Congress Probes Crude by Rail Safety Developments; Voluntary Industry-Regulator Agreement Addresses Safety Concerns

by King & Spalding
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Federal regulators and representatives of the rail and petroleum industries testified before a Congressional panel on February 26, 2014 on emerging safety regulations for transportation of crude by rail. Recent derailments and related explosions and fatalities, such as those in Lac-Megantic, Quebec, and Casselton, North Dakota, have raised the profile of the issue with regulators, industry, and lawmakers.

The recent, dramatic increase in domestic oil production in the Bakken and other shale regions has exceeded pipeline infrastructure capacity, leaving rail as a primary method of delivering new crude oil supplies to market. Crude by rail transport has increased from under 10,000 carloads in 2008 to around 415,000 in 2013, according to data from the Association of American Railroads (AAR). At least ten spills of crude traveling by freight train have occurred since 2008, releasing almost 3 million gallons of oil.

As pointed out by several witnesses appearing before the U.S. House of Representatives Committee on Transportation and Infrastructure, Subcommittee on Railroads, Pipelines, and Hazardous Materials, the vast majority (99.997%) of hazardous materials shipped by rail are delivered safely. Yet industry representatives and government officials agree that further improvements are needed in light of recent incidents.

The hearing was especially timely, given the February 21st announcement of an agreement between government regulators and the rail industry to strengthen safety measures voluntarily, including more frequent track inspections, lower speeds in densely populated areas, and routing of crude oil shipments away from urban areas. Also, the day before the hearing, an emergency Executive Order (the "Order") was issued by the U.S. Department of Transportation (DOT), requiring shippers to classify and package crude by rail cargo as Packing Groups I or II [1] and to test petroleum prior to transport "with sufficient frequency and quality" to ensure proper classification and packaging, or face criminal prosecution and civil penalties of up to $175,000 per day.

Industry groups at the hearing claimed that the Order creates confusion by requiring testing of crude rail cargo "with sufficient frequency and quality." Jack Gerard, President and CEO of the American Petroleum Institute (API), noted that while current regulations require specific testing of boiling points and flash points, the industry does not know what types of testing will satisfy the new Order. Gerard described a possible "chilling" impact, as the Order reminds industry of potential criminal penalties for non-compliance, yet provides unclear testing guidelines. He said industry needs to sit down with regulators, to know and to satisfy their expectations under the Order.

Cynthia Quarterman, Administrator of the Pipeline and Hazardous Materials Safety Administration (PHMSA), which regulates the transport of hazardous materials regardless of mode, responded that the Order's terminology was left vague intentionally, so that shippers can determine what testing is appropriate to their particular operations. Quarterman said PHMSA is glad to answer any questions on how to comply with the Order.

Rep. Rick Larsen (D-WA) asked whether Bakken crude is materially different from other crudes, particularly with regard to vapor pressure, and whether vapor pressure is adequately tested and accounted for under current regulations. Mr. Gerard of API responded that the best information shows Bakken crude is comparable to other light crudes. While vapor pressure is not required testing under current regulations, API – which has created over 600 industry standards in the petroleum sector – is reevaluating this regulatory regime and considering whether vapor pressure, viscosity, and other crude oil properties should be tested for purposes of classification, in addition to flash point and boiling point. Gerard anticipates this process will take less than 6 months on an expedited basis, whereas API's normal standard-setting process takes around 2 years.

Robert Sumwalt, of the U.S. National Transportation Safety Board (NTSB), testified about specific recommendations issued last month by both the U.S. NTSB and Canada's NTSB, including the need for proper classification, revised routes, and emergency response planning. While Sumwalt is encouraged by the recent industry-government agreement to address several of these issues, he said an "unacceptable public risk" still exists in the continued use of the DOT-111 tank car to transport crude by rail. Beginning in 1991, NTSB found the DOT-111 was uncrashworthy and recommended that the federal standard be strengthened.

Rep. Peter DeFazio (D-OR) grilled PHMSA Administrator Quarterman on PHMSA's lengthy delay in revising the DOT-111 standard. Although PHMSA was created in 2004, it did not issue an Advanced Notice of Proposed Rulemaking on the DOT-111 standard until 2013. Rep. DeFazio repeatedly asked Quarterman what is the "earliest date" a final standard could be in place. She refused to answer, stating only that PHMSA recently closed the comment period after receiving over 100,000 comments and currently is drafting the rule with the Federal Rail Administration (FRA), which has jurisdiction over rail safety. Quarterman emphasized the importance of getting the rule "right" and said that once the proposed rule leaves PHMSA and FRA, the Administration needs at least another 120 days to review it. She said a Notice of Proposed Rulemaking could be expected sometime this year.

Edward Hamberger, President and CEO of the AAR, urged PHMSA to move forward as soon as possible on finalizing the DOT-111 rule, so that industry can begin phasing out older cars and investing in newer cars. Subcommittee Chairman Jeff Denham (R-CA) echoed this sentiment, noting companies cannot be expected to commit capital to rail car improvements without certainty in the standard. Hamberger applauded Burlington Northern Santa Fe Railway Company (BNSF) for moving ahead of federal regulation to develop better tank cars. Last week, BNSF, the origin carrier for the vast majority of crude transported in the U.S., issued an RFP to purchase 5,000 of a "next generation" tank car, to be built above current industry and regulatory standards. In addition, Hamberger noted the rail industry is willing to bolster its voluntary standard for the DOT-111 rail car (known as the CPC-1232 standard), which already exceeds the federal standard, by requiring an outer jacket and thicker walls, consistent with some NTSB recommendations.

PHMSA Administrator Quarterman cautioned, however, that a new tank car "is not a silver bullet." She said federal regulators must pursue a holistic, comprehensive safety regime, which includes preventative maintenance and operations, as well as appropriate mitigation and emergency response in the event of an incident. She described "Operation Classification," a joint enforcement initiative last year by PHMSA, FRA, and the Federal Motor Carrier Safety Administration involving unannounced inspections of crude loads, as a good first step toward this goal.

Joseph Szabo, Administrator of the FRA, echoed Quarterman's call for a comprehensive solution. He said the recent agreement between AAR and DOT is a positive first step. He views the agreement as "fully enforceable," and noted FRA will audit and oversee compliance with the agreement and call out companies that violate the agreement. Mr. Hamberger of AAR expressed confidence that rail companies are taking their commitments under the agreement very seriously, as CEOs and other senior managers signed their names to it.

FRA Administrator Szabo also noted the need to address the short line rail industry, which was not party to the recent industry agreement. FRA is in discussions with short line operators, which have different concerns than Class I railroad operators. Szabo said several short lines have indicated they would like to sign onto the AAR agreement.

Chairman Denham and Ranking Member Corrine Brown (D-FL) indicated that the panel plans to hold a field hearing in the Bakken region soon, to further explore crude by rail safety issues. On March 6, 2014, a subcommittee of the Senate Committee on Commerce, Science, and Transportation will hold a similar hearing on rail safety, with a focus on crude by rail transport. And on April 1, 2014, the FRA's Railroad Safety Advisory Committee is expected to complete its evaluation of the safety of crude by rail transport, according to FRA Administrator Szabo.

At this point, it does not appear that legislation specifically addressing crude by rail safety issues is likely to emerge or move. But it is likely that Congress will pay increased oversight attention to the subject, and that PHMSA and the FRA will come under increasing pressure to make crude by rail safety measures a top priority. Given the slow pace of federal rulemaking, regulators can be expected to continue using Executive Orders, informal guidance, and cooperative industry agreements to address crude by rail safety in real time.

[1] Packing Groups are used for determining the degree of protective packaging required for Dangerous Goods during transportation. Packing Group I denotes materials of great danger, such as flammable liquids like diethyl ether or carbon disulfide. Packing Group II denotes materials of medium danger, such as gasoline or acetone. Crude oil was previously classified as Packing Group III (least danger among Dangerous Goods).

 James F. Bowe, Jr.
 Washington, D.C.
 +1 202 626 9601
 jbowe@kslaw.com

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 Sara E. Peters
 Washington, D.C.
 +1 202 626 2951
 speters@kslaw.com

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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