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1 Number 1242 September 29, 2011 Client Alert Latham & Watkins Finance Department Pipeline Safety Snapshot: Potential New Legislative and Regulatory Changes to Pipeline Safety Requirements Taken together, the legislative and regulatory changes under consideration by the US Congress and PHMSA represent potentially sweeping changes to the scope of the federal government s regulatory authority over oil and natural gas pipelines, and if adopted, could impose significant new regulatory requirements and associated costs on pipeline operators. The federal government is considering a number of potentially far-reaching legislative and regulatory measures relating to pipeline safety. Heightened interest in strengthening pipeline safety laws and regulations results from a number of recent, highly publicized pipeline accidents, including a July 2011 spill of 42,000 gallons of oil into the Yellowstone River, a February 2011 natural gas explosion in Allentown, Pennsylvania that led to five fatalities and extensive property damage, a September 2010 natural gas pipeline explosion in San Bruno, California with eight fatalities and extensive property damage and a July 2010 spill of 843,000 gallons of oil in Michigan, among others. I. Proposed Legislation In April 2011, US Department of Transportation (DOT) Secretary Ray LaHood called on Congress to authorize the DOT to close what he termed as regulatory loopholes in the pipeline safety program and to strengthen the program by increasing the maximum civil penalties for pipeline violations, strengthening risk management requirements, adding more pipeline inspectors, and improving data reporting to help with early identification of potential pipeline safety risks. 1 Congress has responded with a number of bills which address pipeline safety concerns 2 and would reauthorize the 2006 Pipeline Integrity, Protection, Enforcement, and Safety (PIPES) Act, 3 which expired on September 30, The legislation currently pending in the House includes the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 (HR 2845), which was introduced by Congressman Bill Shuster (R-PA) and reported out of the House Committee on Transportation and Infrastructure on September 8, In addition to reauthorizing federal pipeline safety programs, the legislation would provide tougher penalties for pipeline operators that violate pipeline safety laws; strengthen pipeline damage prevention measures; authorize DOT to require automatic and remote-controlled shut-off valves on new pipelines; require DOT to evaluate the effectiveness of expanding pipeline integrity management and leak detection requirements; and reform the process by which DOT and pipeline operators notify federal, state and local officials of pipeline accidents and provide information to the public and emergency responders. Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and an affiliated partnership conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Mohammed A. Al-Sheikh. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY , Phone: Copyright 2011 Latham & Watkins. All Rights Reserved.

2 The other leading legislative proposal currently under consideration in the House is the Pipeline Infrastructure and Community Protection Act, sponsored by House Committee on Energy and Commerce Chairman Fred Upton (R-MI) and former Chairman John Dingell (D-MI), which won the support of the Energy and Commerce Committee on September 21, While also reauthorizing the PIPES Act, this legislation goes further than the Transportation Committee s bill, and would expand the integrity management program, phase out class location requirements and mandate the use of automatic and remote control shutoff valves for new pipelines, as well as opening the door to require similar shut-off valves on older pipelines. In addition, the legislation also grants DOT s Pipeline and Hazardous Materials Safety Administration (PHMSA) authority to issue new leak-detection requirements for pipelines located in high consequence areas. With the two House committees which share jurisdiction over pipelines having signed off on different legislative measures, the action now moves to the House floor, where legislative leadership is working to reconcile the proposals in anticipation of a vote later this year. In the Senate, the Pipeline Transportation Safety Improvement Act, co-sponsored by Senator Frank Lautenberg (D-NJ) and Senator Jay Rockefeller (D-WV), mirrors many of the provisions of the Upton-Dingell bill. The Lautenberg-Rockefeller bill received unanimous support from the Senate Commerce, Science and Transportation Committee in May of this year and is currently pending on the Senate floor. Attempts by Senate leadership to move the legislation have been rebuffed, however, by holds placed by individual senators that impose additional procedural hurdles before the measure can be brought to a vote. With the hold prevending quick action on the legislation, it is unclear whether or when Senate leadership will move the measure to a floor vote. 4 II. Regulatory Developments While Congress is considering legislation, PHMSA, the federal agency charged with monitoring the pipeline systems and enforcing safety measures, is proceeding with its own rulemaking processes to address safety issues for both oil and gas pipelines. On October 18, 2010, PHMSA issued an Advance Notice of Proposed Rulemaking on a range of topics relating to the safety of oil and other hazardous liquids pipelines. 5 Among other items, the Advance Notice of Proposed Rulemaking requested comment on whether to extend regulation to certain pipelines currently exempt from federal safety regulations; whether to extend integrity management regulations to additional pipeline segments, or to include additional segments in high consequence areas; and whether to require emergency flow restricting devices and revise valve spacing requirements for new or existing pipelines. The deadline for comments was extended to February 18, PHMSA has not yet taken the next step of a issuing a proposed rule. More recently, PHMSA issued an Advance Notice of Proposed Rulemaking on August 25, 2011 to request comments on a number of similar proposed changes for natural gas transmission pipelines. 6 PHMSA is requesting comments by December 2, 2011 on various possible regulatory changes including whether to modify integrity management requirements for pipeline segments in high consequence areas, whether to bring additional pipeline mileage under the integrity management program, and whether non-integrity management requirements should be expanded to address other issues associated with pipeline system integration. 2 Number 1242 September 29, 2011

3 In addition to the legislative and regulatory efforts outlined above, the National Transportation Safety Board (NTSB), an independent Federal investigative agency, issued a summary of an upcoming incident report which called for the strengthening of safety regulations and identified thirteen recommended actions for PHMSA, including a recommendation that the safety regulations cover pipelines that had been constructed before That recommendation, along with a number of others from the NTSB s report summary, overlap with the topics identified for consideration in PHMSA s rulemaking process. NTSB has no formal authority to regulate the transportation industry, and so its recommendations are not binding unless adopted by Congress, PHMSA or others with such authority. This Client Alert summarizes the regulatory changes being considered by PHMSA and the NTSB s recommendations. Members of the oil and natural gas pipeline and storage industry should consider responding to PHMSA s request for comments and participate in any future rulemakings. 7 A. Existing Framework The federal government regulates oil and natural gas pipeline safety under a variety of laws and regulations. 8 Beginning with the Natural Gas Pipeline Safety Act of 1968, 9 in which Congress authorized DOT to develop minimum safety standards for the transportation of natural gas, there have been a number of statutory and regulatory measures over the years designed to increase the safety of natural gas pipelines, as well as expanding the scope of those pipelines subject to federal safety requirements. Congress used the Natural Gas Pipeline Safety Act of 1968 as the model for the Hazardous Liquid Pipeline Safety Act of 1979, which authorized DOT to develop minimum federal safety standards for the transportation of oil and other hazardous materials by pipeline. The Hazardous Liquid Pipeline Safety Act of 1979 has also been supplemented over time with legislation that, among other things, adds environmental considerations to the list of statutory factors that must be considered in developing safety regulations; 10 establishes safety standards for certain regulated gathering lines ; 11 adds special protection for pipelines in environmentally sensitive areas; 12 and extends regulation to low-stress hazardous liquid pipelines. 13 Together, the Natural Gas Pipeline Safety Act of 1968, the Hazardous Liquid Pipeline Safety Act of 1979, and subsequent legislative developments are referred to as the Pipeline Safety Laws, 14 and are administered by PHMSA. PHMSA and its predecessor agency, the Research and Special Projects Administration, have in turn promulgated regulations pursuant to the Pipeline Safety Laws, which are known as the Pipeline Safety Regulations. 15 These include recent rules such as the Distribution Integrity Management Final Rule, which was issued December 4, and extends the integrity management principles applicable to natural gas transmission pipelines to local distribution systems, which were previously not required to undertake integrity management programs, and a final rule issued May 5, 2011, which increases safety requirements for rural low-stress hazardous liquid pipelines. 17 B. PHMSA s Advance Notice of Proposed Rulemaking for Oil Pipelines In its October 2010 Advance Notice of Proposed Rulemaking involving on-shore hazardous liquid pipelines, PHMSA sought public input on six specific topics, including the scope of current pipeline safety requirements and whether exiting regulatory exemptions were appropriate; the criteria for designating areas as high consequence areas; repair criteria in areas falling outside of a high consequence area; leak detection and the use of emergency 3 Number 1242 September 29, 2011

4 flow restricting devices; valve spacing; and ways to improve understanding and mitigation of threats stemming from stress corrosion cracking. Specifically, PHMSA is considering changing the definition of a high consequence area to bring additional miles of pipeline under its requirements as well as potentially applying additional requirements to pipeline segments lying outside of designated high consequence areas; requiring the use of emergency flow restricting devices, including remotecontrolled valves, in areas not currently subject to integrity management provisions; and adopting other measures relating to leak detection and prevention of stress control cracking. As mentioned above, the comment period for this Advance Notice of Proposed Rulemaking closed February 18, Should PHMSA proceed to issue a formal proposed rule, the proposed regulatory changes would be subject to an additional comment period (and may be the subject of a future Client Alert). C. PHMSA s Advance Notice of Proposed Rulemaking for Gas Pipelines PHMSA is also progressing with a proposed rulemaking to implement stricter safety measures for natural gas pipelines. In its August 25, 2011 notice, PHMSA solicits comments on a number of potential changes to the Pipeline Safety Regulations, including changes that would extend PHMSA s regulatory authority to pre-1970 pipelines, as well as requirements related to the integrity management program. 1. Non-Integrity Management Requirements PHMSA is currently seeking comment on a broad range of possible regulatory changes related to safety of natural gas pipelines. Among these, the most significant issues are whether PHMSA should remove the current exemption for pipelines which were in operation prior to 1970; whether to establish safety requirements for underground natural gas storage; and whether to redefine gathering lines so as to increase PHMSA s jurisdictional purview over these lines, as well as extending integrity management requirements to gathering lines. Pre-1970 Pipelines While gas transmission pipelines have been in use since the early 1920s, federal pipeline safety regulations did not take effect until August 19, Because some of the pipelines in operation at that time were operating at higher maximum operating pressures than would have been allowed under the regulations, DOT exempted those lines from the safety requirements and instead allowed pre-1970 lines to continue to operate at the highest actual operating pressure to which they were subjected in the five years prior to July 1, These older pipelines are similarly exempt from subsequently adopted stress level regulations. Some of these same grandfathered pipelines are still in operation today. 20 PHMSA is now considering eliminating these exemptions, repealing the regulatory provisions that allow for the use of older materials to repair these grandfathered pipelines, and considering additional IM and pressure testing requirements for pipeline segments which have not previously been tested. PHMSA acknowledges that eliminating the exemptions for these older pipelines would have the effect of requiring a reduction in the operating pressure for some older gas transmission pipelines. 21 Underground Natural Gas Storage PHMSA is also seeking comment on whether to establish safety requirements applicable to underground natural gas storage facilities, which are not currently subject to PHMSA regulations. Specifically, PHMSA is seeking comment on issues including whether the current lack of federal standards and preemption provisions in federal 4 Number 1242 September 29, 2011

5 law preclude effective regulation of underground storage by individual states and whether it should develop federal standards to govern the safety of underground storage facilities and if so, whether the standards should be voluntary and what portions of facilities should be covered by any such standards. Gathering Lines Similarly, PHMSA is considering whether to expand its jurisdiction over gas gathering lines. PHMSA regulations currently require certain safety measures for certain defined gathering lines but not all gathering lines. In its notice, PHMSA states that [r]ecent developments in the field of gas exploration and production, such as shale gas, indicate that the existing framework for regulating gas gathering lines may no longer be appropriate. 22 As such, PHMSA is now seeking comment on whether to adopt a new definition of the term gathering line, as well as whether to impose new, risk-based safety requirements on large-diameter, high-pressure gas gathering lines in rural locations and whether to impose IM requirements on gathering lines. Notably, PHMSA is also considering whether to adopt specific requirements for gathering lines associated with landfill gas systems, a development which has the potential to significantly alter the regulatory framework for these systems. Other topics under consideration include the adequacy of PHMSA regulations regarding the spacing and remote operational capabilities of block valves; the potential adoption of additional corrosion control requirements, including for stress corrosion cracking; and two process issues focused on how pipeline companies manage change and the adoption of quality management systems by industry participants. For each of these topics, PHMSA is requesting information and supporting data on the potential costs of modifying existing regulatory requirements; the potential quantifiable safety and societal benefits; the potential impacts on small businesses; and the potential environmental impacts. 2. Integrity Management Requirements PHMSA is also seeking comment on whether existing integrity management requirements should be strengthened to encompass additional natural gas pipeline mileage and to take steps to increase pipeline safety in high consequence areas, where the failure of a pipeline could have a significant impact on people or property, including areas of high population and areas where people regularly gather. PHMSA seeks comment on whether to modify the definition of high consequence areas, including whether to expand the definition to subject additional pipeline segments to integrity management requirements. PHMSA is also seeking comment on whether to add specificity to what is required of pipeline operators for areas within high consequence areas, as well as whether to expand these requirements to pipeline segments outside of high consequence areas. The current regulations require oil and gas transmission operators to take additional measures to prevent a pipeline failure in high consequence areas, as well as to take steps to mitigate the consequences of any potential failure in these areas, but do not currently specify what additional measures are required. Instead, operators are to base the additional measures on a comprehensive risk assessment for each pipeline segment (though the regulations do not contain any objective criteria to guide the determination of appropriate additional measures). In addition, following the issuance of an Advisory Bulletin on the requirements for collecting, validating, and integrating pipeline data in January of this year, 23 PHMSA is now considering whether more prescriptive requirements for 5 Number 1242 September 29, 2011

6 collecting, validating, integrating and reporting pipeline data [are] necessary, 24 whether to mandate a particular risk assessment model, and whether to strengthen requirements on the functions risk models must perform. PHMSA is also seeking comment on whether to extend existing repair requirements to pipelines outside of high consequence areas, as well as whether to revise its repair criteria to require an additional safety margin to failure and whether to update repair requirements to reflect technological advancements. D. NTSB Recommendations The National Transportation Safety Board, which can only offer advice but not issue orders, has also recently weighed in on proposed changes to the pipeline safety regulatory regime, including issuing a number of recommendations that overlap with the issues contained in PHMSA s notice. In a recent incident report, NTSB outlines thirteen specific recommendations for PHMSA. Specifically, the NTSB report summary includes recommendations that PHMSA mandate the use of automatic shutoff and control valves; revoke the grandfathered status of older pipelines; require pressure tests for all pipelines and allow for other inspection and tests; and revise IM requirements. In addition, NTSB also recommended that PHMSA require pipeline operators to provide detailed information to the emergency response agencies of the communities in which those pipelines are located and to immediately notify emergency personnel in the event of possible pipeline ruptures; require pipeline operators to use tools to assist in recognizing and pinpointing the location of leaks; require drug and alcohol testing of all employees who were involved in accidents; and to work with state public utility commissions to assess the effectiveness of state oversight programs (and specifically, to assist the California Public Utilities Commission in conducting a comprehensive audit). NTSB also made a number of recommendations for action to the US Secretary of Transportation, the Governor of the State of California, the California Public Utilities Commission, the Pacific Gas and Electric Company and the American Gas Association and the Interstate Natural Gas Association of America. III. Conclusion Taken together, the legislative and regulatory changes under consideration by the US Congress and PHMSA represent potentially sweeping changes to the scope of the federal government s regulatory authority over oil and natural gas pipelines, and if adopted, could impose significant new regulatory requirements and associated costs on pipeline operators. Businesses engaged in the transportation of natural gas and oil and other hazardous liquids through pipelines, as well as the storage of natural gas in underground facilities, should carefully consider the potential impact these changes could have on their operations and consider active participation in PHMSA s rulemaking process. Interested parties can submit comments in response to PHMSA s natural gas notice by December 2, 2011 and provide the agency with information on the potential cost impacts, quantifiable safety and societal benefits, potential impacts on small businesses and the potential environmental impacts associated with modifying the existing regulatory requirements. Following the close of the comment period, PHMSA may next develop a proposed rule on some or all of the issues presented in the notice, a process that may not be completed before the 2012 elections. Once the proposed rule is published in the Federal Register, there will be a second comment period in which companies can provide additional information on the specific impacts of the proposed rule. This same process 6 Number 1242 September 29, 2011

7 also applies to the issues contained in the October 2010 notice covering hazardous liquid pipeline safety. In developing final regulations for both oil and natural gas pipelines, PHMSA must take into account the information obtained during the public comment period. Endnotes 1 See Press Release, U.S. Transportation Secretary Ray LaHood Announces Pipeline Safety Action Plan (April 4, 2011) available at DownloadableFiles/dot4111.pdf. 2 In addition, legislation has been introduced in California, which would require automatic or remote shutoff valves on natural gas transmission pipelines. This legislation, AB56, has passed the California Assembly and is pending in the state senate. 3 Public Law (2006). 4 A number of other legislative measures have also been introduced, including the Strengthening Pipeline Safety and Enforcement Act, co-sponsored by Senator Dianne Feinstein (D-CA) and Senator Barbara Boxer (D-CA); the Pipeline Safety and Community Empowerment Act, introduced by Congresswoman Jackie Speier (D-CA); and the Clean Rivers Act, co-sponsored by Senator Max Baucus (D-MY) and Senator Jon Tester (D-MT). 5 Pipeline Safety: Safety of On-Shore Hazardous Liquid Pipelines; Advance Notice of Proposed Rulemaking, 75 Fed. Reg. 63,774 (Oct. 18, 2010). 6 Pipeline Safety: Safety of Gas Transmission Pipelines; Advance Notice of Proposed Rulemaking, 76 Fed. Reg. 53,086 (Aug. 25, 2011) 7 The Docket Number for this Advanced Notice of Proposed Rulemaking is PHMSA States have some authority to regulate the safety of intrastate pipelines, and at times enact standards more stringent than the federal standards. These state efforts, while important, are outside the scope of this Client Alert. 9 Public Law (1968). 12 Public Law (1996). 13 Public Law (2006). 14 The Pipeline Safety Laws are codified at 49 U.S.C et seq. 15 The Pipeline Safety Regulations for both oil and natural gas pipelines are codified at 49 CFR parts Pipeline Safety: Integrity Management Program for Gas Distribution Pipelines; Final Rule, 74 Fed. Reg. 63,906 (Dec. 4, 2009). The requirements are codified at 49 C.F.R. part 192, Subpart P. 17 Pipeline Safety: Applying Safety Regulations to All Rural Onshore Hazardous Liquid Low-Stress Lines; Final Rule, 76 Fed. Reg. 25,576 (May 5, 2011). 18 This Client Alert does not purport to summarize the comments received by PHMSA relating to its Advance Notice of Proposed Rulemaking C.F.R (a)(3). 20 According to a recent Wall Street Journal article, these pre-1970 pipelines comprise over 90% of the pipeline miles in operation for at least one major pipeline operator, and make up over 70 percent of the pipeline miles in at least ten different states. See Daniel Gilver, Gas-Pipeline Operators Sweat Test: Companies Question Effectiveness, Cost of Proposed Requirement to Examine Older Networks for Risk of Ruptures, The Wall Street Journal, Sept. 8, Id. 22 Id. at 53, Pipeline Safety: Establishing Maximum Allowable Operating Pressure or Maximum Operating Pressure Using Record Evidence, and Integrity Management Risk Identification, Assessment, Prevention, and Mitigation; Notices; Issuance of Advisory Bulletin, 76 Fed. Reg (Jan. 10, 2011) Fed. Reg. at 53, Public Law (1992). 11 Id. 7 Number 1242 September 29, 2011

8 If you have any questions about this Client Alert, please contact one of the authors listed below or the Latham attorney with whom you normally consult: Kenneth M. Simon Washington, D.C. Sara K. Orr Washington, D.C. Daniel C. Scripps Washington, D.C. Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorney with whom you normally consult. A complete list of our Client Alerts can be found on our website at If you wish to update your contact details or customize the information you receive from Latham & Watkins, please visit to subscribe to our global client mailings program. Abu Dhabi Barcelona Beijing Boston Brussels Chicago Doha Dubai Frankfurt Hamburg Hong Kong Houston London Los Angeles Madrid Milan Moscow Munich New Jersey New York Orange County Paris Riyadh* Rome San Diego San Francisco Shanghai Silicon Valley Singapore Tokyo Washington, D.C. * In association with the Law Office of Mohammed A. Al-Sheikh 8 Number 1242 September 29, 2011