I. Assignment, Qualifications, and Report Structure

1. I am Michael Rosenzweig, a Special Consultant with NERA Economic Consulting. I have been asked by the Government of Canada (“Canada”) to prepare this expert report in response to the Memorial and accompanying expert reports filed by Mercer International Inc., the Claimant in this NAFTA arbitration.1

2. My qualifications for submitting this report include extensive experience in economic and regulatory matters with specific application to international arbitral disputes involving infrastructure industries, such as electricity, natural gas and airports. I also have over 35 years of experience in government and in consulting for private and public utilities on economic and regulatory matters including investment issues related to resource adequacy. I acted as the technical assistant to a Commissioner at the US Federal Energy Commission as well as held the position of head of the Electric Power Division in the Energy Information Agency of the US Department of Energy. Most recently, I have acted as an expert in more than a dozen international arbitrations addressing liability and damages issues from an economic perspective. The details of my experience are available at Appendix 1.

3. My report is organized into three parts. A summary of my findings is presented in Section II. Section III addresses the economic and regulatory bases for assessing the claim put forward in Mercer’s Memorial and supporting expert reports and analyzes Claimant’s quantum assessment. Specifically, in Section III.A, I present a brief discussion of the basic principles of the economic regulation of electric utilities and resource acquisition as they relate to the present case. In Section III.B, I assess, with respect to the results of the previous section, the process and methodology employed by BC Hydro (“BCH”) to determine the Generator Baseline (“GBL”) contained in the energy purchase agreements (“EPA”) BCH negotiated with each pulp mill analyzed by Claimant’s expert. Next, in Section III.C, I respond to specific issues raised by Claimant and its expert in regards to the GBL process and its application to Claimant. In Section III.D I present my analysis of Claimant’s quantum assessment. Finally in Section IV, I present the conclusions of my analysis. Supporting materials are contained in the Appendices.