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Energy Law Exchange

September 13, 2017

International Trade Rules Can Help Unlock Business Opportunities for Cross-Border Electricity Projects


International trade rules can help solve problems in trading electricity across borders and unlock business opportunities in a cross-border electricity sector. Trade rules can dictate, for example, the highest tariff that a country can impose on the importation of electricity, which import / export regulations are lawful, and in which countries and segments of the electricity supply chain businesses can invest and operate (and any limitations on investment or operation). Building on previous King & Spalding articles relating to cross-border electricity trade,[1] this article briefly describes how the rules of the World Trade Organization (“WTO”) and regional trade agreements (“RTAs”) apply to cross-border electricity trade, and what businesses and governments can do to preserve their right to trade electricity, mitigate certain cross-border risks, and unlock business opportunities for cross-border electricity projects when faced with WTO or RTA-inconsistent regulations in a market.

WTO or RTA-inconsistent restrictions on cross-border electricity trade

WTO and RTA rules apply to members of the WTO and parties to the relevant RTA treaty, respectively. Project sponsors or host country governments faced with interference by a cross-border government or state-owned utility in an electricity trade arrangement will need to assess whether any WTO or RTA rules apply to that cross-border entity (i.e., is the cross-border entity in a WTO member or RTA-party state, and do any specific WTO or RTA rules apply to the actions taken?).

WTO rules apply to most countries in the world, including: (i) all countries in the Americas; (ii) all countries in Asia and Oceania, except for Bhutan, North Korea, Timor-Leste, Turkmenistan, and Uzbekistan; (iii) all countries in Europe, other than Belarus, Bosnia and Herzegovina, and Serbia; and (iv) most countries in the Middle East and Africa.[2] The rules regulate the full spectrum of international electricity trade, from the generation of electrical power in one country to its distribution in another. They also establish the guidelines with which countries must align in respect of customs duties, taxes, internal regulations, product and production methods, ownership of production facilities, import and export requirements, transit, and the supply of electricity-related services, among others. 

Map of WTO Members

Source: World Trade Organization

In parallel, many countries have reduced or eliminated trade restrictions under RTAs at a level that goes beyond their WTO commitments. They have, for example, further reduced customs duties on electrical energy, and made deeper and broader commitments regarding electricity-related services. These countries include, among others, the ASEAN members (under the ASEAN Framework on Services), the European Union  Member States (under the EU’s Third Energy Package), the United States and Central American countries (under Dominican Republic-Central American Free Trade Agreement), and the parties to the Energy Charter Treaty. With almost 300 RTAs governing international trade relations, project sponsors or host country governments with potential electricity trade-related claims will need to carry out a case-by-case assessment to determine whether RTA rules apply.

Map of Existing Regional Trade Agreements

Source: World Trade Organization

WTO and RTA violations can take different forms, including changes in law, government action or tax increases. For example, if a WTO Member importing electricity from another WTO Member charges import duties that exceed the ceiling they committed to, then the country affected could challenge the importing country before the WTO tribunals for having breached such commitment. Similarly, a WTO violation could arise if the importing country has made a commitment to let foreign companies generate, distribute, transmit or supply electricity within its territory but does not actually allow such activity.

In general,  international trade law prohibits the following types of government measures, which often can be challenged through the mechanisms available under the WTO and RTA systems:

  • Charging import duties that exceed the WTO or RTA ceilings;
  • Conditioning the importation of electricity on the exporter’s having employed certain energy sources to generate it (e.g., wind power), to the exclusion of other sources (e.g., hydropower or fossil fuels);
  • Prohibiting the importation of electricity on the basis of the origin or nationality of the funds underlying a generation project (for example, if a country were to allow electricity imports only from projects operated or funded by its nationals to the exclusion of other projects);[3]
  • A country of transit not allowing the transmission of electricity through its already installed grids;
  • A country of transit charging an unreasonable charge or imposing an unreasonable requirement as a condition to allow transmission; and
  • Not allowing an economic operator to generate, distribute, transmit or supply electricity contrary to a WTO or RTA commitment.

Project sponsors or host country governments encountering a breach of one of these rules should consider the options available under the WTO or RTA systems to address the breach. They should do so at any stage during the life of the electricity trade / export project: whether in operation, implementation or even before a project has been agreed upon (as a preparatory means to unlock access to a target market unlawfully protected by the importing country).

Options available in the case of a breach of WTO or RTA rules

Where a WTO Member or RTA party applies trade restrictions prohibited by the WTO or relevant RTA, WTO and/or RTA rules provide legal, diplomatic and institutional mechanisms to remove them. Litigation is always an option, but the WTO system provides a number of institutional avenues that are quicker and potentially more effective than standard litigation (including domestic litigation). Most trade friction arising under the WTO system is, in fact, settled through one or more of the following non-litigious options:

  • Trade Policy Review Mechanism (TPRM): Under the TPRM, the performance of all WTO Members is scrutinized every three, five, or seven years, with the largest economies reviewed most frequently. Raising issues or posing questions to a Member under review is a very effective way to inflict pressure on the Member concerned to remove the WTO-inconsistent measure.
  • WTO committees and councils: Similar to the TPRM, the affected government could publicly raise the issue on behalf of its stakeholder(s) during the meetings of these WTO bodies. Governments commonly use this name-and-shame strategy to impose political pressure on Members who have adopted WTO-inconsistent measures. WTO body meetings occur more frequently (i.e., several times a year) than review under the TPRM process.
  • Bilateral discussions: The affected government could request informal consultations with the Member concerned in order to discuss and negotiate a mutually agreed solution off-the-record.

Even if the previous options fail, the affected government could at any point initiate dispute settlement proceedings against the WTO Member that adopted the WTO-inconsistent measure to have it removed. Governments increasingly use WTO litigation to challenge electricity-related measures, which speaks of the confidence that governments have in this system as a means to remove unlawful government measures affecting the sector.[4] Further, in addition to the options available under the WTO system, governments can also resort to the mechanisms available under applicable RTAs, which again require case-by-case analysis given the diversity of RTAs.

Conclusion

International trade rules can help investors and governments solve problems in trading electricity across borders and can also be utilized to unlock business opportunities in the sector at the project development stage. These international avenues may complement other options available under the private contracts governing a project. King & Spalding’s team would be pleased to provide further information on how to unlock business opportunities for cross-border electricity projects through WTO and RTA rules, in addition to other options available at the contractual level.

[1] See Host Country Benefits of Hydropower Export Projects, where K&S authors explained how exporting electricity from hydropower can provide host countries with the opportunity to develop projects that would otherwise be unavailable due to lack of funding; and Added Risks of Export Projects, where the authors explained how export projects could also bring added risk when compared with projects whose entire production is sold in the domestic market.

[2] Algeria, Azerbaijan, Equatorial Guinea, Eritrea, Ethiopia, Iraq, Iran, Lebanon, Libya, Somalia, South Sudan, Sudan, and Syria are not WTO Members and thus WTO rules do not apply to them.

[3] See, for example, the Indian Ministry of Power’s “Guidelines on Cross Border Trade of Electricity”, issued 5 December 2016.

[4] Electricity-related measures have been subject to WTO litigation on six occasions, the first of which was challenged in 2010 and the rest between 2012 and 2016.

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