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California High-Speed Rail: Construction on Track, Funding Unsecured

kidsinclassroom Source: California High-Speed Rail Authority (CHSRA) / Facebook

In-Brief

The High-Speed Rail Project has secured funding from the state’s Cap-and-Trade program, but not enough to cover its costs. In January 2015, the project began construction at a rapid pace and must now address its funding problems before its initial funds run out.

Introduction

For decades, California had been proposing, planning, and legislating for a High-Speed Rail (HSR) system. When California Common Sense first covered the topic in 2012 and again six months ago, the project was frozen by legal, political, and financial setbacks. Since then, some of its legal obstacles have been lifted and construction has begun. Although its finances improved with the addition of Cap-and-Trade funds in June 2014, the project has yet to secure full funding. This issue brief examines the remaining challenges to California’s HSR and what we can expect in the future. 

Current and Imminent Construction

For years, a series of legal environmental challenges and lawsuits that challenged the legality of voter-approved bonds stalled construction of HSR. Last year, the court ruled in favor of the California High-Speed Rail Authority (CHSRA). CHSRA then began implementing its 2014 Business Plan with promises of rapid construction.

Today, nearly 20% of the full length of rail is either under construction or has contractors secured to begin construction in the coming months. High-Speed Rail’s Business Plan proposes that the first major segment of rail, the “Initial Operating Segment” (IOS), will cover approximately 60% of the full rail. The IOS will connect Merced and the San Fernando Valley at an estimated $31 billion over the next eight years. Figure 1 below details the upcoming phases of construction of the IOS and what to expect in the next few years:

Figure 1 – Timeline of Current and Imminent Construction

April 2013 – $1 billion – Tutor Perini/Zachry/Parsons Joint Venture contracted for first 29-mile section, which runs from Madera County to Fresno. Construction Package 1 (CP1).

2013 – 2014 – ~$600 million – Engineering and pre-construction activities begun.

2013 – 2015 – Construction Package 1 delayed due to challenges in land acquisition for construction.

December 2014 – $1.23 billion – Dragados/Flatiron/Shimmick Joint Venture wins bid for a 65-mile section, which runs from Fresno to Tulare County. Construction Packages 2 and 3 (CP2, CP3).

January 2015Official groundbreaking ceremony on first 29-mile section of High-Speed Rail.

February 2015 – $700 – 900 million – Construction bid submission deadline for Construction Package 4 (CP4), section runs from Tulare County through Kern County.

2015 – 2022 – Construction Package 5 (CP5) unannounced, but will connect existing sections to Bakersfield, to complete the first half of the Initial Operating Segment (IOS).

2022 – Other portions of the IOS will be constructed and the project will commence passenger operation in 2022.

To view a larger version of the above map, click on it.

Over the next five years, Californians can expect the construction to add thousands of construction-related jobs and consume approximately $20 billion of CHSRA’s funds (as per the 2014 Business Plan). 

The Impact of Cap-and-Trade Revenues

Although construction is underway in the Central Valley, the lack of funding still poses a serious threat to the project. Of the estimated $67.6 billion final price ($54.9 billion in 2014 dollars), the HSR project has secured $12 billion today – mainly through Federal funds and State bond debt. At this point, the project would deplete its funds before 2018 and run an approximately $38 billion (in 2014 dollars) deficit in 2029 as per the 2014 Business Plan.

After adding Cap-and-Trade auction proceeds to the project’s funding, HSR’s funding situation will change significantly (Figure 2). However, both estimates in Figure 2 show the project would still run out of money before beginning passenger operation in 2022. 

Figure 2 – The Impact of Cap-and-Trade Revenues on HSR Funding

In 2014, California’s legislature justified using Cap-and-Trade funds because the HSR is expected to reduce Greenhouse Gas Emissions by shifting passenger use from fossil-fueled cars and planes to an electric rail service. Starting this year, Cap-and-Trade auction proceeds should compose two-thirds of all emission allowances and of that amount, 25% will go to HSR. The Cap-and-Trade revenues component has a significant impact on HSR funds because Cap-and-Trade revenue is expected to be sizeable and grow over time. The State Legislative Analyst’s Office estimated between $12 and $45 billion in total Cap-and-Trade auction proceeds through 2020.

The exact value of future Cap-and-Trade auction proceeds is unknown, because they are valued on the free market in an auctioning process by the California Air Resource Board (ARB). Figure 3 shows the impact of a range of likely Cap-and-Trade proceeds scenarios and their impact on High Speed Rail funding. See methodology section below for additional details.

In addition to future Cap-and-Trade revenue changes, it is important to acknowledge the possibility of adverse market conditions, delays, and construction cost overruns. In a study that examined hundreds of infrastructure projects between 1927 and 1998, passenger rail projects typically ran 45% above projections, with some higher than 80%. Because the Business Plan does not project these potential cost overruns and delays, HSR could run out of funds sooner and rack up a larger deficit than projected. Even with Cap-and Trade revenue, funding could still run out years sooner than expected, as seen in Figure 3. 

Figure 3 – Cumulative Funds for HSR Construction with Cap-and-Trade Revenues And Cost Overruns

Even if cost overruns do not occur, finding the funds to fill the sizeable deficit will be a challenge. Funding for California’s High-Speed Rail will likely run out before 2020. Initially, HSR planners thought they would secure billions through federal government and private investors, but these expectations now seem unrealistic. On the other hand, since Cap-and-Trade revenues improve HSR’s financial situation, investors may now find the project more attractive. If other funding sources refuse to commit to the project in the future, however, then California would have to cover those expenses with money it does not have currently, and has not planned to secure.

Conclusion

In the past few years, the criticism surrounding long-term financial infeasibility, poor ticket price estimation, and unrealistic ridership has surfaced, but the CHSRA has yet to address and/or solve much of it. If the deficit isn’t filled and construction halts before the rail is operational, California would have an expensive, non-operational railway occupying space in one of the most rural locations in the state. Although Cap-and-Trade funds address some of the immediate needs of the rail, many of the long-term problems critics have pointed out still remain.

“We were selling a $32 billion project then, and we were going to get roughly one-third from the federal government and the private sector … We’re not even close to the timeline (for the project), we’re not close to the total cost estimates, and the private sector money and the federal dollars are questionable.”

Gavin Newsom, Lieutenant Governor of California (2014)

Currently, the CHSRA has awarded bids with contractors at lower than estimated rates for construction. They will have to continue to exercise caution with price to avoid overruns, which could be disastrous to the future of the project. The price has already risen in the current business plan compared to what voters were advertised in 2008, and if higher it could lose even more public support. Although construction is moving ahead at a rapid pace, the High Speed Rail project still has to solve a rapidly approaching fiscal cliff.  

Methodology

The state values CO2 emissions by metric million tons. It has an estimated budget for how much CO2 is allowed to be emitted each year. This CO2 is packaged into ‘allowances’ that entities can buy. Only some of these allowances are sold (approximately two thirds during and after 2015). Of the allowances sold (also referred to as “auction proceeds”), 25% of their value is directed towards High Speed Rail.

A 2013 study commissioned by the ARB estimated that under most scenarios the allowance price would be at, or just slightly above, the price floor with an 80% probability, which is approximately $11.34 (in Dec. 2014). The price is also restricted to a “ceiling” of approximately $40 – 50 from containment reserve prices. As a result, the price floor ($11.34 in 2014 dollars), a $20 estimate (in 2020 at 2007 dollars) that the EAAC expected to be closer to potential future allowance pricing, and the $40 – 50 containment reserve prices were used as a range for allowance prices.

The 25% from Cap and Trade, Cash flows from the Business Plan, the federal funds, and state bond funds are all sources of HSR income. Note that since no full drafting plan is released, in this model all of the state / federal money (that it was delivered on the first year) is front loaded, since they’re considered ‘secured’ funds.

In addition, since this dataset extends beyond 2020, it assumes that the total allowance budget remains at 2020 values in metric million tons and also assumes the same growth rate of 6% posited by the EAAC.

Note: These values are estimated using other studies’ projections and recommendations, making them dependent on the quality of those projects. In addition, costs may change significantly due to market-price changes and/or policy changes.

Works Cited[+ Expand]

Knight, Chris. “California’s High Speed Rail Realities.” July 5, 2012. http://cacs.org/research/californias-high-speed-rail-realities-briefly-assessing-the-projects-construction-cost-debt-prospects-and-funding/

Ravi, Madhu. “High Speed Rail – Unsustainable California: The Top 10 Issues Facing the Golden State.” June 11, 2014. http://cacs.org/research/unsustainable-california-the-top-10-issues-facing-the-golden-state-high-speed-rail/

Siders, David. “Groundbreaking at Fresno for California high-speed rail.” January 6, 2015. http://www.sacbee.com/news/politics-government/capitol-alert/article5519280.html

California High Speed Rail Authority. Agreement No.: HSR13-06, Book 2, Part A, Subpart 1 – Signature Document. July 30, 2013. PDF Link

Sheehan, Tim. “High-speed rail consultant costs nehar $600 million even before construction starts.” November 19, 2013. http://www.fresnobee.com/2013/11/19/3619630_high-speed-rail-consultant-costs.html?rh=1

Vartabedian, Ralph. “After two-year delay, construction on California’s bullet train is set to start.” January 4, 2015. http://www.latimes.com/local/california/la-me-bullet-construction-start-20150105-story.html#page=1

Sheehan, Tim. “Winning bid for next piece of high-speed rail comes in under cost.” December 11, 2014. http://www.fresnobee.com/welcome_page/?shf=/2014/12/11/4281846_winning-bid-announced-to-build.html

California High Speed Rail Authority. “High-Speed Rail Authority Hosts Official Groundbreaking Ceremony.” January 6, 2015. PDF Link

California High Speed Rail Authority. “Requests for Qualifications for Design-Build Contract for Construction Package 4.” November 20, 2014. PDF Link

California High Speed Rail Authority. “Construction of High-Speed Rail.” http://www.hsr.ca.gov/Programs/Construction/index.html

Smith, Scott. “California high-speed rail: Ground broken in Fresno.” January 7, 2015. http://www.mercurynews.com/california-high-speed-rail/ci_27273256/california-high-speed-rail-ground-broken-fresno

California High Speed Rail Authority. “Connecting California: Draft 2014 Business Plan.” February 7, 2014. PDF Link

Air Resource Board. Correspondence: “Greenhouse Gas Reduction Fund: High Speed Rail Expenditure Record for Fiscal Year 2014-15.” August 13, 2014. PDF Link

Air Resources Board. “Appendix J – Allowance Allocation”, J-25. PDF Link

Legislative Analyst’s Office. “The 2014-15 Budget: Cap-and-Trade Auction Revenue Expenditure Plan”, Page 4. PDF Link

Air Resource Board. “Auction and Reserve Sale Information.” January 12, 2015. http://www.arb.ca.gov/cc/capandtrade/auction/auction.htm

Flyvbjerg, Bent, Mette Skeamris Holm, and Soren Buhl. “How common and how large are cost overruns in transport infrastructure projects?” Transport Reviews, 2003, Vol. 23, No.1, 71-88. PDF Link

Vranich, Joseph and Wendell Cox. “California High Speed Rail: An Updated Due Diligence Report.” April 2013. PDF Link

Costa, Jim. “Another View: Debate about high-speed rail should be based on facts.” January 24, 2015. http://www.sacbee.com/opinion/california-forum/article7972092.html

Bowen, Debra. 2008 “Official Voter Information Guide.” September 18, 2008. PDF Link

Varabedian, Ralph. “52% want bullet train stopped, poll finds.” September 28, 2013. http://articles.latimes.com/2013/sep/28/local/la-me-poll-high-speed-rail-20130928

Bailey, Elizabeth M., Severen Borenstein, James Bushnell, Frank A. Wolak, and Matthew Zaragoza-Watkins. “Forecasting Supply and Demand Balance in California’s Greenhouse Gas Cap and Trade Market.” March 12, 2013. PDF Link

California State Budget 2014-15. “Cap and Trade Expenditure Plan.” PDF Link

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