[Federal Register Volume 67, Number 47 (Monday, March 11, 2002)]
[Proposed Rules]
[Pages 10873-10884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5790]


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DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

49 CFR Part 538

[Docket No.: NHTSA-2001-10774; Notice 2]
RIN 2127-AI41


Automotive Fuel Economy Manufacturing Incentives for Alternative 
Fuel Vehicles

AGENCY: National Highway Traffic Safety Administration (NHTSA), 
Department of Transportation (DOT).

ACTION: Notice of proposed rulemaking (NPRM).

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SUMMARY: To provide an incentive for the production of vehicles that 
can operate on certain alternative fuels as well as on regular 
petroleum fuels, Congress established a special procedure for 
calculating the fuel economy of those vehicles for the purpose of 
determining compliance with the Corporate Average Fuel Economy 
standards. This procedure increases the fuel economy attributed to such 
``dual-fueled'' vehicles, thus facilitating compliance with those 
standards. By statute, the incentive is available through the end of 
the 2004 model year and may be extended by up to four additional years 
through rulemaking.
    This document proposes to extend the availability of the incentive 
by four years, i.e., through the end of the 2008 model year.

DATES: Comments must be received on or before April 10, 2002.

ADDRESSES: You may submit your comments in writing to: Docket Section, 
National Highway Traffic Safety Administration, 400 Seventh Street, 
SW., Washington, DC 20590. Alternatively, you may submit your comments 
electronically by logging onto the Docket Management System (DMS) 
Website at http://dms.dot.gov. Click on ``Help & Information'' or 
``Help/Info'' to view instructions for filing your comments 
electronically. Regardless of how you submit your comments, you should 
mention the docket number of this document. You can find the number at 
the beginning of this document. Docket hours are 9 a.m. to 5 p.m. 
Monday through Friday.

FOR FURTHER INFORMATION CONTACT: The following persons at the National 
Highway Traffic Safety Administration, 400 Seventh Street, SW., 
Washington, DC 20590:
    For non-legal issues: Mr. Kenneth Katz, Consumer Programs Division, 
Office of Planning and Consumer Programs, NPS-32, Room 5320, telephone 
(202) 366-4936, facsimile (202) 493-2290.
    For legal issues: Otto Matheke, Office of the Chief Counsel, NCC-
20, Room 5219, telephone (202) 366-5263, facsimile (202) 366-3820.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of Agency Proposal
II. Background
    A. Statutory Background
    B. Report To Congress
    C. Other Developments
    D. U.S. Dependence on Imported Petroleum
    E. Availability and Use of Alternative Fuels
III. Agency Proposal
IV. Benefits and Costs
V. Rulemaking Notices and Analyses
    A. Executive Order 12866 and DOT Regulatory Policies and 
Procedures
    B. Regulatory Flexibility Act
    C. National Environmental Policy Act
    D. Executive Order 13132 (Federalism)
    E. Civil Justice Reform
    F. Paperwork Reduction Act
    G. National Technology Transfer and Advancement Act
    H. Unfunded Mandates Reform Act
    I. Plain Language
    J. Regulation Identifier Number (RIN)
VI. Preparation and Submission of Comments

I. Summary of Agency Proposal

    Congress created the Corporate Average Fuel Economy (CAFE) program 
when it enacted the Energy Policy and Conservation Act of 1975 (Pub. L. 
94-163; Dec. 22, 1975). The CAFE statutory provisions, now codified in 
Chapter 329 of Title 49 of the United States Code (49 U.S.C. 32901 et 
seq.), mandate fuel economy standards that must be met by vehicle 
manufacturers. These standards apply separately to each manufacturer's 
annual fleet of passenger cars and to its annual fleet of light trucks 
under 8,500 lbs. gross vehicle weight rating, instead of applying to 
individual vehicles. Each manufacturer's average fuel economy is 
determined by the Environmental Protection Agency in accordance with 
procedures set forth in 49 U.S.C. 32904. Those procedures provide for 
determining the fuel economy of a manufacturer's model types produced 
in a particular model year and calculating a weighted fuel economy 
average for the manufacturer.
    Congress amended the CAFE provisions when it enacted the 
Alternative Motor Fuels Act of 1988 (``AMFA'') (Pub. L. 100-94; October 
14, 1988). The purposes of AMFA were to encourage the development and 
use of methanol, ethanol and natural gas as transportation fuels and to 
promote the production of alternative fuel vehicles (AFVs). For the 
latter purpose, AMFA provides special procedures for calculating the 
fuel economy of ``dedicated'' alternative fuel vehicles and ``dual-
fueled'' vehicles that meet specified eligibility criteria. ``Dedicated 
vehicles'' are cars or light trucks designed to operate exclusively 
either on natural gas or on a methanol or ethanol fuel mixture composed 
of at least 85 percent of either substance. ``Dual-fueled vehicles'' 
have the capability to operate on conventional petroleum and the 
capability to operate on an alternative fuel. Most dual-fueled vehicles 
produced to date are capable of operating on E85 (a blend of 85 percent 
ethanol and 15 percent gasoline) and either gasoline or diesel. The 
special calculation procedures used in determining the fuel economy of 
alternative fuel vehicles substantially increase the fuel economy 
ratings of these vehicles.
    In creating the incentive program for dual-fueled vehicles, 
Congress expressly limited both the extent to which a manufacturer can 
avail itself of the incentive in any model year as well as the duration 
of the incentives.\1\ For the 1993-2004 model years, the maximum 
increase in CAFE available to a manufacturer for producing qualifying 
dual-fueled vehicles is 1.2 miles per gallon.
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    \1\ Congress did not apply either of these limitations to the 
incentive program for dedicated vehicles.
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    AMFA provides that by December 31, 2001, the agency either extend 
the program beyond the 2004 model year or

[[Page 10874]]

issue a notice of termination ending it at the close of that model 
year. An extension of up to four model years is authorized. If the 
program were extended, the maximum increase in CAFE attributed to the 
incentive would be limited to .9 miles per gallon in any of those model 
years.
    AMFA further directs that NHTSA evaluate the dual-fuel incentive 
program and provide a report to Congress analyzing the success of the 
incentive program and preliminary conclusion regarding extension of the 
program beyond the 2004 model year.
    NHTSA is proposing that the dual-fuel incentive program be extended 
by four years, i.e., through the end of the 2008 model year. We are 
proposing this extension for several reasons. Domestic energy security 
is more important than ever. The vehicles affected by the program 
operate on ethanol, a domestic fuel. To the extent that domestic fuels 
can be used, we can decrease our reliance on foreign petroleum. We 
recognize the potential value to domestic energy security of having a 
fleet of vehicles that can be operated on non-petroleum fuels. This 
value would be realized in times of petroleum shortages. We are mindful 
that the vehicle manufacturers would not likely maintain their current 
level of efforts to produce alternative fuel vehicles in the absence of 
the incentive program. As we recommend in our report to Congress that 
steps be taken to enhance the infrastructure, we want to maintain the 
program while efforts are made to identify and implement those steps. 
The proposed four-year extension would give Congress, other executive 
branch agencies, regional authorities, and the private sector ample 
time to identify, adopt and implement such steps. NHTSA is also 
concerned that an extension of less four years would not allow 
sufficient time to begin to realize the potential benefits from the 
operation of the dual fuel incentive program. For a variety of reasons, 
significant numbers of dual fuel capable vehicles have only recently 
begun to appear in the marketplace. It is, therefore, not yet clear 
whether the continuing presence of these vehicles, their ability to use 
alternative fuels, programs intended to increase the use and production 
of alternative fuels and other conditions will stimulate the expansion 
of the alternative fuel infrastructure as envisioned by Congress in 
creating the dual fuel incentive program. The development of a viable 
alternative fuel infrastructure, particularly one based on domestically 
produced ethanol fuel, would reduce the nation's dependence on imported 
oil. The realization of this significant benefit, in our view, may 
require nothing less than a full four-year extension of the incentive 
program.
    In proposing this extension, we recognize that the incentive 
program, as it is now operating, potentially may be having some 
negative energy effects. By upwardly adjusting the calculated level of 
fuel efficiency of dual-fueled vehicles, the incentive program allows 
manufacturers to build less fuel efficient conventionally fueled 
vehicles without paying CAFE penalties. If manufacturers do so, have no 
other means of meeting CAFE standards in the absence of the incentive, 
and choose not to allow their CAFE to fall to the level where they 
would have to pay penalties, the incentive program provides a means for 
producing a less fuel efficient fleet. Under the foregoing conditions, 
if dual-fueled vehicles are operated almost exclusively on petroleum, 
the net impact is, in effect, to reduce the CAFE levels that are 
achieved by manufacturers and increase the consumption of petroleum. 
However, in order to conclude that the incentive program has a negative 
energy impact, one must make certain assumptions about the various 
actions that manufacturers may take in meeting CAFE, including the 
notion that manufacturers would not, in the face of increasing demand 
for less efficient vehicles, have simply chosen to pay CAFE penalties 
in order to meet that demand. As NHTSA has, until recently, been 
constrained from collecting data regarding manufacturer capabilities 
and any analysis of manufacturer capabilities and choices is 
necessarily complex, the agency cannot state with any certainty that 
the incentive program has, or will, have negative energy effects.
    Any increased costs resulting from the operation of the incentive 
program must, if the program is to be extended, be offset by actual or 
potential benefits. As noted above, one such benefit is having a fleet 
of vehicles that can operate on alternative fuels. Use of alternative 
fuels by these vehicles reduces dependence on foreign oil and would 
help to lessen demand for conventional fuels, thereby helping to keep 
fuel prices low. If sufficient numbers of dual fuel vehicles exist and 
continue to spur development of an alternative fuel infrastructure, the 
nation would, to a degree, be insulated from the impacts of ``oil 
shocks'' resulting from sudden disruptions to the petroleum supply.

II. Background

A. Statutory Background

    In 1988, Congress enacted the Alternative Motor Fuels Act (AMFA). 
Section 6 of that Act amended the fuel economy provisions of the Motor 
Vehicle Information and Cost Savings Act by adding a new section, 
section 513, providing incentives for the manufacture of vehicles 
designed to operate on alternative fuels, including dual-fueled 
vehicles. The section provides that incentive by establishing special 
procedures for calculating the fuel economy of those vehicles. These 
special procedures result in alternative fuel vehicles being assigned a 
higher fuel economy value for CAFE compliance purposes than they would 
have under the procedures used for calculating the fuel economy of 
other vehicles. Manufacturers choosing to build such vehicles can use 
the fuel economy of their alternative fuel vehicles to raise the 
calculated level of their CAFE.
    Dual-fueled vehicles generally are vehicles that can operate either 
on alternative fuel and either gasoline or diesel fuel, or on natural 
gas and either gasoline or diesel fuel. Section 513(h) specifically 
defined a ``dual energy automobile'' as one that meets a minimum 
driving range and:

    (i) Which is capable of operating on alcohol and on gasoline or 
diesel fuel;
    (ii) Which provides equal or superior energy efficiency, as 
calculated for the applicable model year during fuel economy testing 
for the Federal Government, while operating on alcohol as it does 
while operating on gasoline or diesel fuel; [and]
    (iii) Which * * * provides equal or superior energy efficiency, 
as calculated for the applicable model year during fuel economy 
testing for the Federal Government, while operating on a mixture of 
alcohol and gasoline or diesel fuel containing exactly 50 percent 
gasoline or diesel fuel as it does while operating on gasoline or 
diesel fuel.

    A ``natural gas dual energy'' automobile was defined as a vehicle 
that met a specified minimum driving range, and:

    (i) Which is capable of operating on natural gas and on gasoline 
or diesel fuel; [and]
    (ii) Which provides equal or superior energy efficiency, as 
calculated for the applicable model year during fuel economy testing 
for the Federal Government, while operating on natural gas as it 
does while operating on gasoline or diesel fuel.

    The Energy and Policy Act of 1992 added new provisions to section 
513. The definition of ``alternative fuel'' was expanded to include 
liquefied petroleum gas, hydrogen, liquid fuels derived from coal and 
biological materials, electricity and any other fuel

[[Page 10875]]

that the Secretary of Transportation determines to be substantially 
non-petroleum based and have environmental and energy security 
benefits. The 1992 Act also revised terminology by replacing ``dual 
energy'' and ``natural gas dual energy'' with ``alternative fueled 
vehicles'' in order to reflect the expanded list of fuels.
    The 1988 AMFA amendments established the eligibility criteria and 
procedures for calculation of the incentive benefits. Manufacturers of 
alternative fuel vehicles that met the minimum driving range and energy 
efficiency criteria could use a special procedure for calculating the 
fuel economy of these vehicles for the 1993 through 2004 model years. 
The special calculation procedure substantially raises the fuel economy 
of the vehicle. For instance, a dedicated alternative fuel vehicle 
achieving 15 miles per gallon while operating on alcohol would, based 
on the special calculation procedures, be deemed to have a fuel economy 
of 100 miles per gallon.\2\
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    \2\ The fuel economy of dedicated vehicles is derived by 
computing the weighted average of fuel economy while operating on 
gasoline or diesel fuel and when operating on alternative fuel after 
dividing the alternative fuel economy by a factor of 0.15. In the 
example cited above, the equation is as follows: FE=(1/
0.15)(15)=100.
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    The special calculation procedure for alternative fuel dual-fueled 
vehicles is based on the assumption that those vehicles will operate 50 
percent of the time on the alternative fuel and 50 percent of the time 
on conventional fuel, resulting in a fuel economy figure that is based 
on a harmonic average of alternative and conventional fuel. For 
example, an alternative dual-fueled model that achieves 15 miles per 
gallon operating on an alcohol fuel and 25 mpg on the conventional fuel 
would, based on the special calculation procedure, be calculated to 
have a CAFE fuel economy of 40 miles per gallon.\3\
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    \3\ The fuel economy for an alternative dual-fueled model is 
calculated by dividing 1.0 by the sum of 0.5 divided by the fuel 
economy as measured on the conventional fuel and 0.5 divided by the 
fuel economy as measured on the alternative fuel, using the 0.15 
volumetric conversion factor. For example, an alternative dual-
fueled model that achieves 15 miles per gallon operating on an 
alcohol fuel and 25 mpg on the conventional fuel would have its CAFE 
fuel economy calculated as follows: 1/((0.5/ 25)+(0.5/100))=40 miles 
per gallon.
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    The CAFE values for a natural gas alternative fuel vehicle are 
calculated in a similar fashion. For the purposes of this calculation, 
the fuel economy is equal to the weighted average of the vehicle fuel 
economy while operating on natural gas and the vehicle fuel economy 
while operating on either gasoline or diesel fuel. Section 32905(c) 
specifies the energy equivalency of 100 cubic feet of natural gas to be 
equal to 0.823 gallons of gasoline, with the gallon equivalent of 
natural gas to be considered to have a fuel content equal to 0.15 
gallons of fuel.
    Since alternative fuel vehicles will, for CAFE purposes, have a 
higher calculated fuel economy rating than their conventionally fueled 
counterparts, production of alternative fuel vehicles allows 
manufacturers to boost their CAFE ratings. The opportunity for raising 
a manufacturer's calculated CAFE through this incentive program is 
limited to 1.2 miles per gallon per model year for the 1993 through 
2004 model years. If the program is extended beyond the 2004 model 
year, the CAFE increase is limited to 0.9 miles per gallon per model 
year.
    Sections 32905(b) and (d) specify that the dual-fuel incentives 
apply to vehicles produced in the 1993 through 2004 model years. The 
incentives may, however, be extended. Section 32905(f) provides that 
the Secretary of Transportation shall, no later than December 31, 2001, 
either complete rulemaking to extend the incentive program for up to 
four more consecutive model years or issue a notice of termination 
ending it.
    In anticipation of the decision regarding extension, section 
32905(g) directed the Secretary, in consultation with the Secretary of 
Energy and the Administrator of the Environmental Protection Agency, to 
submit a report to Congress containing the results of a study of this 
alternative fuel vehicle mileage credit incentive policy and providing 
preliminary conclusions whether the program should be extended for up 
to an additional four (4) model years. In preparing this study and 
report, the Secretary is required to consider the following factors:

    (i) [T]he availability to the public of alternative fueled 
automobiles, and alternative fuels;
    (ii) Energy conservation and energy security;
    (iii) Environmental considerations; and
    (iv) Other relevant factors.

B. Report to Congress

    In response to the directive in section 32905(g), NHTSA is 
submitting a report to Congress simultaneously with the issuance of 
this notice. This report, which contains the agency's findings 
regarding the impacts and effectiveness of the dual-fuel incentive 
program, was preceded by a request for comments that the agency 
published in the Federal Register on May 9, 2000 (65 FR 26805) (Docket 
No. NHTSA 2000-7087). The request for comments asked a number of 
questions regarding the impact of the incentive program on the 
production and development of dual-fueled vehicles, the costs of 
producing these vehicles, vehicle performance and reliability and the 
efforts made to market the vehicles. Other questions asked for 
information on future product plans for the production of dual-fueled 
vehicles, the impact that the incentives have had on the availability 
of alternative fuels, consumer awareness of alternative fuels, 
obstacles to alternative fuel use, potential modifications to the 
incentive program and whether the incentive program should be extended 
or discontinued.
    The agency received comments from three automobile manufacturers--
General Motors (GM), Ford Motor Company (Ford) and DaimlerChrysler 
(DC); five associations--Alliance of Automobile Manufacturers 
(Alliance), Renewable Fuels Association (RFA), National Ethanol Vehicle 
Coalition (NEVC), Clean Fuels Development Coalition (CFDC), and Ethanol 
Producers and Consumers (EPAC); one state agency--the Missouri 
Department of Natural Resources Energy Center (DNREC); the governors of 
New Mexico, Missouri, Kansas, and Wisconsin; Senators J. Robert Kerrey, 
Tom Daschle, Wayne Allard, Evan Bayh, John Ashcroft, Carl Levin, 
Charles E. Grassley, Christopher S. Bond, and Chuck Hagel; the 
Congressional Auto Caucus; and joint comments from the American Council 
for an Energy-Efficient Economy (ACEEE), Center for Auto Safety (CAS), 
the Sierra Club, and the U.S. Public Interest Research Group (USPIRG).
    With the exception of the joint ACEEE--CAS--Sierra Club--USPIRG 
letter, all of the commenters voiced strong support for continuation of 
the incentive program from the end of the 2004 model year to the end of 
the 2008 model year. The supporting commenters unanimously indicated 
that the incentive program was primarily responsible for the 
development and production of alternative fuel vehicles in high volumes 
and was also responsible for the development of the existing refueling 
infrastructure. The comments also reflected a consensus that 
availability and price of alternative fuels continued to be the most 
significant obstacle to their use. Two commenters, DNREC and Governor 
Gary E. Johnson of New Mexico, indicated that extension of the 
incentive program is desirable for government entities that are 
required to purchase and use alternative fuel vehicles. DNREC and 
Governor Johnson both expressed concern that termination of the

[[Page 10876]]

incentive program could impact the price and availability of 
alternative fuel vehicles and of the fuels that these vehicles use.
    The joint ACEEE--CAS--Sierra Club--USPIRG letter opposed any 
extension of the incentive program. These commenters indicated that the 
incentive program had not resulted in any expansion of alternative fuel 
infrastructure. In their view, the primary impact of the incentive 
program was to allow manufacturers to produce less fuel-efficient 
vehicles. Based on this assessment, the signatories to the letter 
indicated that the incentive program increased petroleum consumption 
and increased emissions. They further urged that the incentive program 
be terminated unless availability of the incentive could actually be 
linked to alternative fuel consumption.
    Ford, GM, DC, and the Alliance all indicated that the existence of 
the incentive program had a major influence on decisions by some 
vehicle manufacturers to produce dual-fueled vehicles in high volumes. 
Ford and DC indicated that they offered dual-fueled vehicles at no 
additional cost to consumers, while GM indicated that pricing was 
subject to a large number of factors. All three of these manufacturers 
indicated that present technology allowed production of reliable and 
usable dual-fueled vehicles. However, DC noted that alcohol fuels 
presented problems with starting in low temperatures. GM observed that 
early alcohol fuels presented corrosion problems. RFA indicated its 
belief that performance of dual-fueled vehicles operating on 
alternative fuels could be improved by tuning the engine management 
system to use these fuels more efficiently. The Alliance and each 
manufacturer also indicated that continued production of alternative 
fuel vehicles would be a part of their efforts to meet the CAFE 
standards and that such production would be adversely affected by 
termination of the incentive program.
    Following consideration of the comments and other data, NHTSA 
issued its report. The agency's report indicates that the dual-fuel 
incentive program has had a positive impact on the production and 
availability of dual-fueled vehicles. However, the increased 
availability of these vehicles has not stimulated any meaningful growth 
in the availability and use of the alternative fuels used in dual-
fueled vehicles. Few dual-fueled vehicles are being operated on 
alternative fuels. Since the incentive program rewards manufacturers 
for producing qualifying vehicles through an upward adjustment of their 
fleet fuel economy, the primary effect of the program, if manufacturers 
produced less fuel efficient vehicles only because the incentive 
program allowed them to do so, has been to increase petroleum 
consumption without producing a corresponding increase in the 
availability or use of alternative fuels (Report to Congress: Effects 
of the Alternative Motor Fuels Act CAFE Incentives Policy, Executive 
Summary (hereinafter cited as Report)).
    The report finds that, by the end of the 2000 model year, the 
population of dual-fueled alternative fuel vehicles had increased to 
over 1.2 million vehicles. This growth, including 115,000 passenger 
cars and 1,077,000 light trucks using E85 ethanol fuel, occurred in 
less than five years (Report, Sec. III). By 2000, close to 8 percent of 
all new light trucks were dual-fueled vehicles as compared to virtually 
no dual-fueled light trucks two years before. About 1.4 percent of 
passenger cars produced in the 2000 model year were dual-fueled 
vehicles (compared to .025 percent in 1993) (Report, Sec. III). As the 
number of dual-fueled vehicles increased, the manufacturers building 
these vehicles grew closer to gaining the maximum CAFE increase 
permitted under the incentive program. For the 2000 model year, both 
Ford and DaimlerChrysler approached the 0.9-mpg maximum benefit level 
that would be allowed if the dual-fueled vehicle CAFE credit provision 
were extended. Similarly, GM increased its production of dual-fueled 
vehicles in order to benefit from the incentive program (Report, 
Executive Summary).
    The agency's report finds that the increased production of dual-
fueled vehicles had stimulated some growth in the use and availability 
of alternative fuels. NHTSA found that alternative fuel use in 
alternative fuel vehicles in the U.S. has been rising over the past 
decade. In 1992, a total of 230 million gasoline gallon equivalents of 
alternative fuel were used in alternative fuel vehicles; for 2000, that 
number is projected to rise to 368 million gasoline gallon equivalents, 
or an increase of roughly 6 percent per year. In comparison, the 
highway use of gasoline and diesel increased roughly 2 percent per 
year. However, alternative fuel use only accounts for 0.23 percent of 
total highway fuel use.
    One factor limiting greater expansion of alternative fuel use is 
the availability of alternative fuels. As of May 2001, there were 5,236 
alternative fuel refueling sites, with sites in all 50 states (Report, 
Sec. IV). Of the existing alternative fuel refueling stations, the vast 
majority offered liquefied petroleum gas (LPG). Natural gas refueling 
sites--1,217 compressed natural gas (CNG) and 44 liquefied natural gas 
(LNG)--had increased from 1,065 CNG refueling sites in 1995. The number 
of ethanol refueling sites, which provide the E85 fuel used in most 
dual fuel vehicles, had grown to 121 from 37 in the five years from 
1995-2001. In the same period, the number of methanol (M85) refueling 
stations dropped from 105 to 37 as the number of M85 flexible-fuel 
vehicles decreased. (Report, Sec. IV).
    Our report indicates that despite the fact that the incentive 
program had led to sales of more than one million ethanol flexible-fuel 
vehicles through the 2000 model year, the small number of E85 stations 
and the limited amount of E85 produced strongly suggest that these 
vehicles were being operated almost exclusively on gasoline.
    The report also notes that conducting an assessment of the energy 
and environmental impacts of the incentive program is complicated by 
uncertainty about the behavior and capabilities of vehicle 
manufacturers. While the use of alternative fuels can reduce petroleum 
consumption and greenhouse gas emissions, the energy consumption and 
environmental impacts cannot be determined with any reasonable amount 
of certainty because it is difficult to determine what manufacturers 
would have done in the absence of the credit incentive.
    In an effort to evaluate the effects of the incentive program up to 
the year 2000, the Environmental Protection Agency (EPA), performed an 
analysis comparing a baseline case in which no incentive program 
existed with a case where the incentive program was in place. In the 
incentive program case, it was assumed that one percent of the fuel 
used by dual-fueled vehicles during the years from 1996 to 2000 was an 
alternative fuel. The model also assumed that the enhanced fuel 
efficiency of dual-fueled vehicles resulting from application of the 
CAFE incentive allowed manufacturers to produce fewer fuel efficient 
conventional vehicles and still meet the CAFE standards and avoid civil 
penalties. Estimates were made of both conventional and alternative 
fuel use, total motor fuel consumption, and greenhouse gas emissions. 
These estimates were compared to the baseline analysis, in which the 
absence of an incentive program or consumer demand for lower mpg 
vehicles compelled manufacturers to make more fuel-efficient 
conventional vehicles. A comparison of the two models indicated that 
when dual-fueled vehicles are only

[[Page 10877]]

operated on alternative fuel one percent of the time, the incentive 
program increases the consumption of petroleum in two ways. First, 
dual-fueled vehicles operating on petroleum consume petroleum 
themselves. Second, the production of the dual-fueled vehicles allows 
manufacturers to build less efficient petroleum fueled vehicles than 
they would without the incentive program. Through 2000, the CAFE 
incentives policy was estimated to have resulted in an increase in 
alternative fuel use (almost all E85) and a slight increase in gasoline 
consumption (about 1 percent)(Report Sec. V).
    The analysis also attempted to predict the effect of an extension 
of the incentive program on the environment and energy consumption. The 
effects of extending the CAFE credit to 2008 under four basic scenarios 
were evaluated under the assumption that manufacturers would continue 
to be constrained by CAFE and choose not to build less efficient 
vehicles and pay CAFE penalties in response to consumer demand. Two 
different production rates for flexible-fuel vehicles were considered: 
One based on a maximum benefit of 0.9 mpg and, due to a then pending 
legislative proposal to amend the existing limit, one based on 1.2 mpg. 
Two different rates of E85 fuel consumption were then considered under 
the aforementioned two production rates (one based on the current rate 
of about 1 percent and one based on a steady increase in use from the 
current 1 percent to 50 percent in 2008) in an attempt to bound the 
range of possible outcomes. All four scenarios would result in 
increases in petroleum use and greenhouse gases if the incentive 
program were extended to 2008. The analysis also considered additional 
scenarios under which flexible-fuel vehicles would use E85 an average 
of 50 percent of the time and 100 percent of time). In the 50 percent 
case, petroleum consumption would not increase if the credit were 
extended to 2008. However, the amount of greenhouse gases produced 
would still increase, if the credit were extended, compared to the 
option of allowing the program to expire in 2004. If flexible-fuel 
vehicles used E85 100 percent of the time, petroleum consumption would 
decline, although greenhouse gases would still increase. The increase 
in greenhouse gases in both cases would stem from the overall increase 
in petroleum use by conventional vehicles allowed by the incentive 
program and the fact that flexible-fuel vehicles burning E85 would 
still generate some greenhouse gas emissions (Report Sec. V).\4\
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    \4\ This analysis assumes that, in the absence of the dual-fuel 
incentive, manufacturers would produce more efficient vehicles to 
meet the CAFE standards, rather than pay civil penalties.
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    The preceding analysis assumes that in the absence of the incentive 
program, manufacturers would not have produced larger, less fuel 
efficient vehicles. It is also possible that manufacturers might have 
responded to strong consumer demand for performance and utility and 
produced the same vehicles without the provision as they did with it. 
In this case, manufacturers would have chosen to pay civil penalties 
rather than meet the CAFE standard. Under this scenario, the main 
effect of the program has been to greatly expand the population of 
vehicles that have the potential to use alternative fuels.
    In assessing the dual-fuel incentive program, the report finds that 
the credit program has been successful in stimulating a significant 
increase in the availability of alternative fuel vehicles. The 
existence of the incentive program was a major factor in the 
development and production of alternative fuel vehicles in high 
volumes. The existence of these vehicles has not, however, stimulated a 
corresponding increase in the availability of alternative fuels. The 
report also finds that the nation's limited capacity for producing E85 
fuel could be further limited by the possibility that a gasoline 
additive, Methyl Tertiary-Butyl Ether (MTBE), could be replaced by 
ethanol. This would further constrain any future expansion of E85 use. 
Given the slow rate of growth in the alternative fuel infrastructure, 
the report states that if the incentive program were used by 
manufacturers to meet CAFE standards in lieu of producing more 
efficient vehicles, energy conservation and environmental benefits will 
only be realized through the extension of the incentive provisions if 
other incentives, programs, or market conditions stimulate the 
production, distribution, and use of E85 fuel. Therefore, the agency's 
report indicates that a number of other actions might be considered to 
improve the program and its chances for success.
    Specific actions by Congress or others might include any or all of 
the following:

    (1) Examine alternatives to the current dual-fuel vehicle CAFE 
credit program structure, such as linking the CAFE credit to actual 
alternative fuel used;
    (2) Develop, implement, and evaluate policies, regulations, or 
programs to promote the actual use of alternative fuels by 
consumers; and
    (3) Develop, implement, and evaluate policies and programs that 
facilitate more rapid expansion and use of the alternative fuel 
infrastructure. Such policies and programs should be evaluated, 
taking into account the availability of alternative fuel and other 
potential transportation uses for each fuel.
    In view of the nation's energy security interests, it is 
important to increase alternative fuel capability throughout the 
fleet. Given the mixed results of the program to date, it would be 
prudent for Federal agencies, Congress, industry, and other 
interested stakeholders to identify additional programs and 
authorities that could contribute to achieving greater use of 
alternative fuels in dual-fuel vehicles that receive the CAFE 
credit.

C. Other Developments

    In the last year, several events have transpired related to CAFE 
and the credit incentive provision. These are summarized below.
    On May 17, 2001, the Energy Policy Development Group, led by Vice 
President Dick Cheney, issued its National Energy Policy. This report 
made recommendations to President Bush regarding the path that the 
administration's energy policy should take and included specific 
recommendations regarding vehicle fuel economy and CAFE. The report 
recommends that the President direct the Secretary of Transportation to

     Review and provide recommendations on establishing CAFE 
standards with due consideration of the National Academy of Sciences 
study to be released in July 2001. Responsibly crafted CAFE 
standards should increase efficiency without negatively impacting 
the U.S. automotive industry. The determination of future fuel 
economy standards must therefore be addressed analytically and based 
on sound science.
     Consider passenger safety, economic concerns, and 
disparate impact on the U.S. versus foreign fleet of automobiles.
     Look at other market-based approaches to increasing the 
national average fuel economy of new motor vehicles.

The Energy Policy Development Group also stated in its report that 
ethanol vehicles offer tremendous potential if ethanol production can 
be expanded. Additionally, the report states that, ``a considerable 
enlargement of ethanol production and distribution capacity would be 
required to expand beyond their current base in the Midwest in order to 
increase use of ethanol-blended fuels.''
    Like the appropriations acts for the preceding five years, the 
fiscal year 2001 DOT Appropriations Act included the rider prohibiting 
the Department from revising the CAFE standards. However it

[[Page 10878]]

also included a provision directing the Department to fund a National 
Academy of Sciences study on the effectiveness and impacts of CAFE 
standards. On July 30, 2001, the National Academy of Sciences released 
a preliminary report entitled, ``Effectiveness and Impact of Corporate 
Average Fuel Economy (CAFE) Standards.'' This report included 15 
findings and seven recommendations. Recommendation 5 stated that, 
``Credits for dual-fuel vehicles should be eliminated, with the 
provision that NHTSA's notice of such action provides enough lead-time 
to limit adverse impacts on the automotive industry.''
    On August 2, 2001, the U.S. House of Representatives passed H.R. 4, 
which is entitled the Securing America's Future Energy (SAFE) Act of 
2001. This bill, which has been placed on the Senate legislative 
calendar, includes provisions in Section 203, Dual Fueled Automobiles, 
which alter the AMFA CAFE credit incentive program by extending it for 
an additional four model years to 2008 and by extending the 1.2 mpg 
limitation on the maximum allowable CAFE credit that can be earned by a 
specific manufacturer's fleet through model year 2008 as well. The 
deadline for making a decision whether to extend the program beyond 
2008 would be December 31, 2005, with the report on the effects of the 
program due on September 30, 2004.
    In July 2001, Secretary Mineta sent a letter to Congress asking 
that the freeze on CAFE standards be lifted immediately so NHTSA could 
resume its CAFE rulemaking responsibilities. However, the freeze was 
not lifted until December 2001, when the Appropriations Act for the 
Department of Transportation, for the first time in six years, did not 
include a rider freezing CAFE standards. NHTSA immediately resumed its 
CAFE rulemaking responsibilities. The FY 2003 DOT budget request 
includes $1,000,000 to support CAFE program activities to meet those 
responsibilities.

D. U.S. Dependence on Imported Petroleum

    The United States met 15 percent of its oil needs in 1955 through 
imports. The import share reached 36.8 percent by 1975, the year CAFE 
standards were authorized by Congress, and then peaked at 46.4 percent 
in 1977. Although the share declined to below 30 percent in the mid-
1980's, lately, the United States has again become increasingly 
dependent on imported oil. Imports totaled 43.6 percent in 1992 and are 
anticipated to be at or over 50 percent in 2001. The Middle East 
controls about 65 percent of the world's oil reserves and about 35 
percent of the world's natural gas reserves. North American reserves of 
oil amount to just 6-7 percent of world reserves, and the Department of 
Energy estimates that the U.S. will import 62 percent of its oil by the 
year 2010. Since the petroleum ``shocks'' of the 1970s, the inflation-
adjusted price of crude oil has generally declined. Since the oil 
shocks of the 1970s several events combined to keep oil prices low: the 
end of the Cold War; a diminution in the market power of OPEC due to an 
increase in petroleum production from non-OPEC nations; and the 
cementing of U.S. security ties to the most important oil-exporting 
nations. The growing dependence of the U.S. on imported petroleum 
offsets the positive developments that have occurred in the global 
petroleum market over the past 20 years and the potential impact of a 
petroleum shock on the U.S. is growing.
    The transportation sector remains overwhelmingly dependent on 
petroleum-based fuels and on technologies that provide virtually no 
flexibility for employing alternative to petroleum. Transportation 
currently accounts for approximately two-thirds of all U.S. petroleum 
use and roughly one-fourth of total U.S. energy consumption. Highway 
transportation petroleum consumption has risen from 121 billion gallons 
per year in 1979 to 155 billion gallons per year in 1999 (28 percent 
over 20 years). Given the dependency of our nation's transportation 
network on petroleum use, substitution of conventional petroleum fuels 
by non-petroleum-based fuels, including alternative fuels, could reduce 
America's vulnerability to disruptions in petroleum supply.
    Increased use of alternative fuels can yield other economic 
benefits as well as improving the nation's energy security. Displacing 
petroleum with alternative and replacement transportation fuels helps 
hold down petroleum prices in two ways. First, reducing the demand for 
petroleum decreases the world price for oil--a 1 percent decrease in 
U.S. petroleum demand could, in the long term, reduce world oil price 
by about 0.5 percent. Short-run impacts could be even greater, due to 
the short-run inelasticity of oil supply and demand. An additional 
benefit of increased alternative or replacement fuel use is the 
potential to reduce the impact of a supply shortage on prices. As 
evidenced in the industrial and utility sectors, the existence of 
alternatives to oil provides potential substitutes for oil in the event 
of a production cutback. Since it is precisely the non-responsiveness 
of transportation oil demand to oil production cutbacks that makes oil 
price shocks possible, increasing competition for oil by using 
alternative fuels reduces the ability of oil suppliers to constrain 
supply in order to increase the price of oil.

E. Availability and Use of Alternative Fuels

    Alternative fuel use in the U.S. has grown significantly since the 
passage of AMFA alternative fuel incentives. In 1992, alternative fuel 
use in the U.S. amounted to 230 million gasoline gallon equivalents; in 
2000, alternative fuel use is estimated to be 368 million gasoline 
gallon equivalents, an overall increase of 60 percent. With the 
exception of methanol and E95 blend ethanol, all of the alternative 
fuels in use have seen notable increases in use between 1992 and 2000. 
An increasing number of CNG and LNG vehicles are available from 
original-equipment manufacturers and electricity has also enjoyed a 
large increase, due to the OEM offerings of electric vehicles in the 
Southwest. Alternative fuel use in alternative fuel vehicles has been 
rising at a rate three times faster than the total highway use of 
gasoline and diesel. Nonetheless, alternative fuel use only accounts 
for 0.23 percent of total highway fuel use.
    The National Energy Policy Development Group, in its May 17, 2001, 
report on the National Energy Policy states that, ``The lack of 
infrastructure for alternative fuels is a major obstacle to consumer 
acceptance of alternative fuels and the purchase of alternative fuel 
vehicles.'' The lack of infrastructure is one of the main reasons why 
most alternative fuel vehicles actually operate on petroleum fuels. As 
the report noted, ``ethanol vehicles offer tremendous potential if 
ethanol production can be expanded.'' However, the report also states 
that, ``a considerable enlargement of ethanol production and 
distribution capacity would be required to expand beyond their current 
base in the Midwest in order to increase use of ethanol-blended 
fuels.''
    The National Renewable Energy Laboratory reports that there are 
5,236 alternative fuel refueling sites as of May 2001, with alternative 
fuel refueling sites in all 50 states. Unfortunately, while most dual-
fuel vehicles use ethanol as an alternative fuel, less than three 
percent of U.S. alternative fuel refueling stations sell ethanol. As of 
May 2001, there were 121 public E85 refueling outlets in operation, up 
from 37 in 1995. For LPG, the most widely available alternative fuel, 
although it has availability in all states, there are only 3,270 
outlets in the U.S. For other

[[Page 10879]]

gaseous alternative fuels, there are 1,237 Compressed Natural Gas (CNG) 
outlets in the U.S and 44 Liquified Natural Gas (LNG) refueling sites.
    The Federal government, specifically DOE, the General Services 
Administration and the Department of Agriculture are involved with 
efforts to promote the use and expansion of alternative fuels and the 
alternative fuel infrastructure. A major focus of these efforts is the 
development of different feedstocks for ethanol and on partnerships 
that result in the expansion of the ethanol fuel infrastructure. DOE 
administers the Clean Cities Program, the Office of Fuels Development 
(OFD) alternative fuel program, and, in conjunction with the General 
Services Administration (GSA), the Federal AFV USER Program. Efforts by 
DOE are underway in Minnesota to help construct a number of ethanol 
refueling sites. In August 2001, the USDA announced that its agencies 
will use ethanol fuels in their fleet vehicles where practicable and 
reasonable in cost.
    As ethanol fuels are generally more expensive than gasoline, cost 
remains an impediment to the more widespread demand that would 
stimulate development of the necessary infrastructure. Although the 
trend in alternative fuels is in the direction of E85 use, the 
infrastructure has been slow to develop because these vehicles also use 
conventional fuel. However, even if relatively few of these vehicles 
are actually being operated on E85, the existence of a dual fuel 
capable fleet could spur an increase in the number of E85 refueling 
sites, and provide consumers an alternative if there are gas shortages 
or gas prices increase significantly. The small number of outlets 
available today points out the need to intensify the E85 refueling 
infrastructure. In addition, it is safe to say that many people who 
have purchased flexible-fuel vehicles do not know they could use E85. 
More public education in areas where E85 refueling stations exist is 
needed to inform people so that they are aware they can use E85.
    Future alternative fuel use may be affected by supply as well as 
demand. Water quality concerns involving the use of MTBE and the 
rapidly increasing number of E85 flexible-fuel vehicles may, if ethanol 
production is diverted to the production of an MTBE substitute, lead to 
insufficient ethanol to meet demand. Current ethanol supply capacity, 
as well as that represented by ethanol plants now planned or under 
construction, indicates that domestic ethanol production is now about 
1.72 billion gallons per year. Plants under construction can add 
another 123 million gallons per year, and plants in the engineering and 
planning stages can add another 149 million gallons per year. If all 
the present and building plants are producing ethanol as planned in 
2003, total ethanol production capacity that year will be about 1.99 
billion gallons of ethanol per year. Capacity in 2010 could reach 2.6 
billion gallons per year. However, if MTBE is banned as a gasoline 
additive and fuel producers replace MTBE with ethanol, it is uncertain 
if there will be enough refinery capacity to both replace MTBE and to 
fuel flexible-fuel vehicles a substantial portion of the time with E85.

III. Agency Proposal

    Section 32905(f) directs NHTSA to take one of the following actions 
on or before December 31, 2001: Either complete a rulemaking extending 
the dual-fuel incentive program or issue a notice of termination ending 
it. The agency's ability to extend the program is not unlimited--it may 
only extend the incentives for Anot more than 4 consecutive model years 
immediately after model year 2004 * * *.''
    On December 31, 2001, NHTSA issued a notice of intent to issue a 
notice of proposed rulemaking that was published in the Federal 
Register on January 7, 2002 (67 FR 713). In that notice, the agency 
explained that it was providing notice of its intention to issue a 
notice of proposed rulemaking to extend the dual fuel incentive program 
from one to four years.
    The agency is proposing to extend the dual-fuel incentive program 
for four model years, from the 2005 through the 2008 model years. NHTSA 
has tentatively concluded that extension of the dual-fuel incentive 
program for four model years would be appropriate and consistent with 
the goals of both the incentive program and the CAFE program as a 
whole.
    The dual-fuel incentive program, which envisions a reduction in 
petroleum dependence through the development of alternative fuels, 
accepts an interim increase in the consumption of petroleum fuels in 
pursuit of that end. When Congress conceived the incentive program, it 
was aware of the risk that manufacturers would avail themselves of 
gains in fleet fuel economy by building dual-fueled vehicles regardless 
of whether the vehicles ever used an alternative fuel. Concern about 
this possibility and the increase in the use of petroleum that could 
result, led to the enactment of two limits on the incentive program. 
One of these limits, now at issue, was to make the incentive available 
for the 1993-2004 model years, with the possibility of an extension of 
up to four model years, i.e., through the 2008 model year. The other 
limit was to place a cap of 1.2 mpg on the maximum increase in fleet 
fuel economy available from the use of the incentives for the 1993-2004 
model years and 0.9 mpg for any of the model year(s) to which the 
program was extended by NHTSA. The existence and nature of these limits 
indicates that Congress understood that the incentive program could 
result in increased petroleum use, that any increases in petroleum use 
would be limited to the life of the program, and that, if the program 
were extended, that the extent of increased petroleum use would be 
controlled.
    The existence of the dual-fuel incentives has spurred a large 
increase in the production of these vehicles in recent years. 
Technologies have been developed to the degree that dual-fueled 
vehicles are as reliable and as useful as their conventionally fueled 
counterparts. Fleet operators and others with access to gaseous fuels 
are, to a limited extent, using gaseous dual-fueled vehicles. Liquid 
fueled dual-fueled vehicles capable of operating on E85 or gasoline are 
being produced in significant numbers. These E85 vehicles may use 
either gasoline or E85 interchangeably with no input required from the 
vehicle operator, save the selection of the fuel to be used when 
filling the tank. With the exception of decreased range resulting from 
the slightly lower energy content of E85, a liquid dual-fueled vehicle 
performs as well on E85 as it does on gasoline.
    Production of E85 vehicles steadily increased through the 2000 
model year, but slightly decreased in the 2001 model year, as dual-fuel 
technology has matured and manufacturers rely on the incentives to 
assist them in meeting CAFE requirements. For example, no liquid fuel 
dual-fueled light trucks were produced in 1997. However, over 1.4 
million dual-fueled light trucks were produced in the 1998--2001 model 
years. In the 2000 model year, close to 7.6 percent, and in the 2001 
model year, 4.6 percent of all light trucks produced were dual-fueled 
vehicles. About 1.4 percent of passenger cars produced in the 2000 
model year and 0.8 percent produced in the 2001 model year were dual-
fueled vehicles (compared to .025 percent in 1993). As of the 2001 
model year, 217,000 E-85 dual-fueled passenger cars and 1,446,000 E-85 
dual-fueled light trucks had been produced. Comments submitted in 
response to the agency's request for information prior to preparation 
of NHTSA's report to Congress indicate that manufacturers

[[Page 10880]]

plan to produce increasing numbers of dual-fueled vehicles as part of 
their overall strategy for meeting CAFE requirements.
    NHTSA notes that almost all of the dual-fueled vehicles produced in 
the U.S. have been built since the 1997 model year. While the incentive 
program has been in place since the 1993 model year, manufacturer 
efforts in the first several years of the incentive program were 
primarily directed at the development of methanol-fueled (M85) 
vehicles. While these efforts met with some success, methanol's 
corrosive properties, problems with the quality of methanol fuels and 
increased demand for methanol in conventional fuel additives led to a 
change in direction toward the development and production of ethanol 
(E85) vehicles. The first production E85 dual-fueled vehicles appeared 
in the 1998 model year and are the only vehicles that have been 
produced in significant quantities since the inception of the incentive 
program.
    In terms of stimulating dual-fueled vehicle production, the 
incentive program appears to be meeting the expectations of Congress. 
Reliable dual-fueled vehicles that perform well while operating on an 
alternative fuel are becoming available in increasing numbers. In some 
instances, manufacturers are producing enough dual-fueled vehicles to 
enable them to obtain close to the maximum benefit under the incentive. 
Although these vehicles, the vast majority of which are E85 dual-fueled 
vehicles, have only begun to be produced in significant numbers, the 
comments submitted in response to NHTSA's May 9, 2000 request for 
comments indicate that the incentive program is the principal impetus 
for their development and manufacture. The incentive program has 
therefore begun to satisfy one component of AMFA's overall goal of 
encouraging the development of alternative fuel vehicles.
    The success of the incentive program in stimulating the production 
of vehicles has not yet resulted either in increased demand for 
alternative fuels or a corresponding increase in availability of these 
fuels. Despite the presence of approximately 1.7 million E85 capable 
dual-fueled vehicles in the U.S. fleet, owners of these vehicles are 
unlikely to be able to use E85 fuel, particularly if they live in one 
of the 32 states without any E85 fuel stations. At present, there are 
less than 140 E85 stations in the U.S. The majority of these stations 
are located in the Midwestern and north central states with 60 stations 
in Minnesota, 13 in Illinois, 10 in Iowa, 8 in Michigan, 7 apiece in 
South Dakota, Nebraska and Kentucky and 5 in Missouri.\5\ While the 
number of E85 stations has increased during the course of the incentive 
program, the growth that has occurred has not yet resulted in a degree 
of expansion suggesting that E85 is likely to serve as a viable 
alternative to petroleum fuels in the near future.
---------------------------------------------------------------------------

    \5\ A list of alternative fuel stations maintained by the 
Department of Energy may be accessed at 
http://www.afdc.nrel.gov/refueling.html.
---------------------------------------------------------------------------

    In one sense, the lack of development of an alternative fuel 
infrastructure is indicative of the technology and marketing of dual-
fueled vehicles. Dual-fueled vehicles perform as well when operated on 
gasoline as conventionally fueled vehicles. It is possible that owners 
of these vehicles often remain unaware that the vehicle can be operated 
on an alternative fuel or, in those areas where alternative fuel is 
available, where they can purchase alternative fuel. Although some 
manufacturers have made efforts to improve owner awareness of the 
unique capability of these dual-fueled vehicles, the fact remains that 
the dual-fuel capabilities of these vehicles are often not well known.
    Owner unawareness of dual-fuel capability is not the only obstacle 
to increased alternative fuel use. As noted above, there are presently 
very few E85 stations in the United States. Even in those locations 
where E85 is available, it has not historically been price competitive 
with gasoline, particularly when the price is adjusted to reflect E85's 
lower energy content. The lower energy content of E85 also results in a 
slight reduction in driving range when compared with gasoline. Those 
consumers who are aware of their vehicle's ability to use an 
alternative fuel most likely will not choose to use alternative fuels 
unless they are more attractive than gasoline.
    Development of an alternative fuel infrastructure is also dependent 
on the supply of alternative fuels. As noted above, current ethanol 
production in the United States is approximately 1.7 billion gallons 
per year. As that capacity increases, ethanol production is projected 
to reach approximately 2 billion gallons per year. A substantial 
percentage of this production capacity is used to produce additives for 
conventional gasoline or to produce gasohol (90 percent gasoline/10 
percent ethanol). As NHTSA notes in its report to Congress, about 400 
million gallons of ethanol were available for use in E85 fuel for dual-
fueled vehicles in 2000. The agency also notes that it anticipates that 
the amount of ethanol available for E85 dual-fueled vehicles would rise 
to approximately 1 billion gallons in 2010.
    Future availability of ethanol for the E85 fuel used by most dual-
fueled vehicles is further complicated by changes in the formulation of 
petroleum fuels. Much of the ethanol produced now is used for 
conventional fuel additives. This use may increase dramatically due to 
concerns about methyl tertiary butyl ether (MTBE). MTBE is an additive 
that has been used in U.S. gasoline as an octane enhancer since 1979. 
Because MTBE use in gasoline reduces certain emissions, it has been 
used in higher concentrations since 1992 in certain geographic areas to 
fulfill the oxygenate requirements set by Congress in the 1990 Clean 
Air Act Amendments. Recent concerns about MTBE in groundwater resulting 
from leaking underground storage tanks has led to a reexamination of 
policies regarding its use.
    While a variety of approaches are being considered, there is a 
possibility that the use of ethanol as an MTBE substitute may spur a 
substantial increase in demand for ethanol. If this were to occur, the 
increased demand for ethanol as an additive might restrict the 
availability of ethanol as a fuel until production capacity is 
increased. However, once the demand for ethanol-based additives 
stabilized, the increased production capacity might make more ethanol 
available as fuel. NHTSA is concerned that the increased demand for 
ethanol additives might restrict the availability of ethanol fuel, 
particularly in the next few years. As temporary shortages of ethanol 
might impact the success of the incentive program in the near term, 
NHTSA believes that a full four-year extension of the program might be 
necessary to allow ethanol production to grow sufficiently to meet the 
demand for additives to petroleum fuel and ethanol fuel itself.
    The agency's proposal to extend the incentive program for four 
years is an attempt to reconcile the promise of an increasingly large 
fleet of dual-fueled vehicles with the constraints preventing the 
development of the dual-fuel infrastructure envisioned by Congress. The 
existence of the incentive program has provided considerable impetus to 
the development and refinement of both gaseous and liquid fueled dual-
fueled vehicles. After efforts in the early years of the incentive 
program revealed technological barriers to practical methanol fueled 
vehicles, industry efforts turned to the development of ethanol capable 
vehicles. The maturation of ethanol capable dual-fueled vehicle 
technology did not occur until well after the incentive program

[[Page 10881]]

began in the 1993 model year. As dual-fueled vehicle production has 
only recently begun to result in significant numbers of dual-fueled 
vehicles in actual use, NHTSA believes that that termination of the 
incentive program before the end of the 2008 model year would be 
premature. The added numbers of dual-fueled vehicles now in use, in 
combination with those that will be produced in the 2002 through 2008 
model years, may spur increased consumption and availability of 
alternative fuels. In addition, the Federal government, and 
specifically DOE, the General Services Administration and the 
Department of Agriculture are involved with efforts to promote the use 
and expansion of alternative fuels and the alternative fuel 
infrastructure. These programs may also bear fruit in the form of 
increased alternative fuel use. Unfortunately, NHTSA does not now have 
the opportunity to wait and examine the impact these vehicles may have.
    The agency's tentative decision to extend the incentive program for 
four years is based on its assessment that the energy and other costs 
of the incentive program are justified by the potential benefits. We 
are unable to predict with certainty how much alternative fuel use, 
which is a critical element to the realization of benefits, will 
increase.\6\ Adoption of the proposed four-year extension entails a 
risk that manufacturers might be producing dual-fuel vehicles that 
operate only on petroleum fuel. On the other hand, if the agency were 
to allow the program to terminate, there would be an equal risk that 
late-blooming alternative fuel technology and production would be 
wasted and the opportunities for eventual reductions in petroleum use 
would be lost. A four-year extension is, in NHTSA's view, a reasonable 
reconciling of those risks. Such an extension will provide 
opportunities for further development of measures to encourage 
alternative fuel use and, if those policies are successful, result in 
the development of a domestic fuel supply and infrastructure with 
either little or no increase in petroleum use. As noted above, the 
maximum incentive benefit available in the 2005 through 2008 model 
years is an 0.9 mpg increase in a manufacturer's fleet average. This 
limitation on the maximum benefit modifies the impact of the incentive 
program's special fuel economy calculation for dual-fueled vehicles. 
Manufacturers will be required to increase the efficiency of their 
conventionally fueled fleet to make up for the reduction in the dual-
fuel incentive. If alternative fuel use has not increased, the 0.9 mpg 
cap will restrict the negative impacts of the incentive program.
---------------------------------------------------------------------------

    \6\ Many of those responding to NHTSA's May 9, 2000 request for 
comments suggested that a number of measures be implemented to make 
alternative fuels more attractive to consumers. These suggested 
measures, which included reductions in fuel taxes on alternative 
fuels, tax credits for alternative fuel use or alternative fuel 
vehicles and other market incentives, are initiatives that are 
beyond NHTSA's authority.
---------------------------------------------------------------------------

IV. Benefits and Costs

    In the preliminary economic assessment, the agency examined two 
scenarios examining the impact of extending the incentive program on 
consumers by projecting the increased fuel costs resulting from less 
efficient conventionally fueled vehicles being available in the 
marketplace. One scenario, scenario 1, is based on the 2001 model year 
combined fuel economy of GM, Ford, and Daimler/Chrysler light trucks of 
20.07 mpg. Scenario 1 examined the 2001 model year fuel economy for 
these manufacturers without operation of the incentive and with the 
incentive in place. (20.52 mpg versus 20.07 mpg.) As the incentive 
program allows the production of less fuel efficient vehicles, the 
lower average fuel economy will result in the average light truck 
purchaser's vehicle consuming more fuel (on average 308 gallons) over 
its lifetime and costing $129 more (present discounted value) to 
operate in fuel over the vehicle's lifetime. Scenario 2 examined the 
potential credit of 0.9 mpg that could be taken during the extension 
years, so it compared 20.97 mpg versus 20.07 mpg. From a light truck 
purchaser's perspective, the lower average fuel economy will result in 
their vehicle consuming more fuel (on average 411 gallons) over its 
lifetime and costing $244 more (present discounted value) to operate in 
fuel over the vehicles' lifetime.
    Scenario 1 could result in an additional 1.7 billion gallons of 
gasoline being used over the lifetime of one model year's fleet of 
light trucks at a present discounted value of $727 million. Scenario 2 
could result in an additional 2.3 billion gallons of gasoline being 
used over the lifetime of one model year's fleet of light trucks at a 
present discounted value of $1,375 million.
    Because there are a variety of ways to improve fuel economy, and 
our ability to collect and analyze data had been restricted under the 
CAFE freeze for the preceding six fiscal years, we are unable at this 
time to determine what are the benefits to the light truck purchaser to 
offset the increase in fuel costs. The light truck purchaser may get 
more choices of large light trucks and sport utility vehicles in the 
market, perhaps the ability to choose a larger engine, or perhaps 
savings in initial vehicle prices if weight reductions due to material 
substitutions, or fuel economy technologies are not added to the 
vehicle. It is entirely possible that the value vehicle purchasers 
place on these attributes exceeds the cost of the extra gasoline these 
vehicles use.

V. Rulemaking Notices and Analyses

A. Executive Order 12866 and DOT Regulatory Policies and Procedures

    Executive Order 12866, ``Regulatory Planning and Review'' (58 FR 
51735, October 4, 1993), provides for making determinations whether a 
regulatory action is ``significant'' and therefore subject to Office of 
Management and Budget (OMB) review and to the requirements of the 
Executive Order. The Order defines a ``significant regulatory action'' 
as one that is likely to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or Tribal governments or 
communities;
    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    This proposal is economically significant. While the proposal does 
not require the production of alternative fuel vehicles, it allows 
manufacturers producing dual-fuel vehicles to produce less efficient 
conventionally fueled vehicles. The impact of the production of these 
less efficient vehicles may result in additional annual fuel costs of 
more than $100 million. Accordingly, it was reviewed under Executive 
Order 12866. The rule is also significant within the meaning of the 
Department of Transportation's Regulatory Policies and Procedures.
    Because this proposed rule is economically significant, the agency 
has prepared a Preliminary Economic Analysis (PEA). This analysis is 
summarized above in the sections on Benefits and Costs. The PEA is 
available

[[Page 10882]]

in the docket and has been placed on the agency's website along with 
the proposal itself.

B. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. 601 et seq., 
as amended by the Small Business Regulatory Enforcement Fairness Act 
(SBREFA) of 1996), whenever an agency is required to publish a notice 
of rulemaking for any proposed or final rule, it must prepare and make 
available for public comment a regulatory flexibility analysis that 
describes the effect of the rule on small entities (i.e., small 
businesses, small organizations, and small governmental jurisdictions). 
The Small Business Administration's regulations at 13 CFR part 121 
define a small business, in part, as a business entity ``which operates 
primarily within the United States.'' (13 CFR 121.105(a)). No 
regulatory flexibility analysis is required if the head of an agency 
certifies the rule will not have a significant economic impact on a 
substantial number of small entities. SBREFA amended the Regulatory 
Flexibility Act to require Federal agencies to provide a statement of 
the factual basis for certifying that a rule will not have a 
significant economic impact on a substantial number of small entities.
    NHTSA has considered the effects of this proposed rule under the 
Regulatory Flexibility Act. I certify that this proposed rule would not 
have a significant economic impact on a substantial number of small 
entities. The rationale for this certification is that there are not 
currently any small motor vehicle manufacturers in the United States 
building vehicles that would be affected by the extension of the dual-
fuel incentive credit.

C. National Environmental Policy Act

    NHTSA has analyzed this rulemaking action for the purposes of the 
National Environmental Policy Act. The agency has performed a 
preliminary Environmental Assessment and determined that implementation 
of this proposed rule will not have a significant impact on the quality 
of the human environment. Adoption of this proposed rule is likely to 
result in increased vehicle emissions and an increase in greenhouse 
gases, depending on the amount of alternative fuel consumed by dual-
fueled vehicles manufactured in response to the rule. Such increases 
will stem largely from the production of larger, less fuel efficient 
vehicles made possible by the propose extension. However, under any 
scenario, the amount of increased emissions represents a very small 
percentage of overall emissions resulting from the consumption of 
petroleum fuels by highway vehicles.

D. Executive Order 13132 (Federalism)

    Executive Order 13132 requires NHTSA to develop an accountable 
process to ensure ``meaningful and timely input by State and local 
officials in the development of regulatory policies that have 
federalism implications.'' ``Policies that have federalism 
implications'' is defined in the Executive Order to include regulations 
that have ``substantial direct effects on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government.'' Under Executive Order 13132, the agency may not issue a 
regulation with Federalism implications, that imposes substantial 
direct compliance costs, and that is not required by statute, unless 
the Federal government provides the funds necessary to pay the direct 
compliance costs incurred by State and local governments, the agency 
consults with State and local governments, or the agency consults with 
State and local officials early in the process of developing the 
proposed regulation. NHTSA also may not issue a regulation with 
Federalism implications and that preempts State law unless the agency 
consults with State and local officials early in the process of 
developing the proposed regulation.
    The agency has analyzed this proposed rule in accordance with the 
principles and criteria set forth in Executive Order 13132 and has 
determined that it would not have sufficient federalism implications to 
warrant consultation with State and local officials or the preparation 
of a federalism summary impact statement. The proposal to extend the 
dual-fuel incentive program through the 2008 model year may result in 
additional conventional fuel costs for state and local governments. At 
the same time, extension of the incentive program will ensure that dual 
fuel vehicles, which state and local governments are required to use by 
other federal mandates, will be available at lower costs. Any increased 
costs that would not be offset by the continued availability of lower 
cost dual fuel vehicles, however, are not direct costs. The agency's 
proposal would not otherwise have any substantial effects on the 
States, or on the current Federal-State relationship, or on the current 
distribution of power and responsibilities among the various local 
officials.

E. Civil Justice Reform

    This proposed amendment would not have any retroactive effect. 49 
U.S.C. 30161 sets forth a procedure for judicial review of final rules 
establishing, amending, or revoking Federal motor vehicle safety 
standards. That section does not require submission of a petition for 
reconsideration or other administrative proceedings before parties may 
file suit in court.

F. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995, a person is not required 
to respond to a collection of information by a Federal agency unless 
the collection displays a valid OMB control number. This proposed rule 
would not require any new collections of information as defined by the 
OMB in 5 CFR part 1320. Data regarding production of dual-fuel vehicles 
would be submitted to the agency under the existing procedures found in 
49 CFR part 537.

G. National Technology Transfer and Advancement Act

    Section 12(d) of the National Technology Transfer and Advancement 
Act of 1995 (NTTAA), Public Law 104-113, section 12(d) (15 U.S.C. 272) 
directs us to use voluntary consensus standards in our regulatory 
activities unless doing so would be inconsistent with applicable law or 
otherwise impractical. Voluntary consensus standards are technical 
standards (e.g., materials specifications, test methods, sampling 
procedures, and business practices) that are developed or adopted by 
voluntary consensus standards bodies, such as the Society of Automotive 
Engineers (SAE). The NTTAA directs us to provide Congress, through OMB, 
explanations when we decide not to use available and applicable 
voluntary consensus standards.
    There are no voluntary consensus standards available at this time. 
However, NHTSA will consider any such standards if they become 
available.

H. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires Federal agencies to prepare a written assessment of the costs, 
benefits, and other effects of proposed or final rules that include a 
Federal mandate likely to result in the expenditure by State, local or 
tribal governments, in the aggregate, or by the private sector, of more 
than $100 million in any one year (adjusted for inflation with base 
year of 1995). Before promulgating a rule for which a written statement 
is needed,

[[Page 10883]]

section 205 of the UMRA generally requires NHTSA to identify and 
consider a reasonable number of regulatory alternatives and adopt the 
least costly, most cost-effective, or least burdensome alternative that 
achieves the objectives of the rule. The provisions of section 205 do 
not apply when they are inconsistent with applicable law. Moreover, 
section 205 allows NHTSA to adopt an alternative other than the least 
costly, most cost-effective, or least burdensome alternative if the 
agency publishes with the final rule an explanation why that 
alternative was not adopted.
    This proposed rule would not result in the expenditure by State, 
local, or tribal governments, in the aggregate, of more than $100 
million annually.

I. Plain Language

    Executive Order 12866 requires each agency to write all rules in 
plain language. Application of the principles of plain language 
includes consideration of the following questions:

--Have we organized the material to suit the public's needs?
--Are the requirements in the rule clearly stated?
--Does the rule contain technical language or jargon that is not clear?
--Would a different format (grouping and order of sections, use of 
headings, paragraphing) make the rule easier to understand?
--Would more (but shorter) sections be better?
--Could we improve clarity by adding tables, lists, or diagrams?
--What else could we do to make this rulemaking easier to understand?
    If you have any responses to these questions, please include them 
in your comments on this NPRM.

J. Regulation Identifier Number (RIN)

    The Department of Transportation assigns a regulation identifier 
number (RIN) to each regulatory action listed in the Unified Agenda of 
Federal Regulations. The Regulatory Information Service Center 
publishes the Unified Agenda in April and October of each year. You may 
use the RIN contained in the heading at the beginning of this document 
to find this action in the Unified Agenda.

VI. Preparation and Submission of Comments

When Is the Comment Closing Date?

    NHTSA has determined that it is necessary to provide a comment 
period of less than 60 days because of the statutory requirement to 
issue a final rule by December 31, 2001.

Will the Agency Consider Late Comments?

    We will consider all comments that Docket Management receives 
before the close of business on the comment closing date indicated 
above under DATES. To the extent possible, we will also consider 
comments that Docket Management receives after that date. If Docket 
Management receives a comment too late for us to consider it in 
developing a final rule (assuming that one is issued), we will consider 
that comment as an informal suggestion for future rulemaking action.

How Do I Prepare and Submit Comments?

    Your comments must be written and in English. To ensure that your 
comments are correctly filed in the Docket, please include the docket 
number of this document in your comments.
    Your comments must not be more than 15 pages long. (49 CFR 553.21). 
We established this limit to encourage you to write your primary 
comments in a concise fashion. However, you may attach necessary 
additional documents to your comments. There is no limit on the length 
of the attachments.
    Please submit two copies of your comments, including the 
attachments, to Docket Management at the address given above under 
ADDRESSES.
    In addition, given the statutory deadline of December 31, 2001, for 
issuance of the final rule, for those comments of 4 or more pages in 
length, we request that you send 10 additional copies, as well as one 
copy on computer disc, to: Mr. Kenneth Katz, Office of Consumer 
Programs, National Highway Traffic Safety Administration, 400 Seventh 
Street, SW, Washington, DC 20590. We emphasize that this is not a 
requirement. However, we ask that you do this to aid us in expediting 
our review of all comments. The copy on computer disc may be in any 
format, although we would prefer that it be in WordPerfect 8 or Word 
2000.
    You may also submit your comments to the docket electronically by 
logging onto the Dockets Management System website at http://dms.dot.gov. Click on ``Help & Information'' or ``Help/Info'' to obtain 
instructions for filing the document electronically.

How Can I Be Sure That My Comments Were Received?

    If you wish Docket Management to notify you upon its receipt of 
your comments, enclose a self-addressed, stamped postcard in the 
envelope containing your comments. Upon receiving your comments, Docket 
Management will return the postcard by mail.

How Do I Submit Confidential Business Information?

    If you wish to submit any information under a claim of 
confidentiality, you should submit three copies of your complete 
submission, including the information you claim to be confidential 
business information, to the Chief Counsel, NHTSA, at the address given 
above under FOR FURTHER INFORMATION CONTACT. In addition, you should 
submit two copies, from which you have deleted the claimed confidential 
business information, to Docket Management at the address given above 
under ADDRESSES. When you send a comment containing information claimed 
to be confidential business information, you should include a cover 
letter setting forth the information specified in our confidential 
business information regulation. (49 CFR part 512.)

How Can I Read the Comments Submitted by Other People?

    You may read the comments received by Docket Management at the 
address given above under ADDRESSES. The hours of the Docket are 
indicated above in the same location.
    You may also see the comments on the Internet. To read the comments 
on the Internet, take the following steps:

    1. Go to the Docket Management System (DMS) Web page of the 
Department of Transportation (http://dms.dot.gov/).
    2. On that page, click on ``search.''
    3. On the next page (http://dms.dot.gov/search/), type in the 
four-digit docket number shown at the beginning of this document. 
Example: If the docket number were NHTSA-1998-1234, you would type 
``1234.'' After typing the docket number, click on ``search.''
    4. On the next page, which contains docket summary information 
for the docket you selected, click on the desired comments. You may 
download the comments. Although the comments are imaged documents, 
instead of word processing documents, the ``pdf'' versions of the 
documents are word searchable.

    Please note that even after the comment closing date, we will 
continue to file relevant information in the Docket as it becomes 
available. Further, some people may submit late comments. Accordingly, 
we recommend that you periodically check the Docket for new material.

List of Subjects in 49 CFR Part 538

    Energy conservation, Gasoline, Imports, Motor vehicles.


[[Page 10884]]


    In consideration of the foregoing, NHTSA proposes to amend 49 CFR 
part 538 as follows:

PART 538--MANUFACTURING INCENTIVES FOR ALTERNATIVE FUELED VEHICLES

    1. The authority citation for part 538 of Title 49 would continue 
to read as follows:

    Authority: 49 U.S.C. 32901, 32905, and 32906; delegation of 
authority at 49 CFR 1.50.

    2. Section 538.1 would be revised to read as follows:


Sec. 538.1  Scope.

    This part establishes minimum driving range criteria to aid in 
identifying passenger automobiles that are dual-fueled automobiles. It 
also establishes gallon equivalent measurements for gaseous fuels other 
than natural gas. This part also extends the dual-fuel incentive 
program.
    3. Section 538.2 would be revised to read as follows:


Sec. 538.2  Purpose.

    The purpose of this part is to specify one of the criteria in 49 
U.S.C. chapter 329 ``Automobile Fuel Economy'' for identifying dual-
fueled passenger automobiles that are manufactured in model years 1993 
through 2004. The fuel economy of a qualifying vehicle is calculated in 
a special manner so as to encourage its production as a way of 
facilitating a manufacturer's compliance with the Corporate Average 
Fuel Economy Standards set forth in part 531 of this chapter. The 
purpose is also to establish gallon equivalent measurements for gaseous 
fuels other than natural gas. This part also specifies the model years 
after 2004 in which the fuel economy of dual-fueled automobiles may be 
calculated under the special incentive provisions found in 49 U.S.C. 
32905(b) and (d).
    4. Section 538.9 would be added to read as follows:


Sec. 538.9  Dual fuel vehicle incentive.

    The application of 49 U.S.C. 32905(b) and (d) to qualifying dual 
fuel vehicles is extended to the 2005, 2006, 2007, and 2008 model 
years.

    Issued on March 6, 2002.
Stephen R. Kratzke,
Associate Administrator for Safety Performance Standards.
[FR Doc. 02-5790 Filed 3-6-02; 3:58 pm]
BILLING CODE 4910-59-P