Derailment Results in Heavier Regulatory Scrutiny of the Railroads

Analysis & Commentary

The derailment and chemical release incident in East Palestine, Ohio, may mark a new era in railroad regulation, one that shippers and other critics believe is long overdue. This time the focus not only will be fixed on rail safety, but also on the currently prevalent operations model that imposes an overwhelming emphasis on cost-cutting to boost shareholder value.

Even before the Ohio incident freight railroads were in trouble with the federal government in the form of investigations, service orders and threatened fines being pursued by the Surface Transportation Board (STB), which supervises the freight railroads’ economic practices involving their customers, including service quality, and how they apply freight rates along with demurrage and other fees.

For example, at the end of last year the board adopted two rules establishing new rate reasonableness procedures which are intended to provide two streamlined approaches for shippers and railroads to resolve smaller rate disputes. It also has ordered the railroads to provide service in areas where it has deteriorated because of neglect due to cost-cutting.

The board is the successor to the old Interstate Commerce Commission and has nothing to do these days with enforcement of federal railroad safety regulations, which are the responsibility of the Federal Railroad Administration (FRA), an agency of the Department of Transportation (DOT).

Investigations of rail accidents are conducted by the National Transportation Safety Board (NTSB), an agency that is entirely separate from DOT, and which is supposed to come under the authority of Congress. Both the NTSB and STB are run by board members who are nominated by the President to set terms and are approved by the Senate. In fact, on occasion the NTSB has been highly critical of DOT safety enforcement efforts in the past.

Adding to the alphabet soup of federal agencies roused to action following the Biden administration’s slow response is the Environmental Protection Agency (EPA). Supervising the clean-up efforts in East Palestine, the EPA most recently stumbled when it failed to communicate with the state governments of Texas and Michigan about shipments of contaminated water and dirt, leaving them waiting in East Palestine until the snafu could be untangled.

Perhaps to make up for their earlier silence in the immediate aftermath of the incident, the EPA and other government officials loudly proclaimed that Norfolk Southern (NS) railroad would have to pay for the clean-up—which in fact was something the railroad had already pledged to do.

The belated haste of federal officials extended to NTSB Chairman Jennifer Homendy, who declared at a Feb. 23 press conference that, “I can tell you this much: This was 100% preventable.” She added, “We call things accidents. There is no accident. Every single event that we investigate is preventable. Know that the NTSB has one goal, and that is safety and ensuring that this never happens again.”

Credibility on the Line

Her statement was highly unusual for a head of the NTSB. Throughout its history, when investigating accidents, the board had sought to bolster its reputation for professionalism and objectivity by limiting public statements to acknowledging that an investigation was underway and a final report would be forthcoming after it was completed, which usually takes months.

Although her statement matches the “zero-accident” safety policy agenda Homendy embraces, by rushing to judgment in this case, she may have done permanent damage to the NTSB’s reputation as a neutral and non-partisan investigator.

On the other hand, Transportation Secretary Pete Buttigieg was the target of widespread criticism for his slow response. After finally visiting East Palestine, he called for Congress to increase the maximum amounts that DOT is allowed by law to apply to railroads for safety violations. At present, the maximum fine the department can impose on a railroad for a violation of hazardous materials regulations is $225,455.

“A six-figure penalty for a fatal incident is pretty much a rounding error for a multibillion-dollar corporation,” Buttigieg said. “A pretty good place to begin would be to add a zero.”

Many Americans were shocked when the DOT secretary seemingly sought to minimize the importance of the East Palestine incident by noting there are about 1,000 train derailments each year. In fact, there were 1,044 in fiscal year 2022 and 12,000 over the past 10 years.

In recent years, the major freight railroads have been under the magnifying glass in Congress and by the STB over the application of an operations model called Precision Scheduled Railroading (PSR). PSR seeks to squeeze out operating costs by wholesale firing of staff, mothballing rolling equipment and closing railyards. The result was a rise in stock value as well as serious and damaging deterioration in rail service throughout the country.

Last December, the U.S. Government Accountability Office (GAO) issued a report stating that its investigation of a connection between rail safety and PSR was inconclusive. However, DOT’s Federal Railroad Administration is continuing to conduct its own investigation into the issue.

In addition, the Brotherhood of Railroad Signalmen rail union has blamed PSR for having a direct role in the East Palestine derailment. They said cost-cutting on the part of NS resulted in the failure of equipment responsible for monitoring the overheating of bearings in wheel assemblies, which at present is believed to be the leading cause of the Ohio accident. Other unions also have cited PSR as a danger to safety because the reduced workforce is stretched thin, and rail workers are overworked and frequently burned out.

All of this adds up to a lengthy schedule of hearings and investigations that could forge a new focus on America’s railroad system, and not just in terms of derailments. Americans may find they must come to grips with a regulatory scheme that has created regional monopolies, routine and severe service failures, and unsafe conditions.

The problem is finding out where Congress and federal regulators can effectively intervene in such a massive industry, where the population is dependent on a single transportation mode that spans a continent but is regulated like a competitive private enterprise.