PUBLIC VERSION CONFIDENTIAL AND RESTRICTED ACCESS INFORMATION REDACTED IN THE MATTER OF AN ARBITRATION UNDER CHAPTER ELEVEN OF THE NORTH AMERICAN FREE TRADE AGREEMENT AND THE ICSID ARBITRATION (ADDITIONAL FACILITY) RULES BETWEEN: MERCER INTERNATIONAL INC. Claimant/Investor AND: GOVERNMENT OF CANADA Respondent/Party ICSID CASE No. ARB(AF)/12/3 WITNESS STATEMENT OF DENNIS SWANSON CONTENTS A. Introduction................................................................................................................. 3 B. FortisBC - Overview................................................................................................... 4 1. Historical Background ............................................................................................ 4 2. The Regulation of FortisBC.................................................................................... 5 3. FortisBC’s Rates ..................................................................................................... 7 4. FortisBC’s Electricity Requirements and Generation Assets ................................. 8 5. FortisBC’s Demand-Side Management Programs................................................ 10 6. FortisBC Customers with Self-Generation ........................................................... 12 7. FortisBC’s Transmission Capacity ....................................................................... 13 C. FortisBC’s Relationship with BC Hydro .................................................................. 13 1. The FortisBC-BC Hydro 1993 PPA ..................................................................... 14 2. The FortisBC-BC Hydro 2014 PPA ..................................................................... 15 PUBLIC VERSION CONFIDENTIAL AND RESTRICTED ACCESS INFORMATION REDACTED D. FortisBC’s Interactions with the Claimant and Celgar ............................................. 15 1. The Celgar Pulp Mill Prior to its 2005 Acquisition by the Claimant ................... 15 2. The Claimant’s Acquisition of the Celgar Pulp Mill and its Exports of Excess Self-Generated Energy .................................................................................................. 17 3. The Claimant’s Efforts to Sell Additional Self-Generated Energy ...................... 19 a) The Green Energy Project................................................................................. 19 b) Celgar’s “Arbitrage” Project ............................................................................. 20 4. The Claimant’s Participation in BC Hydro’s Application Resulting in BCUC Order G-48-09............................................................................................................... 26 E. BCUC Regulatory Proceedings ................................................................................ 32 1. Proceedings Involving Tolko Industries Ltd. (Kelowna) and its City of Kelowna Municipal Utility........................................................................................................... 32 a) BCUC Order G-113-01 ..................................................................................... 32 b) BCUC Order G-198-11 ..................................................................................... 33 c) BCUC Order G-191-13 ..................................................................................... 34 2. Proceedings Pertaining to FortisBC’s Rate Design and Rates for Self-Generating Customers ..................................................................................................................... 36 a) BCUC Order G-156-10 ..................................................................................... 36 b) BCUC Order G-3-11 ......................................................................................... 40 c) BCUC Order G-188-11 ..................................................................................... 40 d) BCUC Order G-202-12 ..................................................................................... 44 e) BCUC Order G-12-14 ....................................................................................... 47 f) BCUC Order G-67-14 ....................................................................................... 48 3. Proceedings Concerning the 2014 BC Hydro-FortisBC PPA............................... 50 a) BCUC Order G-60-14 ....................................................................................... 50 b) BCUC Order G-93-14 ....................................................................................... 51 F. Negotiations between FortisBC and Celgar.............................................................. 52 G. Conclusion ................................................................................................................ 53 2 PUBLIC VERSION CONFIDENTIAL AND RESTRICTED ACCESS INFORMATION REDACTED I, Dennis Swanson, of Kelowna, British Columbia, Canada, MAKE OATH AND SAY AS FOLLOWS: A. Introduction 1. I am currently the Director, Regulatory Affairs, at FortisBC Inc (“FortisBC”). I first joined FortisBC, and its predecessor Companies, in 1997 as an accountant. I have since held the positions of Internal Auditor, Manager of Budgets and Forecasts, Manager of Corporate Reporting and Manager of Administrative Services. I was appointed Director, Regulatory Affairs, on November 26, 2007. 2. My experience at FortisBC is relevant in several respects to this arbitration. This experience includes: my responsibility for FortisBC’s regulatory filings to the British Columbia Utilities Commission (“BCUC”); my general implication in most of FortisBC larger business activities which are almost all regulated; my involvement in the negotiations of energy purchase and supply agreements, including with Celgar and the City of Nelson; as well as my general participation in FortisBC’s interactions with Celgar and BC Hydro relating to power purchase and power sales arrangements. 3. Prior to joining FortisBC, I was employed as an accountant at a sawmill operated by Weldwood of Canada. 4. I hold a Diploma in Financial Management from the British Columbia Institute of Technology. I am also currently enrolled in the Institute’s Certified Management Accounting Program. 5. I attach my curriculum vitae to this witness statement as Appendix A. PUBLIC VERSION CONFIDENTIAL AND RESTRICTED ACCESS INFORMATION REDACTED 6. In the present witness statement, I provide background concerning FortisBC, explain FortisBC’s relationship with BC Hydro, and detail FortisBC’s interactions with Mercer International Inc. (“Mercer” or the “Claimant”) concerning the Celgar pulp mill. I also outline the various regulatory proceedings involving FortisBC and Celgar. 7. I have personal knowledge of the matters described in this witness statement, except where based on information and belief, in which case I indicate the source of the information and my belief that it is true. I have also reviewed the attached documents for purposes of preparing this witness statement. B. FortisBC - Overview 8. FortisBC is a privately-owned public utility that is responsible for supplying electricity to much of the West Kootenay and Okanagan regions in the southern interior of British Columbia (“B.C.”).1 FortisBC is the only significant investor-owned public utility within the province of British Columbia that provides electricity service. Electricity is served to the rest of the province primarily by BC Hydro, a provincially- owned Crown utility, and by five municipally-owned utilities. 9. FortisBC services a range of customers including residential customers, industrial customers (at both distribution voltage and transmission voltage), commercial customers, lighting customers, and irrigation customers. Four of the province’s five municipal 2 utilities operate in our service area and are served by FortisBC as wholesale customers. 1. Historical Background 10. The predecessor of FortisBC, the West Kootenay Power and Light Company (“WKP”), was founded in the late 1800s by a consortium led by Sir Charles Ross, a Scottish landowner and manufacturer of the infamous Ross rifle. WKP was incorporated 1 FortisBC, Service Area, online: http://www.fortisbc.com/About/ServiceAreas/ElectricityUtility/Pages/default.aspx, R-3 2 Specifically, the City of Nelson’s, the City of Grandforks’, the City of Penticton’s and the District of Summerland’s municipal utilities. 4 PUBLIC VERSION CONFIDENTIAL AND RESTRICTED ACCESS INFORMATION REDACTED 3 in 1897 pursuant to the West Kootenay Power and Light Company, Limited, Act, 1897. In 1916, Teck Resources Ltd. (formerly Cominco) purchased WKP to develop an economical power supply for the growing copper and gold mines in south central British Columbia. 11. In 1929, WKP expanded its operations pursuant to an amendment to the West Kootenay Power and Light Company, Limited, Act, 1897, which permitted it to supply other local municipalities and customers, including the Cominco smelter in Trail, British 4 Columbia. 12. In 1987, WKP was purchased by Missouri-based Utilicorp. In October 2001, WKP was renamed Utilicorp Networks Canada BC Ltd. The name was subsequently changed to Aquila Networks Canada BC Ltd in May of 2002. In May 2004, Newfoundland-based Fortis Inc., the largest investor-owned distribution utility in Canada, acquired all the distribution, transmission and generation assets of the former 5 WKP company and renamed it FortisBC. 2. The Regulation of FortisBC 13. FortisBC is regulated by the BCUC as a public utility under the Utilities Commission