Generally, I'm much more in favor of rail over bus service when it's feasible--it's generally faster, doesn't sit in traffic, is more attractive, the fixed-route means greater stability, and it generates more economic growth and redevelopment around stations.
That said, with limited funds, a Portland-Auburn commuter rail line sounds like a waste of money that could seriously limit rail expansion and improvements elsewhere. I'm not incredibly familiar with development and commuting patterns north of Portland, but I would be surprised to find that there is a sizable population commuting between Portland and Auburn, not to mention the rural areas in between.
This really seems like an instance in which a good commuter bus would be a better investment. And your comparison to commercial intercity buses really doesn't reflect what would likely happen here. First of all, commuter rail is not luxury; it is fairly bare bones, and that's sort of the point. Sure it's more comfortable, spacious and smoother than a bus, but it's not Amtrak. Similarly, commuter buses shouldn't be like coach buses--they should be quicker and easier to board.
I still don't think that a Portland-Auburn route would necessarily justify something like this, but the
http://www.ctfastrak.com/index.php/en/http://www.ctfastrak.com/index.php/en/ BRT being built in the Hartford area provides a good model of a bus in lieu of light rail. The bus has a dedicated track separate from traffic, and in this case, separate from any roadway. But at the end, the buses can circulate through the downtown, or branch off into other neighborhoods. Perhaps something like this could work if most of the line and stops where in Portland, perhaps along Forest Ave or something, and with some buses continuing on via I-95 to Lewiston/Auburn.
Much as this would benefit Canadian tourists and the OOB economy, I don't see it happening. Especially now that rail advocates are back in power in New Hampshire, I think it's much more likely that commuter rail will be extended to Concord from Boston. And then rail can be continued north from there to Vermont, where a high-speed train could eventually operate much more directly between Montreal and Boston.