Journal of Energy & Natural ICO gas iriJournal of Energy & Natural Resources Vol 12, no 1 Law February 1994 Pages 1-209 Articles International Energy Trade Introduction David P Cluchey and Donald N Zillman 1 GATT, NAFTA and North American Energy Trade: A Canadian Perspective J Owen Saunders 4 GATT, NAFTA and the Trade in Energy: A US Perspective Ernest E Smith and David P Cluchey a Implications of GATT and EEC on Networkbound Energy Trade in Europe Martha M Roggenkamp 9 GATT and EC Subsidies and State Aids: The Coal Sector Gunther Kithne 8 ‘Trade in Energy and Natural Resources: The Role of GATT and Developing Countries David $ MacDougall 95 Energy Trade and the National Security Exception to GATT Dona‘d N Zillman M7 Energy, Environment and Trade in the European ‘Community Catherine Redgwell 128 NAFTA: Trading Natural Resource Goods and Protecting the Environment Irene McConnell IstNatural Resources Trade Under NAFTA: The Interface with International Environmental Treaties Alastair R Lucas 175 Recent Developments 186 Bibliography 198 apes to be cour for ubication shoul be sent ia dupet, to: Ruth Eldon, itor ‘Assan, Inerntional Bar Aciaton, 2 Harenood Pam London WR SHB, Eapand ook for eview to Davi Flam the above ares. [A coger reprdng eoberptons shold be adres to the Marating Deparment, abasn& Trotoan Lined, String ous, 6 Witon Road, London SWIV IDE (rat #471 #21112). Sutsrpion ates (ocoding poste): Annual £17, Sng opy £2750, (© 193 Seton on Baegy & Neural Resouces Lay ofthe IBA, 6 0064-611PROFESSIONAL TRAINING SEMINAR PROGRAMME ‘SUMMER '94 (September 5-30) (Over 300 profesional from oe 50 counties attended the Cente fr Petroleum & Mine Law & Poly 193 Sumamee Ppa With ain expert from Goverment, the Lagal pofeston and Industry scheduled tae pat, the 1994 programe leks 2 stata even ester idernatinaltaiece: Through etre, ducati sod applied ‘worahopeparpans wll xamine relent ive faciog eer and resource compas species sd professionals open athe fld of ar resoure, ene sad ‘cvronment. Lowers are encourage to ttend this nel saumer programme wich ot only istrative bts ideal for making ting busines contact Extensive materiel. val be prowded. Week I (September $9) (©, 59: Iterations Miner avertment& Environmental Regltion, Dindee, £750 + VAT. (05d, 59: UK OM & Ga Law, London, £995 + VAT Wek 2 (September 12-16) (© 2days, 12-13: Energy Law (EC Developments, Regulation, Comercial Practices), London, £550-+ VAT (© 3 days, 12-14: Iterations Developments the eoaoic of Energy Fey Formulator, Implemestaton sd Inpiations, Dundee, £595 + VAT (© 2 days, 18-16: Envioamentl Regulation of Os & Gus nde, Dandes £880 + VAT Week 3 (September 18.23) (© days 19-21; International Ol Gas Ps, St Andrews, £250 + VAT (© 2 aye, 2223: Invertment & Finance forthe Od & Gat lade, StAndrews, 880 + VAT Week 4 (September 26:30) (© 5 days, 26:30: Contracts inthe Od & Ga Industries Neqtiton & Deting, St Andrews, £1100 + VAT ‘Ear restrain Fes forall bookings recived before Jane It 1894* Extensive materials forthe 1989 summer cures rave from the Centre once opto! valle for some seminar, credit can be eine owed the Cent's tpadunte dees, Detal on resuet. “The Sunes Programme brochure willbe rule rm March 1994, ‘Tobin scopy plate contact Mis Sasn Stevenson, Marketing Asitnt Centre for Peter & Miner Law & Policy ‘Unierstyof Dundee, Dundee, DDI AHN, Sedan, UK ‘eb 440382344000 Fans 144302 22578 Please quote rf JUSPSA onl xgirisNinth fourday Biennial Residential ice Seminar on International Environmental Law ’ International Environmental Law: Madrid, Spain Developing 21.25 May 1994 Legal Issues + Lega Instruments and Mechanisms flowing from ‘Other sources @ 38) ESereereean @ ‘A seminar organised by the Section on Business Law’ Asia Pacific Forum and the Malaysian Bar Council, with the support of the InterPacife Bar ‘Association Fora seminar programme {pd regan for ‘aah rom December 5053, please comglete the foam ana sen itt te ‘dees shown below =< OSprrton Cimino Posse foro om Section on Business Law ALIA PACIFIC FORUM REGIONAL SEMINAR Shangri-La Hotel KUALA LUMPUR, MALAYSIA 20-22 March 1994 This two-day programme will ezine project, financing ast applies to specticindusvies such as petroleum, power generation and the utes. Special features of project finance and citferent financial suctures wil be susie. The various risks involved ~ creat rsks, construction ‘sk, politcal and environmental risks ~ wil be considered along with ‘the importance of documentation, Speakers from efferent counties will cuss the ‘common types of project finance document and the effect that these documents can have onthe cation of rk ‘There wl be case studies on the stucuring of 3 ‘ypical project finance dal and the special Considerations that apply in Malaysia, Singapore, Thaland and other Ase-Paciic cuntres, plies mt rorescd Pc fine See terdoe WIR, gard Sead 65 1200 Fue Sang ab OEFora copy ofthe seminar programme and registration form (eoilabe from October 1903) please contact International Bar Assocation 2 Harewood Place Hanaver Square Landon WIR 9HB, England Tat: +44 (0971629 1206 Fax: 344 (071409 0656 ‘The International Bar Association's Section on Energy & Natural Resources Law presents the eleventh advanced seminar on petroleum, minerals, energy and resources law Energy & Resources Law '94 24-29 April 1994, Barcelona, Spain ‘The working programme will include topics dealing with ‘© Gbal Trends in Energy 1 Mining Law — Reform inthe United States and Recent Trends Throughout the World = Trade in Energy and Natural Rescurces "© Competition versus Regulation in Europe and the Americas, including a Panel Discussion of Developments in Select Countries ‘= Environment Issues Affecting Energy and Minerals 1 Joint Ventures and Other Contractual ‘Aarangements| 1m Finance inthe Resources Industry '= Recent Developments in National itl and Privatisation 1 A Spring 1994 Hot Tople {A varied social programme is planned to give delegates and guests the opportunity o enjoy the sightsof the city and experience true Catalan hospi.Introduction By David P Cluchey* and Donald N Zillman** ‘This isthe fourth collaboration of the Academic Advisory Group (AAG) of the Section on Energy and Natural Resources Law (SER) of the International Bar Association (IBA). In December, 1987 the AAG published “Acquisition of Natural Resources Interests by the State” prior to the 1988 'SERL Meeting in Sydney. In December 1989 the topic was “Monopoly and Competition in Energy Supply” prior to the Leeuenhorst (Netherlands) seminar in 1990, In Volume 10, No I of the Journal of Energy and Natural Resources Law the AAG explored “Abandonment and Reclamation of ‘Energy Sites and Facilities” prior to the 1992 SERL seminar in Washington, ‘The collaborations have now achieved a regularity that suggests perma~ nonce. It is worth reflecting on the strength and rarity of such collaborations among the academics and practitioners in a legal discipline. Such collabor- ation is especially welcome at a time when (in the United States at least) ‘major Hgures in the practicing bar and judiciary decry the increasing gulf between the worlds of the academy and practice. An academy that views the world of practice with an attitude of "Who Cares?” and a bench and bar that view academic scholarship with “So What?” bodes ill for both “To be sure, the decade long existence of the Academic Advisory Group within the Section on Energy and Natural Resources Law has not been ‘without occasional misunderstandings. But goodwill on both sides and a strong sense of shared benefits have made the rough places smooth. The result is @ practtioner-academic collaboration that could be a model for any professional discipline. Any mention of specific leaders who have built this relationship risks omission of essential figures, Thanks to all for what they have built. We trust that the 1994 product will continue the tradition, ‘The topic for the Barcelona SERL seminar continues and modifies past AAG collaborations. The authors and Barcelona presenters are a healthy ‘mix of familiar veterans (who acknowledge a certain greying in the hair but not in the intellect) and able neweomers. Once again, we adopted a two year timetable. The topic “Intemational Trade in Energy” was selected at the AG's meetings in Washingtor in April 1992. It was refined under the skilled hand of Chairmen Al Lucas in the months that followed. Work on individual papers began in Summer 1992 and was largely complete by the gathering of the AAG in April 1993 in Leiden. The support of the [Netherlands Institute for Energy Law and SERL. provided for a productive 1 Profesor of Lam, University of Maine School of Law. eta and avard Godlee Profesor af Law, University of Maine School of Law2 JOURNAL OF ENERGY AND NATURAL RESOURCES LAW 1994 and enjoyable three days. The indefatigable trio of Nicholas Halton, Piet ‘Jan Slot, and Peter Cameron allowed productivity to quickly overtake jet lag ‘At the conclusion of the Leiden gathering, the Group setled the schedule for the Barcelona Seminar. It also asked all presenters to provide final copies of their papers (whose modifications reflected both the intellectual exchange of the Leiden Conference and late breaking developmen's ina fast changing field) to Professor Cluchey and Dean Zillman in time for the Journal dead- line. Ms Kristi Clifford of the University of Maine School of Law staff ably assisted in fina! preparation of the papers. You are reading the product of the authors’ diligence. ‘The one change in format involved the abandonment of the “national paper” approa:h of prior years. In prior years, topics lent themselves to first asking the national experts how they do itin their country. This time Doth the interrational trade topic and the Group's growing transnational {focus suggested a modification of script. Topics wer initially assigned by subject matter rather than by nation. Thus, commentators on environment land energy trade could feel free to draw on their naticnal law, the law of other nations, and the growing international jurisprudence. In practice, we hhave tended to write that which we know best, but the broader range has been welcome. ‘The topic of international energy trade comes at a most appropriate time. ‘Trade law and ssues, commonly the province ofthe specialist, have become front page or nightly TV news around the world. A straggling world econ- ‘omy faces trade proposals that can brighten or worsen the situation, {depending on the gun answering the questions on the opinion show. The General Agreement on Tariffs and Trade — at its birth the quick fix before 1 permanent international agreement would be reached — has become the venerable player in the field. Its Uruguay Round, wich has shown the possibility of having daughters replace fathers as national negotiators, may be nearing completion. Or it may not. Regionalism er bilateralism pose serious threats to GATT's near universalism, George O:well’s vision of the twipolar world -nay be taking shape in trade as the European Community, the Americas and East Asia tet thei afinity as grand markets. As we go to press, the North American Free Trade Agreement faces a dificult and contentious approval vote in the United States Congress, The prospects for the rest of the globe, if such 2 retreat from universal comes to pass, remain cloudy, ‘Modern trade law has also shown itself as too important to be left to the economists, Eoonomic theory is still solidly behind the core concepts of GATT — tiat lowered tarifis and trade barriers are in tae long-run interest of the majority ofthe world’s population. However, the dispassionate expla- nation of the economist may be no match for the more passionate demands of those who perceive themselves losers inthe process, Most politicians well ‘know that more unemployed factory workers and angered envionmentalists than economists will vote in their next election, Further, the envizonmea talists are likely to challenge the free traders’ first premises — worldwide ‘economic expassion is not worth a dangerously polluted planet. Trade issues also provide ar opportunity to press other political obfctives. Opposition to trade agreements may mask racism or unhappiness with foreign abuses of human right. Energy tude issues rcacl thin vontentious new work! of trade already ‘carrying much political baggage. Many nations have refused to treat aspects‘Vou 12 Not Itaopuction 3 of energy — petroleum, electricity generation, export of natural resources — as ust another tradeable product, While energy traders can learn from longer established international traders, they also have lessons to teach, Ttwould be useful ifthe end of the Cold War removed some of the national security mystique of energy trade. However, it would be uafortunate if tura- Ing energy into “just another product” would bury it in the endless nego. Wations that have characterised other sectors of the international economy.GATT, NAFTA and North American Energy Trade: A Canadian Perspective By J Owen Saunders* Introduction On 17 December 1992, the final text of the North American Free Trade ‘Agreement (NAFTA)* was signed by the heads of government of Canada, Mexico and the United States. The conclusion of the Agreement on 13 ‘August 1992 followed 14 months of intensive negotiations among the three ‘states that began with the first formal negotiating session in Toronto on 12 June 1991, a year after Presidents Bush and Salinas had committed their respective tates to the negotiation of a free trade arrangement." Compared to the negotiations on the predecessor Free Trade Agrectrent (FTA) between Canada and the United States," and, of course, compared to the pace of negotiations in the current Uruguay Round of multiateral trade nego- tiations under the GATT, the speed with which the negotiations were con- cluded was remarkable, especially given the breadth of the Agreement. "Much of the success in reaching an early agreement can be attributed to the fact that many of the dificult issues had been setted in the course of the previous negotiations on the FTA. Some ofthe succes also undoubtedly reflects the fact that Mexico was extremely eager to enter into the Agreement, ‘which had become a central plank inthe plans of the Salinas administration to tum the Mexican economy around. Indeed, in some respects, the con- clusion ofthe deal represented to that administration what the achievement fof the FTA had meant to the Mulroney government in Canada: a “"uaran- 1” that the new market-oriented direction of the economy could not easly be reversed by subsequent governments "This article begins with a brief background to the NAFTA by reviewing ‘canadian innate of Resources Law. Faculty f La, the Univesity of Calgary 1 Cannes Minty of Supply and Services Nor Amerzan Fee Pade Agroomon Beer the Gorman of Canada, The Government ofthe Unted Mica Sites an the Goverment (te Unt Ses of rai (1992), Te loa et ofthe agronent wa nile 7 ‘ober spprontnately two moot afer te cencloson of nega “Te ioral negotiatons folomed months of pekimnay css. 5 Euteoal Aft Canada, Canad Ute Sate Pre Tre reanent, 10 Decrbe 1987, in fre | Taouny 190% taplemened a Canada bythe Cana Uned States Free Trade “ecomontImplonenain tet, Se TORR, ° 5 tl nh niet Suey te ite Sa ‘ipa Free rade Ageeneat implemen het of 198, PL 100-08. * General Apres Tails ad Trade, TIAS No 1700, 88 UNTS 198 4Vou 12 Not ‘A CANADIAN Pensrncrive 5 the energy-related aspects of both the GATT and the FT. It then turns to an overview ofthe Canadian objectives going into the NAFTA negotiation, both generally and with respect to energy. The article then summarises soms ‘of the key elements of the NAFTA from a Canadian perspective, befor: addressing the NAFTA provisions dealing with energy. Tn this respect the article is coacerned primarily with issues of energy trade, although it also includes a brief section on some of the non-trade isues in the NAFTA as they affect energy. Finally there are included some brief conclusions Background GATT and exergy {In understanding the special importance placed on energy in the FTA nego- tiations and, to a lesser extent, in the NAFTA negotiations, one must besin with a consideration of the place of energy in the GATT. To a large extent, the negotiations on the FTA were aimed at subjecting trade in energy good: to the norms! disciplines imposed on goods in general by the GATT ta tht respect, energy bore much in common, albeit for diferent reasons, with the agricultural rector. In both cases the FTA negotiating parties saw the GATT rules as inadequate to meet their needs ‘Where dots energy fall under the GATT? With the exception of hydroclec- tricity — which is arguably not subject to GATT discipline because itis no: a “good” but a service — energy goods are in theory no different than any others and are subject to the normal GATT nus. In practice, ofcourse, the picture has proved somewhat different, owing in large part to the specia strategic significance that nations have historically attached to the energy sector, and especially given the importance of this sector in the decade following the OAPEC embargo of 1973, In the enc, the GATT in many respects has been more relevant for its exceptions than its normal rules in the energy sector, The two most import: tant of these for energy goods are the exception relating to national security (Az XXI) and the eteeption relating to conservation of exhaustible natural resources (Art XX(g)).' Neither of these exceptions, of course, gives a state carte blanche to ignore its general GATT obligations; indeed it could be ‘argued that the language of the two provisions, taken at face value, is some- hat restrictive. For example, the security exception refers primarily to ‘essential security interests” relating to nuclear or military activities or in cases of “war or other emergency in international relations”. Similarly, the ‘conservation exception may only be invoked for measures that “are made effective in conjunction with restrictions on domestic production ot consumption”.* ‘in practice, the GATT parties have been rather generous in their interpret: * Ate slat ate GATT Ac X0.2(0) ital hover of een produc Art AX), export restos in sippor ofa Jomeatiprocang indy, where Goes pices ae Sd {low word pos, pursan: toe goveameatsabiation pin ad Art SX(), roduc io (ocr or shor spp Thus int Sopeond decision, wi the principe of conservation was acoped, the implemetationof i under whch tbe United Stats imposed ifereatal burden on imported sito astm cetaup ine United States, was found abectonable: Unie Scr Tes Se Perle sed Crain Imported Subtncs, GATT Duput Seeman Pal Repo, ‘Mlopted 17 June 967, ISD, 40h Supp. (Genera GATT, lune 198), eroded (48) Brit Leg Mat 36,6 JOURNAL OF ENERGY AND NATURAL RasouRces Law 1994 ation of these exceptions in justifying their own restraints on energy trade. ‘Occasionally, such actions have indeed come within the purview of GATT dispute settlement, but more typically, given the sensitivity of the issues, ‘concerns relating to energy trade have been dealt within an entirely diferent fora — most notably through the OECD and the IEA.” (Canadian energy policy and the FTA In asessng the place of exergy in Canada's approach to trade negotiations, ‘one must take into aecoent ot only the international obligations owed (Gihether under the GATT or under the Intemational Energy Programme), ‘bu also, even more importantly, the domestic force shaping Canada’ energy policy. Ths was trie most obviously in the negotiation of the FTA, ‘which in most respects cast the dic from which the NAFTA has Deed Stamped. The background to the energy chapicr of the FTA has been described in detail elsewhere it may be seul, however, to review briefly the broad picture ofthe evolution of Capadian energy policy a8 & sting for the further discussion of the NAFTA” ‘Briefly, Canadian energy policy beginning with the early 1970s rected ‘wo important influences, one historical and domestic, and the other more recent and international The latter was the OAPEC oil embargo of 1973, ‘which was reflected in a seis of nationalistic measures worldwide in produc™ ing states. These measures, initiated during a period of rapidy-rsing energy prices, were generally designed to capture economic rent, whether by tax- tion of by natonalisaticn of the energy sector — or, asin the case of Canada, by some combina‘on ofthe two. In Canada, an editonal influence at play Was an historic undereurrent (albeit in some decades the cureat ran ‘very deep) of economic nationalism that had as its primary theme the ever= present threat (or atleast perceived threat) of continental absorption into {he United States. Indeed, the OAPEC action came precisely during one of those periods when the mood of Canadian nationalism was ais strongest Tn the energy sector the concurrent rise in nationalist sentiment ané ol prices was reflected in inceased controls on foreign investment in Canada (hich paralleled a more general move inthis regard across industial sec- tors) and increased direct government involvement in ol and gas through » The mast important arenent i hs respect is hat amongst OECD astons oo eneey sharing: Agreement onan intemational Energy Programme, Pars, 18 Nove 974, (1973) Tin Lag Mot 1 TIAS No 7B, a ended. ‘See for example, A ude 2087 Quinn, "Eoergy Aspects of the Canada-Usied States free Trade Apres (989) 2 Car Per Tax’) 1; J Owen Saunders, “Energy. Naud ‘Resourns ad te Chnade-Uned Say Fe Trade Agreement (1990) 8 JERE Feigao te aot ats tackround bear some eikng silt in themes to te evtionofeury ply in Meno: J Owen Saude “The Meio Factor in North ‘Amen Fie Trade A Canadhn Perspective” (191) 9 JERL 29, x 20-48, "W"heglanng i the mid-l9e0g Canadian poly maker Sad begun serio ciation of the tar fare appre to fore investment ht had charctrsed Canada eel ie [Bsn and which had son te velopment what many ees dese t banc ant ‘ronan ornate by US fm aa thr subarer. What bad bee sonsieed generally [ran unlloyed tent to the ingeeaive growth ofthe Canadian economy ia the Posen ‘ford was eapraed in two tportant So fers opr one 968 (Tak Fore on he Sracture of Ceoadian Ladue (M Watkins, Chsnnan), Report. Foreign Ova and the Sractre of Cano nds (968), abd the hen 197, o one Jar tfore te ramatic kang ia the Wedd oll industry (HE Gray (Charman), Foreign Imesmen! Conde (972) ~ both of which advocated a wrong natonaisueagndn to couterinlance ie eet ‘ot forelg but expecially Ameria) owners.Vor 12 Not A CANADIAN PexseacrivE 7 te vehicle of a Crown corporation, Petro-Canada.!! These actions culmi- nated in 1980 withthe introduction, in the face of strong apposition from the producing provinces, of the federal National Enegy Programme (NEP), which attempted to insulate Canadian consumers irom the impact of rising world oil prices (through a “made in Canada” price significantly lower than the export price) and which resulted in a signifcant transfer of revenues from the western provinces (but especially Alberts) to central and eastern Canada, Ultimately ofcourse, the predictions of continuously rising energy prices upon which the NEP was prediceted proved wildly inaccurate.” The early 1880s saw the collapse in World ol prices and a recession, both of which ‘moved the country towards « consensus that many aspects of the NEP were inappropriate; this consensus was possible precisely beeaute the tax spoils sociated with high energy prices were no longer present asa spur to inter. retional rivalry. The consensus was cemented in policy withthe election of the Mulroney government in 1984 a government with heavy representation from western Canada. One consequence of that election was the conclusion of two federal-provincial agreements, which effectively decegulated crude oi: prices! and constrained the National Energy Boards powers in the ‘epulation of exports of natural gs.” ‘The dismantling of the NEP was accompanied by a relaxation of the controls that had been instituted on foreign investment begining in the 10s, The most dramatic indication of the Canadian goverament’s ow approach in this respect was the repeal of the Foreign Imestment Review ‘Act which had emphasised the need for "Canadians to maintain effective ‘control over their economic exvironment” (s2(1)), and its replacement with the Investment Canada Act," which had a its purpose "to escourage invest. ‘ment. in Canada by Canadians and non-Canadians” (62; emphasis supplied). — , ‘Against this background, then itis clear that energy was more than just another element in the FTA negotiations between Canada and the United States. While for the United States the inclusion of energy provisions in the FTA reflected an important foreign policy goal that i, itproving energy seeurity through the creation ofa de facto continental energy market for CCenada this inclusion was just as much the implementation of a major change in domestic policy. Indeed, in the producing provines of western Canada, and most especially in Alberta, the Agreement wat “sold” on the bass that it would ensure there could be no return tothe day ofthe NEP. Under the Pero-Camads Act, SC 1974-78-16, e61,eubegueniy RSC 1885, P11, 8 sded Toei, Mince and Retuzee Can, Dh Notion! rary Programe (1980). 1 The Progrenme had peice n goadrpling of pre fom HD 0 1980, "The Westem Accord, An Agreeneat bree the Government of Canada, Altea, Sudacheyan and British tunis on Oi and Gas Pung sd Texto, March 985 ope: ‘ded in Candin Tsute of Resores Law, Canada Bacrey Law Sore (CBLS). Arta Seieor ‘Ageement Among the Governments of Canada, Alberta, Brith Colembin and ‘Suaatchewan on Natural Gas Marks and Peis, 31 Ouober 185; repedaced i CEU. ‘Aterta S007 Sc 913-74, cas, 5 SC 1985, e305 now RSC 1985 ist Supp, 62 * The evolution ofthe Canadian apres towards frtign invest eds in pra, ot,8 JOURNAL OF ENERGY AND NATURAL RESOURCES LAW 1994 In effect the international obligations undertaken inthe FTA were advertised 48 a constraint on the ability of future federal governments to pUrtue a range of domestic policies. Perhaps mot surprisingly, this very fact was the source of much ofthe strong opposition to the Agreement i the consuming region of central Canada. The FTA in Canada, then, was an important document with regard to the nature of federalism, in a way that woule have seemed strange inthe United States (although pechaps notin Europe. "The centrality of energy concerns to the FTA is reflected not only in the ‘Agreement itself — which devotes @ separate chapter to energy — but also, and perhaps even more vividly, in the negotiations preceding the agreement Itis striking, for example, thatthe chapter on energy issues, which in many respects merely repeats the provisions from the general chapter on trade in ‘00d (and indeed is in large pat redundaat, given that enerey goods would also be covered by that chapter), was negotiated fist, wih is structure then being copied into the general chapter. For both Canada and the United States the primary concera underlying the energy provisions of the FTA. was one of stability in energy trade, although the underlying interests in such stability were of course much diferent. Inthe United States, the primary interest, as noted, was in asuring 4 reliable (continental) suppiy of energy; in Canada, the interest was in assuring an unimpeded source of energy demand. The energy chapter of the FTA reflects an accommodation of both those interests by limiting the excep tions that would be permitted exporters and importers in escaping their GATT obligations. The specific details ofthis accommodation are dacussed ‘below in the discussion of NAFTA, which in most respects adops this accommodation, albeit with some important exceptions to refect the special interests of Merico. ‘Canadian objectives forthe NAFTA negotiations Generally ‘Canada was not the prime mover in initiating the NAFTA negotiations snot surprisingly, since itis clear that Canada will be least alected by the implementation ofthe Agreement, Nevertheless, once the move towards free trade between Mexico and the United States was announced, the Canadian ‘government felt that it was in Canada’s interests to join the negotiations ‘The reasons for this willingness to participate, despite the bruising political struggle that had accompanied the fight over the FTA — and which to a degree has continued in Canada since the pastage of the FTA — irvolve not only the trade relationships with Mexico and the United States, but also the implications for trade and investment with other countries, "The Canadian Government has suggested that it had three basic goals to the NAFTA negotiations: (eto guin access for Canadian goods, services and capital to Mexico ...on an equal footing with the United States; ‘© 10 resolve a number of specific iritants with the United States that ‘occurred within the context of the more intense trade and invesiment "pcp of Chapter Noe of the US-CanadaFie-Trade Aprecmen, Conring Trade in ergy", Mamorandara prepared bythe sal of the US Deparment of Eoeey tad the ‘tier ofthe US Trade Representative (Mines, 98), 7You 12 Nol A CANADIAN PasrecrivE 8 relationship ofthe past few years while ensuing no reduction in the benefits and obligations ofthe FTA; and (© to ensure that Canada remained an attractive location for investors ‘Wishing to serve the North American market Tis unlikely, however, that al thre objectives arsed equal weight. With respect to the first objective, for example, there may well be some increase jn Merico-Canada trade as the result’ of the conclusion of NAFTA. However, given the relatively small role that this relationship plays in Canada’s overall trade picture, this was probably not the determining factor in Canada’s willingness to become involved. Similarly, while certainly true that a numberof specific intants (some discussed further on inthis article) have emerged inthe course of implementing the FTA, thes in them= selves would aot jusiy re-opening negotiations in the context of«contnen- tal fee trade agieement. “The most influential factor inducing Canadian involvement in the nego- tations must certainly have ben the precedent that could be set by epar- ate US-Mexico deal and the impliations this would bave for foreign investment. Tn this respec, a separate Mexico-US agreement should be viewed in light of the well-known interest amongst such other Latin ‘American states as Venezuela, Argentina and Colle ia conchiding similar free-trade arrangements with the United States. These are countries that are looking to Mexico's experieoce with market reforms to jnform their own increasingly market-oriented economic policies. The clear ange for Canda ‘was that, rather than enjoying a unique trading arrangement withthe United Sates through the FTA, the latter would become merely one spoke in a wheel of which the United States was the hub. In such a stustion, the United States might become the logical ste of choke for foreign investors Wishing to reach the North (and South) American mazketplce Prorgy serior objctver ‘With respect to the specific objectives of Canada in the energy sector, itis kel that he major concerns didnot relate tothe “hub and spoke” pblem dssribed above, but eather to the posbly of ceasing some of he tade initants that had emerged expecially on the regulatory front, since the ngo- tition ofthe PTA. The major irtans in ths respect have relted to tae ‘equlatinn of maura gas exports from Canada ote Lied Sate an ue {tis dicused at some lengt futher on in thi pape. With respect to Canadian interests in Mexico, the possibility of greter trae and investment opportunities in Mexico for Canadian energy sector companies isnot an emt one, but was certainly of secondary signifianc®, given the relatively low prot that Canada has in Menoo' energy sector. This was particular trae in ight of the ‘eatvely small gains that were likey, piven Menico’e nounced stance of protecting ts eneray industries inthe negotiations (and tts piven the constitutional imitation hat would constrain Mentos n> Sato in this resp) > Canaca, orth Amecon be trae Agreemen: An Overview and Destin (AM, ts92) at10 JOURNAL OF ENERGY AND NATURAL RESOURCES LAW 1994 [NAFTA overview: key elements for Canada ‘While there are some important differences between NAPTA and the FTA, the NAFTA is at heart an extension of the FTA to Mexico (and, unlike the FT, an anticipated extension to ather countries, through its provisions for accession by additional partes), rather than the creation ofan entirely new animal, The differences between the NAPTA. and the FTA largely reflect three factors. Fistly, of course the addition of Mexico raised certain issues peculiar to, or at least more germane to, that state, which had to be accounted for with its inclusion in the NAFTA. Secondly, a number of specifi iritants between Canada and the United States, which had arisen lover several years in the course of trading under the FTA regime, had to bbe addressed. Thirdly, the experence with the FTA and with the GATT suggested areas that either needed increased clarity or which, while unad- Aressed in the FTA, required attention in the NAFTA. Of these three factors, clearly the frst accounts for the majority of changes from the FTA, and indeed it is Mexico that will be required to make the ‘most significant changes to its donesti legislation in the implementation of NAFTA. For example, the Agroument will entail a major opening of the The eft of these guidlines wns to diumataly dereate te oe of US replatory species determining the tems of trade for mort tural tae The Guidlines descrpton ofthe dese preach towne tao Sey much aise with th sentient puvequeaty exposed oases poe txporsin the Canadlan feral provinsal agement fu heer inthe words ofthe Guidelines “She market, ot governmett, shold determine the pie aad other contract" terms of “imported "gan, US buyers ‘shoul have fall freedom ."" along with the responsiity..” Tor neptating te terns of trade arrangements with foreign sells... The sovenmaems sie asurng that the public Interest sequal protected. ould state fee with bayer and seer’ negotiations of the comtecal spp of inpor arrangements Tei thi share understanding, thatthe market sould be given grater scope that was reise in the FEA, and copoly in Arles 0%, 6) ad Dos ofthe energy chapter. With respect oe NEB, thes FTA comnts 1 ce Cana. National Energy Boat Im the Mater of Review of Naa Gus Supa Desemiaton Proce, Reasons for Decision, Jaly 147, ited in CEES, Fray ED DDecston #4 Ti procedure doer not apply to storie expat, wich remot abiet te licensing requests, bu which ae approved by Bosrd orden ¢ powers wha dos oot [rovice or pb harings or objections by third part me Neon Energy Board Part VI [Regulsuon, CRE 197,18, av am. The Garston blow oes ou longer sports, Sx Cada, National Eeigy Board. roponed Chane oe appleaton ote Maret ‘asedProcedre, Reasons for Deion, GHW.1 31, May, 18, dered CALS. Pode, NEB Decaon Sed, CELS, alr a 14754-10475, 2» United States, Department of Enea. New Poly Gudelnes and Delton Orders on ‘the Regulation of nprtd Nancal Gas (Pbruay 196), The Cuidlaes are dase fe (Canad National Eng) Bout Conan Pervacun dncaton Lid Rene of Deco “Aber and Sothern Gas Led (GH), Reasons for Desson, GH RAST fe 199, “gst fe CRLS, Fedral, NEB Deon > at 10408, 408 DOE Guidlines at 6-7, cited in Canada. Nation Energy Boar. Wescurt Bury Inc — Tony Lakes Pipeline Projet, Resoes for Doo, GH 29S. Apel 19 aged (CELS, Feira, NEB Deson 6 10-6Vou 12 Not A CANADIAN PenspectivE 19 were reflected in an amendment to the NEB’s governing legislation,” which, Inter aa, instructed the Board to give effect to the FTA when exercising its powers, and, more specifically, prohibited the Board fiom refusing to auth- rise energy exports where such a refusal would be at variance with the ‘constraints imposed on export restrictions by virtue of Art 904 of the FTA. ‘Additionally, the amendment gave the federal Cabinet the power to make orders with respect to how the Board should interpret and implement the FTA; the Cabinet was also given the power to determine whether restrictions on energy exports to the United States are in conformity with Art 904 of the FTA. Apart from these statutory amendments, the NEB regulations ‘were ako amended to eliminate the “east cost alternative test” for export prices, as required by Annex 905.2 of the FTA. (discussed earlier). ‘Against this backdrop, there was a general expectation in the natural gas industry that not only bad beth countries now moved to’ market-based system for natural gas, but that this market would effectively be a single ‘one in light of the FTA, In fact, it would appear that such expectations ‘exaggerated the effet of deregulation and free trade. Early on, the NEB mace it clear that export sales of satural gas would continue to be tated dlflerestly than domestic sales, and would be subject to special conditions Some of the Board deeions inthis respect in late 1989, which relied on ‘gst-beaefit analysis to refuse permission for gas exports, generated signii- ant eoiTover and were subsequently reversed bythe Bose alia Apri 1990 (effectively rendering moot a court challenge to the Board's decisions. {At the same time the Board abandoned its use of the cost-benefit approach for export sales. Although the isue was not ultimately cecded in court, one of the important questions in the controversy was whether the Board had the jurisdiction to take such actions in light of the FTA. ‘The most serious dispute to date with respect tothe implications of deregu- lation and the FTA for natural gas trade relates to the sale of gas into the California market. In 1988, during the NEB’s consideration of an appli cation for a major expansion and extension ofa gus exper licence to Alberta & Southern (A&S),"" one of the issues the Board considered was the reliability of the California market. In the course of those hearings, the Califoraia Public Utilities Commission (CPUC) filed a letter in support of the licence extension, stating in part: “Because ofits reliability, stability and competitiveness, the Alberta and Southern supply has allowed PGAE to assemble a gas supply portfolio ‘which is very competitive under the market-driven regulatory framework the CPUC has encouraged." Influenced in part by such assurances, the NEB granted a significant 2 By SC 1950, £7, which added new ction, +191 to the National Egy Board Ae RSC 185, 1 sim ig sitauch. "The new aremeat extended th tem by 16 yeas andthe gusty bys tlion cab ‘ez. By vay of backround fo the dicsion below, the elomingdectptia cl te ition sig ever the varou players with interes athe northern Calor take ay te ef “ie norte Calfoaa market served by Paci Gas & Elects (PGKE), a local dts baton compy. nck purchases pu from tno domete plans Tenover aE Paso, wal ae fom POAE' uate, Paofe Gar Tasantascn Company (PCT), ‘Storia ppelise wish connects POAE with Canada, In Canad another POAE wats, ‘Alters Sothe (A&S),agzegtes Canadian production and lds along ter export fese to sel the ps fo PGT." Plat, more, not, at 673-76 Chal ia NEB Decision , pra, note 35, a 104709,» JOURNAL oF ENEROY AND NaTurAL RESOURCES Law 1994 extension of the natural gas licence (although not fully that which was requested). Following this decision there was a change in natural gas markets, with spot prices falling significantly compared to those agreed to under the long term licence. As a result, by the middle of 1990, there was a dramatic change in the CPUC's view of the benefits of the PG&E contracts with A&S, ‘Through a number of devsions, the CPUC in elect demanded thatthe long term contracts entered into by PG&E be re-negotiated to provide California consumers with greater flexibility: “{bJecause PGAE has entered into contract obligations which preclude ‘competitive access to bottleneck facilities, and because (the CPUC] sus- pect{s] the contract prices are substantially higher than Canadian market Drives... Renegotited contracts should provide for reduced minimum takes and improved flexibility. Consideration for these concessions shall not be higher pres for core customers."* Subsequent to this decision, and in an attempt to adapt to the changed regulatory environment, the interested partes io Alberta and California (including both producer and consumer groups) reached a compromise, Known as the Access Agreement, which would have phased in new access rules by 1 August 1994 (while allowing for some limited direct purchases fram AGS peodutets up to Tat ite TH weal ne aloes BS the restructuring of the Tongterm contracts in the interim. While initially ‘adopting this agreement, the CPUC ultimately rejected it (as did an ‘Administrative Law Judge in California) ang, inter ali, ordered & move to fall capacity brokering by 1 October 1992." In a reaction to these various actions by the California authorities the ‘Canadian Petroleum Association (CPA) fled an application wih the NEB fora review of its orginal 1988 Decision approving the long-term exports (GH.S-88). Among other things, the CPA requested thatthe Board “immediately vary all short-term export orders to add a condition that prohibits deliveries into the pipeline system of [PGT] of any Canadian 8 destined for utilisation inthe Norther California market that isnot fis presently contracted by AS for sale to PGT." “This application was eventually granted by the NEB in June 1992, and the condition remains ia force today, wile the varios parties conve to egotate an acceptable selement to the dispute. ‘The dispute and the various tibunal decisions taken inthe course of it raise a number of important legal and regulatory isues. However, the inter- est inthe dispute ere i in the issues that it raises wit respect to trade law s regard isthe June 1992 decision of the NEB, wich involved a discussion by the Board of is powers subsequent tothe implemen. tation of the FTA. The decision also includes an intersting relerence to + CPUC Decision 90.07.65, cited in ia 10471 {Beton lire Ein Conn, hein he UC te ne stomping to rsiad the coral obigatont whch i ha previously core, The CEC ‘Rpysaot on poate reproduced in NEB Drobon #8, fat 10413, 10-74 "SGPUC Deson 911-08, 6 November 199. Capac brokering refers to "te ang ‘cat by shipper of is contced transportation cacy eiements to acter ‘tout the need for coset ofthe pipeline company NEB Decision, 3104713. ‘Stooure x key clement inthe move ost aed eae tat would pomere competion Sng decouple the various parts ofthe tera ar nds. NIE Desa i 1001 (Vou 12 No1 A CANADIAN Pensecriv a GATT practice reference which one Would not expect to seein the proceed- ings of most energy regulatory tribunals ‘One ofthe issues before the Board inthe application for conditioning al short-term export orders was whether or not such an action Would contra- vene the FTA, and thereby violate s 119.5 of the NEB Act. Two possible Contraventions of the FTA were argued: a violation of the prohibition on ‘minimum export prices in Art 902, and a violation of the constraints on export licensing in Art 904, Both of these arguments were zeected by the Board. On the issue of minimum export prices, the Board pointed out that “prices are not dicated by the Board but are set by the Parties through negotiation.”* Similar, the Board concluded that its action complied with all three sub-paragraphs of Art 904; “In particular, by preventing displacement of long-term frm volumes by short-term interruptible sales, the Board is not reducing the proportion of {otal export shipments of ais made available to the US relative to the total supply of gas available to Canada. The requested condition is not imposing # higher price for exports than the price charged domestically for gas. Finals, by limiting the displacement of long-term firm exports | longsterm interuptible exports, normal channels of supply to the US would not be disrupted.” (One aspect of this case which is of particular interest from the perspective of international trade law is that in arguments submited, thre was reference not only to the FTA, but also to GATT, practice. For example, British Columbia, appearing as an interesied party at the hearing, noted the alfi- mation of GATT obligations in Art 902(1) of the FTA, and then argued thatthe Board should look tothe relevant practice dealing with the interpret- ation of GATT Art XI(“General Elimination of Quantitative Restrictions"). In this respect, BC supported its arguments by reference not only to 4 decision flowing from the FTA’s dispute settlement mechanism, but also to ' panel decision ofthe GATT interestingly, both were decisions which went ‘against Canada and in favour of the United States). While the Board did not refer specifically to these decisions init reasons, it did note that on the {question of FTA, it was “convinced by the arguments ofthe (parties inciud- ing] BO”? oe cing question that ent tnanevere inthe cane was wiser the actions by the California authorities were in confct withthe spirit, if not the letter of the FTA. On this point, the NEB ended its decision with this rather eryptic remark: “The Board makes no finding with respect to the actions of the CPUC in respect ofthe intent of Canadian and United States energy policy or the Canada-United States Free Trade Agreement. The Board doesnot believe itis the proper authority to adjudicate on these matters."* How does the NAFTA add to the provisions of the FTA in a way that would affect a dispute such as that between Alberta and California. The NAFTA adds little to the provisions of the FTA, and what it does add is couched in very broad language. The NAFTA incorporates the regulatory maar, © Tha 1947s,2 JOURNAL OF ENERGY AND NATURALRESOURCESLAW 1994 provisions frem the FTA described above,® although it exempts Mexico in this regard (1o which the provisions are largely ielevact in eny event), With respect to new provisions, there is only the generally worded Article 606, which provides: “I. The Parties recognise that energy regulatory measures are subject to the disciplines of: (2) natonal treatment, as provided in Article 301; (b) import and export restrictions, as provided in Article 603; and (©) export taxes, as provided in Article 604 2. Each Party shal seek to ensure that in the application of any energy regulatory measure, energy regulatory bodies within ts teritory avord disruption of contractual relationships to the maximum extent practi- cable, and provide for orderly and equitable implementation appro: priate to such measures.” [emphasis supplied] Alldiough this provision is clearly aimed at the current dsputes that have ‘been waged over the shipment of Canadian natural gas tothe United States, it provides litde in the way of substantive egal obligations other than safe. suarding against egregiously offensive regulatory actions, ‘The relative weakness of the regulatory provisions ia the FTA and NAFTA may not, however, give the full picture ofthe eflct of the agrec- ments on energy tribunals ii Canada and the United States. Most import- antly the precise text may underestimate the degree to whica the agreements ‘make such tribunals conscious of the international trade ‘aw implications (of their decisions. This may not only involve a consciousness of the [FTA/NAFTA regimes, but also a wider appreciation of GATT jurisprudence (which, as noted above, was cited to the NEB in its recent hearings on California gas exports). Nor is this true only for Canidian tribunals, although this naper has focused on the Canadian perspective, There is also evidence, for example that the FER is likewise conscious ofthe significance cof FTA obligations in its practice.” National security ‘The GATT provisions with respect to national security have been subject to some abuse in the energy sector — an abuse that is posible because of the relatively wide reading of the GATT Art XXI exception inthis regard, ‘The FTA tooka two-step process in dealing with national security, a process that is tied very directly to GATT practice and that is replicated in the NAFTA. Firsly, there is a general Article dealing with rational security (ETA, Art 2003; NAFTA, Art 2102) which essentially, with some minor changes in wording, reproduces the obligations of GATT Art XXI. Secondly this provision is subject to two qualifications, one setting a more relaxed test of national security with respect to government procurement, again adopting GATT practice as reflected in the GATT Procurement Code (FTA, ‘Art 1308; NAFTA, Art 1018(1)),” and the other setting « more stringent ‘Standard with respect to the ability of parties to use the exception in © That Arto08 and Aanex 02 ™ Ont pour ee the dacuson in Plat, pra, not 43, The two APpeent inthis respect adopt te relent provision in GATT, Agent on Goverameat Pocuemeat (GATT Procurement Cole), 36 BISD "S (Gusers GATT ‘Scretarat, 18D), Ar VILL The FTA sdope the aise by reference, he NAFTA doe at ‘eer oth Atl, but reproduce ts wording vetatim:Presuabl the nae spac ‘elt th fit tht Metco i ot «party tothe Procurement CodeVor 12 Not A CANADIAN PrmsrEcrivE 3 restricting energy imports and exports (FTA, Art 907; NAFTA, Art 607). ‘The two agreements are essentially identical with respect to Canada and the United States; Mexico, however, is exempted from the application of NAFTA Art 607, In the result, Metico is subject to GATT disciplines in Art XXI and the Procurement Code, but not to the additional restrictions introduced in the FTA for Canada and the United States. The exception {for Mexico reflects the special place the energy sector occupies in Metioo's national sentiment, Indeed, even the subjection of energy to the discipline ‘of the GATT Code is a significant accomplishment. c i Energy sector investment ‘The FTA departed in a radical way from the framework of GATT by includ- ing investment in its coverage (through a separate chapter, Chapter 16); 10 this respect, the NAFTA once again largely follows and builds upon the ‘example set by the FTA. As is true for the provisions dealing with trade in goods, and energy trade in particular, the investment provisins of the NAFTA very much reinforce the domestic politcal goals of the Mulroney In the case of investment, this means promoting as much as possible the free flow of foreign investment into Canada, This appeoach was fully consistent wit the goal ofthe United States going into the FTA nego- tiation, which was to “produce a Canadian policy environment as open to inflows of foreign direct investment as [that in the United Stats]."" The ‘most important aspects of the FTA with respect to investment are those that impose a national treatment standard on the establishment, acquisition, conduct and sale of businesses.”* Amongst other provisions, the FTA. also adopted a common view of what is acceptable expropriation (Ar: 1605) — ‘hich is less significant in that it probably accords with the national practice of the two countries in any event™* — and a prokibition of performance requirements, an issue that has in the past been an irritant in Canada-US relations. ‘The investment provisions are, however, subject to a number of exemp- tions, the most important of which forthe energy sector are set out in Annex 16073 (4). This Annex exempts the oil and gas and uranium industries from the FTA provisions regarding minimum levels of equity and rights o dispose of investments (in Art 1602(2),(3)), and regarding performanes require- ‘ments (Art 1603). In these respects, there is merely an agreement not to Institute policies any more restrictive than those in place as of 4 October 19877 ‘As with much of the rest of the NAFTA, the investment provisions as between Canada and the United States are largely a carry-over from the FTA. This is equally true for those investment provisions relating to the energy sector, where Annex I (at IXC-2— I-C-6) essentially preserves the Testimony of Ambassador Clayton Yeutee, US Trade Represaatie, to te Senate Figane Comite (Apri, 186), ced in Batts and Lock, pra, note 4, a 566 SS FTA, An ote, 1 rl 1603 tnpoae a recondition for expropiton the leet pill put fore by Wester states pule purpss, de proce, non darimiaain, aod prom dequle {ih efivecompeantion at fa maket vale the poe are Sorted a pr Bot 9, 25,4 JOURYAL OF ENERGY AND NATURAL RESOURCES LAW 1994 status quo of the FTA. There are investment-rlated provisions in the NAFTA which are new to that agreement, most notably those providing for arbitration in the settlement of disputes between NAFTA partes and foreign investors from other parties.”* However, these provisions are primar- ily aimed at concerns with Mexican practices, and by far the mejor adjust- ‘ments to the investment regime will be in that country. Even with respect ‘to Mexico, however, these provisions are not very relevant in the energy sector, which is largely insulated from the investment provisions by virtue fof Annex I and Annex 602.3." The two areas where there are significant possibilities for foreign investment are non-basic petrochemicals, vhich is subject to the general rules regarding free flow of investment, and certain aspects of electricty generation. With respect to the former especially, by “locking in’ the earent (and relatively narrow) definition of “basic” petro- chemicals (where there are constitutional restrictions on investment), the energy chapter opens up a rangr of investment opportunities in other petro chemicals for Canadian and US firms — opportunities that are unlikely to be reversed by a simple re-lassification by future government, Energy sector serrees ‘As with investment, the inclusion of services in the FTA marked a major increase in coverage when compared to the GATT, and indeed in many ways may foreshadow future GATT action. The general approgch taken towards services ia the FTA was to treat the issue prospectively. That is, over a wide range of services, there was agreement not to increase the level of barriers to trade, rather than to require amendment of existing laws; existing restrictions are thus not subject to the obligations (Ast 1402(5)). ‘The basic principle accepted in the FTA is one of national treatment (Ast 1402(1)), although’ this is subject to. some important exceptions (Art 1402(3)). Apart from the general provisions, the FTA also sets out some specific comnitments in certain sectoral annexes, which may be added to in the future.”*The approach to services found in the FTA isin essence adopted, and expanded somewhat, in the NAFTA (Chapter 12), which again accepts the basic principle of national treatment (Azt 1202), but whch also limits the application of the agreement so as to grandfather existing restic- tions (Art 1206). In the case of energy-related services, however, there is an important 4ualfication that is particularly relevant to Mexico; that is, the NAFTA explicitly provides (in Art 1201(2)(c)) that the serves chapter does not apply to government procurement (including for this purpose state enterprises). Giver the virtual monopoly position of the PEMEX aad CFE (Comision Federal de Electricidad) in the Mexican energy sector, ths effec- tively removes most ofthe purchase of energy services by Mexico fiom the 1% NAFTA, Cb , etonB 7 Thelate of which ears to the Meicn sates munber of sate actives, chung investment and provsinn of eves a TG) exploration ad explotaon of crude ol and natura! pas: resing or prosing of rose oll and natrl gs and prodoton of artical pa, bane poco tnd thet ‘Rednock aod piper ‘Adina, the nine Anse, i 1(6) slay eserves to he state oregn te, well as tragaporatin, storage aad tribution activites nthe ast “ries annexes (al found in Annex 1404) rele to afchiectur, tour, ad vmputer services tnd eecommuneatons network-based eabsnod seve.Vou 12 Noi A CANADIAN PansrctiVE % ambit ofthis chapter. The more important provisions of the NAFTA ia ths respect therefore ace found m the chapter on government procurement (Chapter 10) ‘With respect to government procurement, the NAFTA does indeed create significant new obligations for Mexico, which have the potential for signif- cant impact in the services sector.” This is especially the case given thet ‘Menico is not a party to the GATT Procurement Code. Both PEMEX and CFE are made subject to the government procurement provisions of the NAFTA," however, the full obligations for PEMEX and CFE will te phased in over a tet-year transition period, beginning with an immediate ‘pening of 50 per cent of procurement to NAFTA disciplines in the fist year ofthe Agreement." The thrust of the NAFTA provisions in this respect is to provide for open and transparent bidding for Canadian and US sup- pliers, so as to put NAFTA suppliers on the same footing as domeste ‘suppliers. There is also provision for each party to maintain a bid challenge procedure (Art 1017) Finally, there is cne other significant provision of the NAFTA touching fn trade in energy-rlated services. This is found inthe energy chapter i and is the obligation of each party to allow is state enterprises to negot performance clauses in their service contracts." Clearly, this provision i Gitected at Mexico, and especially PEMEX, which has been unable histor cally to include such clauses in its drilling contracts in particular (let alone to conclude risk contracts). In the past, PEMEX was restricted to offering fla fes in this respect, regardless ofthe profitability of the well discoverec. Presumably this will increase the flexibility of PEMEX in offering contract terms to foreign drilrsin the future, thus increasing the likelihood of foreiga provision of such services Conclusions The NAFTA follows very much ia the path already cleared by the FTA Certsnly, the NAFTA adds to the FTA in some important respects; how. ever, the essence of the agreement isan extension of the FTA principle 4 larger arena. One of the results ofthis exteosion, especially iasoar asthe NAFTA anticipates the possbilty of other partis joining the agreement, is thatthe documect is much longer and more complicated that its pede cessor. Thisisnrgely owing to the various annexes that deal wih the special Gircumstances of each party ‘What is tue of the NAFTA in generals tre ofthe energy provisions in particular. There is litle new in this respect which is not accounted for by the special problems attendant on Mexico's participation — problems that aise fom the special constitutional provisions relating to energy and from the concomitant and dominating role of Pemex in the Mexican hydrocarbon sector. While Mexico has made some important concesions in the energy Sine the cent sear in nither Canad norte United Stats i controle by paral celeste sac a Pemey the goverment procrement provision have fo sigscat input (nthe ener sotorem hon count ‘Pursuant fo Art 1011) apd Aanex 1001 14-2 (8) 5 Aaner 1012s Bea after fl npementatce, howeer, Mexico wil ail be ned © set ate rom th aplcon ofthe Apetneat al of OSS00 min» eatin Panes tad (Grp contracts Anger D126. Amex 602348),26 JOUINAL OF ENEROY AND NATURAL RISOURCS LAW 1994 sector if judged cn the bass ofits inital position — for eramplein the areas ‘of government procurement and non-basic petrochemicals — by Canadian land US standards, the Mexican energy sector i sll a relatively closed one, especially with respect to foreign investment. ‘As between Canada and the United States, as noted, there has been litte change beyond tae breakthroughs already established in the FTA. There is some minor attempt to address additional irritants in the regulatory area that have continued to spill over from the deregulation of natural gas trade in the two counties. However, there is litle herein the vay of new binding obligations. What is of perhaps most interest in tis respect isthe growing sensitivity of energy regulatory tribunals on both sides ofthe border to the international trade law implications of ther actionsGATT, NAFTA and the Trade in Energy: A US Perspective Emest E Smith* and David P Cluchey** Introduction From a US perspective, it would be dificult to understate the importance ‘of the international trade in energy resources, especially petroleum, to the country’s economy. In 1990 the United States consumed approximately 17 million barrels of oil a day, but produced only 9.68 million barrels Projections for the remainder of the century suggest a steady increase in the sisparity between petroleum consumption and production, By the year 2000 US production will have decreased by at least one million barrels a day.” Even the most optimistic forecasts, which appear to assume enactinent Of federal legislation that encourages energy conservation and promotes dom- estic oil production, suggest that by the turn of the century US consumption will exceed production by over 9 million barrels a day, with imports totaling 52.5 per cent of our daily ol requirements > ‘Trade in natural gas and coal currently lags far behind petroleum, but ‘ay become increasingly important within the next two decades. At present ‘most of the natural gas cossumed in the United States is produced. dom. cstically. Less than 8 per cent is attributable to imports, and vrtualy all of this comes by pipeline from Canada, *In contrast with petroleum and natural 4233, coal figures in US intemational energy trade primavily as an export. In 1990 the United States produced approximately | billion short tons of coal.® Although it consumed most of its production, it exported 106 million + Rex Baker Centeaial Carin Nar Resouces La, Univesity of Texas Law Shoo, ‘Austin Texas. Profesor, University of Mai, Schoo of Law, Prt, Maine Us erg) Information Adniatraen, ntratinal Energy” Outlook 1992 10-11 (DOEMIA'192), The figures ide petrol Served fom al tare, satrl ‘igi aod ery gan aswel as cade of rodacon of reo slowe sconce, the gure i sgicnty smaller, roping to an average eniy production of spronimtely§ rilon teres Ok 3 * Wtio rect years natural ss import frm Canad he arcvnted for been and {per ent of US conmumpion See Crass Border OU & Gat Cane US Brgy Trad3 (Pe [rely om), CS tery orang Admit The ut fo Nal Cor Inport Supporting Anais forth Naina Energy Sategy$ (DOBIETA 1992) The top ‘eps tee 9 aad 100 pr cn’ ofthe tral as ponte atthe US fe * Coal isalso important the Use Sates For eampe dung thea 198s Colas ‘ong made some inroads amoog tans in he ssern pat toe const "See Interantional Eoergy Oulok 1982, ups note ya 3, 272B JOURNAL oF ENERGY AND NATURAL RESOURCES Law 1994 short tons ofcoa, ranking second to Australia as the world’s major exporter of internationally traded coal.” Whether coal exports will continue to grow fr deerease depends upon several complex variables. Decline in European production and world-wide demand for coal-generated electricity suggest that US coal exports will increase, Domestic fuel needs could, of course, reduce the availability of coal for export, but increased domestic demand is likely to be heavily influenced by environmental legislation, such asthe US Clean Air Act, concern over acid rain, development of clean coal technol- gies, and the current administration's choice and implementation of an nergy tax. ‘The GATT has now been applied for over 40 years, It does no: deal systematically with energy and to dateithas only occasionally hd sigaiicant impact on the energy trade-* In 1989 the Canada-United States Free Trade ‘Agreement (CFTA) took effect, and during 1991 and 1992 the North ‘American Free Trade Agreement (NAFTA) was negotiated between Canada, the United States and Mexico,? These free trade agreements were ‘negotiated inthe context of the GATT. Each agreement contains» chapter specifically devoted to trade in energy." While neither regional trade agree- ‘ment i like to have a major immediate impact on how the trade in energy is conducted among the parties to the agreements, the energy chapters are significant aad establish some useful ground rules‘ The presence of these chapters in CFTA and NAFTA suggests that the energy trade will be a ‘matte of coatinuing concern in the negotiation of regional trade agreements fand, perhaps in the negotiation of multilateral trade issues. Tm this aricle we examine the current status, background and scope of INAPTA, as well as its relationship to the GATT. We review the treatment of the energy trade under the GATT with particular emphasis on the US energy trade, We consider the impact of NAFTA on the energy trade of the US" with Canada and Mexico, Finally, we offer some concding ‘observations [NAFTA: background and prospects ‘Reasons for NAFTA ‘Canada and the United States are each other's largest trading partners"? “Mexico is either the second or the third largest trading partner of the United 4 See the disesion a at woes 115-123. » The Canain-Unted Sats Tree Trade Agreement (CTA) 27 ILM 28 (1988) was eg0- tiated from 146 to 1966 abd came ato ore on | Jnvary 1989. The North Arran Tee ‘Trade Agreement (NAFTA) is ted to come nto fore on | agua 199. Dificlies in ‘Sonn pasag ofthe inipenenting lepton nthe United Stter may Sythe apo ‘Thch RAFTA come na free. So th dcuon, isha note 33, "Warte 10 of Chapter One ofthe CFTA spe tat ealhig a ue trae area CCacada andthe Usted Stats are ating content ith GATT Arle XXIV. Arle 10. ‘of Chapter One of NAFTA tothe same elect CBI, Chater Nine NAFTA, Couper St 1 Sethe dies, na at notes SI, 1 {991 Tntrtlonal Montry Fuad gre put Caad's sare of United Sates sports at 171 perc wie the US sate of Cannde'sinort i 82 per cot. For paste of ompaion, Japan the oad lars trading parte of bot the US and Cana, ups 1Ssiper cet oF US import a0d 61 per cent of Canada's tports: The Heonamat, 18 August enya StVou 12 Nol Garr, Narra AND TH TRADe mv ENEROY » States." Both countries are important sources of US oil imports. During the first term of the Reagan administration, imports of crude oil from Canada doubled, making it the first or second largest source of US crude oil imports. Daring much of this same period Mexico accounted for 14 per cent of the crude oil imported into the US! Canada and Mexico are the only sources of pipeline imports of natural gas, Currently, virtualy all ING comes from Canada,” although Mexico has been a source for various periods in the past * Most commentators expect imports of natural gas to ‘row by the end ofthe century because of shifts to natural gas in preference to coal and nuclear for generating electricity,” pressure from the current administration, which has emphasised environmental concerns, and the increased use of compressed natural gas (CNG) in motor vehicle fleets. ‘Although imports of liguified natural gas (LNG), which are now limited to ‘mall quantities from Algeria, may grow within the next 20 years,” most ‘of the increase will probably be pipeline imports from Canada and Mexico Projections on both sides of the US/Canada border indicate that imports of Canadian natural gas will increase until the middle of the current decade, ‘when they will level out.”* Moreover, thre is some expectation that the US will resume imports of natural gas from Mexico, which were suspended in 1985. Current projections suggest that a steady supply of Mexican natural gas will begin being exported by the end of this decade and will initially 4+ go itnaonal Monetary Pond fees pt Mex hse of US igre a 7 er seat and the US share of Mexan imports at 123 per cn a 199, Canada wat Medoot fear ase tang pater spe ero of Mess tpn Meter second td thelr tradi partes a 981 wer apan aod Germany. sopra 3.2 Pr coat 1 Sper cet of Mens port expe. "se Chan Dorr OF Gat, Conde US Boy Trade, pre ote 4 + Si Rater 1 Beck, “Sond Hat Econom Cuneo LO Pcs, Oi & Ga, 29 ‘aly 101, ‘Win reat years tural gs import from Canad as ecoeted or between 5 aad 1 percent of US consumption. Sec Cots Dod OF & Gat. Canis US Brgy Trade wpe ‘ete ad The Oa Jor Naa Gar Igor paste Tas eres Sean 9 ed Tope en ofthe maa us ported te OS fd. 8 The Ouok for Neel Gat Inport nga ote a 5. 2 Alsou as raza afi os ago ver 39 of the United Sate’ eetity was tse om burn cou! apd lost 2 pe cn om nila powered facioe, ve SES ler ave ea Se fo at eather," os Dosa Sous ff Borg in US", Oi d Gas J 30 September 191 t 10, Moe exenve sls gata fs ae planned before the ead of ts entry: althogh his we f natura pat may eat ing ‘be ceting 2 prod when coed stats te eget fo coo line See Inertia! Brergy Outlot 1932, mp ote Is 20. 1968 sboat Ss mich lecrsty (per xt) wat Booed by hjrosee power at wat genre Oy bcsg ‘hurls. pe com eo txounted fer aout 34 pr cnt of the ccty pense ete 5 Some commentator sagas tht ppl ingots rom Mexico wil recommen exe 2000 tneratnal Energy tok WBE agra Boe 35 The Ou fr Nand et Inport pea te & “eth US Bry Information Administration pris lf mpots hat aches 200 ‘et anally a emai cosai for aprotinatay 10 pa, wiea pnealGoha obs. The Outlook Jor Newel Ga Inport. apa pote 4 Sought has ores spice) fewer oer eae of US imports, te Canaan Naboo! Ente Bou at ako eve} {EICUS comunpton of Canaan gs oul gow upd wl the mie, od hen Stabile National Hoey Board, Calon nergy Sippy and Donnd Toad 4653 sae,30 JOURNAL OF ENERGY AND NATURAL RESOURCES Law 1994 stabilise and then begin to rise during the frst three decades ofthe next century. “The negotiation ofa fre trade area among such important trading part- ners who also happen to oecury jounlly most of the continent ot North ‘America, reflects «natural evoluion of thee trading relationships. NAFTA isthe calmination ofa series of bilateral agreements, the most important of Which is certainly the CFTA. The establishment of ae trade area between Canada and the United States provided an essential foundation for the NAPTA negotiations. In a aumber of instances, provisions of the CFTA have either been incorporated ino the NAFTA to govern certain aspects of trade relations between Canada and the United States or have supplied the Substance of similary-worded provisions of NAFTA which govern the con- duct ofall three partie, * The CFTA provided an opportunity forthe nozo- tistion and settlement of a number of important points of controversy between the United States and Canada, Italo led to the creation of several ‘mechanisms, particularly in the realm of disput resolution, tat have proved uccessful and were drawn on in the negotiation and design of NAFTA. ‘The United States and Canada have announced that once NAFTA comes into force the CFTA will be suspended, reinforcing the perception that [NAFTA either incorporates or undertakes t improve upon the provisions of the CTA. During the latter bal of the 1980s, the Mexican government removed significant obstructions to trade end foreign investment inthe Mexican econ- ‘omy. The United States and Mexico entered into « numberof bilateral ‘greements during this period These agreements provided the mutual ‘understanding necessary’ for the negotiation of a free trade agreement 2 See The Outlook fr Nara Gas Import sire noe 4, Unde he potions, mater si ca as sce competing with coal in goceatg ety eed making exons forges at ful for vices, Soo aac, spa not 1 "Sc, eg, NAFTA, Annes 302.25), (10) (roving fo ri imation betwen the US| and Cana parson to Anne 401.2 of CFTAS NAFTA, Anes S00, Appenia A: Canada (Gantainng the Ast Pats prerved by the CETA a te baueapemect ring tothe tae in stomotie product betwen Camas ad the United Satay NAFTA, Anne 300-8, ‘Appendix 21 (Cana nd the Ue Sates wil elite dates on exe aad aparel goods inVtsoréance ith CFTA), NAFTA, Article 60S (provison on te ol GATT sceptons in ‘ergy ade snise 19 CFTA, Arie 90); NAFTA, Amex 70. (apes CFTA aeataal proven 6 aclu ade between US and Cada) NAFTA, Anne 201 Canada-Unted ‘Str tara emergency acon governed by CFTA, Arte (10), and NAFTA, Chapters Tot 20 (pte vlton prone largely dren frm CTA, Chptr 18 and 19) “2°52 Repameato den Ley pra romover i vein Meo Repl Inversion ‘Exar, Dao Of [DO}, 16 May 196, Jorge Caml “Mexico's 1919 Fore Investment [Regione The Comertne of New Eepnomic Model 1 Hou Jf. 1 (989). “e'Soe eg, Marco US" Agreement op Subsidies and Coustaaling Duet, 19 ‘Mexioe US Framework Understand on Butea Trade an vest, © Nowaer 1987, rae (ow ik intending Ropuding rae nd feces Pasian ‘alls, 9 October 1985, 29 ILM 36 (1990); The Iterated Envirounenal Plan for the ‘Mevsan:OS Borde, 152. Merc als entered bata aresnen i Canad, Meso. Connda Undersundng on Coulton on Trade aod Taverne, 199.Vou 12 Nol Gart, Narra AND THE TRADED ENERGY 31 between the United States and Mexico.” Canada chose to join these nego- tiations for its own reasons at a later point in time. ‘The negotiation of a North American Free Trade Agreement serves a number of purposes for the parties. The current inward focus of the European Community suggests that at leat for the short term, « party interested in promoting fre trade wil have greater suocess in a venue other than Europe." It raises a concern for non-European trading countries that the immediate future will produce a Europe that is more insular and less ‘open to free trade than has been true in the pest. Hence, the establishment of a free trade area on the North American continent that is roughly equival- ent to the countries of the European Community and the European Free ‘Trade Area in population and gross national product has great appeal.” ‘The creation of a North American free trade area extends to firms located within the ares zelatvely unobstructed access £9 a world class market a terms of population size and wealth. These firms are given the opportunity to develop efficiencies and to increase productivity in this market which should serve them well in global competition. This isa particular advantage for Mexican and Canadian firms, ‘The inclusion in the NAFTA negotiations of issues that were being nego- tiated concurrently in the Uruguay Round GATT negotiations ensured & 2 n 1983, Mexico began the proces of opening it economy to frig competition a of prvaing scons f economy gene by goverment Stanly thee it begin cooly ‘ling toward the ngocaton a's ee trade apeemeat withthe Und See Tae Uned Sates was ropprtve of Mesiaa efor to fret economy fom goremmen elation td ‘rns, Ove impatant objective of the NAFTA fom Be sundpoa of oth te Mexican ‘td US governments tat Wl nsttionaae he rer wh hae eco tade i he Mexican scone. See prowl, Frascino Valnques,"Msican Parapet on tbe North ‘Atueocan Fre Trtde Agreement, Mico Trade and Law ort 1 Jeary 1992, wadale in LBs, Nex Liteary MICR Se On 10 Tan, 190, Praia Sana and Buh instr tec epetv ade miners tonite preliminary conlaons on the negoitioa oft ie tage sreemen betwee Se two counts, In Febatry 19, Cased expres ia ong the egos pos ‘a thas ec suggested fat Caan oad the so pote guns meen ie negtson ‘the Canada-US Fie Tade Agreement, to make sete improvement inthe powsions of hat areset 0 win acces fo te growing Mein paket for Canada expres and {Omantin Canada aan attractive investnent locaton a Not Aes. Se Mico! Won, "Cada Made the Right Cae to Sita the NAFTA Tale, The Ponca st 31 Rupe 1992, Michael Wikoa was Canada's Miniter fr lateral Tage Gui the NAFTA The adoption ofthe Single Baropean Act wn the negation ofthe Maasicht Treaty suet the prospect of ery subststalntpation ofthe HC mes stat The conver) br the Mansincht Treaty Maseatie of Europes current ward focurTo te ext tat the ECs outwardly found tt oes tends tobe on othe conte of Europe For uae tte EC hat reached apremeat with the Buropean Fre Ts Asosaon to cete the European Bcooomic Ara. Toe EC hs substotaly lacreaed economies fo tbe cour (of Faster Europe In March 1992 grcments wet sto dit providing Wie ache "EC markt for Poland, Hungary aad the former Cochosorki: Keven gues etal it {eae betwee te EC ad the cous of Easter Europe 2 wowing rapa, The Europes {Commision it now seeking a mandate om EC Foren Misses for ede wegoatons ° In 18, the combined GNP of Canna, Maxizo an the US was $5932 tlio and the ‘ombiaed population was 357 milion, Th couad GNP ofthe coun of tbe EC td he Europena Fee Trade Area war $5,704 tilion andthe carted population was 358 akon See Guy Hafbaver and” Tey ‘Schot, Nor Amencon’ tree Trade Ione and econmendalon, Insta, fo nteratioal Benno, 22 JOURNAL OF ENERGY AND NATURAL RESOURCES LAW 1994 relationship between the two negotiations." NAFTA includes successful three-way deals on these issues, a result which, thus far, has cluded the Uruguay Round negotiators. To some degree, the NAFTA negotiations benefited directly from the Uruguay Round negotiations. Infact, some por- tions of NAFTA are based upon tentative agreements reached during the Uruguay Round.” Some of the NAFTA negotiators participated in the ‘Uruguay Round negotiations on behalf of their respective goveraments, and during the NAFTA process they negotiated the same isues they had handled inthe GATT negotiations. Carryover from the Uruguay Round negotiations to NAFTA is, thus, hardly surprising. In a sense, NAFTA presented the ‘opportunity to institutionalite tome of the achievements of the Uruguay ‘Round negotiations. As time passes without the conclusion of the Uruguay ‘Round, this aspect of NAFTA assumes greater importance, Prospects for NAFTA NAFTA was signed by the parties on 17 December 1992. It is slated to ‘come into force on 1 January 1994, Prior to that time, NAFTA must be fapproved by the federal legislatures of Canada, Mexico and the United Slates. NAFTA. was recently approved by the Canadian Parliament. ‘Although complicated somewhat by the requirement of elections in Canada jn 1993, by the election of a new leader of the Conservative Party in Canada ‘and by Mexican elections in 1994, ratification of NAFTA in Canada and Mexico was never perceived asa serious problem. The issue is substantially ‘more uncertain in the United States. “Although NAFTA was negotiated by the Bush Administration, candidate Bill Clinton announced his endorsement of the agreement in October 1992, with the qualifiation that three additional side agreements would have to be negotiated to allay his concerns about the environment, labour issues and protection against a surge of imports resulting from NAFTA. On 17 “March 1993, negotiations on these side agreements commenced, with antici- pated completion of these negotiations in early June of 1993. This deadline ‘was not met, but the side agreement negotiations were successfully concluded land the three side agreements signed on 14 September 1993. Under the terms of the US “fast track” legislative approval process, the President must submit the legislation approving and implementing a trade agreement to Congress and Congress must then act to vote the legislation up or down within 90 days.® Given the continuing political opposition to NAFTA in > Several ofthe major isc ofthe Urugsy Round wee alo pat ofthe NAFTA nego- ‘stone Specialy, exeaion of the GATT to dein serves, provisions resting tothe ‘rotetion of intletal property sighs and steagening of he dispute resolution provaions frre all inpovtatises ofthe Urogsay Round where sigieant proges has bes made EINAFTA 3 For emamps th "Dunkel Dat” of he es ofthe Uruguay Round contain a section ‘on th protection of ttl property sighs has ute sane Yo Chapter 17 of NAFTA. ‘Stee litte for Itermaonal Leal Information “The Dual Daf” Pow the GATT ‘Scrtara, (1988). Argaaty, NAFTA takes te aleve othe Urguay Roa eae ‘gon es metor ad inpoves upon ther. “SPS 1 Use 91 ot a, Present Bush formally presented NAFTA to the Cogzas | December, 1992. There, ie implementing sitio fr NAFTA could be preset by {be Pein a ay tine ad il eve the Bee of be 90 day fast ack spec poses Ttoow appears ttt Congress wl oto NAFTA por dowa before the ed of Novant By contr, the mar smendments ofthe OATT bes negotiated i the Uruguay Round ‘goto are a somewhat diferent Staion. Ac he reuls of hese egotatons have ‘ot yet bee nals, appears unliely tat the Urogay Round wil econo inVor 12 Nol Gar, NAFTA AND THE TRADE IN ENERGY 3 the United States, the approval of NAFTA by the United States Congress in time for it to come into force on 1 January 1984, remains uncertain, One little noted aspect of NAFTA is that it has evoked a much different regional response than CFTA. Labour and industry in the northeastern United States, which were generally favourable tothe CETA, have expressed repeated concerns over the potential flight of industry and jobs southward into Mexico if NAFTA is finally approved. Conversely, whereas southwest= fem gas producers, concerned that Canadian gas would deprive them of thelr ‘markets in the northeastern United States, showed little enthusiasm for the free trade agreement with Canada, NAFTA is viewed as providing a poten- tial opening to a market heretofore reserved almost entirely to: PEMEX, Indeed, NAFTA is generally seen as a boon to local prosperity in the US border states of the south and especially to specific industries, such as trans- portation, which Would benefit from increases in tade between the US and Mexico.” From a more national perspective, the possibility that NAFTA will foster increased energy trade among the US, Canadz and Mexico has been advanced as @ political argument in support of the treaty. During the fist ‘quarter of 1991 almost 60 per cent of US oil imports came from OPEC ‘countries, predominantly from those surrounding the Persian Gulf National vulnerability to energy supply disruptions is aot, of course, simply ‘a matter of dependence on production from a particular region; for the interlocking world economy and competition for wvailable supplies make it impossible for the United States to isolate itself from the economic and politcal impact of events in the Gulf states. Nonetheless, there isa continu ing perception that tis in the country’s best interest to foster greater reliance upon closer and more stable sources of energy supplies, specifically those from Canada and Mexico. Whether NAFTA itselt will have this result is of course, open to question. As indicated earlier, trade with Canada and “Mexico in energy goods has been significant and growing even inthe absence of the agreement. However, by establishing some tasic ground rales for the parties’ energy trade and providing a mechanism for resolving disputes,” such as those that have occurred with respect to natural gas, the agreements should allow the parties to remove some iertants to freer trade in enerEy Boods and, to that extent, support an increase in that trade, ie to tae advantage ofthe recent Congesonl extension of fs track uthosity to 18 Api 1994 In te at requ to Congreso extend fst tick tortion have bs ose for negotiation betwen Congres sd the Present on vay of trade wes ves ih ‘exten ofthe fast ck athe hil implementing the rare of he Urgey Rotad ‘Spouaon ¥ould pensuatiy sand inne ibe ope pros behind he Patents esl care rom package anda bilimplementng NAFTA aod ay sde agreements tse lniatves ae delayed for an) vasa ad the ing of Uraguay Round kaon exes beyond te sng of 1984, the mien Congreonal tons Noveaber 1994 may posh Aig mpleneeaton ofthe Uragusy Round roo the US into 199 *sSe eg The ITC Report. Teas Perspective, May 1991 ol 04 & 5), at 2, 2% See Beck grate 16 at 0. % Sethe dbsason, ra at uoes 94-102™ Jounvat oF ENenay AND NaruRat-Resounces Law 1994 ‘Scope of NAFTA, Objectives of the parties ‘The North American Free Trade Agreement is a formidable document; with annexes, appendices and attached tarif schedules it exceeds 2000 pages. The Actual text of the agreement is much shorter, totaling approximately 266 pages “The primary objective of the parties in negotiating the NAFTA was to establish a fre trade area consistent with Article XXIV of the GATT.” The secondary objectives include eliminating barriers to cross border movement of goods and services, promoting conditions of fair competition, increasing investment opportunities, protecting intellectual property rights, establishing ‘4 mechanism for implementation of the agreement and the resolution of disputes arising under it, and creating a framework for expansion of the sagreement.* Trade in goods NAFTA provisions on trade in goods are found in Chapter Three, This chapter provides for a broad liberalisation of trade among the three partis. Specifically, the chapter affirms the application of the GATT principle of national treatment to trade in goods among the parties” and provides for the elimination of tariffs on many goods over a 14 year transition period.** (Chapter Three also places restrictions on duty drawback and deferral pro- ‘Brammes and limits Waivers of customs duties on goods.“ "NAFTA provisions on trade in goods incorporate GATT limitations ox the use of quantitative restrictions by making Article XI of GATT and its interpretative notes part of NAFTA NAFTA also specifically prohibits ‘export and import price requirements.*® NARTA places limitations on cus- toms user fees and the use of export taxes.“ Article 315 of NAFTA imposes requirements on the use of restrictions permitted under GATT Articles X1:2(@) and XX(g), (i), and (). Rules of origin for goods, an important issue in the ereation of any free 2 ARTA, Arte 10, 3 NAFTA, Arte 102 NAFTA, Arle 3011), Article 301 special incorporates GATT Arte I and its Jnzrpeative totes inio NAFTA Tt abo equ that provioes and sates accord no fat ‘iourale wesmeat fo goods of» party than the mow ourale eaten accorded te Sra oompenve or sebsutuate domo pos “Sth anton prod ra foe | Janny 19%, | January 2008, See NAFTA, Anse 3022. The Tani Schade ofeach party tached to NAFTA designate he Unable or lmao of ta on paral goods. These Sebedles are quite dad aod fu oo 10 pages “A? NAFTA, Artie 308 and 308 2 NAFTA, Amel 305 ‘© NAFTA; Arle 309(2) Thi provision i then fem Arle 07(2) ofthe CFTA. “NAFTA, Arties 310 and 314. These provisions are imlar to Arie 4 and 40 of CFIA, Ts resins requ that export shipment ot be reduced below the proportion ‘exports toa party bear tothe foal supply ofthe good of the party inpoug the expo ‘Son. Ie determination to be bused on the dita forthe tbe rsat Jomonth peice Por to topstion ofthe beatae The expartng pat tay not impose higher Pe = ort than the pice charged for domestically conned goods. The export restestoa 3 ‘Sotdirpt oom chanel supply er normal proportions of gods saphed to the mprtg party. Tes provisions are taken om Ave 409 of the CTAVou 12 Nol Garr, Narra AND Tun Trane tv ENeRaY 35 trade area, are dealt with extensively in Chapter Four of NAFTA. The provision on rules of origin attempy to simply aad thereby improve upon the rules of ergin set forth in the CFTA, The approach of the CPTA was to treat x good as originating in e party ifthe good had boen transformed suffceny in Canada or the United States to result in a change of tariff Classification of the good." CFTA provided as an alternative st that. a 00d wuld be teated as originating in apart iat least 50 pe ent of the ‘ale ofthe good reflected the value of materials ofa party used or consumed in producing the good andr the direst costs of assembling the goed in the territory ofa party.” Although the transformation testi relatively steht forward, the 50 percent value-added tests quite complicated to apply and has led fo several trade disputes between the United States and Cazada For purposes of determining the origin of goods, NAFTA uss a taf! classification transformation test whichis more tightly structured than the test fourd in the CFTA“ Tha, moreover, simplified the value-added test of origit by providing that the vepional value content of a good can be Seterined by sublraeting the value of nomorigtating materials from etter the tranaction value of the good of from the net cost of the good.” The combination of greater structure and simplicity of application stould help {o avoid future trade disputes on rule of origia issues, Energy and petrochemicals ‘The importance of trade in energy goods among the United States, Canada fand Mexico is evidenced by a separate chapter dealing with energy. In Chapter Six the partes specifically incorporate the GATT provisions relating to prohibitions and restrictions on trade in energy and basic petrochemical goods ard reconfirm their understanding that these provisions generally do not allow minimum or maximum export-price requirements and minimum or maximum import-price requirements, except where the latter are imposed “ CFTA, Acti 301, Aner 301.2 ag These disque concerned the inportton of svomobies ase at plants cae in ‘canada andetporad tothe Unied Sater ser the CFIA. Oa of tae Sipe reed 1 pul detsmiaton a Caada'savour uncer he pute reston provions of Chap IB ‘fthe CFIA. Son The Mater af Arce 308 an the Defiton of et Cot of Prossing (Det Cost of Asebling: USA92-1807-01; Final Report of te Pelt Jun 1992 ‘*'NAPTA, Arie 401(0 proves that acho he nen-rgnstig tal sed nthe production o's good must be uasslermed a veut of production acy soci inte fergton ofa py, SSINAPTA, Article 402. This may aot at fst th seem Khe mach of simpleton, oree,yfcatng on ransaction ale, Wich poealy can be baie fom comme ‘avez and the ale of son orgotng goods, he aati alae method shou eich tse fo we tha the CFTA tebed of ttemptg to value the materi and laboured in ‘Ssemblng operations. Although tee ort med willbe sme more Gel ae {eat lat peices hema taa for mlsiog the Bot-cieating coutent of god, Te Should be ated that NAFTA, Arte A prove that good wil be cand ss onpating ina purty if he elon vale f = gpod snot tet than 6 per eat unde he tassaction Value method or no ss than $0 per cnt under he net cot mathe, With some exe tie choise ofthe valuation method's to the expres or producer ote good The NAETA Rules of Onin Caper provides or eprate weaiment of axtemotive gots Soe Arce 0)36 JOURNAL OF ENERGY AND NATURAL RESOURCES LAV 1994 to enforce countervailing and antidumping orders.* The partes further agree not to restrict energy trade by imposing export taxes and duties, unless fuch charges are also imposed on energy goods and petrochemicals destined for domestic consumption.” In Articles 605 and 607, Canada and the United States recognise and limit their rights under GATT to seek exemptions from the general principles noted above. These Articles are virtually identical to Articles 904 and 907 of the CFTA. Article 605 permits quantitative export restrictions that are justified under GATT Articles X1.2(a) and XX(g), (i) and (j). Among other tatters, these GATT articles permit a State to impose temporary export restrictions to prevent critical shortages of esseatial products and to adopt measures to conserve exhaustible natural resources. However NAFTA imposes limitations upon the adoption of such restrictions in addition to the ones imposed by the GATT articles themselves. Export restrictions cannot be used if they reduce the proportion of total supply “hat has been available to the other country for the last thee years, impose « higher price ‘on exports than on the domestic sales, or disrupt normal chanaels of supply fr change the normal mix of energy products. Under Article 607 a party can restrict imports or exports of energy or basic petrochemical goods for rational security purposes in certain limited situations, such as supplying nilitary establishments, falling critical defence contracts, and responding to armed conflict actually involving the party imposing the restrictions,”* ‘Mexico bas not accepted the application of Articles 605 and 607 to its trade in eneray.** Chapter Six authorises import and export licensing systems that are ‘administered in a manner consistent with NAFTA," and expzessly permits {governmental incentives for oil and gas exploration, development and ‘ated activities * Energy regulation is made subject to the national treat- ‘ment principle contained in Article 301 at well as to the Chapter Six pro- visions dealing with import and export restrictions and export taxes.” Emergency action ‘The availability of emergency action provisions assure a party the possiblity ‘of reli in the event that trade concessions result in unaecepiable harm to ‘domestic industry, The emergency action provisions of NAFTA are found jn Chapter Eight. These provisions are consistent with Article XIX of GATT; hhowever, they do provide for more timely action and greater imitations on 5. NAFTA, Arle 03. This provision recognises that party may reste imports or enor ‘tens gods fo non pry and allows fo make nr tht rein re not evaded ‘ecugh eansortation of eerey goods through te other pater teria, However i ‘ary faker rth atiom, hero boh f the olhr putes may request conan in ode {Divoidendueinerfrnce with teow ping, marketing and dsubton angen NAFTA. Arle 5 For eae, GATT Arle XX() allows conservation measures oly they ae taken in conjunction wih estctons on domereprousin or consempeon SONAFTA, Atlee. © NAFTA, Arse 67, Resrictons are abo permite inorder t azplemen¢ masons liso ntcmtonlnreaments elt io eplave ever and to respon to et teste [Bidirpe the supyiy of ucar materiale ed Vor deen perpos SRRPTA, Annese bd 507 5 NAFTA, Arle 8 NAFIA, Astle 6 3 NAFTA, Atle 66. Seneg, GATT, Atle XDKVou 12 Nol Garr, NArtA AND TH TRaDe tN ENEROY 7 use.* Specifically, NAFTA provides that bilateral emergency action pro- ceedings must conclude within one year, that an emergency action at to a particular good can be taken only once during the transition period,° and that any action taken may be maintained for no longer than three years or to the end of the transition period, whichever petiod is shorter A arty ‘may take a bilateral emergency action after the end of the transition period conly with the consent of the party against whom the action is taken, “The parties acknowledge their GATT obligations with respect to global ‘emergency actions, but provide for the exclusion of the goods of a 2arty from such actions unless the goods of the party account for a substintal sare of the total imports of the good subject to such an action. *° The goods ‘of a party will also be excluded from an global emergency action taken by 4 party if itis determined that the goods of the party have not contributed importantly to the injury alleged to have been caused by imports of the oods.” Government procurement ‘The government procurement provisions ofthe NAFTA achieve a significant degree of trade liberalisation and reflect improvements over both the GATT. ‘Agreement on Government Procurement and the CFTA.® Ia addition to bringing greater discipline and transparency to procedures for notification, bid tendering and bid challenges, NAFTA coatains provisions of special interest to suppliers of Mexican energy producers. First, Petrleos Chapter Eight of NAFTA is uit smi to Chapter Elven of CFTA. The NAFTA provioas contain sme minor change, Fr erampl, Avice $01(32)() of NAFTA reir {Bat any emergency ain must be faken within One Jar ofthe instuton ofan eens) ‘lon pocesng hereby impesing ane int on te orton of toch postgres 02(2)\(@) provides that sports om party sonny shal ot be contre tbat Share of inports ls the partys moog the tp ve sopra good eto emerge) ‘ton, The quent CFTA provi, Arce 102(), roc tt "te rage of pet {ant 10 pr conto ler of ttl pore wood sora not be considered mbt NAFTA, Ate SOIC). ILNAEIN, Ae SOG. The tmnton pro xed om 1 Jama 1901 SPNAPTA, Ane $01(2\(6), SS NAFTA, Arte S010). NAFTA, Aree m2, 1 NAFTA, Ariel $02. The goods of pty should not be found fo have coatbuted Imporanty nur ifthe growth rate of Inport ras «pasty ppresly lower tan the {rgptn ate of total import ofthe good in guest. the GATT Agreement on Goverment Prosrement, GATT, 2th Supp RISD 33 (98), 16 ILM 0s2 (1999), cons procurement of good ad servis incidental fo the purhae of ‘ose goods. I doe nt caver sevice contrac It aplesYo proces contarts 01S "50000 oe more. NAFTA Chapter 10 apples to poo, serve ad costroton svt Agee by the pues and set forth in anaae The inion of serves and sonstaction Serves contac «substantial expansion of eoreape beyond both the GATT Cade sd {CPTA. The NAFTA provisions on goverment procuemest ae applicable o federal goer tment contracts for gods nd secs of 830,00 oF moe sb to fegerlcnsrusion comet ‘FS milla or'more They apply to contac fr goods sod series by gover! eterno $250,000 oe mae and constrscton contact 0 $8 milion or move. Te gece {ESid oo sate ead provacal contacts rainfed commun Wea and frovissal govenmats. See NAFTA, Chaper 10 Anncr 100 Ia-3- ANbough tees 4 umber of limits and reservations tothe NAFTA covers levi, the NAFTA ioopatt the mow itera approch to government procirenent of sy extn ree rade apemnet ‘The CPTA actualy provides lower tread for covaage of goverment contract foregle pods — 325000. This thresholds incorporated into the NAFTA to gover relatos betwen {he United Site and Canada on tht, See NAPA, Chap 1, Anse 101238 JOURNAL OF ENERGY AND NATURAL RESOURCES Law 1994 Mexicanos (PEMEX) and the Comision Federal de Electicidad (CFE) are listed as government enterprises specially governed by the goverament procurement chapter.” Second, special transitional provisions for Mexico provide that beginning on 1 January 1994, 50 per cent ofthe covered con- tracts of PEMEX and CFE will be open to bidding by US and Canadian companies. This figure increases gradually over 10 years and in 2003 all Covered contracts will be opea.”" While the initial figure doesnot represent 4 significant inerease over curent foreign participation in supply contracts for PEMEX, the opening of 100 per ceat of those contracts over 10 years is significant” Invesomen, services and financial services Pechaps the most significant achievements of NAFTA are in the investment, services and financial services Chapters ofthe Agreement.”* These are sectors not currently covered by GATT and the extension of GATT to cover trade in these areas s a major objective of the Uruguay Round negotiations, ‘The NAFTA provisions on investment are found in Chapter 12. National treatment and most favoured nation treatment are required for investors of any party.” Export-related performance standards and domestic content requirements for investments are prohibited. Transfers of capital and pro- fits must be permitted without hindrance" and expropriation is only pecmait- ted when done with appropriate due process and reasonable and prompt compensation ‘othe foreign investor.” NAFTA makes clear thatthe parties are free to apply domestic environmental regulations to foreign investment ‘and recognises as inappropriate the relaxation of existing health, safety or cnvironmental standards in order to encourage investment in a party’: teri- tory.” The investment chapter also provides an extensive dispute resolution section which sets up a detailed dispute resolution mechanism, complete With the procedure for the establishment of a roster of 45 presiding arbi ttators to be chosen by the parties by consensus.” Tt should be noted that there are a substantial number of reservations to © See NAFTA, Chapter Te, Amex 101 1-2 7 See NAFTA, Chapt Tet, Annet 1001.23, 1 Meazo doe ete eight to sla oo $300 milion in contacts of PEMEX and (CFE coommenciog inthe Ser 2003. NAFTA, Anne 101 2h Schade of Mei 3), "Soe Lany © Bowie, “Noth Amercia Fee Trade Agcment Oppertsty or US Supple te Pome,” pup dalveed atthe ABA National Instiae on the Nora American Fig Trade Avroeat (3 January 193) (Wusblagton, DC). "S Chapier Ti cores lavestment, Chapter 12 covers Serves and Chapter 14 coves Financial Servis SNAFTA, Aces 110, 1103, and 1104 7 NAFTA; Arse 10s, NAFTA doe permite inpoton of tai ther muirements in connection with an invetment, eg worker tlnng constuction of «Tit and dame ‘gar and development eines NARA, Arie 0) % NAFTA, Aree 11. Artie 114 provides tht» pry tha perceives tha ater pasty soins ah, or enol tana an rss ‘aay fej conslaonswith «view fo avedingsny sah orourgzort™ *3 NAFTA, Arles 115-1138 The cation ofthe rsteris provided fori Ate 124)Vou 12 Nol Garr, Narra AND Tam TRADE my ENERGY 9 the national treatment provision of Chapter 11.%° Of particular interest are the Mexican reservations on investmen: in enterprises for the exploration for oil and the retail sale of petroleum products. The energy exploration reservations, which explicitly prohibit risk sharing service contrac, ate con- sistent with the Mexican position thoughout the negotiation process resisting any liberalisation of PEMEX’s control of the Mexican oil industry. One of the most significant sections of NAFTA is Chapter 12, Cross- Border Trade in Services. As in the investment chapter, NAFTA applies national treatment and most favoured nation treatment to trade in sevices"™ ‘Unlike the approach of the CFTA whick identified specific services covered by the agreement, NAFTA begins with che proposition that all services are covered and requires the partes to schedule those services that will not be subject to the provisions of Chapter 12" Two years are provided for the scheduling of such reservations by the partes on behalf of state and provin- cial governments." Although Chapter 12 is one of the shorter chapters in NAFTA its impact on trade between the partes is likely to be substantial ™ ‘The Financial Services Chapter of NAFTA is, arguably, the most innov- ative of the entire agreement." It covers the banking, securities and insurance industries as well as non-bank financial services providers NAFTA provides for expansion of existing firms and new entry by foreign providers of financial services. This is of particular significance for US and Canadian financial services providers. There have bean substantial barziers to entry of the Mexican financial services market for some years while the US and Canadian markets have been relatively open. It isto be anticipated that a number of US and Canadian banks, securities firms and insurance ‘companies will find the opportunity to enter the growing Mexican market in financial services to be very appealing. ‘The NAFTA provisions on financial srvioes require a phased opening of the Mexican market. There are caps beth on the total percentages of the Mexican market which US and Canadian firms can control and on market shares of individual foreign firms. Generally, these caps are entirely removed by 1 January 2000." The financial services chapter applies the principles of national treatment and most-favoured-nation treatment to f= ancial services firms of a party.* In addition, dispute resolution in the financial services sector is provided for by incorporating the dispute reso- © NAFTA, Arte 1108 provider that te naive tetent, mot favoured mao ret ‘men and paformunce equemeat imation wilot apply toctsing 200 ceaorsng meat {res hatare decibel ina party's shade Anne Tf NAFTA, Nueros ooo onfoag hn hve bens yh rc Inn, ova tes at Bae Fa ‘Sushedle nonconforming mesures, SNAPTA, Arte 102, 1208 and 1204 12 NAFTA, Arte [206 apd 10T 55 NAFTA, Artie [206(2), 13072), ‘Trade in serves easing a ineeag proportion of ade ofthe deteloped mation, 11s now he att groving segment of US tate, ene, net besletng of he de ‘a Sena see tan portant seating oben forthe US und ebe deveoped aos NAFTA, Chapter I ‘ NAFTA, Amex VI, Schedule of Mexico. "Thee an important excepto to thi staement. Meic as rere the ih init on consultations on te nest of temporary linatons on particpation by foe Dass fn tbe Mein markt te authorised capital of fps commercial bans doing Psion Mexia reaches 23 por cent ofthe ttl autor apa fal omer bantsm Men NAFTA, Chapter a, Annes 18138, SE NAPTA, Ares 1408 and 1466cy JOURNAL OF EsEROY AND NATURAL RESOURCES LAW 1998 lution provisions of Chapter 11 (Investment ato Chapter 14 to deal with disputes regarding transfers, expropriation, deal of benefits and environ: rental measures.” Other disputes involving fimncial services are handled nde the general dispute resolution provisions of Chapter 20 and Article 11414 provides for tho creation ofa special rostzr of up to 15 nancial services experts to serve on panels convened pursuant to Chapter 20, Competition policy, monopolies and state enterprises (Chapter 15 of NAFTA deals with competition policy, monopolies and state enterprises Itundertakes to ensure that each pany will maintain an effective competition law and that monopolies and state enterprises designated by a party will function consistently with the party's obligations under NAFTA. fand generally in accord with commercial considerations. °° The provisions of Chapter 15 were originally negotiated by the working group on energy issues, reflecting the substantial concern with the status and power of PEMEX in the Mexican economy.”? The manne in which this Chapter wil be enforced remains unclear.” Intellectual property ‘The NAFTA intellectual property provisions, Ckapter 17 ofthe Agreement, are based upon discussions held during the Ureguay Round negotiations. ‘The NAFTA provisions go beyond the draft txt in the Uruguay Round and provide a comprehensive approach tothe pretetin of intel=tal prop ty Fights. This an sue thatthe US and Cenzda were notable to resolve in the CFTA negotiations and NAFTA takes an mportant step n providing Sipnicant protection of intelletual property right” Dispute resolution Improvement ofthe dispute resolution process of the GATT is an important, objective of the Uruguay Round negotiations. The US and Canada made substantial advances in designing an improved dispute resolution process ‘that was incorporated into the CFTA.* NAFTA drew on the CFTA dispute resolution provisions and improved upon them. ‘The dispute resolution provisions of NAFTA are quite extensive and are found primarily in two chapters of the agreemeat® Chapter 19 provides a Se Artsy 1109-111, 113-114 incorporated into Chap 14 by Arie 402) 5ee tag Arties 115-1138 NAFTA, Aries 02 and 1503, Comment of Wiliam © Ramsty, Deputy Assn! Secretary, Deparment of Sas, ‘ation tote on the North Anetta fice Trade Agena! GF Tanuny 1395) (Wasting, DC) "2 Arie i301 on competition nw pecially provide in paragraph 3 tha pty ey nt seek recourse o NAFTA dupe element mechani fo ae ating ode that Arie Feb cna tou i enact of 8 monopoy o ate cin a ptd er could raed under Chapter 20 nich conan the genre pte ‘elution provsion of NAFTA atte property meatoned in Arise 200 of he CETA. Tht Arle merely ovis tat the partes wil cooperate nthe Uruguay Rood gation ad oer fora CFTR, Ghee tand B 1 Gapice 1 poverat pate stment in anticumping ad couneraig duty maltert snd Chap 20 provides the seca crete roltonprvsns for Gaps arg under the agramsat te sdditoo, there ae a umber of dupe rasationpromsons governing the procedures to be eowed inthe setlcneat of dpe in sci et seas. For example,Vou 12 Nol Gar, Narra AND TH TRADE IN ENERGY 4a mechanism for the binational panel review of administrative decisions on antidumping and countervailing duties. A sinilar mechanism is found in Chapter 19 of the CFTA. This mechanism has been quite successful in allaying concerns in the United States and Cenada about the politicisation of antidumping and countervailing duty determinations.” Chapter 20 of NAFTA provides the general dispute resolution provisions of the agreement. It establishes « Free Trade Commission composed of cabinet-level representatives of the partis which, among other dui, serves fas the negotiating body for the resolution of disputes,” Italso establishes a Secretariat with offices in each country to oversee administration of the ‘Agreement. The Chapter outlines a dispute resolution process which includes consultations between or among the disputing parties,” efforts by the Commission to resolve the dispute," creation of arbitration panels which must preseat a final report within 120 days of selection," and ulti- mate setement of the dispute by the dispuing parties “which normally shall conform with the determinations ard recommendations of the pa an Relationship between GATT and NAFTA, In general NAFTA establishes a free trade area pursuant to Article XXIV of GATT. The partes to NAFTA specifically affirm their rights and obligations under GATT in the agreement, however, inthe event of an inconsistency between. NAPTA and GATT, NAFTA prevails GATT approaches and mechan- isms are explicitly incorporated into the NAFTA at a number of points in Ate 115-1138 provide a dpe setdement mechan fr iavesinent isputes and Ae 1414 modes the Chapter 20 dupuesetemeat provisions Tor dputsconceting ade 8 fagacal service, See gnrally, Andreas Lona, "Bipational DispateSeement Under Chapter 19 of the Canad US FIA" A Interim Appraisal 24 NYU Taf & Pol 29 (1990), SCNAFTA, Arie 201, ABTA, Aru 202 NAFTA, Artie 2006 Sm NARTA, Arle 200 ‘st NAFTA: Arties 208, 2016 snd 2017, Ale 2009 provides that pansits mat be seed from «rose of 30indidal uppoates by consenrs for ems ft Years. A 2D1 eg ating party ose pons wan rh ete apg pats Ma'NAETA, Arse 20181), © NAFTA, Article 10. it NAFTA, Aree 03, Arce 103(2) provides dat “Inthe event of any inconsistency tron this Agreement and Sch her ageeeat, ths Agremert Sal pea othe exes the inconsstency, enept as oles proided inthis Ageemeat” Although Us parasaph Sour nt refer petclly to GATT, readin the cootent of Are 10, appears o have bes the lateot of te drafters that the GATT would be included inthe phase "such othe secenent2 JOURNAL OF ENEROY AND NATURAL RESOURCES LAW 1994 the agreement. Nonetheless, there are instances of quaiations and limi- tations placed on GATT rights and obligations. NAFTA has gone beyond GATT in a number of areas. In addition to ‘he expansion ofthe substantive areas covered in the Agreement,” NAFTA provisions on the environment and its elaborate dispute resolution mecnan- ‘sms represent advances over GATT, While these advances do not creete @ direct conflict with GATT, they arguably do create a degree of tension between the two agreements. Environmental issues The parties will look to NAFTA for guidance in the event of conficts between trade and environmental issues in Canada, Mexico and the US, In Article 104(1) NAFTA lists three environmental agreements, the provisions of which are to prevail over NAFTA in the event of an inconsistency. ‘Annex 104.1 lists two more agreements given the same effect.” Article 104(2) allows the parties to enlarge this list of environmental or conservation agreements. Article 2005(3) specifically provides that in a dispute arking under both GATT and NAFTA where a party claims that the dispu'e is subject to Article 104 the dispute resolution process of NAFTA is the sole recourse of the disputing parties. ‘The standards telated measures chapter of NAFTA (Chapter Nine) makes lear that each party is free to continue to apply any standarde-related measure relating to the protection of the environment when “the demon strable purpose of the measure isto achieve a legitimate objective." Taere is substantial controversy over the potential impact of this chapter ‘NAFTA makes reference to environmental issues at one other significant point. In Article 1114(1) NAFTA makes clear that a party remains free to adopt measures to ensure that investment activity undertaken within its See ep, Arle 301 (eaonal treatment; Arise 209 (quntaie certs); Ate o3(1) (eaiiion and ventions on wade m energy and base ptroshemeany, Ack 809 (ecap cause): Arle 903 (aghts and obigatoor dager GATT Agreement Techical Angers to Trade) Asie 192(2)4)() (GATT retrctions on anlounpng nd Courier vali avs); a Arte 21 (exceptions Under GATT Arle XX). Seo, Arte 318 (ison paring to adopt or mtn rections purwant {© GATT Atades X12(0), XX(Q). (and (Ais (lits on pares ahs to alopt ‘matin retcoas pursuant to GATT Arte XL2(9), XX(a), (ad () oo expos of ‘sory or bast petrochemical) Artie 07 (lit on eit Sh to ado of mata ‘Steeons penn! to GATT Arte XXI on import of nergy ox ase peo) and CGapir Seven, Annex 7032, Schaluie A (US and Meno ve its Uader OAT Ace Safe regnrding cain ase ads), "ipa, mvessent serves, Sani! series and ites props ate rs stge NAFTA peovidessvbtantve coverage snd GATT does not "Sl These tremens sete Convention oa Ineraaonal Trade fn Endangeed Speci of Wi Fauna and Fora, § Mare 197,27 UST 106. TIAS No 20 the Montes! Protea am Soitancrs that Dept the Ozone Layer, 26 ILM 1541, 1550 (1987) and the Buel Convention on te Concl of Transboundary Movenest of Hazardous Waser and Theat Sips 38 HLM 69 (198) ‘D'thase agement are the Apromment Between the Government of Canads an the ‘Goyecament of the Usted Sates ef Amerca Concerning te Tianabouadtsy Movemext of Hizardous Wast, 28 October 1986, aod the Areement Bewee te United Stats of Amiri ronment nthe Border Ares 4 August 198, NNARTAY Artie 904 ' Sedan rele mearues are dal with in Kone McConnell, “The North Ames Free Trade Agreement Tending Netra Rezuree Goo tnd Protein te Eniomnent™, ERE (195),Vou 12 Nol Garr, NAFTA AND THE Taabe my ENuRGY a borders is done in a manner “sensitive to environmental concerns”. The second paragraph of that Article reflects the recognition ofthe parties that itisinappropriate fora party “to encourage investment by relaxing domestic health, safety or environmental measures”. The remedy provided by Article 1114 in the event a party believes that another party has engaged in such encouragement is consultations between the parties to the dispute, ‘Although NAFTA is hardly a comprehensive treatment of environmental and trade issues, iti an initial step in attempting to deal with the confit between the two interests. In contrast, GATT ignores environmental issues tnd has litle to add to the resolution of such conflicts" Dispute resolution issues ‘The elaborate general dispute resolution mechanism of Chapter 20 of NAFTA is clearly superior to the GATT approach. The NAFTA mechanism is much more tightly structured and provides a specitic timetable for the resolution of disputes, Although NAFTA ostensibly leaves open to the par- ties the choice between GATT and NAFTA dispute resolution processes," it Fimits access to this choice ina number of circumstances, expressing a preference for the NAFTA mechanism. ‘While formally acknowledging the role of the GATT as the framework {or multilateral trade liberalisation, NAFTA also recognises that in some areas it is superior to the GATT. In other areas, the GATT is simply itel- evant. Unless the Uruguay Round is completed with dispatch and the agreed ‘amendments expand and improve upon existing GATT provisions, regional trading agreements ike NAFTA will assume greater importance in the future cfforts to liberalise trade. This creates a tension between GATT and NAFTA, (and other regional free trade agreements and customs unions) that has yet to be explored. GATT and NAFTA: impact onthe US energy trade US energy trade and GATT With relatively few exceptions, the political battles over proposals for US energy trade polices have been fought on the basis of domestic regional ouceins that have pitted the northeasteta ad suid-westes sates sini the oiL-producing states of the southwest. The legality ofthe proposed tarts for quotas under GATT has rarely been a determinative issue in the debate, Historically, governmental and industry proposals for US energy ade policy have focused primarily on petroleum and have been motivated by a variety of concerns. These concerns are usually stated in terms of promoting national security, although creating a “level playing field” by eliminating perceived unfair advantages held by foreign producers or transporters, 1 Seep, GATT: Dispte Setement Pane Report on US Reston on Inport of Tans, sonia ssiqi99) 18 NAFTA, Arte 20051), st NAFTA, Arts 20052) (3), and (4) 1 The 198 Coal Trade Eualsaton Act ea good example af proposal whos tat rationale wa etabishing a ee playing fed It wat pronspled by Cngestonal conern ove {US depedence upon frig energy sources ané a Congesionl fing tat foreign col prodacrenjoved an unfir compte advange i tht they fequety were mot eqased {Scomply with be same environmental, eat, mila and sft standard US pods ‘The roan propo woud have create 2 board tai sytem for inpored cod4 JOURNAL OF ENEROY AND NATURAL RESOURCES Law 1994 encouraging energy conservation and, somewhat more recently, reducing the national trade imbalance'"* have also been advanced as energy-policy goals. Ia most instances proposals for implementing the stated goals have Involved imposing either tariffs or quotas on imported oil inorder to protect or revive a flagging domestic energy industry and have evoked strong polit- cal opposition. ‘The best example was the Mandatory Oil Import Programme of 1959, which imposed quotas on all foreign oil (with the significant exceptions of Canada and Mexico) and was justified on the ground of protecting national security "” This act and the Trade Expansion Act of 1962," which vested broad authority in the Chief Executive, was relied on by a series of US presidents from Eisenhower through Ford who implemented various pro- grammes to reduce oil imports. A quota system, which had been used initially, wes changed during the Nixon administration to a system of gradia- ally increasing fees. This system culminated in 1975 in President Ford's ‘attempt to impose tarifs that would rise to $2 and $3 a barrel on imported oil and was ultimately terminated as a result of Congressional opposition, primarily from the northeastern states that rely heavily upon heating ol New proposals for import fees on erade oil and petroleum products based ‘upon stated concems over national security continue to be introduced repeatedly in Congress. These bills can be roughly divided into three types. ‘The fits: fype would simply seta flat tariff om each barrel of imported crude cil A second type would establish a threshold level of oil imports as a specified percentage of domestic oil consumption and would impose a tariff only when that level is exceeded. Most propose bill fall into the third category. These would attempt to stabilise domestic prices of crude oil by establishing a price floor." An iraport fee would be imposed when world oil prices fall below a specified trigger price. An example is the proposed Energy Security Tax Act (Senate Bill 254), introduced in the eurreat con- ‘sressional session. It would establish a variable fee on imports of crude oil, refined petroleum products, and petrochemical feedstocks on petrochemical Gerivatives. The rate for crude oil would be the excess of $25 per barrel over would have inpored an $8.00 per too aif on coef cous that toric bad been {eexporars of nal to he Und Staten and an aon, higher tn pon ot aed by Drogoer that fad tment te environmental andes Enpoed upon US profuse [tough approved bythe House of Representatives the bl ed when fo to win Sate Spprvalselore Congres adjourned. The Coal Trade uation A is ua in tat [Grae coal, ut tpl as approach and ulna ap By mosing afar on lively heap gore coal, tr bil woul hae eemoved is pce venage over domes col St {herald «domestic indastry — especially that prt of eae inthe tatoo cone belt sttorotFeonytvana, Went Virgins and Renacky —characesnd st somewtatcree riod by high Inbour costs and, more een, by expensive enviroment, health ad ay Ss the remarks of Seator Robert Kroger in suppst of Seate Bl 284,119 CONG REC Sitt-2 (Mar 1953). 'S See gaerally G Nas Und Sater Ot Poy, 150-1956 329-35 (1968, ‘oe 19 USC set 1862 (198). Present Fors ation prompted Coagres to conde aupending both the ai and presenta stony oly port fos Ultimate Tade Eps Act wos amended to pve Canes the power to daapprove any presenti adjstnat of petroleum por Seg USC sein 1820) "ag HR a, 10D Cg, at Sem, 139 Cong Rec HIS 1987), "5 Sa fu Fores on Ol Pate Stabalaaon Sang US Ol Prices 13-3 (Univer of ‘Tex 18) Tor a econo aul and atone for leplaonebhhng a pris BootVou 12 Nol Garr, Narra AND ae Teabe In ENERGY 45 the most recently published price per barrel of internationally traded ol. AS the name of the proposed legislauon suggests, tlk virally all proposals. dealing with imported oil, including the 1959 Mandatory Oil Import Programme and the Trade Expansion Act, is justiied on the grounds of national security." ‘From the perspective of international law, there is an obvious question ofthe legality of such proposed legislation under GATT. To date the princi- pal energy-related US legislation directly challenged under GATT has been 1986 law that was intended to help implement the fund for cleaning up toxic waste disposal sites." Under the legislation an 8 cents per barrel “supectund” tax was imposed on domestic oi, whereas foreign oil was sub- ject to & 11.7 cents per barrel imposition. Many petroleum-exporting states Viewed this tax differenial as an indirect tariff on foreign oil imported into the US, and a GATT panel found that it constituted a nontariff barrier to ‘competition in petroleum." Congress responded by equalising the tax on imported and domestic ol at 9.7 cents per barrel in conformity with GATT. art 112). Although a variable tarif, such as that proposed in the Energy Security ‘Tax Act, would appear subject to a similar successful challenge, two GATT. ‘provisions have been cived as permitting such a measure. The fist is Article XIX, “Emergency Action on Imports of Particular Products”. Under this ‘article temporary impor barriers are allowed: “If, asa result of unforeseen developments and of the effect of the obli- 1 fe shold be noted tat there are also environmental and constrvation epunents sranced in favour of this Eaton “The exrronmeatal argent te pony that a {scrense in rad ol pris wold encourage sil to use of mafura at an Ft he rik of {Saker spl by redoing tnports. See Paice Crow, “US Indy Ginding for Bate paar (Gato Boer) Tax Pas Gl Gat J. 1 Match 193 19,22 Comments by acer ft Domestic Petoleum Coupland the TodepeadentPattleum Assocation of Amen. The oaservaton argmets feu both onthe presumed sho gene cea eScency (ch ‘igher megs sae and beter nition i homes and hin) tht wl et rs hgh: ‘Prot olan onthe alot ot higher pen mintaning prodeton fom arial wale La {Sei over I mallon burl day of US erate ol produon was fom “siper wel” tat ‘rodaced an average of 225 bres 2 day. Such well are extreme’ pce 09 ed mall drop inthe pee fend eds to wa spread abandonment Fo example 17384 ‘tipper wel were abandonl in 191, over 00 in Teas alone. Se Intestate O and Gas {Compact Commision, Naa Striper Wel Survey 3-4 (1992), Te nal omsegnce of ‘Standonment ithe low off reserves prodetle by pray recovery ecg ose welt ‘ue ected ino virtually pete els tat wl ot be elo the wel re dandoned ‘Of peraps equates obvis importance tees of ty to we fr potential ecodary ‘or eabaced recovery operation heel. May of tee fl wee improperly prodseed ‘nearer decade nd cont signet guanttes Of that can be prose only by wate flooding o other such chau Ploggig existing wel makes ner ston of acd ‘econeryprogiamines more eipenive and conesponding) ls deinble. Convery the mar- {Gel stro ofthe wells and he operators equeny srl fe the was ang abandoned ‘ritout being puged. This leas (a vate of environmental and recamation problems ‘Ssocated wit orpoaa we. See Constance Mut aod Holy Pus, “Abandonmest and Reclawatig of Energy Sites tndFaciins:Canadn, 10 EAL Bf (192) and Deal Zilla, ete Studien Reco tory Send hie Used State, 10 JERE 871952. ete United State Sopaund Amendients and Renuthortion Act of 1986, coed at 2USCA a 901-9615 ‘Drowsy for etabliing the “Superfund” ate conned ip the Comprebeasve vicumental Reson, Compensation and Lnblsy Ac (CERCLA), 42 USC's 901 ch seg. For more detailed dissson of his controversy, e Wiliam Slomanso, Pandamenal Persgecives om Intemational Law 467-68 (199).46 JOURNAL OF ENERGY AND NATURAL RESOURCES LaW 1994 sations incurred by a contracting party under this Agreement... any prod ‘ct is being imported into the territory of that contracting party in such increased quantities as to cause or threaten serious injury to domestic [producers in that territory ... the contracting party shall be free’... to ‘suspend the obligation in whole or in part ot to withdraw or modify the ‘Whether the requirements ofthis Article ate mets, of course, highly debat- able. Arguably, the collapse of oil prices inthe early 1980s and the surge in imports of cheap foreign oil might have qualied as “uaforescen develop- ments”. The impact upoa the American oil industry included a sharp decline in drilling activity, benkruptcies among service companies, and widespread Wel abandonment. The latter phenomenon may be especaly worth noting. Between 12 and 14 per cent of US crude oil production is from ‘stripper wee” that produce 10 barrels a day or lesa, Mort, in fact, produce leno than 3S barrels a day. They are extremely price-sensitive and even a small decrease in the price of crude oll leads to wide-spread abandonment of such well, 19,233 stripper wells were abandoned when prices dropped precipitately in 1986, more than double the number of abandonments curing 1982, when the price of crude oil was significantly higher.” However it seems rather disingenuous to rely on these eveats to support legislation proposed almost 2 decade after the fact. Moreover, even domestic prodvcers who support the Energy Security Tax Act would readily concede that there are significant reasons for the decline in the domestic industry in addition to increased quantities of imported oil. These reasons include increasingly stringent ‘environmental regulations at both the state and federal levels, Congressional “eluctance to authorise exploration and drilling in envirormentally sensitive areas, such as the Alaskan National Wildlife Refuge, aad, of course, the ‘depletion of most existing on-shore oil retervors in the lower 48 states. ‘The second GATT provision invoked in defence of tars is Article XI, “Security Exceptions”. The relevant portion of this artic states: “Nothing in this Agreement shall be construed (b) to prevent any contracting party from taking aay action which it ‘considers necessary forthe protection ofits essential security inter- ests (Gi) relating to the traffic in arms, ammunition, and implements of ‘war and to such trafic in other goods and materials as is carried (on directly or indirectly forthe purpose of supplying a military establishment.” Arguments ave been advanced that this provisions authorises imposition of tris because adequate cil supplies are essential to national secunty, The following articulation of this position is fairly typical: “The American ability to act with strategic fredom to rrotetits interests in the strength and viability of alles, essential to the maintenance of the ‘balance of power in Europe and Asia, depends in good parton the security of its own energy supply. This explains the anxiety generated by the increased US dependence on oil imports from Arab sources, an increase from 470,000 b/d in 1985 to over 2 million b/d in January 1989. The problem of maintaining US freedom of strategic action is perhaps the © See National Seiper Well Survey, euganot 123, a 3Vou 12No1 Garr, NAFTA AND THE TRADE IN ENERGY a ‘most fundamental national security argument for a national energy policy addressed to limiting imports and maintaining domestic production. ‘The GATT “security exception” is dealt with in more detal elsewhere™ and will not be discussed further here in order to avoid duplication. US energy trade and NAFTA Since trade in ene-gy goods among the United States, Canada and Mexico hhas been steadily expanding for several years without the benefits of NAFTA, the main contribution that the agreement will make isto lessen ‘existing teade barriers, However, complete removal ofall baisixs is ol even theoretically possible, Direct investment by Americana an and gas ventures ia Mexico will continue to be barred; for Mexico's accept- ‘ance of the agreement is conditioned upon retention of its state monopoly ‘overall phases ofthe ol, gus and petrochemical industries. NAFTA's impact upon the remaining obstacles to free energy trade between the United States ‘and Canada is als subject to question. The legal barriers are largely pro- ‘cedural and structural, rather than substantive. They inhere in the division of regulatory authority between central and state/provineial governments and between agercies charged with regulating energy trade and agencies charged with protecting the environment ‘This section ofthe paper will focus primarily, although not exclusively, ‘upon trade in natural gas, rather than upon petroleum. Domesticaly, it i this aspect of energy trade under the NAFTA regime that has received the ‘most attention. The US natural gas industry isin a period of transition, and is moving from an environment dominated by pipelines that purchased gas for resale to local distribution companies to one in which producers are increasingly making direct sales to local distribution companies and end- users. This process has been greatly encouraged by the Federal Energy Regulatory Agency, which has forced pipelines to “unbundle” their services, ie to separate thet transportation and sales functions, and provide more ‘open access to their systems for transportation of gas owned by their cus- tomers." As a result, Canadian and Mexican gas has significantly easier access to US consumers and the pipeline systems than previously. ‘As indicated earlier, all three countries project increased natural gus imports into the United States "* One of the most obvious factors affecting these projections is the US regulatory environment, and serious questions have been raised about the ability ofthe US regulatory system to adapt to 8 free trade policy. As currently administered, US laws and regulations specifically governing natural gas imports and exports should not present elther substantive or procedural barriers to trade under NAFTA. Problems ray, however, arse because of the complexity of the scheme, the division 1% Siang US Gi Prices supra note 122, at 12, The portion of the monograph fom hich ths language istaken was writes by Profasoe Walt W Raslow, Profesor of Peal oonomy at The Univesity of Texas at Austin and former Special Advisor tthe ate Presdeat Tyggen Jones "2 Sue Donald Zioan, “Boery Trade and National Searity’,JERL (1993), | Thi poss war acompisea bya sare of odes ove eral yar, imi a Order 6, 39 FERC pra 6,00, Dock RMSI11.000 and RMT-S4-O85, wh ised on 8 Ape 1992.1 eliminates all “bundled pipe servis and requires all exsting pipeline ‘Sieg canvas tobe ceverted into separate ss and ansporation semen "Sethe scan, spr, at ates 19-234“ JOURNAL OF ENERGY AND NATURAL RESOURCES LAW 1994 of regulatory authority among different federal agencies, and the actions of. state regulatory bodies US regulation of imported natural gas (ING). Regulation of natural gas imports into the United States has a long and tortuous history. Under Section 3 of the Natural Gas Act of 1938" a proposed import or export ‘of natural gss can be authorised “upon application, unless, afler opportunity {or hearing, [the appropriate federal agency] finds that the proposed expor- tation or importation will not be conssteot with the public interest”. Both the agency charged with determining “the public interest” and the criteria ‘upon which the determination is based have changed repeatedly over the last two decades. The Federal Power Commission (FPC) regulated natural 225 imports until 1977, when the Department of Energy was created. At that time responsibility was shifted to the Economic Regulatory ‘Administation (ERA). Tn 1989 authority over natural gas imports vas transfered to the Office of Fossil Energy (OFE). The OFE, (like its prele~ cessor, the ERA) is directly responsible to the Secretary of Energy. ‘This ‘structire permits the agency to react to energy policy mandates relatively ‘quickly. However it also makes the agency susceptible to political pressures that have occasionally infivenced the agency to take actions only partially ‘elated toenergy policy. The best known example was the collapse ofa 197 {g85 marketing agreement, memorialised ina formal “Memorandum of Intentions”, between Petroleos Mexicanos (PEMEX, the Mexicaa state oil and gas monopoly) and a consortium of six US gas transmission companies, ‘The State Department attempted to pressure PEMEX into lowering ‘he price forthe gas by linking approval to issues of illegal immigration from ‘Mexico and drug smuggling. These factors also presumably influenced ‘he Senate, which blocked Export-Import Bank credits for the gas pipeline that PEMEX vas in the process of constructing. The sale was ultimately vetoed by the US Secretary of Energy on the ostensible ground that the price for Mexican gas exceeded that being paid for Canadian gas. Although this incident ad more to do with international politics than domestic energy policy, rejection of the Mexican import request was consst- cent with « restrictive regulatory policy toward gas imports that prevailed until 1984, Decisions on import applications were based on five general factors: (1) the security of the proposed supply and it effect on US balance ‘of payments; (2) the price of the proposed import; (3) consistency with Department of Energy policies; (4) national need for the import, and (8) additional considerations, such as regional need for the import and the supply needs of the applicant” In 1984 the ERA issued a policy statement ‘on gas imports that Was much more compatible with the free market and es is usc e717-219W (9H). 1) See Jones, "US Mencan Energy Relations in the 1980s New Resouces versus OX Dilemmas, 12 Cae Ist Res J In 48S, 495-97 (190) for» cussion of Us depute Seton th Carter sdminstation ahd the Mian government Te ravonblees ofthe pce Was ade bya vary of fcr such a whet the ‘eve crt he import cou be determined by colts ot whether wou be conceded ‘Brough intemaging with domestic ar ats, Comparaity of pie with sltnive cacy ‘Suggest would be ued she import request wat refed was aa looked to, ‘See Note, “Impoted Netra One® Conics Between Intemational Poices ind Regulatory Safeguard, 13 J Uni eon 43, 431-37 (1981) for dacuion of pee Wet ingot poiseVou 12 Noi GATS, NAFTA AND TH TRADE IN ENIAGY ° fre trade concepts of the Reagan administration. Under this policy state- ment," which declared that “the policy cornerstone of the public interest standard is competition”, and the delegation order implementing i,” the ‘agency gave special attention to only three factors: competitiveness of the import, need for the natural gas, and security of supply. ‘The burden of establishing these factors was eased through the use series of presurap- tions. Ifthe import arrangement contained flexible volume or price prO- visions that allowed the buyer to respond to changing market forces, the ‘gas was presumed to be competitive in price. "Need" was viewed as a func: tion of competitiveness, If the imported gas was competitive in the targeted ‘market area, it was presumed to be needed in that locale." ‘Compared with the eatie criteria for assessing a request for natural gas Jmports, the 1984 policy was clearly intended to facilitate transnational sales, land after ¢ vigorous challenge in the courts, agency reliance on the policy statement was ultimately upheld." However procedural problems that pee- vented swift approval of import applications still remained, The presump- tions that imported gas was competitive and needed were rebuttable. Orders {granting specific import authorisation could be challenged by interested par- tues and were subject to judicial review. For example, in New England Fuel Institute» Sconomic Regulatory Agency an association of fuel ol distribu tors challenged a decision granting Granite State Cas Transmission Inc authorisation to import Canadian natural gas on the ground that the ‘decision was not inthe public interest. Although the court upheld the agency faction, it eazefully reviewed its findings on all three essential factors — ‘competitiveness, need, and security of supply — and could, presumably, hhave reversed the agency action in the absence of the extensive agency find ings justifying its ation, ‘As a retult of the Energy Policy Act of 1992, procedural delays in obtaining OFE approval for natural gas imports from Canada have now been largely removed. Section 202 of the Act states that “i]t is the sense fof Congress that natural gas consumers and produces, and the national ‘conomy, are best served by a competitive natural gas wellhead market.” Section 201 provides that the import and export of natural gas from or to ‘2 nation with which the US has a free trade agreement requiring national ‘weatment for trade in natural gas ‘shall be deemed to be consistent with the public interest, and. applications for such imporation or exportation shall be granted without modification or delay”. Aprarenily.as a cesultof this congressional mandate, applications for shoct-iecr imparts of Canadian as (arrangements lasting jess than two years) are. row. granted within. a week." IF NAFTA goes into effect, requests for imports and exports 10 1 49 Fed Reg 67 (198) "3 Dalogaton Order No 024-111 49 Fed Ree 650 (198), ‘oe The Bley Statement ndated tat sect of ply remsine ales, epeialy for intratonal rade poi, org poly [Regulatory Ageny. 82 F 24 1108 (DC Cie 187), Tor 3 deta smary ofthe 1984 pig flgment ands tres baie rite or so saa "2 Report 93, Foster Naural Gas Repo. 2 (10 Jue 1983.0 JOURNAL OF ENERGY AND NATURAL RESOURCES Law 1994 Merico, which now require approximately three or four months for approval, will presumably be approved with equal dispatch US regulation of natural gas transportation, Although authority to import Canadian gas can now be readily obtained from the OFE, an importer may siil face obstacles fiom a second federal agency that i also directly involved. in natural gas regulation. Regulatory authority over natural gas transpor- tation within the US, including transportation of imported natural gas, 5 currently vested in the Federal Energy Regulatory Commission (FERC). FERC also regulates sales of domestic natural gas, grants approvals for new pipelines that will transport gas to or from the Canadian and Mexican Dorders and rules on US pipeline rate structure, FERC, like its predecessor the Federal Power Commission (FPC), is a {quasi-independent agency governed by commissioners appointed for specific {erms. As a result, dgnificant changes in FERC policy can often be elfecti- ated only as new commissioners are appointed. Although the regulatory polices of both the ERA (OFE’s predecessor) and FERC became increas- ingly consistent and free-market oriented during the Reagan and Bush ‘administrations, the structure of the agencies allows them to operate inde- pendently of each other and, on occasion, to pursue somewhat different polices, ‘This possibility for independent action has special significance for trans- ‘boundary trade in natural gas. Even though FERC has no power to approve ‘of disapprove import and export applications, rulings on the various matters within its jurisdiction may affect both the physical practicality and the econ- Comics of import/export projects. A recent, well-known example will serve as illustration. In exercising its public-utlty ratemaking function FERC ‘determines what costs can be passed on to consumers. This determination ‘may be erucial to the costeffectiveness of using ING. In Jn re Natural Gas Pipeline Company of America, FERC Opinion 256, FERC addrested the issue raised by the difference betweea the rate design used by the Canadian ‘exporters, which allocated all fixed costs to the demand charge, and that used by US pipelines, which are not permitted to include recovery of specified ‘equity costs inthe demand charge. In its order FERC refused to allow the US pipelines co pass through demand charges of their Canadian suppliers ‘on an “as billed” bass, thus creating the risk that the importing pipelines in the US would not be able to recover the fixed charges paid to Canadian suppliers from their US customers. The decision had a domino-like effect. US pipelines sought to renegotiate the purchase contract to re-arrange the cost elements so that all oftheir costs could be passed on to their customers. ‘The effect was to shift the risk of under-recovery of costs to the Canadien exporters. They, in tur, have atiempted to alter the structure oftheir sales contracts, including marketing directly to local distributing customers and end-users! Although the issue raised by FERC Order 256 has apparently been resolved a5 a resuk of private renegotiations and subsequent agency Me ST FERC para 61215 (8 December 1986), "© See National Enugy Board, Canaan Energy Suply and Demand 1967-208, ss on 652 (1986)Vou 12 Nol Gar, Nara aND Tu Taabatiy ENERGY 31 action, future FERC action on pipeline rates may impact Canadian imports. Indeed, even Canadian exporters that contract directly with non- pipeline purchasers will be affected by FERC’s action on proposals for new pipeline construction, the terms on which “open access” is encouraged,” and the method of determining transportation fees." ‘Other potentially applicable US statutes and regulations. In addition to regu- latory policies pursued by OFE and FERC, natural gas trade with Canada 1and Mexico may be affected by US statues and repulations dealing with eavironmental protection and preseration of cultural and historical sites, ‘These statutes are not specifically directed at energy trade, but often affect projects that involve extensive construction. For example, the National Historic Preservation Act (NHPA)"™ is intended to protect sites that are listed or eligible to be listed on the National Register of Historie Places. In ‘many instances the Advisory Council on Historic Preservation must be given an opportunity to comment on proposed activity that may affect such sits, and an environmental impact statement may ultimately be required. Feilure to file the envizonmental impact statement ray result in a violation of the National Environmental Policy Act (NEPA). Since NHPA sites include battlefields and Native American burial grounds" as well as structures, almost any projected long-distance pipeline may become subject tothe Act's requirements. These may significantly delay the construction and operation ‘of new natural gas or crude oil pipelines or require alterations in planned routes, ‘The NHPA is only one of many protective acts. The Endangered Species ‘Act**is frequently invoked by environmental groups when thee isa poten tial threat to the habitat ofa threatened or endangered species. Other les lation protects specific animals, such as bald eagles various types of cultural artifacts, and archeological data. In addition, the US has several environ- ‘mental statutes that are more general in scope. Although petroleum and ‘many drilling and production by-products are excluded from two of the ‘most important of these," others, such as NEPA, may occasionally affect pipeline Construction and operation. The Oil Pollution Act of 1990(OPA)™* ‘See Aletander J Bac, “Eoonomie and Bavicomental Regusry Relaons United ‘StugeGanada Fee Trae In Boer 3 Cont J Inv L383, 898-80 (1983). Tor example, FERC Order 436, which allowed pipelines to eek ga ansported for a prodoce against he pipeline’ taker py obligntions to the producer eocourege pplns {increas takes of toma gs in oreo rodent ake pay obligations One rst swat decree tes of Canadian ge "Ss Pptine ate ted on gegrapls 2oe ther than distance wuld have parte efets on dome sod Canadian gs ‘Te USC mons 470 fo 0m (1988), {9 42 USC srtons 434370 (198). ' See National Pw Youh Coane» Anus, S01 Supp 619 (DNM 1980, af 6 34 20 (10 Gir 1981) $e Te USC vctons 153-1568 (198). ‘The Resouree Conservation and Recovery Act (RCRA), 42 USC seins 6901-932, lic regulates the wie and dpa of heardous wane, ecmps many of te matt ‘onl exploring and dling for land earl ga Te Competcasie Environmental Response, Compensation and Liability Act (CERCLA), 42 USC wctons 961-9673, whch Provider finding tnd enforcement mci fr cating p exiting haardow wai ss, ‘ez exeladeptrolem from te deiton of hazadootwobstances ‘Pup L No 01-380, 104 Stat 6 (19%), princaly coded at 33 USC sections2 JOURNAL OF ENERGY AND NATURAL RESOURCES LAW 1994 and the Clean Water Act (CWA) have direct applicability to transpor- {ation by oil tankers and many pipelines. ‘The United States is not alone in imposing environmental and other pro- tective requirements on pipelines, cargo tankers and other faces related to the roduction, refining and transportation of petroleum and natural gas. In Canida the Federal Environmental Impact Assessment Review Procest Guidelines require federal agencies to delay a decision on any proposal that may have an environmental impact uatil the proposal has been sereened for potentially adverse environmental effects. Ifa significant adverse effect is possible the agency must provide for a public review of the proposal by an ‘environmental assessment panel composed of persons with special expertise in the matter” The Guidelines are applicable to virtually all federal agenc- ies. As «result, Canada’s National Energy Board (NEB), which authorises imports and exports of energy goods, has recently initiated a process for reviewing the environmental impact of proposed new pipelines and pipeline ‘extensions, including those designed for gus exports to the United States."* ‘The NEB’s implementation of the Guidelines is gute liely to cause signifi- ccant delays for producers and other parties seeking to export natural gas ‘rom Canada." Delays resulting from the US regulatory system are even more probable. Unlike Canada’s NEB, the US agencies charged with enforcing the various statutes designed to protect the environment and to preserve historic, cul- tural ard archeological sites have no director acknowledged responsibility to facilitate trade in energy goods. Hence itis unlikely that their policies ‘and dedsions will be coordinated with those of the OFE and FERC, the US agencies that have a direct mandate under CFTA or NAFTA. Even ‘more important, facilitating the intent of the free trade agreements is not likely to be @ high priority for agencies that focus on environmental protec- tion and site preservation, State regulatory agencies. Action by ageacies of individual states is another potential barrier to the free movement of energy goods among the NAFTA Countries. Broadly speaking, three types of agencies may be directly or indirecty involved inthe energy trade: those responsible for resource conser- vation, those charged with environmental protection, and those concerned with utlity regulation and protecting consumers aganst artificially high energy prices ‘Under the US federal system control over oil and gas exploration and production is entrusted to the component states. The major oil and gas producing state, such as Texas and Oklahoma, have crsted powerful state Agencies that have broad rule-making powers and fommulate and enforce their own regulatory polices."® Although each state's agency can — and ‘occasionally does — act solely in the interest of its own state, there are 9932 USC meton 13, 15 Fran ofthe Olas Rier Sock » Canada, 1 SCR 3 (192), oo ta 1 Seeeg, Na Energy Ba, Reasons for Decision, TransCanada Pipeline Lid (Bachan Butason Pub NOGH-LS) (uly 1961), Nati Eaesy Ba Rewons for Decision, ‘TrageCamda Pipelines Lt (Gananoque Exeson), Pub No GH+40 (Apel 191), "See Black a 614, spe al note 46 Soe roe B Sth and Jacquin L Weaver, A Trstie on te Texas Law of Oi and Gs, chats U5 (1989 and 992 update) ors dexrpin ofthe Texas reaatry ate,Vou 12 No1 Garr, NAFTA AND TH TRADE In ENERGY. 3 constitutional constraints on an agency's ability to effectuate rules that inte fere wit interstate and international commerce or that conflict with federal Jaw, including treaties, The commerce clause of the US Constitution pro- hibits states from restraining the fee flow of goods, including oil and natural 2s, in interstate commerce. Additionally sate action that is inconsistent With federal policy may be invalidated under the supremacy clause of the Constitution or by the judicial doctrine of pre-emption. For example, in ‘Transcontinental Gas Pipe Line Co v Sate Oil & Gas Board,* x Missisippi law requiring gas pipelines to make proportional purchases from all oper- ators producieg from the same reservoir was held invalid as applied to an interstate pipeline. The US Supreme Court ruled that state action in this ‘area had been pre-empted by the Natural Gas Act™ and the Natural Gas Policy Act!® These various doctrines would preclude a state from restricting imports or exports of Canadian and Mexican energy goods within is boundaries, ‘Whether state conservation laws that curtail or prohibit production would be similarly invalid is less certain, Historicelly such laws have regularly withstood constitutional challenge, * even when their primary goal was the protection of aeighbouring landowners’ correlative rights rather than pre- ‘ention of watteful production." However almost all of these cases dealt primarily with claims that the state proration rules constituted an uncoast- tutional taking of private property or violated the equal protection or con- iract clauses cf the US Constitution.” Invalidity under the pre-emption doctrine or the supremacy and commerce clauses was rarely, if ever, argued.*” Inapost-NAFTA era, these later doctrines may have some fore. ‘Agency rules curtailing gas production within a field could directly impede specific transboundary contracts negotiated under a NAFTA regime that permits US produces to sll natural gas directly to end-users in Mexico, The possibilty that state conservation rues will interfere with NAFTA nergy trade is largely theoretical, but stale environmental regulations and State public utility commissions have already had a limiting effect. Problems in obtaining permits and certifications under the New York Environmental 474 US 409 1986) 15 USCA sections 717-71TW (1988), See aaa Nothere Nana! Gar Co ¥ Comes of the State of Kans, 372 US 84 (963) ao Schnedenind » ANA Pipelines Co 83 US 293 (hag state retin of tet pps poem he ata Cas "15 USCA setons 301-3482 (1982) ‘tp. Oh Gl Coy Indian, 177 US 190 (1900): Champlin Refi Co» Okahos Conoraion Comm'n 286 US 210 (992), tnd Hendon Cor Pann, 0 US 258 (105) 2 Se, Bani Petre Co » Superior Cor, 24 US 8 (1981, ‘se Fora fll ctton of thes costa the hee tes which they wee argued sot ‘si and Weaver agra note 16, at section #5(8) (199) and 1992 up) 'H The pac exception invaed the common purchaser acts, whch rege pits ot sn gu pipelines wells Common eaters to take prodocton “vataly" om a produces thi fig. The oar in Texoma Natal Gos Cor Text Ravad Coren 39824 130, (WD te o%2) htt the Toxar Common Purchaser Ac, Te Nat Rex Coe Ana sions 1101-11113 (ermon 1978) not oly deprived pate pipeline owner of property witout ‘compensation, bu aso burdened ntrtate commerce in olson of the comers Ce ‘Reenyaemot w accomplish the same goal ough pretatening order war io stacked, ‘Uilugh pany on alla” grounds The Rsoy of ie Gap od the cet sats of ‘Sonmon patches sta sot ott in Seth and Wetver, spa noe 160, ston 8.5()(2) (1309) 8 1992 ep.‘ JOURNAL OF ENERGY AND NATURAL RESOURCES LAW 1994 Quality Review Act! have led to extensive litigaticn as well as protracted delays in constructing a pipeline from Iroquois, Ontario to New York City." The California Public Utility Commission has issued a series of orders intended to increase competition in a market hitherto dominated by Canadian suppliers." Action by the later agency resulted in a request by the Canadian Petroleum Association thatthe NEB review an earlier decision approving Alberta and Southern Gas Co's gas sales 1 the California market tough October 2005. One issue before the NEB was its powers under Gah ‘Slate environmental agencies and public utility commissions are as much subject to commerce clauses, supremacy clauses and pre-emption doctrines as conservation agencies. Often, however, the scope of the pre-emption doc {rine or the applicability of constitutional provisions is unclear. Tn the controversy over the Iroquois pipeline project the New York Public Service Commission argued that since FERC required the pipeline to seek certain state certifications and permits, the stat agencies Id independent power {regulate in the areas covered by such permits.* Alermatively it suggested that the pipeline had waived its pre-emption claim and was estopped to assert it because it had accepted the benefits of the state permits.”> The California Public Utilities Commission, while recognising FERC jurisdiction ‘over interstate pipelines, has relied upon the authority ofa state to regulate local distributing companies." In addition, state egencies are frequently empowered to act by federal statutes, uch asthe Coastal Zone Management ‘Act, which requires deference to’a state's environmental conceras. The sae certifications required for the Iroquois pipeline project were mandated by such statutes, US concerns with respect to Canada and Mexico, From the US perspective, potential Canadian legal baries to free trade in energy goods appear similar to those posed by the US system. They arise primarily from competing regulatory jurisdictions and regulatory concerns. Tae principal Canadian agency is the National Energy Board (NEB),""® whch performs functions analogous to those of both OFE and FERC. In adcition to regulating the interprovincial transfer of natural gas, it has jurisdiction over exports and imports.” Like its US counterpart, it ust determine, among other matters, ‘whether a proposed export is compatible “with the public interest”. The history of its policies toward natural gas exports and the public intrest "6 state Bavionmenal Quality Review Act, NY Env Coney Law section 8-010 ey (exiney 1964 aad 1993 Supp) "6" A detailed cusion ofthe Iroquois pplne pot and the ea ust sented canbe found in reer M Lower, "The logue pine Pro: A Stayin Pde State (Cong I alin Le (1983) "Se Alan Holinpwort, "Cabfomia Gas: A Brie History and Recent vente” 31 Ala Lets (999), [PE Tye NEB deci, epi a8 elas to CFTA and GATT is dusted ia J Oven Sundin, “GATT, NAFTA tod North Amacan Bney Trade A Canina Popes 12 TEAL (898), Lower, pre aoe 16, at 18-24 ime 2 Hotingnoth pra aot 170, a 12-103, 53 1G USE sexton 1451-146 (198) 8 National Faey Board Ac, RSC, ch N-7 (198) ‘0 The NED's powers and fection are desed is Alsi Lucas and Constance D Hunt, if and Gas Lawn Canad,Vou 12No1 Garr, NAFTA AND THe TRADE mY ENERGY 55 somewhat parallels that of the FPC (and later the ERA and OFE) toward imports. By 1987 the NEB's relatively restrictive polices toward natural gas ‘exports had given way to a specifically market oriented procedure. This procedure was subsequently modified several times, and by 1990 the NEB had adopted a presumption that freely negotiated, arm'r-length contracts ‘met the public interest criterion." Current Canadian export standards now closely resemble US import policy. Thus it seems unlikely that NEB action ‘on export applications will hinder transboundary natural gas transactions Delays are more likely to arise as a result of applying the environmental review guidelines, meationed earlier. Indeed, in assessing the Canadian regu- latory system, one commentator has concluded that “Environmental impact [studies} of natural gas exports and related facilites isthe biggest potential brake on gas trade between the two countries”. ‘The role of provincial agencies may be equally problematic. The provinces ‘exercise a degree of control over oil and natural gas that in some instances ‘appears to be paramount to that of the federal government. Most of the productive on-shore oil and gas reserves are owned by Allerta, British ‘Columbia, Manitoba and Saskatchewan, and these provinces receive sub- stantial income from royalties. In several instances this pattern of ownership hhas resulted in conficts between the provinces and the federal govern- ‘ment. Provincial control over oil and natural gas is further enhanced by the Canadian constitutional structure, under which the provinces not only regulate exploration and production, but also control exports of non- renewable resources to other parts of Canada (provided export restrictions do not discriminate in prices or in supplies exported to other parts of Canada). This later power raises at least the possibility of rulings by provincial regulatory agencies, such as the Alberta Bnergy Resources Conservation Board, that are inconsistent with the central government’ ‘efforts to comply with the provisions of the CITA. and NAFTA. Legal concerns related to Mexico generally focus upon the special status of minerals, especially petroleum and natural gas, under the Mexican consti tution and the continued, if slightly modified monopoly that PEMEX will continue to hold under NAFTA. These provisions will sharply limit the types of ventures that are possible in Mexico. Article 27 of tbe Mexican Constitution, which vests ownership of all hydrocarbons in the nation, has ‘been construed quite broadly to include all aspects ofthe il and gas indus try, including not only exploration and production, but also refining, trans- portation, storage and sales. Control over all of these industry phases is vested in PEMEX, which is precluded from entering into types of develop- Te procedures infect ty 1989 for approving natural gs exports ar tout in some ical the. Pcior Energy eas, 18 the mater of Castes Energy Lid, Norse Eaeay Resour Lt, Poco Poseurs Lid Ine and Wester Gas Marketing Li Natal Eaey Board GH (19s) Fora deasipton ofthe NEB pe tows natural gs export, See J Owen Saunders, ira a ste 11 Gary 8 Couig, “Natural Gat Transactions Betnea te United States and Maxi Pola and Legal Inpedinents to Fre Trade", 27 Tex nf 757,658 (1932). ‘See Aleande lac, spa at 20 146 Op example the dapat over povoclroyly sles ad its ftom federal tax reyggue dered i Lacs and Ht sire note 177, at 31-35. "See Davie, Gai A Produo's Pepe Foowing Derepulason, 24 le Le (198) fora dncaon ofan inane In which the vine ‘esd to pptore removal appcauons bese the contacts ner which te git wa 0 be {ld were deed wacoJOURNAL OF ENERGY AND NATURAL RESOURCES LaW 1994 ‘ment agreements, soch as production sharing contracts and rik-servce con tracts, that are commonly used by other state oll companies "* "Nonetheless, the business and legslcimate in Mexico has been somewhat more receptive 10 foreign energy-related investmeat in recent years. The reforms instituted by President Salinas have already opened the door t0 investments in secondary. petwochemicals, and. PEMEX has appeared increasingly receptive to service contracts with US companies, [thas receatly entered ato several highy-publicised driling agreements wth Triton and Sonat** NAFTA wil presumably have an additonal postive eect upon international energy ansactons between the US and Mexico. I wil provide increased opportunites for investment in secondary petrocbemials. The ‘American Petroleum Institute posts that PEMEX wil begin a more aggress- ive campaign to costract with US firms for a variety of advanced techtol- opie, Including. sophisticated seismic techniques, advanced drillng technology (such as thet employed in horizontal wells drilled in the Austin Chalk and otber highly fractured ol eservoin), anda variety of enhanced recovery techniques." Although eareat US regulatory polices should aot bes deterent to thee developments, lack of an adequate Mexican ini structure and pricing problems with PEMEX, which bave bees the root of Several failures to arrange long-term natural gas trade between the two} counties, may stl consitate significant barriers evento these modest oe ings of the Mexican energy sector. Effect of NAFTA upon trade barriers. NAFTA will not completely remove existing and potential trade barriers. Chapter Six contains two provisions that specifically acknowledge many of the peculiarities of the energy Jaw regimes of the three contracting partes, In Article 601 the parties “confi ‘thei fll respect for their Constitutions”. This statement i of crucial impor- tance to Mexico, since it leaves Article 27 of the Mexican Constitution firaly in place. Mexico has made it clear that it will not modify its interpretation, of Article 27, and that it wll retain sovereign ownership over oil and zas ‘and governmeatal control over industry operations." As a result, PEMEX will continue to have sole authority over virtually all portions of the Mexican oil and gas industry. Article 601 also bas some relevance to the division of regulatory authority under the US and Canadian federal systems. Provincial ‘control over the extractive industries, which seems to have a firm basis in the Canadian constitution, would presumably be unaffected by NAFTA. Whether NAFTA would preclude US state zegulatory agencies from protat- ing the volume of production dedicated to transboundary gas sales contracts © Fora dessigton ofthe Mexican egal regime applicable othe ol and as industry se Roplo Lopes Vere, “Foreign Partaspaion inthe Ol snd Gat Indy f Meio, The ‘Northern Pre Tree Atreement I Scape and Inpicton or North merc’ Layers ‘nncace ond Poleymakers, Pape H (ABA 193), "oSee“Mexie's Ol Indust Heads Towards ihe 2st Century", Mesico on te Rec, Jaquary 1992 (ol, 2072), at 2 Dama Soli, “Mexico Cuards tz Prous 2 Bases! Forges Push bt Protect Gate Stay Sha, al tJ, 20 Jauary 192, at Ak "Ese Ameen sn it Pe mrs of Sra "ite Ana 6023 Mico revere o itl the ih ie Trade Agreement producing, ein, processing nding, Wanspertng oriagand Srtistiog upto sndincod {behets oo rade ol atral and arta gn ood bain By renga rooeng (tle ll and natural gu, and bss petrochemzals invest in explora,Vou 12 Nol Garr, NAFIA AND TH TRADE Is ENERGY a ‘would apparent turn upon the outeome ofa challenge based on commerce clause and supremacy clause arguments Article 606 addresses the problem that may arise from regulatory action As discussed previously, there is little or 20 co-ordination between the two levels of governrtent regulation in either Canada or the United States, and even ata single level government agencies occasionally appear to be working at cross purposes. Article 606 provides that “|elach party shall seek to ensure that in the application of any energy regulatory measure, energy regulatory bodies within its territory avoid disruption of contractual relationships (2 the maximum ecent practicable ..."” This mandate unquestionably applies to agencies, suchas the NEB or FERC that regulate the sale, trans- pporiation, and distribution of energy goods; however agencies charged Wits ‘enforcing enviroamental rules, such as the US Environmental Protection “Agency, are not “energy regulatory bodies”. By its language, the article docs ‘ot directly apply to such bodies, although their actions are the ones thet ‘seem most likely 10 pose obstacles to energy trade, Moreover, if Article 606 is to be implemen‘ed within the context ofeach party's constitutional system, as suggested by Article 601, its legal effect upon regulatory action by state agencies, including the Texas Railroad Commission, the Alberta Energy Resources Conservation Board, and the California Public Utilities ‘Commission, may be precatory rather than mandatory. If action by a regulatory agency subject to Article 606 is deemed to be inconsistent with NAFTA, the partes will almost certainly utilise the dispute settlement mechanisms contained NAFTA, rather than those provided by GATT." The ue and effect of these dispute resolution provisions upor US judicial decisons that negatively impact energy trade is less direct, A ‘cas overturning ‘he grant of an application to import natural gas or grant of pipeline approvals would presumably be based upon @ decision that the relevant agency acted contrary to statutory authority, and would this require a change in the statute rather than in regulatory policies and practices, Conclusion (Currently there isconcern about the possibility that the GATT multilateral negotiating process willbe displaced by a process of creating and expanding regional trading blocs." The perception that the United States is placing higher priority an the approval and implementation of NAFTA than on ‘the need to bring the Uruguay Round negotiations to a conclusion has fed this concern." This perception appears to be accurate. “The GATT negotiating process arguably has significant advantages over 1 regime of regional trading blocs in the elimination of obstacles to free NAFTA, Aree 606, tm See the dsssien sipro a notes 94-102 and 113-104, 4 Seg, Japan hapa, "The Diniibed Gat Syadiome”, Foreign Afar, Sprig 1993, p22 36, Gan Tafbauer abd Jelfey Sot, NAFTA. dv semen, nei et [nterntdonal Econorc, 1983, pp 116-117 ProfesoeBaagwati sng the poss of se ‘pon wadiag bloc a9 expanded EC, 4 NAFTA extending at South Ame, 2 Japa ‘Stred Asan blue sbd "a [ourth ioe of merponne’ naone sch as tow of South Al {SU Ana" Hufbau and Shot evaicn two competing train blocs sn epanded EC abl "loose Pace Bass group of Nord Amerzas bod East Asn counties ‘ise the dcuson, npr a note 338 JOURNAL OF ENERGY AND NATURAL RESOURCES LAW 1994 ‘rade, The general applicability of the principles of national treatment and ‘most-fvoured-nation treatment ensure tht concessions negotised under GATT auspices will be extended to all member nations. However When GATT sponsored negotiations drag on for years beyond deedlin and appear unlikely to mest the objectives of some of the negotiating partes even if successfully concinded, it should come es no surprise when those parties look fo regional negotiations a an alternative approgch to trade liberal ation. Whether the major trading nations have the will to salvage the ‘Uruguay Round regotitions remains to be seen, NAFTA has achieved advances over the GATT. The extension of coverage to tade in services and to investment are significant. The protection of intelectual propery is important. NAFTA specially saan the energy, trade in a stparatechaptzr. Pechape the most sigiicant impact of NAl “SETH ergy fade wil be the avaiabliy ofthe elaborate depute resolution provisions of the agreement to deal with potential disagreements between the paris. Te significance of federal, state and provincial regulatory Bodies in creating obstacles to trade in energy will be sen over time. In any event, cn balance, NAFTA should facilitate the trade in energy between the United States and Canads and between the United States and Merico.Implications of GATT and EEC on Networkbound Energy Trade in Europe By Martha M Roggenkamp* Introduction ‘Trade in energy may be identified by the way in which itis transported. A clear distinction can be made between the transportation of networkbound {energy and energy that can be transported otherwise. Some modes of energy, like oi, can be transported in more than one way: through pipelines as well as by road in tanker lorries, by canal in barges and by ral. Hence, trade in oil can be clasfied under more than one category. Although natural gas also can be shipped in a gaseous state or as liquifed natural gas (LNG), these modes of transportation will not be taken into consideration as they fare mainly applied when there is no access to a pipeline system or the distance to the market is too far to construct a pipeline.' So, it can be concluded thet the means of transport of natural gas and electricity are limited: by way of pipelines or transmission lines, These modes of transport ray be characterised by the use of fixed installations necessitating the perma- nent occupation of land. Also a number of national laws may prevent the ‘construction of additional infrastructure. This is often the result ofthe exist- ‘ence ofa legalor defacto transport monopoly. Hence, there is only a limited network for transmission of electricity and gas. As there are no other pos- sibilities to transport these types of energy, the lack of competition in this sector is not surprising, In the following article I will concentrate on the {transportation of natural gas and electricity and discuss the impact of two international rade agreements, ie the General Agreement on Tariffs and Trade (GATT) and the Treaty establishing the European Economic Community (HEC), to this special type of energy trade. In particular, atten- tion will be pad to the issue of transit of gas and electricity, and the question of network construction, including the development of technical standards. Energy infrastructure in Burope ‘Before examining both trade agreements and the impact of these agreements ‘on European energy trade, an overview willbe given of the development of Hetroatons!nstuat vor Enerpeesht, Riauiventet Leen EWR Bentsen The Sec Prom of Liged Naural Gat Te LNG Cha — General Lega Aspects, Eset Law 198, TBA, Procrding Voll 38 9© JouRNAL OF ENERGY AND NATURAL RESOURCES LAW 1994 the clectrcity and gas infrastructure in Western Buroge. Considering the increase of world trade, the high level of petroleum expioration and pro- duction and the increate of technial expertise after the iecond World Wat, i is not surprising that the gas and electricity networks in Europe have ‘mainly been established during the last 30-40 years. “The Furopeen natural gus grid, for example, has been developed since the 1960s and is based on the discovery of the Groningen gas field in the (Netherlands. It consists of a North-South and a East-West transportation system. In the North,* Norwegian gas arrives at Enden through the Statpipe/Norpipe system® from where it is transported to the South of Germany" and to the NV Nederlandse Gasunic in the Netherlands. The ‘Dutch pipeline system which is owned and operated by Gasunie is linked to ‘other European systems such as the Socité Buropéene du Gaszoduc. Est- ‘Quest (SEGEO)’ transporting gas through Belgium to F-ance and the Trans Europa Naturgs Pipeline GmbH carrying gas through Germany to Basle, ‘Switzerland, ard from there across the Swiss Alps to Northern Italy.” The “East-West grid has been developed since 1976 when MEGAL GmbH Mitte Europaische Gaslestungsgesellschaft® was founded for the transport of gas from the Czech-German border to the German-French border. A second ‘connection ofthe MEGAL system to the Soviet pipeline grid was established in order to trarsport natural gas via Austria. In France, the pipeline system ‘of Gaz de France is connected to the terminais near Mars, Saint Nazaire ‘and Le Havre where LNG is landed from Algeria.” Although a highly inte- rated European gas grid exists, not all countries are connected to the exist- ing system. Tn contrast to the above system, all the European electricity transmission ‘companies withthe exception of the Irish Electricity Supply Board (ESB) have established a connection with the grid of at least one oftheir neighbour- ing couutties.” In practice, there are fwo seperate European networks for electricity interchanges, NORDEL is an association o: representatives of tlectriity companies in Northern Europe (Denmark, Norway, Sweden, Finland and Iceland) and was founded in 1963. The mainland European nthe North te Garman ga transmis sytem is lo conned tothe Danish si Forth pupoe a tanabordernteconnertor wat eablibed in 198 which explo by © DanihGerman campy called the Deatch/Dniebe Eeasanspor-Geslichaft mbH or STAs om he end of 1993 when the is has of Zzpie it opratinnl, Norwegian gs wl stu te landed in asbrogze Belg. a aon ano ipl, “Europe Wl be on ‘Rcd wih al land a Geman in Germany tampon by Norbuhache Baivomgrt Gnblt (NETO), Miteromsche Brgstanport Gn H (METG) 10a Suddeice Brigttensor! nb (Get) ages NG ha a sare ofS leat $0 percent tech Copy At pest ‘Wintel AG ieconsrucing two addition pgs, e the Mite Denzin nbn [tung (MIDAL) sad the Soom Tharinger- frp Leta (STEGAL). Tas panes ope he tramp fen from he North Sat the Eaters part Geran “joint enters ofthe Hosa at antision company Disuiga SA sb Gaz de France ‘oily owned by Rakreas AG aad the lalancompasy SNAM SpA. this pps slew connected withthe TRANSMED pple sytem in 1986 which ‘wagsports Alpen pst lay "SMIEGAL rai eater of Rubras AG, Guz de Frac, andthe Austian OMY AG. "See RD Vise, The Europe Natural Ga! Marat a. Exploiting the Tneral Markt. CConpeaion tad Competion towards 1990, als P) Sloe aad MCHC van der Woude, Deni, 188 WA Holmes, Bhcricy i Boye — Preset Strand Propet forthe 19%, Facial “Tune Busine Inormtion Londos, 1988‘You 12 Not Byanay Tepe ty BUROPE a clectrcity companies are represented in the Union for the Co-ordination of Production and Transmission of Electricity (UCPTE) which was founded in 1951. Both organisations are advisory bodies which exist to promote the exchange of information on electricity trade and help facilitate co-operative projects ‘The creation of this energy infrastructure in Europe isthe result of inter- national co-operation between national undertakings. ‘These national gas land electricity companies generally transport energy on the basis of legal ‘or a de facto monopoly. Whereas some States have enacted special rules {governing energy trade, others have not. However, the fact that network bound energy wade isstil based on national rules does not Imply that States ‘may impede free trade within ther territories, Two important international ‘agreements governing trade principles which have emerged in the same Period are of speciic portance: the signing of the General Agreement on ‘Tanifs and Trade and’ the establishment of the European Economic Community, [Energy trade under GATT and EEC GATT and EBC The General Agreement on Tariffs and Trade was signed in 1947." The main purposes of the GATT are: to provide a framework of rules for the orderly conduct of world trade, and to supply a set of instruments for the reduction of trade barriers. Article XXIV of GATT permits the estabish- ‘ment of customs uniors and free trade areas."? The same principles governed the establishment of the European Economic Community in 1957." The [EEC is based on a customs union “which shall cover all trade in goods and hich shall involve the prohibition between Member States of customs duties fon imports and exports and of all charges having equivalent effect, and the adoption of acommoncustoms tariffin their relation with tid countries”. Furthermore, a liberal tariff policy is envisaged vis-i-vis third countries oo a basis of reciprocity'* After all, the Treaty of Rome states that "[D]y ‘establishing a customs union between themselves Member States aim to contribute, in the common interest, to the harmonious development of world trade, the progressive abolition of restrictions on international trade and the lowering of customs barriers”. The abolition of internal barriers to trade and the creation of a common customs tariff towards the rest of the work, fare two important elements in a customs union. By contrast, a free trade "The GATT was etblibd within he framework ofthe etabluhet fx ne economic wold order. For this prpoe i was deed lo etic te Inteeationl Mowery Fuad (ME), "the Internationa Bank Yor Roooattion and’ Devsopmeat (IBRD). tod the Ibterauna! Tae Organiation (TO). Within the ramnowork of TT ter eeotsonn wee ‘ld wh esd inthe sgnng sf GATT. The ITO tor came into Tore butte OAT Cie to av aif of tows Se for example RC Hine, The Folic! Economy of Europea Trade, An Inrodein to the Trade Poles of he EEC, Gest Bai, 1985, chapte 3 "2 Treaty etablhing the European Economie Comment, sgn ia Rome on 25 March 1997, berate "EBC Trey ‘Aa 9 paragraph 1 EEC Treaty, PTO Kapeyn, P Valea van Themaat, nvadicton to the Law of the Burepean CComaniies "fer the eming oto foes ofthe Single Prope Ae, ed' LW Garey, KigneriGrabam & Fotman 198, pp 364-368, "Arte 110 BEC Treae JOURNALOF ENERGY AND NATURAL RESOURCES LAW 1994 area may be established solely on the basis of the abolition of internal barriers to trade.” “The next question concerns the relationship between GATT and the EEC. As GATT was establshed 10 years before the FEC, all EEC Member States were already GATT Contracting Parties when they concluded or acceded to the EC Treaties" In order to clearly determine the status of GATT. Within the Community @ number of provisions of the EEC Treaty are of Importance. In the fist place Art 234 FEC, provides that “ihe rights and obligations arising from agreements concluded before the entry into force fof this Treaty (....) shall not be affected by the provisions of this Treaty”. Secondly, Ast 228 para 2 provides that agreements concluded by the Community and one or more States or an international organisation are binding on the Community institutions and the Member States. ‘Under the General Agreement not only States, but aso a "eustoms terri- tory possessing full autonomy in the conduct of its external commercial rolations and of the other matters provided for in this Agreement” may accede to GATT." According to Article XXIV para 2 GATT, a customs tunion is considered to be such a customs territory. The EEC had, therefore, the opportunity to frmally accede to the GATT. This would have been in Tine with the tasks of the Community, which include “the establishment of ‘common customs teilf and of a common commercial policy towards third countries” “However, the BEC has not made use of this opportunity and never for- mally acceded to the GATT. But the practice developed from the “Dillon Round” (1960/1961) is that the EC Coramission participates like a GATT contracting party sul generis in all GATT bodies except the Budget ‘Committee.”' This “couble membership” has never given rise to legal prob- Jems, and the EEC has always boen accepted as 2 contracting party to GATT. The EEC itself takes the view that it has substituted fo the individual “Member States and that it is fully bound by GATT law although itis not a formal GATT contracting party.**Moreover, the Court of Justice of the TEC has in various cases* decided that GATT forms an integral part of Community law. ‘The relation between GATT rules and the Community was clearly deter- © Kapley, Verloea vae Thmat, p30 92 refering to Art XXIV para # GATT ia which fon tade sca Sel as" poup of tro oF moe customs ttre which the Sus fad other festive egutins of commerce ate elmiated on sobtantal al the trade ‘etven the constcattetones in products eripnating such err” ‘'Sejpum, Prana, Lssembourg he Netbands andthe Und Kingdom the Genel Agreement since | Janay 1988. Tis appa is bused on the Proecl of Provssona ‘Application of he Geol Apexeat of 30 Ocabe 1947, The est of the EC Member States ive apled the GATT sins 1980 (Deamark, Grose and Tal), 1981 (Genzany), 1982 (Porag), 1963 (Span) aa 1967 (lng). Atids S00dH GATT, 2% Artie 2 EEC Treaty, Arie 9s BEC Trety and Ale 113 BEC Tey 2 The nail Member States remain response fore nancial contains to GATT. 2 Gate (15 Nederase Spoonepen peter der inorecion en saan EC. 1995, p18 2 ea more complete versew se BU Petersmann, The EEC at @ GATT Member — Legal CConfiets Bermeen GATT Lam ond Earopean Carman Lani: The European Commaiy ond GATT, edit by M HLL, FG Jacob, EU Petesoana, Kinmet Deventer, The Netheriads ‘see. Fox example in Cate 181/73 Haeeeman ECR 1974,» 49, and Case 104/81 Haxpeollamt Main Raftery BCR 192, p64Vor 12 Not Bymncy TRape IN EUROPE a ined in the Coutt’s ruling in cases ©21-24/72 International Fruit Company ¥ Produktschap voor Groenten en Fruit In these eases the Court defined {two conditions which have to be satisfied in order to conclude that provisions ‘of an international agreement can be relied upon before a national court. ‘The frst condition is that the Community has to be bound by the provision. Secondly, the provision must beable to confer rights on Community citizens ‘The Court thea examined whether GATT satisfied these conditions. The first condition was met since the Member States were bound by GATT before the entry into force of the EEC Treaty, and “the Community has assumed the powers previously exercised by Member States in the area govemed by the General Agreement”** As for the second obligation, the Court considered the spirit, the general scheme and the terms of GATT. and concluded that Article XI of GATT (which was the relevant provision hhere) was not capable of conferring rights on Community citizens which they can invoke before a national court. In ease 266/81 SIOT, which will be discussed to a greater extent later, the Court ruled that Article V of GATT could not have direct effect in’ the framework of Community law. From these two cases, and particularly from the reasoning of the Court in the first cases, t can be concluded that GATT in its entirety cannot have direct effect. From the Court's ruling in the International Fruit Company cases the rincipl is derived that rules of international law aze subordinate to the EC ‘Treaties but take precedence over secondary Community legislation. In case the secondary legislation is in conflict withthe international agreement, the existing secondary legislation does not necessarily have to be amended since the international agreement is a higher-ranking rule and, accordingly, takes precedence over secondary Community legislation, On the other hand, a formal amendment of existing secondary legislation is desirable in order to prevent conflicts. In practice, the Community prefers to amend indepea- ‘dently secondary legislation which is contrary to the international agrec- ‘ment, instead oF relying on @ suitable interpretation.”” ‘As GATT in general is not directly applicable individuals cannot rely before national court on provisions of GATT. They can rely, however, on secondary Community legislation, implementing GATT provisions, which have direct effec." From the Court's ruling in the Nakajima case it can also be assumed that an individual can challenge secondary Community legislation when itis considered to be in conflict with GATT. ‘Trade of natural gas and electricity under GATT and EEC In contrast to the Treaty establishing the European Coal and Steel Community ane the Euratom Treaty which apply to specific sectors of the ‘Community, the EEC Treaty covers practically the whole economy of the ‘Member States. The EEC Treaty aims at the foundation of a common pplication of GATT Rales in the European CCogminity in: Te Buropean Conant and GATT, of HaJcobfPeteataaa, p15 ‘Direct eet asuned wheau provision i cur ad uacondonal and doe tea say futher plementation meas. Se for closer examination of the foe Of “sect {Mgt Kapey, Veloce van Temas gp 39-58 Case C0/89 Maja al Precion Co» Come See Common Matket Law Review, Yoluse 29902, pps8l-36464 JOURNAL OF ENERGY AND NATURAL RESOURCES LAW 1994 market, with fee movement of goods, persons, services and capital»? The Comminiy’s customs union is intended to cover all trade it poods and involves the proton between Member States of customs dues on imports and exports and ofall charges baving equivalent effet” Within the European Community there has been some controversy about gas and electricity being goods or services. In Conta/ENEL the Cout implicily decided that electcity is good.** Furthermore, it canbe assumed that gas ray also be considered a good. In the cae 7/68 Commision vZaly, the Court defines goods as products which can be valued in mone) and which, 2 such, ae capeble of forming the subject of commercial transactions ‘The Court has recently in the case C-20 Commission v Belgian of 9 July 1982 rephrased this definition. According to this ruling, goods ae: “objects twanspotted over a national border to be subject to a commercial trans- action” Ia the following Iwill therefore take as a presumption that natural fas and clzrcity are goods and subject to the provisions goveming the free movement cf goods. In contrast to the situation in tte EEC, the position under GATT seems tobe clear In general its assumed tat energy $58 good within he framework of GATT, with the exception of hydroelec- testy which is censidered a service.™ Face, it can be concluded that trade in energy falls within the scope of GATT and the EEC. ‘When examining trade in gas and electricity one should, ofcourse, con- sider the goods vhich ae being transported. Alteraatvely, on could also ‘observe the mean of transportation used. Tis may be of special importance 4 trace in electisty and gas is made dependent on one spec pe of intrastroctare: transmission lines and pipeline. Hence, it could be argued that this spsial te of energy trade could be regulated on the basis of tbe relevant means otrensport instead of the transported goods In this respect itis interesting to consider the situation inthe European Community since a common transport policy is envisaged in the Treaty of Rome. The transportation through pipelines is not included drety in Tile TV of the Treaty.” This i not surprising as this type of transportation was not very much used until the 1960s, Its noteworthy, however, hat atempts have been made inthis period by the EC Commission andthe European Parliament to indude piped transportation in the Commusits’ transport policy. A special working group has, fr example, been etablisied to study The anpect of “energy and transport” Furthermore, a preposal for @ » Katey, Veron van Tmt, 30 re 9 BEC Treaty 2 Cate oh ConaiENBL ECR 196,125, team be noted that i Arle of the Product Ligpity Diente 8974 /EEC (O] 1985, L210, 929), eect so I cosied as 2 ood. "Sate Gh Conmason +i BCR 196, p83, Ths case as nt yt been Publi. Se Ammotation in Common Mark Law Review, ‘ol, No, 1993, ppSSI-6T "YS Arce 3057 BBC Trety. By contrat Sehwarse ates that the Ct Bat not yt cploty doce thn gut ae cet are gods, Morenver, rasuiion gu and eee {ity through pipes apd es constdeed to cost serie Win the alg of ‘Arles 59 aed 8b EBC Teel. See J Scart, Etopean Energy Poly i Conmay Law, ‘Netra Gar the letra eae, Graham ronan, pp 15516 Sree Sauder, "GATT, NAFTA aod North Armen Enetgy Teale; 2 Cansian| rape ao ped in hte ofthe Journal of nergy and Nena Rsoweee Low (BRL) Se Artie 14-8 FEC Treaty. See L Sch, Le Tore dan le Cae de gration rope, Cat uropseanes, Untold Chai de Lowa, 197, pp fal-A2Vou 12 Nol [Exanoy Taape ny Eunore, 6s ‘Council Regulation on transnational oil and gas pipelines was issued on 11 October 1972." On the basis of Article 75 of the EEC Treaty, the Commission proposed that certain pipelines could be declared to be of specific Community interest.” These pipelines could be obliged to transport ol and gas for third parties as long as there is spare capacity, and the tarifs and conditions are noo-discriminatory. This proposal has not been adopted and probably never been discussed. The Commission finally withdrew the proposal on third party acess to oil and gas pipelines on 22 December 1978. ‘After some 20 years during which energy trade has not been a major issue in European Community policy, new developments can be identified after the proposals concerning the establishment of aa internal market" and the entering into force of the Single Eusupeats Act in 1986, The Commission's ‘working document on the internal energy market of 1988 (hereinafter the “Working Document”) provides the basis for a number of proposals for the establishment of a single market in the energy sector.“ In addition to the application ofthe existing provisions of Community law, and the provisions allecting the energy sector as published in the 1985 “White Book on the Internal Market”,® specific measures were envisaged to achieve this goal ‘The Working Document mentions in particular the development of energy infrastructure asa field in which such specific measures could be taken: “the existence of adequate infrastructure is — as a fact — a sine qua non for the transfer of energy and hence a prerequisite with a view to securing fexbility, greater security of supply, and in the final analysis a more integrated Community energy market” A gradual approach is envisaged in order to establish such an internal energy market, The first stage consists of the implementation of the Directives on price transparency and on transit. ‘Under the second stage, the Commission has proposed Directives according to which the energy market should be further liberalised, infer alia, by way of the introduction of a system of third party access, unbundling of manage- ‘ment and accounting, and more freedom in network construction.“ The development of the third stage depends on the experience gained under the second one. As itis not likely that the proposed Directives on the internal clectricty and gas market will be adopted as they stand today.*” The Directives on price transparency and transit are the only substantial results of the coming into being of an internal energy market. 2 Counc! Regulation of 11 October 1972, COM(72) 1204 nl 4 Seals the propra for» Count Relation of 24 Fetrary 1992 (COM(32) 15 fal) ich evo the ration aft deetrnoa of European inet wh ya i ‘ett the exasteat of ane Buropean networks in fe ety aod ar domain, “Completing the Internal Marker, CON{SS) 310 Sal, uae 19, ‘:COMMGS) 298 nal, May 188" ‘The 988 White Book, ner asin a the harmonintion of tcl standards nd th ppening up of pble procurement. “sergy i Euope —" The Iueral Markt, special ies, Commision ofthe Boyes CCogmnten Directorate Gener for Energy 1988 18 "Foenal Dircive 3/377 on pre tansparacy (0 199, 1185/16), Come Decive $47 oo ety transit (OF 1990 L 31380) and Coun Diet 91/298 on ant (oy ts91 Lian). % CON (@1) 348 aa, Febuary 192. ‘The European Palamont hat propowed 4 mamber of amendments whic hae to be di used inthe PrinmentaryEoerey Commitee dng whic plieal poupecan make amen tents oftheir own. Only if hte an agreement in the Commie, ay the la be ocd isthe Energy Coon i ge 1993. Soc BC Emery Monty, May 193,991,66 JOURNAL OF ENERGY AND NATURAL RESOURCES Law 1994 Freedom of transit Freedom of transit under international law (On the basis of the concept of territorial sovereignty itis gensrally assumed that Sates have the right to prevent nationals from other States from passing through its territory withovt permission and to prevent the construction or use of objects designated to the transit of persons or goods.* Others argue that the question of transit requires a more flexible approach. Due to the interdependency of States which exists in an international community, there is a rght to fee or innocent passage for purposes of trade, travel and commerce over the teritory ofall States” Consequently, States may not, without having a good reason, deny each other the use of convenient of necessary routes of communication. Some writers even claim that the legal right :o freedom of transit exists independently of a treaty and that the transit State is under the legal obligation to give its conseat to traffic in transit anyway.” "Be hat as it may, inthe practice of States many treaties have been con- cludec regulating several aspects of the question of transit, Thete treaties may te divided in two categories: those which relate to rivers and inter- natioral waterways," and those regulating transit over land.*In general, these agreements are not directly applicable as, in most legal ystems, enact- ‘ment in domestic law is required.”* Moreover, in the presen state of inter- natioral law, treaties cannot be regarded as evidence of customary law. ‘After al, rules of customary international law result from che practice of States, ‘Whsther or not the right of transit derives from State prectce or treaty provisions, it seems that the existence of a right of transit is dependent on {wo conditions, Fist, there should be a necesity or convenience for transit by a State. If only one route is available, the necessity is obvious and the claim becomes stronger. Second, transit may not cause any harm or prejudice the transit State." However, as words lke “necessary” leavea wide margin for interpretation, transit States have a certain degree of disretion to deter- ‘mine the above conditions. Self-defence or national security may be reasons “28 Lauepach, Freedom of Pantin Imeratinal Low, Problems of Publi and Private ‘ermal Lay, The Gros Sosy, val, Londo, Tamsacions lor the eur 1988 & 199 poate 317 Se for on overview of several writes opaion Lauer, pp 318-322 Lanepact p38. ‘© Brumples ae agrecmens on pvt onthe major rivers ike the Ee, We, Daasbe, ‘Misssuppe Ammzos, andthe Congo, More roasts apc of und We ght of ‘nnocet psmape ar ao ees repulse nthe Geneva Carnenons on tea of te Sea of {9st ard the Tard Coneence of the Law ofthe ea of 185 See Lastapact sre note aso * Nuerous agreements onthe trast overland were conse in the 1th and 20h cena ‘Aner e Fst Wold Wa numberof rans agents were soctdad acer the umbrella ‘ttbe League of Nations (League of Nations Treaty Ser, ol) tbe Bareoas conventions ‘5-30 Ap 192, retain cept Yo the Fedo of Transom Land nto Waser ‘Stlaueatiooal Comer in 903 to more conventions with rept otra wer cele {he Comveaton onthe iaternaoanl rege of always and onthe trammion of ant of ‘Segre power Soe # Lautrpact, gra nat 48a 317 7. "SA action made feweca toe Gust ote mons apcoach, Under the dua spprouh international av isnot ety appt. I aplenty idle by bail iy, See MN Sha, traconal Law, Grote Pbleations Li, 199. Si aierpacke p32Vor 12 Noi [Bamncy Trane ty EUROPE, a for the denial ofa right of transit, It is assumed that States may not arbi- trarily refuse a right of transit hy considerations of security. Av ae alterna tive, they should, for example, propose another route or grant the right subject to certain conditons.** ‘The right of transit depends on certain conditions anyway. The Barcelona Convention on the Freedom of Transit of 1921°* describes it as follows: “Traffic in transit shall not be subject to any special dues in respect of transit (including entry and exit). Nevertheless, on such traffic in transit there may be levied dues intended solely to defray expenses of supervision and sdminis- tration entailed by such transit. The rate of any such dues must correspond nearly as possible with the expenses which they are intended 19 cover, and the dues must be imposed under the conditions of equality (. "> In other words, rates may be charged as long as they are reasonable, It is ‘obvious that parties may disagree about the reasonabless of certain charges, especially if it involves a reasonable return of invested capital Anothet generally accepted condition is that goods which are the object of transit are exempt from custom dues and import or export duties ” Furthermore, the right of transit implies that there is the freedom to use transport ‘cities ‘of any nationality except for those situations where the use ofthese caciliies may be considered a reasonable threat tothe security of the transit State “It follows from this principle that in certain circumstances transit States may limit the categories of goods which are using the transit facilities The Barcelona Convention provides, for example, that in case of an emergency affecting the safety of a State or in case vital interests of the couatry are involved, States may deviate from the principle of freedom of transit for as short 2 period as possible. ‘As under international law the principle of freedom of transits coasidered to be of great importance it is not surprising that a provision on transit is also included in GATT. Article V of GATT establishes under certain con. ditions the freedom of transit for all goods, vessels and other means of {transport crossing the territory of a contracting party via the most con- venient route.® In the following, this Article wll be discussed in relation to transit of gas and electricity. ‘Transit of gas and electricity Introduction. The “classic” principle of freedom of transit as described above sgoes back many centuries and applies to transit over land or waterways ‘nuts Lean, eM O Hdscn, Yotame 1 1919/1921, 197%, 0 80, ‘Arie 3 Statute co Freedom of Trent angered othe Batelia Convetion ox Trans, {Inernaional Lpiation, ed M O Hudsoa, Value I, non. This tafe eneed nto fore ‘nT October 922 and ovns its rg to the cunsderaton of the bjt of eedomal ast ihe pesininary peace confereoce m Pari 1318 ‘# Lauterpacnt pp 302-34 ‘Se Are §Barerona Contention on the Fesdom of Teas ‘= Critedefniton of Arle? the Sate on Trans aneted othe Barcelona scaveation| Later, p34, 1 Artie Sat on the Freedom of Teantsanexed othe arsooa Convento of 12 © Ica be noted that some pars ofthe Barcelona Convention on Tan have ten ed by the Dang Commits of GATT. See GATT Anlyal Ine Nott onthe fing Imerpretation and application of the Aris of th Gneal dgreament, Avie V. Ma 1366« Jounteal or Brenay ax NarunAL REsounces Law 1094 ‘When dscussing transit of gas and electricity, one has to keep in mind that international transport of gas and electricity only goes back some decades fand that this specific type of energy trade is characterised by the existence fof a great aumber of national monopolies controling the infrastructure through which these goods are transported, In the following the applicability of Artide V GATT with respoct to transit of gas and electricity will be iscussed, as well as the relationship of Article V GATT with the newly ‘adopted BEC Transit Directives, Freedom of transit of gas and electricity under Article V of GATT. The principle of freedom of transit is clearly set out in the title of Article V. Moreover, paragraph 2 states: “there shall be froedom of transit through the terntory of each contracting party, via the routes most convenient for intemnatonal transit, for traffic in transit to or from the territory of other ‘contracting parties” The scope of the right of freedom of transit is set ‘down in paragraph 1 which states that all "goods [...] and other means fof transport, shall be deemed to be in transit across such territory [-..] when the passage is only 2 portion of a complete journey beginning and terminating beyond the frontier of the contracting party across whose terr- tory the trafic passes” ®*Relevant in this contexts thatthe principle applies to all goods which includes gas and electricity Hence, gas and electricity are deemed to be in transit if crossing a third State's territory. GATT also states how this traffic in transit is to take place: via the routes most con- venient for international wransit. Although there isan integrated network of {gs and electricity lines connecting most West-European States, the border- frossings are few and Hmmted. Therefore, the choice between the “most ‘convenient routes for transit” of gas and electricity will in practice be limited. ‘Besides the establishment of a freedom of transit, GATT also provides the conditions for transit. Traffic in transit shall not be subject to any "unnecessary delays or restrictions and shall be exempt from customs duties. Basically, there are two types of charges which may be imposed, ie those for transportation and those commensurate with administrative expenses or ‘with the cost of services rendered.* In addition itis required that these charges be reasonable and non-discriminatory. In other words, as GATT is promoting the lieraisation of trade and the removal of trade barriers, the basie obligations are twofold: (a) not to binder or impose unreasonable chargeson goods in transit, and (b) to accord Most-Favoured-Nation treat ‘ment ‘0 goods in transit of all contracting partes, "As GATT Focuses on States as contracting parties, it has to be considered whether transmission companies are required to comply with Article V of % ate V paragraph 2coatiuer: “No distinction shal be made whichis based onthe ag sf etl las fort, departs ety, xt ordination, on any eeenstances relating {othe ownership of goods, of ess of of fer meat of ansper™ ‘BSc dso} Jackson Word Trade ond the Law of CATT. 1983, 9 08 SE where the quon of ps abd det being gods nde the BEC Teety aod GATT ha berm dss. Sr Artide V paragraph 9 GATT, ‘hes hasbeen 8 Sscanon bout the interpretation of he above, expecially concerning the wanportation charge See ackan, pp 309-510 For he purpose of th pape wil ake {ese that anoporaion cara hav tobe reasonable and now dictator. ‘Te Mot Favoured Nation Geatment st bors whic requis aon A to ge eau ‘he bref he sae 7Vor 12 Noi Exenay TRape =v EUROPE o GATT. As GATT is not meant to be directly applicable in domestic law, it seems that Article V does not impose any direct obligations on the owners (of the transmission lines.” These transmission grids are owned by companies under private law, though they often are under considerable governmental influence and conirol either by way of the awatd of exclusive concessions and/or by way of actual participation through shareholding in the com- pany.” If these companies can be classified as State Trading Enterprises lunder Article XVII GATT, then Article V would seem to apply directly. Article XVIL, paragraph 1(a), reads as follows: “Each contracting party undertakes that if i establishes or maintains a state enterprise, wherever located, or grants to any enterprise, formally o in elect, exclusive or special privileges, such enterprise shall, in ite purchases or sales involving either Imports or exports, act in a manner consistent with the general principles ‘of non-diseriminatory treatment prescribed in this Agreement for govern ‘mental measures alecting imports or exports by private traders”. Tris also ‘understood that these enterprises are required to have due regard to the ‘other provisions of this Agreement which includes the freedom of transit From this it could be concluded that Article V GATT may apply directly {o those transmission companies which can be classified as a State Trading Enterpise under GATT. ‘Freedom of transit of gas and electricity in the EC. The right to transit goods is referred to in general in Article 36 of the EEC Treaty.” However, the right to transit has specifically been recognised in the SIOT case in 1982,"* ‘When the issue of transit was brought before the Court of Justice, it held that: “[tJhe Customs Union established by Part Two, Title I, Chapter I of the EEC Treaty necessarily implies thatthe free movement of goods tetween the Member States should be ensured, That freedom could not iself be complete if it were possible for the Member State to izapede or interfere in any Way with the movement of goods in transit. It is therefore necessary, as a consequence of the Customs Union and ia the mutual interest of the Member States, to acknowledge the existence ofa general freedom of transit See above, sole St, and HM Puidrich, Legal Aspects of Tans Carag sx Gat Drnamision Sytem State Oblgations and Prowte Omer, Dacetation, Cente of ‘Pafeloum sad Mineral Law, Dando, 1989, pI “the Netherlands, for example, he gs traamisin company NV Nederandse Gast vas gated an exclave transport coneon on 12 Deemer 183 In atone Slate ‘ens 50 per ent (sy and ndeth) ofthe shares he company whch was eabisbed ‘der pats am "There no dfnion ofthe enterprises mentioned inthis paragraph, but some atice ic provid inthe interpretative nots. Acsordang to Havana Report for example he tn “lat eters doesnot requte any special dlaton a # mar geeralywndeted to lace, ner ala, any agocy of goverment tx engages prchadey orang (ne GATT ‘Analytical Index Arle XVII). A coms examination of Ste ener, bowers beyond {he sop of hs paper. Furthermore ican te roe thet Artie 98 EEC Tray cretats9 tar proven’ te abe uf pus uasehngy mu avakigs co wih Monet ‘Sates grt spl or eachsive right, Member Ste sal nther enc ot mau nose ny mearuer contrary tothe rie Souaiad ia hs Trey)" Public uneralings se aterm] ober bch the pao atin (Stat rgtonalo zal) yer dey rindiety «dominant intents by voto tee ows ote Banca priaioe ‘Bey othe rales that govern” (Arle 2 EEC Duce 8/23), ‘STs Arty iver ali, ns tht probions or testicon a por exports or goods in want ay be js on mera rounds ke pul orl, poly er meant an the Drolet of beat animal aad lant *SSee8 STOT [1983] ECR 137 Joumsat or Enmay anp Narumat Rasounces Law 1994 of goods within the Community”. Article 36 EEC Treaty confirms the ‘above principle of freedom of transit." The Cour also presented a definition, Of the freedom of transit: “[it] means that a Member State may not apply to goods in its territory in transit to or from another Member State transit

You might also like

• The Subtle Art of Not Giving a F*ck: A Counterintuitive Approach to Living a Good Life

  

  From Everand

  The Subtle Art of Not Giving a F*ck: A Counterintuitive Approach to Living a Good Life

  Mark Manson

  Rating: 4 out of 5 stars

  4/5 (5822)
• The Gifts of Imperfection: Let Go of Who You Think You're Supposed to Be and Embrace Who You Are

  

  From Everand

  The Gifts of Imperfection: Let Go of Who You Think You're Supposed to Be and Embrace Who You Are

  Brené Brown

  Rating: 4 out of 5 stars

  4/5 (1093)
• Never Split the Difference: Negotiating As If Your Life Depended On It

  

  From Everand

  Never Split the Difference: Negotiating As If Your Life Depended On It

  Chris Voss

  Rating: 4.5 out of 5 stars

  4.5/5 (852)
• • Magazines
  • Podcasts
  • Sheet music
• Principles: Life and Work

  

  From Everand

  Principles: Life and Work

  Ray Dalio

  Rating: 4 out of 5 stars

  4/5 (610)
• The Glass Castle: A Memoir

  

  From Everand

  The Glass Castle: A Memoir

  Jeannette Walls

  Rating: 4.5 out of 5 stars

  4.5/5 (1717)
• Grit: The Power of Passion and Perseverance

  

  From Everand

  Grit: The Power of Passion and Perseverance

  Angela Duckworth

  Rating: 4 out of 5 stars

  4/5 (590)
• Sing, Unburied, Sing: A Novel

  

  From Everand

  Sing, Unburied, Sing: A Novel

  Jesmyn Ward

  Rating: 4 out of 5 stars

  4/5 (1105)
• Hidden Figures: The American Dream and the Untold Story of the Black Women Mathematicians Who Helped Win the Space Race

  

  From Everand

  Hidden Figures: The American Dream and the Untold Story of the Black Women Mathematicians Who Helped Win the Space Race

  Margot Lee Shetterly

  Rating: 4 out of 5 stars

  4/5 (898)
• Shoe Dog: A Memoir by the Creator of Nike

  

  From Everand

  Shoe Dog: A Memoir by the Creator of Nike

  Phil Knight

  Rating: 4.5 out of 5 stars

  4.5/5 (540)
• The Perks of Being a Wallflower

  

  From Everand

  The Perks of Being a Wallflower

  Stephen Chbosky

  Rating: 4.5 out of 5 stars

  4.5/5 (2104)
• The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers

  

  From Everand

  The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers

  Ben Horowitz

  Rating: 4.5 out of 5 stars

  4.5/5 (349)
• Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future

  

  From Everand

  Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future

  Ashlee Vance

  Rating: 4.5 out of 5 stars

  4.5/5 (474)
• Bad Feminist: Essays

  

  From Everand

  Bad Feminist: Essays

  Roxane Gay

  Rating: 4 out of 5 stars

  4/5 (1025)
• The Outsider: A Novel

  

  From Everand

  The Outsider: A Novel

  Stephen King

  Rating: 4 out of 5 stars

  4/5 (1867)
• Her Body and Other Parties: Stories

  

  From Everand

  Her Body and Other Parties: Stories

  Carmen Maria Machado

  Rating: 4 out of 5 stars

  4/5 (822)
• The Sympathizer: A Novel (Pulitzer Prize for Fiction)

  

  From Everand

  The Sympathizer: A Novel (Pulitzer Prize for Fiction)

  Viet Thanh Nguyen

  Rating: 4.5 out of 5 stars

  4.5/5 (122)
• Angela's Ashes: A Memoir

  

  From Everand

  Angela's Ashes: A Memoir

  Frank McCourt

  Rating: 4.5 out of 5 stars

  4.5/5 (441)
• The Emperor of All Maladies: A Biography of Cancer

  

  From Everand

  The Emperor of All Maladies: A Biography of Cancer

  Siddhartha Mukherjee

  Rating: 4.5 out of 5 stars

  4.5/5 (271)
• Brooklyn: A Novel

  

  From Everand

  Brooklyn: A Novel

  Colm Tóibín

  Rating: 3.5 out of 5 stars

  3.5/5 (1948)
• The Little Book of Hygge: Danish Secrets to Happy Living

  

  From Everand

  The Little Book of Hygge: Danish Secrets to Happy Living

  Meik Wiking

  Rating: 3.5 out of 5 stars

  3.5/5 (403)
• A Man Called Ove: A Novel

  

  From Everand

  A Man Called Ove: A Novel

  Fredrik Backman

  Rating: 4.5 out of 5 stars

  4.5/5 (4771)
• The World Is Flat 3.0: A Brief History of the Twenty-first Century

  

  From Everand

  The World Is Flat 3.0: A Brief History of the Twenty-first Century

  Thomas L. Friedman

  Rating: 3.5 out of 5 stars

  3.5/5 (2259)
• Steve Jobs

  

  From Everand

  Steve Jobs

  Walter Isaacson

  Rating: 4.5 out of 5 stars

  4.5/5 (809)
• Devil in the Grove: Thurgood Marshall, the Groveland Boys, and the Dawn of a New America

  

  From Everand

  Devil in the Grove: Thurgood Marshall, the Groveland Boys, and the Dawn of a New America

  Gilbert King

  Rating: 4.5 out of 5 stars

  4.5/5 (266)
• The Art of Racing in the Rain: A Novel

  

  From Everand

  The Art of Racing in the Rain: A Novel

  Garth Stein

  Rating: 4 out of 5 stars

  4/5 (4208)
• A Tree Grows in Brooklyn

  

  From Everand

  A Tree Grows in Brooklyn

  Betty Smith

  Rating: 4.5 out of 5 stars

  4.5/5 (1929)
• The Yellow House: A Memoir (2019 National Book Award Winner)

  

  From Everand

  The Yellow House: A Memoir (2019 National Book Award Winner)

  Sarah M. Broom

  Rating: 4 out of 5 stars

  4/5 (98)
• Yes Please

  

  From Everand

  Yes Please

  Amy Poehler

  Rating: 4 out of 5 stars

  4/5 (1903)
• A Heartbreaking Work Of Staggering Genius: A Memoir Based on a True Story

  

  From Everand

  A Heartbreaking Work Of Staggering Genius: A Memoir Based on a True Story

  Dave Eggers

  Rating: 3.5 out of 5 stars

  3.5/5 (231)
• Team of Rivals: The Political Genius of Abraham Lincoln

  

  From Everand

  Team of Rivals: The Political Genius of Abraham Lincoln

  Doris Kearns Goodwin

  Rating: 4.5 out of 5 stars

  4.5/5 (234)
• The Woman in Cabin 10

  

  From Everand

  The Woman in Cabin 10

  Ruth Ware

  Rating: 3.5 out of 5 stars

  3.5/5 (2522)
• Wolf Hall: A Novel

  

  From Everand

  Wolf Hall: A Novel

  Hilary Mantel

  Rating: 4 out of 5 stars

  4/5 (3973)
• Fear: Trump in the White House

  

  From Everand

  Fear: Trump in the White House

  Bob Woodward

  Rating: 3.5 out of 5 stars

  3.5/5 (738)
• John Adams

  

  From Everand

  John Adams

  David McCullough

  Rating: 4.5 out of 5 stars

  4.5/5 (2409)
• On Fire: The (Burning) Case for a Green New Deal

  

  From Everand

  On Fire: The (Burning) Case for a Green New Deal

  Naomi Klein

  Rating: 4 out of 5 stars

  4/5 (74)
• The Light Between Oceans: A Novel

  

  From Everand

  The Light Between Oceans: A Novel

  M.L. Stedman

  Rating: 4.5 out of 5 stars

  4.5/5 (789)
• Manhattan Beach: A Novel

  

  From Everand

  Manhattan Beach: A Novel

  Jennifer Egan

  Rating: 3.5 out of 5 stars

  3.5/5 (880)
• The Constant Gardener: A Novel

  

  From Everand

  The Constant Gardener: A Novel

  John le Carré

  Rating: 3.5 out of 5 stars

  3.5/5 (104)
• The Unwinding: An Inner History of the New America

  

  From Everand

  The Unwinding: An Inner History of the New America

  George Packer

  Rating: 4 out of 5 stars

  4/5 (45)
• Britt Krause

  

  Document15 pages

  Britt Krause

  Ale

  No ratings yet
• Rise of ISIS: A Threat We Can't Ignore

  

  From Everand

  Rise of ISIS: A Threat We Can't Ignore

  Jay Sekulow

  Rating: 3.5 out of 5 stars

  3.5/5 (137)
• Little Women

  

  From Everand

  Little Women

  Louisa May Alcott

  Rating: 4 out of 5 stars

  4/5 (105)
• Extreme Sports Vocabulary Esl Picture Dictionary Worksheet For Kids PDF

  

  Document2 pages

  Extreme Sports Vocabulary Esl Picture Dictionary Worksheet For Kids PDF

  Ale

  No ratings yet
• 1 ST Grade

  

  Document2 pages

  1 ST Grade

  Ale

  No ratings yet
• Extreme Sports Vocabulary Esl Picture Dictionary Worksheet For Kids PDF

  

  Document2 pages

  Extreme Sports Vocabulary Esl Picture Dictionary Worksheet For Kids PDF

  Ale

  No ratings yet
• Computer and Telecommunications Law Review

  

  Document65 pages

  Computer and Telecommunications Law Review

  Ale

  No ratings yet
• Computer and Telecommunications Law Review

  

  Document50 pages

  Computer and Telecommunications Law Review

  Ale

  No ratings yet
• Countable and Uncountable

  

  Document10 pages

  Countable and Uncountable

  Ale

  No ratings yet
• Computer and Telecommunications Law Review

  

  Document50 pages

  Computer and Telecommunications Law Review

  Ale

  No ratings yet
• Computer and Telecommunications Law Review

  

  Document58 pages

  Computer and Telecommunications Law Review

  Ale

  No ratings yet
• Computer and Telecommunications Law Review

  

  Document56 pages

  Computer and Telecommunications Law Review

  Ale

  No ratings yet
• Computer and Telecommunications Law Review

  

  Document45 pages

  Computer and Telecommunications Law Review

  Ale

  No ratings yet
• Global Arbitration Review

  

  Document49 pages

  Global Arbitration Review

  Ale

  No ratings yet
• Global Arbitration Review

  

  Document49 pages

  Global Arbitration Review

  Ale

  No ratings yet
• Computer and Telecommunications Law Review February 2000

  

  Document57 pages

  Computer and Telecommunications Law Review February 2000

  Ale

  No ratings yet
• Transport Vocabulary

  

  Document1 page

  Transport Vocabulary

  Ale

  No ratings yet
• Global Arbitration Review

  

  Document49 pages

  Global Arbitration Review

  Ale

  No ratings yet
• In The Past (Yesterday / Last Week Etc)

  

  Document2 pages

  In The Past (Yesterday / Last Week Etc)

  Ale

  No ratings yet
• Global Arbitration Review

  

  Document49 pages

  Global Arbitration Review

  Ale

  No ratings yet
• Global Arbitration Review

  

  Document49 pages

  Global Arbitration Review

  Ale

  No ratings yet
• The Clothes: Cinturón Blouse Blusa

  

  Document10 pages

  The Clothes: Cinturón Blouse Blusa

  Ale

  No ratings yet
• Weather and Colors

  

  Document8 pages

  Weather and Colors

  Ale

  No ratings yet