I don't understand what exactly the encounter system is, then: I thought it was the way to setup each encounter: "an encounter should have X number of enemies, according to the level of the party, adjusting up or down for difficulty", wherever it happened, not blocking a sandbox encounter; and not a fixed "here there should be an encounter, and here another", as I understand the answer. Since I have also seen at least one successful sandbox setup, I think that my interpretation of "encounter system" must have some flaws.
Conley seems to be suggesting that you build the world first, populate it with creatures, and ignore scaling the enounter difficulties to the players. That is, if you place a level 20 dragon in a cave, and the players decide to explore said cave at level 5, they're still going to have to deal with that level 20 dragon. This is opposed to the "normal" style, where you would create encounters that the suit the PCs' level.
In sandbox play, It makes sense to not adjust encounter levels, but in a more narrative game, it would make sense the challenges the players encounter are generally challenges that they can deal with.
Note that neither is right nor wrong. They're just different ways of making use of the encounter-building rules.
In computer gaming terms, Sandbox style is Morrowind, Encounter style is Oblivion. The Sandbox style is somewhat more realistic, in that the players can encounter things that are significantly more or less powerful than they are. However, this can also lead to frustration or boredom on the part of the players if they constantly have to deal with these kind of things. The Encounter style is designed to constantly scale with the player's power, which should keep the frustration or boredom to a minimum. However, if the party is particularly well or badly synergised, they might find 'at-level' encounters too difficult or easy, and run into the same problems.
Also note that almost none of this advice applies to systems outside of D&D. D&D is really the only game that so rigidly sets power levels of critters and players. More free-form character systems remove this rigid power measure, and makes encounter balancing much more complicated. D&D prior to 4 also suffered from this problem when characters were built that did not excel at combat.
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