Matt Volz, Associated Press

Helena, MT – A federal appeals court has handed a new setback to developers of a proposed $550 million railroad that would link southeastern Montana’s untapped coal reserves to Midwestern and overseas markets.

The 9th U.S. Circuit Court of Appeals ruled Tuesday that the Surface Transportation Board did not take a hard enough look at the environmental risks when it approved the 130-mile Tongue River Railroad line in 2007, including the effects of developing the vast Otter Creek coal tracts.

The Tongue River Railroad Co. has been trying to build the line since 1986 to open new areas of the Powder River Basin to coal mining. Five plaintiffs led by the Northern Plains Resource Council challenged the decision by the Surface Transportation Board to approve the line, claiming the federal board fell short in several areas of its environmental impact statement.

The three-judge panel agreed with the plaintiffs that the board’s analysis relied on old data and didn’t include enough information to determine what the effects would be on water quality and wildlife in the area, such as the endangered pallid sturgeon and the sage grouse.

The board’s study of the cumulative environmental effects of coal-bed methane development in the area was too limited, the judges also ruled.

But perhaps most significantly, the Surface Transportation Board now must consider the development of the Otter Creek Coal Mine in its study of the cumulative effects.

Arch Coal Inc. has amassed the leasing rights on 1.5 billion tons of coal in the Otter Creek tracts near Ashland, including tracts leased last year from the state and those already leased from Great Northern Properties of Houston.

Arch needs a new rail line to realize its plan to ship the coal to markets in the Midwest and overseas, and its interest in developing the coal tracts had appeared to boost momentum for the Tongue River Railroad.

One of the plaintiffs, rancher and Northern Plains Resource Council board member Mark Fix, said the appellate court’s decision means the Surface Transportation Board must conduct a new environmental impact study. That buys more time in his fight against the railroad after the Arch Coal deal with the state seemed to put the project on a fast track.

“To me, it feels like a big weight has been taken off my chest,” Fix said. “Right now, it feels good. It feels like I got a breath of fresh air.”

The proposed railroad route would cut through Fix’s ranch 20 miles southwest of Montana City. He said he is not just concerned about the railroad’s effect on his ranch’s operations, but the possible damage to the water quality and the environment around him.

Much has changed with Arch Coal’s acquisition, he said. The target market for the coal is now no longer just the Midwest, but has expanded to Asian markets like China. The Surface Transportation Board needs to account for that expansion, he said.

“A lot of things need to be looked at. If people step back and start looking at all the effects, they may realize that this is not the best thing to do right now,” Fix said.

The judicial panel rejected other claims by the plaintiffs, including charges that the board applied the wrong laws in granting permission to build the rail line and that the board improperly limited the geographic scope of its analysis.

Messages left with the Surface Transportation Board and the Tongue River Railroad Co.’s attorneys in Montana and Washington, D.C., were not returned on Friday.