Report on rail car retrofits pegs $5.3 B cost to ethanol in 2019

By Susanne Retka Schill | December 05, 2014

A new report prepared by economic research firm The Brattle Group showed that the proposed Department of Transportation rule on rail tank cars could cost the economy as much as $60 billion and projected costs for the ethanol industry will increase by nearly $5.3 billion in the industry’s peak impact year of 2019.

Prepared for the Railway Supply Institute, “A Review of the Pipeline and Hazardous Materials Safety Administration’s Draft Regulatory Impact Analysis” studies PHMSA’s draft regulatory impact analysis in depth, finding multiple flaws in the agency’s benefit-cost analysis.

The sections devoted to ethanol industry impacts suggest the regulations as proposed would have substantial costs, not only for retrofitting the existing tank car fleet, but in added costs as product movement shifts to trucks during the modification process. “Our analysis indicates that in 2019, the peak impact year for ethanol, approximately one half of the projected baseline ethanol traffic would be diverted to trucks as a result of the proposed regulations,” the authors write. The analysis assumes the DOT-111 cars in crude oil service are modified first, beginning in 2015, with the ethanol fleet following, beginning in 2018. “As we have seen before, the magnitude of the projected impacts declines over time as the modification program progresses and the existing ethanol fleet is gradually brought into compliance with the proposed regulations. We project that it will take until 2026 to complete the necessary modifications and end reliance on trucks for the transportation of ethanol.”

The costs will be significant, they warn. “In 2019, the peak impact year, we project that ethanol shipper costs will increase by nearly $5.3 billion.” Those costs will decline as the retrofits proceed, they add. “However, the increase in annual ethanol shipper costs caused by the proposed regulations is projected to remain above a billion dollars through 2021.”

The authors raise the question of what might happen should not all ethanol shippers be able to absorb or pass on cost increases of that magnitude. In the peak year of 2019 the at-risk ethanol production could amount to over 100 million barrels, or about 30 percent of the total annual production currently projected for 2018.

As the modification process takes between 30 and 50 percent of equipment out of service at any given time, the authors reason part of the oil and all of the ethanol will be diverted to trucks. “We estimate that replacing lost rail capacity in 2017 with truck transportation for crude oil and ethanol shipments in North America, would require approximately 20,000 trucks carrying over 360 thousand truckloads on North American highways. In 2018, the first full year in which the loss of capacity will be felt, replacement transportation would require approximately 65,000 trucks carrying over 1.4 million loads.”

The safety and environmental consequences of a substantial increase in truck traffic would be significant.  “From 2002-2009, the over-the-road truckers transporting hazardous materials spilled 58 percent more total liquid hazardous materials and roughly double the total equivalent hazardous materials (including gasses, liquids and solids) than railroads did per year and per billion ton-miles,” the authors point out. In addition, the estimate an additional 71.5 million tons of CO2 emissions will be released. Using the Office of Management and Budget’s social cost per ton of CO2, the increased emissions would cost society about $500 million.

The Railway Supply Institute Committee on Tank Cars forwarded the Brattle report to the PHMSA. RSI has urged the agency to take a commodity-based approach rather than a one-size-fits-all approach to its regulations. RSI-CTC’s comments to the proposed rule submitted in October also offer recommendations on how to optimize braking systems, thermal protection systems and fabrication of new tank shells using normalized steel, among other technical specifications. The comments further set out a timeline that accounts for the complexity of the modifications and the practical limitations of shop capacity and available resources to complete the modifications. The comments also urged DOT to focus more on the root causes of most derailments which continue to be track failure and human error, not tank car design.

“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.”  The RSI proposal would prioritize tank car modifications to allow for more efficient use of shop capacity to perform the retrofits, and significantly reduce the loss in capacity during the modification process. RSI estimates the potential increase in ethanol shipment costs for all years under its alternative proposal would be reduced from $12 billion to $3 billion.