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Are CP’s hands really tied on dangerous tank cars?

Canadian Pacific Railway Ltd. boss Hunter Harrison thinks it's long past time to immediately sidetrack outdated tank cars, because they pose too great a risk of rupturing in rail accidents and blowing up.

Everybody accepts that the older, unpressurized cars are more dangerous, investors' favourite railroader told a Calgary business audience.

"So what should we do with them? Stop them tomorrow. Don't wait to study. We know the facts."

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Indeed we do. The cylindrical cars (labelled DOT-111 in the U.S. and CTC-111A in Canada) were built before tougher safety standards were imposed in 2011. But even though they have a nasty habit of rupturing in rail accidents, they still account for as much as four-fifths of the Canadian rail tank-car fleet.

The solution seems simple: Railways should stop agreeing to haul the offending cars if the cars are loaded with crude oil, propane or other potentially explosive products. But as Mr. Harrison is at pains to point out, CP and other railways can't legally refuse to transport the government-approved cars, which are owned or leased by shippers and refiners. For CP's shareholders, it's hard to lose – unless the government pays up for the retrofitting of the older cars, or bans their use, the railways can charge a premium to offset the risk of a catastrophe. But the danger remains.

Mr. Harrison insists Canadian Pacific is prepared to do its part to upgrade the railcars, which would mean installing reinforced outer shells, protective shields and proper venting. But it's an expense that would have to be borne by the owners of the cars (shipping or leasing companies, typically) or worse, the usual victim – the taxpayer.

So unless oil companies and their suppliers stop using the flawed cars unilaterally, as Irving Oil has vowed to do by April 30, that leaves the ball in Ottawa's court.

You would think the Lac-Mégantic disaster and a string of less deadly fires and explosions would have been enough to trigger an outright ban on shipping crude oil in flimsy containers. But if experience is any guide, nothing is likely to happen quickly, despite a strong warning this past month from regulators on both sides of the border about the dangers of shipping crude by these means.

"You know what this comes down to? And I hate to tell you this: The almighty dollar," the characteristically blunt Mr. Harrison said.

"Who is going to pay for this? Stop those tank cars. Deal with human behaviour. Don't think writing more [regulations] is going to fix the situation. Face up to the issues. It's something that I feel very strongly about."

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While waiting for government to yank the cars off the rails, Canadian Pacific and its rival, Canadian National Railway, are turning to a basic but effective economic weapon, demanding higher fees from shippers for hauling the older, more dangerous tank cars, in what amounts to a risk surcharge.

The question is whether the extra charges will be punitive enough to persuade shippers to fork out the $30,000 to $70,000 per car that it would take to retrofit every old tank car, or to rethink the rail option.

In any case, the changeover can't happen quickly, because of a drastic shortage of available tank cars – and thousands of new ones on back order – amid soaring demand to move oil by rail. And with Keystone XL still waiting on approvals from the U.S. government, among others, that demand isn't going anywhere soon.

Either way, Canadian Pacific wins – at least until the next deadly accident.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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