UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

NATIONAL VEHICLE AND FUEL EMISSIONS LABORATORY

2565 PLYMOUTH ROAD ANN ARBOR, MI 48105

- 2498

OFFICE OF
AIR AND RADIATION

August 12 , 2010

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
notice of proposed rulemaking (NPRM) that would redesign the current fuel economy label (FE label ) that is posted on the wind ow 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 purchasin g new vehicles beginni ng with model year 20 12 cars and trucks. The proposed rulemaking 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 Procedure s 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. Th is an alysis is intended to demonstrate that the

i mpacts of the draft proposed FE label regulations on small entiti es will not have a significant economic impact on a substantial number of small entities (i.e., no “SISNOSE”).

For purposes of asses sing the impacts of the draft propo sed 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, tow n, 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

.2 S mall governmental juri sdictions and small organizations as describe d above will not be regulated by the proposed rule

. The main industry sector subject to the proposed regulations will be car and truck manufacturer s

. Another industry sector consisting of companies that import special iz ed cars and trucks into the U nited States (U .S. ) , referred

to as Independent Commercial Importers (ICIs), will also be subject to the proposed regulations. Therefore , t he 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 proposed rule are incremental to a baseline that includes current market factors and presumes full compliance with all existing applicable statu tory 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 manufactu rers 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 t he 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, th e proposed regulations do not make any changes to the current requi rements noted above and therefore there is no incremental impact from the proposed regulations . For this reason, companies that modify certified vehicles, such as limousine and hearse manu facturers, as well as new car
dealers , are excluded from the following analysis of small business impacts.

The following section describe s the two indu stry sector s to which the proposed
rule would app ly, the definition of small business for each sector

, the proposed requirement s that would apply to each sector , the number of small business es to which the proposed rule would apply, and the estimated costs and imp act s associated with the proposed FE label requirement s.

I. Brief Description of the I ndustr y

Based on Environmental Protection Agency (EPA) records

, we have ide ntified a
total of 22 car and truck manufacturers for the 2010 model year which have certified
vehicl es for sale in the U

. S

. Over the last 10 years, t he 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 to approximately 10.6 million cars and trucks for 2009, the most recent year for which sales information is

a vailable. The car and truck market is dominated by large businesses. Based on U.S.
sales levels for cars and trucks , t he top 10 car and truck manufacturers have consistently comprise d 90 percent or more of the total ma rket, while the remaining companies make3

up the remaining roughly 10 percent.

In addit ion, we have identified 11 ICIs that are currently importing 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 bec ause 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 fo r all of the ICIs in recent years.

II . Definition of Small Business

For car and truck manufa cturers , 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 l ess 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 class ifications, such as
used car mer chant wholesalers or automotive e xhaust system repair and replacement shops . The criteria used by SBA to establish whether an entity is a small business var ies by the primary industry classification .) Furthermore, SBA defines a small business as a

concer n that is organized for profit, with a place of business in the U

. S

. , and which
operates pr imarily within the U

. S

. or makes a sign ificant contribution to the U

. S

. economy through payment of taxes or use of American products, materials, or labor. We
have u sed the s e criteria to determine the number of small businesses affected by th e proposed FE label regulation s for the an alysis presented in this memorandum

.

III . Current a nd Anticipated Regulations

(A ) Current Requirements

In 2006, we adopted new FE label requirements and several testing provisions
related to deter mining fuel economy estimates. The FE label adopt ed 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) h ow the vehicle’s combined city/highway fuel economy compares to a range of comparable vehicles , and 3)

e stimated 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. 1

The new FE labe l requirements also direct ed manufacturer s to determine their fuel economy estimates for the label in a different mann er. Instead of basing their
estimates for the label on data fro m 2 driving cycles, m anufacturers 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

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

- 12.4

test results. However, startin g with the 2011 model year, manufacturers ar e required to
collect act ual 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. ) M anufacturer s can continue predicting 5

- cycle results for

v ehicle models within a test group onl y in cases where they ca n demonstrate that the actual fuel economy data fr om 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, w e are proposing a new FE label for all cars and trucks sold in
the U.S. to ta ke effect starting with the 2012 model year. EPA is actually proposing two label designs without a single primary proposa l. While both label designs rely on the same underlying data, they differ in how the data is used and presented on the label. One is a more traditional label design that retains the current label’s focus on fuel economy values and annual fuel cost projec tions, with a general label layout more similar to the current label. The second label design contains all appropriate information but prominently features a letter grade to communicate the overall fuel economy and greenhouse gas emissions

– along with th e 5

- year fuel cost savings associated with a particular vehicle compared to an average vehicle. All labels expand upon the content found on the current label and include the following information for conventional vehicles (advanced technology vehicle labe ls contain additional information tailored to the individual technology):

• City and highway fuel economy values in miles per gallon

• Combined city/highway fuel consumption in gallons per 100 miles

• Tailpipe carbon dioxide (CO2) emissions in grams per m ile

• Annual fuel cost in dollars per year

• A slider bar comparing the combined fuel economy to all other vehicles

• A slider bar comparing the CO2 emissions to all other vehicles

• A slider car comparing “other” emissions to all other vehicles

• A Smartp hone interactive tool

• A reference to “fueleconomy.gov”, t he government’s fuel economy website

The proposal also addresses how to provide information on performance and cost that is most useful for certain advanced technology vehicles that are entering the marketplace now and in the near future, such as EVs and PHEVs . These kinds of technologies, which use fuels other than traditional liquid fuels, present special problems for providing useful information on the label to consumers. In order to provide this information for EVs and PHEVs, we are proposing testing re quirements for determining these performance characteristics

. EVs must already be tested for purposes of range determination for the Federal Trade Commission’s (FTC’s) hang

- tag requirement. T he testing procedures being proposed for the FE label rule are consistent with the requirements already in place for the FTC hang

- tag requirement.

Commensurate with the proposed FE label changes, w e are also proposing to5

eliminate the requir ement for 5

- cycle testing of vehic les that would otherwise apply for ICIs starting in 2011

. Under the proposal, 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 mo re detail below, i ncreasing the cost of importing the vehicle by such a significant amount would likely prevent most people from imp orting their vehicles into
the U.S

. through an ICI.

IV . Number of Small Business es to Which the Rule Applies

Of the 22 c ar and truck manufacturers identified by EPA , only one company

meets the SBA definitio n of a small business. The one small business identified is Tesla,
an electric vehicle manufacturer

. There ar e other manufacturers that are considering selling cars in the U.S

. and have less than 1,000 employees

. However, these companies are not currently certifying vehicles with EPA . For this reason, we have not incl uded any
of these manufacturers as small businesses for the purpose of this analysis.

Of the 11 ICIs identified by EPA , all 11 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 som e initial labo r 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

- qua lity images for the design, these costs are not expected to be large. Third , the proposed FE label designs include the use of color. Because the
current FE labels are black

- and

- white only, there will be some additional costs associated
with the use of co lor pri nting . Fourth , EPA is proposing new testing requirements for
EVs and PHEVs . Finally, EPA is proposing to eliminate certain testing requirements for

ICIs

.

The cost of the proposed fuel economy label program will be different for each
manufacturer depending on a number of factors. The primary factors that will impac t costs are the number of vehicle test groups certified by th e manufacturer, the production
volu mes for each manufacturer , and whether the compan ies produce any EV s or PHEVs

. The follo wing section summarizes the costs of the FE label provisions for the small
business es affected by the proposed program. The inputs used in this small business analysis are based on the cost analysis described in the “ Projected Impacts o f t he Proposed Requ irements ” section of the proposed rule (see section VII of the proposed preamble).6 (B ) Estimated Impacts on Small Business es

T he one small business car and truck manufacturer identified certif ies one test

group with EPA which i s an EV

. Under the draf t proposed regulations

, the manufacturer
will be required to start using the new FE label starting in 2012. Because the vehicle produced by the manufacturer is an EV

, the manufacturer will need to perform testing to demonstrate the operating characteristi cs of the batter ies used to power the vehicle. However, because this manufacturer is already selling EVs in the market, the manufacturer already has to perform the same type of testing under existing Federal Trade Commission (FTC) requirements noted earli er

. As noted earlier, t he testing procedures being proposed for the FE label rule are consistent with the requirements already in place for the FTC hang

- tag requirement. Therefore, the new requirement being proposed by EPA for EVs will not result in any increased testing costs for this
small business car and truck manufacturer.

The 11 small business ICIs certi fy 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 i mported 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 draft proposed regulations, the IC Is will be required to start using the new FE label

star ting in 2012. With regard to testing, we are proposing to relax the testing requirements for vehicles imported by ICIs. A s noted earlier, we are proposing to al low ICIs to continue using 2

- cy cle test results to derive the 5

- cycle fuel economy estimates

n eeded for the FE label starting in 2011 . Without this proposed provision, ICI’s would be required to test the each vehicle being imported ove r 3 additional driving cycles.

(i) Label costs

The FE label changes being proposed 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 proposing 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 ad opting 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 e s timate the one

- time costs of
ad opting 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 this7

task. (For the purposes of this analysis, we h ave used a labor rate of approximately $50 per hour for a professional 2 , and have included a 10 0% markup for overhead. )

The primary variable cost for the new label design is the difference in cost
between black

- and

- white printing and color printing. Bas ed on a study by the California Air Resources Board (CARB) on the incremental cost of color labeling 3 as well as computer industry estimates 4 , we believe the upper

- end cost of switching from black

- and

white printing to color printing will be no more than $ 0.08 per label. The total incremental cost for printing the new FE label will depend on the number of vehicles sold by each manufacturer. In general, vehicle sales numbers are considered confidential business information by manufacturers. Based on a sea rch of publically available information, we estimate the vehicles sales for the one small business car and truck
manufacturer (Tesla) to be no more than 500 vehicles per year . (This is based on a sales number of 1,000 units since 2008 cited in a respected business magazine. 5 ) Based on sales of 500 vehicles per year, the increased cost due to the proposed FE label would be $40 per year. For the small business ICIs, the number of vehicles sold per year, varies, but rarely exceeds 50 vehicles per ICI per ye ar. Using a sales number of 50 vehicles per ICI, the increased labeling costs should be no more than $4 per year per ICI

.

Based on the numbers presented above , t he total label

- related costs are estimated to be $2,740 for the one small business car and t ruck manufacturer, and $2,704 for the

small business ICIs.

(ii) Testing costs

As part of the proposed FE label rule, EPA is proposing test procedures for EVs
and PHEVs that will provide information required for the new FE labels . These are
modificatio ns of testing procedures already used for certification of light

- duty vehicles, light

- duty trucks, and medium

- duty passenger vehicles. As noted earlier, the one small business car and truck manufacturer currently produces EVs that must already be tested

f or purposes of rang e determination for the FTC’s hang

- tag requirement. The results

2 Bureau of Labor Statistics, based on “ Total compensation rates” for full

- time workers,
as taken from Table 11 o f “Employer Costs for Employee Compensation”, March 2010, rounded to the nearest $10. Available at http://www.bls.gov/news.release/pdf/ecec.pdf

3 CARB, “Staff Report: Initial Statement of Reasons for Rulemaking: Proposed Amendments to the Smog Index V ehicle Emissions Label,” May 4, 2007. Available at http://www.climatechange.ca.gov/publications/arb/2007

- 06

- 21_isor.pdf

4 Hewlett

- Packard, “Head to head comparison: color versus black

- and

- white printing.”

Available at http://www.officeproductnews.net/ files/hpc2447wpcolorvsbwgov.pdf

5 Bloomberg Businessweek, “ Tesla Electric

- Car Credit Sales to Honda Ease Losses .”
Available at http://www.businessweek.com/news/2010

- 06

- 04/tesla

- electric

- car

- credit

sales

- to

- honda

- ease

- losses

- update2

- .html8

from the test ing performed to determine the FTC range determination can also be used to satisfy the v alues for the proposed FE label. Therefore, we estimate that there is no incremental testing cost for the one small business car and truck manufacturer

.

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
testin g required for EVs and PHEVs. While we do not believe the one small business car and truck manufacturer will need to perform extra testing for its EVs, 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 cos t to be no higher than $24,000 for the one

small business car and truck manufacturer. This is based on an estimat e of 6 professionals (e.g., information technology staff) spending four weeks to update the information systems.

As noted earlier, we are also proposing to eliminate the requirement for 5

- cycle testing of vehicles that would otherwise apply for ICIs star ting in 2011. Under the proposal, 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 add itional 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. 6 Therefore, by elimin ating the requi rement for ICIs to test imported vehicles
over these three additional driving cycles, the ICI will not be required to incur approximately $6,5 00 of testing costs per vehicle imported by an ICI.

(iii) Total costs compared to annual sales

Based on the i nformation provided above, we estim ate the overall costs to the one small busi ness car and truck manufacturer identified by EPA to be $26,740 in the first

year of the program

. In order to evaluate those cost s for the small business car and truck
manufac tu rer, w e obtained sales /revenue information for the small bus iness. Based on information from Hoovers, a leading source of fina ncial information on businesses , the
annual sales /revenue for the small busi ness car and truck manufacturer is estimated to be

ap proximately $110 million per year. Therefore, the annual co st of th e proposed FE label provisions is estimated to be significantly less than 1 perc ent of the small business car
and truck manufacturer’s annual sales /revenue

.

Based on the information prov ided above, we esti mate the overall costs to the 11
small business ICI s identified by EPA 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 ov erall cost will be a net savings of approximately $3,300 (i.e.,

6 U.S. EPA, “F inal 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.htm9

the $2,704 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 ICI s is est imated to range from $200,000 to $4,200,000 per year. Because the proposed regulations will result in a net savings to ICIs, the annual cost of the proposed
FE label provisions is estimated to be less than 1 percent of each of the small business

ICIs ’ ann ual sales/revenues.

VI . Summary of Impacts on Small Businesses

The discussions presented above provide an analysis of the impacts of the proposed FE label requirements on the sma ll business es identified by EPA

. Given that

we are projecting that the on e small business car and truck manufacturer and all of the
small business ICIs will be impacted by less than 1 percent of annual sales/revenues , we bel ieve we can certify that the proposed FE label provisions will not have a significant economic impact on a subst antial number of small entities (i.e., no SISNOSE).