In the last few games I have played, it seems like the phidi aren't even attempting to colonize their nearby systems. The other races are acting properly aggressive, but the phidi just seem to be doing nothing but building scout ships. Anyone else see this occurring?

I have also seen this quite a lot. Mostly it seemed to be due to their limited compatibility with planets.

Interestingly though, when I have been playing around with difficulty modding, they got super buffed and basically rolled over all the other races which does not make sense if the above were true.

So my assumption now is that it has something to do with the way the AI script handles ships for Phidi. Maybe because they do not have strong enough fleet they shy away from expanding their colonies so the issue might be originating from the ship loadouts available to them?

Well, my last game I watched as the phidi ignored a small ocean world that would have given them a 3rd system (it was an uncontrolled system, and even though I had a fleet in orbit, I did not warn them off at all). I KNOW the side isn't weak, I tried a few games as them and had a fairly easy time of it.

Tested with following:
- 12 Systems
- 2 empires (mine and a Phidi)
- Close distance between stars
- Normal game speed
- Hard AI difficult

Result was quite surprising:
1. Phidi took over much of the available planets within the first 15 turns.
2. Phidi seems to have started the game with several scouts and two colony ships, or they bought these right in the first few turns - so this has helped but they did in no way shy away from expanding
3. Marauder base launched raids against their colonies and even attacked their home system several times after they were pushed back (I only took away one colony from them)
4. After the initial Marauder raids, the AI started piling up ships in its home system. Did not attack nor colonies with now idle colony ships but the fleet gathering there was very of course

So generally it really does not seem to be due to their planet preference, and they do trey to expand early on, but once they suffer setbacks, they seem to revert to an overly defensive state and not risking colonization anymore