Thursday, July 7, 2011

High-Speed Rail's Point of No Return, Approaching Critical Mass in California

We directed you to the California High-Speed Rail Peer Review Committee Memorandum yesterday.  Here is a news article by Tracy Wood, who followed high-speed rail issues in the

What a number of smart people are beginning to point out, and this includes the Peer Review Committee and other local emails, is that we have to think about the California project as having two components. One builds the train infrastructure (tracks, electrification, signalling, station platforms, etc.) and the other operates the train.  The latter owns the rolling stock with their logo on it, advertises, sells tickets, and pays for the operation and maintenance of the rolling stock.

This is the typical management structure in Europe where the rail infrastructure has been built by the government, with or without private partnership, but the train operators are independent and usually private consortia.  Several may even compete for business on the same rail line, as we can now see with the use of the Eurotunnel from the Contintent to the UK.

Right now, we see no such build/operate distinction being made by the rail authority. They are proceeding as if they intend to build, own and operate the entire rail system.  They have, up to now, ignored requests to pursue the most appropriate operator to participate in the planning of the infrastructure to meet all the legal requirements of AB3034, something that the rail authority is obviously incapable of doing by itself.  For example, how can they predict whether or not operating subsidies will be required?  While those are not permitted in the authorizing legislation, they can't reliably know whether or not there will be operating deficits until they start operating. If they say in their business plan that they won't need subsidies, but when operating, they do, where does the legal liability lie? Do they shut the entire system down?  Do they go to jail?

There are really two business models at stake here and they should be distinct.  The design/build capital development process of constructing the infrastructure cannot also incorporate operational issues such as ridership, ticket costs, and operating expenses. That's a separate business plan which must also include strategic plans for maintenance, upgrades and complete replacements, all falling within the surplus revenues expected from such an operation. And these operators must, of course, pay "rent" or lease-fees for the use of the infrastructure.  (Something the CHSRA has not offered to do, or Caltrain required, for the use of the Caltrain corridor on the Peninsula!) Such fees, presumably, contribute to the construction loan (the bond) buy-down.

The rail authority is in no position to specify its "risks" without adequate input from the operator that intends to use the infrastructure under development.  Furthermore, the rail authority has its own, capital development risks, since, as Tracy Wood points out, the current FRA funding, a little over $3 billion, is all that the rail authority can hope to receive from Washington.  That will be enough for around 100 miles of track in the Central Valley that is not usable for high-speed rail.  Then what?  

"Rails to Nowhere!"

Report: High-Speed Rail Management Ignoring 'Clear Risk'

Peer Review Group Report on High-Speed Rail 

Thursday, July 7, 2011

The California High-Speed Rail Authority is in serious danger of starting a massive construction project that it may be unable to finish, according to a detailed assessment by its Peer Review Group.

And if it does begin building the 800-mile train system next year, as currently scheduled, it's overall plan is skewed, according to the nine-page report, because whoever will operate the train system should be closely involved in major construction decisions. The Rail Authority doesn't have a plan for operating the train system or who will run it.

In addition, the report said no commitments should be made to begin construction "until the Legislature and Governor have made an expedited review of the 2011 Business Plan and agreed on a course of action." The business plan is due Oct. 1, but has run into management problems.

These were among a number of other issues -- including such things as who will own and operate the trains and how much the project may actually cost -- were raised by the Peer Review Group. It is the most detailed report to date on potential problems with the actual building of the train system.

The eight-member committee, headed by Will Kempton, chief executive of the Orange County Transportation Authority, is comprised of outside transportation experts appointed to conduct reviews of the proposed rail project.

The group's latest assessment, sent July 1 to the High-Speed Rail Authority and top staff, as well as key lawmakers, was compiled at the request of the state Senate's Select Committee on High-Speed Rail.

"Neither the State nor the Federal Government has given any guarantee of future funding beyond the amounts already allocated," the report reminded lawmakers. "This poses the clear risk that whatever is started will not be finished and whatever is finished may have only limited utility.

"In any event," it continued, "the State may be faced with a limited utility project (albeit partly funded with federal grants) or may need to decide to complete the project using only its own resources if there is no further Federal funding."

Federal rail officials and the Rail Authority have agreed to begin construction in the Central Valley by next year in order to qualify for federal stimulus funds. Projects using those funds must be finished in five years. The total cost now is estimated at $43 billion to $65 billion.

But critics worry the project will become a "train to nowhere" if money isn't found to take it beyond the valley. And the approval given by voters in 2008 for the project specified that no tax money can be used to run it, once it is completed.

In its report, the Peer Review Group warned "there are no risk free ‘mega-projects.' None."

"Whatever else is accomplished before construction commitments begin," it emphasized, "it is essential that major risks be defined, clarified, understood, allocated and accepted to the degree possible."

The report recommended changing the management structure for construction of the rail system, but said the best way to do that can't be determined until there is a business plan.

And it said current project leaders may have their scheduling backwards, making critical decisions before they know who will be operating the system. The operator could be a private company, a government agency or some sort of hybrid.
"The importance of the operator's input into the details of the systems design cannot be overstated," the report said. "... Consequently, it is the norm to let a concession contract for the operator several years prior to the start of commercial operations and before many critical engineering decisions are made."

The Peer Group report warned that the way things are currently being moved along, the state, not the ultimate operator, could be liable for future safety problems.

"These are not abstract problems for which the answers can be delayed for the present and then allowed to emerge over the years," the report said.

Neither Kempton nor Sen. Alan Lowenthal (D-Long Beach), chairman of the Select Committee on High-Speed Rail could be reached for comment Wednesday.

Numerous Unfavorable Reports

The Peer Review Group report is the latest in a string of unfavorable reports released over the past two years on the high-speed rail project, which was approved by voters in 2008.

Among other things, state audits determined millions of dollars were paid to subcontractors without invoices and ridership estimates needed to attract private investors were faulty. Rail contractors and project leaders have been criticized by community leaders and farm owners along the planned route for brushing them aside and failing to communicate openly about the project.

One of the most recent reports was done in May by the state's Legislative Analyst's Office.

The Legislative Analyst's report urged the Legislature to quickly take control of the fledgling train system away from its current board and turn it over to Caltrans.

The Rail Authority, in its response to the Legislative Analyst, said the rail project "has been successful to date in large part because the Authority is not buried within the state bureaucracy."

And, wrote the Rail Authority's CEO Roelof van Ark in a cover letter to the Senate committee, "after taking a thorough look at this report, we however see many flaws in its analysis and can say with certainty that if the Legislature were to adopt the recommendations made by the (Legislative Analyst), it would effectively end the largest infrastructure project in our state's history and would turn back nearly $4 billion in federal funding..."

The Rail Authority is under pressure from Washington to begin construction by next year or lose the $4 billion in federal stimulus funds that Roelof is referring to. At the recommendation of the Legislative Analyst, it asked about extending the deadline but federal rail officials said they didn't have the authority to make an exception for California.

According to a posting on the High-Speed Rail Authority's website, for at least a decade, even before voters in 2008 approved $9 billion to begin construction of the Anaheim-to-San Francisco train system, the Rail Authority has been planning how to build the project.

"Over the last 10 years," it says, "the Authority has carefully and extensively done the studies necessary to prepare for the implementation of high-speed trains in California."

But the latest Peer Review Group report, which was written to respond to the Legislative Analyst's review, said it agreed with the Analyst's Office that "the project is truly at a ‘Critical Juncture' posing perhaps the last available opportunity for the Legislature and Governor to ensure the project is on the right course before a commitment to construction is irrevocable."

But it didn't endorse the idea that Caltrans should take over, saying the project was too big for either Caltrans or the current rail authority.

And among the many issues it raised, the Peer Review Group once again urged lawmakers to ensure the Rail Authority adopts a basic business plan by its October deadline.

"In previous letters we have highlighted this critical issue," the Peer Group report said, "because the business model brings together the sources of money, allocation of costs and benefits, and apportionment of risks."

But just this week an analysis by the staff of the Senate Transportation and Housing Committee of separate rail-related legislation disclosed that the Rail Authority was months off-track in its work to develop such a model.

Please contact Tracy Wood directly at and follow her on Twitter: And add your voice with a letter to the editor.

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