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A new state audit raises questions about flaws in California's $77 billion high-speed rail project, adding pressure on Gov.-elect Gavin Newsom to consider cutting back the construction of the train or make other major changes.
The independent audit is the key focus of a Joint Legislative Audit Committee oversight hearing planned for Thursday in Sacramento, where top officials from the California High-Speed Rail Authority are expected to be questioned by lawmakers.
According to the audit, the state risks having to pay back as much as $3.5 billion in federal funds on the San Francisco Bay Area to Los Angeles project.
"Whatever fantasy the next governor has in mind, he has to deal with a huge multibillion-dollar shortfall between getting anything between Central California and Silicon Valley that is high speed," said Assemblyman Jim Patterson, a Republican from Fresno and longtime critic of the bullet-train project who pushed for the audit. "This audit is so damning that it basically says there is no path to completion and has now triggered a federal audit."
'Poor contract management'State Auditor Elaine Howle's report said the high-speed rail authority's "flawed decision making and poor contract management have contributed to billions in cost overruns and delays in the system's construction." It estimated at least $600 million in overruns so far on three active projects on the initial 119-mile Central Valley segment as well as $1.6 billion in additional costs to complete the projects.
"The auditors identified a number of areas where they believe we can improve how we do business," rail authority board member Mike Rossi said following the Nov. 15 release of the report. "Many of the recommendations are similar to steps we have previously identified through our own internal reviews."
Newsom, who takes office in January, was an early supporter of the 2008 rail bond issue to help finance the project, but he later expressed concerns. Newsom declined comment for this story.
In October, Newsom told the Los Angeles Times that the high-speed line from the Central Valley to Silicon Valley made sense but the more ambitious 500-mile plan to connect it to Los Angeles was "an open-ended question."
The Democrat said during the gubernatorial campaign that high-speed rail could benefit the two valleys and promote significant economic growth. If completed, the mega-train could allow more tech workers to live in the Central Valley, where housing costs are lower, and commute to Silicon Valley.
Private sector moneyNewsom has indicated that expanding the high-speed line into Southern California will likely require private sector money.
The business plan released in June for the high-speed rail claims the "system is projected to generate significant revenues and positive cash flow" over time, which it believes "will create the opportunity for private investment to support expansion."
[img]https://fm.cnbc.com/applications/cnbc.com/resources/img/editorial/2018/10/19/105518432-1539974377708gettyimages-1035225180.530x298.jpeg?v=1539974428[/img]Digital First Media
Torrance Daily Breeze
California Lt. Gov. Gavin Newsom greets supporters as he makes a campaign stop at Assemblyman Al Muratsuchi's re-election office on September 11, 2018 in Torrance, California.
Regardless, some are skeptical the project will generate much private sector interest.
"There's no way there's going to be a profit on this thing, so there's not going to be private interest in it," said Baruch Feigenbaum, an assistant director of transportation Policy at Reason Foundation, a libertarian think tank. He believes the project was designed to go through the Central Valley for political reasons and won't be competitive with air travel.
An initiative could be on the 2020 ballot that would halt the project. It is being touted by some of the same backers who organized Proposition 6, the ballot measure earlier this month that sought to repeal the state's 2017 gas tax hike.
The bullet train line's 119-mile Central Valley segment is under construction and is scheduled to open by 2022, and the partial route between San Francisco and Bakersfield isn't likely to be operational until 2029, according to the project's timeline. As of October, about 2,400 construction workers were on the project.
Federal probeMeantime, a federal audit of California's high-speed rail started in April and is expected to be completed soon. The U.S. probe is looking at the Federal Railroad Administration's oversight of funds awarded to the project.
There's a risk the Trump administration could force the state to pay back $3.5 billion if the project misses a new deadline or if it finds misspent funds. The state has four years to meet a federal deadline but could miss it unless the Central Valley construction progresses essentially twice as fast as it has to date, according to the state audit.
Critics have dubbed the project a "train to nowhere." Outgoing Gov. Jerry Brown, a Democrat, has been an ardent supporter of the project he inherited from former GOP Gov. Arnold Schwarzenegger.
"It's not a train to nowhere," Newsom told the Times. "It's insulting to suggest the Central Valley is nowhere. This is an economic development project, connecting the fastest growing and most dynamic economic regions in the country. That project is achievable and realistic."
Patterson, a former mayor of Fresno, said Newsom should put the brakes on the project when he takes the reins of state government. Political insiders say Newsom is unlikely to pull the plug on the entire project but may force changes in the rail authority.
Tunneling challenges"What Gavin Newsom is suggesting cannot be done," said Patterson. "My experience with Gavin Newsom is he talks a good political game but he's absolutely short on the details and how to get it done."
For one, Patterson said there are challenges posed by the tunneling through the Pacheco Pass that is required to connect San Francisco to the Central Valley. He said there's "no plan and no financing" to do what the audit calls "complicated tunneling."
According to the state auditor, the rail authority has identified funding of over $28 billion that it believes "will be sufficient to complete initial segments" of the line between Madera and north of Bakersfield and between San Francisco and Gilroy. Of the total, though, less than $13 billion in funding has actually been secured.
At the same time, there's not enough money to complete the rest of the system between San Francisco and Los Angeles since that is now estimated to cost over $77 billion, according to the audit. The business plan issued earlier this year warned the cost of the system could approach $100 billion.
Cap-and-trade auctionVoters authorized nearly $10 billion in rail bonds for the project in 2008. There's also been about $3.5 billion in federal funds available and other money from about 25 percent of the proceeds from the state's emissions trading program, or the quarterly cap-and-trade auction, designed to reduce greenhouse gases.
The cap-and-trade auction held earlier this month resulted in the state generating over $813 million in revenue, meaning the high-speed rail project stands to get about $200 million in new funds. So far, the rail project has received about $2 billion in funds from the auction.
The rail authority is projecting it will get $4 billion to $4.5 billion in the future from the cap-and-trade auction through 2030. It also estimates it could get nearly $4 billion to $11 billion in additional funds it is able to borrow against future cap-and-trade revenues through a federal loan or public-private partnership.
Yet some suggest the auction of emission allowances has been volatile in recent years and could weaken, as they did a few years ago. As a result, they believe it may be risky to rely on these auction revenues for financing major projects.
"The revenue from the program is highly uncertain," said Danny Cullenward, a Stanford University energy economist and researcher at the climate-change think tank Near Zero. "It's not likely that you'd see significantly higher revenues in the near future. In fact, you may see them dip down as the volume of allowances goes down."
This article first appeared on www.cnbc.com
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