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In the World Trade Organization

CANADA – MEASURES RELATING TO THE FEED-IN TARIFF PROGRAM

(DS426)

Second Written Submission

by the European Union

Geneva, 26 April 2012

Canada – FIT Program European Union(DS426) Second Written Submission

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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

A. THE FIT PROGRAM AND ITS RELATED CONTRACTS CAN BE CHARACTERISED AS A "FINANCIAL

CONTRIBUTION" OR AS A FORM OF "INCOME OR PRICE SUPPORT".................................................................. 2B. 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 .............................. 6C. SUGGESTED ANALYTICAL STEPS TAKEN BY THE PANEL ................................................................................ 7D. MOST RELEVANT FEATURES OF THE FIT PROGRAM AND ITS RELATED CONTRACTS ...................................... 8E. LEGAL CHARACTERISATION OF THE FIT PROGRAM AND ITS RELATED CONTRACTS..................................... 10

1. Income or price support in the sense of Article XVI of the GATT 1994 ........................................... 102. Financial contribution...................................................................................................................... 13

F. THE FIT PROGRAM AND ITS RELATED CONTRACTS CONFER A BENEFIT UNDER ARTICLE 1.1(B) OF THE SCMAGREEMENT............................................................................................................................................... 161. Article 14(d) of the SCM Agreement is not applicable in the present case and, in any event,

Canada's suggested benchmark is inappropriate............................................................................. 182. The existence of benefit under Article 1.1(b) of the SCM Agreement has to be determined by

reference to the marketplace ............................................................................................................ 183. The proper market benchmark should relate to the market conditions for electricity in Ontario,

regardless of how it is generated...................................................................................................... 214. 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 .......................... 225. The HOEP is an appropriate benchmark in this case ...................................................................... 246. Any of the other alternative benchmarks show the existence of benefit ........................................... 27

(a) The weighted average wholesale rate received by all generators in Ontario other than FIT and RESOP generators ............................................................................................................................................... 27

(b) The "commodity charge" portion of retail prices for electricity in Ontario ............................................ 28(c) The average wholesale rate for electricity in competitive wholesale markets outside of Ontario........... 29

7. 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......................................................................... 29

8. Concluding remarks as to the existence of "benefit"........................................................................ 29G. CONCLUSION .............................................................................................................................................. 30

III. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE NOT COVERED BY ARTICLE III:8(A) OF THE GATT 1994 ..................................................................................................................... 30

A. ARTICLE III:8(A) OF THE GATT 1994 COVERS REQUIREMENTS DIRECTLY RELATING TO THE PRODUCT

PURCHASED BY THE GOVERNMENT ............................................................................................................. 31B. THE FIT PROGRAM DOES NOT INVOLVE A "PURCHASE" (OR PROCUREMENT) ............................................. 34C. THE FIT PROGRAM DOES NOT INVOLVE A PURCHASE "FOR GOVERNMENTAL PURPOSES" ........................... 34D. ANY ALLEGED PURCHASE OF ELECTRICITY THROUGH THE FIT PROGRAM IS WITH A VIEW TO COMMERCIAL

RESALE ....................................................................................................................................................... 37E. ANY ALLEGED PURCHASE OF ELECTRICITY THROUGH THE FIT PROGRAM IS WITH A VIEW TO BEING USE IN

THE PRODUCTION OF GOODS FOR COMMERCIAL SALE ................................................................................. 41F. CONCLUSIONS ............................................................................................................................................ 42

IV. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH ARTICLE 2.1 OF THE TRIMS AGREEMENT, IN CONJUNCTION WITH PARAGRAPH 1(A) OF ITS ANNEX.......................................................................................................................................................... 42

V. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH ARTICLE III:4 OF THE GATT.................................................................................................................................... 42

VI. CONCLUSIONS........................................................................................................................................... 43


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TABLE OF CASES

Short Title Full Case Title and Citation

Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377

Canada – Wheat Exports and Grain Imports

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

China – Auto Parts 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

EC – Countervailing Measures on DRAM Chips

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

EC and Certain Member States – Large Civil Aircraft

Appellate Body Report, European Communities and Certain Member States –Measures Affecting Trade in Large Civil Aircraft, WT/DS316/AB/R, adopted 1 June 2011

Japan – Alcoholic Beverages II

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

Japan – DRAMs (Korea) 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

Mexico – Taxes on Soft Drinks 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

US – Anti-Dumping and Countervailing Duties (China)

Appellate Body Report, United States – Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WT/DS379/AB/R, adopted 25 March 2011

US – Countervailing Measures on Certain EC Products

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

US – FSC(Article 21.5 – EC II)

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

US – Large Civil Aircraft (2nd complaint)

Appellate Body Report, United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint), WT/DS353/AB/R, adopted 23 March 2012

US – Line Pipe 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

US – Softwood Lumber IV 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

US – Softwood Lumber IV 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


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Short Title Full Case Title and Citation

US – Textiles Rules of Origin 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

US – Upland Cotton Appellate Body Report, United States – Subsidies on Upland Cotton, WT/DS267/AB/R, adopted 21 March 2005, DSR 2005:I, 3


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EXHIBITS

Number Title

EU-20 European Wind and Energy Association, The Economics of Wind Energy (March 2009)(extracts)

EU-21 Intergovernmental Panel on Climate Change, Renewable Energy Sources and Climate Change Mitigation (2012) (extracts)

EU-22 Definition of "Necesidad", Real Academia Española

EU-23 Definition of "Besoin", Le Petit Robert

EU-24 Defintion of "Dans le commerce", Le Petit Robert

EU-25 Definition of "Comercio", Real Academia Española


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I. INTRODUCTION

1. At the outset, the European Union 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 European Union 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 1994. The European Union 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 European Union 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 1994.

II. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH

ARTICLES 3.1(B) AND 3.2 OF THE SCM AGREEMENT

3. The European Union 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 European Union 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. 2.


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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 European Union 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".3

7. 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 Canada's first written submission, para. 60.3 Canada's Opening Oral Statement, First Meeting with the Panel, para. 84.


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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 alsobe 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'".4

8. To illustrate this with a drawing. Canada perceives Article 1.1(a) of the SCM Agreement as follows:

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:

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 1.1.

4 See also Appellate Body Report, EC and Certain Member States – Large Civil Aircraft, footnote 1634

(emphasis added).

FinancialContribution

Income or Price

SupportA

C

B


Incomeor

Price Support

A

B

C

Drawing 2 Drawing 3


Income or Price

Support

A

C

B

Drawing 1


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11. The European Union 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 European Union 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


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addition to features of income or price support schemes which would not amount to financial contribution).5

15. Consequently, contrary to what Canada argues, the European Union 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 European Union 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 European Union 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:

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 European Union 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 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".

6 The European Union 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. 163 – 172). Likewise, in US – FSC (Article 21.5 II – EC), the

Financial Contribution

Income or PriceSupport

Drawing 4


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a "financial contribution", or both. And indeed the European Union 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

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. 8.221). 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. 6.141). Similarly, the different provisions in Article 1.1(a) of the SCM Agreement "constitute alternative bases for a claim".

7 Canada's opening oral statement, first meeting with the Panel, para. 91.8 Canada's opening oral statement, first meeting with the Panel, para. 92.


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same time as a purchase of goods by the government and as a direct transfer of funds or income or price support.

20. The European Union 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".11

21. Consequently, contrary to what Canada argues, the European Union 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 European Union 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 European Union 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 European Union requests the Panel to follow the Appellate Body's guidance in US – Large Civil Aircraft:

9 Panel Report, Japan – DRAMs (Korea), para. 7.439.10 Panel Report, Japan – DRAMs (Korea), note 613, citing Appellate Body Report, US – Countervailing

Measures on Certain EC Products, para. 113.11 Appellate Body Report, US – Large Civil Aircraft, para. 613, footnote 1287.


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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 measureproperly 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.12

24. Thus, in the European Union'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 European Union considers the following features as the most central in the present case.13

26. 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.

12 Appellate Body Report, US – Large Civil Aircraft, paras. 586 and 589 (footnotes omitted).13 See Japan's first written submission in DS412, paras. 113 – 180.


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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 generatingprojects 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

14 FIT Rules, Section 1.1 (Exhibit EU-4, Exhibit JPN-119). 15 FIT Rules, Section 1.1 (Exhibit EU-4, Exhibit JPN-119).16 In this sense, the European Union 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).

17 FIT Rules, Section 1.2 (Exhibit EU-4, Exhibit JPN-119).


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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 European Union'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 European Union 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 European Union 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 European Union 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 European Union 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 1994

33. The European Union 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).


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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 wasmeant to incorporate, within the notion of "subsidy" in the SCM Agreement, what was already considered as falling within that notion since the GATT 1947.22

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

19 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').

20 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").

21 European Union's first written submission, paras. 35 and 36.22 European Union's first written submission, para. 34.


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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 European Union 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 European Union 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 European Union 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").


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2. Financial contribution

39. As explained in our first written submission, the European Union 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 European Union 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 European Union'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.

24 European Union's first written submission, paras. 45 – 50.25 See Canada's Opening Oral Statement, First Meeting with the Panel, paras. 12 and 14.26 See Canada's Opening Oral Statement, First Meeting with the Panel, paras. 86 – 90.27 Thus, for instance, in a procurement context electricity can be provided to the government by

delivering it to government buildings or to public infrastructure.28 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 tothe government by the recipient, in contrast to the first sub-clause of that paragraph, where the goods are provided by the government").

29 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


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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 FITGenerators are instructed not to produce electricity).32 The European Union 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 European Union 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").

30 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.

31 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.

32 See FIT Contract, Exhibit B, Article 1.5 (Exhibit EU-5, Exhibit JPN-127).33 Canada's opening oral statement, first meeting with the Panel, paras. 11 – 34.


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47. First, the fact that the OPA is assigned, or may otherwise benefit from, by-products from the production of renewable energy (as stated in Article 2(10)(a) of the FIT Contract) does not imply that the OPA is purchasing electricity. Environmental attributes, including carbon credits, may be considered as separate products. The fact that the OPA is acquiring "rights, title and interest" in some environmental attributes related to the electricity produced by the FIT Generators does not mean that the OPA is purchasing the electricity itself. Moreover, the OPA does not acquire environmental attributes for all purposes or all environmental attributes. Some (notably in connection to further support programmes) are kept by the FIT Generator.34 Thus, the fact that the OPA gains rights over certain environmental attributes derived from the production of electricity by the FIT Generator does not show that the OPA purchases electricity.

48. Second, the fact that the OPA can claim revenue (80%) from Future Contract Related Products does not imply, contrary to what Canada asserts,35 that the OPA purchases electricity. It merely shows that the OPA is entitled to a share of the future profits generated by the FIT Generator. If anything, it helps characterise the FIT Contracts as a profit sharing or a joint venture agreement with respect to products (i.e., Future Contract Related Products) for which the FIT Generator remains as the only owner. Again, this does not show that the OPA actually purchases electricity.

49. Third, the fact that the OPA commits to paying sales taxes on the supply of electricity by the FIT Generators does not necessarily imply that the OPA is the actual buyer. It is an issue of tax autonomy to decide the operations subject to taxation36 or the most efficient methods of tax collection.

50. Fourth, contrary to what Canada asserts, the FIT Contract is not titled "power purchase agreement", but rather "FIT Contract". Canada's attempts to find references to "power purchase agreement" in the text of the FIT Contract are unavailing and indeed show that there is a distinction between "the FIT Contract and other power purchase agreement with the OPA".37 The European Union observes that the term "Pre-COD Facilities" does not appear as such in the FIT Contract so such a reference is of questionable weight. In any event, such reference in the definition of "Pre-COD Facilities" does not necessarily show that the FITContract is a category of power purchase agreements. Rather, it defines the term by reference to facilities having FIT Contracts or other types of contracts of similar (but not identical) nature. Moreover, the fact that the FIT Contract is signed between the OPA and the FIT Generator does not imply that any reference to the terms "purchased hereunder" or "sold hereunder" automatically means that the electricity produced by the FIT Generators is purchased by the OPA. In this respect, the European Union recalls that, according to Section 1.2 of the FIT Rules (titled "Participation in the FIT Program"), the Applicant commits to make the

34 FIT Contract, Standard Definitions, Appendix I, para. 85 ("but excluding…") (Exhibit JPN-135).35 Canada's Opening Oral Statement, First Meeting with the Panel, para. 20.36 Indeed, the European Union observes that certain supplies are exempted from sales taxes (GST/HST)

(see http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/gnrl/txbl/xmptgds-eng.html, last visited on 25 April 2012).

37 Canada's Opening Oral Statement, First Meeting with the Panel, para. 24.


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necessary investments and enter into the 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". This is the essence of the FIT Contract, as noted by Canada several times,38 i.e., that the OPA pays FIT Generators in return for delivering electricity into the grid. However, those payments are not in exchange of electricity provided to the OPA. Thus, Canada's struggles to find any language that support its characterisation of the FIT Contracts as "power purchase agreements" are without merit. It is precisely the lack of clarity and the ambiguity as to its characterisation which draws into question the characterisation alleged by Canada. Notably, while the FIT Generator is referred to under the FIT Contract as "the Supplier", the OPA is not referred to as "the Buyer". And even if there are references to the electricity as being sold, delivered or purchased, it is not clear at all that the OPA is the buyer.

51. In sum, the different bits and pieces mentioned by Canada in order to characterise the FIT Contract as a "power purchase agreement" and thus the FIT Program and its related contracts as purchases of goods under Article 1.1(a)(1)(iii) of the SCM Agreement are unwarranted. The language used in the FIT Contract is not determinative and the characterisation of the measure at issue as "procurement" or as an acquisition by Canada is not dispositive of the Panel's analysis.39 Rather, it is an issue of legal characterisation of the facts before the Panel as falling or not within particular provisions of the SCM Agreement.

52. Consequently, for the purpose of characterising the measures at issue under the "financial contribution" category, the European Union maintains that an examination of the most central features of the FIT Program and its related contracts leads to the conclusion that they amount to a "direct transfer of funds" under Article 1.1(a)(1)(i) of the SCM Agreement, since the OPA commits to paying in exchange of the FIT Generators supplying the electricity into the grid.

53. In any event, should the Panel agree with Canada's characterisation of the measure as a government purchase of goods, the European Union submits that the first element of the subsidy definition will be met and, as a result, the validity of the claim advanced by the European Union concerning the breach of Article 3 of the SCM Agreement would not be affected. The Panel would then have to examine whether the FIT Program and its related contracts confer a benefit, an issue to which we turn in the next section.

F. The FIT Program and its related contracts confer a benefit under Article 1.1(b) of the SCM Agreement

54. Canada argues that, in accordance with Article 14(d) of the SCM Agreement, locating a proper benchmark in the present case implies a benchmark that reflects the prevailing market conditions for wind and solar electricity in Ontario.40

38 E.g., Canada's first written submission, para. 16; and Canada's Opening Oral Statement, First Meeting

with the Panel, para. 13.39 See Appellate Body Report, US – Large Civil Aircraft (2nd Complaint), para. 586; see also id., paras.

593 and 604.40 Canada's opening oral statement, first meeting with the Panel, paras. 101 – 103.


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According to Canada, the prices of electricity produced from different generating technologies cannot be fairly compared in view of the different production costs and operating conditions of all generating technologies. Thus, Canada considers that the Panel should compare the FIT rates to a benchmark located from an examination of the conditions on which wind and solar electricity are normally exchanged in Ontario since the fundamental condition of purchase under the FIT Program is that renewable electricity is being purchased.41

55. Canada also argues that the focus of any benefit analysis must be on the recipient and that, by focusing on the views of the end-consumers as not distinguishing between electricity generated from renewable or non-renewable sources, the European Union's benchmark on non-renewable energy is incorrect. According to Canada, it is only by focusing on the actual suppliers and purchasers of wind and solar electricity in Ontario that the prevailing market conditions can bedetermined.42

56. Moreover, Canada maintains that the HOEP is an inappropriate benchmark for FIT wind and solar rates because (i) the HOEP is essentially a price based on the production of non-renewable electricity; (ii) the HOEP is the result of a system concerning the physical distribution of electricity in Ontario and does not determine what the appropriate price for electricity is; (iii) the IESO market mechanism is not the classical competitive market where supply and demand meet; and (iv) even if the HOEP were to be established by market forces, it does not account for the cost of producing renewable electricity, the central condition of the purchase under the FIT Program.43

57. Finally, Canada argues that none of the alternative market benchmarks put forward by the European Union can be appropriate benchmarks since they do not take into account the fundamental condition of purchase under the FIT Program, namely, that only renewable electricity is to be supplied by a FIT producer.44

58. In sum, Canada's arguments that (i) Article 14(d) of the SCM Agreement is applicable in the present case; (ii) a proper market benchmark in this case must locate the conditions on which wind and solar electricity are normally exchanged in Ontario, rather than on electricity prices from non-renewable sources, since the product purchased is electricity from particular renewable sources and different generating technologies lead to different electricity prices; (iii) the HOEP is not an appropriate market benchmark in the present case; and (iv) none of the alternative market benchmarks suggested by the European Union is appropriate since they fail to take into account the fundamental condition of purchase under the FIT Program, i.e., that only renewable electricity is to be supplied by a FIT Generator. The European Union will address each of these arguments below.

41 Canada's first written submission, para. 66.42 Canada's opening oral statement, first meeting with the Panel, paras. 105 – 111.43 Canada's opening oral statement, first meeting with the Panel, paras. 114 – 118.44 Canada's first written submission, para. 4.


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1. Article 14(d) of the SCM Agreement is not applicable in the present case and, in any event, Canada's suggested benchmark is inappropriate

59. The European Union considers that Article 14(d) of the SCM Agreement is not applicable in the present case since, for the reasons explained before, the OPA does not purchase electricity from the FIT Generators.

60. In any event, applying Article 14(d) to the facts of this case, Canada considers that the Panel should compare the FIT rates to a benchmark located from an examination of the conditions on which wind and solar electricity are normally exchanged in Ontario.45 In the European Union's view, Canada is asking the Panel to compare the FIT rates with the FIT rates themselves since wind and solar electricity in Ontario is only produced under the umbrella of the FIT Program. In other words, the FIT Program, including the FIT Price Schedule, and as implemented through each FIT Contract, determines the price for electricity from wind and solar electricity generators. There is no other price in Ontario for that electricity as potential generators would never give up the generous conditions automatically offered to them by the FIT Program. Thus, Canada is asking for a circular and thus meaningless comparison.

61. At most, Canada's suggested benchmark unveils the market reality for the generation of wind and solar electricity in Ontario, i.e., that there would be no generator ready to make the necessary investments in Ontario, absent the FIT Program. In other words, the conditions on which wind and solar electricity are normally exchanged in Ontario are those of the FIT (subsidised) program, absent which no exchanges would take place in Ontario, as the incentive nature of the FIT Program itself shows.

2. The existence of benefit under Article 1.1(b) of the SCM Agreement has to be determined by reference to the marketplace

62. The European Union submits that the existence of benefit in this case has to be determined by reference to the marketplace, i.e., what the FIT Generators would have obtained from the market in Ontario absent the FIT Program.

63. In Canada – Aircraft, the Appellate Body noted that "the ordinary meaning of 'benefit' clearly encompasses some form of advantage"46 and that "the second element in Article 1.1 is concerned with the 'benefit… conferred' on the recipientby [the] governmental action".47 Thus, in order to determine whether "benefit" exists within the meaning of Article 1.1(b) of the SCM Agreement, thegovernment action, regardless of its form (i.e., financial contribution or income/price support) has to confer some form of advantage to the recipient.

45 Canada's first written submission, para. 66.46 Appellate Body Report, Canada – Aircraft, para. 153.47 Appellate Body Report, Canada – Aircraft, para. 156.


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64. The Appellate Body also noted that, in order to identify whether such an advantage exists, some kind of comparison or counterfactual is required: in particular whether the government action makes the recipient "better off" than it would otherwise have been, absent that government action. According to the Appellate Body, "the marketplace provides an appropriate basis for comparison … because the trade-distorting potential of a [government action] can be identified by determining whether the recipient has received [a form of "financial contribution" or income/price support] on terms more favourable than those available to the recipient in the market".48 According to the Appellate Body, "Article 14, which we have said is relevant context in interpreting Article 1.1(b), supports our view that the marketplace is an appropriate basis for comparison [since a] 'benefit' arises under each of the guidelines if the recipient has received a 'financial contribution' on terms more favourable than those available to the recipient in the market".49

Thus, the essence of the determination of the existence of benefit under Article1.1(b) is to compare, on the one hand, what the recipient obtained from the government action with, on the other hand, what the recipient would have obtained from the market, absent the government action.

65. In Japan – DRAMs the Appellate Body recalled the reference to the market standard in the following terms:

The relevant market may be more or less developed; it may be made up of many or few participants. ... In some instances, the market may be more rudimentary. In other instances, it may be difficult to establish the relevant market and its results. But these informational constraints do not alter the basic framework from which the analysis should proceed. ... There is but one standard—the market standard.50

66. In EC and Certain Member States – Large Civil Aircraft, the Appellate Body observed that:

The marketplace to which the Appellate Body referred in Canada – Aircraft reflects a sphere in which goods and services are exchanged between willing buyers and sellers. A calculation of benefit (…) demands an examination of behaviour on both sides of a transaction, and in particular in relation to the conditions of supply and demand as they apply to that market.51

67. Similarly, in US – Softwood Lumber IV, the Appellate Body noted that:

[t]he text of Article 14 (d) [of the] SCM Agreement does not qualify in any way the 'market' conditions which are to be used as the benchmark … [a]s such, the text does not explicitly refer to a 'pure' market, to a market 'undistorted by government intervention', or to a 'fair market value'."52

48 Appellate Body Report, Canada – Aircraft, para. 157.49 Appellate Body Report, Canada – Aircraft, para. 158.50 Appellate Body Report, Japan – DRAMs (Korea), para. 172.51 Appellate Body Report, EC and Certain Member States – Large Civil Aircraft, para. 981.52 Appellate Body Report, US – Softwood Lumber IV, para. 87.


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68. Thus, the existence of benefit has to be determined by reference to the market as it is, the market where the government action takes place, in this case Ontario.

69. The main features of the FIT Program and its related contracts with respect to the benefit analysis are that, pursuant to them, the OPA (i) guarantees rates that the FIT Generators could not obtain from the market; and (ii) provides such above-market rates for a period of 20 years, including generous price escalation conditions, thereby shielding the FIT Generators from any market risks. Those conditions are provided regardless of the scale or generation capacity of the project.

70. The FIT Program and its related contracts are the result of the OPA's efforts to facilitate new generation investment by private producers that the wholesale market was incapable of encouraging.53 They are, as Canada qualifies them, "incentives for long-term investment to meet forecasted demand".54 Thus, absent the FIT Program, the FIT Generators would not be able to participate on the market.55 This shows, in the European Union's view, that absent the government measure, the FIT Generators would not have been able to secure the FIT rates and the other favourable conditions included in the FIT Contracts.

71. The Panel may find the existence of benefit on this basis alone, since the Panel is not required to determine the amount of benefit under Article 1.1(b) of the SCM Agreement (merely its existence).56 Indeed, in other cases, panels and the Appellate Body have determined the existence of benefit in view of evidence showing that, absent the government action, the recipient would have obtain nothing from the market. This is the case, for instance, of equity infusions or funds provided to rescue companies in economic difficulties where no rational investor (i.e., the market) would have provided the same funds on the same terms.57

53 Canada's first written submission, para. 71.54 Canada's first written submission, para. 72, referring to Hogan Report, Exhibit CDA-2, p. 18.55 See also Canada’s first written submission in DS412, paras. 27, 35-36, 137, 140, 149-150; and Hogan

Report, pp. 1, 16-18, 25, 31, 36 (Exhibit CDA-2).56 Panel Report, EC – Countervailing Measures on DRAM Chips, para. 7.178 ("In our view, there are

two distinct questions to be addressed. The first relates to the existence of a benefit, the second deals with the calculation of the amount of the benefit. In other words, a finding that the financial contribution was provided on terms more favourable than what the market place provided for is, in our view, sufficient to find that a benefit existed. Our view is based on our interpretation of the term benefit as it appears in Article 1.1 of the SCM Agreement which determines when a subsidy is deemed to exist, read in the context of the SCM Agreement and Article 14 thereof, in particular. Whether such a finding allows an authority to consider the full amount of the financial contribution as the amount of the benefit and treat it like a grant, is, in our view, a different question which relates to the calculationof the amount of the benefit, rather than its existence").

57 See e.g., Panel Report, EC – Countervailing Measures on DRAM Chips, para. 7.196 ("The record shows that, by January 2001, Hynix's credit rating was BB+179, which implies that under the government's own admission Hynix would not have been able to issue bonds on the market. It is therefore clear to us that the KDB purchase of Hynix bonds as part of the KDB Debenture Programme, provided an advantage to Hynix compared to what it would have been able to obtain on the market") and para. 7.205 ("We first recall that, with regard to the existence of a benefit, it seems that in this case the basis for concluding that the creditor banks were directed to participate in the October 2001 Restructuring Programme was precisely the fact that no reasonable market investor would have purchased Hynix CBs in May-June 2001"); Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1375 (as confirmed by the Appellate Body, para. 1012).


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3. The proper market benchmark should relate to the market conditions for electricity in Ontario, regardless of how it is generated

72. Should the Panel consider that further analysis is required to determine the existence of benefit in the present case, the European Union considers that the proper benchmark in this case should relate to the market conditions for electricity in Ontario, regardless of how it is generated.

73. Electricity is a commodity, physically alike in all respects.58 One kilowatt-hour of electricity is perfectly substitutable for another kilowatt-hour of electricity, regardless of whether it was generated from a renewable or non-renewable source. In this respect, they belong to the same product market. As the Appellate Body noted in US – Upland Cotton, "it seems reasonable to conclude that two products would be in the same market if they were engaged in actual or potential competition in that market".59

74. Moreover, in Ontario the environmental effects of different energy sources are not reflected in the prices consumers pay, which is the result of a blended price. Consumers pay the HOEP plus the Global Adjustment, which do not distinguish among the different generating technologies.60

75. The European Union also observes that Canada has not demonstrated that there is a separate product market with respect to electricity produced by particular sources of renewable energy in Ontario. It merely argues that consumer preferences are irrelevant to determine the market benchmark in this case, since the focus of any benefit analysis must be on the recipient, which supplies wind and solar electricity in this case.61 Canada misses the point. A proper market benchmark (and certainly in the "purchase of goods" scenario advocated by Canada) must take into account whether there are similar or competing products on the market.62 The fact that the recipient supplies a particular category of a product does not imply that the proper market benchmark is limited by such category if there are similar or competing products on the same market. Thus, the fact that the product under consideration in the FIT Program is electricity produced from renewable sources is irrelevant to determine the proper benchmark since consumers in Ontario buy and use electricity without any distinction as to its generation source.

76. In addition, in the circumstances of this case, the Government of Ontario has established a mechanism to regulate the electricity market by reference to a single price for electricity (HOEP) regardless of how it is generated. Consumers also pay a single price for electricity (through the RPP) regardless of how it is generated.

58 Hogan Report, p. 2 ("[E]very kilowatt-hour … of electricity flowing into homes and business at any

particular moment is identical from a physical point of view") (Exhibit CDA-2).59 Appellate Body Report, US – Upland Cotton, para. 408. See also Appellate Body Report, EC and

Certain Member States – Large Civil Aircraft, paras. 1120-1121 and footnotes 2467-2468.60 Japan's first written submission in DS412, paras. 81 – 83.61 Canada's opening oral statement, first meeting with the Panel, paras. 105 – 111.62 Appellate Body Report, EC and Certain Member States – Large Civil Aircraft, para. 975 ("[A] proper

market benchmark is derived from an examination of the conditions pursuant to which the goods or services at issue would, under market conditions, be exchanged").


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77. Consequently, contrary to what Canada maintains, in the present case the proper benchmark should relate to the market conditions for electricity in Ontario, regardless of how it is generated.

78. In any event, in the European Union's view, there is no reason to believe that consumers willing to buy electricity generated from renewable sources would have a preference for electricity for more expensive technologies rather than less expensive technologies. In other words, insofar as the electricity is produced from "clean" sources, consumers may not have further preferences as to the specific type of source. This being said, should the Panel consider that the relevant market benchmark in the present case should take into account the existence of a distinction between electricity generated from renewable and non-renewable sources in Ontario, the European Union considers that the Panel could also determine the existence of benefit on the basis of the different rates guaranteed within the FIT Program. In this respect, the European Union observes that the FIT Price Schedule reflects lower prices for other types of electricity generated from renewable sources, such as waterpower, biomass or biogas, when compared with wind and solar.63 Thus, even considering renewable electricity as a market separate from non-renewable energy in Ontario (quod non), there would be a benefit granted to the generators of wind and solar electricity.

4. 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

79. The European Union considers that, contrary to what Canada maintains, an appropriate market benchmark in this case does not have to reflect the cost of producing renewable electricity. Rather, the relevant question in identifying the appropriate market benchmark in this case is what is the market value of the product (i.e., electricity) for which the FIT Program and its related contracts provide long-term, guaranteed rates.

80. In the context of provision of goods by the government, the Appellate Body noted that it is not the cost to the government in making the product that is the reference to determine the existence of benefit; rather, it is the market value of the product in question.64 In the European Union's view, the same applies in cases of purchases of goods. The existence of benefit cannot be determined by reference to the cost of production of the producer of the good in question; rather, it is the market value of the product purchased by the government which has to be examined in order to determine whether the government paid adequate remuneration in accordance to the "prevailing market conditions". Quite telling, among the factors included within the notion of "prevailing market conditions" in Article 14(d) there is no reference to "cost of production".

81. The fact that the FIT rates at least cover the high cost of production of the FIT Generators does not show that there is no benefit in the present case. Rather, it

63 See FIT Price Schedule (Exhibit JPN-030).64 Appellate Body Report, EC and Certain Member States – Large Civil Aircraft, paras. 981 – 982.


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shows that, without the FIT Program, no investor would be willing to produce wind and solar energy in Ontario in view of such high costs of production and in view of the fact that they would not be able to ensure an appropriate return in that market.

82. In any event, even if the cost of generating wind and solar electricity would have to be taken into account, as Canada alleges, the European Union submits that the structure of the FIT Program leads to payments in excess of costs. Indeed, the cost of producing wind and solar electricity in general mainly depends on the location of the generating facilities. The capital costs involved in the setting up of a generation facility should not vary too much between different countries because the generation equipment amounts to the largest share of the installation of a generation facility (and thus the capital costs), and those goods can be traded. What makes the difference is the availability of the resources –wind and sun. The fact that FIT rates are standardised (i.e. they are the same for all generators) regardless of the location of the generation facilities and their actual production capacity should logically lead to a higher return for those FIT Generators that will set up facilities in good locations.

83. To illustrate the point more precisely: all wind power generators are entitled to the same FIT rate, regardless of size (which is an important factor in terms of overall efficiency), with the only differentiation being between onshore and offshore. It is a fact that with efficient equipment and in good locations wind farms can generate electricity at a fraction of the guaranteed FIT rate: a cost around US$ 7-8 cents/kWh seems feasible.65 In sub-optimal locations, the capacity factor of wind farms can be low and, consequently, the cost of generation per kWh can be significantly higher. Yet, the structure of Ontario's FIT Program is such as to base payments not on the actual potential of each project, but on a previously defined standard rate. As it could not be otherwise, project developers rush to the best wind locations in order to maximise the benefits they obtain from relatively high FIT rates.

84. As for solar energy, Ontario is not as well endowed as lower latitudes, and cannot be compared to best locations in Southern US or EU regions. Thus, the decision of the Government of Ontario to promote a type of energy with a low capacity factor in the geographical and climatic circumstances of Canada is one that implies a need for support or incentives. Even if FIT rates for solar facilities include some differentiation on the basis of the size of the project, the fact that the rates are standardised may also lead, as for wind, to overcompensation in some cases (a range between US$ 20-40 cents/kWh may be obtained in good –lower part of the range– to average –upper part of the range– locations).66

65 See EWEA, The Economics of Wind Energy (March 2009), p. 9 (Exhibit EU-20) (a full copy of this

report is available at http://www.ewea.org/fileadmin/ewea_documents/documents/00_POLICY_document/Economics_of_Wind_Energy__March_2009_.pdf); and IPCC Report, Renewable Energy Sources and Climate Change Mitigation (Exhibit EU-21) (a full copy of this report is available at http://srren.ipcc-wg3.de/report/IPCC_SRREN_Full_Report.pdf).

66 IPCC Report, Renewable Energy Sources and Climate Change Mitigation (Exhibit EU-21).


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85. It is interesting to underline that, as mentioned before,67 the predecessors of the FIT Program were administered based on the best prices offered by generators through a bidding process. That element of competition was replaced by standardised rates which had to account for the higher costs of inducing the development of local manufacturing capacity (pursuant to the domestic content requirements). Renewable generation capacity could therefore be deployed in Ontario at lower cost. Thus, the European Union maintains that the structure of the FIT Program leads to payments in excess of cost of production.

5. The HOEP is an appropriate benchmark in this case

86. The European Union maintains that, in the circumstances of this case, the HOEP is an appropriate benchmark to determine the existence of benefit.

87. First, the HOEP represents that wholesale electricity price in Ontario. It is the referenced price which triggers additional payments by the Government of Ontario to generators (including the FIT Generators) which have regulated rates.

88. Second, even if the HOEP is the result of a system concerning the physical distribution of electricity in Ontario and, thus, in this respect, cannot be characterised as a "market" price in the economic sense, it is the market price in the nominal sense and for the purpose of the benchmark analysis under Article 1.1(b) of the SCM Agreement. It is undisputed that "but for" the long-term, guaranteed rates provided by the FIT Program, the FIT Generators would only be able to supply their electricity into the grid at the wholesale electricity market price, that is, at the MCP/HOEP. Absent the FIT Program, a producer of electricity from wind or solar sources, like the FIT Generator, would have to become a market participant under the IESO market rules and supply its electricity within the wholesale electricity market, at the HOEP. Thus, the HOEP becomes the nominal market price in the circumstances of this case, i.e., the counterfactual that would prevail absent the government measures at issue.

89. Canada confirms that 8% of Ontario generators do receive only the HOEP. However, Canada considers that this fact does not make the HOEP a "market" price since this 8% are old government-owned generation facilities whose capital costs have been largely depreciated. In other words, they can set their prices for the electricity they produce at a very low level and thus obtain the HOEP only. Canada also notes that most users of electricity in Ontario pay the price required of them by the system, i.e., the prices regulated by the OEB.

90. In the European Union's view, Canada again confirms the validity of the HOEP as a market benchmark in the present case. In fact, the alleged 8% figure of generators receiving only the HOEP appears to be around 16% of total electricity delivered in 2010.68 In any event, regardless of the figure, the fact of the matter is that there are some generators whose cost structure allows them to sell their electricity and receive only the HOEP. The FIT Generators simply cannot since their cost

67 See para. 27, footnote 16 of this submission.68 See Japan's first written submission in DS412, para. 33, delivered electricity in 2010 with respect to

OPG's unregulated assets.


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structure is different. To conclude that the HOEP paid to those generators cannot be used as a benchmark in the present case would be like saying that actual market prices in a particular sector cannot be used for a particular category of the same product because their cost of production are much higher and thus cannot compete with the cost of production of the other operators. That cannot be the case. If for the same product, i.e., electricity, there are generators capable of generating it and earning an appropriate return through the HOEP, then the higher costs of other generators of electricity cannot be used to argue that the HOEP is not an appropriate benchmark. Canada's argument taken to an extreme would lead to absurd results. Indeed, a Member could argue that there is no subsidy involved by compensating the higher cost of production when using obsolete technologies in the production of goods that will compete in another market were operators are more developed technologically and have more efficient methods of production. Thus, the European Union considers that the fact that there are operators receiving the HOEP only shows that it can be used as a market benchmark in the present case. Similarly, in Japan – DRAMs, with respect to the distinction between inside and outside investor, the Appellate Body noted that there is one standard, the market standard according to which rational investors act. In this sense, the fact that there were some inside investors, which may have different interests and return expectations than outside investors, willing to provide the necessary funds to a company in economic difficulties implies that the market would have provided those funds. In other words, the market is also measured by the existence of a category of investors willing to make the necessary investments, even if there is another category which would not make them. Like in the case of outside investors, the presence of generators only receiving the HOEP in the market of Ontario shows that they are part of the market with respect to which the existence of benefit can be determined.

91. Third, Canada argues that the IESO market mechanism is not the "classical" competitive market where supply and demand meet. Indeed, the European Union agrees that it may not be the "classical" market. And there may not be many "classical" markets in many jurisdictions with respect to electricity or other products. However, it is a market where demand, represented by the relevant competent authorities in Ontario, meets with supply (i.e., electricity generators). And it is the market mechanism chosen by the competent authorities in Ontario to regulate the exchanges of electricity. Thus, the HOEP amounts to the rate that is determined based on supply and demand in Ontario.

92. Fourth, the European Union observes that one possible means to assess whether the HOEP represents the price of electricity in Ontario under market conditions is to examine the prices charged and paid by Ontario in its imports and exports of electricity. In its webpage, IESO explains that "[e]very hour of the day, Ontario imports and exports energy with neighbouring jurisdictions based on changing market and system conditions".69 Imports and exports occur from and to neighbouring provinces (Manitoba and Manitoba SK) and US States (Michigan, Minnesota and New York). Because neither the Canadian provinces nor the US States are submitted to overarching governmental regulations, these entities trade

69 http://www.ieso.ca/imoweb/siteShared/imports_exports.asp?sid=ic


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electricity entirely based on their demand and their available supply. In consequence, one may expect import and exports to occur under market conditions. Although IESO's webpage does not provide details regarding the conditions of individual transactions, it informs the revenues that have been obtained and the prices that have been paid with the import and export of electricity to Ontario's neighbours. The following table is provided:

Table [_1_]

EXPORTS

Month TWh Millions ($)

January 2012 1.1 $28.8

February 2012 1.0 $23.9

2012 2.1 $52.7

2011 12.8 $418.9

2010 15.2 $567.4

IMPORTS

Month TWh Millions ($)

January 2012 0.2 $6.7

February 2012 0.2 $5.0

2012 0.5 $11.6

2011 3.9 $141.8

2010 6.4 $247.6

93. A Terawatt-hour corresponds to a billion Kilowatt-hours. Having this in mind and based on the information made available by IESO, the average price for the kWh imported and exported over the past years can be calculated. The following table expresses these prices:

Table [_2_]EXPORTSMonth/year TWh Total price (mi C$) Average price (C$/kWh)

January 2012 1,1 28,8 0,026182February 2012 1 23,9 0,0239

2012 2,1 52,7 0,025095

2011 12,8 418,9 0,032727

2010 15,2 567,4 0,037329IMPORTS

Month/year Total TWhTotal price ( mi

C$) Average price (C$/kWh)

January 2012 0,2 6,7 0,0335

February 2012 0,2 5 0,025

2012 0,5 11,6 0,0232

2011 3,9 141,8 0,036359

2010 6,4 247,6 0,038688

94. Table [_2_] shows that the average price for the kWh imported and exported by Ontario has fluctuated between 2 and 4 cents for the past three years. This corresponds roughly to the weighted average HOEP in the same period. For the


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months of January and February 2012, for example, the weighted average HOEP charged to consumers was 2.23 ¢/kWh,70 whereas the weighted average import price was 2.51 ¢/kWh, and the average weighed import price was 2.92 ¢/kWh. The slight difference is explainable. Import and export occur at those times of the day when one province's generators cannot produce enough electricity to supply demand. Imports and exports occur at the peak times for electricity consumption in each province, that is, when the HOEP itself is also higher.71 As a result, the prices for import and export are understandably higher than the weighed average HOEP, which includes both high prices for the peak times and lower prices for off-peak times. The similarity between the HOEP and the import and export prices is nonetheless revealing of the fact that the HOEP faithfully reflects the price practiced in Ontario and neighbouring jurisdictions under market conditions.

95. In any event, the European Union submits that either on its own or as a proxy,72 the import and export prices for electricity in Ontario show that a benefit exists in the present case.

96. Consequently, should the Panel consider it necessary to establish the existence of benefit in the present case by reference to the difference between the FIT rates and another benchmark, the European Union submits that the HOEP would serve as a basis to find such benefit since the HOEP would be price the FIT Generators would obtain in the wholesale electricity market in Ontario absent the FIT Program, like other generators not obtaining regulated rates.

6. Any of the other alternative benchmarks show the existence of benefit

97. In any event, should the Panel consider that the HOEP is not an appropriate benchmark in the present case in order to establish the existence of "benefit" under Article 1.1(b) of the SCM Agreement, the European Union submits that any of the other alternative benchmarks submitted by Japan in DS412 would show that there is a benefit in the present case.73

(a) The weighted average wholesale rate received by all generators in Ontario other than FIT and RESOP generators

98. The "market" price in economic sense in a situation where the government regulates prices could be understood to be the result of the free exchanges between the government (representing in this case the demand and acting on behalf of consumers) and the electricity generators (representing supply). In this sense, the result of the weighted average of all rates agreed between the Government of

70 http://www.ieso.ca/imoweb/siteShared/monthly_update.asp?sid=ic 71 http://www.ieso.ca/imoweb/siteshared/smoothing_the_peaks.asp?sid=ic

http://www.ieso.ca/imoweb/siteshared/tou_rates.asp?sid=ic 72 Panel Report, US – Softwood Lumber IV, para. 7.57, footnote 136 (Canada agreed that, where a

government is the sole supplier, "import prices for the same good, which may or may not be 'world market prices', if available to purchasers in the country of provision, could be used as a benchmark").

73 Japan's first written submission in DS412, paras. 221 – 247; European Union's first written submission, para. 80.


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Ontario (excluding FIT and similar rates) and all generators (excluding FIT and similar generators) in Ontario could be said to amount to the "market" price for wholesale electricity. Such average was 7.13 cents/kWh in 2010,74 thus below the guaranteed rates under the FIT Program for wind and solar electricity. On this basis, the Panel may find that the FIT Program and its related contracts confer a benefit under Article 1.1(b) of the SCM Agreement.

(b) The "commodity charge" portion of retail prices for electricity in Ontario

99. Ontario retail prices may be taken into account as a possible benchmark because no generator of electricity in Ontario should expect to receive a rate in excess of the price paid by retail consumers in the commodity portion of their bill, i.e., the retail price for the electricity itself, excluding any service charges. The retail prices of electricity determined by the OEB as part of its RPP range from 7.1 cents/kWh to 8.3 cents/kWh for customers with conventional meters, and from 6.2 cents/kWh to 10.8 cents/kWh for customers with smart meters.75 These RPPs reflect HOEP plus the Global Adjustment, and are the prices paid by retail consumers in Ontario for the electricity commodity itself (i.e., absent any fees and charges associated with the services of transmission/distribution and market operation). No generator in Ontario should expect to receive rates in excess of these RPP prices for the electricity commodity established by the OEB.

100. Moreover, the European Union notes Canada's statement that "most" users of electricity in Ontario pay the price required of them by the system, i.e., the prices regulated by the OEB.76 Indeed, there are some consumers who can buy their electricity pursuant to bilateral contracts with generators.77 Needless to say, such a price will always be lower than the regulated price for final consumers (otherwise, there would not be any interest in having such bilateral contracts).78 Thus, even if the Panel were to consider that the HOEP is not a market benchmark in the present case, the European Union considers that, absent the FIT Program, the FIT Generators could only sell their electricity at a price equal to or a bit below the prices regulated by the OEB (RPP), all of which are way below the FIT rates. Since there is no need to quantify the amount of the subsidy but merely its existence under Article 1.1(b) of the SCM Agreement, the Panel can find that the FIT Program and its related contracts confer a benefit to the FIT Generators on this basis.

74 Japan's first written submission in DS412, para. 226.75 See OEB: Electricity Prices (Exhibit JPN-066).76 Canada's opening oral statement, first meeting with the Panel, para. 117.77 See European Union's response to Questions 15 and 51.78 Prices to final consumers regulated by the OEB (RPP) can be found in Japan's first written submission

in DS412, para. 98. They range between 6.2 and 10.8 cents/kWh. Thus, even taking the highest of the RPP in peak times, there would be a benefit.


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(c) The average wholesale rate for electricity in competitive wholesale markets outside of Ontario

101. The European Union observes that Canada does not argue that Ontario's prices for electricity (either those rates agreed between the Government of Ontario and the generators or RPPs) are distorted. In fact, Canada maintains that the Panel should compare the FIT rates to a benchmark located from an examination of the conditions on which wind and solar electricity are normally exchanged in Ontario.79 In this respect, the European Union considers that there is no need to go outside Ontario to identify a proper benchmark in this case since, even if prices are heavily regulated, this does not imply that they are distorted. As mentioned in para. 98 above, in the particular circumstances of this case, it could be said that the Government of Ontario acts as the "demand", whereas generators (acting as the "supply") freely agree their rates with the State. In this sense, there is a marketplace where supply and demand meets and Canada has not shown that the fact that the Government of Ontario agrees rates implies that those rates are distorted.

102. That being said, should the Panel consider that regulated rates or prices in Ontario cannot be used, the European Union considers that the outside benchmarks proposed by Japan,80 where rates are competitively determined in deregulated electricity markets where the government has a limited presence,81 show that the FIT Program and its related contracts provide a benefit.

7. 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

103. Finally, the European Union maintains that the Panel may find the existence of benefit under Article 1.1(b) of the SCM Agreement in the present case exclusively by noting the long-term nature of the rates guaranteed to the FIT Generators, regardless of whether those rates are above the market. Indeed, as explained before, one of the most relevant features of the FIT Program and its related contracts is that they protect the FIT Generators from any market risks for a period of 20 years. During that period, the FIT Generators have a rate in exchange of which they can supply as much electricity as they can. Moreover, the FIT Contracts include price escalation conditions which ensure profitability regardless of the market conditions. The OPA assumes all market risks without charging any premium.

104. Thus, on the basis of this, the Panel may conclude that the FIT Program and its related contracts, regardless of the level of the guaranteed rates, confer a benefit to the FIT Generators.

8. Concluding remarks as to the existence of "benefit"

79 Canada's first written submission, para. 66.80 Japan's first written submission in DS412, para. 222.81 Japan's opening oral statement in DS412, first meeting with the Panel, para. 35.


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105. To sum up, the European Union considers that the Panel may find that the FIT Program and its related contracts confer a benefit to the FIT Generators on the basis of the uncontested fact that, absent the FIT Program, the FIT Generators would not be able to obtain the necessary returns from the market. Thus, the inherent nature of the FIT Program as an incentive to promote the generation of electricity through renewable sources shows the existence of benefit under Article 1.1(b) of the SCM Agreement, like in cases where the fact that no rational investor would have made a particular investment shows the existence of benefit, regardless of its quantum.

106. Should the Panel consider it necessary to determine the existence of benefit in the present case by reference to the difference between the FIT rates and an appropriate market benchmark, the European Union has put forward a variety of benchmarks to show to this effect. Under any of those, the European Union considers that the Panel may find that the FIT Program and its related contracts confer a benefit under Article 1.1(b) of the SCM Agreement. Even when considering generation costs, as advanced by Canada, the existence of a benefit is apparent.

107. Finally, the Panel may also determine the existence of benefit in this case on the basis of the long-term nature of the guaranteed rates. Indeed, the fact that the FIT Generators receive a guarantee to receive payments at particular rates, regardless of their level, for a period of 20 years, where those prices are automatically subject to price escalation regardless of any market development, provides a benefit to the FIT Generators which is distinguishable from the benefit conferred by the above-market level of the FIT rates.

G. Conclusion

108. In view of the foregoing, the European Union submits that the FIT Program and its related contracts amount to a "subsidy" in accordance with Article 1.1 of the SCM Agreement. Since Canada does not contest that the domestic content requirements contained in the FIT Program and its related contracts are "contingent … upon the use of domestic over imported goods" in the sense of Article 3.1(b) of the SCM Agreement, the European Union requests the Panel to find that they are prohibited under Articles 3.1(b) and 3.2 of the SCM Agreement.

III. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE NOT COVERED BY

ARTICLE III:8(A) OF THE GATT 1994

109. Canada's defence against the European Union's claims under Article 2.1 of the TRIMs Agreement, in conjunction with paragraph 1(a) of its Annex, and Article III:4 of the GATT 1994, is that the FIT Program and its related contracts fall under the scope of Article III:8(a) of the GATT 1994. Canada does not argue that the measures at issue fall under Article III:8(b) of the GATT 1994.

110. In its first written submission, the European Union already anticipated most of the arguments in order to rebut Canada's expected defence under Article III:8(a) of the GATT 1994. In it opening oral statement at the first meeting with the Panel, the


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European Union already rebutted Canada's actual defence based on Article III:8(a) of the GATT 1994, as set out in Canada's first written submission.82 In its second written submission, the European Union will provide further rebuttal to Canada's arguments.

111. The European Union notes that Canada's defence under Article III:8(a) of the GATT 1994 may not be an obstacle for the Panel to find that 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. As a consequence of such violation, the Panel may also find that the FIT Program and its related contracts are inconsistent with Article III:4 of the GATT 1994, without engaging in a substantive analysis of Canada's defence under Article III:8(a) of the GATT 1994.83 In any event, in order to provide a positive solution to this dispute,84 the European Union requests the Panel to examine and make findings (even in the form of alternative findings) with respect to Canada's defence under Article III:8(a) of the GATT 1994 in view of the fact that the conditions for the application of such a provision are not met in the present case.

A. Article III:8(a) of the GATT 1994 covers requirements directly relating to the product purchased by the government

112. Canada argues that the scope of Article III:8(a) of the GATT 1994 is not confined to the purchase of products that are the focus of a claim for breach of Article III.85

According to Canada, the text of Article III:8(a) does not in any way tie the products that are purchased to the products that are the focus of a claim under Article III. Further, Canada considers that Article XVI of the Agreement on Government Procurement prohibits the inclusion of conditions on the inputs, by means of local content requirements, into the product that is purchased. According to Canada, such prohibition would not make sense if Article III:8(a) of the GATT 1994 already prohibits them.

113. Canada's arguments are inapposite. First, the text of Article III:8(a) of the GATT 1994 states that the national treatment obligation does not apply to laws, regulations or requirements governing the procurement by governmental agencies of "products purchased" for governmental purposes. Thus, the text of Article III:8(a) is structured in a manner that the term "products" is directly qualified by the term "purchased", which implies that the requirements govern the products purchased by governmental agencies and not other products that do not have any relationship with the object or subject-matter of the procurement contract.86 In other words, the requirements governing the acquisition of products purchased by governmental entities are limited to those products and cannot extend to other products with no relation whatsoever with the product purchased.

82 The European Union notes that in DS412 Japan also rebutted those arguments. The European Union

hereby incorporates paras. 47 – 86 of Japan's opening oral statement in DS412 at the first meeting with the Panel (Panel's Working Procedures, para. 21).

83 See European Union's response to Question 14 and 54.84 DSU, Articles 3.4, 3.7 and 11.85 Canada's opening oral statement, first meeting with the Panel, paras. 45 – 52.86 See European Union's response to Question 56.


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114. Second, Article XVI(1) of the Agreement on Government Procurement is of no assistance to Canada. Such provision contains the obligation not to impose offsets including domestic content requirements in the qualification and selection of suppliers, products or services, or in the evaluation of tenders and award of contracts. Article XVI(2), in turn, provides for an exception for developing countries, which are entitled to impose domestic content requirements. Contrary to what Canada argues, the fact that Article XVI(1) of the Agreement on Government Procurement prohibits what Article III:8(a) of the GATT 1994 also prohibits does not mean that Article III:8(a) must have a different meaning. There are many cross-references in the covered agreements to obligations contained in other covered agreements and that does not imply that the substantive obligations under those provisions are meaningless.87 Thus, the Agreement on Government Procurement may be understood as clarifying, insofar as domestic content conditions are concerned, what is otherwise prohibited under Article III:8(a) of the GATT 1994.

115. Moreover, the nature of the Agreement on Government Procurement as a plurilateral agreement implies that the parties to that Agreement intended to regulate the matter in a self-contained manner, i.e., without the need to invoke other provisions such as Article III:8(a) of the GATT 1994.

116. The European Union also observes that fact that there is a need for an exception of the general rule not to include domestic content requirements in procurement contracts with respect to developing countries in Article XVI(2) of the Agreement on Government Procurement could also be interpreted as meaning that the general prohibition in Article III:8(a) of the GATT 1994 also applies to developing countries. The possibility to negotiate some conditions upon accession to the Agreement on Government Procurement would be intended to encourage participation in the system, without making any judgement on the applicability of Article III:8(a) of the GATT 1994. Furthermore, the GATT 1994 also includes provisions on the adoption of measures on balance of payments grounds, a situation which is mentioned in the Agreement on Government Procurement as one development aspect underlying the use of offsets. The TRIMs Agreement also includes a provision in this respect.88 Finally, it is not unprecedented for WTO Members, when negotiating a new agreement, to accept on a transitional basis the maintenance of measures that are inconsistent with WTO provisions in force: Article 5 of the TRIMs Agreement is a good example of this practice, which can also be read in Article XVI(2) of the Agreement on Government.

117. Consequently, the reference as to how the Agreement on Government Procurement deals with offsets is not relevant to interpret the scope of Article III:8(a) of the GATT. Otherwise, the scope of a multilateral agreement (the GATT 1994, and in particular the scope of Article III:8(a) of the GATT 1994) would be affected by the

87 E.g., reference to Article VI of the GATT 1994 in Article 1 of the Anti-Dumping Agreement;

reference to Article XVI of the GATT in Article 1.1(a)(2) of the SCM Agreement; reference to Articles III and XI in Article 2.1 of the TRIMs Agreement; reference to Article X of the GATT in Article 12 of the Customs Valuation Agreement; multiple references to Articles XXII and XXIII of the GATT 1994 in multiple covered agreements, etc.

88 TRIMs Agreement, Article 4.


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meaning provided to other different terms in a plurilateral agreement which is not binding on the entire WTO Membership.89

118. Third, as noted in our response to Question 22, in the circumstances of the present case the European Union agrees with the proposition that the domestic content requirements are not within the scope of Article III:8(a) because it is not the equipment that is being procured by the government. The good being procured or purchased (if any) by the Government of Ontario would be the electricity produced by the FIT Generators. The domestic content requirements relate to different products (i.e., the electricity generation equipment and components), the sourcing of which does not add anything to and is completely disconnected from the basic nature of the product procured or purchased. In other words, the European Union contends that the domestic content requirements imposed by the Government of Ontario do not "govern" the alleged procurement of electricity, within the meaning of Article III:8(a), because they are not requirements related to the subject-matter of the procurement, which is electricity. Those requirements "govern" a "feature" of the equipment for the generation of electricity which has no rational link to the attributes of the electricity and the object of the alleged procurement.

119. To illustrate our views with an example. The European Union considers that a government may require in a public tender to purchase electricity that will be used to provide light to its highways and public roads that such electricity is generated by using renewable sources. In such situations, there is a link between the good purchased and the requirements governing its procurement insofar as the renewable source is a characteristic connected to the object of the contract, i.e., the purchase of electricity. Similarly, the government may include requirements with respect to the materials or fabric used in the suits or shirts it purchases for its public officials. In contrast, the inclusion of requirements such as the suits or shirts must be made or knitted using machines or equipment made locally (or similarly the requirement as to the origin of the generation equipment and components like in the present case) would be unrelated to the subject-matter of the procurement. And in fact such requirements would amount to a disguised measure of trade protectionism.

120. In sum, the facts of this case show that the requirement to use equipment and components made in Ontario in order to benefit from the FIT Program has nothing to do with the stated object of the FIT Contract, which refers to the supply of electricity. For this reason alone, the Panel may find that the FIT Program and its related contracts do not fall under the scope of Article III:8(a) of the GATT 1994.

121. In any event, the European Union also invites the Panel to examine the substantive requirements contained in Article III:8(a) of the GATT 1994 which, in the European Union's view, lead to the same result, i.e., that the FIT Program and its related contracts do not fall under such provision.

89 The European Union observes that Canada argued in its first written submission that terms in the

Agreement on Government Procurement (in particular the definition of "procurement" in its commitments) do not influence the meaning of Article III:8(a) of GATT 1994 (and in particular the term "procurement"), even when the same terms are used in both agreements (see Canada's first written submission, paras. 27 and 28). Canada's arguments are thus contradictory.


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B. The FIT Program does not involve a "purchase" (or procurement)

122. As explained before in the context of our claims under the SCM Agreement, Canada attempts to characterise what the OPA does pursuant to the FIT Contracts as a "purchase" or "procurement" by the government.90 For the reasons already mentioned in our section dealing with the claims under the SCM Agreement, the European Union maintains that the FIT Program and its related contracts do not involve a "purchase" or "procurement".91

123. Moreover, Canada maintains that the ordinary meaning of "procurement" is "acquisition" and that the OPA certainly acquires renewable electricity under the FIT Contracts.92 In this respect, the European Union notes that Canada agrees that the term "procurement" in Article III:8(a) of the GATT 1994 is coterminous with "acquisition", as per the French and Spanish versions.93 However, the European Union disagrees that the OPA is acquiring electricity from the FIT Generators through the FIT Contracts. Pursuant to the FIT Program and its related contracts, the OPA facilities the production of electricity from renewable sources and directs the FIT Generators to supply their electricity into the grid. In this sense, the OPA does not "acquire" anything, other than the obligation to pay upon the delivery of electricity into the grid or upon the compliance by the FIT Generators with the IESO instructions to refrain from generating electricity.

124. Consequently, the OPA does not acquire, use or possess the electricity supplied by the FIT Generators. The purpose of the FIT Program and its related contracts is not to purchase or acquire electricity, but rather to ensure that electricity produced from renewable sources in injected into the grid. Canada appears to confirm that there is no purchase when stating that there is no "resale" of renewable electricity under the FIT Program.94 If there is no resale, then it is reasonable to assume that there was no purchase in the first place by the OPA. Since Article III:8(a) of the GATT 1994 requires that the government purchases or acquires products and the OPA does not do so pursuant to the FIT Program and its related contracts, the Panel may find that those measures do not fall under Article III:8(a) of the GATT 1994.

C. The FIT Program does not involve a purchase "for governmental purposes"

125. Assuming that the FIT Program and its related contracts amount to a "purchase" or "procurement" by the Government of Ontario (quod non), the European Union submits that the Panel may also find that the FIT Program and its related contracts do not meet the requirement under Article III:8(a) of the GATT 1994 that the products must be purchased "for governmental purposes".

90 Canada's opening oral statement, first meeting with the Panel, paras. 11 – 34.91 See paras. 46 – 51 above in this submission.92 Canada's opening oral statement, first meeting with the Panel, para. 37.93 European Union's first written submission, para. 114.94 Canada's opening oral statement, first meeting with the Panel, para. 56.


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126. The European Union already addressed Canada's arguments on this element in its opening oral statement at the first meeting with the Panel.95 In its oral opening statement at the first meeting with the Panel, Canada did not further address such requirement.

127. In this respect, the European Union recalls that Canada's argument regarding the meaning of "for governmental purposes" revolves around the notion of the "aims of the government" insofar as such aims are contained in legislation, regulations, policies or executive directions.96 The European Union considers it irrelevant that the stated aims are contained in a piece of legislation or regulation. Otherwise, any stated aim, no matter what purpose or how disconnected with the object of the procurement contract, would be considered as automatically meeting the condition of a purchase "for governmental purposes".97 Likewise, it is also irrelevant that the government purchases products in line with a particular public policy or public objective since, as a matter of principle, governments are expected to always act in pursuance of public policies or public objectives. In other words, it should be presumed that governments when procuring products do so having a public objective or public policy in mind. Thus, those objectives or public policies cannot be determinative of the question as to the meaning of "products purchased for governmental purposes", as otherwise those terms would be deprived of any real meaning.

128. In the European Union's view, the key issue under the terms "for governmental purposes", when seen together with the French and Spanish versions of Article III:8(a) of the GATT 1994, is whether the products purchased by the government agency were acquired with a view to covering the "needs" of the government. The term "necesidad" ("needs" in Spanish) means, among other things, "aquello a lo cual es imposible sustraerse, faltar o resistir") (something that is impossible to avoid or resist).98 The term "besoins" ("needs" in French) means "les choses considérées comme nécessaires à l'existence) (something considered to be necessary to exist).99 Thus, the terms "necesidades/besoins" or "purposes" should be understood as referring to the needs of the government, in the sense that the different government bodies and structures would be unable to exist or perform their functions without reliance on the goods purchased. Such needs may include government purchases in order to be able to provide government services to citizens, as products will be needed by the public institutions in charge of the delivery of public services for their direct use in the delivery of such services. As observed by Brazil in its third party oral statement, different governments may have different needs depending on "the different roles that governments may come to play in different societies".100 However, the European Union considers that the

95 European Union's opening oral statement, first meeting with the Panel, paras. 36 and 37.96 Canada's first written submission, paras. 23 – 34.97 European Union's opening oral statement, first meeting with the Panel, para. 36.98 Definition of "necesidad", Real Academia Española (Exhibit EU-22).99 Definition of "besoin", Petite Robert (Exhibit EU-23). 100 Brazil's third party oral statement, para. 3. See also Appellate Body Report, US – Anti-Dumping and

Countervailing Duties (China), para. 297 ("As we see it, the reference to "normally" in [Article 1.1(a)(1)(iv) of the SCM Agreement] incorporates the notion of what would ordinarily be considered part of governmental practice in the legal order of the relevant Member. This suggests that whether the functions or conduct are of a kind that are ordinarily classified as governmental in the legal order of


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needs of the government cannot include purchases aiming at complying with any stated public policy, regardless of whether the goods will or will not be used by government in the performance of its many functions, and therefore regardless of whether such purchases cover the government's needs. Otherwise, government purchases aimed at "protecting local producers against imports" as a stated public policy would escape the national treatment obligation in Article III of the GATT 1994. In other words, an interpretation according to which the term "purposes" or "needs" refers to any public policy stated by the government would allow for circumventing the fundamental national treatment principle and thus would run contrary to the object and purpose of Article III of the GATT 1994.

129. To illustrate this with an example. A government may purchase medical equipments and drugs to be used in public hospitals or books to be used by students at public schools in order to provide health and education services for the benefit of citizens. Such purchases would be covered by Article III:8(a) of the GATT 1994 since they will be used by the government in providing health and education services to its population. In contrast, the purchase of electricity by the government to be used only by local producers, even if there was a public policy behind of supporting domestic producers, would not aim at covering the needs of the government (or even generally the citizens), but rather a more dubious public policy from the national treatment perspective. More generally, the purchase of electricity by the government for injection into the grid and for use by industrial or residential users cannot be seen as a purchase "for governmental purposes" for the purposes of Article III:8(a) of GATT 1994.101

130. In sum, the European Union considers that "for governmental purposes" refers to government purchases to cover its needs, which in turn also covers their needs for the maintenance of public sector infrastructure and services, including the provision of services to citizens. However, those terms do not cover purchases made in view of any public policy since, by definition, all purchases by the government are made with such a purpose and that interpretation would allow Article III of the GATT 1994 to be circumvented.

131. In the present case, Canada argues that the OPA purchases electricity from the FIT Generators to fulfil a public policy, i.e., to secure a sufficient and reliable supply of electricity from clean sources.102 As said, it is not the existence of a public policy objective that is relevant for the purposes of Article III:8(a), but the existence of a "need" of the government to purchase goods that the government will use in the performance of its many functions. In this case, the fact that the OPA purchases electricity from the FIT Generators to secure a sufficient and reliable supply of electricity from clean sources, in pursuit of a public policy, is irrelevant since the electricity purchased is not used by the OPA or the Government of Ontario to

the relevant Member may be a relevant consideration for determining whether or not a specific entity is a public body").

101 This contrasts with cases where the government assumes the responsibility to provide, for instance, electricity transmission services. Purchases of goods necessary for the dairy maintenance the transmission network components (e.g., cupper for the wires) may thus be "for governmental purposes", as such goods would be used by the government in the provision of services to citizens.

102 Canada's first written submission, para. 34.


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perform any of its functions (such as providing light in public buildings, roads, etc).

132. In addition, Canada fails to demonstrate the need that the domestic content requirements imposed on such purchases satisfies. In the European Union's view, the inclusion of domestic content requirements with respect to wind and solar electricity show that the electricity supplied by the FIT Generators is not delivered into the grid to cover the government's needs, such as to secure a sufficient and reliable supply of electricity from clean sources; rather, there is another objective behind the stated one that does not satisfy any government need.

133. Consequently, even if the Panel were to consider that pursuant to the FIT Contract, the OPA purchases electricity, the FIT Program and its related contracts insofar as they contain the domestic content requirements for wind and solar electricity, would not amount to purchases "for governmental purposes" in the sense of Article III:8(a) of the GATT 1994.

D. Any alleged purchase of electricity through the FIT Program is with a view to commercial resale

134. Canada interprets the terms "not with a view to commercial resale" in Article III:8(a) of the GATT 1994 as meaning that the purchase must not be with the aim to resell for profit.103 Canada maintains that the OPA does not purchase the electricity with the aim of making a profit and, in fact, there is no profit since the OPA recoups the cost of its purchase through the Global Adjustment. Further, Canada argues that there is no resale of renewable electricity under the FIT Program since the OPA purchases the electricity so it is delivered into the grid, where it is available for consumption.104

135. The European Union submits that Canada's arguments are without merit. First, with respect to the interpretation of the terms "commercial resale" Canada refers to a definition of the term "commerce" including the notion of profits. The European Union observes that Canada's definition was taken from a specialised definition coming from (French) Commercial Law. In fact, the definition before the one mentioned by Canada, which has an economic connotation, defines "commerce" as an "exchange".105 Likewise, other French dictionaries, and in their general entries, more specifically defining the very terms used in Article III:8(a) of the GATT 1994, i.e., "dans le commerce", refer to "sur le marché", without indicating any link with profits.106 Similarly, the term "comercio" in Spanish is not defined by

103 Canada's first written submission, paras. 39 and 42; and Canada's opening oral statement, first meeting

with the Panel, paras. 55 and 57. 104 Canada's opening oral statement, first meeting with the Panel, para. 56.105 Exhibit CDA-62, Entry II.A.1 ("ÉCON. Activité qui consiste à échanger, ou à vendre et acheter, des

marchandises, produits, valeurs, etc. Jules Lefort accrut considérablement sa fortune dans le commerce des laines (GOZLAN, Le Notaire de Chantilly, 1836, p. 26) : 6. ... nous ne faisons pas attention (...) que la totalité du commerce pourrait s'effectuer sans argent et sans négociants (...) : l'argent en est le véhicule et l'instrument, mais ce n'est pas là proprement le commerce. Le commerce consiste essentiellement dans l'échange. Tout échange est un acte de commerce".

106 Definition of "dans le commerce", Le Petit Robert (Exhibit EU-24)


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reference to profits.107 Therefore, Canada's dictionary interpretation of the term "commercial" is not dispositive. Other definitions support the European Union's interpretation that the terms "commercial resale" mean that the purchased product is sold or introduced into the market ("revendus dans le commerce").

136. Second, Canada refers to some case-law where panels and the Appellate Body have interpreted the term "commercial".108 The European Union observes that those panel and Appellate Body reports did not interpret the term "commercial" in Article III:8 of the GATT 1994. Since the same term may have different meanings in different context, the European Union submits that Canada's references to those reports are unavailing.

137. Moreover, even if those panels and the Appellate Body reports considered profitability as central to the meaning of "commercial" in other contexts, this does not mean that the notion of "commercial" must always imply profitability in all cases and in all contexts.109 It may be clear that the term "commercial" covers situations where profits are present. However, it may also cover situations where those profits are absent and yet qualify the action as "commercial".

138. In this respect, the European Union disagrees with Canada's interpretation of the findings of the panel in Canada – Wheat Exports and Grain Imports. Canada argues that the panel's interpretation of the term "commercial considerations", in Article XVII:1(b) of the GATT 1994, "confirms that profitability is central to the ordinary meaning of 'commercial'".110 However, this is not what the panel decided. Canada bases its interpretation on the following finding by the panel, regarding State-Trading Enterprises (STEs):

The requirement that STEs make purchases or sales solely in accordance with commercial considerations must imply that they should seek to purchase or sell on terms which are economically advantageous for themselves and/or their owners, members, beneficiaries, etc.111

139. This provides many alternatives for STEs making purchases and sales. They may conduct them on terms which are economically advantageous either for themselves or for their "owners, members, beneficiaries etc." In the second case, they would not be acting for profit, but for the benefit of others. As the panel goes on to explain, "the 'commercial considerations' requirement does not imply that in deciding whom to sell to and on what terms, export STEs must act as if they were 'commercial actors'".112 The panel provides a different interpretation of the term "commercial considerations":

107 Definition of "comercio", Real Academia Española (Exhibit EU-25).108 Canada's first written submission, paras. 35 – 39.109 The Appellate Body has noted that the same term can have different meanings depending on its

specific context (e.g., Appellate Body Report, Japan – Alcoholic Beverages II, p. 21 ("The concept of "likeness" is a relative one that evokes the image of an accordion. The accordion of "likeness" stretches and squeezes in different places as different provisions of the WTO Agreement are applied").

110 Canada's first written submission, para. 39.111 Panel Report, Canada – Wheat Exports and Grain Imports, para. 6.87.112 Panel Report, Canada – Wheat Exports and Grain Imports, para. 6.92.


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In our view, the circumstance that STEs are not inherently "commercial actors" does not necessarily lead to the conclusion that the "commercial considerations" requirement is intended to make STEs behave like "commercial" actors. Indeed, we think it should lead to a different conclusion, namely, that the requirement in question is simply intended to prevent STEs from behaving like "political" actors. To elaborate, "commercial actors" must make purchases or sales solely in accordance with commercial (i.e., not political, etc.) considerations in order to stay in business. STEs, on the other hand, because they are not inherently "commercial actors", may be able to make purchases or sales in accordance with non-commercial (i.e., political, etc.) considerations and still stay in business. As we see it, this is precisely why it is necessary to require them to make purchases or sales solely in accordance with commercial (i.e., not political, etc.) considerations. Otherwise, Members could seek to use STEs to escape relevant GATT 1994 obligations.113

140. "Commercial" here is contrasted with "political", but not in the broad sense of "any governmental objective". Rather, the panel explains that STEs may well be established to fulfil governmental objectives and still have to abide by the obligation to make their purchases and sales according to "commercial considerations":

[T]he United States' argument that STEs must act like "commercial actors" tends to overlook the fact that STEs are not necessarily used only for commercial purposes. STEs may also be established or maintained to carry out governmental policies or programmes (e.g., policies related to food security, policies aimed at reducing alcohol consumption, policies to achieve price stabilization, etc.).Such STEs must and, hence, do purchase or sell on the basis of commercial considerations, but they do not normally purchase or sell for the purpose of maximizing profit.114

141. In fact, regarding the particular structure of the STE that was the object of the dispute - the Canadian Wheat Board (CWB) – the panel explicitly observed that "[i]t is uncontested that the objective of the CWB in selling wheat is not to make a profit for itself".115 Rather, the CWB acts as an instrument, aiming at returns not for itself but for the Canadian producers: "because of its governance structure, the CWB has an incentive to maximize returns to the producers whose products it markets … even if the CWB were to make sales in greater volumes and, in some instances, at lower prices than a profit-maximizing enterprise, this would not necessarily imply that the CWB's sales would not be based solely on commercial considerations".116 In other words, the correct interpretation of the decision of the panel in Canada – Wheat Exports and Grain Imports is that it is entirely possible for an entity, organised as a State-Trading Enterprise, to have a goal other than making profits for itself, and still to make purchases based on "commercial considerations".

113 Panel Report, Canada – Wheat Exports and Grain Imports, para. 6.94.114 Panel Report, Canada – Wheat Exports and Grain Imports, para. 6.96.115 Panel Report, Canada – Wheat Exports and Grain Imports, para. 6.133.116 Panel Report, Canada – Wheat Exports and Grain Imports, para. 6.133.


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142. Third, Canada argues that purchases of products by the government with a view to reselling them outside of the government to recover the costs of the acquisition (i.e., without a profit) fall within the scope of Article III:8(a) of the GATT 1994 because the resale might be necessary to fulfil the government purpose for which the product was purchased.117 In other words, Canada maintains that if, in order to comply with a government purpose the product purchased must be reintroduced into commerce, even if it is subsequently sold, those purchases would fall under Article III:8(a) of the GATT 1994 and thus they would not have to comply with the national treatment obligation. The European Union observes that such interpretation of Article III:8(a) cannot stand since it would lead to circumvention of the national treatment obligation.

143. On the facts of this case, what Canada argues is that the OPA can purchase electricity from the FIT Generators, direct them to supply such electricity into the grid and permit distributors to sell it to consumers. According to Canada, since there is no profit made by the OPA, such mechanism would not involve a commercial resale and would fall under Article III:8(a) of the GATT 1994. The European Union disagrees. The term "commercial resale" cannot be measured against the economic resources of Members capable of purchasing goods and reselling them with no profit to other operators so that they ultimately make profits. That would be tantamount as saying that some Member would have the financial capacity to circumvent the national treatment obligation in Article III (by selling without profit) whereas others would always fall under Article III of the GATT 1994. To use other examples. A government cannot purchase domestic potatoes only and then resell them with no cost to the government (or perhaps at a loss) to other operators because the negative trade-distorting effect captured by the national treatment obligation in Article III would have already been caused. Indeed, because of the government action, domestic producers of potatoes would get their production purchased by the government and ultimately such production would be reintroduced into commerce, thereby circumventing the essence of Article III of the GATT 1994. The terms "not with a view to commercial resale" in Article III:8(a) are meant to ensure that the national treatment principle is not circumvented by permitting a government purchase on a discriminatory basis in cases where the purchased product will go back to the actual market because the government resells the product. In this sense, the negotiating history confirms that the term "commercial" was introduced "to ensure the continued application of the national treatment exemption to procurement of goods which are sold after use".118

144. Finally, the European Union observes that, in the present case, the fact that there is no profit made by the OPA may be irrelevant insofar as the electricity is supplied into the grid "with a view to commercial resale". Indeed, it is uncontested that the electricity supplied by the FIT Generators is subsequently sold at profit by distributors or independent retailers.

117 Canada's opening oral statement, first meeting with the Panel, para. 65.118 Working Party on GATS Rules, Background Note by the Secretariat, Interpretation of Procurement-

Related Provisions in GATT, Possible Application to Article XIII of GATS, S/WPGR/W/29, 31 March 1999, para. 15.


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145. Consequently, the European Union considers that the Panel may find that the FIT Program and its related contracts are with a view to commercial resale and, thus,escape from the application of Article III:8(a) of the GATT 1994.

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

146. Canada maintains that in order to fall under the last part of the sentence in Article III:8(a) of the GATT 1994 a purchase must be made "with a view to" the use of the product in the production of goods for commercial sale. Cases where the product purchased is used incidentally in the production of goods for commercial resale would fall under Article III:8(a) of the GATT 1994.119

147. The European Union disagrees. The use of the terms "with a view to" do not depend on the subjective intention of the Member concerned when purchasing the products in question. That would make the legal standard under Article III:8 of the GATT 1994 subjective and thus subject to circumvention (i.e., if only based on the alleged or stated intention of the Member concerned). Instead, the European Union considers that the legal test under Article III:8(a) should be objective. In this sense, the Spanish and French versions on the terms "with a view to", i.e., "para"/"pour" ("for") are neutral and cover situations where there is evidence of the intention behind the governmental purchase as well as situations were in fact those products purchased by the government outside the national treatment obligations are used in the production of goods for commercial sale. Thus, Canada's subjective interpretation of the terms "with a view to" cannot stand.

148. Moreover, Canada maintains that the terms "use in the production of goods for commercial sale" should be understood as referring to the actions of the government, and not to actions of other operators.120 The European Union considers that such interpretation cannot stand either. The terms are neutral in respect of the user and, certainly, do not state "use by the government" as Canada pretends. Rather, Article III:8(a) employs the term "use" in general, without specifying the actual user. In view of the underlying anti-circumvention nature of these terms, the European Union considers that the correct interpretation should encompass situations where the government purchase is made with a view to anyone subsequently using the product in the production of goods for commercial resale.

149. Consequently, in the present case, the Panel can find that this element in Article III:8(a) of the GATT 1994 is not met since the electricity supplied into the grid by the FIT Generators is used by entities in Ontario in the production of goods for commercial purposes, a fact that Canada does not contest.

119 Canada's opening oral statement, first meeting with the Panel, para. 70.120 Canada's opening oral statement, first meeting with the Panel, para. 71.


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F. Conclusions

150. In view of the foregoing, the European Union requests the Panel to find that the domestic content requirements included in the FIT Program and its related contracts do not fall under Article III:8(a) of the GATT 1994. The Panel may do so by examining one, several or all of the elements mentioned above in Article III:8(a) of the GATT 1994.

IV. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH

ARTICLE 2.1 OF THE TRIMS AGREEMENT, IN CONJUNCTION WITH PARAGRAPH

1(A) OF ITS ANNEX

151. Canada does not make any arguments against the European Union's claims under the TRIMs Agreement other than its defence under Article III:8(a) of the GATT 1994. In this respect, Canada considers that Article III:8(a) of the GATT 1994 also applies in cases where the alleged violation is included in paragraph 1(a) of the Annex to the TRIMs Agreement.

152. For the reasons explained in its opening oral statement at the first meeting with the Panel and in its responses to Questions 14 and 54, the European Union submits that the Panel can examine our claims under the TRIMs Agreement without examining Canada's defence under Article III:8(a) of the GATT 1994. In this respect, the European Union reiterates, for the reasons mentioned in our first written submission, that 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. The domestic content requirements contained in the FIT Program and its related contracts squarely fall within the type of measures included in paragraph 1(a) of the Annex to the TRIMs Agreement, to be considered as inconsistent with Article III:4 of the GATT. Thus, the measures at issue, as TRIMs, are inconsistent with Canada's obligations under Article 2.1 of the TRIMs Agreement.

153. In any event, even if unnecessary from a legal perspective, in order to secure a positive solution in the present case, the European Union requests the Panel to make alternative findings with respect to Canada's defence under Article III:8(a) of the GATT 1994 even if the Panel were to agree with the European Union's interpretation of the relationship between Articles 2.1 and 2.2 of the TRIMs Agreement and paragraph 1 of its Annex and Article III:8(a) of the GATT 1994.121

V. THE FIT PROGRAM AND ITS RELATED CONTRACTS ARE INCONSISTENT WITH

ARTICLE III:4 OF THE GATT

154. The European Union observes that Canada does not dispute that the FIT Program and its related contracts are inconsistent with Article III:4 of the GATT 1994 in its submissions, other than through its defence under Article III:8(a) of the GATT 1994.

155. Should the Panel find that the measures at issue are inconsistent with Article III:4 of the GATT 1994 as a consequence of the violation of Article 2.1 of the TRIMs

121 Appellate Body Report, China – Auto-Parts, para. 208.


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Agreement, in conjunction with paragraph 1(a) of its Annex, the European Union considers that the Panel would not be required to examine Canada's defence under Article III:8(a) of the GATT 1994.122 Indeed, in making a consequential finding, the Panel would have already addressed the issue of the applicability of Article III:8(a) of the GATT 1994 in the present case when examining whether such provision applies to the situations listed in the Annex to the TRIMs Agreement.

156. Should the Panel start its analysis by our claim under Article III:4 of the GATT 1994, the European Union submits that the domestic content requirements included in the FIT Program and its related contracts are inconsistent with Article III:4 of the GATT 1994.

VI. CONCLUSIONS

157. In view of the foregoing, the European Union repeats its requests, as outlined in its first written submission, that the Panel find that the FIT Program and its related contracts are inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement, Article 2.1 of the TRIMs Agreement, in conjunction with paragraph 1(a) of its Annex, and Article III:4 of the GATT 1994. Accordingly, the European Union requests the Panel to recommend that Canada withdraws its prohibited subsidies without delay (and, in no case, no more than within 90 days), as required by Article 4.7 of the SCM Agreement; and that Canada brings the FIT Program and its related contracts into conformity with the TRIMs Agreement and the GATT 1994 as required by Article 19.1 of the DSU.

122 See European Union's responses to Questions 14 and 54.