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Exxonmobil Pipeline Co. v. United States Department of Transportation

United States Court of Appeals, Fifth Circuit

August 14, 2017

EXXONMOBIL PIPELINE COMPANY, Petitioner,
v.
UNITED STATES DEPARTMENT OF TRANSPORTATION; PIPELINE AND HAZARDOUS MATERIALS SAFETY ADMINISTRATION; OFFICE OF PIPELINE SAFETY, Respondents.

         Petition for Review of a Final Order Issued by the Pipeline and Hazardous Materials Safety Administration

          Before ELROD, SOUTHWICK, and GRAVES, Circuit Judges.

          JENNIFER WALKER ELROD, Circuit Judge

         ExxonMobil Pipeline Company petitions for review of a Pipeline and Hazardous Materials Safety Administration order following the release of several thousand barrels of crude oil from a pipeline it owned and operated. ExxonMobil specifically challenges Items 1-4, 7, and 8 of the agency's final order. We vacate Items 1-4 and 7 and affirm the agency with regard to Item 8 but remand with an instruction to reevaluate the basis for the penalty associated with this violation.

          I. Background

         The 859-mile long Pegasus Pipeline transports crude oil from Patoka, Illinois to Nederland, Texas. In March 2013, the Pegasus Pipeline ruptured, spilling several thousand barrels of oil near Mayflower, Arkansas. The pipeline is owned and operated by ExxonMobil Pipeline Company. In the wake of the oil spill, the Pipeline and Hazardous Materials Safety Administration (the "agency"), an operating administration of the United States Department of Transportation, conducted an investigation. The agency ultimately issued a final order, concluding that ExxonMobil violated several pipeline safety regulations. The agency assessed a $2.6 million civil penalty and ordered ExxonMobil to take certain actions to ensure compliance with those regulations.

         A. Regulatory Framework

         The Pipeline Safety Act, 49 U.S.C. § 60101 et seq., gives the Secretary of Transportation regulatory and enforcement authority to take actions to protect the public against risks to life and property posed by pipeline transportation and pipeline facilities. The statute provides that the Secretary of Transportation "shall prescribe minimum safety standards for pipeline transportation and for pipeline facilities." 49 U.S.C. § 60102(a)(2). Pursuant to this authority, the agency has promulgated regulations establishing minimum safety standards. See 49 C.F.R. pts. 190-199.

         The Pipeline Safety Act and the agency's integrity management regulations require each pipeline operator to create what is known as an integrity management program ("IMP") for all pipelines that could affect a high consequence area. High consequence areas include populated areas, areas that are unusually sensitive to environmental damage, or commercially navigable waterways. 49 C.F.R. § 195.452. A pipeline operator's IMP is to be specific to its own pipeline systems. The purpose of developing an IMP is to assist the operator in "address[ing] the risks on each segment" of its pipelines. Id. § 195.452(b)(1).

         An IMP must include a written plan to conduct periodic integrity assessments of each of the operator's pipelines and to address any problematic conditions discovered by those assessments. Id. §§ 195.452(b)(3), (f)(2)-(5). The pipeline integrity regulations require operators to "establish an integrity assessment schedule that prioritizes pipeline segments for assessment." Id. § 195.452(e)(1). This integrity assessment schedule is informed by the pipeline operator's threat identification and risk assessment process. See id. §§ 195.452(e), (j)(5). As part of this process, operators are tasked with evaluating numerous risk factors for each pipeline segment, including, inter alia, the results of the previous integrity assessment; pipe material, manufacturing, and seam type; and leak history. Id. § 195.452(e). The regulations state that the pipeline operator "must consider" these factors in establishing an assessment schedule. Id. § 195.452(e)(1). Based on the results of an operator's risk assessment analysis, the operator must prioritize its pipeline segments for reassessment on five-year intervals. Id. § 195.452(j)(3).

         The pipeline integrity regulations also set forth the available methods by which the operator may conduct the periodic integrity assessments. The regulations list three assessment methods available to operators: (1) in-line inspections; (2) hydrostatic pressure testing;[1] and (3) external corrosion direct assessment. Id. § 195.452(j)(5). An additional requirement may apply to pipelines constructed of a certain type of pipe known as pre-1970 low-frequency electric resistance welded steel ("LF-ERW") pipe because this type of pipe is known to have a higher risk of seam failure than other types of pipe due to manufacturing defects. According to the regulations, if-and only if-the LF-ERW pipeline segment is shown to be "susceptible to longitudinal seam failure, " the methods an operator selects to assess that segment "must be capable of assessing seam integrity and of detecting corrosion and deformation anomalies." Id.

         The pipeline integrity regulations are silent as to how operators must determine whether LF-ERW pipe is susceptible to longitudinal seam failure. However, in 2004, the agency commissioned and published a third-party report, referred to here as the Baker Report, which extensively discusses pipeline metallurgy. Section 4 of the Baker Report contains a methodology for determining seam-failure susceptibility. This methodology, illustrated by a decision tree, considers, inter alia, pipe and seam characteristics, in-service and hydrostatic test failures, the cause of those failures, and operating stress levels to determine whether a given segment of LF-ERW pipe is susceptible to seam failure. As outlined in the Baker Report decision tree and as testified to by Dr. John F. Kiefner, one of the authors of the Baker Report, "seam related in-service failures and/or hydrostatic test breaks or leaks by themselves do not indicate that a pipeline is susceptible to seam failure." Rather, according to the decision tree and the Baker Report's co-author, whenever a seam-related in-service failure or hydrostatic test failure occurs, these failures should be analyzed for two primary causes that would indicate susceptibility to seam failure: pressure-cycle induced fatigue and selective seam corrosion.

         In the event that a pipeline operator fails to comply with the federal Pipeline Safety Act or the integrity management regulations, the agency may issue compliance orders and assess civil administrative penalties after notice and a hearing. 49 U.S.C. §§ 60118(b), 60122.

          B. ExxonMobil's Application of the Regulations

         Under ExxonMobil's IMP plan, its process for analyzing seam failure susceptibility of LF-ERW pipe is based on the methodology outlined in the Baker Report decision tree. ExxonMobil retained the services of Dr. Kiefner to assist it in applying the pipeline integrity regulations and the Baker Report's guidance to its IMP plan. ExxonMobil has conducted a series of periodic integrity assessments on the Pegasus Pipeline, each time applying the framework provided by the Baker Report decision tree. Following each assessment, ExxonMobil concluded that the Pegasus Pipeline segment at issue in this case was not susceptible to longitudinal seam failure and therefore did not warrant prioritization over other pipeline segments for reassessment.

         ExxonMobil first evaluated the Pegasus Pipeline's susceptibility to longitudinal seam failure in late 2004 through early 2005. Its evaluation took into account the pipeline's manufacturing history, pipe materials, operating and maintenance history, leak history, as well as the results of prior pressure tests and integrity assessments. Hydrostatic tests performed in 1969 and 1991 revealed several seam failures and a minor in-service seam leak occurred in 1984.[2] However, despite these seam failures, ExxonMobil determined that the pipeline was not susceptible to seam failure because the past failures were not caused by either pressure-cycling induced fatigue or selective seam corrosion- the two factors enumerated in the Baker Report decision tree.

         A year after the initial evaluation of the pipeline, ExxonMobil conducted a hydrostatic test for the Pegasus Pipeline. The test resulted in eleven seam-related failures, and ExxonMobil replaced the failed joints and hired a third-party expert in metallurgy to conduct an analysis on why the joints failed.

          Because the analysis did not reveal evidence of either pressure-cycling induced fatigue or selective seam corrosion, ExxonMobil once again concluded that the LF-ERW pipe segments were not susceptible to longitudinal seam failure.

         In 2007, ExxonMobil again evaluated the Pegasus Pipeline's susceptibility to longitudinal seam failure. ExxonMobil's evaluation took into account the pipeline's manufacturing history, pipe materials, operating and maintenance history, leak history, the results of prior pressure tests and integrity assessments, as well as the results of subsequent metallurgical analyses. Once again, applying the Baker Report decision tree, ExxonMobil concluded that the line was not susceptible to longitudinal seam failure. Two years later, ExxonMobil again evaluated the Pegasus Pipeline for susceptibility to seam failure and reached the same conclusion.

         ExxonMobil performed an in-line inspection in 2010 to assess the integrity of the Pegasus Pipeline with two in-line inspection tools it had deemed appropriate. The following year, ExxonMobil again reevaluated the pipeline's longitudinal seam failure susceptibility determination, taking into account all of the same information as before in addition to the results of the 2010 in-line inspection. Again, ExxonMobil concluded that the pipeline was not susceptible to longitudinal seam failure.

         In late 2012 through early 2013, ExxonMobil conducted another inspection of the Pegasus Pipeline with an in-line inspection tool known as a TFI seam/crack tool. It ran the tool through the section of line where the oil release would eventually occur shortly before the release. After the in-line inspection was complete and while the data from the inspection was being processed, the Mayflower oil spill occurred. Even though the third-party vendor processing the inspection results was aware that a seam failure had occurred, the vendor could not identify a defect at the point of rupture.

         C. The Agency's Findings

         In the wake of the Mayflower release, the agency conducted an investigation and determined that the cause of the release was a manufacturing defect in the seam of the Pegasus Pipeline's LF-ERW pipe. The agency concluded that ExxonMobil's IMP plan had not properly accounted for the risk of longitudinal seam failure and that this was a contributing factor in the Mayflower release. The agency found that ExxonMobil's determination that the pipeline was not susceptible to longitudinal seam failure was erroneous and that ExxonMobil failed to properly assess the pipeline's integrity. The agency also concluded that ExxonMobil's IMP plan was deficient in a number of other respects.

         The agency's final order stated that ExxonMobil violated section 195.452(e)(1) "by failing to properly consider the susceptibility of its ERW pipe to seam failure when establishing a continual integrity assessment schedule based on all risk factors on the Pegasus Pipeline." The agency found that ExxonMobil's conclusion that the relevant portion of the pipeline was not susceptible to seam failure was "flawed" "[g]iven the history of seam-related failures both in-service and during pressure testing of the pipeline." Specifically, the agency rejected ExxonMobil's position that the Baker Report permitted it to conclude that its pipe was not susceptible to seam failure because the prior seam failures did not exhibit evidence of fatigue or preferential seam corrosion. The agency reasoned that the pipeline's past seam failures-including eleven seam failures during the 2005-2006 hydrostatic test-"strongly suggested the ERW pipe was susceptible to seam failure" and ExxonMobil's conclusion to the contrary was unreasonable.

         The agency ultimately cited ExxonMobil for nine separate violations of the regulatory requirements. According to the agency's final order, violations 1 and 4 are based on § 195.452(e)(1), which requires operators to "consider" pipeline risk factors, including seam type and manufacturing information, among other factors. Violation 2 is based on subsection (j)(3), which requires an operator to schedule continual assessments of susceptible pipelines at five-year intervals. Violations 3, 7, 8, and 9 are based on subsection (b)(5), which requires operators to establish and implement an integrity management program. Violation 5 is based on subsection (h)(1), which requires operators to take prompt action to address conditions discovered through an integrity assessment. Finally, violation 6 is based on subsection (h)(2), which requires operators to promptly discover a condition within 180 days of an integrity assessment. The agency assessed a civil penalty in the amount of $2, 630, 400. The agency also issued a compliance order in which it directed ExxonMobil to take a number of actions to abide by the pipeline integrity regulations.

         Now on appeal, ExxonMobil challenges Items 1-4, 7, and 8 of the agency's final order. ExxonMobil does not challenge the violations cited in Items 5, 6, or 9.

         II. Standard of Review

         The standard of review we apply to the agency's final order is prescribed by the Administrative Procedure Act, 5 U.S.C. § 706. See 49 U.S.C. § 60119(a)(3). Under the APA, we uphold an agency's actions, findings, and conclusions unless we determine them to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A); see also Allred's Produce v. U.S. Dep't of Agric., 178 F.3d 743, 746 (5th Cir. 1999). "Arbitrary and capricious review focuses on whether an agency articulated a rational connection between the facts found and the decision made." Pension Benefit Guar. Corp. v. Wilson N. Jones Mem'l Hosp., 374 F.3d 362, 366 (5th Cir. 2004). "We must disregard any post hoc rationalizations of the [agency's] action and evaluate it solely on the basis of the agency's stated rationale at the time of its decision." Luminant Generation Co., L.L.C. v. E.P.A., 675 F.3d 917, 925 (5th Cir. 2012). The party challenging the agency's action bears the burden of establishing that the agency's determination was arbitrary and capricious. La. Pub. Serv. Comm'n v. FERC, 761 F.3d 540, 558 (5th Cir. 2014).

         III. Items 1-4 and 7

         We first address whether the agency's interpretation of the pipeline integrity regulations should be afforded Auer deference. Because the regulations are unambiguous, we conclude that Auer deference is inappropriate. We next address whether the agency acted in an arbitrary and capricious manner when it found ExxonMobil to be in violation of the regulations under Items 1-4 and 7 of the final order. Because the regulations unambiguously instruct pipeline operators to "consider" certain risk factors, and because the evidence demonstrates that ExxonMobil did carefully consider those factors, we conclude that the agency's decisions pertaining to Items 1-4 and 7 of its final order were arbitrary and capricious.

         A.

         The central issue before us is what is required of pipeline operators by the term "consider" within the context of § 195.452(e)(1) of the pipeline integrity management regulations.[3] As noted, § 195.452(e)(1) of the regulations requires pipeline operators to

establish an integrity assessment schedule that prioritizes pipeline segments for assessment . . . . An operator must base the assessment schedule on all risk factors that reflect the risk conditions on the pipeline segment. The factors an operator must consider include, but are not limited to:
(i) Results of the previous integrity assessment, defect type and size that the assessment method can detect, and ...

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