     Case: 16-60448   Document: 00514114973      Page: 1   Date Filed: 08/14/2017




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                                  United States Court of Appeals
                                                                           Fif h Circuit
                                  No. 16-60448                           FILED
                                                                   August 14, 2017

EXXONMOBIL PIPELINE COMPANY,                                        Lyle W. Cayce
                                                                         Clerk
             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.
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                                    No. 16-60448
                               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
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                                     No. 16-60448
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



      A hydrostatic test is performed by subjecting a pipeline to pressures that exceed its
       1

maximum operating pressure, thereby identifying the weakest segments of the pipeline.
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                                  No. 16-60448
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.




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                                    No. 16-60448
               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.



      2  This minor leak is known as a “weep/pinhole leak” and it only released about two
gallons of oil before it was repaired.
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                                  No. 16-60448
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.


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                                 No. 16-60448
                           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”
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                                 No. 16-60448
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
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                                       No. 16-60448
(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


       3 Both parties agree that this is the central issue on appeal. Both parties also agree
that the violations cited in Items 1, 2, and 3 of the final order are premised on the agency’s
finding that ExxonMobil did not properly consider the risk factors as directed by
§ 195.452(e)(1). The parties disagree, however, as to whether Items 4, 7, and 8 rise and fall
with our conclusion regarding § 195.452(e)(1). We conclude that Items 4 and 7 rise and fall
based on our interpretation of § 195.452(e)(1) while Item 8 does not.
       Notably, in explaining its basis for Items 4 and 7, the agency’s final order explicitly
relies on Item 1—failing to properly consider all risk factors under § 195.452(e)(1) to
determine seam failure susceptibility. In other words, the basis for Items 4 and 7 would be
undermined if we were to find that ExxonMobil did not violate § 195.452(e)(1) and vacate
Item 1. Therefore, we conclude that Items 1–4 and 7 are all premised on whether ExxonMobil
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                                       No. 16-60448
       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 defect
          growth rate;
                (ii) Pipe size, material, manufacturing information,
          coating type and condition, and seam type;
                (iii) Leak history, repair history and cathodic protection
          history . . . .
49 C.F.R. § 195.452(e)(1). If, after considering these risk factors, a pipeline
operator determines that a pipeline segment constructed of LF-ERW pipe is
susceptible to longitudinal seam failure, the operator must conduct the
integrity assessment with a method “capable of assessing seam integrity and
of detecting corrosion and deformation anomalies.” Id. § 195.452(j)(5).
       ExxonMobil argues that § 195.452(e)(1) is a process-based regulation
that requires a pipeline operator to consider factors but does not compel the
operator to reach a specific outcome. ExxonMobil contends that it considered
all pipeline risk factors under § 195.452(e)(1) and it determined—on four
separate occasions—that the Pegasus Pipeline’s LF-ERW pipe segments were
not susceptible to longitudinal seam failure. Under its interpretation of
§ 195.452(e)(1), the agency argues that given the history of seam failures to the
LF-ERW pipe, it was unreasonable for ExxonMobil to consider the above
factors and conclude that the pipeline was not susceptible to longitudinal seam



properly “considered” the relevant risk factors under § 195.452(e)(1) in determining that the
pipeline was not susceptible to longitudinal seam failure.
       We conclude that Item 8, however, is not premised on the agency’s finding that
ExxonMobil did not properly consider risk factors as directed by § 195.452(e), but rather is
supported by an independent basis, as we discuss below. Our conclusion is consistent with
the position ExxonMobil took in its post-hearing briefing before the agency. Even though
ExxonMobil argued before the agency that Items 1–4 and 7 were a related series of violations
because they all relied on the same assertion by the agency that ExxonMobil failed to consider
the Pegasus Pipeline to be susceptible to seam failure, ExxonMobil did not contend that Item
8 was based on this assertion.
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                                  No. 16-60448
failure. The agency contends that its interpretation of § 195.452(e)(1) is
entitled to deference under Auer v. Robbins, 519 U.S. 452 (1997).
      We will generally grant Auer deference to an agency’s interpretation of
its own ambiguous regulation. Delek Refining, Ltd. v. OSHRC, 845 F.3d 170,
175 (5th Cir. 2016) (“[W]e will defer to an agency’s reasonable interpretation
of its own regulations when the text of the regulation is ambiguous.”); see also
Auer, 519 U.S. at 461. “In situations in which the meaning of regulatory
language is not free from doubt, the reviewing court should give effect to the
agency’s interpretation so long as it is reasonable,” and it “sensibly conforms
to the purpose and wording of the regulations.” Martin v. OSHRC, 499 U.S.
144, 150–51 (1991) (alterations and internal quotation marks omitted).
However, Auer deference does not apply if the petitioner “lacked fair notice” of
the agency’s interpretation of the regulation that the agency is advancing in
the enforcement action. Employer Sols. Staffing Grp. II, L.L.C. v. Office of Chief
Admin. Hearing Officer, 833 F.3d 480, 487–88 (5th Cir. 2016); see also
Diamond Roofing Co., Inc. v. OSHRC, 528 F.2d 645, 649 (5th Cir. 1976);
Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 155 (2012). If the
regulation is unambiguous, we will not defer to the agency’s interpretation.
Christensen v. Harris Country, 529 U.S. 576, 588 (2000); see also Moore v.
Hannon Food Serv., Inc., 317 F.3d 489, 495–96 (5th Cir. 2003).
      Therefore, to determine whether the agency’s interpretation of the term
“consider” in the regulations is entitled to deference, we must first determine
whether § 195.452(e)(1) is ambiguous. “We interpret regulations in the same
manner as statutes, looking first to the regulation’s plain language.” Anthony
v. United States, 520 F.3d 374, 380 (5th Cir. 2008). Where the language of the
regulations is unambiguous, we do not look beyond the plain wording of the
regulation to determine its meaning. Copeland v. C.I.R., 290 F.3d 326, 332–33


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                                 No. 16-60448
(5th Cir. 2002). We hold that § 195.452(e)(1) is textually unambiguous and
therefore no Auer deference is warranted to the agency’s interpretation.
      Section 195.452(e)(1) plainly instructs pipeline operators that they “must
consider” “all risk factors that reflect the risk conditions on the pipeline
segment.” 49 C.F.R. § 195.452(e)(1). The Oxford English Dictionary defines
“consider” as follows: “to contemplate mentally, fix the mind upon; to think
over, meditate or reflect on, bestow attentive thought upon, give heed to, take
note of.” Consider, Oxford English Dictionary (online edition). The Merriam-
Webster’s Collegiate Dictionary similarly defines consider as “to think about
carefully.” Consider, Merriam-Webster’s Collegiate Dictionary (Deluxe ed.
1998).
      The regulation’s requirement to consider certain factors unambiguously
requires pipeline operators to carefully undergo an informed decision-making
process in good faith, reasonably taking into account all relevant risk factors
in reaching a decision. Contrary to the agency’s assertion, the term “consider”
does not compel a certain outcome, but rather it serves to inform the pipeline
operator’s careful decision-making process. See J.H. Miles & Co., Inc. v. Brown,
910 F. Supp. 1138, 1156 (E.D. Va. 1995) (explaining that a federal regulation
requiring federal fishing officials to “consider” various statutory factors in
setting fishing quota recommendations was not a “strict dictate,” but rather
officials had “some discretion” in preparing their recommendation); see also
Cent. Valley Chrysler-Jeep v. Witherspoon, 456 F. Supp. 2d 1160, 1173 (E.D.
Cal. 2006) (“Congress’s use of the term ‘consider’ in a statute requires an actor
to merely ‘investigate and analyze’ the specified factor, but not necessarily act
upon it.”).
      Because we conclude that § 195.452(e)(1)’s instruction to “consider” all
relevant risk factors unambiguously serves to inform a pipeline operator’s
careful and deliberate decision-making process rather than to compel a
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particular outcome, the agency’s interpretation of the regulation does not
warrant Auer deference. See Exelon Wind 1, L.L.C. v. Nelson, 766 F.3d 380,
399 (5th Cir. 2014) (“[A]n agency is not entitled to deference when it offers up
an interpretation of the Regulation that we have already said to be
unambiguously foreclosed by the regulatory text.”); Christensen, 529 U.S. at
588 (“Auer deference is warranted only when the language of the regulation is
ambiguous.”).
                                               B.
       Owing no deference to the agency’s interpretation of the regulation, we
next address whether ExxonMobil reasonably applied § 195.452(e)(1)’s
instruction to “consider” all relevant risk factors in making its pipeline
susceptibility determination. 4 As discussed, the pipeline integrity regulations
plainly instruct pipeline operators that they “must consider” “all risk factors
that reflect the risk conditions on the pipeline segment” in creating an
assessment schedule. 49 C.F.R. § 195.452(e)(1). By its plain text, this is a
process-based requirement that directs pipeline operators to carefully take into


       4  Ordinarily, even if a regulation is unambiguous such that Auer deference does not
apply, the agency’s rulings, interpretations, and opinions may still be “entitled to respect”
under Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944), “but only to the extent that those
interpretations have the power to persuade.” Moore v. Hannon Food Serv., Inc., 317 F.3d 489,
497 (5th Cir. 2003); see also Belt v. EmCare, Inc., 444 F.3d 403, 408 (5th Cir. 2006) (“If the
regulation is unambiguous, we may still consider agency interpretation, but only according
to its persuasive power.”). We have noted, however, that “[u]ltimately, Skidmore analysis is
of limited value in interpreting regulations, given that it stops short of requiring deference
and is likely to be invoked only when a court has already found the regulation to be
unambiguous.” Moore, 317 F.3d at 498 n.14; cf. United States v. Mead Corp., 533 U.S. 218,
250 (2001) (Scalia, J., dissenting) (“[T]he rule of Skidmore deference is an empty truism and
a trifling statement of the obvious: A judge should take into account the well-considered views
of expert observers.”). Here, the agency argues only that we should apply Auer deference to
its interpretation of the pipeline integrity regulations; it does not offer any alternative
argument as to Skidmore deference. When pressed at oral argument as to where we could
find the agency’s interpretation of the regulations to which the agency argues we should
defer, the agency could not point us to a particular interpretation. Therefore, we need not
apply Skidmore deference to the agency’s interpretation of the regulation—whatever that
interpretation might be.
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account all relevant risk factors when reaching a decision. The regulations do
not mandate a particular outcome, but rather prescribe a decision-making
process that pipeline operators must undergo in good faith. The record
demonstrates that ExxonMobil satisfied its obligation to “consider” various
risk factors when it conducted a lengthy, repeated, and in-depth analysis of
those risk factors by utilizing the available industry-commissioned guidance of
the Baker Report decision tree. We therefore ultimately conclude that
ExxonMobil’s actions were reasonable and that the agency’s decisions
pertaining to Items 1–4 and 7 of its final order were arbitrary and capricious.
       Contrary to the agency’s assertion, nothing in the regulations compels
an operator to conclude that a pipeline constructed of LF-ERW pipe is
susceptible to longitudinal seam failure when the pipeline has experienced
seam failures. If the agency wished to enforce outcome-based requirements
instead of the process-based requirements that are currently in place with
regards to seam failure susceptibility, the agency could have promulgated
regulations to that effect. For example, the regulations could have prescribed
that all LF-ERW pipelines are susceptible to seam failure. Alternatively, the
regulations could have prescribed that any LF-ERW pipeline that experiences
a seam failure during testing or while in service must be deemed seam-failure
susceptible. But the process-based regulations currently in place only require
that the pipeline operator “consider” various risk factors in making its risk
assessment determination, and they ultimately leave it up to the pipeline
operator to make the decision on seam failure susceptibility. 5



       5  Section 195.303(d) of the pipeline safety regulations states that “[a]ll pre-1970 ERW
pipe . . . is deemed susceptible to longitudinal seam failures unless an engineering analysis
shows otherwise.” 49 C.F.R. § 195.303(d). This regulation was issued in 1998 in a subpart of
the pipeline safety regulations entitled “Pressure Testing” and is distinct from and was
promulgated prior to the pipeline integrity regulations at issue here. Section 195.303(d)
required operators to conduct a one-time hydrostatic pressure test of certain categories of
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                                       No. 16-60448
       In its final order, the agency found that ExxonMobil violated § 195.452(e)
because ExxonMobil allegedly “failed to properly consider the history of seam-
related failures and low toughness of the seam.” While the agency suggests
that ExxonMobil simply ignored past seam failures, this is contradicted by the
evidence. The record clearly demonstrates that ExxonMobil carefully
considered the past seam failures. Indeed, even the agency’s final order itself
acknowledges the various steps ExxonMobil took in considering the pipeline’s
past seam-related failures:
       The failures were analyzed for evidence of pressure cycling
       induced fatigue and preferential seam corrosion, but neither
       condition was detected. [ExxonMobil] attributed the failures to
       mill defects and a lower test temperature, which the Company
       believed caused the seams to be more brittle. Due to the absence
       of pressure cycling induced fatigue and preferential seam
       corrosion, [ExxonMobil] concluded the ERW pipe was not
       susceptible to seam failure.
       Following each seam failure the Pegasus Pipeline experienced, including
the seam failures that resulted from the 2005–2006 hydrostatic test,
ExxonMobil applied the analysis set forth in the Baker Report decision tree to
determine whether the pipeline’s LF-ERW pipe was susceptible to seam
failure. Applying the Baker Report decision tree was in accordance with the



pipelines and allowed operators to elect by December 1998 if they wanted to use risk-based
criteria rather than a hydrostatic test. That one-time election was unavailable for pre-1970
LF-ERW pipe. Section 195.303(d) did not have any further applicability after the December
1998 deadline. When the agency promulgated the pipeline integrity regulations at issue in
this case, it did not create a similar rebuttable presumption regarding pre-1970 LF-ERW
pipe. In its Final Order and Decision on Petition for Reconsideration, the agency specifically
cites to § 195.303(d) as support for the position that there is a presumption that all LF-ERW
pipe is susceptible to longitudinal seam failure. This presumption is plainly inaccurate
because § 195.303(d) is obsolete and is therefore not relevant here. The agency appears to
have abandoned this position on appeal, contending that it did not apply a presumption of
susceptibility for pre-1970 ERW pipe based on § 195.303(d). In any event, we conclude that
the agency cannot base any part of its finding on the now-obsolete § 195.303(d) and that
§ 195.303(d) did not provide ExxonMobil with fair notice that it was compelled to deem its
LF-ERW pipe as susceptible to longitudinal seam failure.
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                                       No. 16-60448
regulations, which while silent as to how operators are to determine seam
failure susceptibility, instruct operators to “[f]ollow recognized industry
practices.” 49 C.F.R. § 195.452(b)(6). The Baker Report certainly reflects
“recognized industry practices.” Not only did the agency publish the Baker
Report to its website and incorporate it into its enforcement manual, it has also
relied on the Baker Report in prior enforcement decisions. 6
       To ensure that it was correctly applying the Baker Report and the
decision tree, ExxonMobil retained the services of Dr. Kiefner, the Baker
Report’s co-author who largely developed the methodology that the decision
tree represents. Because the pipeline did not reveal evidence of the two factors
enumerated in the decision tree as indicating susceptibility to seam failure—
namely, pressure-cycling induced fatigue or preferential seam corrosion—
ExxonMobil concluded the pipeline was not susceptible to seam failure. 7 After
determining that the pipeline was not susceptible to longitudinal seam failure,
ExxonMobil then considered these results, the pipeline’s seam type, and
history    in    developing      its   integrity    reassessment        schedules     under
§ 195.452(e)(1). Undergoing this deliberate, considered process is precisely
what § 195.452(e) requires.




       6  In one prior enforcement action, another company argued that there was a lack of
industry guidance for how to determine the susceptibility of LF-ERW pipe to seam failures.
In re Kinder Morgan Energy Partners, CPF No. 1-2004-5004 (June 26, 2006), at 3. The agency
responded that the methodology embodied in the Baker Report is an example of an acceptable
means of performing a seam failure susceptibility analysis that is available to the industry.
Id.
        7 Dr. Kiefner, after reviewing ExxonMobil’s inspection and evaluation activities and

data, testified that ExxonMobil “correctly followed the guidance described in the Baker
Report. This [analysis] would not have resulted in a finding that the failed segment was
‘susceptible to seam failure in the context of Part 195 IMP regulations.’” Notably, the agency
itself acknowledges that “[t]he evidence supports [ExxonMobil’s] assertion that prior seam
failures did not exhibit evidence of fatigue.”

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                                 No. 16-60448
      The agency heavily criticizes ExxonMobil’s reliance on the analysis
embodied by the Baker Report decision tree. The agency found ExxonMobil to
be in violation of the regulations because it determined that it was
inappropriate for ExxonMobil to rely on the decision tree to justify ignoring
seam failures exposed during testing. The agency contends that the decision
tree’s methodology is inaccurate because it does not address the pipe’s
“toughness.” The agency claims that brittle pipe, or pipe with low toughness,
will not exhibit the same evidence of fatigue cracking, which is the end point
of the decision tree. Therefore, the agency found, ExxonMobil failed to consider
“that the absence of fatigue was a result of the low toughness of the pipe.”
      We are unpersuaded by the agency’s criticism of ExxonMobil’s
application of the process set forth in the Baker Report decision tree and the
agency’s interpretation of the Baker Report. Notably, the Baker Report itself
specifically directs operators to rely on and apply the decision tree in reaching
a   seam    failure   susceptibility   determination.      Under   the   heading
“Determination of Susceptibility,” the Baker Report states that
      [t]he means of determining whether or not the seam of a particular
      pipeline is susceptible to failure are illustrated in [the decision
      tree]. . . . [The decision tree] allows one, by supplying appropriate
      data on a given segment, to determine if a seam-integrity
      assessment is required based on the federal pipeline integrity
      management regulations.
The Baker Report unequivocally directs pipeline operators to apply the
decision tree, explaining that it is “[t]he means of determining whether or not
the seam of particular pipeline is susceptible to seam failure.” To discredit the
decision tree’s methodology, the agency relies on language found elsewhere in
the Baker Report that states that “[i]f a seam-related in-service or hydrostatic
test failure has occurred on the segment, the segment is considered
susceptible.” However, this argument is unavailing. Notably, yet another
passage in the Baker Report states that “[i]f no fatigue-related failures exist,
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                                       No. 16-60448
it is reasonable to certify that the pipeline is not susceptible to seam failures
in the context of the federal integrity management requirements.” We are not
sure what we—or more importantly, pipeline operators—are to make of this
conflicting guidance. This causes us to place even more emphasis on the Baker
Report’s clear pronouncement that the decision tree is the means of
determining seam failure susceptibility.
       In sum, the record demonstrates that ExxonMobil met its obligation
under § 195.452(e)(1)’s instruction to “consider” various risk factors.
ExxonMobil concluded that the Pegasus Pipeline was not susceptible to seam
failure only after lengthy, repeated, and in-depth consideration of seam failure
risk factors and after utilizing the available industry-commissioned guidance
of the Baker Report decision tree with the assistance of Dr. Kiefner—a national
expert in LF-ERW pipe who co-authored the Baker Report. ExxonMobil’s
application of the decision tree was in accordance with the guidance of the
Baker Report itself. This purposeful, deliberate decision-making process is
precisely what § 195.452(e)(1) requires. The agency’s finding that ExxonMobil
did not “properly consider” 8 all of the relevant factors simply because
ExxonMobil reached a different determination from the one the agency now, in
hindsight, proclaims ExxonMobil should have reached is contradicted by the
record and is therefore arbitrary and capricious. Pension Benefit Guar. Corp.,


       8 The agency has recognized that pipeline operators have wide latitude in how they
will weigh various risk factors in determining how to prioritize pipeline segments for
assessment. See In re Magellan Midstream Partners, L.P., CPF No. 4-2006-5020, at *7
(“Section 195.452(e)(1) lists nine factors that must be considered in establishing a schedule
but leaves it up to the operator to determine what other factors need to be considered, how to
assign risk scores to each factor and pipe segment, and how to prioritize assessments.”)
(emphasis added). Therefore, to say that ExxonMobil did not “properly consider” the
appropriate risk factors begs the question of what would constitute proper consideration. To
the extent the agency contends that proper consideration mandates a particular outcome,
this is not supported by the text of the regulation nor the industry guidance of the Baker
Report.

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                                     No. 16-60448
374 F.3d at 366 (“Arbitrary and capricious review focuses on whether an
agency articulated a rational connection between the facts found and the
decision made.”).
      The fact that the Mayflower release occurred, while regrettable, does not
necessarily mean that ExxonMobil failed to abide by the pipeline integrity
regulations in considering the appropriate risk factors. If it did, then an
operator that experiences a seam-related pipeline leak on its pipeline system
could never escape liability under pipeline integrity regulations, thus
nullifying the regulations and creating a strict-liability regime that Congress
has not authorized. See generally 49 U.S.C. § 60101 et seq. The unfortunate
fact of the matter is that, despite adherence to safety guidelines and
regulations, oil spills still do occur.
      Because we conclude that ExxonMobil properly considered the
susceptibility of its LF-ERW pipe to seam failure when establishing a continual
integrity assessment schedule based on all risk factors on the Pegasus
Pipeline, as required by the plain language of § 195.452(e)(1), we vacate Item
1 of the agency’s final order. Because Items 2–4 and 7 are premised on the
finding that ExxonMobil violated § 195.452(e)(1), we also vacate those Items.
                                          C.
      Even assuming arguendo that we were to determine that the regulations
governing    seam     failure   susceptibility   are   ambiguous,     the   agency’s
interpretation would still fall short of warranting Auer deference for the
additional and independent reason that ExxonMobil lacked fair notice of the
interpretation of the regulation that the agency advances in this enforcement
action. See Employer Sols., 833 F.3d at 487–89 (holding that “despite the
degree of deference potentially owed” to the agency, Auer deference was
inappropriate where the petitioner “lacked fair notice” of the agency’s
interpretation of its regulation).
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                                  No. 16-60448
      We have warned that fair notice requires the agency to have “state[d]
with ascertainable certainty what is meant by the standards [it] has
promulgated.” Diamond Roofing Co., 528 F.2d at 649. This rule requires that
agency regulations that “allow monetary penalties against those who violate
them . . . must give [a party] fair warning of the conduct it prohibits or requires,
and it must provide a reasonably clear standard of culpability to circumscribe
the discretion of the enforcing authority and its agents.” Id. (cited by
Christopher, 567 U.S. at 156 n.15). The Supreme Court has noted that “[i]n
penalty cases, courts will not accord substantial deference to an agency’s
interpretation of an ambiguous rule in circumstances where the rule did not
place the individual or firm on notice that the conduct at issue constituted a
violation of a rule.” Christopher, 567 U.S. at 156 n.15 (quoting 1 R. Pierce
Administrative Law Treatise § 6.11, at 543 (5th ed. 2010)); see also Employer
Sols., 833 F.3d at 488 (“The challenged statute or agency action must ‘give the
person of ordinary intelligence a reasonable opportunity to know what is
prohibited, so that he may act accordingly.’”) (quoting Grayned v. City of
Rockford, 408 U.S. 104, 108 (1972)). “In the absence of notice—for example,
where the regulation is not sufficiently clear to warn a party about what is
expected of it—an agency may not deprive a party of property by imposing civil
or criminal liability.” General Elec. Co. v. E.P.A., 53 F.3d 1324, 1328–29 (D.C.
Cir. 1995).
      Under this analysis, the relevant inquiry is whether the agency’s
interpretation of the pipeline integrity regulations could have been understood
with “ascertainable certainty” by ExxonMobil at the time it engaged in the
conduct that allegedly exposed it to this enforcement action. Diamond Roofing
Co., 528 F.2d at 649. As explained by the D.C. Circuit,
      we must ask whether the regulated party received, or should have
      received, notice of the agency’s interpretation in the most obvious

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                                 No. 16-60448
      way of all: by reading the regulations. If, by reviewing the
      regulations and other public statements issued by the agency, a
      regulated party acting in good faith would be able to identify, with
      “ascertainable certainty,” the standards with which the agency
      expects parties to conform, then the agency has fairly notified a
      petitioner of the agency’s interpretation.
General Elec. Co., 53 F.3d at 1329 (citing Diamond Roofing Co., 528 F.2d at
649). As explained above, the pipeline integrity regulations themselves did not
provide ExxonMobil notice that the pipeline’s leak history compelled it to label
the LF-ERW pipe susceptible to longitudinal seam failure. In fact, references
to susceptibility to longitudinal seam failure are surprisingly scarce within the
text of § 195.452. Section 195.452(j)(5) requires operators to select an
assessment method capable of assessing seam integrity only if the LF-ERW
pipe segments are determined to be susceptible to longitudinal seam failure.
Critically, however, the regulations are silent as to how operators are to make
that determination. Even if this silence creates an ambiguity in the
regulations, as the agency asserts, it does not provide ExxonMobil with fair
notice that an operator is compelled to deem a pipeline as susceptible to seam
failure just because the pipeline is constructed with LF-ERW pipe and has
experienced leaks.
      Because the regulations themselves are silent as to how operators are to
determine seam failure susceptibility, operators are forced to find an extra-
regulatory method to make this determination. ExxonMobil turned to the
Baker Report. Given the agency’s numerous endorsements of the Baker Report
methodology, ExxonMobil was entirely justified to rely in good faith on the
Baker Report to conduct its seam failure susceptibility analysis. Indeed, to hold
otherwise in this enforcement action would constitute unfair surprise and
deprive ExxonMobil of the fair notice to which it is entitled. See Diamond
Roofing Co., 528 F.2d at 649.


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                                       No. 16-60448
       The agency’s criticism of ExxonMobil’s reliance on the Baker Report
decision tree amounts to a post hoc litigation-derived seam-susceptibility
standard that deprives ExxonMobil of fair notice. The agency has failed to
point to any instance where it has indicated to the industry generally or
ExxonMobil specifically that it is inappropriate for a pipeline operator to rely
on the Baker Report decision tree. The agency claims that another section of
the Baker Report provided ExxonMobil with notice that a pipeline with a
history of seam failures should have been deemed susceptible. As noted, this
section states that “[i]f a seam-related in-service or hydrostatic test failure has
occurred on the segment, the segment is considered susceptible.” While this
sentence may contradict the methodology outlined in the decision tree, we are
ultimately persuaded that ExxonMobil was justified to rely on the decision
tree. The Baker Report explicitly states that the decision tree is “[t]he means”
of determining seam failure susceptibility. The importance of the word “the”
cannot be overstated. Even though there might be a conflict between the
decision tree and other portions of the Baker Report, ExxonMobil was still
justified in adhering to the decision tree as the means of determining whether
its pipes were susceptible to seam failure. 9
       Simply put, ExxonMobil lacked any notice that the agency had a specific
interpretation of the regulations that departed in any way from the Baker
Report decision tree, let alone notice that they could be subject to an



       9 As to the agency’s contention that applying the decision tree is inappropriate because
it allegedly does not address the toughness of the pipe, the Baker Report notes that all LF-
ERW pipe “possess bondline regions that are prone to low toughness and brittle-fracture
behavior.” Because all LF-ERW pipe is prone to low toughness and brittle cracking, those
factors are presumably built into the process for analyzing seam-failure susceptibility
represented by the decision tree. To the extent that the agency believes that this is not the
case, the agency must “state with ascertainable certainty,” before an enforcement action, that
applying the decision tree is inappropriate for this reason. Diamond Roofing Co., 528 F.2d at
649.
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                                       No. 16-60448
enforcement action for strictly adhering to the decision tree. In the absence of
some agency instruction provided to the industry that the decision tree is no
longer the means for determining seam failure susceptibility, we must conclude
the agency’s rejection of ExxonMobil’s use of the decision tree’s methodology
violates the principles of fair notice to which ExxonMobil is entitled.
Christopher, 567 U.S. at 156 (holding that Auer deference is “unwarranted”
where to hold otherwise “would seriously undermine the principle that
agencies should provide regulated parties ‘fair warning of the conduct [a
regulation] prohibits or requires’”). Thus, even if we were to determine that the
regulations are ambiguous as to the precise methodology a pipeline operator is
to use to determine whether pipe is susceptible to seam failure, ExxonMobil
lacked fair notice, which alters the deference owed to the agency. Employer
Sols., 833 F.3d at 490. The agency’s new interpretation of the Baker Report
decision tree “does not flow clearly from any authority in existence prior to this
action. Thus, Auer . . . [is] inapplicable.” Id. 10
       In sum, the agency’s interpretation of the pipeline integrity regulations
does not warrant Auer deference because ExxonMobil lacked fair notice of the
interpretation the agency now seeks to enforce in this action. Because the
agency’s interpretation is not entitled to Auer deference and because
ExxonMobil reasonably complied with the guidance found in the Baker Report
decision tree, we conclude that the agency acted in an arbitrary and capricious
manner when it found that ExxonMobil violated § 195.452(e)(1). Therefore, we




       10If the agency now believes there is a proper methodology to determine seam failure
susceptibility, it would be entirely appropriate for the agency to promulgate a new regulation
to that end moving forward, following notice and comment from all concerned parties.
However, the pipeline integrity regulations as currently constituted only broadly instruct
pipeline operators to examine whether pipe is susceptible to seam failure and then to factor
that consideration into its overall § 195.452(e)(1) risk evaluation.
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                                      No. 16-60448
vacate Items 1–4 and 7 of the agency’s final order on this alternate and
additional ground. 11
                                       IV. Item 8
       In addition to challenging Items 1–4 and 7 of the agency’s final order,
ExxonMobil also challenges Item 8. Under Item 8, the agency found that
ExxonMobil had violated § 195.452(b)(5), which requires a pipeline operator to
develop and follow a written integrity management program. 49 C.F.R.
§ 195.452(b)(5). Because Item 8 is not based on the same grounds as the other
challenged violations, and because ExxonMobil has not articulated how the
agency acted in an arbitrary or capricious manner in finding that ExxonMobil
had violated § 195.452(b)(5) under Item 8, we affirm the agency’s finding with
respect to this violation.
       Under Item 8 of its final order, the agency explained that ExxonMobil’s
written IMP plan provides for the use of the Threat Identification and Risk
Assessment (“TIARA”) program in the risk management process. This program
requires ExxonMobil to manually enter information in response to certain
questions. One of the questions posed to ExxonMobil was: “Has a ILI crack tool
(TFI or UT) been successfully run and have the appropriate repairs been
scheduled?” In 2011, ExxonMobil answered “yes” to this question even though
no such tool had been run. 12 ExxonMobil explained in the administrative
hearing that the decision to answer “yes” was based on a belief that it would
perform a TFI tool assessment in the near future. The tool run, however was
delayed approximately two years. Despite this delay, ExxonMobil never
revisited its answer to the question.




       11 “This circuit follows the rule that alternative holdings are binding precedent and
not obiter dictum.” United States v. Potts, 644 F.3d 233, 237 n. 3 (5th Cir. 2011).
       12 ExxonMobil does not cite to or contest any of these facts in its brief.

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                                      No. 16-60448
       In its Final Order, the agency found that
       [b]y answering this question in the affirmative, [ExxonMobil]
       misrepresented the current status of integrity verification on the
       pipeline. The answer did not accurately reflect the fact that the
       tool had not been run and no repairs had been scheduled. The issue
       was then compounded when the tool run became delayed for two
       years. As a result, [ExxonMobil] failed to adhere to the procedures
       as written.
Ultimately, the agency concluded that ExxonMobil violated § 195.452(b)(5) “by
failing to follow its written procedures for the TIARA program by incorrectly
indicating that a TFI tool run had been performed and then failing to correct
it when the tool run was delayed.”
       ExxonMobil claims in only the most general terms that Item 8 of the
agency’s final order should be vacated along with the other challenged
violations. However, ExxonMobil does not directly address its basis for this
argument. Unlike Items 4 and 7, in which the agency expressly relies on Item
1 in finding that ExxonMobil committed a violation, it is not apparent how
Item 8 relates to the other contested violations, most importantly those
pertaining to § 195.452(e)(1). We therefore conclude that ExxonMobil has
forfeited its challenge to Item 8. 13 See United States v. Scroggins, 599 F.3d 433,
446–47 (5th Cir. 2010) (holding that an argument is not adequately presented
on appeal by a party that fails to identify the relevant legal standards or
authority to support its argument).
       Even if we were to liberally construe ExxonMobil’s argument, its
argument is unpersuasive. ExxonMobil appears to argue that even though it
misrepresented that it had run an ILI tool assessment which resulted in the


       13Notably, in its brief, ExxonMobil appears to concede that Item 8 is not premised on
Item 1 like the other challenged violations are, stating that “[the agency] has alleged one
regulatory violation, namely Violation 1 for alleged failure to ‘consider’ certain risk
information and conclude that the Pegasus Pipeline was susceptible to seam failure. [The
agency] then expanded it to four additional violations (Nos. 2-4 and 7).”
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                                 No. 16-60448
TIARA program indicating that there were no identified threats to the
pipeline, it went above and beyond what it was required to do and ran a state-
of-the-art ILI seam/crack tool anyway in 2012–2013, which did not detect any
defects in the pipeline. Therefore, ExxonMobil argues, even if it had accurately
answered the question and was required to run an ILI tool as a result of its
answer, the ILI tool run would not have detected any defects in the pipeline so
it should not be found to have been in violation of the regulations. However,
the agency found ExxonMobil to be in violation of § 195.452(b)(5) under Item 8
primarily because ExxonMobil did not follow its written IMP plan when it
failed to accurately use the TIARA program in the risk management process,
not just because ExxonMobil did not run the appropriate test.
      Accordingly, we affirm the agency’s finding that ExxonMobil violated
§ 195.452(b)(5) under Item 8. However, for the reasons explained below, we
remand to the agency to reevaluate the penalty levied against ExxonMobil
under Item 8.
                                 V. Penalties
      ExxonMobil challenges the penalties imposed by the agency. We review
an agency’s penalty determination under the arbitrary and capricious
standard. Interamericas Invs., Ltd. v. Bd. of Governors of the Fed. Reserve Sys.,
111 F.3d 376, 384 (5th Cir. 1997). First, ExxonMobil argues that the penalties
should be capped at $1,000,000 under the Pipeline Safety Act. Second,
ExxonMobil argues that the agency erred in increasing the assessed penalty
for Item 8 on the basis that it had a “contributory impact” on the Mayflower
release. We discuss each of these arguments below.
      First, ExxonMobil argues that the total amount of the penalty assessed
by the agency must be capped at $1,000,000 under the Pipeline Safety Act, 49
U.S.C. § 60122. We disagree. In 2012, Congress raised the maximum civil
penalty that the agency could levy for “a related series of violations” of the
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                                       No. 16-60448
pipeline safety regulations from a cap of $1,000,000 to $2,000,000. See 49
U.S.C. § 60122(a). The statute states that “[a] separate violation occurs for each
day the violation continues.” 49 U.S.C. § 60122(a)(1) (emphasis added).
Therefore, each day a violation under the remaining Items in the final order
occurred after 2012 was a separate violation subject to the $2,000,000 penalty
maximum. Accordingly, we conclude that the agency did not act in an arbitrary
or capricious manner in applying the $2,000,000 penalty maximum. 14
         ExxonMobil’s second argument pertains to Item 8, which we have
affirmed above. ExxonMobil argues that the agency erred in increasing the
assessed penalty for Item 8 on the ground that it had a “contributory impact”
on the Mayflower spill. 15 In determining the penalty amount, the agency is
directed by statute to consider the following: the nature, circumstances, and
gravity of the violation, including adverse impact on the environment; the
degree of the violator’s culpability, any history of prior violations, and any
effect on ability to continue doing business; and the violator’s good faith in
attempting to comply. 49 U.S.C. § 60122(b). In assessing the $783,300 penalty
for Item 8, the agency applied these factors and stated the following in its final
order:
         With regard to the nature, circumstances and gravity of the
         violation, including adverse impact on the environment, the
         Violation Report suggested the violation had the highest level of
         gravity because the violation was a causal factor in the Mayflower
         Accident, which was the result of ERW pipe seam failure. In


          ExxonMobil also argues that the agency acted in an arbitrary and capricious
         14

manner when it rejected its argument that Items 1–4 and 7 are “a related series of violations”
under 49 U.S.C. § 60122(a)(1). However, in light of our decision vacating Items 1–4 and 7, we
need not reach this question because the penalties associated with the remaining violations
are less than $2,000,000.
       15 ExxonMobil also argues that the agency erred with regard to Items 1 and 2 on the

same grounds; however, because we have vacated Items 1 and 2, we need not address this
argument as to those violations.

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                                 No. 16-60448
      addition, with regard to the degree of culpability and good faith,
      the Violation Report suggested that [ExxonMobil] had an elevated
      degree of culpability and that no good faith credit was warranted.
ExxonMobil contends that the violation cited in Item 8 did not contribute to
the Mayflower release because even if it had complied with the regulations—
i.e. even if it had treated the pipeline as susceptible to seam failure and
assessed the integrity of the pipe with a method capable of assessing seam
integrity under § 195.452(j)(5)—it would not have discovered the specific defect
in the Pegasus Pipeline that caused the release. ExxonMobil bases this
argument on the fact that when it ultimately ran such an assessment, the
defect was not detected.
      We conclude that the agency erred in finding that Item 8 “had the
highest level of gravity because the violation was a causal factor in the
Mayflower Accident.” While it is true, as discussed above, that ExxonMobil is
culpable of misrepresenting that a TFI tool run had been performed, the record
does not support the agency’s finding that the misrepresentation “was a causal
factor in the Mayflower Accident.” When the agency ran the TFI tool in 2012–
2013 shortly before the Mayflower release occurred, the tool was unable to
identify a defect in the Pegasus Pipeline even though the third-party vendor
who was later analyzing the results from the tool run knew that the Mayflower
release occurred. It follows that even had ExxonMobil run the TFI tool in a
timely manner, the results of the run would not have identified a defect in the
pipeline and therefore would not have prevented the oil spill.
      The agency contends that the fact that ExxonMobil’s integrity
assessment tool run did not detect any anomaly at the site of the pipeline’s
failure “may have” been because ExxonMobil used an inappropriate tool for




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                                          No. 16-60448
that assessment. But the agency did not make a finding on this point. 16 Indeed,
the agency suggested in Item 1 of its final order that the TFI seam/crack tool
was appropriate for that assessment. 17 Further, the regulations indicate that
either an in-line inspection tool or a hydrostatic test are appropriate for
assessing LF-ERW pipeline seam integrity. See 49 C.F.R. § 195.452(j)(5)(i)–(ii).
For the agency to now come forward with a new rule that this particular in-
line inspection tool is not appropriate for assessing seam integrity in these
circumstances would implicate fair notice concerns. See Diamond Roofing Co.,
528 F.2d at 649.
         We conclude that the agency acted contrary to the evidence before it and
in an arbitrary and capricious manner when it determined that ExxonMobil’s
misrepresentation to the TIARA program was a causal factor in the Mayflower
release. Accordingly, we remand to the agency to reevaluate what would be an
appropriate penalty for Item 8 in light of this determination and in light of our
decision vacating the violations associated with Items 1–4 and 7 of the final
order. Further, given that we have vacated Items 1–4 and 7, we likewise vacate
the penalties associated with those items.




         16   In its order denying ExxonMobil’s Petition for Reconsideration, the agency stated
that
         [a]lthough no anomaly was previously detected at the failure location using a
         TFI tool, there were questions raised during the proceeding about the
         appropriateness of using a TFI tool in the first place, given that the types of
         defects detected by hydrostatic tests in 2005–2006 would not likely be detected
         with a TFI tool. . . . While the Final Order did not decide if hydrostatic testing
         would have detected the anomaly that failed, the fact that it was not detected
         does not negate the contributory impact of the violations.
          Under Item 1 of its final order, the agency noted that “[i]t was not until 2012–2013
         17

that [ExxonMobil] finally performed an ILI using a TFI seam/crack tool, which is designed to
detect certain ERW seam integrity issues.” (emphasis added).
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                                   No. 16-60448
                             VI. Compliance Order
      ExxonMobil challenges the agency’s compliance order. The compliance
order contains direction pertaining to Items 1, 2, 5, 6, and 8 of the agency’s
final order. ExxonMobil argues generally that the terms of the compliance
order exceed the agency’s authority. Under the Pipeline Safety Act, the agency
is authorized to “issue orders directing compliance” with a regulation
promulgated by the agency and such orders must “state clearly the action a
person must take to comply.” 49 U.S.C. § 60118(b).
      Because we have vacated Items 1 and 2 of the agency’s final order, we
similarly vacate Paragraphs 1 and 2 of the compliance order. ExxonMobil also
purports to challenge the paragraphs of the compliance order that are related
to Items 5, 6, and 8. However, ExxonMobil did not challenge these provisions
of the compliance order in the proceedings before the agency. To the extent
ExxonMobil now seeks to challenge these provisions of the compliance order,
it has forfeited those arguments. See Scroggins, 599 F.3d at 446–47; see also
United States v. Chavez-Valencia, 116 F.3d 127, 130 (5th Cir. 1997) (the failure
to raise a claim below “constitutes a forfeiture . . . of that right for the purposes
of appeal”). Therefore, the paragraphs of the compliance order pertaining to
Items 5, 6 and 8 remain in effect.
                                 VII. Conclusion
      According to the unambiguous text of the pipeline integrity regulations,
pipeline operators are required to “consider” various risk factors when they
prioritize pipelines for assessment. This is a process-based requirement that
does not mandate a particular outcome, but rather prescribes a careful,
informed decision-making process that pipeline operators must undergo in
good faith. ExxonMobil complied with this requirement when it determined
the Pegasus Pipeline was not susceptible to seam failure by applying the
methodology set forth in the Baker Report decision tree and, considering this
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                                 No. 16-60448
determination, the pipeline’s seam type, and leak history, developed its
integrity reassessment schedule under § 195.452(e)(1). We therefore VACATE
the agency’s final order with respect to Items 1–4 and 7, which are all premised
on a finding that ExxonMobil did not properly consider the appropriate factors
in developing its integrity reassessment schedule under § 195.452(e)(1), and
VACATE the penalties associated with Items 1–4 and 7. We REMAND to the
agency with instructions to reconsider the penalty imposed for Item 8 in light
of our determination that the Item 8 violation was not a causal factor in the
Mayflower release.




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                                 No. 16-60448
JAMES E. GRAVES, JR., Circuit Judge, concurring in part:
      I agree with the majority that ExxonMobil lacked sufficient notice of the
agency’s interpretation of 49 C.F.R. § 195.452(e). Consequently, I agree that
Items 1-4 and 7 should be vacated. I also agree that the agency’s determination
regarding Item 8 should be affirmed, but should be remanded to the agency to
reevaluate the basis for the penalty associated with this violation. But the
regulation is ambiguous and for that reason, deference is appropriate on that
ground. It is well-settled that an agency’s interpretation of its own regulation
must be given “controlling weight unless it is plainly erroneous or inconsistent
with the regulation.” Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414
(1945). “[T]his broad deference is all the more warranted when, as here, the
regulation concerns ‘a complex and highly technical regulatory program,’ in
which the identification and classification of relevant ‘criteria necessarily
require significant expertise and entails the exercise of judgment grounded in
policy concerns.’” Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 412 (1994)
(quoting Pauley v. Beth Energy Mines, Inc., 501 U.S. 680, 697 (1991)).
      The majority acknowledges that the regulatory program here is highly
complex and, at minimum, involves “lengthy, repeated, and in-depth analysis”
of risk factors by referencing the Baker Report’s elaborate and “conflicting”
guidance. Instead of concluding that the agency’s interpretation of § 195.452(e)
is not plainly erroneous, however, the majority creates its own definition of
“consider,” which requires pipeline operators “to carefully undergo an informed
decision-making process in good faith, reasonably taking into account all
relevant risk factors in reaching a decision.” The majority states that its
definition reflects the unambiguous meaning of the regulation. See Christensen
v. Harris Cnty., 529 U.S. 576 (2000) (“Auer deference is warranted only when
the language of the regulation is ambiguous.”) But its interpretation is not
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                                  No. 16-60448
compelled by the regulation’s plain language, which tersely states that a
pipeline operator “must consider” “all risk factors that reflect the risk
conditions on the pipeline segment.” See § 195.452(e)(1). Nor is it compelled by
any authority that the majority cites. See, e.g., J.H. Miles & Co., Inc. v. Brown,
910 F. Supp. 1138, 1156 (E.D. Va. 1995) (stating that “consider” “can hardly be
read as a strict dictate” but “[t]his does not mean that the Council has carte
blanche to ignore plainly relevant information”) (emphasis added). More to the
point, the majority’s interpretation, however reasonable or well-crafted, cannot
supplant the agency’s interpretation of its own ambiguous regulation, “unless
it is plainly erroneous or inconsistent with the regulation,” which it is not.
Seminole Rock, 325 U.S. at 414.
      Though the majority is correct that plain language of § 195.452(e) allows
pipeline operators some discretion regarding how they choose to comply with
the regulation, it is implausible that the agency would enact a regulation that
would be so toothless as to be practically unenforceable, and would give
regulated parties ultimate power to decide whether they are in compliance.
Because the agency’s interpretation of its own ambiguous regulation is not
“plainly erroneous or inconsistent with the regulation,” I would give it
deference. See Seminole Rock, 325 U.S. at 414.




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