DS: European Union and its Member States — Certain Measures Relating to the Energy Sector

This dispute concerned certain measures by the European Union and three of its member States (Croatia, Hungary and Lithuania), which regulate the natural gas sector and seek to facilitate the development of natural gas infrastructure within the European Union. The challenged measures fall in seven categories, identified as the unbundling measure, the public body measure, the LNG measure, the upstream pipeline networks measure, the infrastructure exemption measure, the third-country certification measure and the TEN-E measure.

The unbundling measure consists of rules governing the separation of natural gas production and supply activities, on the one hand, from natural gas transmission activities, on the other hand. These rules apply to so-called vertically integrated undertakings (VIUs), which, per definition, perform both of these types of activities. Russia challenged the unbundling measure in Directive 2009/73/EC (the Directive) as well as the unbundling measure as implemented in the national laws of Croatia, Hungary and Lithuania.

Regarding the unbundling measure in the Directive, Russia challenged the implementation of different unbundling models by EU member States, pursuant to the Directive, as inconsistent with the non-discrimination obligations in Article II:1 of the GATS and Articles I:1 and III:4 of the GATT 1994. The Directive requires each EU member State to implement the so-called “ownership unbundling” (OU) model and permits EU member States to implement — in certain circumstances — the so-called “independent system operator” (ISO) and “independent transmission operator” (ITO) models. The OU model imposes structural separation between entities engaged in natural gas production and supply activities and entities engaged in natural gas transmission activities. The ITO and ISO models require a lesser degree of structural separation for such entities, but impose requirements for their behaviour and relationship and subject them to additional oversight by the relevant authorities.

As a preliminary matter, the Panel rejected the European Union's objection that it would not be appropriate for the Panel to address differences among the national laws of various EU member States where these are accorded discretion in implementing an EU legal instrument. It did so because the challenged EU Directive applies throughout the EU territory and sets out the OU, ISO and ITO models challenged by Russia. Ultimately, all of Russia's discrimination claims under the GATS and the GATT 1994 were, however, rejected for the reasons listed below.

Under Article II:1 of the GATS, the Panel agreed with Russia that the conditions of competition are modified for pipeline transport service suppliers under the different unbundling models, as the OU model imposes the legal necessity for entities to choose between producing and supplying natural gas or supplying pipeline transport services, whereas the ITO model does not necessarily do so. The Panel, however, found that Russia had not demonstrated that the use of different unbundling models throughout the European Union resulted in de facto discrimination against Russian pipeline transport service suppliers, as these are subject to both unbundling models.

Under Articles I:1 and III:4 of theGATT 1994, the Panel found that Russia had not demonstrated that the different unbundling models modify the conditions of competition for natural gas, since the relevant rules require operators to provide natural gas of all sources access to the transmission system on the same conditions and specify that access for the natural gas of any related entity must comply with market conditions.

Russia challenged the unbundling measure as implemented in the national laws of Croatia, Hungary and Lithuania under three different provisions of Article XVI:2 of the GATS. The European Union sought to defend the measure under Articles XIV(a) and (c) of the GATS.

Under Article XVI:2(a) of the GATS, Russia claimed that the unbundling measure in the national implementing laws of Croatia and Lithuania imposes an impermissible limitation on the number of service suppliers because, according to Russia, both these countries have designated certain entities as the monopoly suppliers of gas transmission services. Specific to Lithuania, Russia also alleged the establishment of a monopoly in “gas supply services”. With respect to Croatia, the Panel found that the designation of a particular entity as a gas transmission system operator does not mean that other entities are not allowed to operate in the same market. With respect to Lithuania, the Panel found that Russia failed to show that the entity has been established, by national law, as a monopoly for supply of gas transmission services. Regarding “gas supply services”, the Panel considered that such services are not part of Lithuania's market-access commitments because they are not covered by the ordinary meaning of “pipeline transport services” in Lithuania's Schedule. Hence, the Panel concluded that Russia had not demonstrated that the unbundling measure in the national implementing laws of Croatia and Lithuania imposes an impermissible quantitative limitation on the number of service suppliers in the form of a monopoly or exclusive service suppliers within the meaning of Article XVI:2(a) of the GATS.

Under Article XVI:2(e) of the GATS, Russia claimed that the unbundling measure implemented in the national laws of Croatia, Hungary and Lithuania impermissibly restricts or requires specific types of legal entities through which service suppliers of other Members may supply pipeline transport services. The Panel interpreted the scope of Article XVI:2(e) based on the ordinary meaning of relevant terms read in their context, and found that this provision does not cover any measure that may affect a legal entity, either by requiring a legal entity to do something or by restricting it from doing something. The Panel considered that it is for the complaining Member to show that the measures at issue restrict or require the legal form of a legal entity through which a service supplier may supply a service under the applicable law of the Member concerned. It found that the national implementing laws of Croatia, Hungary and Lithuania, while restricting the combination of activities or services that an entity can simultaneously carry out, do not restrict the legal form that the entity may take and hence concluded that the measure is not inconsistent with Article XVI:2(e) of the GATS.

Under Article XVI:2(f) of the GATS, Russia claimed that the unbundling measure implemented in the national laws of Croatia, Hungary and Lithuania sets forth formal limitations on the participation of foreign capital. Russia argued that Article XVI:2(f) forbids measures that limit the participation of foreign capital, irrespective of whether the measure also limits the participation of domestic capital. The Panel however found that limitations falling within the scope of Article XVI:2(f) must target foreign capital participation due to the foreign origin of the capital and that limitations applying without distinction to both foreign and domestic capital participation are not covered by this provision. The Panel concluded that the national implementing laws of Croatia, Hungary and Lithuania do not limit the "participation of foreign capital" within the meaning of Article XVI:2(f) of the GATS.

Having rejected all of Russia's claims against the unbundling measure implemented in the national laws of Croatia, Hungary and Lithuania, the Panel did not address the defences raised by the European Union under Articles XIV(a) and (c) of the GATS.

The public body measure consists of the provisions of the national implementing laws of Croatia, Hungary and Lithuania pertaining to unbundling in the case of an EU member State or other public bodies exercising control over a natural gas transmission entity and an entity engaged in the production or supply of natural gas. Russia argued that the public body measure in the national implementing laws of Croatia, Hungary and Lithuania violates the national treatment obligation in Article XVII of the GATS because it is, first, an “exemption” from the obligation to unbundle and, second, available only to domestic pipeline transport service suppliers. The Panel rejected Russia's claim on both counts. Based on its assessment of the meaning of municipal law, as well as the design, structure and expected operation of the public body measure, the Panel found that Russia had neither demonstrated that the public body measure is an “exemption” from the obligation to unbundle nor that it applies only to domestic pipeline transport service suppliers. It thus concluded that the measure is not inconsistent with Article XVII of the GATS. Having rejected Russia's claim, the Panel did not address the defence raised by the European Union under Article XIV(c) of the GATS.

The LNG measure consists of the provisions of the Directive pertaining to unbundling in the case of liquefied natural gas (LNG) facilities and LNG system operators. Russia argued that, because LNG system operators are not required to unbundle and operators of transmission pipelines are required to do so, LNG imported into the European Union via LNG facilities receives an advantage within the meaning of Article I:1 of the GATT that is not accorded to Russian natural gas imported into the European Union via pipelines. The Panel found that Russia had not demonstrated that LNG and natural gas are “like” products within the meaning of Article I:1 of the GATT 1994, and concluded, on that basis, that Russia had not established a violation of Article I:1.

The infrastructure exemption measure consists of the legal regime in the Directive allowing the relevant authorities to exempt certain categories of natural gas infrastructure, which fulfil specified conditions, from the Directive's rules on unbundling, third-party access and tariff regulation, as well as specific infrastructure exemption decisions issued by the European Commission and the national regulatory authorities pursuant hereto. Russia challenged the measure as violating Articles I:1, X:3 and XI:1 of the GATT 1994 as well as Article II:1 of the GATS.

The Panel considered that Russia's claim under Article X:3 of the GATT 1994 related to the substantive content rather than the administration of the measure and hence found no violation.

For its claims under Article I:1 of the GATT 1994 and Article II:1 of the GATS, Russia challenged the alleged incoherent or discriminatory application of the infrastructure exemption measure by referring to the details of the analysis by the European Commission and the national regulatory authorities in selected individual infrastructure exemption decisions. The Panel considered that this evidence was insufficient to demonstrate that the relevant authorities do in fact apply the measure in an incoherent or discriminatory manner and hence found no violation.

Under Article XI:1 of the GATT 1994, Russia challenged two conditions contained in the European Commission's infrastructure exemption decision concerning the OPAL pipeline: (a) the 50% capacity cap (limiting the allocation of transport capacity to Gazprom and related companies) and (b) the gas release programme which requires Gazprom and related companies to release 3 billion cubic metres/year of gas in order to exceed this cap. Russia argued that these result in a de facto quantitative restriction on the volume of imported Russian natural gas. The Panel upheld Russia's claim, finding that the two challenged conditions imposed in conjunction with the infrastructure exemption granted to the OPAL pipeline limit competitive opportunities for the importation of Russian natural gas into the European Union. In reaching this finding, the Panel acknowledged the European Union's argument that Russian law grants Gazprom an export monopoly for natural gas but considered that it was required to focus on the domestic law of the importing Member, rather than that of the exporting Member.

The upstream pipelines network measure consists of the provisions of the Directive pertaining to unbundling, third-party access and tariff regulation in the case of pipelines or networks of pipelines operated and/or constructed as part of an oil or gas production project, or used to convey natural gas from one or more such projects to a processing plant or terminal or final coastal landing terminal. Russia challenged the upstream pipeline networks measure under Articles I:1 and III:4 of the GATT 1994.

Russia argued, firstly, that due to the non-application of the unbundling obligation, third-party access and tariff regulation rules to the operators of upstream pipeline networks, imported natural gas originating in non-EU countries and transported via upstream pipelines is granted an advantage within the meaning of Article I:1 that is not accorded to natural gas originating in Russia and transported via transmission pipelines. Secondly, Russia argued on the same basis that the measure modifies the conditions of competition to the detriment of Russia natural gas in comparison to domestic natural gas, in violation of Article III:4 of the GATT 1994. Thirdly, Russia argued that the measure violates Article I:1 of the GATT 1994 based on a comparison of the general legal regime of the operators of upstream pipeline networks under the Directive with the specific legal regime of the operators of the NEL and OPAL pipelines pursuant to their individual infrastructure exemption decisions.

With respect to the first two claims, the Panel considered that Russia had not demonstrated that the legal regime of the operators of upstream pipeline networks creates more favourable conditions for the transportation of natural gas via upstream pipelines than via transmission pipeline. The Panel therefore considered that Russia had not established a violation of Articles I:1 or III:4 of the GATT 1994 on this basis. With respect to the third claim, the Panel considered that Russia had not demonstrated how the differences between those legal regimes affect the conditions of competition of imported natural gas of Russian or any other origin and hence concluded that Russia failed to make a prima facie case of violation under Article I:1 of the GATT 1994.

The third-country certification measure requires natural gas transmission system owners and operators controlled by a person or persons from a third country or third countries to demonstrate that their certification will not put at risk the European Union's security of energy supply. Russia challenged the third-country certification measure in the Directive under Article II:1 of the GATS and challenged the third-country certification measure as implemented in the national laws of Croatia, Hungary and Lithuania under Articles VI:1, VI:5(a) and XVII of the GATS. The European Union sought to defend the latter under Article XIV(a) of the GATS.

Regarding the third-country certification measure in the Directive, the Panel examined Russia's claim under Article II:1 of the GATS alleging de facto less favourable treatment of Russian pipeline transport services and service suppliers. Russia argued that the European Commission required a security of energy supply assessment when it reviewed and provided opinions on draft certification decisions by national regulatory authorities concerning certain Russian pipeline transport service suppliers, but did not require such an assessment for certifications concerning certain pipeline transport service suppliers of other non-EU countries. The Panel considered that the evidence Russia provided, which consisted of certain individual certification decisions, did not appear to involve any Russian pipeline transport service suppliers nor did the evidence suggest that the relevant authorities de facto discriminated against these service suppliers in the application of the third-country certification measure. The Panel hence concluded that Russia had not made a prima facie case of violation under Article II:1 of the GATS.

Regarding the third-country certification measure in the national implementing laws of Croatia, Hungary and Lithuania, both parties agreed that the measure, de jure, violates the national treatment obligation in Article XVII of the GATS by requiring a security of energy supply assessment prior to the certification of third-country transmission system operators, but not domestic ones. In assessing the public order defence raised by the European Union under Article XIV(a) of the GATS, the Panel found that the measure is necessary to protect the European Union's security of energy supply from threats posed by potential interference from third-country governments acting through third-country transmission system operators. The defence was, however, rejected under the chapeau of Article XIV, as the Panel considered that the measure does not address threats posed by potential interference from third-country governments acting through domestic transmission system operators. The Panel concluded that the measure results in arbitrary and unjustifiable discrimination.

Having made this finding of violation, the Panel exercised judicial economy with respect to Russia's claims under Article VI:1 of the GATS, concerning the administration of the third-country certification measure, and Article VI:5(a) of the GATS, concerning licensing and qualification requirements and technical standards.

The TEN-E measure consists of the provisions of the TEN-E Regulation that set out the criteria for the designation of certain infrastructure projects as projects of common interest (PCIs), lay out the regulatory framework to facilitate their implementation and provide them with certain incentives. Russia challenged the measure under Articles I:1 and III:4 of the GATT 1994 and Article II:1 of the GATS. The European Union sought to defend the measure under Article XX(j) of the GATT 1994.

Russia's claims under Articles I:1 and III:4 of the GATT 1994 were both based on the argument that the criteria used to select PCIs are discriminatory towards Russian natural gas. It argued that the objective underlying the measure's criterion of “diversification of gas supply” is to reduce the supply and transmission of imported Russian natural gas into and within the European Union. The Panel considered that, given Russia's status as the main natural gas supplier to the European Union and the only or predominant supplier in a number of individual EU member States, the “diversification of gas supply” criterion will, in many instances, imply developing infrastructure aimed at connecting certain EU member States with sources of natural gas supply other than Russia. The Panel concluded that the TEN-E measure provides more favourable conditions for the transportation of natural gas of any origin other than Russian and hence found that it is inconsistent with Articles I:1 and III:4 of the GATT 1994.

The European Union submitted a defence under Article XX(j) of the GATT 1994, arguing that natural gas is a product in general or local short supply because of the existence of genuine and serious risks of disruption of supply of natural gas. According to the European Union, the TEN-E measure seeks to develop and improve infrastructure to connect the European Union with the main potential sources of natural gas within and around it in order to ensure security of natural gas supply, and is therefore essential to the acquisition or distribution of natural gas. The Panel considered that the European Union's arguments concerned risks of disruption to natural gas supply but had not demonstrated that natural gas is currently “in short supply” in the European Union. The Panel hence rejected the European Union's defence.

Finally, Russia argued that the TEN-E measure violates Article II:1 of the GATS because it modifies the conditions of competition to the detriment of Russian pipeline transport services and service suppliers. In Russia's view, the criteria for PCI designation under the TEN-E measure are inherently biased against Russian pipeline transport services and service suppliers. The Panel found that the concept of an infrastructure project under the TEN-E measure does not coincide with the concept of a pipeline transport service or service supplier and that the activities regulated by the TEN-E measure do not involve the supply of pipeline transport services. It thus concluded that Russia had not established that there is a sufficiently close connection between infrastructure projects covered by the TEN-E measure and pipeline transport services and service suppliers covered by the GATS such that the alleged discriminatory treatment of “Russian” infrastructure projects will necessarily result in discrimination against Russian pipeline transport services or service suppliers. The Panel hence found that the measure does not violate Article II:1 of the GATS.