U.S. ENVIRONMENTAL PROTECTION AGENCY

OFFICE OF INSPECTOR GENERAL

Unless California Air 

Resources Board Fully 

Complies With Laws and 

Regulations, Emission 

Reductions and Human Health 

Benefits Are Unknown 

Report No. 14-R-0130 March 6, 2014 

Scan this mobile 

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about the EPA OIG. 
 

 

 

 

 

 

 

 

Report Contributors: Darren Schorer 

 Lela Wong 

Abbreviations 

CARB California Air Resources Board 

CFR Code of Federal Regulations 

DERA Diesel Emissions Reduction Act 

EPA U.S. Environmental Protection Agency 

FY Fiscal Year 

NOx Nitrogen Oxide 

NREC National Railway Equipment Company 

OIG Office of Inspector General 

OMB Office of Management and Budget 

Cover photo:	 An example of a BNSF Railway Company switch-yard locomotive located at 

the Hobart rail yard in Commerce, California. (EPA photo) 

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write:	 EPA Inspector General Hotline write: EPA Inspector General 

1200 Pennsylvania Avenue, NW 1200 Pennsylvania Avenue, NW 

Mailcode 2431T Mailcode 2410T 

Washington, DC 20460
 Washington, DC 20460 
 

 

 

U.S. Environmental Protection Agency 14-R-0130 

March 6, 2014 Office of Inspector General 

At a Glance 

Why We Did This Review 

The U.S. Environmental 

Protection Agency (EPA) Office 

of Inspector General (OIG) 

conducted this examination to 

determine whether the costs 

claimed under cooperative 

agreement 2A-00T13801 

awarded under the American 

Recovery and Reinvestment 

Act of 2009 to the California Air 

Resources Board (CARB) 

were reasonable, allowable and 

allocable in accordance with 

applicable laws, regulations, 

and cooperative agreement 

terms and conditions. The OIG 

also sought to determine 

whether cooperative agreement 

objectives were met. 

This report addresses the 

following EPA themes: 

Unless California Air Resources Board Fully 

Complies With Laws and Regulations, Emission 

Reductions and Human Health Benefits Are Unknown 

What We Found 

Our examination disclosed material weaknesses in CARB did not fully 

CARB’s compliance with laws, regulations, and the comply with the 

Energy Act and terms and conditions of the cooperative agreement. cooperative agreement Specifically, CARB did not comply with the requirements, resulting requirement of the cooperative agreement and the in potential Energy Policy Act of 2005 to scrap or remanufacture overpayment of the old engines. CARB also did not accurately report $8,866,000. 

jobs created or retained or provide actual emissions 

reduction calculations, as required under the cooperative agreement. In addition, 

CARB paid contract costs that were not in accordance with contract terms. 

CARB completed the locomotive repower according to the workplan. However, 

CARB has not demonstrated that it met the cooperative agreement objective for 

achieving significant emissions reduction as CARB did not provide actual 

emissions benefit calculations.

 Recommendations and Corrective Actions 

	 Addressing climate change 

and improving air quality. 

	 Making a visible difference 

in communities across the 

country. 

For further information, 

contact our public affairs office 

at (202) 566-2391. 

The full report is at: 

www.epa.gov/oig/reports/2014/ 

20140306-14-R-0130.pdf 

For the contract terms issue, we recommended that the Region 9 Regional 

Administrator disallow and recover ineligible costs of $94,109 claimed under the 

cooperative agreement and require CARB to establish internal controls prior to 

any future awards. In response to draft report, CARB repaid the $94,109 to the 

EPA. CARB’s contractor—BNSF Railway Company—also signed an agreement 

on November 18, 2013, to scrap or remanufacture the replaced engines. We 

recommend that the region verify that CARB and BNSF comply with the 

agreement and document the scrap or remanufacture. The region should recover 

the federal share of $8,771,891 claimed in the event CARB violates the 

November 18, 2013, agreement. 

We also made recommendations related to jobs reported as created or retained, 

developing a more accurate calculation of project results based on actual fuel 

usage, and adjusting the reporting of CARB’s project results. In response to the 

draft report, CARB submitted the job report corrections. Region 9 and CARB 

disagreed with the two recommendations relating to project results.

 Noteworthy Achievements 

CARB and the BNSF Railway Company repowered 11 locomotives instead of the 

eight required by the cooperative agreement because of cost reductions 

achieved by the manufacturer and a higher contractor contribution percentage 

than what was required under the agreement. The subcontractor also 

accomplished construction of the 11 locomotives in less than 4 months in order to 

meet the Recovery Act deadline of September 30, 2010. 
 

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

THE INSPECTOR GENERAL 

March 6, 2014 

MEMORANDUM 

SUBJECT: Unless California Air Resources Board Fully Complies with Laws and Regulations, 

Emission Reductions and Human Health Benefits Are Unknown 

 Report No. 14-R-0130 

FROM: Arthur A. Elkins Jr. 

TO:	 Jared Blumenfeld, Regional Administrator 

Region 9 

This is our report on the subject examination conducted by the Office of Inspector General (OIG) of the 

U.S. Environmental Protection Agency (EPA). This report contains findings that describe problems the 

OIG has identified and corrective actions the OIG recommends. This report represents the opinion of the 

OIG and does not necessarily represent the final EPA position. In accordance with established auditresolution procedures, EPA managers will make final determinations on matters in this report. 

Action Required 

In accordance with EPA Manual 2750, you are required to provide us your proposed management 

decision on the findings and recommendations contained in this report before you formally complete 

resolution with the recipient. Your proposed management decision is due in 120 days, or on July 7, 2014. 

To expedite the resolution process, please email an electronic version of your proposed management 

decision to adachi.robert@epa.gov. 

Your response will be posted on the OIG’s public website, along with our memorandum commenting on 

your response. Your response should be provided as an Adobe PDF file that complies with the 

accessibility requirements of Section 508 or the Rehabilitation Act of 1973, as amended. The final 

response should not contain data that you do not want to be released to the public; if your response 

contains such data, you should identify the data for redaction or removal along with corresponding 

justification. We will post this report to our website at http://www.epa.gov/oig. 

If you or your staff have any questions regarding this report, please contact Rich Eyermann, 

acting Assistant Inspector General for Audit, at (202) 566-0565 or eyermann.richard@epa.gov; 

or Robert Adachi, Product Line Director, at (415) 947-4537 or adachi.robert@epa.gov. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unless California Air Resources Board 14-R-0130 

Fully Complies With Laws and Regulations, 

Emission Reductions and Human Health Benefits Are Unknown 

Table of Contents 

Chapters 

1 Independent Accountant’s Report.................................................................... 1
 

2 Introduction ........................................................................................................ 4

 Purpose ....................................................................................................... 4 

Background ................................................................................................. 4 

 Noteworthy Achievements ........................................................................... 5 

3 Costs Claimed Were Not in Accordance With Contract Provisions.............. 6 

Costs Billed by the Contractor Exceeded Contribution Percentage ............ 6 

Conclusion................................................................................................... 8 

 Recommendations ...................................................................................... 8 

EPA and Recipient Comments .................................................................... 8 

 OIG Response ............................................................................................. 8 

4 Noncompliance With Laws, Regulations and 

Cooperative Agreement Conditions ................................................................. 9 

CARB Did Not Comply With Requirement to Scrap or Remanufacture ...... 9 

CARB Jobs Report Did Not Comply With OMB Requirements ................... 11 

Recommendations ...................................................................................... 12 

EPA and Recipient Comments ................................................................... 12 

 OIG Response ............................................................................................. 13 

5 CARB Did Not Provide Actual Emissions Reduction Calculations ............... 14 

CARB Calculated Emissions Reductions Using Estimated Fuel Usage ...... 14 

Conclusion................................................................................................... 15 

Recommendations ...................................................................................... 15 

EPA and Recipient Comments ................................................................... 16 

 OIG Response ............................................................................................. 16 

Status of Recommendations and Potential Monetary Benefits.............................. 17
 

Appendices 

A Agency’s Comments on Draft Report .............................................................. 18 

B CARB’s Comments on Draft Report ................................................................. 24 

C Distribution ......................................................................................................... 30 
 

 

Chapter 1

Independent Accountant’s Report 

As part of our oversight of assistance agreement awards made by the 

U.S. Environmental Protection Agency (EPA), the EPA’s Office of Inspector 

General (OIG) examined the costs claimed under Cooperative Agreement No. 

2A-00T13801 awarded to the California Air Resources Board (CARB). The OIG 

conducted the examination to determine whether the costs claimed under the 

cooperative agreement were reasonable, allowable and allocable in accordance 

with the Code of Federal Regulations (CFR) under 40 CFR Part 31, Uniform 

Administrative Requirements for Grants and Cooperative Agreements to State and 

Local Governments; 2 CFR Part 225, Cost Principles for State, Local, and Indian 

Tribal Governments (Office of Management and Budget Circular A-87); and the 

terms and conditions of the cooperative agreement. We also reviewed CARB’s 

accomplishment of the cooperative agreement’s objectives and compliance with 

the following American Recovery and Reinvestment Act of 2009 requirements: 

 Buy American requirement under Section 1605. 

 Davis-Bacon Act wage requirements under Section 1606. 

 Job reporting requirements under Section 1512. 

By accepting the funding provided through the cooperative agreement, CARB is 

responsible for complying with these requirements. Our responsibility is to 

express an opinion on CARB’s compliance based on our examination. 

We conducted our examination in accordance with generally accepted 

government auditing standards issued by the Comptroller General of the United 

States and the attestation standards established by the American Institute of 

Certified Public Accountants. We examined, on a test basis, evidence supporting 

management’s assertions and performed such other procedures as we considered 

necessary in the circumstances. We believe that our examination provides a 

reasonable basis for our opinion. 

We conducted our audit work between March 11, 2013, and September 25, 2013. 

We contacted representatives from the EPA’s Region 9 to gather information on 

criteria relevant to the cooperative agreement, obtain an understanding of the 

proposed project, and gather information concerning CARB’s performance. 

Specifically, we performed the following steps: 

 Reviewed the EPA’s project and cooperative agreement files. 

 Reviewed the application associated with the award. 

 Reviewed award documents, including amendments. 

 Reviewed CARB’s original and revised work plans. 

 Conducted interviews with EPA Region 9 staff. 

14-R-0130 1 
 

 

On March 11, 2013, we made a site visit to CARB’s office in 

Sacramento, California, to conduct interviews and obtain documentation 

needed to address our objectives. We performed the following steps: 

	 Reviewed recipient cooperative agreement files and interviewed recipient 

personnel to gain an understanding of the accounting system, internal 

controls, and the costs reported and work performed under the cooperative 

agreement. 

	 Reviewed CARB’s request for proposal, bids submitted, contracts and 

subcontracts. 

	 Reviewed costs claimed under the cooperative agreement to determine 

whether the costs met applicable requirements under 40 CFR Part 31, 

2 CFR Part 225, and the terms and conditions of the cooperative 

agreement. 

	 Reviewed CARB’s compliance with Recovery Act requirements. 

	 Conducted a site visit to the BNSF Railway Company’s rail yards to verify 

the existence of locomotives and completion of work in accordance with 

the work plan. 

	 Reviewed supporting documentation for reported emissions reductions. 

CARB is responsible for establishing and maintaining effective internal control 

over compliance with the requirements of 40 CFR Part 31, 2 CFR Part 225, the 

Recovery Act, and the terms and conditions of the cooperative agreement. 

In planning and performing our examination, we considered CARB’s internal 

control over compliance with the requirements listed above as a basis for 

designing our examination procedures for the purpose of expressing our opinion 

on compliance, but not for the purpose of expressing an opinion on the 

effectiveness of internal control over compliance. Accordingly, we do not express 

an opinion on the effectiveness of CARB’s internal control over compliance. 

Our consideration of internal control over compliance was for the limited purpose 

described in the preceding paragraph and was not designed to identify all 

deficiencies in internal control over compliance that might be significant 

deficiencies or material weaknesses; therefore, there can be no assurance that all 

deficiencies, significant deficiencies or material weaknesses have been identified. 

A significant deficiency is a deficiency in internal control, or combination of 

deficiencies, that adversely affects that entity’s ability to initiate, authorize, 

record, process or report data reliably in accordance with the applicable criteria or 

framework, such that there is more than a remote likelihood that a misstatement of 

the subject matter that is more than inconsequential will not be prevented or 

detected. A material weakness is a significant deficiency, or combination of 

significant deficiencies, that results in more than a remote likelihood that material 

misstatement of the subject matter will not be prevented or detected. 

14-R-0130 2 
 

 

Our examination disclosed material weaknesses in CARB’s compliance with 

laws, regulations and cooperative agreement requirements. In particular, CARB: 

 Did not comply with the requirement of the cooperative agreement and the 

Energy Policy Act to scrap or remanufacture the old engines. 

 Did not accurately report jobs created or retained. 

 Did not provide actual emissions reduction calculations. 

Our examination also disclosed a significant deficiency in internal controls that 

resulted in CARB paying contract costs that were not in accordance with contract 

terms. 

As a result of the issues noted above, we questioned the entire $8,866,000 

claimed under the cooperative agreement. In our opinion, CARB has not 

complied with the terms and conditions of cooperative agreement 2A-00T13801. 

CARB completed the locomotive repower according to the workplan. 

Specifically, CARB repowered 11 locomotives (three more than the eight required 

under the cooperative agreement) using EPA-verified technology, and the 

repowered locomotives were operating in the required area. However, CARB has 

not demonstrated that it met the cooperative agreement objective for achieving 

significant emissions reduction as CARB did not provide actual emission benefit 

calculations. 

Robert K. Adachi 

Director, Forensic Audits 

March 6, 2014 

14-R-0130 3 
 

 

Chapter 2

Introduction 

Purpose 

The EPA OIG conducted this examination to determine whether the costs claimed 

under cooperative agreement 2A-00T13801 were reasonable, allocable and 

allowable in accordance with applicable federal requirements and the terms and 

conditions of the cooperative agreement. The OIG also reviewed CARB’s 

compliance with select Recovery Act requirements and the accomplishment of 

cooperative agreement objectives. 

Background 

The Diesel Emissions Reduction Act (DERA) was signed into law in August 2005 

under Title VII, Subtitle G, of the Energy Policy Act of 2005. DERA authorized 

$200 million per year from fiscal years (FYs) 2007 through 2011 (a total of 

$1 billion). The money enabled the EPA to fund programs to achieve significant 

reductions in diesel emissions (e.g., tons of pollution produced and dieselemission exposures, particularly from fleets operating in areas designated by the 

agency as poor air quality areas). Of the authorized DERA amount, 70 percent is 

authorized for competitive national grants and low-cost revolving loans, as 

determined by the EPA Administrator. The remaining 30 percent is for state 

grants and loan programs. Congress appropriated a total of $219.1 million for the 

EPA under DERA for FYs 2008 through 2011. Congress appropriated an 

additional $300 million to the EPA in FY 2009 for DERA grants under the 

Recovery Act. 

On July 10, 2009, the EPA used Recovery Act funds to award cooperative 

agreement 2A-00T13801 to CARB under the National Clean Diesel Funding 

Assistance Program. This award authorized federal funds of $8,888,888 to 

repower eight existing switch-yard locomotives with new Tier 3 nonroad engines. 

Total project costs were $12,000,000, which included the authorized federal funds 

and the recipient’s share of $3,111,112. The project period was June 15, 2009, 

through December 31, 2010. 

CARB proposed operating the repowered locomotives within rail yards located in 

the South Coast Air Basin. The EPA designated the South Coast Air Basin as a 

particulate matter nonattainment area. CARB conducted health risk assessments 

of 18 major rail yards and determined that 90 percent or more of switch-yard 

locomotive emissions are generated in and around large rail yards in California. 

CARB also determined that switch-yard locomotives can represent at least half of 

the locomotive diesel particulate matter within and around rail yards. 

14-R-0130 4 
 

 

CARB estimates that a new locomotive engine could potentially provide up to a 

90-percent reduction in nitrogen oxide (NOx) and particulate matter emissions 

compared to an older engine. Specifically, a repowered locomotive could provide 

reductions of up to 0.045 tons per day for NOx emissions and 0.0018 tons per day 

for particulate matter emissions. A 90-percent reduction could provide substantial 

cancer and noncancer health benefits to communities in the South Coast Air 

Basin, which consists of parts of Los Angeles and San Bernardino counties and all 

of Orange County (see figure 1 below). 

 Figure 1: Map of the South Coast Air Basin 

Source: CARB website at www.arb.ca.gov/msprog/onroad/porttruck/maps/scab7map.pdf. 

Noteworthy Achievements 

CARB and BNSF repowered three locomotives in addition to the eight required 

by the cooperative agreement. In addition, the federal share of the project cost 

was $22,888 less than the authorized funding of $8,888,888. The additional 

repowered locomotives and the reduction in the federal share was because of cost 

reductions achieved by the manufacturer and because BNSF contributed funding 

in excess of the recipient’s share of 25.93 percent required by the cooperative 

agreement. The subcontractor also accomplished construction of the 

11 locomotives in less than 4 months in order to meet the Recovery Act deadline 

of September 30, 2010. 

14-R-0130 5 
 

 

Chapter 3

Costs Claimed Were Not in Accordance 

With Contract Provisions 

Our examination disclosed that CARB paid contractor costs that were not in 

compliance with contract provisions because CARB did not monitor contractor 

billings to ensure compliance. Specifically, the contractor billed costs in excess of 

CARB’s share of the total costs, which included a remote-control system that was 

not for the locomotives under the cooperative agreement. As a result, we 

questioned $94,109 of the $8,866,000 claimed under the cooperative agreement. 

Costs Billed by the Contractor Exceeded Contribution Percentage 

Costs billed by BNSF to CARB were in excess of CARB’s share of the actual 

costs incurred by BNSF’s subcontractor. The contract between CARB and BNSF 

states that CARB agreed to reimburse BNSF for actual expenditures incurred in 

accordance with the rates specified in the contract. The contract provided for a 

cost of $1,430,000 for each locomotive, based on a price quote received from the 

National Railway Equipment Company (NREC). The contract also included a 

BNSF contribution percentage that ranged from 35 to 50 percent. Specifically, 

BNSF agreed to pay 50 percent of the costs for six locomotives, 40 percent of the 

costs for one locomotive, and 35 percent of the costs for four locomotives. Based 

on these contract terms, total BNSF contribution is $6,864,000 and CARB or 

federal contribution is $8,866,000. 

Once the work started, BNSF billed CARB for costs based on invoices submitted 

by NREC for each locomotive. BNSF also billed CARB for materials that BNSF 

provided to NREC (at no cost to the subcontractor) for use in the construction of 

the locomotives. BNSF billed NREC’s costs using the contract-required 

contribution percentages. However, BNSF did not invoice CARB for the BNSFprovided materials using the contract-required contribution percentages. In 

addition, BNSF invoiced CARB for a remote-control system that was not for the 

locomotives repowered under the cooperative agreement. 

We calculated the total cost for each locomotive based on the invoices submitted 

by NREC and BNSF. We limited eligible costs for each locomotive to the 

$1,430,000 rate noted in the contract between CARB and BNSF. The federal 

share we calculated is shown in table 1. 

14-R-0130 6 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 1: OIG’s calculation of federal share 

Locomotive Total cost 

Eligible cost 

per contract 

Federal 

percentage of 

eligible costs 

Federal 

share 

1293 $1,502,111 $1,430,000 50% $715,000 

1294 1,505,807 1,430,000 50% 715,000 

1300 1,414,206 1,414,206 50% 707,103 

1301 1,415,209 1,415,209 65% 919,886 

1302 1,394,614 1,394,614 60% 836,768 

1303 1,423,281 1,423,281 65% 925,133 

1304 1,417,316 1,417,316 65% 921,255 

1305 1,414,495 1,414,495 65% 919,422 

1306 1,412,752 1,412,752 50% 706,376 

1307 1,411,838 1,411,838 50% 705,919 

1308 1,400,058 1,400,058 50% 700,029

 $15,711,687 $8,771,891 

Source: Total costs are from invoices submitted by NREC and BNSF. Federal percentages 

are from the contract between CARB and BNSF. Eligible cost per contract and the federal 

share are based on the OIG’s analysis of the data. 

The costs claimed and questioned are summarized below: 

Table 2: Summary of questioned costs 

Cost category Amount 

Total project costs a $15,711,687 

Amount claimed b 8,866,000 

Federal share based on contribution share per locomotive c 8,771,891 

Cumulative cash draw d 8,866,000

 Amount due EPA c

 $94,109 

Source: See notes below. 

a. Total project costs amount is based on invoices BNSF submitted to CARB. 

b. Amount claimed is from the final federal financial report that CARB submitted 

to the EPA under the cooperative agreement. 

c. Federal share and amount due EPA are based on the OIG’s analysis of the 

data provided by CARB. 

d. Cumulative cash draw is from EPA and CARB’s accounting records. 

CARB staff agreed with the total costs and percentages provided in table 1 above, 

but believed the intent of the contract with BNSF was to reimburse BNSF for total 

project costs without a ceiling amount for each locomotive. CARB staff said the 

rate cited in the contract refers to the contribution percentage, not the cost per 

locomotive. CARB believes the calculation for eligible costs should be based on 

the total cost of the locomotive without the $1,430,000 ceiling. 

14-R-0130 7 
 

 

 

 

Conclusion 

The OIG’s analysis determined that eligible costs for each locomotive were 

limited to the contract cost of $1,430,000 agreed to by CARB and BNSF. CARB 

staff said the intent of the contract was to apply CARB’s contribution percentage 

to the total cost of the individual locomotives, regardless of whether the cost 

exceeded $1,430,000. However, the contract does not specifically indicate that the 

rates only apply to contribution percentages. Therefore, we believe the rates in the 

contract refer to both the cost ceiling and the contribution percentage for each 

locomotive. We believe $94,109 is ineligible. 

Recommendations 

We recommend that the Region 9 Regional Administrator: 

1.	 Recover the ineligible amount of $94,109 claimed under the cooperative 

agreement from CARB. 

2.	 Require CARB to establish internal controls prior to any future awards, to 

ensure that contractor billings comply with contract terms and conditions. 

EPA and Recipient Comments 

The OIG received comments on the draft report from Region 9 and CARB, as 

shown in appendices A and B, respectively. Region 9 and CARB also provided 

supplemental documentation as support for their comments, and although not 

included in this report the supplemental documentation is available upon request. 

Region 9 agreed with the recommendations and said that it will work with CARB 

to ensure that contractor billings comply with EPA requirements and contract 

terms and conditions. CARB acknowledged that BNSF erroneously billed a 

remote control system that was not used for the locomotives repowered under the 

project. However, CARB disagreed that $94,109 of the project costs is ineligible. 

CARB said the issue is whether the contract ceiling is on each locomotive or on 

the total projects. CARB believes it should be given the discretion to determine 

the intent and interpretation of the contract provisions and managed the contract 

based on a not-to-exceed total project cost ceiling of $8,866,000. However, 

CARB acknowledges the basis for the questioned costs and the OIG’s rationale. 

OIG Response 

The OIG’s position remains unchanged. Region 9 concurred with our 

recommendations. Although CARB disagreed that the $94,109 is ineligible, 

CARB repaid the $94,109 to the EPA on January 9, 2014. We acknowledge the 

repayment and consider recommendation 1 resolved. 

14-R-0130 8 
 

 

Chapter 4

Noncompliance With Laws, Regulations 

and Cooperative Agreement Conditions 

As part of our examination, we reviewed CARB’s compliance with applicable 

laws, regulations, and terms and conditions of the cooperative agreement. 

We found that CARB and BNSF have not scrapped or remanufactured old 

engines taken from the repowered locomotives in accordance with the cooperative 

agreement and Energy Policy Act requirements because CARB allowed BNSF the 

option to ban the old engines from operating in California as an alternative to 

scrapping. CARB said it did not require BNSF to scrap or remanufacture the old 

engines because of the unique nature of locomotives. CARB also believed the ban 

option was approved by the EPA. The potential use of the old engines by BNSF 

outside of California could offset emissions reductions gained by the newer 

engines and result in no net environmental benefit being derived from the project. 

As a result, we questioned the $8,866,000 claimed under the cooperative 

agreement. Since $94,109 of the $8,866,000 claimed has already been questioned 

in chapter 3 of this report, we are only questioning here the remaining $8,771,891. 

In addition, CARB did not report jobs created or retained in accordance with 

Office of Management and Budget (OMB) guidance. CARB reported jobs created 

based on total hours expended on the project. OMB guidance requires that jobs 

funded partially with Recovery Act funds only be counted based on the proportion 

funded by the Recovery Act. During the course of the audit, CARB recalculated 

the jobs created and agreed to work with EPA Region 9 to revise the number of 

jobs reported. 

CARB Did Not Comply With Requirement to Scrap or Remanufacture 

CARB did not comply with requirements of the cooperative agreement and 

Energy Policy Act to scrap or remanufacture the older locomotive engines. CARB 

allowed BNSF the option to ban the use of the old engines in California as an 

alternative because of the unique nature of locomotives. However, this option is 

not provided for by the Energy Policy Act or the cooperative agreement. 

CARB Provided Alternative to Scrapping and/or Remanufacturing 

CARB’s contract with BNSF to repower switch-yard locomotives provided the 

option to ban or scrap older, existing engines from California operations. The 

contract states that to use the ban option, the engines must be removed from older, 

existing locomotives. The railroad company must also make sure that the original 

older engines will not operate in California. The contract does not specifically 

require remanufacturing of older engines under the ban option. 

14-R-0130 9 
 

 

In the project final report, CARB reported that BNSF retained possession of the 

engines taken from the repowered locomotives. The report states that the engines 

will be upgraded to the best possible emissions and performance standards as the 

need arises. The engines will be placed in locomotives that will be banned from 

operating in California. CARB stated that BNSF will notify CARB if an older 

engine is placed in another locomotive. CARB can then track the locomotive to 

ensure the locomotive is not observed operating in California during rail yard 

inspections, field surveys or photographic tracking. 

BNSF Requested Ban Option 

CARB staff said BNSF raised concerns about the lack of flexibility when it comes 

to provisions for the scrappage and remanufacture of older engines. BNSF 

requested that CARB provide the option to ban the engines from California, 

which is consistent with CARB’s other funding programs using incentives 

(e.g., Proposition 1B and the Carl Moyer Program). 

CARB believes that unique engine costs, the need to reuse engines for rebuilds, 

and the ability to track locomotive operations provides the basis for the option to 

ban older engines from California instead of scrapping or remanufacturing them. 

CARB staff stated that due to the cost and size of locomotive engines, the engines 

that are sent to scrap yards are typically overhauled or remanufactured. CARB 

believes that banning the engines was an acceptable scrapping method in 

accordance with the language of programmatic condition 10 of the cooperative 

agreement. 

CARB Believed EPA Region 9 Approved the Ban Option 

CARB believes that EPA Region 9 provided oral approval for the option to ban 

the locomotives and that the approval is consistent with the programmatic 

language of the cooperative agreement. CARB staff also said that the EPA had 

opportunities to review CARB’s proposed ban option in its request for proposal 

and contract with BNSF but the EPA did not question the option. 

EPA Region 9 staff did not recall approving the ban option. Region 9 staff said 

the options are well defined in the cooperative agreement and banning 

locomotives is not an option. 

Energy Policy Act and Cooperative Agreement Do Not Provide 

Ban Option 

Neither the Energy Policy Act nor the cooperative agreement allows for the 

option to ban the use of older engines as described by CARB. The Energy Policy 

Act, Title VII, subtitle G, section 793(d)(3), allows use of grant funds for certified 

engine configurations. Section 791(2) requires that in the case of an engine 

14-R-0130 10 
 

 

configuration replacing an existing engine, the replaced engine should be returned 

to the supplier for remanufacturing to a more stringent set of engine emissions or 

be designated as scrappage. Programmatic condition 10 of the cooperative 

agreement requires that the engine being replaced be scrapped within 90 days of 

the replacement or be returned to the original engine manufacture for 

remanufacturing to a cleaner standard. 

Programmatic condition 10 provides for other acceptable scrapping methods with 

EPA approval. However, the condition defines scrappage “as a permanently 

disabled engine or vehicle, no longer suitable for use.” CARB’s option to ban the 

older engines did not result in permanently disabling the engines. As explained in 

the second paragraph of the subsection “CARB Provided Alternative to Scrapping 

and/or Remanufacturing,” BNSF has not permanently disabled the engines but 

retains possession with the possibility of using the engines at a later date. 

Conclusion 

CARB and BNSF have not scrapped or remanufactured the engines taken from 

the repowered locomotives in accordance with the cooperative agreement or 

Energy Policy Act requirements. The ban option CARB allowed is not compliant 

with the Energy Policy Act or the cooperative agreement. CARB staff stated that 

the cooperative agreement did not provide a specific time frame for the 

remanufacture. In our opinion, although the cooperative agreement did not 

provide a specific time frame for remanufacturing the old engines, the cooperative 

agreement stated that to be considered a repower, the purchase of new engines 

must be accompanied by the scrappage or remanufacture of the old engines. In 

addition, the cooperative agreement states that evidence of appropriate disposal is 

required in a final assistance agreement report submitted to the EPA. We believe 

that the cooperative agreement requirements express intent to complete 

remanufacture prior to close-out of the cooperative agreement. 

In response to the audit, CARB and BNSF signed a written agreement on 

November 18, 2013, to scrap or remanufacture the 11 older locomotive engines 

within 18 months of the agreement date. If there is a delay in the scrap or 

remanufacturing process due to unforeseen circumstances, BNSF agreed to 

inform CARB in writing the reason for the delay at least 90 days prior to the end 

date of the scrap/remanufacture. BNSF may request a time extension in writing 

with the consent of all signatories. 

CARB Jobs Report Did Not Comply With OMB Requirements 

CARB incorrectly reported the number of jobs created and retained under the 

Recovery Act. Recovery Act Section 1512 requires each recipient receiving 

Recovery Act funds from a federal agency to submit a quarterly report with an 

estimate of the number of jobs created and the number of jobs retained by the 

project. OMB issued various guidance documents to implement Recovery Act 

14-R-0130 11 
 

 

 

requirements. On December 18, 2009, OMB issued guidance M-10-8 to update, 

among other things, the method for estimating the number of jobs created and 

retained. The guidance defines jobs created or retained as those jobs funded in the 

quarter by the Recovery Act. Jobs funded partially with Recovery Act funds will 

only be counted based on the proportion funded by the Recovery Act. 

CARB reported the number of jobs created using total hours NREC worked on 

the locomotives. Recovery Act funds only provided approximately 56 percent of 

the funding for the project. As a result, CARB overstated the number of jobs 

reported. CARB recalculated the jobs created and has agreed to work with the 

EPA to revise the number of jobs reported. 

Recommendations 

We recommend that the Region 9 Regional Administrator: 

3.	 Verify that CARB and BNSF scrap or remanufacture the old engines in 

accordance with the November 18, 2013, agreement. 

4.	 Require CARB to provide documentation that the replaced engines were 

scrapped or remanufactured in accordance with the November 18, 2013, 

agreement. 

5.	 Recover the federal share of $8,771,891 claimed in the event CARB does 

not scrap or remanufacture the engines in accordance with November 18, 

2013, agreement. 

6.	 Require CARB to revise the jobs reported as created or retained to reflect 

the number of jobs funded by the Recovery Act. 

EPA and Recipient Comments 

Region 9 concurred with the recommendations. CARB concurred with 

recommendation 6, but did not state whether it concurred with recommendations 

3 to 5. CARB reiterated that it was clear in its intent to allow BNSF to ban the 

engines from operation in California and that the cooperative agreement and the 

Energy Policy Act provided the flexibility to include alternatives to scrappage. In 

the draft report, we recommended that the Region 9 Regional Administrator 

require CARB to scrap or remanufacture the replaced engines in accordance with 

the Energy Policy Act and the terms and conditions of the cooperative agreement. 

In response to the recommendation, CARB and BNSF signed a written agreement 

on November 18, 2013, to scrap or remanufacture the 11 older locomotive 

engines within 18 months of the agreement date. If there is a delay in the scrap or 

remanufacturing process due to unforeseen circumstances, BNSF agreed to 

inform CARB in writing the reason for the delay at least 90 days prior to the end 

date of the scrap/remanufacture. BNSF may request a time extension in writing 

with the consent of all signatories. Region 9 and EPA headquarters support the 

14-R-0130 12 
 

 

 

agreement. Region 9 said it will continue to work with CARB to track progress. 

Region 9 said the EPA does not anticipate the need to recover $8,771,891 based 

on the terms of the agreement between CARB and BNSF. However, if BNSF 

does not properly scrap or remanufacture the locomotives in compliance with the 

terms and conditions of the agreement, Region 9 will seek to recover grant funds 

from CARB. 

To address recommendation 6, CARB provided the revised number of jobs 

created and retained and Region 9 said it is in the process of reporting revised 

numbers. 

OIG Response 

We acknowledge the November 18, 2013, written agreement from BNSF to scrap 

or remanufacture the locomotive. We agree with Region 9’s plan to track progress 

until the recommendations are fully resolved. In the event CARB or BNSF does 

not scrap or remanufacture the engines as required by the agreement, Region 9 

should recover the $8,771,891 questioned. 

Based on our research, Recovery Act Section 1512 quarterly reports for prior 

periods cannot be amended. Since CARB has submitted the revised report and 

explanations for the error, we consider recommendation 6 resolved. 

14-R-0130 13 
 

 

Chapter 5

CARB Did Not Provide Actual 

Emissions Reduction Calculations 

CARB did not provide actual emission benefit calculations as required by the 

cooperative agreement. CARB staff said emissions reductions are based on 

estimates of fuel usage because Class I railroads do not calculate or estimate 

individual locomotive fuel consumption. As a result, CARB does not have 

reasonable assurance that the repowered locomotives are achieving projected 

emissions reductions and human-health benefits. Further, DERA program results 

may be overstated or understated. 

CARB Calculated Emissions Reductions Using Estimated Fuel Usage 

For the final report, CARB calculated a range of emissions reductions for the 

repowered locomotives based on estimated annual fuel usage and EPA-certified 

emission factors for NOx and particulate matter. CARB used the emission 

calculation methodology from California’s Carl Moyer Program criteria and 

guidelines. According to Region 9, the Carl Moyer guidelines are the EPA’s 

guidelines. The Carl Moyer methodology allows emissions reductions to be 

calculated based on hours of operation, fuel consumption or miles traveled. 

CARB used the fuel-consumption method, which uses the gallons per year and 

emission factors, to determine the emissions reductions. 

CARB staff stated they used several methods to determine an annual fuelconsumption rate for switch-yard locomotive engines. For older engines, CARB 

used the hourly fuel rate and estimated annual operation hours. CARB also 

estimated annual fuel usage based on a 2004 inventory of intrastate locomotives 

and the average fuel consumed. CARB estimated fuel usage for newer switchyard locomotives using a demonstration study of a Tier 4 locomotive in the South 

Coast Air Basin. CARB also used fuel-consumption data provided by BNSF for 

switch-yard locomotives operating in Texas. Based on these data, CARB’s 

estimated fuel usage ranges from 40,000 to 50,000 gallons per year for older 

locomotives and 30,000 to 40,000 gallons per year for newer locomotives. 

For the project final report, CARB used a range of potential reductions for NOx 

and particulate matter based on the fuel usage estimates noted above. Estimated 

NOx emissions ranged from 0.047 to 0.026 tons per day. CARB’s estimated 

particulate matter emissions ranged from 0.002 to 0.0011 tons per day. The 

difference between the high end of the range and the low end represents a 

45-percent variance. Table 3 summarizes the emissions reductions calculations. 

14-R-0130 14 
 

 

 

 

Table 3: CARB’s calculation of potential emissions reductions 

High end 

of range 

Low end 

of range Variance 

Gallons per year (old engines) 50,000 40,000 

Gallons per year (new engines) 40,000 30,000 

NOx emissions (tons/day/locomotive) 0.047 0.026 45% 

Particulate emissions (tons/day) 0.002 0.0011 45% 

Source: Project final report submitted by CARB. 

The cooperative agreement was expected to provide potential reductions of 

approximately 0.045 and 0.0018 tons per day of NOx and particulate matter, 

respectively. However, as illustrated by the data provided by CARB, fuel usage 

varies significantly and the project may not achieve the emissions reduction target. 

The cooperative agreement states the recipient will include “actual” emissions 

benefit calculations in the final report. However, CARB has not required BNSF to 

provide actual fuel consumption for the 11 locomotives repowered under the 

cooperative agreement. CARB stated that Class I railroads do not calculate or 

estimate individual locomotive diesel-fuel consumption in normal operations 

because diesel-fuel consumption is normally calculated on a national basis. 

BNSF’s proposals stated that fuel records for currently operating switch 

locomotives in its rail yards are not maintained. CARB staff said it is not realistic 

to require BNSF to provide actual fuel usage, and the staff also believes that the 

use of estimates provides an adequate surrogate for actual data. 

Conclusion 

CARB calculated potential emissions reductions for the repowered locomotives 

based on estimates of fuel usage because actual fuel-usage data for individual 

locomotives is not available. CARB provided a range of emissions reductions 

based on estimated fuel usage. Unless CARB can provide actual fuel usage, the 

EPA does not have reasonable assurance that the project will achieve projected 

emissions reductions or expected environmental results and human-health benefits. 

Recommendations 

We recommend that the Region 9 Regional Administrator: 

7.	 Work with CARB to start collecting actual fuel usage data and develop a 

more accurate calculation of project results based on actual fuel usage. 

8.	 Adjust DERA program reporting of CARB project results to reflect 

recalculated results. 

14-R-0130 15 
 

 

 

 

EPA and Recipient Comments 

Region 9 and CARB disagreed with the finding and recommendations. Region 9 

said CARB provided the emission reduction calculations based on the most 

accurate data available. CARB said it followed the industry standard practice by 

using the EPA’s emission reduction calculation methodology, which relies on fuel 

consumption estimates and EPA-certified emission factors for NOx and 

particulate matter. 

Region 9 explained that the EPA’s emission quantification models used various 

assumptions to generate the emission factors for locomotive engines. Region 9 

further said that estimates, not actual or quantifiable emission, are used in the 

EPA’s engine rules as well as the tool used for quantifying the emissions reductions 

for DERA projects. Region 9 and CARB said that railroads rarely track or retain 

data on fuel use for switcher locomotives because it represents a small percentage 

of total Class I locomotive fuel use. CARB said this tracking is only done as a part 

of a funded technology demonstration project and was unavailable for the 

cooperative agreement. Region 9 said the U.S. Department of Transportation does 

not require reporting annual fuel use for each locomotive. Region 9 and CARB said 

the OIG’s recommendation is not feasible because requiring railroads to track and 

report fuel use data would be very time consuming and costly. 

CARB said it relied on fuel use estimates from multiple correlative data sources 

that represented the best available information. CARB said it sought out and 

updated that data throughout the project to ensure the emission reduction 

estimates from the project were the most accurate possible. As a result, CARB 

said it does have assurance that the repowered locomotives are, in fact, achieving 

the range of projected emission reductions and health benefits. 

OIG Response 

The OIG’s position remains unchanged. The OIG has already addressed CARB’s 

calculation methodology in the draft report. The OIG does not question the 

emission reduction calculation methodology or the use of estimated emission 

factors for NOx or particulate matter. Our issue is the use of estimated, rather than 

actual, fuel usage. We acknowledge that actual usage data does not currently exist 

and collecting actual usage data may be costly. However, “actual” emissions 

benefit calculations is expressly required under the cooperative agreement and 

BNSF can collect this data. It collected this data for the locomotives operating in 

Texas. While CARB stated that it has assurance that the repowered locomotives 

are achieving the range of projected reduction and health benefits. However, the 

range varies significantly. The variance between the high end and low end of the 

range is approximately 45 percent. Unless CARB can provide actual fuel usage, 

the EPA and the public do not have reasonable assurance that the project will 

achieve projected emissions reductions or expected environmental results and 

human-health benefits. 

14-R-0130 16 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Status of Recommendations and 

Potential Monetary Benefits 

POTENTIAL MONETARY 

RECOMMENDATIONS BENEFITS (in $000s) 

Planned 

Rec. 

No. 

Page 

No. Subject Status1 Action Official 

Completion 

Date 

Claimed 

Amount 

Agreed-To 

Amount 

1 8 Recover the ineligible amount of $94,109 claimed 

under the cooperative agreement from CARB. 

C Region 9 

Regional Administrator 

12/31/13 $94 $94 

2 8 Require CARB to establish internal controls prior to 

any future awards, to ensure that contractor billings 

comply with contract terms and conditions. 

U Region 9 

Regional Administrator 

3 12 Verify that CARB and BNSF scrap or 

remanufacture the old engines in accordance with 

the November 18, 2013, agreement. 

O Region 9 

Regional Administrator 

5/18/15 

4 12 Require CARB to provide documentation that the 

replaced engines were scrapped or 

remanufactured in accordance with the 

O Region 9 

Regional Administrator 

5/18/15 

November 18, 2013, agreement. 

5 12 Recover the federal share of $8,771,891 claimed in 

the event CARB does not scrap or remanufacture 

the engines in accordance with the November 18, 

2013, agreement. 

O Region 9 

Regional Administrator 

5/18/15 $8,772 

6 12 Require CARB to revise the jobs reported as 

created or retained to reflect the number of jobs 

funded by the Recovery Act. 

C Region 9 

Regional Administrator 

12/31/13 

7 15 Work with CARB to start collecting actual fuel 

usage data and develop a more accurate 

calculation of project results based on actual fuel 

U Region 9 

Regional Administrator 

usage. 

8 15 Adjust DERA program reporting of CARB project 

results to reflect recalculated results. 

U Region 9 

Regional Administrator 

O = Recommendation is open with agreed-to corrective actions pending.
 

C = Recommendation is closed with all agreed-to actions completed.
 

U = Recommendation is unresolved with resolution efforts in progress.
 

14-R-0130 17 

1 
 

 

Appendix A 

Agency’s Comments on Draft Report 

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

REGION 9 

75 Hawthorne Street 

San Francisco, CA 94105 

December 9, 2013 

MEMORANDUM 

SUBJECT: Response to Office of Inspector General draft report Project No. OA-FY13-0210 

“Weaknesses Disclosed in California Air Resource Board’s Compliance with 

Laws, Regulations and Recovery Act Requirements,” September 25, 2013 

FROM: Thomas McCullough 

Assistant Regional Administrator 

TO: Robert Adachi 

Director, Forensic Audits 

Office of the Inspector General 

Thank you for the opportunity to respond to the issues and recommendations in the subject audit 

report. Following is a summary of the Environmental Protection Agency Region 9’s (Region 9) 

overall position, along with our position on each of the report recommendations. For those 

recommendations with which Region 9 agrees, we have provided high-level intended corrective 

actions and estimated completion dates to the extent we can. For those report recommendations 

with which Region 9 does not agree, we have explained our position and proposed alternatives to 

the recommendations. For your consideration, we have included a Technical and Substantive 

Comments Attachment 1 to supplement this response. 

EPA REGION 9’S OVERALL POSITION 

Region 9 shares your interest in ensuring we protect the integrity of our cooperative agreements 

as we achieve environmental goals. We agree with most of the draft report recommendations, 

and have noted the two recommendations with which we disagree. In addition, we have general 

comments and recommended changes which are noted in the Technical and Substantive 

Comments Attachment. For example, we propose the report title be revised with more neutral 

wording to more accurately reflect the findings in the context of the positive results achieved. 

We have moved forward to undertake many of the recommendations raised in your report, as 

outlined below, and look forward to addressing and resolving other report recommendations. 

14-R-0130 18 
 

 

 

AGENCY’S RESPONSE TO REPORT RECOMMENDATIONS 

Agreements 

No. Recommendation High-Level Intended Corrective Actions Estimated 

Completion 

1 Recover the ineligible 

amount of $94,109 

claimed under the 

cooperative agreement 

Region 9 agrees with this recommendation and is 

working with the California Air Resources Board 

(CARB) to return $94,109, or the full amount of the 

ineligible funds. However, minor inaccuracies exist 

in this section of the report (see the Technical and 

Substantive Comments Attachment for rewording 

suggestions). 

1st

 Quarter 

FY14 

2 Require CalARB to 

establish internal controls 

prior to any future awards, 

to ensure that contract 

billings comply with 

contract terms and 

conditions. 

Region 9 agrees with this recommendation and 

will work with CARB to ensure adequate internal 

controls are put in place to ensure billing meets 

EPA’s requirements and terms and conditions. 

2nd

 Quarter 

FY14 

3 Require CalARB to scrap 

or remanufacture the 

replaced engines in 

accordance with the 

Energy Policy Act and the 

terms and conditions of 

the cooperative 

agreement. 

Region 9 agrees with this recommendation. On 

November 18, 2013, EPA Region 9 received an 

executed Closeout Agreement between CARB and 

Burlington Northern Santa Fe (BNSF) which 

details BNSF’s plan to scrap and/or remanufacture 

all of the 11 old locomotive engines (see 

Attachment 2 Closeout Agreement between CARB 

and BNSF). EPA Region 9 and Headquarters staff 

supports this Agreement and will continue to work 

with CARB to track progress. 

3rd

 Quarter 

FY15 or no 

later than 

May 18, 

2015 

4 Require CalARB to 

provide documentation 

that the replaced engines 

were scrapped or 

remanufactured. 

See response to Recommendation 3 above. The 

Agreement between CARB and BNSF contains a 

provision which states that CARB will meet the 

requirements of Programmatic term and condition 

P.10 (Scrappage and/or Remanufacture 

requirement). Region 9 will work with CARB to 

ensure that proper scrapping and/or 

remanufacturing of the eleven locomotives occurs. 

3rd

 Quarter 

FY15 or no 

later than 

May 18, 

2015 

5 Recover $8,771,891 of the 

remaining total federal 

share of the claimed 

costs, unless CalARB 

complies with the 

scrappage requirements. 

Region 9 and Headquarters do not anticipate that 

they will need to recover $8,771,891 based on the 

terms of the Closeout Agreement referenced 

above. However, if BNSF does not properly scrap 

and/or remanufacture the engines pursuant to the 

terms of the aforementioned Agreement, Region 9 

will seek to recover grant funds from CARB. 

3rd

 Quarter 

FY15 or no 

later than 

May 18, 

2015 

6 Require CalARB to revise 

the jobs reported as 

created or retained to 

reflect the number of jobs 

funded by the Recovery 

Act. 

Region 9 agrees with this recommendation. It 

should be noted that CARB has provided the 

revised jobs created and/or retained and Region 9 

is in the process of reporting such. 

1st

 Quarter 

FY14 

14-R-0130 19 
 

 

Disagreements 

No. Recommendation Agency Explanation/ Response Proposed 

Alternative 

7 Work with CalARB to 

develop a more accurate 

calculation of project 

results based on actual 

fuel usage. 

Region 9 and Headquarters do not agree with 

Chapter 5 since CARB provided the most accurate 

emission reductions. Additional information, 

including the industry standards for reporting these 

types of results, is provided in the Technical and 

Substantive Comments Attachment. 

Delete 

Chapter 5. 

8 Adjust DERA program 

reporting of CalARB 

project results to reflect 

recalculated results. 

As mentioned above, Region 9 and Headquarters 

do not agree with Chapter 5 since CARB provided 

the most accurate emission reductions. Additional 

information is provided in the Technical and 

Substantive Comments Attachment. 

Delete 

Chapter 5. 

CONTACT INFORMATION 

If you have any questions regarding this response, please contact Ben Machol, Manager, Clean 

Energy and Climate Change Office, Air Division at (415) 972-3770 or Machol.Ben@EPA.gov. 

Attachment 1: Technical and Substantive Comments 

Attachment 2: Closeout Agreement with CARB and BNSF 

cc: 

Deborah Jordan, Director, Air Division, U.S. EPA Region 9 

Ben Machol, Manager, Clean Energy and Climate Change Office, Air Division, U.S. EPA 

Region 9 

Jack Kitowski 

Assistant Chief, Stationary Source Division 

CA Air Resources Board 

1001 I Street 

PO Box 2815 

Sacramento, CA 95812 

Trina Martynowicz, Environmental Protection Specialist, Air-9, Region 9 

Penelope McDaniel, Environmental Protection Specialist, Air-9, Region 9 

Marie Ortesi, Team Lead, Audit Follow-up, MTSD-4-2, Region 9 

Magdalen Mak, Audit Follow-up Coordinator, MTSD-4-2, Region 9 

Lela Wong, Auditor, OIG 

14-R-0130 20 
 

 

Attachment 1: Technical and Substantive Comments 

Response to Office of Inspector General (IG) Draft Report Project No. OA-FY13-

0210 “Weaknesses Disclosed in California Air Resource Board’s Compliance with 

Laws, Regulations and Recovery Act Requirements,” September 25, 2013 

EPA Region 9 and Headquarters are providing the following technical and substantive 

corrections to the IG draft report: 

1.	 The project number is incorrectly referenced as “QA-FY13-0210” on the title page of the 

report and should be changed to “OA-FY13-0210.” 

2.	 The title of the report should be revised with more neutral wording to better reflect the 

findings in the context of the positive results achieved, for example: “Examination of the 

California Air Resource Board’s Compliance with Laws, Regulations and Recovery Act 

Requirements.” 

3.	 A more common acronym for the California Air Resources Board is “CARB,” not 

CalARB, therefore “CalARB” should be revised throughout the report to “CARB.” 

4.	 All sections of the report that discuss scrapping or remanufacturing the old locomotive 

engines should be revised to state “scrapping and/or remanufacturing,” since Burlington 

Northern Santa Fe Railway Company (BNSF) may choose to undertake either or both of 

these activities. 

5.	 CARB’s original workplan included repowering eight locomotives, as mentioned in the 

draft report. EPA recommends the IG include additional language to accurately highlight 

these significant achievements. For example, in Chapter 2’s Noteworthy Achievements, 

the following language should be added: “Because BNSF repowered three additional 

locomotives, significant air quality benefits were achieved by these emission reductions. 

The communities surrounding these rail yards will experience improved air quality due to 

the achievements by CARB, BNSF, and the engine manufacturer.” 

6.	 The final sentence in the third paragraph on page 6 of the report should list the correct 

funding amount that will be returned so that it reads: “CARB agreed with our issue on the 

remote-control system and is currently working with Region 9 to refund to the EPA the 

over-billed amount of $94,109.” 

7.	 On the top of page 8 of the report, the final sentence of the first paragraph should be 

changed to: “However, CARB has agreed to return the full ineligible amount of 

$94,109.” 

8.	 Under Recommendation number 1 on page 8 of the report, the IG recommends that the 

Region 9 Regional Administrator recover the ineligible amount of $94,109 claimed under 

the cooperative agreement. EPA Region 9 suggests adding the following information in 

response to that recommendation: “CARB agrees with this recommendation and will 

return the full ineligible amount of $94,109 to EPA Region 9.” 

14-R-0130 21 
 

 

 

9.	 Under Recommendation number 3 on page 12 of the report, the IG recommends that the 

Regional Administrator require CARB to scrap or remanufacture the replaced engines in 

accordance with the Energy Policy Act and the terms and conditions of the cooperative 

agreement. On November 18, 2013, EPA Region 9 received an executed Closeout 

Agreement between CARB and BNSF which details BNSF’s plan to scrap and/or 

remanufacture all of the 11 old locomotive engines (see Attachment 2 Closeout 

Agreement with CARB and BNSF.) EPA Region 9 and Headquarters support this 

agreement, and will continue to work with CARB to track progress to ensure that the 

terms and conditions of the cooperative agreement are met. If BNSF decides to 

remanufacture any locomotive engine BNSF will meet EPA’s standards for 

remanufactured engines. The final IG report should make note of the Closeout 

Agreement. In addition, Region 9 recommends that item number 3 on page 12 of the 

report be revised to read as follows: “The replaced engines will be scrapped and/or 

remanufactured pursuant to the terms delineated in the November 18, 2013 Closeout 

Agreement between CARB and BNSF.” EPA Region 9 and Headquarters has highly 

encouraged the old engines to be scrapped and/or remanufactured within one year of the 

signed date of this Agreement, though Region 9 agreed to allow these activities to occur 

within 18 months, or before May 18, 2015. 

10. Under Recommendation numbers 7 and 8 on page 14 of the report, the IG recommends 

that EPA work with CARB to develop a more accurate calculation of project results 

based on actual fuel usage and adjust the DERA program reporting to reflect these 

recalculated results. EPA Region 9 and Headquarters disagrees with the IG’s 

recommendations and fully supports CARB’s emission reduction calculation 

methodology, which is based on the most accurate and available information. CARB 

regularly updates their methodology and calculations for emission reductions and has 

extensive experience calculating emission reductions from in-use and currently operating 

locomotives. CARB provides approximately $90 million annually in grants for diesel 

emission reductions activities through their Carl Moyer Program, including switcher 

locomotives, similar to EPA’s DERA program and this specific cooperative agreement.1 

Therefore, CARB has a strong need to and has extensive past experience in accurately 

calculate emission reductions from diesel projects. Additional information on the way in 

which EPA and CARB calculate overall emission reductions, as well as typical industry 

practice for quantifying fuel use are provided below. 

EPA’s emission quantification models, including those used for setting emission 

standards for manufacturing locomotive engines, use various assumptions to generate the 

emission factors. Estimates, not actual or quantifiable emissions are used in EPA’s engine 

rules, as well as EPA’s Diesel Emission Quantifier (DEQ), the tool used for quantifying 

the emission reductions for Diesel Emission Reduction Act (DERA) projects. As the 

DEQ website states, this tool provides estimates of, not actual emission reductions.2 

1 CARB’s “Carl Moyer Memorial Air Quality Standards Attainment Program,” 

http://www.arb.ca.gov/msprog/moyer/moyer.htm. 2

 EPA Nation Clean Diesel Campaign’s “Diesel Emission Quantifier,” 

http://www.epa.gov/cleandiesel/quantifier/. 

14-R-0130 22 
 

 

 

 

Because switcher locomotives represent such a small percent of the Class 1 locomotive 

fleet’s fuel use and the cost to maintain such records is so high, the railroads rarely track 

or retain this data. Therefore, fuel usage estimates are used to quantify emission 

reductions. EPA’s methodology for calculating emission reductions describes how the 

agency generates estimated, but never actual emission rates.3 

The common Class 1 railroad practice of tracking and reporting fuel usage differs greatly 

from other DERA recipients, such as long-haul truck or school bus fleets. Railroad 

companies do not track nor regularly quantify the actual fuel consumed for each 

locomotive. Unlike diesel-fueled trucks or school buses that fuel at a specific fueling 

station owned by a third party, railroads have their own fueling stations located at the rail 

yard for both switcher and line-haul locomotives. 

Department of Transportation’s (DOT) Surface Transportation Board requires all Class 1 

railroads to report quarterly and annual fuel use for both switcher locomotives, which this 

cooperative agreement funded, as well as line-haul locomotives.4

 DOT does not mandate 

reporting annual fuel use for each locomotive. BNSF switcher locomotives only 

consumed approximately 3.5% of the total fuel used for all BNSF locomotives in 2012.5 

Railroads purchase their fuel in bulk and quantify the amount of fuel used for all 

locomotives, hardly ever for an individual locomotive. In addition, it is not common 

industry practice for Class 1 railroads to monitor fuel consumption on a data log for a 

given switcher locomotive due to the high cost of tracking, monitoring and reporting. 

Meeting the IG’s recommendation is not feasible. Requiring railroads to track and report 

fuel use data would be very time consuming and costly and seen as a heavy 

administrative burden for the old dirtier and/or new cleaner locomotives. Based on 

common industry practices and the way in which EPA quantifies emission factors for 

engines used in locomotives, CARB provided emission reduction calculations that are 

acceptable. EPA Region 9 and Headquarters believes the emission reductions CARB 

provided are the most accurate and available, therefore Chapter 5 of this draft report 

should be deleted altogether. If the IG does not agree with Region 9’s conclusion to 

delete this section of the report, the Region will work with the IG to provide changes to 

ensure the accuracy of this chapter. 

3

 EPA Office of Transportation and Air Quality’s “Emission Factors for Locomotives,” April 2009, 

http://www.epa.gov/otaq/regs/nonroad/locomotv/420f09025.pdf. 4

 DOT Surface Transportation Board’s “Annual Reports R-1 Selected Schedules and Complete 

Annual Reports,” http://www.stb.dot.gov/stb/industry/econ_reports.html. 5

 BNSF’s “Class I Railroad Annual Report Restatement To The Surface Transportation Board 

For the Year Ending December 31, 2012,” Page 91 “750. Consumption of Diesel Fuel,”
 

http://www.bnsf.com/about-bnsf/financial-information/surface-transportation-boardreports/pdf/12R1.pdf. 

14-R-0130 23 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix B 

CARB’s Comments on Draft Report 

Air Resources Board
 

Mary D. Nichols, Chairman 

1001 I Street • P.O. Box 2815 

Matthew Rodriquez Sacramento, California 95812 • www.arb.ca.gov Edmund G. Brown Jr. 

Secretary for Governor 

Environmental Protection 

November 25, 2013 

Mr. Robert Adachi
 

Director, Forensic Audits
 

U.S. Environmental Protection Agency
 

Office of the Inspector General
 

75 Hawthorne Street
 

y!h Floor, M/C IGA-1
 

San Francisco, California 94105
 

Dear Mr. Adachi: 

The Air Resources Board (ARB) is documenting the actions we have taken to resolve 

the issues raised in the draft findings and recommendations of the U.S. Environmental 

Protection Agency (U.S. EPA) Office of Inspector General (OIG) audit report number 

OA-FY13-0210. The OIG audit covers the American Recovery and Reinvestment Act 

(ARRA) project award of $8.88 million to ARB under cooperative agreement 

2A-OOT13801. The project achieved its objective to cut air pollution and health risk near 

railyards in Southern California through incentives for BNSF Railway to replace old 

locomotive engines with cleaner models. 

Although we do not concur with the majority of the OIG conclusions, we appreciate that 

the discussion in the draft report accurately characterizes the information we provided to 

the auditors. ARB has addressed all of the issues raised by the OIG during the course 

of this audit. This letter provides documentation and our commitment to follow through 

with U.S. EPA to ensure the OIG concerns are fully resolved. I would like to specifically 

highlight an edit we are requesting to the title of the draft audit report to be more 

consistent with other published OIG reports- replacing "Weakness Disclosed in... " with 

"Examination of..." in the title. Thank you for considering this edit. In addition to this 

letter, please find copies of the following supporting documents enclosed: 

• Background and ARB's responses to each of the draft findings of the OIG audit. 

•	 The signed legal agreement between BNSF and ARB that requires BNSF to scrap or 

remanufacture eleven older BNSF locomotive engines by May 18, 2013. 

• Documentation of payment to ARB of $94,109 by BNSF on November 18, 2013. 

• ARB letter to U.S. EPA Region 9 addressing several audit issues. 

•	 The U.S. EPA OIG draft audit report with ARB's suggested updates and factual
 

corrections identified in redline/strikeout format. 

• ARB's signed management representation letter. 

14-R-0130 24 
 

 

 

Mr. Robert Adachi, Director 

November 25, 2013 

Page 2 

We remain convinced that the ARRA co-funded replacement of old engines with new 

genset models in eleven locomotives was a successful, cost-effective project with 

on-time delivery that continues to produce real emission reductions for communities 

near Southern California railyards. 

ARB appreciates the opportunity to provide the U.S. EPA OIG auditor with written 

responses to the draft audit. If you have any questions, please contact 

Mr. Jack Kitowski, Assistant Chief, Stationary Source Division at (916) 445-6102 or 

jkitowsk@arb.ca.gov. 

Sincerely, 

/\ ti), 

Richard W. Corey 

Executive Officer 

Enclosures 

cc: Ms. Lela Wong, CPA, CFE 

Project Manager, Office of Inspector General 

U.S. Environmental Protection Agency 

75 Hawthorne Street 

San Francisco, California 94105 

Ms. Deborah Jordan, Director
 

Air Division, Region 9
 

U.S. Environmental Protection Agency 

75 Hawthorne Street 

San Francisco, California 94105 

Mr. Jack Kitowski
 

Assistant Chief
 

Stationary Source Division
 

14-R-0130 25 
 

 

 

 

 

 

 

RESPONSES TO DRAFT FINDINGS
 

I. BACKGROUND 

On July 10, 2009, U.S. EPA awarded ARB $8.88 million in ARRA funding under cooperative 

agreement 2A-00T13801. The OIG audit project number is OA-FY13-0210. The purpose of 

the ARRA award was to cut railyard locomotive emissions in the Basin through the repower or 

replacement of old engines in eight (8) switch locomotives with much cleaner engines using 

“genset” technology. 

Genset switch locomotives, with the required use of ARB diesel, can reduce older 

switch locomotive diesel particulate matter (PM) and oxides of nitrogen (NOx) emissions by 

up to 90 percent, and significantly reduce the associated cancer risks, in and around California 

railyards. 

On October 1, 2009, ARB released a Request for Proposal (RFP) for qualifying 

railroads in the Basin to compete for the ARRA funding. ARB received two proposals in 

response to the ARB ARRA RFP from California’s two Class I railroads – BNSF and Union 

Pacific Railroad (UP). 

ARB awarded the project to BNSF at a total project cost of $15.73 million. BNSF matched 

$8.87 million of ARRA funds, which was less than the U.S. EPA ARRA award of $8.88M, 

with $6.86 million in private funding and proposed to repower a total of eleven locomotives 

because of a lower per locomotive cost estimate from the genset locomotive manufacturer 

National Railway Equipment Company (NREC). 

This project successfully repowered eleven locomotives by the ARRA project deadline of 

September 30, 2010, delivering significant health benefits from day one. This was 

accomplished by BNSF and NREC prioritizing and completing the genset switch locomotive 

production, testing, and delivery within three months – a process that normally takes 12 to 18 

months. We understand that this accomplishment makes the project part of the five percent 

of all ARRA projects nationwide that were completed on time. 

II. ARB RESPONSES TO DRAFT OIG REPORT ITEMS 

A. Chapter 3: Costs Claimed Were Not in Accordance With Contract Provisions 

1. Summary. The OIG identified two specific issues relating to the contractor’s 

billings. The first issue is the contractor’s erroneous billing of a locomotive control system. 

The second issue is whether or not the project billing is subject to a per locomotive cost cap, 

or a total project cost cap, for federal funding. When taken together, these issues result in the 

OIG recommendation that U.S.EPA Region 9 recover an ineligible amount of $94,109. While 

ARB disagrees with the OIG’s conclusion that $94,109 of project cost is ineligible, we 

acknowledge the basis for the OIG’s rationale. We have invoiced and received payment from 

BNSF for the full amount of $94,109 (see enclosed). 

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2. Discussion. ARB concurs that BNSF erroneously invoiced ARB for a remote 

control system that was not used for the genset switch locomotives repowered under the 

ARRA-funded project. This issue was acknowledged early in our discussions with U.S. EPA 

Region 9 and the OIG. The second issue focused on whether or not the provisions within the 

ARB/BNSF contract applied a “per locomotive” cost cap or a “total project” cost cap for the 

federal share. While ARB is clearly in compliance with the U.S. EPA terms and conditions, 

the difference comes in the interpretation of the ARB/BNSF contract. ARB believes it should 

be given discretion as to the intent and interpretation of the ARB BNSF contract provisions. 

As discussed in the draft audit report, ARB staff managed the ARB/BNSF contract based 

on a not-to-exceed “total project” cost cap of $8,866,000, and specific per locomotive 

cost share percentages. 

ARB staff and BNSF regarded the reference in the contract to $1.43 million per genset switch 

locomotive to be an estimate, with the understanding that each genset locomotive would have 

unique design or mechanical differences (e.g., different number of traction motors, need for 

Remote Control Locomotive (RCL) devices, etc.) that would result in differences in actual 

costs. Thus, the total cost for each of the eleven genset switch locomotives would “average” 

about $1.43 million, but the ARRA contribution in total could not exceed $8,866,000. 

The $1.43 million per locomotive cost was clearly identified as an estimate in the 

April 2009 ARB ARRA application and in the October 2009 BNSF proposal provided in 

response to the ARB RFP. However, the tables in the ARB/BNSF contract did not include the 

word “estimate,” which led the OIG to conclude that there was a $1.43 million per locomotive 

cap. 

Based on the OIG auditor’s interpretation that a per locomotive cost cap applies, ARB staff 

agrees that there is a difference of $94,109, as compared to allowing a federal share of total 

projects costs of up to $8.866 million. To implement the OIG auditor’s interpretation, ARB 

staff sent an invoice to BNSF for the full $94,109 difference on October 18, 2013. 

We would like to note, however, that ARB previously denied BNSF’s requests for 

consideration of other eligible costs for nine of the genset switch locomotives with costs below 

$1.43 million each. The other eligible costs that were incurred by BNSF during the project 

were for locomotive paint and transportation. ARB denied BNSF’s request for consideration 

of these other eligible costs because, at that time, those costs would have exceeded the total 

project cost share cap of $8.87 million. Had the project expenditures been tracked and 

approved based on a per locomotive cap, these other eligible expenses would have more than 

offset the $94,109. U.S. EPA Region 9 has informed us that since the project file is closed, 

there is no longer opportunity to provide additional documentation of these other eligible costs. 

B. Chapter 4: Noncompliance With Laws, Regulations and Cooperative 

Agreement Conditions 

1. Summary. The first issue is related to the requirement in the agreement 

between U.S. EPA and ARB that the old locomotive engines be scrapped, remanufactured, or 

14-R-0130 27 
 

 

 

 

 

 

 

 

 

 

 

an alternative approved by U.S. EPA. The second issue is related to the scope of the job 

creation estimates required by ARRA. 

As to the first issue, ARB was clear and transparent in its intent to allow BNSF to ban the old 

engines from operation in California as an alternative to scrappage, consistent with ARB’s 

approach on State incentive programs. This was premised on our mistaken belief that U.S. 

EPA staff supported the approach. We acknowledge that we should have put our approach in 

writing and requested written U.S. EPA approval to be certain all parties had the same 

understanding. ARB and BNSF have since signed a legal agreement that requires BNSF to 

scrap or remanufacture the old engines within 18 months to address the draft finding in the 

audit. 

On the second issue, ARB concurs that the job creation estimates provided by BNSF and 

reported by ARB inadvertently included all of the job creation benefits associated with the 

project, rather than the prorated benefits attributable to only the federally- funded portion of 

the project cost. ARB has reported the corrected numbers to U.S. EPA. 

2. Discussion. The draft OIG report questions ARB’s compliance with the terms 

and conditions of the ARRA cooperative agreement related to the scrap or remanufacture of the 

older locomotive engines. While the language of the cooperative agreement and the Energy 

Policy Act provides for the flexibility to include alternatives to scrappage, the OIG disagrees 

that the option to ban the older locomotive engines from operations in California is allowed 

under this flexibility. 

As documented by the OIG report, ARB included the ban option based on a verbal discussion 

with U.S. EPA Region 9 staff, after which ARB staff had the impression the ban option was 

acceptable. ARB was transparent about this approach – the ban option was clearly stated in 

the RFP for the project, and in the contract with BNSF. Both of these documents were 

provided to Region 9 staff for advance review, but no issues were raised about allowing this 

option. 

However, the OIG has clarified that even if U.S. EPA had provided formal approval, the ban 

option was not allowed under the Energy Policy Act, and would still have been subject to an 

audit finding. 

In response to this issue, ARB and BNSF have signed a written agreement committing BNSF 

to scrap or remanufacture the eleven older locomotive engines within 18 months. A copy of the 

agreement is attached to this letter. ARB has also forwarded a copy of the signed agreement to 

U.S. EPA Region 9. When BNSF completes the scrap and/or remanufacture, ARB will 

forward the appropriate documentation to U.S. EPA to demonstrate compliance. 

For the second issue in Chapter 4, the updated estimates of the jobs created by the ARRA 

funded portion of the project were relayed to U.S. EPA Region 9 and are included in this 

package. The enclosed letter to U.S. EPA Region 9 documents ARB’s 

formal transmittal of the updates. At this time, we understand that U.S. EPA Region 9 is 

working with headquarters to determine the appropriate forum to publish the revised job 

14-R-0130 28 
 

 

 

 

 

 

creation numbers since ARB can no longer access or update the project information on- line in 

the federal database. 

C. Chapter 5: CalARB Did Not Provide Actual Emissions Reduction Calculations 

1. Summary. The OIG draft report states that ARB does not have reasonable 

assurance that the repowered locomotives are achieving the projected emission reductions and 

human health benefits because actual fuel usage was not used to estimate emissions. ARB 

staff strongly disagrees. Actual fuel use was unavailable for this project, and is cost prohibitive 

for the railroads to collect on an ongoing basis for each locomotive. ARB staff relied on fuel 

use estimates from multiple correlative data sources that represented the best available 

information. ARB staff sought out and updated that data throughout the project to ensure the 

emission reduction estimates from the project were the most accurate possible. As a result, 

ARB does have assurance that the repowered locomotives are, in fact, achieving the range of 

projected emission reductions and health benefits. 

2. Discussion. To estimate the project’s emission reductions, ARB followed the 

industry standard practice by using U.S. EPA’s emission reduction calculation methodology 

(http://www.epa.gov/otaq/regs/nonroad/locomotv/420f09025.pdf), which relies on fuel 

consumption estimates and U.S. EPA-certified emission factors for NOx and PM. Class I 

railroads do not typically track or measure individual locomotive diesel fuel consumption in 

normal operation due to the high associated cost of about $50,000 per year per locomotive. 

This tracking is only done as a part of a funded technology demonstration project, and was 

unavailable for this ARRA grant. As a result, ARB relied on several robust data sources to 

estimate and corroborate the switch locomotive diesel fuel consumption figures used for this 

project in the final report. 

These data sources included information that increased the accuracy of the emission reduction 

estimates, but were not available to ARB in early 2009, the time of ARB’s original application 

to U.S. EPA. These data sources included additional fuel consumption data in BNSF’s grant 

application to ARB in late 2009, and data obtained in 2010 at the completion of a switch 

locomotive demonstration project. 

The OIG has recommended that we work with U.S. EPA to develop a more accurate 

calculation of project results based on actual fuel usage. ARB recognizes the value and is 

committed to obtaining the best available information to estimate emission reductions. 

As such, ARB has continuously strived to develop new and innovative methodologies and has 

continued to fund numerous technology demonstrations that provide measured fuel and 

emissions data. We commit to continue to work with U.S. EPA to improve on the existing 

calculation methodologies in order to more accurately calculate locomotive emissions. 

14-R-0130 29 
 

 

Appendix C 

Distribution 

Regional Administrator, Region 9 

Deputy Regional Administrator, Region 9 

Assistant Regional Administrator, Region 9 

Assistant Administrator for Air and Radiation 

Director, Grants and Interagency Agreements Management Division, Office of Administration 

and Resources Management 

Director, Office of Transportation and Air Quality, Office of Air and Radiation 

Agency Follow-Up Official (the CFO) 

Agency Follow-Up Coordinator 

Audit Follow-Up Coordinator, Office of Air and Radiation 

Audit Follow-Up Coordinator, Office of Grants and Debarment, Office of Administration and 

Resources Management 

Audit Follow-Up Coordinator, Region 9 

Chief, Administrative Services, California Air Resources Board 

14-R-0130 30