Potentially fatal flaws are threatening California's proposed high-speed rail system, according to a new report by a panel of "peer group" experts.

The six-member panel called for a "thorough reassessment" of key engineering, financial, economic and managerial issues, and urged agreement between the Legislature, the governor and the California High-Speed Rail Authority as to how to resolve the issues.

Major flaws include "totally inadequate" authority staffing, uncertain funding, questionable ridership assumptions, poor risk assessments and no viable business plan, the experts warned in a new report unofficially leaked to the media starting late last week.

The report, by a six-member California High-Speed Rail Peer Review Group, echoes previous findings by State Auditor Elaine Howle and the Legislative Analyst's Office and adds fresh critiques of project. The report calls on the authority to create a better business plan and do a more thorough analysis of risks.

Under the present plan, the system would stretch from San Francisco to Los Angeles by 2020 and relay passengers from the Bay Area to Southern California in less than three hours. Last week, the authority's board of directors approved a stretch between Borden and Corcoran in the Central Valley as the starting point for the line, but stressed that its objective remains a statewide system.

But the authority's business plan for an 800-mile system remains riddled with uncertainties, the report states. Among the biggest obstacles is a lack of a "business model" (different than a "business plan") that would make the system viable.

"The proposed business model for the HSR project has not received enough attention and yet is probably the critical organizing principle around which most issues will need to be resolved," the group said. Selecting a business model for the system "may be the most difficult of the decisions the Authority now faces," it said in the report.

The peer group specifically calls on the authority to decide whether high-speed rail should operate as a public entity (much like BART), as a mostly private enterprise, or as a combination.

"The Authority's actual decision must be the result of a careful balance of finances, private and public costs and benefits, and risk sharing, among other factors," the report stated, noting that neither a fully public nor a fully private model are likely. "What the group does strongly believe, though, is that the progress on the HSR system is critically dependent on action by the Authority to identify the business model option it will pursue or, at least, to start the process of selecting the preferred approach.

"It will not be possible for the group to reach a judgment on the viability of any plan or request for use of bond funding without a much better understanding of the authority's proposed business model."

The new report, like previous audits, also expresses concern about the lack of funding for the project, which has an estimated price tag of $43 billion. California voters approved a $9.95 billion bond for high-speed rail in 2008.

Will Kempton, chair of the group, wrote in the report's cover letter that building such a system would be a "daunting task under the best of circumstances" and that meeting the challenge would "require a thorough re-assessment of a number of crucial engineering, financial, economic and managerial issues, and will require agreement among the Legislature, the Governor and the Authority on what the resolution of those issues should be."

The report calls the lack of a "clear financial plan" a "critical concern." The report particularly takes issue with the rail authority's projection that it will receive between $17 billion and $19 billion in federal funding for the project. This projection, along with the authority's expectations of local and state funding, gives the financial plan an "air of unreality," the report states.

"For these reasons, the project, as of now, has only limited credibility with private investors," the report states. "The demonstration of firm public sector financial commitments will be an absolute necessity, prior to approaching sources of private capital."

The cost of the rail system could go up further, the report notes, because of community opposition, most notably on the Peninsula, where Palo Alto, Menlo Park and Atherton are suing the rail authority over its environmental study. The authority should "conduct more detailed and transparent sensitivity analyses of the impact on the expected outcomes of variations in demand, revenues, investment costs, operating costs and project timing."

"All 'mega projects' such as High-Speed Rail carry significant risk and uncertainty," the report stated. "Community opposition to the project's proposed alignment between San Francisco and San Jose, as well as the early stage of the system's overall design status (among many other issues) will cause the cost of the project to fluctuate."

The peer group also acknowledges that the rail authority remains grossly understaffed and states that its current staffing level "is inadequate to oversee a project of this magnitude, no matter what business model is ultimately chosen." It calls on state legislators to ensure that the agency has the staff necessary to manage the project because "anything less will ensure major problems of budget control, accountability, and schedule."

Jeff Barker, deputy director of the rail authority, said the agency "continues to make progress on addressing the challenges that go along with a project of this size and scope, which have been well documented in previous reports."

Barker told the Weekly in an e-mail that the authority's staff will work with the board of directors on development of a business model in the middle of 2011 and that it is moving ahead with its plans to refine the ridership projections. As part of the latter effort, the authority will create a five-member Ridership Peer Review Committee to vet the latest forecasts.

Barker acknowledged the challenge of attaining more than $11 billion in federal funding, but noted that the state has secured almost $3 billion in federal funds in less than a year.

"California has been more successful than any other state in garnering federal support for its high-speed train project, but today's report should be a wake-up call that a commitment of ongoing federal support for the project is still crucial to its future," Barker said in an e-mail.