Railroaded By the Gas Industry

Why Biden should use common sense insurance requirements to protect Pennsylvania communities.
by Eric de Place

Feb 9, 2021 | Blog Posts, Natural Gas

Before you get behind the wheel of a car, you’re required to have auto insurance. It costs a few bucks, especially for bad drivers, but everyone understands that insurance is a commonsense way to protect the public from the costs of accidents.

It’s too bad railroads don’t have to play by the same rules. Even when moving dangerous cargo through towns and cities, they are not required to carry insurance proportional to the risk. So when railroad accidents happen — and they do — taxpayers can end up footing the bill.

Exhibit A for the risk of underinsurance is a new project that would ship mile-long trains of explosive liquefied natural gas (LNG) through eastern Pennsylvania to a port terminal in New Jersey. It’s a worrisome prospect because LNG is so hazardous that a derailment could be catastrophic. The monetary costs of an LNG train going off the rails could be staggering, potentially several billion dollars — far more than the railroads are insured for.

The good news is that fixing the problem is relatively straightforward, at least in theory. Federal regulators in the new Biden administration could simply do an actuarial assessment of the danger of LNG trains and then require them to carry risk-proportional insurance. The hard part is that an insurance requirement like this would run afoul of two politically powerful industries that enjoy the free lunch they get now: railroads and the natural gas industry.

Still, the costs are serious and it’s worth understanding the scale of financial risk the public is exposed to by LNG trains. That risk was made clear in a 2014 exposé in the Wall Street Journal. After a string of oil train derailments that sparked explosions — which continues unabated — the Journal discovered that the financial risks of a catastrophic derailment fall largely on taxpayers.

According to James Beardsley with insurer Marsh & McLennan, there is about $1.5 billion of liability insurance available for a major railroad. Keep that number in mind — $1.5 billion — because any damage in excess of that amount would be on the public’s dime.

The problem, according to Beardsley, is that the cost for a worst-case derailment scenario “is multiples of that.” In fact, “there is not currently enough available coverage in the commercial insurance market anywhere in the world to cover the worst-case [train derailment] scenario.”

The risk has gotten worse since his interview with the Journal because LNG, which was formerly prohibited on railroads because of its extreme danger, is not ready to roll. If even a single LNG railcar ignited in a derailment, the blast could flatten buildings and result in major fires. That’s a nerve-wracking prospect given the statistics: in a typical year, around 70 trains will derail in Pennsylvania, including more than a dozen carrying hazmat material. The evidence shows that even a single reasonable-worst-case-scenario explosion could do billions dollars of damage—sums far in excess of railroad insurance coverage.

How much could an LNG train derailment cost?

We can ballpark the cost of an LNG train accident in a populated area based on prior accidents and settlements. Sightline Institute also compiled rough estimates using 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 cost-benefit analysis. All these can help us understand how under-insured the industry is, and therefore how much liability now rests on taxpayers.

A 2005 derailment in Graniteville, South Carolina caused the rupture of a single tank car of chlorine that killed nine people, injured hundreds, and cost $178 million not even counting cleanup and legal settlements. If the accident had not occurred in the middle of night when few people were around, it “would’ve potentially bankrupted the safest [best insured] railroad in the country,” Beardsley told the Journal.

In 2009, an ethanol train exploded in Cherry Valley, Illinois, killing Zoila Tellez. The family settled a lawsuit with Canadian National in which they received $22.5 million for her life. An accident in a major metro area with, say, 100 deaths (a rather modest figure given the magnitude of the explosions from LNG derailments) could, at least theoretically, therefore cost $2.25 billion just for the lives lost. Injuries, property damage, and business losses could add billions more.

The most direct comparison to a potential LNG accident is the notorious Lac-Mégantic, Quebec derailment in 2013 that killed 47 people when an oil train exploded and leveled four blocks of the small town. City officials estimate that it will cost $2.7 billion to rebuild the broken village over the course of a decade, a figure that does not even include any payment for the deaths.

Factoring in the deaths would drive up the cost. When the federal government was evaluating new rules for oil trains in a Regulatory Impact Analysis, the Pipeline and Hazardous Materials Safety Administration (PHMSA) estimated upper-end damages for a 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 were to take place in an area five times as dense, as in an urban center like Pittsburgh or Philadelphia, PHSMA said the event would produce roughly $5 billion in total damages.

Yet this method may severely understate the actual costs. PHSMA’s math relies on a little-known technical variable, the Value of Statistical Life (VSL), which in 2021 is less than $9.8 million. (Technically, it’s $7.6 million in 2006 dollars, adjusted for inflation.) The whole notion of putting a price on lives may seem callous, but it underlies much regulatory decision making in the US. It’s also probably too low. Remember that the family of Zoila Tellez, killed by an ethanol train, settled for $22.5 million — about two-and-a-half times greater than the value used by PHSMA for its estimates — which implies the real cost might be more like $12.5 billion.

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.

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. 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.

How the Biden administration can insure the safety of communities

As a consequence of the mismatch between financial risk and insurance coverage, each and every rail shipment of LNG would effectively be traveling uninsured against the losses that could result from a catastrophic accident in any of the communities along its route. That’s especially true in the densely-populated Philadelphia metro area where many thousands of buildings and people are located well within the blast zone of a potential conflagration.

States can take steps to protect their communities and their wallets. The attorney generals of Pennsylvania and New Jersey have already sued over the Trump administration’s hasty regulatory approval of the operation. Although states are generally prohibited from imposing financial regulations on railroads (because that authority is reserved for the federal government in order to protect interstate commerce) states can require railroads to disclose information. They can, for example, require LNG-shipping railroads to share with the public the routes they use and the amount of insurance they carry. These basic facts would allow officials to take steps to protect themselves from the risks, whether physical or financial.

The real power is with the federal government though. The Biden administration should immediately suspend Trump’s approval of LNG-by-rail operations until officials can conduct a legitimate risk assessment of LNG trains, one with actuarial rigor. Then, based on that assessment, Biden should take the same commonsense approach we use for motorists: require railroads to carry insurance proportional to their risk.

The industry would surely howl. The fact is, a commonsense insurance requirement would almost certainly spell the end of LNG by rail because neither the railroads nor the gas companies can buy enough coverage to protect the public. And even if they could buy it, it would likely be so costly as to make the whole endeavor unprofitable. But if the project they’re backing — running mile-long LNG trains through Pennsylvania cities — can’t be underwritten by private insurance, isn’t that a big red flag that it’s just too dangerous?

Eric de Place