Interpretation ID: nht90-2.71

TYPE: Interpretation-NHTSA

DATE: June 1, 1990

FROM: William F. Canever -- Staff Attorney, Office of the General Counsel, Ford Motor Company

TO: Stephen P. Wood -- Acting Chief Counsel, U.S. Department of Transportation, NHTSA

TITLE: None

ATTACHMT: Attached to letter dated 3-14-91 from Paul Jackson Rice to William F. Canever (A37; Part 535; CSA S 502(1))

TEXT:

As we discussed, Ford Motor Company will be submitting a credit allocation plan to cover a CAFE credit shortfall for its 1989 Domestic Light Truck Fleet. You have asked us to explain our proposed method of credit allocation.

Our credit allocation method is consistent with the methodology that was reviewed and approved by NHTSA when Ford filed a 1985 light truck credit allocation plan. (See letter from Diane K. Steed, dated April 26, 1988, approving the 1985 credit allocatio n plan.) Under that approved plan, Ford utilized 1986 CAFE credits earned on a combined reporting basis and prorated the credits based upon the sales mix of individual 4x2 and 4x4 vehicles to cover the 4x4 portion of its 1985 credit shortfall. Proratio n was necessary because Ford had elected to report its 1985 light truck CAFE on a class basis (4x4 and 4x2), while reporting its 1986 light truck CAFE on a combined basis. After proration, application of 4x4 credits to the 1985 shortfall and recombinati on, Ford has 3,208,660 combined light truck credits available from 1986. Ford intends to apply those credits to its 1989 combined light truck CAFE credit shortfall.

The proration method was approved by NHTSA in a Notice of Interpretation. In the Notice, NHTSA's Chief Counsel stated:

The Agency interprets . . . the Act to require as much commonality as possible between classes in transferring credits, but not absolute identity. . . . In transferring credits earned in 1979-1980 model years the agency will attempt to assure that those credits are applied to offset civil penalties on the same type of vehicles as those which generated the credits. This will be pursue d by pro-rating the earned credits according to the number of vehicles in the credit-earning class which would fall in the class subject to the civil penalty in the prior or subsequent year. 44 Fed. Reg. 64943 (1979).

While the Notice of Interpretation was prompted by new standards which permitted manufacturers to comply with light truck CAFE standards on a combined basis or a class basis, the proration methodology was not specifically limited to any particular model year nor was it limited to a one time only application. In fact, the preamble to the final rule which established the three-year carryforward and carryback of fuel economy credits for manufacturers of light trucks reaffirmed the proration methodology ci ting examples which indicated that the methodology could be used in several different years.

This notice also reaffirms the policy set forth in the November 1979 notice of interpretation regarding the transfer of credits by a manufacturer between a year in which it complies with a single fuel economy standard applicable to al l light trucks and a year in which it complies with several standards for different classes of light trucks. 45 Fed. Reg. 83233 (1980).

Neither the preamble nor the notice of interpretation limit the proration methodology to any given year or to a single opportunity. Indeed, it is instructive to note that at the time the preamble was published light truck CAFE standards had been set onl y through 1985, and the preamble discussed the proration of credits as a choice available to a manufacturer for all of those years:

Additional examples are set forth below to illustrate how this procedure will be applied in light of the manufacture(r)s' choice in model years 1983-1985 to comply with either a single standard for all light trucks or with optional se parate standards for two-wheel (4x2) and four-wheel drive (4x4) light trucks.

(45 C.F.R. S535.4(e)) While the regulation states that credits may not be transferred between classes of light truck, it is clear that the proration methodology protects against such an occurrence. Prorating of combined credits assures that credits are applied to offset civi l penalties on the same types of light trucks as those that generated the credits. This fact was recognized by NHTSA when it first proposed and approved the use of the proration methodology.

The regulatory scheme creates two methods of complying with light truck CAFE standards, it does not create three classes of light trucks. Manufacturers can comply with light truck CAFE standards on a combined basis or on a class basis. However, there ar e only two classes of light trucks--4x4 and 4x2. No where is the term "class" applied to the combined light truck fleet. In fact, if a combined fleet were a separate "class" of light trucks, then the proration methodology would be prohibited even in th e circumstances identified in the Notice of Interpretation and in the preamble. Both the regulation and the discussion in the preamble to the final rule make it clear that there are only two "classes" of light trucks, and that there are two separate met hods of complying with the light truck CAFE standards. Complying with a single fuel economy standard applicable to all light trucks is a method of compliance--it does not create a new and separate class of trucks.

As you know, Ford has elected different means of compliance for different model years. In the past, Ford has reported its light truck CAFE on a combined basis for model years 1982, 1986, 1987, 1988, and 1989, while reporting on a class basis for model y ears 1980, 1981, 1983, 1984, and 1985. Ford has, with NHTSA approval, utilized the proration method of credit allocation to cover shortfalls in 1982 and 1985. (Because NHTSA has eliminated the option of complying with the standard on a class basis begi nning in 1992, it can be anticipated that the proration

methodology may be employed by manufacturers to determine credit allocation. However, if NHTSA maintains a combined fleet standard, these issues will resolve themselves after the 1995 model year.)

The proposed use of 1986 credits to cover 1989 does not directly involve the use of prorated credits. Ford elected to report both 1986 and 1989 on a combined basis. Proration is involved here only to the extent that Ford prorated some of its 1986 credi ts to cover 1985 and then recombined the remaining credits to carry forward for future allocation. Because the proration and recombination of 1986 credits was previously accepted by NHTSA when it approved Ford's 1985 credit allocation plan, we do not be lieve that there are any outstanding issues to be addressed. However, as we discussed, we will not file our credit allocation plan for 1989 until you have had an opportunity to review this information. Please let us know if you require any additional i nformation or if we can be of assistance in any way.