12. However, Russia's interpretation of the market access obligation in Article XVI:2(e), (a) and (f) is entirely misguided. If Russia's interpretation would be followed, this would significantly threaten the delicate balance carefully sought by the drafters of the GATS between the right to regulate and the principle of trade liberalisation. Japan also highlighted this risk in its third party written submission. 1 2.1.1 Sub-paragraph (e) of Article XVI:2 of the GATS 13. Russia's first claim is that the unbundling requirement qualifies as a measure "which restrict[s] or require[s] specific types of legal entity or joint venture through which a service supplier may supply a service", prohibited under subparagraph (e) of Article XVI:2 of the GATS, to the extent a commitment was made. However, the unbundling requirement in Directive 2009/73/EC does not limit the type of legal entity the service supplier can use. 2 It specifies only certain characteristics of an undertaking providing pipeline transport services. 14. Namely, it is not permitted that the person that controls, or exercises any right in, a transmission system operator or a transmission system, controls, or exercises any right in, an undertaking performing any of the functions of production or supply (and vice-versa). 3 It is also not permitted that the same person or persons are entitled to appoint members of the supervisory board, the administrative board or bodies legally representing the undertaking, of a transmission system operator, and directly or indirectly to exercise control or exercise any right over an undertaking 1 2 3 Japan's third party written submission, para. 5. See also Japan's third party written submission, para. 15. Article 9(1)(b) of Directive 2009/73/EC, in connection with Article 9(2) therein; Article 14 of Croatia's Gas Market Act, (Exhibit RUS - 45). -3-
performing any of the functions of production or supply. 4 Furthermore, the same person is not entitled to be a member of the supervisory board, the administrative board or bodies legally representing the undertaking, of both an undertaking performing any of the functions of production or supply and a transmission system operator. 5 15. The above requirement applies in case of ownership unbundling 6 and independent system operators ("ISOs"). 7 The requirement to ensure independence of the transmission system operator also applies in case of independent transmission operators ("ITOs"). In case of ITOs it is prohibited, inter alia, that the subsidiaries of the vertically integrated undertaking that perform functions of production or supply have any direct or indirect shareholding in the transmission system operator, and vice-versa. 8 16. This unbundling requirement, which aims to eliminate any conflict of interests between the activities of transmission and the activities of production and supply, does not in any way determine or limit the type of legal entity that a service supplier may use to provide pipeline transmission services in the EU territory. Rather, what is disciplined is the combination of activities production and transmission that cannot be deployed simultaneously. 9 Therefore, the unbundling requirement is not a measure of the type specified in Article XVI:2(e) of the GATS and thus does not violate any of the EU's commitments under this provision. 4 5 6 7 8 9 Article 9(1)(c) of Directive 2009/73/EC. Article 9(1)(d) of Directive 2009/73/EC. Article 9(1) of Directive 2009/73/EC; Article 14 of Croatia's Gas Market Act (Exhibit RUS - 45); Section 121/H of Hungary's Gas Act (Exhibit EU - 41); Article 41 of Lithuania's Law on Natural Gas (Exhibit RUS - 21). Article 14(2)(a) of Directive 2009/73/EC; Article 15 of Croatia's Gas Market Act (Exhibit RUS - 45); Section 121/I of Hungary's Gas Act, (Exhibit EU - 41). Article 18 of Directive 2009/73/EC, in particular Article 18(3); Article 15 of Croatia's Gas Market Act (Exhibit RUS - 45); Sections 121/B-G of Hungary's Gas Act (Exhibit EU - 41). See also WTO Secretariat note of 31 January 2005, which provides exactly such measures as examples of measures that do not fall within the scope of Article XVI of the GATS, but rather within the scope of Article VI:4 of the GATS. Working Party on Domestic Regulation, Examples of measures to be addressed by Disciplines under GATS Article VI:4. Informal Note by the Secretariat, Revision, 31 January 2005, JOB(02)/20/Rev.10 (Exhibit EU - 40). -4-
2.1.2 Sub-paragraph (a) of Article XVI:2 of the GATS 17. Russia also argues that the unbundling measures in the domestic laws of Croatia and Lithuania have the effect of limiting the number of service suppliers, in violation of Article XVI:2(a) of the GATS. 18. Yet, Russia makes an incorrect interpretation of sub-paragraph (a) of the GATS that does not fit with the facts at hand. Measures covered by sub-paragraph (a) are measures intended specifically to limit the number of "service suppliers". 10 It does not cover measures that "indirectly give rise to a quantitative limitation on service suppliers". 11 We agree with Japan that, to qualify as a measure under subparagraph (a), the core characteristic of the measure must be to limit the number of service suppliers. 12 19. The unbundling requirement does not, in any way, limit the number of service suppliers that may supply pipeline transport services in the EU, nor does it impose a monopoly supplier. There are an unlimited number of pipeline transport service suppliers that can be certified as transmission service operators in Croatia and Lithuania. 20. Russia has not, and cannot, demonstrate how the unbundling measure, as implemented in Croatia, limits the number of transmission service operators that can provide pipeline transport services in Croatia. The fact that there is, at present, only one TSO in Croatia is entirely irrelevant in this respect, since there is nothing in Croatia's law that prevents other TSOs from being certified. 21. Also with respect to Lithuania, Russia has failed to demonstrate that the unbundling requirement would prevent the establishment of another TSO in Lithuania. There are no legal restrictions in Lithuania's law in this respect. And, in fact, Russia itself admits that "it would be possible for a domestic entity (i.e. an entity established in Lithuania or another Member State) to obtain a TSO license under the Law on Natural Gas". 13 10 11 12 13 Panel Report, Argentina Financial Services, para. 7.421. Panel Report, Argentina Financial Services, para. 7.420. This point was not appealed. Japan's third party written submission, para. 11. Russia's first written submission, para. 219. -5-
22. In sum, the unbundling requirement as implemented in Croatia's and Lithuania's domestic laws does not qualify as a measure that limits that number of service suppliers, in the sense of sub-paragraph (a) of Article XVI:2 of the GATS. 2.1.3 Sub-paragraph (f) of Article XVI:2 of the GATS 23. A final market access claim that Russia makes in respect of the unbundling requirement is that it would violate sub-paragraph (f) of Article XVI:2 of the GATS. Yet, prohibited limitations under this sub-paragraph are maximum percentage limits on foreign shareholding, or a maximum percentage limit of the total value of individual or aggregate foreign investment. Sub-paragraph (f) is thus not concerned with all limitations on capital participation, but is specifically concerned with limitations tied to the fact that the capital originates outside of the Member adopting the limitation. 14 The unbundling requirement does not impose a "limitation on the participation of foreign capital" 15 and is neither "expressly [nor indirectly] discriminatory". 16 The unbundling requirement if it would limit investment at all applies without distinction to domestic and foreign investment. Such measure is not covered by the prohibition in sub-paragraph (f) of Article XVI:2 of the GATS. 24. For all these reasons, all of Russia's market access claims must fail. 2.2 THE PUBLIC BODY SPECIFICATION IN ARTICLE 9(6) OF DIRECTIVE 2009/73/EC DOES NOT VIOLATE THE NATIONAL TREATMENT OBLIGATION IN ARTICLE XVII OF THE GATS 25. Russia next makes a specific claim regarding the public body specification in Directive 2009/73/EC. Russia argues that the specification in Article 9(6) of the Directive that the unbundling requirement not only applies to transmission system operators owned by private undertakings, but also to those owned by public bodies, violates Article XVII of the GATS. Russia's claim must be dismissed. 26. In case the transmission system operator is owned by a public body, the national regulatory authority must scrutinize that the two public bodies controlling the 14 15 16 See Japan's third party written submission, para. 18. Panel Report, China Publications and Audiovisual Products, para. 7.1394 (emphasis added). Panel Report, China Electronic Payment Services, para. 7.653. -6-
transmission system operator, on the one hand, and a production or supply undertaking, on the other hand, are truly separate public bodies. In each case, it is determined whether the public bodies are independent from one another and that they are indeed not under the common influence of another public entity in violation of the unbundling rules. 17 Such independence control is in addition to the control by the regulatory authority that compliance with all requirements of ownership unbundling is met. Hence, the specification in Article 9(6) of the Directive does not eliminate the need to meet the unbundling requirements of Article 9(1) and the following paragraphs. As Ukraine has correctly observed, 18 rather than being an exemption, the specification ensures that the unbundling requirements are extended to the public sector. 27. Article 9(6) also covers persons controlled by a public body from a third country and thus is not de jure discriminatory. A transmission system operator that is controlled by a public body from a third country may thus seek to unbundle in accordance with Article 9(6), provided that the unbundling rules are met and that the public bodies are truly separate. 19 28. The specification in Article 9(6) is not de facto discriminatory either. Russia has not demonstrated that the conditions of competition are modified in Hungary, Lithuania or Croatia to the detriment of non-domestic suppliers of pipeline transmission services. In all these countries, the existing TSO is subject to the unbundling requirement and the national regulatory authorities must ensure that the TSO meets the unbundling requirements of Article 9. 29. The public body specification is thus entirely consistent with the 's national treatment obligation in Article XVII of the GATS. 17 18 19 Commission Interpretative note on Directive 2009/72/EC concerning common rules for the internal market in electricity and Directive 2009/73/EC concerning common rules for the internal market in natural gas. The unbundling regime, 22 January 2010, p. 10 (Exhibit EU 42). Ukraine's third party written submission, paras. 13, 17. If the TSO or the system operator is controlled by a person from a third country, Article 11 of the Directive will be applicable. -7-
2.3 THE UNBUNDLING MEASURE DOES NOT VIOLATE THE MOST FAVOURED NATION OBLIGATION IN ARTICLE II:1 OF THE GATS 30. Russia also makes a number of discrimination claims against the unbundling measure in general. In particular, Russia argues that the unbundling measure in the Directive violates the 's obligation under Article II:1 of the GATS because, when implementing the unbundling requirement in the Directive, some Member States implement not only ownership unbundling, but also the ISO and ITO models. Russia considers that this modifies the conditions of competition in the to the detriment of Russian services and service suppliers, compared with like services and service suppliers of other Members. 20 31. More specifically, to make its discrimination claim, Russia compares the treatment of the Russian supplier of pipeline transport services in Member States that permit only ownership unbundling in particular in Lithuania with the treatment of other third country pipeline transport service suppliers in Member States that also permit the ISO or ITO models. 32. Russia's starting point for comparison is already mistaken. The most favoured nation treatment of different third country suppliers must be assessed in the EU Member State implementing the unbundling requirement. The conditions of service supply are specific to the domestic law of each Member State. When a Member State has implemented ownership unbundling only (like e.g. Lithuania), the Russian pipeline transport service provider is subject to ownership unbundling in that Member State in exactly the same manner as any other pipeline transport service provider from another third country that wants to provide such service in that Member State. There is no discrimination. 33. An interpretation of the MFN obligation in the GATS that would require one single harmonised treatment throughout the Member States of the is manifestly wrong and would have grave consequences for any WTO Member with a federal system. As Japan also recognises in its submission, 21 it would mean that any differences that may exist in the laws or regulations that apply in subdivisions of a WTO Member must disappear. For this reason already, the Panel 20 Russia's first written submission, para. 316. -8-
should dismiss Russia's claim that the unbundling requirement violates the MFN obligation in the GATS. 34. Even if the Panel would disagree, it should still dismiss Russia's claim because the choice of unbundling model has no detrimental impact on the competitive position of service suppliers and neither would such alleged impact be predominantly 22 on the group of pipeline transport service suppliers from Russia. 35. Russia indeed suggests that the ISO and ITO models are "less restrictive" than ownership unbundling and thus would provide a competitive advantage to suppliers making use of these models. 23 As the has demonstrated in detail in its first written submission, this is entirely incorrect. 24 36. All three unbundling models have as their objective to ensure independence of the transmission interest, on the one hand, from the production and supply interests, on the other hand. They only differ in the means to achieve this: each model has certain requirements and characteristics, and each model may be perceived as more burdensome in some respects, and less burdensome in other respects. Also in case of the ISO and ITO models, requirements concerning the independence of transmission from production and supply activities must be complied with 25 and this is ensured by means of additional rules, 26 making them arguably more burdensome to comply with. 37. In fact, Russia's attempts to describe the ISO and ITO models as granting certain "advantages" compared to ownership unbundling, reveal Russia's intention to abuse the ISO and ITO models to restrict competition in the EU market for natural gas, in direct contradiction with the spirit and the letter of the unbundling provisions. Russia focuses on the particular case of a vertically integrated undertaking that wants to control the TSOs and the transmission network at the same time as its controls production and supply entities. According to Russia, this 21 22 23 24 25 26 Japan's third party written submission, para. 37. Appellate Body Report, Chile Alcoholic Beverages, para. 67. Russia's first written submission, paras. 314, 319. 's first written submission, paras. 306-337. Recital (15) of Directive 2009/73/EC; See in particular Article 14(2)(a) of Directive 2009/73/EC and Article 18 of Directive 2009/73/EC. Recital (16) of Directive 2009/73/EC. -9-
would enable the VIU to control access to the transmission network and would result in financial benefits for the VIU. However, no matter the unbundling model that applies in a particular EU Member State, effective unbundling must be ensured and there must be effective separation of networks from activities of production and supply. Transmission tariffs are also paid to the TSO and not the VIU. Cross-subsidisation is prevented by unbundling of accounts. If the rules are complied with, there should thus be no competitive "benefit" resulting from the use of the ISO or ITO model. 38. Finally, we note that Russia cannot demonstrate that any detrimental impact (if such impact would exist at all) of the ownership unbundling requirement would be predominantly on the pipeline transport service providers from Russia. In fact, as demonstrated in our first written submission, Russian gas transport service suppliers are also active in Member States that have implemented the ITO models and have made use of this model. 27 39. Therefore, the Panel should find that the unbundling requirement in the Directive is consistent with the MFN obligation in Article II:1 of the GATS. 2.4 THE UNBUNDLING MEASURE DOES NOT VIOLATE THE NATIONAL TREATMENT OBLIGATION IN ARTICLE III:4 OF THE GATT 1994 AND MFN OBLIGATION IN ARTICLE I:1 OF THE GATT 1994 40. Russia further makes discrimination claims regarding the unbundling requirement under the GATT 1994. Russia argues that pipeline transport service suppliers in certain Member States have been permitted to adopt the ISO and/or ITO models, while Russian-origin gas would be transported and placed on the market in Member States that require ownership unbundling. According to Russia, this would treat Russian-origin gas less favourably than gas originating in the Member States of the EU and in other third countries. 41. However, nothing in Directive 2009/73/EC indicates that the implementation of the unbundling requirement, and the choice of the model to be used, is based on the origin of the gas being supplied. Rather than negatively affecting competitive conditions, under all three models, the unbundling requirement precisely ensures -10-
competition between gas of different origins: it prevents discrimination by transmission system owners in favour of certain producers or suppliers. 42. In making these discrimination claims, Russia does not and cannot demonstrate how the application of ownership unbundling requirement to the TSO in the EU Member States negatively affects the competitive position of gas originating in Russia. Russia appears to assume that an automatic link exists between the treatment of the supplier and the product that is supplied. Together with the, several third parties have pointed out that such assumption is unfounded. 28 43. In each EU Member State, imported gas from Russia has exactly the same competitive opportunities as gas imported from other Member States or from other third countries. In making its argument, Russia seeks to rely on the situation in Lithuania, where only ownership unbundling is permitted. 29 Yet, Russia admits at the same time that Gazprom may import gas to Lithuania without any limitation 30 and recent evidence shows that Gazprom is successfully covering all natural gas demand in Lithuania. 31 There is thus no link between the unbundling model that applies and any specific impact on Russian gas. 44. Russia is further also unable to show that any alleged impact of ownership unbundling is predominantly on Russian gas. In fact, Russian gas is also supplied in Member States where all three unbundling models are available. For instance, Bulgaria has transposed all unbundling models and imports only Russian gas. 32 45. In sum, Russia's arguments that the unbundling requirement in Directive 2009/73/EC would discriminate against Russian gas fail on all accounts. The requirement is thus fully consistent with the 's non-discrimination obligations in Articles III:4 and I:1 of the GATT 1994. 27 28 29 30 31 32 's first written submission, paras. 338-343. Japan's third party written submission, para. 41; Ukraine's third party written submission, para. 20. Russia's first written submission, paras. 354, 357. Russia's first written submission, paras. 357. 's first written submission, paras. 370-371, referring to: Gazprom Export's gas auction for Baltic states completed (Exhibit EU - 62) and Gazprom Annual Report, p. 81 (Exhibit EU - 63). See GAZPROM Export, Bulgaria, (Exhibit EU - 64). -11-
2.5 THE TREATMENT OF LNG FACILITIES AND UPSTREAM PIPELINE BY DIRECTIVE 2009/73/EC DOES NOT VIOLATE ARTICLES I:1 AND III:4 OF THE GATT 1994 46. Russia also challenges the manner in which the unbundling requirement applies to LNG facilities and upstream pipeline networks. According to Russia this implies that Russian gas is being treated less favourably than gas imported from other third countries, violating the MFN obligation in Article I:1 of the GATT 1994. With respect to LNG facilities, Russia also makes a claim of violation of Article III:4 of the GATT 1994. 47. With respect to LNG facilities, the Directive has not gone so far as to subject separate LNG system operators to unbundling requirements, due to the specificities of the LNG facilities and the differences from the transmission networks. LNG facilities are different from transmission pipelines since they are used for liquefaction of natural gas or the importation, offloading, and regasification of LNG, while transmission pipelines are used for transport. 33 48. The competitive concerns are also very different: while the transmission network is a natural monopoly, this is not the case for LNG facilities. These can be constructed in any location, providing sea access and subsequent connection to transmission networks, and they operate in conditions of competition with other LNG facilities. There is thus no fear that LNG facilities are used to foreclose access of gas of a certain origin to the market in the EU. This is all the more the case because the obligations of third party access and non-discrimination, 34 unbundling of accounts, 35 as well as the prohibition of cross-subsidisation 36 apply also to LNG facilities. This ensures undistorted competition and access by all interested entities to all LNG facilities. 49. Russia's argument that the treatment of LNG facilities in the Directive violates Article I:1 of the GATT 1994 is unfounded. To start with, LNG is not "like" natural gas. 37 It has different physical characteristics, LNG being liquid and natural gas being in gaseous form. It has different end-uses since LNG needs to be 33 34 35 36 37 's first written submission, paras. 427-432. Article 32 of Directive 2009/73/EC. Article 31 of Directive 2009/73/EC. Article 41(1)(f) of Directive 2009/73/EC. See 's first written submission, para. 360-12-
re-gasified for further transport and is not directly sold to end-consumers. And LNG and natural gas have different tariff classifications. 38 50. Further, the application of the Directive to LNG facilities does not affect the competitive opportunities of gas. The fact that some different rules apply to different service suppliers (LNG operators and TSOs), based on objective differences, does not mean that an advantage is granted to one or the other service supplier. Moreover, even if there would be such an advantage (quod non) there is no reason why this would also give a competitive advantage to gas from a certain origin. We recall that the LNG operators are also subject to the third party access requirements, meaning that the competitive opportunities of all gas, no matter its origin, are protected. 51. With respect to upstream pipelines, Russia's discrimination claim also fails. Unlike transmission pipelines which connect gas sources to customers, via meshed networks covering large areas upstream pipelines are directly linked to production fields and connect those to the EU transmission network. 39 Such pipelines are inherently linked to gas production, as they are used to transport the gas from the production field to the transmission network. As a result, there is in practice little or no competition with regard to the use of the network to transport the gas to the transmission network. Indeed, there is usually only one or a few producers on a given production site and the capacity of the pipeline is tailored to the production capacities. Therefore, there is no risk that the network could be operated in a manner such as to favour the particular producer and deny access to other producers, hampering competition. 52. Yet, the Directive contains rules to address a situation where such risk of excluding producers would nonetheless exist. Article 34 requires Member States to take the necessary measures to "ensure that natural gas undertakings and eligible consumers, wherever they are located, are able to obtain access to upstream pipeline networks". 40 The Directive requires Member States to ensure that third 38 39 40 LNG is classified under HS 2711.11 while natural gas is classified under HS 2711.21. See Exhibit EU - 32. See Figure 1 above. Article 34(1) of Directive 2009/73/EC. -13-
party access to the network is given to interested entities in a fair an open manner to ensure competition and to avoid abuse of a dominant position. 41 Hence, Russia is incorrect when it suggests that upstream pipelines are not subject to the third party access requirement. 53. Russia also does not and cannot explain how the specific treatment of upstream pipelines would translate in a competitive advantage for gas of certain origin. Gas transported via a transmission pipeline has exactly the same competitive opportunities as gas transported via an upstream pipeline. What Russia appears to claim is that its production facilities should be able to control the transmission network in order to be able to foreclose competitors from having access to this network. Such actions would obviously undermine the very principle of third party access on competitive and non-discriminatory conditions and reveals again Russia's intention to seek avenues to distort competition in the EU gas market. 54. In sum, the treatment of LNG facilities and upstream pipelines by Directive 2009/73/EC does not violate Articles I:1 or III:4 of the GATT 1994. 3. CLAIMS RELATING TO THIRD COUNTRY CERTIFICATION 55. We now turn to Russia's claims relating to third country certification. Directive 2009/73/EC requires that the undertakings providing gas transmission services must be approved and designated as TSOs by the competent NRA. In turn, before an undertaking is designated as TSO, it must be certified in accordance with the requirements and procedures laid down in Articles 10 and 11 of the Directive. Article 10 applies to all TSOs. Article 11 lays down special requirements and procedures which apply when either the TSO or the transmission system owner is controlled by a person or persons from a third country or third countries. Specifically, Article 11(3) of the Directive provides that, in those cases, the certification is to be refused when it would put at risk the security of energy supply ("SoS") of the Member State concerned and of the Union. 42 56. Russia claims that the SoS certification requirement stipulated in Article 11(3) of the Directive, as transposed into the national laws of Croatia, Hungary and 41 Article 34(2) of Directive 2009/73/EC. -14-
Lithuania, is inconsistent with Articles XVII, VI:1 and VI:5 GATS. Russia further claims that Article 11(3) of Directive 2009/73/EC is, by itself, inconsistent with Article II:1 GATS and Article III:4 GATT. 57. As shown by the in its first written submission, Russia's claims with regard to the SoS certification requirement are either outside the Panel's terms of reference and/or unfounded in substance. 3.1 ARTICLE XVII OF THE GATS 58. As regards Russia's claims under Article XVII GATS, the has shown that the SoS certification requirement is justified under the exception contained in Article XIV(a) GATS with regard to measures that are necessary to maintain public order. 59. The policy objective pursued by the SoS certification requirement is to ensure the security of energy supply in the. That objective is a "fundamental interest" of the EU society, as reflected in EU's law and policies. Foreign control of TSOs and transmission system owners may in some circumstances pose "genuine and sufficiently serious threats" to such fundamental interest. 60. TSOs and other gas undertakings play a critical role in ensuring SoS within the. They can undermine the EU's SoS strategy either by failing to comply with the legal obligations imposed upon them with a view to ensuring SoS; or by acting in a manner that, while not being contrary to EU law, is not in their own commercial interest, thereby undermining the effectiveness of the market based instruments on which the EU's SoS policies are based. 61. Unlike the authorities of the EU Member States, the governments of third countries may in some cases have important economic and/or political interests which conflict with the EU's own interest in ensuring SoS within the European Union. As a result, third-country governments may, under certain circumstances, have strong incentives to take measures that have the effect of undermining the EU's SoS policies. In addition, a third-country government has at its disposal adequate means to require or induce the TSOs or transmission systems owners 42 Article 11(3) b) of Directive 2009/73/EC. -15-
which it controls, or which are controlled by persons of that country, to act in manners that have the effect of undermining the EU's SoS. 62. Moreover, where the TSO or the transmission system owner is controlled by the government or persons of a third country, the threats to SoS are compounded by the fact that it may be more difficult for the EU authorities to enforce effectively the legal obligations imposed by EU law with a view to ensuring SoS. 63. Article 11 of Directive 2009/73 addresses the threats to SoS posed by the TSOs or the transmission system owners controlled by persons of a third country in a direct, effective and fully calibrated manner. It does so by putting in place a screening mechanism which allows the competent authorities to detect and assess in advance the potential risks to SoS posed specifically by each foreign controlled TSO or transmission system owner on the basis of a careful examination of all the relevant facts. Where warranted on the basis of that case-by-case assessment, the competent authorities may deny access to the transmission market for those operators that would put at risk the SoS or make it conditional upon compliance with appropriate safeguards, thereby preventing the risks to SoS from materialising. This preventive approach ensures a high level of protection against the risks to SoS. 64. The challenged measure is, nevertheless, much less restrictive than other possible alternatives, such as a complete ban on third-country TSOs. The competent authorities must take into account all specific facts and circumstances of each case, including any agreements concluded between the or its Member States and the third country concerned which address the issues of SoS. This caseby-case approach allows the competent authorities to limit the trade-restrictive effects as much as possible, by refusing certification only in those specific instances where it has been positively established that a TSO poses a genuine risk to SoS. In practice, the challenged measure has been applied so far in a manner that has caused only minimal trade restrictions, if any at all. The competent authorities have received three applications for certification under Article 11 of Directive 2009/73/EC, including one where the owner of the transmission system was jointly owned and controlled by a Russian entity. None of the three -16-
applications has been refused on grounds of SoS and all the three TSOs concerned operate currently on the EU market. 65. The SoS certification does not apply in respect of the certification of TSOs controlled by EU persons. But this difference in treatment is fully consistent with the objective pursued by the SoS certification requirement. Indeed, the SoS certification requirement does not apply to TSOs controlled by EU persons because those TSOs do not pose comparable threats to the EU's SoS. 66. Furthermore, the SoS certification requirement does not give rise to any discrimination between services and service suppliers of third countries, let alone to "unjustifiable or disguised discrimination". The SoS certification requirement applies to all TSOs controlled by persons of any third country, without any distinction being made among them, either directly or indirectly, on the basis of their nationality. 67. Russia also claims that, besides the SoS certification requirement, some allegedly additional requirements included in the national laws of Hungary and Lithuania transposing the Directive 2009/73/EC are also inconsistent with Article XVII GATS. As shown in the EU's first written submission, however, these claims are either outside the Panel's terms of reference and/or unfounded. 3.2 ARTICLE II:1 OF THE GATS 68. Russia claims further that Article 11 of Directive 2009/73/EC is inconsistent de jure with Article II:1 GATS. According to Russia, it "conditions a favourable security of supply assessment at least in part on the existence of [a] pre-existing agreement" 43 concluded between the and/or the EU Member State concerned and the third country of origin of the certification applicant which addresses the issues of security of supply. 69. As explained in the EU's first written submission, this claim was not raised in the Panel request and is manifestly outside the Panel's terms of reference. In any event, this claim is unfounded in substance. The SoS requirement applies equally to all transmission system owners or TSOs which are controlled by a person or -17-
persons from any third country or third countries, regardless of the third country of origin. Contrary to Russia's allegations, the certification under Article 11 of Directive 2009/73/EC is not conditional, even "at least in part" 44, upon the existence of an agreement addressing the issues of security of supply. The existence of such an agreement is just one of the facts to be "taken into account" by the NRAs and the Commission. It is neither necessary nor dispositive in itself. Furthermore, there is no basis in Article 11 of the Directive for Russia's contention that only agreements such as the EEAA or the Energy Community Treaty are to be "taken into account". 70. Russia also claims, in the alternative, that the has acted inconsistently with Article II:1 GATS because it has implemented the SoS certification requirement in a manner that, de facto, accords less favourable treatment to Gazprom, a Russian service supplier, than to certain TSOs controlled by persons of other countries. As explained in detail in the EU's first written submission, these claims are partly outside the Panel's terms of reference and, in any event, factually incorrect. 3.3 ARTICLE III:4 OF THE GATT 1994 71. Russia further claims that the "third-country certification measure" is inconsistent with Article III:4 GATT because it has, "on its face", 45 a detrimental impact on the competitive opportunities of gas imported from other WTO Members vis-à-vis domestically produced EU gas. 72. This claim is manifestly outside the Panel's terms of reference. The Panel request did not include any claim under Article III:4 GATT with respect to the "third country certification measure". 73. In any event, Article 11 of Directive 2009/73/EC applies equally to all TSOs controlled by persons of third countries, irrespective of whether the infrastructure operated by each of them is used to transmit domestic and/or imported gas. Russia has not explained, let alone demonstrated, how the challenged measure results in 43 44 45 Russia's first written submission, para. 450. Russia's first written submission, para. 454. Russia's first written submission, para. 502. -18-
different and less favourable treatment being accorded to imported gas. As shown by the, in practice the TSOs controlled by EU persons very often operate infrastructures that are used exclusively or mainly to transmit imported gas, including Russian gas. Conversely, TSOs controlled by persons of third countries operate infrastructures used in part to transmit EU gas. 3.4 ARTICLE VI:1 OF THE GATS 74. Russia claims that Croatia, Hungary and Lithuania act inconsistently with Article VI:1 GATS because they do not "administer" their respective national laws transposing Article 11 of Directive 2009/73/EC in a "reasonable, objective and impartial manner". 75. As explained in the EU's first written submission, none of the three EU Member States concerned has taken yet any measure in order to "administer" its national laws transposing Article 11 of the Directive. There is no basis whatsoever, therefore, for Russia's claim that those three EU Member States' "administration" of their national laws is not reasonable, objective or impartial. In reality, the claim submitted by Russia is not addressed against the "administration" of measures of general application within the scope of Article VI:1. Instead, it is addressed against the "substantive content" of those measures and, more precisely, against the SoS requirement. That requirement, however, is not open to challenge "as such" under Article VI:1 GATS. 76. In any event, the takes issue with Russia's contention that the SoS requirement is insufficiently precise, let alone so imprecise as to "lead necessarily" 46 to an impermissible "administration" of that requirement. While Article 11 of Directive 2009/73/EC does not define explicitly the term "security of supply", the has pointed out a number of other elements that provide sufficient and adequate guidance for interpreting and applying that notion. 3.5 ARTICLE VI:5 OF THE GATS 46 Appellate Body Report, EC - Customs matters, para. 201. -19-
77. Russia further claims that the national laws of Croatia, Hungary and Lithuania transposing Article 11 of Directive 2009/73/EC are inconsistent with Article VI:5 GATS. 78. For the reasons explained in the EU's first written submission, Article 11 of Directive 2009/73/EC and the transposing measures enacted by Croatia, Hungary and Lithuania are fully compliant with each of the three criteria listed in letters (a), (b) and (c) of Article VI:4. Therefore, those measures are consistent with Article VI:5, without it being necessary to examine whether those measures could have been reasonably expected by Russia at the time the commitments were made. 79. First, contrary to Russia's contentions, the mere fact that the measures at issue do not define the notion of SoS does not mean, as just explained, that the SoS certification requirement is not an "objective" and "transparent" criterion within the meaning of Article VI:4 (a) GATS. 80. Second, Russia's allegations under letter (b) of Article VI:4 are based on a fundamental misunderstanding of the scope of that provision. The domestic regulation of services may pursue many legitimate policy objectives in addition to ensuring the "quality" of the services. Letter (b) of Article VI:4 applies only to the extent that a measure is aimed at ensuring the "quality" of the service. It does not apply where, as in the present case, a measure (or a requirement of a measure) pursues a different legitimate policy objective. 81. Third, letter (c) of Article VI:4 applies to "licensing procedures", rather than to "licensing requirements". Russia has not alleged, let alone proven, that the licensing procedures for the submission and processing of certification applications are in themselves restrictive. Instead, Russia limits itself to argue that the underlying substantive licensing requirement (i.e. the requirement that the TSO does not put at risk SoS) is restrictive. This claim, therefore, falls plainly outside the scope of letter (c) of Article VI:4. 4. CLAIMS RELATING TO INFRASTRUCTURE EXEMPTIONS -20-
82. Russia makes several claims regarding the possibility, provided for in the 's legislation, to temporarily exempt certain major new infrastructure projects from the generally applicable unbundling, third party access and regulated tariff requirements. According to Russia, the EU legislation provides for two types of exemptions: the exemption upon request of new major gas infrastructure, which Russia calls the "infrastructure exemption measure", and an alleged "exemption for upstream pipeline networks", which would apply automatically. 4.1 THE ALLEGED EXEMPTION FOR UPSTREAM PIPELINE NETWORKS 83. The will clarify from the outset that, contrary to Russia's contentions, EU legislation does not provide for any exemption favouring upstream pipeline networks. The specific regime applicable to this type of pipelines is justified by their characteristic features, which are different from those of transmission pipelines. Upstream pipelines are linked to gas production activities on a particular site and can usually only be used by the undertaking exploiting that site. However, if other undertakings would be in a factual position to access that pipeline, Article 34(1) of Directive 2009/73/EC requires Member States to ensure that access. Therefore, Russia assumes incorrectly that the specific rules applying to upstream pipeline networks grant them a "blanket exemption" from the generally applicable obligations. This misguided assumption underlies both Claim XXI, invoking a violation of Article I:1 of the GATT 1994, and Claim XXII, regarding a breach of Article II:1 of the GATS. 4.2 THE EXEMPTION FOR NEW MAJOR INFRASTRUCTURE 84. In respect of this exemption, which is currently provided for in Article 36 of Directive 2009/73/EC, Russia raises 4 separate claims (Claims XVIII to XX and Claim XXIII). They are all without merit. 4.2.1 Article X:3(a) of the GATT 1994-21-
85. Russia starts by claiming that the has failed to administer the infrastructure exemption measure in a uniform, impartial and reasonable manner, thus acting in violation of Article X:3(a) of the GATT 1994. 86. This claim is unfounded for several reasons. 87. First, Russia asserts that Article 36 of Directive 2009/73/EC "affects" the sale, distribution and transportation of natural gas within the meaning of Article X:1 of the GATT, but failed to demonstrate it. The purpose of the exemption is to incentivise investment in new infrastructure or in significant increases of capacity in existing infrastructure. It is not clear how and to what extent those incentives for expanding and improving infrastructure affect the sale, distribution and transportation of natural gas. It should be noted that the provisions at issue only apply if a request for an exemption from the general requirements on unbundling, third-party access or regulated tariffs is submitted to the competent authorities of one or more EU Member States. Individual exemption decisions, which are not acts of general application, may be subject to conditions seeking to ensure that such temporary exemptions are not, inter alia, detrimental to competition. Therefore, it cannot be presumed that the sale, distribution and transportation of natural gas are necessarily affected by the measure of general application that allows new infrastructure to be exempted from certain obligations imposed by Directive 2009/73/EC. 88. Second, Russia's comparison of the decisions taken by the Commission or national regulatory authorities in respect of 5 pipeline investment projects does not show the supposed flaws or inconsistencies in the administration of the measure. 89. In fact, an exemption may only be granted if the major infrastructure project complies with all of the 5 cumulative criteria laid down in Article 36(1) of Directive 2009/73/EC. Importantly, Article 36(3) explicitly requires the competent national regulatory authority to decide on a case-by-case basis whether the exemption is warranted. The assessment of a major infrastructure project in the light of those 5 criteria is not a mechanical operation. It requires detailed economic and legal analysis and its outcome will be necessarily determined by the characteristics of the infrastructure project and of the markets concerned. -22-