In any case, one could also argue that the HO has earned a de facto easement based on the neighbor not complaining about the existing device that extends into the setback.
Easement will not be granted.
There is also a possibility that the property line is not exactly where the inspector might have thought it is. It is also not unusual for local codes to prohibit installing a fence under the conditions described.
The boundary is considered to be where the two owners believe it to be until one of them has evidence it is elsewhere, such as a site survey.
I think there are a lot of good arguments that the HO could make. Whether the pin heads at the inspection department listen is another thing.
Best argument is that a repair not an upgrade was made.
Possible scenario if left in place:
Other property owner builds a fence.
Panel property owner can't get service for the panel until it gets moved.
Possible legal actions all around.
If the judge understands property rights then the decision permits building the fence. The panel owner has to solve their own problem. And pay legal expenses.