Alternative Dispute Resolution
The Texas Administrative Procedures Act (APA) outlines the basic administrative process state agencies must use to resolve disputes and questions brought before them. This contested case process is similar to a court case, and is described in detail in Chapter 1 of this report concerning rate regulation. The Public Utility Regulatory Act (PURA) places additional requirements on the way PUC resolves disputes and questions.
The contested case process allows individuals and entities affected by the outcome of PUC's decisions to participate in its decision-making process. The time required to complete this process can vary dramatically. Some cases brought to PUC are resolved within 35 days, while others require more than 185 days. Moreover, the cost of this process can be quite high; in one recent rate case before the commission, the utility's expenses alone were about $13 million.[ 1 ]
Alternative dispute resolution (ADR) is a blanket term describing a variety of processes designed to resolve disputes without litigation or adversarial hearings procedures. Benefits attributed to ADR include reduced legal costs, faster settlements, and more amicable relations among disputing parties.[ 2 ] The most common ADR technique is mediation; other processes include arbitration and negotiated rulemaking.[ 3 ] These techniques offer considerable advantages over PUC's present contested case process.
Mediation uses a neutral third party to bring both sides in a dispute to a negotiated agreement. The third party guides the negotiation, advises both sides, and helps develop an agreement. Mediation is nonbinding, meaning that both parties retain the right to pursue other means of resolving the dispute, including litigation.[ 4 ]
Arbitration submits the dispute to a person outside the judicial system for resolution. If the arbitration is binding, the parties must agree in advance to comply with the decision; if it is nonbinding, the parties may pursue other means to resolve their dispute.[ 5 ]
Negotiated rulemaking brings together a governmental agency and the parties who will be affected by its actions to negotiate proposed rules with the help of a neutral facilitator.[ 6 ]
In response to recent state and federal legislation, PUC has begun using ADR in some types of cases. State law specifies that certain disputes among electric utilities owning transmission lines must be resolved using ADR; federal law requires PUC to arbitrate among competing telephone providers when they cannot reach agreement on their own.
The industries regulated by PUC are large and dynamic. Deregulation will increase PUC's need to establish policies and resolve disputes quickly. Delays can hurt both businesses and consumers. For example, consumers may be denied service until any dispute over which utility can serve them is resolved, or until the extension of a transmission line is approved. Similarly, companies can be put out of business if their rivals are allowed to continue practices that violate state law or PUC rules.
TPR examined PUC's regulatory activities that use the contested case process to identify promising areas for the use of ADR. This chapter contains two recommendations designed to improve PUC's dispute resolution activities by broadening PUC's use of ADR while guaranteeing that consumers' interests remain protected.
PUC should increase its use of alternative dispute resolution techniques.
The 1995 Legislature authorized PUC to require the use of alternative dispute resolution (ADR) to resolve disputes over prices, terms, and conditions of wholesale electric transmission service--the transfer of electricity from a generating facility to a utility.[ 7 ] In March 1996, PUC adopted rules for the use of ADR in such disputes. Under these rules, disputing parties must engage in mediation or other ADR processes before filing a case with PUC. If the parties cannot resolve the dispute themselves, the Electric Reliability Council of Texas (ERCOT), the organization that operates the state's electric transmission system, will arbitrate the dispute. ERCOT must conduct this arbitration in accordance with American Arbitration Association (AAA) rules.[ 8 ] At this writing, however, these procedures have not yet been used to settle a dispute.
The Federal Telecommunications Act of 1996 (FTA 96) also addresses the use of ADR, requiring state utility agencies to arbitrate certain disputes among telephone providers. Under FTA 96, existing providers of local exchange telephone services must allow new providers to connect to their systems, an arrangement called interconnection. If good-faith negotiations among these providers do not achieve an agreement, they may seek arbitration or mediation from the state utility agency.[ 9 ]
Some parties have sought PUC arbitration under the terms of FTA 96, and PUC has adopted new rules governing such proceedings.[ 10 ] In doing so, PUC acknowledged that Congress intended a process different from its existing contested case process.[ 11 ] PUC's rules establish a streamlined process that limits the number of participants and uses panels of expert witnesses to answer staff and arbitrator questions. In their first trial, these rules allowed PUC to complete a hearing in only 12 days and to issue its decisions within three weeks after the hearing. Three companies already have filed interconnection agreements based on the outcome of this arbitration.[ 12 ]
ADR success factors
While ADR can be an effective technique for resolving disputes quickly and cheaply, agencies using these processes must adopt coherent rules and an agency plan for its use. Mediators and arbitrators must be properly trained and work within a well-defined system that has the agency's full support. At minimum, an agency's ADR program should identify appropriate disputes for ADR, specify the agency's role and individuals who can participate in the process, and set qualifications and selection criteria for mediators and arbitrators.[ 13 ]
A successful mediator should help disputing parties reach a solution, rather than imposing a solution, as would a judge or hearing examiner. For this reason, mediators require different skills than those of judges or examiners. An effective mediator listens and speaks without judgment, uses unbiased language, and avoids creating the perception of preference for any party's position.[ 14 ] Mediators must listen carefully and ask probing questions as needed to assist the parties in airing all underlying issues.
State law recommends that mediators have at least 40 hours of training to gain a basic understanding of the mediation process.[ 15 ] In Texas, such training can be obtained from the University of Texas at Austin's LBJ School of Public Affairs; the school's training costs from $800 to $900 per individual.[ 16 ]
Barriers to ADR
In the past, utility companies generally have relied on protracted and expensive litigation to resolve disputes, and this pattern is reflected at PUC. To date, PUC has implemented ADR only as required by state or federal law; beyond these legal requirements, the agency has done little to make use of these processes. In 1994, for example, PUC conducted a day-long ADR workshop at which participants discussed possible pilot projects to evaluate its usefulness.[ 17 ] The agency, however, did not implement any pilot projects or take any other action after the workshop.
State law specifies the timeframes in which PUC must complete certain types of contested cases, such as a 185-day limit for rate cases, a one-year limit for the certification of electric transmission lines, and a 60-day limit for Certificates of Operating Authority for new telephone providers.[ 18 ] These limits take effect as soon as a case is filed with PUC. Any time allocated to ADR procedures will reduce the time parties have to prepare for a hearing; thus, parties to a contested case must balance the resources they expend on ADR against the need to prepare a case if ADR fails.
Texas Natural Resources Conservation Commission
The Texas Natural Resources Conservation Commission (TNRCC) makes extensive use of ADR; the agency adopted rules in June 1991 that "encourage the resolution and early settlement of all contested matters through voluntary settlement procedures."[ 19 ] To implement these rules, TNRCC created an ADR office that reports directly to the agency's commissioners. All disputes are referred to the ADR office as soon as the commissioners rule that the dispute is legitimate and within the agency's jurisdiction. The ADR office employs three trained mediators to work with the parties to settle their disputes.[ 20 ]
Participation in ADR is voluntary, since state law does not require its use prior to a contested hearing. In fiscal 1996, TNRCC employed a trained mediator in 29 of 105 contested cases, and achieved settlements in 22, or 76 percent. TNRCC estimates that it saved an average of about $4,000 in staff expenses each time it avoided a contested hearing.
Promising uses for ADR
The goal of all ADR processes is to resolve issues equitably, quickly, and as completely as possible. In a deregulated market, the need to resolve disputes quickly will be even more critical, since delays might give one party to a dispute a competitive advantage over another, or even eliminate a competitor. A 1995 summit of state utility commissioners noted that complaint mediation will be necessary in a competitive environment.[ 21 ]
TPR found that seven of the 15 other states surveyed indicated that have used or are considering using ADR in lieu of contested cases. Two of the states, Pennsylvania and New York, have made more extensive use of ADR. The Pennsylvania Public Utility Commission has used mediation in small water utility cases for the past three years and reported an 80 percent success rate. Based on this success, it has recently expanded mediation to all utility rate cases where the total rate increase is less than $1 million.[ 22 ] The New York Public Service Commission (PSC) has used ADR on a wide variety of cases from rate cases to approval of new electric transmission facilities to consumer complaints. PSC's goal is to train all of its administrative law judges to be mediators. At this writing, about half of the administrative law judges received training and PSC has begun training for all agency employees to identify cases that could be referred to ADR.[ 23 ]
Several of PUC's regulatory activities might be more appropriately resolved by ADR than through the existing contested case process. ADR appears to work better when the issues are technical and the number of parties is limited.[ 24 ] For instance, fuel reconciliations--the periodic review of fuel costs previously passed on to ratepayers by electric utilities--could be conducted through ADR rules similar to those already in place for transmission access disputes, since the scope of the issues is relatively narrow and technical, the number of parties generally is limited, and the existing hearings process requires a significant use of staff resources.[ 25 ]
Under an ADR model, a utility would file its reconciliation subject to review and approval by PUC staff. If staff objections arise, Legal Administration could provide a mediator to work with all interested parties to resolve the disagreement. The matter would become a contested case only if the utility and other participants to the mediation could not reach agreement.
Other types of cases that could be addressed through ADR involve certificates of convenience and necessity for transmission lines or other electrical facilities, the purchase of electric power, or consumer complaints. Again, these cases involve relatively narrow and highly technical issues that might be better addressed in a forum allowing various experts to discuss the issue.
Still other promising areas for ADR cases deal with incentive regulation of telephone companies and certificates of authority for new providers of local exchange service. These matters need to be resolved quickly to facilitate competition. Agency-imposed administrative penalties for violations of the Public Utility Regulatory Act also could be referred to ADR.
A. Section 1.101 of the Public Utility Regulatory Act (PURA) should be amended to specify that PUC may refer parties to alternative dispute resolution (ADR), and to modify PURA deadlines to allow time for ADR procedures.
Section 1.101 should contain a provision stating that PUC may refer any contested case to ADR if it finds that doing so would encourage the settlement of the dispute. The agency also should adopt a rule authorizing an administrative law judge to order the parties to a contested case to participate in ADR. Adjustment of jurisdictional deadlines to provide for a settlement phase before the contested case process begins should allow parties to better focus on settlement efforts.
PUC historically has served a quasi-judicial role, with all its proceedings designated as contested cases, as defined in the state's Administrative Procedures Act. To change this perspective, the Legislature should provide new direction indicating that ADR processes are not only acceptable, but in some cases preferable to litigation.
At the same time, the Legislature should grant PUC additional flexibility in jurisdictional timelines, to allow parties to focus on the settlement process. This authority could be granted in Section 1.101 of PURA, in the interests of facilitating settlements without hearings. If ADR processes fail, the adjusted timeline still should allow the parties a fair opportunity to develop their cases.
B. PUC should adopt procedural rules that clearly outline its ADR system.
The most basic requirement of successful ADR is a perception of fairness by all the parties. PUC's system must support this perception by clearly stating the agency's commitment to the process and providing rules that are specific and easily understood. These rules should specify the agency's role in the ADR process and note which disputes are appropriate for ADR; who can participate in the process; who should mediate; and how mediators should be selected.
C. PURA should be amended to include provisions requiring the use of ADR in fuel reconciliations; applications for certificate of convenience and necessity for electric transmission lines and other electrical facilities; agreements to purchase power; certificates of operating authority for new telephone providers; administrative penalties; and consumer complaints.
When PUC determines that any of these cases would require a hearing, PUC should require the parties to participate in ADR before a hearing would be held. The Legislature has already taken a similar step in Section 3.457 of PURA, which declares that interconnection cost studies should not be reviewed as contested cases.
D. PUC should train a small staff of ADR specialists within the Legal Administration Division.
Mediators in particular must be perceived as neutral. For this reason, they should be part of the Legal Administration Division, which is responsible for case management, rather than an enforcement division. Initially, the agency could train three administrative law judges until it has time to assess the demand for ADR procedures. This training could be staggered if necessary, to interfere as little as possible with existing workloads.
Expansion of ADR would entail a one-time training cost for agency mediators. Based on TNRCC's experience, PUC could train three of its current staff members in mediation at a cost of about $900 each, for a total of $2,700.
State law required the State Office of Administrative Hearings (SOAH) to conduct PUC's contested case hearings beginning in fiscal 1996. PUC's fiscal 1996 contract with SOAH totalled $1,034,284 that included several one-time costs. To complete the hearings, SOAH logged 12,224 hours. A review of SOAH's hours found that 43 percent was allocated to cases that would be referred to ADR under this recommendation.
Mediation typically resolves 50 to 75 percent of the disputes in which it is used.[ 26 ] Assuming PUC resolved 50 percent of its eligible cases with mediation, PUC would have saved $222,371. The fiscal 1997 contract with SOAH is $707,000. Assuming that SOAH's hours would be allocated in the same percentages, PUC would save $152,000.
The net savings of $149,300 would be available to fund other recommendations in this report.
The Public Utility Regulatory Act should be amended to ensure the continued participation of the Office of the Public Utility Counsel in PUC proceedings.
The outcomes of PUC's rulemaking and contested case processes determine the rates Texans pay for utility services, the services offered, and the minimum quality of those services.
PUC's rulemaking function sets policies that affect utilities and individuals throughout the state. PUC is required to provide public notice of proposed rules and must receive public comments before it can adopt them. In a contested case, a utility and other affected persons are allowed to argue their positions before PUC's commissioners or an administrative law judge. All participants in the case may present information and question each other's witnesses.
To ensure that PUC remains aware of the impact of its actions on residential and small business consumers, the 1983 Legislature created the Office of the Public Utility Counsel (OPUC) to participate in all proceedings before PUC.[ 27 ] OPUC can participate in any hearing, investigation, inquiry, or other fact-finding or decision-making action concerning PUC, including the rejection of requests for action and the dismissal of complaints.[ 28 ]
The Federal Telecommunications Act of 1996 (FTA 96) required that certain disputes between competing telephone companies, such as interconnection, be submitted to arbitration.[ 29 ] In 1996, PUC conducted its first interconnection arbitration under FTA 96 between Southwestern Bell Telephone Company (SWB) and other companies seeking to provide local telephone service, to determine how these other companies will connect with Southwestern Bell's infrastructure and the rates they will pay to do so.
PUC developed a set of rules for this arbitration using the rulemaking process outlined in the Texas Administrative Procedure Act (APA).[ 30 ] PUC determined, however, that the only participants allowed to participate in the arbitration proceeding would be the actual parties to the final interconnection agreement. OPUC was excluded from the actual arbitration proceeding, although it was allowed to comment at each stage of the hearing. By contrast, some states, including Colorado, Delaware, Georgia, Maryland, Missouri, New Hampshire, North Carolina, Pennsylvania, and Virginia, allowed consumer advocacy agencies to participate as a full party in FTA 96-related arbitrations. At least two states, Arkansas and Louisiana, joined Texas in excluding the consumer advocate.[ 31 ]
While the FTA 96 assumes that competition is the best way to protect small ratepayers, OPUC's staff believes that small ratepayers still need an advocate in all proceedings, particularly during the transition to competition.[ 32 ]
The state law that created OPUC addressed the legal processes in use at the time it was drafted. In a changing legal and regulatory environment, PUC still must remain aware of the interests of residential and small business consumers. The changing environment will include competitive markets involving multiple providers; speedy resolution of disputes will be needed to ensure that no company can achieve an unfair competitive advantage during the course of a proceeding. State and federal law have authorized the use of alternative dispute resolution (ADR) processes such as arbitration to resolve certain disputes and, since a major benefit of ADR is its ability to resolve issues quickly, their use is likely to increase .
The Public Utility Regulatory Act should be amended to specify that the Office of Public Utility Counsel may participate in any proceeding before PUC, including alternative dispute resolution processes.
New dispute resolution processes have left OPUC's role unclear, as in the instance of FTA 96 arbitration. This recommendation emphasizes that OPUC should be allowed to participate fully in any ADR-related proceedings.
No fiscal impact should result from this recommendation. OPUC should continue to participate as it does now, regardless of the changing character of PUC proceedings.
[ 1 ] Interview with Phil Ricketts, Bracewell & Patterson, Austin, Texas, December 6, 1996.
[ 2 ] Isaac D. Benkin, "Alternative Dispute Resolution: A Primer for Utility Managers," Electrical World (July 1993), p. 9.
[ 3 ] Center for Public Policy Dispute Resolution, Activity Report and 1998-99 Special Item Legislative Appropriation Request (Austin, Texas, August 31, 1996), p. 4.
[ 4 ] Interview with Jetta Todaro, mediator, Austin, Texas, November 21, 1996.
[ 5 ] V.T.C.A., Civil Practice and Remedies Code SS154.027.
[ 6 ] Center for Public Policy Dispute Resolution, Activity Report and 1998-99 Special Item Legislative Appropriation Request, p. 15.
[ 7 ] Vernon's Ann. Civ. St. art. 1446c-O, SS2.057(d).
[ 8 ] 16 T.A.C. SS23.67(s).
[ 9 ] U. S. Congress, Telecommunications Act of 1996, SS251-252.
[ 10 ] 16 T.A.C. SS22.301-SS22.310.
[ 11 ] Secretary of State, State of Texas, 21 Texas Register 8484-8485, September 3, 1996.
[ 12 ] Interview with Bill Magness, Office of Policy Development, Public Utility Commission of Texas, Austin, Texas, December 1, 1996.
[ 13 ] Interview with Jan Summer, executive director, Center for Public Policy Dispute Resolution, University of Texas, Austin, Texas, November 20, 1996.
[ 14 ] Interview with Jetta Todaro.
[ 15 ] V.T.C.A., Civil Practice and Remedies Code SS154.052.
[ 16 ] Interview with Jetta Todaro.
[ 17 ] Public Utility Commission of Texas, "Agenda, Alternative Dispute Resolution Workshop," Austin, Texas, December 8, 1994.
[ 18 ] Vernon's Ann. Civ. St. art. 1446c-O, SS2.212(d), SS2.255(e), SS3.2532(b).
[ 19 ] 30 T.A.C. SS264.1.
[ 20 ] Interview with Carl Forrester, director of Alternative Dispute Resolution, Texas Natural Resource Conservation Commission, Austin, Texas, November 21, 1996.
[ 21 ] National Regulatory Research Institute, Missions, Strategies, and Implementation Steps for State Public Utility Commissions in the Year 2000: Proceedings of the NARUC/NRRI Commissioners Summit (Columbus, Ohio, May 1995), p. 12.
[ 22 ] Interview with Herbert Nurick, ADR mediation coordinator, and Charles Hilmer, mediator, Office of Administrative Law Judge, Public Utility Commission, Harrisburg, Pennsylvania, January 8, 1997.
[ 23 ] Interview with Jeffery Stockholm, administrative law judge, Office of Administrative Hearings, Public Service Commission, Albany, New York, January 9, 1997.
[ 24 ] Herbert J. Martin, "Alternative Dispute Resolution: Coming to Proceedings Near You," Public Utilities Fortnightly, (March 1, 1991), p. 25.
[ 25 ] Interview with Paula Mueller, director, Legal Administration Division, Public Utility Commission of Texas, Austin, Texas, December 11, 1996.
[ 26 ] Interview with Mel Waxler, mediator, Austin, Texas, November 22, 1996.
[ 27 ] Texas Sunset Advisory Commission, Staff Evaluation: Office of Public Utility Counsel (Austin, Texas, April 1992), p. 20.
[ 28 ] Vernon's Ann. Civ. St. art. 1446c-O, SS1.054(a)(2).
[ 29 ] U. S. Congress, Telecommunications Act of 1996, SS252.
[ 30 ] 16 T.A.C. ß22.301-SS22.310.
[ 31 ] Interview with Rick Guzman, assistant public counsel, Office of the Public Utility Counsel, Austin, Texas, December 10, 1996.
[ 32 ] Interview with Suzi Ray McClellan, public counsel, Office of the Public Utility Counsel, Austin, Texas, October 18, 1996.
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