Santa Monica city officials had no idea they would trigger an international legal brawl when they sent their water out for routine testing in 1996 and discovered it contained the foul-smelling gasoline additive MTBE.
Formally known as methyl tertiary butyl ether, MTBE was banned by California because of its perceived threat to humans and the water supply. But what began as an environmental issue took a twist into international trade when a Canadian firm contested the state order under a provision of the North American Free Trade Agreement.
In the first such case involving a challenge to a U.S. environmental measure, Methanex Corp., the world's largest producer of methanol, a primary ingredient in MTBE, claims Gov. Gray Davis acted in a protectionist manner by imposing a ban that harmed foreign methanol producers and benefited Archer-Daniels-Midland Co., a campaign donor and domestic maker of a competing fuel additive, ethanol.
Saying its investors were hurt, Methanex is demanding nearly $970million in damages because of the MTBE phaseout, slated to be completed by 2003.
Investors can only sue for compensation and cannot force a government to change a law. But experts say a multimillion-dollar award in the Methanex case could have a chilling effect by discouraging federal or state governments from considering similar measures. More than a dozen states are considering action to restrict the use of MTBE.
The case also has become a cause celebre for globalization critics who argue the case underscores their concern that free trade agreements give companies too much power and undermines the sovereign rights of governments to protect their citizens.
The Methanex case, brought in 1999 under NAFTA's Chapter 11 which allows foreign investors to sue a government for violating their trading rights, is pending before a three-member tribunal in Washington. A decision is expected soon on whether the tribunal has jurisdiction in a case that could take years to work its way to resolution.
If Methanex is victorious, the firm hopes the U.S. would take steps to remove the prohibitions on MTBE, according to Jim Emmerton, a Methanex senior vice president.
He argued that the European Union recently gave the green light to MTBE after determining that it did not pose a public health or environmental risk.
Methanex's Maker Says Product Isn't Dangerous
"We would hope the U.S. would look at what other jurisdictions are doing," he said. "MTBE is not a threat to human health and it is not a threat to the environment if it'shandled carefully."
Archer-Daniels-Midland, also known as ADM, did not respond to a request for comment on the Methanex accusations. "The governor sets policies based on science and facts concerned with the issue," according to David Chai, a spokesman for the governor. "Ethanol clearly is not getting favorable treatment in the state of California."
"Methanex is grasping at straws," said William L. Rukeyser, assistant secretary at Cal-EPA. "If the record is reviewed, you can see that MTBE regardless of the manufacturer is bad for California. That decision is based on science and science alone carries the day."
The U.S. government, the defendant in the NAFTA case, termed Methanex's charge "absurd" and warned that a positive ruling for the company could hurt the ability of the U.S., Canada and Mexico to protect public health and the environment, according to court filings.
"No NAFTA party could carry out its most fundamental government functions unless it were prepared to pay for each and every economic impact occasioned by doing so," said the U.S. government in its Methanex filing. "The NAFTA parties never intended the NAFTA to bring about such a radical change in the way they function and Methanex cannot show otherwise."
The U.S. is in an awkward position, having been the most vocal proponent of the so-called investor-state dispute mechanism. These provisions are designed to give multinationals an independent arbiter for disputes in countries where the governments and courts are weak or corrupt. U.S. officials are pushing to have Chapter 11-style investor protections in the proposed Free Trade Area of the Americas that would extend NAFTA throughout South America.
In Santa Monica, which has been forced to shut down more than half of its water supply and spend an additional $3 million a year to purchase untainted water, officials say they are incredulous that NAFTA has opened the door to a challenge from the north.
"The state's MTBE law was a prudent and measured effort made to phase out a chemical that had proven to be harmful or potentially harmful," said Assistant City Atty. Joel Lawrence.
"The thanks you get from this is a claim from a Canadian manufacturer that somehow it has the birthright to produce and force this stuff down the gas pipes of California residents and down their digestive tracts as well," Lawrence said.