UK: WTO - Energy Services

The energy sector is one of the sectors for which the new trade negotiations in the World Trade Organisation (WTO) are expected to yield a considerable result. Trade negotiators and WTO member countries show much greater interest in the energy sector than when they negotiated the WTO rules that apply today. In the light of the pending WTO negotiations on energy services, Craig Pouncey, a partner in Herbert Smith’s Brussels office describes the general background and discusses the practical implications for companies.

The existing WTO rules that apply to the energy sector are spread out over a number of legal texts. This is related to the nature of the energy sector and the distinction that the WTO makes between trade in goods and trade in services. Trade in goods is covered by the General Agreement on Tariffs and Trade (GATT) while trade in services is covered by the General Agreement on Trade in Services (GATS). The energy sector involves trade in goods and services and is covered by both sets of rules. However, because of the broad interpretation that is given to the concept of trade in services in WTO law, the energy sector is mainly a services sector. This involves, for instance, services related to exploration and production of energy, construction and maintenance of energy facilities, network services, storage services, supply services, energy management, decommissioning of energy facilities etc.

When assessing the impact of the GATS on energy services, it is important to take into account two key features of the GATS. The first is that GATS covers several "modes of supply" one of which is "commercial presence" of a service supplier of one WTO member on the territory of another WTO member. Via this concept of "commercial presence" GATS disciplines are de facto extended to overseas investments in energy infrastructure. The second key feature is that the GATS uses an "opt in" system. The basic GATS disciplines of non-discrimination and regulatory transparency are only applicable to a certain services sector in a certain WTO member country if that country has made a relevant commitment in a relevant sector. In other words, different WTO members have different WTO obligations and in order to know the precise obligations of a WTO member it is necessary to consult that country’s "Schedule of Commitments".

These "Schedules of Commitments" are based on a services classification list that was drafted in 1991. At that time the energy sector was still largely dominated by state-owned vertically integrated utilities and there was no demand to introduce energy services as a specific sector in the negotiations. This does not mean that energy services are currently not covered by GATS. Aspects of energy services are covered by non-sector specific services categories such as engineering services, services incidental to mining, construction services, distribution services, pipeline transport services etc. The problem with the current approach, however, is that few WTO member countries have made commitments that conform to the commercial reality of the energy sector and that have a meaningful practical impact. For instance, a country may have made commitments for certain distribution services that would also apply to distribution of energy but it may have omitted to make commitments on engineering services that, in commercial reality, are normally supplied simultaneously with energy distribution services.

In early 2000, however, new negotiations started on the further liberalisation of services in the WTO. It is generally expected that these will be given considerable impetus from the full round of new trade negotiations that was launched at the WTO’s Ministerial conference in Doha in November 2001. Energy services is one of the areas where considerable progress is expected. Both the EU and the US have tabled favourable negotiating papers and the US based "WTO Energy Services Coalition" has set up a global lobbying campaign to support this. Most importantly, however, commercial reality in the energy sector has changed over the past decade. Many Governments have started to introduce competition in the energy supply chain through liberalisation and privatisation. Vertically integrated oil and power companies have also started to buy-in and sell-on certain specialist service functions. It is this commercial evolution that has enabled the trade in "energy services" to grow and that triggers the need for appropriate covering by the GATS. This coincides with a growing demand in non-OECD countries for improved energy supplies that can only be met by investments from foreign energy companies. In order to attract such investments these countries would be willing to make binding GATS commitments on energy services. The actual negotiations on these commitments would be conducted on the basis of a stand-alone sectoral classification for energy services or on the basis of an informal "energy services checklist". The latter would include all generic services categories on which a WTO country should make commitments to ensure commercially meaningful commitments for energy services.

Such a proper coverage of energy services by GATS would help to decrease the political and regulatory risk for private infrastructure investments in non-OECD countries that are members of the WTO. The various WTO Agreements are supported by a dispute settlement system that has greatly exceeded expectations in the first seven years of its existence. Whilst this dispute settlement system is only open for States and not for private parties, both the US and the EU have mechanisms in place that allow companies to bring complaints via their Government or the European Commission. Non-compliance with a WTO dispute settlement ruling can result in economic countermeasures and almost all WTO dispute settlement procedures have eventually resulted in a satisfactory solution.

The standard of protection offered by GATS could also be included in the contractual obligations of an investment project. If backed up by an investor-State arbitration agreement this would allow an investor to bypass the exclusively intergovernmental character of WTO rules. Such inclusion of WTO rules by reference has the advantage that the correct application to complex regulatory situations of relatively vague concepts such as non-discrimination is clarified by dispute settlement practice. The latter tends to interpret these concepts broadly and this can offer protection against a wide variety of unpredictable and unfavourable regulatory interventions. Another advantage of including WTO rules by reference is that a host State will find it difficult to argue with a prospective investor against rules that it has already subscribed to (albeit in the exclusively inter-state context of the WTO).

"© Herbert Smith 2002

For more information on this or other Herbert Smith publications, please email us."