Inside U.S. Trade - Keystone XL NAFTA Challenge Far From A Slam-Dunk Case, Experts Say
Cécile Toubeau
Inside U.S. Trade - 02/05/2016
News Analysis
Keystone XL NAFTA Challenge Far From A Slam-Dunk Case, Experts Say
February 04, 2016
TransCanada is wading into murky waters with its plan to bring an investor-state dispute against the United States over the Obama administration's rejection of the Keystone XL pipeline, according to arbitration experts, as both previous case law and the specific facts around the rejection leave it far from clear whether a challenge will succeed.
Experts agree that one of the key elements in this case will be how a tribunal would interpret the controversial "minimum standard of treatment" (MST) obligation contained in the investment chapter of the North American Free Trade Agreement (NAFTA), under which TransCanada has said it intends to bring its claim. The company's Jan. 6 notice of intent to submit a claim argues that the U.S. breached the MST obligation, among others.
But investor-state dispute settlement (ISDS) tribunals have differed on whether proving a breach of MST entails reaching a relatively high threshold, or a more lenient test. Questions over how the tribunal would rule on this matter alone introduce a level of uncertainty about how likely the company is to succeed if it pursues arbitration.
Experts generally seem to agree that TransCanada is unlikely to be able to meet the higher bar, which was used in the 2009 Glamis Gold ruling and would require it to prove that the administration acted "egregiously." That term is undefined in case law, but would likely mean that the company would have to show the administration willfully breached its NAFTA obligations, according to one investment expert. TransCanada would have difficulty doing that because finding evidence to prove a willful breach of NAFTA is unlikely, according to the expert.
But there is also disagreement over whether TransCanada could meet the more lenient standard, given the facts of the case, further making the outcome of any future litigation unclear. Meeting the lower MST bar -- which is laid out in the 2004 Waste Management II case -- will most likely depend on whether TransCanada can prove that the U.S. State Department acted in an "arbitrary" manner in denying its application for a permit to build the Keystone XL pipeline.
Given how the process unfolded, there are arguments that can be made either way on this question. The State Department established its criteria for weighing whether to grant the permit in a 2004 Executive Order, which says the department must judge if granting a permit for a cross-border pipeline is in the "national interest."
Pursuant to that, in a January 2014 Final Supplemental Environmental Impact Statement (EIS) on the Keystone XL pipeline, the State Department said it would consider a broad range of factors in its national interest determination.
These factors include foreign policy goals, and environmental and economic reasons. On foreign policy, for example, State cited the administration's strategy to address climate change and bilateral relations with neighboring countries -- specifically the country where the pipeline connects -- as considerations in its decision.
All of these factors were taken into account when the State Department subsequently rejected the permit to build the Keystone XL pipeline on Nov. 4 of last year, a point that could lend credibility to the notion that the decision was consistent with previously stated administration policy.
But a possible counterpoint to this argument -- and one that TransCanada hints at in its notice -- is that the criteria listed by State in 2014 departed from past practice, and came into play only after the Keystone XL pipeline was in the process of being considered by the administration.
The company pointed specifically to an April 24, 2009 Public Notice issued by the State Department, suggesting that criteria it contained were much narrower. This document said national interest determinations take place "[w]ithin the context of appropriate border security, safety, health, and environmental requirements."
In its notice, TransCanada appears to interpret this as meaning that those factors are the only ones that should be considered in a national interest determination -- rather than the wider set of issues cited by the State Department in its 2014 EIS and its decision to deny TransCanada the permit.
The Canadian company also points to an August 2009 national interest determination by State approving the Canada-U.S. Alberta Clipper pipeline as an example of when the State Department applied that limited criteria, in an apparent effort to demonstrate how far of a departure the Keystone XL decision was from past practice.
In that Aug. 9, 2009 national interest determination, the State Department cited seven factors relating to environmental impacts, energy supply, and the economic impacts of the pipeline. Foreign policy was not explicitly mentioned, but there was reference to ensuring crude oil supply from non-OPEC countries.
In its November rejection of Keystone XL, by contrast, State said a "key consideration" was that approving the pipeline "would undermine U.S. climate leadership and thereby have an adverse impact on encouraging other States to combat climate change and work to achieve and implement a robust and meaningful global climate agreement."
TransCanada derides the foreign policy objectives cited by State in its rejection of Keystone XL as merely "symbolic" reasons, and points to them as proof that the administration did not take into account the merits of its application. It also claims that a decision based on U.S. climate leadership could have been made when TransCanada first filed its permit application in 2008, rather than seven years later.
That initial application submitted in 2008 was denied for a procedural reason in January 2012. TransCanada then resubmitted its application in May 2012.
Another possible argument that TransCanada could employ in arguing that the State decision was "arbitrary" is that the action taken by the administration does not advance its stated purpose, Todd Weiler and Lawrence Herman, investment lawyers that specialize in NAFTA claims, said in separate interviews.
This argument may be borne out by pieces of State's own decision memo. In it, the department acknowledged that by denying the permit for Keystone XL, it still may fail to prevent the extraction of oil from the Alberta tar sands -- a type of fuel that is notoriously carbon-intensive, and was to be the main type of oil carried by the pipeline.
TransCanada, in its notice of intent to file a claim, also argued that the other means of extraction and transportation -- such as transport by rail -- could actually carry more damaging impacts to the environment than if the oil were carried by the pipeline.
In addition to its claims that the U.S. violated its MST obligations, TransCanada also alleges that the U.S.did not live up to its Article 1102 and 1103 obligations relating to national treatment and most-favored nation (MFN) status, respectively. To prove those claims, TransCanada would likely have to establish that the U.S. has approved other pipelines proposed by U.S. and non-Canadian foreign investors in "like circumstances" to the Keystone XL project.
More specifically, to show a violation of the national treatment principle, TransCanada must show that the U.S. has treated domestic pipeline investments better than it treated Keystone XL. But one critic of ISDS said that might be hard to prove, given that domestic pipelines are not subject to the same review process as cross-border pipelines.
TransCanada's notice signaled that it would attempt to prove that the U.S. was discriminating against Canadian oil because the Obama administration supported segments of the pipeline that did not cross a U.S. border. It points to a March 2012 press conference held by President Obama in Cushing, Okla., where he endorsed the building of a segment of the Keystone XL pipeline from Cushing to the Gulf of Mexico because it would benefit U.S. oil production.
With regard to MFN, TransCanada would have to show that it somehow received worse treatment than investors from other countries -- such as Mexico. But on this point as well, the critic said, the company could have a tough time. One reason is that the type of oil carried by a U.S.-Mexico pipeline would not be the same as that extracted from the Alberta Tar Sands, which is unique and recognized as more carbon-intensive.
The final claim TransCanada is making against the U.S. is that its decision to reject the pipeline amounted to "expropriation," which would be a violation of Article 1110 of NAFTA. That article states that a government may not directly or indirectly expropriate an investment from an investor from another NAFTA country unless it is done for a public purpose; on a non-discriminatory basis; in accordance with due process of law; and the investor receives appropriate compensation.
In this claim, TransCanada would have to argue that the regulation it was subject to greatly reduced the value of its asset, Simon Lester, a trade policy analyst at the Cato Institute said.
This argument would be difficult to prove, according to Weiler, because it would require proving that the investment was reduced to a degree "tantamount to taking." This would require TransCanada to prove the U.S. undermined the investment's future value, and subsequently require TransCanada to prove what that value would have been, which Weiler said is difficult to do definitively.
In previous NAFTA tribunal decisions, interpretations have varied of the MST obligation. The test generally understood to be the most strict is one known as the "Neer standard," which arose out of the Glamis Gold case brought by a Canadian mining firm against the United States.
In that case, the tribunal said that proving a breach of MST requires an investor to demonstrate that a government action was "sufficiently egregious and shocking--a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons." The tribunal borrowed this standard from a case brought in 1926 before the U.S.-Mexican claims commission by L.F.H. Neer over government inaction in response to the shooting death of her husband in Mexico.
Some observers of ISDS claims have noted that the tribunal embraced this tighter standard in the context of a challenge against the U.S., which has never lost an ISDS challenge. One ISDS critic suggested that arbitrators may be more cautious about using a more lenient standard in litigation against the U.S., given the potential for political blowback from Washington if the government finally loses a case.
Both before Glamis Gold and afterward, other NAFTA tribunals including Waste Management II set an arguably lower bar. In Waste Management II -- which involved a U.S. investor claim against Mexico -- the tribunal argued that the MST standard is breached if a government action is "arbitrary, grossly unfair, unjust or idiosyncratic."
That same test was adopted in a NAFTA case that was concluded in 2015 in favor of the the U.S. investor Bilcon, which was seeking to establish a mining quarry in Nova Scotia, Canada. Herman, who has represented investors and governments before NAFTA tribunals, characterized the Glamis Gold ruling as an outlier and said he expects the Waste Management II standard to prevail because it is used more often. -- Brett Fortnam
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Kind Regards,
Cecile
| Cécile Toubeau Manager, Better Trade and Regulation M +32 (0)475 226 997 Skype t-e_cecile Twitter : @Cecile_Toubeau
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