I think the main issue with the Milwaukee electrification was that it was (at its time state of the art) 3000V DC. If they had converted it to 25kV 60Hz, and connected the two islands, they probably would not have gone under (I know, it is speculation). Because of the higher speed, they might have been able to attract premium freight.

The difference between "government ownership" and "private ownership" is that private is (at least in USAn practice) focused on very short time spans (find me a "manager" who thinks further than the end of period determining his bonus…). Government can (and must) think long-term (yes, there are some private companies which do that too, Vinci comes to my mind). Infrastructure IS long-term.

Maybe a possibility for diesel-centric operation would be something I believe have read about already: create a double or triple unit where one part contains a diesel engine, and the other is loaded with batteries. The batteries can be used as a booster for acceleration, and they also can take up regenerative braking energy. With a smart energy management, CO2 and particulate output could be considerably reduced.