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GRAFTON, Mass. — In early 2012, residents of this sleepy town began to notice an unusual amount of activity around the Grafton & Upton rail yard at the north end of town. An old barn came down. Earth-moving equipment was brought out to clear the land.

The tiny 16.5-mile railroad had been nearly defunct, but was purchased in 2008 by Jon Delli Priscoli, a major local developer with a penchant for railroads; he also owns a Thomas the Tank Engine theme park 70 miles away.

At least one town official who visited the site to ask about the construction and the railroad’s plans said he was told that the railroad’s activities weren’t subject to review by the town.

In December 2012, Delli Priscoli finally unveiled his plans to more than 100 residents at a meeting in the municipal gym. The railroad yard, he announced, was to become a propane transfer or “transloading” facility, meaning that propane would be brought there by rail and unloaded onto tanker trucks to be distributed. With four 120-foot long, 80,000-gallon storage tanks to be filled by up to 2,000 train tank cars a year, it would be the biggest rail propane facility in Massachusetts.

Residents were dumbfounded: The location was in the middle of a residential neighborhood, less than 2,000 feet from an elementary school and atop the town’s water supply. But, aside from an application to the state’s fire marshal (still unapproved), the railroad’s owner had not requested nor obtained, town officials say, any local construction permits, environmental assessments, zoning variances — or permission.

And as residents would learn, it was the railroad’s position that it didn’t have to: Being a railroad, the Grafton & Upton was exempt from any state or local law that interfered with its business, a legal doctrine known as pre-emption.

As one resident put it, “You mean we have no rights?”

Around the country, in towns as small as Grafton and as large as Philadelphia and Chicago, communities are beginning to ask the same question as the domestic energy boom makes the expansion of railway infrastructure — to host trains carrying crude oil, propane and ethanol — a profitable venture indeed.

After more than a dozen serious explosions, fires and spills around the country, those trains have become notorious. But an investigation by the New England Center for Investigative Reporting suggests a critical part of the energy-by-rail picture has largely escaped national attention: The rail industry is exploiting historic exemptions from state and local laws to build often-massive transfer and processing stations free from virtually any permit requirements and without regard for basic laws protecting the communities in which they are based.

Railroads are exploiting a large, surprising loophole in federal regulatory law, critics say, and they are doing so with the backing of an obscure federal agency, the Surface Transportation Board, which has been quietly creating what some call a “regulation-free zone” and asserting a jurisdiction over railroads that trumps health and safety laws.

The result is a “regulatory hole you could drive a train through,” says Ginny Sinkel Kremer, an attorney who represents the town of Grafton in its legal battles against the transloading facility and the STB.

Legacy of westward expansion

As railroads thrive in the wake of a domestic oil boom, communities around the country are fighting to enforce local laws (Map: Shawn Musgrave for NECIR)

The idea that railroads should be exempt from local laws is as old as railroads themselves. From 1887 until the mid-1990s, railroads were regulated by the federal Interstate Commerce Commission, which oversaw virtually all aspects of national rail commerce. But starting in the 1970s, Congress began to deregulate the industry. Restrictions the railroads found burdensome were whittled away and the ICC was itself abolished in 1995. It was replaced by the STB, with half the budget of its predecessor and a fraction of its historic staffing: Where the ICC had a peak staff of roughly 2,000 to regulate railroads in 1980 — a number that had dwindled to just over 400 employees in 1995 — the STB has fewer than 150 employees.

Tiny as it is, the STB was nonetheless invested with exclusive authority over all commercial aspects of the roughly $60 billion domestic freight rail industry.

 As with counterparts such as the Federal Communications Commission and the Federal Trade Commission, the STB is both a regulatory and adjudicatory agency and acts, often, more like a court than a traditional federal department. Its three-member board issues opinions to settle disputes between railroads and shippers or between railroads themselves.

It also decides the question of what constitutes “transportation by rail carrier” and whether a given company is, in fact, exempt from state or local rules.

But unlike that of a traditional court, the STB’s mandate is also to ensure that minimal burdens are placed on rail commerce — making the agency, some say, an inconsistent arbiter of the industry it regulates.

“Any failure to give [railroad owners] their way will result in the bankruptcy of the railroad,” sarcastically observed Robert Szabo, former executive director of a railroad shipping industry group. “No rational human being would listen to that and think that has any merit, except the people at the STB — and, generally, most members of Congress.”

The closeness between the STB and the industry it is meant to regulate is plainly visible. The STB is located around the corner from the offices of the Association of American Railroads in the nation’s capital, and it has a long list of members and senior staff who have left to work for railroads.

A 2007 review by Frank Wilner, a former STB staffer and now contributing editor for the industry publication Railway Age, found that 10 STB senior staff members had either left to work for railroads or had been hired from that industry and that from its inception to 2007, four of the six former STB board members had themselves left to work for railroads. Linda J. Morgan, who served on the board from its inception until 2003, has worked as outside legal counsel to various railroads, including the Grafton & Upton Railroad. STB member Roger Nober, who served from 2002 to 2006, is now executive vice president of law and corporate affairs for railroad giant BNSF. Board member Charles Nottingham, who left the STB in 2011, was until recently a partner handling transportation and regulation issues for the law firm Husch Blackwell, which offers a variety of rail-related legal services.

“So many have gone to work for railroads, there is this perception [of] regulatory capture,” says Wilner.

All of the rail companies cited in this report were contacted, but most, including Delli Priscoli, declined to comment. Others offered factual clarifications. But trade groups such as the Association of American Railroads defend pre-emption as a national economic necessity.

STB officials acknowledge that laws pre-empted at the local level often have no equivalent in federal regulations. But they argue that the ICCTA, the law that created the agency, restricts STB authority to a relatively narrow set of regulatory tools.“Pre-emption ensures uniformity of laws across all states and provides a framework so that freight railroads can make necessary operations adjustments to respond to the shipping needs of their customers … and to move the country’s economy,” said Ed Greenberg, a spokesman for the Association of American Railroads.

But that conclusion isn’t absolute: Some decisions were left to the STB, and over the years, it has interpreted its jurisdiction to include activities that bear little resemblance to traditional rail traffic. Starting around the early 2000s, companies began opening solid waste facilities alongside railroad tracks — without permits, zoning approvals, environmental analyses or almost any other permission from state or local officials. The companies argued that they were exempt from these requirements because the waste constituted “transportation by rail” and was therefore exempt from state and local laws — and the STB mostly agreed.

Marc Goldstein, an environmental attorney who has represented towns that fought the waste-by-rail operations, says that industrial and hazardous materials facilities are normally subject to any number of requirements: environmental impact reviews, site approvals, zoning variances, wetland impact studies and building plan approvals. In a case like the proposed propane facility in Grafton, he speculated, “The pure fact that you want to do it in a residential area — you’d never get a variance for that.”

In 2008, Congress passed the Clean Railroads Act, excluding solid waste facilities from railroad exemption. But the law didn’t address other activities “ancillary” to railroads, such as the storage and transfer of toxic and flammable materials — and the construction of massive transloading facilities.

Broad environmental laws like the federal Clean Air and Water Acts are mostly either prescriptive, setting limits for states to meet, or else are punitive, prescribing penalties for environmental damage. But when it comes to something like a transloading facility, there simply is no overarching federal permit process that applies, said Allison Fultz, an attorney with expertise representing towns in legal battles with railroads. That job, she said, has always been left to the states.

“It can be the case that every element of what the railroad wants to do makes no sense from a community-safety point of view — but they’re pre-empted,” she said.

The STB does have its own office of environmental analysis, though, and the power to require and assess environmental reviews — but it generally doesn’t require them for “ancillary” facilities and can effectively prevent other state and local agencies from doing so.

STB officials have acknowledged, even publicly from time to time, that the result of its interpretation of the law is a “gap” in the law. But the agency takes the position, as STB attorney Charles Vance put it in July in a hearing on the Grafton case against the board, “The [statute] that Congress adopted necessitates that regulatory gap.”

The problem with the status quo, says Stuart Flashman, an attorney who is working on several cases involving railroad pre-emption, is that “If you don’t allow the states and towns to consider these things as their problem, then it’s nobody’s problem.”

‘Trapped in our houses’

Construction continues at Grafton & Upton Railroad's liquefied propane gas (LPG) transloading facility at 42 Westboro Road in Grafton on Thursday, Sept. 17, 2015. T&G Staff/Paul Kapteyn
Construction continues at Grafton & Upton Railroad’s liquefied propane gas (LPG) transloading facility at 42 Westboro Road in Grafton on Thursday, Sept. 17, 2015. (Photo: T&G Staff/Paul Kapteyn)

Grafton has already had a glimpse of what pre-emption can look like on the ground. Less than 10 miles away, in the town of Upton, the Grafton & Upton Railroad has already opened a transloading and repackaging facility for wooden pellets. Also located near residential properties, the facility operates late into the night and creates a din that, neighbors have told state officials, exceeds state noise limits. (State regulators conducted a noise study that resulted in some voluntary noise abatement by the railroad, but residents say the noise persists.)

Diana Del Grosso, one of several plaintiffs in a lawsuit brought against the Surface Transportation Board on behalf of residents in Upton, said the noise was like “a really loud Shop-Vac, but with rocks clanging through pipes.

“We’re all trapped in our houses,” Del Grosso said. “Nobody will buy them now.”

The proximity of hazardous materials to residential neighborhoods has also raised alarms: In 2013, 100 gallons of styrene, a noxious and flammable chemical, was spilled at the railroad yard in Upton. (The spill was cleaned up without further incident.) And in June, a train carrying a tank to store propane derailed on its way to the transloading yard. No one was injured, but residents were shaken.

While the majority of reportable accidents involving hazardous materials occur while trains are in transit, releases of toxic materials that occurred during the loading or unloading of trains make up about 8 percent of nearly 500 “serious” incidents reported to the federal Pipeline and Hazardous Materials Safety Administration since 2010.

Transloading facilities have been the sites of several major accidents. In April, an explosion in an Omaha, Nebraska, rail yard killed two people. In July 2014, a North Dakota transloading yard handling crude oil exploded in a massive fire.

Such accidents are rare, but with a limited number of transfer stations capable of serving the 100-car “unit” trains now carrying crude oil and other petroleum products across the country the demand for new and bigger facilities is growing.

“It’s something that communities are going to be facing more and more,” says Fultz, the attorney. “A railroad comes in, brings potentially dangerous substances on-site, and the town cannot tell the railroad ‘No, you can’t bring that there.’ ”

In Alexandria, Virginia, the Norfolk Southern railroad opened an ethanol transloading facility in 2008. The city argued in federal court that even if the railroad was generally exempt from local laws, Alexandria retained the right to impose restrictions on the truck traffic rumbling through its neighborhoods. The city lost that argument: While the community theoretically had such powers, a district court judge ruled, it was invoking them as a de facto “permitting requirement” to thwart the plant.

In March, Norfolk Southern informed city officials that it planned to expand the ethanol facility yet again. Alexandria has little power to stop the expansion.

Chicago, meanwhile, has struggled to enforce a 2014 city ordinance aimed primarily at the activities of KCBX Terminals, a Koch Industries subsidiary that had been storing 60-foot-high piles of hazardous dust from “petroleum coke,” an oil refining by-product, next to a residential neighborhood on the city’s southeast side.

After two years of legal wrangling, multiple air-quality violations issued by the EPA and a lawsuit by the Illinois attorney general, the company finally announced that it would remove pet coke piles at one of its two storage sites and eliminate the outdoor storage of the material at the other — but not until June 2016, a time frame to which the city has acceded.

But this investigation found that another, smaller operator, Calumet Transload — which stores and moves pet coke on behalf of KCBX — has asked the STB to declare it exempt from the city’s ordinance. Should the STB find Calumet Transload exempt from the law, so too, presumably, would be the Koch Industries’ railroad.

Regulatory gap

In March 2015, Rep. James McGovern, a Massachusetts Democrat whose district includes Grafton, filed an amicus brief on behalf of the town and in May introduced the Safe Communities Act, which gives municipalities more say over liquefied natural gas (propane) transloading facilities in their towns.

“I’m a huge supporter of the railroads. I understand the importance of pre-emption as a concept,” said McGovern. “But there are serious safety issues here.… I don’t think the Surface Transportation Board was meant to be simply a rubber stamp on everything a railroad wants.”

In 2014, the Environmental Protection Agency approached the STB with a question of fundamental importance regarding approval of a state environmental plan by California that included new restrictions on train idling. The plan is required by federal law and, if approved by the EPA, would carry the “force and effect of federal law.”

If the EPA approves California’s law, will the STB allow railroads to ignore it anyway?

In a letter of “guidance,” the STB answered, “it is likely that the Rules would be preempted.”

Meanwhile, Grafton’s case, which started as a failed attempt to stop the Grafton & Upton and is now a suit against the STB, awaits a decision from the 1st U.S. Circuit Court of Appeals. Precedent suggests the town’s appeal faces an uphill battle.

The town’s case is being watched closely by legal experts, environmental advocates and railroad interests across the country, as its outcome will likely set precedent.

“There’s increasing state and local concern over this,” said Flashman, the attorney working on several railroad pre-emption cases. “But there isn’t a whole lot of jurisprudence about … how broad is the pre-emption clause. Nothing has gone to the Supreme Court — yet.”

NECIR intern Cory Dawson contributed to this report.

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