SMART board approves in-house freight rail operation, ditches gas tanker storage, at a loss

The North Bay’s passenger rail system is moving into freight operations, and one of the governing board’s first decisions about the scope of those operations is likely to make them a money loser, at least at the outset.

Board members for the taxpayer-financed Sonoma-Marin Area Rail Transit voted unanimously Jan. 5 to launch an in-house freight rail division, while at the same time reaffirming their commitment to abandon the storage of gas tanker cars near Schellville, a decision that will cost $500,000 a year in revenue.

Halting the moneymaking storage bowed to political pressure from Marin and Sonoma county residents concerned about environmental and public safety risks, particularly in the Sonoma Valley. But the search for freight rail business of equal value may prove daunting, according to those familiar with the industry.

The takeover means that SMART, a public agency, is adding an ancillary business with extra costs and unproven revenue potential at a time when expansion of its core service ‒ the north-south passenger rail line promised to voters in 2008 ‒ remains stalled by lawsuits that have tied up critical construction funds.

Still, SMART officials cautiously celebrated the possibilities, hailing the expansion into commercial freight as another step forward for the 20-year-old rail agency. It now controls all rail traffic in the North Bay.

“This board is very cognizant of the responsibility and the financial obligations of taking on freight,” said board chair and Sonoma County Supervisor David Rabbitt.

“The opportunities are there and I think the benefit to the community is there,” he said. “We just need to continue to keep doing our due diligence.”

The board’s Jan. 5 decision begins to define how SMART will, in the year to come, embark into regional freight rail business, which has been limited to just a handful of customers. Proponents like Rabbitt see an opportunity to move freight off roadways like Highway 101.

But the move comes even as staff and board members acknowledge that fundamental questions about SMART’s fiscal sustainability remain unresolved.

Even SMART’s understanding of its new business venture remains murky, as the private company that today runs freight trains has yet to fully open its books, SMART officials said.

SMART also sits at a pivotal moment in its leadership and development, with a new executive director and a Bay Area transit ecosystem undermined in potentially permanent ways by the COVID-19 pandemic.

Lawsuits have halted rail expansion north into Windsor and construction on some segments of the bike and pedestrian path meant to one day accompany the 70-mile passenger line planned to stretch from Larkspur to Cloverdale.

Origin of freight takeover

State lawmakers, chiefly Sen. Mike McGuire, D-Healdsburg, guided the passenger agency into the freight business as they seek to clear the way for a signature “rail to trail” project that would convert abandoned tracks north of Cloverdale into a 320-mile bike and pedestrian trail and tourist attraction tying San Francisco Bay to Humboldt Bay.

McGuire also sought to shut down the North Coast Railroad Authority, a debt-riddled state agency known by some as NCRA that oversaw freight rail operations and owned lines not controlled by SMART.

“NCRA was a hot mess,” McGuire said in an emailed statement Thursday.

“They were in massive debt, teetering on bankruptcy and had completely failed their mission over the last 20 years to provide freight rail to the North Coast. They should have been shut down years ago.”

McGuire said SMART’s takeover of freight operations would allow the agency “to control their own destiny.”

Operating the freight trains allows SMART to avoid scheduling conflicts on the line, and gives them rights of way to expand east into Solano County — tying into the Capitol Corridor system running between Sacramento and Oakland.

A state-funded SMART study in 2019 put the cost of that extension at $1 billion. SMART officials have endorsed the idea while stressing their first priority is build-out of the North Bay passenger line promised to voters who approved the system’s quarter-cent sales tax in 2008.

The Legislature, in a bill authored by McGuire, gave SMART $4 million to buy out private operator Northwestern Pacific Railroad Co., which runs trains through an agreement with NCRA.

Northwestern Pacific Railroad (NPR) is co-owned by former North Coast Rep. Doug Bosco and holds a significant portion of NCRA’s debt.

Bosco is an investor in Sonoma Media Investments, owner of The Press Democrat.

His freight company operated on clearly favorable terms with NCRA: The contract did not require any payments from NWP Co. to NCRA until the freight operator reached $5 million in annual revenues — a threshold it never met.

Bosco did not want to sell his company, he said in a Jan. 7 interview.

“None of this was our idea,” he said. But when the Legislature moved to shutter NCRA, Bosco said, “we were left without a landlord. I didn’t want to just be floating out there with no public sponsor.”

Adding new jobs, abandoning gas storage

SMART is set to take over NWP’s operations Feb. 28.

The transit agency will hire another party to manage the freight trains until they can contract their own staff. SMART will add six full-time employee positions to manage freight operations. Officials estimate filling those positions by March or April.

As SMART assume’s NWP’s limited business, the agency is also inheriting new, extensive repair costs for the track it did not already control.

The Legislature awarded SMART $2 million in 2018 for repairs along that track. However, the state estimates the freight rail infrastructure needs $10.5 million in track and signal maintenance plus around $450,000 a year in ongoing maintenance costs.

The Legislature added another $4 million in the 2022 fiscal year budget for repairs and upgrades. SMART will draw on those funds to fill in for lost revenue, including its decision to abandon gas tanker storage.

For some local elected officials, the opportunity to phase out that use in particular was a political boon in the freight takeover.

The storage of as many as 80 gas tankers at a time has driven local ire since 2016, often channeled through Sonoma County Supervisor and SMART Board Member Susan Gorin.

She has argued that continuing to store the tanker cars — held for refineries — could cost SMART votes when it returns to the ballot for an extension on its sales tax, a moment many consider make or break for the agency.

In March 2020, SMART fell well short of the two-thirds majority vote it needed to extend its tax measure to 2059. If SMART can’t win voters over, its quarter-cent sales tax will expire in 2029.

Scope of existing freight business

NWP today has four freight customers — grain to Lagunitas Brewing and three livestock feed companies — and stores freight cars for five entities, from the gas tankers to boxcars to cars owned by the Golden Gate Railroad Museum.

The gas tankers are “about half the income the railroad takes in,” Bosco said. Without that revenue, “they’d be working pretty hard to get (revenues) up to where they are now,” he said.

Neighbors have worried the gas tankers could explode, or be pushed adrift during a flooding event, as the section of track outside of Schellville where they are stored is toward the edge of low-lying wetlands.

But, for the freight operator, “the LPG (liquified petroleum gas) cars are a very easy source of really good income,” he said.

The board has directed SMART to eliminate the gas tanker storage by the end of June. SMART Chief Financial Officer Heather McKillo believes she found about $300,000 in savings on NWP’s operating costs to cushion the blow, she said.

To run the freight rail without the gas tanker storage, SMART estimates it will be spending $200,000 a year until it can make up that revenue by expanding its customer base.

Bosco said he didn’t know where the public agency might find new business.

“It’s very hard to find new opportunities on the line because the line doesn’t go through industrial areas that require freight railroad,” he said.

Complicating McKillop’s budget analysis is that the NWP books have remained closed to SMART officials even as the state-backed takeover nears conclusion.

“I was not given a balance sheet … or profit and loss sheets or anything,” McKillop said.

Instead, SMART has made budget projections largely based on conversations with Bosco and other NWP staff and the industry expertise of SMART’s own employees, some of whom have worked in short line railroads.

Bosco said he has been transparent with SMART officials when asked questions. He contended he does not want to put the business’ dealings into the public record, even though he is preparing to unwind NWP after the freight transfer is completed.

“We’re not doing anything surreptitious or hiding anything,” he said, “It’s just that we can’t have our books made public.”

Emails, balance sheets and other documents shared with SMART would be vulnerable to public disclosure under the California Public Records Act, he said.

Once the freight transfer is completed on Feb. 28, NWP “will stick around” as a company for 2-3 years as Bosco and his staff wrap up loose ends, he said.

You can reach Staff Writer Andrew Graham at 707-526-8667 or andrew.graham@pressdemocrat.com. On Twitter @AndrewGraham88