.Numbers Game—SMART Ducks Questions About Freight Takeover

Read the Bohemian’s previous coverage of SMART’s freight takeover here, here and here.

Last Wednesday, Jan. 19, the Sonoma-Marin Area Rail Transit district’s board of directors selected a company to take over the agency’s recently-acquired freight operations. 

Beginning on March 1 and lasting for three months, the temporary contract with Willits-based Summit Signal is the SMART’s most recent step in taking over freight operations from Northwestern Pacific Railroad Company (the privately-owned railroad company which currently serves four customers in Petaluma twice a week and stores trains filled with Liquified Petroleum Gas for Bay Area refineries).

Throughout the freight takeover process, beginning in May 2020, SMART’s board of directors appears to have made decisions before receiving complete financial information and has allowed agency staff to present conflicting financial projections without explaining the reason for the discrepancies. The interim freight contract raised still more questions because Summit Signal, the company SMART selected, does not have any experience operating a freight railroad, while two companies who submitted competing bids do.

ALL ABOARD Passengers board a southbound SMART train in downtown Santa Rosa on Monday, Jan. 24. Photo by Will Carruthers.

On Friday, Jan. 21, the Bohemian/Pacific Sun sent the agency’s new director, Eddie Cumins, and several other staff members questions requesting clarification about the process of awarding the freight contract and other related issues mentioned in this article. On Monday, instead of answering the questions, SMART spokesman Matt Stevens said that he had sent the questions to the agency’s public records coordinator to search for documents, a process which often takes weeks. The Bohemian/Pacific Sun reiterated that we were requesting answers to specific questions, not filing a public records request. We also forwarded the questions to David Rabbitt and Barbara Pahre, the chair and vice chair of SMART’s board of directors. No representative of SMART responded before our print deadline.

At a May 20, 2020 meeting, 11 of 12 SMART board members voted to inherit freight services in the North Bay, after the state decided to shut down the North Coast Railroad Authority, a heavily-indebted agency which owned rails running through  the North Bay up to Humboldt County.

As the Bohemian/Pacific Sun reported last November, at the time of the meeting, SMART’s directors had little information about the financial prospects of the business they were taking over.

Doug Bosco, the CEO of NWP Co, the company which leased rights to run freight on NCRA’s lines, has repeatedly declined to share complete information about the company’s revenues and operating costs with SMART. At the May 2020 SMART board meeting, Bosco said that the company brought in about $2 million in revenue per year but declined to share additional information. Bosco, a former congressman representing the North Coast in the 1980s, is an investor in Sonoma Media Investments, which owns the Press Democrat and numerous other print publications in Sonoma County.

Read “Freight Railroaded” and “Train Lines” to learn about the curious relationship between the NCRA and NWP Co, and the process of shutting down the NCRA.

In late August 2020, three months after agreeing to take over freight, SMART started searching for an outside firm to study the financial prospects of the North Bay’s freight rail market. At  the time, SMART was aiming to hire a consultant by Oct. 22 and complete the report within three months. Instead, the agency ended up hiring a consultant, Project Finance Advisory Limited, in February 2021.

SMART published a five-page executive summary of the full report in August 2021, followed by the final report on Dec. 9, 2021, almost 11 months after the original planned completion date.

The agency released the executive summary as part of a Request For Information seeking input from rail companies interested in temporarily taking over freight services on SMART’s lines. All told, 11 companies responded, with many expressing interest in the opportunity and asking questions about SMART’s freight plans.

However, at a Nov. 17 board meeting, SMART staff did not reference the consultant’s executive summary or the responses from freight rail companies. The board was asked to decide whether the agency should operate freight in-house or hire an outside company to manage freight and business outreach on behalf of SMART. The board also considered whether SMART should continue NWP Co’s practice of temporarily storing train cars filled with LPG near Schellville.

Go figure

Instead of using figures from the consultant’s executive summary, a presentation by SMART’s Chief Financial Officer Heather McKillop cited differing revenue and cost estimates based on “conversations with NWP Co.” In the same presentation, McKillop estimated that operating freight in-house would cost $1.7 million per year, while hiring an outside company to manage the freight operation in part or full would cost SMART between $3 million and $3.4 million per year. (Read our coverage of the Nov. 17 meeting here.)

McKillop’s staff report and slideshow presentation did not offer the public any specific insight into how she had calculated the estimated operating costs.

SMART’s board voted to handle freight in-house, an exceedingly rare arrangement in the freight world, where private companies most frequently operate freight lines.

To David Schonbrunn, a long-time transit advocate and president of TRANSDEF, the presentation was an example of “faith-based accounting” seemingly designed to make handling freight in-house appear to be the most financially desirable choice.

“[The calculation] was based on absolutely nothing. In my view, it was preposterous that they made an actual decision on that basis,” Schonbrunn said.

At the same meeting, the board of directors voted to get rid of one of NWP Co’s most lucrative income streams: storing LPG cars.

Explosive revelations?

NWP Co began storing full and empty LPG cars at Schellville in 2016 despite opposition from SMART, which shared ownership of the lines with NCRA, the agency which NWP Co leased freight rights from. At SMART’s Nov. 17 board meeting, Sonoma County residents raised concerns that the tanker cars might explode or leak, damaging the environment, homes and businesses and leading to massive legal claims against SMART. They also submitted a petition signed by over 400 citizens.

While critics of the LPG storage claim that the cars are highly dangerous, state and federal rail regulators offer a different picture. Though there have been LPG explosions in the past, the risk of a massive explosion is low, even if a train derails in transit.

According to a Federal Railroad Administration spokesperson, the last time an LPG-filled car “catastrophically failed” was in 1996, when a 36-car train derailed in Weyauwega, Wis. Of the 14 train cars filled with LPG, three cars caught on fire. A fourth car exploded after two hours of fire. 

Terrie Prosper, a spokesperson for the California Public Utilities Commission, which regulates railroads and numerous other industries, said that, “Chain explosions are not common with LPG cars.”

According to CPUC data, six railroads, including NWP Co, currently store LPG in various locations around the state. Employees in the CPUC’s Rail Safety Division track the location of hazardous materials being stored by railroads in monthly reports, checking whether the railroads storing hazardous materials are complying with federal regulations.

For SMART, the LPG decision was political. At the November meeting, SMART director Susan Gorin, who represents the area where the tanker cars are stored on the Sonoma County Board of Supervisors, said that voters in her district would oppose a crucial SMART sales tax renewal if SMART allowed the LPG cars to stay in Schellville. Quickly falling in line, the board voted to end LPG storage as soon as possible.

Several weeks later, SMART finally published the consultant’s full freight market report.

The full report paints a fairly grim picture of the prospects of increasing freight revenue and highlights the fact that LPG storage was the most lucrative freight business opportunity currently available.

“Without assistance from public or alternate funding sources to help level the competitive field, it is unlikely that a meaningful number of area businesses would elect to ship by rail [instead of by truck],” the report states. The report goes on to say that there could be opportunities to install some new freight spurs and set up transloading facilities, locations where multiple companies can access a freight spur with trucks. However, those options will cost SMART, and the businesses who use them, money up front to set up.

Although it is more in-depth than any other previous analysis by SMART, the Dec. 9 report does not recommend a path forward and is more limited in scope than SMART originally planned.

“The portion of the study that will provide an operational review, financial analysis & modeling, development of a strategic plan, and recommendations for freight business investments as described in the September 2020 [Request For Proposals] has been deferred at SMART’s request and is therefore not included in this initial report,” the report states.

One reason SMART may have requested the consultant hold off on the financial analysis is that the agency has still not gained access to NWP Co’s full financial records. Emails obtained from the SMART via public records request show that NWP Co provided SMART’s staff and consultants with some of the company’s recent financial data, but required that the consultants writing the report sign non-disclosure agreements. SMART did not provide copies of the NDAs before our print deadline.

With their hands tied, the consultant’s freight report ends with a disclaimer: “The information and preliminary conclusions presented in this report may be further refined and developed following receipt of complete financial and traffic records from NWPCo. and additional information from various customers. Once that information is obtained and financial modeling conducted, it will be possible to formulate strategic policies to guide decision making and investments regarding SMART’s freight business.”

Still, that lack of “strategic policies” hasn’t stopped SMART from pushing ahead.

SMART Signal - Chelsea Kurnick
Photo by Chelsea Kurnick

Second thoughts

At a Jan. 5 meeting, following another freight report from McKillop, board members Barbara Pahre, Judy Arnold and Deborah Fudge seemed to have second thoughts about eliminating LPG storage after McKillop told the board that SMART would lose approximately $42,000 per month—$504,000 per year—in revenue by eliminating LPG storage.

“Is there a way to safely store the LPG [cars] on our tracks? I mean, it’s an amazing financial hit to us,” Pahre said at the meeting. “Have they [refineries and freight companies] ever taken into account how those could safely be stored away from people and away from other areas? I don’t need to have that answered right now, but if that information is available, I think that would be important to us as we move forward.”

In response to comments by Pahre and other board members, Gorin reminded her colleagues of their November vote and questioned whether any of the other board members would like to have LPG cars stored in their districts. The board stuck to their November decision.

At the board’s next meeting, on Jan. 19, board members unanimously approved a staff recommendation to hire Summit Signal to manage SMART’s freight operations for three months beginning on March 1, the day after NWP Co has agreed to stop running trains on SMART’s lines. The original contract will cost SMART up to $395,000.

Summit Signal’s contract costs only half what McKillop—SMART’s CFO—previously estimated SMART would pay to contract out freight services. In November, McKillop stated it would cost SMART between $3 and $3.4 million per year to partially or fully outsource freight services. Yet, if Summit Signal’s current three-month contract was extended to a full year, it would cost SMART only $1.58 million.

SMART did not respond to questions about what accounts for the major discrepancy between McKillop’s November estimates and the cost of Summit Signal’s contract.

SMART’s lack of transparency about their decision-making process and financial calculations is cause for concern, says Schonbrunn, the transit advocate.

“[They] should have been thorough in documenting everything and then stop appearing like they’re trying to slip something over on the public. That’s what it looks like, whether it is or isn’t is a little harder to say, but it sure looks like there’s something going on that they’re trying to hide. That’s never good.”

NOTE: A shorter version of this article appeared in print on Wednesday, Jan. 26. We have added additional detail to the online version.

Will Carruthershttp://www.wrcarruthers.com
Will Carruthers is the news editor of the Pacific Sun and North Bay Bohemian. Email tips to [email protected]. Follow him on Twitter at @Carruthers_W.


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