BILL ANALYSIS                                                                                                                                                                                                    Ó






           SENATE TRANSPORTATION & HOUSING COMMITTEE       BILL NO: SB 325
          SENATOR MARK DESAULNIER, CHAIRMAN              AUTHOR:  rubio
                                                         VERSION: 4/4/11
          Analysis by:  Art Bauer                        FISCAL:  yes
          Hearing date:  April 12, 2011



          SUBJECT:

          Railroads

          DESCRIPTION:

          This bill creates the Central California Railroad Authority 
          (CCRA) to ensure the continuation of short line rail service in 
          the San Joaquin Valley for shippers and receivers and to provide 
          passenger rail service. 

          ANALYSIS: 

          In June 2008, the Surface Transportation Board (STB), the 
          federal agency that oversees the United States' railroad 
          industry, authorized the abandonment of 30.6 miles of service 
          operated by the San Joaquin Valley Railroad (SJVRR) between 
          Strathmore and Jovista in Tulare County. In the same decision, 
          the STB denied a request to abandon the rail line from 
          Strathmore to near Exeter.  The STB documents show that the 
          SJVRR sought authority to abandon the line because "there is 
          insufficient traffic available to justify the cost of 
          maintaining and operating the line, and that investing capital 
          in the line would not be a prudent use of carrier resources."  
          During the abandonment process, Tulare County sought to acquire 
          the section being abandoned and asked the STB to set terms and 
          conditions for the sale of the right-of-way.  The STB set the 
          purchase price at $3.3 million.  Tulare County declined to 
          purchase the line at that price.

          Matters related to railroad operations, corporate structure, 
          ownership, service provision, and other aspects of the railroad 
          business are preempted by the federal government.  In fact, 
          states and local governments cannot exercise the right of 
          eminent domain to obtain railroad property and are unable to 
          regulate shipping rates and other aspects of railroad 
          operations. 





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           This bill  :

             1.   Makes findings and declarations that the counties of 
               Fresno, Merced, Kern, Kings, and Tulare should continue 
               receiving short line rail service should one or more short 
               line operators discontinue service or abandon the rail 
               facilities.  Further, it declares the intent of the 
               Legislature that a multicounty joint powers agencies formed 
               by the designated counties' regional transportation 
               planning agency administer the CCRA.  Finally, it finds 
               that the CCRA should also operate passenger rail service.

             2.   Defines the CCRA as a local agency for the purpose of 
               receiving disaster assistance.
               
             3.   Defines the area of jurisdiction of the CRRA as the 
               counties of Fresno, Merced, Kern, Kings, and Tulare and 
               authorizes the counties of Madera, San Joaquin, and 
               Stanislaus to join the CCRA.
               
             4.   Provides that the CCRA be governed by a board consisting 
               of one person appointed by each of the regional 
               transportation planning agencies of the counties of Fresno, 
               Merced, Kern, Kings, and Tulare.  Should the board be 
               enlarged to include other counties, the regional 
               transportation planning agencies of the counties shall each 
               appoint a member.  Board members shall serve two-year 
               terms. 
               
             5.   Exempts CCRA board members from existing law prohibiting 
               a local official from simultaneously holding incompatible 
               offices.
               
             6.   Authorizes the CCRA to exercise the following powers: 

                  a.        Acquire, own, operate, and lease real estate 
                    and obtain property through the exercise of eminent 
                    domain. 

                  b.        Acquire, own, lease, and operate railroad 
                    lines and equipment, track, rights-of-way, and 
                    facilities.

                  c.        Issue revenue bonds under the terms and 
                    conditions of the Revenue Bond Act of 1941 without an 
                    election within the counties comprising the area of 




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                    jurisdiction.

                   d.         Accept grants or loans from state or federal 
                     agencies.

                  e.        Operate railroads, including railroads outside 
                    its area of jurisdiction, to connect its lines with 
                    the lines of another railroad corporation.

                  f.        Select a public or private entity as a 
                    franchisee to acquire or operate a rail transportation 
                    system in CCRA's area of jurisdiction.                 
                                                                           
                         
                     g.     Prepare a plan for the acquisition and 
                    operation of any railroad line in the area of the 
                    member agencies to further the purposes of the Act at 
                    no expense to the state. 

                  h.             Conduct engineering and related studies 
                 related to the acquisition of a railroadline.

                  i         Evaluate alternative plans from firms to 
                  acquire, finance, and operate a railroadsystem 
                  consistent with the purposes of the act.

             7.   Exempts the state from any liability for contracts, 
               debts, or other obligations of the CCRA.


          



          COMMENTS:

              1.   Purpose of the bill  .  This bill creates a public 
               authority that may provide freight, and potentially 
               passenger, rail service should the STB authorize the 
               abandonment or discontinuance of service on an existing 
               short line railroad operating in the counties of Fresno, 
               Merced, Kern, Kings, and Tulare.  According to the author, 
               southern San Joaquin Valley communities that rely on short 
               line rail service stand to lose access to shipping services 
               unless an alternative provider is established.  Further, 
               the community representatives believe that without service 




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               they are less attractive to potential commercial investors.
               The Tulare County Association of Governments commissioned a 
               market analysis for rail service in the county.  The 
               analysis' conclusion was that there are customers desiring 
               service and that the continuation of service would enhance 
               the attractiveness of the county for economic development.  
               A graduate school project by a group of students from the 
               business school at California State University Fresno 
               conducted an analysis of an abandoned segment and concluded 
               there was a potential market for continuing freight 
               service. 

              2.   Background  .  With the deregulation of the American 
               railroad industry in 1980, mergers, acquisitions, and 
               bankruptcies have reformed the railroad industry.  Large 
               railroads, like the Union Pacific (UP) and the Burlington 
               Northern Santa Fe (BNSF), both of whom operate in the San 
               Joaquin Valley, are allowed to discontinue unprofitable 
               branch line service which link customers to their trunk 
               lines. The STB, the successor to the Interstate Commerce 
               Commission, which oversees the surface transportation 
               industry, may require that service be continued to the 
               branch line customers.  Short line railroads provide the 
               branch line service and hand-off the freight cars to the 
               major railroads.  A short line either acquires the large 
               railroad's branch line property outright or, more 
               frequently, enters into a long-term lease agreement for the 
               facilities.  Short lines can afford to provide service in 
               the smaller markets because they have a lower cost 
               structure than the large railroads. 
               RailAmerica, operating as the SJVRR, is among the short 
               line operators providing service in the San Joaquin Valley. 
                RailAmerica, a publicly traded company with a market 
               capitalization of $934 million, operates forty railroads in 
               every region of the county.  In California, the company 
               operates five railroads, including the SJVRR.  The term 
               short line is a misnomer, since SJVRR operates over 477 
               miles from the Bakersfield area through Fresno and west to 
               Firebaugh and Oxalis. 

              3.   Local agencies' experience with short line rail 
               operations  .  Generally, local agencies' experiences with 
               short line railroads have been good.  For example, the 
               agency that operates the San Diego Trolley acquired a 
               114-mile subsidiary of the Southern Pacific Railroad in the 
               late 1970's to use a portion of the right-of-way for 




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               trolley service.  As a condition of the acquisition, the 
               public agency had to ensure federal authorities that 
               freight service would continue.  To satisfy this condition, 
               the trolley operator contracted with a short line rail 
               operator.  Another short line operator provides a variety 
               of services associated with the movement of rail freight 
               for the Ports of Long Beach and Los Angeles.  Typically, 
               the agencies contracting for the short line services have 
               not tried to operate the service themselves, but have done 
               so through a contractor.  
               In comparison, the North Coast Railroad Authority, 
               established by state legislation in 1990 to restore 
               railroad service from the Bay Area to Eureka, does not have 
               an independent source of public funds and has not 
               contracted with a short line railroad to plan service.  Its 
               source of operating revenue is supposed to be shippers and 
               receivers along the line.  Since its formation, the 
               authority has received over $70 million from the state and 
               from federal capital grants for rail improvements, but it 
               has been unable to meet its goals.  State and federal 
               auditors have examined the authority since 1993 for 
               unacceptable business practices, including an unacceptable 
               internal accounting system, weak procurement and management 
               practices, an inadequate payroll system, and an inadequate 
               inventory control systems.  The required business 
               practices, the cost of restoring the railroad, including 
               repairing a 100-mile washed out section in the Eel River 
               Canyon, and restoring collapsed tunnels have overwhelmed 
               the authority.  To be sure, the authority may be in an 
               unusual situation because of geography, but its experiences 
               underscore the fact that successfully operating a 
               commercial railroad is challenging. 

              4.   Central California Rail Authority has unusual 
               organizational structure  .  CCRA, as created by this bill, 
               includes several unusual futures.  To begin with, the CCRA 
               is a special district, but it is not activated until an 
               abandonment or discontinuance of service on a rail line in 
               the CCRA's area of jurisdiction occurs.  According to the 
               statement of findings and declarations, it is the intent of 
               the Legislature that the CCRA operate as a joint powers 
               agency comprised of the regional transportation planning 
               agencies of its member counties.  Statements of intent are 
               not operative statutory language, and establishing the 
               management of an agency through the creation of a joint 
               powers agreement is not the typical practice for 




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               establishing an agency.  Moreover, a joint powers agreement 
               is an agreement between public agencies to collaboratively 
               provide a service that they have the authority to provide 
               individually.  Regional transportation planning agencies in 
               the San Joaquin Valley do not have the authority to operate 
               railroads.  Therefore, the committee may wish to consider 
               two amendments:
                  a.        Remove the intent language regarding the 
                    management of the CCRA by a joint powers agency from 
                    the statement of findings and declarations and include 
                    it in the operative language of the bill. 
                  b.        Authorize the regional transportation agencies 
                    to operate rail service within CCRA area of 
                    jurisdiction only for the purposes of this bill. 

              5.   The membership of CCRA's governing board is unclear  .  
               The bill requires the five regional transportation planning 
               agencies to each appoint a member to the board of 
               directors. It is unclear if the appointee is a sitting 
               member of the regional agency, a member of the public, or 
               an elected official who is not on the regional agency's 
               board.  In addition, the appointees are not subject to 
               incompatible office statute. This allows the board members 
               to serve without the possibility of having conflicts of 
               interest between the interest of the agency on which they 
               sit and the CCRA board.  The committee may wish to amend 
               the bill to require that the appointees be sitting members 
               of the regional agencies' governing boards.                 
                    
              6.   Powers of the CCRA  .  Among the powers of the CCRA is the 
               authority to acquire property and to operate railroads 
               outside of its area of jurisdiction.  It is difficult to 
               understand why CRRA needs to acquire railroad property 
               outside its area of jurisdiction. Similarly, it is 
               difficult to understand the reason for the CCRA to operate 
               trains outside of its jurisdiction.  Because a short line 
               network is not required to be contiguous, a short line may 
               have trackage rights on either the UP or BNSF in order to 
               connect with a noncontiguous segment of it network.  The 
               committee may wish to consider the following amendments:
                  a.        Page 4 line 31, after "domain" add "within its 
                    area of jurisdiction".  This limits property 
                    acquisition to CCRA's area of jurisdiction.
                  b.        Page 4 line 34, after "corporation" add 
                    "provided the service begins within CCRA's area of 
                    jurisdiction".  This prevents the CCRA from operating 




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                    an orphan service outside its service area.            
                                                                           
                              
             1.   Funding for the CRRA  .  Although this bill permits the 
               CRRA to issue revenue bonds, it provides no funding for 
               debt service.  In addition, no funding is made available 
               for the day-to-day operations of the CRRA.  It is unclear 
               how this agency will carry out its responsibilities.  
               Funding for transportation is scarce in California.  There 
               are two state authorized funding sources for local mass 
               transportation and intercity passenger rail service.  The 
               Transportation Development of 1971 provides that a  
               percent of each county's local sales tax be set aside for 
               public transportation purpose.  These funds support 
               existing transit services throughout California.  A second 
               source of funding is the state Public Transit Account, 
               which is funded with sales tax revenue from the sale of 
               diesel fuel.  A portion of this revenue is distributed to 
               local agencies by formula for public transit purposes and 
               to the Department of Transportation (Caltrans) for the 
               support of intercity passenger rail services provided by 
               Amtrak under contract to Caltrans.  The last source of 
               funding is voter-approved local transportation sales taxes. 
                Agencies that have access to this source of revenue may 
               allocate funds to the CRRA, provided the ordinance approved 
               by the voters governing the use of revenue does not 
               preclude such an allocation.  
                In light of the fiscal uncertainty of the CRRA and the 
               scarce resources for public transportation, the committee 
               may wish to consider the following amendments:

                  a.        The signatories to the joint powers agreement 
                    activating the CRRA shall be liable for contracts, 
                    debts, or obligations of the CRRA.
                  b.        The Transportation Development Act revenues 
                    shall not be used to fund the administration, 
                    planning, and services provide by the CRRA.

                  c.        The CRRA shall not be entitled for funding 
                    from the Public Transit Account.  

              1.   Should the CRRA operate passenger rail service  ?  White 
               the bill authorizes the CRRA to provide passenger rail 
               services, no local plan exists for passenger rail service 
               in CRRA's area of jurisdiction.  There have been 
               discussions about developing rail transit to serve future 




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               high-speed rail stations in the San Joaquin Valley, 
               although it is unclear when the high-speed rail service 
               will be operational.  The segment the High Speed Rail 
               Authority proposes to construct first in the Central Valley 
               will not offer service, until a longer segment is 
               completed.  Based on information received from the author, 
               it is clear that the purpose of the bill is to establish an 
               organizational framework to assume the operation of 
               discontinued or abandon short line freight railroad 
               service.  Including passenger service among the CCRA's 
               responsibilities at this time may diminish the agency's 
               focus on its principle mission of ensuring the continuation 
               of freight service.  In addition, there are several 
               financial and related issues that would have to be defined, 
               analyzed, and resolved before proceeding with passenger 
               service.  The committee may wish to remove the 
               authorization of authority to operate passenger rail 
               service. 
          

          POSITIONS:  (Communicated to the Committee before noon on 
          Wednesday, 
                     April 6, 2011)

               SUPPORT:  Kern Council of Governments
                         Fresno Council of Governments
                         Merced County Association of Governments
                         Madera County Transportation Commission
                         Tulare County Association of Governments
                         City of Blythe
                         City of Lemoore
                         City of Lindsay
                         City of Parlier
                         City of San Joaquin
                         City of Taft
                         City of Wasco
                         County of Kern
                         County of Tulare
                         Tricor  Refining, LLC
                         Central California Rail Shippers& shippers 
          Association
                         Richard Best Transfer, Inc.
                         Superior Soil Supplements
                         Golden Empire Transit District
                         Tulare Frozen Foods, LLC
                         San Joaquin Refining Co., Inc. 




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               OPPOSED:  None received