Given the nasty tendency for oil trains to explode when they derail, it’s probably worth asking what a catastrophic accident might cost. No doubt, the thousands of communities visited daily by oil trains would like to know what sort of financial risks they are exposed to. Unfortunately for these governments, the available data suggest that a reasonable worst-case-scenario explosion could do several billion dollars of damage—sums far in excess of railroad insurance coverage.
But how many billions are we talking about?
It’s a surprisingly difficult question to answer with any real precision. The widespread deployment of unit trains loaded with crude oil is such a recent phenomenon that there is not a lot of history to guide estimates of accident costs. The recent oil train accidents in Lac-Mégantic, Quebec, and Lynchburg, Virginia, are commonly used as guideposts, but officials are still cleaning up these accidents and assessing the damages, so the accounting remains incomplete. For a sharper picture, you have to examine other sources: things like lawsuits against railroads that have released hazardous materials; insurers’ estimates for comparable events like terrorist attacks; and estimates used by federal regulators for the cost-benefit analysis they must do in tandem with their proposed oil train rules.
It doesn’t help that the most obvious place to look for damage cost estimates is also the least helpful: the federal government’s own databases. Railroads file their own reports on accidents that cause a hazardous material release, but the numbers are not useful. In the draft July 2014 Regulatory Impact Analysis (RIA) that accompanied the proposed rules for oil and ethanol trains, the US Pipeline and Hazardous Materials Safety Administration (PHMSA) acknowledged that its “hazardous material incident report database often contains inaccuracies.” The agency “believes that response costs and basic cleanup costs, when they are reported, do not represent the full costs of an accident or the response.”
Moreover, initial incident reports are frequently not updated by the railroad. For example, in the case of the November 2013 oil train explosion in Aliceville, Alabama, PHSMA notes that “the initial estimate of crude oil lost was 28,000 gallons. After a follow-up inquiry from PHMSA personnel, the carrier has revised this estimate to more than 450,000 gallons.” And subsequent reporting put the total lost at 630,000 gallons—more than 22 times the original filing.
The most direct comparison is the Lac-Mégantic accident because it was the first major oil train explosion in a populated area. It killed 47 people. City officials estimate that it will cost $2.7 billion to rebuild the broken village over the next decade. The tank cars released 1.6 million gallons of crude oil, of which about 26,000 gallons went into the nearby Chaudeiere River. The city estimates that the accident contaminated 12.3 million gallons of sewer, lake, and ground water, which will cost $200 million in apparently additional money to clean up. The potentially liable parties—the railroads, oil shippers, tank car lessors, and federal regulators—are being sued by the victims, as well as by each other to determine who is at fault—and who will pay. Until there is a settlement, we won’t have the final tabulation for the damages.
The 2014 Lynchburg derailment offers another set of clues. PHMSA, in its Regulatory Impact Analysis, estimated that based on the Lynchburg derailment, your basic run-of-the-mill oil train explosion with no loss of life will probably set you back around $300 per gallon for property damage, remediation, and cleanup costs.
The railroad responsible, CSX, reported to the Federal Railroad Administration that the emergency response and cleanup costs for that incident ran to $8.99 million. (Of this $8.99 million cost, an estimated $5 million was due to environmental damage.) PHSMA used the railroad’s reported costs together with its own estimate of 30,000 gallons spilled, to come up with their $300 per gallon estimate.
Yet the Lynchburg figure is very likely too low for estimating potential future costs. In comments they submitted on the federal government’s proposed oil and ethanol train regulations, EarthJustice and Forest Ethics explain:
First, the [National Transportation Safety Board] investigation has not yet been completed for [Lynchburg], and the clean-up is still underway. The full extent of the potential and actual harm is likely to increase as both the investigation and clean-up progress. Second, it has been reported that the Lynchburg derailment involved primarily CPC-1232 tank cars, which are less prone to puncture and spilling oil than DOT-111s. An accident involving [legacy] DOT-111 tank cars, given their fragility, would almost certainly spill more oil and cause greater harm and therefore result in a higher per gallon cost. Third, while the Lynchburg accident caused serious contamination of the James River, it would have been far worse had a derailed tank car landed on the town side of the tracks during a busy lunchtime instead of in the river.
In the same draft RIA cost-benefit analysis, PHMSA also estimated upper-end damages for an oil train derailment causing a “higher consequence event” in an area of average population density along a train route. (By PHMSA’s reckoning, 141 people per half square kilometer is average; it’s just a bit more than the small town of Lac Mégantic with its 136 people per half square kilometer.) The agency pegged those costs at $1 billion for lives lost, property ruined, and the cleanup. If the event takes place in an area five times as dense, as in an urban center, PHSMA said the event would produce roughly $5 billion in total damages.
Yet this method, too, may severely understate the actual costs. PHSMA’s math relies on a little-known technical variable, the Value of Statistical Life (VSL), which in 2014 is calculated at $9.2 million based on expected average lifetime income. Consider that the family of Zoila Tellez, killed at the scene of a 2009 ethanol train explosion in Cherry Valley, Illinois, settled a lawsuit with the Canadian National railroad for $22.5 million— 2.5 times greater than the value used by PHSMA for its estimates.
Legal settlements like the Cherry Valley case are another way to estimate the potential costs of an oil train explosion. We can examine rail accidents that resulted in the release of “Toxic Inhalation Hazard” materials like chlorine where railroads were successfully sued for damages. In the business, these are considered something like nightmare scenarios because they can affect large areas and therefore large numbers of people. They are probably not directly comparable to an oil train derailment, but the associated settlement payments are relevant.
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In June 2005, two Norfolk Southern trains crashed into each other in Graniteville, North Carolina. A single tank car of chlorine ruptured and released enough material to kill 9 people, injure 554, and force the evacuation of 5,400 others. According to a recent law review article, “The railroad settled a class-action lawsuit with the 5,400 people displaced by the accident, agreeing to pay $2,000 to every household within a one-mile radius for inconvenience and $200 per day for each person kept away from his or her home during the cleanup effort.”
A textile plant, Avondale Mills, was located near the scene of the accident and several mill workers were among those killed. The accident was the final straw. Already struggling against global competition, the disruption proved insurmountable and the firm laid off 4,000 workers. Avondale then brought suit against the railroad, seeking over $450 million. After four weeks of trial, the parties settled the lawsuit for an undisclosed amount.
In another case, a CSX tank car in a New Orleans railyard burst into flames, releasing a poisonous gas from a volatile compound used to make synthetic rubber. A Louisiana jury awarded $3.5 billion in punitive damages to 8,000 residents affected by fire. In 1997, after a decade of appeals, CSX settled the case for $850 million.
Another way to ballpark oil train explosion costs is with numbers that the railroads themselves sometimes use. A damage assessment report prepared in 2006 by the American Academy of Actuaries for the President’s Working Group on Financial Markets analyzes terrorism risk. (Railroads cite this report when attempting to convince regulators they need special tariffs or protection from the potential financial ruin caused by the enormous uninsured damages from an accident involving hazardous material like chlorine.) The Actuaries group ran through several scenarios of insured loss estimates in variously sized cities. They pegged these numbers for the closest analogy, a truck bomb, at $3 billion for Des Moines, $8.8 billion for San Francisco, and $11.8 billion if the incident occurred in New York City.
We can say with some confidence that if the loaded oil trains that went off the rails near downtown Seattle or Philadelphia had exploded, the damage could have ranged well into the billions. Given that the Lac-Megantic oil train inferno cost at least $2.7 billion and experts ballpark a Des Moines truck bomb at $3 billion, it’s fair to believe that an explosion in a bigger city could cost much more—perhaps something on the order of $5 billion that PHMSA estimates. When the railroads insist on running loaded oil trains past sports stadiums on game night or through the heart of cites during major festivals, it’s especially problematic that they do not carry insurance proportional to the risks they introduce.
The under-insurance problem is bad enough in cities like Spokane and Portland that sit alongside the major railroads that carry perhaps $1 billion in insurance. In places like Grays Harbor, Washington, or Clatskanie, Oregon, served by railroads owned by a short line railroad-holding company, the paltry $500 million or so they carry in insurance coverage could almost be a joke. Except that there’s really nothing funny about it.