United States: Reed Smith's "Crude By Rail" Series - DOT Publishes Amended Regulations For Rail Transport

As part of a 19-month initiative to improve the safety of hazardous rail traffic, on Friday, May 8, 2015, the U.S. Department of Transportation ("DOT") published¹ new regulations and standards for the bulk transport of Class 3 flammable liquids—including crude oil and ethanol² —via the nation's railroads, amending the existing Hazardous Materials Regulations ("HMR"). See 49 CFR parts 171-180.

The amended regulations, which go into effect on July 7, 2015, are explained in the DOT's extensive summary of the "Final Rule," titled "Hazardous Materials: Enhanced Tank Car Standards and Operational Controls for HHFTs."³ The Final Rule was jointly developed by DOT's Pipeline and Hazardous Materials Safety Administration ("PHMSA") and the Federal Railroad Administration ("FRA") — and in coordination with Transport Canada.⁴ According to DOT, the amended regulations are "designed to prevent accidents, mitigate consequences in the event of an accident, and support emergency response."

This client alert is intended to give those impacted by the a high-level overview of the new requirements and the contents of the Final Rule. Specifically, this client alert addresses the following questions:

1. Does the Final Rule Impact the Oil Industry?
2. What Should You Know about the Final Rule?
3. Is the DOT's Final Rule Harmonized with Transport Canada's Rules?

Please also look for your invitation to Reed Smith's upcoming May 27, 2015 webinar discussing these issues in more detail. Register for the May 27 webinar here.

I. Does the Final Rule Impact the Oil Industry?

It is apparent from the title that the Final Rule affects the rail industry, but does it affect the oil industry too? Yes, the Final Rule contains new requirements for offerors and shippers, specifically related to classification, and the requirements placed on the rail industry are likely to have economic implications on the oil industry.

Offerors and Shippers in the Oil Industry. The HMR impacts offerors and shippers of crude oil and other petroleum products. "Offeror" is defined by the HMR as one who does either or both of the following: (i) performs, or is responsible for performing, any pre-transportation function required under the HMR for transporting hazardous material in commerce; or (ii) tenders or makes the hazardous material available to a carrier for transportation in commerce. See 49 C.F.R § 171.8. "Shipper" is defined in the Federal Railroad Safety Act ("FRSA") as a person contracting with one or more railroads for freight transportation. See 49 C.F.R § 200.3.

The Final Rule does not broaden those subject to the HMR. Indeed, the DOT specifically declined to amend or broaden the definition of offeror or shipper, instead amending the HMR by placing more obligations on offerors regarding proper classification. Accordingly, companies in the oil industry that buy or sell crude oil or ethanol that could be transported by rail should familiarize themselves with the Final Rule and its requirements before the new regulations go into effect on July 7, 2015.

Economic Implications on for Oil Industry. Although many of the Final Rule's new requirements place the onus on rail car manufacturers, owners, and carriers, these requirements will have an indirect effect on oil companies that rely on rail to transport their crude. As common carriers, rail companies are required to transport materials offered, but the rail companies can adjust their rates, fees, and contracting terms.

How exactly the Final Rule's resulting economic burdens will be distributed and shared among the rail, shipping, and oil industry is not currently known. At a minimum, rail carriers are likely to amend their tariffs and attempt to shift the Final's Rule's financial burden to their customers. Similarly, the cost to lease or purchase new rail cars for Class 3 flammable liquids is likely to increase.

II. What Should You Know About The Final Rule?

Does the Final Rule follow the NPRM? In most respects, the Final Rule closely follows the notice of proposed rulemaking ("NPRM") PHMSA issued on August 1, 2014⁵, notwithstanding the 3,200 public comments and recommendations DOT received in response. The most noteworthy differences between the NPRM and the Final Rule are the narrowing of the trains to which the amended regulations will apply and the adopting of a risk-based schedule for retrofitting older rail cars (based not just on the car type but also the packing group).

What trains are subject to the Final Rule? The Final Rule applies to the following trains:

• High-Hazard Flammable Train ("HHFT") is defined as trains with "a continuous block of 20 or more tank cars loaded with a flammable liquid or 35 or more tank cars loaded with a flammable liquid dispersed through a train."
• High-Hazard Flammable Unit Train ("HHFUT") is a "train comprised of 70 or more loaded tank cars containing Class 3 flammable liquids traveling at greater than 30 mph."

The DOT's intent in amending the HMR is to address potential hazards associated with the bulk transport of Class 3 flammable liquids, as defined by these two definitions added to Section 171.8. Although these definitions closely follow FRA Emergency Order Nos. 28 and 30, issued August 17, 2013 and May 7, 2014, respectively, they are more narrow than the definitions contained in the NPRM.

What are the new requirements in the Final Rule? The amended regulations impose requirements on HHFT and HHFUT in four key areas:

1. New Cars and Retrofitting Schedule for Tank Cars;
2. New Braking Standards;
3. New Operational Protocols; and
4. Classification - Sampling and Testing Programs.

Below you will find an overview of these four key areas of the Final Rule.

A. New Cars and Retrofitting Schedule for Tank Cars

Of importance to railcar manufacturers and owners, as well as rail carriers and shippers of petroleum products, is Part 179 of the Final Rule requiring enhanced tank car standards. The DOT adopted Option 2 from the NPRM despite opposition from the majority of the industry. New tank cars are required to meet enhanced design and performance specifications for use in an HHFT in accordance with DOT Specification 117. See 49 C.F.R §§ 179.200 and 179.202. For existing DOT-111 and CPC-1232 tank cars used in HHFT, DOT has issued an aggressive schedule for meeting retrofit requirements. After considering the commentary submitted, the DOT issued a retrofit schedule based on the type of car, DOT-111 vs. CPC-1232, as well as the packing group.

New Cars. All cars constructed after October 1, 2015 shall meet the new DOT Specification 117. The adopted DOT-117 requirements are summarized in the table below:

Each of these changes is intended to reduce loss of containment in the event of a derailment, except the increase in capacity. The increase in capacity was adjusted in an attempt to address industry concern that these design changes would reduce the amount of product that could be transported by a DOT-117 tank car.

Retrofit Cars. Tank cars made to the DOT Specification 111 and CPC-1232 shall be retired or retrofitted in accordance with a specified schedule. The first deadline, January 1, 2017, triggers a reporting requirement where shippers are required to report the number of non-jacketed DOT-111 tank cars (owned or leased) that have or have not been retrofitted. A full timeline of the required retrofit schedule for U.S. and Canada may be found here. The table below shows deadlines for transporting Packing Group I liquids only:⁶

As shown in the table above, DOT-111 or CPC-1232 tank cars that have not been retrofitted cannot be used for transporting Packing Group I liquids after April 1, 2020. Additionally, by May 1, 2025, DOT-111 and CPC-1232 tank cars must be phased out or repurposed according to the designated scheduled for carrying materials in Packing Group II and III.

The retrofitting must be in line with DOT Specification 117R, which slightly modified the DOT Specification 117, applicable to new cars.⁷

B. Braking Standards

The Final Rule also includes new braking standards for certain trains, intended to reduce the severity of accidents and the so-called "pile-up effect." See 49 C.F.R § 174.310(1) and §179.102-10. Under these standards, HHFT must have a functioning two-way end-of-train ("EOT") device or a distributive power ("DP") braking system in place. More significantly, however, by January 2021, any train qualifying as an HHFUT must be operated with an electronically controlled pneumatic ("ECP") braking system if it is transporting at least one tank car of PG I, Class 3 flammable liquid. All other HHFUTs must be operated with an ECP braking system by May 1, 2023. See id.

C. Operational Protocols

The Final Rule also imposes new operational protocols for trains transporting large volumes of flammable liquids, including routing requirements, speed restrictions, and notifications for local government agencies.

Routing Requirements. Prior to selecting a route, railroads that operate HHFTs must perform a routing analysis that includes consideration of at least 27 safety and security factors, including track type and maintenance schedule. See 49 C.F.R §§ 172.820 and 174.310. All routing and planning requirements shall be maintained by the railroads and shared with the FRA or PHMSA upon request. A point of contact with state, local and tribal officials in each jurisdiction that may be affected by a rail carrier's routing decision shall be designated. Id.

Speed Restrictions. The Final Rule restricts all HHFTs to 50 mph in all areas and requires HHFTs that contain any tank cars not meeting the enhanced tank car standards under the Final Rule to operate at a 40 mph speed restriction in high-threat urban areas ("HTUA").⁸ See 49 C.F.R §174.310(2). The 40 mph restriction for HHFTs without new or retrofitted tank cars is currently mandated under FRA's Emergency Order No. 30; the Final Rule replaces Emergency Order 30 as of July 7, 2015.

Notifications. The DOT declined to adopt the notification requirement proposed in the NPRM under § 174.310(a)(2). Instead the DOT relied on: (1) the expanded route analysis and consultation requirements in §172.820; and (2) the existing rules and requirements, such as the Emergency Planning and Community Right-to-Know Act of 1986. The DOT agreed with a majority of commentators that the notification rules should apply to all HHFTs rather than limiting them to trains transporting one million gallons or more of Bakken crude as provided in the May 7, 2014 Emergency Order. The DOT concluded that because the amendments to §172.820(a) include reporting requirements for all HHFTs, the Final Rule supersedes the May 7, 2014 Emergency Order.

D. Classification - Sampling and Testing Programs

Building on the DOT's March 6, 2014 Amended Emergency Order No. DOT-OST-2014-0025,⁹ the Final Rule mandates that offerors establish a sampling and testing program to ensure proper classification, while clarifying the materials to which the new program requirement applies. See 49 C.F.R §173.41. Declining to require a sampling and testing program for all hazardous material, as some proposed, the Final Rule obligates offerors to develop and implement a comprehensive program to sample and test unrefined petroleum-based products. Those programs must use certain criteria and sampling frequency to improve the accuracy of classifications, and the programs must account for "any appreciable variability of the material" over time. Offerors have the flexibility to identify the factors contributing to variability in their specific operation, and are allowed to conduct the sampling before the crude oil has been loaded into a transport vehicle. Offerors must certify that hazardous materials subject to the program are packaged in accordance with the test results, document the testing and sampling program outcomes, and make that information available to DOT personnel upon request.

The Final Rule makes clear that ANSI/API RP 3000, although not adopted by DOT, does provide guidance for compliance with the DOT's provisions. Enforcement will continue to include unannounced inspections, data collection, and sampling by PHMSA investigators at various points along the crude oil transportation chain — from cargo tanks that deliver crude oil to rail loading facilities, from storage tanks at the facilities, and from pipelines connecting storage tanks to rail cars.

III. Is the DOT's Final Rule Harmonized with Transport Canada's Rules?

Explicitly recognizing that rail transport is a cross-border issue, the DOT and Transport Canada, which also is issuing  new tank car standards to harmonize with the U.S., collaborated on these initiatives, reaching harmony on most issues. Harmonization has yet to be reached as to the cars to which the standards would apply or as to the braking requirements:

1. Scope: Canada's standards apply to any single tank car while the US's Final Rule applies only to tank cars used on a HHFT.
2. Brakes: Canada requires a two-way EOT whereas the US requires a two-way EOT or a DP braking system. Both Transport Canada and the DOT will continue to work toward a harmonized approach to braking.

All other issues are either fully harmonized, harmonized to the extent needed, or harmonization is not required.

IV. Conclusion

DOT's recent rulemaking adopts several recommendations made by the National Transportation Safety Board and is part of a wider and increasingly active federal initiative to improve safety for hazardous material rail traffic. While federal agencies, from the EPA to the Department of Homeland Security, are currently exploring additional strategies to make transporting flammable liquids safer, many lawmakers in Congress are dissatisfied with the extent of the new safety measures and the pace of their implementation. Just days after the Final Rule was issued, eight senators signed a letter to DOT Secretary Anthony Foxx asking that first responders and the public receive more information about trains carrying oil from the Bakken Shale into their communities. Similarly, senators in states with a high volume of hazardous traffic have proposed legislation (S. 859) that would go much further than DOT's Final Rule. And, in criticizing the new regulations, Senators Maria Cantwell (D-Wash.) and Tammy Baldwin (D-Wisc.) signaled that proposals to accelerate the phase-out of existing tank cars may be forthcoming. At a minimum, it is highly likely, if not inevitable, that federal authorities will continue to expand regulations in the crude-by-rail context.

We look forward to providing a more in-depth review of these issues in our upcoming webinar on May 27, 2015. If you have any questions about the regulations or the effect on your company's business, please reach out to one of the authors.

Footnotes

1. The DOT issued a previous version of the Final Rule on May 1, 2015 and on May 8, 2015 it was officially published in the Federal Register.

2. According to DOT, "this rule primarily impacts trains transporting large quantities of ethanol and crude oil, because ethanol and crude oil are most frequently transported in high-volume shipments. . ." See Executive Summary of Final Rule.

3. As discussed in further detail below, HHFTs refer to High Hazard Flammable-Trains.

4. Transport Canada is the Canadian federal department responsible for the majority of the Government of Canada's transportation policies and programs.

5. See 79 F.R. 45015.

6. A timeline of the required retrofit schedule for U.S. and Canada may be found at the following link: http://www.dot.gov/mission/safety/rail-rule-summary

7. Recognizing it would be impossible to "add steel" to DOT-111 and CPC-1232 tank cars, the DOT-117R allows use of 7/16th steel.

8. "High Threat Urban Area (HTUA) means an area comprising one or more cities and surrounding areas including a 10-mile buffer zone. . . ." 49 C.F.R. 1580.3

9. This Emergency Order remains in effect until March 31, 2016.

Client Alert 2015-120

This article is presented for informational purposes only and is not intended to constitute legal advice.