RESEARCH AND ANALYSIS

Energy Transit under the Energy Charter Treaty and the General Agreement on Tariffs and Trade

Danae Azaria, PhD candidate, Teaching Fellow, University College London (UCL), Faculty of Laws

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The article examines whether transit of energy, especially via fixed infrastructure, is covered by the existing GATT provision on ‘freedom of transit’, GATT Article V. It points out the difficulties that arise for energy transit under GATT Article V, especially in view of (a) the findings of the first Panel Report on GATT Article V (Colombia-Ports of Entry case (2009), and (b) the proposals in the Doha Round negotiations for Trade Facilitation to include ‘pipelines and grids’ in the wording of GATT Article V. It finally assesses the existing and proposed GATT Article V wording against the provisions of the Energy Charter Treaty (‘ECT’) and its Trade Amendment, as well as the negotiations for the draft Transit Protocol, which fall within the 'Energy Charter process'. It argues that GATT Article V should be informed by the experience gained in the Energy Charter process.

ECT and GATT/WTO do not share identical member states. The ECT is a sector-specific treaty governing investments, trade, transit, competition and environmental concerns relating to ‘Energy Materials and Products’, which include oil, gas, nuclear energy, electricity and coal. These are also defined as 'energy' for the purposes of this article. ECT Article 7, the treaty's transit provision, has been characterised as 'GATT-plus' provision.

In the context of the energy sector, one needs not only to clarify that energy is a good covered by GATT, but also that fixed infrastructure, such as pipelines and grids, is covered by GATT Article V. Energy is not explicitly excluded or included in GATT; nothing prevents us from arguing that it is covered by the GATT. GATT Article V does not distinguish between goods and ‘means of transport’ as ‘traffic in transit’. GATT Article V(1) states that ‘Goods … , and also vessels and other means of transport shall be deemed to be in transit’. Although fixed infrastructure itself cannot be ‘traffic in transit’, it is, however, the ‘route’. Accordingly, the proposals regarding 'pipelines and grids' can be seen as efforts to clarify the existing regime. The ‘object and purpose’ of GATT Article V relates to the goods; means of transport are relevant to the extent that any impediment to transportation hinders the transit of goods. Notably, GATT Article V does not establish an obligation to construct or allow the construction of new pipelines and grids. It only allows transit via existing infrastructure.

According to the Panel (Colombia-Ports of Entry case) GATT Article V does not require a Member to guarantee transport on necessarily any or all routes in its territory, but only the ones ‘most convenient’ for transport through its territory. Nonetheless, what the Panel did not answer is who defines ‘convenience’ and how is such convenience measured. Does this refer to convenience of transit only with respect to the requesting state? Or does it also embrace convenience of transit for a community of states? Although it has been argued that the transit state is to determine the ‘most convenient route’, a transit state ‘cannot always be aware of what the ‘most convenient route’ would be for a given economic operator. In the energy sector the convenience of existing routes depends on special factors: not only geographical considerations (including the geographical position of the producer and the consumer, as well as of the producing field), but also questions of commercial feasibility and the physical capacity of a given infrastructure. These factors need to be taken into account when determining convenience.

The Panel found that GATT Article V(2) ‘requires that goods from all Members must be ensured an identical level of access and equal conditions when proceeding in international transit’. ‘Level of access’ implies the level of entry in order to proceed to ‘traffic in transit’, while ‘conditions when proceeding in international transit’ means treatment ‘while in transit’. Applied to fixed infrastructure, this creates an obligation to allow access to pipelines or grids – when these are most convenient routes – on a non-discriminatory basis. Yet it cannot be suggested that GATT Article V provides mandatory Third Party Access (neither does ECT Article 7). ‘Identical level of access’ should be interpreted to require the transit state to establish a procedure to allow the owners of goods identical possibilities of access. This idea, underpinned by the principle of transparency, is central to the Energy Charter process (draft Transit Protocol).

Similarly transit tariffs cannot be monetarily equal ('equal conditions when proceeding in international transit'), because they depend on, inter alia, geographical parameters, pipeline design and actual utilisation, financing costs, ownership of the pipeline (public versus private) and on whether the pipeline is used purely for transit or whether it is used for domestic transport and transit. Accordingly, the Energy Charter standard for tariffs is ‘objective, reasonable, transparent and non-discriminatory’, rather than ‘equal’.

In the Doha Round negotiations proposals suggest that alongside the existing non-discrimination standard of GATT Article V (MFN treatment) the 'national treatment' standard should apply. There are conflicting approaches to the content of 'national treatment': some compare ‘traffic in transit’ with imports/exports of the transit state; others compare it with domestic traffic. Others suggest comparing ‘traffic in transit’ with imports/exports and domestic transport. ECT Article 7(3) includes the national treatment standard, but contracting parties have interpreted differently its content. The above discussion indicates that there is linkage between the ECT, the draft Transit Protocol, and the GATT standards. In fact, the Doha Round negotiations point towards certain common concerns.

The only energy transit dispute brought in the framework of the WTO was between Slovenia and Croatia (2002) on oil road transit. The dispute was discontinued in the WTO and the parties agreed to hold further consultations. The dispute was settled through diplomatic channels in accordance with ECT Article 27(1). It is likely that if ECT parties brought an energy transit dispute into the WTO DSU on the basis of GATT Article V, the WTO bodies would take into account ECT Article 7 for the case of energy transit, especially if all parties to the dispute were ECT parties (VCLT Article 31(3)(c)). Moreover, the WTO Panel or AB could request the Energy Charter Secretariat to provide them with materials that would assist them in the interpretation of WTO covered agreements in cases relevant to energy trade, or GATT Article V specifically (DSU Article 13). ECT Article 4 stipulates that nothing in the ECT shall derogate from GATT/WTO for ECT contracting parties, which are also WTO members. By becoming parties to the ECT, WTO members make a statement as to how they understand contemporary standards and the necessities of energy transit without derogating from GATT Article V.

The clarity of ECT Article 7, especially for energy transit via fixed infrastructure, affords an ECT dispute settlement forum a comparative advantage against the WTO. Nonetheless, WTO member states may prefer use of the WTO DSU because of differences in procedure (since WTO members are more familiar with the DSU procedures it is natural to use this mechanism), as well as the implementation guarantees provided by the two different systems (the DSU provides for a specific mechanism and deadlines for the implementation of the Panels’ and AB reports, while ECT Article 27(3) (h) provides that arbitral awards are final and binding on contracting parties parties to the dispute).

The efforts for Trade Facilitation through the revision and strengthening of the GATT transit provision (fixed infrastructure, national treatment and discussions on access and use of capacity, as well as tariffs) draw on ECT Article 7 and are relevant to the negotiations for the draft Transit Protocol. Another common denominator is established by the ECT Trade Amendment, which establishes Panels similar to the WTO DSU, which have to be guided by the WTO Panels interpretation when interpreting WTO rules (by reference) on energy trade between ECT contracting parties. A considerable number of WTO parties are parties to the ECT. These members bring this experience and those obligations to bear in seeking to address the inadequacies of GATT Article V, especially in view of the ‘principle of good faith’ according to which states negotiate their treaties in good faith taking account of all of their other international obligations.

This is a summary of certain findings of the following publication: Danae Azaria, ‘Energy Transit under the Energy Charter Treaty and the General Agreement on Tariffs and Trade’, 27(4) Journal of Energy and Natural Resources Law 2009, pp. 559-596.

 

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