Trade officials and representatives in Europe and around the world are learning more about the controversial Investor-State Dispute Settlement (ISDS) mechanism that is now part of many trade deals, and they are balking at its inclusion in deals like the Comprehensive Economic & Trade Agreement (CETA), the Transatlantic Trade and Investment Partnership (TTIP), the Trans-Pacific Partnership (TPP) and other similar trade deals. By the end of January, the international press was reporting that both Germany and France want to reopen the Canada-European Union CETA to change the ISDS clause.
They are wise to recoil in horror. Indeed, all they have to do is look at Canada’s record under NAFTA.
ISDS means that foreign investors and corporations that think they are receiving unfair treatment under a nation’s regulations, or that their expected profitability is interfered with by a government policy, can sue that country for billions of dollars in secret tribunals. NAFTA was the first trade deal to include ISDS under its Chapter 11 section. Veteran trade critic Scott Sinclair says, “Canada has been sued far more under NAFTA’s Chapter 11 than its North American neighbours: some 35 times in total, with claims totalling many billions of dollars. Indeed, Canada may be the nation most targeted by ISD Sanctions.”
In July, another of those 35 NAFTA claims against Canada will begin oral hearings, three years after the complaint was filed. It’s a pulp and power case that could have far-reaching ramifications.
Sinclair’s latest ISDS compilation, released by the Canadian Centre of Policy Alternatives in January, provides details of the dozens of NAFTA legal challenges made by investors and corporations against national governments since 1994 when NAFTA was ratified by Canada, the US and Mexico: 35 against Canada, 22 against Mexico, and 20 against the US.
Of 13 claims against Canada that have been ruled on to date, Canada lost or settled six cases and paid out damages totaling more than $170 million, plus millions in lawyers’ fees. Billions more in claims are yet to be settled by the secret arbitration process. Mexico has lost five cases and paid damages of US$204 million. Interestingly, the US has never lost a NAFTA investor-state case.
Now a US company called Mercer International is vying to pocket $250 million from Canadian taxpayers, thanks to ISDS.
Mercer International is a US company whose Canadian subsidiary owns and operates a pulp mill and biomass co-generation facility in Castlegar, BC – the Zellstoff Celgar pulp mill. The mill produces 520,000 tons of Northern Bleached Softwood Kraft (NBSK) pulp per year. Mercer bought the mill in 2005. Its previous owners had equipped the mill to self-generate 100% of its needed electricity as far back as 1993, with a 52 MW turbine. Now Mercer is claiming $250 million in damages under NAFTA’s Chapter 11.
Heritage Hydro Rate
Mercer president Jimmy Lee said in a January 2012 news release that under provincial policy “the mill’s ability to effectively utilize its own generation assets and to sell and purchase energy is severely and unfairly restricted.” He added, “All other competing pulp mills in British Columbia receive more favourable treatment with respect to their ability to purchase and sell energy. This puts the [Zellstoff Celgar] mill at an unfair competitive disadvantage.”
Mercer’s Lee claimed $250 million in damages, based on a loss of $19 million a year in energy sales since 2008 and ongoing losses that will arise in the future.
The Vancouver Sun’s Gordon Hamilton explained (January 27, 2012) that “Mercer says that the issue is over a provincial policy in which BC Hydro provides power to industrial users at a lower-tier rate, called the heritage rate, and then, if the company invests in green power generation, Hydro buys all that new power back at a higher rate, not just power that is surplus to the company’s own needs. The policy is to encourage investment in bioenergy, as pulp mills can utilize waste wood to power boilers rather than fossil fuel.”
In 2008, the BC Liberal government had directed BC Hydro to issue Bioenergy Phase 1 and Phase 2 calls for energy as part of the provincial Green Energy plan. Three successful proposals were from pulp mills – Canfor’s Prince George pulp mill, Domtar’s Kamloops pulp mill, and Mercer’s Zellstoff Celgar – which received Electricity Purchase Agreements (EPAs).
These EPAs allowed the mills to buy electricity at a low rate and then sell their excess co-generation energy to the grid at a much higher rate.
But as the Vancouver Sun’s Hamilton pointed out: “In 2008, [BC] Hydro applied for, and received from the BC Utilities Commission [BCUC], an order that Celgar can only sell power that is surplus to its needs. It is that order that Mercer is contesting.” The BCUC order clearly stated that “onsite generation present at the time the customer’s baseline power needs are established cannot be sold to BC Hydro at the higher marginal price.”
Complicating the situation is the fact that Mercer’s Zellstoff Celgar mill is in the southeastern interior, where FortisBC, rather than BC Hydro, distributes the power produced by BC Hydro. FortisBC is a subsidiary of Fortis Inc., the largest private electricity and natural gas distributor in Canada. (In 2007, Fortis purchased the natural gas distribution business of Terasen Inc. from Kinder Morgan Inc.)
Then the Harper government added another element to an already complicated pulp and power situation.
Green Transformation Fund
In June 2009, the Harper government announced a $1 billion Green Transformation Fund (GTF) to help the pulp industry. Administered by Natural Resources Canada (NRCan), the fund was specifically intended to “direct funds to profitable and competitive mills” – a policy that helped the industry further automate and mechanize while consolidating into fewer mills. The giveaway also encouraged major companies to pulp more of the forests and shut down many sawmills.
Perhaps the most controversial aspect of that $1 billion federal GTF giveaway was the money’s use “for energy efficiency and generation projects” to burn biomass as energy for sale to provincial grids. Across Canada, 24 pulp mills received federal funding under the GTF, including $57.7 million to Zellstoff Celgar. Provincial governments in turn provided tax credits, capital infusions, carbon credits and other incentives for pulp mills to produce power and pulp, not just pulp.
An April 2014 report from the BC Ministry of Forests, Lands and Natural Resource Operations, 2012 Economic State of the B.C. Forest Sector, states: “In 2012, about 25% of the total biomass harvested was used to generate energy.”
Greenpeace Canada’s 2011 report Fuelling a Biomess stated that “whole trees and large areas of forest are being cut to provide wood that is burnt for energy” – a highly inefficient mode of energy production and a costly one for the public.
As Watershed Sentinel writer Rob Wiltzen noted in 2011, “We are witnessing a policy shift that is geared towards meeting energy demands by liquidating forests. Pulp mill corporations are paid to build the [energy] capacity, and then paid for the energy produced, and then paid for the carbon credits they earn by producing ‘renewable’ energy.”
Watershed Sentinel writer Arthur Caldicott stated in 2011, “The long-term beneficiaries of these programs are corporations and their shareholders. [Mercer International’s] Zellstoff Celgar, for example, now owns a 48 MW [co-generation] facility paid for by the GTF which is generating about $22 million per year paid by BC’s electricity ratepayers.”
You would think that Mercer International would have been happy with that situation, but apparently not. As the Vancouver Sun explained back in January 2012 when Mercer announced its NAFTA claim, “[Zellstoff] Celgar has an agreement with Fortis to buy all of its energy needs from them. Fortis in turn had an agreement with Hydro to purchase electricity at the heritage rate. Mercer claims Fortis could then sell that power to Celgar at the heritage rate if it were not for the utilities commission order.”
But apparently, it’s a little more complicated (and clever) than that, according to the federal lawyers defending against this NAFTA claim.
The public can access the August 22, 2014 legal counter-claim on the Foreign Affairs, Trade and Development Canada website. The somewhat redacted public version states: “… the Claimant [Mercer International Inc.] planned to have BC Hydro purchase its ‘self-generated’ energy without receiving anything in return. The Claimant referred to this plan as its ‘Arbitrage Project.’ It believed that its Celgar pulp mill was in a ‘unique’ position to purchase more electricity from FortisBC, its local utility, at low-cost regulated rates and then sell it as if it were its own ‘self-generated’ electricity to BC Hydro or an imaginary US buyer.
“None of the Claimant’s ‘self-generated’ electricity would actually change hands in these transactions. Rather, the Claimant intended to ‘notionally’ purchase as much electricity from FortisBC as was normally self-generated at the Celgar pulp mill. It would then pretend that this electricity was its own ‘self-generated’ electricity so that it could sell it at a higher price. In reality, the Claimant’s self-generated electricity would continue to serve its pulp mill – as it always had. This arbitrage of electricity was a simple accounting transaction.
“FortisBC intended to obtain the additional electricity for this accounting transaction from its supplier, BC Hydro, under the terms of a low-cost long-term power purchase agreement. The Claimant then planned to buy this low-cost electricity from FortisBC and sell it back, for more than three times the price, to BC Hydro as if it were the Claimant’s own self-generated electricity. This elaborate buy-and-sell scheme would provide BC Hydro with no new electricity and would ultimately have harmed both BC Hydro and its ratepayers ….”
Mercer International Inc. is claiming $250 million in damages, based on a loss of $19 million per year in energy sales since 2008 and ongoing losses in the future because of restrictions on its energy sales.
The claim is another egregious example of how NAFTA’S investor-state dispute settlement (ISDS) process works against the public.
In March 2014, the Sierra Club, the Council of Canadians, the Institute for Policy Studies, and the Mexican Action Network on Free Trade (RMALC) jointly released a report called NAFTA: 20 Years of Costs to Communities and the Environment. It’s a devastating critique of free trade’s impact on people and the environment.
Canada can withdraw from NAFTA after giving six months’ notice. Not a single politician is suggesting this yet, although it could become an election issue if people make enough noise about it.
Joyce Nelson is an award-winning freelance writer/researcher. She is currently crowdfunding (in low-tech style) in order to write her sixth book. She can be reached at: Apt. 2, 105 Dixon Ave., Toronto, Ontario M4L 1N8