Windstream Energy LLC USA v The Government of Canada - PCA Case No 2021-26 - NAFTA - Reply Memorial of the Claimant - 14 August 2023
Country
Year
2023
Summary
TABLE OF CONTENTS
PART ONE - INTRODUCTION
I. OVERVIEW
II. WINDSTREAM'S REPLY EVIDENCE
PART TWO - THE FACTS
I. FACTS LEADING TO THE WINDSTREAM I AWARD
A. The Windstream I Tribunal Rejected Canada's Arguments Regarding Regulatory Uncertainty
B. The Windstream I Tribunal Rejected Canada's Arguments that the Moratorium was Imposed Solely Due to the Precautionary Principle
C. The Windstream I Tribunal Found Canada Violated the NAFTA Due to the Manner of the OPA's Negotiations with Windstream
II. FACTS FOLLOWING THE WINDSTREAM I AWARD
A. Windstream's Enforcement Application After Canada Fails to Pay the Windstream I Award
B. Following the Windstream I Award, Windstream and Ontario Shared the View that the Project Could Proceed
1. Windstream's Expectation
2. Ontario's Shared Expectation
C. Windstream's Efforts to Move the Project Forward
1. Windstream Updated its REA Submission and Conducted Additional Engineering Work
2. Windstream's Negotiations with Potential Partners
3. Windstream's Lobbying Efforts
4. MEI's Refusal to Meet with Windstream
D. WWIS Commences the Ontario Application to Protect its Rights
1. Windstream's Initiation of the Application
2. Windstream's Continuation of the Application
E. IESO's Decision to Terminate the FIT Contract After the Ontario Government Fails to Direct it Not to Do So
F. The Ontario Government Created the Conditions that Gave Rise to the Termination of the FIT Contract
1. Ontario's Energy Supply Needs
2. Ontario Conducts No Further Research
G. Windstream's Continued Efforts to Use its Project to Meet Ontario's Energy Supply Needs
H. Windstream Has Been Treated Inconsistently with Other FIT Contract Holders
1. MEI's Use of its Formal and Informal Control over the IESO
2. The Value Paid to Other FIT Contract Holders
I. The Project Was and is Technically FeasibleB.2
PART THREE - THE TRIBUNAL HAS JURISDICTION OVER WINDSTREAM'S CLAIMS
I. WINDSTREAM'S CLAIMS ARE NOT BARRED BY RES JUDICATA, COLLATERAL ESTOPPEL OR ABUSE OF PROCESS
A. The Issues Raised in this Arbitration are Not Barred by Res Judicata
1. The Principles Applicable to Establishing Res Judicata
2. Cause of Action Estoppel Does Not Apply
3. Collateral Estoppel Does Not Apply
B. Abuse of Process is Inapplicable in this Case
II. WINDSTREAM HAS ESTABLISHED A PRIMA FACIE DAMAGES CLAIM
A. Windstream has Surpassed the Low Threshold to Establish a Prima Facie Damages Claim
B. Canada's Argument is Premised on the Res Judicata Objection
III. WINDSTREAM FILED ITS CLAIM IN ACCORDANCE WITH THE NAFTA'S LIMITATION PERIOD
A. Windstream First Knew that Canada Breached the NAFTA, and
that Windstream Suffered Damages, No Earlier than February 2018
B. There is No Basis to Accept Canada's Recharacterization of Windstream's Claim
PART FOUR - CANADA IS LIABLE FOR BREACHES OF THE NAFTA
I. CANADA HAS UNLAWFULLY EXPROPRIATED WINDSTREAM'S INVESTMENTS IN VIOLATION OF ARTICLE 1110
A. The Applicable Test for Expropriation
B. Windstream Has Investments Capable of Being Expropriated
1. Canada is Seeking to Re-Litigate the Issue that was Before the Windstream I Tribunal
2. WWIS and the Project are Investments Capable of Being Expropriated
3. The FIT Contract is an Investment Capable of Being Expropriated
C. Windstream's Investments Have Been Expropriated
1. Windstream was Substantially Deprived of the Economic Value of its Investments
2. The Expropriation was Unlawful as it Did Not Meet the Criteria Set out in Article 1110 and the Police Powers Doctrine Does Not Apply
II. CANADA HAS FAILED TO ACCORD WINDSTREAM'S INVESTMENTS FAIR AND EQUITABLE TREATMENT (VIOLATING ARTICLE 1105)
A. Canada Mistates the Applicable Legal Standard Under Article 1105(1)
B. Canada has Denied Windstream's Investments Fair and Equitable Treatment
1. The Treatment of Windstream's Investments was Arbitrary and Grossly Unfair
2. Ontario Breached Windstream's Legitimate Expectations
PART FIVE - DAMAGES AND INTEREST
I. THE STANDARD OF COMPENSATION UNDER NAFTA CHAPTER 11
II. CANADA'S NAFTA BREACHES CAUSED WINDSTREAM'S LOSS
A. The Cause of Windstream's Loss was the Termination of the FIT Contract, Which Occurred Because of Conduct that Post-dates the Windstream I Award
B. Windstream Has Not Been Compensated for its Losses
III. THE CLAIMANT'S APPROACH TO DAMAGES REFLECTS THE PROPER VALUATION OF THE PROJECT AS AT FEBRUARY 18, 2020
A. Secretariat's DCF Analyses Most Accurately Reflect the Quantum of Windstream's Losses
B. The Fact that the Project Faced Risks Does Not Make a DCF Methodology Inappropriate
C. The DCF Approach is Industry Standard
D. The Claimant's Comparables Approach Should be Preferred to Canada's Cherry-Picked Comparables
IV. WINDSTREAM IS ENTITLED TO PRE- AND POST-AWARD INTEREST
PART SIX - RELIEF REQUESTED
I. OVERVIEW
1. This case is about a deliberate decision by the Government of Ontario to continue a course of conduct that a previous tribunal found breached Canada's obligations under the NAFTA. In that Award, the tribunal found that:
a) the Government of Ontario had breached its obligation to treat the Claimant, Windstream Energy LLC, in accordance with the fair and equitable treatment standard by leaving it in a "legal and political limbo" and failing to direct the legislatively-created contractual counterparty, the Ontario Power Authority (the "OPA") (now the Independent Electricity System Operator, the "IESO"), to make good on the promises made by the Ontario Government to protect Windstream's project (the "Project") from a moratorium on all offshore wind projects (the "Moratorium");
b) Windstream's investment had not been expropriated because its Feed-in-Tariff Contract (the "FIT Contract") with the IESO was still valid and in force, and could still be renegotiated by the parties to implement the promises made the Ontario Government; and
c) as a result, Windstream was only awarded compensation reflecting the measure of damage to its investment by virtue of Ontario's wrongful conduct - approximately C$25 million.
2. If Ontario had wished to avoid liability for any future damage to Windstream's still extant investment, the Windstream I tribunal's findings should have caused it to reflect and change course. It did not. Instead, Ontario determined that it would continue its policy of refusing to engage with Windstream and refusing to direct the IESO to take the steps necessary to affect the Ontario Government's promise that the Project would be insulated from the effects of the Moratorium. In light of the lack of direction from the Ontario Government, the IESO refused to renegotiate the FIT Contract and ultimately terminated it, effective February 18, 2020. Notably, in making its termination decision, the IESO relied upon the Ontario Government's lack of direction.
3. The Ontario Government's deliberate decision "not to intervene" on Windstream's behalf to ensure the FIT Contract was renegotiated, and its creation of the circumstances that ultimately led to the FIT Contract's termination, was arbitrary and grossly unfair. There is no legitimate reason for Ontario's refusal to act or to even meet with Windstream. In an era of climate change, Windstream was looking to build a renewable energy project that would assist Ontario in its efforts to transition to green energy. Ontario is also facing a serious energy crisis; it is projecting a substantial electricity supply shortfall and the Ontario Government is procuring long-term contracts for projects just like Windstream's to address this energy deficit. Windstream has put forward expert evidence addressing the benefits the Project would provide to Ontario in this current energy climate. Indeed, just one month ago, the Ontario Government released a new plan outlining the actions it will be taking to address its serious need for electricity supply, including procuring long-term contracts for renewable energy projects.
4. Despite its desperate need for energy and the fact that it is seeking out long-term contracts just like the Project, Ontario has provided no rationale for why it persisted in the wrongful conduct that allowed the IESO to terminate the FIT Contract. The only rationale it provided at the time (Canada has not provided a different one in this proceeding) was that Ontario will not intervene in the IESO's contractual relationships. But this is patently untrue. The evidence demonstrates that the Ontario Government regularly intervenes in the IESO's contractual relationships. It frequently directs the IESO, both formally and informally, to enter into, amend and/or terminate power purchase agreements to reflect promises that the Ontario Government has made to the proponent.
Windstream seems to be the only party for whom Ontario has decided not to intervene politically to fulfill the promises made to it. It is notable that Canada provided no evidence in response to this issue - it has simply chosen to ignore it.
5. The differential treatment does not end there. When the Ontario Government has terminated other FIT contract holders, it has ensured the project proponents were paid out, with the Government paying hundreds of millions of dollars for those terminated projects. Indeed, the Ontario Government has reportedly paid out the owner of the only other FIT 1 Contract holder, the White Pines project, over $100 million for the cancellation of its FIT contract for a 60MW onshore wind farm (of which 18.5 MW was ultimately useable; by contrast, Windstream's project was 300MW). Despite its clear acknowledgment that compensation is due to other proponents, the Ontario Government maintains it owes nothing to Windstream.
6. In this proceeding, Windstream is challenging the deliberate decision by the Ontario Government not to intervene on Windstream's behalf with the IESO and its conduct that created the circumstances that permitted the IESO to terminate the FIT Contract. This termination was in direct contradiction of the promises Ontario had made to Windstream that its Project would be insulated from the effects of the Moratorium. Windstream's Memorial on the Merits dated February 18, 2022 (the "Memorial") sets out in detail the background that led to these second NAFTA proceedings.
7. This Reply Memorial responds to the arguments raised in Canada's Counter-Memorial dated December 13, 2022 (the "Counter-Memorial"). At its core, Canada's response raises two arguments that permeate each of its purported bases for dismissing Windstream's claim. Both arguments misapprehend the tribunal's award in Windstream I (the "Award") and Canada's obligations to investors under the NAFTA and at international law.
8. First, relying on a flawed interpretation of the tribunal's Award in the Windstream I proceedings, Canada suggests that Windstream was already fully compensated for the losses to its investment. Canada relies heavily on arguments that Windstream made before the Windstream I tribunal, as Windstream had argued that it had lost the entire value of its investment. The problem with Canada's dependence on these statements is that they were ultimately not accepted by the Windstream I tribunal.
9. Instead, the Windstream I tribunal found that there had been no expropriation under
Article 1110 of the NAFTA, as the "FIT Contract [was] still formally in force and ha[d] not been
unilaterally terminated by the Government of Ontario" and that "it continue[d] to remain open for
the Parties to re-activate and, as appropriate, renegotiate the FIT Contract to adjust its terms to the
moratorium."1 The tribunal declined to award damages based on the full value of Windstream's
investment on the basis that the FIT Contract had not been cancelled, opting instead to award
damages based on the damage to Windstream's unexpropriated investment arising from the "legal
and contractual limbo" that Ontario had left it in through the imposition of the Moratorium and the
failure to direct the OPA to renegotiate the contract to reflect the impact of the Moratorium
10. As Windstream explained in the Memorial, the finding by the Windstream I tribunal that the FIT Contract had not been expropriated (together with Canada's multiple representations in the Windstream I proceeding that the FIT Contract was "frozen" and the Moratorium was temporary) underpinned Windstream's expectation that the value in the FIT Contract could be realized and that the Project could proceed. Indeed, internal documents reveal that Ministry of Energy ("MEI") officials shared Windstream's interpretation of the Windstream I Award: "[the tribunal] determined that the Claimant hasn't lost the entire value of its investment (i.e., its project) as there was no expropriation: the contract is still in force."3 It is unsurprising that MEI and Windstream shared this interpretation; the Award is clear on this point.
11. Although Ontario appears to have shared Windstream's understanding of the Award, Ontario inexplicably determined that it should do nothing to end the legal and political limbo that the Windstream I tribunal had determined had breached the FET standard. This was not a matter that simply escaped the Government's notice: it was explicitly considered and determined that Ontario should not engage with Windstream. Within mere days of the release of the Windstream I award, one senior government official sent an email "strongly [suggesting] that no political government representative engage in dialogue with Windstream."4
12. Canada's second argument is that Ontario's decision to do nothing is unobjectionable because Ontario had no obligation to do anything following the Award in Windstream I. This submission necessarily fails if this Tribunal finds that Windstream was not fully compensated for its losses, because, in that case, Ontario is responsible for the loss of the entirety of Windstream's investment flowing from the FIT Contract's termination.
13. Further, this Tribunal should not countenance Canada's suggestion that Ontario was entitled to double down and continue the conduct that the tribunal in Windstream I determined had breached the NAFTA. Amongst other things, this submission is fundamentally wrong in law: states are obliged to cease continuing conduct that breaches international law. The fact that a prior tribunal has awarded some measure of compensation reflecting the damage done to a party's investment does not give the state license to continue that conduct and cause further damage to the investment. This case exemplifies the principle that a state's decision to continue conduct that breached its international legal obligations can give rise to further damage to an investment: where, after the Windstream I Award, Windstream once had a valid FIT Contract and a promising project that was attracting interest from significant players in the renewable energy sector, it now has a terminated FIT Contract and an investment that the parties agree is now valueless.
14. These two flawed arguments permeate each of Canada's responses in its Counter-Memorial. In whatever form they arise, they should be rejected.
15. Canada's Jurisdictional Challenges are Without Merit. Canada raises three objections to the Tribunal's jurisdiction. Each depend heavily upon a skewed interpretation of the Windstream I Award and the measures that Windstream raises in these proceedings.
a) First, Canada says that the Tribunal lacks jurisdiction based upon the principles of res judicata, collateral estoppel and abuse of process. These arguments mischaracterize the Windstream I Award and Windstream's claim in these proceedings. This case is not about Ontario's 2011-2012 conduct that was at issue in Windstream I. It is about Ontario's deliberate decision to continue the very conduct that the Windstream I tribunal determined gave rise to a breach of the FET standard. This new post-Award conduct resulted in the termination of the FIT Contract and further substantial damage to Windstream's investment. Windstream is not seeking to relitigate the Windstream I Award: it is seeking to rely upon its findings. In reality, it is Canada that has in its Counter-Memorial attempted to re- open a number of issues that were resolved against it by the Windstream I tribunal.
This Tribunal should not permit Canada to do so.
b) Second, relying again on its mischaracterization of the case, Canada repeats an argument set out in its bifurcation request: that Windstream has not shown that it incurred prima facie damages. This argument is not appropriate for the merits stage - the parties have already put in extensive evidence on the issue of damages, and the Tribunal should assess that evidence in rendering a decision. As set out below, when that evidence is assessed on its merits, it establishes that Windstream has suffered the loss of its entire investment as a result of Ontario's wrongful conduct.
c) Lastly, Canada asserts that the Tribunal lacks jurisdiction as Windstream's claims are time-barred. This argument, too, depends upon Canada framing Windstream's claim as a continuation of the same measures that were before Windstream I. It is not. Ontario's breach in this case occurred upon the termination of Windstream's FIT Contract, on February 18, 2020. This is the date when Windstream first knew that Ontario had breached the NAFTA and that it had sustained damage by virtue of that breach. That date is well within the three-year limitation window.
16. Windstream's Investment was Expropriated. As a result of Ontario's conduct, the FIT Contract was terminated and Windstream was substantially deprived of the value of its investments, in contravention of Article 1110 of the NAFTA. The expropriation was unlawful as it did not meet the requirements of Article 1110, including that compensation was not paid for the taking. Canada's arguments that the investments could not be expropriated because they have no value turns on the argument that the Windstream I tribunal fully compensated Windstream for the loss of its investment. It is wrong.
17. Canada also argues that the FIT Contract was not an investment capable of being expropriated because it was merely a contingent right depending on a future event. This is an attempt to relitigate issues that were already argued and determined in the Windstream I proceedings. In any event, it is also incorrect. Canada admits that Windstream Wolfe Island Shoals Inc. ("WWIS") and the Project are each an investment capable of being expropriated.
Furthermore, Canada has led no evidence to support its position that the FIT Contract is not a property right capable of being expropriated. It simply asserts that is the outcome the Tribunal should accept. In contrast, in response to this argument in Windstream I, Windstream put forward expert evidence establishing that the FIT Contract is a valuable asset under Ontario law. It is not a contingent right. Having failed to put forward any responding evidence of its own, Canada's argument must (again) fail.
18. Ontario Failed to Treat Windstream Fairly and Equitably. Ontario's conduct has breached Canada's obligations under Article 1105(1) by failing to accord Windstream fair and equitable treatment. The FET standard was violated by Ontario continuing the very course of conduct already found to be unfair and inequitable, i.e., the failure to act and rectify the "legal and contractual" limbo Ontario had created for Windstream. Ontario's failure to do so created the conditions that led to the wrongful termination of the FIT Contract. This was contrary to the promises made to Windstream and the representations made to the Windstream I tribunal that the Project was only on hold and could proceed once the temporary Moratorium was lifted. Ontario's conduct was also arbitrary and capricious: it had no valid reason, particularly in light of Ontario's increasing energy needs and the manner in which other FIT contract holders have been treated.
19. Windstream is Entitled to Damages Arising from Canada's Breaches. Windstream is entitled to damages arising from Canada's breaches of NAFTA. Canada is obliged to provide compensation to Windstream that, to the extent possible, reestablishes the situation that would have existed in the absence of its wrongdoing.
20. The parties agree that the appropriate approach to damages is to determine the fair market value of the investment that Windstream lost. The fair market value of Windstream's investment is best determined using a Discounted Cash Flow ("DCF") methodology, which is the most reliable method for determining the value of Windstream's investment but-for Canada's conduct and is the preferred approach of market participants for projects like Windstream's that have revenue certainty.5 Although Canada's expert, Dr. Jerome Guillet, suggests that the Project faced too many future risks to be valued under a DCF approach, this ignores the specific characteristics of the Project (including its revenue certainty through the FIT Contract, which makes it particularly appropriate for a DCF approach) and the fact that accounting for future risk is at the very heart of the DCF analysis.
21. In the opinion of Secretariat, Windstream's quantum experts, Windstream's losses arising from Canada's NAFTA breaches are between $291.4 million and $333 million as of the date of the cancellation of the FIT Contract, February 18, 2020. However, Secretariat has not just relied upon a DCF methodology: it has also conducted a valuation by benchmarking the project against other comparable projects, resulting in a Project valuation of $284.7 million to $299.1 million (which is broadly consistent with the fair market value determined through a DCF approach).
22. Instead of providing its own DCF analysis, Canada pins its entire damages case on a single, cherry-picked comparables analysis conducted by Dr. Guillet. The analysis has several flaws. For example, Dr. Guillet's analysis overlooks the specific features of the Project and instead lumps projects into two broad categories: "early stage" and "late stage", despite the fact that key milestones in a project (including obtaining price certainty) often occur at different stages depending on the applicable regulatory framework. Further, none of the projects that Dr. Guillet relies on as "comparable" to the Project had the revenue certainty that the Project did, despite the fact that Dr. Guillet agrees that that this the "single most important" factor in financing renewable projects.6 Dr. Guillet also relies on projects that significantly pre-date the Project's valuation date, including projects relied upon for his opinion in the Windstream I proceedings, despite the fact that he has acknowledged that the offshore wind industry has advanced significantly since that time, and that offshore wind valuations have increased.
23. Finally, Dr. Guillet has not conducted any other analysis to confirm his opinion, despite his recognition that it is typical for market participants to conduct "secondary" confirmatory analyses (including, in some circumstances, a DCF approach).7 By contrast, Secretariat has prepared three separate principal analyses (two income approaches to value and one comparables approach) which each confirm the value that the Project would have had but for Canada's breach of the NAFTA. These analyses are themselves supported by several other ancillary analyses that confirm the reasonableness of Secretariat's conclusions. Their approach should be preferred over Canada's standalone comparables analysis, and compensation paid to Windstream in accordance with Secretariat's opinion.
II. WINDSTREAM'S REPLY EVIDENCE
...