APPLICATION OF ADR TO REGULATORY DISPUTES

1. APPLICATION OF ADRTO REGULATORY DISPUTES • Presentation To: • American Public Power Association • 2004 Legal Seminar • November 8, 2004 • Steven A. Shapiro • Dispute Resolution Service • Federal Energy Regulatory Commission

2. Agenda • Benefits of ADR • Use of ADR in State and Federal Processes • ADR Defined • Negotiation Approaches • Barriers to ADR • ADR Program Development • Ethical Considerations

3. Part 1What are the Benefits of ADR?

4. ADR Benefits (Cont’d) • Timing and Flexibility • Third-party neutrals work within the schedules set by the parties • ADR can be parallel process on discrete disputes • No filing required • Reduced costs • Increases level of compliance

5. ADR Benefits • If no agreement is reached, parties are better prepared for an adjudicatory process • Builds constructive relationships • Confidentiality • At FERC: • Communications are exempt from ex parte rules, i.e., not on the record and with a non-decisional employee • There is an environment for open frank discussions needed for fruitful negotiations

6. ADR Benefits (Cont’d) • Use of Technical/Subject Matter Expert (SME) • At FERC: • Non-decisional, SME can assist the third-party neutral and parties • SME can provide reality checks when options are being evaluated to solve problems

7. Part 2Support for ADR Use in Federal and State Government Processes?

8. State Examples • New York Public Service Commission • ALJs cross trained as settlement judges and trial judges • Entire cases, or segments of cases, may be handled through ADR • Carrier-carrier, public, and policy matters all have been referred Illinois Commerce Commission - Title 83: Public Utilities, Chapter 1: Illinois Commerce Commission, Part 734 Mediation Practice

9. State Examples Oregon Public Utilities Commission - Settlement Guidelines and Mediation Public Service Commission of Wisconsin - Interim Procedures for Negotiations, Mediation, Arbitration and Approval of Agreements

10. State Examples • Montana Public Service Commission Proposed Policy Statement on ADR issued in 2003 - Encourages voluntary ADR - Any mechanism to resolve dispute without litigation or formal administrative processes - Notes benefits - Sets forth ADR Principles - Describes ADR Techniques

11. State Examples • Colorado Public Utilities Commission “Consumer Service QualityThe PUC's focus on customer service quality continues. Disputes between utilities will increase under competition and could affect service to customers. These activities can be time-consuming and complex. As dispute resolution becomes a more common component of the PUC workload, the skill sets and the knowledge of staff will change. It is expected that managerial, organizational, and negotiation skills will become more critical to the successful resolution of issues. The PUC will also rely more on quicker and simpler regulatory methods such as alternative dispute resolution processes.”

12. State Examples • Washington Utilities and Transportation Commission administrative code WAC 480-09-465-470 - Options include voluntary negotiations, settlement conferences, collaboratives, stipulations and stipulated facts - “The commission will not delegate to parties the power to make final decisions, but will retain the authority to approve any proposed settlement or agreement.”

13. FERC Support • In 1958, the FPC stated that ". . . settlements, as a rule, are favored in the law. § 5(b) of the Administrative Procedure Act requires us to afford all interested parties in proper proceedings opportunity for . . . offers of settlement . . . where time, the nature of the proceeding, and the public interest permit.” • Commission Order No. 32, issued in 1979, emphasized the importance of voluntary settlements to the orderly and expeditious conduct of its business. Procedures for Submission of Settlement Agreements, Order No. 32, FERC Stats. & Regs. ¶ 30,061 (1979); Order No. 32-A, 8 FERC ¶ 61,160 (1979)

14. Administrative Dispute Resolution Act of 1990(initially passed in 1990; later finalized in 1996) • promotes the use of alternative means of dispute resolution • ADR is any voluntary procedure used instead of traditional adjudication to resolve matters in controversy • each agency required to designate a senior official to be the Dispute Resolution Specialist • ADR may be used only "if the parties agree to such a proceeding"

15. FERC Support • In 1994, the Commission in its NOPR to implement the ADRAct stated: • “It is the policy of the Commission to conclude its administrative proceedings as fairly, effectively, efficiently, and expeditiously as possible. . . . The ADRA gives the Commission the opportunity to further develop and refine its policies to achieve less costly, less contentious, and more timely decisions in its proceedings. . . . [T]he Commission intends to foster the effective and sound use of innovative ADR procedures pursuant to the guidelines established in the ADRA.” • Administrative Dispute Resolution, Notice of Proposed Rulemaking, FERC Stats. & Regs. ¶ 32,510, at 32,914 (1994).

16. FERC Support • Order No 578 issued in April 1995 integrated ADR techniques into the Commission's dispute resolution procedures. The final rule also modified, and added to, the Commission's regulations to achieve this goal. Alternative Dispute Resolution, Order No. 578, FERC Stats. & Regs. ¶ 31,018 (1995). • Order No. 602, issued 3/31/99, revised the Commission’s regulations governing complaints: encourages and supports the consensual resolution of complaints; offered the services of the new Office of Dispute Resolution Service and the Commission's Enforcement Hotline to achieve this goal; and filings must state whether ADR has been tried and if ADR under the Commission's supervision should be considered.

17. Part 3Alternative Dispute Resolution Defined

18. What is ADR? • A term that covers a variety of dispute resolution methods. • ADR generally focuses on interests but can focus on positions. • ADR is generally a voluntary process. • ADR involves a third party neutral. • ADR is NOT - adjudication (except for arbitration) - appropriate to every dispute - a guarantee that a solution will result

19. Resolving Disputes ContinuumWhere Does ADR Fit in Conflict Resolution?

20. Conciliation • Involves building a positive relationship between the parties by the use of a third party or conciliator • May establish communications, clarify misperceptions, deal with strong emotions, and build trust. Conciliators may: provide for a neutral meeting place, carry initial messages between/among the parties, provide reality testing regarding perceptions or misperceptions, and affirm the parties' abilities to work together.

21. Facilitation • What is it? Facilitation involves the use of techniques to improve the flow of information in a meeting between parties and may also be applied to a decision-making meeting where a specific outcome is desired. • The term "facilitator" is often used interchangeably with the term "mediator," but a facilitator does not typically become as involved in the substantive issues as does a mediator. The facilitator focuses more on the process involved in resolving a matter.

22. Facilitation • How is it done? The facilitator generally works with all of the participants at once and provides procedural directions for the group to move efficiently and arrive at the jointly agreed-upon goal. • The facilitator may be a member of one of the parties to the dispute or may be an external consultant. Facilitators focus on procedural assistance and typically remain impartial to the topics or issues under discussion.

23. Facilitation When is it used? Appropriate when: • the intensity of the parties' emotions about the issues inhibits good communication • the parties or issues are not extremely polarized • the parties have enough trust in each other that they can work together • the parties are in a common predicament and they need or will benefit from a jointly-acceptable outcome.

24. Mediation What is it? • The intervention of an acceptable, impartial and neutral third party who has no decision-making authority • The objective of the third-party neutral is to assist the parties in voluntarily reaching a resolution • Mediation does not eliminate other dispute resolution options • Process is confidential

25. Mediation How is it done? A mediator • works with parties to develop a process that meets their needs and the role they want the mediator to play • will focus parties on identifying issues first and then have parties define their underlying interests • will focus parties on developing options and may suggest options to encourage parties to expand the range of possible resolutions • works with parties in caucuses, or with all parties present, to explore options that address their interests • can differ in their degree of directiveness.

26. Settlement Judge Proceedings • A settlement judge attempts to: • - reduce the inherent and tactical delays in the settlement process, provides structure, controls the pace of negotiations • - meets with all parties separately, and/or collectively, looks for a common ground, and crafts or suggests solutions • - often expresses an opinion based on precedent and the judge's experience as to how the case may or may not be decided by a presiding judge or the agency if the case proceeds to litigation.

27. Settlement Judge Process - Advantage of Process • Provides For Frank Exchange of Merits of Positions • Judicial Deference Holds Down Rhetoric and Posturing • Power To Continue Negotiations Where Other Neutrals Might Give Up • Substantive Knowledge Helps

28. Early Neutral Evaluation What is it? Early neutral evaluation (ENE) - provides parties with an early and frank evaluation of the merits of a case • used when the parties disagree significantly about the value of their cases and are locked in positional bargaining • is voluntary and does not eliminate other dispute resolution options. • is confidential, whether or not it results in settlement • the evaluator is neutral

29. Early Neutral Evaluation How is it done? • The objective Evaluator studies background materials, performs independent research, considers presentations (written and/or oral), and clarifies positions and facts through questions. • The Evaluator offers a non-binding, advisory-only, confidential opinion as to the settlement value and the potential outcome of the case, and including in the case of FERC, what the Commission staff may recommend. • The evaluation may alter parties negotiation approaches, cause parties to reevaluate their BATNAs, or explore other options for settlement.

30. Early Neutral Evaluation When is it used? ENE is particularly appropriate when the dispute involves technical or factual issues that lend themselves to expert evaluation, and when the top decision-makers of one or more of the parties could be better informed about the real strengths and weaknesses of their cases. ENE can enhance direct communication between the parties about their claims and supporting evidence and provide an assessment of the merits of the case by a neutral expert. In addition, ENE can provide a "reality check" for clients and lawyers and help to identify and clarify the central issues in dispute.

31. Mini-trial What is a Mini-trial? A mini-trial is not a trial. It involves a structured settlement process in which each side to a dispute presents abbreviated summaries of its cases to the major decision-makers for the parties who have authority to settle the dispute. The summaries contain presentations about the legal basis and the merits of a case. How is it done? The process generally follows more relaxed rules of discovery and case presentation than might be found in a court or other formal proceeding and usually the parties agree on specific limited periods of time for presentations and arguments.

32. Mini-trial • A third party neutral may oversee a mini-trial. That individual is responsible for explaining and maintaining an orderly process of case presentations and may give an advisory opinion regarding a settlement range, if requested, rather than offer a specific solution for the parties to consider. The third party may also provide mediation services upon request. • When is it used? The rationale behind a mini-trial is that if the decision-makers are fully informed directly as to the merits of their cases and that of the opposing parties, they will be better prepared to successfully engage in settlement discussions.

33. Fact-finding What is it? Fact-finding is a process of determining the relevant facts to a controversy. How is it done and when is it used? Fact-finding can be performed by advisory staff or a neutral third party selected by the parties in advance. The parties may also select expert fact-finders, who are neutrals who give expert opinions that are either conclusive or non-binding on technical, scientific or legal questions. FERC’s advisory staff's use of technical conferences is comparable to an ADR fact-finding process.

34. Binding Arbitration • What is it and how is it done? A party presents a dispute to an impartial or neutral individual (arbitrator) or panel (arbitration panel) for issuance of a binding decision (non-appealable on the merits). The parties usually have the ability to select the arbitrator(s). The parties may retain a particular arbitrator (often from a list of arbitrators) to decide a number of cases or to serve the parties for a specified length of times. Parties are typically free to negotiate the terms and conditions under which arbitrators are used to resolve disputes, including the procedures for their selection.

35. Binding Arbitration When is it used? Binding arbitration is most appropriate when the parties want a third party to decide the outcome of their dispute for them but would like to avoid the formality, time, and expense of a trial. The parties do not retain control over how their dispute is resolved, and generally cannot appeal the arbitrator's award.

36. Role of the Third-Party Neutral • Works with the parties to help them find mutually acceptable, win/win or mutual gain solutions • Assists the parties with identifying their interests • Assists the parties with creative problem-solving through the generation of options to meet their interests • Is evaluative in an early neutral evaluation role or in arbitration

37. ADR May Not Be Appropriate If: • The resolution will define policy • Existing procedures cannot be changed • Outcome would affect non-participants • A full record is important (e.g., rate case) • A definitive resolution is required • Parties do not have full commitment to the process or want a definitive ruling based on their position

38. Part 4 Negotiation Approaches in ADR

39. Interest-Based Aspects of ADR • Basic Elements • Separates people from the problem • Explores all interests to define issues clearly • Brainstorms possibilities and opportunities • Establishes a fair process and objective criteria • Should identify “Best Alternative to a Negotiated Agreement” (BATNA) • Focuses on effective communication and relationships

40. Positional-Based Aspects of ADR • Parties focus on the value or merit of their positions in which the resolution is based on who has the better position, as opposed to interest-based negotiation in which parties attempt to meet each others' interests • Party sees that if one is right, the other must be wrong • Large opening demands, reluctance to disclose information, may threaten consequences if no agreement, hard on people and the problem • Can damage relationship/trust, inhibits creative solutions, acceptance of compromise

41. Major Distinctions Between Positions and Interests Positions are what a party feels/believes/wants The party’s own solutions to an issue. Interests are why a party feels/believes/wants a certain thing What is important about the issue.

42. 7 Elements of Effective Negotiation: Circle of Influence • Communication Relationship • Commitment BATNA * Getting to Yes, Roger Fisher and William Ury (1981). Interests Options Legitimacy

43. ADR as Mutual Gains Negotiations • Preparation (Know your BATNA, define your interests and think about opponents interests) • Create Value (brainstorming, no attribution or evaluation, make the pie larger) • Distribute Value (build trust, standards, use neutrals) • Follow Through (monitoring, incentives, focus on relationships) * Dealing With An Angry Public, Lawrence Susskind and Patrick Field.

44. Part 5Barriers to ADRIs it Cultural or Behavioral?Or Both?

45. ADR Barriers • Asking for third-party assistance is viewed as a sign of weakness - Internally -- to bosses, management - Externally -- to other entities • There are concerns about meeting schedules • There a perception that ADR must be applied to the entire project rather than discrete disputes • Company fears loss of control over decisions

46. More ADR Barriers • Using ADR once will require the company to use it on every dispute • Misunderstanding of ADR process • Cultural and behavioral blocks to use of ADR • Participants are wedded to traditional approaches • Who is in control - Lawyers or Managers?

47. Examples of How ADR Is Misunderstood • Excerpts from complaint filings: • “. . . has attempted for almost a year to resolve this dispute informally with . . . . [We even] sent . . . . a settlement proposal . . . For these reasons [we] believe that further discussions with . . . would not be productive.” • “. . . the parties have already discussed the issues presented . . . without a successful resolution. Consequently, the issues have already been joined through those direct discussions with little possibility for success of alternative dispute resolution procedures.”

48. Part 6ADR Use in the FutureWill You Have A role?

49. Questions For FERC’s Regulatory Community Will conflict resolution in the energy industries be different in the 21st Century? Or Will conflict resolution rely on the 20th Century approach of costly, time-consuming adjudication?

50. Using ADR Benefits Competitive Gas and Electric Markets • Competition: • requires faster and more flexible decision-making • benefits from certainty • in most circumstances, benefits if business interests are met rather than deciding which party has the winning legal position • seeks cost avoidance • lower litigation costs • fewer human resources devoted to disputes