I. Scope of Work and Qualifications

1. Navigant Consulting, Inc. has been asked by Arnold & Porter, LLP (“Counsel”) to prepare this expert report in connection with the arbitration proceedings commenced by Mercer International, Inc., (“Mercer” or “Claimant”) against the Government of Canada (“Canada” or “Respondent”) pursuant to Chapter 11 of the North American Free Trade Agreement (“NAFTA”). Mercer’s subject investment is its wholly-owned Canadian subsidiary, Zellstoff Celgar Ltd. and its interest in a Canadian limited partnership, Zellstoff Celgar Limited Partnership (collectively, “Celgar”). The limited partnership’s general partner is Zellstoff Celgar Limited, which owns 0.1 percent of the partnership units, and its limited partner is Mercer, owning 99.9 percent of the partnership units.1

2. Celgar operates and owns the assets of the Celgar Mill, a northern bleached softwood kraft (“NBSK”) pulp mill in Castlegar, British Columbia with a capacity of 520,000 air-dried metric tons (“ADMT”) per year.2 The Celgar Mill has the ability to self-generate “green energy” through its biomass-based cogeneration facility with nameplate generating capacity of 100 megawatts (“MW”).3 The Celgar Mill’s generation capacity exceeds the mill’s own electricity demand (its “load”). Since 2010, the Celgar Mill has been permitted to sell its self-generated electricity that is in excess of its load at “green energy rates,” which historically have been higher than the spot price of conventionally generated electricity in British Columbia. Celgar also has sought to sell its below-load electricity, but has been prevented from doing so by acts of the BC Hydro and Power Authority (“BC Hydro”), a Crown corporation owned and controlled by the Province, and the British Columbia Utilities Commission (“BCUC”), the Province’s public utility regulatory agency.

3. To facilitate the sale of all its biomass fueled green energy, in August 2008, Celgar signed a power supply agreement with its electric utility, FortisBC Inc. (“FortisBC”), under which Celgar would have been able to purchase embedded cost utility power to meet its entire load (the “FortisBC PSA”).4 In January 2009, Celgar secured an electricity purchase agreement with BC Hydro for the sale of a portion of its biomass-fueled green energy (the “BC Hydro EPA”) – that portion being amounts in excess of its 2007 load.5