UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

NATIONAL VEHICLE AND FUEL EMISSIONS LABORATORY

2565 PLYMOUTH ROAD

ANN ARBOR, MI  48105-2498

									     OFFICE OF

									AIR AND RADIATION

May 2, 2011

Screening Analysis:  Small Business Impacts from Revisions to Motor
Vehicle Fuel Economy Label

	The Office of Transportation and Air Quality (OTAQ) is currently
preparing a final rulemaking (FRM) that will redesign the current fuel
economy label (FE label) that is posted on the window sticker of all new
cars and trucks sold in the U.S.  The redesigned FE label will provide
new information to American consumers about the fuel economy and
consumption, fuel costs, and environmental impacts associated with
purchasing new vehicles beginning with model year 2013 cars and trucks
(and optionally for the remaining portion of the 2012 model year).  The
FRM will also include new FE labels for advanced technology vehicles
which are poised to enter the U.S. market, in particular electric
vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs).

 

	The Regulatory Flexibility Act (RFA), as amended by the Small Business
Regulatory Enforcement Fairness Act of 1996 (SBREFA), generally requires
an agency to prepare a regulatory flexibility analysis of any rule
subject to notice and comment rulemaking requirements under the
Administrative Procedures Act or any other statute unless the agency
certifies that the rule will not have a significant economic impact on a
substantial number of small entities.  This analysis is intended to
demonstrate that the impacts of the new FE label regulations on small
entities will not have a significant economic impact on a substantial
number of small entities (i.e., no “SISNOSE”).

	  SEQ CHAPTER \h \r 1 For purposes of assessing the impacts of the new
regulations on small entities, a small entity is defined as: (1) a small
business as defined by the Small Business Administration’s (SBA’s)
regulations at 13 CFR 121.201; (2) a small governmental jurisdiction
that is a government of a city, county, town, school district or special
district with a population of less than 50,000; and (3) a small
organization that is any not-for-profit enterprise which is
independently owned and operated and is not dominant in its field.

	Small governmental jurisdictions and small organizations as described
above will not be regulated by the FRM.  The main industry sector
subject to the new regulations will be car and truck manufacturers. 
Another industry sector consisting of companies that import specialized
cars and trucks into the United States (U.S.), referred to as
Independent Commercial Importers (ICIs), will also be subject to the new
regulations.  Therefore, the discussion below considers the impact on
small business car and truck manufacturers and small business ICIs.

It is important to note that calculations of burden for evaluating the
impacts of the FRM are incremental to a baseline that includes current
market factors and presumes full compliance with all existing applicable
statutory or regulatory requirements, including both federal and state
requirements.  In light of this, two additional industry sectors which
are subject to parts of the fuel economy labeling requirements have been
excluded from this analysis.  The first sector comprises of companies
that take a certified vehicle configuration and modify the vehicle
within a range specified by the vehicle manufacturer, such as stretch
limousine manufacturers or hearse manufacturers.  Under current EPA
regulations, such manufacturers may need to replace the fuel economy
label on the original vehicle if the modified vehicle weight is
increased.  The fuel economy information needed for the replacement
label is provided by the original manufacturer to the company planning
to modify the vehicle.  The second sector comprises of new car dealers. 
Under current EPA regulations, dealers are required to make available to
customers copies of the Fuel Economy Guide published annually by the
Department of Energy.  For both of these sectors, the new regulations do
not make any changes to the current requirements noted above and
therefore there is no incremental impact from the new regulations.  For
this reason, companies that modify certified vehicles, such as limousine
and hearse manufacturers, as well as new car dealers, are excluded from
the following analysis of small business impacts.

	 The following section describes the two industry sectors to which the
FRM would apply, the definition of small business for each sector, the
requirements that would apply to each sector, the number of small
businesses to which the FRM would apply, and the estimated costs and
impacts associated with the new FE label requirements.

I.  Brief Description of the Industry

	Based on Environmental Protection Agency (EPA) records, there are
approximately 25 car and truck manufacturers which have certified
vehicles for sale in the U.S. for the 2010 and 2011 model years.  During
the last 10 years, the total sales of cars and trucks for the U.S. have
generally been around 17 million cars and trucks per year.  However,
because of the recent economic downturn, sales have dropped
significantly.  In 2009, total sales were approximately 10.6 million
cars and trucks.  The car and truck market is dominated by large
businesses.  Based on U.S. sales levels for cars and trucks, the top 10
car and truck manufacturers have consistently comprised 90 percent or
more of the total market, while the remaining companies make up the
remaining roughly 10 percent.

	In addition, we have identified 11 ICIs that import cars and trucks
into the U.S.  ICIs work with customers to bring in cars from overseas
either because the owners are moving to the U.S., or because the vehicle
is not otherwise available in the U.S. (e.g., high-performance sports
cars and right-hand drive postal vehicles).  ICIs import very small
numbers of vehicles compared to total sales, with total imports of less
than 200 vehicles per year for all of the ICIs in recent years.

II.  Definition of Small Business

	For car and truck manufacturers, SBA defines a small business as one
with fewer than 1,000 employees.  For ICIs, SBA defines a small business
as one with fewer than 100 employees, or less than $7 million in annual
revenues, or less than $23 million in annual revenues depending on the
primary industry classification of the ICI.  (ICIs potentially fall
under several different types of primary industry classifications, such
as used car merchant wholesalers or automotive exhaust system repair and
replacement shops.  The criteria used by SBA to establish whether an
entity is a small business vary by the primary industry classification.)
 Furthermore, SBA defines a small business as a concern that is
organized for profit, with a place of business in the U.S., and which
operates primarily within the U.S. or makes a significant contribution
to the U.S. economy through payment of taxes or use of American
products, materials, or labor.  We have used these criteria to determine
the number of small businesses affected by the new FE label regulations
for the analysis presented in this memorandum.

III.  Current and Anticipated Regulations

	(A)  Current Requirements

	In 2006, we adopted new FE label requirements and several testing
provisions related to determining fuel economy estimates.  The FE label
adopted under the 2006 revisions required all new cars and other
personal vehicles to contain the following three pieces of core
information:  1) City and highway fuel economy, 2) how the vehicle’s
combined city/highway fuel economy compares to a range of comparable
vehicles, and 3) estimated fuel cost to operate the vehicle for a year. 
The requirement to use the new FE labels took effect in 2008 for all
manufacturers, except those that produce only electric vehicles.  In the
recent greenhouse gas rule for cars, EPA amended the regulations to
require the FE label to manufacturers producing only electric vehicles
starting in 2012.

	The new FE label requirements adopted in 2006 also directed
manufacturers to determine their fuel economy estimates for the label in
a different manner.  Instead of basing their estimates for the label on
data from 2 driving cycles, manufacturers must base their estimate on a
total of 5 driving cycles.  EPA provided flexibility through the 2010
model year to predict the 5-cycle estimates using specified equations
that are based on 2-cycle test results.  However, starting with the 2011
model year, manufacturers are required to collect actual fuel economy
data on the 5 driving cycles at the test group level.  (The requirement
to test over 5 driving cycles does not apply to alternative-fueled
vehicles, including electric vehicles.)  Manufacturers can continue
predicting 5-cycle results for vehicle models within a test group only
in cases where they can demonstrate that the actual fuel economy data
from 5-cycle testing agree with the predicted values from the 2-cycle
test results within a few percent based on the certification vehicle for
the test group.

	(B)  New Requirements

	As noted earlier, we are planning to adopt requirement for a revised
fuel economy and environmental label to be affixed to all new
automobiles sold in the U.S. starting with the 2013 model year and
optionally for the remaining portion of the 2012 model year.  The new
final fuel economy and environment labels retain many of the attributes
of the existing fuel economy label; specifically: estimated annual fuel
cost; city, highway, and combined MPG; and fuel economy relative to
other vehicles in the same class will remain on the label, although
their relative prominence is revised to create space for new features. 
Vehicles run on liquid fuels will display MPG, while vehicles run on
other fuel types will display gasoline-energy equivalent MPG (or MPGe). 
The FRM also requires fuel economy and emissions certification test
procedure and calculation methodologies for electric and plug-in hybrid
electric vehicles, essentially codifying the procedures that have been
in use under EPA’s general authority to develop procedures for
technologies not specifically discussed in the regulations.

New label features include a vehicle fuel type identifier in the upper
right corner, fuel consumption (the inverse of fuel economy), fuel
economy relative to all new vehicles (as well as within class), the
projected five-year fuel costs or savings of this vehicle compared to
the average new vehicle, and environmental ratings for smog-forming
pollutants and greenhouse gases.  The vehicle’s projected range when
fully fueled will be required on dedicated alternative fuel vehicles and
can be included at the manufacturer’s discretion on flexible fuel
vehicles.  For vehicles that use an external electricity source, charge
time at 220-240 V (or optionally at 110 V) will also be shown.   Several
features of the design of the label differ from the current labels, such
as the removal of the large image of a fuel pump, the blocking of the
label into various defined areas, and the name on the label, as well as
other design changes. 

Plug-in hybrid electric vehicle labels will reflect energy use during
operation in charge-depleting mode and, separately, in charge-sustaining
mode.  As with labels for other technologies, PHEV labels will feature a
prominent MPG or MPGe metric, as well as fuel consumption values based
on units of purchased fuel; for PHEV labels, these values will be
presented for each operating mode.  Several values on the label—fuel
costs and savings, MPGe relative to other vehicles, and the greenhouse
gas and smog ratings—will be based on assumptions of the relative use
of the two fuels, using a standard utility factor approach.  Fuel cost
and savings values, as well as MPGe relative to other PHEV labels, will
also indicate the range of the charge-depleting mode as well as the
entire range.  Finally, charge time will be displayed as on electric
vehicles.  

	Commensurate with the new FE label changes, we are also planning to
eliminate the requirement for 5-cycle testing of vehicles that would
otherwise apply for ICIs starting in 2011.  Under the FRM, ICIs would be
allowed to continue predicting their 5-cycle fuel economy estimates from
data collected over 2 driving cycles.  As noted earlier, ICIs import
very limited number of vehicles each year, with many of the vehicles
being imported for people moving to the U.S. and bringing their vehicle
with them.  Because the cost of performing testing on 5 driving cycles
is significantly higher, as described in more detail below, increasing
the cost of importing the vehicle by such a significant amount would
likely prevent most people from importing their vehicles into the U.S.
through an ICI.

IV.  Number of Small Businesses to Which the Rule Applies

	Of the car and truck manufacturers identified by EPA, five companies
meet the SBA definition of a small business.  The five small businesses
identified include Tesla, THINK Global, Wheego Electric Cars, and Azure
Dynamics Corporation, all of which produce electric vehicles, and The
Vehicle Production Group, which produces gasoline vehicles.  There are
other manufacturers that are considering selling cars in the U.S. or
have sold cars in the past in the U.S. and may meet the SBA definition
of a small business.  However, these companies are not currently
certifying vehicles with EPA.  For this reason, we have not included any
of these manufacturers as small businesses for the purpose of this
analysis.

	Of the 11 ICIs identified by EPA, all of these companies meet the SBA
definition of a small business.

 

V.  Projected Business Impacts

	(A) Estimated Costs

	Costs are expected to be incurred in several categories.  First, we
assume that revising the FE label will require some initial labor costs
for manufacturers to become familiar with the new requirements.  Second,
there will be one-time graphic design work on the part of each
manufacturer to redesign the current FE label.  Because EPA would
provide the template or high-quality images for the design, these costs
are not expected to be large.  Third, EPA is adopting new testing
requirements for EVs and PHEVs.  Finally, EPA is eliminating certain
testing requirements for ICIs.  (In the proposal for this rule, EPA
proposed FE label designs include the use of color.  However, this
provision has been dropped from the final rule and therefore we are not
projecting any additional costs associated with the use of color
printing.)

	The cost of the new fuel economy label program will be different for
each manufacturer depending on a number of factors.  The primary factors
that will impact costs are the number of vehicle test groups certified
by the manufacturer and whether the companies produce any EVs or PHEVs. 
The following section summarizes the costs of the FE label provisions
for the small businesses affected by the new program.  The inputs used
in this small business analysis are based on the cost analysis described
in the “Impacts of Label Requirements” section of the FRM (see
section VI of the preamble).

	(B)  Estimated Impacts on Small Businesses

	The five small business car and truck manufacturers identified fall
into two categories, those that produce gasoline vehicles and those that
produce EVs.  One of the small businesses certifies gasoline vehicles
and four of the small businesses certify EVs.  In all cases, the
manufacturers certify one test group with EPA.  Under the new
regulations, the manufacturers will be required to start using the new
FE label starting in 2013.  For the gasoline vehicle manufacturer, the
new requirements will only require the use of a new FE label design. 
For those manufacturers that produce EVs, the manufacturers will need to
use the new FE label design and perform testing to demonstrate the
operating characteristics of the batteries used to power the vehicle. 
However, because each of these EV manufacturers currently sell EVs in
the market, the manufacturers already perform the same type of testing
under existing Federal Trade Commission (FTC) requirements noted
earlier.  As noted earlier, the testing procedures being adopted for the
FE label rule are consistent with the requirements already in place for
the FTC hang-tag requirement.  Therefore, the new requirement being
adopted by EPA for EVs will not result in any increased testing costs
for these small business car and truck manufacturers.

	The 11 small business ICIs certify multiple test groups with EPA.  In
most cases, each vehicle is certified as its own test group because each
vehicle is a unique vehicle being imported for an individual.  The
actual number of test groups varies from year to year, depending on the
type of vehicles being imported in any given year.  Under the new
regulations, the ICIs will be required to start using the new FE label
starting in 2013.  With regard to testing, we are relaxing the testing
requirements for vehicles imported by ICIs.  As noted earlier, we are
allowing ICIs to continue using 2-cycle test results to derive the
5-cycle fuel economy estimates needed for the FE label starting in 2011.
 Without this new provision, ICIs would be required to test the each
vehicle being imported over 3 additional driving cycles.

	(i)  Label costs

The FE label changes being adopted would not affect either the existence
or size of the FE label.  Manufacturers currently have significant
flexibility in whether the FE label should be a stand-alone label or
included in the “Monroney label” (which provides information on the
price and options included for a specific vehicle), or where it is
placed on the Monroney label.  We are not making any changes to this
flexibility.

	Each manufacturer is likely to incur some startup costs associated with
the new label.  These include understanding the new requirements and
adopting the new label design.  We estimate the one-time costs of
understanding the new requirements to be no higher than $300 per
manufacturer based on an estimate of 3 hours of time required for a
professional (e.g., engineer) to carry out this task.  We estimate the
one-time costs of adopting the new label design to be no higher than
$2,400 per manufacturer based on an estimate of 24 hours of time
required for a professional (e.g., engineer) to carry out this task. 
(For the purposes of this analysis, we have used a labor rate of
approximately $50 per hour for a professional, and have included a 100%
markup for overhead.)

	Based on the numbers presented above, the total label-related costs are
estimated to be $2,700 for each of the small business car and truck
manufacturers, and also $2,700 for each of the small business ICIs.

	(ii)  Testing costs

As part of the new FE label rule, EPA is adopting test procedures for
EVs and PHEVs that will provide information required for the new FE
labels.  These are modifications of testing procedures already used for
certification of light-duty vehicles, light-duty trucks, and medium-duty
passenger vehicles.  As noted earlier, four of the small business car
and truck manufacturers currently produce EVs that must already be
tested for purposes of range determination for the FTC’s hang-tag
requirement.  The results from the testing performed to determine the
FTC range determination can also be used to satisfy the values for the
new FE label.  Therefore, we estimate that there is no incremental
testing cost for the four small business car and truck manufacturers
that produce EVs.

	We are not adopting any new testing requirements for manufacturers of
gasoline cars and trucks.  Therefore, there are no new testing costs for
the one small business manufacturer of gasoline cars and trucks.

For those manufacturers that produce EVs and PHEVs, we expect there will
be an additional one-time cost of updating information systems to
accommodate the additional testing required for these vehicles.  While
we do not believe the four small business car and truck manufacturers
that produce EVs will need to perform extra testing for their vehicles,
we are including the costs of updating their information systems to
communicate the testing results to their information system in order to
get the data to EPA and the FE label because there is no need to do that
currently.  We estimate this cost to be no higher than $24,000 for each
of the four small business car and truck manufacturers that produce EVs.
 This is based on an estimate of 6 professionals (e.g., information
technology staff) spending four weeks to update the information systems.
 (These additional costs for updating information systems would not
apply to the one small business car and truck manufacturer that produces
gasoline cars and trucks.)

	As noted earlier, we are also eliminating the requirement for 5-cycle
testing of vehicles that would otherwise apply for ICIs starting in
2011.  Under the FRM, ICIs would be allowed to continue predicting their
5-cycle fuel economy estimates from data collected over 2 driving
cycles.  During the previous FE label rule, we estimated the cost of
performing testing on the three additional driving cycles.  These three
cycles, referred to as the US06, SC03, and Cold-temperature CO, were
estimated to cost $1,860 per test, $2,206 per test, and $2,441 per test,
respectively, to perform for a vehicle.  Therefore, by eliminating the
requirement for ICIs to test imported vehicles over these three
additional driving cycles, the ICI will not be required to incur
approximately $6,500 of testing costs per vehicle imported by an ICI.

	(iii)  Total costs compared to annual sales

	Based on the information provided above, we estimate the overall costs
in the first year of the program to be $2,700 for the small business car
and truck manufacturer that produces gasoline cars and trucks and
$26,700 for those small business car and truck manufacturers that
produce EVs.  In order to evaluate those costs for the small business
car and truck manufacturers, we obtained sales/revenue information for
the small businesses.  Based on information from Hoovers (a leading
source of financial information on businesses), the small business car
and truck manufacturer that produces gasoline vehicles has annual
sales/revenue of $3.9 million per year.  For the four small business car
and truck manufacturers that produce EVs, the annual sales/revenue
ranges from $3.6 million to $110 million per year.  Therefore, the
annual cost of the new FE label provisions is estimated to be less than
1 percent of each of the seven small business car and truck
manufacturers’ annual sales/revenue.

	Based on the information provided above, we estimate the overall costs
to the 11 small business ICIs to be a net savings.  The actual savings
for each ICI will depend on the number of vehicles imported in a given
year, but even if they only import one vehicle, the overall cost will be
a net savings of approximately $3,300 (i.e., the $2,700 for labeling
costs along with the cost savings of $6,000 for reduced testing burden).
 Based on information from Hoovers, the annual sales/revenue for the
small business ICIs is estimated to range from $200,000 to $4,200,000
per year.  Because the new regulations will result in a net savings to
ICIs, the annual cost of the new FE label provisions is estimated to be
less than 1 percent of each of the small business ICIs’ annual
sales/revenues.

VI.  Summary of Impacts on Small Businesses

	The discussions presented above provide an analysis of the impacts of
the new FE label requirements on the small businesses identified by EPA.
 Given that we are projecting that all of the small business car and
truck manufacturers and all of the small business ICIs will be impacted
by less than 1 percent of annual sales/revenues, we believe we can
certify that the new FE label provisions will not have a significant
economic impact on a substantial number of small entities (i.e., no
SISNOSE).

  See 75 FR 25324, dated May 7, 2010.  See regulatory section 40 CFR
600.301-12.

  Bureau of Labor Statistics, based on “Total compensation rates”
for full-time workers, as taken from Table 11 of “Employer Costs for
Employee Compensation”, March 2010, rounded to the nearest $10. 
Available at http://www.bls.gov/news.release/pdf/ecec.pdf

  U.S. EPA, “Final Technical Support Document:  Fuel Economy Labeling
of Motor Vehicle Revisions to Improve Calculation of Fuel Economy
Estimates,” December 2006.  Available at
http://www.epa.gov/fueleconomy/regulations.htm

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