Report: Proposed tank car rule is costly

A report prepared by The Brattle Group on Tuesday, Dec. 2, 2014, states that a new proposed rule on railroad tank cars could cost the U.S. economy as much as $60 billion.

The report was submitted by the Railway Supply Institute Committee on Tank Cars (RSI-CTC), to the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA), which proposed the new rule in July.

Entitled “A Review of the Pipeline and Hazardous Materials Safety Administration’s Draft Regulatory Impact Analysis,” the report was conducted with the support of the RSI-CTC, from September through November 2014. The report analyzed available data on the current and proposed fleet of rail tank cars in North America. It showed that PHMSA underestimated the overall costs that would likely occur should PHMSA’s timeline for fleet modifications be implemented as proposed.

According to the report, the high price tag to the economy is largely due to the costs associated with modal shifts from rail to highways, potential modifications to tank cars, early retirement of existing tank cars, and lost service time for tank cars under modification or awaiting modification.

“The numbers show that almost two-thirds of rail tank cars will need to be idled for some period of time during the proposed modification program,” said Dr. Kevin Neels, a Principal at the economic research firm The Brattle Group and a co-author of the report. “Almost one million tank car years of capacity could be lost due to early retirement and idle time associated with cars awaiting modification.”

According to the report, modal shifts to truck transport could result in 65,000 trucks carrying 1.4 million loads in 2018 alone, resulting in 11 million additional annual tons of carbon dioxide (CO2). It is unclear if a modal shift of this magnitude is either operationally or economically feasible. If the modal shift is not feasible, up to 300 million barrels of oil and 100 million barrels of ethanol would be at risk of being stranded, or production levels would be reduced.

The report noted that the indirect effects of proposed new regulations could be severe, and include:

• Decreases in crude oil production would likely translate to higher prices at the pump as costs are passed on to consumers. These effects would be magnified in geographic regions where production drops;

• A reduction in ethanol production may also impact the availability and price of gasoline, given the U.S. requirements to blend gasoline with ethanol; and

• Assuming “an overly aggressive timetable for modifications,” a severe constraint on “shop capacity for work required in support of other cars, potentially resulting in shortages for transport of other commodities.”

The report further found that the proposed new rule may have overstated benefits of the rule in several key areas by overestimating accident rates and gallons spilled per incident. At the same time, the Brattle report says the proposed new rule underestimated direct compliance costs, underestimated the size of the fleet requiring modification, and assumed that unsubstantiated economies of scale would reduce modification costs.

· The Brattle report also says the proposed new rule does not account for the loss of rail transportation of crude oil and ethanol production that could occur if tank cars cannot be modified in time to comply with the proposed modification deadlines.

“The Railway Supply Institute Committee on Tank Cars is committed to aiding in the creation of a comprehensive industry response that will enhance the safe transportation of crude oil and ethanol by rail,” said RSI President Tom Simpson. “Our experts have submitted a tank car-related proposal to PHMSA that will do just that. We have been calling on DOT since 2011 to identify tank car standards that can be efficiently and rapidly implemented.”

The RSI-CTC’s proposal to PHMSA supports nearly all of the elements of the prescribed requirements set forth in Option 3 of the Proposed Regulations as the modification requirements for existing tank cars. Specifically, modifications would include jackets (if not already present), full-height half-inch head shields, the reconfigured bottom outlet valve handle, a reclosing pressure relief valve, and a thermal protection system that meets the 100-minute pool fire requirement.

In contrast to PHMSA’s proposed regulations, the RSI-CTC modification timeline realistically accounts for the shop capacity available to carry out the required modification work and avoids many of the penalties, inefficiencies, and capacity shortages associated with an overly aggressive timeline. Under the RSI-CTC’s proposal, tank car modifications would be prioritized to address tank cars that would benefit most from the modifications first. This would allow for a more efficient use of the available and incremental tank car modification capacity, RSI says.

Under the RSI-CTC proposal:

• Tank cars that cannot be modified by the applicable deadline and so will need to be held until modification capacity becomes available are reduced from 103,000 to 42,000.

• Lost tank car years of capacity are reduced from 1 million to 400,000.

• Potential increase in crude oil shipment costs (all years) is reduced from $81 billion to $12 billion.

• Potential peak-year crude oil production loss is reduced from 310 million to 67 million barrels.

• Potential increase in ethanol shipment costs (all years) is reduced from $12 billion to $3 billion.