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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.