by P. Jean Baker
A “litigation explosion.” That’s what the energy industry witnessed in 2004-unprecedented growth in litigation.
Several different ADR techniques are currently being used successfully to resolve public and private sector energy disputes.
In the wake of the California energy crisis, the collapse of the energy trading business, investigations by various governmental agencies, and the precipitous drop in shareholder value, energy companies were hit from all fronts with novel theories of liability. Gas industry deregulation and changes in oil and gas trading and marketing created an explosion of disputes in the royalty area. A downturn in the global economy was marked by an escalation in the number and quantum of damages alleged in international energy disputes. Responding to these unprecedented changes, the FERC issued new standards that quickly became the focus of contention at the agency and in the U.S. Court of Appeals.
With increasing regularity, public and private organizations were becoming parties to some type of energy-related dispute. Unfortunately, litigation before regulatory commissions, administrative agencies and the courts is costly, often protracted, burdensome, highly adversarial, and damaging to relationships. And, ultimately, it is the consumer who bears the financial burden imposed by traditional litigation, in the form of increased energy costs.
How can the energy litigation explosion be better addressed? Enhanced use of alternative dispute resolution processes, such as mediation and arbitration, could serve businesses, regulators, and consumers far better than continued reliance upon conventional litigation. That was the consensus of the Alternative Dispute Resolution forum, a group formed by the Center for the Advancement of Energy Markets and composed of public agency and private industry leaders.
According to the forum’s October 2006 report, “Using ADR to Resolve Energy Industry Disputes: The Better Way,” the spectrum of processes encompassed by the term “alternative dispute resolution” includes negotiation, facilitation, mediation (including regulation negotiation), early neutral evaluation, mini-trial and binding arbitration. Benefits associated with using ADR include the promotion of creative solutions and efficient decision-making by regulatory agencies; the preservation of relationships; savings in time and money; and the promotion of good business practices.
Several different ADR techniques are currently being used successfully to resolve public and private sector energy disputes. Mediators assist with state regulatory rule making, resolution of private sector contractual disputes, enforcement of federal regulatory policies, electric utility bankruptcy reorganizations, gas pipeline certificate proceedings, licensing hydroelectric projects, and site cleanups. ALJs assist with restructuring state electric utility markets and resolving customer complaints, and facilitators develop regional regulatory policies. Arbitrators resolve disputes involving ISOs, RTOs, other types of transmission organizations, individuals and business entities.
The use of ADR in the energy industry can be enhanced. For example, regulators could screen filings when instituting proceedings and consider directing the parties to an ADR process. Inclusion of ADR provisions in ISO, RTO and other types of transmission organization tariffs could be mandatory.
According to the report, the use of ADR can produce beneficial results, such as the preservation of crucial relationships and a reduction in business uncertainty and disruption. To reach these goals, significant changes in corporate, legal and government culture will have to occur in conjunction with substantial outreach and educational activity by members of the forum and other interested parties.
P. Jean Baker is an Alternative Dispute Resolution forum member and vice president with the American Arbitration Association.