Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on International Trade & Investment Group, July 2011
On July 6, 2011, by issuing a notice of intent, Mesa Power initiated the first step in a claim against Canada under Chapter 11 of the North American Free Trade Agreement (NAFTA). Mesa Power is a private Texas-based wind energy company owned by T. Boone Pickens, the famous American financier. The company argues that Ontario's Feed-In Tariff Program (FITP), created under the Green Energy Act, is a violation of Canada's NAFTA obligations because it allegedly gives preferential treatment to certain businesses and contains prohibited "buy local" requirements. The company also argues that, in general, the FITP is being implemented and administered in an arbitrary and non-transparent manner. Among the relief sought, Mesa Power is asking for C$775-million in damages. The company expects to file a formal notice of arbitration sometime after October 3, 2011.
The Feed-in Tariff Program
The FITP was created to encourage renewable energy production in Ontario. The program is administered by the Ontario Power Authority (OPA), a Crown corporation controlled by the Government of Ontario. The OPA is the body responsible for managing Ontario's energy supply. As part of the program, the OPA entered into power purchase agreements (PPAs), which are long-term fixed-price contracts, with renewable energy producers in order to purchase their renewable energy. In order to be eligible for a PPA, renewable energy producers have to satisfy certain domestic content requirements. The guaranteed market and premium prices offered by the PPAs are intended to act as strong incentives for businesses to produce renewable energy in Ontario.
Mesa Power's Arguments
In its notice of intent, Mesa Power presents four arguments in support of its claim that the FITP violates Canada's NAFTA obligations. First, Mesa Power argues that Canada allegedly failed to accord it a minimum standard of treatment as required under Article 1105. Originally under the FITP, wind power projects over 10 kilowatts were required to be evaluated under four components: expertise of wind power development, financial capacity, guaranteed access for wind supply and permitting. The evaluation resulted in a priority ranking that was to be used to award PPAs to applicants within a specified geographic region. Only a limited number of PPAs could be awarded because each geographic region had a capacity cap. Initially, two out of four of Mesa Power's wind projects were given priority rankings in the Bruce Region. On June 3, 2011, the OPA issued new rules for awarding PPAs. Among the important changes, projects in the Bruce or West London Region could now interconnect and build transmission lines into neighbouring regions. As a result of these changes, Mesa Power alleges that its two projects in the Bruce Region lost their priority rankings due to higher ranking projects in the West London Region coming into the Bruce Region and displacing it in the rankings. On July 4, 2011, when PPAs were awarded, Mesa Power was not awarded any PPAs. Mesa Power argues that the OPA's change in rules was capricious, discriminatory and unfair, and thus a violation of the requirement to accord NAFTA investors and their investments a minimum standard of treatment.
Second, Mesa Power argues that Canada violated the prohibitions against performance requirements contained in Article 1106 since the FITP allegedly contains various impermissible buy-local requirements. Under the FITP, wind power projects over 10 kW that have an operational date prior to January 1, 2012, are required to have 25 per cent domestic content, while those with an operational date after January 1, 2012, are required to have 50 per cent.
Third, Mesa Power argues that Canada failed to provide it with either National or Most Favoured Nation Treatment under Articles 1102 and 1103, respectively, since a Canadian and a non-NAFTA country competitor allegedly were treated more favourably under the FITP. With regards to National Treatment, Mesa Power alleges that Boulevard Associates Canada, a Canadian competitor with projects in the West London Region, was able to bring four of its projects over to the Bruce Region after the change in rules. Boulevard Associates Canada allegedly would not have been able to obtain PPAs in the West London Region because of the capacity caps. Mesa Power argues that the change in rules was enacted to benefit its Canadian competitor to the detriment of its own interests. In addition, Mesa Power argues that it was not accorded Most Favoured Nation Treatment because a competitor from a non-NAFTA country allegedly received preferential treatment from the Government of Ontario in the form of a guarantee that the competitor would receive "priority access" in parts of southern Ontario.
Lastly, Mesa Power argues that Canada is in violation of Article 1503(2), which requires a NAFTA party to ensure that its state enterprises do not act in a manner that is inconsistent with its Chapter 11 obligations. In this case, Mesa Power argues that Canada is responsible for not preventing the OPA from acting in a manner that Mesa Power alleges is inconsistent with Canada's NAFTA Chapter 11 obligations.
We make two observations at this stage of the dispute. First, the FITP is also being challenged by Japan under the World Trade Organization (WTO). Japan argues that the FITP's domestic content requirements allegedly violate several of Canada's WTO obligations. On July 20, 2011, the WTO Dispute Settlement Body approved Japan's second request for a panel to be convened in regards to its WTO challenge against Canada. Second, we note that further to NAFTA Article 1108, procurements are carved out of the application of several provisions of the NAFTA Chapter 11 investment obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.