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Wednesday, November 17, 2010

Sides in Pennichuck deal deserve kudos

Scott Flegal

Were you surprised when you heard the news that the city of Nashua had settled its dispute with Pennichuck Corp.? I suspect not.

After all, the statistics say that more than 98 percent of cases filed in court settle prior to final judgment. But kudos to both sides for taking matters into their own hands and settling the case without further court involvement. It could not have been easy.

Like all negotiations, this case contained structural barriers that had to be overcome for the parties to come to agreement. There were a number of constituencies whose interests needed to be accommodated before a settlement could occur.

On the Pennichuck side of things, shareholder interests were an obvious concern. But regulatory obligations also complicated the picture, and that makes negotiating tougher. These obligations involved not only state issues associated with the New Hampshire Public Utilities Commission, but federal issues involving Pennichuck’s status as a publicly traded company.

From the city’s perspective, there may have been even more structural barriers to overcome. The current mayor inherited this situation from her predecessor. She had to carve out a position on the issue that respected the work done so far on the case. She also had to find a way to balance the interest in preserving the autonomy of her office with Right-to-Know law issues and keeping the Board of Aldermen informed and engaged. Given that most negotiators prefer to negotiate privately, this had to be a significant challenge. Finally, of course, the negotiating team also had to keep at the forefront of their efforts the interests of the real stakeholders here: the citizens of Nashua.

Most negotiations also contain interpersonal barriers to agreement that need to be overcome, and this negotiation was no exception. There was a lot of history here. The parties had done business together for decades. There have been relationships between Pennichuck management and the city that have flourished, and others that have died. The Pennichuck board of directors is still populated mostly by local community leaders, many of whom have had a stake in this relationship for years. That sort of board composition in a public company is pretty unusual. What did this uncommon familiarity breed as this conflict wore on? Maybe not contempt, but it probably didn’t accelerate the settlement process either.

Despite the fact that these challenges have been overcome, I would be remiss if I failed to point out that there were also characteristics present in the dispute that suggest that it might have been settled sooner. First, it was at its core a dispute between a customer and a supplier. That dynamic, believe it or not, creates more opportunities for forward progress than disputes between suppliers, or between customers. Meaningful trade opportunities existed that might have been leveraged early on in the process to generate settlement momentum.

Even more importantly, there was an economic reality in play here that suggested that a sale of Pennichuck to the city in one form or another was inevitable. Simply put, the city of Nashua could afford to pay more for Pennichuck than any other likely suitor. Businesses in private industry do not have municipal bonding capability and the access to cheap capital that the city of Nashua had in this case. In the end, that no doubt helped the parties close the gap between them.

Nonetheless, like so many cases, this one played out in court for years before the parties were able to resolve their differences. Might it have been settled sooner with less expense? Not without a major commitment of resources by both sides to collaboratively solve the problem. In addition to a change in the mindset of the parties, it would have required third-party intervention. A mediator with experience mediating large public disputes could have been the deal advocate needed to drive the settlement process faster. MIT professor and Harvard Program on Negotiation executive Larry Susskind might have been able to pull it off. He was right down the road in Cambridge. But for the reasons cited here and no doubt many others, the parties didn’t see third party intervention as a viable option.

Was this a good deal for the city of Nashua? Truthfully, it cannot be fairly evaluated for years. The sunken costs associated with this process are enormous, and they are not over yet. Getting this deal to closure will no doubt entail thousands more in legal fees. Remember too that the out-of-pocket costs incurred by both sides here arguably impact the value of the deal. What percentage of Pennichuck rate increases over the past few years were related to the dispute with Nashua? This has already been an expensive transaction for Nashua citizens. Will the benefits of ownership be sufficient to overcome those costs, and others that may arise down the road? Only time will tell.

In the meantime though, we should be thankful for the leadership of both parties for having the common sense to commit to resolving this dispute without further court involvement. That, we can be sure, was in all of our best interests.

Scott Flegal is a business lawyer and mediator. Visit him online at www.flegal.com or www.negotiationworks.org.