NAFTA - Chapter 11 - Investment

Mercer International Inc. v. Government of Canada

Before the additional facility of the international centre for settlement of investment dispute (ICSID)

Between:

Mercer International Inc.
Claimant / Investor

And:

Government of Canada
Respondent / Party

ICSID case no. ARB(AF)/12/(3)

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Government of Canada
Rejoinder Memorial

31 March 2015

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Sections and excerpts identified as "[REDACTED]" represent redactions in the official version of this document.

Please see full Canada's Rejoinder Memorial Public Version (PDF 2.77 MB)

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Departments of Justice and of
Foreign Affairs, Trade and Development
Trade Law Bureau
Lester B. Pearson Building
125 Sussex Drive
Ottawa, Ontario
K1A 0G2
Canada

Executive Summary

1. Proponents responding to a competitive call for the procurement of energy sometimes disagree with the contractual terms and conditions proposed, which define the parameters of the procurement. In these circumstances, the proponent has a choice: it can accept these terms and conditions; it can attempt to negotiate new terms and conditions; or it can walk away from the process. It is not reasonable, however, for a proponent to expect the procuring entity to offer terms and conditions that differ fundamentally from the mandate of the call and that would effectively reduce the amount of the energy procured.

2. This is precisely what the Claimant alleges should have happened when it claims that BC Hydro should not have “imposed” a “restriction” on Celgar through the exclusivity clause in its Electricity Purchase Agreement (“EPA”). It also complains that the B.C. Utilities Commission (“BCUC”) effectively continued this “restriction” on its ability to sell electricity in Order G-48-09. Much of the Claimant’s case now appears to rest on these supposed “restrictions.” The Claimant, however, also continues to complain about the amount of electricity BC Hydro procured when it set a Generator Baseline (“GBL”) for Celgar.

3. The Claimant in complaining about these “restrictions” expects this Tribunal to assume the role of BC Hydro, a state enterprise, in the context of a competitive procurement so that it can assess the commercial reasonableness of the exclusivity clause, which applied to all proponents. It also requests this Tribunal to substitute its judgement for that of BC Hydro when it made complex and highly technical decisions concerning the amount of electricity it would procure when it set GBLs. The Tribunal is then expected to vault into the role of the BCUC to interpret its previous regulatory decisions and replace the BCUC’s weighing and balancing of what is in the “public interest” with decisions that would only be in the Claimant’s interest. It is not the role of a NAFTA Chapter 11 tribunal to act in the stead of state enterprises and administrative tribunals in this manner.

4. Perhaps more importantly, the Claimant’s alleged “restrictions” are not really restrictions at all. The Claimant asserts that BC Hydro used the exclusivity clause to “force”^{Footnote 1} Celgar to use its self-generated electricity for its own load and to prevent it from selling its electricity in the U.S. market. Mr. Merwin tries to paint BC Hydro in an unfavourable light alleging that it foisted the clause on Celgar in the context of the EPA negotiations at the “11th hour,” leaving the Claimant with no choice but to accept it.^{Footnote 2}

5. Nothing could be further from the truth. The exclusivity clause is a standard provision of every EPA (including the Tembec and Howe Sound EPAs) and formed part of the terms and conditions when the Claimant made its bid into the competitive call for power. As Mr. Scouras explains in his second witness statement, it was Mr. Merwin who requested the removal of the clause relatively late in the negotiations.^{Footnote 3}

6. The exclusivity clause ensures that BC Hydro will have security of supply under the EPA, and thus its removal was a concern. BC Hydro nonetheless “wanted to be responsive to the interests of Celgar”^{Footnote 4} and proposed a compromise—a Side Letter Agreement that would require the parties to amend the exclusivity clause if the BCUC decided that Celgar could sell below-GBL electricity in “any pending or future regulatory proceeding.^{Footnote 5} No other pulp mill in British Columbia has received an accommodation similar to the Side Letter Agreement.^{Footnote 6}

7. Mr. Merwin’s testimony leaves the impression that BC Hydro strong-armed Celgar into accepting the exclusivity clause in the EPA.^{Footnote 7} This misleading version of events, however, is contradicted by Mr. Merwin’s own contemporaneous report to his CEO on this issue, which indicates that:

• [O]n Friday Hydro added one major wrinkle to our negotiations. This wrinkle was not unexpected and approximately 4 weeks ago we had reached agreement on how this issue would be addressed. The issue at hand is our current activities to allow us to sell all of Celgar’s existing generation (the Arbitrage Project). …A number of weeks ago we reached agreement with Hydro that we would leave this issue for the BC Utilities Commission to decide and withdrew the term from the EPA and agreed to set up a side letter acknowledging this withdrawal and that neither party could use this omission to further their argument. BC Hydro came back to us on Friday with the position the wording should be left in the contract to prevent us from selling our mill load and we would have a side letter acknowledging that subject to certain conditions this term would be removed. … They however indicated they are prepared to live by the principles we established several weeks ago which [sic] was to leave this to the BCUC to decide.^{Footnote 8}

8. This email stands in stark contrast to how the Claimant and Mr. Merwin now attempt to characterize the discussions concerning the exclusivity clause in the context of the EPA negotiations.^{Footnote 9}

9. BC Hydro and the Claimant subsequently negotiated the Side Letter Agreement and executed it alongside the EPA on January 27, 2009.^{Footnote 10} The parties effectively agreed in the Side Letter Agreement that they would to leave it to the BCUC to decide the issue of Celgar’s sales of below-load electricity.

10. BC Hydro had separately applied to the BCUC to determine whether FortisBC was permitted under the terms of its 1993 Power Purchase Agreement (“1993 PPA”) with BC Hydro to supply electricity to customers such as the City of Nelson and Celgar who intended to engage in arbitrage. The Claimant intervened in this proceeding to push its buy all, sell all scheme. Mr. Merwin, contrary to his most recent testimony,^{Footnote 11} was fully aware that there was a risk that the BCUC could reject his “Arbitrage Project.” Mr. Debienne, Vice President of Power Supply and Strategic Planning for FortisBC, had discussed with Mr. Merwin the relevant BCUC regulatory precedents and informed him that there was a 50 percent chance that the BCUC could reject the project.^{Footnote 12} The Claimant had also advised its Board of Directors of this regulatory risk.^{Footnote 13}

11. FortisBC’s reservations turned out to be right. The BCUC in Order G-48-09 amended the 1993 PPA to prevent FortisBC from selling electricity supplied under this agreement to a customer that was selling electricity below their load (i.e., engaging in arbitrage). The Claimant characterizes Order G-48-09 as the second “restriction” on its ability to sell below-GBL electricity because it allegedly “prevents” FortisBC from supplying any embedded cost energy to facilitate arbitrage. This, however, mischaracterises Order G-48-09, which places no restrictions on FortisBC’s ability to source the Claimant from its own embedded cost resources.

12. The Claimant, for this reason, would subsequently request the BCUC to direct FortisBC to develop a matching methodology which would allow FortisBC to supply Celgar using non-1993 PPA sources of electricity. The Claimant argued that that this non-PPA electricity could then be “matched” against its load so that it could engage in below-load sales without arbitraging electricity under the 1993 PPA.^{Footnote 14} FortisBC agreed that this approach might be feasible^{Footnote 15} and the BCUC thus directed FortisBC in Order G- 188-11 to develop a rate based on this “matching methodology.” The BCUC also confirmed that “Celgar is free to sell all or a portion of its generation below the BC Hydro GBL into the market and supply its mill from FortisBC resources, not including BC Hydro PPA Power.”^{Footnote 16} Indeed, Mr. Merwin would explain to his Board of Directors that BCUC Order G-188-11 was a “major victory”.^{Footnote 17}

13. Mr. Merwin would also write BC Hydro shortly after BCUC Order G-188-11 to request that it exercise the Side Letter Agreement and amend the exclusivity clause from the EPA.^{Footnote 18} BC Hydro was not adverse to this request and contacted FortisBC to discuss how the accounting would be done for Celgar’s EPA sales to BC Hydro in conjunction with the new rate.^{Footnote 19} Regrettably, the Claimant then decided instead that it would file its Notice of Intent under the NAFTA and never followed-up with its request.^{Footnote 20}

14. FortisBC subsequently proposed a “Non-PPA Embedded Cost Power” (“NECP”) rate to facilitate the Claimant’s below-GBL sales.^{Footnote 21} The BCUC in Order G-202-12 confirmed that the Claimant could nominate as much as 100% percent of its load^{Footnote 22} for service from FortisBC using the NECP rate.

15. The Claimant argues in this arbitration that the NECP rate would not reflect “traditional” embedded cost rates and that “[u]nlike all other FortisBC customers, Celgar would receive none of the benefit of FortisBC’s existing, low cost generation assets.”^{Footnote 23} This is not accurate. Mr. Dennis Swanson, Vice President of Corporate Services for FortisBC, explains that the NECP rate would be sourced from all of FortisBC’s resources with the exception of BC Hydro’s 1993 PPA electricity.^{Footnote 24} These resources would include FortisBC’s traditional embedded cost power from sources such as its hydro-electric facilities. He also explains that the NECP rate would have been no higher than the rates Celgar has received since BCUC Order G-48-09.^{Footnote 25}

16. The Claimant’s argument that the BCUC has imposed a “restriction” that has denied it “access” to embedded cost power is thus false.^{Footnote 26} The BCUC has in fact made considerable efforts to accommodate the Claimant’s demands to sell its below-GBL electricity. The Claimant has criticized the NECP rate even though it suggested this approach as a solution.^{Footnote 27} In any event, the fact that a customer of one utility could have a slightly higher rate than a customer of anther utility is not a valid ground for a NAFTA complaint—especially when the customer has requested this rate so that it can secure a right to sell electricity in a way that no other self-generating customer has in the province.

17. The Claimant’s intransigence over the NECP rate is also surprising in light of its repeated assertions that it could sell its electricity as “green” or renewable energy at prices that would surpass the cost of the NECP. For example, Mr. Merwin testifies that he “targeted [REDACTED] as a prospective buyer” and had “fruitful preliminary discussions.”^{Footnote 28} Roger Garrett of Puget Sound, however, testifies that he has no recollection of the Claimant^{Footnote 29} and that Claimant’s electricity would not have, in any event, qualified as renewable or green energy under Washington state law.^{Footnote 30}

18. Canada raised significant concerns in its Counter-Memorial over the Claimant’s failure to provide evidence that it could sell its electricity to third parties.^{Footnote 31} In its Reply, the Claimant again failed to provide any meaningful evidence and merely recycled the same unsupported claims that it made in its Memorial. Canada thus contacted Michael McDougall, Director of Trade Policy and Information Technology of Powerex, and Dean Krauss, Director of Business Development and Contract Services for NorthPoint, the Claimant’s former electricity broker, to determine whether the Claimant could actually have sold its electricity in the manner that Mr. Merwin and its experts suggest.

19. Mr. McDougall testifies that Celgar’s electricity was not eligible as renewable electricity in the states of Washington,^{Footnote 32} Oregon,^{Footnote 33} Montana,^{Footnote 34} California,^{Footnote 35} New Mexico,^{Footnote 36} and Arizona.^{Footnote 37} He also explains that Alberta, Idaho, Wyoming and Utah do not have renewable energy markets.^{Footnote 38} Mr. Krauss also explains that NorthPoint has never sold “green” or renewable electricity.^{Footnote 39} The Claimant thus had no market for this electricity as renewable energy. Nor did it have a broker that had experience marketing renewable energy.

20. Mr. McDougall and Mr. Krauss also explain that U.S. wholesale electricity prices tumbled towards the end of 2008, a few months after the peak prices the Claimant repeatedly refers to in its pleadings,^{Footnote 40} and that these electricity prices have remained low since that time at first as a result of the U.S. recession and later due to the increase in U.S. shale gas production.^{Footnote 41} Mr. McDougall and Mr. Swanson have also provided NERA’s Dr. Rosenzweig with data concerning Mid-Columbia market prices, line losses and transmission costs. Dr. Rosenzweig has “done the math” with this data and concluded that the Claimant could not have sold its electricity in a profitable manner on the Mid-Columbia market in the manner described in their Reply from 2009 onwards.^{Footnote 42} Mr. McDougall and Mr. Krauss also explain some of the numerous transmission challenges the Claimant would face marketing its electricity in the United States.

21. For this reason, the Claimant is forced in its Reply to claim that BC Hydro would procure all of the Claimant’s below-load electricity absent the measures while in the same breath stating that BC Hydro is “not legally obligated to buy it.”^{Footnote 43} The Claimant’s argument remains nothing more than a thinly veiled attempt to realize the profits from its “Arbitrage Project”, which BC Hydro properly rejected in the context of the Bioenergy Call for Power.

22. The Claimant spends hundreds of pages alleging that BC Hydro had no GBL methodology,^{Footnote 44} that it set the Claimant’s GBL with “no rules”,^{Footnote 45} that it has fabricated a “current normal” GBL methodology,^{Footnote 46} that even if such a standard existed it was applied less favourably to the Claimant,^{Footnote 47} and that in any event the energy policies underlying BC Hydro’s procurement of electricity are “not legitimate.”^{Footnote 48} Each one of these baseless accusations has been made to support a claim that BC Hydro set the Claimant’s GBL “too high,”^{Footnote 49} and that the Claimant should be compensated on the basis of a “nondiscriminatory GBL.” This is most evident in Table 12 of Mr. Kaczmarek’s most recent report which provides the Tribunal with numerous GBL “options,” all of which are lower than the Claimant’s actual GBL of 40 MW. Mr. Kaczmarek then proceeds to quantifies damages on the basis that the proper “but-for” world is one where BC Hydro should have procured additional electricity.^{Footnote 50} The Claimant seemly wants to transform this Tribunal into a “Court of GBLs” asking it to examine these GBLs in granular detail, frequently without any evidence that another pulp mill in like circumstances received the same treatment.

23. The Claimant and its experts continue to allege that BC Hydro afforded the Howe Sound and Skookumchuck pulp mills more favourable treatment when it set their GBLs. It does so with little regard for the unique technical and operational circumstances of each mill. Canada has already submitted witness statements from Pierre Lamarche and Fred Fominoff concerning these critical differences at the Howe Sound pulp mill.^{Footnote 51} Mr. Christian Lague, the Energy Manager at the Skookumchuck pulp mill, has now submitted a witness statement with this Rejoinder that confirms the basis on which BC Hydro determined a GBL for the 2009 Tembec EPA.^{Footnote 52}

24. The Claimant’s case also fails for an entirely different reason—it is required to use its 52 MW turbine to provide electricity to meet its mill load. This commitment was made during a proposed expansion of the pulp mill in the early 1990s where the Claimant’s predecessor, Celgar Pulp Co., repeatedly used energy self-sufficiency as a selling point for the project’s approval.

25. Mr. Ostergaard and now Dr. Jon O’Riordan, the former Assistant Deputy Ministers from the Ministries of Energy and Environment, were responsible for supervising the review of Celgar Pulp Co.’s Energy Project Certificate application and both testify that Celgar’s representation that it would use this electricity for the purpose of load displacement was a critical consideration in approving the application and issuing the Ministers’ Order.^{Footnote 53} Ms. Denise Mullen, the Director of the Projects and Policy Branch after Mr. Ostergaard, explains that the Ministry would have expected the Celgar Pulp Co. to request an amendment to the Ministers’ Order if it intended to use the electricity for a purpose other than load displacement. Rather than request an amendment, the Claimant has instead raised numerous arguments in an attempt to evade the obligations imposed by this order, or alternatively, to render it unenforceable.

26. Finally, Canada will explain the Claimant’s strategy of using BCUC litigation as a means to “[REDACTED]”^{Footnote 54} by raising issues that would have “[REDACTED].”^{Footnote 55} The Claimant was able to adopt this strategy because applicants such as FortisBC normally underwrite much of the cost of intervenors in BCUC proceedings. This improper litigation strategy has contributed to an annual rate increase of 1.5% for all ratepayers in FortisBC’s service area.^{Footnote 56}

27. Canada submits that Claimant’s allegations when properly understood are devoid of factual or legal merit. Canada therefore requests that the Tribunal dismiss these claims and award Canada its full costs in this arbitration.