Y2K liability specter prompts need for alternative mediation process

Campbell Killefer

Shaw Pittman

Executives should cringe at the thought that electric utilities` year 2000 (Y2K) readiness might be judged by the “prudence” standard previously applied to nuclear power plants and other large construction projects under the regulatory microscope of state public utility commissions. The popular press, utility financial analysts, and legal pundits worry about a possible tidal wave of litigation relating to Y2K disputes. The predicted tidal wave, however, may only amount to a trickle if advocates of alternative dispute resolution (ADR) win more converts.

The recently enacted federal Y2K Act promotes the use of ADR to resolve Y2K disputes. ADR advocates begin from the common sense notion that businesses should try to compromise their disputes through mediation, early neutral evaluation, or other non-binding proceeding before resorting to litigation or arbitration. ADR helps both companies and customers preserve their business relationships without launching into legal warfare.

In contracts ranging from simple software license agreements to complex technology outsourcing agreements, sophisticated companies provide for mandatory, escalated negotiation or fast mediation with a respected neutral before either party pursues litigation or arbitration. Sweeping language of “disputes arising out of or relating to” the company`s agreement will ensure the parties are required to give mediation a chance to resolve Y2K-related problems.

Utilities should consider adopting such ADR provisions in many of their contracts along with additional protections:

– ensuring confidentiality;

– providing for procedural rules and whether the ADR will be administered by one of the many service providers (e.g., AAA, JAMS/Endispute, CPR Institute for Disputed Resolution, et al.);

– specifying the substantive state law that applies and the location of the ADR proceeding;

– setting a schedule;

– providing for any discovery; and

– requiring that executives who have authority to settle and who were not significantly involved in the Y2K-related dispute participate in the ADR.

Cooperation

The most critical ingredient for a successful ADR is the parties` good faith participation. If either party does not truly want the non-binding proceeding to resolve the Y2K disputes, the ADR will be merely a costly detour before litigation or arbitration ensues.

ADR is more likely to achieve speedy and amicable settlements than subjecting utilities to the dreaded prudence standard over their Y2K readiness.

Faced with over-budget and long-delayed nuclear power plant projects, utilities were often subjected to regulatory prudence reviews in the 1980s and early 1990s. State public utility commissions, not immune from political pressures, engaged in disallowing huge costs from rate base treatment with the benefit of 20/20 hindsight. These prudence reviews supposedly applied a reasonableness standard, but more often than not second-guessed many utilities` decisions that had been thoroughly analyzed and supported when they were made.

Y2K problems are not rocket science or even as complicated as constructing a nuclear power plant, but are certainly a daunting management challenge. Being ready for Y2K involves managing many complex tasks, a finite amount of time with limited available resources, and at least one IT project deadline that will not be extended.

Some of the same utility prudence factors applied to nuclear power plant projects may be brought to bear in possible utility Y2K disputes: compliance with regulatory requirements; active and disciplined management oversight; thoughtful and documented planning; development and use of procedures; thorough evaluation of alternatives; appropriate use of consultants; rigorous testing and documentation; and management applying a project sense of urgency.

Utility management will also need to show they aggressively managed critical third-party vendors, suppliers and service providers as well as important customers and the utility`s insurance carriers.

Finally, a prudently managed utility Y2K project will show well-prepared contingency plans and “event planning”-a command center or SWAT team to deal with unanticipated problems during critical date rollovers.

Good engineering practices should apply, with utility management scrupulously documenting important decisions, what alternatives were considered, and the reasons behind choices. The prudent answer almost always will be the common sense response to an issue, but contemporaneously documenting the Y2K decisions will go a long way to undercut after-the-fact criticism of utilities.

Mediating Y2K disputes may well help avoid unrealistic prudence standards and facilitate utilities` sensible and confidential solution of their business problems.

Campbell Killefer is a partner in the law firm, Shaw Pittman, Washington, D.C., with a trial and ADR practice primarily in technology-related and intellectual property disputes.

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