High-Speed Rail Authority’s Dan Richard Argues for California’s Business Plan

Dan Richard: In my mind, the seminal moment (for HSR) occurred last summer in Fresno, where the new governor of California, Jerry Brown -- who had been told by all of his political advisors, “You need to move away from this high-speed rail thing. It’s controversial. The state’s in fiscal disorder. This is the time to take an off-ramp,” stood up and said, “California is still a place where we do big things. And if the high-speed rail authority can get its act together, then we should be moving forward with high-speed rail.”

Were it not for the courageous leadership of the governor of this state, I don’t think you’d have chosen to have your meeting here in California because we would be moribund in terms of our high-speed rail program. The governor’s leadership has been critical. And despite a flurry of criticism for this and for the fact that we do have this terrible budget problem, Governor Brown has remained absolutely steadfast.

This is something that he really believes needs to happen, and that is the kind of courageous leadership that we really need across the country. For support we have the President of the United States, the Vice President of the United States, the Secretary of Transportation, the Governor of California, the leader of our state Senate, the Speaker of our State Assembly, and every major business organization in our major cities – the Bay Area Council, the Silicon Valley Leadership Group, the Los Angeles Chamber of Commerce, the Fresno Chamber of Commerce, the Orange County Business Council. All of these leadership organizations and civic and political leaders believe that this is part of California’s future. I’ll take those odds against whoever is standing on the other side.

So let’s talk about where we are and where we’re going. I’d also like to share a couple of observations now that I’ve been on the Authority for a few months. We do have a number of issues in California, and when I was appointed in August, the High-speed Rail Authority was supposed to produce its updated business plan about three weeks after that point. And we just weren’t ready. The governor appointed another person at the same time, Michael Rossi, the former vice chairman of Bank of America. He has a long history in infrastructure finance, including having financed some of the European and Asian high-speed rail systems. So it was great: new governor, my background in energy and transportation and somewhat in finance, Mr. Rossi’s background in finance and business. So we were able to bring a business-like approach to the high-speed rail business plan.

When I opened the document to read our draft business plan for the first time, I became very uncomfortable because the person who had written this talked about “how great it is to do this and we need to build this because this is the future and blah blah blah.” And it ended up with, “Let’s do it!” But this was not a business plan. This was a marketing plan, a promotional plan. So out came the red pen to slash through all of that.

We have a state of 38 million people. Within 20 or 30 years, we’re going to have a state of 50 million people. We have a growing population that is going to put additional strains on our natural resources, and our current means of mobility are becoming more and more strained. So the question is, first and foremost, do we make an investment in mobility for our future needs? And if so, what kind of investment do we make?

Now, we can choose not to make any investments in new mobility modes, but that’s not without a cost. We know that, looking forward, we could be seeing something like 320 million hours of lost productivity time over the next 20 years of people just sitting in traffic. And we know that we have environmental issues in the Central Valley of California: 20% of our children in the Central Valley suffer from some form of asthma. It is a giant basin enclosed by mountains, with agricultural activity that stirs up dust, with trucks moving up and down the freeways, and so forth. The air quality challenges in the valley are dramatic. We can’t pretend that doing nothing doesn’t have a cost, because it does.

We could expand 2300 more lane miles of roads, or add more airports, more airport gates. The funny thing is, in our business plan there is a letter from John Martin, the general manager of the San Francisco International Airport, supporting high-speed rail. Why? Because John Martin has a limited number of aircraft gates. He would rather use that limited capacity not for little puddle-jumper flights that could be accomplished by a rail network but for transoceanic and transcontinental flights. That’s a more effective use of his facility. So he supports high-speed rail as an airport director.

We approach the business plan from the standpoint of this being an investment decision choice facing California. It’s not a luxury; it’s not something that would be cool to have. This, we believe, looking at the alternatives, is the most sensible way to meet the mobility needs of a growing population. I really think it’s important to have the dialogue on that level because otherwise it becomes all about the technology, and then people look at it as not as a “gotta-have” but as a “nice-to-have.” Mr. Rossi and I tore into the business plan issues, and at the heart of the business plan is the question of whether or not we can operate the system without a public subsidy. Now, for those of you who aren’t as familiar with our program here in California: the voters, in 2008, passed a bond measure, but that bond measure not only appropriated close to $10 billion for high-speed rail and related projects but also imposed certain restrictions on how the money was to be used because the authors sort of anticipated what we are going through right now. When there is a pot of money, politicians would like to reach in and grab it. So they said, “This bond money can only be used to build an intercity system that is capable of speeds of 200 miles an hour, that is operated as a grade-separated system, that is designed to achieve a connection between Los Angeles Union Station and San Francisco in 2 hours and 40 minutes.” And that’s the only permissible use of those bonds, to build that kind of system. So we have these requirements on the bonds, and, by the way, these bonds may not be used to provide an operating subsidy. The system must pay for itself.

I served on the BART board for 12 years. We built BART to the San Francisco Airport. There were lots of skeptics – “it’s a boondoggle,” “nobody’s going to ride it,” etc. And despite all the skeptics, last year, on just that leg from San Francisco to the airport, passenger revenues covered 93% of the cost. This year they hit 100%, which is what we forecast. Systemwide, when I was elected to BART, we covered 48% of our costs from the farebox; I’m happy to say 12 years later we’re at 62%.

On my first day on the job at high-speed rail, I sat down with Roelof van Ark, our CEO, and said, “I don’t know how this works. Because I served on the BART board and we thought we were really good, but we still had 38% public subsidy. I’m reading this measure that says we have to build high-speed rail with no public operating subsidy. How is this possible?” And Roelof said to me, “Dan, it’s not comparable. Every urban transit system is subsidized. But high-speed rail around the world serves a different market. It’s an intercity market, and it competes with airline travel. It’s got different operating characteristics, different cost parameters, and every single one of them, once built, is able to go forward and have an operating profit going forward.”

Now, I’ve revisited this, tested this, Mike Rossi has tested this, and we believe this is absolutely true. And we get frustrated sometimes because you pick up the paper and the opponents are always saying, “These things are always subsidized.” They redefine subsidy to include return of the initial capital, which, by the way, a couple systems in the world are doing. Former Congressman Oberstar told me that he read that in France there was apparently a 300 million euro check written from the authority back to the government to pay off some of the initial construction costs. Mike Rossi’s estimates are that in 62 years of operation, the California high-speed rail system will return all of its capital. We don’t talk about that too much because, frankly, we think people will challenge us on it. But Rossi’s a banker, and I put his credibility on numbers up against anybody’s. And he says, based on what we believe our operating costs will be, that it will not only cover operating costs, but that we will actually be in a position in two generations to have paid off the system.

We put out the draft plan and we got hundreds and hundreds of comments. Are the ridership numbers right? Are your O&M numbers right? The fundamental questions: is this a wise decision? We have scrubbed our ridership numbers; we have tested them; we ran our ridership models using numbers from the northeast corridor and came in and showed that the model was able to replicate those numbers. We had said to not do high-speed rail but to make other investments would cost $170 billion, and people jumped on that. But that number only includes the capital cost and not the maintenance cost of those facilities over the next 30 years. So it’s probably $300 billion. So we kind of pounded away on that, and we have satisfied ourselves that the fundamentals are sound. The ridership will be there to cover the operating cost, and that the cost of doing other things is greater.

The second set of comments goes to the specifics of our business plan itself. In many cases, those criticisms are valid. The first criticism was that this thing costs too much. The second criticism was that we are putting everything into this core section in the Central Valley of California. Now, with all due respect to the Chair of the House Transportation and Infrastructure Committee who commented that there are more cows than people in the Central Valley, had I been testifying that day, I would have pointed out to him that the Central Valley of California, which is the fastest growing portion of our state, would rank 26th amongst the 50 states in the US. And not only that, our current service in the Central Valley, the San Joaquin Amtrak service, is the fifth busiest service in Amtrak nationwide and has just gone through 16 months of sustained passenger growth. It has 1 million trips per year on a relatively slow train with 200,000 of those trips per year taking a bus bridge from Bakersfield to Los Angeles.

My predecessors had this idea that we should hold off on the decision of where we go after the Central Valley. All that did, frankly, was make people nervous and not get people to buy in. So we declared, “You know what? We’re not doing that. We’re going south.” Our first move will be south. We are going to connect the Central Valley, which is the fastest-growing region of our state, with the Los Angeles Basin, which is the most populous region in our state. That’s going to close the most prominent gap in rail service in California, which is the area from Bakersfield, across the Tehachapi Mountains, to Palmdale at the gates of the Los Angeles Basin. That’s going to be about an $11 billion project. We think that this will help us move forward, and it will help us with our congressional delegation because we give them a clear sense of what our priorities are. Let’s build this spinal system in the Valley; we’re making simultaneous investments in the urban areas, and we’re focused as a state on our next priority, which is “get across the gap.”
As my friend Will Kempton, the head of our legislative peer review, says, “We get to Palmdale, everything changes.” Why does it change? Because there is already a commuter rail from LA up to Palmdale. Which means you can go then by rail from Fresno down to LA. And Al Lowenthal, one of the leaders of the Senate who has to opine on this, said, “You know, Dan, what you ought to be saying is, ‘First we’ll beat the car, and then we’ll beat the plane’.” I thought that that was an elegant way of looking at this.

The other thing about Palmdale, for those of you who don’t know about California geography, is that Palmdale is a mere 50 miles or so from Victorville. Now what’s in Victorville? What’s in Victorville is the potential southern terminus for the Desert Express from Las Vegas into California. As you know, the federal government is currently considering their application for railroad improvement fund loans for that project. I asked some of the folks I know in the Fresno area, “If Desert Express came down and connected over to Palmdale, and we were connecting you guys to Palmdale, do you think people here would go to Las Vegas?” The answer was, “Yes. Sure.” That could be 7 million additional riders per year on Desert Express coming into our system. And now we start to look at networking the high-speed rail systems in ways that really add densification.