The U.S. Court of Appeals for the Fifth Circuit vacated the Pipeline and Hazardous Materials Safety Administration’s (PHMSA’s) final order in which the agency concluded that ExxonMobil Pipeline Co. had violated several pipeline safety regulations in the Pegasus pipeline spill, and remanded the $2.6 million penalty in light of the court’s findings (ExxonMobil Pipeline Co. v. U.S. Department of Transportation, No. 16-60448, 8/14/17).
On appeal, ExxonMobil challenged certain findings in the agency’s final order, and the court determined that PHMSA had acted arbitrarily and capriciously in concluding that ExxonMobil had failed to properly assess the pipeline’s integrity prior to the spill.
In March 2013, ExxonMobil’s Pegasus Pipeline ruptured near Mayflower, Arkansas, and spilled thousands of barrels of oil. Following the spill, PHMSA conducted an investigation, and issued a final order finding that ExxonMobil had violated several pipeline safety regulations, and assessing the $2.6 million penalty.
Integrity Management Plan. At issue was ExxonMobil’s integrity management plan (IMP), that is required under the Pipeline Safety Act. Pipeline operators must create an IMP for pipelines that could affect a high consequence area, and establish an integrity assessment schedule by evaluating numerous risk factors for pipeline segments, said Judge Jennifer Walker Elrod, writing for the court. Pipeline operators must also prioritize pipeline segments that must be reassessed every five years.
In addition to these requirements, any pipeline constructed of pre-1970 low-frequency electric resistance welded steel (LF-ERW) must be assessed for susceptibility to longitudinal seam failure, the court explained. In 2004, PHMSA issued the Baker Report, which provides a methodology for determining seam-failure susceptibility by using a decision tree that considers several factors.
ExxonMobil included the Baker Report decision tree in its IMP for Pegasus, and conducted periodic integrity assessments of the pipeline, said the court. The periodic assessments showed past failures in the pipeline, but not because of either pressure-cycling induced fatigue or selective seam corrosion, which are the two factors in the Baker Report decision tree.
Agency Investigation. Following the rupture and spill in 2013, PHMSA’s investigation lead the agency to determine that ExxonMobil had failed to properly assess the pipeline’s integrity. Specifically, PHMSA determined that ExxonMobil erroneously determined that the pipeline was not susceptible to longitudinal seam failure. The pipeline had 11 seam failures during hydrostatic testing in 2005 and 2006, and PHMSA concluded that the test results strongly indicated that the pipeline was susceptible to seam failure.
Agency was Arbitrary and Capricious. The appellate court concluded that PHMSA’s determination was arbitrary and capricious, because the evidence supported the conclusion that ExxonMobil had carefully considered the risk factors as required by the Act and regulations.
ExxonMobil argued that it considered the risk factors, but that 49 C.F.R. § 195.452(e)(1) doesn’t require a certain outcome. PHMSA argued that the risk factors in light of the history of seam failures required ExxonMobil to conclude that the pipeline was susceptible to seam failure. PHMSA also contended that its interpretation of the regulation was entitled to deference under Auer v. Robbins.
PHMSA wanted deference applied to its interpretation of the term “considered” in the regulation that requires that certain pipeline risk factors be considered by the pipeline operator, said the court. Deference under Auer was not warranted, said the appellate court, because the wording in § 195.452(e)(1) is unambiguous.
The court then turned to the issue of whether ExxonMobil’s interpretation of the regulation was reasonable, and concluded that ExxonMobil had satisfied its obligation to consider the various risk factors by using the guidance in the Baker Report decision tree. The regulation is a process-based requirement, said the court, and not an outcome-based requirement as PHMSA tried to argue.
The regulation doesn’t create a strict-liability regime for pipeline operators that experience a leak after applying the risk factors, said the court, because the Act clearly indicates that Congress didn’t intend that outcome.
The court also noted that, even if it determined the regulation was ambiguous, PHMSA’s interpretation didn’t warrant Auer deference because the agency never gave fair notice of its interpretation of the regulation. The court explained that it has held that when an agency’s regulations provide for civil penalties, the agency must provide a clear standard of culpability. The regulation is silent on how operators are to determine seam failure susceptibility, and ExxonMobil was justified in applying the Baker Report decision tree, said the court.
The court therefore vacated PHMSA’s finding on five of the items in the final order that ExxonMobil challenged. The appellate court affirmed PHMSA’s determination on one other challenged item, that ExxonMobil failed to develop and follow a written integrity management program.
The court vacated the penalties for the five items where it determined PHMSA acted arbitrarily and capriciously, which was a $2 million penalty. The court remanded the remaining penalty, because while it upheld PHMSA’s determination on item 8, it wasn’t clear if that was a causal factor in the spill.
The court also partially vacated the agency’s compliance order based on the vacatur of the five items in the final agency order.
Judge James Graves concurred in part, agreeing with the majority that ExxonMobil didn’t have sufficient notice of the agency’s interpretation of § 195.452(e), but found the agency’s interpretation of the regulation should have been afforded deference.
By Denise Ryan DRyan@fosterreport.com
 49 U.S.C. §§ 6011, et seq.; 49 C.F.R. Parts 190-199.
 519 U.S. 452 (1997).
 Diamond Roofing Co. v. OSHRC, 528 F.2d 645, 649 (5th Cir. 1976).
This article appears as published in The Foster Report No. 3162, issued August 18, 2017
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