Your forgetting one thing, the Ben Gilman factor. The Influential Congressman from Middletown, and the City of Middletown, wanted the old Erie Main removed through the downtown section along Railroad Avenue. As a result there was pressure brought on Conrail to abandon the "excess" old main line, and use the Graham line. The state provided grants to up grade the trackage and signaling. One of the issues with the West of the Hudson service on the old main in the late 1970s and early 1980's was in fact lack of commuter parking, and the Graham Line, being in a more rural setting helped. As the land was available for the park and ride lots. From a two railroad town of old, the Erie and O & W, Middletown became a no railroad town, just M&NJ.
"The Ben Gilman factor."
Aha!! Just as I suspected: someone had his eyes on the ROW.
Also, if PC, then Conrail didn't know if the states were going to take over the expense of running commuter trains, they probably also wanted to make the line as unattractive for commuters as possible, to get rid of them. (A few years before, the NYS&W had offered to pay off their last few commuters if they would stop using the trains, so they could get the Public Utilities Commission to let them abandon the service. The last few riders said "Nothing doing," but a year or two later, the railroad had its way.) Back then, the states wanted no obligations to provide mass transit; just tax revenues from the "rich" railroads to spend on other things (highways, graft . . .) It was really a mass abdication of responsibility.