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NAFTA lawsuit takes aim at B.C. renewable energy purchases

The Vancouver Sun reports this week that pulp company Mercer International is suing the Canadian government for $250 million under NAFTA Chapter 11, claiming B.C. hydro is depriving it of an opportunity to sell clean energy from its Celgar pulp mill in Castlegar into the grid for a profit. This follows a Notice of Intent to Submit a Claim to Arbitration filed on January 26, 2012. Like in the AbitibiBowater case, though Mercer is a Canadian company, being listing in the United States makes it eligible to use NAFTA’s investor-state dispute settlement mechanism as an alternative to settling its claim of discrimination through the courts.

“Like many B.C. pulp mills, Celgar also has a biomass electricity generating facility adjacent to the mill,” writes the Sun. “The facility burns wood waste to generate both heat and power for the mill. Like other mills, Celgar also sells energy to BC Hydro through a green energy power purchase agreement. What makes Celgar different from other mills, however, is that it operates in an area of the province where FortisBC is the initial provider of energy to the mill, rather than BC Hydro.”

About 90 per cent of B.C. hydro power is supplied by Hydro, a public Crown corporation, with the remaining 10 per cent provided by Fortis. Mercer was buying energy from Fortis at one rate (about $45/mw/hr) under a 2008 agreement then selling renewable power its biomass plant was generating back to the province at a much higher rate (more than $100/mw/hr). That was until the province and B.C. Hydro put a stop to it about three weeks later. The firm is claiming it is at a competitive disadvantage to all other B.C. mills (which are supplied power from and sell renewable power to B.C. Hydro exclusively).

“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,” says Mercer in a press release this week about its NAFTA claim.

“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.”

The Mercer challenge is the second in recent years against provincial regulations related to green energy purchases by a provincial government. On July 6, 2011, Mesa Power Group LLC, a U.S. energy firm owned by T. Boone Pickens, which owns four wind farm locations in Ontario (all incorporated in Alberta), filed a Notice of Intent to file a NAFTA claim of discrimination and unfair treatment due to changes in the Ontario Green Energy Act.

The Mesa claim takes issue with the way Samsung, a Korean firm with local presence in Ontario, was handed a $7 billion green energy contract giving it better access to the grid on terms that are still secret, though the deal with the company is public. It argues that an arbitrary change by the provincial government in how renewable projects were ranked led to some firms previously lower down on the ranking system to jump ahead of Mesa to take contracts. Mesa has not yet taken the next step to bring its NAFTA Chapter 11 case forward, as Mercer did this week in B.C.

Both cases are complicated and we’ll need to look at them more closely on their merits. But it’s interesting to note the extent that both involve renewable energy policies where the “greening” of the grid is to be achieved through the purchase of renewable power, mostly from private power producers, and where both provinces have a mixed public-private energy system with some deregulation. As a basic cautionary tale, the NAFTA lawsuits, as well as the EU-Japan challenge to Ontario’s Green Energy Act can tell us something, I think, about the relative safety of fully public systems. Quebec Hydro’s local content requirements on green energy projects are not being challenged at the WTO.

More updates on this as things develop…