I am not sure this could be considered "frivolous", this isn't like someone suing a distillery because they got cirrhosis of the liver downing a fifth of bourbon every day. Like any legal case, it is going to come down to the answer to several questions:
1)Has the plaintiff in the case experienced harm? Answer in this case, yes, the government spent 25 million dollars or whatever putting out the fire (and theoretically, if any private residences or farms burned, they could sue as well).
2)Does the evidence in the matter support the claim of the plaintiff that the defendant through its actions was the prime cause of the loss/harm. In this case, what evidence do we have that it was a cinder from the engine that caused this, which will come out in discovery and in the trial itself
3)Did the defendant in this case violate any regulations or laws in the operation of the engine, for example, if regulation required that the engine have some kind of cinder catching gizmo on the smokestack and it was found it didn't, this could lead to a summary judgement against the railroad from what I know if the plaintiff asked.
4)Did the defendant follow best practices of the industry, in this case in regards to preventing a fire,and more importantly, did they follow their own designated rules? Wouldn't necessarily be a cinder, if for example the railroad has a rule of no smoking allowed in the cab of the engine, and it was found that engineers and firemen were routinely violating this rule, the railroad apparently wasn't enforcing it, and someone tossed a cigarette butt that caused a fire (obviously not in this case), the rr could be held liable. If best practice is to have a fire suppression car in the train or following it, did they do that?
5)Was the railroad operating in conditions it should not have been? For example, in this case, was there a drought where it was known there was a much greater chance of starting a fire, and thus perhaps the trains should not be running. Or were there really high winds, which would increase the likelihood of a spark igniting a fire (this would fall under negligence)
6)Another question that I could see coming from the defense, did the government know of increased risk in sending trains through the area ie higher risk of fire yet didn't warn people using the area of the increased risk? For example, the smokey the bear signs they have in state and national parks showing the relative risk of wildfires starting.
7)Another thing that would be relevant if I remember correctly is if the plaintiff regularly instituted legal action in similar cases. So for example, if let's say through negligence a chemical company caused a huge explosion and fire that burned a forest, did the government sue them for the cost? From what I know, unequal enforcement or unequal legal actions (suing some businesses for the cost of action and not others) could weaken the federal government's case.
In the end, when these questions are answered at trial, it will be up to a jury or judge to decide how the answers to these questions lead to a verdict. At least from having been on civil trials, the damages are based on relative liability ie how much of the blame can be put on the defendant and also how much of the blame could be laid at the feet of the defendant (kind of like in a car accident, where they assign relative blame). If the railroad followed procedures, if it was found not to be negligent, if this simply was an accident, a jury or judge could award the federal government a percent of what they are claiming, if the railroad was negligent, showed wanton disregard, a jury or judge depending on the relevant federal laws could end up making the railroad pay more than the value the government was looking for (basically a penalty award for negligence, if I understand it correctly).
My opinion, for as little as that is worth:
-There is a strong chance that the parties may settle before going to court, many lawsuits are settled. It saves the cost of a trial, and both sides get something out of it, the government recoups some of its costs, and the railroad isn't hit with a heavy payout (or its insurer).
-If it does go to trial, it is likely that the government unless the railroad was negligent, will recoup the full cost of fighting the fire, and whatever the judgement is, likely the railroads liability insurance will pick it up. Keep in mind I suspect the railroad already has liability insurance that takes into account the risk of steam engines igniting a fire, the way any liability insurance looks at risk, so likely even if there is a judgement against the railroad likely it won't raise their rates to the point they can't afford it, unless they have had enough claims where the risk level is raised on them.
I think the government in this case isn't stupid, and knows that if it results in putting the railroad out of business it will generate a lot of bad publicity and to be honest unless the guy doing this is someone with a vendetta against steam engines (ya know, one of them Diesel-lovin' wackos) or someone who saw the movie Bambi too often and it rotted their brains, likely any settlement or award will end up not being catastrophic. PGE on the other hand was not just found to be negligent in the particular fire in question, but had a long, long record of such incidents, not to mention a number of other judgements for corporate negligence, PGE is almost a poster child for a poor corporate actor.