Negotiated settlements: The development of legal and economic thinking

Negotiated settlements are a form of regulation of public utilities that is alternative or complementary to the conventional process of litigation. Since the early 1960s they have been seen primarily as a means of coping with a regulatory backlog and as saving regulatory processing time. More recently legal scholars and practitioners suggest that settlements better serve the needs of the parties, allow greater flexibility and innovation, and can achieve results that lie beyond the traditional litigated approach. Economists have had little to say about settlements. Recent research indicates a high proportion of settlements in some US and Canadian jurisdictions and confirms that settlements involve considerable innovation, notably the introduction of rate moratoria, multi-year incentive regulation and light-handed regulation, that otherwise might not have been possible. Subject to an adequate process, settlements allow market participants to make their own decisions instead of imposing the judgements, preferences and decisions of the regulatory agency. There is considerable scope for further research on the impact and policy implications of this practice.