Going On or Off the Rails? The Department of Transportation Issues Controversial New Crude-by-Rail Rules  

The shipment of crude oil by rail throughout the U.S. has been an explosive issue, both literally and figuratively. Over the last several years, rail shipments from North Dakota’s Bakken fields and Canada’s tar sands have increased exponentially, mainly because of significantly increased production and lack of pipeline capacity to refineries on the U.S. coasts. At the same time, there has been an increasing number of recent high-profile derailments, spills and explosions, particularly at Lac Megantic, Quebec, but also in several U.S. states. These incidents have galvanized federal, state and local officials and citizens, who are concerned about the growing traffic of long “unit” trains carrying crude that regularly pass through large urban areas.

On May 1 of this year, the U.S. Department of Transportation’s (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA), in coordination with the U.S. Federal Railroad Administration (FRA) and their Canadian counterparts, issued long-anticipated and controversial rules for rail shipments of crude oil, entitled “Enhanced Tank Car Standards and Operational Controls for High-Hazard Flammable Trains.” Through these rules, effective July of this year, PHMSA has sought to strike a balance between ensuring public safety and not over burdening the nation’s rail transportation system or petroleum industry. Not surprisingly, PHMSA was hit immediately with lawsuits by industry groups, which think the rules go too far, and environmental advocates that think it doesn’t go far enough. As usual, the reality may lie somewhere in between, as PHMSA has sought to be both pragmatic and accommodative to both sides. Meanwhile, DOT has indicated its work may not be done.

A string of agency actions following a string of accidents

While Lac Megantic was the most tragic and destructive accident to date, the number of derailments, spills and explosions involving crude-by-rail has increased along with the number of shipments. Even before the latest rules were proposed in August 2014, PHMSA and FRA issued a series of orders, including several emergency orders and safety advisories, on issues such as securement, speed limits, testing and classification, routing and emergency response. Many of these actions focused specifically on Bakken crude, which is considered by PHMSA and others to be more volatile than other crude shipments. At the same time, the rail industry reached voluntary agreements or established their own standards on speed limits and tank car integrity. The U.S. National Transportation Safety Board (NTSB) chimed in with its own concerns, particularly regarding the industry’s updated standard car, which continued to fail in several recent accidents. Meanwhile, across the border in Canada, the locus of the Lac Megantic accident, agencies are several steps ahead of the U.S., mandating changes in tank car standards and requiring phase-out of older models.

The final rule

The final rule incorporates many of these orders, actions and agreements and expands safety requirements considerably beyond crude oil. It also reflects cost considerations by moderating the strength of some of PHMSA’s initial proposals (tank car integrity, phase-out dates), while pushing for higher standards in other areas (braking systems). The rule applies to a new category of trains, called “high-hazard flammable trains” (HHFT), which are a continuous block of 20 or more tank cars loaded with a flammable liquid (such as crude or ethanol), or 35 or more tank cars loaded with a flammable liquid but dispersed throughout a train. According to DOT, these are the highest risk trains.

The rule focuses on three main areas: tank car integrity, rail operations and classification.

1. Tank cars

The rule requires all new tank cars constructed after October 1 of this year to meet a new enhanced DOT specification for use in a HHFT. Significantly, in a bow to industry evidence of cost concerns, this was not the most protective option of the ones considered by PHMSA, but also not the least. It requires a 9/16″ shell, 11-gauge thermal jacket, top-fitting protection and a full-height head shield. Existing tank cars must be retrofitted (or else phased out) in accordance with DOT-specified standards and on a timeline based on packing group (which is based on boiling point/flash point) and type of car (DOT-111 and newer industry-standard CPC-1232). The timeline for retrofits and phase-outs of older cars has been extended beyond the initial proposal and broadened to coordinate with the one set by Canadian officials since these trains regularly run between the two countries. The least protected and oldest DOT-111 cars in packing group 1 (the lowest boiling/flash point) would need to be retrofitted or phased out no later than by January 2018, with deadlines for other DOT-111 and CPC-1232 cars running between 2018 and 2025, depending on packing group and car type.

These timelines are supposed to take into account manufacturer and retrofit capacities, but even as they are less strict than first proposed, they remain a source of great controversy. Even with the extra time for retrofits, industry warns that there still will not be sufficient time or shop capacity to supply enough new and retrofitted cars by the established deadlines, while environmental and safety advocates and some members of Congress demand a more immediate phase-out of the older tank cars. Significantly, some companies like Tesoro are voluntarily speeding up their purchases of cars which meet or exceed the new standards, or seeking to incentivize removal of older tank cars through pricing structures, like BNSF.

1. Rail operations

All HHFTs are restricted to 50 mph in all areas and any HHFTs containing tank cars not meeting the enhanced standards are limited to 40 mph in high-threat urban areas. This is largely consistent with the most recent emergency order which currently keeps all unit trains at such a speed in these highly urbanized areas. The rule defines a subcategory of HHFTs—high-hazard flammable unit trains (HHFUTs) or a train comprised of 70 or more loaded tank cars containing flammable liquid traveling at over 30 mph—to be operated with an electronically controlled pneumatic (ECP) braking system by January 1, 2021 when carrying a packing group 1 flammable liquid (e.g. crude). All other HHFUTs are to have such a braking system by May 1, 2023. By contrast, all other HHFTs are to have in place an enhanced braking system (two-way end-of-train device or distributed power braking systems), which is a significant concession to the railroads given the costs of the ECP brakes. The rule also establishes rail routing risk assessments by railroads and requires routing information be available to state, local and tribal officials.

While the speed limit issue has been less controversial, there are concerns regarding how slower speeds might impact the rail system and traffic as a whole. The ECP braking requirements, by contrast, are a key issue for industry and railroad interests, which assert they are unjustifiably expensive and unnecessary. Though PHMSA did not require ECPs for all trains in the short term, as safety proponents hoped, it did make these systems the default for HHFUTs in eight years.

1. Testing and classification

Finally, document sampling and testing programs are required for all unrefined petroleum based products, such as crude oil. The information must be documented, reported and made available to DOT, but the rule didn’t impose a requirement that the crude be stabilized, as North Dakota has ordered of its producers in the Bakken. Then again, PHMSA might later decide such a step is necessary after gathering and reviewing the data. A debate continues as to whether the volatility of Bakken crude has played a role in the recent explosions during derailment.

The fault lines are established

Since PHMSA selected new standards for tank cars and ECP braking as well as retrofit timelines that were stricter than industry preferred, it is not surprising that the rule remains controversial among railroads, producers and refiners due to the increased cost, processes to follow and technologies to apply. On the other hand, public health and safety officials argue that the phase-out of the older tank cars needs to be faster, and two municipalities have challenged the rule for not applying to smaller unit trains (e.g. less than 20 tank cars). All of these parties will have their day in court – petitions for review have already been filed by the differing sides in four separate courts of appeals.

Congressional responses have been diverse. Republican leaders of the relevant Congressional committees (Senate Commerce, Science and Transportation; House Transportation and Infrastructure) initially offered cautious support for the rules. Democrats and Republicans from producing states are more critical of the costlier requirements, while Democratic leaders, particularly from the Northwest and transit states, still press for faster action and quicker phase-outs. States also continue to express concern with current shipments, and some are seeking to enact safety-based legislation within their fairly proscribed authority (most rail-related regulation is federally preempted).

In the end, though, it is not surprising that PHMSA acted as it did, as it was confronted with both serious cost-benefit issues by industry and considerable pressure to prevent a growing number of crude-by-rail accidents. It remains to be seen whether these rules will significantly reduce accidents or spills, or increase the cost of shipments of crude-by-rail sufficient to reduce these shipments (PHMSA projected a marginal cost of compliance to be U.S. $2.5 billion). Already, shipments are down for the first quarter of 2015, mainly because of the dropping price of oil. Still, DOT and the Energy Information Agency predict a continued growth in crude-by-rail demand, which also brings with it an expected increase in accidents.

The game is far from over

Meanwhile, DOT and PHMSA have made it clear that the rule is not the final word. There are additional rulemakings underway on securement, emergency response, transfer of oil to and from tank cars and other issues. And as stated above, PHMSA may also refocus on stabilization as well as other rail operation issues, such as track safety. Ultimately, what DOT, PHMSA and FRA might do next may depend on whether the new rules slow down the rate of derailments, accidents, releases and fires. The next round of agency action may be as likely as the next big accident.

Jim Rubin is counsel in Dentons’ global energy sector.