Small Business Participation in the Alaska Natural Gas Pipeline Project
Gao ID: GAO-05-860R August 4, 2005
Alaska currently holds 35 trillion cubic feet of proven recoverable natural gas resources, about 19 percent of total U.S. reserves. Efforts to construct a pipeline to transport this natural gas from Alaska's North Slope to the lower 48 states have been stalled since 1982. The recent increase in natural gas prices has renewed interest in completing the pipeline, a project that is estimated to cost up to $20 billion. In addition to providing access to significant natural gas reserves, some expect the project to generate thousands of jobs and billions of dollars in revenues for the federal government and the State of Alaska. This report responds to a mandate in the Alaska Natural Gas Pipeline Act (the Pipeline Act) that we conduct a study to determine the extent to which small business concerns have participated in the construction of oil and gas pipelines. The Pipeline Act includes a "sense of Congress" provision that the sponsors of the Alaska natural gas pipeline should maximize the participation of small business concerns in contracts and subcontracts awarded for the project. This provision, while setting out a statement of congressional opinion, does not establish a legal requirement for small business participation. We confirmed that this report would focus on small business participation in the Alaska natural gas pipeline. It describes (1) the status of the Alaska natural gas pipeline project and (2) the extent to which any regulatory or oversight structure is in place to monitor small business participation in the construction of the pipeline.
Given the lengthy steps required for state and federal approval of the project, the earliest that construction can begin on the Alaska natural gas pipeline is late 2009. As of June 2005, the State of Alaska had not concluded negotiations with potential project sponsors under the Alaska Stranded Gas Development Act (Stranded Gas Act), which allows the state to negotiate fiscal terms (e.g., taxes and royalties) with project sponsors.4 In addition to being approved by the state, prospective project sponsors must, under the federal Pipeline Act, (1) conduct a study of gas consumption needs and prospective points of delivery within the State of Alaska and (2) hold an open season allowing potential customers to compete for and acquire capacity on the proposed pipeline. Also, the sponsors have been strongly encouraged to submit a prefiling request to FERC. Prefiling allows the sponsors to begin the environmental review process prior to submitting a formal application to FERC. In this way, stakeholders become involved early, issues are identified and resolved, and FERC's statutory deadline for acting on an application to construct the pipeline can be met. After completing the prefiling process, the sponsors must then submit an application to FERC for a certificate of "public convenience and necessity," authorizing construction and operation of the pipeline. Once FERC determines that the application is complete, it then has 20 months to prepare the environmental impact statement and issue a final order granting or denying the application. According to FERC officials, it could take several years to complete the above steps before actual construction of a pipeline can take place, but the beginning of the process is controlled by the project sponsor(s). No structure exists at the federal or state level to monitor small business participation in the construction of the Alaska natural gas pipeline. Although the pipeline will be privately funded, the project sponsors must apply to FERC for a certificate authorizing construction of the pipeline and to DOE if they wish to participate in $18 billion in loan guarantees authorized by the Pipeline Act. According to FERC officials, they typically do not monitor small business participation as part of the permitting process. They noted that FERC does not have expertise on small business matters and that, while FERC could gather the information, other federal agencies such as the Office of Federal Coordinator, created by the Pipeline Act, or SBA might be better situated to do so. According to DOE officials, that agency does not have a legal requirement to track small business participation as part of the loan guarantee process. In the absence of such a requirement, DOE officials stated that their agency has no plans at this time to track small business participation in the pipeline project. Finally, while the Governor of Alaska lists small business participation as one objective for the pipeline project, state officials told us that the State of Alaska does not have a structure in place to monitor or track small business participation. They noted that the state's focus has been on negotiating financial terms with potential sponsors. They also stated that the participation of Alaska businesses (both large and small) and resident hire provisions continue to be issues of discussion with the applicants.
GAO-05-860R, Small Business Participation in the Alaska Natural Gas Pipeline Project
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United States Government Accountability Office:
Washington, DC 20548:
August 4, 2005:
The Honorable Thad Cochran:
Chairman:
The Honorable Robert C. Byrd:
Ranking Minority Member:
Committee on Appropriations:
United States Senate:
The Honorable Jerry Lewis:
Chairman:
The Honorable David R. Obey:
Ranking Minority Member:
Committee on Appropriations:
House of Representatives:
The Honorable Ted Stevens:
Committee on Appropriations:
United States Senate:
Subject: Small Business Participation in the Alaska Natural Gas
Pipeline Project:
Alaska currently holds 35 trillion cubic feet of proven recoverable
natural gas resources, about 19 percent of total U.S. reserves. Efforts
to construct a pipeline to transport this natural gas from Alaska's
North Slope to the lower 48 states have been stalled since 1982. The
recent increase in natural gas prices has renewed interest in
completing the pipeline, a project that is estimated to cost up to $20
billion. In addition to providing access to significant natural gas
reserves, some expect the project to generate thousands of jobs and
billions of dollars in revenues for the federal government and the
State of Alaska.
This report responds to a mandate in the Alaska Natural Gas Pipeline
Act (the Pipeline Act) that we conduct a study to determine the extent
to which small business concerns have participated in the construction
of oil and gas pipelines.[Footnote 1]
The Pipeline Act includes a "sense of Congress" provision that the
sponsors of the:
Alaska natural gas pipeline should maximize the participation of small
business concerns in contracts and subcontracts awarded for the
project[Footnote 2]. This provision, while setting out a statement of
congressional opinion, does not establish a legal requirement for small
business participation. After consultation with your staff, we
confirmed that this report would focus on small business participation
in the Alaska natural gas pipeline. It describes (1) the status of the
Alaska natural gas pipeline project and (2) the extent to which any
regulatory or oversight structure is in place to monitor small business
participation in the construction of the pipeline.
In addressing these objectives, we focused primarily on the federal
role in the approval and construction phase of the proposed project
and, more specifically, in the monitoring of small business
participation in pipeline construction. We reviewed relevant federal
laws and regulations. In addition, we interviewed Federal Energy
Regulatory Commission (FERC), Department of Energy (DOE), and Small
Business Administration (SBA) officials and analyzed documents they
provided or referenced. Although the Pipeline Act established the
Office of the Federal Coordinator for Alaska Natural Gas Transportation
Projects (Office of Federal Coordinator) as an independent office in
the executive branch, a Federal Coordinator had not been appointed at
the time of our review.[Footnote 3] As such, we contacted DOE in its
capacity as the temporary Federal Coordinator. We limited our work at
the state level to discussions with representatives of Alaska's
Governor's Office and Department of Law. We also contacted
representatives of several of the potential sponsors of the Alaska
natural gas pipeline--ConocoPhillips, ExxonMobil, and TransCanada--to
determine the extent to which they routinely track small business
participation in pipeline construction. We performed our work in
Washington, D.C., from January 2005 to June 2005 in accordance with
generally accepted government auditing standards.
Results in Brief:
Given the lengthy steps required for state and federal approval of the
project, the earliest that construction can begin on the Alaska natural
gas pipeline is late 2009. As of June 2005, the State of Alaska had not
concluded negotiations with potential project sponsors under the Alaska
Stranded Gas Development Act (Stranded Gas Act), which allows the state
to negotiate fiscal terms (e.g., taxes and royalties) with project
sponsors.[Footnote 4] In addition to being approved by the state,
prospective project sponsors must, under the federal Pipeline Act, (1)
conduct a study of gas consumption needs and prospective points of
delivery within the State of Alaska and (2) hold an open season
allowing potential customers to compete for and acquire capacity on the
proposed pipeline. Also, the sponsors have been strongly encouraged to
submit a prefiling request to FERC. Prefiling allows the sponsors to
begin the environmental review process prior to submitting a formal
application to FERC. In this way, stakeholders become involved early,
issues are identified and resolved, and FERC's statutory deadline for
acting on an application to construct the pipeline can be met. After
completing the prefiling process, the sponsors must then submit an
application to FERC for a certificate of "public convenience and
necessity," authorizing construction and operation of the pipeline.
Once FERC determines that the application is complete, it then has 20
months to prepare the environmental impact statement and issue a final
order granting or denying the application. According to FERC officials,
it could take several years to complete the above steps before actual
construction of a pipeline can take place, but the beginning of the
process is controlled by the project sponsor(s).
No structure exists at the federal or state level to monitor small
business participation in the construction of the Alaska natural gas
pipeline. Although the pipeline will be privately funded, the project
sponsors must apply to FERC for a certificate authorizing construction
of the pipeline and to DOE if they wish to participate in $18 billion
in loan guarantees authorized by the Pipeline Act. According to FERC
officials, they typically do not monitor small business participation
as part of the permitting process. They noted that FERC does not have
expertise on small business matters and that, while FERC could gather
the information, other federal agencies such as the Office of Federal
Coordinator, created by the Pipeline Act, or SBA might be better
situated to do so. According to DOE officials, that agency does not
have a legal requirement to track small business participation as part
of the loan guarantee process. In the absence of such a requirement,
DOE officials stated that their agency has no plans at this time to
track small business participation in the pipeline project. Finally,
while the Governor of Alaska lists small business participation as one
objective for the pipeline project, state officials told us that the
State of Alaska does not have a structure in place to monitor or track
small business participation. They noted that the state's focus has
been on negotiating financial terms with potential sponsors. They also
stated that the participation of Alaska businesses (both large and
small) and resident hire provisions continue to be issues of discussion
with the applicants.
Background:
The Alaska Natural Gas Transportation Act (ANGTA) of 1976 established
streamlined procedures for the consideration, approval, and
construction of a natural gas pipeline to bring Alaskan natural gas to
the lower 48 states.[Footnote 5] Under the act, the Federal Power
Commission (now FERC) was to recommend to the President a specific
transportation proposal, the President then would submit a decision and
report to Congress, and Congress would vote on the proposal.[Footnote
6] In 1977, President Carter designated a route that would follow the
existing Alaska oil pipeline and the Alaska Highway into Canada,
proceed through Canada to Alberta, and split into two legs continuing
to the West and Midwest. Congress approved the plan, and FERC issued a
conditional certificate to designate project sponsors.[Footnote 7]
Phase I--1,500 miles of pipeline that transports Canadian gas from
Alberta, Canada, to Oregon and Iowa--was completed in 1982. Phase II,
the Alaska portion of the project, was delayed because market
conditions made the project commercially unfeasible. That is, the
expected market value of the natural gas was not considered to be
sufficient to justify the expected cost of constructing the pipeline
and transporting the natural gas.
The recent increase in natural gas prices has renewed interest in
constructing an Alaskan pipeline. In October 2004, Congress passed the
Pipeline Act, which, among other things, (1) authorized FERC to
consider and act on an application for a certificate of public
convenience and necessity for an Alaska natural gas transportation
project other than the Alaska natural gas transportation system
designated under ANGTA; (2) established an expedited approval process;
(3) required FERC to issue regulations governing the conduct of open
seasons--periods during which potential customers compete for and
acquire capacity on the proposed pipeline; (4) created the Office of
Federal Coordinator, an independent office in the executive branch, to
coordinate all federal activities relating to the Alaska natural gas
transportation project; (5) authorized up to $18 billion in loan
guarantees for the project; and (6) included a sense of Congress
provision that the sponsors of the pipeline should maximize the
participation of small business concerns in contracts and subcontracts
awarded for the project.[Footnote 8]
The Pipeline Act adopted the Small Business Act's definition of "small
business concern" that is set out in 15 U.S.C. § 632(a). This
definition provides that small business concerns must be independently
owned and operated and must not be dominant in the applicable field of
operation. Further, in addition to these criteria, the SBA has
statutory authority to establish detailed standards, known as "size
standards," that may be based on the number of employees, dollar volume
of business, net worth, net income, a combination of these factors, or
other appropriate factors.[Footnote 9] SBA publishes these size
standards, which are almost always stated either as the average
employment or average annual receipts of a business concern and vary by
industry. SBA's size standard for companies that construct oil and gas
pipelines is $28.5 million in annual receipts.[Footnote 10] SBA's size
standard for specialty trade contractors (such as structural steel and
precast concrete contractors) that may assist in the construction of
pipelines is $12 million in annual receipts.[Footnote 11]
Start of Construction at Least 4 Years Away:
Construction has not yet begun on the Alaska natural gas pipeline.
Before construction can begin, a number of events must occur. The State
of Alaska, under its Stranded Gas Act, may negotiate with prospective
project sponsors regarding fiscal terms (e.g., taxes and royalties)
related to the cost of the pipeline. For example, the Alaskan
administration might negotiate a contract of regular payments from
pipeline owners in lieu of state and municipal taxes. Through
negotiations, the legislation is intended to encourage new investment
to develop Alaskan stranded gas resources by establishing fiscal terms
for such investment, establish some certainty for calculating taxes and
royalties over the life of a project, and maximize the benefit to the
people of Alaska. Further, under federal law, sponsors must (1) conduct
a study of gas consumption needs and prospective points of delivery
within the state of Alaska and (2) hold an open season allowing
potential customers to compete for and acquire capacity on the proposed
pipeline.[Footnote 12] A detailed open season plan must be submitted to
FERC.[Footnote 13] Also, the project sponsors are encouraged to submit
a prefiling request to FERC. Prefiling allows the sponsors to begin the
environmental review process prior to submitting a formal application
to FERC. Thus, it will involve stakeholders, identify and resolve
issues early, and ensure that FERC's statutory deadline for acting on
an application to construct the pipeline will be met. After completing
prefiling, the sponsors may submit an application to FERC for a
certificate of "public convenience and necessity" authorizing
construction and operation of the pipeline.[Footnote 14] Once FERC
determines that the application is complete, it has 20 months to
prepare the environmental impact statement and issue a final order
granting or denying the application.
As of June 2005, three groups had submitted applications under the
Stranded Gas Act expressing interest in constructing the pipeline and
begun negotiations with the State of Alaska: (1) a consortium of three
oil and gas producers--BP Exploration (Alaska) Inc., ConocoPhillips
Alaska, Inc., and ExxonMobil Alaska Production Inc; (2) the TransCanada
Corporation, a Canadian-based energy company that focuses on gas
transmission; and (3) the Alaska Gasline Port Authority, a municipal
port authority formed by the North Slope Borough, Fairbanks North Star
Borough, and the City of Valdez. As shown in figure 1, the earliest
projected date for construction to start is late 2009.
Figure 1: Projected Time Line for FERC Action on Approval of the Alaska
Natural Gas Pipeline Project:
[See PDF for Image]
[End of Figure]
No Structure Is in Place to Track Small Business Participation in the
Pipeline Project:
No federal or state regulatory or oversight structure exists
specifically to monitor small business participation in the
construction of the Alaska natural gas pipeline. According to FERC
officials, they typically do not monitor small business participation
as part of the permitting process. While indicating that FERC could
gather the information, the officials noted that other federal agencies
such as SBA or the Office of Federal Coordinator might be better suited
to do so, particularly because FERC does not have small business
expertise. When regulating pipelines, FERC typically focuses on
protecting the environment, ensuring that the pipeline is designed
correctly and operated safely, and requiring open access at just and
reasonable rates. According to DOE officials, that agency does not have
a legal requirement to track small business participation in the
pipeline as part of the loan guarantee process. The officials told us
that, as a result, their agency does not have plans at this time to
track small business participation in the project.[Footnote 15]
Similarly, because it will not involve federal procurement, SBA
officials told us that their agency has no plans to track small
business participation in the project. However, they noted that, if
required, SBA would provide assistance to any interested party
concerning ways of tracking and increasing small business participation
for the project.
As is the case at the federal level, no one at the state or project
level currently has a structure in place to track small business
participation. According to representatives of the Governor's Office,
the Governor of Alaska includes small business participation among the
project objectives. However, the state does not have a mechanism in
place to track small business participation in the construction of the
pipeline. The officials noted that the state's focus has been on
negotiating financial terms with potential sponsors. They also stated
that the participation of Alaska businesses (both large and small) and
resident hire provisions continue to be issues of discussion with the
applicants. Additionally, none of the potential sponsors that we
interviewed has developed a tracking system specifically for the Alaska
natural gas pipeline project. However, according to one company's
officials, they typically track their use of small businesses and
report it for internal purposes. The officials added that, if they were
required to track small business participation in the construction of
the pipeline from the start of the project, they could track and share
information on small business participation in their contracts and
subcontracts. They stressed that there would be no way to track every
aspect of small business participation because of the sheer magnitude
of the project. Representatives of another potential sponsor told us
that they track similar information and, therefore, it would not be
difficult for them to add a tracking requirement regarding use of small
businesses. In contrast, a representative of a third potential sponsor
noted that the company would be concerned about a tracking requirement
because it is their policy to minimize the number of constraints they
place on their prime contractors.
Although no monitoring structures are in place for the pipeline
project, the federal government has created regulatory and oversight
systems to track or oversee similar private contracting initiatives.
For instance, ANGTA included an equal opportunity requirement that was
directed to federal agencies and authorized the appointment of a
Federal Inspector to, among other things, monitor compliance with
applicable laws and other requirements.[Footnote 16] Specifically,
ANGTA required that all federal officers and agencies take such
affirmative action as was necessary to assure that no person--on the
grounds of race, creed, color, national origin, or sex--be excluded
from receiving or participating in any activity conducted under any
certificate, permit, right-of-way, lease, or other authorization
granted or issued pursuant to the act. The implementing regulations
stated that (1) each certificate (including the certificate of public
convenience and necessity issued by FERC), permit, right-of-way, lease,
or other federal authorization must include an equal opportunity clause
and (2) the project sponsors and certain contractors and subcontractors
must have affirmative action plans.[Footnote 17] These entities also
were required to submit compliance reports.[Footnote 18] Finally, the
Office of the Federal Inspector (similar to the Office of Federal
Coordinator created under the Pipeline Act) was responsible for
tracking compliance, including compliance with the equal opportunity
and affirmative action requirements.
As another example, the United States and Canada reached an agreement
that required the companies approved to build the Alaska natural gas
pipeline to report information on bidders they proposed to supply
certain goods and services. In 1977, the two countries reached an
agreement on Principles Applicable to a Northern Natural Gas Pipeline
where they would endeavor to ensure that the supply of goods and
services to the Alaska gas pipeline would be on generally competitive
terms. In 1980, the two countries entered into a procurement procedures
agreement outlining procedures designed to ensure procurement on a
generally competitive basis for the Alaska gas pipeline. The agreement
stated that the appropriate regulatory authority in each country (the
Office of the Federal Inspector in the United States and the Northern
Pipeline Agency in Canada) would be responsible for implementing the
procedures. For example, the procedures included a requirement that the
project companies submit a list of qualified bidders they proposed to
invite to tender bids on certain items subject to the agreement (e.g.,
line pipe and pipe fittings) to the appropriate domestic regulatory
authority. The regulatory authority of the other country would have the
opportunity to review the bidders' list and propose the addition of any
firms that it considered should also be invited to tender bids.
Observations:
Congress expressed the opinion (in a sense of Congress) that the
sponsors of the Alaska natural gas pipeline should maximize the
participation of small business concerns in contracts and subcontracts
awarded in carrying out the project, but no federal structure has been
designated or currently exists to track small business participation in
the proposed project. The federal agencies currently involved in the
pipeline project, FERC and DOE, cited limited roles in the process or
lack of small business expertise. While we cannot quantify the costs
the federal government and sponsors would face to monitor small
business participation, federal precedents for monitoring private
contracting initiatives exist. For example, under ANGTA the federal
government created an office to monitor, among other things, equal
opportunity compliance. Further, the Pipeline Act established the
Office of Federal Coordinator to coordinate all federal activities
relating to the project. The Federal Coordinator, once appointed, would
be uniquely situated to work with federal and state agencies on
monitoring the extent of small business participation in the pipeline's
construction. However, we note the concerns of project sponsors who,
while generally able to obtain and report information on small business
contracting, may not be able to capture all levels of small business
participation because of the magnitude of the project.
Agency Comments:
We provided a draft of this report to DOE, FERC, and SBA for their
review and comment. All three agencies provided technical comments,
which we have incorporated where appropriate.
We are sending copies of this report to the Secretary of Energy,
Chairman of the Federal Energy Regulatory Commission, Administrator of
the Small Business Administration, and interested congressional
committees. We also will make copies available to other interested
parties upon request. In addition, the report will be made available at
no charge on the GAO Web site at [Hyperlink,http://www.gao.gov].
Please contact me at (202) 512-8678 or shearw@gao.gov if you or your
staff have any questions about this report. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Other major contributors to this report
were Harry Medina, Paige Smith, Linda Rego, and Barbara Roesmann.
Signed by:
William B. Shear:
Director, Financial Markets and Community Investment:
(250232):
FOOTNOTES
[1] Pub. L. No. 108-324, Div. C, § 112, 118 Stat. 1255 (Oct. 13, 2004)
(codified at 15 U.S.C. § 720j). The Pipeline Act requires GAO to submit
a report to Congress no later than 1 year after the date of enactment
of the act (October 13, 2004) and update the study at least once every
5 years until construction of the Alaska natural gas transportation
project is completed.
[2] "Sponsors" refers to the companies that will construct and operate
the pipeline.
[3] 15 U.S.C. § 720d. The Pipeline Act vested the functions,
authorities, duties, and responsibilities of the Federal Coordinator in
DOE until the latter of the appointment of the Federal Coordinator by
the President, or 18 months after October 13, 2004--April 13, 2006 (15
U.S.C. § 720d(g)).
[4] Alaska Stat. §§ 43.82.010-43.82.990.
[5] 15 U.S.C. §§ 719 - 719o.
[6] 15 U.S.C. §§ 719c, 719e, and 719f.
[7] Pub. L. No. 95-198, 91 Stat. 1268 (Nov. 8, 1977).
[8] Pub. L. No. 108-324, Div. C, 118 Stat. 1255 (Oct. 13, 2004)
(codified at 15 U.S.C. §§ 720-720n).
[9] 15 U.S.C. § 632(a)(2).
[10] 13 C.F.R. § 121.201, North American Industry Classification System
(NAICS) code no. 237120.
[11] Id., NAICS code no. 238120.
[12] 15 U.S.C. § 720a(e) and (g); and 18 C.F.R. § 157.33. Moreover, the
Pipeline Act required FERC to issue regulations governing the conduct
of open seasons for capacity on proposals for Alaska natural gas
projects. 15 U.S.C. § 720a(e)(2). FERC issued these regulations in
February 2005. See 70 Fed. Reg. 8269 (Feb. 18, 2005) (codified at 18
C.F.R. §§ 157.30 - 157.39). On June 1, 2005, FERC issued Order No. 2005-
A that reaffirmed, revised, and clarified its rules establishing
requirements governing the conduct of open seasons for capacity for
future Alaska natural gas pipeline projects, effective June 16, 2005.
See 70 Fed. Reg. 35011 (June 16, 2005).
[13] 18 C.F.R. § 157.38.
[14] In their application, the sponsors must show that the proposed
project is or will be required by the present or future public
convenience and necessity.
[15] In May 2005, DOE published a notice of inquiry seeking comments
and information from the public to assist it in developing regulations
implementing the loan guarantee provisions in the Pipeline Act. The
information requested included questions regarding collateral and
monitoring and reporting requirements. See 70 Fed. Reg. 30707 (May 27,
2005).
[16] See 15 U.S.C. § 719o (equal opportunity requirement); and 15
U.S.C. § 719e(a)(5) (repealed 1992) (appointment of Federal Inspector).
Effective July 1, 1979, the President created the Office of the Federal
Inspector for Construction of the Alaska Natural Gas Transportation
System (Office of the Federal Inspector), which was headed by the
Federal Inspector. 5 U.S.C. App. 1, Reorg. Plan No. 1 of 1979 (also set
out under 15 U.S.C. § 719e). The Federal Inspector had exclusive
responsibility for enforcement of all federal laws relevant in any
manner to pre-construction, construction, and initial operation of the
pipeline. The position and office were abolished in 1992. Pub. L. No.
102-486, Title XXX, § 3012, 106 Stat. 2776 (Oct. 24, 1992).
[17] 43 C.F.R. § 34.6 and 43 C.F.R. § 34.8. The regulations required
each ANGTA contractor and subcontractor with 50 or more employees and
with a contract of $1 million or more and certain contract bidders to
have an affirmative action plan.
[18] 43 C.F.R. § 34.9.