The ‘High Cost’ & ‘ High Risk’ Of Rail

by Daniel Mintz, August 6, 2013

A draft feasibility study prepared for the county’s Harbor District has identified several challenges to railroad development and deemed it to be a “high cost and high risk” venture.

Authored by the Washington-based BST Associates and the Portland-based Burgel Rail Group consulting firms, the draft study’s focus has disappointed rail advocates who believe imported manufactured goods are an important source of rail cargo.

The study only considers export of bulk goods such as coal, grain and iron ore, describing them as high volume, strong growth rail traffic commodities that “represent a key source of revenue to railroads.”

High cargo volume is described as a requirement for recouping investment, debt and operation costs of a new rail line. Developing an east-west railroad is estimated in the study to cost up to $1.2 billion. The cost of redeveloping the North Coast Railroad Authority’s unused north-south line from Windsor to Samoa is estimated at $609,000 in the study.

Etching an east-west rail corridor from here to the Gerber/Redding area and its connection to a national rail line is a challenging proposition due to the “extreme ruggedness” of the terrain, according to the study. The distance is about 100 miles but 200 miles of rail track would be needed as the route would wind and curve around slopes and mountains.

Three primary east-west route alternatives are outlined in the study, beginning in the Eureka/Arcata/Samoa areas and ending at Union Pacific railheads in the Redding/Gerber/Red Bluff areas.

The study questions whether rail development is economically feasible, as there are several existing West Coast port/rail connections.

“Humboldt County would face several competitive disadvantages relative to these other ports, including the need to cover the cost of constructing the new line and the lack of a rail distance advantage,” the study states.

It references a 2009 study sponsored by the Security National Company, which operates a shipping terminal in Fairhaven. Drafted by the U.K.-based Drewry Shipping Consultants firm, that analysis focused on imports of container (manufactured) goods and part of its executive summary is quoted in BST/Burgel study.

“This report concluded that ‘Under no foreseeable circumstances should Security National consider building a new container terminal at the port, without the prior contractual support of at least one shipping line, in the hope that ‘the lines will come when it is built,’” the study states.

Also included is this quote from the Drewry report summary: “The difficulty will lie in convincing the shipping lines that the Port of Humboldt Bay offers sufficient competitive advantages over Prince Rupert, Vancouver, Seattle, Tacoma, Portland and Oakland for it to fully support the project before construction commences.”

Returning to its focus on exports, the study adds that “it is assumed that if Humboldt County were to attract a commodity that is not currently shipped through another West Coast port, it would most likely be destined for Asia.”

Coal is identified as the commodity that fits the assumption, as the amounts shipped from the U.S. have “risen sharply” in recent years. Corn and petroleum products are also named as high volume Asian export commodities.

Humboldt would have an export distance advantage over some West Coast rail-connected ports, such as the one in Coos Bay, but the study deems it to be insubstantial. Far greater is the basic advantage offered by other shipping hubs compared to Humboldt, according to the study.

“A critical advantage that all of these other ports have relative to Humboldt County is that the rail lines are already in place,” the study states. “In addition, most of these existing rail routes are capable of handling large volumes of heavy rail traffic, without the billion dollar-plus investment needed for an east-west route to Humboldt County.”

The draft study was presented to the Harbor District’s Board of Commissioners and an audience of railroad advocates and skeptics on July 25.

Brian Winningham of BST described various financing scenarios and said higher-interest borrowing may be more appropriate for a high risk project like rail development. Depending on the interest rate for financing, a north-south rail would need to move anywhere from 5.6 to 42 million tons a year of cargo and an east-west operation would need 11.5 to 100 million tons to cover costs, he said.

Winningham compared that with the “top export ports” of Portland, Oregon and Kalama, Washington, which each handle 10 to 12 million tons a year. “When you get up to some of the higher volumes, these are beyond what anybody on the West Coast does right now,” Winningham said of the Humboldt cargo estimates.

Commissioner Richard Marks said he attended a forum whose participants said they’ve been negotiating with the Wal-Mart corporation on importing its products to Humboldt’s port.

When Winningham said Humboldt would be competing with Oakland’s port — which he said has additional capacity — Marks pointed out that Humboldt has a two-day shipping time advantage when fielding imports from Asia.

But Commissioner Pat Higgins, a rail skeptic, said the expansion of Oakland’s port was government-supported and lower payback on borrowing would allow Oakland to “undercut” Humboldt if it came down to a bidding war.

Winningham said container volumes peaked in 2005 and there’s “new competition” from Canadian ports and even more will be introduced with the widening of the Panama Canal. “It’s a riskier business now,” he said, adding that ports in Los Angeles and Long Beach are also expanding.

The study cost $19,000 and was paid for by the California Department of Transportation.

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