June 10, 2018

To:   SCCRTC Commissioners
Cc:   George Dondero, info@sccrtc.org
Fr:   SCC Greenway

George Dondero, the Executive Director of the Santa Cruz County Regional Transportation Commission, on June 8, 2018 directly responded to a series of well researched and documented stories[1] by Santa Cruz County Greenway.

We are pleased that Mr. Dondero’s memo[2] validates all of Greenway’s six stories about the proposed Progressive Rail contract[3]. The stories and analysis on the Greenway website, as well as the responses below, are backed by publicly referenced documents. Unfortunately, Mr. Dondero’s claims of “factual errors, exaggerations and distortions” are not supported by publicly available evidence. The information provided by Greenway is factual, documented, and does deserve your utmost concern.

After reading and listening to misdirection, vague statements and strategic omissions from RTC staff regarding the rail corridor for the past three years, the time is long past for the public to believe RTC staff’s assertions without evidence. We welcome the documented corrections to any perceived errors in Greenway’s research.

RTC Commissioners, thank you for your public service and willingness to look at the facts for this important decision in our county.

The text of the original memo from Mr. Dondero with our responses to his comments on each individual post are below. We urge readers to read the stories on Greenway’s website and make their own conclusions.

June 8, 2018

To: Regional Transportation Commission
From: George Dondero, Executive Director
Re: Response to Greenway’s Six Stories

Recently, Santa Cruz County Greenway posted a series of six stories on the “Case Against Progressive Rail” providing reasons why they think the Santa Cruz County Regional Transportation Commission should not approve the operating agreement with Progressive Rail. The material contains many factual errors, exaggerations and distortions that, if true, would deserve concern. This memorandum will provide some clarity on the facts.

1. “Progressive Rail Execs Sued for Fraud”[4]

RTC Response: There are two lawsuits – one filed by the U.S. Government, and another filed as a class action suit. According to Progressive Rail, their executives are not named individually in the government suit, and “The class action suit alleges that we were complicit in a cover-up, which is meritless and without fact. The notion that we were protectors of the founders could not be further from the truth. We upheld our fiduciary responsibilities to the shareholders.” Class action suits typically name as many people as possible, knowing full well that only a few may be actually held accountable for the named actions.

Greenway Response: Mr. Dondero reiterates what Greenway already posted. He quotes Progressive Rail executives asserting their innocence. We expect all defendants in major federal litigation would claim the same. However, the courts in the United States work differently. Both plaintiffs and defendants have their day in court. The charges are serious and cannot be waved away by a quote from those accused, particularly when the federal government[5] and the Securities and Exchange Commission[6] have filed suit against the founders of Dakota Plains Holdings (where current Progressive Rail management worked) over the same securities fraud[7]. The claim that class action lawsuits name “as many people as possible” is not supported by any reference (see definition of class action[8]).

The bigger question is: Why was this information not provided to the Commissioners or the public, and why did it not surface in the due diligence process, when management’s ethics are directly relevant to the choice of a rail operator?

2. “Stories from Progressive’s Midwest Towns”[9]

RTC Response:

• Minnesota Pollution Control Agency Fine – The Minnesota Pollution Control Agency did fine Progressive Rail $75,000. However, this fine was issued due to a trucking company employee spilling much of the contents of one rail car during transloading at a property owned by Progressive Rail. While Progressive Rail was assessed the fine because it occurred on company property, the railroad’s personnel did not cause the spill.

Greenway Response: Contrary to Mr. Dondero’s implication, Progressive Rail is responsible for its contractors, shippers, suppliers and employees on its property. How would Mr. Dondero’s response be accepted by Santa Cruz County residents after a hazardous spill in our community? Further, the report specifically states that Progressive Rail failed to notify the Minnesota Pollution Control Agency (MPCA) after “a number of” spills, failed to take reasonable steps to prevent spills of oil and other hazardous substances, failed to have an industrial stormwater permit and a stormwater pollution-prevention plan and allowed spilled materials to enter the stormwater conveyance system and be discharged directly into the soil.

• Bridgewater Township, MN – Proposed Ethanol Facility – Dave Fellon, Progressive Rail owner and president, and other advocates did pursue construction of an ethanol plant in Bridgewater Township, MN, even appearing regularly on a radio show to discuss the proposed development with the public. While the ethanol plant wasn’t constructed there, others have been constructed in southern Minnesota, taking advantage of the local corn supply. According to the Minnesota Bio-Fuels Association, the state hosts 19 such plants and is the fourth largest ethanol producer in the country. Please see: https://www.mnbiofuels.org/resources/production-in-minnesota.

Greenway Response: In attempting to change the subject from the actual information reported by Greenway, Mr. Dondero misses the main point: Mr. Fellon’s statement that Progressive Rail may do as it wishes per federal preemption law once it is the operator of record is deeply disturbing. It is why the Sierra Club noted in its letter of June 6 to the RTC[10]:

We see section 6.3 of the contract as being vague and subject to disputed interpretations as to whether there will be a defined, functioning limit on what Progressive Rail might choose to do or build on the rail corridor Property, including on the Property but outside the Freight Easement Property. Of special concern is the statement,

"The parties agree that Railway will need to identify and construct additional maintenance and storage locations on the Property, which Railway may do as needed, subject to applicable law and the Commission’s prior written consent (subject to the provisions of Section 2.3, which prohibit material interference with Railway’s Freight Service rights and obligations under federal law, unless first approved by the STB)."

Might an out-of-state business person later assert this to mean Progressive Rail may build a warehousing storage facility wheresoever it chooses on the rail Property, describing it as one of its freight service operating rights under federal law?

Once the contract language is adopted, would the RTC have an uncompromised right to say no to something like a locally incongruent new storage facility of some kind? We don’t see that made clear, nor is it spelled out that the RTC shall make its own approval decisions in consultation with and fully compatible with local land use policies of adjoining local jurisdictions.

What the Sierra Club requests is reasonable but difficult according to federal preemption law, and once signed, we are handing the keys for land use decisions to the rail operator. We have already seen with Iowa Pacific that the rail operator will do what it wishes and fall back on federal railroad statutes to dismiss local concerns.

Regardless of promises from Progressive Rail, or even the terms of an agreement, train freight services have extraordinary rights via federal preemption[11] and the STB,[12] which trump the desires of local communities[13]. This is one reason it is so important that the RTC recognize its obligations under the state’s California Environmental Quality Act (CEQA).

• Eagle Point, WI – Proposed Road Closure – Due to a spike in train traffic on the Wisconsin Northern Railroad (owned by Progressive Rail), Progressive Rail has pursued a petition to close a lightly-travelled town road in an effort to reduce train blockages at a rail crossing on a busy county road one mile south. The town government is opposed to Progressive Rail’s petition, which is pending before the state railroad commissioner for a decision.

Greenway Response: Again, Mr. Dondero validates our story, except there is no reference to support his claim that the road is “lightly-travelled.” In fact, Eagle Point Town Chairman Dennis Festenou specifically states in the local newspaper[14], the Leader Telegram:

“Ninety-fifth Avenue is a heavily used road…To close it is not in the interest of public safety.” (italics added)

The town government is opposed to the road closure and Progressive Rail is not yielding to local land use preferences. Progressive Rail is attempting to bypass the local government and is petitioning the state Railroad Commissioner to achieve its road closure objective. Is that what we want in Santa Cruz County?

• Lakeville, MN – Environmental Violations and Long-Term Railcar Storage – Progressive Rail and the City of Lakeville, where Progressive Rail is headquartered, have a healthy relationship. This is best evidenced by Progressive Rail seeking a conditional use permit (CUP) from the City to operate a propane distribution facility for the first time at the Lakeville transload facility. After Progressive Rail worked with City staff on developing the CUP, the city’s Planning Commission and City Council each separately approved the CUP by unanimous support in January 2018. Progressive Rail’s preferred method of operating is in collaboration with the local unit of government to reach a favorable outcome.

Greenway Response: There are clearly those in the community, as evidenced by well documented information on the Greenway website[15], that are seriously affected by Progressive’s railcar storage, movement of railcars in neighborhoods without warning, traffic delays, and general visual blight from railcars and graffiti.

Again, the bigger question is: Do Santa Cruz County residents want freight railcar traffic north of Mile 3 (Lee Rd. in Watsonville) on the Santa Cruz Branch Line?

There is no freight business north of Mile 3, yet the RTC is proposing to create it so that an out-of-town rail operator can make money.

3. “A Secretive, Biased Process”[16]

RTC Response: Nothing prohibited communications with potential proposers before the release of the formal RFP, nor did any communications give Progressive Rail (or any other proposer) any unfair advantage over any other proposer in the selection process. Progressive Rail was in contact with RTC Deputy Director Luis Mendez and Executive Director George Dondero several months prior to the issuance of an RFP as were several other rail operators during the same time. It was well known in the rail industry (and reported in our local news) that Iowa Pacific was having financial difficulties as early as 2016. We received unsolicited calls and emails from at least three other operators expressing interest in the line should Iowa Pacific depart. All three of these operators (in addition to Progressive Rail) submitted proposals in response to the RFP. Since we knew that Iowa Pacific was likely to end their relationship with us, it was prudent to stay in touch with any and all interested parties. We had informal conference calls and meetings with these parties when they expressed interest in doing so. It was an opportunity for them to learn more about the conditions and operations on the line, and an opportunity for us to informally learn more about the individuals on their respective teams prior to the more formal RFP process. We had the RFP ready to issue in December so as not to delay the procurement process, and we engaged the services of a seasoned railroad consultant with over 50 years experience in the industry to evaluate the proposals. Despite some accusations that staff has been rushing to get a new agreement signed, it has now been six months since Iowa Pacific sent us written notice that they wished to exit.

Copies of our email communications with Progressive Rail are being shown as supposed “proof” of a pre-arranged and “secretive” deal. These emails were obtained through a public information request that only asked for communications with Progressive Rail. No requests were ever made for the communications we had with any of the other rail operators we were in contact with. Looking at the complete picture, the procurement process has been lawful, cautious and fair.

Greenway Response: It is notable that Mr. Dondero does not deny the substance of A Secretive, Biased Process. Instead, he ignores the central theme of the story:

Iowa Pacific did not initiate this process,
is still the rail operator of record,
and could be until the Unified Corridors Investment Study[17] (UCIS) is complete and the RTC has voted on the overall strategic direction for transportation in Santa Cruz County.

An alternate approach that would add validity to the UCIS results rather than compromising the process:

Work with Iowa Pacific until the completion of the UCIS given that the RTC’s now chosen path has and will cost an enormous amount of money and staff time and has created an unnecessarily divisive debate within the community;
If for any reason Iowa Pacific is not able to meet its freight commitments, work with the four shippers in the city of Watsonville to identify alternative freight transportation until the completion of the UCIS. Options could include truck shipping for an interim period or contracting a rail operator to service Watsonville customers, a contract which does not have to mirror the failed Iowa Pacific relationship and can be limited to Watsonville freight shipments;
Factually explore the options provided in the existing agreements for abandonment with the Surface Transportation Board.
Pay back the state’s $10.2M Prop 116 funds or make an alternate arrangement with the CTC who has expressed a willingness to work with the RTC.

Greenway welcomes the production and public viewing of all correspondence between RTC staff/Commissioners and other rail operators during 2017 and 2018. We are not interested in cherry-picked correspondence supporting Mr. Dondero’s assertions. The RTC has failed to comply in a timely manner and still has not fully complied with the Public Records Request made by Greenway.

A similar accusation was made by Trail Now, indicating that RTC staff had violated Public Contract Code section 20216. This code does not apply to the RTC’s process to select an operator. It specifically applies to a “competitive negotiation” procurement process undertaken by specified agencies engaged in transit operations to contract for the manufacture and delivery of specified goods, transit vehicles, or equipment. Adopted in 1992, its purpose was to regulate the purchase by agencies engaged in transit operations of specialized transit equipment and apparatus (such as computers, telecommunications equipment, fare collection equipment, microwave equipment, and other related electronic equipment and apparatus, and rail cars) under laws exempting such purchases from competitive (low-bid) requirements. It has no application to this contract.

Greenway Response: See above.

4. “We Don’t Need to Hire a New Operator”[18]

RTC Response: As our legal counsel explained in a confidential memo to RTC Commissioners on January 17, 2018, “In sum, the SCCRTC has both legal and practical reasons to pursue a new operator to continue freight operations on the rail line,” and again in a letter dated June 1, 2018 to Ryan Whitelaw, a copy of which was sent to RTC Commissioners and included in the June 14, 2018 agenda packet. It reads in part:

“As is publicly available on the RTC’s website and was communicated publicly in response to questions by the Commission at its April 19, 2018, Transportation Policy Workshop (and subsequently published in the Santa Cruz Sentinel), the conditions of approval by the California Transportation Commission (“CTC”) of the use of $10,200,000 of Proposition 116 funds for purchase of the Santa Cruz Branch Rail Line require that the RTC commit to be responsible to continue freight rail service and to initiate recreational passenger rail service.

Specifically, CTC Resolution PA-10-06, which was adopted by the CTC Board at its meeting of June 30-July 1, 2010, upon the express prerequisite that the RTC meet the five conditions set forth therein[1], at Paragraph 2.1, subdivisions (3) and (4), requires that:

1. “SCCRTC commits, via a board resolution, to be responsible for initiating recreational passenger rail service, in accordance with PUC Section 99640”; and

2. “SCCRTC commits, via a board resolution, to be responsible for continuing freight rail service for as long as would be required by the Surface Transportation Board, as provided in 49 USC sections 10901, 10910 and 11347.”

CTC Resolution PA-10-06, Paragraph 2.2, further states: “in the case where SCCRTC ceases to utilize the Branch Line for the original purpose as approved by the Commission, SCCRTC commits, via a board resolution, to reimburse the State, the greater of either the amount allocated or the then present fair market value as determined by STATE.”

In light of these requirements (in addition to the subsequent commitments made by the RTC Board in accordance therewith) it cannot be reasonably argued that the RTC has not undertaken a legal commitment to continue freight service on the line, or that a decision to abandon rail service on the line would not result in potential financial liability to the RTC.”

Greenway Response: The two provisions enumerated above as items 1 & 2 are being fulfilled and would continue to be fulfilled with Iowa Pacific as the operator. The RTC board did initiate recreational passenger rail service. Freight service is being provided on the line by Iowa Pacific.

There has been no clamor for freight service north of Watsonville because no demand exists, as proven by Iowa Pacific’s quarterly freight reports to the RTC.

The CTC has indicated to the RTC in a letter to Commissioners[19] of September 8, 2015 that it “is willing to work with RTC to develop a solution to any issues affecting this transportation corridor.” The CTC has invited the RTC into a dialogue regarding the “best use of the corridor” as promised in Measure D, but the RTC has not pursued any discussions.

There are many reasons that county counsel’s legal advice to RTC staff and Commissioners is incorrect and not supported by case law. Greenway has included here its official response of June 8, 2018 to the RTC from Greenway’s legal counsel Shute, Mihaly and Weinberger LLP[20] (experts in land use and lead counsel in the recently won case Friends of the Eel River v. North County Rail Authority[21]). In it, Greenway’s attorney demonstrates that the Progressive Rail contract cannot be signed for reasons of CEQA[22], Measure D[23] commitments, and the one-sided proposed contract not in the interests of the people of Santa Cruz County.

Also important in understanding the rationale of Greenway’s counsel is the expert opinion of Albert E. Bauer, former Staff Director of the California Senate Transportation and Housing Committee from 2006 to 2012, who explains on pages 41-50 why the proposed contract with Progressive Rail cannot be signed: severe environmental impacts, the necessity to complete the UCIS, the need for an updated economic analysis regarding the need for freight service given two successive failed operators and the dramatic changes in the state and local economies, and finally the need to assess the use of the Santa Cruz Branch Line for purposes other than rail.

5. “Flawed Rail Contract”[24]

RTC Response:

a. The previous contract with Iowa Pacific is not what failed – it was the operator.

Greenway Response: We strongly disagree. This is the third contract being proposed since the RTC took control of the rail corridor (first Sierra Northern, then Iowa Pacific, and currently Progressive Rail). There is no economic justification for freight service on the line. The federal Surface Transportation Board does not require railroads to lose money and would consider a petition for abandonment according to the RTC’s own consultants. Progressive Rail’s business plan is replete with unsubstantiated revenue and railcar freight projections and shows a complete misunderstanding of the local fresh food agricultural transportation market[25]. The RTC will be making a third mistake in a row.

b. Freight service takes priority – this clause was required by the Federal Surface Transportation Board (STB). The reality is that simple coordination between freight and excursion trains will be needed. The frequency of either is not likely to create unsolvable conflicts on the line. Since Progressive would be operating both the freight and excursion trains, there should not be any issues with this coordination.

Greenway Response: Besides confirming Greenway’s point re the priority of freight service, Mr. Dondero misses the bigger point that the RTC is responsible for transportation in our county, which is in crisis. We need solutions, not enabling of an out-of-town freight rail operator that will tie up our corridor for 10 years. Additionally, proposed excursion trains do nothing to address our county’s transportation needs.

c. Trail must not interfere with Railway’s rights and operations – when the Master Plan for the trail was developed, the planning team consulted frequently with Iowa Pacific to ensure that no conflicts between trail and railway uses was being incorporated into the plan. Rail with trail projects have succeeded in many other places and we are confident it can work here as well.

Greenway’s Response: Progressive Rail is not Iowa Pacific and informal consulting does not overrule federal preemption. (See Bridgewater Township example and Sierra Club letter above.)

Greenway has a better way to move more people at a fraction of the cost. The majority of the community is not interested in a transportation corridor for people that is not designed to move pedestrians, bikes, e-bikes, e-scooters, e-boards and e-cargo vehicles safely and effectively, without the safety and health concerns posed by heavy diesel trains.

d. Graffiti control – RTC has always been responsible for removing graffiti. It has been a problem, but one that we have and will continue to manage. We now have a tracking system to record reports of graffiti, and an on-call contractor to paint it out or remove it.

Greenway’s Response: We welcome the new tracking system and note that graffiti remains a major eyesore in our community. If the entire corridor is activated as a vibrant and effective Greenway, its popularity will likely lead to a decline in graffiti and other negative activity.

e. Locomotive inspection pit on the westside of Santa Cruz – this is a carryover from Sierra Northern, an earlier operator. Progressive was quoted in the Good Times as being agreeable to removing this clause.

Greenway’s Response: Due to the due diligence of Greenway and other opponents of the proposed contract with Progressive Rail, the RTC should now get agreement to remove this clause. What would have happened without this review since the provision is in the draft agreement that the RTC is proposing to the public? We should not have to rely on in-depth reporting by the Good Times[26] to negotiate a contract of this importance.

f. Bypassing the outcome of the Unified Corridor Investment Study – the RTC is working on storm damage from last year, but no upgrades to track will be made before a decision on the future of the track is made, subsequent to completion of the Unified Corridor Investment Study.

Greenway’s Response: Notice Mr. Dondero says “no upgrades to track will be made before a decision on the future of the track is made.” Most people would assume that “working on storm damage” does not entail spending $2-3 million of taxpayer money, yet that is just what the RTC is planning to do to repair storm damage on unused tracks.

The $2-$3M in track repairs that are required by the agreement, raise the following questions:

Why would the RTC spend this amount of money when the UCIS may recommend the abandonment of the corridor at the end of the year?
Why does Stage 1 of the contract extend beyond the 3 miles of currently active freight service in Watsonville?
Does Mr. Dondero know something now about the conclusions of the UCIS that he is not sharing with the public?
Is the UCIS going to be fair and objective as promised to the public in Measure D?

g. Continued concern about Prop 116 funding requirements – Yes, the RTC does take seriously the agreements made with the California Transportation Commission. See #4 above.

Greenway’s Response: Also see #4 above. The CTC is inviting the RTC into a dialogue and there are clearly solutions to these issues, just not ones the RTC appears willing to pursue.

6. “Failure Likely But Success Could Be Worse”[27]

RTC Response:

a. Progressive Rail has an impressive history of turning around failing branch lines into success stories (including one line that had deteriorated under Iowa Pacific).

Greenway Response: Greenway prefers to use data, facts, and Progressive Rail’s own assertions. The analysis done by Greenway stands on its own and is based on the actual freight in Santa Cruz County. The Santa Cruz Branch Line is an uneconomic freight line because of changes to business in our county (closure of Cemex plant in Davenport, fresh berry and vegetable industry not being able to use rail freight services from Watsonville, etc.). Those facts are not going to change.

At the April 19th RTC meeting, Progressive Rail President/Owner Dave Fellon acknowledged that once customers switch to trucks they are unlikely to switch back to trains. Nonetheless, he claimed Progressive Rail would be successful because they have Midwest customers who want to extend their markets to California.

Fellon’s assertion raises two big questions:

Who are these customers?
Would “turning around” the Branch Line for freight bring more benefit or harm to our county?

b. A fear of new businesses coming to the county, even if not wanted, based on federal preemptions is outright fear-mongering. A business needs land on which to operate – and thus will have to comply with any local land use and environmental permitting rules in place. Whether situated in Watsonville, the County or elsewhere, any new business will have to meet local zoning and building codes. Since Progressive Rail does not own the property, it is difficult to see where any preemption could even apply.

Greenway Response: From “The Local Regulation of Interstate Railroads: What Part of “Plenary” Don’t You Understand?” by Michael N. Conneran Hanson Bridgett LLP:

With regard to almost all other potential projects that may be developed within a city’s limits (other than those of some governmental agencies protected by intergovernmental immunity), a city would normally have legal authority to exercise the land use, environmental and building regulation under its police powers. However, that power does not necessarily extend to the approval of the construction of rail lines and facilities. Under 49 USC 10501(b)(2), the STB has exclusive jurisdiction over “the construction, acquisition, operation, abandonment, or discontinuance of spur, industrial, team, switching or side tracks and facilities, even if the tracks are located, or intended to be located entirely in one State.” Citing the language of 10501(b), another court stated “[I]t is difficult to imagine a broader statement of Congress’ intent to preempt state regulatory authority over railroad operations.” (Friends of the Aquifer et al. (STB Finance Docket No. 33966, served August 15, 2001.)

It’s ironic that Mr. Dondero would assert that “it is difficult to see where any preemption could even apply.” In fact, RTC’s counsel stated in a formal letter to Greenway’s counsel that CEQA does not apply to this project because of federal preemption. RTC cannot have it both ways.

Furthermore, it’s laughable that Greenway would be charged with “fear of new businesses coming to the county” when Greenway board members are actively engaged in improving the economic health and quality of life in our region. It’s a fact that the Santa Cruz County Business Council’s Board of Directors voted unanimously for the Greenway plan in 2017, and subsequently the Business Council’s membership voted[28] 86% in favor of the Greenway plan in a confidential vote.

c. The statement that “many, if not most, of Progressive Rail’s current locations transload hazardous commodities” is contradicted by the visit to three different rail lines owned and operated by them in March of 2018. RTC Commissioner Bottorff and Executive Director George Dondero walked through several transload facilities that handled milled hardwood, coiled aluminum, cardboard, utility poles, oyster shells, and yes – propane. Propane is most safely transported by rail, and the storage and transfer facilities are highly regulated for safety under state and federal laws. A local business owner who is not affiliated with Progressive Rail has been permitted and is building a propane facility in Watsonville, with access to the RTC’s rail line.

Greenway Response: While neither Greenway nor the RTC has the precise data regarding the number and freight content of Progressive Rail’s transloading facilities, Progressive Rail’s website lists all of their transloading facilities having “pipe” capability and three out of ten with “hazmat” capabilities. The RTC should request that Progressive Rail provide the exact locations and specific freight transloaded at all its facilities prior to entering any contract.

In a March 2, 2018 memorandum to the City Manager and Watsonville City Council[29] Alan Smith, Attorney to The City of Watsonville wrote:

If the transloading of liquid natural gas in City rail corridors is subject to STB jurisdiction, some City regulation of the railroad and the transloading operation would be preempted by federal law. Federal law “categorically” (or totally) preempts certain types of state and local regulation, so that the City cannot adopt or enforce these types of regulations as applied to railroads.

Further, according to a 2015 report by The New England Center for Investigative Journalism[30], Dondero’s statement that “(railroad) transfer facilities are highly regulated for safety under state and federal laws” is simply wrong:

...when it comes to something like a transloading facility, there simply is no overarching federal permit process that applies, said Allison Fultz, an attorney with expertise representing towns in legal battles with railroads. That job, she said, has always been left to the states.

“It can be the case that every element of what the railroad wants to do makes no sense from a community-safety point of view — but they’re pre-empted,” she said.

The STB does have its own office of environmental analysis, though, and the power to require and assess environmental reviews[31]—but it generally doesn’t require them for “ancillary” facilities and can effectively prevent other state and local agencies from doing so.

Regarding the safety of propane transport through our community, we refer you to Greg Becker, who has done extensive research on the topic[32].