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SMART Just Got Hit by a Freight Train – PART I
“If you’re playing cards and you don’t know who the patsy at the table is, you’re the patsy” ~ Warren Buffett
On May 20, 2020, the SMART Board authorized the purchase of freight-related assets of the Northwestern Pacific Railroad Co. (NWP Co). NWP Co. is a privately held company whose owners include its general counsel, former Congressman Doug Bosco, now part owner of the Press Democrat.
NWP Co. has been providing freight services between Lombard in Napa County[1] to about Windsor, operating on track owned by SMART. It was overseen by the North Coast Railroad Authority (NCRA), which is a state-enabled special district that was established in 1989 to oversee and regulate private freight operations, even though freight was not operating on track owned by the NCRA.
In 2018, the NCRA’s oversight responsibility was dissolved by Senate Bill 1029 (McGuire) and inherited by SMART. The bill did not direct SMART to own the freight related assets.
After the SMART Board approved the purchase of NWP Co. assets, Marin County Supervisor and SMART Board member, Judy Arnold, was quoted as calling the Board’s decision a “watershed moment” for SMART. Similarly, Marin County Supervisor Damon Connolly, who is also a SMART Board member, stated, “I view this decision as a nod to the long run, and as a generational opportunity to continue building out the backbone of a regional public transportation system.”
As explained by SMART General Manager Farhad Mansourian, and recorded in the SMART Board minutes, the amount of $4 million from the State of California will be used for the acquisition of freight rights, equipment, and easements from NWP Co., including the Operating Agreement between the NCRA and NWP Co. It was also claimed that Senator McGuire was able to secure an additional $2 million of $10 million needed for maintenance that was identified by SMART staff, as the additional cost to SMART.
So, this purchase was a great opportunity for SMART, right?
One Board member refused to endorse the proposal: San Rafael Mayor Gary Phillips. He objected because he felt there was not enough information provided for the Board to make a decision. As recorded in the minutes of the meeting,
“Director Phillips voiced his concerns about not having enough financial analysis prior to this approval. He is not sure if this acquisition will yield enough revenue for SMART, which is needed. Also, he is not sure if SMART is equipped to fully take the responsibility of freight. He would like more financial information to review. He asked if there is additional financial information that can be reviewed now or prior to end of June.”
The Mayor’s concerns were ignored by the rest of the board. But, the Mayor’s instincts were correct. However, in order to understand why—and why the rest of the Board was wrong to rubberstamp the staff’s proposal—involves some understanding of the a number of interconnected and relevant pieces of information. These include,
- The history of the 300 plus mile Northwestern Pacific rail line that runs from Eureka through the Wild and Scenic Eel River Canyon to Lombard (Napa County. See map, below.)
- Basic freight rail economics and the criteria businesses use when choosing to ship their products by rail vs. trucks.
- NCRA and NWP Co.’s loss in the California Supreme Court, in May 2017, in a CEQA lawsuit filed by Friends of Eel River (FOER) and Californians for Alternatives to Toxics (CATS). See Attachment A, below, for details.
- SB 1029 (McGuire), signed by Governor Brown in September 2018, which created the Great Redwood Trail, extended SMART’s ownership of the rail line to Mendocino County, and shifted the oversight of freight rail operations on the SMART-owned right-of-way from the NCRA to SMART
- Staff, Doug Bosco, Jason Liles (Sen. McGuire’s office), and SMART Board member comments at the May 20th SMART Board meeting.
- An analysis regarding what was actually behind this “deal.”
Why is the History of Rail Operations on this Right-of-Way Important to Understand?
On May 20, 2020, SMART has decided to purchase freight assets, including the “Operating Agreement” between NCRA and NWP Co., in order to own and operate freight trains on part of a rail line that has a very long history, but has been an economic failure for decades, requiring constant government subsidies to facilitate operations.
The most recent example of this need for subsidy is the $40 million granted by the California Transportation Commission (the “CTC”), in late 2006, to rebuild the track between Lombard and Windsor, even though a few days prior to this award voters in Marin and Sonoma County had rejected Measure R, a quarter cent sales tax to fund SMART rail (later passed in November 2008). Recent statements by SMART Board directors that this is a “huge opportunity” for SMART is contradicted by this history and the underlying economics of freight rail in this corridor.
A map and a timeline are helpful in understanding why this is the case.
Map of Northwestern Pacific Rail Right-of-Way
The Long History of the Rail Right-of-Way from Marin and Napa to Humboldt County
Late 1800s: Both the Southern Pacific Railroad and the Atchison, Topeka and Santa Fe Railway were interested in building rail lines north from San Francisco to Humboldt County to transport lumber—primarily redwood—south to the SF Bay Area.
1906: These two companies merged numerous other (smaller) rail companies into one. The southern end of this rail right-of-way is the very one that SMART trains travel on, today.
Before the 1930s: Passenger rail service boomed until the 1930s, including in Marin County.
After the 1930: Improved roads and highways made traveling by automobile and shipping by trucks more economical. The ebbs and flows of rail service (both freight and passenger) were also impacted negatively by the Great Depression.
World War II: Demand for freight service increased with the growth of the economy, propelled by the war.
1958: All mainline passenger service was discontinued south of Willits in Mendocino County. Limited passenger service was provided north of Willits until 1971, when passenger rail service was abandoned.
1964: There were huge rains and flooding in the Eel River Canyon, impacting the rail line and destroying 100 miles of the line. However, it was partially rebuilt and some service was restored in mid-1965. But it was far less reliable since the soils in the canyon had become unstable.
- These rains and the instability of the soils in the Eel River Canyon had a huge negative effect on the underlying economics of rail service between Humboldt County and the northern counties of the San Francisco Bay Area.
1981: The Eel River was designated as a “Wild and Scenic River.”
September 1983: Southern Pacific announced that it was abandoning freight rail service north of Willits, which is just south of the entrance to the Eel River Canyon. This led to a contentious court battle because Southern Pacific did not properly notify the Interstate Commerce Commission of its intent to abandon the line. The line was ordered reopened by the U.S. Circuit Court in March 1984.
- Abandonment of rail service by a private freight company that had previously obtained “common carrier” status granted by the federal predecessor, to the Surface Transportation Board, is not guaranteed. This issue has relevance to SMART should it at some future time wish to abandon providing freight service to customers in Sonoma County.
1986: Congressman Doug Bosco introduced and succeeded in passing House Resolution 2, which provided funds to the Golden Gate Bridge, Highway and Transportation District, in conjunction with Marin and Sonoma Counties, to purchase southern portions of the Southern Pacific right-of-way for $24 million, with the vision of continuing freight and passenger service.
1989: Portions of the right-of-way began to enter state public ownership when the NCRA was established by the California Legislature under the “North Coast Railroad Authority Act.” Around the same time, the Golden Gate Bridge, Highway, and Transportation District, in conjunction with Marin and Sonoma Counties, began purchasing southern portions of the railroad from the Southern Pacific Railroad.
1992: The State of California purchased the rail line from Willits northward.
1998: The NCRA was ordered by the Federal Railroad Administration to shut down rail operations on the line until basic repairs were made. Service did not restart again until late 2009. A press release by the NCRA (October 2009) provided some highlights.
- Train service was stopped by the Federal Railway Administration (FRA) in 1998 (“Emergency Order 21”) due to safety concerns. This order was not lifted for over 10 years.
2002: Assembly Bill 2224 (Joe Nation) was approved and created the Sonoma Marin Area Rail Transit (SMART) District. The bill established that passenger rail was to operate in harmony with existing freight service operating on the same rail line. The bill designated:
- SMART as owner of the rail right-of-way between Lombard in Napa County and the Hwy 37 turnoff (the “Wye”) and between Larkspur and Healdsburg.
- The NCRA as the owner of the rail right-of-way north of Healdsburg all the way to Eureka, including through the Eel River Canyon.
- The NCRA had a “perpetual and exclusive” freight easement from Healdsburg to the Wye and from the Wye to Lombard on SMART-owned track. No freight easement was provided on SMART owned track south of the Wye.
- SMART had a “perpetual and exclusive” passenger easement on NCRA-owned track from Healdsburg to Cloverdale.
2006: The NCRA selected NWP Co. as its freight operator and signed a 95-year lease agreement that was later extended. It currently expires in 2098. That lease (the “Operating Agreement”), dubbed a “sweetheart agreement” by some, and never generated a single payment to the NCRA from NWP Co. because one of the clauses in the agreement contained a $5 million profit threshold, which, if not reached, would not require the NWP Co. to make a lease payment to the NCRA.
- Since the legislation enabling the NCRA provided no direct funding for this agency, it was contemplated that the Operating Agreement would generate revenues to run the agency. The signed Operating Agreement led to the NCRA borrowing operating and capital funds from the company it was supposed to be regulating. The exact amount owed to NWP Co. is in negotiation, but a $4 million payment was referred to in SB 1029, referenced below.
- Astonishingly, the Operating Agreement also allowed NWP Co. to unilaterally extend its lease term without any additional approval by NCRA, which is why it currently expires in 2098.
- In 2008, the City of Novato filed a lawsuit against the NCRA and NWP Co. for CEQA violations. (It was settled prior to the November 2008 Measure Q election.) One of the claims in that lawsuit was as follows:
“NCRA’s August 15, 2007, approval of a secured loan agreement with NWP Co. was in violation of the statute which created NCRA and outside of the authority granted to the NCRA under that statute. As such, said approval was ultra vires (acting or done beyond one’s legal authority), and the agreement is void and should be set aside.” [Emphasis and definition added]
2006 (Nov): The California Transportation Commission released about $40 million in state funds to repair 62 miles of track from Lombard to Windsor.
- NCRA started work in 2007 to repair 55 crossing signals, replace 50,000 crossties and 23,000 tons of ballast, shore-up levees in Schellville, and repair 43 rail bridges between Windsor and the train connection with the Union Pacific in Lombard. This work was completed before SMART began construction and was pulled up by SMART contractors when constructing the line for passenger rail.
- The funding from the CTC came with a condition that the NCRA follow the California Environmental Quality Act (CEQA), by analyzing and disclosing the potential impacts of rebuilding the line. This condition was an important element of the lawsuit filed later by Friends of the Eel River (“FOER”) and Californians for Alternatives to Toxics (“CATS”) in July 2011.
2010 (July): In a memo to the Marin County Board of Supervisors, NCRA Directors from Marin County (Tom MacDonald and Bernard Meyers) reported the following:
“The NCRA continues to be severely under‐funded as it has been throughout its 20-year history. The agency struggles to meet its monthly operating expenses and has inadequate resources to pay off its backlog of debt. There is no clear‐cut plan for how the NCRA can extract itself from its accumulated debt, even after the rail line resumes operations.”
2011 (July): The first freight train delivered grain to Petaluma.
2017 (June): At a CTC meeting, commissioners directed the NCRA to prepare a “shut-down” order.
- Commissioner Jim Madaffer told NCRA executive director Mitch Stogner, “It is unconscionable to continue in this operation.” The commission had “substantial doubt” about the NCRA’s ability to continue.
- This issue was not brought up or discussed at the May 2020 SMART Board meeting approving the purchase of NWP Co. assets.
2017 (July): The California Supreme Court ruled in the lawsuit filed by the environmental organizations, FOER and CATS, against the NCRA and NWP Co., essentially ending a multi-year legal battle. Later, the US Supreme Court denied a request from the NCRA and NWP Co. to review the ruling by the California Supreme Court.
2018 (March): State Senator Mike McGuire introduced “The Great Redwood Trail Act” (SB 1029) to simultaneously resolve what to do with the NCRA and create a vision for a world-class trail to run through the Eel River Canyon.
2018 (Sept): Governor Brown signed SB 1029 into law.
- Senator McGuire’s Press Release, when SB 1029 became law, states (in part):
“We couldn’t be more thrilled about the Governor’s action, which will launch one of the most significant positive transformations we’ve seen in a generation here on the North Coast — taking a crumbling rail line, managed by a functionally bankrupt public agency, and turning it into a world-wide wonder of a trail and economic driver for Northern California…It’s time for us to move beyond the old debates and begin the process of turning this 300-mile rail line into a world class trail and destination that generations will enjoy.
“The new law also gives SMART the ability and funding to negotiate for the take-over of the complex, long-term freight contract that NCRA sold to Northwestern Pacific Company over a decade ago. This could provide SMART with full control of the rail line from Marin to Willits in Mendocino County. This would help SMART as they would now manage both passenger and freight operations, which would aid SMART’s long-term scheduling and expansion needs. The State Secretary of Transportation and the Director of the Department of Finance would have to approve any takeover plan of freight operations between Willits and Marin.”
If the SMART Board had stepped up and performed any due diligence on the purchase of NWP Co.’s assets, including the Operating Agreement, many of the complex issues associated with this history and the potential financial risks to taxpayer-financed SMART, would have been identified and made public. However, these issues were not raised and the SMART Board members appeared unaware or uninterested in understanding this history.
The General Manager’s summary of NCRA’s history glossed over the liabilities now inherited by SMART.
The truth is, SMART Board just rolled the dice.
PART II COMING SOON
[1] SMART’s ownership ends at the “Brazos Junction” just west of Hwy 21 in Napa County.
ATTACHMENT A – The FOER & CATs v. NCRA & NWP Co: Case History
Note: this represents the key legal steps in the legal history. Additional filings occurred within this time period, which are not included in this chronology.
2011 (March): The NCRA Board adopted a Final EIR for the rail line that excluded any assessment of rail operations in the Eel River Canyon.
2011 (July): FOER and CATS filed a lawsuit against the NCRA and NWP Co. for failure to review full environmental impacts associated with restarting freight rail service on the rail right-of-way through the Eel River Canyon. CEQA mandates that state and local agencies study and disclose environmental impacts of proposed projects and adopt measures to mitigate those impacts.
2011 (August): The NCRA decertified its prior approval of the Final EIR and filed a notice of “removal” with the court, claiming it was not required to complete one.
2013 (May): Marin County Superior Court ruled that said freight rail traffic is interstate commerce under the domain of federal regulators and is not subject to CEQA.
2014 (September): A three-judge panel of California’s 1st District appellate court ruled that North Coast freight rail operators do not need to conduct a more rigorous study of the railroad’s environmental impacts.
2017 (July): The California State Supreme Court reversed the district and appellate courts, ruling in favor of FOER and CATS that CEQA, in fact, applies to state-owned rail projects.
2018 (April): The US Supreme Court denied the petition of the NCRA and NWP Co. to review the CA Supreme Court’s ruling.
- The refusal meant that the California Supreme Court’s decision stands and the NCRA and NWP Co. remained subject to the requirements of CEQA
- Meanwhile, the legal decision led to Sen. Mike McGuire submitting (and eventually passing) SB 1029.
Arnold is a PhD economist, currently lecturing at the Fromm Institute (USF) and in the Osher Life Long Learning Institute (OLLI) at Dominican University and Sonoma State University.