With the Pipeline and Hazardous Materials Safety Administration recently releasing advisories relating to records and reporting for gas transmission pipelines, what challenges will industry face in upholding the new standards, and what are the legal consequences for noncompliance? During today's OnPoint, Bizunesh Scott, a partner in Steptoe & Johnson's energy practice and a former chief general counsel to PHMSA, discusses the reasoning behind the new standards and explains the chief challenges for the pipeline industry as it works to comply. Scott also explains how the recent surge of interest in pipeline acquisition and construction could pose financial and legal risks for new industry players.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Biz Scott, a partner in Steptoe and Johnson's energy practice and a former chief general counsel to the Pipeline and Hazardous Materials Safety Administration. Biz, thanks for joining me today.
Bizunesh Scott: Oh, thank you for having me.
Monica Trauzzi: Biz, PHMSA recently released advisories relating to records and reporting for gas transmission pipelines. What are the issues the agency saw with current recordkeeping?
Bizunesh Scott: You know, the industry does have a sort of self-policing standard that PHMSA overseas and I think over the years in their various inspections, they've seen issues and addressed them in a very individual level. However, some more recent incidents have really questioned, you know, what records look like and what they should look like going forward. And so that's one of the things that they're trying to really address, is making sure that the industry has a sort of consistent standard, if you will. Now, unfortunately, I think they took the standard from sort of one of the players that wasn't quite attuned to PHMSA standards, because it was a company that was being regulated by the state and really took that to the entire industry and that's what the industry is facing right now, is a standard that was set for one company really being applied to the entire industry without much comment by the industry.
Monica Trauzzi: And when we spoke earlier, you likened this to the IRS coming and asking you for the last 15 years of records, when they've only asked you to keep seven years of records. So, how do you see this posing difficulty for industry?
Bizunesh Scott: Well, depending on how you happen to do your recordkeeping, it's going to impact whether or not you're now compliant. For example, many people will take the data from a lot of information, so you may know your household income and you may know the number of people in your house, but you don't necessarily know what you put on each line of your tax return. Very similar, they, the companies, will take the relevant data or certainly data that they were told was relevant then or data that they needed for their operations, and they'll put that data in a way that, put that data in systems for safety, for compliance, for operations. Now PHMSA is saying, well, we want you to look at maybe some of the original documents. Well, they may have been transcribed. They may be put into a context that you can't now reconstitute into that original piece of paper. One of the things that PHMSA mentioned was that a document had to have a signature. Well, if the document is now data on a form in a computer, well, it may not have a signature. Now, I do want to note that PHMSA is being flexible with those things. But the industry really hasn't had an opportunity to talk through all of the different options that exist right now for data and really come up with something comprehensive and then make sure that its forward-looking and make sure that when you're talking about how to go backwards with compliance, that there is a whole program. So we talked about records. Well, if you don't have the records the way PHMSA is now suggesting, you know, through, you know, and that's not necessarily to say that you weren't compliant, but it's that you don't have the piece of paper with the signature and you don't have enough of the information that PHMSA wants, PHMSA hasn't quite told you what's going to happen.
Monica Trauzzi: So, we don't know what the legal consequences will be at this point?
Bizunesh Scott: No, we don't. I mean we can assume that there may be some potentials in terms of penalties, some money, but what we really care about is pipeline safely and I think what the industry cares about is knowing what they are going to need to do to ensure that their regulators and the state regulators are comfortable with the actions that they've taken to ensure that they have the records to support their pipeline safety program.
Monica Trauzzi: As someone who worked within the walls of PHMSA not too long ago, do these changes make sense on the whole?
Bizunesh Scott: The changes make sense. I think that the process that PHMSA has really been forced to use to implement them, unfortunately, doesn't have the public comment. So this isn't a normal regulatory process with notice and comment from the industry so that they can get a fulsome understanding of what the records look like. Instead, you've taken records from incidents and records from particular situations, so it's not necessarily industry standard that they've looked at, and taken that to build a program. You know, that's a function of time. There certainly is a congressional mandate and they are trying to meet the time and the Congressional mandate and, you know, I do think it is hard to have sympathy for going slow on safety. That said, I do think that, and I think many in the industry will say that we do want some certainty and ensuring that they know, well, if the pipeline records aren't up to the standard now, one, is that going to be the standard for the next 50 years? Are we sure that this is the standard? Because, obviously, there was a standard created when the regulations were put into place that now people are questioning. And then the second thing is giving people an opportunity to know what the result is going to be. So, for example, if I have to report that my pipeline doesn't have the records, I'd like to be able to also report, and I'd also like to be able to do this for the safety of the pipeline to say and these are the steps that I've taken. And PHMSA has continually said that they haven't yet indicated what steps that you need to take to make sure that your inadequate records are supplemented with a safety program.
Monica Trauzzi: So, is there enough communication happening between industry and regulators? I mean what's your sense of sort of that interplay when it comes to changing the regulatory framework and compliance?
Bizunesh Scott: I do think that PHMSA is doing a good job of everything that we call informal communications. The question really is should this have been a regulatory change with full notice and comment? Obviously, the downside for that is that it takes time. You know, it takes, on average, 18 months to two years to get a rule out. But that would have allowed an opportunity for everyone in the public that wanted to comment to provide an opportunity to comment. The way the advisory bulletin came out, I think there were some, and I wasn't a part of this piece of it, but there were some discussions and PHMSA certainly used the information that it had from its inspections and enforcement and its own lessons learned. But perhaps they didn't have enough of the folks that were doing it right. Perhaps they didn't have enough of an understanding of the IT and the data and how a pipeline uses that data operationally and with compliance. So they didn't do a census, they didn't do an information collection, and they didn't do public comment. So, you know, they are definitely meeting congressional mandate, they're definitely meeting some of the NTSB recommendations, but industry is scrambling a bit because there's a lot of gray right now.
Monica Trauzzi: Pipeline acquisition and construction is really hot right now. There are a lot of companies trying to jump in on this. Why do you think this could pose a potential business risk to all these companies who are trying to get in on the action?
Bizunesh Scott: Well, the pipeline operator assumes all of the risks. So any pipeline operator that, any pipeline company that is acquiring assets, they traditionally have not done due diligence on the safety and compliance program, specifically on the pipes and really to understanding how the records support the operation of the pipe and the fitness of the pipe. If that has not changed, if people are not aware of that, they could end up purchasing an asset and quickly realizing that they have a lot of liability with respect to PHMSA finds, other undefined things to come in terms of, you know, how you're going to fix it. Very likely that there's going to be a lot of testing, which is expensive, and if you can't meet the test, you may have to replace or do some significant repair on your pipeline. So, there are some unknown liabilities there. That said, I think the good news is that due diligence is the way to go so that you manage your risks within the deal.
Monica Trauzzi: All right, we're going to end it right there. Thank you for coming on the show.
Bizunesh Scott: All right, thanks.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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