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17 September 2018

WTO Case Summary “EU — Energy Package” (DS476)

WTO PANEL REPORT

The case “EU – Energy Package” (DS476) concerns certain measures imposed by the European Union (EU) and three Member-States (Croatia, Hungary and Lithuania), which regulate the natural gas sector and seek to facilitate the development of natural gas infrastructure within the EU.[1]

SIGNIFICANCE OF THE REPORT

The present case is of particular significance for Ukraine and has at least two important implications.

Firstly, Ukraine and the EU share concerns over dependency on Russian natural gas. For some time, Ukraine suffered from Russia’s gas manipulations. Fear that similar manipulations could be used against the EU triggered the adoption of the Third Energy Package, which helped to address the issue by creating the EU’s own gas capacities. Thus, the Panel’s decision will contribute to reduced dependency of the EU and Ukraine on Russian gas.

Secondly, Ukraine is currently implementing the Third Energy Package which legality was confirmed by the Panel in the present ruling. Importantly, for Ukraine implementation of the Third Energy Package is not only a commitment within the framework of the relevant agreement with the EU, but also a necessary condition in order to achieve energy efficiency and independence.

In addition, this case was the first instance in the WTO in which a Panel was required to rule upon legal aspects of trade with energy resources supplied via fixed infrastructure.

BACKGROUND

For a considerable period, the EU was dependent on Russian natural gas. In order to address this issue and improve the functioning of the internal energy market, the EU enacted the Third Energy Package in 2009. It includes rules on the separation of energy supply and generation from the operation of transmission networks (unbundling), non-discriminatory access to energy infrastructure, and independence of national energy regulators.[2] According to the European Commission, an integrated and competitive EU energy market is the most cost-effective way to ensure secure and affordable supplies to EU citizens and to provide business with the choice of energy supplier.[3]

However, the Third Energy Package caused a number of problems for Gazprom that over the past decades has been investing in trading, distribution, pipeline and storage activities in the EU. Due to the requirement to vertically unbundle integrated energy suppliers from network operators, Gazprom faced a legal obligation to separate its production and supply activities from transmission operations inside the EU and to allow access to its gas pipelines to other energy companies.

In this connection, Russia initiated a WTO dispute against the EU, challenging the WTO-consistency of seven measured introduced by the EU.

Nine WTO members (including Ukraine) with a substantial interest in the energy sector have reserved their right to participate as third parties in the panel proceedings.

CHALLENGED ISSUES

The unbundling measure

The unbundling measure consists of rules governing the separation of natural gas production and supply activities from natural gas transmission activities.

The unbundling measure in Directive 2009/73/EC (the Directive)

The Directive requires each EU Member-State to implement the so-called ‘ownership unbundling’ (OU) model and permits EU Member-States to implement, in certain circumstances, the so-called ‘independent system operator’ (ISO) and ‘independent transmission operator’ (ITO) models. The OU model requires structural separation between entities engaged in natural gas production and supply activities and entities engaged in natural gas transmission activities. The ITO and ISO models require a lesser degree of structural separation for such entities but impose requirements for their behaviour and relationships while subjecting them to additional oversight by the relevant authorities.

Article II:1 of the GATS

Russia claimed that the unbundling measure accords less favourable treatment to Russian pipeline transport services and service suppliers by ‘enabling’ EU Member-States to choose the unbundling model to be implemented contrary to most-favoured nation principle under Article II:1 of the GATS.[4]

As a first step, the Panel established that the conditions of competition are indeed modified for pipeline transport service suppliers under different unbundling models, as the OU model requires entities to choose between producing and supplying natural gas or providing pipeline transport services, whereas the ITO model does not necessarily do so.[5]

Furthermore, the Panel analyzed Russia’s argument that Gazprom was prohibited from supplying its pipeline transport services to the EU through a commercial presence in Lithuania (which implements only the OU model), whereas certain other vertically integrated undertakings (VIUs) from other non-EU countries were able to do so.[6] This approach was questioned both by the EU and the Panel because the treatment of the ‘group’ of Russian pipeline transport services and service suppliers must be compared with the treatment of the ‘group’ of like pipeline transport services and service suppliers of any other non-EU country.[7] By so doing, the Panel stated that there are more instances where Gazprom continues to supply pipeline transport services through the commercial presence of ITOs than instances of VIUs from any other non-EU country continuing to provide pipeline transport services through the commercial presence of ITOs.[8] On this basis, the Panel decided that the unbundling measure complies with Article II:1 of the GATS.[9]

Articles I:1 and III:4 of the GATT 1994

While arguing that the unbundling measure violates the non-discriminatory requirement under Articles I:1 and III:4 of the GATT 1994, Russia developed the same line of argument as with respect to Article II:1 of the GATS.[10] Similarly, the Panel did not agree that the different unbundling models modify the conditions of competition for natural gas since the relevant rules require operators to provide access to natural gas from all sources to the transmission system on the same conditions. Thus, the measure was considered as consistent with Articles I:1[11] and III:4[12] of the GATT 1994.

The LNG measure

The liquefied natural gas (LNG) measure concerns unbundling in the case of LNG facilities and LNG system operators.

Article I:1 of the GATT 1994

Russia stated that LNG imported into the EU via LNG facilities receives an advantage within the meaning of Article I:1 of the GATT 1994 that is not accorded to Russian natural gas imported into the EU via pipelines, because LNG system operators are not required to unbundle while operators of transmission pipelines are required to do so.[13] The Panel determined that LNG and natural gas are not ‘like’ products, and thus found no violation of Article I:1 of the GATT 1994.[14]

The infrastructure exemption measure

The infrastructure exemption measure allows the relevant authorities to exempt certain categories of natural gas infrastructure that fulfil specified conditions of certain rules envisaged by the Third Energy Package (such as unbundling, third-party access, tariff regulation, specific infrastructure exemption decisions etc.).[15]

Articles I:1 of the GATT 1994 and II:1 of the GATS

Russia challenged what it termed as the incoherent and discriminatory application of the infrastructure exemption measure. According to Russia, the European Commission and the relevant national regulatory authorities interpreted certain criteria of the infrastructure exemption measure differently in respect to a Russian pipeline transport service supplier than with regard to pipeline transport service suppliers from other non-EU countries.[16] The core concern of Russia was that OPAL conditions are more trade restrictive than the conditions imposed in the exemption decisions on the Gazelle (owned by European financial services company), TAP, Nabucco and Poseidon pipelines (owned by German, Hungarian, Azerbaijani, Austrian companies  etc.).[17] The Panel has checked the cited infrastructure exemption decisions and did not establish that the European Commission had taken such exemption decisions as regards OPAL and other mentioned pipelines in a manner that would amount to an ‘inconsistent’ or ‘discriminatory’ application of the infrastructure exemption measure.[18] Thus, the Panel decided that the measure complies with Articles I:1 of the GATT 1994 and II:1 of the GATS.[19]

Article XI:1 of the GATT 1994

Russia claimed that two conditions concerning the OPAL pipeline (the 50% capacity cap and the gas release programme requiring Gazprom and related companies to release 3 billion cubic metres of gas per year in order to exceed this cap[20]) result in a de facto quantitative restriction on the volume of imported Russian natural gas.[21]

The Panel determined that Gazprom (and RWE Transgas) is the only entity subject to the 50% capacity cap as the exclusive user of the OPAL pipeline capacity and the only importer of natural gas from Russia via the Nord Stream pipeline.[22] The Panel then established that the challenged conditions affect the ability of Gazprom to access the transport capacity of the OPAL pipeline regardless of the fact that other possibilities exist for Russian natural gas imports to the EU. Nevertheless, Article XI:1 of the GATT 1994 does not require a demonstration that certain types of goods as a whole imported by one Member from another are limited in order to support a finding of violation, but rather prohibits a Member from limiting competitive opportunities for importation from another Member.[23] Consequently, the Panel found that the measure disincentivizes the importation of Russian natural gas through the Nord Stream pipeline and, thereafter, the OPAL pipeline. This limits the competitive opportunities for importation of Russian gas into the EU[24] in violation of Article XI:1 of the GATT 1994.[25]

The third-country certification measure

The third-country certification measure requires natural gas transmission system owners and operators controlled by a person or persons from a third country or third countries to demonstrate that their certification will not put the EU’s security of energy supply at risk.[26]

Article XVII of the GATS

Regarding the third-country certification measure in the national legislation of Croatia, Hungary and Lithuania, both Russia and the EU agreed that the measure de jure violates the national treatment obligation of Article XVII of the GATS by requiring a security of energy supply assessment prior to the certification of third-country transmission system operators, but not of domestic ones.[27]

Article XIV(a) of the GATS

In order to justify a violation, the EU defense under Article XIV(a) of the GATS argued that the measure is necessary to ensure the EU’s security of energy supply and, consequently, to maintain public order.[28] The Panel found that the measure is indeed necessary to protect the EU’s security of energy supply from threats posed by potential interference from third-country governments acting through third-country transmission system operators.[29] However, the Panel ultimately rejected this defense, since the measure fails to satisfy the requirements of the chapeau of Article XIV of the GATS and results in arbitrary and unjustifiable discrimination.[30]

The TEN-E measure

The Trans-European Networks – Energy (TEN-E) measure envisages the criteria for the designation of certain infrastructure projects as projects of common interest (PCIs), establishes the regulatory framework to facilitate their implementation, and provides them with certain incentives. In order to be designated as a PCI, an infrastructure project must satisfy the general criteria and ‘significantly contribute’ to at least one of the specific criteria.[31]

Article I:1 and III:4 of the GATT 1994

Russia argued that the TEN-E measure is inconsistent with Articles I:1 and III:4 of the GATT 1994 because the criteria used to select PCIs are discriminatory towards Russian natural gas. Russia was specifically unsatisfied with the so-called ‘diversification of gas supply’ criterion, which, according to Russia, would lead to reduction of the supply and transmission of imported Russian natural gas into and within the EU.[32]

In the Panel’s view, the main objective of the TEN-E measure is to develop infrastructure aimed at connecting certain EU Member-States with sources of natural gas supply other than Russia[33] and will in practice end the dependency of Estonia, Finland, Latvia and Lithuania on Russian natural gas.[34]In such a way some infrastructure projects will be designated as PCIs and will receive benefits associated with their PCI designation, because they develop pipeline infrastructure to transport natural gas of non-Russian origin.[35] Therefore, the Panel decided that the TEN-E measure provides more favourable conditions for the transportation of natural gas of any origin other than Russia contrary to Articles I:1and III:4 of the GATT 1994.[36]

Article XX(j) of the GATT 1994

The EU claimed that the violation is justifiable under Article XX(j) of the GATT 1994. The EU argued that there is a genuine and serious risk of disruption of supply of natural gas as a product in general or local short supply in the EU.[37] However, the Panel considered that the EU failed to demonstrate that natural gas is currently ‘in short supply’[38] and, consequently, rejected its defense.[39]

CONCLUSIONS

To sum up, the Panel rejected most of Russia’s claims concerning the alleged incompatibility of the EU’s energy policy measures with WTO rules. At the same time, the Panel agreed with Russia that the EU has indeed violated certain provisions of the GATS and the GATT 1994.

The EU received a recommendation to review WTO-inconsistent aspects of the Third Energy Package and bring it in conformity with the GATS and the GATT 1994.[40] Either Party can appeal the Panel Report to the WTO Appellate Body within 60 days after the date of its circulation to WTO Members.

For more information, please contact Anzhela Makhinova or Victoriia Mykuliak.

[1] Panel Report, EU – Energy Package, para. 2.1.

[2] The main component of the Third Energy Package is contained in Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas.

[3] European Commission, Commission welcomes WTO ruling confirming lawfulness of core principles of the EU third energy package: http://europa.eu/rapid/press-release_IP-18-4942_en.htm?locale=en.

[4]  Panel Report, EU – Energy Package, para. 7.402.

[5]  Panel Report, EU – Energy Package, para.7.457.

[6]  Panel Report, EU – Energy Package, para.  7.484.

[7]  Panel Report, EU – Energy Package, para. 7.486.

[8]  Panel Report, EU – Energy Package, para. 7.510.

[9]  Panel Report, EU – Energy Package, para. 7.514.

[10] Panel Report, EU – Energy Package, para. 7.515.

[11] Panel Report, EU – Energy Package, para. 7.584

[12] Panel Report, EU – Energy Package, para. 7.569.

[13] Panel Report, EU – Energy Package, para. 7.825.

[14] Panel Report, EU – Energy Package, para. 7.852.

[15] Panel Report, EU – Energy Package, para. 2.41.

[16] Panel Report, EU – Energy Package, para. 7.912.

[17] Panel Report, EU – Energy Package, para. 7.952.

[18] Panel Report, EU – Energy Package, para.  7.961.

[19] Panel Report, EU – Energy Package, para. 7.971.

[20] Panel Report, EU – Energy Package, para. 7.954.

[21] Panel Report, EU – Energy Package, para. 7.977.

[22] Panel Report, EU – Energy Package, para. 7.997.

[23] Panel Report, EU – Energy Package, para.  7.999.

[24] Panel Report, EU – Energy Package, para. 7.1000.

[25] Panel Report, EU – Energy Package, para. 7.1003.

[26] Panel Report, EU – Energy Package, para. 2.46.

[27] Panel Report, EU – Energy Package, para. 7.1134.

[28] Panel Report, EU – Energy Package, para. 7.1135.

[29] Panel Report, EU – Energy Package, para. 7.1240.

[30] Panel Report, EU – Energy Package, para. 7.1254.

[31] Panel Report, EU – Energy Package, para. 7.1267.

[32] Panel Report, EU – Energy Package, para. 7.1263.

[33] Panel Report, EU – Energy Package, para. 7.1278.

[34] Panel Report, EU – Energy Package, para. 7.1276.

[35] Panel Report, EU – Energy Package, para. 7.1311.

[36] Panel Report, EU – Energy Package, paras. 7.1300; 7.1312.

[37] Panel Report, EU – Energy Package, para. 7.1336.

[38] Panel Report, EU – Energy Package, para. 7.1353.

[39] Panel Report, EU – Energy Package, paras. 7.1354; 7.1382.

[40] Panel Report, EU – Energy Package, para. 8.3.

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