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Published online by Cambridge University Press: 09 August 2019
This article discusses the decision of the Panel of the World Trade Organization (WTO) in the EU–Energy Package dispute between the Russian Federation and the European Union (EU) and certain of its Members. This decision is an important milestone in the history of the WTO. First, it presents a good example of how international economic disputes concerning politically sensitive matters, such as energy security, may be resolved in a pragmatic way, by adhering to multilateral trade rules of the WTO. Second, as the first WTO decision to address a Member's regulatory regime for natural gas, it reminds the WTO community that energy trade is not an alien subject for the WTO. In this article, we discuss some of the Panel's findings that may have significance for other similar cases, and examine the implications of these findings for the EU's internal gas market and energy security. The Panel's decision is currently under appeal with a ruling by the WTO Appellate Body not expected before the end of 2019. Hence, the outcome of this dispute remains uncertain.
Vitaliy Pogoretskyy, Counsel at the Advisory Centre on WTO Law (Geneva), e-mail: vitaliy.pogoretskyy@acwl.ch. Prof. Kim Talus, James McCulloch Chair in Energy Law and Director of the Tulane Center for Energy Law (Tulane Law School); Professor of European Energy Law at UEF Law School (University of Eastern Finland); Professor of Energy Law at Helsinki University. The views expressed in this article are strictly personal and should not be attributed to the organizations with which the authors are affiliated. The authors thank Niall Meagher and the anonymous reviewers for their comments. All errors remain ours alone.
1 Panel Report, European Union and Its Member States – Certain Measures Relating to the Energy Sector (EU–Energy Package), WR/DS476/R, circulated to Members on 10 August 2018.
2 These are Croatia, Hungary, and Lithuania.
3 During its accession negotiations to the WTO, Russia ‘confirmed that Gazprom will be notified as [a state-trading enterprise] in accordance with Article XVII of the GATT 1994’. WTO, Working Party on the Accession of the Russian Federation, ‘Report of the Working Party on the Accession of the Russian Federation to the World Trade Organization’, WT/ACC/RUS/70 (17 November 2011), para. 88.
4 Gazprom accounts for 12% and 68% of the global and Russia's national gas output respectively. On the role of Gazprom in Russia's gas market, see Gazprom, http://www.gazprom.com (accessed 11 November 2018); and Nazarov, I. (2015), ‘Overview of the Russian Natural Gas Industry’, in Vavilov, A. (ed.), Gazprom: An Energy Giant and Its Challenges in Europe, Palgrave Macmillan, pp. 15–16Google Scholar, 31, 41–42, 44.
5 Among the definitions of energy security discussed in the Panel Report is ‘the uninterrupted availability of energy sources at an affordable price’, EU–Energy Package, n. 1 above, para. 7.1150. The need for diversification is emphasized in, inter alia, recital 5 and Article 4 of Regulation (EU) No. 347/2013 of the European Parliament and of the Council of 17 April 2013 on guidelines for trans-European energy infrastructure and repealing Decision No. 1364/2006/EC and amending Regulations (EC) No. 713/2009, (EC) No. 714/2009, and (EC) No. 715/2009 (OJ L 115, 25.4.2013, p. 39).
6 EU–Energy Package, n. 1 above, paras. 7.1154, 7.1198, footnote 1922.
7 See section 2.
8 In 2016, Russian gas accounted for 39.9% of the EU's total imports of gas. EU Commission (2018), ‘EU Energy in Figures’, Statistical pocketbook, https://www.euneighbours.eu/en/east/stay-informed/publications/eu-energy-figures-statistical-pocketbook-2018 (accessed 11 November 2018), p. 26.
9 Gazprom, for example, has joint control over Europolgaz (the owner of the Yamal gas pipeline in Poland), and supplies pipeline transport services in several EU Member States through transmission system operators, such as NEL GT, OPAL GT, and GASCADE. See EU–Energy Package, n. 1 above, paras. 7.613, 7.1082, 7.1085, and footnote 906.
10 Russia acceded to the WTO on 22 August 2012. Russia requested WTO consultations with the EU and its Member States regarding the Third Energy Package on 30 April 2014.
11 For example, in section 3.4, we discuss the significant deference that the Panel gave to the authorities of the EU and its Member States in administering certification requirements for transmission system operators.
12 LNG is natural gas chilled to the point where it becomes liquid, at an average temperature of –160° C (–260° F). EU–Energy Package, n. 1 above, footnote 1414. See also Gas Strategies industry glossary, www.gasstrategies.com (accessed 12 December 2018).
13 The EU appealed certain findings of the Panel on 21 September 2018, while Russia submitted its other appeal on 26 September 2018. See WTO, Notification of an Appeal by the European Union, WT/DS476/6, 25 September 2018; and WTO, Notice of an Other Appeal by the Russian Federation, WT/DS476/7, 28 September 2018. According to the most optimistic scenario, the Appellate Body will issue its decision not earlier than the beginning of 2020.
14 Even today, certain ‘national energy rights’ are excluded from the scope of the EU's energy-specific competence under Article 194(2) of the Treaty on the Functioning of the European Union.
15 The historical development of EU energy law is examined in detail in Talus, K. (2013), EU Energy Law and Policy: A Critical Account, Oxford University PressCrossRefGoogle Scholar.
16 This Package included: Directive 98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common rules for the internal market in natural gas (OJ L 204, 21.7.1998, p. 1); and Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity (OJ L 27, 30.1.1997, p. 20).
17 Third-party access entails a system where third parties, other than owners and operators of the pipeline, can have non-discriminatory access to pipeline transportation services. Third-party access can be based on negotiated access, where the system operator is required to negotiate access with third parties, or regulated access, where the regulator ensures non-discriminatory access, including tariffs, through regulation.
18 Unbundling entails a separation of pipeline activities from other gas market activities. There are various unbundling models ranging from account unbundling to legal and ownership unbundling, among other things. Functional unbundling means that the network department is separate from the rest of the vertically integrated company and that behavioral rules are put in place to ensure the independence of this department.
19 This Package included: Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC (OJ L 176, 15.7.2003, p. 57); Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC (OJ L 176, 15.7.2003, p. 37); and Regulation (EC) No. 1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity (OJ L 176, 15.7.2003, p. 1).
20 Inquiry pursuant to Article 17 of Regulation (EC) No. 1/2003 into the European gas and electricity sectors (Final Report) (COM/2006/851 final) 10 January 2007.
21 For an in-depth analysis of the impact of enforcement of competition law on natural gas markets, see Talus, K. (2011), ‘Long-term Natural Gas Contracts and Antitrust Law in the European Union and the United States’, Journal of World Energy Law and Business, 4(3): 1CrossRefGoogle Scholar; and Talus, K. (2011), ‘Just What Is the Scope of the Essential Facilities Doctrine in the Energy Sector: Third Party Access-Friendly Interpretation in the EU v. Contractual Freedom in the US’, Common Market Law Review, 48(5): 1571Google Scholar.
22 It consists of the following legal instruments: Regulation (EC) No. 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators (OJ L 211, 14.8.2009, p. 1); Regulation (EC) No. 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No. 1228/2003 (OJ L 211, 14.8.2009, p. 15); Regulation (EC) No. 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No. 1775/2005 (OJ L 211, 14.8.2009, p. 36); Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC (OJ L 211, 14.8.2009, p. 55); and Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC (OJ L 211, 14.8.2009, p. 94).
23 Ownership unbundling entails full separation of network activities from other gas market activities. Vertically integrated companies are, therefore, required to divest their control and rights over either their natural gas production and supply undertakings or their transmission systems and network operators. See section 3.2 below.
24 ‘Liberalization’ needs to be distinguished from ‘privatization’. Many energy companies in the EU are still state-owned. However, with liberalization, these state-owned companies have lost their exclusive or special rights in the EU energy markets and compete today like privately owned companies.
25 This is discussed in Talus, K. (2017), ‘Decades of EU Energy Policy: Towards Politically Driven Markets’, Journal of World Energy Law & Business, 10(4): 380CrossRefGoogle Scholar.
26 Article 4 of Regulation (EU) No. 347/2013, n. 5 above.
27 An example of such administratively driven projects appears to be the Finnish–Estonian Balticconnector, which was developed within the framework of one of the EU's gas priority corridors (i.e. the Baltic Energy Market Interconnection Plan, covering, inter alia, the three Baltic States and Finland). For a more detailed overview of this project and PCI designations more generally, see Talus, K. (2016), Introduction to EU Energy Law, Oxford University PressGoogle Scholar; and Enerdata (2015), ‘Gasum Cancels Regional LNG Terminal and Finland–Estonia Gas Pipeline’, www.enerdata.net/publications/daily-energy-news/gasum-cancels-regional-lng-terminal-and-finland-estonia-gas-pipeline.html (accessed 10 April 2019).
28 See Talus, ‘Just What Is the Scope of the Essential Facilities Doctrine in the Energy Sector’, n. 21 above.
29 Moreover, certain of Russia's claims were found to be outside the Panel's terms of reference (jurisdiction). EU–Energy Package, n. 1 above, para. 7.79.
30 However, see the Panel's interpretation of Articles XVI:2(e) and XVI:2(f) of the GATS, as well as its analysis of ‘likeness’ between LNG services and pipeline transport services in ibid., paras. 7.627–7.651, 7.709–7.719, and 7.1398–7.1416.
31 Ibid., paras. 7.251–7.252, 7.254–7.255, 7.278; WTO, Request for the Establishment of a Panel by the Russian Federation, WT/DS476/2, 28 May 2015, footnote 3.
32 EU–Energy Package, n. 1 above, paras. 7.272–7.274, 7.280.
33 Ibid., para. 7.269, footnote 604.
34 Ibid., para. 7.282.
35 Ibid., para. 7.281.
36 Ibid., paras. 7.330–7.333.
37 Ibid., para. 7.338.
38 Ibid., para. 7.279, footnote 692. GATT Contracting Parties and the newly acceded WTO Members have inscribed specific commitments in their GATS Schedules, based on the document ‘W/120’, prepared originally by the GATT Secretariat during the Uruguay Round of negotiations. This document had, in turn, been drawn up based on the UN Provisional CPC.
39 Curiously, the Panel referred to the CPC 2.1 in its substantive analysis of Russia's claim against the TEN-E measure under Article II:1 of the GATS, i.e. its assessment of ‘likeness’ between LNG services and pipeline transport services – although without explaining the legal basis upon which this version of the CPC was used. The Panel found that these services were not ‘like’. Ibid., footnote 692, paras. 7.1412–7.1413, 7.1416.
40 Ibid., para. 7.282, footnote omitted.
41 Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, adopted 20 April 2005, para. 172.
42 Note that the CPC is exhaustive and covers all goods and services. Ibid.
43 EU–Energy Package, n. 1 above, para. 7.333.
44 Panel Report, China – Certain Measures Affecting Electronic Payment Services, WT/DS413/R and Add.1, adopted 31 August 2012, paras. 7.55–7.62.
45 The Panel acknowledged this fact in EU–Energy Package, n. 1 above, paras. 7.282, 7.311.
46 The Panel noted in this respect that it ‘encountered [Russia's] claims against various aspects of the challenged measures under both the GATS and the GATT 1994, accompanied by some argumentation seemingly blurring fundamental distinctions between the GATS and the GATT 1994’. Ibid., para. 7.14, footnote omitted. See this issue discussed in greater detail in Pogoretskyy, V. (2017), Freedom of Transit and Access to Gas Pipeline Networks under WTO Law, Cambridge University Press, pp. 123–124Google Scholar. On different types of services related to trade in natural gas, see Pogoretskyy, V. and Melnyk, S. (2016), ‘Energy Security, Climate Change and Trade: Does the World Trade Organization Provide for a Viable Framework for Sustainable Energy Security?’, in Delimatsis, P. (ed.), Research Handbook on Climate Change and Trade Law, Edward Elgar, p. 254Google Scholar.
47 EU–Energy Package, n. 1 above, paras. 2.10–2.28, 7.409, 7.426. Articles 9–23 of 2009/73/EC Directive n. 22 above.
48 EU–Energy Package, n. 1 above, para. 7.404.
49 Ibid., paras. 7.373, 7.451, 7.482.
50 The facts in the table are discussed in ibid., paras. 7.484, 7.494, 7.509, footnotes 885, 906.
51 See ibid., paras. 7.486–7.492 (and, in particular, para. 7.488, citing Appellate Body Report, US–Tuna II (Mexico) (Article 21.5 – Mexico), para. 7.71). The Panel took issue with Russia's use of the same approach in the context of certain other claims as well, in particular Russia's claims against the infrastructure exemption measure and the third-country certification measure. Ibid., footnote 1529, para. 7.1081.
52 Ibid., para. 7.510.
53 See the Panel's interpretation of Articles XXVIII(d), XXVIII(m)(ii), and XXVIII(n) of the GATS in ibid., paras. 7.432–7.444, 7.477, 7.498.
54 Russia appealed the Panel's findings with respect to the unbundling measure under Article 11 of the DSU. See WTO, Notice of an Other Appeal by the Russian Federation, n. 13 above.
55 Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, para. 133.
56 Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R, adopted 5 April 2001, para. 162.
57 Note that the Panel disagreed with Russia that some of these measures, in particular the public body measure, could properly be characterized as ‘exemptions’ from unbundling, as, in the Panel's view, they contained separate regimes, functionally equivalent to unbundling. EU–Energy Package, n. 1 above, paras. 7.776, 7.786.
58 LNG system operators are not subject to the unbundling measure as a consequence of how LNG facilities and LNG system operators are defined in the EU Gas Market Directive. Ibid., paras. 7.825, 7.831. See also Articles 9–23 of 2009/73/EC Directive, n. 22 above.
59 EU–Energy Package, n. 1 above, para. 7.827.
60 Ibid., para. 7.837 (citing Appellate Body Report, EC–Asbestos, paras. 99 and 101–102).
61 Ibid., para. 7.847.
62 Ibid., paras. 7.842, 7.848, footnote 1407.
63 Ibid., para. 7.850.
64 Ibid., para. 7.855.
65 M. Wüstenberg, K. Talus, and R. D. Ripple (October 2018), ‘A False Dichotomy Between LNG and Natural Gas? A Comment on Recent Practises at the World Trade Organization’, OGEL, www.ogel.org, p. 2; Smith, J. M., Ness, H. C. Van, and Abott, M. M. (2005), Introduction to Chemical Engineering Thermodynamics, 7th edn, McGraw-HillGoogle Scholar, chapters 3 and 6.
66 Burning a liquid with an average temperature of –160° C (–260° F) would be technically impossible.
67 Wüstenberg et al., n. 65 above, p. 2; ‘New Fuel Rules Push Shipowners to Go Green with LNG’, www.reuters.com/article/us-shipping-fuel-lng-analysis/new-fuel-rules-push-shipowners-to-go-greenwith-lng-idUSKBN1L01I8 (accessed 12 December 2018). The Panel also acknowledged this in EU–Energy Package, n. 1 above, footnote 1407.
68 Panels have these powers under Article 13 of the DSU.
69 As the Panel itself recognized, ‘this dispute occurs in the context of certain highly complex factual realities of the natural gas industry, including particularities of the markets for natural gas and its transport’. EU–Energy Package, n. 1 above, para. 7.15.
70 Ibid., paras. 7.924, 7.926; Article 36(1) of 2009/73/EC Directive n. 22 above.
71 OPAL GT is owned jointly by German Wintershall and Gazprom through another company, WIGA Transport. See OPAL, www.opal-gastransport.de/en/company/ (accessed 11 November 2018).
72 EU–Energy Package, n. 1 above, para. 7.976.
73 The second condition, ‘gas release programme’, served to reinforce the first one by discouraging the exceeding by Gazprom of ‘the 50% capacity cap’. Ibid., paras. 7.983, 7.1000.
74 The development of the Nord Stream–OPAL pipeline route has faced political opposition from opponents both within and outside the EU. For example, Poland – the host country of a competing pipeline project Yamal – and its State company PGNiG, as well as Ukraine's national oil and gas company, Naftogaz, challenged the 2016 OPAL Exemption Decision (revising the original 2009 Decision) before the Court of Justice of the EU and a German national court. See Case T-849/16, PGNiG Supply & Trading v. Commission (ECLI:EU:T:2017:924); Case T-849/16 R (ECLI:EU:T:2017:544) and the appeal C-117/18, PGNiG Supply & Trading v. Commission; and T-196/17, Naftogaz of Ukraine v. Commission (ECLI:EU:T:2018:140). At the time of writing, the proceedings before the Court of Justice of the EU initiated by Poland and PGNiG were still pending. However, the action of Naftogaz was dismissed as inadmissible.
75 EU–Energy Package, n. 1 above, para. 7.976.
76 Ibid., para. 7.995.
77 GATT Panel Report, Canada – Administration of the Foreign Investment Review Act, L/5504, adopted 7 February 1984, BISD 30S/140, para. 5.14. Unlike the prohibition on import restrictions in Article XI:1, the national treatment obligation in Article III:4 does not prevent Members from applying regulatory measures that have some restrictive effect on imports, as long as they do not discriminate between imported and domestic like products.
78 Panel Report, Indonesia — Measures Concerning the Importation of Chicken Meat and Chicken Products, WT/DS484/R and Add.1, adopted 22 November 2017, para. 7.185.
79 Ibid., para. 7.192, emphasis added.
80 Appellate Body Reports, China – Measures Affecting Imports of Automobile Parts, WT/DS339/AB/R / WT/DS340/AB/R / WT/DS342/AB/R, adopted 12 January 2009, paras. 158, 162.
81 EU–Energy Package, n. 1 above, paras. 7.994–7.996.
82 Ibid., para. 7.997.
83 The Panel stated, albeit without much elaboration, that ‘Russian natural gas imported via other pipelines goes to other EU destinations and cannot be substituted for natural gas that could have been transported through the additional capacity on the OPAL pipeline’. Ibid., paras. 7.998–7.999, footnotes 1693–1694.
84 See ibid., paras. 7.15, 7.994. The network dependence of gas trade is discussed in greater detail in Pogoretskyy (2017), n. 46 above, pp. 46–48.
85 EU–Energy Package, n. 1 above, footnote 1687. See also n. 74 above; and K. Yafimava (January 2017), ‘The OPAL Exemption Decision: Past, Present, and Future’, OIES PAPER: NG 117.
86 Commission Decision of 28.10.2016 on Review of the Exemption of the Ostseepipeline-Anbindungsleitung from the requirements on third party access and tariff regulation granted under Directive 2003/55/EC, Brussels, 28.10.2016 C(2016) 6950 final.
87 At the time of the adoption of the Third Energy Package, the third-country certification measure under Article 11 of the EU Gas Market Directive was also called ‘Lex Gazprom’, as, in some analysts’ view, it was clearly intended to target primarily Gazprom to restrict its presence in the EU gas markets. Willems, A. R., Sul, J., and Benizri, Y. (2009), ‘Unbundling As a Defence Mechanism Against Russia: Is the EU Missing the Point? ’, OGEL 2Google Scholar, www.ogel.org.
88 EU–Energy Package, n. 1 above, para. 7.1079. Article XVII:1 applies only to services and the modes of supply with respect to which the WTO Member concerned undertook specific commitments on national treatment in its GATS Schedule. The Panel found that Croatia, Hungary, and Lithuania took such commitments with respect to the supply of pipeline transport services via a commercial presence. Ibid., paras. 7.362, 7.365, 7.370.
89 Ibid., para. paras. 7.1117, 7.1121.
90 Ibid., para. 7.1138.
91 Footnote 5 states: ‘The public order exception may be invoked only where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society.’
92 EU–Energy Package, n. 1 above, paras. 7.1148–7.1156, 7.1171–7.1202, 7.1207, 7.1213–7.1224, 7.1226, 7.1228, 7.1239.
93 Ibid., para. 7.1250.
94 Ibid., paras. 7.1241–7.1254.
95 Ibid., paras. 2.52–2.60, 7.1267–7.1269; Article 4 of Regulation (EU) No. 347/2013, n. 5 above.
96 EU–Energy Package, n. 1 above, paras. 7.1262–7.1263, 7.1265–7.1266, footnote 2054.
97 Ibid., para. 7.1269.
98 Ibid., para. 7.1275 (referring to Annex I.2(8) of Regulation (EU) No. 347/2013) and para. 7.1277.
99 Ibid., paras. 7.1275–7.1278 (referring to the European Commission's communication ‘Energy Infrastructure Priorities for 2020 and Beyond — A Blueprint for an Integrated European Energy Network’ (COM(2010) 677 final of 17 November 2010), p. 34).
100 Ibid., para. 7.1281, emphasis added (and paras. 7.1282–7.1285, 7.1298–7.1286, 7.1298–7.1300).
101 Ibid., para. 7.1312 (and paras. 7.1300–7.1301, 7.1313).
102 Ibid., para. 7.1336.
103 Ibid., paras. 7.1348–7.1350 (referring to Appellate Body Report, India–Solar Cells, para. 5.90; and Panel Report, India–Solar Cells, para. 7.250).
104 Pogoretskyy (2017), n. 46 above, pp. 44–48.
105 EU–Energy Package, n. 1 above, footnote 2089.
106 This is confirmed in the TEN-E measure itself. See recital 5 of Regulation (EU) No. 347/2013, n. 5 above. See also the European Commission's communication, n. 99 above, p. 7 (‘[d]eveloping our energy infrastructure will not only enable the EU to deliver a properly functioning internal energy market, it will also enhance security of supply’). Although, with the passage of time, the EU's gas networks continue to expand and this problem is becoming less acute, the existence of infrastructure bottlenecks in the EU's internal gas market, preventing free gas flows, underinvestment in energy facilities, and the overreliance on a single supplier, such as Russia, are not completely in the past.
107 The Appellate Body has, for example, clarified that ‘Article III:4 … seeks to preserve equality of competitive opportunities for imported products as compared to like domestic products’. Appellate Body Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R, adopted 19 January 2010, para. 305, emphasis added. This suggests that measures that seek to correct an inequality of competitive opportunities between products of different origins, which was created due to a market failure (such as the lack of adequate infrastructure), should not fall afoul of this provision, as well as the MFN obligation in Article I:1.
108 This appears to be the Panel's position in EU–Energy Package, n. 1 above, paras. 7.1319–7.1321.
109 Commission Decision n. 86 above.
110 ACER, CEER (2018), ‘ACER Market Monitoring Report 2017 – Gas Wholesale Markets Volume’, www.acer.europa.eu/Official_documents/Acts_of_the_Agency/Publication/ACER%20Market%20Monitoring%20Report%202017%20-%20Gas%20Wholesale%20Markets%20Volume.pdf (11 April 2019).
