The Pipeline and Hazardous Materials Safety Administration (PHMSA) has recently completed its decade-long rulemaking exercise that increases regulation of onshore natural gas pipelines. As a result, pipeline operators will now face new legal issues that could pose challenges to their businesses. PHMSA’s new Final Rule on Valve Installation and Minimum Rupture Detection Standards may also impose additional legal and compliance costs on pipeline operators.
PHMSA Has Extended Its Authority Over the Nation’s Pipelines
The Rule’s new requirements represent a dramatic expansion of PHMSA’s regulatory authority. They come in the wake of a congressional directive after a high-profile pipeline rupture in California. Now, over 400,000 miles of onshore gas gathering pipelines are subject to regulation.
The new Rule created a new category of pipelines that are subject to regulation, known as Type C pipelines. These pipelines are located in rural areas. The extent of an operator’s obligations depends on the following:
- The diameter of the pipeline
- Whether the pipeline is in the radius of a building occupied by people
Requirements for Type C and Type R Pipelines
For any Type C pipeline, there are new requirements for design, construction, initial inspection, and testing. Larger diameter pipelines will have even more requirements regardless of where they are located. According to PHMSA, approximately 91,000 miles of pipeline are subject to new safety requirements under the new Rule.
There is also a new category of pipelines that are called Type R pipelines. These are pipelines that do not fit into the existing Type A or B categories or the new Type C category.
Type R pipelines must now comply with the incident and annual reporting requirements that the other types of pipelines must follow. Even though these do not seem like detailed regulations, any reporting requirement raises potential legal issues for a pipeline operator that was not previously subject to it. Do not make the mistake of thinking that reporting requirements cannot be every bit as substantive and complex as design and safety mandates.
These new requirements were the third part of a so-called “mega rule” that overhauled PHMSA’s regulatory authority and imposed new requirements. Because the Rule dramatically expanded PHMSA’s authority, even if pipeline operators were not previously subject to the agency’s regulations, they must review the Rule to determine whether they have new legal obligations. It does not matter whether their pipelines are exempt from Federal Energy Regulatory Commission (FERC) regulations. Chances are that practically every pipeline operator will now have obligations to meet under at least some regulatory requirements, even if none existed before.
The Rule Is Heavily Prescriptive
Like many recent federal regulations, these new pipeline regulations disregard a risk-based approach in favor of prescriptive regulations. In the past, federal agencies have allowed regulated entities to best determine their own compliance using broad-based principles. The Rule, however, formalizes best practices across the industry, regardless of what pipeline operators did before. Even those that have had sterling safety records will need to invest substantial resources because of the Rule’s new requirements, which were inspired by high-profile pipeline failures and were enacted to help prevent future ones. Under the Biden Administration, federal agencies have taken regulatory leeway away from businesses. This approach raises legal costs and often forces companies to spend additional resources to comply with one-size-fits-all regulations.
Confidential Information Could Be at Risk
One major concern with the Rule is that by following the reporting requirements in it, pipeline operators may need to turn over confidential information. The Federal Rules of Civil Procedure, applicable to civil lawsuits filed in federal court, afford a certain degree of protection to an attorney’s work product. Normally, an attorney’s work product prepared in anticipation of litigation is confidential and protected from discovery. But documents created to comply with an external requirement, such as laws, regulations, or rules, like PHMSA’s new safety requirements, generally are not recognized as attorney work product and do not receive the same confidentiality protections as attorney work product typically receives. Thus, if a pipeline operator shares information with the government under a new PHMSA reporting requirement, it may mean that it has waived the protection of the work-product doctrine.
When investigating and filing information with the federal government, a pipeline operator will need to take pains to balance its regulatory requirements with protecting sensitive information that could be later used against it. One potential solution is to conduct parallel and separate investigations of the same incident. One investigation could fulfill the reporting requirement, while the other investigation could help the pipeline operator prepare for potential litigation. However, the report to the federal government could contain various admissions that may place the pipeline operator in a precarious legal position.
Initial Challenges that Pipeline Operators Will Face
Although PHMSA may have some discretion in enforcing the Rule at first, one can be certain that its future enforcement efforts will be vigorous. In the meantime, here are some challenges that pipeline operators will face as they navigate the initial regulatory environment after the finalization of the Rule.
- Pipeline operators will need to hire a number of new compliance staff members, even when the labor market in the natural gas industry is already tight
- Pipeline operators will need to learn their own lessons about compliance and revise their policies and procedures, ensuring that they are followed
- Compliance with the Rule’s new requirements will need to be meticulously documented, so pipeline operators will be in a position to respond when questioned by PHMSA
- Operators will need to build significant data collection and management operations, so they can make the necessary annual reports (Some older regulated pipelines may not have had any of this infrastructure in place)
Compliance with PHMSA’s new requirements under its Rule will now be an ongoing obligation that will require continuous reevaluation and application of lessons learned. The sooner operators invest in complying with the new obligations, the less likely they’ll be to come under scrutiny from PHMSA. Pipeline operators will need to work closely with experienced energy attorneys regarding their compliance with the Rule, especially when it comes to learning how PHMSA is interpreting and enforcing the Rule.