As of late, the East Palestine train derailment, a disastrous incident that led to a controlled burn of hazardous chemicals and a multi-day evacuation of a small Ohio town, has been a hot topic for politicians, news pundits, and rail industry professionals. The derailment has led to public outcry over rail line safety, large-scale reactions across the political spectrum, and a growing concern within the rail industry that significant additional regulations could be forthcoming. As a result of the East Palestine disaster and the resulting public and political attention, it is becoming increasingly likely that significant changes may come to the rail industry in the coming months and years, impacting not only rail line operations, but the shipping and railcar finance industries as well. These potential changes include:

• An expedited timetable in the adoption of DOT-117 compliant railcars, which currently must be put into use by 2029 in order to carry Class 3 flammable liquids.
• Re-adoption of regulations to require electronically controlled pneumatic brakes to be installed on all “High-Hazard Flammable trains.”
• New Federal regulations regarding hot bearing detectors and requirements for their use in

  the rail industry.

What Happened

On February 3, 2023, 38 railcars derailed near East Palestine, OH, on a Norfolk Southern rail line. Eleven of the cars involved in the derailment contained hazardous chemicals, including vinyl chloride, benzene residue and butyl acrylate, all of which are classified as hazardous under U.S. law. Most notably, vinyl chloride is a class 2.1 flammable gas. The National Transportation Safety Board (NTSB) has not issued a definitive statement as to what caused the derailment, but based on preliminary reports, it is currently believed that the derailment was caused by a mechanical issue with a railcar axle or bearing. Shortly before the incident, surveillance video from a local home showed what seems to be a wheel bearing in the final stages of overheat failure. The affected bearing and wheelset have been collected for testing by the NTSB, but the investigation into the ultimate cause of the derailment remains ongoing.

As a result of the derailment, several railcars caught on fire and the blaze proved difficult to contain over the following days. Authorities became concerned that the rising temperatures within one of the derailed railcars that contained vinyl chloride indicated that the chemical was undergoing a polymerase reaction, which could lead to a massive explosion. On Feb. 6, 2023, three days after the derailment, all residents within a 1 x 2 mile area surrounding the derailment site were evacuated and the chemicals contained in the derailed cars were set on fire in a controlled burn in an effort to avoid a disastrous explosion. This controlled burn, a “lesser of two evils,” as described by Ohio Governor Mike DeWine, released massive amounts of smoke and waste into the atmosphere. On Feb. 9, 2023, the evacuation order was lifted, and residents from the areas surrounding the derailment site were permitted to return to their homes. While the Environmental Protection Agency (EPA) has stated that a return to the affected area is safe, many residents have reported adverse health effects since their return home, such as nosebleeds, headaches, rashes and eye and nose irritation. Norfolk Southern has since been ordered by the EPA to pay for all cleanup costs resulting from the derailment and subsequent release of chemicals.

In the aftermath of the derailment, there have been numerous bi-partisan calls for reform, including an evaluation of the rules around hazardous cargo notification requirements. Under current rules, the train that derailed near East Palestine was not considered a “High-Hazard Flammable Train” (HHFT) and as such, the State of Ohio was not notified of the train’s presence in Ohio until after the derailment. Currently, any train hauling at least 20 cars of a Class 3 flammable liquid (such as crude oil) in a continuous block or at least 35 cars of a Class 3 flammable liquid overall throughout the train is classified as an HHFT. The train that derailed in East Palestine was not considered an HHFT because it was hauling 149 railcars, 20 of which contained hazardous materials. In addition, vinyl chloride does not currently fall under the relevant definition of flammable liquid. As a result, HHFT notification requirements did not apply to the train involved in this incident.

On Feb. 21, 2023, the Department of Transportation (DOT) released a “call to action” for the rail industry, which included the following proposals aimed at various stakeholders in the rail industry:

• Join the Federal Railroad Administration’s Confidential Close Call reporting program, a program that allows rail workers to report unsafe conditions. (At the time of the statement, no Class I railroad was a participant in this program. However, all seven Class I railroads have since stated their intent to join the program.)
• Deploy new inspection technologies in addition to human inspections.
• Phase in DOT-117 compliant railcars before the 2029 mandatory deadline to put these cars into service.
• Provide notice when transporting hazardous materials through a state.
• Provide workers with sick leave.

In addition, the DOT “call to action” indicated that the DOT will continue to advance new rules that would require a minimum of two crewmembers for most railroad operations, increased inspections on trains carrying hazardous materials and older railcars, deployment of funds to modernize and improve rail tracks, additional rulemakings related to trains carrying hazardous materials, and electronically controlled pneumatic (ECP) brakes.

Finally, the DOT called on Congress to take actions to increase rail safety, such as increasing the maximum fines the DOT can issue to rail companies for violating safety regulations (the current maximum fine is $225,455), strengthening rules related to hazardous rail shipments, modernizing braking regulations, and speeding up the timeframe for safer railcars to be placed into service.

On March 6, 2023, Norfolk Southern released a new “six-point safety plan,” which outlines initiatives that the company will take in response to the derailment and orders by the NTSB to improve the safety of their rail network. It is likely that many companies will follow suit and implement the same or similar increased safety measures within their own railcars and rail networks.

On March 21, 2023, the NTSB released findings regarding pressure relief devices (PRDs) that were removed from the vinyl chloride tank cars that were involved in the East Palestine derailment as well as the possible impact of aluminum in the incident. PRDs serve to regulate pressure within railcars in order to reduce the potential for tank failure. The NTSB found irregularities in the function of some of the PRDs, which may have impacted their ability to relieve pressure within the railcars. Moreover, one of the PRDs was, according to the manufacturer’s specifications, incompatible with vinyl chloride due to an internal spring that was coated with aluminum. As of today, there is no evidence that aluminum from this spring or aluminum debris from melted protective housing covers entered any tank. That said, further testing will be necessary to determine the extent of the effect, if any, that PRD irregularities and aluminum debris had on the events following the derailment.

Next Steps for the Rail Industry

As a result of this tragedy and the resulting political outcry, it is likely that the rail industry, due to increased regulation and public pressure, will adopt additional safety measures more quickly than previously expected. Such additional measures may take the form of DOT-117 compliant railcars being adopted sooner than is statutorily necessary, re-adoption by the Pipeline and Hazardous Materials Safety Administration and the Federal Railroad Administration of previously repealed regulations mandating Electronically Controlled Pneumatic Brakes for all HHFTs, and increased temperature checks on rail lines.

Adoption of DOT 117 Railcars

The 2015 Fixing America’s Surface Transportation (FAST) Act requires owners of tank cars that carry Class 3 flammable liquids to place all such tank cars in compliance with DOT-117 by 2029. The DOT-117 was developed in response to a 2013 rail disaster in Lac-Megantic, Quebec, involving then-industry-standard DOT-111 railcars. DOT-117 compliant railcars are non-pressurized cars with a shell thickness of 9/16ths of an inch, insulation materials to provide thermal protection, protected top fittings, fully protected head shields, and bottom outlet valves with an enhanced handle designed to prevent the tank car from emptying its contents in a derailment or other incident. As a result, DOT-117-compliant railcars have increased safety features as compared to DOT-111 cars, which are non-pressurized tank cars with a shell thickness of 7/16ths of an inch, no required head shields to protect the tank car from an adjacent car in an incident, and unprotected fittings and valves. The railcars that derailed during the East Palestine incident were DOT-105 compliant, a specification that meets a higher standard than the DOT-111 specification but is a lower standard than the DOT-117 specification.

In 2016, only 8% of railcars carrying crude oil and other Class 3 flammable liquids complied with DOT-117 specifications. By 2021, the Bureau of Transportation Statistics (BTS) found that 57% of all rail tank cars carrying Class 3 flammable liquids complied with DOT-117 or DOT-117R specifications (DOT-117R compliant railcars are railcars that have been retrofitted to meet DOT-117 specifications). In addition, it was expected by the BTS that 5,642 new DOT-117 cars would be produced in 2022 and 2,680 existing cars would be retrofitted to meet DOT-117R specifications, introducing a total of 8,322 new DOT-117 compliant cars into the market in 2022.

Even though the adoption of DOT-117 railcars is not required until 2029, it is likely that governmental and market pressures will lead to the widespread implementation of these cars before the statutory deadline. Given the significant public pressure for rail companies to prioritize safety and the looming statutory deadline to adopt DOT-117-compliant railcars, a proactive choice to adopt DOT-117-compliant cars earlier than necessary may signal to regulators and the public that a company is committed to and focused on safety. In addition, in the case of a derailment or other incident, DOT-117 railcars are less likely to leak hazardous materials or explode, potentially allowing a company to return to regular operations more quickly and efficiently after an incident than would be possible if non-updated railcars had been used. The anticipated increased demand for DOT-117 railcars within the industry could result in higher costs and potential delays in the production of DOT-117 railcars, a potential concern for those wishing to purchase DOT-117 complaint railcars or upgrade existing railcars for DOT-117 compliance.

Implementation of Electronically Controlled Pneumatic Brakes

In 2018, the Pipeline and Hazardous Materials Safety Administration and the Federal Railroad Administration repealed a rule which would have required electronically controlled pneumatic brakes to be installed on all High-Hazard Flammable Trains by 2023. These ECP brakes use electronic signals to simultaneously apply and release brakes throughout the length of a train rather than each individual car separately applying its own brakes. ECP brakes would also allow train cars to brake faster than with conventional air brakes. Transportation Secretary Pete Buttigieg mentioned the withdrawal of the rule requiring ECP brakes for HHFTs in the DOTs “call to action,” stating that the DOT’s ability to regulate the rail system is “constrained by law” due to the withdrawal of this rule and that the DOT would propose rulemakings related to ECP brakes. As such, it seems very likely that the DOT will soon propose to re-introduce a requirement that all HHFTs are outfitted with electronically controlled pneumatic brakes. This re-introduction of the rule may also come in conjunction with updated requirements for the categorization of trains as HHFTs.

The derailed train in East Palestine was not equipped with ECP brakes, which, according to former Federal Railroad Administration official Steven Ditmeyer, could have lessened the severity of the derailment. However, by most accounts, it is not yet clear whether ECP brakes would have reduced the severity of the East Palestine incident, especially given that the train that derailed was not classified as an HHFT and, as a result, would not have been required to have ECP brakes anyway. Nonetheless, due to the increased scrutiny on the rail industry due to the derailment, it seems increasingly likely that a rule requiring ECP brakes for all HHFTs is adopted in the near future, even if not directly aimed at preventing the specific causes of the East Palestine incident.

A mandate for the installation of ECP brakes could be extremely costly to rail companies. A 2017 Regulatory Impact Assessment conducted by the Pipeline and Hazardous Materials Safety Administration found that the estimated total, undiscounted cost of implementing ECP brakes for HHFTs over a 20-year period ranged from $427.3 million to $554.8 million. However, when taking into account potential efficiencies of ECP brakes such as savings on wheels, fuel, and damage mitigation, the total costs of implementing ECP brakes over that same could decrease by $257 million to $491 million.

Increased Temperature Checks for Rail Lines

The Railway Safety Act of 2023 (the Act), introduced by a bipartisan group of U.S. Senators in the aftermath of the East Palestine derailment, aims to respond to safety concerns raised by the incident. The Act would set nationwide requirements for installing, maintaining and placing hot bearing detectors (HBDs) across the nation’s rail network. The crew involved in the East Palestine derailment was alerted by a HBD to slow down and inspect the train immediately before the derailment occurred, but, once the train was stopped, the derailment had already happened. The last two detectors the East Palestine train ran over were 19 miles apart, and some believe that HBDs placed closer together could have prevented the derailment by alerting the crew to the overheating components earlier.

The proposed act would mandate that HBDs be placed on rail lines in increments of every 10 miles. Currently, railroads can decide where to place HBDs and what temperatures should trigger detection of an overheating bearing. However, on March 8, 2023, all Class I railroads voluntarily agreed to install additional HBDs across their key routes, with the goal of achieving average spacing of 15 miles (except if the route is equipped with acoustic bearing detection capability or other similar technology, in which case HBD spacing will not exceed 20 miles between detectors). This commitment will lead to a deployment of around 1,000 new HBDs, and will cost the rail industry over $150 million, according to the American Association of Railroads. If the Railway Safety Act is approved, this financial burden on the rail industry will only increase.

Impact on Railcar Financing

Railcar financing sources should consider the possibility that existing DOT 111, CPC 1232, and other non-DOT-117-compliant railcars may need to be retrofitted for DOT-117 compliance earlier than the statutory deadline for compliance of 2029. In order to ensure that lessees and borrowers are able to perform any necessary modifications to existing railcars in connection with DOT-117 compliance, financing companies should also ensure that strong “required modification” or “mandatory modification” provisions are in place in their railcar leases and loans so that railcars can be retrofitted as needed in response to potential new governmental safety measures, such as a mandate to add ECP brakes to HHFTs. These modification provisions should include requirements for the party who possesses the railcars to make all necessary modifications to qualify the railcars for continued use in railroad interchange service. These provisions may also provide that the modifications be made at no cost to the financing company and that the modifications may not be removed upon expiration of the lease or return of the railcars to the lessor.

It is likely that the coming months and years will be a period of significant change for rail industry regulation, and finance companies should take care to structure leases, loans, and other agreements to provide adequate flexibility for all parties to adapt to and comply with any additional regulations that may be promulgated by the DOT or Congress.

Conclusion

As discussed above, the tragic East Palestine train derailment will likely spur a new wave of regulation for the rail industry. To signal a strong commitment to safety, rail companies may adopt DOT-117-compliant railcars before the statutory deadline imposed by the FAST Act. It is also likely that Congress will take action in the form of the re-introduction of legislation requiring all HHFTs to be equipped with ECP brakes. Moreover, because an overheated railcar part is currently deemed the probable cause of the East Palestine derailment, it is possible that Congress will take additional action to regulate HBDs in excess of the commitments already made by the rail industry. Keeping these possible regulatory and industry changes in mind, railcar financing sources should take steps to ensure that their railcar financing documents include strong “required modification” or “mandatory modification” language and provide adequate flexibility for equipment operators to comply with new, unanticipated regulations. In this way, railcar financing sources can stay ahead of the curve and ensure that they are set up for success in the increasingly volatile regulatory environment.