UPDATE 2-Quebec crash probe to transform rail sector, official says

Fri Jul 12, 2013 5:37pm EDT

By Richard Valdmanis and Phil Wahba

LAC-MEGANTIC, Quebec, July 12 (Reuters) - The train derailment that demolished the heart of a small Canadian town last weekend will likely spur tougher regulations for rail-car hand brakes, tanker cars and possibly train crew size, according to one of the lead investigators of the crash.

"I am confident that this will be an investigation that changes the industry," Canadian Transportation Safety Board (TSB) investigator Glen Pilon told Reuters by phone on Friday.

The TSB makes safety recommendations to Transport Canada, the federal government department that regulates the railway industry. Analysts said the disaster, viewed as the worst rail accident in North America in 24 years, is almost certainly going to lead to new regulations that could add to the cost of transporting oil by rail, a burgeoning business in both the United States and Canada.

Police estimate 50 people were killed when the runaway train of oil tanker cars jumped the tracks at the town of Lac-Megantic, Quebec, and erupted into a wall of fire shortly after 1 a.m. (0500 GMT) on Saturday.

The train - operated by the Montreal, Maine & Atlantic Railway (MMA) - had been parked uphill from Lac-Megantic in the neighboring municipality of Nantes.

MMA Chairman Edward Burkhardt has said he believes the train's sole engineer did not apply enough hand brakes to keep the train in place after its air brakes failed. Burkhardt said he had been told that 11 hand brakes were set, but he could not verify that number. The engineer could not be reached for comment.

Pilon said the TSB was looking closely at whether the engineer set a sufficient number of hand brakes. The engineer spent roughly 30 minutes securing the train before leaving to stay the night at a local hotel.

"It takes about three minutes to set each hand brake," Pilon said. "We have evidence to support what we believe happened and we are examining the cars, but many of them were destroyed in the incident."

Pilon said the TSB is also trying to find out why backup systems such as the "dead-man pedal", which is meant to stop a train automatically if it is not being manned, did not work.

"It was an older locomotive, so that may be part of it," Pilon said. He said the locomotive was a GE C30-7. That model was built by a division of General Electric Co. GE could not immediately confirm that engine was used in the train.

INDUSTRY IMPACT

Canadian officials stressed the probe could take months, with 30 TSB investigators working on it, including 20 on site. TSB Chief Operating Officer Jean Laporte told reporters on Friday that it was "out of the question" that trains would operate in the area until investigators have finished their work on the ground.

"At the TSB we hold by the theory that no accident is ever caused by one thing, it's always a series of things," TSB Chairwoman Wendy Tadros said. "It always involves the organization and the way that they operate, so we have to look deeply into that. It never comes down to one individual."

Ratings agency Moody's warned on Thursday that the accident would limit the near-term growth of petroleum freight, raising costs and tightening restrictions for North American producers.

"The Quebec derailment ... will inevitably lead to increased U.S. and Canadian government scrutiny and permitting delays, along with higher costs for shippers. These higher costs will be credit negative for North American rail companies."

Coming under scrutiny is the class of cylindrical tank cars, known as DOT-111s, that were used in the derailed train. DOT-111 tank cars have long been flagged by U.S. and Canadian regulators, who have recommended that they be reinforced if they carry oil.

"The likelihood is pretty overwhelming that there will be some stricter regulations," said Stifel analyst Michael Baudenstiel. "It poses a risk for the leasing companies that they will have to spend capital to bring the older equipment up to newer standards, or they may serve crude-on-rail less than they are currently."

One of the biggest tank-car leasing companies is Chicago-based Union Tank Car, a unit of The Marmon Group, which is controlled by Warren Buffett's Berkshire Hathaway. Other companies that lease rail cars include GATX Corp, Trinity Industries Inc, GE and Wells Fargo & Co.

Matthew Troy, an analyst at Susquehanna Financial, said the catastrophe could result in higher costs if companies have to invest in more expensive equipment or insurance.

"Obviously, a tragic accident such as this will cause regulators as well as the railroads themselves to take pause and examine how exactly an accident like this can happen," he said.

At the same time, he stressed the accident is "not a game changer", and many observers say it is too soon to say if the disaster will quell the crude-by-rail boom.

MMA Railway is permitted to run its trains with only one crew member, and Pilon said this policy is also being looked at as a possible factor in the crash.

MMA's own safety requirements went "above and beyond" Transport Canada regulations, TSB investigators have found, but Pilon declined to give details. He said the company's track record before the crash was not abnormal in the industry.

"We have had no issues with them that we haven't had with other companies," he said.

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