Small Business Participation in the Alaska Natural Gas Pipeline  
Project (04-AUG-05, GAO-05-860R).				 
                                                                 
Alaska currently holds 35 trillion cubic feet of proven 	 
recoverable natural gas resources, about 19 percent of total U.S.
reserves. Efforts to construct a pipeline to transport this	 
natural gas from Alaska's North Slope to the lower 48 states have
been stalled since 1982. The recent increase in natural gas	 
prices has renewed interest in completing the pipeline, a project
that is estimated to cost up to $20 billion. In addition to	 
providing access to significant natural gas reserves, some expect
the project to generate thousands of jobs and billions of dollars
in revenues for the federal government and the State of Alaska.  
This report responds to a mandate in the Alaska Natural Gas	 
Pipeline Act (the Pipeline Act) that we conduct a study to	 
determine the extent to which small business concerns have	 
participated in the construction of oil and gas pipelines. The	 
Pipeline Act includes a "sense of Congress" provision that the	 
sponsors of the Alaska natural gas pipeline should maximize the  
participation of small business concerns in contracts and	 
subcontracts awarded for the project. This provision, while	 
setting out a statement of congressional opinion, does not	 
establish a legal requirement for small business participation.  
We confirmed that this report would focus on small business	 
participation in the Alaska natural gas pipeline. It describes	 
(1) the status of the Alaska natural gas pipeline project and (2)
the extent to which any regulatory or oversight structure is in  
place to monitor small business participation in the construction
of the pipeline.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-860R					        
    ACCNO:   A32018						        
  TITLE:     Small Business Participation in the Alaska Natural Gas   
Pipeline Project						 
     DATE:   08/04/2005 
  SUBJECT:   Construction (process)				 
	     Federal/state relations				 
	     Gas pipeline operations				 
	     Monitoring 					 
	     Natural gas					 
	     Performance measures				 
	     Regulatory agencies				 
	     Reporting requirements				 
	     Small business					 
	     Federal regulations				 
	     Strategic planning 				 
	     Natural resources					 
	     Alaska						 

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GAO-05-860R

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

1

business concerns have participated in the construction of oil and gas
pipelines. The Pipeline Act includes a "sense of Congress" provision that
the sponsors of the

1Pub. L. No. 108-324, Div. C, S: 112, 118 Stat. 1255 (Oct. 13, 2004)
(codified at 15 U.S.C. S: 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.

Alaska natural gas pipeline should maximize the participation of small
business concerns in contracts and subcontracts awarded for the project.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.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

4

project sponsors. 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

2"Sponsors" refers to the companies that will construct and operate the
pipeline.

315 U.S.C. S: 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. S: 720d(g)).

4Alaska Stat. S:S: 43.82.010-43.82.990.

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.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

515 U.S.C. S:S: 719 - 719o.

decision and report to Congress, and Congress would vote on the proposal.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

7

plan, and FERC issued a conditional certificate to designate project
sponsors. 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.8

The Pipeline Act adopted the Small Business Act's definition of "small
business concern" that is set out in 15 U.S.C. S: 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.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

                                       10

and gas pipelines is $28.5 million in annual receipts. SBA's size standard
for

615 U.S.C. S:S: 719c, 719e, and 719f.

7Pub. L. No. 95-198, 91 Stat. 1268 (Nov. 8, 1977).

8Pub. L. No. 108-324, Div. C, 118 Stat. 1255 (Oct. 13, 2004) (codified at
15 U.S.C. S:S: 720-720n).

915 U.S.C. S: 632(a)(2).

1013 C.F.R. S: 121.201, North American Industry Classification System
(NAICS) code no. 237120.

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.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.12 A detailed open season plan must be
submitted to FERC.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

14

necessity" authorizing construction and operation of the pipeline. 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

11Id., NAICS code no. 238120.

1215 U.S.C. S: 720a(e) and (g); and 18 C.F.R. S: 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. S: 720a(e)(2). FERC issued these regulations in February 2005. See
70 Fed. Reg. 8269 (Feb. 18, 2005) (codified at 18 C.F.R. S:S: 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).

1318 C.F.R. S: 157.38.

14In their application, the sponsors must show that the proposed project
is or will be required by the present or future public convenience and
necessity.

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

Source: FERC staff.

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.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.

15In 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).

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

                                       16

with applicable laws and other requirements. 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

16See 15 U.S.C. S: 719o (equal opportunity requirement); and 15 U.S.C. S:
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. S:
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, S: 3012,
106 Stat. 2776 (Oct. 24, 1992).

subcontractors must have affirmative action plans.17 These entities also
were required to submit compliance reports.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

1743 C.F.R. S: 34.6 and 43 C.F.R. S: 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.

1843 C.F.R. S: 34.9.

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
http://www.gao.gov.

Please contact me at (202) 512-8678 or [email protected] 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.

William B. Shear
Director, Financial Markets and

Community Investment

(250232)

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