I. Scope of Work and Qualifications

1. Navigant Consulting, Inc. has been asked by Arnold & Porter, LLP (“Counsel”) to prepare this expert reply 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”). As noted in our first report, 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 Celgar owns and operates 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

2. Celgar has been permitted to sell its self-generated electricity in excess of its electricity consumption (i.e., its load). Celgar also has sought to sell its self-generated electricity below its load, 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. These acts (the “Measures”) contain two components.

3. First, Mercer alleges that BCUC Order G-48-09, which came into effect on 6 May 2009, applied a “net-of-load” standard to Celgar. BCUC Order G-48-09 prevented FortisBC from supplying electricity to customers that were selling their self-generated electricity. Specifically, BCUC Order G-48-09 prevented FortisBC from selling any electricity purchased from BC Hydro under the parties’ 1993 power purchase agreement (the “1993 BC Hydro-FortisBC PPA”) while the self-generator was selling electricity. As FortisBC’s generation and electricity purchases are commingled into a single resource stack, the practical impact of BCUC Order G-48-09 is that FortisBC is prevented from selling any electricity to self-generators that are selling their selfgenerated electricity (e.g., Celgar). The application of a net-of-load standard on Celgar frustrated the implementation of an August 2008 power supply agreement between FortisBC and Celgar (the “FortisBC PSA”). Under the FortisBC PSA, Celgar could have purchased electricity up to its entire load at embedded-cost rates from FortisBC while selling its self-generated electricity.