Restructuring in the electric power supply industry has created some profound changes, says author Gregory Vassell. Increased competition brought about by such restructuring has also meant an increase in disputes. In the following article, Vassell maintains that conflicts involving highly complex technical issues call for creative means of resolution. He writes that arbitration, mediation, and other ADR processes offer an effective alternative to costly and time-consuming court litigation. The Federal Energy Regulation Commission (FERC) likewise recognizes this fact and has since launched a number of ADR-related initiatives, including the creation of its Office of Dispute Resolution Service.
The use of ADR in the electric power supply industry generally evolved in a manner quite similar to other industries. In the commercial area, however, ADR use was profoundly affected by the unique structure of the industry.
That structure, until recently, was predicated on the proposition that the supply of electric power and energy to the public at large is "affected with the public interest" because of the essential nature of the service and, therefore, electric power companies needed to be designated as "electric utilities."
It was also predicated on the proposition that electric utilities-which for the most part evolved into vertically integrated entities in terms of their generation, transmission, and distribution facilities-were "natural monopolies" in a given geographical area. So as to protect the consumer from exorbitant prices that otherwise might be imposed by a single power company providing service in such an area, the electric utilities needed to be subject to overview by regulatory commissions with respect to the adequacy and cost of their services.
Under this regulatory scheme-often called a "regulatory compact"-- electric utilities accepted the obligation to serve any customer in their "certified" service area and a limitation on rates of return on their investment dedicated to public service, in return for regulatory promise that they would have the opportunity-not the guarantee-to earn a fair return on that investment.1
The electric power supply industry's structure predicated on the "natural monopoly" concept established a relationship between individual electric utilities and their customers that was quite different from that usually prevailing in most other commercial circumstances. That relationship involved very close scrutiny by the appropriate regulatory commission-a state commission in the instance of retail customers and the Federal Energy Regulatory Commission (FERC) in the instance of wholesale customers.
Thus, most disputes that might arise between an electric utility and one or more of its customers could not be resolved through litigation in the courts or, in the alternative, through entirely voluntary and private processes of mediation or arbitration-as such processes would apply to other areas of commerce-but rather would need to be dealt with, in the first instance, before an appropriate regulatory commission in accordance with the administrative processes established by that commission.
At the federal level, the FERC (and its predecessor, the Federal Power Commission) has a long history of encouraging resolution of cases before it through settlement, as a way of reducing its hearing caseload to a manageable level. Thus, for example, in fiscal year 1980, 47 of the 54 electric cases before the FERC were resolved by settlement.2 Similar informal processes are also used by many state regulatory commissions.
If a settlement could not be reached in a given case before a regulatory commission, a formal adjudicatory process would need to go forward, culminating in a formal decision by the commission. Such decision would then be subject to an appeal in the courts.3
The electric power supply industry's structure predicated on the "natural monopoly" concept also affected the relationship among individual, vertically integrated electric utilities by eliminating most, if not all, competitive considerations in their dealings with each other. As a result, collegial and cooperative attitudes evolved within the industry over time, making disputes infrequent and litigation extremely rare.
The collegial attitudes prevailing in the industry were reinforced further by the industry's efforts to improve the reliability of electric bulk power supply in the aftermath of the Northeast Blackout of 1965. That event demonstrated the need for greater cooperation and coordination among electric power systems in the areas of planning and operation. The industry responded by creating nine (subsequently enlarged to 10) Regional Reliability Councils and, in 1968, by establishing the National Electric Reliability Council (subsequently renamed the North American Electric Reliability Council (NERC)), to coordinate, promote, and communicate about reliability of their generation and transmission systems (i.e., help utilities work together to reduce the likelihood of blackouts).4
Today, the electric power supply industry is undergoing a profound structural change under the banner of greatly increased competition (and, through competition, hopefully lower electricity prices to the consumer). Increased competition is to be brought about by way of eliminating utility monopolies in electric power production, ameliorating the effect of such monopolies in electric power transmission and distribution (through the concept of nondiscriminatory open access) and introducing "customer choice" at the retail level.
The restructuring process was triggered at the national level by the enactment of the National Energy Policy Act of 1992 and by the subsequent series of actions by the Federal Energy Regulatory Commission, aimed at forceful implementation of that Act. FERC's Order No. 888 in Docket No. RM95-8-000, issued on April 24, 1996, and aimed at promoting wholesale competition through open-access, nondiscriminatory transmission services by public utilities, requires the unbundling of transmission and wholesale generation services. At the state level, restructuring legislation was enacted in several states, aimed at providing "customer choice" of electric providers at retail.5
These changes affected in a major way the thrust of the economic incentives and disincentives in the electric power supply business; they shattered the collegial and cooperative relationships among electric utilities; they transformed the relationship between electric utilities and many of their customers; and they introduced a multitude of new "players" into the electric power supply market. All of these increased the number of disputes that reach the FERC (and, to a somewhat lesser extent, many of the state regulatory commissions) and that require adjudication. It also increased manifold the number of participants in individual disputes.
Thus, for example, the then FERC chairman James Hoecker reported in July 1997 that for fiscal year 1997, the FERC expected to receive between 4,000 and 5,000 electric filings, representing an increase by a factor of five or six over the number of filings received in fiscal year 1992.6 Where in the past a rate filing or a complaint filed with the FERC may have prompted two or three (if any) other entities to intervene in the case, today such a filing often impels as many as 20, 30, and more intervenors to participate in the proceeding.
While the FERC has a long history of encouraging resolution of cases through settlement, the tidal wave of filings it is now encountering in the wake of the ongoing industry restructuring is compelling the commission to look for additional ways to reduce its load of cases, particularly cases that need to be adjudicated in a formal hearing. Thus, following the passage of the Administrative Dispute Resolution Act of 1990, the FERC implemented the provisions of that Act by its Order No. 578 (issued on April 12, 1995) and it incorporated the provisions of the Administrative Dispute Resolution Act of 1996 in its Order No. 602 (issued on March 31, 1999). Through these recent initiatives the FERC established within its structure the Office of Dispute Resolution Service, with the objective of expanding the commission's use of alternative dispute resolution procedures.
Since many of the disputes arising in the newly competitive electric power supply industry involve highly complex technical issues-and since the technical competence of the FERC and its staff is limited-the commission has been encouraging the resolution of such disputes within the industry itself, through appropriate ADR procedures, without the need for a filing of a formal complaint with the commission. Thus, for example, the "Pro Forma Open Access Transmission Tariff"-included in FERC's Order No. 888 in Docket No. RM95-8-- 000-specifies, in its section 12, the detailed ADR procedures to be included in each Open Access Transmission Tariff being filed with the commission. Such procedures allow the parties to the dispute to agree voluntarily to binding arbitration, with the arbitrator (or arbitrators) selected by the parties and being "knowledgeable in electric utility matters, including electric transmission and bulk power issues."
Recognizing that many of the disputes arising in the evolving, competitive electric power supply industry are bound to be reliability-related, the North American Electric Reliability Council-in the belief that such disputes should be resolved through industry-based dispute resolution mechanisms-established formal "Policies for Dispute Resolution."7 These policies call for the NERC "to assemble, at the parties' request, an advisory, mediation, nonbinding, or binding dispute resolution panel" and to provide meeting facilities and other assistance as required. So as to help the parties agree on a specific individual or group of individuals to assist them in the ADR process, the NERC established a list of qualified individuals who are trained and experienced in ADR processes and who have the necessary technical expertise.
Acknowledging the increasing importance of ADR in the competitive electric power supply industry, the American Arbitration Association-- a leading not-for-profit organization providing alternative dispute resolution services throughout the United States and beyond-established, in 1997, a national energy panel, i.e., a nationwide roster of "neutrals" with expertise in energy matters. Members of the panel are available to help resolve conflicts arising in the energy industries, primarily in the electric power and natural gas areas, in the wake of restructuring.8
The attractiveness of arbitration and mediation (they being, by far, the most frequently used ADR processes) as a means of avoiding the time-consuming and costly adjudication of commercial disputes in the courts is just as valid in the instance of the electric power supply industry-in areas that are not subject to a regulatory commission's jurisdiction-- as it is in other fields of commerce. Such attractiveness is oftentimes even greater in disputes that are subject to a regulatory commission's jurisdiction, since litigation before a regulatory commission can be as timeconsuming and as costly as that before the courts and, furthermore, any decision by a regulatory commission is still subject to challenge in the courts.
Thus, consideration of arbitration or mediation as an alternative to litigation-whether litigation before the courts or before a regulatory commission-is a very worthwhile undertaking. In doing so, however, it is important to keep in mind that the use of arbitration or mediation in resolving a commercial dispute is not always possible or desirable and that a decision in this regard must be based on the specific circumstances at hand.
1 Leonard S. Hyman, America's Electric Utilities: Past, Present and Future, 3rd ed. (Arlington, Va., Public Utilities Reports, Inc., 1988), pp. 117-125; W. S. White, Jr. and Gregory S. Vassell, "U.S. Electric Power Supply at the Crossroads-The Technical and Historical Background," Public Utilities Fortnightly, p. 12 January 5, 1989).
2 Charles F. Phillips, Jr., The Regulation of Public Utilities, 2nd ed. Arlington, Va., Public Utilities Reports, Inc., p. 191 (1988).
3 Id. at 182-193.
4 Gregory S. Vassell, "The Northeast Blackout of 1965," Public Utilities Fortnightly, pp. 12-17 (October 11, 1990); North American Electric Reliability Council, Reliability Assessment 19972006, Princeton, NJ., p. 3 (1997).
5 Gregory S. Vassell, "Reliability of Electric Bulk Power Supply in a Competitive Environment" (a guest editorial), IEEE Computer Applications in Power, pp. 10-11. (April 2000).
6 Electric Utility Week, The McGraw
Hill Companies, New York, N.Y., p. 3 (July 21, 1997).
7 North American Electric Reliability Council, NERC 2000-The Future Role of the North American Electric Reliability Council, Princeton, NJ., pp. 15-21 (September 30, 1993).
8 American Arbitration Association Annual Report, 1997, p. 8; Stanley W. Hulett, "Restructuring The Electric Utility Industry," Dispute Resolution Journal, pp. 26-27 (November 1998).…