Mercer International Inc. has announced it has served a Request for Arbitration on the Government of Canada for breaches by it of its obligations under the North American Free Trade Agreement ("NAFTA").

Actions by BC Hydro and the BC Government Disadvantage Mercer's Celgar Pulp Mill 

Mercer's NAFTA claim arises from the treatment of its Celgar Pulp Mill's energy generation assets and operations by the Province of British Columbia, both directly and through the actions of British Columbia Hydro and Power Authority ("BC Hydro"), a Provincially-owned and controlled enterprise, and the British Columbia Utilities Commission, a Provincial Government regulatory agency. Mercer's Claim is against Canada, rather than the Province of British Columbia as, under NAFTA, Canada is responsible for the actions of its Provinces.

Under NAFTA, Mercer's investments in Canada are required to be accorded treatment that is no less favorable than the most favorable treatment accorded to Canadian investors. The Celgar Mill, BC's largest and most modern, has been placed at a competitive disadvantage as a result of discriminatory treatment by BC Hydro and the uneven application of BC energy policy.

As a preliminary step in the NAFTA arbitration process, Mercer had previously served a Notice of Intent to Submit a Claim to Arbitration (the "Notice") on the Government of Canada on January 26, 2012.

Subsequent to the filing of the Notice, Mercer representatives met with representatives of the Government of Canada and the Province of British Columbia to attempt to settle the Claim through consultation and negotiation, as required under NAFTA Article 1118. However, no resolution was achieved. As a result, Mercer filed the Arbitration Request in order to meet the applicable filing deadline and to preserve and progress the Claim.

"We have reluctantly filed the Arbitration Request following years of attempts to resolve our issues through proceedings before the Commission, dialogue with the Province and recent consultations that included the Government of Canada," said Jimmy Lee, President and CEO. Mr. Lee also reiterated that: "Under Provincial policy, the Mill's ability to effectively utilize its own generation assets and to sell and purchase energy is severely and unfairly restricted. All other competing pulp mills in British Columbia receive more favorable treatment with respect to their ability to purchase and sell energy. This puts the Mill at a competitive disadvantage."

Under the NAFTA Claim Mercer is seeking damages in the amount of approximately CDN $250 million, consisting of past losses of approximately CDN $19 million per year accruing since 2008 and the net present value of projected losses that would result from the ongoing application of discriminatory Provincial policies should the status quo remain unchanged.

About the Claim

The Province of British Columbia is primarily served by two regulated utilities, BC Hydro, whose service area covers approximately 90% of the Province by area, and FortisBC Inc. ("FortisBC"), whose service area covers most of the remainder of the Province.

In the Arbitration Request, Mercer describes how the Mill has received unfair and discriminatory treatment as compared to other pulp mills and entities that generate and sell electricity within the Province of British Columbia.

As set forth in Mercer's press release of January 26, 2012, the basis for the Claim is that:

- In August, 2008, the Mill entered into an agreement with FortisBC (the "2008 PPA") to purchase all of its electricity needs from FortisBC, and filed the agreement for approval with the Commission. The 2008 PPA would have enabled the Mill to sell all of its self-generated electricity to third party purchasers. At the time that the Mill entered into the 2008 PPA, the agreement complied with all existing regulatory requirements.

- At such time, BC Hydro was obliged to supply a significant portion of FortisBC's energy requirements pursuant to an energy purchase agreement between BC Hydro and FortisBC (the "3808 Agreement") at lower embedded cost rates, the benefits of which were passed on to FortisBC's customers. The energy generated by BC Hydro's hydroelectric facilities is commonly referred to as "Heritage Power" and, as a matter of Provincial policy, is supposed to be made available to all BC Hydro ratepayers, including FortisBC for the benefit of its customers.

- In September, 2008, approximately three weeks after the Mill and FortisBC filed the 2008 PPA with the Commission, BC Hydro made application to the Commission to amend the 3808 Agreement for the purpose of restricting access by customers of FortisBC, such as the Mill, to energy (inclusive of Heritage Power) purchased under the 3808 Agreement, while such customers were selling their own self-generated electricity. The Province of British Columbia argued in favor of BC Hydro's application and the Commission ordered the requested amendment. The Mill was the only pulp mill in British Columbia operationally affected by the amendment.

- The 2008 Agreement was frustrated by the Commission's order. The Mill's ability to purchase energy from FortisBC, while selling its self-generated electricity, was blocked. As a result, the Mill became the only pulp mill in the Province of British Columbia that was required to service all of its internal electricity needs, from self-generation, before being entitled to sell any of its self-generated electricity.

- Other pulp mills throughout the Province have entered into agreements with BC Hydro that entitle them to purchase electricity from BC Hydro at the same time that they sell electricity. A similar arrangement between the Mill and FortisBC was prevented by the Commission order.

- As a result, competing pulp mills within the Province have been and continue to be provided an economic and competitive advantage over the Mill, in perpetuity, not because of technological innovation, greater investment or superior infrastructure, but because of government policy and regulatory intervention. In addition, such pulp mills have been the recipients from BC Hydro of direct subsidies or low interest rate loans, together with agreements to purchase power generated by such pulp mills, below their internal requirements, at favorable, market-based rates. Similar incentives, loans and below net-of-load purchase arrangements have not been made available to the Mill.

-Mercer has engaged in dialogue with the Province and has undertaken subsequent applications and proceedings before the Commission, seeking a reconsideration of the Commission's initial decision, and seeking other alternative remedies. However, the Mill remains barred from purchasing any energy from FortisBC, and continues to be the only pulp mill in the Province of British Columbia that is denied access to any Heritage Power, while selling energy that is not in excess of its operational needs.