New bullet train business plan will show higher costs, CEO Brian Kelly says

The California bullet train will take longer to build and cost more than previously estimated under a soon-to-be-released business plan, but plans to begin the project by linking the Bay Area to the Central Valley remain intact, according to the rail authority’s new chief executive, Brian Kelly.

Kelly, who took over leadership of the project Feb. 1, said in a wide-ranging interview that he plans to make transparent the challenges facing the project in an effort to bolster confidence that it can still be successfully executed. The rail authority will issue its 2018 business plan with the new cost estimates March 9.

Kelly did not disclose the new price tag for completing the entire Los Angeles to San Francisco system, but he made clear that the $64-billion estimate from the 2016 business plan will change.

Since the earlier estimate was unveiled, the state has confronted extended delays in buying land for a 119-mile segment in the Central Valley, encountered higher costs to build safety barriers where its tracks will run close to freight lines, sustained higher costs to move underground utilities and agreed to pay claims to construction firms whose work was delayed.

The problems led to a disclosure last month that the 119 miles will cost $10.6 billion, up from the original estimate of about $6 billion. When that was unveiled at a rail authority board just days after Kelly took over, the authority did not say whether it would impact the total system price.

“There will be a cost increase,” Kelly said. “You cannot have that cost increase in the Central Valley without affecting the overall program cost.”

The new estimate will be given in a range of costs, reflecting “too many unknowns to be specific,” he added.

Under the prior plan, the rail authority said it would build a starter system, or what it calls an “initial operating segment,” from San Jose to the farming town of Wasco for $21 billion and have it operating by 2025. The plan included the construction of a 13-mile tunnel under the Pacheco Pass in the Diablo Range, at least four train stations, a heavy maintenance facility, an advanced signaling system and miles of high-voltage electrical power infrastructure.

Outside experts said that the construction of the tunnel alone made the 2025 start-up date and its budget woefully unrealistic. The Central Valley construction was supposed to be the easiest part of the system, since it did not involve a mountain crossing and the land for the right of way was largely rural. But the authority underestimated the amount of land it would need, encountered virulent legal opposition by local authorities and found that landowners would not easily hand over their property.

How the problems in the Central Valley will affect the cost estimates for other segments of the system is still unclear. The passage through the San Gabriel and Tehachapi mountains in Southern California will require a world-class tunnel system of about 36 miles, which is difficult to price.

And the passage through urban Los Angeles is already a political minefield that has triggered demands for tunneling to avoid neighborhood impacts. Last week, a rally by an opposition group in the north San Fernando Valley, the “Save Angeles Forest for Everyone” coalition, attracted more than 500 residents to a local church. The group is demanding that local politicians, including Mayor Eric Garcetti, back their demand for an underground passage through Shadow Hills, Lakeview Terrace, Pacoima, San Fernando and other communities.

The project is already facing a funding gap, so the new business plan will have to lay out a credible path for financing the higher costs. Under the old plan, the authority had proposed to issue $5 billion in revenue bonds that would be paid off by its 25% share of the proceeds of the state’s greenhouse gas auction system. But that plan fell apart. Kelly said that the agency is revisiting how to borrow against future revenues from the greenhouse gas fees.

But to complete the project’s links to Los Angeles, it ultimately needs more federal support, he acknowledged. The Obama administration provided grants of $3.5 billion. Since then, House leaders have said they will not approve any additional support.

Southern California leaders back the project but are growing increasingly concerned that it could end up as a Northern California commuter system that, for the foreseeable future, only links Silicon Valley to the Central Valley.

Assembly Speaker Anthony Rendon (D-Paramount) said in a recent interview that he is concerned about the growing talk of the project becoming a commuter system for Northern California. “It is a concern for both sides” of the political spectrum, Rendon said in a January interview. “The south is the population center for the state.”

The rail authority has told Southern California it will pour money into local transportation projects that will later be part of the bullet train, including a redesign of Union Station.

“It is important for us to lay out that we are still building a statewide system,” Kelly said.

Kelly acknowledged that the higher costs that will be disclosed in the 2018 business plan are likely to cause a furor. The challenges facing the bullet train program are multifaceted, involving political, technical, financial and operational issues, he said.

“I am preparing for a couple of tough months,” he said. “We are going to get bounced around in hearings. I am going to take the punches. It is never easy to talk about cost increases.”

In only four weeks since taking over the job that former CEO Jeff Morales left last June, Kelly has made a sharp change in the rail authority’s approach. The authority had long disputed outside estimates, including a risk analysis by the Federal Railroad Administration in late 2016 that projected the Central Valley construction could cost $10 billion.

The project got off to a rocky start when it issued its first construction contract to Tutor Perini before it had enough land to build anything, causing the company to park heavy equipment at staging lots for months.

“Candidly, I think the authority for good reasons moved into construction too early,” Kelly said. “There were risks that were not fully known. We have to show folks that we learned something here. We won’t make the same mistakes again.”

Kelly, 49, who previously was secretary of the California State Transportation Agency and is a longtime political insider, said he believes the public understands that the project will face challenges and that its cost could increase. The need for the project is undiminished, he said. As the state’s economy and population grows, it will need more transportation than highways and airlines alone can provide.

“I have been doing transportation policy for 24 years; this project is the most transformative I have ever seen,” he said.

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