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Market Structure As an Impediment to International Trade in Electricity: Vertical Integration, Monopolies and State Ownership

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World Trade Law and the Emergence of International Electricity Markets

Part of the book series: European Yearbook of International Economic Law ((EYIELMONO,volume 25))

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Abstract

Energy sectors around the world have been tightly regulated with strong state intervention for decades. Liberalization and the break-up of monopolies have been employed in some countries, but the benefits of liberalization and restructuring are far from universally recognized. On the basis of concrete examples from different jurisdictions, this Chapter analyzed the toolbox of international trade law in dealing with market foreclosures and discriminatory practices of incumbent monopolists in the electricity sector.

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Notes

  1. 1.

    See above in Sect. 2.2.1, pp. 25 et seq.

  2. 2.

    Among many others, this is the case in China. Cf. Yi-Chong (2017), pp. 180 et seq.

  3. 3.

    See, e.g. Wälde and Gunst (2004), p. 193.

  4. 4.

    EUROSTAT, ‘Electricity Production, Consumption and Market Overview’ (July 2018) https://ec.europa.eu/eurostat/statistics-explained/index.php/Electricity_production_consumption_and_market_overview#Electricity_generation.

  5. 5.

    Based on data provided by EUROSTAT.

  6. 6.

    EUROSTAT, Electricity Market Indicators, available at https://ec.europa.eu/eurostat/statistics-explained/.

  7. 7.

    Lakatos (2004), footnote 83 on p. 150.

  8. 8.

    Energy Charter Secretariat, ‘Regional Electricity Markets in the ECT Area’ (Paper Submitted for the Energy Charter Seminar ‘Liberalizing Trade and Investment in the Eurasian Power Sector’, 3 October 2002, Brussels) 35, available at https://energycharter.org/fileadmin/DocumentsMedia/Events/20021003-EPS_Seminar_ECS_Regional_Electricity_Markets.pdf.

  9. 9.

    International Energy Agency, World Energy Investment 2016 (IEA 2016), p. 116. The number includes fossil fuel, nuclear and hydropower plants. With respect to new wind and solar PV capacity, the picture is more diverse and state ownership less prevalent.

  10. 10.

    See Boulle (2019).

  11. 11.

    Energy Charter Secretariat, Regional Electricity Markets in the ECT Area (ECT 2003), p. 84. See also Dralle (2018), p. 324.

  12. 12.

    While in other sectors, the vertically integrated and monopolistic structure of markets has hindered imports through measures like the imposition of very high retail prices, the problem seems to have had less significance in the electricity sector in the past. This is likely due to the strategic importance of a reliable and secure supply with electric power for each country individually and the historically very limited degree of interconnection which easily arrives at maximum capacity.

  13. 13.

    The gas sector, where international trade has been firmly embedded for decades, offers evidence. The first WTO dispute on trade in natural gas was brought by Russia against the EU in 2014.

  14. 14.

    Government of South Africa, Official Guide to South Africa 2017/18: Energy and Water (Government Communication and Information System 2018) https://www.gcis.gov.za/sites/default/files/docs/resourcecentre/pocketguide/09-Energy%20and%20Water-1718.pdf.

  15. 15.

    Load shedding refers to an intentional interruption of electricity delivery in certain parts of a system. It is used as a last resort measure to avoid larger blackouts and occurs mainly in systems where generation is insufficient or where the infrastructure is poorly managed.

  16. 16.

    Nicholls (2019).

  17. 17.

    Energy Charter Secretariat (2003), p. 100.

  18. 18.

    Maria Das Neves reports about the situation in Norway, where the private development of merchant interconnections was only possible in partnership with the TSO Statnett. Das Neves (2014), p. 197.

  19. 19.

    To give an example, in Mexico until the electricity reforms of 2013, interconnection requests had to be directed to the state utility CFE and there was no statutory obligation on CFE to grant interconnection. See Cabrera-Colorado (2018), p. 93.

  20. 20.

    Energy Charter Secretariat (2003), p. 97.

  21. 21.

    Wälde and Gunst (2004), p. 182.

  22. 22.

    Ibid, 193.

  23. 23.

    Mavroidis (2016), p. 173.

  24. 24.

    WTO, Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and Trade 1994 [1].

  25. 25.

    The ‘added value’ of the working definition seems to lie in the fact that it requires exclusive or special rights or privileges to have been granted to any kind of undertaking, while this does not follow from the text of Article XVII itself. State enterprises are covered by the general definition absent the granting of exclusive or special rights or privileges. Following the working definition, there does not appear to be an obligation to notify state enterprises which are not recipients of such privileges or rights while these types of entities continue to be covered by Article XVII. Cf. Mattoo (1998), p. 38.

  26. 26.

    Cf. WTO, ‘Technical Information on State Trading Enterprises’ (WTO Website), https://www.wto.org/English/tratop_e/statra_e/statra_info_e.htm. The Working Party on STEs has drafted an illustrative list. Where a dispute arises as to the question whether or not an entity qualifies as an STE, it will ultimately be up to WTO dispute settlement to decide on the matter. See also Mavroidis (2016), p. 405.

  27. 27.

    WTO, ‘Technical Information on State Trading Enterprises’ (WTO Website), https://www.wto.org/English/tratop_e/statra_e/statra_info_e.htm.

  28. 28.

    In the words of the Panel in Canada — Wheat Exports and Grain Import, the object and purpose of Article XVII is ‘to prevent WTO Members from doing indirectly through STEs that which they have contracted not to do directly under the GATT 1994’. WTO, Canada – Measures Relating to Exports of Wheat and Treatment of Imported Grain, Report of the Panel (30 August 2004) WT/DS276//R [4.224]; See also Energy Charter Secretariat (2001) [140].

  29. 29.

    Mavroidis (2016), p. 405.

  30. 30.

    WTO, Canada – Measures Relating to Exports of Wheat and Treatment of Imported Grain, Report of the Appellate Body (30 August 2004) WT/DS276/AB/R [89].

  31. 31.

    For the affirmative view see WTO, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, Report of the Panel (31 July 2000) WT/DS161/R, WT/DS169/R [7.53]; GATT, Canada – Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies, Report of the Panel (22 March 1988) L/6304 - 35S/37 [4.26] (‘the Panel saw great force in the argument that Article III:4 was also applicable to state-trading enterprises at least when the monopoly of the importation and monopoly of the distribution in the domestic markets were combined (…)’); Energy Charter Secretariat (2001) [149]; Defilla (2003), p. 434. For the opposing view see GATT, Canada – Administration of the Foreign Investment Review Act, Report of the Panel (7 February 1984) L/5504 - 30S/140 [5.16]; Jackson (1991), p. 284; Dralle (2018), pp. 291 et seq.

  32. 32.

    As Tilman Dralle points out, if the vertically integrated undertaking controlling the transmission networks was only required to provide MFN treatment, ‘this would hardly be of any value, given that the TSO could deny network access to all foreign energy products’. See ibid at 291 f.

  33. 33.

    Article XVII:1 GATT (emphasis added).

  34. 34.

    See, e.g., Mitchell et al., (2016); Diebold (2011). See also WTO, ‘Principles of the Trading System’ (WTO Website) https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm.

  35. 35.

    WTO, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, Report of the Panel (31 July 2000) WT/DS161/R, WT/DS169/R [7.53].

  36. 36.

    WTO, Canada — Wheat Exports and Grain Imports, AB Report [98].

  37. 37.

    Ibid [85].

  38. 38.

    GATT, Canada – Administration of the Foreign Investment Review Act, Report of the Panel (7 February 1984) L/5504 - 30S/140 [5.16].

  39. 39.

    See the Report of the first session of the Preparatory Committee held in London in 1946, EPCT/33 (‘London Report’), p. 32. See also Petersmann (1998), p. 71.

  40. 40.

    Tilman Dralle argues that based on this limitation in the text of Article XVII GATT, the provision does not include a national treatment obligation because an STE does not have to comply with the general non-discrimination principles with respect to purely domestic transactions. See Dralle (2018), p. 292.

  41. 41.

    Balancing energy refers to the procurement of electricity from generators at short notice to balance unplanned fluctuations and deviation from forecasted generation or load.

  42. 42.

    The STEs currently notified can be consulted on the WTO website at https://www.wto.org/english/tratop_e/statra_e/statra_e.htm.

  43. 43.

    Countries like India, Jordan, Mexico, Uruguay and Venezuela have notified STEs in the oil sector. See also Mathur and Mann (2014), p. 82.

  44. 44.

    Power Marketing Administrations (PMA) are federal agencies within the U.S. Department of Energy and have been tasked primarily with the marketing of hydropower and constructing the necessary infrastructure to transmit the electricity. There are currently four PMAs, all of which were notified as STEs to the WTO: The Bonneville Power Administration and the Southeastern, Southwestern and Western Area Power Administrations, respectively. Only Bonneville and the Western Area PMA engage in exports and imports of electricity. See also Campbell (2019).

  45. 45.

    WTO, Working Party on State Trading Enterprises, New and Full Notification Pursuant to Article XVII:4(a) of the GATT 1994 and Paragraph 1 of the Understanding on the Interpretation of Article XVII – United States (10 April 2017) G/STR/N/16/USA.

  46. 46.

    Mexico’s energy sector underwent major reforms and liberalization. The reforms did not entail privatization of state-owned enterprises, however. See above in Sect. 3.2.2.2, pp. 56 et seq.

  47. 47.

    Cf. Mathur and Mann (2014), p. 82; Energy Charter Secretariat (2003), p. 8.

  48. 48.

    Art. II:4 GATT reads, in relevant part: ‘If any contracting party establishes, maintains or authorizes, formally or in effect, a monopoly of the importation of any product described in the appropriate Schedule annexed to this Agreement, such monopoly shall not, except as provided for in that Schedule or as otherwise agreed between the parties which initially negotiated the concession, operate so as to afford protection on the average in excess of the amount of protection provided for in that Schedule.’ Article II:4 GATT thus restricts import monopolies to the extent that once the WTO Member maintaining the monopoly has committed to a tariff binding on electricity, the entity may not go beyond what is provided in the schedule in protecting domestic electricity producers. This becomes relevant with respect to sales of electricity on the domestic market. In addition to the level of the tariff binding the WTO Member has committed to, the import monopoly can only apply a ‘mark-up’ representing reasonable profit margin and costs associated with the marketing of imported electricity. See Energy Charter Secretariat (2001), pp. 145–147.

  49. 49.

    WTO, General Agreement on Tariffs and Trade, Ad Note to Articles XI, XII, XIII, XIV and XVIII.

  50. 50.

    Energy Charter Secretariat (2001), p. 153 which applies the same example to the case of natural gas.

  51. 51.

    The obligations apply if the WTO Member concerned, formally or in effect, (a) authorizes or establishes a small number of service suppliers and (b) substantially prevents competition among those suppliers in its territory. See WTO, China – Certain Measures Affecting Electronic Payment Services, Report of the Panel (16 July 2012) WT/DS413/R [7.587].

  52. 52.

    Willemyns (2016), p. 664.

  53. 53.

    Bigdeli and Rechsteiner (2008) [4].

  54. 54.

    Ibid [5].

  55. 55.

    Ibid [5] citing Mattoo (1998), p. 39.

  56. 56.

    The German transmission system is a case in point. In Germany, four transmission system operators each administer a separate control area corresponding to different geographical parts of the country. The four TSOs emanated from former vertically integrated energy companies as part of the fulfilment of their unbundling obligations. The TSOs were never granted explicit statutory rights by the German government, but they were granted a permit to operate the transmission network. The reason why these regional transmission monopolies continue to operate without competition is mainly technical and economical. The assets are owned by the TSO and there is no incentive to divest from all or parts of the network.

  57. 57.

    Article VIII:1 GATS reads: ‘Each Member shall ensure that any monopoly supplier of a service in its territory does not, in the supply of the monopoly service in the relevant market, act in a manner inconsistent with that Member’s obligations under Article II and specific commitments.’

  58. 58.

    WTO, Council for Trade in Services, Energy Services – Background Note by the Secretariat (09 September 1998) S/C/W/52 [39] (emphasis added).

  59. 59.

    Adlung (2006), p. 473.

  60. 60.

    WTO, Council for Trade in Services, Energy Services – Background Note by the Secretariat (09 September 1998) S/C/W/52 [39].

  61. 61.

    Dee and Findlay (2008), p. 351.

  62. 62.

    Ibid, at 343.

  63. 63.

    Bigdeli and Rechsteiner (2008) [25 ff.] citing Lipsky and Sidak (1999), pp. 1190–1191. The doctrine has been developed to a large extent by U.S. case law, see United States v. Terminal Railroad Association, 224 U.S. 383 (1912). This line of jurisprudence developed a ‘four elements test’ under which the liability of the monopolist for abuse of its dominant position has to be analyzed. According to this test there has to be (a) control of an essential facility by a monopolist, (b) a competitor’s inability to practically duplicate the facility, (c) denial of the use of that facility to a competitor and (d) the feasibility of providing the facility. See Poretti and Rios Herran (2006), p. 35. The essential facilities doctrine has also found its way into the EU legal order and has developed there with slightly different nuances. See for two leading judgments of the European Court of Justice Joined Cases C-241/91 P and C-242/91 P, Radio Telefis Eireann v Commission [1995] ECLI:EU:C:1995:98 and Case C-418/01, IMS Health GmbH & Co. OHG v NDC Health GmbH & Co. KG [2004] ECR 2004 I-05039. As to the energy sector see Talus (2011).

  64. 64.

    De Hautecloque and Talus (2012), pp. 210 et seq. The authors refer to the ‘litigation approach’ by the EU Commission to tackle grandfathering rights prevalent in EU Member States.

  65. 65.

    Reference Paper on Basic Telecommunications Services (24 April 1996) 36 I.L.M. 367 (1997). The Reference Paper on Basic Telecommunications includes rules regarding transparency concerning such issues as terms of access. See also Bigdeli and Rechsteiner (2008) [31].

  66. 66.

    See Article VIII:3 GATS.

  67. 67.

    See Article VIII:4 GATT. In case other Members raise concerns, Article XXI GATS applies which foresees provisions on modification and withdrawal of commitments.

  68. 68.

    Bigdeli and Rechsteiner (2008) [34].

  69. 69.

    The relevant services would concern services outside the scope of the monopoly rights of a Member’s monopoly.

  70. 70.

    See also Krajewski (2003a), pp. 341 et seq. With respect to the energy sector see Dralle (2018), p. 91.

  71. 71.

    Krajewski (2005), pp. 430 et seq.

  72. 72.

    Krajewski ascribes this also partly to lobbying efforts of the telecommunications industry that advocated strongly for making the GATS a vehicle for deregulation and privatization. Ibid, at 430.

  73. 73.

    WTO, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, Report of the Panel (10 November 2004) WT/DS285/R [6.318]. See also WTO, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, Report of the Panel (12 August 2009) WT/DS363/R [7.1353].

  74. 74.

    Emphasis added.

  75. 75.

    Pauwelyn (2005), p. 153 citing WTO, US – Gambling, Panel Report (10 November 2004) [6.327].

  76. 76.

    Krajewski (2003b), p. 87.

  77. 77.

    WTO, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, Report of the Appellate Body (7 April 2005) WT/DS285/AB/R.

  78. 78.

    Ibid [230]. The US had argued in this case that only numerical limitations, i.e. those limitations specifically expressed in numbers, could be subject to subparagraphs (a) or (c) of Article XVI GATS. The AB rejected these arguments and found that measures not dressed in numbers but amounting to a ‘zero quota’ would also be covered by the scope of the provision. The decision has been discussed critically by several authors. See, e.g. Ortino (2006), p. 136 who criticizes the AB for insufficient methods of treaty interpretation.

  79. 79.

    Article XXVIII (h) GATS, which was referred to above, defines a monopoly supplier as a person which ‘is authorized or established formally or in effect by that member as the sole supplier of that service’.

  80. 80.

    Krajewski (2003b), p. 87.

  81. 81.

    Ibid.

  82. 82.

    Ibid.

  83. 83.

    Cf. WTO, Council for Trade in Services, Energy Services – Background Note by the Secretariat (09 September 1998) S/C/W/52 [70]; for a general discussion see Adlung (2006), p. 455. On the concept of PSOs see above in Sect. 2.2.3, pp. 29 et seq.

  84. 84.

    Lakatos (2004), p. 145.

  85. 85.

    According to the Telecoms Reference Paper, ‘any member has the right to define the kind of universal service obligation it wishes to maintain. Such obligations will not be regarded as anti-competitive per se, provided they are administered in a transparent, non-discriminatory and competitively neutral manner and not more burdensome than necessary for the kind of universal service defined by the Member.’ See Reference Paper on Basic Telecommunications Services (24 April 1996) 36 I.L.M. 367 (1997).

  86. 86.

    See below in Sect. 14.3.2.2, pp. 247 et seq.

  87. 87.

    Energy Charter Secretariat, ‘Frequently Asked Question about the Energy Charter Process’ http://www.energycharter.org/process/frequently-asked-questions/. See also Dralle (2018), p. 308.

  88. 88.

    The term used in the ECT is ‘state and privileged enterprises’.

  89. 89.

    Emphasis added.

  90. 90.

    Article 6 (5) ECT.

  91. 91.

    See the overview in Marhold and Weiss (2019), pp. 61 et seq.

  92. 92.

    See Article 2.13 of the Free Trade Agreement between the European Union and South Korea (16 September 2010) OJ 2011/L 127 (entered into force on 1 July 2011).

  93. 93.

    See Article 22.1 of the Canada-United States-Mexico Agreement, titled ‘state-owned enterprises and designated monopolies’.

  94. 94.

    Article 12.8 of the United States – Singapore Free Trade Agreement (6 May 2003) 42 I.L.M. 1026 (entered into force 1 January 2004).

  95. 95.

    See Article 2.13 of the EU-Korea FTA.

  96. 96.

    An example is the US-Singapore FTA. It comprises a number of provisions which go further than the non-discrimination standard at the WTO level and are also more detailed. Its provisions apply to ‘designated monopolies and government enterprises’.

  97. 97.

    Article 217 (1) Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and Georgia, of the other part (27 June 2014) OJ 2014/L 261/4, 86.

  98. 98.

    Georgia has been a Member of the Energy Community since July 2017.

  99. 99.

    Enhanced Partnership and Cooperation Agreement between the European Union and the Republic of Kazakhstan (21 December 2015), OJ 2016/L 29/3, Art. 145.

  100. 100.

    EU – Kazakhstan Enhanced Partnership and Cooperation Agreement above, Article 145(1).

  101. 101.

    Article 7 (1) of the Chapter on Energy and Raw Materials of the new EU-Mexico FTA as published by the European Commission, available at https://trade.ec.europa.eu/doclib/docs/2018/april/tradoc_156800.pdf. The EU and Mexico in April 2018 reached ‘agreement in principle’ on a new bilateral trade agreement replacing its predecessor which came into force in 2000. The Agreement has not yet been signed by the Parties and the text may thus be subject to further modifications.

  102. 102.

    Ibid, Article 7 (2).

  103. 103.

    Ibid, Article 7 (3).

  104. 104.

    Free Trade Agreement between the European Union and the Socialist Republic of Vietnam (12 June 2020) OJ 2020/L 186/3.

  105. 105.

    Ibid, Article 7.1.

  106. 106.

    Ibid, Article 7.4.

  107. 107.

    Nor, in principle, are governments under an obligation to act or provide useful remedies against private operators that engage in restrictive practices. See United Nations Conference on Trade and Development, ‘WTO Core Principles and Prohibition: Obligations Relating to Private Practices, National Competition Laws and Implications for a Competition Policy Framework’ (United Nations 2003) [6], available at https://unctad.org/en/Docs/ditcclp20032_en.pdf.

  108. 108.

    See also Dralle (2018), p. 324.

  109. 109.

    Dee and Findlay (2008), p. 354.

  110. 110.

    Willemyns (2016), p. 667.

  111. 111.

    See also WTO, Council for Trade in Services, Energy Services – Background Note by the Secretariat (09 September 1998) S/C/W/52 [6].

  112. 112.

    Article 3.3 of the DSU allows WTO contracting parties to resort to the dispute settlement system of the WTO in ‘situations in which a Member considers that any benefits accruing to it directly or indirectly under the covered agreements are being impaired by measures taken by another Member’ (emphasis added).

  113. 113.

    WTO, United States – Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan, Appellate Body Report (15 December 2003) WT/DS244/ [81].

  114. 114.

    In US – Corrosion Resistant Steel Sunset Reviews, the Appellate Body held that ‘in principle, any act or omission attributable to a WTO Member can be a measure of that Member for purposes of dispute settlement proceedings.’ See ibid [81].

  115. 115.

    WTO, Japan – Measures Affecting Consumer Photographic Film and Paper (Kodak/Fuji), Report of the Panel (31 March 1998) WT/DS44/R [10.56].

  116. 116.

    Ibid.

  117. 117.

    Zedalis (2007), pp. 357 et seq.

  118. 118.

    International Law Commission (ILC), Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentaries (2001) YBILC 2001/II(2).

  119. 119.

    Ibid, Article 8.

  120. 120.

    WTO, United States – Certain Country of Origin Labelling (COOL) Requirements, Reports of the Appellate Body (29 June 2012) WT/DS384/AB/R, WT/DS386/AB/R [291].

  121. 121.

    GATT, Japan – Trade in Semi-Conductors, Report of the Panel (4 May 1988) L/6309 - 35S/116 [109].

  122. 122.

    Ibid [117].

  123. 123.

    WTO, China – Measures Related to the Exportation of Various Raw Materials, Reports of the Panel (5 July 2011) WT/DS394/R; WT/DS395/R; WT/DS398/R [7.1006].

  124. 124.

    Zedalis (2007), p. 357.

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Frey, C. (2022). Market Structure As an Impediment to International Trade in Electricity: Vertical Integration, Monopolies and State Ownership. In: World Trade Law and the Emergence of International Electricity Markets. European Yearbook of International Economic Law(), vol 25. Springer, Cham. https://doi.org/10.1007/978-3-031-04756-5_10

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