Briefing Report: High-Speed Rail Redux

Is it back to the drawing board?
Wednesday, May 9, 2012

On April 2, 2012, the California High-Speed Rail Authority issued its fourth attempt at a business plan, dramatically revamping recently issued plans in a desperate attempt to meet the governor’s goal of reducing costs and increasing the speed of delivering an ambitious infrastructure project for the governor to point to when people ask if the Golden State’s golden era was officially at an end.  In defending the project in his State of the State address, the governor derided any opponents of the project as “declinists” who lacked vision, guts and ambition.  With all due respect to this governor and the last, it’s not a lack of vision or even ambition… but a lack of money that will be the final nail in the coffin for a project that is being referred to now as the “Moonbeam Express.”

High-speed Rail 4.0

When the HSRA issued its new plan at the beginning of April, the media coverage was almost universally positive.  After all, the plan had lopped 5 years off in construction time and $30 billion in cost.  However, the executive summary that was being distributed to reporters failed to provide any details, and the details of the new plan reveal this plan for what it is, a white-wash.

Blended System

The first significant change in the current plan is that the HSRA has opted to create a blended system.  What this means, in essence, is that the system they deliver will not be a statewide high-speed rail system with a first phase connecting San Francisco to Anaheim and a second phase attaching lines to Sacramento and San Diego.  Instead, the system will be a high-speed rail line through the Central Valley that connects to existing intercity rail lines in the Bay Area and Los Angeles that will be upgraded using Prop 1A funds.  What this means to the potential customer, is a system that is far slower than promised, according to the HSRA’s own documents, as the trip from San Francisco to Los Angeles will take three hours.  This is significant because it does not meet the 2 hour and 40 minute threshold in the bond passed by voters, and also makes the train significantly slower than air travel.

Cost

The media reports on the system are quick to point out that it will cost $30 billion less than the plan issued last November.  In truth, the plan is only $9.8 billion less than the blended system envisioned in the November 2011 plan.  These cost savings are achieved through what amounts to smoke and mirrors.  The plan proposes to stop the rail line in Los Angeles, rather than Anaheim, which would save $4 billion (although the HSRA has backed down on this elimination in recent weeks), makes unsupportable assumptions on the inflation rate over the life of the project (assuming a 1%-2% inflation rate over the next three years, despite the fact that the inflation rate for the first quarter of 2012 is set at 3%), which would save $3.8 billion, and $2 billion by increasing the speed of delivery of the project by 5 years.  These assumptions simply do not pencil out.

No More Train to Nowhere

In addition, the plan has responded to the overwhelming public criticism of the previous plan that proposed an Initial Construction Segment (ICS) between Borden and Corcoran.  Instead, the first phase of the project, called the Initial Operating Segment (IOS) will connect Madera to Bakersfield for $6 billion and then connect Merced to the San Fernando Valley for another $25.3 billion, what previously was referred to as the IOS South.  

Show us the Money

What the plan leaves a little murky, as have all its predecessors, is where the money to pay for the project will come from.  Currently, Proposition 1A has $8.2 billion to invest in construction of the system, along with $3.3 billion in federal grants, or $11.5 billion in total identified funds for the construction of the initial segment of the system.  The problem is that this represents less than half of the funds necessary for even the completion of the first marketable segment of the system.  The plan addresses this enormous hole with a wink and a prayer, in essence claiming that the rest will be made up with federal money.  However, the Congress has recently zeroed out all additional funding for high-speed rail systems, and is in the process of investigating the financing of the system.  The only rational conclusion is that the funding for high-speed rail will not be coming out of Washington anytime in the near future.

Cap & Trade

The final difference in the current plan is that it includes a contingency plan for when federal funds fail to materialize.  The plan assumes that, in the case that there is a funding gap, the state will invest funds from the cap & trade system implemented under AB 32, to help pay for the construction of the project.  Although the HSRA states that they have a legal opinion justifying the use of revenues from this source, the plan simply defies logic and the law.  AB 32 specifically states that the revenues from the cap and trade auctions must be used for the administration of the program and not for ancillary government programs.  Any use of these funds for other programs, including high-speed rail, would redefine the cap and trade fees as a tax and require a 2/3 vote of the electorate.  Provided these hurdles can be cleared, use of these funds for the construction of a high-speed rail would still face other legal hurdles, not the least of which is the fact that the system will be under construction well beyond 2020, which is the target for when state greenhouse gas emissions must be reduced to 1990 levels.

During the construction phase of the project, the system will have a significant GHG impact, because construction materials like concrete have a significant carbon footprint.  Even supporters of the program acknowledge that the system would not start achieving GHG reductions for several decades, and critics believe it may never actually achieve GHG reductions because there is an open question as to whether the system can even be powered by 100% renewable energy, or that the system will ever achieve the ridership it projects.

Don’t Take My Word for It

The other big difference in the debate over high-speed rail in California is that the system is coming under increased fire from unbiased, neutral observers.  Since the release of the November, 2011 business plan, virtually every third-party analysis of the system has concluded that the plan is unworkable.  The most recent analysis was undertaken by the Legislative Analyst’s Office in a report released April 17, 2012.  The LAO hammers the HSRA plan on three basic points: future funds are not identified; the use of cap and trade revenues is highly speculative; and significant changes to the plan are made without necessary details or justification.  “Based on our review of the 2012 Business Plan and the Governor’s related budget proposal, we find that the HSRA has not provided sufficient detail and justification to the Legislature regarding its plan to build a high-speed rail system.”

The analysis documents the fact that the plan assumes $42 billion in funding from the federal government, despite the fact that $39 billion of this funding remains unsecured.  The LAO is also skeptical of the plan to use cap and trade revenues, citing a Legislative Counsel opinion that the cap-and-trade auction revenues constitute mitigation fees.  In the LAO’s opinion, “…the IOS would not be completed until 2021 and Phase I blended would not be completed until 2028…given the project’s timeline, it would not help achieve AB 32’s primary goal of reducing GHG emissions by 2020.”  The analysis goes on to document that the plan would increase GHG emissions for many years.  “…an independent study found that – if the high-speed rail system met its ridership targets and renewable electricity commitments – construction and operation of the system would emit more GHG emissions than it would reduce for approximately the first 30 years.” The LAO is also concerned that the new plan’s commitment to spend Proposition 1A revenues on the local and regional rail systems that connect to the HSRA system were undertaken without enough analysis or justification, further adding to the risk of the project.

In conclusion, the LAO states that there are important gaps in the details and documentation that the HSRA has provided the Legislature and that at minimum, the Legislature should require the HSRA to provide the following:

  • A copy of the third-party analysis of the HSRA’s estimated operating costs in comparison to international systems.
  • Copies of the memoranda of understanding (MOUs) with the regional agencies operating the “bookends.”
  • An analysis of the net impact that the system will have on the state’s GHG emissions.  

In the interim, the LAO advised “the Legislature not approve the Governor’s various budget proposals to provide additional funding for the high-speed rail project.”

Operations & Maintenance

HSRA critics have been railing against the system’s lack of credibility when it comes to sources of revenue, the cost of construction and the use of impossibly optimistic ridership numbers for years and for good reason. But the LAO report raises another important issue that has not received as much attention – the cost of operating and maintaining the system.  Despite the fact that the HSRA claims that many high-speed rail systems throughout the world are profitable (and by this they mean are able to meet or exceed operations and maintenance costs), the reality is far less clear.  In a recent paper available at www.cc-hsr.org, Alain Enthoven, William Grindley and William Warren extensively researched the issue of operations and maintenance costs on international high-speed systems and California. The paper concluded that the HSRA will never be able to cover O&M costs and will thus require a significant subsidy, something expressly prohibited by Proposition 1A.  Their conclusions are based on data presented on the HSRA’s own website, in which international rail operators have repeatedly testified that their costs per passenger mile are in the range of 40 cents.  Despite that experience from every other high-speed rail system in the world, the HSRA believes that its cost per passenger mile will only be 10 cents.

What this means is that California’s high-speed rail system is claiming it will cost less to operate than any of the other systems in the world, despite having a smaller potential customer base, higher energy costs and a host of other challenges than its competitors abroad have not been saddled with.  Simply stated, despite repeatedly testifying that their operating figures are in line with the international experience, the HSRA is not being forthright on the cost  in order to be able to claim it will not need an operating subsidy.

The Lemon Law

As George Skelton pointed out in the Los Angeles Times on April 23, 2012, a consumer is granted certain public protections from unscrupulous salesmen that offer them something and then half-way through the sales process change the dynamics of the deal.  Those protections are called lemon laws and are designed to keep consumers from being the targets of a bait and switch.  Unfortunately, the voters do not have that same protection.  As Skelton says, “You’re only entitled to buyer’s remorse, short of a citizen’s ballot initiative, and there’s no special interest money to pay for that.”

The time has come for Republicans and Democrats to take a long look at this project and judge it on its merits, not the mirage of promises coming out of the governor’s office.  If the project is supportable, it’s time to send it back to the voters with the real numbers.  Along those lines, Senator Doug LaMalfa has proposed a bill (SB 985) to put the issue back before the voters.  However, this bill did not move out of the Senate Transportation & Housing Committee.

Short of placing the issue back before the voters, it will take an act of political courage by Democrats to vote down budget proposals designed to spend close to $6 billion on the first leg of the project.  Hidden beneath the governor’s optimistic rhetoric about building for the future is the cynical calculation that spending the state’s bond proceeds to start construction will make it politically impossible to derail the project when federal money fails to materialize.  Unless the Democrats in the majority develop the courage to kill the project now, the governor’s political calculations will be proven right and the California taxpayer will be saddled with nearly $100 billion in construction costs for the Moonbeam Express at a time when we cannot even afford to educate our children, pave roads or ensure public safety.

It is unfortunate that the Legislature is unclear on what every family in California living on a budget already understands, a shiny new Chevy Volt may be a really cool toy and even be environmentally friendly, but you don’t buy one if you can’t pay for groceries.

For more information on this report or other Transportation issues, contact Ted Morley, Senate Republican Office of Policy at 916/651-1501.