California's Adventure - Chapter 5; Money, Money, & Pollution
Link to the meeting: March 23rd: 7:30 Central
CoE Study Abroad Info Sheet
High Speed Rail Alliance Conference
Cascadia Rail Meeting (April 13th)
California HSR, Chapter 5
Cap and Trade - say what?
Guess why the airlines will invest in high speed rail
High-speed rail would get $205B boost via new bill
U.S. House members introduce American High-Speed Rail Act
Road and Bridges
Florida Transportation Officials Place Brightline Under the Gun
Hyperloop steps closer to reality as firm working on Chicago-Cleveland route unveils world's first 16ft safety valve
California High-Speed Rail Construction Update- March 2021
Youtube | California High Speed Rail Authority
High Speed Rail Alliance
March 30th meeting
Free to Students
APTA High Speed Rail Conference
April 7th thru 8th
Free to Students
California High Speed Rail: Chapter 5
For the last few weeks the group has been reviewing the newly revised California High Speed Rail Business plan.
We started with a rosier view of the project, but are slowly getting to the dark, dirty and nitty gritty parts. This week the bill is due, as we jump into the how California is financing the building of the system. As in a bad relationship, let’s just say... it's complicated.
Part 1: How it is all being paid for
There are two main funding sources:
The federal money is pretty simple to understand and has been funding most of the building of the system to date.
American Recovery of Reinvestment Act of 2009 (yep, $880 million of that money was going to go to Wisconsin).
Grant Money directly from Congress (this was the money Trump tried to pull).
State Funds: This actually makes you scratch your head:
Proposition 1A funding: through bonds issued by the state backed by increased sales tax.
Cap and Trade: essentially the transfer of credits between polluting industries to pay for greener options. See the next section for more details.
Below is a breakdown of all the funding:
What is scary about the funding is the Cap and Trade (C&T). Yes, that funding is available, but the source of the funding is very unpredictable as it depends on a futures market for the value of pollution. Which means it is betting that pollution credits from CHSR can sell, and will be valuable enough, to polluting companies.
Part 2: Questionable Funding and Trump Wars
The Cap and Trade program, which is the state’s Greenhouse Gas Reduction Fund, could provide $10 billion to $15 billion for future HSR funding. However, this method is volatile and unpredictable meaning a private lender will not be able to make a loan. This eliminates private funding for this project, and may even hinder a private operator coming in to run the trains.
In May 2019, at the recommendation of President Trump, because of California refusing to support the border wall, the Federal Railway Administrator pulled the $929 million from the Federal FY10 grant under the stipulation that the project had failed. The lawsuit is still ongoing, but the CHSR authority has asked the Biden Administration to re-establish the funding. There is no answer yet.
The above only covers the first $25 billion, and there are no plans for funding the rest of the 494 mile system.
Part 3: Building Costs
Now let's jump into the more realistic costs of building. Below is a breakdown of each component of the $71.5 Billion program. Granted this is still coming in at $145 million per mile for the while project, which is an astronomical price! Most high speed rail in the world is built for less than $50 million a mile!
Of course, this is confusing because the above are costs in the build out according the Environmental Impact Study. These are overestimated and according to Chapter 5, the costs below are supposed to be more reliable numbers, but as you can see, these numbers are even more confusing because total costs are coming in between $140 million per mile up to $202 million dollars a mile! Mind you China and Spain have built high speed rail for less than $30 million per mile. So something is very wrong here!
It should be noted that Merced to Bakersfield will cost $21-$23 billion for 1 track ($1.1 billion will be needed for that second track). But that is another story.
More intriguing, according to table 5.5 Bakersfield to Palmdale will cost $12.6 billion to $24.4 billion? Ah, that is quite a big difference of nearly 100%. More importantly, why does it cost $159.5 to $239 million per mile! It is only 79 miles between those two cities mostly thru desert! Granted there is a small mountain range, but these mountains are only 1,000 feet above the Palmdale highlands and are no higher than the mountains in Spain, Japan, or China. But again, I guess this is just California.
Of course, then we have Palmdale to Burbank which is only 41 miles, but the prices are coming in at $308 to $596 million per mile! That is over 1/2 billion per mile! Crazier still, the Chuo Shinkansen in Japan which is in a tunnel under mountains is coming in at only $469 million per mile. That means, we are getting to the point that it would be cheaper for California to hire Central Japan Railways to build a 300 mph magnetic levitating train between Burbank and Palmdale than it may be for California to build a 200 mph train over the mountains!
Part 4: Sources of Revenue:
Ok, enough digging, where are they gonna make money?
Of course, there is passenger ticket revenue that we will dive into next week, which I am sure will be an adventure trying to understand how many people from Fresno wants to go to the outskirts of Bakersfield. But I digress.
In terms of real estate, this is what the California HSR authority has to say:
Also seek funding linked to the local value that the railway is generating by focusing on “station area value capture” and the appreciating real estate values that the system will help create. The full value of the asset will be realized by using innovative methods of value capture, such as secondary use of the system right of way to provide fiber-optic communications connectivity. Ancillary revenues and transit-oriented development will provide further sources of funding that can contribute to system expansion or other costs.
Local funds can be used to build out the capabilities of station-hubs into commercial and residential centers. (page 98-99)
That is confusing. Had to read it over a few times, and eventually the thoughts on secondary revenue streams makes sense... but that's it! No other mentions are made or discussed regarding additional revenue streams. No estimates on increased property values or even revenues for parking, just a passing mention. As Brightline knows, real estate is probably the most lucrative part of high speed transportation. Heck, even the builders of the transcontinental railroad knew that back in 1864! But with 2021 California...nada!
Part 6: What about Private Investment?
The authority states:
The scale of investment required to bring the high-speed rail system to operation is generally greater than even the largest private sector organizations can bear. In general, contracts for public-private partnerships do not typically exceed $5 billion. This is a general rule and larger projects have been proposed by contracts any larger than $5 billion generally present too great a risk to any individual company and can limit competition, which is also a critical factor in system cost. In summary, the reason that no private sector funding is being used it that we are too early in the process and the required investment is too high.
Once the Silicon Valley to Central Valley line is built and in operation, then the system will become viable, and produce positive cash flow.
I am not sure how to read this section above, considering that Brightline and Texas Central are private companies. While they are using federal funds, the government is essentially acting as a bank to those PRIVATE companies. Then of course, the Transcontinental Railroad was also a private company; but that was the 1800's and we must know better now. Uh huh.... Right.
Part 7: Summary and Conclusion
I try to be an optimist. However, this just does not seem right. We have shaky funding sources, with record costs, and after 12 years nothing but a few viaducts to show for it. Honestly I am scared to read about their passenger projections for next week. However, I am very fearful that this project is going to fail for a multitude of reasons. Personally, I get the feeling that you have CHSR trying to learn as the go, when an organization with the expertise and experience to build high speed rail fast and efficiently should have been brought in. Instead we risk a failure of this project, which would set high speed rail in the US behind for decades.
From the Captain
Cap and trade, say what?
Please call maintenance, we need to fix something:
Cap and trade works with two businesses, one pollutes and one has low green house emissions. The government (typically state level) sets up emission standards for both companies. The companies that pollute then have to buy permits from other companies that don't pollute. Essentially it is trading a futures contract, but is using the pollution output rather than a commodity to determine prices.
The challenge is that companies are being penalized for the pollution, which is a good thing, however high speed rail is dependent on those companies to continue polluting. That is not so good.
Polluting companies will have a choice of paying for a permit or reducing the pollution. The problem is California High Speed Rail is relying on Cap and Trade to pay for half the project, meaning the system is dependent on companies not putting into place pollution controls, but rather being will to pay for continuing to pollute. Huh?
That’s right, California HSR is dependent on companies not improving the amount of CO2 emissions that put into the atmosphere. While the logic doesn’t make sense, neither does the predictability of the revenue streams for this program and these revenue streams are proving to be highly volatile.
Rather than Cap and Trade, what about a program where the government gives green industries tax credits that can then be sold to anyone to offset their income tax? Then the government just taxes those companies that pollute? This is no cost to the government and a lot more companies could get involved that aren’t polluters increasing the demand for credits, such as telecom and digital media. This would also promote more investment in green industries, much as a similar program has increased affordable housing programs across the US (called Low Income Housing Tax Credits). Most importantly, this would be a much more reliable revenue stream for building high speed rail than relying on companies not making investment to pollution reduction. It is just more logical!
Well let's see what happens.
Guess why the Airlines will investing in High Speed Rail?
Yea, I know. The first thought is the two would get along as well as two Beta fish sharing the same tank (talking here about Southwest Airlines killing Texas High Speed Rail in 1990s). However, there is a strong incentive for both to work together, and it is called sustainability and profitability.
The airlines have a big, BIG problem. No matter which way you look at it they are polluters. They have tried to move to bio fuels (yea!), but there is no way bio fuel can match the needs of the 18.7 billion gallons consumed in 2019 (boo!). In fact, according the International Energy Agency, by 2030 no more than 10% of all demand for aviation fuels will be met by bio fuels (big boo).
Of course, startups are working on electric or hydrogen airplanes (yay), but mass market electric airplanes have yet to fly and will carry only 6 passengers, meanwhile hydrogen airplanes are still just theoretical (boo).
The airlines have reduced emissions by 50% over the past 30 years and they emit less CO2 emissions per passenger carried 1 mile than a gasoline powered vehicle (Yea!). But what greenhouse gases they are emitting go directly into the stratosphere, where they can be more harmful than an automobile at ground level (Boo).
What is even scary to the airlines is what happens if California's Cap and Trade program is extended across the US...or worse across the world! Not only will airlines have to now worry about volatile pricing for purchasing fuel, but will have to plan for purchasing carbon offset credits on a spot market. This is like going to the gas station, paying to fill up your tank, then paying the another station an unknown price to drive your car with their gas.
Meanwhile, flight shaming spreads from Europe to the US. Talk about being between a hard place and a hard place while standing on a slippery slope. This could be big problem for the airlines and why you have seen United Airlines make investment in sustainable technology (more on that next week).
However, based upon the California Cap and Trade model, the airlines investing in high speed rail may be the perfect answer. They would be able to increase market access (hello direct service to downtown), increased reliability, decreased operational costs (after all those regional jets are expensive!); while at the same time using the Cap and Trade credits from the high speed rail operation to offset their polluting long haul flights. Essentially the airlines use an investment in high speed rail as a hedge against green house reduction programs... all while improving their customer experience and bottom line.
Unfortunately we are still years away from an operational high speed rail line and a more comprehensive sustainability policy from the Biden White house, but it is coming and it will be interesting to see where this all goes.