CANADA – CERTAIN MEASURES AFFECTING THE RENEWABLE ENERGY GENERATION SECTOR
Document: CANADA – MEASURES RELATING TO THE FEED-IN TARIFF PROGRAM Reports of the Panels Addendum
Date: 19 December 2012
Document codes: WT/DS412/R/Add.1; WT/DS426/R/Add.1; WT/DS412/R-WT/DS426/R.
Complainant: Japan
Respondent: Canada
Third parties: Australia, Brazil, China, El Salvador, EU, Honduras, India, Saudi Arabia, South Korea, Mexico, Norway, Taiwan, U.S.
Dispute stage: Appellate Body
Agreements cited: Art. XXIII:1  GATT 1994Art. 1.1, 3.1(b), 3.2  Subsidies and Countervailing Measures (SCM)Art. III:4  GATT 1994Art. 2.1  Trade-Related Investment Measures (TRIMs)

CANADA – CERTAIN MEASURES AFFECTING THE
RENEWABLE ENERGY GENERATION SECTOR

CANADA – MEASURES RELATING TO THE FEED-IN
TARIFF PROGRAM

Reports of the Panels

Addendum

 This addendum contains Annexes A to C to the Reports of the Panels to be found in document

ANNEX A

FIRST AND SECOND WRITTEN SUBMISSIONS OF THE PARTIES, RESPONSES
TO QUESTIONS AND ORAL STATEMENTS OF THE PARTIES AT THE
FIRST AND SECOND SUBSTANTIVE MEETINGS OF THE PANEL

Contents Page
Annex A-1 Integrated Executive Summary of Japan A-2
Annex A-2 Integrated Executive Summary of the European Union A-31
Annex A-3 Integrated Executive Summary of Canada A-56

I. INTRODUCTION1

1. This dispute concerns the discriminatory treatme nt affecting imports of parts and equipment
utilized in facilities that generate electricity from wind and solar photovoltaic ("PV") sources (referred
to hereafter as "renewable energy generation equipment" 2) by the Canadian Province of Ontario
("Ontario") pursuant to its feed-in tariff ("FIT") program (the "FIT Program") 3 established on
24 September 2009. Specifically, the FIT Program pr ovides subsidies to generators of renewable
energy in Ontario, and it requires that in orde r to receive those subsidies, wind and solar PV
generators use renewable energy generation equipment made in On tario (the "domestic content
requirement").

2. Thus, the Government of Ontario grants and ma intains subsidies contingent upon the use of
domestic over imported renewable energy generati on equipment and accords less favorable treatment
to imports of such equipment than that accord ed to such equipment produced domestically.
Accordingly, Japan submits that the FIT Program, as well as individually executed FIT and microFIT
contracts for wind and solar PV projects, are inc onsistent with Canada's obligations under: (i)
Articles 3.1(b) and 3.2 of the Agreement on Subsidies and Countervailing Measures ("SCM
Agreement"); (ii) Article III:4 of the Genera l Agreement on Tariffs and Trade 1994 ("GATT 1994");
and (iii) Article 2.1 of the Agreement on Trade-Related Investment Measures ("TRIMs Agreement").

3. To be clear, Japan challenges the FIT Program, and individually executed FIT and microFIT
contracts, not because they have the effect of promoting investment in renewable energy generation,
but rather because, in light of the domestic conten t requirement, they discriminate against imports of
renewable energy generation equipment in favor of Ontario-made renewable energy generation
equipment. Japan does not take issue with Onta rio's stated goal of enhancing renewable energy
generation. On the contrary, the domestic conten t requirement, which would have the effect of
limiting generators' access to the best availa ble technology from the global marketplace, is
inconsistent with that goal. Thus, the claims a dvanced by Japan cannot properly be characterized as a
"trade and environment" dispute; rather, this is a "trade and investment" dispute.

4. In this regard, Canada's recurrent theme thr oughout its submissions that it is necessary for
governments to secure the supply of electricity for th e benefit of the public welfare, and particularly
renewable electricity for the benefit of the environm ent, serves only to divert the Panel's attention.
Japan shares the view that governments may have a ce rtain role in securing a stable electricity supply
and that FIT programs can play a critical role in promoting renewable energy generation. However,
the domestic content requirement in Ontario's FIT Program is a de jure discriminatory measure that is
designed to promote the production of renewable ener gy generation equipment in Ontario rather than
to promote the generation of renewable energy, and this de jure discrimination in international trade is
not and cannot be justified by the public policy goals on which Canada places such emphasis.

1 At the outset, Japan notes that it incorporates its arguments from DS426 into DS412, where
applicable.
2 The term "renewable energy generation equipment" is used to refer to the goods that are listed in the
Domestic Content Grids provided in Exhibit D to the FIT Contract, Exhibit JPN-127, and Appendix C to the
microFIT Contract, Exhibit JPN-164.
3 References to the "FIT Program" include both projects over 10 kW (i.e., FIT projects) and projects of
10 kW or less (i.e., microFIT projects). Further, unl ess specified, terms such as "FIT contracts", "FIT
generators", etc. should be understood to refer to "FIT and microFIT contracts", "FIT and microFIT generators",
etc., even where the conjunctive term "FIT and microFIT" is not utilized. Similarly, terms such as "FIT
contract", "FIT generator", etc. should be understood to refer to "FIT or microFIT contract", "FIT or microFIT
generator", etc.

5. Notably, Canada does not contest certain essen tial facts and legal conclusions presented by
Japan, namely: (i) the existence and operation of the FIT Program's domestic content requirement;
(ii) the conclusion that, should the FIT Program and contracts be considered to provide "subsidies",
those subsidies are "contingent … upon the use of domestic over importe d goods", and therefore
"prohibited", within the meaning of Article 3.1( b) of the SCM Agreement; and (iii) the conclusion
that, should the exemption under Article III:8(a) of the GATT 1994 not apply, the FIT Program and
contracts are inconsistent with the terms of Ar ticle III:4 of the GATT 1994 and Article 2.1 of the
TRIMs Agreement. Thus, the principal issues in dispute between the parties are: (i) the proper
characterization of FIT contracts under Article 1.1(a) of the SCM Agreement;
4 (ii) whether a "benefit"
exists under Article 1.1(b) of the SCM Agreement; a nd (iii) whether FIT contracts fit within the scope
of the government "procurement" exemption under Article III:8(a) of the GATT 1994.

II. FACTUAL BACKGROUND

6. This section provides the factual basis for the clai ms raised by Japan in this dispute. It
discusses, first, the history and operation of Ontario's electricity market in which the FIT Program is
established, and second, the history and operation of the FIT Program within the Ontario market. The
primary focus of this section is the supply-side and wholesale market within Ontario's electricity
market, as it is the FIT Program's impact on this porti on of the market that gives rise to violations of
Canada's WTO obligations. Moreover, Japan's discussion focuses on the "commodity charge" portion
of wholesale and retail prices, as it is that portion of the prices paid by consumers that serves as
payment for the electricity itself, rather than paym ent for services associated with the delivery of that
electricity to consumers.

A. THE ONTARIO ELECTRICITY MARKET

7. Historically run by a state-owned monopoly called Ontario Hydro, the Ontario electricity
market underwent a series of reforms between 1998 and 2004 that separated the functions of
generation, transmission and distribution, and regula tion and administration of the electricity market. 5
At present, the Ontario electricity market is a partly liberalized market, with generation, transmission,
and distribution involving a mixture of public and private entities, and regulation and administration
conducted by several public entities.6

1. History of the Ontario Electricity Market

8. The Ontario electricity market began its transition away from a state-owned monopoly system
in 1998 with the Electricity Act and the Ontario Energy Board Act, collectively enacted as the Energy
Competition Act, 1998 .7 The Electricity Act, 1998 separated the state-owned monopoly Ontario
Hydro into a number of new entities with different functions, including: (i) Ontario Power Generation
("OPG"), which assumed Ontario H ydro's generation assets; (ii) H ydro One Inc. ("Hydro One"),
which assumed responsibility for much of the transm ission and rural distribution systems; (iii) the
Independent Electricity Market Operator ("IMO" ), which assumed administrative responsibility for

4 Japan, however, submits that the particular char acterization under Article 1.1(a) is not really a
relevant question that the Panel needs to address given the Appellate Body's finding in US – Large Civil Aircraft
(2nd Complaint) that a transaction may be covered by multiple subparagraphs of Article 1.1(a)(1) and Canada's
concession that FIT contracts satisfy this element of the definition of a subsidy. See Japan's second written
submission, Section III; Japan's opening statement at the second meeting of the Panel, para. 7; Japan's response
to Panel question No. 22 after the second meeting.
5 Japan's first written submission, Appendix I.
6 Japan's first written submission, Section III.A.
7 Japan's first written submission, Appendix I.

the electricity grid and electricity markets, and was renamed the Independent Electricity System
Operator ("IESO") in 2005; and (iv) the Ontario Electricity Financial Corporation ("OEFC"), which
assumed all liabilities and residual assets of Ontario Hydro and administered contracts with a small
number of private generators. In addition, the Ontario Energy Board Act, 1998 designated the
Ontario Energy Board ("OEB") as the regulator of the new market, with the authority to, inter alia,
approve certain rates and prices applicable in the Ontario market.

9. Following three years of reorganization of the industry, a liberalized electricity market opened
on 1 May 2002. The IMO assumed the roles of operating and administering this new market,
including operation of a computer-automated "stack system" to establish market prices and
accommodate the existence of numerous generators and consumers. However, this liberalized market
did not invite the sufficient entry of new generato rs, and the Government of Ontario was forced to
further restructure the electricity market in order to facilitate investment in new generation.
8
Accordingly, the Government of Ontario enacted the Electricity Restructuring Act, 2004 , amending
the Electricity Act, 1998 . Significantly, the Electricity Restructuring Act, 2004 established the
Ontario Power Authority ("OPA"), giving this agen cy the mandate to ensure a long-term, adequate
supply of electricity by entering into contracts with electricity generators in the liberalized electricity
supply market. It was pursuant to this mandate that the OPA, on 1 October 2009, established the FIT
Program.

2. Operation of the Ontario Electricity Market

10. In this section, Japan describes the various entities relevant to its claims that presently operate
in the Ontario electricity market, addressing entities responsible for: first, electricity generation;
second, transmission, distribution, and consumption; and third, regulation and administration. Japan
then discusses how the prices paid by consumers are determined in order to settle the rates received by
electricity generators. Diagrams depicting the basic flows of electricity and money in the Ontario
electricity market are provided as Attachment 1 to Japan's first written submission.

(a) Generation

11. Electricity is generated in Ontario by three groups of generators: (i) the government-owned
assets of OPG, which are the former generation asset s of Ontario Hydro; (ii) non-utility generators
("NUGs"), which are private generators that had c ontracts to supply to Ontario Hydro prior to the
electricity market's partial liberalization, and now supply electricity under contracts with the OEFC or
the OPA; and (iii) independent power producers ("IPPs "), which comprise all the other generators in
Ontario that have entered the market since its pa rtial liberalization, including FIT generators, and
typically supply electricity under contracts with the OPA.
9

12. The majority of generators receive rates that are either established by government regulations
as set forth by the OEB or through electricity supply contracts. In particular, OPG's assets may be
divided into "regulated" and "unregulated" assets. "Regulated" OPG assets are those for which OPG
receives rates set by the OEB for the electricity OP G generates with those assets. OPG's remaining
assets are "unregulated"; however, like many other ge nerators in Ontario, OPG may supply electricity
generated from its unregulated assets to the market via contracts with the OPA. Because OPG is the
dominant generator in Ontario, the rates provided to OPG's facilities, primarily through OEB
regulations, are established in order to prevent OP G from exercising its dominant market position to

8 See also Japan's comment on Canada's response to Panel question No. 1 after the second meeting.
9 Japan's first written submission, Section III.A.1.

impose excessive prices on consumers, while the ra tes provided to other generators, such as FIT
generators, are aimed at supporting their very entry into and existence in the Ontario market.
10

13. Generators with assets that receive a regulated or contracted rate (i.e., OPG's regulated assets,
OPG's unregulated assets with OPA contracts, NUGs, and most IPPs) will receive that rate regardless
of the market rate, known as the hourly Ontario energy price ("HOEP"). These generators will
receive the difference between HOEP and their regul ated/contracted rate where HOEP is lower than
the regulated/contracted rate, and on rare occasi ons, will be charged the difference between HOEP
and their regulated/contracted rate where HOEP is higher than the regulated/contracted rate. This
difference between HOEP and the re gulated/contracted rate is accounted for through a charge to the
consumer called the Global Adjustment ("GA"). By contrast, generators with assets whose rates are
not regulated or contracted (i.e., OPG's unregulated assets with no OPA contracts, and IPPs with no
OPA contracts) will simply receive the market rate of HOEP.

14. The following table summarizes the known facts re garding the capacity, delivered electricity,
and rates received by generators in Ontario's electricity market.

Generator
Year-End 2010
Capacity
(MW)
2010
Delivered
Electricity
(TWh)
Rate
(Average
Or Range)
(¢/kWh)
OPG Assets
Regulated Nuclear 6,606 45.8 5.59
Regulated Hydro 3,312 18.9 3.41
Unregulated Hydro 3,684 11.7 3.7
Unregulated Thermal 6,327 12.2 4.3
NUGs with OEFC Contracts 1,652
59.8
8.0
IPPs with OPA
Contracts
Non-FIT/Non-RESOP 11,659.5 5.0 - 23.9
RESOP 424.2 11.04 - 42.0
FIT 30.3 10.3 - 80.2
TOTAL 34,710 150.8 N/A
Capacity, Delivered Electricity, and Rates Received By Ontario Electricity Generators

(b) Transmission, Distribution, and Consumption

15. Depending on their generation capacity, generato rs typically connect to the transmission
system or to the distribution system. 11 Specifically, generators with capacity greater than 10 MW
(including large-capacity FIT generators) typical ly connect to the transmission system, while
generators with capacity of 10 MW or less (includi ng small-capacity FIT and microFIT generators)
typically connect to the distribution system via a local distribution company ("LDC"). Whether a
generator is transmission-connected or distributi on-connected is relevant because the process for
settling payments for generated electricity, includ ing electricity generated under the FIT Program,
differs based upon how a generator is connected to the grid.

16. As for consumption, large industries generally connect directly to the transmission system,
while other consumers (i.e., residences, busin esses, and governmental entities) connect to the
distribution system.
12

10 Japan's comment on Canada's response to Panel question No. 5, para. 7.
11 Japan's first written submission, Section III.A.2.
12 Japan's first written submission, Section III.A.3.

17. The manner in which generators connect to the grid, and by which electricity flows to
consumers, is depicted in the Flow of Electricity diagram provided as Attachment 1 to Japan's first
written submission.

(c) Regulatory and Administrative Entities

18. For purposes of the present dispute, the OPA, IESO, and OEB are the key entities regulating
and administering the current market for electricity supply in Ontario.
13

19. The OPA was established by the Electricity Restructuring Act, 2004, amending the Electricity
Act, 1998. It was created because the liberalized market structure established after the dissolution of
Ontario Hydro in 1998 did not invite the sufficient en try of new generators, particularly generators
using alternative and renewable energy sources. The Government delegated to the OPA responsibility
for medium- and long-term system development, i.e., forecasting demand for and reliability of
electricity resources, and contracting with electri city generators to meet this demand. The
Government also delegated to the OPA authority to impose charges on consumers to recover its costs
of contracting with electricity generators. Thus, th e OPA enters into contracts with generators for the
supply of electricity, which includes FIT contracts, and charges consumers the amounts promised to
generators in excess of market rates.

20. The IESO is responsible for administering the electricity market (i.e., determining how much
electricity is produced and consumed, by whom, wh en, and at what market rate) and conducting the
operation of the electricity grid to ensure real -time coordination between electricity supply and
demand.
14 It imposes market rules for the operation of the electricity grid, pursuant to which it
operates a computer-automated settlement mechan ism that uses supply and demand "stacks" to
determine for every five-minute interval: (i) which generators supply electricity and which consumers
consume electricity; (ii) the amount of electricity to be supplied and consumed; and (iii) the market
rate (i.e., HOEP) for that electricity. Further, the IESO settles payments among participants in the
IESO-administered wholesale market. It does so by collecting funds from wholesale consumers and
distributing them to electricity generators in accordance with the rates owed to each generator
(whether the market rate or a regulated/contracted rate).

21. The OEB is the agency that regulates Ontario's electricity sector in conformity with the public
interest. It does so through its authority to set transmission and distribution rates, and license all
market participants. The OEB determines the paymen ts to be made to the "regulated" assets of OPG
and also maintains the Regulated Price Plan ("RPP" ), which establishes the prices paid by most retail
consumers to their LDCs for the electricity th ey consume (i.e., for the electricity commodity,
excluding service charges). In addition, the OEB is responsible for establishing, inter alia, codes for
the transmission system, distribution system, and retail settlement.

(d) Price Determination and Settlement of Payments

22. The prices paid by consumers at the wholesale and retail levels in Ontario must be
distinguished from the rates received by electricity generators, which may be the market rate of
HOEP or a regulated or contracted rate generally higher than HOEP.
15

23. At the wholesale level, the total wholesale price charged to consumers consists of: (i) the
hourly Ontario energy price (i.e., HOEP), which is th e entire rate owed to generators that do not have

13 Japan's first written submission, Section III.A.4.
14 See also Japan's first written submission, Appendix II.
15 Japan's first written submission, Sections III.A.5 and III.A.6.

regulated or contracted rates; (ii) the Global Adjust ment, which is distributed only to generators with
regulated or contracted rates, in order to make up the difference between HOEP and the
regulated/contracted rate; and (iii) various service charges.

24. The first component of the electricity price, HOEP, is set in the IESO-administered market by
the IESO's matching of electricity supply and de mand through a computer-automated "stack system"
to determine the market price owed to all Onta rio generators. The second component comprises the
additional amounts owed to generators that receiv e regulated/contracted rates (i.e., OPG regulated
assets that have rates set by the OEB, OPG unregul ated assets that have contracts with the OPA,
NUGs that have contracts with the OPA or OEFC, and the vast majority of IPPs that have contracts
with the OPA). These additional amounts are collected from consumers through the Global
Adjustment. While the GA can either be positive or negative, depending on whether the market rate
of HOEP is lower or higher than the fixed rates, it has been consistently positive since at least 2009,
as the OPA has entered into additional contracts for electricity supply at rates higher than HOEP.

25. At the retail level, prices paid by retail consum ers are generally determined by adding to the
wholesale price – i.e., the total of HOEP, GA, and ot her fees and charges – an additional distribution
charge to cover the cost of delivering electricity to the consumer. Residential and small business
consumers that purchase electricity from their LDCs based on use pay RPP prices set by the OEB.
Retail consumers not under the RPP (generally larger businesses) may enter into a retail contract with
an LDC or licensed electricity reseller, paying a contracted price for electricity for a fixed period, plus
the GA.

26. Importantly, the Government of Ontario purchases electricity from LDCs like any other retail
customer in Ontario – i.e., by paying market prices based on HOEP plus the GA. Notably, energy use
in government-owned facilities in 2008-09 was approximately 0.307 TWh, which is a mere fraction of
the amount of electricity that could be expected to be generated in a give n year under wind and solar
PV FIT contracts.
16

27. The manner in which the payments made by c onsumers for electricity consumed flow to
electricity generators is depicted in the Flow of Money diagram provided as Attachment 1 to Japan's
first written submission, and is addressed in greater detail in the discussion of the settlement process
under the FIT Program in Section II.B.2.c below.

B. THE FIT PROGRAM

28. The FIT Program was established on 1 October 2009 as the Government of Ontario's current
program to encourage the entry of renewable energy generators into the market by guaranteeing those
generators, through the execution of a contract wi th the OPA, a specified above-market rate for a
specified term up to a specified contract capacity.17

29. The FIT Program is divided into two streams: FIT and microFIT. The FIT stream refers to
facilities with a capacity over 10 kW, and the microFIT stream refers to facilities with a capacity of 10
kW or less. FIT and microFIT contracts are ava ilable for facilities using the following technologies:
biomass, biogas, waterpower, landfill gas, solar PV , and wind. However, only wind facilities with
capacity greater than 10 kW (i.e., FIT), solar PV facilities with capacity greater than 10 kW (i.e., FIT),
and solar PV facilities with capacity less than or equal to 10 kW (i.e., microFIT) must satisfy a
domestic content requirement in order to receive a contract, and ultimately payments, under the FIT
Program.

16 See Japan's second written submission, Section IV.A.
17 Japan's first written submission, Section III.B.

1. History of the FIT Program

30. On 14 May 2009, the Government of Ontario enacted the Green Energy and Green Economy
Act, 2009, which, inter alia, added Section 25.35 to the Electricity Act, 1998, providing the legal basis
for the FIT Program. 18 This law was intended to promote entr y into the market of renewable energy
generators, which otherwise did not have sufficien t incentive to enter the market. Subsequently, on
24 September 2009, the Minister of Energy issued a directive instructing th e OPA to create the FIT
Program.

31. At issue in this dispute is the FIT Progr am's domestic content requirement, which the
Government of Ontario instituted in order to encourage investment in Ontario in facilities that
manufacture renewable energy generation equipment. In doing so, the provincial government aimed
to move the manufacturing of renewable energy gene ration equipment into Ontario, to the detriment
of imports of such goods. This domestic content requirement impedes Canada's asserted objective of
increasing renewable energy generation in the Ontario electricity supply.

2. Operation of the FIT Program

32. The FIT Program is governed and administered by several key documents issued by the
OPA.
19 The FIT Rules set out the requirements around project eligibility, application process,
connection availability assessment, and contract issuance. The model FIT Contract is used to execute
individual FIT contracts, and provides the standa rd terms and conditions applicable to all FIT
projects, as well as technology-specific conditions that must be reviewed prior to participation in the
Program. In addition, the OPA issues Standard Definitions that apply to the FIT Rules and FIT
Contract. It also makes available a FIT Program Overview for applicants that explains the
requirements of the FIT Rules and model FIT Contract. With regard to the microFIT stream, the OPA
similarly issues the microFIT Rules, model microFIT Contract, and microFIT Program Overview.

33. In the IESO Market Manual, the FIT Program is categorized as a "Standard Offer Program",
which means that the Program "provides a ‘standard pr ice' that eligible generators receive simply by
complying with the eligibility criteria". In other words, upon a generator's satisfaction of some basic
eligibility requirements, the OPA becomes obligated under a FIT contract to pay the generator the
above-market contract rate for electricity produced throughout the contract term.

(a) Domestic Content Requirement

34. For purposes of this dispute, the most important requirement that a wind or solar PV FIT
generator must satisfy is the domestic content requirement.
20 Pursuant to Section 6.4(b) of the FIT
Rules, FIT generators that do not satisfy the domestic content requirement are in default under the FIT
contracts, while for microFIT generators, an offer of a microFIT Contract is strictly conditional on
compliance with the microFIT domestic content requirement.

35. The Domestic Content Level of a FIT or microF IT project is determined by reference to a
"Domestic Content Grid" provided in Exhibit D to the FIT Contract and Appendix C to the microFIT
Contract, which lists the goods and services that ma y be utilized to satisfy the Minimum Required
Domestic Content Level for a particular generati on facility, and specifies the qualifying percentage
that each good or service may contribute toward the Do mestic Content Level of a particular project.
In order for solar PV (FIT and microFIT) or wind (FIT) generators to recei ve the guaranteed, long-

18 Japan's first written submission, Section III.B.1.
19 Japan's first written submission, Section III.B.2.
20 Japan's first written submission, Section III.B.3.

term rates under the FIT Program, they must utili ze a sufficient amount of the Ontario-origin goods
and services listed in the applicable Domestic Co ntent Grid to satisfy the applicable Minimum
Required Domestic Content Level. This, by itself, establishes an incentive for such generators to
utilize goods of Ontario origin in preference to goods of other origins in their solar PV or wind
generation facilities; however, the Domestic Content Grids in fact require that for all project types, at
least some goods manufactured, formed, or assembled in Ontario must be utilized in order to satisfy
the Minimum Required Domestic Content Levels, eviden cing the particularly pernicious nature of the
domestic content requirement at issue in this di spute. The following table summarizes the Minimum
Required Domestic Content Levels for FIT and microFIT contracts.

 Wind
(FIT)
Solar PV
(FIT)
Solar PV
(microFIT)
Milestone Date For
Commercial Operation
2009-2011 2012- 2009-2010 2011- 2009-2010 2011-
Minimum Required
Domestic Content Level
25% 50% 50% 60% 40% 60%
Minimum Required Domestic Content Levels for Wind and Solar PV FIT Contracts

(b) FIT Contract Rates and Terms

36. All FIT projects other than waterpower projects ha ve a set term of 20 years. Pursuant to the
FIT or microFIT Contract, a generator is guaranteed payment of the contract rate for all the electricity
it produces (or could have produced but was instructed by the IESO not to) up to its project's contract
capacity throughout the term of the contract.
21

37. Rates under the FIT Program vary by the type of renewable fuel, contract capacity and, in
certain cases, the category of applicant or othe r project characteristics. The following table
summarizes the applicable rates for wind and solar PV projects (including FIT and microFIT) as of
3 June 2011.

Renewable Fuel Size Tranches Contract Rate
(cents/kWh) Escalation Percentage
Solar PV
Rooftop ≤ 10 kW 80.2 0%
Rooftop > 10 ≤ 250 kW 71.3 0%
Rooftop > 250 ≤ 500 kW 63.5 0%
Rooftop > 500 kW 53.9 0%
Ground Mounted ≤ 10 kW 64.2 0%
Ground Mounted > 10 kW ≤ 10 MW 44.3 0%
Wind
Onshore Any size 13.5 20%
Offshore Any size 19.0 20%
Contract Rates for Wind and Solar PV FIT Projects

(c) Settlement Process

38. The settlement process for electricity generato rs, including FIT and microFIT generators,
varies depending on whether the generation facility is connected to the transmission system or the
distribution system.
22 The primary difference is that, generators that are connected to the transmission
system settle the HOEP with the IESO and the Globa l Adjustment with the OPA, while generators

21 Japan's first written submission, Sections III.B.2.a.ii, III.B.2.b.
22 Japan's first written submission, Sections III.B.2.a.iii, III.B.2.b.

connected to the distribution system settle their entire contract rate (i.e., HOEP and the GA) with their
local distributor, which in turn settles the GA with the OPA through the IESO. The IESO's active role
in collecting the Global Adjustment from electr icity consumers and the OPA's active role in
transferring to FIT generators the portions of the Gl obal Adjustment due to them as a result of FIT
contracts is well established in various Ontario statutes and regulations.

39. For transmission-connected projects, the FIT generator receives the HOEP from the IESO
through the IESO settlement system (or pays th e HOEP if it is negative), and then settles the
difference between the contract rate and the HOEP (o r zero, whichever is greater) with the OPA. The
OPA receives the funds to settle this difference fro m the IESO's collection of the Global Adjustment
from electricity consumers, and uses those funds to pay the FIT generators the difference between the
contract rate and the HOEP.

40. For distribution-connected projects, the generator settles the entire contract rate (i.e., the full
amount owed to the generator under the contract) with the LDC, which th en settles with the OPA
through the IESO settlement system discussed above to ensure that the LDC pays only the wholesale
price for electricity.

41. Importantly, however, regardless of whether a project is transmission-connected or
distribution-connected, ultimate liability for paymen ts under FIT contracts and microFIT contracts
lies with the OPA.

3. Individually Executed FIT and microFIT Contracts for Wind and Solar PV Projects

42. The measures at issue in this dispute include not only the domestic content requirement of the
FIT Program as such, but also the domestic conten t requirements contained in individually executed
FIT and microFIT contracts for wind and solar PV projects as applied.
23 These individually executed
contracts serve not only as evidence of the operati on of the domestic content requirement in the FIT
Program, but also as measures unto themselves that are challenged by Japan as inconsistent with
Canada's WTO obligations.

43. Data provided by the OPA confirm the existen ce of hundreds of executed wind FIT, solar PV
FIT, and solar PV microFIT contracts as of 24 Ma rch 2011. In addition, statistics made publicly
available by the OPA indicate that as of 30 September 2011 (i.e., in the first two years of the FIT
Program), OPA had executed 1,786 solar PV contracts (including microFIT) worth 1,240 MW and 71
wind contracts worth 2,575 MW, and it has likely continued to execute additional such contracts since
that date. Each of these contracts contains Minimum Required Domestic Content Levels in
accordance with the applicable versions of the FI T or microFIT Rules and Contracts, and a large
number of these contracts have been provided w ith a Connection Date and/or are already in
commercial operation.

44. Thus, an objective assessment of the available facts pursuant to Article 11 of the DSU should
lead the Panel to conclude that all the wind FIT, so lar PV FIT, and solar PV microFIT contracts that
are already in commercial operation have satisfi ed their Minimum Required Domestic Content
Levels, and FIT payments are currently being made under these contracts.

23 Japan's first written submission, Section III.B.4.

III. LEGAL ARGUMENT

A. ORDER OF ANALYSIS OF JAPAN'S CLAIMS AND JUDICIAL ECONOMY

45. In this dispute, Japan raises claims and ar guments under: (1) the SCM Agreement; (2) the
GATT 1994; and (3) the TRIMs Agreement. Japan submits that the Panel should begin its analysis
with Japan's SCM Agreement arguments, then pr oceed to Japan's GATT 1994 arguments, and finally
conclude with Japan's TRIMs Agreement arguments . The Panel may not, however, exercise judicial
economy with respect to any of Japan's claims; rath er, the Panel must reach findings on all three sets
of claims.
24

46. The Panel should begin with Japan's SCM Agreem ent arguments for three principal reasons.
First, the Appellate Body stated in EC – Bananas III that the provisions from the agreement that
"deals specifically, and in detail" with the measures at issue should be analyzed first, 25 and in the
present case, the FIT Program precisely provides subsid ies to FIT generators contingent on their use
of domestic over imported goods. Second, if Japan's SCM Agreement arguments are successful, they
would allow for a remedy under Article 4.7 of the SCM Agreement, which would resolve this dispute
more promptly than the remedy under Article 19.1 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes ("DSU") that would result from a violation of the GATT 1994 or
the TRIMs Agreement. Third, a favorable fi nding under Japan's GATT 1994 and TRIMs Agreement
arguments would not allow the Panel to exercise judicial economy with respect to Japan's SCM
Agreement arguments, so the Panel would not be able to eliminate this part of its assessment by
beginning with the GATT 1994 and TRIMs Agreement arguments.

47. As between Japan's arguments under the GA TT 1994 and TRIMs Agreement, Japan submits
that the Panel should examine the GATT 1994 argument s first for four principal reasons. First, both
Japan and Canada have presented their GATT 1994 arguments before their TRIMs Agreement
arguments. Second, there are no disagreements betw een the parties that the measures at issue are
trade-related investment measures ("TRIMs") or th at they are inconsistent with the terms of
Article III:4 of the GATT 1994; the only dispute be tween the parties is whether the measures are
excluded from the scope of GATT Article III by virtue of Article III:8(a). Third, prior WTO panels
have not uniformly analyzed one of these agreements before the other. Fourth, a particular mandatory
sequence of analysis is not required unless failure to follow such a sequence "would amount to an
error in law", 26 and here analyzing the GATT 1994 arguments prior to the TRIMs Agreement
arguments would not amount to an error in law.

48. Finally, the Panel may not exercise judicial ec onomy with respect to any of Japan's claims
because violations of the SCM Agreement result in recommendations and rulings pursuant to
Article 4.7 of the SCM Agreement, while viola tions of the GATT 1994 and TRIMs Agreement result
in recommendations and rulings pursuant to Article 19.1 of the DSU. The Panel is required to make
all findings that "will assist the DSB in making the recommendations or in giving the rulings provided
for in the covered agreements" pursuant to Article 11 of the DSU, so as to "secure a positive solution
to a dispute" in accordance with Article 3.7 of the DSU. Because recommendations and rulings solely
pursuant to Article 4.7 of the SCM Agreement or so lely pursuant to Article 19.1 of the DSU may be
insufficient to resolve the presen t dispute, the Panel must consider all of Japan's claims and
arguments.

24 See Japan's response to Panel question No. 24 after the first meeting.
25 Appellate Body Report, EC – Bananas III, para. 204.
26 Panel Reports, China – Auto Parts , para. 7.99, citing Appellate Body Report, Canada – Wheat

B. THE FIT PROGRAM , AND FIT AND MICROFIT CONTRACTS , PROVIDE SUBSIDIES CONTINGENT
UPON THE USE OF DOMESTIC OVER IMPORTED GOODS INCONSISTENT WITH CANADA 'S
OBLIGATIONS UNDER ARTICLES 3.1(B) AND 3.2 OF THE SCM AGREEMENT

1. Article 1.1(a) of the SCM Agreement: "financial contribution by a government or any
public body" or "any form of income or price support"

49. Japan begins by establishing that the guarant eed electricity rates provided under the FIT
Program and contracts satisfy the first element of th e definition of a subsidy under Article 1.1(a) of
the SCM Agreement.
27 Japan argues principally that the gua ranteed rates that the OPA pays and
contractually commits itself to pay under the FI T Program and contracts result in a "financial
contribution by a government or any public body" as defined under Article 1.1(a)(1) because they
involve a "direct transfer of funds" or "potential direct transfer of funds" from the Government of
Ontario. Japan further submits that these guaranteed rates are a form of income or price support for
FIT generators within the meaning of Article 1.1(a)(2).

50. The FIT Program and contracts constitute "a government practice [that] involves a direct
transfer of funds" because, under the FIT Rules and c ontracts, the OPA is "liable to the Supplier for
the Contract Payments". As defined in the FIT Standard Definitions, "Contract Payments" refer to
"all payments to a Supplier under a FIT Contract … determined for each Settlement Period in
accordance with Exhibit B of the FIT Contract". Ge nerally speaking, Exhibit B of the FIT Contract
operates to provide that:

 in the general case where a FIT generator deliv ers electricity to the grid, the Contract
Payment on a per kWh basis is equal to the contract rate minus the HOEP; and

 in the special case where a FIT generator is instru cted not to deliver electricity to the grid, the
Contract Payment on a per kWh basis is equal to the entire contract rate.

The Government of Ontario delegates to the OPA the authority to "establish and impose charges to
recover from consumers its costs and pa yments under procurement contracts".
28 Pursuant to this
authority, the OPA collect these Contract Paymen ts from consumers through the Global Adjustment,
and then distributes them to FIT generators pursuan t to the terms of their FIT contracts. Japan
submits these payments are most appropriately characterized as "direct transfer[s] of funds".29

51. Independent of the actual payment of FIT contract rates, the OPA's commitments in FIT
contracts to provide these rates over a fixed term also result in a "potential direct transfer of funds".
Under a FIT contract, a FIT generator becomes entitle d to guaranteed payments for all electricity
generated (or foregone per IESO instruction) to the ex tent of its contracted capacity for the contract
term, which is 20 years in the case of wind and solar PV contracts. The OPA's execution of FIT
contracts, which commits the agency to disburse these payments, is thus a government practice
involving a "potential direct transfer of funds".
30

52. These financial contributions are "by a governme nt or any public body" because the OPA,
which is ultimately liable for all FIT payments, is a "public body". The OPA is unmistakably a public

27 See Japan's first written submission, Section IV.A.1; Japan's response to Panel question No. 5 after
the first meeting.
28 Electricity Act, 1998, Exhibit JPN-005, Section 25.20.
29 Japan's first written submission, paras. 189-191; Ja pan's response to Panel question No. 5 after the
first meeting, paras. 2-3.
30 Japan's first written submission, paras. 192-194.

body because it possesses and exercises governmental au thority, expressly vested in it by statute and
directives of the Minister of Energy, and because the Government of Ontario exercises meaningful
control over the agency and its conduct.
31

53. Even if the Panel finds that the OPA's paymen ts to FIT generators and payment commitments
under FIT contracts are not financial contributions by a public body, Japan submits that the FIT
Program and contracts provide a form of "income or price support" to electricity generators in the
sense of Article XVI of the GATT 1994. An interpretation of the te rm "income or price support" in
accordance with the customary international law ru les of treaty interpretation shows that the FIT
Program and contracts would constitu te such "income or price support" if they contributed to the
income or prices of FIT generators, thereby operatin g to reduce imports of any products into Ontario
and distorting international trade. Here, by pa ying guaranteed above-market rates to renewable
energy generators, as well as committing itself to providing these rates over a 20-year term for wind
and solar PV generators, the Government of Ontari o contributes to the prices and income enjoyed by
FIT generators and incentivizes the production of renewable energy. Moreover, because the
Government of Ontario makes this contribution subject to a domestic content requirement (i.e., receipt
is contingent on the FIT generator's use of renewa ble energy generation equipment made in Ontario),
it incentivizes the production of such equipment in Ontario, and reduces imports of such equipment
into Ontario. For these reasons, the FIT Program a nd contracts constitute a form of "income or price
support".32

54. Canada's argument that the FIT Program and contracts are properly characterized as
"purchases [of] goods" by the OPA, and not as "direct tr ansfer[s] of funds", "potential direct transfers
of funds", or "income or price support" is without merit.33

55. Canada's argument is without merit because " purchase[] [of] goods" is not even a plausible
characterization of these measures. Th e verb "purchase" means broadly "[t]o obtain; to gain
possession of", and more narrowly "[t]o acquire in exchange for payment in money or an equivalent;
to buy".34 However, the FIT Program is not aimed at promoting renewable energy generation in order
to supply electricity solely to the OPA or other agencies of the Government of Ontario, but to all
electricity consumers in Ontario. Nor is the FIT Program designed to allow the Government of
Ontario to sell electricity generated under FIT contr acts to local distributors and/or consumers. The
defining aspect of FIT contracts is that they ensure renewable energy genera tors payments in excess
of those that they would receive but for the FIT Program, and accordingly, the OPA never has
possession of or exercises control over obtaining of the electricity supplied under the FIT Program.
35
The OPA does not have any interest in obtaining the possession of such electricity, given that it does
not consume the electricity for its own use, does not seek profit from its re-sale, and does not manage
or control the production and transmission of electricity in Ontario. 36 In fact, the OPA does not
obtain, gain possession of, or acquire the electricity delivered under FIT contracts; rather, that
electricity is injected into the grid and goes straight to consumers.

31 Japan's first written submission, paras. 195-204.
32 Japan's first written submission, paras. 205-214.
33 See Japan's opening statement at the first meeting of the Panel, Section III.B.1; Japan's second
written submission, Section III; Japan's opening statement at the second meeting of the Panel, Section II.A;
Japan's response to Panel question No. 25 after the sec ond meeting; Japan's comment on Canada's response to
Panel question No. 24 after the second meeting.
34 The Oxford English Dictionary , OED Online, Oxford University Press,
http://www.oed.com/view/Entry/154832 (emphases added).
35 Japan's opening statement at the first meeting of the Panel, para. 23.
36 See Japan's comment on Canada's response to Panel question No. 47, para. 60.

56. Canada argues that the characterization of FI T contracts as "purchases" under the text of its
domestic measures shows that they are "purchases" for purposes of WTO law, but this argument has
been rejected by the Appellate Body. 37 Most recently, in US – Large Civil Aircraft (2 nd Complaint),
the Appellate Body said in no uncertain terms: "w e 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 ".38 Thus, the characterization and
treatment of a measure under domestic law is not determinative of its status under WTO law. A
conclusion to the contrary would be tantamount to enabling Canada, the responding Member, to
determine whether its measures are consistent with its WTO obligations, which "clearly, cannot be
so".39

57. Canada also argues that the presence of conditio ns for FIT payments, such as the delivery of
electricity to the grid, serves as evidence that th ey are "purchases" of electricity, and not "direct
transfer[s] of funds". However, the Appellate Body has explained that "what is captured in
[Article 1.1(a)(1)(i)] is a gove rnment's provision … of funds, irrespective of whether this is done
gratuitously or in exchange for consideration",
40 noting that a "conditional grant" (which is analogous
to the situation of FIT payments) is an indisputable example of a "direct transfer of funds". Thus, the
conditions attached to FIT payments are neutral or irrelevant to wh ether FIT contracts may be legally
characterized as "direct transfer[s] of funds".41

58. The Appellate Body has explained that under Ar ticle 1.1(a) of the SCM Agreement, a panel
must, first, gain a proper understanding of the relevant characteristics of a measure, and second, assess
whether and where that measure falls under Article 1.1(a). 42 Japan submits that the relevant
characteristics of the FIT Program with respect to wind and solar PV generators are as follows:

 the FIT generator must build a generation f acility while satisfying a requirement to use
Ontario-made wind and solar PV generation equipment in constructing the facility;

 in return, the OPA promises to pay an above-mar ket rate that guarantees the recovery of costs
plus a reasonable return on investment over a 20-year period;

 the OPA pays that rate to the generator upon the generator delivering electricity to the grid, or
upon the generator withholding such delivery pursuant to instructions from the IESO, up to
the contract capacity; and

 the electricity injected into the grid goes strai ght to consumers, without the OPA or any other
government agency taking possession of the electricity, having the right to take possession of
the electricity, using or intending to use the electricity, or seeking any profit from the resale of
the electricity.

These relevant characteristics reveal that the nature of FIT contracts may be summarized as a program
to finance the construction of renewable energy ge neration facilities in Ontario, where such facilities
that use wind and solar PV technologies are require d to use locally made generation equipment in

37 Japan's second written submission, Section III.A.
38 Appellate Body Report, US – Large Civil Aircraft (2 nd Complaint) , para. 586 (quoting Appellate
Body Report, US – Softwood Lumber IV, para. 56). See also id. paras. 593, 604.
39 Appellate Body Report, India – Patents (US), para. 66.
40 Appellate Body Report, US – Large Civil Aircraft (2nd Complaint), para. 618 (emphasis added).
41 Japan's second written submission, paras. 43-45.
42 See Appellate Body Report, US – Large Civil Aircraft (2nd Complaint), paras. 585-586.

their production of electricity.
43 Accordingly, FIT contracts are properly characterized as "direct
transfer[s] of funds", "potential direct transfers of funds", or "income or price support" – and not as
"purchases [of] goods" – under Article 1.1(a) of the SCM Agreement.

59. However, even if FIT contracts may be char acterized as "purchases [of] goods", the Panel
may still find them to be characterized as "direct tran sfer[s] of funds", "poten tial direct transfers of
funds", or "income or price support". This is because the Appellate Body in US – Large Civil Aircraft
(2nd Complaint) made clear that a transaction may be covered by multiple subparagraphs of
Article 1.1(a)(1),44 and moreover, the presence of "or" betw een Articles 1.1(a)(1) and 1.1(a)(2) does
not preclude a measure from being plausibly characterized under both of those provisions. Thus, the
Panel may determine whether FIT pa yments confer any benefit to FI T generators on the premise that
FIT payments are "direct transfer[s] of funds" (or al ternatively "potential direct transfers of funds" or
"income or price support"), even if FIT contracts may also be characterized as "purchases" of
electricity.
45

60. Finally, if the Panel were to find that FIT contracts should be characterized only as
government purchases of goods ( quod non ), Japan has still met its burden in this dispute. This is
because purchases of goods are explicitly listed in Ar ticle 1.1(a)(1)(iii), and therefore, Canada's
argument for "purchases of goods" should be deemed as its admission that FIT contracts satisfy the
first element of the definition of a subsidy, i.e., "a financial contribution by a government or a public
body". Further, the benefit analysis for FIT c ontracts characterized as purchases of goods would be
no different than the benefit analysis for FIT contract s characterized as direct transfers of funds – i.e.,
the benefit may be assessed, on a per unit basis, by taking the difference between the FIT rate and the
market rate for electricity in Ontario. Thus, if the Panel were to find that FIT contracts should be
characterized only as government purchases of goods, the Panel should still find that FIT contracts are
subsidies under Article 1.1 of the SCM Agreement, and prohibited subsidies under Articles 3.1(b) and
3.2 of that Agreement.
46

2. Article 1.1(b) of the SCM Agreement: "benefit"

61. Next, Japan establishes that the FIT Program and contracts confer a "benefit" on FIT
generators, fulfilling the second element of the defin ition of a subsidy under Article 1.1(b) of the
SCM Agreement.47 Because Japan has raised a prohibited subsidy claim under Articles 3.1(b) and 3.2
of the SCM Agreement, it is suffi cient for Japan to show only the existence of a benefit; no precise
quantification of the benefit is necessary.

62. A "benefit" is to be assessed from the perspectiv e of the recipient of a financial contribution
with reference to a market benchmark. In particular, the Appellate Body and WTO panels have found
that a "financial contribution" confers a "benefit" when it is provided on te rms that are better than
those that would have been available to the r ecipient on the market. Thus, "it is necessary to
determine whether the financial contribution places the recipient in a more advantageous position

43 Japan's second written submission, para. 36; Japa n's response to Panel question No. 25 after the
second meeting, para. 9.
44 See Appellate Body Report, US – Large Civil Aircraft (2nd Complaint), para. 613 and note 1287.
45 Japan's opening statement at the first meeting of the Panel, para. 28; Japan's opening statement at the
second meeting of the Panel, para. 7; Japan's comment on Canada's response to Panel question No. 24 after the
second meeting.
46 Japan's response to Panel question No. 22 after the second meeting, para. 7.
47 See Japan's first written submission, Section IV.A.2; Japan's opening statement at the first meeting of
the Panel, Section III.B.2; Japan's second written subm ission, Section II; Japan's opening statement at the
second meeting of the Panel, Section II.B; Japan's response to Panel question No. 28 after the second meeting.

than would have been the case but for the financial contribution …. Accordingly, a financial
contribution will only confer a ‘benefit', i.e., an advantage, if it is provided on terms that are more
advantageous than those that would have been available to the recipient on the market".48

63. Because each form of "financial contribution" confers a different type of "benefit", a "benefit"
must be examined in relation to the provision of Article 1.1(a) at issue. Therefore:

 The benefit conferred with respect to the direct transfer of funds, on a per unit basis, may be
assessed by examining the difference between th e rate guaranteed by the OPA under the FIT
contract and the rate that the FIT generator w ould have received for its electricity in the
wholesale market where the rate is established at the point where electricity supply matches
demand.

 The benefit conferred with respect to the potentia l direct transfer of funds may be assessed by
examining the market value of the commitments under a FIT contract compared to what a FIT
generator has given up or "paid" to obtain the FIT contract, or by comparing the commitments
under a FIT contract with the terms that a FIT generator may be able to obtain in a
hypothetical contract from a market-based purchaser of electricity.

 With respect to price support, because FIT gene rators' prices are supported by the difference
between the market rate and FIT contract rate, a benefit analysis would correspond closely to
the benefit analysis for a direct transfer of funds.

 And with respect to income support, because FIT generators' incomes are supported by the
difference between the income stream promis ed by the OPA under a FIT contract and the
income stream that the generators would r eceive on the market, a benefit analysis would
involve taking the income stream derived from FIT contract rates and subtracting the income
stream derived from a market rate, thus follo wing in part from the benefit analysis for
potential direct transfers of funds.
49

64. Given the facts of this dispute, each of these analyses requires subtraction of the market value
of electricity in Ontario (which is, of course, depe ndent on the market price of electricity in Ontario)
from the amounts provided under FIT contracts. 50 Because it is sufficient fo r Japan to show only the
existence of a benefit, and no precise quantification of the benefit is necessary, Japan offers the Panel
several possible benchmarks for the market price of electricity in Ontario, each of which clearly
demonstrate the existence of a benefit under the FIT pricing scheme.

65. In particular, the Panel should consider Japan's proposed benchmarks as follows:

 HOEP: The most appropriate market benchmark be cause it is: (i) the rate that is determined
based on supply and demand in Ontario; and ( ii) the rate a renewable energy generator in
Ontario would actually receive but for the FIT Program;

 Japan's calculated wholesale rate: Japan's calcu lation of the weighted average rate for the
electricity commodity in Ontario provided to generators other than renewable energy
generators in Ontario;

48 See Appellate Body Report, Canada – Aircraft, para. 149 (emphasis added); Appellate Body Report,
EC and certain member States – Large Civil Aircraft , para. 849. See also Panel Report, Brazil – Aircraft ,
49 Japan's first written submission, Sections IV.A.2.a, IV.A.2.b, and IV.A.2.c.
50 Japan's response to Panel question No. 21 after the first meeting, para. 2.

 The RPP commodity charge: The OEB's calculatio n under the RPP of the weighted average
rate for the electricity commodity in Ontario, which acts as the ceiling for the amount that
Ontario consumers pay for the electricity commod ity in Ontario, taking into account the rates
provided to all electricity generators in Ontario, meaning Ontario generators should be unable
to enter the market and expect to receive a rate higher than this rate; and

 Out-of-jurisdiction wholesale rates: Averag e wholesale rates in deregulated/competitive
electricity markets outside Ontario – specifically the close-proximity markets of Alberta, New
York, New England, and the Mid-Atlantic Un ited States – which the Panel may turn to if it
determines that the aforesaid in-jurisdiction rates are distorted in any way.51

66. For HOEP, Japan notes that any generator in Ontario, including a renewable energy
generator, may participate in the wholesale market administered by the IESO and sell electricity at
HOEP without any kind of long-term electricity supply contract, provided that the generator satisfies
all technical and regulatory requirements. 52 For the RPP commodity charge, Japan notes that
consumers in Ontario will continue to pay the same rate for the electricity commodity as they are
currently paying, and therefore, but for the FIT Pr ogram, the OPA may enter into a supply contract
with a new generator that can supply electricity at that rate or less, because it will not require the OPA
to increase the amount of the Global Adjustment, and consequently, the rate consumers will pay. In
determining the market benchmark, it would be unr easonable to assume that the OPA could enter into
a supply agreement with a generator that can supply el ectricity at a rate highe r than the rate Ontario
consumers currently pay, because that would force consumers to pay more than they are currently
paying.53

67. Japan's proposed benchmarks, and a comparison with FIT rates showing the existence of a
benefit, are summarized in the following table.

Benchmark Rates
Benchmark Rate (cents/kWh)
Weighted Average HOEP 3.79
Weighted Average wholesale rate for generators in Ontario other than FIT and
RESOP generators (by capacity)
7.02
Weighted Average wholesale rate for generators in Ontario other than FIT and
RESOP generators (by delivery)
7.13
Average wholesale rate in Alberta 5.2
Average wholesale rate in New York ISO 6.1
Average wholesale rate in New England ISO 5.3
Average wholesale rate in Mid-Atlantic US 4.9
Ontario RPP retail prices established by OEB (conventional meters) 7.1 (low-tier)
8.3 (high-tier)
Ontario RPP retail prices established by OEB (smart meters) 6.2 (off-peak)
9.2 (mid-peak)
10.8 (on-peak)
FIT Rates
FIT Generator Rate (cents/kWh)

51 Japan's response to Panel question No. 7 after the first meeting, paras. 10-16; Japan's second written
submission, paras. 8-12; Japan's opening statement at the second meeting of the Panel, paras. 14-19; Japan's
response to Panel question No. 31 after the second meeting.
52 Japan's second written submission, para. 10. See also Japan's comment on Canada's response to
Panel question No. 2 after the second meeting, para. 3.
53 Japan's response to Panel question No. 26 after the second meeting, para. 15.

Benchmark Rates
Benchmark Rate (cents/kWh)
Solar PV, Rooftop, ≤ 10 kW 80.2
Solar PV, Rooftop, > 10 ≤ 250 kW 71.3
Solar PV, Rooftop, > 250 ≤ 500 kW 63.5
Solar PV, Rooftop, > 500 kW 53.9
Solar PV, Ground Mounted, ≤ 10 kW 64.2
Solar PV, Ground Mounted, > 10 kW ≤ 10 MW 44.3
Wind, Onshore, Any size 13.5 + 20% escalation
Wind, Offshore, Any size 19.0 + 20% escalation
Comparison of FIT Rates with Benchmark Rates

68. Japan also submits that the Panel may confir m the existence of a benefit in this case by
examining the history of the Ontario electricity ma rket, and the objective design and structure of the
FIT Program.

69. The history of the Ontario electricity market demonstrates that Ontario established its present
market structure, including the OPA and ultimatel y the FIT Program, because the liberalized market
that operated in 2002 did not attract sufficient elect ricity supply, including from renewable sources, to
the province. The Government of Ontario therefor e decided to internalize the positive externalities of
renewable energy by guaranteeing payments that cover the production costs and reasonable profits for
these generators, which payments these generators otherwise would not be able to obtain in the
market. In other words, the history of the Onta rio electricity market shows that, but for the FIT
Program, these generators would not operate in the market today.54

70. Further, the objective design and structure of the FIT Program confirms that FIT contracts
confer a "benefit" upon FIT generators . FIT contracts offer terms that guarantee a price that covers a
FIT generator's production costs and provides a reasonable profit for a period of 20-years for the wind
and solar PV generators of inter est in this dispute. It should be self-evident that no producer
participating generally in the market would have such certainty in recovering its production cost and a
reasonable profit over such a long period of time. In other words, the FIT Pr ogram removes the risk
that wind and solar PV generators would otherwise face if they were to operate under normal market
conditions. This again shows that wind and solar PV generators obtain more preferable treatment
under their FIT contracts than they would obtain in the market, and is therefore also indicative of the
conferral of a benefit.
55

71. Because the benefit analysis requires compar ison with a "market benchmark", and not a
specific market price,56 the history of Ontario's electricity market and the objective design and
structure of the FIT Program may be useful in assessing whether the terms received by FIT generators
at the time they enter into their FIT contracts w ith the OPA are more advantageous than the terms
they could have obtained in the Ontario market at that time.
57

54 Japan's second written submission, paras. 3-7; Japan's opening statement at the second meeting of the
Panel, paras. 10-13; Japan's comments on Canada's respons es to Panel question Nos. 1 and 42 after the second
meeting.
55 Japan's second written submission, paras. 13-16; Japan's opening statement at the second meeting of
the Panel, para. 20; Japan's response to Panel question No. 32 after the second meeting.
56 See Appellate Body Report, US – Large Civil Aircraft (2nd Complaint), paras. 641, 647.
57 See Japan's comment on Canada's response to Panel question No. 1, note 8. Indeed, Japan presented
evidence of the terms that might be available to FIT gene rators in the Ontario market under private contracts,
and those terms are clearly less advantageous th an the terms offered under FIT contracts. See Japan's response
to Panel question No. 28 after the second meeting, para. 41.

72. Canada's argument that the proper market be nchmark in this case should be a price that
reflects the higher costs of production of renewable electricity is without merit.
58 Canada
misunderstands the benefit analysis that is required under Article 1.1(b) of the SCM Agreement. This
analysis requires a comparison between an actual (what the world looks lik e in the presence of the
measure at issue) and a counterfactual (what the world would have looked like in the absence of that
measure).59 It therefore requires a benchmark that re flects "the conditions pursuant to which the
goods … at issue would under market conditions, be exchanged".60 Thus, a market price for purposes
of the benefit analysis "is not determined solely by reference to either supply-side or demand-side
considerations without reference to the other"; rather, "[t]he price of a good or service must reflect the
interaction between the supply-side and demand- side considerations under prevailing market
conditions."61 Accordingly, the views of end-users of el ectricity in Ontario, and the conditions that
those end-users of electricity consider in th eir transactions when purchasing electricity from
generators in the Ontario market, are very rele vant to an assessment of the proper counterfactual
market benchmark with which to compare the subsid y measures at issue. The relevant question is:
what rate would wind and solar gene rators receive for their electricity from consumers in the Ontario
market absent the existence of the FIT Program?62

73. Canada has not established that distinct mark ets for renewable and non-renewable electricity
exist in Ontario, where suppliers and consumers exch ange renewable electricity at a higher price that
reflects the higher costs of production of renewable electricity. This should not be surprising, because
as Canada agrees, electricity is a commodity, and ther efore one unit of electricity is indistinguishable
from another unit of electricity in Ontario. Japan further notes that Ontario's FIT Program does not
give consumers the option to choose a renewable s ource for the electricity they use, and to pay a
higher rate for that electricity. Rather, the higher rates owed to FIT generators are distributed across
all consumers via the Global Adjustment to establish a single price paid by consumers for electricity.

74. Absent a distinct market for renewable electricity in Ontario, there can be no distinct market
rate for renewable electricity to serve as a mark et benchmark; rather, the market rates for the
electricity commodity as a whole (which reflect the full supply mix of renewable and non-renewable
electricity), as advanced by Japan, serve as the pr oper comparators because those are the rates under
which electricity "would … be exchanged" between consumers and suppliers in the Ontario market.
63

75. In this regard, the Panel should note the distinction between: (i) regulated prices that cover
production costs plus reasonable profit; and (ii) subsidized prices that cover production costs plus
reasonable profit. In a market environment, the most efficient producer of electricity (for example
due to economies of scale) should be able to sell its electricity at a price covering its production cost
plus reasonable profit, and should be the dominant generator. The market may even support this
generator charging a higher price, but this generato r may not be permitted to sell at any higher price
by virtue of government regulation. By contrast, in a market environment, less cost-efficient
generators, such as renewable ener gy generators, would be unable to survive competition with the
dominant generator. In order to enable such less cost-efficient gene rators to survive in the market

58 See Japan's opening statement at the first meeting of the Panel, Section III.B.2; Japan's second
written submission, Section II; Japan's opening statement at the second meeting of the Panel, Section II.B.
59 See Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 973.
60 Appellate Body Report, EC and certain member States – Large Civil Aircraft , para. 975 (emphasis
added).
61 Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 981-982.
62 Japan's second written submission, para. 22. See also Japan's opening statement at the second
63 Japan's opening statement at the first meeting of the Panel, paras. 43-44.

despite their inferior cost-efficiency, the government must subsidize these generators. The FIT
Program represents such an example in Ontario.64

76. Japan draws the Panel's attention to the funda mental difference in the objectives behind the
rates provided to OPG and the rates provided to ot her generators (including FIT generators) in the
Ontario market. Because OPG is the dominant gene rator in Ontario, the rates provided to OPG's
facilities, primarily through OEB regulations, are established in order to prevent OPG from exercising
its dominant market position to impose excessive prices on consumers. By contrast, the rates
provided to other generators, such as FIT generators , are aimed at supporting their very entry into and
existence in the Ontario market, by guaranteeing them rates of return that they could not otherwise
obtain in the market.
65

3. Article 2 of the SCM Agreement: specificity

77. Turning to the question of specificity, Article 1.2 of the SCM Agreement provides that "[a]
subsidy as defined in paragraph 1 shall be subject to the provisions of Part II … only if such subsidy
is specific in accordance with the provisions of Article 2". The subsidies provided by the FIT
Program and contracts are prohibited subsidies under Article 3 of the SCM Agreement, and therefore
are deemed to be specific pursuant to Article 2.3.
66

4. Article 3.1(b) of the SCM Agreement: "subsidies contingent … upon the use of domestic
over imported goods"

78. The subsidies provided to renewable energy ge nerators under the FIT Program and contracts
are subsidies "contingent … upon the use of dome stic over imported goods", which are prohibited
under Article 3.1(b) of the SCM Agreement.
67 Canada does not contest that, should the FIT Program
and contracts be considered to provide "subsid ies", those subsidies are inconsistent with
Article 3.1(b).

79. The Appellate Body has found "contingent" to mean "conditional" or "dependent for its
existence on something else", and it has interpre ted Article 3.1(b) as addressing both subsidies
contingent "in law" and "in fact".
68 The FIT subsidies are: (i) "contingent" because they are
conditional or dependent upon satis fying the domestic content requirement (specifically, a Minimum
Required Domestic Content Level for wind and sola r PV projects, ranging between 25%-60% for FIT
projects and between 40%-60% for microFIT projects); and (ii) contingent "in law" or "in fact"
because this requirement is expressly stated in, inter alia, the Green Energy and Green Economy Act,
2009, Minister's FIT Directive of 24 September 2009, every version of the FIT and microFIT Rules
and FIT and microFIT Contracts, and every execu ted solar PV (FIT and microFIT) and wind (FIT)
contract.

80. The Domestic Content Level of a FIT or microF IT project is determined by reference to a
"Domestic Content Grid", which lists the goods and services that may be utilized to satisfy the
Minimum Required Domestic Content Levels. These Grids create incentives for solar PV (FIT and
microFIT) and wind (FIT) generators to utilize goods of Ontario origin in preference to goods of other
origins in their solar PV or wind generation faciliti es. Such incentives, in and of themselves, render

64 Japan's response to Panel question No. 33 after the second meeting, para. 57.
65 Japan's comment on Canada's response to Panel question No. 5 after the second meeting, para. 7.
66 See Japan's first written submission, Section IV.A.3.
67 See Japan's first written submission, Section IV.A.4.
68 See Appellate Body Report, Canada – Aircraft, paras. 139, 166; Appellate Body Report, US – FSC
(Article 21.5 – EC), para. 111.

the FIT Program subsidies, as such, contingent upon the use of domestic over imported goods,
inconsistent with Article 3.1(b).

81. The detailed provisions for FIT and microFIT projects in the Rules and Contracts confirm that
receipt of the FIT subsidies is contingent on th e use of domestically produced renewable energy
generation equipment over imported varieties of those goods. The Domestic Content Grids require
that, for all project types, at least some goods manufactured, formed, or assembled in Ontario must be
utilized in order to achieve the Minimum Required Domestic Content Level for that project.

82. In short, to satisfy the FIT Program's domes tic content requirement and benefit from the
subsidized rates that it accords to participants, any solar PV (FIT and microFIT) or wind (FIT)
generator is incentivized to use goods that are ma nufactured within Ontario, and must necessarily do
so. This establishes that the subsidies provided by the FIT Program and contracts are subsidies
contingent upon the use of domestic over imported goods inconsistent with Canada's obligations
under Article 3.1(b) of the SCM Agreement.

5. Article 3.2 of the SCM Agreement: "neither grant nor maintain subsidies"

83. Finally, in granting and maintaining prohibite d subsidies contingent upon the use of domestic
over imported goods, Canada is in violation of its obligations under Article 3.2 of the SCM
Agreement.
69

C. THE FIT PROGRAM , AND FIT AND MICROFIT CONTRACTS , ARE INCONSISTENT WITH CANADA 'S
NATIONAL TREATMENT OBLIGATION UNDER ARTICLE III:4 OF THE GATT 1994

1. Inconsistency with Article III:4 of the GATT 1994

84. The FIT Program, and FIT and microFIT contr acts, violate Canada's national treatment
obligation under Article III:4 of the GATT 1994, because they impose "requirements" on renewable
energy generators "affecting" the "internal" "sale", "purchase", and "use" of renewable energy
generation equipment, and accord imported equi pment treatment "less favourable" than "like
products" of Ontario origin.
70 Canada does not contest that, should Article III:8 of the GATT 1994
not apply, the FIT Program and contracts are inconsistent with Cana da's obligations under
Article III:4.

85. First, renewable energy generation equipmen t manufactured domestically in Ontario and
imported from Japan are "like products". These products are in a directly competitive relationship in
the market. There is no substantial difference be tween domestic and imported equipment in terms of
their physical properties, end-uses, consumer perceptions, and tariff classifications – i.e ., they share
all four categories of "characteristics" identified by the Appellate Body as relevant in an analysis of
"likeness".71

86. Second, the domestic content rules of the FIT Program and contracts are "requirements". A
renewable energy generator that wishes to obtain the subsidized rates offered by the FIT Program
voluntarily accepts, through the application for and execution of a FIT contract, the obligation to
comply with a variety of conditions, including the minimum required domestic content level relevant
to its solar PV (FIT and microFIT) or wind (FIT) project. In other words: (i) the FIT Program creates
obligations to comply with a variety of conditio ns, including achievement of a minimum required

69 See Japan's first written submission, Section IV.A.5.
70 See Japan's first written submission, Section IV.B.1.
71 See Appellate Body Report, EC – Asbestos, paras. 99, 101.

domestic content level for solar PV (FIT and micr oFIT) or wind (FIT) generating facilities, which are
(ii) voluntarily undertaken by FI T generators entering into a FIT contract with the OPA. These
obligations should therefore be considered to c onstitute a "requirement" within the second situation
identified by the panel in India – Autos.72

87. Third, the domestic content rules of the FIT Program and contracts "affect[]" the "internal"
"sale", "purchase" or "use" of these goods. This is because the domestic co ntent rules incentivize
Ontario-based wind and solar PV energy genera tors to choose renewable energy generation
equipment manufactured in Ontario over such equipment produced abroad. These rules thereby
modify the conditions of competition in favor of such goods made in Ontario, and have "an effect on"
the sale, purchase or use of those goods in Ontario. 73 The Appellate Body and WTO panels have
found measures that "create an incentive" for domestic over imported goods to "affect", inter alia, the
internal "use", "purchase" or "sale" of those goods. 74 Moreover, the effect on the sale, purchase, or
use of the equipment should be considered "interna l" because the requirements apply only inside the
customs territory of Canada (in particular, the Province of Ontario) and not at the border.75

88. Finally, the domestic content rules of the FIT Program and contracts accord "less favourable"
treatment to imported renewable energy generation e quipment than that accorded to like products of
Ontario origin. The focus of this analysis is whether the FIT Program and contracts modify the
conditions of competition in the relevant market to the detriment of imported products.76 By requiring
the use of goods or services of Ontario origin in or der to obtain subsidized electricity rates, the FIT
Program necessarily creates incentives, or a purch asing preference, among Ontario-based wind and
solar PV energy generators for renewable energy generation equipment produced within Ontario,
which in turn stimulates domestic production of su ch equipment. The detailed Domestic Content
Grids go further to require that any such generator use at least some Ontario-origin goods to achieve
the Minimum Required Domestic Content Level, thereby confirming the preference for locally-
produced goods over goods of foreign origin. In India – Autos, the panel found that "the very nature
of [an] indigenization requirement generates an incentive to purchase and use domestic products and
hence creates a disincentive to use like importe d products", and therefore, an indigenization
requirement clearly modifies the conditions of competition in favor of domestic products. 77 T h e
situation in Ontario is similar.

89. In sum, because the FIT Program and contracts impose a domestic content requirement on
wind and solar PV electricity generators that affect s the internal sale, purchase, or use of renewable
energy generation equipment, according less favorable treatment to like products of Japanese origin,
they are inconsistent with Cana da's national treatment obligatio n under Article III:4 of the GATT
1994.

72 See Panel Report, India – Autos, para. 7.184.
73 See Panel Report, Turkey – Rice , paras. 7.221-22. See also Panel Report, Canada – Autos ,
74 See Appellate Body Reports, China – Auto Parts , para. 196; Panel Report, India – Autos ,
paras. 7.195-98 & 7.305-09; Appellate Body Report, US – FSC (Article 21.5 – EC), para. 212.
75 See Panel Report, Brazil – Retreaded Tyres, para. 7.418.
76 See Appellate Body Report, Korea – Various Measures on Beef , para. 135. See also Panel Report,
Turkey – Rice, para. 7.232; Panel Report, China – Publications and Audiovisual Products, para. 7.1532.
77 See Panel Report, India – Autos, paras. 7.201-7.202.

2. Inapplicability of Article III:8 of the GATT 1994

(a) Article III:8(a) Does Not Apply

90. Canada's only defense to Japan's claim under Article III:4 of the GATT 1994, as well as to its
claim under Article 2.1 of the TRIMs Agreement di scussed in Section III.D below, is that the FIT
Program and contracts are not subject to GATT Article III by falling within the government
procurement exemption under Article III:8(a). Canada's argument lacks merit.
78

91. First, FIT contracts are not "procurement by governmental agencies of products purchased".
To begin, FIT contracts do not fall within GATT Artic le III:8(a) for the simple reason that they are
not "purchases", while Article III:8(a) requires that products be "purchased" in order for a measure to
fall within its scope.79

92. The real question is whether the OPA, not the Government of Ontario, "purchases" electricity
under FIT contracts "for governmental purposes". Here, the OPA does not . This observation is
confirmed by the history of the liberalization of the Ontario electricity market. In 1999, the
Government separated the state-owned monopoly On tario Hydro into a number of new entities with
different functions. Canada has clarified the rol es that each of these government agencies and other
entities serve for the purpose of ensuring the stable supply of electricity in Ontario as follows: (i) OPG
produces and sells electricity; (ii) Hydro One and other transmission/local distribution companies
transmit and distribute electricity to consumers, in cluding selling it to consumers; (iii) IESO serves as
a regulator, including operating the grid; and (iv) OPA and OEFC manage contracts with various
generators, and provide settlement services to them. With the establishment of the FIT Program, FIT
generators (which are private entities) also now produce and sell electricity, with the OPA assuming
the additional role of providing them with financial assistance.

93. Japan understands that the Government of Onta rio chose this allocation of roles among these
different entities, rather than the concentration of these roles into a single entity like Ontario Hydro,
because it believes the former helps achieve the objective of ensuring the stable supply of electricity
in Ontario. In light of this decision, the Govern ment of Ontario has no need to assign to the OPA the
role of purchasing electricity from FIT generators and selling it to transmission/local distribution
companies or consumers to fulfill its objective to achieve a stable supply of electricity.

94. Given its role, the OPA has no interest in obt aining the possession of the electricity generated
pursuant to its FIT contracts, and therefore should not be deemed as "purchas[ing]" such electricity
"for governmental purposes" under Article III:8(a) of the GATT 1994. This is evident from several
facts, including: (i) the OPA does not consume the el ectricity delivered pursuant to FIT contracts for
its own use; (ii) the OPA does not seek profit (i.e., fiscal revenue) from such electricity by re-selling it
to consumers; (iii) the OPA does not manage or control the production and transmission of such
electricity, which is conducted by other entities (e .g., IESO, Hydro One or other transmission/local
distribution companies); and (iv) FIT generators se ll their electricity directly to transmission/local
distribution companies, with the OPA only serving th e role of settling payments to those generators.
Thus, even given the legitimacy of the Government of Ontario's policy of ensuring the stable supply

78 See Japan's first written submission, Section IV.B.2.a; Japan's opening statement at the first meeting
of the Panel, Section IV.B; Japan's second written submission, Section IV; Japan's opening statement at the
second meeting of the Panel, Section III.B; Japan's responses to Panel question Nos. 45, 47 and 48 after the
second meeting; Japan's comments on Canada's responses to Panel question Nos. 45, 47 and 48 after the second
meeting.
79 Japan's second written submission, para. 56; Japan' s opening statement at th e second meeting of the
Panel, para. 27.

of electricity, the steps taken by the Governme nt to achieve that objective – specifically, the
separation of Ontario Hydro into a number of entiti es with different functions – confirms that the
OPA is not "purchas[ing]" electricity under FIT contracts "for governmental purposes".

95. In this regard, Japan notes that the present case should be distinguished from cases where, in
order to ensure the stable supply of electricity , the government chooses to assign all functions of
electricity supply (i.e., production, transmission and distribution to consumers) to a single government
agency, and that government agency "purchases" electricity generated by other generators for supply
to consumers. In that case, the government ag ency obviously has an interest in obtaining the
possession over such electricity, for example to manage the physical electricity supply, and therefore
may be deemed as "purchas[ing]" such electricity "for governmental purposes".

96. Here, given the policy decisions by the Government of Ontario, the OPA does not have to
"purchase" electricity generated under FIT contracts as discussed above. If Canada's argument that
the OPA's role, as established by the Government of Ontario, qualifies for the government
procurement exemption set forth in GATT Article III:8(a) is accepted , this would enable all Members
to circumvent the national treatment requirement s under GATT Article III:4 by using a government
agency to intervene between market participants under the pretext of "purchas[ing]" a product to
pursue a "governmental purpose" of ensuring the stab le supply of that product, when "purchase" of
that product by the government agency is not requir ed to achieve that purpose. For this reason,
Canada's interpretation cannot stand.
80

97. Japan notes that Canada's response to a question of the Panel further highlights the risk of
circumvention of the GATT's national treatment disci plines that will arise if Canada's arguments on
Article III:8(a) of the GATT 1994 are accepted. Ca nada indicates that "Hydro One is required to
operate as a ‘commercial enterprise'",
81 and "[t]he 77 publicly owned Local Distribution Companies
(LDCs) … receive rates for the distribution of electricity that allow for cost recovery and a rate of
return that is ‘just and reasonable '".82 Canada therefore confirms that these entities obtain profit by
selling electricity to consumers (or distributors). In this connection, Japan notes that Canada has
argued, in the alternative, that "when a FIT supplier injects its renewable electricity into the grid, the
vast majority of that electricity is transferre d to the physical possession of the Government of
Ontario", and thus, "the Government of Ontario is still purchasing renewable energy".83 However, the
Government of Ontario would not be permitted to impose local content requirements on the purchase
of FIT electricity by it, or more specifically, by Hydro One or the 77 publicly-owned LDCs, by virtue
of GATT Article III:4, and further would not be exempted from that obligation by virtue of GATT
Article III:8(a) because Hydro One and the LDCs w ould be purchasing FIT electricity indisputably
for commercial resale. Thus, under Canada's alte rnative argument, if FIT contracts were executed
with Hydro One and/or the LDCs, rather than with the OPA, they would be inconsistent with Canada's
national treatment obligations. Ca nada's position is therefore tantamount to arguing that the local
content requirements on the alleged purchase of FIT electricity are exempted from Canada's national
treatment obligations as a result of GATT Article III:8(a) by merely placing the OPA in between the
FIT generators, on the one hand, and Hydro One a nd/or the LDCs, on the other hand. Such an
interpretation cannot stand because of the loophole it would create in the GATT's national treatment
obligations.
84

80 Japan's comment on Canada's response to Panel question No. 47 after the second meeting, paras. 57-
62.
81 Canada's response to Panel question No. 13 after the second meeting, para. 41.
82 Canada's response to Panel question No. 13 after the second meeting, para. 42 (emphasis added).
83 Canada's opening statement at the second meeting of the Panel, para. 27.
84 Japan's comment on Canada's response to Panel question No. 13 after the second meeting, paras. 21-
22.

98. Further, even if products could be considered as "purchased" under FIT contracts, such
contracts still do not constitute "procurement by governmental agencies". A proper interpretation of
the term "procurement" in acco rdance with the customary international law rules of treaty
interpretation reveals that an analysis of whethe r "procurement" exists under Article III:8(a) requires
consideration of four general elements, none of which alone may be decisive: (i) government payment
for the procurement; (ii) government use, consumption, or benefit (where "benefit" refers to the
benefit of the use of a product not in th e government's possession); (iii) government obtainment,
acquisition, or possession ; and (iv) government control over the obtaining of the product.
Consideration of whether "procurement" exists must necessarily be done on a case-by-case basis,
taking into account all relevant facts in a holistic analysis.
85

99. Here, Ontario consumers in general, and not the Government of Ontario, are the ones that use,
consume, and benefit from the electricity delivered under FIT contracts; and they do so for their own
purposes, and not for the benefit of or on behalf of the government. This follows from the fact that
FIT payments are made for electricity that is delivered into the grid . The Government of Ontario
acquires the electricity it actually consumes in th e same manner as other retail consumers, and not
through the FIT Program or contracts.

100. Next, the Government of Ontario does not obtain, acquire, or possess the renewable
electricity delivered pursuant to FIT contracts, nor does it have any interest or right in doing so.
Notably, the Government does not take title to or retain any ownership interest in the electricity
delivered under FIT contracts. Canada fails to explain how the OPA possesses or obtains – and
thereby acquires – renewable electricity that is delivered under FIT contracts to the grid for ultimate
use by Ontario consumers.

101. Finally, the Government of Ontario has no control over the obtaining of the electricity that is
delivered to the grid pursuant to FIT contracts. Ra ther, electricity is withdrawn from the grid at the
direction of Ontario consumers when they turn on or off their electronic devices, and this withdrawal
is "almost instantaneous" with no possibility of control by the government.

102. For all these reasons, considering the facts of th e present case, and all of the elements of the
procurement analysis taken toge ther, none of which alone could be decisive, the only logical
conclusion is that the Government of Ontario is not engaged in the "procurement" of renewable
electricity under the FIT Program and contracts.
86

103. Second, FIT contracts are not entered into "for governmental purposes". Properly interpreted
in accordance with the customary in ternational law rules of treaty interpretation, the term "for
governmental purposes" means for government use, consumption, or benefit , where again "benefit"
refers to the benefit of using a product th at may not be in the government's possession. 87 Here, the
Government of Ontario does not use, consume, or benefit from the electricity delivered pursuant to
FIT contracts as already discussed, so that electricity is not "for governmental purposes".

85 Japan's opening statement at the first meeting of the Panel, paras. 49-58; Japan's opening statement at
the second meeting of the Panel, para. 28.
86 Japan's opening statement at the first meeting of the Panel, paras. 59-66; Japan's second written
submission, paras. 57-60; Japan's opening statement at the second meeting of the Panel, paras. 29-32.
87 Japan's opening statement at the first meeting of the Panel, paras. 69-75; Japan's opening statement at
the second meeting of the Panel, paras. 30, 33; Japan's responses to Panel question Nos. 45 and 47 after the
second meeting; Japan's comments on Canada's responses to Panel question Nos. 45 and 47 after the second
meeting.

104. Canada's argument that "for governmental purposes" simply means "for an aim of the
government" – such as securing the supply of renewa ble electricity – cannot stand, because it would
render the national treatment obligations in Article III completely ineffective. Canada suggests that,
"to fall within the scope of Article III:8(a), a purch ase must be for an aim of the government other
than discrimination, itself, even if, when purch asing a product for such an aim, the government
chooses to impose discriminatory conditions". 88 If Members understood that to be the meaning of
"for governmental purposes", then Members that wished to take discriminatory measures could
simply do so by masking the discriminatory measu re under an allegedly principal non-discriminatory
aim behind its purchase of products, such as the aim to secure the stable supply of that product. This
would make the government procurement exempti on under Article III:8(a) limitless, and render the
remainder of Article III obsolete.89

105. Moreover, even accepting Canada's stated obj ective of securing the supply of renewable
electricity, the OPA – which is the entity Canada alleges to be purchasing electricity under FIT
contracts for governmental purposes – has no need to purchase such electricity given the Government
of Ontario's policy decision to establish the OPA as an entity that manages contracts with various
generators and provides settlement services to th em, while other entities (e.g., IESO, Hydro One or
other transmission/local distribution companies) manage or control the production and transmission of
electricity in Ontario. Under such circumstanc es, considering the OPA's role to qualify for the
government procurement exemption in Article III:8(a) would again enable all Members to circumvent
the national treatment requirements under Article II I:4 by using a government agency to intervene
between market participants under the pretext of pursuing a "governmental purpose" of ensuing the
stable supply of a certain product, when "purchase" of that product by the government agency is not
required to achieve that purpose.
90

106. Calling the government's intervention in the mark et to become the supplier of a particular
product to its citizenry a "public service" is entir ely artificial and clearly distinguishable from the
provision of legitimate services such as health or ed ucation. In this circumstance, the government is
not providing a "public service", but rather stepping into the market in order to become the supplier of
a good. Products purchased by the government fo r the purpose of supplying that product to its
citizenry cannot be considered "for governmental purposes" within the meaning of Article III:8(a)
because such an interpretation would render the rema inder of Article III ineffective, as Japan has
previously explained.
91

107. Third, FIT contracts are entered into "with a view to commercial resale". A proper
interpretation of this term in accordance with the customary international law rules of treaty
interpretation shows that it means with a view to being sold in to the stream of commerce or trade (as
opposed to being used or consumed by the government). 92 Importantly, the negotiating history of
Article III:8(a) demonstrates that the term "commercia l" was included in this provision to distinguish
a government's introduction of goods into the stream of commerce after use by the government from a
government's introduction of goods into the st ream of commerce without such use by the

88 Canada's second written submission, para. 58.
89 Japan's opening statement at the second meeting of the Panel, para. 34.
90 Japan's comment on Canada's response to Panel question No. 47 after the second meeting, paras. 57-
62.
91 Japan's response to Panel question No. 47 after the second meeting, para. 70.
92 Japan's opening statement at the first meeting of the Panel, paras. 78-85; Japan's second written
submission, paras. 66-68.

government.
93 Here, again, because the electricity delivere d pursuant to FIT contracts is injected into
the transmission grid and delivered almost instantane ously to Ontario consumers for their use, to the
extent renewable electricity can be considered to have been purchased by the Government of Ontario
under FIT contracts, that renewable electricity is purchased "with a view to commercial resale".

108. Canada's interpretation of "commercial" resale as requiring a profit element would render all
of Article III ineffective. This argument suggest s that, whenever a government desires to do so, it
could simply insert itself as the middle man, pay a domestic producer to deliver goods to a consumer,
and recover from the consumer the amount paid to the producer (i.e., without profit, or even with a
loss), all while taking protectionist measures that would otherwise violate Article III, such as a
requirement that the domestic producer utilize solely local content in its production. For this reason,
Canada's interpretation of "commercial" resale cannot stand.94

109. However, even if the term "commercial" require s a profit element, that element is satisfied
here. This is because, even under Canada's interpre tation, Article III:8(a) would simply require that
the government not have " a view to " having profit generated from the resale of a product – i.e., it
would not require that the profit from the resale go to the government. FIT rates are designed
precisely to allow FIT generators to recover their costs and earn a reasonable profit on the electricity
that they deliver into the grid. Therefore, FIT c ontracts are certainly entered into by the OPA "with a
view to commercial resale".
95

110. To conclude, Japan emphasizes the im plication of Canada's position on GATT
Article III:8(a). If the local content requirement that serves as a condition for receiving FIT payments
is exempted by Article III:8(a) on any of the ground s alleged by Canada, a Member could require that
commerce in any goods be conducted through a government agency for the alleged government
purpose of ensuring the stable supply of those goods , while at the same time enacting protectionist
measures such as local content requirements in co nnection with the production and supply of those
goods. Canada's arguments would totally eviscerate the national treatment requirements set forth in
GATT Article III, thereby indicating that Canada's interpretation of GATT Article III:8(a) directly
contradicts its immediate context, i.e., the entiret y of GATT Article III, and accordingly, cannot be
supported under Article 31 of the Vienna Convention on the Law of Treaties.

111. Thus, in Japan's view, the question before the Panel is not whether FIT contracts fall within
the exemption provided by GATT Article III:8(a) – they do not. Rather, the real question before the
Panel is: at what point under Article III:8(a) do FIT c ontracts fall outside the scope of that provision?
Japan's principal argument is that FIT contracts fa ll outside the scope of Article III:8(a) because they
are not "procurement by governmental agencies of products purchased". However, Japan also argues
alternatively that FIT contracts fall outside the scope of Article III:8(a) because they are not entered
into "for governmental purposes", or because th ey are entered into "with a view to commercial
resale".

93 Japan's opening statement at the second meeting of the Panel, para. 36; Japan's response to Panel
question No. 48 after the second meeting; Japan's comment on Canada's response to Panel question No. 48 after
the second meeting.
94 Japan's second written submission, para. 69; Japan' s opening statement at th e second meeting of the
Panel, paras. 37-39.
95 Japan's second written submission, paras. 70-71; Japan's opening statement at the second meeting of
the Panel, para. 39.

(b) Article III:8(b) Does Not Apply

112. Article III:8(b) of the GATT 1994 is also inapp licable to this dispute because Japan does not
claim that the payment of subsidized rates under the FIT Program is made exclusively to domestic
producers. Rather, Japan argues that the FIT Program's domestic content requirement discriminates
against imported renewable energy generation equipment in favor of such equipment produced in
Ontario.
96

D. THE FIT PROGRAM , AND FIT AND MICROFIT CONTRACTS , ARE TRADE -RELATED INVESTMENT
MEASURES INCONSISTENT WITH CANADA 'S OBLIGATION UNDER ARTICLE 2.1 OF THE TRIMS
AGREEMENT

113. The FIT Program, and FIT and microFIT contracts, are also inconsistent with Article 2.1 of
the TRIMs Agreement because they are TRIMs that ar e inconsistent with the provisions of Article III
of the GATT 1994.
97 Canada does not contest that, should Article III:8 of the GATT 1994 not apply,
the FIT Program and contracts are inconsistent with Canada's obligations under Article 2.1 of the
TRIMs Agreement.

114. Japan has already establi shed that the FIT Program and contracts are inconsistent with
Article III of the GATT 1994 (including that Article III:8 does not apply), so the key question is
whether the measures at issue may be considered "investment measures related to trade in goods" –
i.e., TRIMs. There should be little doubt that these measures qualify as TRIMs because: (i) they
encourage investment in the production of renewabl e energy and associated equipment in Ontario,
and are therefore "investment measures"; and (ii) they affect trade in wind and solar energy generation
equipment, which is without question "trade in goods".

115. Should there be any doubt that the FIT Progr am and contracts are inconsistent with
Article 2.1 of the TRIMs Agreement, one need only turn to the Illustrative List contained in the
Annex to the TRIMs Agreement. Since the domestic content rules of the FIT Program and contracts
require wind and solar energy producers in Ontario to use Ontario-produced equipment to generate
their electricity in order to take advantage of the rates offered by the FIT Program, these measures are
WTO-inconsistent TRIMs under the terms of Annex 1(a).

IV. CONCLUSION

116. For the above reasons, Japan requests that the Panel make the following findings:

 through the FIT Program, as well as individually executed FIT and microFIT contracts for
wind and solar PV projects, Canada grants and maintains prohibited subsidies that are
contingent upon the use of domestic over importe d goods, in violation of Articles 3.1(b) and
3.2 of the SCM Agreement;

 the domestic content requirement of the FIT Pr ogram, as well as individually executed FIT
and microFIT contracts for wind and solar PV projects, accords less favorable treatment to
Japanese renewable energy generation equipment than accorded to like products of Ontario
origin, in violation of Article III:4 of the GATT 1994; and

 the FIT Program, as well as individually executed FIT and microFIT contracts for wind and
solar PV projects, constitute trade-related investment measures inconsistent with the

96 See Japan's first written submission, Section IV.B.2.b.
97 See Japan's first written submission, Section IV.C.

provisions of Article III of the GATT 1994, and are therefore in violation of Article 2.1 of the
TRIMs Agreement.

117. Accordingly, Japan asks the Panel to recommend that Canada:

 withdraw its prohibited subsidies without de lay, as required by Article 4.7 of the SCM
Agreement, by eliminating the domestic conten t requirement of the FIT Program, as well as
that of individually executed FIT and microFIT contracts for wind and solar PV projects; and

 bring the FIT Program, as well as individually executed FIT and microFIT contracts for wind
and solar PV projects, into conformity with the GATT 1994 and the TRIMs Agreement, as
required by Article 19.1 of the DSU.

I. INTRODUCTION

1. At issue in the present dispute are the domestic content requirements included in the FIT
Program (including the microFIT Program) issued by the Government of Ontario in 2009. To be clear,
the European Union does not bring claims against other elements included in the FIT Program; nor
does the European Union contest the general purpose of the FIT Program, as helping promote
electricity supply from renewable energy sources. Su ch a purpose is legitimately valid and, in the
European Union's view, WTO Members can and shoul d actively support it, for instance, by granting
subsidies, insofar as they are consistent with the covered agreements. However, WTO Members
cannot use FIT programs in order to achieve other trade-distorting purposes, such as the protection of
its domestic industries to the detriment of others, by including domestic content requirements.

2. The European Union notes that the measures at is sue in this dispute have been taken by one of
Canada's provinces, and in particular by the Govern ment of Ontario. Domestic content requirements
are completely unnecessary and even alter the pr oper achievement of the legitimate objectives
pursued by FIT programs. Indeed, by imposing a pr otectionist requirement to benefit from Ontario's
FIT Program, Ontario is rendering it more difficult and expensive to generate electricity from
renewable sources, as it curtails the ability of genera tors to install the best available equipment at
competitive prices. This step – i.e. the trade ba rriers and distortions introduced by the Ontario
measures – defeats the logic of favouring the de ployment of renewable energy equipment, as a
category of environmental goods.

3. The European Union considers that the dom estic content requirements in Ontario's FIT
Program, and the protectionist interest they serve, are contrary to the fundamental national treatment
principle and, thus, are inconsistent with the c overed agreements. After goi ng through the procedural
background, the measures at issue and the factual bac kground of this dispute, most of them identical
to the dispute in DS412, the European Union w ill examine its claims under the SCM Agreement, the
TRIMs Agreement and the GATT 1994.

4. The European Union requests the Panel to examine and provide recommendations and rulings
on all fundamental aspects of this dispute, that is , the prohibited subsidy and the national treatment
aspects. Only by making findings and recommendations with respect to both our claims against
prohibited subsidies and our claims on the breach of national treatment obligations under the TRIMs
Agreement and the GATT 1994, would the Panel be "g iving the rulings provided for in the covered
agreements" in accordance with the aim of the di spute settlement mechanism "to secure a positive
solution to a dispute". The European Union also in vites the Panel to examine the EU claims in the
order as presented in this submission.

II. FACTUAL BACKGROUND

5. The European Union incorporated the factua l description, including a ll exhibits, of Japan's
first written submission in DS412 as well as in subsequent submissions.

III. LEGAL ARGUMENT

6. The European Union submits that Ontario' s FIT Program (including the microFIT Program)
as well as individual contracts executed pursuant to that Program (referred to "the FIT Program and its
related contracts") are inconsistent with Canada 's obligations under the SCM Agreement, the TRIMs
Agreement and the GATT 1994 since they constitut e a prohibited subsidy, and also discriminate
against imports of equipment and components for renewable energy generation facilities.

A. THE MEASURES AT ISSUE ARE SUBSIDIES C ONTINGENT UPON THE USE OF DOMESTIC OVER
IMPORTED GOODS: ARTICLES 3.1(B) AND 3.2 SCM AGREEMENT

7. The European Union submits th at the measures at issue are inconsistent with Articles 3.1(b)
and 3.2 of the SCM Agreement, beca use the measures are subsidies w ithin the meaning of Article 1.1
of the SCM Agreement that are provided continge nt upon the use of domestic over imported goods,
namely contingent upon the use of equipment and components for renewable energy generation
facilities produced in Ontario over such equi pment and components imported from other WTO
Members, including the European Union.

1. The first element of the definition of subsidy is met: income/price support and financial
contribution

(a) Income or price support: Article 1.1(a)(2) of the SCM Agreement

8. In the present case, the EU pr imarily submits that the measures at issue amount to a form of
income or price support for the FIT Generators. Th e European Union considers that the measures at
issue amount to a form of income or price support in the sense of Article XVI of the GATT 1994 and
thus fall under Article 1.1(a)(2) of the SCM Agreem ent. The FIT Program operates as a price support
system whereby the Government of Ontario, thr ough its agency, the OPA, contractually agrees with
the FIT Generators a rate and then pays such a ra te directly (through another agency, the IESO) or
indirectly (through LDCs) to the FIT Generators. Ca nada argues that the measu res at issue must be
characterised as "purchases of goods" and not as "inc ome or price support" because of the nature of
the transaction between the OPA and the FIT Generato rs (i.e., the OPA paying the FIT Generators in
exchange for their delivery of renewable electricity into Ontario's electricity grid). However, the
alleged characterisation of the measures at issue as a "purchase" is, in and of itself, no obstacle for
such measures to be characterised as "any form of income or price support". Thus, even assuming
arguendo that each contract or payment under the FIT Program could be characterised as a "purchase
of goods" ( quod non ), the fact that there is a program in place aimed at guaranteeing rates to
generators implies that the measures at issue shoul d be characterised as "income or price support".
The EU considers that the Panel should follow the analytical steps suggested by the Appellate Body in
US – Large Civil Aircraft and identify which features are the mo st central to the measures at issue as
a whole and which of those features are to be accorded the most significance for purposes of
characterising them under Article 1.1(a) of the SCM Agreement.

9. Moreover, there is income or price support "in the sense of Article XVI of GATT 1994".
Importantly, "in the sense of Article XVI of GATT 1994" in Article 1.1(a)(2) of the SCM Agreement
in relation to the concept of "income or price s upport" does not carry with it the requirement of a
finding of "serious prejudice" referred to in the second sentence in Article XVI:1. Article 1.1 of the
SCM Agreement is not concerned with effects arising from subsidies, but only with the concept (that
is, the "definition") of subsidies. The terms " in the sense" (that is, "in the meaning") confirm that the
reference to Article XVI of GATT 1994 is limited to the concept of income or price support, as a
scope/definitional issue, not to the applicable disciplines.

10. In the present case, the FIT Program contains local content requirements which, by their own
nature, reduce or even eliminate imports of equipment and components for renewable energy
generation facilities into Ontario. Consequently, th e 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.

(b) Financial contribution: Article 1.1(a)(1) of the SCM Agreement

11. The European Union maintains that the use of the term "or" between paragraphs (1) and (2) in
Article 1.1(a) of the SCM Agreement does not excl ude the possibility that a measure can fall at the
same time under one or the other sub-element. It merely provides for a choice or alternative
characterisations to meet the first element of the de finition of "subsidy". This contrasts with the use of
the term "and" in between the first and second subpara graphs (a) and (b) in Article 1.1, which require
that the first (in any of the alternatives) and second elements (i.e., benefit) be present for the definition
to be met. The EU 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.

12. The European Union argues that the guaranteed electricity rates that the OPA contractually
commits to under the FIT Program and its related contracts result in a "financial contribution by a
government or any public body" as defined under Ar ticle 1.1(a)(1) because they involve a "direct
transfer of funds" from the Government of Ontari o. The financial contribution is granted once the
OPA signs the FIT Contract with the FIT Generator and agrees to provide the guarantee rates, either
through disbursements made by the IESO or thr ough LDCs. In the alternative, the European Union
argues that the guaranteed electricity rates that the OPA contractually commits to under the FIT
Program and its related contracts result in a "finan cial contribution by a government or any public
body" as defined under Article 1.1(a)(1) because they involve a "potential direct transfer of funds"
from the Government of Ontario or a situation where the government " purchases goods". Moreover,
in the alternative, the European Union argues that the disbursements made by other private operators
(LDCs) paying the guaranteed electricity rates that the OPA contractually commits to under the FIT
Program result in a "financial contribution by a government or any public body" as defined under
Article 1.1(a)(1) because they involve entrustment or direction in the sense of Article 1.1(a)(1)(iv) of
the SCM Agreement.

13. The European Union considers that the c ontractual commitments undertaken by the OPA
pursuant to the FIT Contract are better characteris ed as a "direct transfer of funds" in the sense of
Article 1.1(a)(1)(i) of the SCM Agreement because future payments are made unconditionally (other
than the nature of the contract, i.e. the expected delivery of electricity in exchange of the payment).
Indeed, under the FIT Contract, the FIT Generators commit to supply the generated electricity into the
grid in exchange of a payment at the agreed rates. Such generation electricity is expected in order to
obtain the advantageous guarant eed rate. Thus, for the purpose of the financial contribution
determination, the payments committed under legally binding contracts should be considered as
"granted" or "transferred", even though physically those payments have not yet occurred or have not
been made.

14. The European Union submits that the legal co mmitment to transfer the difference between the
market rate of electricity that a generator would receive through the standard operation of the market
(i.e. MCP/HOEP) and the rate enjoyed by a gene rator under a FIT Contract to the FIT Generator
amounts to "a government practice [that] involves a direct transfer of funds" in the sense of
Article 1.1(a)(1)(i) of the SCM Agreement. Indeed , the FIT Rules and the FIT Contract contain the
binding commitment by the OPA to pay the guaranteed rates if and when the FIT Generator supplies
the electricity into the grid. Moreover, no matter wh at happens, the OPA is ultimately liable to make
those payments. Thus, the OPA's role is more of th e nature of an intermediary (like an agent or a
clearing house) where the OPA does not actually purch ase electricity. Rather, electricity is purchased
by other market operators (either at market rates or above, i.e., at "regulated" rates), while the OPA
pays the above-market rates agreed contractua lly with the FIT Generator. Thus, in the
European Union's view, the transfer of the guarant eed, above-market rates to the FIT Generators is
better characterised as a "direct transfer of funds ". Should the Panel consider that the measures at

issue are not "direct transfers of funds", the Europe an Union maintains that the Panel can find that the
measures at issue amount to a "potential direct transfer of funds"

15. In any event, should the Panel consider that the OPA actually "purchases" electricity pursuant
to the FIT Contract, the European Union considers that this would amount to a financial contribution
in the form of purchases of goods under Article 1.1(a)(1)(iii) of the SCM Agreement.

16. In the alternative, the European Union also argues that the disbursements made by other
private operators (LDCs) paying the guaranteed elec tricity rates that the OPA contractually commits
itself to pay under the FIT Program result in a "financial contribution by a government" as defined
under Article 1.1(a)(1), in any of the forms di scussed above, because they involve entrustment or
direction in the sense of Article 1.1(a)(1)(iv) of the SCM Agreement. However, the fact that under
Section 8.4 of the FIT Rules, the OPA is ultimat ely liable for the payments agreed under the FIT
Contracts reinforces the European Union's view that the FIT Program and its related contracts are
better characterised as a "direct transfer of funds" by the government.

17. In sum, no matter how the Panel addresses this question, the European Union considers that
the FIT Program and its related contracts amount to a "financial contribution" in the sense of
Article 1.1(a)(1) of the SCM Agreement. Indeed, the EU invites the Panel to make alternative findings
in this respect.

2. The second element of the definition of subsidy is met: benefit

18. The European Union submits that the FIT Program and its relate d contracts provide a
"benefit" to the recipient, i.e. the FIT Generator, in the sense of Article 1.1(b) of the SCM Agreement.

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

19. 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.

20. In any event, applying Article 14(d) to the f acts 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. In the European Union's view, Canada
is asking the Panel to compare the FIT rates w ith 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, a nd as implemented through each FIT Contract,
determines the price for electricity from wind and sola r electricity generators. There is no other price
in Ontario for that electricity as potential genera tors 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.

21. 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 Ontari o 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.

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

22. 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.

23. In Canada – Aircraft, the Appellate Body noted that "the ordinary meaning of 'benefit' clearly
encompasses some form of advantage" and that "t he second element in Article 1.1 is concerned with
the 'benefit… conferred' on the recipient by [the] governmental action". Thus, in order to determine
whether "benefit" exists within the meaning of Ar ticle 1.1(b) of the SCM Agreement, the government
action, regardless of its form (i.e., financial contri bution or income/price support) has to confer some
form of advantage to the recipient.

24. The Appellate Body also noted that, in orde r to identify whether such an advantage exists,
some kind of comparison or counterfactual is requi red: in particular whether the government action
makes the recipient "better off" than it would ot herwise have been, absent that government action.
According to the Appellate Body, "the marketplac e provides an appropriate basis for comparison …
because the trade-distorting potential of a [govern ment action] can be identified by determining
whether the recipient has received [a form of "f inancial contribution" or income/price support] on
terms more favourable than those available to th e recipient in the market". 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 appropr iate basis for comparison [since a] 'benefit' arises
under each of the guidelines if the recipient has r eceived a 'financial contribution' on terms more
favourable than those available to the recipient in the market". Thus, the essence of the determination
of the existence of benefit under Article 1.1(b) is to compare, on the one hand, what the recipient
obtained from the government action with, on the othe r hand, what the recipient would have obtained
from the market, absent the government action.

25. In Japan – DRAMs the Appellate Body recalled the refere nce 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 whic h the analysis should proceed. ... There is but one standard—the
market standard". In E C and Certain Member States – Large Civil Aircraft , the Appellate Body
observed that: "The marketplace to wh ich the Appellate Body referred in Canada – Aircraft reflects a
sphere in which goods and services are exchanged between willing buyers a nd sellers. A calculation
of benefit (…) demands an examina tion 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". 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 valu e'." Thus, the existence of benefit has to be
determined by reference to the market as it is, th e market where the government action takes place, in
this case Ontario.

26. 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 shield ing the FIT Generators from any market risks.
Those conditions are provided regardless of the scale or generation capacity of the project.

27. The FIT Program and its related contracts are the result of the OPA's efforts to facilitate new
generation investment by private producers that th e wholesale market was incapable of encouraging.
They are, as Canada qualifies them, "incentives for long-term investment to meet forecasted demand".
Thus, absent the FIT Program, the FIT Generators w ould not be able to participate on the market.
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.

28. 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).
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.

(c) The proper market benchmark should relate to th e market conditions for electricity in Ontario,
regardless of how it is generated

29. Should the Panel consider that further analys is is required to determine the existence of
benefit in the present case, the European Union c onsiders that the proper benchmark in this case
should relate to the market conditions for electricity in Ontario, regardless of how it is generated.
Electricity is a commodity, physically alike in al l respects. 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".

30. Moreover, in Ontario the environmental effect s 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.

31. 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. 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.

32. In any event, in the Europ ean Union's view, there is no re ason 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 expe nsive technologies. In other words, insofar as the
electricity is produced from "clean" sources, consum ers 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. T hus, even considering renewable electricity as a
market separate from non-renewable energy in Onta rio (quod non), there would be a benefit granted
to the generators of wind and solar electricity.

(d) The proper market benchmark should not be iden tified by referring to cost of production and,
in any event, the structure of the FIT Program leads to payments in excess of costs

33. The European Union considers that, contrary to what Canada maintains, an appropriate
market benchmark in this case does not have to refl ect the cost of producing renewable electricity.
Rather, the relevant question in identifying the appr opriate 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.

34. 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 prod uct in question. In the European Union's view, the
same applies in cases of purchases of goods. The ex istence 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 whic h has to be examined in order to determine
whether the government paid adequate remune ration in accordance to the "prevailing market
conditions". Quite telling, among the factors incl uded within the notion of "prevailing market
conditions" in Article 14(d) there is no reference to "cost of production".

35. The fact that the FIT rates at least cover th e high cost of production of the FIT Generators
does not show that there is no benefit in the pr esent case. Rather, it 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.

36. In any event, even if the cost of generating wind and solar electricity would have to be taken
into account, as Canada alleges, th e European Union submits that the structure of the FIT Program
leads to payments in excess of co sts. Indeed, the cost of produci ng wind and solar electricity in
general mainly depends on the lo cation 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 ar e standardised (i.e. they are the same for all
generators) regardless of the location of the gene ration 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.

37. It is interesting to underline that, as menti oned before, 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 manufactur ing capacity (pursuant to the domestic content
requirements). Renewable generation capacity could th erefore 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.

(e) The HOEP is an appropriate benchmark in this case

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

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

40. 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 ma rket 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.

41. Canada confirms that 8% of Ontario generators do receive only the HOEP. In the
European Union's view, Canada again confirms th e 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. 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 ca nnot since their cost 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 genera tors 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 t echnologies in the production of goods that will
compete in another market were operators are more developed technolog ically and have more
efficient methods of production. Thus, the European Union considers that th e 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 ge nerators 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.

42. 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 "cl assical" 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 competen t 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.

43. 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. 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 jurisdicti ons under market conditions. In any event, the
European Union submits that either on its own or as a proxy, the import and export prices for
electricity in Ontario show that a benefit exists in the present case.

44. Consequently, should the Pane l consider it necessary to establis h the existence of benefit in
the present case by reference to the difference be tween 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.

(f) Any of the other alternative benchm arks show the existence of benefit

45. 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.

(i) The weighted average wholesale rate receive d by all generators in Ontario other than FIT
and RESOP generators

46. 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 consum ers) and the electricity generators (representing
supply). In this sense, the result of the weighted av erage of all rates agreed between the Government
of Ontario (excluding FIT and similar rates) and a ll 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, thus below the guarant eed 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.

(ii) The "commodity charge" portion of ret ail prices for electricity in Ontario

47. Ontario retail prices may be taken into acc ount 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 re tail 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 mete rs. These RPPs reflect HOEP plus the Global
Adjustment, and are the prices paid by retail consum ers in Ontario for the electricity commodity itself
(i.e., absent any fees and charges associated with th e 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.

48. Moreover, the European Union notes Canada's statement that "most" users of electricity in
Ontario pay the price required of them by the syst em, i.e., the prices regulated by the OEB. Indeed,
there are some consumers who can buy their electricity pursuant to bilateral contracts with generators.
Needless to say, such a price will always be lo wer than the regulated price for final consumers
(otherwise, there would not be any interest in having such bilateral contracts). 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 Genera tors 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 am ount of the subsidy but merely its existence under
Article 1.1(b) of the SCM Agreement, the Pane l can find that the FIT Program and its related
contracts confer a benefit to the FIT Generators on this basis.

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

49. 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. In this respect, the Eur opean Union considers that there is no need to go
outside Ontario to identify a proper benchmark in th is case since, even if prices are heavily regulated,
this does not imply that they are distorted. That being said, should the Panel consider that regulated
rates or prices in Ontario cannot be used, the European Union consid ers that the outside benchmarks
proposed by Japan, where rates are competitively de termined in deregulated electricity markets
where the government has a limited presence, show that the FIT Program and its related contracts
provide a benefit.

(g) 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

50. 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, regard less of whether those rates are above the market.
Indeed, as explained before, one of the most rele vant 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 Contract s include price escalation conditions which ensure
profitability regardless of the market conditions. Th e OPA assumes all market risks without charging
any premium.

51. 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.

(h) Concluding remarks as to the existence of "benefit"

52. 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 existe nce of benefit under Article 1.1(b) of the SCM
Agreement, like in cases where the fact that no ra tional investor would have made a particular
investment shows the existence of benefit, regardless of its quantum.

53. Should the Panel consider it necessary to dete rmine 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 benchmar ks to show to this effect. Under any of those,
the European Union considers that the Panel may fi nd 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.

54. Finally, the Panel may also determine the exis tence of benefit in this case on the basis of the
long-term nature of the guaranteed rates. Indeed, th e 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 distinguish able from the benefit conferred by the above-market
level of the FIT rates.

3. Contingent upon the use of domestic over imported goods: Article 3.1(b) SCM
Agreement

55. The European Union submits that the FIT Pr ogram is a subsidy contingent upon the use of
domestic over imported goods, in the sense of Artic le 3.1(b) of the SCM Agreement. The FIT
Program requires the use of domestic over impor ted goods, "solely or as one of several other
conditions". This may cover the situation where a s ubsidy is simultaneously subject to two or more
cumulative conditions. But it may as well apply to the situation where a subsidy is subject to two or
more alternative conditions, so that compliance with any of them gives a right to the subsidy. If one of
those conditions is "the use of domestic over impor ted goods" the subsidy must be deemed prohibited
by Article 3.1(b), even if it might also be th eoretically possible to qualify for the subsidy by
complying with an alternative condition, such as us ing a certain proportion of domestic labour or of
domestic services. A different interpretation –e.g. suggesting that a subsidy may not be prohibited if at
least one qualifying condition is not inconsistent with the SCM Agreement– would run contrary to the
letter of Article 3(1)(b) and would make it very easy to circumvent the prohibition simply by
providing that the beneficiaries may also qualify fo r the subsidy by fulfilling some irrelevant but
dissuasive alternative condition.

56. In sum, the European Union submits that the FIT Program amounts to a prohibited subsidy
under Article 3.1(b) of the SCM Agreement.

4. Specificity: Article 2.3 SCM Agreement

57. Article 1.2 of the SCM Agreement states that: "[a] subsidy as defined in paragraph 1 shall be
subject to the provisions of Part II or shall be subject to the provisions of Part III or V only if such a
subsidy is specific in accordance with the provisions of Article 2". Article 2.3 establishes that: "[a]ny
subsidy falling under the provisions of Article 3 sh all be deemed to be specific". The subsidies
provided by the FIT Program and related contracts ar e prohibited subsidies under Article 3.1(b) of the
SCM Agreement and, therefore, are deemed to be specific pursuant to Article 2.3 of the SCM
Agreement.

5. Violation of Article 3.2 SCM Agreement

58. In view of the foregoing, the European Union submits that Ontario's granting and maintaining
of prohibited subsidies contingent upon the use of domestic over imported goods is inconsistent with
Canada's obligations under Article 3.2 of the SCM Agreement.

6. Conclusion and relief requested

59. The European Union requests the Panel to find that through the FIT Program as well as
individually executed FIT and microFIT contracts fo r wind and solar PV projects, Canada grants and

maintains prohibited subsidies that are contingent upon the use of domestic over imported goods, in
violation of Articles 3.1(b) and 3.2 of the SCM Agreement.

60. The European Union requests the Panel to recommend that Canada withdraw 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.

B. THE MEASURES AT ISSUE ARE TRADE -RELATED INVESTMENT MEAS URES AND REQUIREMENTS
AFFECTING THE INTERNAL SALE, PURCHASE OR USE OF PRODUCTS IN THE SENSE OF ARTICLE 1
OF THE TRIMS AGREEMENT AND ARTICLE III:4 OF THE GATT 1994 RESPECTIVELY

61. Once the European Union has demonstrated that the FIT Program and its related contracts are
inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement, the European Union will address
how the domestic content requirements included in th e FIT Program violate other relevant provisions
of the covered agreements containing the fundamental principle of national treatment.

1. The measures at issue are trade-related investment measures in the sense of Article 1 of
the TRIMs Agreement

62. Article 1 of the TRIMs Agreement defines its coverage as applying to investment measures
related to trade in goods. The FIT Program and its related contracts meet this definition.

63. First, the FIT Program and its related contracts are "investment measures" in that they aim at
encouraging the development of a local manufact uring capability for equipment and components for
renewable energy generation facilities in Ontario. Second, the domestic content requirements included
in the FIT Program and its related contracts are undoubt edly "related to trade". Finally, the domestic
content requirements contained in the FIT Program a nd its related contracts affect trade in goods, in
particular in wind and solar energy generation e quipment and components. The FIT Program creates
an incentive to purchase or use Ontario's produc ts to the detriment of imported like products.
Consequently, the European Union submits that the FIT Program and its related contracts fall within
the scope of the TRIMs Agreement.

2. The measures at issue are requirements aff ecting the internal sale, purchase or use of
products in the sense of Article III:4 of the GATT 1994

64. In its first written submission in DS412, Japan has demonstrated that the domestic content
rules of the FIT Program and its related contracts are "requirements" that affect the "internal sale, …
purchase, … or use" of renewable energy generation equipment and components in Ontario within the
meaning of GATT Article III:4. The European Un ion incorporates those arguments in the present
submission, and consequently, submits that the FI T Program and its relate d contracts fall under the
scope of application of these provisions.

3. Conclusion

65. In light of the foregoing, the European Union submits that both the TRIMs Agreement and
the GATT 1994 are applicable to the measures at issue.

C. ARTICLE III:8 OF THE GATT 1994 DOES NOT APPLY IN THE PRESENT CASE

66. Before applying the relevant national tr eatment provisions contained in the TRIMs
Agreement and the GATT 1994 to the facts of this c ase, as a preliminary issue, the European Union

will examine whether Article III:8 of the GATT 1994 a pplies in the present dispute. As the European
Union will show below, Article III:8 is not applicable to this dispute.

1. Article III:8(a) of the GATT 1994

67. Article III:8(a) of the GATT 1994 states that:

The provisions of this Article shall not a pply to laws, regulations or requirements
governing the procurement by governmental agencies of products purchased for
governmental purposes and not with a view to commercial resale or with a view to use
in the production of goods for commercial sale.

68. 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 Agreem ent, 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 Artic le III:4 of the GATT 1994, without engaging in a
substantive analysis of Canada's defence under Artic le III:8(a) of the GATT 1994. In any event, in
order to provide a positive solution to this dispute, the European Union requests the Panel to examine
and make findings (even in the form of alterna tive 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.

69. The European Union has shown that Canada's defence under Article III:8(a) must failed in
view of the following reasons.

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

70. 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. 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.

71. 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 appl y to laws, regulations or requirements governing
the procurement by governmental agencies of "p roducts 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 re quirements 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. 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.

72. Second, Article XVI(1) of the Agreement on Go vernment 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 s uppliers, 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 cont ent requirements. Contrary to what Canada

argues, the fact that Article XVI(1) of the Agre ement on Government Procurement prohibits what
Article III:8(a) of the GATT 1994 also prohibits do es not mean that Article III:8(a) must have a
different meaning. There are many cross-refere nces in the covered agreements to obligations
contained in other covered agreem ents and that does not imply that the substantive obligations under
those provisions are meaningless. Thus, the Agreement on Government Procurement may be
understood as clarifying, insofar as domestic conten t conditions are concerned, what is otherwise
prohibited under Article III:8(a) of the GATT 1994.

73. Moreover, the nature of the Agreement on Government Procurement as a plurilateral
agreement implies that the parties to that Ag reement 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.

74. The European Union also observ es 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 G overnment 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 Artic le 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 Agreem ent also includes a provision in this respect.
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.

75. Consequently, the reference as to how the Ag reement on Government Procurement deals with
offsets is not relevant to interpret the scope of Ar ticle III:8(a) of the GATT. Otherwise, the scope of a
multilateral agreement (the GATT 1994, and in partic ular the scope of Article III:8(a) of the GATT
1994) would be affected by the meaning provided to other different terms in a plurilateral agreement
which is not binding on the entire WTO Membership.

76. Third, as noted in our response to Question 22, in the circumstances of the present case the
European Union agrees with the proposition that th e 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 conten t 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 natu re of the product procured or purchased. In other
words, the European Union cont ends 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.

77. To illustrate our views with an example. The European Union cons iders 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 require ments 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 re quirements with respect to the materials or fabric
used in the suits or shirts it purchases for its public of ficials. In contrast, the inclusion of requirements
such as the suits or shirts must be made or kn itted using machines or equipment made locally (or
similarly the requirement as to the origin of th e generation equipment and components like in the
present case) would be unrelated to the subject-m atter of the procurement. And in fact such
requirements would amount to a disguised measure of trade protectionism.

78. 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 elect ricity. 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.

79. In any event, the European Union also invites the Panel to examine the substantive
requirements contained in Article III:8(a) of th e 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.

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

80. 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. 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".

81. Moreover, Canada maintains that the ordinary meaning of "procurement" is "acquisition" and
that the OPA certainly acquires renewable electricity under the FIT Contracts. In this respect, the
European Union notes that Canada agrees that the te rm "procurement" in Article III:8(a) of the GATT
1994 is coterminous with "acquisition", as per the French and Spanish versions. However, the
European Union disagrees that the OPA is acquiri ng 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.

82. 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. 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 a nd the OPA does not do so pursuant to the FIT
Program and its related contracts, the Pane l 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"

83. Assuming that the FIT Program and its re lated 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".

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

85. In this respect, the European Union recalls that Canada's argument regarding the meaning of
"for governmental purposes" revolves around the noti on of the "aims of the government" insofar as
such aims are contained in legislation, regulati ons, policies or executive directions. The European
Union considers it irrelevant that the stated aims ar e 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 auto matically meeting the condition of a purchase "for
governmental purposes". Likewise, it is also irrelevant that the government purchases products in line
with a particular public policy or public objectiv e since, as a matter of principle, governments are
expected to always act in pursuance of public polici es or public objectives. In other words, it should
be presumed that governments when procuring pr oducts do so having a public objective or public
policy in mind. Thus, those objectives or public polic ies cannot be determinative of the question as to
the meaning of "products purchased for government al purposes", as otherwise those terms would be
deprived of any real meaning.

86. In the European Union's view, the key issu e 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 agen cy 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 re sistir") (something that is impossible to avoid or
resist). The term "besoins" ("needs" in French ) means "les choses considérées comme nécessaires à
l'existence) (something considered to be necessary to exist). Thus, the terms "necesidades/besoins" or
"purposes" should be understood as referring to the n eeds 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 n eeds may include government purchases in order to
be able to provide government services to c itizens, as products will be needed by the public
institutions in charge of the delivery of public ser vices 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". However, the European Union consider s that the needs of the government cannot include
purchases aiming at complying with an y 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 need s. 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 treat ment principle and thus would run contrary to
the object and purpose of Article III of the GATT 1994.

87. 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 benef it 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 natio nal treatment perspectiv e. More generally, the
purchase of electricity by the government for injec tion into the grid and for use by industrial or
residential users cannot be seen as a purchase "f or governmental purposes" for the purposes of
Article III:8(a) of GATT 1994.

88. 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.

89. 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.
As said, it is not the existence of a public polic y 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 secu re 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 perform any of its functions (such as providing
light in public buildings, roads, etc).

90. In addition, Canada fails to demonstrate th e 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 electric ity 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 source s; rather, there is another objective behind the
stated one that does not satisfy any government need.

91. Consequently, even if the Panel were to cons ider 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 th e FIT Program is with a view to commercial
resale

92. Canada interprets the terms " not with a view to commercial re sale" in Article III:8(a) of the
GATT 1994 as meaning that the purchase must not be with the aim to resell for profit. 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.

93. The European Union submits that Canada's argu ments 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 Eu ropean 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". 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 profit s. Similarly, the term "comercio" in Spanish is

not defined by reference to profits. 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").

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

95. Moreover, even if those pane ls and the Appellate Body repor ts 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. 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".

96. In this respect, the European Union disagrees with Canada's interpreta tion 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 Ar ticle XVII:1(b) of the GATT 1994, "confirms that
profitability is central to the ordinary meaning of 'c ommercial'". However, this is not what the panel
decided. In fact, regarding the particular structur e of the STE that was the object of the dispute - the
Canadian Wheat Board (CWB) – the panel explicitl y observed that "[i]t is uncontested that the
objective of the CWB in selling wheat is not to make a profit for itself". 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 incentiv e 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". 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".

97. Third, Canada argues that purchases of products by the government with a view to reselling
them outside of the government to recover the co sts 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 purch ased. 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, tho se 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.

98. On the facts of this case, what Canada ar gues 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 alwa ys 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 obligati on 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 en sure 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 th e term "commercial" was introduced "to ensure the
continued application of the national treatment ex emption to procurement of goods which are sold
after use".

99. 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 elect ricity 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.

100. 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 FI T Program is with a view to being use in the
production of goods for commercial sale

101. Canada maintains that in order to fall under th e 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 pur chased is used incidentally in the production
of goods for commercial resale would fall under Article III:8(a) of the GATT 1994.

102. 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 lega l 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.

103. 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. The European Union considers that such interpretation cannot sta nd 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 ge neral, without specifying the actual user. In view
of the underlying anti-circumvention nature of thes e 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.

104. Consequently, in the present case, the Panel can fi nd 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 co mmercial purposes, a fact that Canada does not
contest.

(f) Conclusions

105. In view of the foregoing, the European Union requests the Panel to find that the domestic
content requirements included in the FIT Progr am and its related c ontracts 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.

106. Consequently, the FIT Program and its re lated contracts do not fall under the scope of
Article III:8(a) since they do not involve a purch ase (or procurement) by a governmental agency.
Even if a purchase is made, such an acquisition is not made for the direct consumption, benefit or use
by the government of Ontario. Finally, even if a purchase is made, such an acquisition is made with a
view to commercial resale and/or with a view to be used in the production of goods for commercial
sale.

2. Article III:8(b) of the GATT 1994

107. In the present case, the European Union do es not claim that the FIT Program violates
Article III:4 because its above-market rates for the energy produced by the FIT Generators are
available only to Ontario-based renewable energy generators, and not to non-Ontario-based renewable
energy generators. Rather, the European Union ma intains that the FIT Program's domestic content
requirements discriminate against imported renewa ble energy generation equipment and components
in favour of such equipment and components produ ced in Ontario. Consequently, the FIT Program
and its related contracts do not fall under the scope of Article III:8(b).

3. Conclusion

108. In view of the above, the European Union concludes that Article III:8 of the GATT 1994 does
not apply in this case. Therefore, the national tr eatment provisions in Article III:4 of the GATT 1994
and Article 2.1 of the TRIMs Agreement, in conj unction with paragraph 1(a) of its Annex, are
applicable in the present case.

D. THE MEASURES AT ISSUE ARE TRADE -RELATED INVESTMENT MEAS URES INCONSISTENT WITH
ARTICLE 2.1 OF THE TRIMS AGREEMENT , IN CONJUNCTION WITH PARAGRAPH 1(A) OF ITS
ANNEX

109. The European Union submits that the measures at issue are inconsistent with Article 2.1 of
the TRIMs Agreement , in conjunction with paragraph 1(a) of its Annex, because the measures are
trade-related investment measures that require th e purchase or use by enterprises of equipment and
components for renewable energy generation facilities of Ontario origin or source.

1. The claims under the TRIMs Agreement are more specific than the claim under
Article III:4 of the GATT 1994

110. The core of the matter in this dispute is th e domestic content requirements included in the FIT
Program and its related contracts. In particular, in order for solar PV (FIT and microFIT) or wind
(FIT) Generators to receive the guaranteed, long-term rates under the FIT Program, they must
purchase or use a sufficient proportion of goods manuf actured, formed or assembled in Ontario and
that are listed in the applicable Domestic Conten t Grid to satisfy the applicable Minimum Required
Domestic Content Level. This establishes an ince ntive for the FIT Generators to utilise goods of

Ontario origin in preference to goods of other origin s in their solar PV or wind generation facilities,
because goods of Ontario origin count toward the Do mestic Content Level of a project while goods of
other origins do not. In other words, the FIT Program discriminates against imported products because
the FIT Generators have to purchase or use at least some products of domestic origin or source in
order to benefit from the FIT Program. In view of the more specific language of the claim under the
TRIMs Agreement to the facts at issue in the presen t dispute, as compared to the GATT, and of the
nature of the measures at issue as a TRIM, the European Union will examine its claims under the
TRIMs Agreement first.

2. The FIT Program falls under paragraph 1( a) of the Annex to the TRIMs Agreement

111. In order to show that a TRIM is inconsistent with Article 2.1 of the TRIMs Agreement, there
are at least two possibilities relevant in this case: either (1) evidence is adduced demonstrating the
existence of any of the situations described in the illustrative list of TRIMs as inconsistent with the
national treatment provision provided for in Article III:4 of the GATT (and, in particular,
paragraph 1(a)) of the Annex to the TRIMs Agreement, or (2) a violation of Article III:4 of the GATT
1994 is shown.

112. The European Union considers that there is sufficient evidence that the FIT Program and its
related contracts are TRIMs explicitly addressed in paragraph 1(a) of the Annex to the TRIMs
Agreement. Indeed, the FIT Program is a TRIM "c ompliance with which is necessary to obtain an
advantage" since failure to comply with Minimu m Required Domestic Content Level denotes that the
generators will not benefit from the FIT Program. Moreover, the FIT Program requires the purchase
or use of domestic equipment and components in order to satisfy the applicable Minimum Required
Domestic Content Level.

113. Therefore, the European Union submits 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, because they are TRIMs that require the purc hase or use by enterprises (FIT Generators) of
equipment and components for renewable energy generation facilities of Ontario origin or source.

3. Conclusion and relief requested

114. In view of the foregoing, the European Union requests 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, because they are TRIMs that require the purchase or use by enterprises of
equipment and components for renewable energy generation facilities of Ontario origin or source.

115. The European Union requests the Panel to recommend that Canada brings the FIT Program
and its related contracts into conformity with th e TRIMs Agreements as required by Article 19.1 of
the DSU.

E. THE MEASURES AT ISSUE ARE INCONSISTENT WITH ARTICLE III:4 OF THE GATT 1994

116. The European Union argues that the FIT Progr am and its related contracts are inconsistent
with Article III:4 of the GATT 1994 because they ar e TRIMs falling under paragraph 1(a) of the
Annex to the TRIMs Agreement. Alternatively, th e European Union argues that the FIT Program and
its related contracts are inconsistent with Article III:4 of the GATT 1994 because they impose
domestic content requirements on wind and solar PV electricity generators that affect the internal sale,
purchase or use of renewable energy generatio n equipment and components, according less
favourable treatment to like products of EU origin.

117. The FIT Program and its relate d contracts fall within the illustrative list of measures that are
deemed to be inconsistent with Article III:4 of the GATT in accordance with the Annex to the TRIMs
Agreements. The European Union considers that, on this basis alone, the Panel can find that the FIT
Program and its related contracts are also, consequently, inconsistent with Article III:4 of the GATT.

118. Should the Panel decide to examine the claim under Article III:4 of the GATT 1994
separately (e.g., because it does not exercise judicial economy) and/or before the claim under the
TRIMs Agreement, the European Union submits that the measures at issue are inconsistent with
Article III:4 of the GATT 1994, because the measur es accord less favourable treatment to imported
equipment and components for renewable energy gene ration facilities than accorded to like products
originating in Ontario. The European Union incor porates hereto paragraphs 262 – 283 of Japan's first
written submission in DS412 into this submission.

119. Indeed, the renewable energy genera tion equipment and components manufactured
domestically in Ontario and imported from the Eu ropean Union are "like products" within the
meaning of Article III:4 of the GATT 1994. A number of panels have held the view that where a
difference in treatment between domestic and impor ted products is based exclusively on the products'
origin, it is correct to treat products as "like" within the meaning of Article III:4. In that case, there is
no need to establish the likeness between imported and domestic products in terms of the traditional
criteria – that is, their physical properties, end-uses and consumers' tastes and habits. In other words, it
is sufficient for purposes of satisfying the "like prod uct" test for a complaining party to demonstrate
that there can or will be domestic and imported produc ts that are "like". In the case at hand, the sole
criterion distinguishing the products is that of the or igin. The Domestic Content Grid does not refer to
any substantial difference between domestic and imported equipmen t in terms of their physical
properties, end-users, consumer perceptions and tariff classifications. Thus , both products, domestic
and imported, are like.

120. Moreover, as explained before, the FIT Progr am and its related contracts are requirements
affecting the internal sale, purchase or use of products in the sense of Article III:4 of the GATT 1994.

121. In addition, the FIT Program and its related contracts accord less favourable treatment to
imported renewable energy generation equipment and components than that accorded to like products
of Ontario origin. The FIT Program creates in centives among Ontario-based wind and solar PV
energy generators to use renewable energy ge neration equipment and components produced within
Ontario. The fundamental thrust of these measures is to alter the conditions of competition between
imported and like domestic products in order to artificially create a preference for domestic products.

122. Consequently, because the FIT Program and its related contracts impose domestic content
requirements on wind and solar PV electricity generators that affect the internal sale, purchase, or use
of renewable energy generation e quipment and components, according less favourable treatment to
like products of EU origin, they are inconsistent with Canada's national treatment obligation under
Article III:4 of the GATT 1994.

123. In view of the foregoing, the European Union requests the Panel to find that the FIT Program
and its related contracts are inconsistent with Article III:4 of the GATT 1994 because they are TRIMs
falling under paragraph 1(a) of the Annex to the TRIMs Agreement. Alternatively, the
European Union requests the Panel to find that the FIT Program and its related contracts are
inconsistent with Article III:4 of the GATT 1994 b ecause they impose domestic content requirements
on wind and solar PV electricity gene rators that affect the internal sale, purchase or use of renewable
energy generation equipment and components, accordi ng less favourable treatment to like products of
EU origin.

124. The European Union requests the Panel to recommend that Canada brings the FIT Program
and its related contracts into conformity with the GATT 1994 as required by Article 19.1 of the DSU.

IV. CONCLUSIONS AND REQUEST FOR RELIEF

125. Based on the foregoing, the European Un ion requests that Panel to find that:

 Canada violated Articles 3.1(b) and 3.2 of th e SCM Agreement since the FIT Program and its
related contracts established by the Government of Ontario are subsidies within the meaning
of Article 1.1 of the SCM Agreement that are provided contingent upon the use of domestic
over imported goods, namely contingent upon th e use of equipment and components for
renewable energy generation facilities produced in Ontario over such equipment and
components imported from other WTO Members, including the European Union;

 Canada violated Article 2.1 of the TRIMs Agre ement, in conjunction w ith paragraph 1(a) of
its Annex, because the FIT Program and its related contracts established by the Government
of Ontario are TRIMs that require the purchase or use by enterprises of equipment and
components for renewable energy generation facilities of Ontario origin or source; and

 Canada violated Article III:4 of the GATT 1994 because the FIT Program and its related
contracts established by the Government of On tario are TRIMs falling under paragraph 1(a)
of the Annex to the TRIMs Agreement or, alternatively, because they impose domestic
content requirements on wind and solar PV electricity generators that affects the internal sale,
purchase or use of renewable energy generati on equipment and components, according less
favourable treatment to like products of EU origin.

I. CANADA'S FIRST WRITTEN SUBMISSION IN DS412 1

A. INTRODUCTION

1. Electricity is critical to public welfare. Thus , the Government of Ontario plays an important
role in ensuring a sufficient and reliable supply of electricity, including from clean sources, by
regulating the electricity industry, owning genera tion facilities, and owning the majority of the
transmission network. The Government of Ontario al so procures electricity through its agent, the
Ontario Power Authority (OPA), which enters into "Power Purchase Agreem ents" with Independent
Power Producers (IPPs).

2. Through the Ontario Feed-In-Tariff (FIT) Program, the OPA purchases electricity from
renewable sources. In addition to helping secure the supply of electricity, the FIT Program also helps
protect the environment as it reduces Ontario's re liance on electricity from coal, thus reducing the
production of greenhouse gases.

3. The procurement of electricity by the OPA th rough the FIT Program falls within the scope of
Article III:8(a) of the General Agreement on Tariffs and Trade 1994 (GATT) and as a consequence, is
not subject to Article III of GATT and cannot be inc onsistent with Article 2.1 of the Agreement on
Trade-Related Investment Measures (TRIMS Agreem ent). Article III:8(a) removes laws, regulations
and requirements that govern certain procurements from the obligations of Article III of the GATT
and TRIMS. As explained by Japan's Ministry of Economy, Trade and Industry, Article III:8(a)
"permits governments to purchase domestic products preferentially, making government procurement
one of the exceptions to the national treatment rule".

4. Japan has also failed to substantiate its alle gation that the FIT Program is a prohibited subsidy
under the Agreement on Subsidies and Countervailin g Measures (SCM Agreement) for two reasons:
first, it has mischaracterized the OPA's purchase of goods as a direct or potential direct transfer of
funds, or a form of income or price support; and, second, the benchmarks it has chosen to establish the
conferral of a "benefit" are inappropriate
2.

B. FACTUAL OVERVIEW

5. The electricity system in Ontario has histor ically been owned and ope rated by the provincial
government. From 1973 to 1998, a government corpora tion named Ontario Hydro was responsible for
ensuring almost all generation and transmission of electricity in the province. In 1998, financial
difficulties experienced by Ontario cau sed the government to enact the Energy Competition Act and
the Electricity Act, 1998 , which created the electricity market and split Ontario Hydro's
responsibilities across five separate entities.

6. First, the Independent Electricity Market Operator (IMO) was created to manage the
wholesale electricity market 3. Second, Ontario Power Generati on (OPG) was formed to own and

1 Canada has summarized its key arguments in its written statements and oral opening statements
chronologically. Canada has endeavoured to summarize only the new points that have arisen in subsequent
submissions. With respect to summaries of its respon ses to the Panel's questions and certain comments on
responses by the complainants, Canada has either inserted these in relevant sections in this document or, to the
extent possible, placed them in a footnote to the text that is most relevant.
2 With respect to Canada's request for a preliminary ruling under Article 6.2 of the DSU, the Panel has
set out a general outline of Canada's arguments in its decision.
3 Response to question No. 19 (Second Set): The IMO wholesale electricity market was based on
offers of electricity and bids to purchase electricity. In that market, generators offered quantities of electricity at
specific rates and volumes while purchasers (mainly Lo cal Distribution Companies (LDCs)) bid to purchase.

operate the generation assets of Ontario Hydro, thus assuming responsibility for 90% of electricity
generation in Ontario. Third, Hydro One was ma de responsible for owning most of Ontario's
transmission system and its largest distribution co mpany. Fourth, the Ontario Electricity Financial
Corporation (OEFC) was created to manage de bt and Non-Utility Generator (NUG) contracts
inherited from Ontario Hydro. Fifth, the Electrical Safety Authority (ESA) was established to improve
electrical safety for Ontario residents.

7. At the same time, the Ontario Energy Board (OEB) was tasked with regulating the electricity
industry, and setting the rates for distribution utiliti es and consumer prices under the Regulated Price
Plan (RPP)
4.

8. While the competitive market was being de veloped between 1998 an d 2002, few generation
facilities were constructed and there was insufficien t investment from the private sector to ensure
reliable supply. The competitive market opened in May of 2002
5. Over the summer of 2002, very high

The IMO balanced supply and demand by accepting all offers up to the total qua ntity of electricity required in a
particular five-minute interval. The last quantity of electricity accepted by the IMO set the Market Clearing
Price (MCP). The average of all the MCPs for a particular hour set the HOEP. After the market closed in
November 2002, this mechanism continued to be the basis on which the IESO balanced physical supply and
demand (i.e. volume). However, the IESO mechanism func tions differently. First, not all generators present
"offers" in the same manner. Most significantly, non-dispatchable generation (including FIT wind and solar
electricity) is automatically accepted in to the IESO stack on the basis of estimates of volumes generated and
without any rate "offer". Th e IESO then accepts into the stack the baseload quantity from all regulated OPG
facilities. OPG "offers" this baseload electricity at extr emely low and often negative rates to ensure that it will
be accepted. It can do so and face no negative revenue impact because its true rates are set through regulation by
the OEB.
It is only after these volumes are accepted that the IESO begins to acc ept offers into the stack from
other generators. These are generators who either receive contractual rates or the HOEP alone. These offers
occur across all generation sources except non-dispat chable sources. However, the rates offered are not
reflective of the true price for th e generation of any contracted elect ricity source because these are pre-
determined by the OPA/OEFC contracts. Ultimately, the last quantities of electricity accepted into the stack tend
to be from gas generators with OPA contracts. These cont racts contain provisions that require gas generators to
"offer" at a rate determined by a fo rmula that ensures that the generators run when it is most economical for
them to do so.
With respect to the demand side of the IESO stacking mechanism, LDCs, who make up the vast
majority of the demand "bids", are both rate and volume inelastic. They simply flow through the demand of end-
users on the basis of expected volumes consumed and take any rate.
4 Response to question No. 37 (First Set): The operations of the OEB before and after the period of the
competitive market in 2002 are substantively the same. In 2003, its role was expanded to include responsibility
for developing a new retail electricity pricing mechanism, the RPP. In addition, when the OPA was created in
2002, the OEB was made responsible for approving its fees and procurement processes. In 2005, the OEB
became responsible for regulating the rates for the OPG's regulated generating assets.
In 2002, the IESO was called the IMO. It was re sponsible for managing th e wholesale electricity
market and operation of the system. In 2004, the IMO was renamed the IESO. The IESO today continues to
manage the reliability of the power system, is responsible for operating the algorithm to balance physical supply
and demand, and provides short-term forecasts of dema nd and supply of electricity. There is no substantive
change to its responsibilities; however, the removal of the term "Market" from its title indicated the change in
Ontario's electricity system. The OPA did not exist in 20 02. It was created by the El ectricity Restructuring Act
in 2004. In 2002, there was no entity mandated to procure electricity on behalf of the Government of Ontario.
5 Response to question No. 1 (Second Set): The generation technologies that existed during
liberalization were nuclear, coal, oil and gas, hydroelectric, wind, wood and waste. The respective capacities and
outputs for 2002 have been provided. These generators received the HOEP as remuneration, with the exception
of NUG producers, who rece ived contractual rates. Du ring liberalization, NUG pr oducers received averagely
$0.06 to $0.07/kWh. The IMO mechanism was not applie d to NUG generators as they were entitled to their
contractual rates agreed to with the former Ontario Hydro in the early 1990s. NUG generators accounted for

temperatures in the province drove up demand as well as the prices of electricity. As a result, the
government capped electricity prices for residential, institutional and small business consumers.

9. As part of a plan to remove the price caps a nd to facilitate investment in new generation, the
government restructured the electricity system again in 2004 through the Electricity Restructuring
Act. This largely led to the system that exists in Ontario today. Governmental oversight of the
electricity system was mandated to the Ministry of Energy, which has the responsibility for ensuring
that Ontario's electricity needs are met in a sust ainable manner. The Ministry of Energy also has
legislative responsibility over the Independent Electri city System Operator (IESO), OEB, OPA, OPG
and Hydro One.

10. As the experience with the competitive wholesale market demonstrated that this would not be
sufficient to provide for long-term supply n eeds, the OPA was created and mandated with
responsibility for long-term system planning, procur ing electricity and the promotion of renewables
and clean energy
6. During restructuring, the IMO was also renamed the IESO. The IESO continues to
manage the reliability of the power system and administer the electricity system.

11. Today, electricity is generated by OPG facilities (which provide approximately 50% of
supply) and by IPPs who have contracts with the OPA or OEFC (approximately 42% of supply). By
mid-2011, OPA-procured electricity accounted fo r approximately 12,426MW of generating capacity
in Ontario. The OPA procures electricity by en tering into long-term contracts known as "Power
Purchase Agreements"
7.

about 6% of generation in 2002. The average HOEP during liberalization ranged from $0.03 to $0.0831/kWh.
Non-commodity charges were not included in the HOEP , nor are they presently included. In 2002, these
constituted the wholesale market service charge, transmis sion charge and debt retirement charge; for the period
of May to November 2002 inclusive, these charges averaged $0.07/kWh, $0.0887/kWh and $0.07/kWh,
respectively. These were paid, in addition to the HOEP, by all end-users of electricity during the liberalization
period, just as they are today. From May to November 2002, Ontario imported a total of 5.1 TWh of electricity.
This represented about 5.7% of total Ontario demand over this period (net imports were about 4.4% of total
demand).
The Government of Ontario decided to put an end to liberalization as very high temperatures drove up
demand, supply was hampered by the market structure which did not encourage sufficient entry of new
generators, and, as a result, prices rose significan tly over a short period. The difficulties experienced by
consumers as a result of these high prices led the gove rnment to lower and cap the prices of electricity for
certain consumers. In order to remove price caps and facilitate investment in new generation, the government
restructured the electricity market into the electricity system that presently exists.
6 Response to question Nos. 10 and 36 (First Set): The OPA is neither an "agent" nor a "clearing
house", as asserted by the European Union. The legislation that created the OPA does not mandate it to act as an
agent but to enter into procurement contracts. It has no ag ency contracts with sellers or purchasers of electricity
and does not act on any instructions from FIT suppliers or consumers. Rather, together with the Ministry of
Energy, it decides the conditions of purchase.
A "clearing house" is "[a]n institution […] for the adjustment of their mutual claims for cheques and
bills […]". The OPA does not perform this role. The OPA also does not act as a "regulator" – that is the role of
the OEB. The OEB regulates the prices paid by low-volume Ontario consumers and businesses, the rates paid to
electricity generating assets owned by the government, and the fees paid to transmission and distribution
companies for delivering electricity. By contrast, the OPA does not regulate anything. It enters into contracts for
the purchase of power. Suppliers are free to accept or reject the price offered by the OPA.
Response to question No. 29 (First Set): The OPA's liabilities are not guaranteed by the Government of
Ontario. Presently, the OPA's only source of revenue to pa y the contracted prices is the Global Adjustment. In
the unlikely event that consumers do not pay the Global Adjustment, the OPA may be unable to make these
payments.
7 Response to question Nos. 16 and 18 (Second Set): It is standard practice for contracts to specify the
type of generation technology that will be employed. For example, contracts under the Hydroelectric Contract

12. Thus, the Government of Ontario helps secure the supply of electricity by regulating the
electricity industry, owning generati ng facilities and procuring electricity
8. In doing so, the
government faces two main challenges: first, securing sufficient supply; and, second, securing supply
from clean sources.

13. The first challenge of securing sufficient suppl y exists as Ontario's population will increase by
28% by 2030, while several nuclear facilities will be temporarily shut down for maintenance. Thus,
supply will be declining while demand is exp ected to increase. Further, the government has
committed to eliminating coal-fired generation by 2014. It is forecast that 15,000MW of generation
capacity will need to be renewed, replaced or added to the existing capacity of 35,000MW by 2030.

14. However, the government faces the problem of stimulating investment in new electricity
generation, i.e. the "missing money" problem. This problem arises when wholesale prices do not
provide adequate compensation to pay for the fixed costs of generators or the total investment costs of
new generators. As a result, investors would not finance the construction of new generation at
wholesale prices. This problem is more severe for the capital intensive generation technologies
required for renewable electricity generation
9.

15. In Ontario, the wholesale market price ( known as the Hourly Ontario Energy Price (HOEP))
does not provide sufficient compensation to stimulat e investment in generation. As such, 92% of
generators in Ontario are not compensated by the HOEP alone – they are paid regulated or contract
prices that are above the HOEP in accordance wi th OEB regulations, OPA contracts or OEFC
contracts
10. OPG's nuclear and baseload hydroelectric generation have their rates set by the OEB,

Initiative (HCI) are only awarded to hydroelectric plants. Similarly, contracts under the Combined Heat and
Power Standard Offer Program are only for electricity supplied from gas. Other programs, such as FIT, require
that the electricity is supplied from certain renewable sources. The only contract for nuclear generation is for the
refurbishment of Bruce Power. OPA contracts with h ydro facilities under the HCI and FIT are generic in terms
of technology (i.e. they provide for standard rates). It is also standard practice for contracts of grid-connected
generators to stipulate requirements related to the grid . These typically incorporate the IESO Market Rules. For
example, section 2.2(d) of the RES II Contract requires generators to provide a "Connection Impact Assessment
[…]".
8 Response to question No. 34 (First Set): In Ontario, the goals of electricity security and sustainable
generation are set out in section 1 of the Electricity Act, 1998. The OPA's mandate to ensure an adequate,
reliable and secure supply of electricity is set out in section 25.2 of th is Act. These objectives are also
contemplated by the Green Energy Act, 2009 and the Long-Term Ener gy Plan (LTEP). These goals are shared
by neighbouring jurisdictions. In order to participate in the North American electricity grid, the IESO is required
to comply with standards developed by the North Amer ican Reliability Corporation, including requirements for
having adequate generation reserves.
9 Response to question No. 42 (First Set); question Nos. 2 and 7 (Second Set): A significant barrier to
entry for a new electricity investor in Ontario is ensuring that its sales revenue covers its total costs of
production and earns it an attractive enough return to me rit the risks. In addition, new investors also face
barriers in securing project financing as they must often demonstrate to lenders that they have long-term
contracts for the purchase of electricity with credit-wo rthy entities. Additionally, they must meet a number of
regulatory requirements, including: certain credit require ments; application to the IESO to become a market
participant and pay an application fee; obtain a licen ce from the OEB; register generation facilities with the
IESO (if they are transmission grid conn ected); and register interval meters to measure energy that flows in or
out of the grid.
All FIT suppliers connected to the IESO grid are considered "Market Participants" and must adhere to
IESO Market Rules. The Market Rules exist to ensure the safety and reliability of the system.
10 Response to question No. 38 (First Set); que stion No. 5 (Second Set): All rates received by
generators are above the HOEP, with the exception of certain older, unregulated OPG-owned coal and non-
baseload hydro facilities. OPG nuclear and base-load hydro plants receive abov e-HOEP rates. Effective

while generators receiving a capacity contract price are NUGs, IPPs, OPG plants that have contracts,
and Renewable Energy Supply (R ES) and FIT Program generators11. The only generators that receive
the HOEP alone are OPG's unregulated hydroelectric facilities and two coal-fired facilities, making up
approximately 8% of generation. These are older, state-owned facilities whose capital costs have
largely been depreciated. In the case of coal, these facilities will be shut down by the end of 2014.

16. Second, Ontario faces the challenge of secu ring clean energy supply as it has committed to
reducing its production of greenhouse gases and to ph asing out all coal-fired generation by the end of
2014. Coal generation will be replaced partly by renewable generation. The Government aims to
increase capacity from wind, solar and bioenergy to 10,700MW by 2018
12.

17. FIT Programs play an important role in securing clean electricity supply. Countries around
the world, including Japan, have developed FIT pr ograms which generally provide guaranteed rates
with long-term contracts in re turn for the provision of renewable electricity by a producer
13. These

1 March 2011, the rate for nuclear was $0.056/kWh, and regulated hydro was $0.034/kWh. Bruce Power
received $0.057/kWh for its "A" units and a floor price of $0.045/kWh for its "B" units, adjusted in accordance
with its contract terms. These rates escalate according to the Consumer Price Inde x (CPI) factor. Unregulated
hydro plants receive only the HOEP. Plants under the OPA's HCI receive $0.069/kWh, escalated in accordance
with the CPI. Waterpower generato rs under FIT receive $0.131/kWh. On average, OPA-contracted gas
generators are paid $0.09/kWh, while NUG gas contract s receive $0.10/kWh. Two coal facilities with OEFC
contracts receive approximately $0.10/kWh above the HOEP as a con tingency support payment. The remaining
coal facilities receive the HOEP alone. Bioenergy gene rators under the RESOP Pr ogram receive $0.11/kWh.
New bioenergy projects under FIT recei ve from $0.104 to $0.195/kWh. Wind and solar rates under RES range
from $0.08/kWh to $0.11/kWh. Wind projects under FIT receive $0.135/kW h. FIT solar generators receive
prices that range from $0.443 to $0.713/kWh, depending on the solar facility. Solar generators under the RESOP
Program receive $0.42/kWh. OPA cont racts for natural gas and non-solar PV generation under RESOP receive
an annual price escalation of 20% of the Ontario CPI.
11 Response to question Nos. 15 and 16 (First Set): The only contract between generators in Ontario
and transmission companies is a "connection agreement" which provides the terms on which generators inject
electricity into the transmission grid. The transmission company's fee for distributing the electricity is
determined by the OEB and paid by consumers. There ar e no contracts for the purcha se of electricity between
generators and transmission companies. The only contract between generators and LDCs is a similar
"connection agreement". The fee of LD Cs for distributing electricity is determined by the OEB and paid by
consumers. There are no electricity purchase contracts be tween generators and LDCs. There is no contractual
relationship between electricity generators in Ontario and consumers, whether transmission or distribution
connected.
12 Response to question No. 33 (First Set): The current policies on "supply mix" are found in the LTEP.
The LTEP directs that Ontario's supply mix must balance reliability, cost and environmental impacts.
Consequently, the different technologies employed must achieve a balance of goals, that is: conservation,
sufficient baseload, intermediate and peak power, and the reduction of carbon emissions.
13 Response to question Nos. 46 and 50 (Second Set): A number of governments around the world
promote the supply of electricity from cl ean sources as part of policies to ensure reliable and sufficient supply.
For example: (1) Japan, through its "Strategic Energy Policy"; (2) Europe, through the "Directive on the
promotion of the use of energy from renewable sources"; (3) Germany, in its statement on "The Path to the
Energy of the Future – Reliable, Affordable and Envi ronmentally Sound"; (4) Calif ornia, through its "Clean
Energy Future" policy; (5) Australia, through the Department of Resources, Energy and Tourism, on its
commitment to clean energy technolo gies; (6) South Africa, through its National Energy Act; and (7)
Switzerland, through its "Energy Strategy 2050".
Canada is not of the view that all governments pursue this objective in the same manner as the
Government of Ontario. Some do. For example, India procures renewable electricity through its National Solar
Mission program, which aims to "promote ecologically sustainable growth while addressing India's energy
security challenge" and requires state utilities to procure solar generated electricity through a "Renewable
Purchase Obligation".

prices are often higher than those for electricity produced from traditional sources, to reflect the
higher costs of production.

18. The production costs from the wind and sun are significantly higher for several reasons. For
instance, there are fewer economies of scale in co mparison with large nuclear, coal, hydro and gas
plants; wind and solar facilities produce electricity for a much smaller proportion of the year; the
smaller experience base means there are fewer operati onal efficiencies; and the lack of experience in
constructing wind and solar facilities leads to fewe r efficiencies. Thus, prices guaranteed by FIT
programs provide remuneration to generators to cover the highe r costs involved in renewable
electricity generation.

19. The Ontario FIT Program was created by a Mini sterial Direction issued by the Minister of
Energy and Infrastructure to the OPA on 24 Sept ember 2009, under the authority provided by section
25.35 of the Electricity Act, 1998. The objective of this was to induce new renewable generation. This
was necessary as most of these generators would no t have entered the market in the absence of the
FIT Program.

20. The Ministerial Direction instructed the OPA to develop a FIT Program "designed to procure
energy from a wide range of renewable sources" a nd stipulated that each wind and solar photovoltaic
(PV) and solar microFIT project contain a percentage of domestic content
14. The key objectives of the
FIT Program are to "increase capacity of renewabl e energy supply to ensure adequate generation and
reduce emissions" and to "introduce a simpler me thod to procure and deve lop generating capacity
from renewable sources of energy". The Ministerial Di rection dictates the eligible technologies of the
program, and prescribes the process for establi shing prices, contract duration and specific
requirements to be contained in the FIT Rules and contract.

21. The OPA implements the FIT Rules and the Ministerial Direction through "Power Purchase
Agreements" with genera tors under the authority provided by the Ministerial Direction and its
authority to procure electricity in section 25.2(5) of the Electricity Act, 1998. The FIT Program is
open to generators of electricity from solar, wind, water and bioenergy sources 15. Domestic content
requirements are restricted to solar projects and wind projects greater than 10 kilowatts.

22. The FIT contracts provide so lar and wind generators fixed prices in accordance with the FIT
Price Schedule, for 20 years. Domestic content requirements are set out in Exhibit D (Domestic
Content Grid) of the FIT Contract. Like other regulated and procured electricity in Ontario, FIT
contracts provide prices that are higher than the HOEP to provide the additio nal revenue required to
pay for the higher costs involved. These supplem ental payments are recovered from the Global
Adjustment charge, an amount charged to customers in proportion to total consumption and type of
consumer
16.

14 Response to question No. 32 (First Set): The FIT Program was developed in line with the goals of
the Green Energy Act, 2009. There are no functional or technical requirements underpinning the domestic
content requirements.
15 Response to question No. 41 (First Set): The OPA has the discretion to reject applications made to
the FIT or microFIT Programs that could nonetheless satisfy the relevant conditions. This discretion is set out in
section 12.2(c) of the FIT Rules, and, section 6.1(e) of the microFIT Rules.
16 Response to question No. 30 (First Set); ques tion No. 3 (Second Set): Ontario's electricity
generation, transmission and distribution system is a closed financial system. All costs are recovered from
ratepayers through fees or through charges levied under the Global Adjustment. No funds from consolidated
revenue are made to the OPA, OEB or IESO.
In January 2005, the Government of Ontario initiated the "Provincial Benefit" mechanism in part to
recover the cost of the NUG contracts. This was later renamed the "Global Adjustment".

C. LEGAL ARGUMENTS

23. Japan's claims that Canada has breached the GATT, the TRIMS Agreement and the SCM
Agreement are without merit because: (i) the local content requirement is within the scope of GATT
Article III:8(a) and therefore is not subject to Article III of the GATT; (ii) as the local content
requirement is not subject to Article III, it cannot be inconsistent with Article 2.1 of the TRIMS
Agreement; (iii) the Panel has no jurisdiction over the SCM Agreement claim due to Japan's deficient
panel request; (iv) in the alternativ e, the Government of Ontario is not transferring funds or providing
any form of income or price support within the meaning of the SCM Agreement – it is purchasing
electricity; and, (v) Japan has failed to demonstrate that the price the Government pays for renewable
energy under the FIT Program confers a benefit within the meaning of the SCM Agreement.

1. The FIT Program Is not Subject to GATT Article III

24. Certain government procurements are not subj ect to GATT Article III. When this Article was
being developed, some parties sought to have its obligations apply broadly to purchases by
government. However, this proposal to expressl y extend the national treatment obligation to
governmental purchases was rejected. Instead, certain government procurements were removed from
the scope of national treatment through what eventually became Article III:8(a)
17. This Article
provides:

The provisions of this Article shall not a pply to laws, regulations or requirements
governing the procurement by governmental agencies of products purchased for

Response to question No. 39 (First Set); question Nos. 4 and 8 (Second Set): The IESO pays the HOEP
component of a FIT generator's payment, while the OPA pays the balance through the Global Adjustment. The
LDC serves as an agent on behalf of the OPA with respect to making payments under FIT contracts to
distribution-connected generators using funds collected from consumers that constitute the HOEP and the
Global Adjustment. The settlement processes are set out in Section 8 of the FIT Rules (Overview of Settlement)
and Exhibit B to the FIT Contract. The same settlement process generally applies for all generators with OPA
contracts irrespective of technology . Transmission-connected generators receive HOEP payments from the
IESO and the balance from the OPA via the Global Adjustment. Distribution-connected generators receive
payments through the LDC. However, with respect to the RES generators under OPA contracts, the OPA pays
RES I and RES II contract-holders the full payment direct ly. RES III contract holders are paid by the IESO for
the HOEP component, and by the OPA for the balance. The OEB does not have contracts with any generators.
All OPA contracts, including FIT and microFIT, serv e the same basic objective – to ensure a secure
and reliable source of electricity for Ontario from clean sources. Generally , IPPs with OPA contracts receive
rates that vary according to technolo gy and the terms of their contracts. Rates for wind projects under the RES
request for proposal process range from $0.08/kWh to $0.11/kWh. These projects provide much smaller
capacity than the capacity provided by the wind projects under FIT, whic h receive $0.135/kWh. Compensation
to producers who have gas- fired generation contracts w ill vary according to the cont ract. Clean Energy Supply
contracts receive rates on the basis of the lowest cost bids accepted. Other gas cont racts receive rates based on
bilateral negotiations. Gas contracts are designed to ensu re that generators are able to recover fuel costs
regardless of fluctuations in natu ral gas prices. While grid connectio n requirements are similar for each
technology, larger generation projects have more extensive requirements.
Response to question No. 40 (First Set): The LDC serves as an agent of the OPA with respect to
making contract payments to microFIT generators. Settle ment procedures are descri bed in Section 4.4 of the
microFIT Contract and Section 5.2 of the microFIT Rules.
17 Response to question No. 59 (First Set): The purpose of Article III:8(a) is to exclude laws,
regulations and requirements that govern certain procurements from the scope of Article III. This ensures that
such laws, regulations and requirements are not subject to Article III and that Members are free to impose
conditions on the relevant procurements that would otherwise be inconsistent with the Article.

governmental purposes and not with a view to commercial resale or with a view to
use in the production of goods for commercial sale.
25. Article III:8(a) preserves governments' flexib ility to pursue public policy objectives through
their procurements. As Japan's Ministry of Economy, Trade and Industry has explained:

GATT Article III:8(a) permits governments to purchase domestic products
preferentially; making government procuremen t one of the exceptions to the national
treatment rule. This exception is permitted because WTO Members recognize the role
of government procurement in national policy. For example, […] government
procurement may […] be used as a policy tool to promote smaller business, local
industry or advanced technologies.
26. The laws and requirements that create and im plement the FIT Program – section 25.35 of the
Electricity Act, 1998 , the Ministerial Direction, and the FIT and microFIT Rules and contracts –
satisfy all the elements of Article III:8(a). The Electricity Act, 1998 is a law, the Ministerial Direction
imposes requirements on the OPA to establish the program, the FIT and microFIT Rules and standard
contracts impose requirements on the OPA concerni ng implementation of the Program. In addition,
these laws and requirements govern the procurement of renewable electricity by the OPA.

27. The OPA is a governmental agency that procures the product
18 of renewable electricity. The
Oxford English Dictionary defines "product" as "[a]n object pr oduced by a particular action or
process; the result of mental or physical work or ef fort". Renewable electricity is such an "object".
The aforementioned laws and requirements also expressly state that the OPA is "procuring" electricity
and that the FIT Program is a "program for procurement", and that it is designed to procure energy
from a wide range of renewable energy sources.

28. The ordinary meaning of "procurement" is "[ t]he action of obtaining something; acquisition
[…]" and "purchase" is "[t]o acquire in exchange for payment in money or an equivalent; to buy"
19.
The OPA acquires renewable electricity by purchase: it is paying money in return for the delivery of
that electricity into the transmission grid. The Ministerial Direction and contracts state that the OPA is
purchasing electricity under contracts that are "Power Purchase Agreements".

29. The FIT Program laws and requirements govern the procurement of electricity because they
direct or regulate the OPA's purchase. The ordinary meaning of "govern" endorsed by the panel in EC
– Customs Matters, is to "control, regulate, or determine […]".

30. The ordinary meaning of a "purchase for gove rnmental purposes" is a purchase for an aim of
the government. Such purchases can be directed in legislation, regulations, policy or an executive
direction. The OPA's purchase of renewable electricity furthers the aim of the Government to secure
the supply of adequate and reliable electricity from clean sources.

18 Response to question No. 51 (Second Set): Electricity is a good and a product for the purposes of the
SCM Agreement, the GATT 1994 and the TRIMs Agreement.
Response to question No. 53 (First Set): Electricity produced from renewable electricity sources that
are the subject of the FIT contracts is the same product as electricity produced from all other sources.
19 Response to question No. 56 (First Set): "Procurement " is just one element of Article III:8(a). There
is no indication that the words following "procurement" limit its ordinary meaning. To fall within the scope of
this Article, the "procurement" must be of a "product", which is "purchased" by a "governmental agency", and
that purchase must be for "governmental purposes". A "purchase" will always be an "acquisition" and
consequently, will always be a "procurement" for the purposes of Article III:8(a).

31. Further, this purchase is not with a view to commercial resale as it is not a purchase with an
aim to resell for profit. The ordinary meaning of "c ommercial" as endorsed by the Appellate Body in
US – Anti-Dumping and Countervailing Duties , is "interested in financial return rather than artistry;
likely to make a profit […]" while "with a view to" means "with the aim of attaining […]" 20. The
OPA's purchase is not aimed at resale for profit. In accordance with subsection 25.2(2) of the
Electricity Act¸ 1998, the OPA does not profit from the sale of electricity – it simply recovers its costs
of the purchase. Similarly, the OPA is not purchasing renewable electricity with a view to using this
product in the production of goods for commercial sale as neither the OPA nor any other part of the
Government of Ontario uses the electricity to make goods.

2. Japan's Claim under the TRIMS Agreement

32. Article 2.1 of the TRIMs Ag reement states: "Without prejudice to other rights and obligations
under GATT 1994, no Member shall apply any TRIM th at is inconsistent with the provisions of
Article III or Article XI of GATT 1994". Thus, the FIT Program can only breach Article 2.1 if it is
inconsistent with Article III of the GATT. As the FIT Program is not subject to the obligations of
Article III, consequently it is not inconsistent with Article 2.1 of TRIMS21.

3. Japan's SCM Agreement Claim

33. The panel has no jurisdiction to hear this cl aim as Japan's panel request concerning the SCM
Agreement failed to comply with Article 6.2 of the Dispute Settlement Understanding (DSU) by
failing to "provide a brief summary of the legal basis of the complaint sufficient to present the
problem clearly". In responding to Canada's prior jurisdiction submission, Japan summarized its panel
request and explained for the first time that: the form of the benefit is a "financial contribution" or
"income or price support" through "guaranteed long-te rm pricing" on "terms mo re advantageous than
available on the market"; and, "the recipients of the benefit are "renewable energy generation facilities
[…] that contain a defined per centage of domestic content".

34. As confirmed by the Appellate Body in EC and Certain Member States – Large Civil
Aircraft, Japan's response cannot remedy the deficiencies in its panel request. A complaining Member
cannot provide the "legal basis of the claim" b ased on "subsidies contingent […] upon the use of
domestic over imported goods" unless it identifies from Article 1.1(a) which form of subsidy has been

20 Response to question No. 48 (Second Set): The struct ure of Article III:8(a) indicates that the word
"commercial" was included to ensure that the purchase of a product falls within its scope when a government
agency wants to resell the product on a non-commercial basis to help fulfil the governmental purpose behind the
purchase. This interpretation is consistent with the General Agreement on Trade in Services (GATS). GATS
confines its scope to measures that are "commercial" rather than "governmental". The exclusion from the scope
in GATS of "services supplied in the exercise of governmental authority" illustrates the importance to WTO
Members of preserving policy flexibility when undertaking certain "governmental" activities.
21 Response to question No. 54 (First Set): The European Union's submission seems to be that, while
measures that fall within GATT Article III:8(a) cannot breach Article 2.1 of the TRIMs Agreement, those
measures listed in the Annex to the TRIMs Agreement were regarded by the negotiators as falling outside the
scope of GATT Article III:8(a). This is not correct. First, this submission is inconsistent with the text as neither
the Article nor the Annex refers to the consistency of the measures with GATT Article III as a whole. Second,
the European Union provides no evidence to support its inte rpretation of the negotiators' intention. Third, this is
inconsistent with the other provisions of the TRIMs Agreement. If the European Union's interpretation is
correct, then this must also be the effect of the illu strative list of TRIMs that are inconsistent with GATT
Article XI:1. That is, the TRIMs that are listed in the Anne x as inconsistent with Article XI:1 must fall outside
the scope of Article XI:2. For example, the Annex lists measures "which restrict the importation by an enterprise
of products used in or related to its local production […]". Such a measure can clearly fall within the scope of
Article XI:2(c)(ii).

provided. By failing to identify the form of the subsidy, who provided a nd who benefited from the
subsidy, and the form of the benefit conferred, Japan 's panel request failed to satisfy Article 6.2 of the
DSU, and the Panel has no jurisdiction to hear the subsidy claim. Accepting jurisdiction will
undermine the requirement to provide "the legal b asis of the complaint" and encourage complaining
Members to obtain procedural advantages by waitin g until the first written submission to disclose the
legal basis of their claim.

35. In the alternative, Japan ha s failed to demonstrate its claim under the SCM Agreement for two
reasons. First, it has mischaracterized the OPA's purchase of goods as a "direct or potential direct
transfer of funds", or "any form of income or price support". As Canada has demonstrated above, the
OPA purchases renewable electricity
22 under Power Purchase Agreements . According to the panel in
US – Large Civil Aircraft, if a transaction is appropriately characterized as a purchase, even though it
involves transfer or potential transfer of funds, it must be classified as a purchase of goods, otherwise
the term "purchases goods" in Article 1.1(a)(1)(iii) is rendered "redundant and inutile". Thus, the
transfer here, i.e. the payment of the FIT rate in exchange for the production and delivery of
renewable electricity, cannot alter the correct characterization, which remains a purchase of goods.

36. Similarly, Japan's alternat ive characterization that the FIT Program constitutes a form of
income support is inconsistent with the ordinary meaning and context provide d by Article 1.1(a)(1)
and the panel's reasoning in US – Large Civil Aircraft. Such a characterization would also render
Article 1.1(a)(1)(iii) inutile.

37. Second, Japan has failed to demonstrate that the FIT Program confers a "benefit" on
producers of wind and solar electricity under Artic le 1.1(b) of the SCM Agreement as its four
proposed benchmarks and the "present market valu e" calculation are inappropriate comparators for
assessing benefit. These benchmarks are: the HOEP; certain average wholesale prices in certain
jurisdictions outside Ontario (Alberta, New Yo rk, New England and the PJM Interconnection); a
"weighted average wholesale price" for all produ cers in Ontario other than FIT and Renewable
Energy Standard Offer Program (RESOP) producers; and the "Commodity Charge" portion of Ontario
ratepayer bills.

38. The importance of locating a proper comparator has been highlighted by the Appellate Body
in EC and Certain Member States – Large Civil Aircraft where it stated that "a financial contribution
will only confer a 'benefit' […] if it is provided on terms that are more advantageous than those that
would have been available to the recipient on the market ". Further, the context in Article 14(d) of the
SCM Agreement describes the conditions that must be considered when selecting a comparator, i.e.
"the adequacy of remuneration shall be determined in relation to prevailing market conditions […] in
the country of provision or purchase (incl uding price, quality, availability, marketability,
transportation and other conditions of purchase or sale)".

39. The fundamental condition of purchase in the FIT Program is that the electricity be generated
from renewable resources. As all of Japan's benchmar ks ignore this condition, they are inappropriate.
The inappropriateness of this is confirmed by the f act that the cost structure and operating conditions
of wind and solar are different from other genera tion technologies and will influence the price at
which a producer will be willing to sell its goods and the price at which the good will actually be sold.

22 Response to question No. 23 (First Set): The fact s that demonstrate there are "products purchased"
under GATT Article III:8(a) also help demonstrate a gove rnment "purchases goods" under Article 1.1(a)(1)(iii)
of the SCM Agreement. Nevertheless, these two phrases are not identical. Consequently, a conclusion that a
government does not "purchase" under the SCM Agreement does not automatically mean there are no "products
purchased" for the purpose of Article III:8(a). It would still be possible for the Panel to find that the OPA
procures electricity in accordance with Article III:8(a).

A benchmark that refers to rates that would not cover reasonable costs of production cannot be
appropriate. All of Japan's benchmarks have ignored the fundamental condition in the FIT Program23.

40. As explained by Professor William Hogan, a leading electricity economist, wind and solar
facilities have much lower economies of scale comp ared to nuclear, coal, gas and hydro plants. Non-
renewable producers use larger-scale technologies and are able to produce energy at lower cost. Wind
and solar facilities also produce elect ricity for a much smaller proportion of the year than most non-
renewables. The key differences in costs and ope rating characteristics between technologies have
been summarized by Professor Hogan in Table 1 of his report.

41. As a result, Japan's comparators are inappropr iate because they fail to reflect the fundamental
condition of purchasing renewable electricity. Howe ver, there are other reasons these proposed
benchmarks are inappropriate, as well. First, the HOEP price does not meet the costs of production of
non-renewable electricity producers
24. In fact, 92% of producers in Ontario receive more than the

23 Comment on Japan's response to question No. 28 (Second Set): Japan has presented two new prices
that are higher than the RPP in an attempt to rehabilitate its proposed "commodity charge portion of the Ontario
retail price" benchmark. It ignores that these are rates for commodity electricity and not comparable to rates for
wind and solar electricity. Generally, end-users would pay more than the RPP if they choose to contract with a
retailer on the basis of guaranteeing some price certai nty over a portion of the commodity price (i.e. the HOEP
portion) over a longer period of time than that offered by the RPP.

24 Response to question No. 14 (Second Set): The OEB does not set "wholesale electricity rates"
(HOEP). The HOEP is determined by the IESO's dispat ch mechanism. The OEB sets rates for a number of
entities including OPG regulated rates. 14(a): These rate s for prescribed OPG generation would allow for OPG
to reinvest its facilities in a manner that ensures the l ong-term sustainability of OPG assets. 14(b): In setting
these rates, the OEB is guided by the framework set out in Ontario Regulation 53/05. The OEB considers
whether the costs of the facilities were prudently incurre d, the deemed capital structure (debt to equity ratio),
cost of debt, and return on equity. The OEB follows standard Canadian and US utility regulation precedents and
jurisprudence for cost of service regulation. To a ssist with information gathering, the OEB conducts
interrogatories and public hearings where stakeholders are able to present evidence and to be cross-examined.
14(c): The OPA may impose fees and charges for any costs incurred carrying out activities permitted or
required under the Electricity Act, 1998. OPA rates must be approved by the OEB. Through those fees, the OPA
recovers its staffing costs and costs for consultants.
Response to question Nos. 26 and 27 (First Set); question Nos. 12 and 15 (Second Set): Payments to
the OPG (for regulated facilities) are based on cost recovery and a margin of return. This is determined by a
formula based on Government of Canada and corporate bond rates and a risk premium. In 2011, the margin of
return was 9.43%. However, for unregulated facilities, th ese receive only the HOEP as they are older facilities
whose capital costs are largely depreciated. Some of OPG's coal facilities have a contract with the OEFC, which
provides for OPG to recover its costs until the facilities are shut down by the end of 2014. Payments by the OPA
to OPG for a planned biomass facility will also be guided by the principle of cost recovery and a margin of
return.
OPG does not report a "commercial risk profile" since it borrows from the Government of Ontario. In
2011, OPG's Standard & Poor's credit rating was "A-". Rega rding IPPs, for competitive contracts, the rate is the
lowest bids received that meet the requisite conditions. Fo r FIT contracts, the rate was based on cost recovery
and margin. The rate of return on equity used to develop FIT rates in 2009 was 11%. For solar PV RESOP
contracts, the rate was based primarily on cost recovery , while others were based on RES rates. NUG rates do
not provide for a particular rate of return but are tied to the rates paid by large electricity consumers.
The "price formula" is not the same for all technologi es as some generators receive regulated rates and
others contracted rates in accordance with the relevant procurement program and objectives of the procurement.
As such, the price calculations are not designed to creat e preferential treatment. The general principle behind
contract and regulated rates is to allow for cost recovery and a reasonable rate of return to generators.
Response to question No. 17 (Second Set): The profits of electricity generators will vary according to
their specific efficiencies. Generally, a generator can earn higher returns compared to other generators if it is
able to reduce its actual costs and/or increase its output. Any variation in profitability during the life of any
contract will also be a function of efficiencies and output.

HOEP and even Japan admits that the offers and bids "do not reflect the prices actually paid by
consumers or the rates actually received by generators ; rather they serve as a 'dispatch' mechanism to
determine the quantity of supply and the HOEP". Japa n's out-of-jurisdiction comparators also reflect
wholesale market prices similar to the HOEP based on traditional non-renewable electricity
production costs. Thus, they are inappropriate fo r the same reasons. These comparators bear no
relation to the reality of renewable electricity production in Ontario. As acknowledged by Japan, the
FIT Program "became necessary to encourage the entry into the market of renewable energy
generators, most of which would not have entered the market in the absence of the FIT Program".

42. Second, both Japan's weighted average wholesale price and its "commodity charge"
component of the OEB-regulated retail price also fa il to reflect the fundamental condition of purchase
under the FIT Program that renewable electricity be generated. These comparators include
predominantly non-renewable electricity productio n technologies that are not comparable between
themselves and that also enjoy significant economie s of scale, higher capacity factors, and lower sunk
and fixed costs. Further, the "commodity charge" is a bundled price for all electricity and reflects the
overwhelming volume of non-renewable electricity production. Renewable electricity, other than
hydroelectricity, currently makes up only approximately 4% of Ontario's capacity.

43. Finally, Japan's present market value calcula tion is flawed because, again, it ignores that the
critical condition of purchase is that renewable electricity must be supplied. Japan's use of the HOEP
and the "commodity charge" as its so-called "mar ket rate of electricity" takes no account of the
significant costs FIT wind and solar electricity produ cers incur, nor a reasonable rate of return. As
demonstrated by Professor Hogan, inv estors will only finance construction of any new generation if
the present discounted value of exp ected future revenues exceeds their all-in costs. Japan's approach
presumes that an investor or producer would be willing to accept rates well below their costs of
production for a 20-year period. No rational invest or would accept such losses. Thus, Japan has failed
to demonstrate that the FIT Program confers a benefit and that it constitutes a prohibited subsidy.

44. For the reasons above, Canada requests that the Panel reject Japan's claims and find that
Canada has not acted inconsistently with Article III:4 of the GATT and Article 2.1 of the TRIMS
Agreement.

II. CANADA'S FIRST WRITTEN SUBMISSION IN DS426

45. The European Union supports its claims largel y by repeating the arguments set out in Japan's
first written submission in DS412. Canada demonstr ated that these arguments were unfounded in its
first written submission in DS412 and, therefore, incorporates that submission here.

A. THE FIT PROGRAM IS NOT SUBJECT TO GA TT ARTICLE III AS IT FALLS WITHIN THE
SCOPE OF ARTICLE III:8(A)

46. For the reasons described in Canada's first written submission in DS412, the FIT Program is a
procurement program within the scope of Article III: 8(a). The fact that the OPA purchases electricity
is confirmed by its payment of sales tax under FIT contracts.

47. The European Union argues that the OPA's role to facilitate the diversification of electricity
supply sources by promoting the use of cleaner energy sources does not require purchasing electricity
from FIT generators. However, the European Union overlooks the fact that the OPA is also required
to "support […] the goal of ensuring adequate, re liable and secure electricity supply". While

Response to question No. 20 (Second Set): The OPA does not carry cash reserves. Any excess cash at
the end of a month is used to pay the operating expenses in the following month.

"promoting the use of cleaner energy sources" may not require purchase, this is how the Government
of Ontario has chosen to promote that goal.

48. The European Union argues that the dicti onary meaning of "for governmental purposes"
would imply that the acquisition is "in favour of a reason pertaining to the government". This accords
with Canada's definition, as reasons pertaining to th e government can also be described as the aims of
the government. The European Union also argue s that "governmental purposes" means for the
"consumption, benefit or use" of the government and relies on the French and Spanish versions of
Article III:8(a) to conclude that this means th e purchase is for the "needs" of the government.
However, the European Union does not explain how purchases for the "needs" of a government are
purchases for the consumption, benefit or use of a go vernment. Indeed, the "needs" of the government
can be interpreted as simply what is required to fulfil the government's aims
25. The European Union
has also relied on Canada's General Notes to Appendix 1 to the Agreement on Government
Procurement (GPA). This is not relevant contex t as the Notes do not fall under any of the categories
recognized in Article 31(2) of the Vienna Conven tion on the Law of Treaties. These Notes were not
made in connection with the conclusion of the GATT and were drafted solely by Canada concerning a
treaty concluded decades after the GATT between differe nt parties. Canada's Notes merely clarify the
extent of its commitments under a different agreemen t, the GPA. Canada was not advancing a general
meaning of "procurement", let alone any such meaning for the purposes of GATT Article III:8(a).

49. Further, the European Union's reference to the Background Note from the WTO Secretariat
does not support its interpretation of "government purposes". The Note only ob serves that, originally,
the two provisions were meant to refer to the same type of procurement but says nothing of the
drafters' final intention. Indeed, the Note highlight s that the drafters ultimately did not confine its
scope to purchases for "consumption in governmental use".

50. The OPA's purchase is not with a view to commercial resale as it is not with an aim to resell
for profit. The centrality of profit to the meani ng of "commercial" is confirmed by several WTO
decisions, namely, US – Anti-Dumping and Countervailing Duties (China) (Appellate Body)
previously discussed; China – Intellectual Property Rights (panel), which stated, "[t]he distinguishing
characteristic of a commercial activity is that it is carried out for profit"; and Canada – Wheat Exports
and Grain Imports (panel), which held that a state trad ing enterprise acting in accordance with
"commercial considerations" should seek to pur chase or sell on terms that are "economically
advantageous".

51. Further, the European Union's example of a supermarket selling goods at a loss does not
support its interpretation of "commercial", as the s upermarket can still hope to profit through the sale
of other goods to customers who are attracted by th is "loss-leader". As explained in Canada's first
written submission in DS412, the purchase of electricity is not "with a view to production of goods for
commercial sale" as it is to ensure a reliable and sufficient source of electricity for Ontarians.

B. THE EUROPEAN UNION'S SCM AGREEMENT CLAIM

52. The Panel has no jurisdiction to hear this cl aim as the European Union failed to provide the
legal basis for its claim in its panel request in acco rdance with Article 6.2 of the DSU. The European
Union failed to identify the type of financial contribution or form of income or price support, the

25 Response to question No. 28 (First Set): This inte rpretation is confirmed by the English text of
GATT Article III:8(a). That text does not refer to a purchase for the "needs" of the government. Rather, it refers
to a purchase for "governmental purposes". The ordinary meaning of a purchase for "governmental purposes" is
a purchase for the aims of the government. Since the French and Spanish text can be read as consistent with this
interpretation, as explained above, this must be the proper interpretation of that phrase.

beneficiary, and how a benefit is conferred. Cana da asks the Panel to find that both the European
Union's and Japan's panel requests are inconsistent with Article 6.2 and to refuse jurisdiction.

53. In the alternative, the European Union fa ils to demonstrate that the FIT Program is
inconsistent with the SCM Agreement for the reasons set out in Canada's first written submission in
DS412 (summarized above).

54. The European Union has adopted Japan's mi scharacterization of the OPA's purchase, but
suggests that it is only the difference between the HOEP rate and the FIT rate that represents the funds
being directly transferred. Yet, separating the HOEP payments does not transform these "purchases of
goods" into "direct transfers of funds".

55. As the Appellate Body held in US – Softwood Lumber IV, the "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 gove rnment". The appropriate focus is on the nature of the
transaction as a whole, not simply how payments are made.

56. The Appellate Body recognized that, in additi on to the monetary contributions enumerated in
paragraphs 1.1(a)(1)(i) and (ii), "a contribut ion having financial value can also be made in kind
through governments providing goods or services, or through government purchases". The "financial
contributions" enumerated in (i) are all examples of "monetary contributions". Those enumerated in
(iii) either do not involve a monetary contribution at all (in-kind provisions of goods or services) or do
not simply involve a monetary contribution (i.e. the pu rchase of goods). What differentiates a simple
monetary contribution such as a "direct transfer of funds" from a "purchase of goods" is that the latter
involves a monetary contribution in exchange for a good. Here, the OPA's transaction with FIT
generators involves a monetary contribution (payments) in exchange for electricity – a good – that the
OPA directs be supplied into the system once generated. Thus, this transaction is properly
characterized as a "purchase of goods" and not a transfer of funds.

57. The European Union also argues that the OPA's purchase constitutes a form of "income or
price support". In its first written submission in DS412, Canada showed th is interpretation would
render Article 1.1(a)(1)(iii) "redunda nt and inutile". Further, the European Union has misinterpreted
the terms "any product" in GATT Article XVI to support its position. "Any product" in Article XVI
does not refer to unsubsidized input goods. Rather, it refers to goods actually impacted by the notified
subsidy. The European Union alleges that the OP A subsidizes renewable electricity, not input goods.
Hence, the European Union would need to demonstrat e that trade in electricity, not in the equipment,
is affected by the alleged subsidy.

58. The European Union relies on Japan's proposed benchmarks to determine that a benefit has
been conferred on renewable electricity producers. It claims that the HOEP is established by market
forces and thus is an appropriate benchmark. Howe ver, as Canada has demonstrated in response to
Japan's first written submission, the HOEP is not an appropriate benchmark because it does not reflect
the cost of producing renewable electricity
26. As a result of restructuring in 2004, the formerly

26 Response to question No. 55 (First Set): Based on the Appellate Body's decisions in US – Softwood
Lumber IV and EC and Certain Member States – Larg e Civil Aircraft, Article 14(d) of the SCM Agreement
does not qualify in any way the market conditions that are to be used as the benchmark. As such, the text does
not explicitly refer to a "pure" market, or market "undis torted by government intervention", or to "fair market
value". Thus, the fact that there is government regulation does not necessarily prevent the use of prices in a
jurisdiction subject to such regulation for the purpose of a benefit analysis. The Appellate Body has also
acknowledged that, in limited circum stances, for example where prices are distorted by a government's
predominant position as a provider of a good, benchmarks other than private prices in the relevant jurisdiction

competitive wholesale market became a mechanis m primarily aimed at enabling the IESO to
physically balance supply and demand through dispatch instructions.

59. Thus, the IESO wholesale market is primarily a dispatch mechanism in which electricity is
offered at rates that do not reflect the true cost of generation. The true costs for most generators are
accounted for by OEB-regulated rates or in contract s. In addition, FIT wind and solar generators are
not dispatchable, that is, they do not submit offers into the IESO market mechanism. Thus, their
generation does not affect the HOEP price. Instead, they provide the IESO, on a day-ahead basis, with
hourly estimates of the volume of electricity they forecast they will generate.

60. For the reasons described above, Canada request s that the Panel reject the European Union's
claims. Canada also requests that the Panel find that it does not have jurisdiction under the SCM
Agreement claim.

III. CANADA'S OPENING STATEMENT AT THE FIRST MEETING OF THE PANEL

A. THE GATT CLAIM

61. The OPA's purchase of renewable electricity is evidenced by five facts. First, the OPA only
pays money in exchange for renewable electricity th at is produced. Articles 3.1 and 1.4 of Exhibit B
to the FIT Contract show that the OPA pays producers only for the electricity that they deliver into the
grid
27. Second, the OPA acquires the right to future revenue, as well as by-products from the

may be used in an adequacy of remuneration analysis. It follows that, when prices are distorted by the
government's predominant position as a purchaser of a good, alternative benchmarks may be used. However, the
Appellate Body also cautioned that, whatever the alternative chosen, it must relate to the prevailing market
conditions in that country, and must reflect price, quality, marketability and other conditions of purchase and
sale as required by Article 14(d). In Canada's view, it is not possible to determine in the abstract a "point" at
which the involvement of a government in a market deprives that market of its price-setting ability for the
purpose of a benefit analysis. Such a determination must be made on a case-by-case basis.
Response to question No. 57 (First Set): 57(a): A "ben efit" analysis must begin with an examination of
the "market" and an effort to locate a proper comparator. However, there ma y be situations where a market test
cannot be applied "strictly". In this respect, the startin g-point, when determining adequacy of remuneration, is
the prices at which the goods in question are purchased by private buyers in arm's-length transactions in the
country of purchase (US – Softwood Lumber IV). However, alternative benchmarks may be used and "could
include proxies that take into accoun t prices for similar goods quoted on wo rld markets, or proxies constructed
on the basis of production costs".
57(b): The structure of Article 14 of the SCM Agreement im plies that a benefit can be determined in
different ways taking into account the type of financial contribution. While the underlying principles should be
similar, Article 14 acknowledges that some flexibility exists to tailor the benefit analysis to the type of "financial
contribution" in question. Furthermore, the type of product at issue may require the benefit determination to be
conducted in different ways as the nature of the produc t itself may influence relevant market conditions. In this
case, for example, we are dealing with a unique good, the production and consumption of which requires
government regulation to ensure adequate supply. Furthermore, the physical nature of electricity requires central
planning due to the physical constraints of needing to constantly balance supply and demand.
27 Response to question No. 17 (First Set); question No. 10 (Second Set): The obligation in FIT Rule
6.3 is implemented through Article 3.1 and 1.4 of Exhibit B to the FIT Contract. In practice, the OPA discharges
the 'payment obligations' referred to in FIT Rule 6.3(a) by calculating each month the amount of its obligations
under the FIT contracts. It reports this to the IESO who uses this amount, together with amounts for other OPA
and OEFC Power Purchase Agreements , to calculate the Global Adjustment. This Global Adjustment is
included in the monthly electricity bill paid by households and businesses, usually to an LDC. The LDC
recovers its charge for distribution and sends the rest to the IESO, which extracts the Global Adjustment and
sends it to the OPA. The OPA uses this to pay its oblig ations under its Power Purchase Agreements. Exhibits
B3A and B3B to the FIT Contract both relate to distribution-connected projects.

production of renewable electricity, as shown in Article 2.10(a) of the FIT Contract
28. Third, the OPA
pays sales tax on the payments to the producers, as shown in Article 3.5 of the FIT Contract 29. Fourth,
the contracts describe the OPA as purchasing electricity 30 in the Definitions, Article 3.4, 3.5,
Appendix A of the FIT Contract, and Article 2.1 of the microFIT Contract 31. Fifth, other legislation
and OPA documents recognize that the OPA "procu res" and "purchases" electricity, as seen in the
Electricity Act, 1998, the Ministerial Direction and the Retail Settlement Code.

62. Japan also relied on the panel decision in US – Sonar Mapping. However, the panel there was
addressing the meaning of a different term – "govern ment procurement" – and a different treaty, the
Tokyo Round Agreement on Government Procurement. That panel was not addressing the meaning of
"procurement" within GATT Article III:8(a).

63. Japan argues that the OPA does not purchase electricity because it is supplied by producers
directly into the grid. However, electricity is uni que because it cannot be stored and is consumed
almost at the same time as it is produced. Thus, it is not helpful to try to determine ownership through
physical possession. Further, possession is not a condition for its purchase, as exemplified by a
purchase of a book over the internet by someone who pays with a credit card and directs Amazon to
deliver the book to a different recipient. Another example is the trade of products in transit through
bills of lading.

Response to question No. 9 (First Set): Canada does not agree with footnote 69 of the
European Union's first written submission. The Government of Ontario (Government "A" in the European
Union's example) does not "direct" an y company to sell anything. The Gove rnment, through the OPA, enters
into a contract under which it agrees to purchase electricity that the supplier injects into the grid.
28 Response to question No. 18 (First Set): FIT Rule 7.3(c) refers to the OPA's purchase of revenue
from Future Contract Related Products. Through the FIT Contract, the OPA acquires 80% of the revenue from
any Future Contract Related Products. In addition, it also acquires Environmental Attributes. This helps
demonstrate that the OPA is purchasing the renewable electricity.
Response to question No. 2 (First Set): This Artic le refers to Environmen tal Attributes, which are
defined as the "interests or rights arising out of attributes […] associated with a Renewable Generating Facility".
Through its payment to suppliers, the OPA acquires by-products, such as carbon credits.
29 Response to question No. 11 (Second Set): There is no provision dealing with the liability for sales
tax in the microFIT Contract. This is because the OPA anticipated that microFIT suppliers would qualify for the
tax exemption from the requirement to charge and collect sales tax that is applicable to those with revenues of
less than $30,000 a year.
30 Response to question No. 25 (Second Set): The FIT contracts provide for the purchase of electricity.
Like every purchase contract, they c ontain provisions to ensure that the good meets the requirements of the
purchaser, i.e. that the electricity supplied helps fulfil th e government of Ontario's goal of a secure electricity
supply. To that end, the contract prov ides for payment for electricity that is injected into the grid. It imposes
conditions concerning the design and construction of the facilities for safety and grid compatibility reasons.
Insurance covenants in the contract help ensure that the facility is actually built. Lenders' rights and provisions
for re-negotiations help ensure the continued operation of the facility. Even if FIT contracts are more than just
purchase contracts (which they are not), as long as the contract does not change the nature of the transaction into
one of the other forms of "financial contribution" identifie d in Article 1.1(a)(1), then the transaction will be one
where the government purchases goods. None of the "f acets" identified by the Panel in its question changes the
nature of the transaction.
Comment on Japan's response to question No. 25 (Second Set): Japan argues that "the OPA promises to
pay […] [a] rate that guarantees the recovery of costs plus a reasonable return on investment over a 20-year
period " but it is the price that is guaranteed, not the r ecovery of costs or a reason able rate of return. The
efficiencies of generators determine whether they recover their costs and obt ain a reasonable rate of return. An
inefficient generator may be unable to recover its costs.
31 See response to question No. 1 (First Set).

64. The scope of Article III:8(a) is not confined to the purchase of products that are the focus of a
claim of a breach of Article III. This is because th e drafters of the GATT did not include such specific
limits, such as the obligations imposed in the GP A. Article XVI of the GPA prohibits the imposition
of "offsets" (i.e. "measures used to encourage lo cal development or improve the balance-of-payments
accounts [including] by means of domestic content […]"). The GPA prohibits such offsets.
Signatories to the GPA would not have needed to pr ohibit offsets if they were already prohibited by
the GATT32. There would have been no point.

65. Japan and the European Union have argued that the purchase by the OPA falls outside the
scope of Article III:8(a) as it is with a view to commercial resale. In response, Canada notes the
following. First, the renewable electricity purchased by the OPA is not "resold"; instead, it is co-
mingled with electricity from other sources and is available for consumption. Second, the OPA does
not purchase with the aim to make any profit. Thir d, despite the European Union's reliance on the
French version of Article III:8(a), which refers to "revendus dans le commer ce", the French text can
be interpreted as a resale for profit. "Commerce" can be defined as " opération ayant pour objet de
profit". The choice of words in the English and Spanis h version, i.e. "commercial resale" and "reventa
commercial", instead of "resale in commerce", confirms this interpretation
33.

66. Purchases with a view to resell outside governme nt to recover costs fall within the scope of
Article III:8(a) because that resale might be n ecessary to fulfil the government purpose for which the
product was purchased.

67. Finally, the purchase of renewable electric ity by the OPA is not "with a view to the
production of goods for commercial sale". A pur chase will only fall outside the scope of
Article III:8(a) if it is "with a view to" the u se of the product in the production of goods for
commercial sale. A purchase does not fall outside the scope of the Article merely if the product is
used in the production of goods for commercial sale. However, renewable electricity is purchased
with a view to ensure a reliable and sufficient suppl y of electricity. It is not purchased with a view to
the use to which some consumers may put that electricity.

B. THE SCM AGREEMENT CLAIM

68. Canada focuses its submissions on two key po ints. First, contrary to the complainants'
continued mischaracterizations of the nature of the transaction, the OPA purchases renewable
electricity through the FIT Program. In US – Large Civil Aircraft (2nd complaint), the Appellate Body

32 Response to question No. 22 (First Set): WTO Me mbers have a means to accept disciplines on the
conditions they impose on the inputs – i.e. the GPA, not the GATT. Further, Article XVI(2) of the GPA allows
developing countries to negotiate exemptions from the disciplines on offsets. There would be no point to this if
they faced such disciplines under the GATT. Professor Sue Arrowsmith explains that it is common practice for
governments to require private firms to purchase na tional products as a cond ition of access to government
contracts. Such measures are generally referred to as "offsets". When such offset s relate only to work in
connection with the government contr act, it is clear that they are meas ures governing procurement and are
excluded from the national treatment rule.
33 Response to question No. 25 (First Set): Any "lack of purity" in the market conditions does not
directly determine whether a resale in that market is "commercial". Rather, it is directly determined by whether
the intention of the reseller is to profit. Nevertheless, there may be circumstances where the regulation of a
market helps demonstrate the welfare to consumers and, in turn, helps indicate that the product was purchased
with a view to ensuring it is available for consumption by consumers, rather than with a view to profit from the
resale. The regulation of the enviro nment in which a transaction takes place does not affect whether that
transaction is a purchase under GATT Article III:8(a) or the SCM Agreement. The "purchase" is determined by
whether there is an "acquisition" in exchange for "payment".

characterized "direct transfers for funds" as "[…] action involving the conveyance of funds from the
government to the recipient" where "funds" include "not only money, but also financial resources and
other financial claims more generally". In c ontrast, it characterized the "purchase of goods" as
situations in which "[...] goods are provided to the government by the recipient […]". It noted that
"purchase" is usually understood to mean that th e person or entity providing the goods will receive
some consideration in return"
34.

69. The Appellate Body also noted in US – Softwood Lumber IV that the "range of government
measures capable of providing subsidies is broadened still further by the concept of 'income or price
support' […]"
35.

70. Thus, the methods by which a government can transfer economic value are differentiated by
reference to their inherent qualities. "Direct transf ers of funds" are transactions "by which money,
financial resources, and/or financial claims are made available to a recipient". Forms of "income or
price support" involve transactions whose nature is to support incomes or prices for a particular
commodity. However, in government "purchases", pa yment is made "in consideration" for the
exchange of a good.

71. Second, one must look at the whole transaction to ascertain the essential nature of the
transaction. As shown earlier, the nature of the OPA's transaction is that payments are made in
consideration for renewable electricity.

72. The complainants have failed to demonstrate that the OPA's purchases confer a benefit. In
accordance with Article 14(d) of the SCM Agreem ent, there is no benefit conferred unless the
"purchase is made for more than adequate rem uneration" "in relation to the prevailing market
conditions for the good in qu estion in the country of purchase". As recognized in EC and Certain
Member States – Large Civil Aircraft, "locating a proper comparator" is critical to this determination.
Thus, the Panel must locate a benchmark that focu ses on the conditions of exchange of, specifically,
wind and solar electricity, as the measure at issu e concerns only these OPA purchases. Neither Japan
nor the European Union has identified such benchmarks.

73. Instead, the complainants have focused on benchmarks for non-renewable electricity. This
focus may be due to the fact that, to an end-user, all electricity is the same. While it is true that
ultimate consumers cannot distinguish between th e electricity they consume, their views are

34 See response to question No. 19 (First Set).
35 Response to question No. 58 (First Set): 58 (a): Whatever "income or price support" might precisely
mean, it is a concept not covered by "financial contributions". Article 1.1(a)(1) and (2) are separated by the
disjunctive "or", indicating that "financial contributions" are distinct from "income or price support". The fact
that Article 1.1(a)(2) refers to GATT Article XVI means that the type of "income or price support" captured by
the SCM Agreement is the type of "income or price support" notified under Article XVI.
58(b): Agricultural import tariffs, indeed any import tariff, may confer benefits on producers of goods,
but they should not be treated as subsidies. As the pa nel in US – Export Restraints held, not all governmental
action capable of conferring a benefit should be treated as a subsidy, such as import tariffs. With respect to what
distinguishes such governmental action from "income or price support", the focus must be on the nature of the
measure. Where prices for a good ar e supported by government purchases, such action may be characterized as
income or price support if the support decreases imports of competitive products or increases exports of the
supported product. However, this is not the case with respect to the FIT Program. The nature of the OPA's
purchase is to ensure sufficient supply of electricity from clean sources. Regarding minimal wage requirements,
Canada does not consider that they could support prices as they would presumably add costs to the production
of a good.
58(c): It is likely that "income or price support" under the SCM Agreement would involve some kind
of fiscal commitment.

irrelevant. The focus of any benefit analysis must be on the alleged recipients of the benefit, i.e. the
wind and solar generators.

74. To Ontario, the purchaser in question, how th e electricity is produced is an essential condition
of purchase, as this condition is intended to help meet the objective of a secure and clean energy
supply. The Panel must examine the behaviour of wind and solar generators and purchasers of wind
and solar electricity in relation to the conditions of supply and demand in Ontario.

75. The HOEP is an inappropriate benchmark for r easons Canada has explained in its first written
submissions. The IESO market mechanism is not the classical competitive market where supply and
demand meet. Furthermore, despite the fact that 8% of Ontario generators do receive only the HOEP,
this is only because these generators are old government-owned facilities whose capital costs have
been largely depreciated and, in the case of coal faciliti es, will be shut down by the end of 2014. For
92% of generators, the HOEP is not an adequate pri ce. Moreover, most users of electricity simply pay
the price required by the system.

76. In sum, Japan and the European Union have failed to present an appropriate benchmark and,
consequently, failed to demonstrate the existence of a subsidy. Thus, the FIT Program cannot be
found to violate Article 3.1(b) of the SCM Agreement.

IV. CANADA'S SECOND WRITTEN SUBMISSION IN DS412 AND DS426

77. The first hearing reinforced that the FIT Pr ogram is a program for the purchase of renewable
electricity to help secure a sufficient and reliable supply of electricity for Ontario's citizens from clean
sources. It also reinforced that the Government's purchase of renewable electricity falls within the
scope of Article III:8(a) of the GATT.

78. During the first hearing, Japan and the European Union failed to prove that the FIT Program
involves "direct transfers of funds" within the mean ing of Article 1.1(a)(1) of the SCM Agreement.
Instead, the complainants continued to repeat their assertions from their first written submissions.
Japan and the European Union also failed to carry their burden of proving the FIT Program involves a
form of "income or price support" within the meaning of Article 1.1(a)(2) of the SCM Agreement.

79. Further, Japan and the European Union fa iled to prove that the FIT Program confers a
"benefit" on FIT suppliers, as required by Article 1.1(b) of the SCM Agreement.

80. In terms of the order of analysis in this case, in response to question No. 24 of the Panel's first
set of questions, Canada noted that, according to the Appellate Body in EC – Bananas III , when the
GATT 1994 and another Agreement in Annex 1A to the WTO Agreement (for example, the SCM
Agreement) both appear to apply to the measure in question, the measure should be examined on the
basis of the agreement that "deals specifically and in detail" with the measure.

81. In this case both Japan and the European Union have taken great pains to be clear that what
they are challenging in the FIT Program and FIT contracts is the domestic content requirements. In
its first written submission Japan states, at the outset:

To be clear, Japan challenges the FIT program and individually executed FIT and
microFIT contracts, not because they have the effect of promoting investment in
renewable energy generation, but rather because, in light of the domestic content
requirement, they discriminate against imports of renewable energy generation
equipment in favor of Ontario-made renewable energy generation equipment.

82. In a similar vein, the European Uni on states in its first written submission:

At issue in the present dispute are the dom estic content requirements included in the
FIT Program (including the microFIT Program) issued by the Government of Ontario
in 2009. To be clear, the European Union does not bring claims against other
elements included in the FIT Program, nor does the European Union contest the
general purpose of the FIT Program, as helping promote electricity supply from
renewable energy sources. […] However, WTO Members cannot use FIT programs
in order to achieve other trade-distorti ng purposes, such as the protection of its
domestic industries to the detriment of ot hers, by including by domestic content
requirements.
83. It is thus clear that the domestic conten t requirements and their impact on imports of
renewable energy generation equipment from these tw o countries are central to the complaint of both
Japan and the European Union. The agreement that deals most specifically with the treatment of these
goods is the GATT and, more specifically, GATT Artic le III. Therefore, in this case, the Panel's
analysis should begin with the GATT.

A. THE GATT CLAIM

84. Canada reaffirms its explanations in previ ous submissions that the OPA purchases renewable
electricity. Japan and the European Union have ch allenged Canada's relianc e on descriptions of the
OPA purchasing and procuring electricity set out in legislation and related doc uments that authorize
the OPA's purchase. In response, Canada notes that it is relying on the characterization by various
government and private entities that have nothing to do with this dispute and have no incentive to
mischaracterize it. Moreover, WTO panels have acknowledged the importance of a Member's
description of its own law. In EC – Trademarks and Geographical Indications (US) the panel
observed that a Member is normally "well-placed to explain the meaning of its own law".

85. Japan argues that "[g]overnment acquisition and payment are certainly aspects of the
'procurement analysis', but critically, so too is gove rnment use, consumption or benefit". None of the
sources that Japan relies on to support its definition of "procurement" is apposite.

86. With respect to Japan's reliance on US – Sonar Mapping, Canada notes that the panel was not
addressing the meaning of the term "procurement", either generally or with in Article III:8(a). The
panel even stressed that it was "not intending to o ffer a definition of government procurement within
the meaning of Article I:1(a)".

87. Japan has argued that the word "use" in Artic le III:8(a) shows that the Article "contemplates
consideration of how th e acquired products are used". Contrary to Japan's assertions, the word "use"
at the end of the Article highlights that drafters did not intend to impose a requirement that
government purchases that fall within the scope of Ar ticle III:8(a) be for governmental use. Despite
Japan's reliance on comments of GATT and WTO Secretariats, these are not valid sources for
interpreting the GATT. Moreover, the Secretariats do not suggest that "government procurement" is
confined to the circumstances described in Article XVII:2
36. In fact, the Secretariat stated that

36 Response to question No. 45 (Second Set): Ther e are similarities between Articles III:8(a) and
XVII:2. Both limit the scope of GATT obligations. Both Articles contain the word "governmental" and both
refer to "products", "resale" and "use in the production of goods". However, there are significant differences.
Article III:8(a) applies to "laws, regulations or requir ements", whereas Article XVII:2 applies to "imports of
products". While Article III:8(a) refers to "product s purchased", Article XVII:2 refers to "products for
immediate or ultimate consumption". Article III:8(a) refe rs to "products purchased for governmental purposes",

"originally, the two provisions were meant to refer to the same type of procurement", but says nothing
about the drafters' ultimate intention.

88. Japan also seeks to confine the meaning of "procurement" by relying on the purpose of GATT
Article III, "to avoid protectionism […]". In doing so, Japan ignores the purpose of Article III:8(a),
which is to allow Members scope to pursue policies through their procurements outside their national
treatment obligation, as recognized by Japan's Mini stry of Economy, Trade and Industry statement on
this Article.

whereas Article XVII:2 refers to "consumption in governme ntal use". Article III:8(a) excludes from its scope
those purchases "with a view to" "commercial resale" or "use in the production of goods for commercial sale",
whereas Article XVII:2 excludes from its scope those purchases "for" "resale or use in the production of goods
for sale". Whereas Article III:8(a) qualifies the words "resale" and "sal e" with "commercial", Article XVII:2
does not. Article XVII:2 imposes an obligation on the imports that fall within the scope of the paragraph –
Members must "accord to the trade of the other contra cting parties fair and equ itable treatment" – whereas
Article III:8(a) imposes no obligation. Finally, Article II I:8(a) links the first conditions on the application of the
paragraph with the second conditions through the words "and not" – it states that "[t]he provisions of this Article
shall not apply to laws, regulations or requirements g overning the procurement by governmental agencies of
products purchased for governmental purposes and not with a view to commercial resale […]". Conversely,
Article XVII:2 links the conditions with the words "and not otherwise" – it states that "[t]he provisions of
paragraph 1 of this Article shall not apply to imports of products for immediate or ultimate consumption in
governmental use and not otherwise for resale […]".
The ordinary meaning of "otherwise" is "in circumstances different from those present or considered".
Its use in Article XVII:2 could indicate that the import of "products […] for resale" is a different circumstance
to the import of "products for immediate or ultimate consumption in governmental use". These significant
differences in the structure and word ing of Article XVII:2 undermine its utility as context for the purpose of
interpreting Article III:8(a). Nonetheless, whatever cont ext is provided by the Article helps demonstrate that
"governmental purposes" in Article III:8(a) is not confined to "consumption in governmental use" but has a
wider scope. Article XVII:2 also helps demonstrate that the conditions in Article III:8(a) are cumulative. The
inclusion of the word "otherwise" in Article XVII:2 highlights that the drafters chose not to include this word in
Article III:8(a). By instead linking those conditions w ith the word "and", the drafters indicated that the
conditions are cumulative – to fall within the scope of Ar ticle III:8(a) a purchase must be for "governmental
purposes" and also "not with a view to commercial resale or with a view to use in the production of goods for
commercial sale".
Since the conditions in Article III:8(a) are cumulative, a purchase for "governmental purposes" must be
capable of also being a purchase "with a view to commercial resale or with a view to use in the production of
goods for commercial sale" – otherwise, there would be no point including the condition that the purchase is not
with such a view. This reinforces that a purchase for " governmental purposes" cannot be confined to a purchase
for consumption by the government, as suggested by Japan and the European Union. A government agency
cannot purchase a product to consume and, at the same time, purchase it with a view to its commercial resale or
its use in the production of goods for commercial sale. Conversely, a government agency can purchase a product
for an aim of the government but also with a view to th e product's commercial resale or use in the production of
goods for commercial sale. (For example, the Liquor Control Board of Ontario purchases alcohol for
commercial resale to the public but for the governmental aim of financing the provision of public services with
the profits from that resale.)
Comment on Japan's response to question No. 45 (Second Set): Although Japan relies on commentary
by Dr. Ping Wang that the differences between Article III: 8(a) and XVII:2 are not substantial, the sole authority
for this statement is an unpublished lecture note of Professor Arrowsmith. However, Professor Arrowsmith has
written that "purchases [of] books for distribution at a nominal charge to community libraries" are "within the
exclusion". Clearly, a governmental ag ency that purchases books for distribution to community libraries is not
purchasing to consume the books itself. Similarly, she has written that the purchase of goods as part of aid for a
foreign country falls within the scope of Article III:8(a), even though it is the foreign country that will consume
the goods.

89. Japan's reliance on the negotiating history, i.e. an alleged comment from the WTO Secretariat
regarding "purchases effected for governmental use" is based on a statement that has been misquoted
by the GATT Analytical Index and, in turn, the Secretariat. The actual document does not state this.

90. Japan has also selectively quoted from John Jackson to support its interpretation of
government purposes. However, in his comments on which Japan relies, Jackson was not referring to
the meaning of "governmental purposes", but a different aspect of Article III:8(a).

91. Finally, Japan cannot rely on negotiating histor y with respect to the United States' proposal to
extend the national treatment obligation, as this proposal was rejected.

92. Even if Japan's interpretation of "procurement " is correct, the OPA's purchase still falls within
all four elements of Japan's interpretation. First, the OPA " pays" for the electricity. Second, as
"benefit" means "advantage, profit or good", this purchase is for the "advantage" and "good" of the
Government of Ontario since it helps fulfil its governmental policy of a sufficient and reliable
electricity supply from clean sources. Third, the OPA " obtains" and " acquires" the electricity by
paying and stipulating that the electricity must be injected into the grid. Use or possession is not
necessary as a government often obtains and acquires me dicine that is used by the sick. The IESO's
statement that it does not take title to energy say s nothing about the OPA's acquisition. Fourth, the
OPA and the Ministry of Energy have " control" over obtaining the electricity because they decide the
terms of the purchase, including price and length of the contract, while consumers only obtain
electricity from the co-mingled pool through their use.

93. Japan relies on Australia's definition of "purpo se", to mean "practical advantage or use" but
fails to mention that Australia acknowledged that this meaning may not be as common as the meaning
cited by Canada, and that the context of this defi nition is specific to "to work to good purpose", which
is not similar to the phrase "governmental purposes".

94. Japan's definition further ignores the context of Article III:8(a). In addition to excluding from
its scope those purchases "with a view to the produc tion of goods for commercial sale", this Article
also excludes those purchases "with a view to commercial resale". However, a government cannot
purchase a product for its "use" or "consumption" and, at the same time, purchase it "with a view to
commercial resale". Thus, defining the purchase as one for governmental "use" or "consumption"
denies the requirement that the purchase is not "with a view to commercial resale" of any effect.

95. Japan and the European Union assert that in terpreting a purchase for "governmental purposes"
as a purchase for an aim of the government would re nder the requirement limitless. This is incorrect.
First, only purchases that are objectively discernible as for the aims of the government will be for
"governmental purposes". Second, the aim must be discernible before the purchase
37. Third,

37 Response to question No. 47 (Second Set): The provision of public services is an aim of any
government. The Panel can distinguish between public services that should be considered to fall under
Article III:8(a) and those that should not by distinguishing between those that are publicly identified by the
government before the time of the purchase as a service that it is providing and those that are not. Thus, the
provision of a reliable and sufficient supp ly of electricity from clean sources is a public service that falls within
the meaning of "government purposes" as the Government of Ontario identified this as a public service that it
would provide through legislation enacted before the time of the purchase.
In the alternative, the Panel can still distinguish objectively in line with an approach suggested by
Brazil where "governmental purpose" includes the provision of public services for which the government has
"constitutional or legal responsibility". With respect to the "specific function performed by a given government"
in the "sector of its economy", the Government of Ontario regulates the electricity sector, and owns many of the
generation facilities and the majority of the transmission and distribution network. The government's role is
performed under the authority of the Canadian constitution. Under the European Union's interpretation, the

discrimination, itself, cannot be the aim behind the purchase. To interpret a discriminatory purpose as
a "governmental purpose" would ensure that a purchase could fall within the scope of Article III:8(a)
simply because it is inconsistent with the nationa l treatment obligation of Article III:4. Such an
interpretation, therefore, could render Article III:4 ineffective.

96. In addition, Japan and the European Union ov erlook the limits imposed by the GPA. While a
purchase that is for the aims of the government and that satisfies the other requirements of
Article III:8(a) is not subject to the disciplines of Ar ticle III, it will be subject to the disciplines of the
GPA if the Member chose to accept them.

97. Even if a purchase for "governmental purpo ses" is not a purchase for the aims of the
government, the OPA's purchase of renewable elec tricity is still for governmental purposes. The
OPA's purchase is for governmental purposes, according to the interpretation of that term by Brazil.

98. Brazil rejected the suggestion that a pu rchase for "governmental purposes" within GATT
Article III:8(a) is confined to purchases for consumpt ion by the government. According to Brazil, this
interpretation would "indicate that the sole purpose of the government is to provide services that
enable its own maintenance and the regular func tioning of its bureaucracy". However, "state
bureaucracy is only a means to the achievement of a myriad of ends, defined by each society".

99. Brazil noted that "[t]he 'purpose of a govern ment' cannot be conceptually construed" but it
will depend on the "role" a government "may […] pl ay" and "the degree of intervention exerted in
practice in any given country". Brazil observed that, for example, "most governments do have the
constitutional or legal responsibility to provide a gr eat number of services to their citizens, such as
health, education, water, electricity, transportati on and public security" and notes that "[p]roviding
these services is certainly regarded as a governmental purpose by these governments".

100. Thus, the OPA's purchase is for "governmenta l purposes", according to the interpretation of
that term by Brazil. To apply Brazil's example, the Canadian Constitution Act, 1982 gives Canadian
provinces powers to make laws related to the deve lopment of sites and facilities in the province for
the generation of electricity
38. Thus, the Government of Ontario ha s enacted legislation to pursue a
reliable and sufficient supply of electricity from cl ean sources. It is for this purpose that the
government, through the OPA, purchases renewable electricity.

101. Japan and the European Union argue that the purchase of renewable electricity by the OPA is
"with a view to commercial resale". Japan interprets this phrase as meaning "with a view to being sold
into the stream of commerce or trade (as opposed to being used or consumed by the government)".
Similarly, the European Union argues that "the de termining factor is whether the goods are sold on
the market place, where other similar goods are trad ed". However, this interpretation denies the word
"commercial" of any effect.

102 Moreover, the grounds on which Japan and the European Union rely to support their
interpretation of "commercial" ha ve no foundation. To support its inte rpretation of the phrase "with a

purchase of electricity through the FIT Program is also for a public service as it is no different to a government's
purchase of "drugs to be used in public hospitals or books to be used by students at public schools".
38 Response to question No. 35 (First Set): The distri bution of legislative authority between the Central
Government of Canada and the Province of Ontario is established under sections 91 and 92 of the Constitution
Act, 1867. Provinces have legislative authority over the generation of electricity, including developing
renewable energy facilities, subject to two exceptions. First, the federal government has legislative authority
over generation from nuclear power (under its exclusive authority over atomic energy), and, second, it has
authority over international exports of electricity (under its exclusive authority over trade and commerce).

view to commercial resale", Japan relies on a dictiona ry definition of "commercial" as meaning "[o]f
or pertaining to commerce or trade". Japan then pr ovides several definitions of "commerce" which, it
states, "do not include any element of 'profit'". However, Japan overlooks th at "commerce" has been
defined as "the exchange of the products […], with an intent to realize a profit". The WTO Secretariat
comment relied upon by Japan actually undermines Japan 's interpretation of "commercial resale" as it
indicates that a resale of a second-hand product after its use will not be a commercial resale. The
resale of a second-hand product is not with the aim to profit; it is to recover some of the costs of the
original purchase.

B. THE SUBSIDY CLAIM

103. Japan and the European Union bear the burde n of demonstrating that the FIT Program is a
subsidy. They both claim to have made a prima facie case and thereby hope to shift the burden to
Canada to rebut the claim. However, as Canada has demonstrated, the complainants have continued to
mischaracterize the transaction at issue and continue d to rely on inappropriate benchmarks to assess
benefit. As a result, they have failed to meet th eir burden. This burden is only met when there is
sufficient evidence adduced to raise a presumption th at what is claimed is true. Only when this
presumption has been established does this burden shift to the respondent to rebut.

104. Canada reiterates its previ ous explanations which show that transactions under the FIT
Program are purchases of renewable electricity and not a "direct transfer of funds" or "income or price
support". The OPA enters into a variety of procurem ent contracts with different generators through
bilateral negotiations, requests for proposals and st anding offer programs such as the FIT Program. In
doing so, it is fulfilling its statutory mandate to pr ocure sufficient electricity supply. This is not
"income or price support". Under the complainants' theory, any government contract for the purchase
of goods at a contracted price would constitute "income or price support".

105. The European Union suggests that the FIT Progr am functions in a similar manner to a typical
support scheme for agricultural products wher e governments ensure that producers obtain a
guaranteed price that a market otherwise would not have provided. This is incorrect because the
HOEP does not represent a market price for electricity, a nd, in a typical situation of price support, the
price is received not only by sellers who sell to th e government, but also by other sellers of the good
in question.

106. In response to the complainants' continue d focus on the HOEP as a benchmark, Canada
reiterates its previous explanations on the inappropriateness of doing so.

V. CANADA'S OPENING STATEMENT AT THE SECOND MEETING OF THE
PANEL

A. THE GATT CLAIM

107. Canada has demonstrated that the FIT Program is not subject to the obligations in GATT
Article III:4 and Article 2.1 of the TRIMs Agreement as it falls within the scope of GATT
Article III:8(a). Canada reiterates its previous e xplanations and will elaborate on several issues in
response to the complainants.

108. In its question No. 59, the Panel asked a bout the purpose of GATT Article III:8(a). In its
answer, Japan did not address the statement of its Mi nistry of Economy, Trade and Industry. Instead,
Japan relied on paragraph 1 of Article III to restrict the scope of Article III:8(a). However, its reliance
is misplaced. This Article begins by stating, " [t]he provisions of this Article shall not apply to laws,

regulations or requirements governin g" certain procurements. Thus, all the provisions of Article III,
including paragraph 1, do not apply to laws, regulations or requirements governing procurements.

109. Canada explained that physical possession is not a condition for a purchase, as exemplified by
the purchase of a book over the internet, and products s ubject to a bill of lading. Japan now appears to
have shifted ground as it argues that, in these examples, "the alleged purchasers have the right to take
possession". However, Japan provides no sources to support this new definition of "purchase". Japan
also suggests that the purchaser must either use th e product itself or seek profit from the resale of the
product. This is not consistent with the purchase by non-profit organizations of food and medicine,
which they do not use themselves, nor derive any profit.

110. Japan also contrasted the role of the OPA with the role of electricity "marketers" and
"aggregators" in certain US states who are describ ed by those state governments as taking "title" to
electricity. Although electricity "marketers" and "a ggregators" may take "title" to electricity, they
never physically possess it as the electricity is passed from the generator to the end-consumer, through
transmission and distribution lines. Even if possession is a condition of a purchase, the Government of
Ontario still purchases electricity as it owns 97% of the transmission lines, and only three of the 80
local distribution companies in Ontario are private
39. Consequently, when a FIT supplier injects
electricity into the grid, the vast majority is tran sferred to the physical po ssession of the Government
of Ontario.

111. The contract condition that requires the OPA to pay for electricity that a supplier is directed
not to produce is needed to prevent oversupply of electricity into the grid and is a common condition
in electricity purchase contracts. The IESO h as never directed a FIT supplier not to produce
electricity, contrary to the European Union's statement
40. The IESO also cannot make such a request
of smaller FIT suppliers because they are not connected directly to the grid.

39 Response to question No. 13 (Second Set): While Hydro One (transmission company) is required to
operate as a "commercial enterprise", its core mandate is to ensure "safe, reliable and cost-effective transmission
and distribution of electricity". It must "prioritize investments in transmission and distribution capacity to
support projects necessary to maintain ongoing gr id security and reliability". Th e 77 publicly owned LDCs are
mandated to provide "reliable delivery of electricity". LD Cs are required to incorpor ate in accordance with the
Electricity Act, 1998. They receive rates for the distribution of electricity that allow for cost recovery and a rate
of return that is "just and reasonable". The OEB is responsible for approving the rates of Hydro One and LDCs
according to this principle.
40 Response to question No. 21 (First Set): 21(a): A FIT generator has never been directed by the IESO
to reduce production.
21(b): If a generator is directed to reduce all of its output, the nature of the transaction should still be
characterized as a "purchase of goods". The "Additiona l Contract Payment" provision is a condition on the
purchase of renewable electricity. Furthermore, this is a common clause in Power Purchase Agreements for
electricity produced from any source, as system administrators must be able to reduce supply into the grid to
safeguard against overloads. It is not unusual for purcha se and sale agreements for a variety of commodities to
contain conditions requiring payments even when the purchaser cannot take supply. This may be the case, for
example, where the purchaser has committed to paying for goods but is unable to take them into inventory.
21(c): This situation does not apply to microFIT and Type 3B fac ilities because they are not connected
to the transmission grid. Only transmission-connected generators are dispatched by the IESO.
21(d): A similar condition applies to certain cont racts with nuclear facilities, which cannot easily
moderate the volume of electricity they produce in resp onse to IESO instructions. In particular, contracts with
Bruce Power (nuclear) have provisions allowing for full payments when its generators are required to reduce
production or be dispatched off in order to manage grid congestion. Most dispatchable generators (such as coal
and hydro) do not require such provisions as they can mo re easily respond to instructions to turn supply on or
off.

112. The OPA's purchase of electricity is anal ogous to the European Union's examples of
purchases for governmental purposes, i.e. medical equipment and drugs to be used in public hospitals,
and books to be used in public schools "in order to provide health and education services for the
benefit of citizens". Similarly, electricity is purchase d to be used by Ontarians in order to provide the
government service of a secure supply of electric ity from clean sources for the benefit of Ontario's
citizens.

113. The European Union has argued that a pur chase for "governmental purposes" is a purchase
for the "needs" of the government. It clarifies that "[s]uch needs may include government purchases in
order to be able to provide government services to citizens […]". However, the European Union has
focused on the wrong purpose when it argues that the domestic content requirement is not imposed in
order to provide services. The domestic content requirement is a condition of the purchase and
Article III:8(a) does not impose any limits on th e purpose of such conditions. For example, in
purchasing books to be used by students at public schools, the government could impose the condition
that the books be published domestically. Thus, the purpose behind this purchase is governmental.
Similarly, the OPA's purchase of renewable electricity is for "governmental purposes" as it is to help
secure a sufficient and reliable supply of electricity for Ontario's citizens from clean sources and it is
also "in order to be able to provide government services to citizens".

114. The European Union and Japan have also argue d that a "commercial resale" is a resale with
the intention of anyone to profit, and that the FIT suppliers, distributors and retailers will all profit
from the alleged resale. However, the elements of Article III:8(a) focus on the actions of the
government: the purchase is "by governmental agencies"; the purposes are " governmental"; and the
view with which the purchase is made is that of the government. Thus, the "commercial" nature of the
resale is determined by the intention that the government profit.

115. Further, any resale of electricity is irrelevant to the profits of FIT suppliers as they make their
profit on the FIT Contract as soon as they deliver electricity into the grid. Distributors also do not
profit from the resale, but from the service of distributing electricity. Finally, retailers make their
profit through separate financial contracts with e nd-users and not through the use of electricity by
those end-users.

116. The European Union has argued that the domestic content requirement does not govern any
procurement by the OPA. However, it is not the domestic content requirement that must govern the
procurement. Nothing in Article III:8(a) obliges th e "requirement governing procurement" to be the
same requirement alleged to breach the national treat ment obligation. Even if the European Union is
correct, the domestic content requirement does " govern" the OPA's procurement, as to "govern"
means to "control, regulate, or determine", and the OPA is not allowed to purchase the electricity if
the condition is not satisfied.

117. Moreover, the domestic content requirement is not "disconnected from the basic nature of the
product" as it concerns the process and production met hod of the electricity that is purchased, i.e. the
services and inputs used to produce the electricity. As stated by Professor Sue Arrowsmith, "[w]hen
such offsets or secondary measures relate only to work in connection with the government contract
awarded […] it is clear that they are measures 'governing' procurement […]".

B. THE SUBSIDY CLAIM

118. In this statement, Canada will focus on the following issues: first, the correct analytical
approach to determine "financial contribution" or "income or price support"; and, second, the proper
characterization of FIT transactions.

119. The European Union relies on three cases to argue that the same measure can be
simultaneously characterized under several sub-headings in Article 1.1(a)(1). However, these cases do
not support the European Union's theory.

120. In Japan – DRAMs (Korea) , the panel was speaking in obiter and actually dealing with
whether the modification of loan repayment terms a nd debt-to-equity swaps were "direct transfers of
funds" and not whether they could be treated as some other "financial contribution".

121. In US – Countervailing Measures on Certain EC Products , the Appellate Body was not
dealing with an Article 1.1 "financial contributio n" analysis. Rather, it was interpreting the term
"recipient" in the context of a benefit analysis and determining whether a recipient had to be a "legal
person" or whether they could be a natural pers on. The Appellate Body's point was simply that
"financial contributions" can be provided directly to legal persons such as corporations or through
natural persons such as the owners of a corporation through a tax concession. This is not the same as
saying that the same transaction can be properly char acterized as both a "direct transfer of funds" and
"revenue foregone" at the same time.

122. The European Union also relies on US – Large Civil Aircraft (2nd complaint) , where the
Appellate Body stated in a footnote that: "[t]he stru cture 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". The
Appellate Body's point is that "Article 1.1(a )(1) […] does not explicitly spell out the intended
relationship between the constituen t subparagraphs". Contrary to the European Union's assertions,
what is clear from this jurisprudence is that th e Appellate Body has not specifically ruled that a
particular measure or transaction could be proper ly found to be multiple forms of "financial
contribution" at the same time
41.

123. With respect to the nature of "income and price support", Canada notes that the type of
"income or price support" captured by GATT Article XVI has been incorporated by reference into the
text of Article 1.1(a)(2)
42. Article XV1:1 requires notification of "any subsidy, including any form of
income or price support, that operates directly or indirectly to increase exports […] or reduce imports
[…]". Thus, this requires "trade effects". There is no evidence suggesting that imports of wind or solar
electricity into Ontario have declined as a result of the FIT Program or that exports have increased. In
fact, there is no evidence that wind or solar electricity is traded at all. Thus, one of the requirements of
"income and price support" cannot be met.

124. The ordinary meaning of "price support" is "a ssistance from a government or other official
body in maintaining prices at a certain level regard less of supply or demand", and applies equally to
the concept of income support. Thus, this not only m eans that incomes or prices must be maintained
through government measures, but that there would be income or price levels first established by
supply and demand (i.e. by a market).

41 Response to question No. 24 (Second Set): The Appellate Body did not, contrary to the European
Union's assertions, find that a particular measure could be properly found to be multiple forms of "financial
contribution" at the same time. A panel should come to a view as to where the measure properly fits. If that is
within Article 1.1(a)(1) as a "financial contributio n", then a proper characterization will lead to one
subparagraph. When the Panel's choice is between one of the subparagraphs in Article 1.1(a)(1) and possible
(2), then the same proper characterization analysis will again lead to a conclusion that places it in one or the
other but not both at the same time. The "or" between the two paragraphs reinforces this approach.
42 Response to question No. 20 (First Set): Article 1.1(a)(2) does not require a finding of "serious
prejudice" in order to find "income or price support". This dispute is not a "serious prejudice" case (pursuant to
Articles 5(c) and 6 of the SCM Agreem ent). In such cases, an assessment of serious prejudice should be
conducted only after a finding of benefit, and of "specificity" under Article 2 of the SCM Agreement.

125. So, "income or price support" necessarily pr esupposes a market that provides a signal causing
a government to take measures to maintain inco me or prices when they fall below a certain level. The
European Union acknowledges this when it provides the example of a system for milk in which
producers will obtain payments if the market price is below the guaranteed price. The FIT Program is
not based on any such signal.

126. Recipients of price support will not be limite d to sellers who sell to the government. Indeed,
price support should also alter the market price for ot her sellers in that mark et. For example, when a
government purchases sugar to support its price, this should alter the price of sugar not only for those
selling to the government but for other sellers as well . Here, there are no allegations that any sellers
apart from the FIT generators selling to the government receive FIT prices.

127. With respect to a "direct transfer of funds" , Japan has now claimed that the FIT Program is a
"conditional grant". It is incorrect because, first, the obligation to generate electricity and deliver it
into the system is the central characteristic of all OPA contracts. Japan may characterize it as a
"reciprocal obligation" made in "performance" for receiving payment, but this is only another way of
describing a "purchase of goods". Second, Japan fail s to reference the Appellate Body's conclusion
that grants are normally given "[…] without an obligation or expectation that anything will be
provided to the grantor in return ". Japan's theory seeks to blur the distinction between a "direct
transfer of funds" and a "purchase of goods" to the point that the latter is rendered redundant.

128. Turning now to the issue of "benefit", Canada has repeatedly demonstrated that all of the
complainants' proposed benchmarks are rates for co-mingled commodity electricity and, therefore, do
not reflect the conditions of purchase and sale for wind or solar electricity in Ontario. The underlying
premise of the complainants' position that rates fo r blended commodity electricity are appropriate
benchmarks is untenable. They argue that there is a single market for electricity in Ontario and all
sources of generation compete with each other in that single market. This is simply not the case for
the reasons set out below.

129. First, the IESO administered market mechanism or algorithm
43 is not a "venue where buyers
and sellers meet with the aim of exchanging go ods or services […]". Such a wholesale market for
electricity in Ontario both began and ended in 20 02. Subsequently, the government created a system
with a market mechanism to allow the IESO to balance physical supply and demand and make
dispatch decisions. The OEB was also mandated to regulate the rates of certain OPG facilities.

130. As a result, the HOEP no longer represents a rate for electricity determined by the interaction
of buyers and sellers, and only 8% of generation is paid the HOEP. Canada notes that the European
Union questions this figure based on certain data in Table 1 of Japan's first written submission.
However, the European Union assumes that all the generation Japan has included under "Unregulated
Thermal" "OPG Assets" receives the HOEP price alone . This is a faulty assumption. Japan's Exhibit
JPN-15, on which Table 1 is based, includes thr ee facilities – the Lambton, Nanticoke and Lennox
stations – under this category that account fo r over 11.5 TWh of production. These facilities all

43 Response to question No. 31 (First Set): There is one algorithm, the "dispatch algorithm" that is run
in two modes – "constrained" and "unconstrained". The difference is that the constrained mode considers all
physical limitations of the system, while the unconstrained mode ignores these. The constrained mode produces
the dispatch instructions, while the unconstrained mode is run to stack offers (from the lowest to the highest)
and determine the MCP. Consumers pay the HOEP plus Global Adjustment.
The price paid by consumers is based on the RPP developed and reviewed every six months by the
OEB. These prices reflect a forecast of the HOEP a nd Global Adjustment for th e next 12 months and any
variance recovery from the previous year. The average HOEP in 2011 was $31.47/MWh, representing about
22% of the average residential bill. The Global Adjustment averaged $40.48/ MWh in 2011.

receive contractual rates under agreements with the OEFC or the OPA. They do not receive the HOEP
alone. When properly taken into acc ount, the proportion receiving the HOEP alone is indeed 8% in
2010. Although imports receive the HOEP, this is st ill not an appropriate benchmark as imports also
constitute co-mingled commodity electricity.

131. Second, contrary to the assertions of Japan and the European Union, different sources of
electricity in Ontario do not compete with each other in the manner asserted by Japan and the
European Union as they have different costs and inherent attributes
44. Further, despite the European
Union's admission that the government represents the demand side of the transaction, it continues to
focus on the views of end-users who do not even pa rticipate in the IESO mechanism that allegedly
constitutes the relevant market.

132. Third, the complainants have also argued that the HOEP is the rate generators would obtain
but for the FIT Program. However, even prior to the program, Ontario had specific procurement
programs for purchasing renewable electricity. In all likelihood, but for the FIT Program, a
prospective renewable electricity generator would approach the government through the OPA and
attempt to negotiate a contract at rates reflective of prevailing market conditions, including its costs
and the government's supply requirement.

133. The various out-of-jurisdicti on benchmarks presented by Japan and the European Union are
also rates for commodity electricity and, thus, ina ppropriate. The European Union further argues that
Canada has not shown that the proposed in-jurisdic tion benchmarks are distorted. Canada underscores
that it is the party wanting to rely on out-of-jurisdi ction benchmarks that must justify their use, as
exemplified in US – Softwood Lumber IV and US – Anti-Dumping and Countervailing Duties (China).

134. Even if there were justification for using such benchmarks, they would need to be adjusted to
reflect prevailing market conditions for wind and sola r electricity in Ontario. The Appellate Body has
recognized that making the necessary adjustments w ould be very difficult. Japan has not made any
adjustment to the out-of-jurisdiction rates presented. As such, they are inappropriate for the Panel's
analysis.

135. Finally, if the HOEP or any of the other pr oposed benchmarks were appropriate, this would
mean that any generator earning a rate higher than these benchmarks would be conferred a benefit,

44 Response to question No. 3 (First Set): Renewabl e electricity has significantly higher costs of
production than electricity from non-renewable sources. The production of renewable electricity also results in
environmental attributes such as carbon credits that may have economic value in carbon credit markets.
Response to question Nos. 41 and 43 (Second Se t): There is no competition between FIT wind and
solar electricity – either on the basis of rates or volumes – and any other form of electricity generation in
Ontario in the manner alleged by the complainants. Beca use the FIT contracts themse lves establish the rates
paid to generators, there is no price competition. Al so, because FIT wind and so lar generators produce non-
dispatchable forms of generation, the IESO accepts all their generation volume estimates into the dispatch stack
before all other forms of generation and without any rate offer. The rates for other forms of renewable
generation are also set by contracts and such generators do not submit offers to the IESO. Since the rates for
OPG regulated generation are set by the OEB, there is no price competition. Likewise, there is no price
competition between contracted forms of generation. With respect to older coal and smaller hydro facilities that
receive the HOEP alone, this is not a result of rate competition between forms of electricity. Rather, the rate is a
function of a government policy decision.
No competitive wholesale electricity market currently exists in Ontario in the manner alleged by the
complainants. As the European Union admits, the HOEP, which is ultimately set by the final accepted offer of
electricity into the IESO stack, is generally set by the of fers of gas generators with OPA contracts. These offers
are determined by a formula containe d in the contracts. Thus, the HOEP is a rate set by OPA contracts, not
competitive market forces.

even if the rates were insufficient to cover the costs of production
45, 46. Generators losing money every
day would be found to be receiving a subsidy. This Panel would have to find that a rate for electricity
much lower than the costs of producing that el ectricity would constitute "more than adequate
remuneration" – this simply cannot be.

136. An analytical approach that might have been taken could have started by locating in-
jurisdiction private prices for the goods in questi on. The complainants have not provided any such
evidence. If no private prices for wind and solar electri city in Ontario are available, an alternative,
such as a constructed benchmark based on the costs of production, could possibly be used, as noted by
the Appellate Body. In response to the Panel's que stion Nos. 65 and 67, Saudi Arabia effectively
makes the same point. The complainants have not offered such an alternative.

137. If an appropriate in-jurisdic tion benchmark were ultimately e xhausted, the prospect for using
an out-of-jurisdiction benchmark might still have existed, but such rates must be justified and adjusted
to reflect prevailing market conditions in Ontari o. Despite clear Appellate Body guidance, the
complainants chose not to pursue such an appr oach and have instead provided inappropriate
benchmarks. These benchmarks cannot be the b asis of a proper benefit analysis. Thus, the
complainants have failed to meet their burden of establishing that the FIT Program is inconsistent
with the SCM Agreement.

The implication of this argument is that FIT generators will only locate their facilities where the rate would be
considerably higher than costs, meaning that "structurally" the FIT Program cannot be said to reflect the costs of
generation and therefore confers a benefit. This assertion is untenable. First, the European Union provides no
textual or jurisprudential support for its position that a benefit can be simply determined because the payment
for a good is at a fixed rate. Second, suggesting that standard rates necessarily confer a benefit on some
producers would lead to absurd results. Take the example of a government's purchase of pens at a list price
applicable to all consumers. Obviously, any given pen manufacturer will have inhe rently different costs and
relative efficiencies. If a benefit analysis were conduc ted on the basis suggested by the European Union, a
government would be found to be providing subsidies to all manufacturers despite the fact that other non-
governmental purchasers pay the same price for the good. This cannot be the proper analysis.
The Quebec wind rates presented by the European Union are from a jurisdiction other than Ontario.
The European Union has provided no justification for the use of these rates as a benchmark. Further, any such
use must first be adjusted for prevailing market conditions in the jurisdiction in question. As this has not been
done, the rates are not useful to the Panel's consideration of benefit.
46 Response to question No. 42 (Second Set): Japan's argument that the history of Ontario's electricity
market demonstrates that the FIT Program confers a benefit is unpersuasive. First, Japan seems to argue that the
Panel may find a benefit conferred in an abstract manner. However, the Panel must determine whether the
OPA's purchases are for more than adequate remunera tion according to Ar ticle 14(d) of th e SCM Agreement.
Second, Japan fails to acknowledge that the competitiv e wholesale market ended in November 2002 and there
has been no return to such a market. Third, the analysis of benefit must be based on a comparison with a
contemporaneous benchmark. It would be illogical to compare the purchase price for any good with market
conditions that existed year s before the transactions in question. Here, the impugned rates for FIT wind and
solar electricity came into effect on 24 September 2009. Fourth, referring to a historical market price in the form
of the HOEP as it was during liberalization is still a reference to a rate for co-mingled electricity.

ANNEX B

WRITTEN SUBMISSIONS AND ORAL STATEMENTS
OF THE THIRD PARTIES

Contents Page
Annex B-1 Integrated Executive Summary of Australia B-2
Annex B-2 Integrated Executive Summary of Brazil B-6
Annex B-3 Integrated Executive Summary of China B-8
Annex B-4 Integrated Executive Summary of El Salvador B-12
Annex B-5 Integrated Executive Summary of the European Union
(in WT/DS412) B-14
Annex B-6 Integrated Executive Summary of Japan (in WT/DS426) B-18
Annex B-7 Integrated Executive Summary of Korea B-24
Annex B-8 Integrated Executive Summary of Mexico B-28
Annex B-9 Norway's Third-Party Statement B-32
Annex B-10 Integrated Executive Summary of Saudi Arabia, Kingdom of B-34
Annex B-11 Integrated Executive Summary of the United States B-38

ANNEX B-1

INTEGRATED EXECUTIVE SUMMARY
OF AUSTRALIA

I. INTRODUCTION

1. These proceedings initiated by Japan and th e European Union present Members with the
opportunity to consider the interpretation of Members' international trade obligations in the context of
domestic environmental measures. Australia addresses the following key issues:

a. the definition of a subsidy under Article 1.1 of the Agreement on Subsidies and
Countervailing Measures (SCM Agreement);
b. the determination of benefit under Article 1.1(b) of the SCM Agreement; and
c. the scope of Article III:8(a) of the Ge neral Agreement on Tariffs and Trade 1994
(GATT 1994).

II. SUBSIDY

A. F
INANCIAL CONTRIBUTION OR INCOME OR PRICE SUPPORT

2. Australia agrees with the arguments of the European Union and Japan with respect to the
classification of the FIT contracts as a form of income or price support under Article 1.1(a)(2) of the
SCM Agreement.

3. As an alternative, Australia considers it woul d be open to the Panel to consider an argument
that the Government of Ontario "purchases goods" und er Article 1.1(a)(1)(iii) of the SCM Agreement
through the operation of the FIT contracts.

4. Canada argues that the Ontario Power Au thority (OPA) enters into Power Purchase
Agreements with renewable energy producers to procure or purchase renewable energy. Canada
asserts that this transaction "is, and remains, a purchase of goods".
1

5. The Appellate Body in US – Large Civil Aircraft identified two aspects of a purchase of
goods within Article 1.1(a)(1)(iii):

a. goods are provided to the government by the recipient; and
2
b. the person or entity providing the goods will receive some consideration in return.3

6. Australia considers that in determining wh ether a financial contribution is a purchase of
goods, it is not necessary for the government to use the goods purchased. Rather, in Australia's view,
a purchase of goods for the purposes of Article 1.1(a)(1)(iii) occurs where a government pays a person
or entity for the provision of goods.

7. In the current dispute, the OPA is an agen t of the Government of Ontario. The OPA is
contractually bound under an executed FIT contract to pay the contract rate for electricity produced by

1 Canada's first written submission, para.120.
2 Appellate Body Report, United States – Large Civil Aircraft, para. 619.
3 Ibid.

FIT generators. The contract rate received by FI T generators could be a ppropriately classified as
consideration for the electricity supplied to the Ontario electricity market.

8. Australia considers that the Panel could use th is reasoning to find that the transaction between
the OPA and FIT generators could be appropriate ly characterised as a purchase of goods within the
definition of financial contribution in Article 1.1(a)(1)(iii).

B. B
ENEFIT

9. Australia does not accept Canada's argument that comparators used by Japan and the
European Union are inappropriate for assessing whether the OPA's procurement of wind and solar
electricity under the FIT Program contracts confers a "benefit".
4

10. Australia notes that a financial contribution c onfers a benefit if the terms of the financial
contribution are more favourable than the terms ava ilable to a recipient on the market. In Australia 's
view the relevant market in this dispute is the elec tricity market. In this regard, Australia notes that
the Appellate Body in EC and Certain Member States – Large Civil Aircraft stated that a calculation
of benefit in relation to the prevailing market c onditions "demands an exam ination of behaviour on
both sides of the transaction, and in particular in relation to the conditions of supply and demand as
they apply to that market".
5

11. In Australia's view, Canada's defence of the FIT program predominantly focuses on the
conditions of supply of renewable energy in its analys is of benefit. That is, Canada repeatedly points
out that renewable energy production costs are significantly higher than non-renewable energy
production costs. Australia does not dispute this. Ho wever, in Australia's view, the Panel should also
consider the demand side of the electricity market in examining benefit. In this regard, Australia
submits that although the FIT program distinguish es between different renewable energy sources
(wind and solar) in determining the rate received by FIT generators per kWh of electricity produced,
that distinction does not flow through to the mark et place. Further, consumers of electricity in
Ontario do not (and cannot) distinguish between renewable and non-renewable sources of electricity.

12. Australia does not consider that the differ ence in the production costs for different energy
types precludes a benefit analysis using the market price for electricity. In Australia's view, the
subsidised product in question is electricity, not th e subset of electricity generated from renewable
sources.

13. In Australia's view, there are two possible ways in which the FIT contracts confer a benefit to
FIT generators. First, the government support establishes a buyer for the renewable energy that would
not otherwise exist. Absent the government support, there would not be sufficient compensation to
stimulate investment in renewable energy – market forces alone would not engender profitable
participation in the renewable energy sector. S econd, the FIT generators receive a higher price for
their product than that which is otherwise available on the market.

14. In relation to the second issue, Australia consid ers that the HOEP used by Japan and the EU is
an appropriate comparator for determining benefit. The HOEP is the rate of electricity as determined
by supply and demand of electricity in Ontario and is the rate that a generator of electricity would
receive in the wholesale market, absent any contractual and regulatory arrangements.
6

4 Ibid, para. 130.
5 Appellate Body Report, EC and Certain Members States – Large Civil Aircraft, para. 981.
6 Japan's first written submission, para. 220.

III. GOVERNMENT PROCUREMENT

15. A significant issue that arises in this case is whether the purchase of electricity for distribution
to the general public should be properly characterised as government procurement for the purposes of
Article III:8(a) of GATT 1994.

16. Australia submits that the mere labelling of an activity as "procurement" in legislation is not
sufficient to bring that activity within the scope of Article III:8(a) of GATT 1994.

A. G
OVERNMENT PURPOSES

17. Critical to the analysis of Article III:8(a) of GATT 1994 is a determination of whether the
purchase of electricity by the Government of On tario can be appropriately characterised as for
"governmental purposes".

18. Australia notes that "purpose" can mean "practical advantage or use".7 This meaning may not
be as common as the meaning cited by Canada, but the Appellate Body has indicated that a treaty
interpreter "should seek the meaning that gives effect, simultaneously, to all the terms of the treaty, as
they are used in each authentic language". 8 Australia notes that the French version of Article III:8(a)
provides in relevant part:

19. This version of the text, and in particular th e reference to "les besoins" appears to support an
interpretation of the term "purposes" as being "for the practical advantage or use" by the government,
rather than a "purchase for an aim of the government" or "a purchase by a governmental agency which
is directed in legislation, regulations, policy or an executive direction".9

20. Australia submits that the Panel will need to consider whether, in the absence of a practical
advantage or use by the government, the Government of Ontario's procurement of electricity is for
"governmental purposes" under Article III:8(a) of GATT 1994.

B. C
OMMERCIAL RESALE

21. If the Panel accepts that the purchase of elect ricity by the Government of Ontario is for
"governmental purposes", Australia submits that th e Panel should consider the following issues in
determining whether the procurement is "with a view to commercial resale" under Article III:8(a) of
the GATT 1994.

22. Australia notes that the online New Oxford Dictionary defines "commercial" as concerned
with or engaged in "commerce"; commerce is de fined as the activity of buying and selling. The
concept of profit in both these definitions is a secondary consideration.
10

7 Collins English Dictionary online, accessed 9 January 2012:
 http://www.collinsdictionary.com/dictionary/english/purpose
8 US – Final CVD for Softwood Lumber, para. 59.
9 Canada's first written submission, para. 86.
10 Oxford New Dictionary, online, accessed 9 January 2012:
http://oxforddictionaries.com/definition/commercial?q=commercial;
 http://oxforddictionaries.com/definition/commerce?q=commerce

23. Although the OPA does not operate for profit, it procures electricity which is fed into the
electricity grid for immediate resale and distributi on. The electricity grid is characterised as a
"physical market" where electricity is bought and sold. 11 The OPA procures the electricity with the
intention that the electricity will be resold on market terms.

24. Australia submits that to interpret "with a view to commercial resale" as meaning a purchase
with an aim to re-sell for profit would be an overl y narrow definition. Such an interpretation would
expand the possible exemptions to the national tr eatment provisions in Article III:1 captured by
Article III:8 (a). Australia submits that it is open to the Panel to consider whether the exemption in
Article III:8(a) envisaged such a broad carve-out from the provision.

25. The Government of Ontario does not use the vast majority of electricity it purchases. The
electricity is purchased for distribution to consumer s who purchase the electricity at market rates.
Australia submits that Article III:8(a) of GATT 1994 was not intended to cover the situation where a
government enters into contracts for the supply or pu rchase of electricity at fixed prices, which it then
sells on a market for general consumption.

IV. CONCLUSION

26. In Australia's view, the FIT program could be categorised as either a purchase of goods within
the meaning of financial contribution in Article 1. 1(a)(1)(iii) or a form of income or price support
under Article 1.1(a)(2) of the SCM Agreement.

27. Australia does not consider that the differ ence in the production costs for different energy
types precludes a benefit analysis using the market price for electricity.

28. Finally, in Australia's view, interpreting Artic le III:8(a) of GATT in the manner suggested by
Canada would extend the scope of the provision well beyond its ordinary meaning. Such an
interpretation could significantly undermine the scope of the national treatment obligations set out in
Article III and permit a wide range of protectionist measures, at odds with the important principle
enunciated in Article III:1 of GATT 1994.

11 Japan's first written submission, para. 68, footnote 120.

ANNEX B-2

INTEGRATED EXECUTIVE SUMMARY
OF BRAZIL

I. INTRODUCTION

1. Brazil offers comments on aspects of: (i) th e meaning of "for governmental purposes" in
Article III:8(a) of the GATT; and (ii) the interpreta tion of the term "benefit" in Article 1.1(b) of the
SCM Agreement and the appropriate benchmark for a determination thereof.

II. ARTICLE III:8(A) OF THE GATT: "FOR GOVERNMENTAL PURPOSES"

2. By maintaining that only purchases for the government's own use or benefit should be
considered to serve the purposes of the government , Japan and the EU unduly limit the scope of the
term "for governmental purposes" in Article III:8( a) of the GATT. This interpretation seems to
indicate that the sole purpose of the government is to provide for the maintenance and the regular
functioning of its bureaucracy and disregards the fact that state bureaucracy is only a means to
achieve a myriad of ends, defined by each society. If negotiators wished to restrict the meaning of the
term "for governmental purposes" to purchases made by governmental agencies for their "own use",
they should have expressly done so. Instead, the wo rding of Article III:8(a) reads "procurement by
governmental agencies of products purchased for governmental purposes ", which means that the
proper interpretation of this provision must give meaning to the term "for governmental purposes".

3. The "purpose of the government" cannot be con ceptually construed, in a general aprioristic
manner. Rather, it can only be understood on a case-by-case basis, informed by the specific function
performed by a given government in each sector of the economy. Brazil proposes that such concept
can be seen as a spectrum: at one end of the spect rum, the Member may be acting as an intervening
agent, constitutionally or legally bound to guarantee the supply of a certain good or service; at the
other, it may act as an economic agent like any other, wholly subject to market conditions. On the
first case, the governmental purpose is central, ther efore clearly covered by Article III:8(a); on the
second, it is at best marginal, and outside the scope of said exception. The scope of governmental
purposes may be perceived as falling within the follo wing categories of governmental action: i) as
providers of goods or services (sometimes constituti ng a state monopoly); ii) as fomenting agents,
promoting strategic sectors to ensure the development of areas where private enterprise alone may not
suffice; iii) as regulators, closely monitoring the purveyance of a certain service, while not legally
obliged to provide such goods or services; and iv ) as economic agents, subject to market conditions.
In the first two categories governmental purposes would be readily discernible. In the third, it would
require that other considerations be taken into acc ount. In the fourth, governmental action would fall
outside the range of governmental purposes.

4. The Panel should thus compare the overall desi gn, structure and architecture of a procurement
program with the specific function exercised by the government. Moreover, in interpreting the
meaning of "governmental purposes", adjudicat ors should refrain from making abstract
determinations of what is a legitimate "governmental purpose". Just as an "accordion" (in reference to
the analogy developed for "like product" by the Appellate Body in Japan – Alcoholic Beverages II )
the definition of governmental purpose stretches and squeezes according to how and to which extent a
particular government acts to achieve its pur poses, as inferred from the legitimate framework
applicable and from the facts of each case.

5. Nonetheless, the definition of "governmenta l purposes" cannot be as broad as suggested by
Canada ("all purchases by a governmental agency direct ed in legislation, regulations, policy or an
executive direction"), or else the scope of the nationa l treatment obligation set out in Article III would
be significantly undermined.

III. ARTICLE 1.1(B) OF THE SCM AGREEMENT: "BENEFIT" AND BENCHMARKS

6. The parties in the dispute disagree on the proper benchmark, or "comparators", that would
allow an assessment of whether there is a "ben efit" in the sense of Article 1.1(b) of the
SCM Agreement conferred by the rates paid for th e energy producers that participate in the FIT
programme. For Brazil, the appropriate benchmar k in this case should be assessed in light of the
Appellate Body's decision in EC and other member States – Large Civil Aircraft, which built upon the
concept of "marketplace" established in Canada – Aircraft to conclude that:

"[…] Even where a market is limited for a particular good or service, that market
price is not dictated solely by the price a seller wishes to charge, or by what a buyer
wishes to pay. Rather, the equilibrium price established in the market results from the
discipline enforced by an exchange that is reflective of the supply and demand of
both sellers and buyers in that market."
1
7. Though the costs of production are relevant to analyse whether a benefit is being conferred
(as it determines whether a producer would offer a product but for government intervention), they are
incomplete parameters to inform benchmarks, for they only refer to the supply-side of the market 2. In
order to properly analyse a market and therefore adequately establish its benchmarks, there needs to
be a complete assessment of both buyers and sellers, looking at not only the price at which sellers are
willing to offer their products, but also the price buyers are willing to pay for the goods or services in
question.

8. When there is significant government participa tion in the market, private prices may not be an
appropriate benchmark, as the A ppellate Body has acknowledged in US – Softwood Lumber VI ). In
that case, the Appellate Body emphasized that th e use of alternative benchmarks needs to be
connected with "prevailing market conditions in the country of provision, (including price, quality,
availability, marketability, transportation and other conditions of purchase or sale), with a view to
determining, ultimately, whether the goods at issu e were provided by the government for less than
adequate remuneration".
3

9. As to the appropriate benchmark to be used in this case, Brazil considers that both the supply
and the demand sides in the energy market should be taken into account. The benchmark cannot be
based solely on the prices for which producers of a certain kind are willing to sell or the prices
government set forth, neither can wholesale unregulated market prices in a strategic sector of an
economy form the basis for this benchmark.

1 EC and certain member States – Large Civil Aircraft (AB Report, paragraph 981).
2 "We acknowledge that, in certain circumstances, a se ller's costs may be a relevant factor to consider
in assessing whether goods or services were provided for less than adequate remuneration. As we see it,
however, the difficulty with the Panel's analysis is not that it referred to these costs as a factor in its analysis, but
rather as the sole basis for its findings" ( EC and certain member States – Large Civil Aircraft. AB Report,
paragraph 980).
3 US – Softwood Lumber IV, (AB Report, paragraph 115).

ANNEX B-3

INTEGRATED EXECUTIVE SUMMARY
OF CHINA

I. WHETHER ARTICLE III:8 (A) OF THE GATT 1994 APPLIES IN THE PRESENT
DISPUTE

1. Canada submits that the procurement of rene wable electricity under the FIT Program shall fall
within the scope of GATT Article III:8(a), theref ore, shall be exempted from the discipline of
Article III:4 of the GATT 1994.

2. In order to apply the exemption, several conditions need to be satisfied, which are, inter alia,
"for governmental purposes" and "not for commercial r esale". In China's view, the two terms refer to
two parallel conditions, a nd failure to meet any condition shall lead to non-application of GATT
Article III:8 (a).

a. For governmental purposes

3. In its submission, Canada claims that a purchase for "governmental purposes" is a purchase
for an aim of the government. In China's view , the phrase of "a purchase for governmental purpose"
shall be read as a whole. If it is read as a whole, the ordinary meaning of "a purchase for government
purposes" shall be that government is the reas on for purchase, government shall benefit from the
result or effect of purchase, or government is the aim or the end of purchase.

4. There is no doubt electricity "purchased" by OPA will be injected into the grid for sale to end
users of Ontario. Therefore, the electricity is purchased for end users instead of government.
Government itself will not directly benefit from the result of effect of purchase. Although the
Government of Ontario also purchases the electrici ty through the OPA, the quantity of electricity
consumed by Government of Ontario only accounts fo r a very insignificant part. Therefore, the
government is not the aim or end of purchase. Furthe rmore, since majority of electricity are sold to
end users instead of government, how can government benefit from such a "purchase"? Therefore,
China is not convinced by the assertion of Canada that the "purchase" by OPA is for governmental
purpose.

b. Not with a view to commercial resale or no t with a view to use in the production of
goods for commercial sale

5. China takes note of the statement by Canada that OPA does not aim to profit, nor does it
profit in fact, from the sale of renewable electricity – the OPA simply recovers the cost of purchasing
that renewable electricity. However, in China's view, the fact that government does not make any
profit may only prove that the purchase by OPA does not constitute commercial resale, the panel shall
continue to examine if the purchase constitute use in the production of goods for commercial sale.
According to Canada, the electricity will be delivered into the grid for use by all Ontario consumers,
whether they are homeowners, government or busin ess operators. The electricity sold to business
operators will surely be used in the production of goods for commercial sal e. Although Canada
argues that neither the OPA, nor any other part of the Government of Ontario, is using the renewable
electricity which is purchased by the OPA to make any goods, Canada can not prevent other end users
of electricity to make goods for commercial resale.

6. In conclusion, China believ es that since the purchase of electricity by OPA is not for
governmental purpose, and the electricity will be so ld by OPA to end users and some end users may
use the electricity in the production of goods for commercial sales, FIT program does not meet the
criteria of GATT Article III: 8(a).

II. WHETHER THE FIT PROGRAM CONCERNED CONSTITUTES A SUBSIDY
UNDER SCM AGREEMENT

7. Canada argues that Japan fails to demonstrat e that the FIT Program and Contracts confer a
"benefit" on FIT Producers of wind and solar electricity under Article 1.1(b) of the SCM Agreement.

8. Japan proposes four benchmarks in support of its allegation that the FIT Program and
contracts confer a benefit under Article 1.1(b) of the SCM Agreement, including the HOEP. Canada
argues that all of Japan's proposed comparators are improper because they do not reflect the
fundamental condition of purchase in a FIT contract, namely that renewable electricity be produced.
Canada stressed that the unique cost and operati ng conditions make comparing prices of some or all
non-renewable electricity and wind and solar electr icity inappropriate. However, China is not
convinced by Canada's assertion.

a. Whether or not confer a benefit does not depend on the proportion of non-subsidized
recipient

9. Canada argues that Japan fails to demonstrat e that the FIT Program and Contracts confer a
"benefit" on FIT Producers of wind and solar electricity under Article 1.1(b) of the SCM Agreement.

10. As indicated by Appellate bod y in Canada-Aircraft, a financial contribution will only confer a
"benefit" i.e., an advantage, if it is provided on terms that are more advantageous than those that
would have been available to the recipient on the market .
1 Furthermore, in accordance with the
criteria set by the Appellate Body in DS379, in order to deny the market price, i.e. HOEP as the
appropriate benchmark, Canada has to prove that (1) the government of Ontario is a " predominant"
supplier (or purchaser); (2) the market of electric ity in Ontario is distorted due to the presence of
"predominant" role of the government of Ontario; (3) other factors. However, Canada only states that
92% producers received more than HOEP, therefore, it seems that the government of Ontario is a
"predominant" purchaser. However, Canada did not address in detail why the market is distorted due
to the presence of "predominant" role of the government of Ontario, nor did it address in detail if there
are any other factors which may affect the assessing appropriate benchmark. Therefore, in China's
view, Canada's rebuttal on "benefit" does not meet the requirement of Appellate Body in this regard.

b. Whether or not confer a benefit does not depend on the cost of recipient of subsidy

11. Canada argues that wind and solar energy n eed significant investment in capital and face
considerable ongoing fixed costs, and no rational inv estor in wind or solar generation would ever sell
electricity below the cost. Therefore, Canada subm its that the benchmark prices proposed by Japan is
below the cost of production, and can not be appropr iate benchmark for determining the existence of
"benefit".
2 China also can not agree with such an assertion.

12. In China's view, the benchmark price is not decided by the cost of the production. As
indicated above, conferring a benefit depends on whet her or not there is advantage compared with
prices available in the market. It clearly does not depend on the cost of recipient of subsidies.

1 Appellate Body Report, Canada – Aircraft, para. 149. (emphasis original)
2 Canada's first written submission, para. 147.

13. Canada argues that cost of de veloping renewable energy is greater than other forms of energy.
However, even if it is true, the high cost may only prove the existence of subsidy, because unless
intervened by government there is no reason for ratio nal end users to pay more to buy the electricity
generated from renewable energy since its quality is not superior to the electricity from fossil. Since
the electricity from renewable energy and those from other forms of energy are similar and
comparable, we fail to see the reason why HOEP ava ilable to electricity from other forms of energy
can not be the appropriate benchmark. Taking a step back, even if HOEP is not an appropriate
benchmark, we still fail to see the reason why the cost of production of recipient of subsidies shall be
decisive for assessing the existence of conferring a "benefit", which does not have any legal basis in
the WTO Agreements and case laws.

14. In conclusion, China believes that Canada's assertion on "benefit" is not consistent with
Article 1.1(b) of the SCM Agreement and relevant WTO case law.

III. WHETHER EXPORT RESTRICTION COULD BE CONSIDERED AS "INCOME
SUPPORT" UNDER ARTICLE 1.1(A)(2) OF THE SCM AGREEMENT

15. China noted that Paragraph 33 of the EU's submission in DS426 referred to United States —
Measures Treating Export Restraints as Subsidies (DS194) and China — Measures Related to the
Exportation of Various Raw Materials (DS394, DS395 and DS398), asserting that export restriction
could be considered as "income support" under Article 1.1(a)(2) of the SCM Agreement.

16. China submits that export restriction is not "income or price support", and illustrates the
reasoning as the below:

17. Firstly, reading the term "income or price support" in its context, it does not exhaust all
government interventions that may have an effect on income or price, such as tariffs and quantitative
restrictions. In China's view, the term "income or price support" shall base on the nature of a
government action rather solely on the basis of the effects of such an action.

18. Secondly, applying the "effect" test to the ex istence of an "income or price support" would
have far-reaching implications. In particular, it would seem to imply that any government measure
that creates market conditions favourable to or resu lting in the increased supply of a product in the
domestic market would constitute a "income or pr ice support", and hence a "subsidy" under the SCM
Agreement. It is inevitable that the effect test will exaggerate the reasonable scope of "income or
price support".

19. Thirdly, since Article XI of the GATT 1994 has dealt with deals with Members' obligation of
"general elimination of quantitative restrictions", it is very doubtful that the concept of "income or
price support" contained in Article 1.1(a) of the SCM Agreement seeks to bring such government
action within the ambit of the SCM Agreement.

20. Fourthly, we note that a concept of "marke t price support" is included in the Annex 3 of
Agreement on Agriculture, which provides that "marke t price support" is calculated as the difference
between an external reference price and the "applied administered price". It indicates that a direct
control over domestic price by the government is re quired in order to prove the existence of "price
support". Therefore, in terms of "income or pr ice support", the core issue should be the direct
government action and the nature of such an action, rather than a movement in prices which is an
indirect effect of another form of government intervention.

21. Lastly, the EU reached its conclusion by re ferring to Paragraph 7.430 of the Panel Report in
China — Measures Related to the Ex portation of Various Raw Materials (DS394, DS395 and

DS398). However, by referring to the Panel Report, the EU failed to notice the footnote therein added
by the Panel, which explicitly expressed that "The use of the term "subsidy" herewith does not
implicate a legal conclusion under the WTO Agreement on Subsidies and Countervailing Duties".3

22. To sum up, China believes that the term of "income or price support" shall be interpreted
narrowly, and export restriction is not "income or price support". Having said that, China does not
challenge the assertion of the EU that relevant FIT programs constitute subsidies. What China
disagree is that the EU uses an inappropriate example of export restriction to illustrate the term of
"income or price support".

3 Panel Report, China — Measures Related to the Exportation of Various Raw Materials (DS394,
DS395 and DS398), footnote 674.

ANNEX B-4

INTEGRATED EXECUTIVE SUMMARY
OF EL SALVADOR*

I. INTRODUCTION

1. El Salvador has expressed its interest in participating as a third party in these proceedings
because they address various systemic issues ch iefly relating to the WTO Agreement on Subsidies
and Countervailing Measures. El Salvador believes th at subsidies are vital tools for the management
of a country's trade policy, since in some cases th ey are essential to a country's economic and social
development.

2. This summary raises two issues of systemic im portance to El Salvador: (a) the key element
that the subsidy must come from a government or any public body within the territory of a Member;
and (b) income or price support must be provided "in the sense of Article" XVI of the GATT 1994.

II. DISCUSSION

A. A
 GOVERNMENT OR ANY PUBLIC BODY WITHIN THE TERRITORY OF A MEMBER

3. This dispute has given rise to a debate over the nature of the relationship between different
entities operating on the renewable energy market in the Province of Ontario, as can be seen in
Question 15 from the Panel to the Parties.

4. El Salvador considers it important to undersco re the relevance of the fact that the Local
Distribution Companies (LDCs) are owned by the Government of Ontario, given the predominant role
that the complainants claim is being played by these companies in the direct or potential direct
transfer of funds, in the sense of Article 1.1(a)(1) of the SCM Agreement, to FIT generators.
1

5. In this connection, we would point out that , for purposes of determining government or public
body intervention in a subsidy, the Appellate Body in United States - Definitive Anti-Dumping and
Countervailing Duties on Certain Products from China called upon investigating authorities and
panels to engage in a " careful evaluation of the entity in qu estion and to identify its common features
and relationship with government in the narrow sense, having regard, in particular, to whether the
entity exercises authority on behalf of government. An investigating authority must, in making its
determination, evaluate and give due consideration to all relevant characteristics of the entity and, in
reaching its ultimate determination as to how that entity should be characterized, avoid focusing
exclusively or unduly on any single characteristic without affording due consideration to others that
may be relevant".2

6. We consider the foregoing relevant to this di spute, because in this way it will be possible to
ascertain the amount of generation tariff-related financia l transactions in favour of FIT generators, in

* This Executive Summary was originally made in Spanish.
1 Japan's First Written Submission (DS412), Attachment 1: Reproduction of Flow of Electricity and
Money Diagrams Presented as Figures 2 and 3.
2 Appellate Body Report, United States - Definitive Anti-Dumping and Countervailing Duties on

the exercise of Ontario Government authority, since both complainants, namely Japan and the
European Union, have asserted that the "majority" of LDCs are owned by the Government of Ontario.

B. I
NCOME OR PRICE SUPPORT MUST BE PROVIDED "IN THE SENSE OF ARTICLE" XVI OF THE
GATT 1994

7. In its first third-party submission, El Salva dor referred to the requirement that the form of
income or price support under Article 1. 1(a)(2) of the SCM Agreement be in " the sense of Article "
XVI of the GATT 1994.
3

8. In the same submission, we expressed our vi ew that objective parameters should be provided
for the Panel to determine that there had been a decline in imports of renewable energy generation
equipment and components in favour of equipment and components from the Province of Ontario.

9. We also note that in its Question 20 to th e Parties the Panel referred to this element of
Article 1.1(a)(2) of the SCM Agreement.

10. El Salvador considers that the SCM provisi on in question requires evidence that a subsidy
falls within the meaning of Article XVI:1 of the GATT 1994, i.e. that it be shown in what way it
operates "directly or indirectly" to "reduce imports of any product into its territory".

11. Under the Agreement, price s upport is required to meet certain criteria. To assess this, the
direct or indirect effects on trade based on impor ts and exports of the s ubsidized product should be
taken into account. Price support will therefore exist insofar as it causes or has an impact in the form
of a decline in imports.

12. We consider that the methods employed unde r other WTO provisions may be used to deal
with the measure at issue in this dispute. In matters relating to safeguards, for example, there is a way
to examine the correlation between the increase in injury and the domestic industry; this may be a
time-related correlation (i.e. ascertaining whether a correlation exists between the moment when
imports increased and the injury). The other way is to analyse the conditions of competition between
imports and the like domestic product.

13. In El Salvador's view, there must be an assessment and a positive, method-based
determination that income or price support has been provided in the sense of Article XVI of the
GATT 1994.

III. CONCLUSION

14. This case raises important questions of a system ic nature relating to the implementation of the
Agreement on Subsidies and Countervailing Measures. El Salvador therefore trusts that the Panel will
take the foregoing into consideration.

3 First Written Submission of El Salvador (DS426), paras. 13-16.

I. INTRODUCTION

1. The European Union interv enes in this case because of its systemic interest in the
interpretation of fundamental provisions of the Agreement on Subsidies and Countervailing Measures
("SCM Agreement"), the General Agreement on Tariffs and Trade 1994 (the "GATT 1994"), the
Agreement on Trade-Related Investment Measures ("TRIMs Agreement") and the Understanding on
Rules and Procedures Governing the Settlement of Disputes ("DSU"). The European Union also has
a substantial commercial interest in this matter, wh ich led to its own request for consultations with
Canada on 11 August 2011 (DS426). In the cont ext of its third party intervention, the
European Union will provide its views on the legal cl aims advanced by Japan, while not taking a final
position on the specific facts of this case or prejudging the European Union's possible claims and
arguments in the context of dispute DS426.

II. CANADA'S REQUEST FOR A PRELIMINARY RULING

2. The European Union fails to understand why the parties did not provide copies of their
submissions to third parties when they were filed. Due process is a fundamental principle of WTO
dispute settlement that informs and finds reflection in the provisions of the DSU. Due process implies
that the interests and views of third parties "s hall be fully taken into account during the panel
process". This can only be achieved if the parties pr ovide copies of their submissions to third parties
when they are filed (or shortly thereafter). Th e European Union also fa ils to understand why the
Panel did not forward the parties' submissions to th e third parties when it received them and, in any
event, before taking a preliminary decision on the issues raised by Canada. On substance, the
European Union agrees with Japan that Canada's request for a preliminary ruling is unwarranted.

III. MEASURES AT ISSUE

3. The European Union understands that Japan challenges the FIT Program (including the
microFIT Program) as well as the FIT and microFIT contracts.

IV. SCM AGREEMENT

4. The European Union agrees with Japan that th e measures at issue, i.e. the FIT Program, and
FIT and microFIT contracts, by imposing a domestic content requirement on FIT Generators of wind
and solar PV electricity as a condition for receiving guaranteed, above-market electricity rates, would
provide subsidies contingent upon the use of do mestic over imported goods, which are prohibited by
Articles 3.1(b) and 3.2 of the SCM Agreement.

5. The European Union considers that the FIT Program amounts to a subsidy as defined by
Article 1.1 of the SCM Agreement. First, no matter how regarded, either as a direct transfer of funds
or a potential direct transfer of funds, the FIT Program implies a financial contribution by the
government of Ontario, through its public agenci es (and, in particular, through the OPA) and/or
through private bodies entrusted or directed by the government to make FIT payments (i.e. LDCs).
The Canadian province of Ontario, through the FIT Contract signed between the OPA and the FIT
Generator, commits to pay the agreed price for the el ectricity generated by the FIT Generator. In the
European Union's view, this commitment could be be tter characterised as a "dir ect transfer of funds"
in the sense of Article 1.1(a)(1)(i) of the SC M Agreement because future payments are made
unconditionally (other than the nature of the contract , i.e. the expected delivery of electricity in
exchange of the payment). Second, in the alterna tive, the FIT Program provides a form of income or
price support to the FIT Generator through guaranteed prices in the sense of Article 1.1(a)(2). Third,
the FIT Program also provides a benefit to the recipient, i.e. the FIT Generator. The FIT Program will
result in most cases in a benefit to the FIT Genera tor resulting from the difference between the market

prices and the guaranteed prices. In the European Union's view, in an ex-ante analysis, the benefit
assessment should focus on the relevant market benc hmark at the time the financial contribution is
granted to the recipient. That benchmark entails a consideration of what a market participant would
have been able to secure on the market at that time. The market benchmark is predicated upon a
projection as to the anticipated flow of returns that are expected to accrue as a result of the financial
contribution. Japan has illustra ted this in various ways. No matter how the Panel addresses this
question, the European Union considers that the FIT Program confers a benefit to the recipient.

6. The subsidy appears to be "contingent" in th e sense that compliance with the domestic content
requirements is mandatory: if the FIT Generator does not show that it has met the domestic content
requirements before starting its operations, the contra ct will be in default. Moreover, the FIT Program
would require the use of domestic over imported goods, "solely or as one of several other conditions".

V. GATT 1994

7. According to Japan the renewable energy ge neration equipment manufactured in Ontario and
the one imported from Japan, and to the EU's understanding also in other countries, are "like
products" in the sense of Article III:4 of the GAT T 1994. The European Union agrees with Japan's
assessment. According to the information pr ovided by Japan, the contested measures are
"requirements" in the sense of Article III:4. On the basis of the information provided by Japan, the
Domestic Content Grid is enforceable, mainly in view of the fact that a failure to comply with those
domestic content requirements implies that the cont ract is in default. Concerning the question
whether the measure affects the internal sale, purchase or use of the imported goods, the
European Union wishes to recall that it is sufficien t that it may be reasonably expected that this
measure will adversely modify the conditions of compe tition. It is therefore sufficient to analyse, on
the basis of the available elements of fact, whethe r that is the case as regards the measures challenged
by Japan.

8. The European Union considers that an analysis of the actual effects of the measure at issue on
the sale of imported products is not required under Article III:4. Concerning the issue whether Japan
has discharged its burden of proof in respect of th e question whether the challenged measure modifies
the conditions of competition to the detriment of imported goods, the Europ ean Union observes that
the Appellate Body recently noted that the analysis of whether imported products are accorded less
favourable treatment requires a careful examinati on grounded in close scrutiny of the fundamental
thrust and effect of the measure itself, including th e implications of the measure for the conditions of
competition between imported and like domestic pr oducts. This analysis however does not need,
according to the Appellate Body, to be based on em pirical evidence as to the actual effects of the
measure at issue in the internal market of the Member concerned. The FIT Program creates incentives
among Ontario-based wind and solar PV energy ge nerators to use renewable energy generation
equipment produced within Ontario. In particular, on the basis of the inform ation provided in Japan's
first written submission, the FIT Program attaches th e contractually guaranteed standard rate only to
the use (to an important extent, see Domestic Content Grid) on Ontario sourced goods.

9. Finally, on the basis of the facts provi ded in Japan's first written submission, the
European Union shares the analysis concerning the inapplicability of Article III:8 of the GATT 1994.
First, it seems that no "procurement" in the sense of Article III:8(a) exists. The Government of
Ontario is at no stage acquiring any products for its own use or benefit under the FIT Program. In any
event, it seems that even if one could argue that it is being done, quod non, this would be the case
only with a view to commercial resale or use in production of goods for commercial sale. On the
basis of the information provided by Japan, electrici ty delivered under the FIT Program is sold to all
consumers at commercial prices. Second, the excep tion of Article III:8(b) does not apply either.
Japan's case is not that the FIT Program favours On tario-based renewable energy generators, but that

FIT Program discriminates against imported renewabl e energy generation equipment. On the basis of
the constant case-law, Article III:8(b) does not serve as a defence for measures which discriminate
between imported and domestic products.

10. Consequently, the European Union considers th at the measures at issue are inconsistent with
Article III:4 of the GATT 1994.

VI. TRIMS AGREEMENT

11. According to Japan, the FIT Program, FIT and mi croFIT contracts are also inconsistent with
Article 2.1 of the TRIMs Agreement. The European Union generally agrees with Japan's assessment.
In addition to the arguments presented by Japan, the European Union would like to underline that the
panel in Indonesia-Autos noted that the TRIMs Agreement is a "fully fledged agreement in the WTO
system", which applies independently to GATT Article III and which contains special transitional
provisions including notification requirements; concluded that the TRIMs Agreement has an
"autonomous legal existence". In that case the pane l decided to examine the claims first under the
TRIMs Agreement, "since the TRIMs Agreement is more specific than Article III:4 as far as the
claims under consideration are concerned". The Eur opean Union is of the opinion that, should this
Panel follow the approach chosen by the panel in Indonesia-Autos, the requirements to find a breach
of Article 2.1 of the TRIMs Agreement would be met.

12. Finally, the European Union also notes th at the measures at issue would be covered by
Annex 1(a) of the TRIMs Agreement, which refers to a category of measures that are deemed
inconsistent with the obligation of national treat ment provided for under Article III:4 of GATT 1994.
A finding that a measure falls under Annex 1(a) of the TRIMs Agreement results, in and of itself, in a
finding of violation of Article 2.1 of the TRIM s Agreement and, consequently, in a finding of
violation of Article III:4 of the GATT 1994. Thus, in the European Union's view, the Panel does not
need to examine first whether ther e is a violation of Article III:4 of the GATT 1994 to then conclude
that there is a violation of Article 2.1 of the TRIMs Agreement.

ANNEX B-6

INTEGRATED EXECUTIVE SUMMARY
OF JAPAN (WT/DS426)

TABLE OF ABBREVIATIONS

Abbreviation Description
DSU Understanding on Rules and Procedures Governing the Settlement of Disputes
EC European Communities
EU European Union
FIT feed-in tariff
FIT Program Ontario's Feed-In Tariff Program
GATT 1994 General Agreement on Tariffs and Trade 1994
OED Oxford English Dictionary
OPA Ontario Power Authority
SCM Agreement Agreement on Subsidies and Countervailing Measures
US United States
Vienna Convention Vienna Convention on the Law of Treaties
WTO World Trade Organization

TABLE OF CASES

Short Title Full Case Title and Citation
China – Raw Materials
Appellate Body Reports, China – Measures Related to the
Exportation of Various Raw Materials , WT/DS394/AB/R /
WT/DS395/AB/R / WT/DS398/AB/R, circulated to WTO
Members 30 January 2012, adopted 22 February 2012
EC – Selected Customs Matters
Appellate Body Report, European Communities – Selected
Customs Matters , WT/DS315/AB/R, adopted
11 December 2006, DSR 2006:IX, 3791
EC – Trademarks and Geographical
Indications (US)
Panel Report, European Communities – Protection of
Trademarks and Geographical Indications for Agricultural
Products and Foodstuffs , Complaint by the United States,
WT/DS174/R, adopted 20 April 2005, DSR 2005:VIII, 3499
India – Patents (US)
Appellate Body Report, India – Patent Protection for
Pharmaceutical and Agricultural Chemical Products ,
WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, 9
US – 1916 Act (EC)
Panel Report, United States – Anti-Dumping Act of 1916,
Complaint by the European Communities , WT/DS136/R and
Corr.1, adopted 26 September 2000, upheld by Appellate Body
Report WT/DS136/AB/R, WT/DS162/AB/R, DSR 2000:X, 4593
US – Countervailing Measures on Certain
EC Products
Panel Report, United States – Countervailing Measures
Concerning Certain Products from the European Communities ,
WT/DS212/R, adopted 8 January 2003, as modified by Appellate
Body Report WT/DS212/AB/R, DSR 2003:I, 73
US – Section 301 Trade Act
Panel Report, United States – Sections 301-310 of the Trade Act
of 1974, WT/DS152/R, adopted 27 January 2000, DSR 2000:II,
815

1. Japan addresses three issues in this submission: (i) the sufficiency of the European Union's
panel request; (ii) the relevance of the character ization of measures in domestic law for purposes of
WTO law; and (iii) the meaning of "income or price support".
1

I. THE EUROPEAN UNION'S PANEL REQUEST IS SUFFICIENT UNDER
ARTICLE 6.2 OF THE DSU, AND ACCORDINGLY, THE PANEL SHOULD
REJECT CANADA'S PRELIMINARY RULING REQUEST

2. In a letter to the Panel dated 14 February 2 012, Canada repeated the request for a preliminary
ruling that it made with respect to Japan's panel request in DS412. The panel in DS412 did not find
merit in Canada's request, stating explicitly that it was "not convinced of the merits of Canada's
request".
2 This Panel should similarly find no merit in Canada's request for a preliminary ruling in
this dispute largely for the same reasons expr essed by Japan in its 11 November 2011 response to
Canada's preliminary ruling request in DS412.3

3. Canada raises two new points that were not mentioned in DS412 and warrant a response.
First, Canada suggests that the Appellate Body's recent report in China – Raw Materials supports a
finding that the EU's panel request is insufficient. Second, Canada suggests that the EU's use of a
term that Japan did not use in its own panel re quest in DS412 – i.e., the term "above-market" –
establishes that Japan's panel request in DS412 w as inadequate. For the reasons provided below,
these arguments by Canada have no merit.

A. T
HE APPELLATE BODY'S ANALYSIS IN CHINA – RAW MATERIALS DOES NOT SUPPORT A
FINDING THAT THE EU'S PANEL REQUEST IS INSUFFICIENT

4. The European Union's panel request is sufficient pursuant to Article 6.2 of the DSU, and a
decision by this Panel to reject Canada's preliminar y ruling request would be fully consistent with the
Appellate Body's reasoning in China – Raw Materials . Japan also observes that the Appellate Body
in China – Raw Materials relied on much of the same jurisprudence that the parties in DS412
addressed in their submissions on this issue.4

5. The Appellate Body in China – Raw Materials emphasized that the determination of
sufficiency under Article 6.2 "involves a case-by-case analysis". 5 Moreover, a determination of
sufficiency "may depend on whether it is sufficien tly clear which 'problem' is caused by which

1 At the outset, Japan notes that it incorporates its arguments from DS412 into DS426, where
applicable.
2 Panel’s Communication to the Parties, WT/DS412, 21 November 2011.
3 Japan’s Response to Canada’s Preliminary Ruling Request, WT/DS412, 17 November 2011.
4 See Appellate Body Reports, China – Raw Materials , paras. 218-235. Canada appears to rely
primarily on the Appellate Body’s reiteration in that dispute of its finding in the previous dispute that a brief
summary of the basis under Article 6.2 should “explain succinctly how and why the measure at issue is
considered by the complaining Member to be violating the WTO obligation in question”. Appellate Body
Report, China – Raw Materials , para. 226, quoting the Appellate Body Report, EC – Customs Matters ,
para.130. However, Japan notes that in its preliminary ruling submission in DS412, Canada had already
advanced its arguments relying on this finding of the Appellate Body in EC – Customs Matters (See Annex 1 of
Canada’s preliminary Ruling Submission of 14 February 2012 in DS426, para.5) but Canada’s request was
squarely rejected by the panel in DS412. See the panel’s communication of 21 November 2011 to the parties in
DS412. Thus Canada’s perfunctory arguments in DS426 relying on the Appellate Body’s mere reiteration of its
previous finding hardly establishes a prima facie case that would disturb, or warrant departure from, the panel’s
preliminary ruling in DS412.
5 Appellate Body Reports, China – Raw Materials, para. 220.

measure or group of measures", and whether "a panel's ability to perfo rm its adjudicative function" is
"impair[ed]".6

6. The key issue in the present dispute is whet her the EU's panel request "provide[s] a brief
summary of the legal basis of the complaint sufficient to present the problem clearly".
7 The Appellate
Body in China – Raw Materials , relying on its earlier jurisprudence, explained that "a brief summary
of the legal basis of the complaint as required by Article 6.2 of the DSU should 'explain succinctly
how or why the measure at issue is considered by the complaining Member to be violating the WTO
obligation in question'".8

7. The Appellate Body in China – Raw Materials concluded that the panel request at issue in
that dispute did not satisfy this aspect of DSU Article 6.2. 9 The Appellate Body further observed that
the listed WTO provisions "contain[ed] a wide array of dissimilar obligations" 10, and found that the
panel request was insufficient pursuant to Article 6. 2 because of its "failure to provide sufficiently
clear linkages between the broad range of obligations contained [in the 13 listed WTO provisions] and
the 37 challenged measures".11

8. None of these facts and circumstances exis ts in the present dispute (or in DS412). The
European Union's panel request does not involve a complex array of measures and WTO provisions,
without providing sufficiently clear linkages between the measures and legal obligations alleged to be
violated. Rather, the European Union's panel request makes it abundantly clear which "problem"
12
with respect to the SCM Agreement is caused by the enumerated measures relating to the FIT
Program – that is, the FIT measures are "subs idies" as defined in Article 1.1 of the SCM Agreement,
that are "provided contingent upon the use of domestic over imported goods", and thereby
inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement. The European Union does not
obscure "how or why" 13 the measures at issue violate the WTO obligations in question. And those
obligations are contained in Articles 3.1(b) and 3. 2 of the SCM Agreement, not Article 1.1 of the
SCM Agreement. Accordingly, it is clea r that the Appellate Body's reasoning in China – Raw
Materials, when read in the context of the facts of that dispute, supports a finding by the current Panel
that the European Union's panel request is sufficient under Article 6.2 of the DSU.

B. T HE PRESENCE (OR ABSENCE) OF THE TERM "ABOVE-MARKET" IN THE EU'S PANEL REQUEST
IS OF NO SIGNIFICANCE

9. Further, it is difficult to understand what si gnificance the Panel could attach to the term
"above-market" that the European Union inserted in its description of the measures at issue, in the
Panel's consideration of Canada's request for a preliminary ruling wh ere Canada allege s a failure to
provide a brief summary of the legal basis of the complaint.

6 Appellate Body Reports, China – Raw Materials, para. 220.
7 DSU Article 6.2.
8 Appellate Body Reports, China – Raw Materials, para. 226 (emphasis in original), quoting Appellate
Body Report, EC – Selected Customs Matters, para. 130.
9 Appellate Body Reports, China – Raw Materials, para. 226.
10 Appellate Body Reports, China – Raw Materials, para. 228.
11 Appellate Body Reports, China – Raw Materials, para. 234.
12 DSU Article 6.2.
13 Appellate Body Reports, China – Raw Materials, para. 226.

II. THE GOVERNMENT OF ONTARIO'S CHARACTERIZATION AND TREATMENT
OF ITS FIT PROGRAM DOES NOT DETERMINE THE STATUS OF THE
MEASURES UNDER ARTICLE III:8(A) OF THE GATT 1994 AND
ARTICLE 1.1(A)(1)(III) OF THE SCM AGREEMENT

10. Canada asserts that the characterization and tr eatment of the FIT Program in the text of the
Ontario measures at issue establishes that the FIT Program constitutes the "procurement" or
"purchase" of renewable electricity within th e meaning of Article III:8(a) of the GATT 1994
14, and
the "purchase" of such electric ity within the meaning of Article 1.1(a)(1)(iii) of the SCM
Agreement.15 However, the characterization and treatment provided in the text of domestic measures
cannot have any bearing on applying or interpreting these provisions of the WTO agreements, or more
generally on determining whether any WTO obligations have been violated. This is because domestic
measures are to be taken as facts by a WTO panel; treaty language is to be interpreted by a WTO
panel in accordance with the custom ary rules of treaty interpretation as codified at Articles 31 and 32
of the Vienna Convention on the Law of Treaties; and then the available facts are to be applied to the
proper legal interpretation to determine whether a vi olation has taken place. Indeed, it would be no
more compelling for the Panel's analysis had the Gove rnment of Ontario explicitly declared within its
FIT contracts that "this contract is deemed to be consistent with the provisions of the GATT 1994" or
"this contract constitutes procurement pursuant to the Agreement on Government Procurement".

11. A conclusion to the contrary would be tant amount to enabling Canada to determine whether
its measures are consistent with its WTO ob ligations, which the Appellate Body said in India –
Patents (US) , "clearly, cannot be so". 16 Simply put, WTO panels are not bound by a Member's
interpretation or characterization of its own domestic measures. 17 Rather, as the panel aptly
summarized in US – Countervailing Measures on Certain EC Products , WTO panels are tasked with
"establish[ing] the meaning of the disputed [measures] as a factual element and determin[ing] whether
the factual element constitutes conduct by the respondent Member contrary to its WTO obligations".18

12. For similar reasons, precisely how a Member c hooses to administer its tax system has little
relevance for whether a particular transaction is or is not a "procurement" or "purchase" for purposes
of Article III:8(a) of the GATT 1994, and/or a "pur chase" for purposes of Article 1.1(a)(1)(iii) of the
SCM Agreement. This is purely a question of fina nce internal to the government of the Member in
question, and undoubtedly a government may choose to tax many activities other than purchases. At
most, the alleged fact indicates that the Governme nt of Ontario has determined the scope of the
"sales" subject to its "sales" tax.
19 This is nothing other than a ma tter of legal characterization under
domestic law, which cannot bind the panel's legal character ization of the government action at issue
under the WTO Agreement.

14 Canada’s first written submission, paras. 16-17.
15 Canada’s first written submission, para. 54.
16 Appellate Body Report, India – Patents (US), para. 66.
17 See Panel Report, EC – Trademarks and Geographical Indications (US) , para. 7.55; Panel Report,
US – Section 301 Trade Act, para. 7.19; Panel Report, US – 1916 Act (EC), para. 6.51.
18 Panel Report, US – Countervailing Measures on Certain EC Products , para. 6.38 (emphasis
omitted), citing Panel Report, US – Section 301 Trade Act , para. 7.18 and Appellate Body Report, India –
Patents (US), para. 66.
19 Japan also observes that the particular tax at issue is described as a tax “that applies to the supply of
most property and services in Canad a”, and therefore does not appear to be a tax applied to the “purchase” of
property and services, despite use of the term “sales tax”. See Canada Revenue Agency, How GST/HST Works,
Exhibit CDA-56 (emphasis added). This further illustrates why a panel should not rely upon a Member’s
characterization of a measure in its domestic legal system for purposes of applying and interpreting WTO law.

III. ARTICLE XVI:1 OF THE GATT 1994 DO ES NOT LIMIT "INCOME OR PRICE
SUPPORT" TO SUPPORT PROVIDED FO R THE GOODS ACTUALLY IMPACTED
BY THE SUBSIDY

13. Canada suggests that for "income or price support" to constitute a "subsidy" within the
meaning of Article 1.1 of the SCM Agreement, the support must be provided to the goods whose trade
is actually impacted by the support. Canada bases this view on the notification requirements listed in
Article XVI:1 of the GATT 1994, and particularly its view that the reference to "any product" in that
provision "is not a reference to unsubsidized input goods ", but rather a reference to "the subject of the
alleged subsidy".
20

14. Japan notes that Article XVI:1 of the GATT 1994 does not define the meaning of "subsidy";
the definition of "subsidy" is provided by Article 1.1 of the SCM Agreement. Article XVI:1 of the
GATT 1994 provides the conditions under which the notification requirements and the discussion
obligation imposed by that provision shall take place.

15. To the extent Article XVI:1 may serve as rele vant context for interpreting "income or price
support" under Article 1.1(a)(2) of the SCM Agreem ent, it does not support Canada's view. Canada
offers no support or analysis of any kind for its in terpretation that the term "any product" is a
reference to the "subject of the alleged subsidy", and may not be a reference to "unsubsidized input
goods". It is noteworthy that Article XVI:1 uses the term " any product", and not a term such as " like
product".
21 With regard to the definition of "any", the Oxford English Dictionary provides: "In
affirmative sentences it asserts concerning a being or thing of the sort named, without limitation as to
which, and thus constructively of every one of them, since every one may in turn be taken as a
representative".22 Thus, the term "any product" in Article XVI:1 refers to every product, including
unsubsidized input goods, whose e xports may increase or imports may decrease as a result of the
income or price support provided. In other words, for "income or price support" to fall within the
scope of GATT Article XVI, and thereby within the meaning of Article 1.1(a)(2) of the
SCM Agreement, it need not be provided to a product th at is identical to or ev en "like" the affected
products. Rather, income or price support provided to a product falls within the definition of a
"subsidy" if it increases exports or reduces imports of any product, whether an identical product, a
"like" product, or any other product.

20 Canada’s first written submission, paras. 61-62.
21 Emphases added.
22 The Oxford English Dictionary , OED Online, Oxford University Press,
http://www.oed.com/view/Entry/8973 (emphasis in original).

ANNEX B-7

INTEGRATED EXECUTIVE SUMMARY
OF KOREA

1. In Korea's view, the measures adopted by Ontario that are the subject of this dispute appear to
be intended, fundamentally, to address a critical issue of environmental protection — to provide
incentives that will encourage the development of methods for generating electricity that are
ultimately environmentally-sustainable and economically-v iable. It is critical that the provisions of
the WTO Agreements not impede these global effort s. At the same time, the goal of promoting
environmentally-sound energy policies should not be allowed to serve as a pr etext for discriminatory
measures adopted not to protect the environment, but to promote domestic production over imports.

2. In light of this, this dispute carries import ant systemic implications that go beyond the factual
details of Ontario's incentive programs. The ruling by the Panel in this case will provide an important
indication of how actions taken to develop sustainable energy alte rnatives can and should be squared
with the WTO rules.

A. Interpretation of Article III:8(a) of the GATT 1994

3. Canada does not appear to dispute that Ontari o's program fails to comply with the obligations
of GATT Article III:4 and Article 2.1 of the TRIM s Agreement. Instead, Canada contends that
Article III:4 is simply inapplicable here, because Ontario's program falls under the exception set forth
in GATT Article III:8(a). And, in light of its clai ms that Article III:4 does not apply, Canada also
contends that there can be no derivative violation of Article 2.1 of the TRIMs Agreement.

4. Examining the specific terms of Article III:8(a) of GATT, the term "procurement" is not
defined in the article — or, for that matter, in the plurilateral Agreement on Government Procurement
(the "GPA"). The text of Article III:8(a), when read as a whole, does suggest that the meaning of
"procurement" is not completely identical to the meaning of "purchase" — since Article III:8(a) uses
both terms in the same sentence in a manner that su ggests that there may be types of procurement that
do not involve purchases. The term "procurement," then, would appear to encompass any form of
government acquisition, including but not limited to "purchase."

5. Complaining Members assert that there is no "procurement" in this case "because the
Government of Ontario is not acquiring any pr oducts for its own use or benefit under the FIT
Program."
1 The Panel's evaluation of that argument w ill require not only interp retation of the legal
meaning of the term "procurement," but also assessment of the precise role played by the Government
of the Ontario in the transactions covered by Ontario's FIT program.

6. Canada asserts that it is beyond dispute that "renewable electricity" is a "product."
2 Its only
support for this contention is an online dictionary that defines "product" as "[a]n object produced by a
particular action or process; the result of mental or physical work or effort." However, electric power
is not a material object. 3 It is, instead, a form of energy typically generated when coils of wire are

1 See Japan's First Written Submission, para. 287.
2 See Canada's First Written Submissi on, para. 70 ("Nor can there be any dispute that renewable
electricity is a product.").
3 In this regard, it should be noted that the Shorter Oxford English Dictionary does not define "product"
as any "object," as Canada suggests. Instead, it defines "product" as a " thing produced by an action, operation,

turned in a magnetic field to cause a quantity of elect rons (the electric current) to flow as a result of a
difference in potential (the voltage). As a techni cal matter, electric power (measured in watts or
kilowatts) is the result of current multiplied by volt age. Electric energy (measured, for example, in
kilowatt-hours) is electric power multiplied by time.4

7. At the time that the GATT was negotiated, the classification of electric power under the
provisions of the GATT was raised in a discussion of the Article XX exception for exhaustible natural
resources. According to the New York (Drafting Committee) Report, "As it seemed to be generally
agreed that electric power should not be classified as a commodity, two delegates did not find it
necessary to reserve the right for their countries to prohibit the export of electric power." 5 It is clear,
then, that there was some doubt as to whether electric power was cons idered to be a "product" for
purposes of the GATT at the time the GATT was negotiated.

8. This doubt appears to continue to exist ev en today. For example, while the Harmonized
Tariff System does include a heading for electrical energy (HTS Code 27.16.00), it also indicates that
this heading is "optional."
6 In other words, the HTS takes the position that it is possible, but not
necessary, to classify electrical power as a commodity for tariff purposes.

9. Furthermore, even if electric power is properly classified as a "product" for purposes of
Article III:8(a), it is not clear that "renewable energy" — the term used by Canada and the
Complaining Members for electricity generated using wind, solar photovoltaic, or other "clean"
alternatives — is a distinct product. The WTO juri sprudence has consistently defined "products" in
terms of the characteristics of the item in questio n, and not in terms of the "processes and production
methods" (or "PPM") used to make them.
7 While the Appellate Body's decision in US – Shrimp
suggests that certain restrictions based on the me thod of production may be permitted when justified
under Article XX of the GATT, such restric tions represent an exception to the normal GATT
disciplines, and not an application of a definition of "product" based on production methods.

10. It therefore remains an open question whether, in the circumstances of this dispute, electricity
should be considered a "product," or whether a de finition of "product" that considers the methods
used to produce the electric power would be approp riate where the definition is intended to achieve
important environmental objectives. The Panel will need to consider these issues carefully using all
of the tools for the interpretation of treaties. It is not, in Korea's view, sufficient just to cite a single

or natural process;" and it defines, a "thing" as an "inanimate material object." See Shorter Oxford English
Dictionary (6th ed.2007) at 2359 and 3239.
On the other hand, other dictionaries indicate that a "product" may be a "good" or a "service" that is
marketed or sold as a commodity. See Merriam Webster's Collegiate Dictionary (11th ed. 2003) at 991.
4 In mathematics, the result of multiplying two figure s together is referred to as the "product" of those
figures. Id. However, there is no indication that the drafters of Article III:8 intended to adopt this mathematical
usage.
5 See Analytical Index: Guide to GATT Law and Practice (6th ed. 1995) at 585, citing New York
Report, p. 31, general comments on Article 37, and EPCT/C.6/89, p. 4.
6 See World Customs Organization, Harmonized Nomenclature 2007, Chapter 27, available at
«www.wcoomd.org/home_hsoverviewboxes_tools_and_instruments_hsnomenclaturetable2007.htm».
7 See, e.g., United States – Measures Concerning the Importation, Marketing and Sale of Tuna and
Tuna Products, Panel Report, WT/DS381/R, 15 September 2011, paras. 7.216 to 7.219. See also id. at 4.244
(reporting Mexico's argument that: "The obligations in the WTO Agreements must not be interpreted so as to
allow a WTO Member to condition access to its domestic market based on complian ce with that Member's
unilateral policy relating to actions outside its terr itory including unincorporated process and production
methods. The only circumstances where such actions should be permitted are where they can be justified under
one of the specific exceptions to the WTO obligations.").

dictionary definition and assert that there can be no dispute as to the meaning of the term or its
application in the circumstances of this case.

11. At the same time, relying on a dictionary defi nition of the term "purpose," Canada asserts that
"'a purchase for governmental purposes' is a purchase for an aim of the government." And, because
"Governments express their aims through legislation, regulations, policies and executive directions,"
Canada claims that any "purchase by a governmental agency which is directed in legislation,
regulations, policy or an executive direction is a purchase for governmental purposes."
8

12. Under Canada's interpretation, however, there would be no reason for Article III:8 to refer to
purchases for government purposes, because almost all procurements made by a government would
be "for government purposes." In short, in or der to avoid rendering the "government purposes"
language of Article III:8 inutile, that term must im ply something more than an act consistent with
"legislation, regulations, policies or executive directions."

13. Canada also seems to suggest that " governmental purposes" can be discerned from the
societal interest in the alleged aim of the government action. Canada certainly is correct in stressing
the importance of adequate and reliable electrical energy supplies to the public welfare.
9 But the same
description could be applied to almost any other field of economic activity: Adequate and reliable
food supplies, health care, education, inform ation collection and dissemination, clothing,
transportation, employment, arts and entertainmen t, and individual expression are all important, in
their own way, to the public welfare. Consequently , if the term "government purpose" is to provide
any meaningful limitation under Article III:8, a test that requires only some connection of the
purchase to some matter relevant to public welfare would appear to be inadequate.

B. Ontario's Feed-In-Tariff System and the SCM Agreement

14. In the present dispute, Complaining Members also contend that the incentives provided under
Ontario's FIT program should be prohibited under Article 3 of the SC M Agreement, because they are,
in their view, subsidies contingent upon the use of domestic over imported goods.

15. There appears to be a factual dispute between Complaining Members and the Responding
Member concerning whether the disbursements to electric-power generators under Ontario's FIT
system represent payments for purchases of electric power, or other transfers of monies that are
distinct from electricity purchase transactions. Furthe rmore, to the extent that the disbursements are
payments for purchases of electric power, a furt her question arises whether the electric power
represents goods, services, or some other category. In Korea's view, a proper analysis of the
transactions under Article 1.1(a)(1) of the SCM Agre ement is not possible until these complex factual
issues are satisfactorily resolved.

16. Articles 2 and 14 of the SCM Ag reement require the application of a benchmark, to the extent
feasible, in the analysis of "benefit." Because "benefit" is a relational concept that requires a
comparison between a transaction under a government program with a transaction with market terms,
identifying a proper market benchmark is critical to a proper benefit analysis. At the very least, a
benchmark should provide an objective yardstick for measuring the existence and amount of the
benefit, based on consideration of actual situations in the market for business transactions.

17. Korea notes that selection of a "market pri ce" (and, thus, the benchmark for the benefit
analysis) at times requires a complex analysis th at may involve an examination of returns over a

8 See Canada's First Written Submission, para. 86.
9 See, e.g. Canada's First Written Submission, paras. 16 to 17.

longer period of time. Because individuals have di fferent time horizons, rati onal market participants
may assign different weights to the short-term and long-term consequences of a transaction, and thus
value the overall return quite differently. Mo re generally, it is common for profit-maximizing
businesses to accept a short-term loss in order to obtain a greater long-term profit. Research and
development programs — whether funded by corpor ations or by governments — would provide good
examples of such long-term thinking.

18. Viewed from this perspective, it seems far fro m easy or simple to select a benchmark where,
as in this case, complex long-term business and polic y considerations, and investments with lengthy
pay-back periods, are involved. In these circumstan ces, a snap shot at a single moment of time may
not necessarily ensure a reliable comparison that tak es into account the real market situation, as
mandated by Article 14 of the SCM Agreement.

ANNEX B-8

INTEGRATED EXECUTIVE SUMMARY
OF MEXICO
1

I. INTRODUCTION

1. Mexico expressed its intention to participat e as a third party in this proceeding because it
raises important systemic issues in connection with the SCM Agreement, the TRIMs Agreement, and
certain provisions of the GATT 1994. Moreover, we take this opportunity to state our position on
another procedural matter of considerable rele vance to Mexico, namely the interpretation of
Article 6.2 of the DSU.

2. We acknowledge that the WTO rules do not prevent Members from promoting the creation of
infrastructure to generate alternative, environmentally friendly sources of energy. We also underscore
the importance that countries should encourage the generation of this type of energy, provided that the
obligations in the covered agreements are met. However, the parties' submissions give us to
understand is that this is not a dispute concerning trade and the environment.

3. This submission addresses two issues of systemic importance to Mexico: (i) analysis of the
request for the establishment of a panel under Article 6.2 of the DSU; and (ii) relationship between
the SCM Agreement and Article III of the GATT 1994 and the TRIMs Agreement, in the case of
subsidies contingent upon the use of domestic over imported goods.

II. DISCUSSION

A. I
NTERPRETATION OF ARTICLE 6.2 OF THE DSU

4. Mexico notes that many dispute settlement cases recently referred to the WTO have seen
preliminary objections being put fo rward in relation to Article 6.2 of the DSU. Mexico's concern is
that such preliminary objections should become the ru le rather than the exception and be used as a
dispute strategy that impedes and delays the proceedings.

5. Canada contends in its preliminary objections that the panel requests filed by Japan and the
European Union do not meet the requirements of Articl e 6.2 of the DSU in respect of their complaints
relating to the SCM Agreement.

6. Firstly, we note that Article 6.2 of the DSU sti pulates, in its relevant part, that a request for a
panel "shall . . . identify the specific measures at i ssue and provide a brief summary of the legal basis
of the complaint sufficient to present the problem clearly".

7. As is evident from the text of Article 6.2 of the DSU, a request for the establishment of a
panel calls for no more than: (i) the identification of the specific measures at issue; and (ii) a brief
summary of the legal basis of the complaint suffici ent to present the problem clearly. The text of
Article 6.2 requires identification, rather than an explanation, of the measures at issue, and a summary
of the legal basis of the complaint, rather than a set of arguments - provided that this is sufficient to
present the problem clearly.

1 This Executive Summary was originally made in Spanish.

8. Article 6.2 of the DSU has been interpreted as meaning that the panel request not only
determines the Panel's terms of reference, but also serves the due process objective of notifying the
respondent of the nature of the case to be defended. In EC - Fasteners (China) (paragraph 562) and
China - Raw Materials (paragraph 219), the Appellate Body noted as follows:

Article 6.2 of the DSU lays out the key requirements for a panel request and, by
implication, the establishment of a panel's terms of reference under Article 7.1 of the
DSU. The complaining party must identify the specific measure at issue and provide
a brief summary of the legal basis of the complaint, sufficient to present the problem
clearly. The Appellate Body has found that the panel request "assists in determining
the scope of the dispute" in respect of each measure, and "consequently, establishes
and delimits the jurisdiction of the panel". The panel request also serves the
important due process objective of notifying th e respondent of the nature of the case
it must defend. As the Appellate Body stated in EC and certain member
States - Large Civil Aircraft , "[t]his due process objective is not constitutive of, but
rather flows from, the proper establishment of a panel's jurisdiction". The panel
request must therefore be examined "as it ex isted at the time of filing" in order to
determine whether a particular claim falls w ithin the panel's terms of reference. For
its part, a panel must "scrutinize carefully the panel request, read as a whole, and on
the basis of the language used", in order to determine whether it is "sufficiently
precise" to comply with Article 6.2 of the DSU.
The Appellate Body has explained that Article 6.2 of the DSU serves a pivotal
function in WTO dispute settlement and sets out two key requirements that a
complainant must satisfy in its panel re quest, namely, the "identification of the
specific measures at issue, and the provision of a brief summary of the legal basis of
the complaint (or the claims)". Togeth er, these two elements constitute the " matter
referred to the DSB", so that, if either of them is not properly identified, the matter
would not be within the panel's terms of re ference. Fulfilment of these requirements,
therefore, is "not a mere formality". As the Appellate Body has noted, a panel request
forms the basis for the terms of reference of panels, in accordance with Article 7.1 of
the DSU. Moreover, it serves the due pr ocess objective of notifying the respondent
and third parties of the nature of the complainant's case. The identification of the
specific measures at issue and the provision of "a brief summary of the legal basis of
the complaint sufficient to present the problem clearly" are therefore central to
defining the scope of the dispute to be addressed by the panel.
9. Mexico recognizes the importance of the role played by the panel request, not only in
determining the panel's terms of reference but also in meeting the due process objective. However,
the preliminary objections provided for in Article 6.2 of the DSU should lie only in the event of
exceptional circumstances and where an actual deficiency jeopardizes due process.

10. In its panel request, we note that Japan id entifies the specific measures at issue as "those
taken by the Government of Cana da or its provinces relating to the FIT Program established by the
Canadian province of Ontario in 2009 providing for guaranteed, long-term pricing for the output of
the renewable energy generation facility that contai n a defined percentage of domestic content". For
its part, the European Union identifies the measure s as "those relating to the FIT Program established
by the Canadian province of Ontario in 2009 pr oviding for guaranteed, above-market, long-term
pricing for the output of renewable energy generatio n facilities that contain a minimum percentage of
domestic content".

11. In their requests, Japan and the European Union also identify the legal instruments pertaining
to the measure. Finally, both requests advance th ree complaints, specifying the type of violation
involved, in other words, stating the legal basis of th e complaint. In Mexico's view, this is sufficient
to present the problem clearly in terms of Article 6.2 of the DSU.

12. Canada argues, moreover, that a complain t relating to a subsidy in accordance with the
SCM Agreement requires identification of the relevant elements of the subsidy in order to satisfy the
requirements of Article 6.2 of the DSU, that is, the financial contribution, the government, public
body or private body entrusted with granting it, and the benefit conferred.

13. As regards the constitutive elements of the subsidy which Canada argues should be identified
in order to meet the requirements of Article 6.2 in subsidy complaints - and without prejudging
whether the argument is correct or whether th e elements identified actually fall within the
corresponding definitions in the SCM Agreement - we can identify the authority granting the subsidy,
i.e. the Government of Canada or its provinces, specifically, the province of Ontario, from the panel
requests filed by Japan and the European Union. Likewise, Mexico is of the view that a reading of the
requests shows that the financial contribution can be identified as guaranteed , long-term pricing for
the output of renewable energy generation facilities that contain a defined percentage of domestic
content. Lastly, we can see that the benefit conf erred would be that obtained from the guaranteed
fixed rates.

14. Although the European Union and Japan could ha ve been more specific regarding the public
bodies granting the subsidy and also been clearer in noting that the guaranteed rates were provided
through the contracts under the FIT Program, Mexico therefore considers that the panel requests filed
by the two complainants were sufficiently speci fic and clear for Canada to know what the case
involved, thus meeting the requirements of Article 6.2 of the DSU to identif y the specific measures at
issue and provide a brief summary of the legal basi s of the complaint sufficient to present the problem
clearly. Moreover, it seems to us that the identif ication of the subsidy is sufficient to fulfil the
requirements of Article 6.2 of the DSU.

15. We thus reiterate our concern that the prel iminary objections relating to Article 6.2 of the
DSU could become a mere dispute strategy intended to avoid going into the substance of a matter
instead of being a legitimate recourse to ensure that the defence in a case could be put forward
properly.

B. R
ELATIONSHIP BETWEEN THE SCM AGREEMENT, ARTICLE III OF THE GATT AND THE TRIMS
AGREEMENT

16. As Mexico understands it, where the SCM Agre ement is determined to have been violated
owing to the existence of a prohibited subsidy c ontingent upon the use of domestic over imported
goods, this necessarily implies a breach of the princi ple of national treatment contained in Article III
of the GATT 1994. In other words, a programme c ontingent upon the use of domestic over imported
goods is discriminatory in that it grants less favourab le treatment to foreign goods. Moreover, these
types of programme contingent upon the use of national products constitu te investment-related
measures, and in contravening Article III of the GATT 1994, they auto matically violate Article 2.1 of
the TRIMs Agreement.

17. However, an additional element of complexity in the case before us is Canada's argument that
the measures constitute governme nt procurement and that therefore Article III of the GATT 1994
does not apply. The Panel's determination as to whether or not the measures constitute
government procurement will be decisive in resolving this case.

18. As Mexico sees it, in the case of government procurement a violation of the SCM Agreement
would not automatically entail a breach of Ar ticle III of the GATT 1994: Article III of the
GATT 1994 contains specific provisions excluding government procurement from its scope of
application (i.e. Article III:8(a) of the GATT 199 4). Furthermore, where Article III of the
GATT 1994 does not apply to government procurement th ere would be no violation of Article 1.2 of
the TRIMs Agreement.

19. We have found no specific provision in the SCM Agreement excluding
government procurement from its scope. None theless, it remains an open question whether
government procurement, by virtue of the fact th at the government receives something in exchange
for payment, may be construed as a financial contri bution for purposes of the definition of a subsidy
within the meaning of the SCM Agreement.

20. However, if the Panel were to determine that this is not a case of government procurement,
the measure would not fall under the exception set forth in Article III of the GATT 1994 and could
therefore be in violation of GATT Article III and the TRIMs Agreement. If so, it should also be
determined whether the elements for the definition of a subsidy under the SCM Agreement are met.

21. In view of the foregoing, the Panel's dete rmination whether or not the measure constitutes
government procurement will define, in this pa rticular case, the relationship between the
three agreements in this dispute.

III. CONCLUSION

22. Mexico hopes that the Panel will give cons ideration to the viewpoints expressed in this
third party submission, because the decision in this dispute involves issues that are of systemic
importance in the interpretation of the rele vant provisions of the SCM Agreement, the
TRIMs Agreement and the GATT 1994.

ANNEX B-9

NORWAY'S THIRD-PARTY STATEMENT

Mr. Chairman, Members of the Panel,

1. Norway welcomes this opportunity to present its views on the issues raised in these panel
proceedings. Norway's comments relate to both DS412 and DS 426. Norway did not present a
written third party submission to the Panel, and will th erefore in this oral statement briefly set out its
views on one legal issue; the applicability of the GATT Article III:8.
1

2. In response to Japan's and the European Union's claims that the "FIT Program" is contrary to
Canada's obligations under the GATT Article III:4, Canada argues that this provision is not applicable
in this case because the measure falls within the scope of the GATT Article III:8.

3. According to the GATT Article III:8, Article III of the GATT "shall not apply to laws,
regulations or requirements governing the proc urement by governmental agencies of products
purchased for governmental purposes and not with a view to commercial resale or with a view to use
in the production of goods for commercial sale".

4. Canada asserts that the Ontario Power Author ity (the OPA) is a governmental agency which
procures the product of renewable energy for govern mental purposes. Norway notes that there is
disagreement between the parties as to whether there is any "procurement" in this case. In this respect,
Norway agrees with Japan and the European Union that the crucial question is whether the OPA is
actually "purchasing" renewable energy or whether the Aut hority is just an intermediary, some sort of
"clearing house".
2 As we see it, it is not sufficient that the activities of the OPA is called or referred
to as "procurement". The FIT program may only fa ll within the ambit of GATT Article III:8 if the
OPA actually acquires renewable energy. Without going too deeply into the facts of this dispute,
Norway tends to agree with the Eu ropean Union that the OPA seems to be more of an intermediary
than an entity actually purchasing – or procuring – renewable energy.3

5. If the Panel, however, should reach the conc lusion that the OPA is actually procuring
renewable energy, it will need to consider wh ether this purchase – or procurement – is for
"governmental purposes". Canada stresses that the purchase is "in furtherance of aim of the
Government of Ontario", and that this constitutes "governmental purposes".
4 This interpretation by
Canada would in practice allow every single pur chase made by a government to constitute a
"governmental purpose" as every such purchase will have some sort of aim by that entity.

6. Like other third parties in their written subm issions, Norway would urge the Panel to show
caution when interpreting the term "governmental purpose". If Canada's interpretation is accepted,
this could, as noted by others, have the conseque nce that every governmental procurement effected

1 The General Agreement on Tariffs and Trade 1994 ("the GATT").
2 Japan’s first written submission, paras. 287-28 9; European Union’s first written submission,
paras. 114-115.
3 European Union’s first written submission, para. 57.
4 Canada’s first written submission para. 88.

through purchase would fall under Article III:8. Th is would result in the language "governmental
purposes" being made inutile, and also circumvent the obligation of the GATT Article III:4.5

7. Before concluding, Mr. Chairman, Norway notes that some of the third parties have discussed
the term "public body" and other questions related to the case US – Anti-Dumping and Countervailing
Duties.
6 Although this has not been extensively raised by the Parties in this case, Norway would like
to support Saudi-Arabia in urging that the principles with respect to the terms "public body" and
"governmental control" as established by the Appe llate Body in the above-mentioned case should be
respected.

8. Thank you for your attention. Norway stands ready to respond to any questions the Panel
may have.

5 Australia’s third party submission, para. 41. Korea’s third party submission, para. 32. China’s
third party submission, para. 15.
6 Saudi Arabia’ third party submission, paras. 2-17 . El Salvador’s third’ party submission paras. 5-8.

ANNEX B-10

INTEGRATED EXECUTIVE SUMMARY OF
SAUDI ARABIA, KINGDOM OF

I. INTRODUCTION

1. The Kingdom of Saudi Arabia has joined as a Third Party in these disputes to provide its
views on two important issues relating to the in terpretation of the Agreement on Subsidies and
Countervailing Measures (the SCM Agreement). These issues are of systemic importance to all WTO
Members.

II. A "PUBLIC BODY" IS AN ENTITY THAT POSSESSES, EXERCISES OR IS
VESTED WITH GOVERNMENTAL AUTHORITY

2. The Appellate Body ruling in US — Anti-Dumping and Countervailing Duties (China) sets
out the authoritative standard that a Panel must use to determine whether an entity is a "public body".
The Appellate Body established in that decision that a public body is an entity that possesses,
exercises or is vested with governmental auth ority. The Appellate Body found that only
governmental authority is determinative of whether an entity is a public body, and that other factors,
such as government ownership, are not sufficient to satisfy the legal standard.
1

A. "G OVERNMENTAL AUTHORITY" IS THE POWER TO COMMAND OR COMPEL PRIVATE
BODIES

3. Saudi Arabia respectfully requests that the Pa nels recognize the unique defining elements of
"governmental authority" – the authority to command or compel. The Appellate Body in US — Anti-
Dumping and Countervailing Duties defined "government" as the "continuous exercise of authority
over subjects; authoritative direction or regulation and control". 2 The Appellate Body found that the
"defining elements" of the term "government" – "the effective power to regulate, control, or supervise
individuals, or otherwise restrain their conduct, through the exercise of lawful authority" – necessarily
inform the meaning of the term "public body".3

4. In elaborating on "governmental authority", the Appellate Body explained that a public body
must have the power to "entrust or direct" a private body to act, as provided for in Article 1.1(a)(1)(iv)
of the SCM Agreement
4, and that such "direction" requires the authority "to compel or command a
private body, or govern a private body's actions". 5 Thus, a public body must possess the ability to
compel, command, control or govern a private body. This is the essence of "governmental authority",
consistent with the plain text of Article 1.1 of the SCM Agreement.

1 Appellate Body Report, US – Anti-Dumping and Countervailing Duties (China), paras. 318, 346.
2 Ibid. para. 290.
3 Ibid.
4 Ibid. paras. 293-294.
5 Ibid. para. 294.

B. N ON-DISCRETIONARY ADHERENCE TO A GOVERNMENT MANDATE DOES NOT
CONSTITUTE THE EXERCISE OF GOVERNMENTAL AUTHORITY

5. If an entity's role is merely to follow a governmental mandate and it is powerless as to the
manner in which it pursues governmental functions, then it has no "governmental authority" and is
instead merely acting at the direction of the go vernment. WTO jurisprudence has distinguished
between "discretionary" action – "involving an exercise of judgment and choice" – and
"implementation of a hard-and-fast rule". 6 If an entity is required by law to implement a certain
policy or program, without discretion, implementation of the law does not indicate that the entity
possesses or exercises governmental authority. Unde r such circumstances, a Panel's analysis of
whether the entity's transactions may constitute a "financial contribution" must be based on the
"entrustment or direction" standard of Article 1.1(a)(1)(iv) of the SCM Agreement.

C. P UBLIC BODY DETERMINATION REQUIRES OBJECTIVE EVALUATION OF ALL EVIDENCE
WITHOUT UNDUE EMPHASIS ON ANY SINGLE FACTOR

6. Panels have an affirmativ e obligation to examine objectivel y all evidence related to the
question of public body, and not to give undue emphasis to any one characteristic of the entity in
question. According to the Appellate Body, this examination requires a Panel to analyse thoroughly
the legal status and actions of the entity in question.
7 A Panel "must point to positive evidence"
establishing that the relevant entity is a public body, i.e., that it possesses or exercises governmental
authority.8 If no such evidence exists, then the entity cannot be found to be a "public body", although
a Panel may subsequently consider whether the en tity has been "entrusted or directed" by the
government.

D. E
VIDENCE OF GOVERNMENTAL CONTROL IS NOT SUFFICIENT TO SATISFY THE "PUBLIC
BODY" STANDARD

7. The government's exercise of "meaningful control" over an entity alone is not sufficient to
determine that the entity is a public body. Inst ead, government control is merely one element of
evidence that may be considered when dete rmining whether the entity at issue possesses
"governmental authority", as define d above. The Appellate Body in US — Anti-Dumping and
Countervailing Duties (China) made this point clear.
9

8. Although evidence of a government's exercise of meaningful control over an entity may
establish a rebuttable presumption that the entity is a "public body", the Appellate Body has held that
such evidence alone is not dispositive of the issue, and may be rebutted by evidence that the entity at
issue does not possess or exercise any governmental authority.
10 The Panels therefore must ensure
that any determination that an entity is a public body is supported by positive evidence that the
relevant entity possesses governmental authority and exercises that authority in the performance of
governmental functions. Evidence of government c ontrol may be considered, but only insofar as it
serves to establish the entity's possession of governmental authority.

6 Panel Report, China – Audiovisual Services , para. 7.324. See also Panel Report, Turkey – Rice ,
para. 7.128.
7 Appellate Body Report, US – Anti-Dumping and Countervailing Duties (China), para. 319.
8 Ibid. para. 326.
9 Ibid. paras. 318-319.
10 Ibid. para. 318.

III. EXTERNAL SUBSIDY BENCHMARKS ARE GENERALLY INAPPROPRIATE

9. In determining the existence and magnitude of a subsidy benefit, resort to external
benchmarks, such as international market prices or prices in third countries, is generally inappropriate.
WTO rules establish that the domestic market, not external markets, provides the most appropriate
benchmark.

1. Measurement of a Benefit Should Be Based on a Domestic Market Benchmark

10. The home market of the country at issue is th e starting point for any determination of benefit
under Article 1.1(b) of the SCM Agreement. The term "benefit" is not defined in the Agreement, but
the Appellate Body in Canada – Aircraft stated that the term "implies some kind of comparison",
which measures whether the "financial contribution" at issue has made "the recipient 'better off' than it
would otherwise have been, absent that contribution".
11 The Appellate Body added that the
benchmark for measuring a subsidy benefit must be based in the "marketplace".

11. Article 14 of the SCM Agreement, which the A ppellate Body has used as context to interpret
benefit under Article 1.1(b), expressly establishes that the "marketplace" is the home market of the
WTO Member providing the "financial contribution". Article 14(d) states that the adequacy of
remuneration "shall" (not "may" or "should") be determined in relation to prevailing market
conditions in the country of provision.

2. External Benchmarks Are Not Permitted Except In "Very Limited" Circumstances

12. Although the Appellate Body has not ruled on the use of external, out-of-country subsidy
benchmarks to calculate a benefit under Article 1.1(b), its rulings on Article 14(d) strictly limit the use
of such external benchmarks. Price is foremost among the "prevailing market conditions" enumerated
in Article 14(d), and it should be the first reference point used to determine benefit.

13. The Appellate Body confir med this interpretation in US – Softwood Lumber IV , where it
stated that Article 14(d) "emphasize[s] by its te rms that prices of sim ilar goods sold by private
suppliers in the country of provision are the primary benchmark that investigating authorities must
use when determining whether goods have been provided by a government for less than adequate
remuneration…".
12 The Appellate Body also has made clear that "the starting-point, when
determining adequacy of remuneration, is the prices at which the same or similar goods are sold by
private suppliers in arm's length tran sactions in the country of provision". 13 The Appellate Body
emphasized that the circumstances under which an investigating authority could use alternative
benchmarks are "very limited" – only when it has been proven that private prices are distorted. 14 The
Appellate Body also warned in this regard that subsidy disciplines must not be used to "offset
differences in comparative advantages between countries".15

14. Thus, a Panel may not use external benchmarks to measure the amount of "benefit", if any,
conferred upon the recipient of a financial c ontribution unless it establis hes the "very limited"
circumstances necessary to permit such a benchmark.

11 Appellate Body Report, Canada – Aircraft, para. 157. (emphasis added)
12 Appellate Body Report, US – Softwood Lumber IV, para. 90. (emphasis added)
13 Ibid.
14 Ibid. paras. 102-103.
15 Ibid. para. 109.

IV. CONCLUSION

15. Saudi Arabia respectfully urges the Pane ls to consider the Kingdom's positions on the
interpretive issues set out above.

ANNEX B-11

INTEGRATED EXECUTIVE SUMMARY
OF THE UNITED STATES

I. INTERPRETATIVE QUESTIONS RELATING TO ARTICLE III:4

1. Japan discusses past reports concerning Article III:4 of the GATT 1994. The United States
supplements the discussion of "likeness" in one re spect: several panels, including the panel in
Canada – Wheat, have found significant the fact that a measure distinguishes between a domestic and
an imported product solely on the basis of origin. The panel in US – FSC (Article 21.5) upon finding
that the statute at issue in that dispute made a distinction between imported and domestic articles
solely on the basis of origin, stated that "there is no need to demonstrate the existence of actually
traded like products in order to establish a violation of Article III:4."

II. INTERPRETATIVE QUESTIONS RELATING TO ARTICLE III:8(A)

2. Canada has improperly assigned an "object a nd purpose" to Article III:8(a), employed an
overly broad interpretation of "governmental purposes", and incorrectly identified the relevant product
for purposes of Article III:8(a).

A. OBJECT AND PURPOSE OF THE GATT 1994

3. Canada states that the object and purpose of Article III:8(a) is to allow governments to pursue
public policy through procurements.

4. The Vienna Convention on the Law of Treaties ("Vienna Convention") instructs that "[a]
treaty shall be interpreted in good faith in accordan ce with the ordinary meaning to be given to the
terms of the treaty in their context and in the light of its object and purpose." The reference to "its
object and purpose" is in the singular. In contrast, the other two interpretive tools set out in Article 31
of the Vienna Convention – ordinary meaning and c ontext – are with reference to "the terms of the
treaty" (plural). The reference in the singular – " its object and purpose" – therefore relates back to
"[a] treaty." Thus, the object and purpose that must inform the interpretation of treaty provisions is
the object and purpose of the entire agreement.

5. Accordingly, proper identification of the object and purpose of an agreement is not derived by
reviewing an isolated subsection of an agreemen t. The object and purpose that must inform the
Panel's interpretation of Article III:8(a) is the object and purpose of the GATT 1994. Canada assigns
an object and purpose to Article III:8(a) and then attempts to use this self-proclaimed object and
purpose to inform the interpretation of Article III:8(a). That approach is incorrect.

6. Moreover, aside from the fact that Canada's approach to object and purpose is incorrect,
Canada has provided no support for its chosen object and purpose. The passage Canada relies on for
its alleged object and purpose of Article III:8(a) is no t the text of the agreement, an interpretation of
the Ministerial Conference or General Council, or guidance from a panel or the Appellate Body.
Rather, Canada bases its entire theo ry for the object and purpose of Article III:8(a) on one statement
found in a Japanese government document. A single Member's views are not authority or guidance
upon which Canada can rely to make its case about the object and purpose of Article III:8(a).

B. GOVERNMENTAL PURPOSES IN ARTICLE III:8(a)

7. Building from this concept of object and purpose, Canada puts forth an overly broad
definition of "purchased for governmental purposes" in Article III:8(a). Canada states that a purchase
for a governmental purpose is a purchase made with any aim of the government in mind. Moreover,
Canada argues that aims of governments ar e expressed through documents promulgated by a
government, and any procurement that occurs pursu ant to a government document is procurement
pursuant to a governmental purpose.

8. This definition of governmental purpose is clearly too broad. First, Article III:8(a) already
specifies that it only applies to "laws, regulati ons, or requirements governing the procurement by
governmental agencies." It is difficult to conceive of a situation in which a government would say it
is not acting with a governmental aim in mind. An interpretation of "gov ernmental purposes" that
amounts to saying that if a procurement is by a gove rnment agency then it is for government purposes
is circular and would render the phrase "for governmental purposes" inutile.

9. Second, nearly every government procurement is "directed by" a government document of
some sort. As a practical matter, Canada's definition would collapse "for governmental purposes" into
the very act being considered in the first place – the purchase of a product by a government. Such a
definition would render meaningless the phrase "purchased for governmental purposes" in
Article III:8(a) and is therefore incorrect.

C. PRODUCT AT ISSUE

10. Canada takes the position that in this di spute the relevant "products" for purposes of
Article III:8(a) of the GATT 1994 are "electricity." Assuming for the sake of argument that Ontario is
procuring electricity, it would then be important to determine what are the relevant "products" in this
dispute for purposes of invoking Article III:8(a) in order to assess whether the local content
requirements at issue are justified.

11. Canada's reliance on the purported procurement of electricity appears misplaced. The
particular purchases to which the Ontario FIT local content requirements apply – sales of equipment
by equipment manufacturers to private power generators – appear to differ in nature and by contract
from the purported governmental procurement of el ectricity that is at the core of Canada's
Article III:8(a) defense. Although Canada consis tently identifies "electricity" as the "product"
covered by Article III:8(a), it seeks to justify local content requirements that apply to "equipment."
Yet the two products are not the same. It does not follow that a purported governmental procurement
of one class of goods under Article III:8(a) justif ies a local content requirement covering private
purchases of a different class of goods. Indeed, Cana da's approach would appear to read into
Article III:8(a) language that is not there, in eff ect adding a sentence at the end of Article III:8(a)
along the lines: "Additionally, the provisions of this Article shall not apply to laws, regulations or
requirements governing the purchase by private parties of other products."

12. Furthermore, the interpretation advanced by Canada would extend the scope of
Article III:8(a) well beyond its ordinary meaning, effectively broadening it to permit a government
procurement of a good to be used to leverage a ll manner of domestic content requirements. For
example, it would appear to permit a government to condition the procurement of a good on the
supplier discriminating against im ported products throughout a supplier's operations. A government
could require that a supplier use only domes tically manufactured equipment for all of its
manufacturing, its facilities to be built only with do mestic materials, and that it purchase its inputs
only from those who met similar discriminatory require ments. Because the local content requirement

at issue here applies to private purchases of rene wable energy equipment, Article III:8(a) cannot be
cited to justify those local content requirements on the bases cited by Canada.

III. INTERPRETATIVE QUESTIONS RELATING TO ARTICLE 6.2

13. In its submission, Canada reiterates its claim that Japan violated Article 6.2 of the DSU by
failing to provide a brief summary of the legal basis of its complaint sufficient to present the problem
clearly. The United States notes that Canada's argum ent that Japan's panel request did not include a
brief summary of the legal basis of its complain t is similar to that recently addressed in the
preliminary ruling of the panel in China – EPS . As that panel stated, "the term 'legal basis' in
Article 6.2 of the DSU refers to the claim made by the complaining party." It further explained that
"[a] claim 'sets forth the complainant's view that the respondent party has violated, or nullified or
impaired the benefits arising from, an identified provision of a particular agreement'."

14. It appears to the United States that Japan has satisfied that requirement. Japan identified the
measures at issue and then provided a brief summary of the legal basis of its complaint by setting
forth its view that the measures violated specific pr ovisions of the WTO Agreement. As such, Japan's
panel request satisfied Article 6.2 of the DSU.

15. Canada's argument that a Member cannot claim a measure viol ates Article 3 of the
SCM Agreement without identifying specifically "the form of the subsidy, as well as who provided
the subsidy, who benefitted from the subsidy and the form of the benef it" is also without merit. As
Canada acknowledges, Article 1.1(a) defines a type of measure – a subsidy. Japan properly stated in
its panel request that it believed the measures it iden tified were subsidies. It then stated which
provisions of the SCM Agreement it believes these me asures violated. Article 6.2 does not require
that Japan provide arguments as to why it believ es the measures meet the definition of subsidy.
Rather, Japan was required to state the legal basis of its complaint, and it is apparent that it did.

ANNEX C

REQUESTS FOR THE ESTABLISHMENT OF A PANEL

Contents Page
Annex C-1 Request for the Establishment of a Panel by Japan C-2
Annex C-2 Request for the Establishment of a Panel by the European Union C-6

ANNEX C-1

REQUEST FOR THE ESTABLISHMENT OF
A PANEL BY JAPAN

7 June 2011

(11-2786)
 Original: English

CANADA - CERTAIN MEASURES AFFECTING THE RENEWABLE
ENERGY GENERATION SECTOR

Request for the Establishment of a Panel by Japan

 The following communication, dated 1 June 2011, from the delegation of Japan to the
Chairperson of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU.

 My authorities have instructed me to request the establishment of a Panel on behalf of the
Government of Japan ("Japan").

 On 13 September 2010, Japan requested cons ultations with the Government of Canada
("Canada") pursuant to Article 4 of the Understanding on Rules and Procedures Governing the
Settlement of Disputes ("DSU"), Article XXII:1 of the General Agreement on Tariffs and Trade 1994
("GATT 1994"), Article 8 of the Agreement on Trade-Related Investment Measures ("TRIMs
Agreement"), and Articles 4.1 and 30 of the Agreement on Subsidies and Countervailing Measures
("SCM Agreement"), with respect to Canada's measures re lating to domestic content requirements in
the feed-in tariff program ("the FIT Program").
1 The request was circulated on 16 September 2010 as
document WT/DS412/1, G/L/926, G/TRIMS/D/27, G/SCM/D84/1.

 Consultations were held on 25 October 2010 with a view to reaching a mutually satisfactory
solution. Unfortunately, the consultations failed to resolve the dispute.

 As a result, Japan respectfully requests that a Panel be established to examine this matter
pursuant to Articles 4.7 and 6 of the DSU, Article XXIII of the GATT 1994, Article 8 of the TRIMs
Agreement, and Articles 4.4 and 30 of the SCM Agreement.

1 The reference to "FIT Program" in this request includes both projects over 10 kilowatts and projects
of 10 kilowatts or less ( i.e., microFIT). See http://fit.powerauthority.on.ca/;
http://fit.powerauthority.on.ca/what-feed-tariff-program; and http://microfit.powerauthority.on.ca/.

 The measures that are the subject of this request are those taken by the Government of
Canada or its provinces relating to the FIT Program established by the Canadian province of Ontario
in 2009 providing for guaranteed, long-term prici ng for the output of renewable energy generation
facilities that contain a defined percentage of dom estic content. These measures include, but are not
limited to, the following:

 the Electricity Act, 1998 ,
2 as amended, 3 including in particular Part II (Independent
Electricity System Operator), Part II.1 (Ontario Power Authority) and Part II.2
(Management of Electricity Supply, Capacity and Demand) thereof, including in
particular Section 25.35 (Feed-in tariff program);
 an Act to enact the Green Energy Act, 2009 and to build a green economy, to repeal
the Energy Conservation Leadership Act, 2006 and the Energy Efficiency Act and to
amend other statutes (the "Green Energy and Green Economy Act, 2009 "),
4 including
in particular Schedule B amending the Electricity Act, 1998;
 an Act to amend the Electricity Act, 1998 and the Ontario Energy Board Act, 1998
and to make consequential amen dments to other Acts (the " Electricity Restructuring
Act, 2004"),5 including in particular Schedule A, Sections 29-32, enacting Part II.1 of
the Electricity Act, 1998, and Sections 33-38, enacting Part II.2 of the Electricity Act,
1998, and Schedule B, Sections 17-18, en acting Sections 78.3-78.4 of the Ontario
Energy Board Act, 1998;
 Ontario Regulation 578/05 made under the Ontario Energy Board Act, 1998 entitled
"Prescribed Contracts Re Sections 78.3 and 78.4 of the Act";
 Independent Electricity System Operator ("IESO") Market Manual, including in
particular Part 5.5 ("Physical Markets Settlement Statements");
 IESO Market Rules, including in partic ular Chapter 7 ("System Operations and
Physical Markets"), Chapter 9 ("Settlements and Billing") and Chapter 11
("Definitions");
 FIT direction dated 24 September 2009, fro m George Smitherman, Deputy Premier
and Minister of Energy and Infrastruct ure, to Colin Andersen, Chief Executive
Officer, Ontario Power Authority ("OPA"), directing OPA to develop a FIT Program
and include a requirement that the applicant submit a plan for meeting the domestic
(i.e., Ontario) content goals in the FIT rules;
 individual FIT and microFIT contracts executed by the OPA since the inception of
the FIT Program on 24 September 2009;
6

2 S.O. 1998, c. 15, Sched. A.
3 The latest amendment was by: 2010, c. 15, s. 223.
4 S.O. 2009, c. 12.
5 S.O. 2004, c. 23.
6 These contracts include, but are not limited to, those referenced at
"http://fit.powerauthority.on.ca/Storage/10989_FIT_Contracts_Offered_April_8_10_-
_Applicant_Legal_Name_Order3.pdf" and
http://fit.powerauthority.on.ca/Storage/11216_FIT_Contract_Awards_-_Final_List_-_February_24,_2011.pdf.

 the FIT Rules, Version 1.4 (8 December 2010), and the microFIT Rules, Version 1.6
(8 December 2010), issued by the OPA;
 the FIT Contract, Version 1.4 (8 Dece mber 2010), including General Terms and
Conditions, Exhibits, and Standard Definitions, the microFIT Contract, Version 1.6
(8 December 2010), including Appendices, and the Conditional Offer of microFIT
Contract, Version 1.0, issued by the OPA;
 the FIT Application Form (1 December 2009), and online microFIT Application,
issued by the OPA;
 the FIT Price Schedule (13 August 2010), and the microFIT Price Schedule
(13 August 2010), issued by the OPA;
 the FIT Program Interpretations of th e Domestic Content Requirements (14
December 2009, as updated on 4 October 2010 and 26 April 2011), issued by the
OPA; and
 any amendments or extens ions of the foregoing, a ny replacement measures, any
renewal measures, any implementing measures, and any related measures.
7
 These measures are inconsistent with Canada's obligations under the SCM Agreement , the
GATT 1994, and the TRIMs Agreement because they constitute a pr ohibited subsidy, and also
discriminate against equipment for renewable ener gy generation facilities produ ced outside Ontario.
In particular, Japan considers that these measures are inconsistent with the following provisions:

1. Articles 3.1(b) and 3.2 of the SCM Agreement , because the measures are subsidies
within the meaning of Article 1.1 of the SCM Agreement that are provided contingent
upon the use of domestic over imported goods, namely contingent upon the use of
equipment for renewable energy generati on facilities produced in Ontario over such
equipment imported from other WTO Members such as Japan;
8
2. Article III:4 of the GATT 1994, be cause the measures acco rd less favourable
treatment to imported equipment for renewable energy generation facilities than
accorded to like products originating in Ontario; and
3. Article 2.1 of the TRIMs Agreement , in conjunction with paragraph 1(a) of the
Agreement's Illustrative List, because the measures are trade-related investment
measures inconsistent with Article III :4 of the GATT 1994 which require the
purchase or use by enterprises of equipment for renewable energy generation
facilities of Ontario origin.

7 Japan notes that, as a matter of convenience, the above list identifies th e most recent versions
available as of the date of this request of the FIT Rule s, microFIT Rules, FIT Contract, microFIT Contract, FIT
Application Form, microFIT Application, FIT Price Schedule, microFIT Price Schedule, and FIT Program
Interpretations of the Domestic Content Requirements. Japan's request, however, encompasses all versions of
these measures adopted since the inception of the FIT Program on 24 September 2009.
8 As subsidies falling under the provisions of Article 3 of the SCM Agreement , the measures are
deemed to be specific under Article 2.3 of the SCM Agreement.

 Further, Japan considers that Canada's measur es nullify or impair benefits accruing to Japan
directly or indirectly under the cited Agreements in a manner described in Article XXIII:1 of the
GATT 1994.

 Japan requests the establishment of a Panel w ith standard terms of reference in accordance
with Article 7.1 of the DSU.

ANNEX C-2

REQUEST FOR THE ESTABLISHMENT OF A PANEL
BY THE EUROPEAN UNION

10 January 2012

 (12-0144)
 Original: English

CANADA – MEASURES RELATING TO THE FEED-IN TARIFF PROGRAM

Request for the Establishment of a Panel by the European Union

 The following communication, dated 9 Ja nuary 2012, from the delegation of the
European Union to the Chairperson of the Dispute Settlement Body, is circulated pursuant to Article
6.2 of the DSU.

On 11 August 2011, the European Union requested consultations with the Government of
Canada ("Canada") pursuant to Article 4 of the Understanding on Rules and Procedures Governing
the Settlement of Disputes ("DSU"), Article XXII:1 of the General Agreement on Tariffs and Trade
1994 (" GATT 1994"), Article 8 of the Agreement on Trade-Related Investment Measures (the
"TRIMs Agreement"), and Articles 4(1) and 30 of the Agreement on Subsidies and Countervailing
Measures (the " SCM Agreement "), regarding Canada's measur es relating to domestic content
requirements in the feed-in tariff program (the "FIT Program").
1 The request was circulated on
16 August 2011 as document WT/DS426/1, G/L/959, G/TRIMS/D/28, G/SCM/D87/1.2
Consultations were held on 7 Se ptember 2011 with a view to reaching a mutually satisfactory
solution. Unfortunately, the consultations failed to resolve the dispute.
As a result, the European Union respectfully re quests that a Panel be established to examine
this matter pursuant to Articles 4.7 and 6 of the DSU, Article XXIII of the GATT 1994, Article 8 of
the TRIMs Agreement, and Articles 4.4 and 30 of the SCM Agreement.

1 "FIT Program" referred to in this request include s both projects over 10 kilowatts (kW) and projects
of 10 kW or less (microFIT). See http://fit.powerauthority.on.ca/.
2 An addendum to the European Union's request for consultations was circulated on 24 August 2011
since the statement of available evidence with regard to the existence and nature of the subsidies in question was
erroneously omitted from the request for consultations.

The measures that are the subject of this request are those relating to the FIT Program
established by the Canadian province of Ontari o in 2009 providing for guaranteed, above-market,
long-term pricing for the output of renewable energy generation facilities 3 that contain a minimum
percentage of domestic content. These measures include the following:
 the Electricity Act, 1998,4 as amended,5 incl uding in particular Part II (Independent
Electricity System Operator), Part II.1 (Ontario Power Authority) and Part II.2
(Management of Electricity Supply, Capacity and Demand) thereof, including in
particular Section 25.35 (Feed-in tariff program);

 an Act to enact the Green Energy Act, 2009 and to build a green economy, to repeal
the Energy Conservation Leadership Act, 2006 and the Energy Efficiency Act and to
amend other statutes (the "Green Energy and Green Economy Act, 2009 "),
6 including
in particular Schedule B amending the Electricity Act, 1998;
 an Act to amend the Electricity Act, 1998 and the Ontario Energy Board Act, 1998
and to make consequential amen dments to other Acts (the " Electricity Restructuring
Act, 2004"),7 including in particular Schedule A, Sections 29-32, enacting Part II.1 of
the Electricity Act, 1998, and Sections 33-38, enacting Part II.2 of the Electricity Act,
1998, and Schedule B, Sections 17-18, en acting Sections 78.3-78.4 of the Ontario
Energy Board Act, 1998;
 Ontario Regulation 578/05 made under the Ontario Energy Board Act, 1998 entitled
"Prescribed Contracts Re Sections 78.3 and 78.4 of the Act";
 Independent Electricity System Operator ("IESO") Market Manual, including in
particular Part 5.5 ("Physical Markets Settlement Statements");
 IESO Market Rules, including in partic ular Chapter 7 ("System Operations and
Physical Markets"), Chapter 9 ("Settlements and Billing") and Chapter 11
("Definitions");
 FIT direction dated 24 September 2009, fro m George Smitherman, Deputy Premier
and Minister of Energy and Infrastruct ure, to Colin Andersen, Chief Executive
Officer, Ontario Power Authority ("OPA"), directing OPA to develop a FIT Program
and include a requirement that the applicant submit a plan for meeting the domestic
(i.e., Ontario) content goals in the FIT rules;
 the FIT Rules, Version 1.5.1 (31 October 2011), and the microFIT Rules, Version
1.6.1 (10 August 2011), issued by the OPA;
 the FIT Contract, Version 1.5.1 (31 Oc tober 2011), including General Terms and
Conditions, Exhibits, and Standard Definiti ons, the microFIT Contract, Version 1.6.1
(31 October 2011), including Appendices, a nd the Conditional Offer of microFIT
Contract, Version 1.6.1, issued by the OPA;

3 In particular, facilities utilising windpower with a contract capacity greater than 10 kW, and facilities
utilising solar (PV).
4 S.O. 1998, c. 15, Sched. A.
5 The latest amendment was by: 2010, c. 15, s. 223.
6 S.O. 2009, c. 12.
7 S.O. 2004, c. 23.

 the FIT Application Form (1 December 2009), and online microFIT Application,
issued by the OPA;
 the FIT Price Schedule (3 June 2011), and the microFIT Price Schedule (13 August
2010), issued by the OPA;
 the FIT Program Interpretations of th e Domestic Content Requirements (14
December 2009, as updated on 4 October 2010 and 26 April 2011), issued by the
OPA;
8
 individual FIT and microFIT contracts executed by the OPA since the inception of
the FIT Program on 24 September 2009;9 and
 any amendments or extens ions of the foregoing, a ny replacement measures, any
renewal measures, any implementing measures, and any related measures.10
These measures are inconsistent with Canada's obligations under the SCM Agreement , the
GATT 1994 , and the TRIMs Agreement because they constitute a prohibited subsidy, and also
discriminate against imports of equipment and com ponents for renewable energy generation facilities.
In particular, the European Union considers that these measures are inconsistent with the following
provisions:
1. Articles 3.1(b) and 3.2 of the SCM Agreement, because the measures are subsidies within the
meaning of Article 1.1 of the SCM Agreement that are provided contingent upon the use of
domestic over imported goods, namely contingent upon the use of equipment and components
for renewable energy generation facilities pr oduced in Ontario over such equipment and
components imported from other WTO Members, including the European Union;
2. Article III:4 of the GATT 1994 , because the measures accord less favourable treatment to
imported equipment and components for renewable energy generation facilities than accorded
to like products originating in Ontario; and
3. Article 2.1 of the TRIMs Agreement, in conjunction with paragra ph 1(a) of the Agreement's
Illustrative List, because the measures are trade-related investment measures inconsistent with
Article III:4 of the GATT 1994 which require the purchase or use by enterprises of equipment
and components for renewable energy generation facilities of Ontario origin or source.

8 See " http://fit.powerauthority.on.ca/domestic-content-0, and http://fit.powerauthority.on.ca/table-
final-interpretations".
9 These contracts include, but are not limited to, those referenced at
"http://fit.powerauthority.on.ca/Storage/10989_FIT_Contracts_Offered_April_8_10_-
_Applicant_Legal_Name_Order3.pdf" and
http://fit.powerauthority.on.ca/Storage/11216_FIT_Contract_Awards_-_Final_List_-_February_24,_2011.pdf.
10 The European Union notes that, as a matter of conv enience, the above list identifies the most recent
versions available as of the date of this request of the FIT Rules, microFIT Rules, FIT Contract, microFIT
Contract, FIT Application Form, microFIT Application, FIT Price Schedule, microFIT Price Schedule, and FIT
Program Interpretations of the Do mestic Content Requirements ( see "http://fit.powerauthority.on.ca/what-feed-
tariff-program/; and http://microfit.powerauthority.on.ca/". The European Union's request, however,
encompasses all versions of these measures ad opted since the inception of the FIT Program on
24 September 2009.

Accordingly, the European Union respectfully requests the establishment of a Panel with standard
terms of reference in accordance with Article 7.1 of the DSU. The European Union asks that this
request be placed on the agenda for the meeting of the Dispute Settlement Body to be held on
20 January 2012.