The North Dakota Industrial Commission (NDIC) issued an order last month requiring Bakken producers to condition crude oil prior to transport in order to make it safer for shipment by rail (the Order).  The Order follows a series of federal regulatory and legislative efforts intended to improve the safety of transportation of crude by rail. [See prior posts on PHMSA crude by rail safety alert and proposed crude by rail safety rules].  State legislative and regulatory efforts to impose requirements in areas already regulated by federal law may raise constitutional concerns under the doctrine of preemption.  The Order is potentially vulnerable to a preemption challenge if it can be shown that it mandates practices inconsistent with applicable federal regulations occupying the field, including in particular interstate rail transportation of hazardous materials, and that it unreasonably burdens interstate commerce.

The Order requires production facilities to use conditioning methods intended to strip lighter hydrocarbons from crude (such as butane, propane, and other combustible NGLs), intended to make it less volatile.  These methods must be sufficient to produce crude oil with a vapor pressure no greater than 13.7 psi, 1 psi less than recommended in ANSI/API Recommended Practice 3000 (“Classifying and Loading of Crude Oil into Rail Tank Cars”), which was published in September 2014.  The Order also prohibits blending of crude with liquids recovered from gas pipelines or with NGLs prior to custody transfer and requires rail facilities to notify NDIC of any crude oil tendered for shipment in violation of federal crude oil safety standards.

Two divisions of the Department of Transportation (DOT) – PHMSA and the Federal Railroad Administration (FRA) – regulate various aspects of hazardous material transportation by rail under the Hazardous Materials Transportation Act (HMTA) and Federal Rail Safety Act (FRSA), respectively.  Both of these statutes contain express preemption provisions.  The HMTA prohibits state regulation of hazardous materials transportation in circumstances where (1) compliance with both state and federal laws would be impossible; (2) the state requirement presents an obstacle to carrying out federal law; or (3) the state requirement concerns subject matter covered by the HMTA (such as classification, labeling, and packaging of hazardous materials) and is not “substantively the same as” the HMTA requirement.  49 U.S.C. § 5125(a); (b).  The FRSA allows for state regulation of rail safety matters already regulated by DOT as long as these requirements are necessary to eliminate an essentially local safety or security hazard, are not incompatible with federal law, and do not unreasonably burden interstate commerce.  49 U.S.C. § 20106(a)(2).  

Neither FRA nor HMTA require oil conditioning prior to shipment, but both statutes unquestionably regulate the safety of interstate hazardous material transportation by rail.  As a result, the Order could be susceptible to a challenge if it can be established that it imposes practices that interfere with the federal regulation of rail safety and that unduly burden the interstate shipment of crude oil.

Similar arguments were made in a recent lawsuit challenging California’s state-specific oil spill prevention and response requirements for oil trains.  Pointing out that hazardous material rail transportation safety is subject to comprehensive federal regulation, the lawsuit seeks a ruling that the California requirements are not only preempted by federal law but are contrary to the national policy of comprehensive and uniform regulation.  It also points out that specific state pre-clearance requirements for interstate rail shipments are inconsistent with railroads’ common carrier obligations to accept all properly tendered shipments.  49 U.S.C. § 11101.  The North Dakota order, which is effective April 1, 2015, appears vulnerable to a challenge on analogous grounds.