The following is testimony by Martin Wagner, director of international programs for Earthjustice, given today at a joint hearing before the Senate Committee on Banking, Commerce and International Trade and the Senate Committee on International Trade Policy and State Legislation.

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Thank you Senators Kuehl and Machado.

My name is Martin Wagner. I am Director of International Programs at Earthjustice Legal Defense Fund, which is based in San Francisco, and adjunct professor of international trade and environmental law at Golden Gate University School of Law. I appreciate the opportunity to discuss the impact of international investment agreements on California.

NAFTA’s Chapter 11: The Methanex Case

Several years ago [approx. 1996], the city of Santa Monica had to shut down half of its municipal wells – which served the city’s 93,000 residents – because they had been contaminated with a chemical called MTBE. The incident is one piece of a story that demonstrates the threat to Californians posed by international investment agreements being negotiated by the federal government.

Let me tell that story briefly. MTBE (methyl tertiary-butyl ether) is a chemical used in nearly all gasoline sold in California. In recent years, it has become clear that MTBE is also a threat to the environment and human health.

The primary harm posed by MTBE is contamination of ground and surface water. MTBE mixes quickly with water, and does not absorb into soil. As a result, when it comes into contact with water, either because of a gasoline spill, a leak from a boat or other engine, or a leak in a storage tank, MTBE spreads quickly. Once MTBE enters the ground or surface water, it is difficult to detect, resists decay and hard and costly to remove. Scientists from the Lawrence Livermore National Laboratory found MTBE contamination in 78% of the monitoring wells in the vicinity of leaking underground gasoline storage tanks. A University of California report estimated that at least 10,000 sites in California have been impacted by MTBE contamination.

MTBE contamination makes water unfit for human consumption. Concentrations in even the low parts per billion range can cause water to smell and taste like turpentine. And it does not take much gasoline to contaminate a lot of water – for example, ten gallons of gasoline – which could leak from a single car in an accident – contains enough MTBE to contaminate millions of liters of water; a single accident in Maine led to the contamination of over 20 domestic wells.

MTBE has several other health effects in addition to making water undrinkable. MTBE is known to cause cancer in some mammals, as well as neurological, respiratory and skin problems. Human exposure can occur through drinking contaminated water, or breathing its vapor while showering or cooking. Once in the bloodstream, MTBE goes to the kidneys, brain and liver, where it is converted into formaldehyde, which is recognized as a probable human carcinogen. [The UC MTBE Report concluded that “[u]nless all four of the cancer types reported in mice and rats exposed orally or by inhalation are shown to have negligible predictive value for humans, it must be assumed that MTBE poses some human cancer risk.”]

Because of the threat posed by MTBE, the California Senate and Assembly passed the MTBE Public Health and Environmental Protection Act in September 1997. The law called for the University of California to evaluate the human health and environmental risks of the use of MTBE in gasoline, and for the governor to take appropriate action in response to the findings. The study confirmed the risks I have just described, concluding that the use of MTBE in gasoline in California poses a “significant risk to the environment.” As a result, in 1999, the governor ordered MTBE to be removed from gasoline by the end of 2002.

This is where the international investment rules come in. Three months after the governor announced the MTBE ban, a Canadian corporation called Methanex, which manufactures one component of MTBE (methanol), filed a claim against the United States in an obscure international forum demanding $970 million if California insisted on following through with its MTBE ban.

If you’re not familiar with recent trends in international investment agreements, this may seem like a ludicrous proposition – the maker of a harmful chemical demands nearly $1 billion in exchange for measures to prevent the harm. Under the North American Free Trade Agreement and other international agreements the United States is negotiating, the claim is not so easily dismissed.

NAFTA includes a section – called Chapter 11 – devoted to protecting foreign investors. It is these provisions on which Methanex relied in bringing its claim against the United States. Let me describe a few important characteristics of these provisions.

The issue has to do with NAFTA’s protection against what is called “expropriation.” The concept of expropriation is international law’s version of what US law calls protection against “takings.” The principle is straightforward: the government can take your property for the benefit of society at large – as when it decides it needs to build a highway in a certain area of private property – but it must pay fair compensation for the property it takes.

In the United States, however, we have limited that rule, because we recognize that our governments could not carry out their responsibility to promote the common good if they had to pay every time government action impacts private property. In a nutshell, the rule is that government must pay if takes your property outright, but it does not have to pay for the reduction in property value if a government measure reduces the value of your property, but does not remove the property entirely. The US Supreme Court put it well when it said that the impact of regulations protecting important public interests “are the burdens we must all bear in exchange for the advantage of living and doing business in a civilized community.”

NAFTA’s investment chapter has thrown this finely balanced system out of kilter. Chapter 11 provides that governments must compensate foreign investors for [direct or indirect] expropriation, as well as measures that are “tantamount to expropriation.” It was on the basis of this provision that Methanex based its billion dollar claim against the United States – it argued that the California MTBE ban, while not actually taking away Methanex’s property, was “tantamount to expropriation.” Under Methanex’s theory, California should either remove its ban, or compensate Methanex for the profits the company might have earned from future sales of this chemical the state has determined to be harmful to human health and the environment.

Methanex’s claim is not without precedent under NAFTA. A US corporation challenged Canada over a similar ban on a potentially carcinogenic gasoline additive. Rather than litigate the entire claim, Canada removed its ban and paid the company $13 million. In Mexico, a state government refused to permit a US corporation to operate a hazardous waste facility where it would contaminate groundwater and harm a sensitive ecosystem. The NAFTA arbitration tribunal decided that Mexico had to pay the company $90 million dollars in compensation.

It is easy to see how this NAFTA expropriation provision is [turning the US system I descried earlier on its head, and] impairing the ability of California and other governments to protect their citizens and environment. In the words of a lawyer who has represented several companies using the NAFTA expropriation provision, the provision means that “Governments that want to protect their own citizens have to pay for it.” When the cost of protective regulations runs in the billions of dollars, the incentive not to regulate becomes quite powerful.

Another issue raised by the NAFTA investment chapter has to do with democracy and public accountability. California’s MTBE ban was put into place by the state’s legislature and governor, all of whom are directly accountable to the public. What’s more, before the governor ordered the ban, he published the results of the UC scientific study and held three extensive public hearings. In other words, the ban was a response to a public threat by people accountable to the public.

In stark contrast, Methanex’s challenge to the MTBE ban – like all the NAFTA investment challenges – is being heard and decided in secret by a panel of three private arbitrators whose decisions are binding in domestic courts. The rules generally require that the proceedings –documents submitted to the panel as well as any meetings with the parties – be kept confidential unless both the challenging corporation and the defending government agree to make them open. That agreement has never happened in a NAFTA proceeding.

This closed system – which some of its officials call a system of “private justice” – is completely contrary to the democratic protections we employ in California and throughout the United States. Here, all but the most sensitive court proceedings are open to the public, and closing them requires special justification. Individuals or organizations with an interest in the outcome of a case can often participate, either by becoming a party or by participating as friends of the court. This means that the courts are informed of special concerns or considerations not presented by the parties, and that matters of importance to the public are decided in public.

Not so with NAFTA. In the Methanex case, I represent three environmental groups who worked with the California government to ban MTBE. We have petitioned the arbitration panel for permission to participate so the panel can consider the interests of the people of California. Although the panel decided it had the power to accept our written petitions (not that it would; just that it had the power to do so), it refused to permit us to attend the hearings or to have direct access to the documents submitted by the parties.

[When the measure at issue is a state or local law or regulation, as in the Methanex case, the lack of accountability becomes even greater. Under NAFTA, it is the United States that must defend the investor’s challenge. This means that not even the government that decided the measure was necessary is guaranteed a chance to defend its decision. This is should be especially troublesome to Californians. We are often the vanguard of health and environmental protection, implementing important measures before others, including the US government, recognize their value. With Chapter 11, we have to trust the defense of those measures to someone else.]

I hope the picture I’m trying to paint is clear: NAFTA’s Chapter 11 allows foreign corporations to use secretive and powerful private tribunals to challenge democratically enacted measures for the public good whenever those measures affect their investment. A state government gets little if any say in the defense of its actions.

In conclusion, I will say that matters appear only to be getting worse. The federal government is presently negotiating with 34 other governments to create the Free Trade Area of the Americas, an expansion of NAFTA’s rules throughout the hemisphere. The early draft of the agreement includes provisions that essentially mirror those I have just described, although the US Trade Representative refuses to make public its position on the investment rules or any others. (Although it has publicized very cursory summaries of its positions, it refuses to disclose the precise details of the commitments it is making on our behalf.) Such an agreement would greatly increase the likelihood of future challenges to California health and environmental measures.

This is yet another opportunity for California to show the rest of the nation the way. California should clearly express its objection to any federal trade agreement that weakens its ability to protect its environment and the health of its citizens. It should demand that private foreign investors not be given special powers and their own secret procedures in which to exercise them. It should insist that measures enacted democratically be reviewed democratically. And it should take these steps on behalf of Californians and all people before it is too late.

Thank you.