A Preliminary Assessment of the
    Gaseous Fuels Aftermarket
                  Final Report
               Office of Mobile Sources
           US Environmental Protection Agency
                  prepared by:
                ICF Incorporated
             EPA Contract No. 68-C1-0059
            Work Assignment No. 1, Subtask 1
                September 28,1992

     This report was prepared under contract to an Agency of the United States
Government.  Neither the United States Government nor any of its employees, contractors.
subcontractors, nor their employees makes any warranty, expressed or implied, or assumes
any legal liability or responsibility for any third-party use of any information or product
disclosed in this report, or represents that its use by such third parties would not infringe on
privately owned rights.

     Publication of the data in this document does not signify that the contents necessarily
reflect the joint or separate views and policies of the US Environmental Protection Agency.
Mention of trade names or  commercial products does not constitute endorsement or
recommendation for use.
Final Report • * • September 28,1992

      This reoort was funded by the Office of Mobile Sources (QMS) of the US Environmental
Protection Agency.  The project was managed by Mr. Bryan Manning and Mr. John Mueller of
QMS. "he reoon was developed and written by ICF Incorporated. The following persons are
gratefully acxnowieoged for their contributions.

      ICF incorporated

      Andrea Cousins
      Karen Doerschug
      Barry Galef
      Nathan Tiller
     Endine. Fuel, and Emissions Engineering

     Sean Turner
     Christopher S. Weaver
     In addition, thanks to other individuals and industry representatives who provided
information on the attermarket conversion industry.
Final Report * * * September 28,1992

                               TABLE OF CONTENTS
Introduction	1

Chapter 1  - Methodology	3
      1.1   Identification of Participating Companies and
           Collection of Industry Information  	3
      1.2   Collection of Company-Specific Information	5
      1.3   Development of Representative Model Companies  	6
      1.4   Estimating Potential Compliance Costs	7
      1.5   Limitations of the Data	7

Chapter 2 - Industry Overview 	9
      2.1   History  	9
      2.2   The Conversion Industry is both Emerging and Transitional	10
      2.3   Nature of Competition	11
      2.4   Industry Structure 	15

Chapter 3 - Industry Segments and Model Companies	18
      3.1   Kit Makers	18
      3.2   Installers	22
      3.3   Engineered Converters 	24

Chapter 4 - Demand for Industry Products and Services  	27
      4.1   Demand Based on Economic Factors	27
      4.2   Demand Related to Air Quality and Regulation  	29
      4.3   Interaction of Market Segments	31
      4.4   Elasticity of Demand	31

Chapter 5 - Cost Structure of  the Aftemnarket Conversion Industry	33
      5.1   Conversion Prices	33
      5.2   Components of Conversion Costs	34
      5.3   Economies of Scale  	34
      5.4   OEM Competition 	35

Chapter 6 • Preliminary Analysis of Impacts	36
      6.1   Emission Tests 	36
      6.2   Low-Mile Certification Tests	38
      6.3   Tailpipe Tests for CFF Vehicles	45
      6.4   Summary of Estimated Regulatory Costs	46
      6.5   Cut-Off Points	49

Appendix A - Glossary of Terms	50
Appendix B - Assessment of Demand Elasticity  	51

Final Report * * *  September 28,1992                                                "i

      Alternative transportation fuels like compressed natural gas, propane, electricity, and
methanol. are increasingly considered viable options to traditional transportation fuels such as
gasoline and diesel.  There are an estimated 425,000 liquified petroleum gas (LPG) vehicles
and 30,000 compressed natural gas (CNG) vehicles in use in the US today.1  Advantages of
these alternative fuels include that they are cleaner burning, are less expensive than gasoline
per gallon equivalent, and can reduce vehicle maintenance.  However, with few exceptions
such as the Ford CNG Crown Victoria and the GMC  Sierra, one currently cannot purchase
alternative fuel vehicles (AFVs) from automakers.  Nearly all of the AFVs on the road today
were retrofitted to enable them to run on fuels other than gasoline or diesel. This report
characterizes the industry that performs these retrofits, the aftermarket conversion industry.

      Historically, the aftermarket conversion industry has been driven by economic factors.
The number of conversions fluctuated directly with the price of gasoline. Conversions were
done on a one-by-one basis.  Conversion kits containing all the necessary components to
convert a vehicle were frequently "one-size-fits-all" and employed rudimentary technology.  In
the past few years, however, the outlook for the conversion industry has changed
dramatically as a result of the 1990 Clean Air Act Amendments (CAA), state legislation
(especially in California, Texas, Oklahoma, and Colorado), and other state and local initiatives
that promote alternative fuels. Conservative estimates by the gaseous fuels industry indicate
that there will be at least 4.5 million AFVs on US roads by the year 2005.2

     To meet the demand for AFVs, the aftermarket conversion industry is undergoing a
rapid transition:  Many new companies are entering the industry; technology is becoming
increasingly sophisticated; original equipment manufacturers (OEMs - e.g., automakers) are
entering the market; and companies are facing significant learning curves. As demand for
AFVs grows, large companies may experience substantial economies of scale.

     The purpose of this report is to provide information to be used in assessing the
potential impacts of EPA's proposed Gaseous Fuels  and Clean  Fuel Fleet rulemakings on the
aftermarket conversion industry. Therefore, the report will focus on issues germane to
determining these impacts (such as financial profiles of companies involved, future trends in
industry development and sales, and costs of complying with conversion requirements) rather
than assessing the viability of current technologies or the emissions benefits of alternative
fuels.  Moreover, the  report focuses on conversions to CNG and LPG as conversions to these
fuels are most viable  at this time, even though EPA's proposed conversion regulations could
potentially apply to any fuel (e.g., liquid natural gas).
   1   NPGA and U.S. Department of Energy, cited by LP Gas Clean Fuels Coalition.

   2  Energy Analysis. American Gas Association Planning and Analysis Group, Appendix 1, January

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      This report is divided into six chapters.  Chapter 1 presents the methodology ICF used
to gather information and develop representative model companies for the three major
industry segments (kit manufacturers, engineered converters, and installers). Chapter 2
provides an overview of the industry and discusses factors relevant to assessing impacts
such as the industry structure and nature of competition.  Chapter 3 provides information on
the major industry segments and presents model companies in each segment.  Chapter 4
summarizes the cost structure of the aftermarket conversion industry. Chapter 5 discusses
demand for conversions.  Finally, Chapter 6 provides a brief discussion of some aspects of
the potential impacts of the regulation of gaseous fuels and clean fuel fleet conversions.
Final Report * * * September 28, 1992

                                   CHAPTER 1
     There are no publicly available, comprehensive reports on the US aftermarket
conversion industry nor even a complete list of participating companies.  This chapter
explains the methodology and data sources used to characterize the aftermarket conversion
industry.  It is presented in four sections: Identification of Participating Companies and
Collection of Industry Information; Collection of Company-Specific Information; Development
of Representative Model Companies; and Limitations of the Data.

1.1   Identification of Participating Companies and Collection of Industry Information

     A two-pronged approach was used to generate a list of companies participating in the
conversion industry and to gather general industry information on trends and business
practices. First, ICF compiled an initial listing and partial characterization of firms involved in
manufacturing, assembling, installing, and/or distributing  CNG and LPG conversion kits.
Second. ICF contacted industry organizations, national information sources, and state
representatives. Using this approach, ICF generated a list of companies in the conversion
industry and additional state and industry representatives who could provide general
information on the industry.

     ICF then contacted these various organizations to obtain general information about the
industry,  lists of participating companies, and recommendations of additional information
sources until it began to get repetitive recommendations. The organizations ICF contacted
are  listed in Exhibit 1 -1.

     Due to the limitations of the Paperwork Reduction Act, ICF spoke with only one or two
representatives of conversion kit manufacturers, engineered converters, and installers to
obtain  public information about their companies and general industry and market information.
iCF's questions and the content of its conversations with each of these industry
representatives varied  greatly because of the differences among companies and company

     Even though contacts with industry participants were limited, ICF is confident that this
thorough approach has allowed it to identify the majority of companies participating in the
aftermarket conversions industry and to develop a sound industry characterization. It is
unlikely, however, that ICF has identified all small and recent start-up companies as many
continue to enter the industry  or all companies that have converted parts of their fleets on a
trial basis.
Final Report * * * September 28,1992

                                 EXHIBIT 1-1
                      ORGANIZATIONS CONTACTED
                    American Gas Association
                    Automotive Industry Action Group
                    California Air Resources Board
                    Clean Air Texas
                    Colorado Oept. of Health
                    Engine Manufacturers Association
                    Interstate Natural Gas Association
                    LP/Gas Magazine
                    LPG Coalition
                    National Highway Traffic Safety Administration
                    National Fire Protection Association
                    National Renewable Energy Labs
                    National Research Council Transportation Board
                    National Gas Transportation Association
                    National Propane Gas Association
                    Natural Gas Vehicle Coalition
                    Natural Gas Supply Association
                    Natural Gas Fuels Magazine
                    Oklahoma Alternative Fuels Program
                    Society of Automotive Engineers
                    Texas Railroad Commission
                    Texas Air Control Board
                    Texas General Land Office
Final Report * * * September 28, 1992

 1.2   Collection of Company-Specific Information

      Once ICF identified the majority of companies in the industry, it gathered publicly
 available information on individual companies.  Sources of data included Dunn & Bradstreet's
 Business Information Reports. Market Identifiers. Electronic Business Directory, and Financial
 Records Plus: and Trinet's US Businesses and Company Database.

      ICF used information from these sources and industry contacts to create a company
 database with selected information:

      *     Company name;
      •     Location;
      •     Contact person;
      •     Corporate status;
      •     Name of parent company (if relevant);
      •     Four digit Standard Industrial Classification (SIC) codes corresponding to the
            principal business activities;
      •     Activity or activities performed in the industry -
                 manufacture component(s) or entire kit, distribute components/kits, perform
                 conversions, type of conversions (CNG or LPG);
      •     Number of conversions performed in the past year, past 5 years;3
      •     Indication of whether the  financial information presented pertains to the parent
            company or affiliate/division/subsidiary/joint venture;
      •     Financial information for the most recent fiscal year -
                Annual revenues (sales)
                Net worth
                Current assets
                Current liabilities
                Current ratio
                Working capital
                Net profit (income)
                Total assets
                Estimated percent of income from conversion activities
                Financial condition  (fair, good, strong, unbalanced)
                Trend  (in sales, general financial stability);
      •    Whether the company is located in a state with a centralized or decentralized
           inspection and maintenance program (a proxy for accessibility of state emission
           inspection facilities); and
      •    Whtther the company is located in one of the 22 non-attainment areas.
   3 This information was available for only a small minority of companies.

Final Report * * * September 28,1992

1.3   Development of Representative Model Companies

      To accurately characterize firms participating in the attermarket conversion industry, ICF
developed a set of model firms for each of the three segments of the industry:  kit
manufacturers, engineered converters, and installers. Each set consisted of a model
company profile for the typical (median) large firm, typical (median) small firm, and lower
quartile small firm in the segment.  The process by which ICF developed these model firms is
presented below.

      Identification of Large and Small Companies

      To develop  model firms, ICF first categorized each identified firm as small or large. As
specified in the Regulatory Flexibility Act, ICF used Small Business Administration (SBA)
definitions of small firms to make an initial determination of small and large entities within
each segment.  The SBA size cutoffs are typically at 100, 500, or 750 employees, depending
on the industry as defined by the four-digit SIC codes. Among the 60 firms identified as
participating in the aftermarket conversion industry, 43 four-digit SIC codes (most of which
have SBA cutoffs  of 100 employees) are represented. This variety reflects the fact that the
industry is new, diverse, and changing.

      To judge whether this initial determination was correct, ICF checked if the companies
known to be major players (e.g., IMPCO, ANGI) in the industry were large firms. This was
done because the primary purpose of a regulatory flexibility analysis is to detect
disproportionate impacts of regulations on small companies relative to large companies in the
affected industry segment (which may not be the industry represented by the company's SIC
code). In most cases, the initial determination seemed correct.  However, a few small firms
mat had close to the cutoff number of employees and are considered major players in the
industry were classified as large firms for the purpose of this analysis.

      Interpolating for Missing Data

      Second, ICF utilized data from companies with complete financial information to
interpolate financial information that was missing for other companies in the same segment
and size  category. For many of the smaller firms, for example, only information on SIC  code,
employees, and sates was publidy available. To estimate other financial information needed
to develop representative  model companies, ICF used regression analyses to identify
relationships among various characteristics. For example, because relationships between
sales and employees, and assets and employees, were generally very strong, missing values
could be filled in with a reasonable degree of confidence.  Filling in missing data on return on
assets was more difficult, in part because profits tend to be more volatile and subject to
special factors (such as start-up costs and write-off). For firms for which data on profits were
unavailable, ICF assumed that the firm's return on assets was equal to the average profit for
its size category.  ICF also tested whether rates of profit among small firms are related to size,
but was unable to confirm this hypothesis.
Final Report * * * September 28, 1992

      Determining Characteristics of Model Companies

      ICF's third step in developing model firms involved determining the actual
 characteristics (e.g., number of employees, sales, assets, profits) of each model firm.  This
 was accomplished by separately sorting employment, sales, assets, and profits by magnitude
 for small and large firms in each industry segment. Then, the initial characteristics for the
 large model firms were  chosen using the median employment, sales, assets, and profits for
 the large firms.  Similarly,  the initial characteristics of the two smaller model firms were
 selected using the median and lower quartile values from the employment, sales, asset, and
 profit distributions of small firms in each segment. To make the model companies internally
 consistent, other characteristics (e.g.,  return on assets) were calculated from the initial model
 firm characteristics.

      By using this approach, the nine model firms (three for each of three segments) are as
 representative as possible (given the data and time restraints) of actual firms' characteristics
 that are most relevant for  projecting regulatory impacts. The creation of three models of
 different sizes for each segment allows for the  comparison of impacts on large and small
1.4   Estimating Potential Compliance Costs

      ICF assessed the potential impacts of the proposed regulations by comparing
compliance costs to the revenues and profits in each model firm profile. The model firm
approach, as opposed to a direct assessment of impacts on each of the actual firms, was
chosen in response to data limitations and the inherent difficulties of projecting how specific
firms will  grow and change in a rapidly developing industry.

      To  assess the impacts of regulatory costs using the model firms,  ICF estimated the
magnitude of each regulatory cost element for each type and size of firm. Costs that cannot
be easily passed on to customers were compared to the assets and profits of the model firm
of the appropriate type and size; costs that  will probably be passed on  to customers were
compared to the model firm's sales, to determine whether a price increase large enough to
cover the cost increase would be large enough in percentage terms to  affect sales
1.5  Limitations of the Data

     As a pralminary assessment of a new industry, this report is necessarily based on data
that are limited In significant ways. The limitations stem from lack of publicly available
information about industry participants, the methodology selected to accommodate data
inadequacies, and the inherent difficulties of projecting the characteristics of a changing
industry into the future.

     Since the aftermarket conversions industry is relatively new and small, there are no
comprehensive sources of information available on the industry. Large classes of valuable
information, such as the number of kits sold per company, the type of technology used in

Final Report * * * September 28,1992                                                 7

each company's products, and the distribution of sales between light-duty and heavy-duty
vehicles, are neither tracked through a federal data collection effort nor otherwise publicly
available.  Moreover, the ability to obtain data from companies directly was limited by the
Paperwork Reduction Act; even when contacts were  made, many firms justifiably withheld
information they judged proprietary.

     Even if complete information had been available on the industry as it now stands,
considerable uncertainty would remain regarding the industry's characteristics over the next
decade and beyond. This is a new industry, which is changing technologically and
structurally; the driving factor behind demand for the industry's products is in the process of
shifting from economic advantages to an emphasis on emissions reductions; and many new
companies are appearing each year.  There is regulatory uncertainty in  predicting when state
implementation plans (SIPs) will go into effect and what they will entail (e.g., Texas
emphasizes CNG, and does not consider reformulated gasoline an alternative fuel).  Finally, it
is not clear how clean fuel vehicles will be distributed across all alternative fuels, and between
conversions and OEMs.  Thus, no solid estimates are available even of the total number of
conversions per year in the future, and it is even more difficult to predict sales for individual
firms, regions, and types of vehicles (such as heavy vs. light duty vehicles).  Nevertheless,
IGF used appropriate analytical and modeling techniques, plus information obtained from EPA
and others, to make the best possible projections for the future for the three market segments
and parameters of interest.
Final Report * * * September 28,1992                                                  8

                                   CHAPTER 2
                               INDUSTRY OVERVIEW
      In 1995, there are projected to be 45,000 clean fuel fleet vehicles (CFFVs) in the US.4
This number is expected to increase to 105,000 by 1998 and to 1.2 million by 2010.5
Approximately one-quarter of these vehicles are expected to use either CNG or LPG.6 This
demand for CFFVs will come about as a result of a number of Federal, state, and local
mandatory and incentive programs.  In addition, there will be a few hundred thousand other
vehicles converted to use gaseous fuels as a result  of the fuel cost-savings associated with
CNG and LPG.  This growth will bring about dramatic technological, structural, and
competitive changes in the aftermarket conversion industry. This chapter first provides a brief
summary of the history of the US aftermarket conversion industry.  It then discusses current
industry characteristics, the nature of competition, the industry structure, and how these
factors are expected to change in the coming decade.
2.1    History

      The aftermarket conversion industry first developed in Italy during and after World War
II, when it became necessary to substitute domestic gas for unavailable oil. Aftermarket
conversions to CNG and LPG have since become significant in a number of countries,
including Argentina, Australia, Canada, Holland, Italy, New Zealand, and the US.

      In the US, interest in LPG as a vehicle fuel was sparked by  its low cost and by LPG
marketing campaigns in the 1950s and 1960s; interest in LPG has continued through the
present, increasing and decreasing with gasoline price movements. Because LPG has
relatively few uses and is produced as a byproduct of petroleum refining and natural gas
processing, supply chronically exceeds demand; this results in LPG having a relatively low
price. Many retail LPG supply companies provide low-cost LPG conversions as a marketing
tool to expand LPG demand and to smooth seasonal fluctuations. Customers for these
conversions are primarily fleets of vehicles with engines designed for gasoline use such as
city delivery trucks.

      CNG has also been used as a vehicle fuel for some time in the US.  Interest in CNG
has tended to peak in times of rising oil prices and/or limited oil supply. The major advocates
of CNG, and the major fleet users to date, have been the natural  gas distribution companies.
   4  Energy Analysis. American Qas Association Planning and Analysis Group, Appendix 1, January

   5  U.S. EPA, QMS, Regulatory Impact Analysis, Clean Fuel Fleet Program, Draft, August 14,1992.
      Table 1-8.

   6  Office of Mobile Sources Memorandum to ICF, Estimates of Gaseous Fuels OEMs and
      Conversions, July 9,1992.

Final Report • • • September 28,1992                                                s

These companies see the vehicular market as offering the potential for expansion (at a time
when most of their other potential markets are already saturated), and as offering a useful
counter-peaking demand profile (automotive fuel use tends to peak in the summer, while
natural gas demand has a sharp winter peak for heating).  Some gas utilities had established
test fleets of natural gas vehicles (NGVs) in the 1960s, but interest waned with the increase in
natural gas prices and limitations in gas use in the Natural Gas Policy Act passed in the late
1970s. Currently, the continuing low price of natural gas, the CAA emphasis on alternative
fuels, and substantial funding for promotion and R&D of natural gas vehicles are combining to
sustain interest in NGVs at a high level.
2.2   The Conversion Industry is both Emerging and Transitional

      The aftermarket conversion industry is unusual in that it is both emerging - in terms of
technology and growth - and transitional - it may well be largely supplanted by automakers'
mass production of AFVs within 20 years or so. The following paragraphs describe general
characteristics of the aftermarket conversion industry.7

      Embryonic companies.  Many new and small companies are entering the conversion
industry, especially in the states such as Texas and Oklahoma that have alternative fuels
legislation and CNG/LPG suppliers.

      Technological uncertainty. Conversion technology is rapidly changing.  For example, it
is moving from mechanical to  electronic controls and from open- to closed-looped fuel
metering controls.  There is a  large degree of uncertainty about which systems or
technologies will perform best and which companies will produce them.

      Erratic product quality.  There are few standards for conversion kits and no national
accreditation of mechanics who perform conversions.  Therefore, the quality of kits and
installations to date has been  erratic.  Poor quality from a few firms could lead to image and
credibility problems for the entire industry.

      Image and credibility problems with the financial and insurance communities.
Uncertainty about technology, demand, upcoming regulatory requirements, and mechanics'
capabilities is creating some hesitancy in the financial and insurance communities. Several
industry participants indicated that small companies are having difficulty obtaining adequate
insurance for performing conversions.  Insurance is necessary to allow companies to bid on
state (and probably private) contracts for fleet conversions.  New small companies may also
have a hard time Mcuring low-cost financing to purchase a dynamometer and other
necessary equipment (e.g., computers) and pay for the training that some kit makers require
before they allow a converter to use their kit.
   7  Many of these characteristics are common to emerging industries as described by Michael E.
      Porter in his book, •Competitive Strategy:  Techniques for Analyzing Industries and

Final Report * * * September 28, 1992                                                10

      Regulatory-driven.  While the proposed Clean Fuel Fleet and Gaseous Fuels
 rulemakings do not mandate aftermarket conversions or the use of gaseous-fueled vehicles in
 general, they do require that conversions are performed with EPA-certified kits.  The effect of
 this requirement is that each conversion kit technology  be thoroughly tested and certified to
 assure  it meets emissions standards.  This process, unless managed correctly, may unduly
 slow product introduction.

      Absence of infrastructure.  The conversion industry historically has been subject to the
 "chicken and egg" syndrome.  Fuel suppliers are unwilling to invest in an alternative fuel
 distribution system until they are assured that there will  be a sufficient demand for the fuel; kit
 manufacturers and automakers are reluctant to invest in developing new and improved  AFVs
 until they are assured there will be easily accessible fuel for their customers. The CAA, state
 legislation, and other initiatives have helped to resolve this impasse, at least in non-attainment

      Perceived likelihood of obsolescence.  Potential buyers may be hesitant to convert their
 vehicles as they are aware technology is changing and  fear that second- or third-generation
 technology will make obsolete currently available kits. This hesitancy is somewhat lessened
 for fleet owners by the fairly  rapid turnover of fleet vehicles and by the institution of credit and
 incentive programs.

      First-time buyers.  Nearly all AFV purchasers in the next five to ten years will be first-
 time buyers.  They will need  to be convinced that a vehicle retrofitted to run on CNG or LPG
 is  right for them. This will take considerable amounts of consumer education about the pros
 and  cons of each alternative fuel and the technologies used to convert vehicles.  This is
 particularly important for fleets as it will take a relatively  large investment to convert the
 portions required by the CAA and to make the necessary changes in maintenance programs
 and  mechanic training.
2.3   Nature of Competition

      The aftermarket conversion industry is very competitive - and it is growing more so
every year. Exhibit 2-1  depicts the competitive forces in the industry.8 It is the relative
strength of these forces that will determine the long-term profit potential of the industry.
   8 This competitive forces model was first presented by Michael £ Porter in his book, •Competitive
     Strategy: Techniques for Analyzing Industries and Competitors.'

Final Report * * * September 28,1992                                                 11

                                       EXHIBIT 2-1
              Power for
o Component
                                 POTENTIAL ENTRANTS
                                o Fuel Suppliers
                                o High-tech Manufacturers
                  High Threat of Entry

 o Kit Makers
 o Engineered Converters
 o Installers
                               Rivalry Among Existing Firms
                  High Threat of Substitution
                                o Reformulated Gasoline
                                o Conventional Vehicles
                                o Electric Vehicles
                                o OEM Vehicles
o Fleets
o Mass Market
                                                                   Significant Barganing Power

      Industry Competitors.

      There are two main activities in the aftermarket conversion industry:  1) The design and
 manufacture of components necessary to convert a vehicle to run on a gaseous fuel; and 2)
 the actual conversion of the vehicle.  For the purpose of this report, companies who primarily
 perform the first activity are called kit makers as they manufacture or assemble components
 into conversion kits. Companies who perform the second activity are called installers since
 they convert vehicles by installing conversion kits on vehicles, or assembling and installing
 the necessary components.

      An example of a hybrid company that performs both activities is the engineered
 converter.  These companies work closely with OEMs to develop and refine a conversion
 system for a specific vehicle type. They generally perform large numbers of conversions and
 participate in marketing the converted vehicles.

      As the industry grows, the distinctions between these company types is fading.  Kit
 makers are integrating vertically by opening conversion centers and/or developing a network
 of authorized installers.  Engineered converters are packaging their conversion systems and
 selling them to others to install.

      As a result, companies in the aftermarket conversion industry compete both within and
 across segments. For example, the larger kit makers compete with engineering start-ups in
 the kit maker segment.  Larger kit makers also tend to be vertically integrated and thus
 compete (with price and knowledge advantages) with installers.

      Currently, competition among and between kit makers and engineered converters (and
 potential  entrants) is via  product differentiation.  The companies with technologies able to
meet upcoming federal and state emissions standards, or optimize performance of AFVs, are
 expected to dominate the industry.  Currently, this competition is primarily among domestic
 companies. However, competition is likely to become global as OEMs enter the market and
 companies involved in the conversion industry in other countries introduce their products to
 take advantage of the large demand for AFVs in the US.

      Competition among kit installers is on a geographic and price basis.  Buyers usually do
 not travel significant distances to have their vehicles converted. Conversion companies
 located in states with significant conversion activities (essentially Texas, Oklahoma, and
 Colorado) witt gain an advantage over companies in other locations as they gain more
 experience and move along the learning curve.

      For conversion companies within a given area and for diversified companies (which
 may have some cost carrying and competitive advantages), competition is  on the basis of
 price. Fuel suppliers (who often offer conversions at cost because of expected future profits
 from fuel sales) and large conversion centers (who are able to purchase kits and other
 supplies in bulk) may have a price advantage over other companies. Profits for small
 installers are currently low or non-existent Each of the three segments will be discussed in
 more detail in Chapter 3.
Final Report * * * September 28,1992                                                13

      Potential entrants.

      As expected in a transitional auto industry, hi-tech auto parts manufacturers have a
high probability of entering the conversion industry.  Suppliers of alternative fuels are
expected to continue entering the industry, particularly into the conversion segment. They
also are entering other segments by forming joint ventures wrth manufacturing or engineering


      Manufacturers of components that are critical to a kit's ability to meet emissions
standards (e.g., closed-loop carburetors) or increase performance (e.g., electronic fuel
injectors) have considerable bargaining power.


      The gaseous fuel conversion industry faces substantial threats of substitution  from
OEMs producing gaseous-fueled vehicles.  General Motors, Ford, and  Chrysler all have
recently introduced CNG vehicles.  While the incremental cost of a retrofitted vehicle and a
CNG OEM are roughly the same now, OEMs are. expected to have a substantial price
advantage due to mass production by the  year 2000.9 The aftermarket conversion industry
also faces competition from manufacturers or converters of vehicles using other types of
alternative fuels.  Threat of substitution of reformulated gasoline is particularly high as it
requires no alteration of the vehicle.


      Fleets have large bargaining power within the conversion industry since they offer the
potential to convert large numbers of vehicles.  To take advantage of potential cost-savings,
larger fleets may have an engineered converter develop a demonstration vehicle and then
train in-house  mechanics to actually convert and maintain the fleet

      In addition to these forces, government is potentially a significant competitive force in
the aftermarket conversion industry. Demand for AFVs is essentially being driven by the
federal CAA and state legislation and initiatives.  Emission standards are affecting technology
and greatly increasing the amount of R&O  on AFVs; they may also affect the relative
feasibility, cost, and quality  of substitutes.  Regulatory approval of technologies (e.g.,
durability and other emissions testing) will affect the cost structure of the industry. However,
since government primarily  affects industry competition through the above-mentioned
competitive forces, it was not considered a force in and of itself.
   9  California Energy Commission, Cost & Availability of Low-Emission Motor Vehicles and Fuels,
      AB234 Report. Draft, August 1991, p. 37.

Final Report * * * September 28, 1992

 2.4   Industry Structure

      The conversion industry structure is closely related to the technological approaches
 that have been used in conversions.  Historically, conversions have been done on a one-by-
 one basis,  which left little scope for significant engineering.  Conversion kits tended to be
 fairly generic (i.e., "one size fits all"). The resulting "loose" industry structure is depicted in
 Exhibit 2-2.  OEMs have a small percentage of the AFV fleet market.  Engineered converters
 work primarily in concert with OEMs, but are starting to work directly with fleet customers.

      Kit makers generally sell their kits to distributors, which in turn, sell them to installers.
 The two primary kinds of installers  are gas companies and small, "mom and pop" auto shops.
 However, some kit makers vertically integrate by owning installation facilities.  One advantage
 of doing  this is that the kit maker has more control over the quality of the conversions
 performed with its products.

     The industry characteristics discussed  in Section 2.2 and the competitive forces
 discussed in Section 2.3 are forcing the attermarket conversion industry to change, thereby
 causing major shifts in commercial relationships.  Importantly, there is a trend toward vertical
 integration  (whereby one company makes and installs kits) and having  authorized installers
 (much like current automakers have authorized dealers).  For example,  one currently may get
 a vehicle converted using Stewart & Stevenson or BKM technology only by going to
 authorized, trained installers.  For the installer to purchase Stewart & Stevenson and ANGI
 equipment, s/he must attend multi-day training courses at company facilities.  Stewart &
 Stevenson also requires installers to use a laptop computer to install its kit and adjust the
vehicle's  fuel system.  Industry practices such as this will improve the quality of conversions
 and  increase the credibility of a specific firm and the industry as  a whole. Such trends will
effectively realign the industry.

     ICF's projection of the structure of the industry in five to ten years is shown in Exhibit
2-3.  OEMs may supply 25 to 50 percent of fleet AFVs  and are beginning to make AFVs
 available to the public in general.  Engineered converters hold a  larger  share of the market
than in 1992 and work with both fleets and OEMs. There will be a smaller set of technology-
driven, vertically-integrated firms producing conversion kits.  These firms typically will be either
traditional kit makers or gas companies that have entered the kit business via acquisition or
joint venture in order to stimulate vehicle demand for natural gas. Distributors will function
much as  they currently do; however, fewer kits may be sold through them as vertical
 integration increases and kit makers ship kits directly to authorized installers.  As discussed
 above, the majority of installers will be authorized to convert vehicles using  kits from one or
 more kit makers. Many of these authorized installers will be the same companies that
currently  perform conversions, namely gas companies and small auto shops.  However, we
 expect there will be a trend toward larger installation centers to obtain economies of scale.  In
addition,  some larger fleets may work out agreements with kit makers to allow fleets to
convert their vehicles in-house.
Final Report * * • September 28,1992                                                  15

                                 EXHIBIT 2-2











                                 EXHIBIT 2-3


                                   CHAPTER 3
      There are approximately 60 firms currently participating in the aftermarket conversion
industry. As discussed previously, these firms can be categorized by their activities into three
primary segments (kit makers, installers, and engineered converters). Exhibit 3-1 provides
names of companies currently participating in the aftermarket conversion industry.  This
chapter discusses the characteristics of each segment and presents financial profiles of
representative model companies for each segment.
3.1   Kit Makers

      There are currently 15 US companies manufacturing or assembling conversion kits.
The majority of these companies (10) are industrial equipment manufacturers or wholesalers.
The others are fuel or engineering companies.  While no exact information on market share is
available, two companies, IMPCO Technologies (IMPCO) and Automotive Natural Gas Inc.
(ANGI), account for an estimated 70 percent to 90 percent of kit sales. Both of these
manufacturers produce both CNG and LPG kits for all EPA vehicle classes.  Several of the kit
makers (e.g., Stewart & Stevenson) only began selling conversion kits this year.

      There is no readily available information on the annual number of kits sold by, nor the
number of kit/engine family combinations provided by, each  kit maker. Kits often vary with
the model year of the vehicle as well as with the technological sophistication of the
componentry. ANGI, for example, has 159 CNG kit types certified by the Colorado State
Department of Health.10  Exhibit 3-2 lists kit makers and indicates whether they produce
CNG and/or LPG kits and if they have received any type of certification for them.

      As mentioned in Chapter 2, kit technology is changing rapidly.  There is the potential
for a shake-out as kit makers who do not have closed-loop air/fuel control technology (which
is necessary to bring NOX emissions from converted  cars to  below CAA standards) are forced
out of the industry. This would result in a smaller set of high-technology companies. In view
of the offsetting effects of growth in demand, technology, and start-up firms on one hand, and
the possibility of consolidation on the other, ICF expects that the total number of kit makers in
2000 will be stmtar to the current total of about 15.
   10 Twenty-eight of these kits are certified for use in light-duty gasoline powered passenger cars,
     73 for light-duty gasoline powered trucks, and 58 for heavy-duty gasoline powered trucks.

Final Report • * * September 28,1992                                                 18

                                 EXHIBIT 3-1

                                  KIT MAKERS
         Algas Industries Inc.
         Automotive Natural Gas
         BKM, Inc.
         Bowgen Fuel Systems
         Carburetion Lab
         CleanFuels, Inc.
         Garretson Equipment
         IMPCO Technologies
Metre-pane, Inc.
Mogas Inc.
National Energy Service Co.
Natural Gas Resources
OHG Inc.
Propane Equipment Corp.
Stewart & Stevenson Power, Inc.
                          ENGINEERED CONVERTERS
         BKM, Inc.
         Cars and Concepts
         Clean Air Partners
         IMPCO Technologies
Intelligent Controls
NGV Technology Center
Stewart & Stevenson
Tecogen, Inc.
         Autocraft, Inc.
         Automotive Natural Gas
         BKM, Inc.
         Bus Manufacturing USA
         Carburetion Lab
         Carburetion & Turbo Systems
         City Spring
         CleanRMs, Inc.
         CNG Futl Converters
         CNQ Technologies Corp.
         CNG Corp.
         Crane Carrier Co.
         Dallas Fleet Maintenance
         Detsco, Inc.
Ferrellgas, Inc.
IMPCO Technologies
Mesa Operating Ltd Partnership
National Energy Service Co.
Natural Fuels Corp.
Natural Gas Resources
Northern Indiana Public Service Co.
Pacific Gas & Electric
Petrolane, Inc.
Southern Cal Gas Co.
Stewart & Stevenson Power, Inc.
Tom Gorman Company
Tren Fuels
Tri-Fuels, Inc.
Washington Gas & Light Co.
Final Report * * * September 28,1992

                             EXHIBIT 3-2

            Ust of Kit Makers by Kit Type and Certification
Algas Industries Inc.
Automotive Natural Gas
BKM, Inc.
Bowgen Fuel Systems
Carburetion Lab
CleanFuels, Inc.
Garretson Equipment
IMPCO Technologies
Metropane, Inc.
Mogas Inc.
National Energy Service Co.
Natural Gas Resources
OHG Inc.
Propane Equipment Corp.
Stewart & Stevenson Power, Inc.






AGA. CARB, CO Dept. of Health


CARB. CO Dept of Health


CARB (pending)
Final Report * * * September 28,1992

      There is no comprehensive information available on the split among the kit makers
between heavy- and light-duty vehicle conversion kits. Available information suggests that all
kit makers will sell light-duty vehicle kits while only about two-thirds of kit makers (about 10)
will sell kits for heavy-duty vehicles.

      Exhibit 3-3 provides financial profiles for three different sizes of kit makers.  There is a
substantial  difference between the resources of the median large and the median small
company profiles. The median large company has over 20 times the sales, and almost 10
times the assets, of the median small company. However, the median large company sells
only two and one half times as many kits as the median small company.  This reflects the fact
that the larger kit makers tend to be diversified and obtain most of their income from other
industries.  The smaller companies tend to be more focused on the conversion industry and
are benefiting from rapid industry growth (as evidenced by a return on assets of 9.5 percent).
However, is there is no clear indication whether size is correlated with the technological
sophistication of a company's kits. Technology will be one of the key determinants of a
company's  success in this industry.
                                     EXHIBIT 3-3
                       1992 FINANCIAL PROFILES OF KIT MAKERS

Return on Assets
Working Capital
Net Worth
Lower Quartile
Small Company
Small Company
Large Company
Protected Number of Kits SoM In the Year 2000
OFF Regulations
Gaseous Fuels
Final Report * * * September 28,1992

 3.2   Installers

      There are more than 40 companies performing CNG and LPG conversions in the US
 today.11  While these companies are located across the US, many new companies are
 entering the industry in states with strong alternative fuel legislation (e.g., Texas and
 Oklahoma). The number of conversion companies is expected to increase rapidly, especially
 in states that pass new legislation and in non-attainment areas.  By 2000, ICF expects that the
 total will rise to as many as 120 installers, with a substantial majority (about 100 of the 120)
 located in the high-demand non-attainment areas.  A large fraction of these installers will be
 performing conversions capable of meeting federal OFF standards, with the rest serving
 economic demands and state-driven demands. In addition, only a fraction  of these (perhaps
 a third) are likely to offer heavy-duty conversions, due to the substantially lower total  demand
 for heavy- as opposed to light-duty OFF vehicles.

      Currently, there are four types of conversion companies: vertically-integrated kit
 makers; suppliers/distributors of fuels, or providers of fuel services (i.e., utilities); auto repair
 shops; and small, start-up companies that are dedicated to conversions. Each type of
 company is notably different in terms of size and competitive position.

      Vertically-integrated kit makers such as IMPCO have always performed some
 conversions;  however, they are expected to do more as demand for AFVs grows. They have
 several potential advantages over other installers including lower price (since they obtain the
 kits at cost) and in-depth knowledge of the technology in their kit. Companies authorized to
 use specific kits may also benefit from these advantages.

      Fuel companies and gas utilities  have historically dominated the conversion segment.
They are also the largest consumers of conversion kits and other conversion equipment.12
Although some companies supported gaseous fuels initiatives earlier, most gas utility
companies began their involvement in the aftermarket vehicle conversion industry in the early
seventies (1972-74) when gasoline prices (world market) were high.  To avoid paying the high
prices of gasoline and to take advantage of the cost advantages of CNG and LPG, utility
companies began converting their fleet vehicles to use gas. These conversions tended to be
relatively low-tech and were not carefully checked for emissions.  Today, many gas utility
companies own conversion facilities and are beginning to offer conversion services to outside
fleet operations (such as city police departments and school districts). Locally, utility
companies provide the majority of installation services. Even though utility  companies may
have a significant role in the local market the utility conversion businesses are a small
percentage of 1ht companies' revenues (less than one percent) and sometimes represent a
loss of net revenue.
   11 This estimate does not include distributors nor the thousands of gas and utility companies who
     perform occasional conversions on their own vehicles.

   12 School districts and other municipal operations with fleets are the other large consumers of
     these products.

Final Report * * * September 28,1992                                                 22

      In general, the number of conversions performed by individual utility and gas
 companies per year is fairly small (fewer than  100); some, however, such as Southern Union
 Gas and Enfuel 3 (both in Houston, Texas), have conversion centers capable of converting
 on the order of 1,000 conversions per year. It is estimated that three large LPG  conversion
 companies (Petrolane, Ferrellgas, and Amerigas)  account for about half of LPG conversions.
 These large conversion centers experience significant economies of scale. They are able to
 buy supplies and equipment in bulk, and purchase only the components they need rather
 than complete kits. In addition, these  companies perform conversions at or near cost to
 promote the  use of natural or propane gas as a fuel (they will earn profits from the future sale
 of fuel to the converted vehicles). Their ability to  provide these services  at or near cost
 enables them to submit low bids for contracts to perform fleet conversions.  Smaller
 companies, whose primary business may be conversions, often cannot afford to compete
 with utility companies' low bids for these contracts.

      The third type of conversion company, auto-repair shops, offers conversion services as
 a side-line business.  They tend to be  small (fewer than 15 employees) and have performed a
 minimal number of conversions (perhaps one  to twenty).  In general, these companies
 probably will not invest large amounts of money in conversion  equipment or become major
 players in the industry.  However, there may be profitable niches for some companies who
 provide fleet  maintenance services, for example.

      The fourth type of conversion  company, dedicated conversion companies, currently is
 similar in size to auto-repair shops.  However,  they are committed to capitalizing on
 conversion opportunities brought about by the CAA. They tend to  be start-up companies and
• are fairly vulnerable - they have not yet converted a significant  number of cars and are in
 debt. These companies may have a difficult time  obtaining loans to purchase the necessary
 conversion equipment and obtain the proper insurance.  They are at a cost disadvantage
 relative to the larger conversion companies as they cannot purchase supplies in  bulk nor offer
 conversions at cost.

      As with auto-repair shops, these small conversion companies may  be able to find niche
 or regional markets.   They may also be able to become affiliated  with one or more kit
 makers, thus gaining the resources and repute necessary to enable them to grow and
 compete with larger installers.

      As in many industries, though relatively small installers are likely to predominate in
 terms of numbers, a substantial majority of all  conversions will be performed by outlets
 performing more than 300 conversions per year.  ICF expects that in the  year 2000, about
 100,000 vehicle conversions will be performed, though only about 37,000 of these will be
 attributable to the federal OFF requirements.15 Most of the conversions related to the
    13 Enfuet's conversion center is expected to open in mid-1992.

    14 Competition in the conversion segment is generally on a regional basis; fleets probably will not
      travel large distances to have their vehicles converted.

    15 The basis for these estimates is presented in Chapter 4.

 Final Report  * * * September 28,1992                                                23

 federal requirements can be expected to be performed within the 22 non-attainment areas.
 Some (roughly 10 percent) will be performed outside of the non-attainment areas but close
 enough to serve the demand originating within them.

      Exhibit 3-4 presents financial profiles for three different sizes of conversion companies.
                                      EXHIBIT 3-4
                       1992 FINANCIAL PROFILES OF INSTALLERS

Return on Assets
Working Capital
Net Worth
Lower Quartile
Small Company
Small Company
Large Company
Projected Number of Installations In ttw Year 2000
CFF Regulations
Gaseous Fuels
3.3   Engineered Converters

      Engineered converters are firms investing substantial engineering resources in
developing and optimizing a conversion system for a specific vehicle model.  Since the cost
of this optimization, emissions certification, etc., can easily run as high as $100,000 to
$500,000, costs mutt be recovered through significant sales volumes (typically over 500
vehicles per year).  Engineered converters frequently work in concert with an OEM, and are
increasingly working with large fleets.  The GM pickup trucks and Ford Crown victoria NGVs
are being produced in this way.  In the future, these types of firms are expected to dominate
the conversion industry.

      ICF has identified eight firms that perform engineered conversions.  Three of these firms
are also kit makers (BKM, Impco, and Stewart & Stevenson), four are specialty engineering
firms (Cars and Concepts, Clean Air Partners, Intelligent Controls, and Tecogen Inc.), and one
Final Report * * * September 28,1992

(NGV Technology Center) is a joint venture between Southern Union Gas Company and NGV
Development Corporation.  As with the kit makers, ICF expects that the total number of
engineered converters will be approximately the same in 2000 as at  present; thus, the total
number of firms certifying kits will be between 20 and 25.  All  or virtually all are expected to
be involved in light-duty conversions; many (roughly ten) will offer a  kit or conversion for at
least one heavy-duty engine.

      Five of the engineered converters are located in non-attainment areas; a sixth is located
in Texas, which has recently passed alternative fuels legislation. In five years, ICF expects
that most engineered converters will be found within non-attainment  areas, as a result of the
growing demand for emissions-related conversions there.

      While engineered conversion companies are generally small, both in terms of sales and
employees, they are expected to grow significantly in the next ten  years.  Exhibit 3-5 provides
financial profiles of three different sizes of engineered converters.
                                     EXHIBIT 3-5

Return on Assets
Working Capital
Net Worth
Lower Quartile
Small Company
Small Company
Large Company
Projected Numbw of Conversion* In th« Year 2000*
CFF Regulations
Gaseous Fuels
     These projections do not include vehicles that engineered conveners produce with OEMs.

     Sales of the median large company are approximately nine times the sales of the
median small company, which are, in turn, approximately three times the sales of the lower
quartile small company. There does not appear to be a strong correlation between company
Final Report * * * September 28,1992

size and return on assets (ROA):  the median small company has the highest ROA at 8 9%
This could reflect the fact that the larger engineered converters tend to be diversified (and.
therefore, may gain the majority of their revenues from other, slower growing, businesses)
and the smallest engineered converters are essentially start-ups (which have performed few
conversions at this time).
Final Report • * * September 28,1992                                                26

                                   CHAPTER 4
      Demand for the products and services of the various segments of the industry-
conversion parts, kits, and installations-are ultimately derived from the demand for converted
vehicles. For this reason, a brief examination of the reasons for owning gaseous fueled
vehicles is worthwhile.

      As mentioned in the introduction to this report, AFVs have many potential benefits
including cleaner emissions and low fuel costs and vehicle maintenance.  However, the
choice of a converting a vehicle to use gaseous fuel also has several negatives sides: the
expense of the initial conversion; greater weight and reduced carrying capacity; generally
shorter range on the gaseous fuel; uncertain gaseous refueling at locations other than the
vehicles' home bases; and costs for fueling centers.  The problems related to range and
fueling uncertainty are particularly important for dedicated  gaseous fuel vehicles. For a
vehicle owner to choose to convert to gaseous fuel (especially if the conversion is to a
dedicated gaseous fuel vehicle), he or she must see advantages that outweigh these
4.1   Demand Based on Economic Factors

      Up to the present, the main advantages of gaseous fuel conversions were economic.
Depending on relative costs and availability of different fuels, natural gas and LPQ vehicles
can have significantly lower operating costs and greater actual or perceived security of
supply.  If an alternative fuel costs on the order of half as much as gasoline  on an energy-
equivalent basis vehicle owners can save hundreds of dollars per vehicle on fuel every year
by converting. The fuel cost per mile for a natural gas-fueled car, for example, has been
estimated by the American Gas Association at 1.6 cents per mile in comparison with a cost of
3.6 cents per mile for a comparable gasoline-powered car.  (It was assumed that the car
travelled 25 miles per gallon of gasoline, that the cost of gasoline was $1.21 per gallon, that
uncompressed natural gas cost $3.15 per million  Btu, and that the energy efficiency of the car
was the same for both fuels.)  Savings of two cents per mile amount to $300 per year for a
vehicle traveling 15,000 miles per year.16  Vehicles that are  used  more intensively, and
vehicles that UM more fuel per mile, will show greater savings. Potentially lower maintenance
costs and great* certainty of supply (in the face of gasoline rationing, for example) can
contribute even more to the advantages of gaseous fueled vehicles. Whether savings of this
   16 Energy Analysis. American Qas Association Planning and Analysis Group, p. 9, April 16,1991.

Final Report • * * September 28,1992                                                27

magnitude can be achieved depends a great deal on matters such as whether the vehicle is
optimized for gaseous fuels, and on tax requirements for CNG/LPG relative to gasoline.17

      Whether these advantages outweigh the costs of the initial outlay on conversions and
refueling facilities (in addition to the range, weight, and capacity tradeoffs) depend in part on

      *    The cost of the alternative fuel,

      *    The certainty of the supply of the alternative fuel,

      •    The number of vehicles using each refueling center, and

      •    The availability and cost of capital for up-front expenses.

Fleets will be the most likely candidates for conversion in part because they have relatively
high annual mileage per vehicle and many vehicles over which to spread the costs of the
refueling system. Fuel suppliers (natural gas and propane distributors) will also be good
prospects because they will face particularly low fuel costs (wholesale rather than retail) and
will have a relatively certain supply. Finally, regulated utilities that are able to raise capital at
low effective cost will have  an additional reason to convert.18  Given these factors, it is
understandable that the fleets of fuel suppliers (including natural gas utilities) are prominent
among existing conversions.  Other types of fleets include package delivery services such as
Federal Express and UPS;  repair vehicles such as telephone and electric companies;
beverage distributors; and local governments and school districts in many states.

      It has been estimated that there are almost half a million gaseous-fueled vehicles in the
United States-30,000 using CNG and 425,000 using LPG.19  No firm estimates of the
current rate of gaseous fuels conversions are available. It is reasonable to estimate, however,
that between 5,000 to 8,000 CNG conversions and 70,000 to 100,000 LPG conversions are
being performed annually, for a total in the range of 90,000 per year.20
   17 See Environmental Protection Agency, Office of Mobile Sources, Special Report, Analysis of the
      Economic and Environmertal Impacts of Compressed Natural Gas as a Vehicle Fuel. Volumes 1
      and Z April 1990.

   18 Most rate-regulated utilities are able to cover the costs of approved capital investments through
      rate incrMM*. Thus, they can be more favorably disposed toward making capital investments
      than are businesses for whom an investment poses risks.

   19 NPGA and U.S. Department of Energy, cited by LP Gas Clean Fuels Coalition.

   20 If the total stock of converted vehicles is growing by ten percent per year (a moderate growth
      rate for a relative new market segment) 3,000 CNG conversions and 42,500 LPG conversions
      would  be required even if no existing vehicles had to be replaced. An additional 3,000 CNG
      and 42,500 LPG conversions would be needed to replace existing vehicles even if only 10
      percent of the stock were scrapped each year.  The ranges presented in the text allow for the
      considerable uncertainty in the estimates of growth and scrappage rates.

Final Report * * * September 28,1992                                                  28

      Numerous factors will influence the future demand for gaseous-fueled conversions. By
the year 2000, total demand for gaseous-fueled vehicles for economic reasons will have
grown from the range of 90,000 per year to almost 200,000 per year if demand grows at ten
percent per year from 1992 to 2000; this growth rate would not be out of line for relatively
new industry with a favorable economic basis and a growing availability of products and
infrastructure.  ICF expects the growth rate to be even higher than ten percent, for three
reasons.  First, OEMs are expected to enter the market with lower-cost gaseous fueled
vehicles.  The OEM vehicles should achieve significant market penetration because of the
lower costs of their offerings (due to economies of scale) and because purchasing from a
major carmaker is a more familiar action than engaging an aftermarket converter.  Second,
tax credits are likely to become available for gaseous-fueled vehicles. Finally, as the refueling
infrastructure expands, the convenience of using a gaseous-fueled vehicle will increase. ICF
estimates that these three factors could push economically driven demand for gaseous-fueled
vehicles above 300,000 per year by 2000.21

      Some of the economically-driven demand for gaseous-fueled vehicles is likely to
overlap with the demand driven  by air quality concerns (covered in Section 4.2).  We have
assumed that half of the economically driven demand in the non-attainment areas is
preempted by the Federal OFF regulations and similar regulatory initiatives, which apply in
areas with almost thirty percent of vehicle sales.  We have therefore reduced our estimate of
the sales of gaseous-fueled vehicles for strictly economic motives is reduced by 15 percent to
about 250,000 per year by 2000.     .

      Not all of these economically driven  sales will be conversions of gasoline fueled
vehicles:  because a total market of 250,000 vehicles is large enough for mass production of
a variety of models, OEMs are likely to be  the most important factor in the market for
economically driven gaseous-fueled vehicles.  However, it is difficult to estimate the
percentage of these gaseous-fueled vehicles which will come from conversions, and no
estimate is made here.

      Of these sales, ICF assumes that almost all will be light-duty vehicles, with about four
percent (or 3,000 vehicles) in the heavy-duty category.  This division between light and  heavy-
duty vehicles is a rough estimate, based on EPA's estimates for the Federal OFF program
(see Section 4.2.2 below).
4.2   Demand Related to Air Quality and Regulation

      The potential emission control advantages of gaseous fuels have, until now, been a
secondary coneWeration in the decision to convert  Clean fuel fleet regulations resulting from
the 1990 amendments to the dean Air Act, in addition to related state initiatives, have
   21 This increase of SO percent in demand, from 200,000 to 300,000, is based on rough
     assumptions that favorable tax treatment and cost reductfans could bring the net cost of a
     conversion down by $1,000, and ICFs estimate (presented below in this chapter and in
     Appendix B) that each $100 drop in price could lead to between a four and eight percent
     increase in the quantity demanded.

Final Report * * * September 28,1992                                                29

introduced a major new component to gaseous fuel vehicle demand.  Requirements to
convert larger fractions of fleets to alternative or clean fuels place gaseous fuels in a separate
competition with electric, methanol, ethanol, and (to some extent) reformulated gasoline-
powered vehicles.

      Where the definition of clean-fuel vehicle excludes reformulated gasoline (as in Texas),
gaseous-fueled vehicles have a clear chance to capture a large share of the clean-fuel
segment of the market due in part to the limited availability and high costs of electric vehicles
and alcohol fuels. Even where gaseous-fueled vehicles are in competition with reformulated
gasoline for the clean-fuel market, the higher costs of reformulated gasoline, active
participation by the gas companies, and the potentially lower emissions from gaseous fuels
could lead to significant demand for gaseous fuel conversions.  This demand is likely to be
pushed further by EPA's Inherently Low Emission Vehicle (ILEV) incentive program.
4.2.1  Light-duty Demand Related to Air Quality and Regulation

      The majority of the vehicles affected by air quality regulations will be light-duty vehicles
(passenger cars and light trucks).  Estimated sales of emissions-driven gaseous fueled light-
duty vehicles can be divided into three groups: sales driven directly by California's
regulations; sales driven by the Federal OFF regulations for non-attainment areas outside of
California; and sales driven  by state clean air initiatives outside of California that go beyond
the federal program in geographic coverage or in scope.  However, this analysis focuses only
on clean fuel fleet vehicles.

      Sales of light-duty clean-fuel fleet vehicles that are driven directly by the Federal CFF
rules have been estimated by EPA at 209,000 in the year 2000.  Of these, EPA expects no
more than 25 percent (52,300 per year) to be gaseous fueled, and estimates that  OEM
penetration will  be about 30 percent.22 Thus, the Federal CFF standards will result in
almost light-duty 37,000 conversions per year by the year 2000. This estimate of the
percentage of these vehicles that will be supplied by the OEMs is based on an examination of
potential economies of scale in supplying vehicles in response to the Federal CFF standards
in isolation.  Considering the broader market for gaseous-fueled vehicles driven by the
California program, other state programs, and economically driven demand, ultimately a larger
fraction of Federal CFF demand may be met by OEMs, and a smaller fraction by conversions.

      The split between CNG and LPG is currently uncertain.  Industry groups have
confidence in thefr own products, as one would expect: the American Gas Association
projects that between 40 and 60 percent of dean fuel vehicles will run on natural gas,  while
an LPG group reports a survey showing that LPG's share will be two to three times that of
electric or CNG vehicles.
   22 Office of Mobile Sources memorandum to ICF Inc., Estimates of Gaseous Fuels OEMs and
      Conversions, July 9, 1992.

Final Report * * • September 28,1992                                                 30

 4.2.2 Heavy-duty Demand Related to Air Quality and Regulation

      A small number of gaseous fuel conversions will be of heavy-duty vehicles. EPA
 estimates that by the year 2000, the Federal CFF program will result in an annual demand for
 no more than 2.500 gaseous fueled heavy-duty vehicles, of which about 1,500 will be
 conversions and 1,000 will be supplied by OEMs.  Sales of 1,500 amount to only about four
 percent of the 37.000 light-duty conversions driven by the Federal CFF program.
4.3   Interaction of Market Segments

      In light of the preceding sections, it is apparent that there are two relatively distinct
segments to the demand for gaseous fueled vehicles:  the existing segment, driven by
economic considerations; and a new segment, driven largely by clean fuel fleet requirements.
The distinction between these demand segments is not absolute.  First, economic
considerations will affect the demand for clean fuel vehicles of different types relative to one
another.  In addition, the emission reduction benefits of gaseous fueled vehicles may in some
cases add to their economic attractiveness in the eyes of vehicle owners not covered by
clean fuel fleet requirements (e.g., if clean fuel vehicles earn  Transportation Control Measure
(TCM) exemptions, such as exemptions from high-occupancy vehicle (HOV) lane restrictions,
or where clean fuel vehicles earn marketable credits), and the cost advantages of gaseous
fuels will be enhanced in areas in which reformulated gasoline is required for all gasoline-
fueled vehicles.

      An additional connection between the clean fuel based demand segment and the
economic-based demand may arise as a result of the spread of refueling outlets. Increases in
the stock of gaseous fueled vehicles resulting from the dean fuel fleet program may create a
demand for public refueling stations. By increasing the availability of fuel, an expanded
refueling network will reinforce the economic-based demand for gaseous fueled vehicles.
This effect is not likely to develop until there are substantial numbers of clean fuel vehicles on
the road.
4.4  Elasticity of Demand

     Whether or not there are regulations mandating the use of dean fuels, there will be no
guaranteed market for any particular provider of gaseous fuel conversion products or
services. Instead, market penetration will be a function of all costs and benefits to the
potential purchasers. If the costs of conversions rise for an individual business or for an
entire industry segment (all other things equal), the number of conversions demanded will be
Final Report * * * September 28,1992                                               31

      The extent to which demand will fall off in response to a given increase in price cannot
be predicted wrth any degree of certainty. Order-of-magnitude estimates can be made fairly
easily, however, for two of the most important classes of situations:

      (1)    Where prices are increased by a single supplier of a relatively standard
            conversion part or installation service;  and

      (2)    Where prices are increased by al| suppliers of conversion parts or services.

In the first class of situations, demand can be expected to be quite sensitive to small price
changes, for the same reason that prices of  comparable grades of gasoline in the same area
match closely:  if an individual station raises its price by more than a few cents, it loses its
customers to its competitors. Only those individual suppliers offering special products or
services, or  serving a  particular market niche, will be  able to increase prices without seeing
substantial reductions in sales.

      In the  second class of situations, in which prices are increased across an entire
industry segment, the sensitivity of sales to price changes can be expected to be moderately
low.  In the demand segment in which gaseous fueled vehicles are in competition with
gasoline powered vehicles, a conversion price increase of $100 might reduce the quantity
demanded by between four and eight percent; similarly, a $100 price decrease might increase
sales by four to eight percent.23 In the demand segment in which gaseous fuels are in
competition  with electric vehicles only, the sensitivity  to price changes is likely be to
considerably smaller.24  In a situation in which one type of gaseous fueled vehicle
increased in price'compared to another (e.g., if CNG  rose in price compared to LPG), the
price sensitivity might be relative higher (than if prices of all gaseous fueled vehicles rose),
since these two segments of the industry are relatively close substitutes for one another.
   23 This rough estimate was made on the basis of estimating the change in the fraction of fleet
      vehicles for which a conversion to natural gas would no longer be cost effective after a first-cost
      increase of $100, using an estimate of the distribution of miles travelled per year for different
      fleet vehicles. See Appendix B.

   24 This estimate is based on estimates of the demand for electric vehicles as a function of the ratio
      between their lifecyde costs and the lifecycte costs of internal combustion vehicles.  This
      analysis is presented in Appendix B.

Final Report * * * September 28,1992                                                 32

                                    CHAPTER 5
      An analysis of potential impacts of regulations that impose costs on the aftermarket
conversion industry requires an assessment of the costs of providing conversion products
and services, including an assessment of the relationship of costs to the size of the business.
This chapter provides an overview of the price  of conversions (which reflects in large part the
full acquisition costs of conversions); the components that influence conversion costs; the
relationship between costs and the scale of the conversion operation; and the potential costs
of gaseous fueled vehicles from OEMs.
5.1   Conversion Prices

      The price for converting a vehicle to use gaseous fuels at the present time depends
both on the type of fuel to be used (CNG or LPG) and the size of the vehicle (light-duty or
heavy-duty). Estimates of the price of a CNG conversion for a light-duty vehicle vary from
$2,000 to $3,500; the low end of this range may reflect lower-pressure fuel storage cylinders
and simpler open-loop technologies that are not likely to meet strict emission standards.25
Converting to LPG is less expensive, ranging from $1,000 to $2,000 for a light-duty vehicle.
26 These estimates of the costs for light-duty CNG conversions are consistent with EPA's
recent estimates of $2,550 to $3250.   Conversions for heavy-duty vehicles are more
expensive:  a minimum of $3,500 for converting a gasoline engine to CNG, and $7,000 to
$10,000 for LPG. Gaseous, fuels conversions for heavy-duty diesel engines are even more
expensive, with costs for converting to CNG estimated at between $12,000 and $30,000.28

      Gaseous fuel vehicle prices are expected to drop in the future through mass production
and the participation of original equipment manufacturers (OEMs). The added cost of a light-
duty CNG vehicle from an OEM is projected to be between $900 and $1,600 for CNG at large
production levels; a similar range is projected for propane vehicles.29
     Tramportatton Sector. Technical Report Ten: Analysis of Alternative-Fuel Fleet Requirements.
     U.S. Department of Energy, Office of Policy, Planning, and Analysts, p.  23, April, 1992.;
     Govemm'a Report. Table S.S: conversations with Christopher Weaver.

   28 Final Report of the Governor's Alternative Fuete Task Force. Table 5.5, December 19, 1991.

   27 Environmental Protection Agency, Office of Mobile Sources, Special Report, Analysis of the
     Economic and Environmental Impacts of Compressed Natural Gas as a Vehicle Fuel. Volume 1.
     p. 10, April 1990.

   28 Final Report of Governor's Task Force. Tables 5.5 and 5.6, and p. 63.

   29 Idem.

Final Report * * * September 28,1992                                                33

5.2   Components of Conversion Costs

      Conversion costs can be divided into the costs for the kits; the fuel storage cylinders;
and installation.  Among the more technologically advanced kits, projected prices range from
31,100 to $4,000 at high production volumes.30  Fuel cylinder costs will depend on the
required fuel capacity and on the type of fuel.  A typical value for CNG is $1,000 per vehicle:
fuel storage costs for LPG are lower due to the smaller volumes and lower  pressures

      Costs for installations depend on the costs of labor, facilities, and equipment.
Currently, a gaseous fuel conversion takes about 20 labor hours. At a typical rate for auto
repair facilities of $40 per hour for trained labor, including a markup to cover benefits,
overhead, and profit, labor would be billed  at $800 per  conversion.  Adding this cost to the
costs for fuel storage and a conversion kit produces a cost of $2,900 for a  CNG conversion
for a light-duty vehicle.

      A straight labor-hour calculation oversimplifies the full costs of installation,  however,
especially for a small facility.  Workers must complete training courses before being certified
to perform conversions; one kit supplier requires a multi-day training course at its own facility.
Beyond this formal training, installers need  extensive experience to perform efficiently.  Thus,
an installation business needs to make significant investments in labor before it can compete
effectively, and this investment must be amortized over  the conversions performed. In
addition to  its investments in labor, installers of sophisticated conversion kits need equipment,
including a dynamometer and electronic testing equipment to ensure that the conversions are
performed correctly.  Dynamometers cost $35,000, and the rest of the specialized equipment
brings the investment in test equipment to about $50,000.  Installers also require liability
insurance, which may be difficult to obtain for small operations.  The total investment required
for a new conversion operation may be $250,000, including training, equipment, and initial
inventory.  As this investment must be spread over the  income earned from conversions, low-
volume operations will have higher unit costs.

      Amortization of equipment will depend on the discount rate, the number of years that
the equipment can be used, and the number of conversions per year.  To amortize $50,000 in
equipment over 5 years, with a 10 percent discount rate, is about $13,000 per year.  To
spread this investment over 250 conversions per year (or one per day) would mean a per-unit
cost of about $50, which is a relatively small fraction of  the total  cost of a conversion.
5.3   EconomiM of sole

      One LPG group has asserted that economies of scale in installations are small due to
extensive labor on individual vehicles, rather than on assembly lines.  However, there are
likely to be substantial economies in larger volume pan or kit orders; in fully utilizing
equipment, and in developing labor skills. As in the example presented above, spreading
$50,000 worth of specialized testing equipment over 250 conversions per year for five years
   30 Conversations with Stewart and Stevenson and Christopher Weaver of EF&EE.

Final Report * * * September 28, 1992                                                34

 amounts to only about $50 per conversion.  Spreading the costs over only 50 conversions a
 year, or one per week, raises the unit cost by a factor of five to about $250. Similarly, at
 1.000 conversions per year the unit cost falls to less than half of one  percent of the total cost
 of the conversion.   In the carefully studied "learning curve" phenomenon, it has been
 found that each doubling of cumulative output can cut labor inputs by 20 percent.  Thus, a
 facility where cumulative  volumes are  eight times greater (as in dedicated facilities where
 workers install conversion kits full time), labor costs are expected to be  only half as great.32
 Thus, costs would be in the neighborhood or $2,500, or perhaps less, depending on the
 economies of scale in larger volume kit orders.

 5.4   OEM Competition

      Eventually, OEMs will compete strongly in the market for gaseous fueled vehicles. Their
 advantages include greater buying power; the efficiencies of the assembly line; and savings
 on pans that do not have to be added only to be removed at the time of conversion.  One
 estimate is that OEM gaseous fueled vehicles will cost only $800 more,-as opposed to $2,500
 more for retrofit gaseous fueled vehicles.33  Still, models on which OEM will offer gaseous
 fuel option is likely to be  limited to those for which substantial sales are possible (for
 example, 10,000 units per year).  Limited offerings by OEMs will leave substantial sales
 opportunities for aftermarket conversions  both for economic and clean fuel uses.
   31 Assumes that $50,000 is amortized over five years at a real discount rate of 10 percent and
     that a conversion costs roughly $3,000 in all.

   32 H. Asher, 'Cost Quantity Relationships in the Airframe Industry,' Rand Corporation Technical
     Report no. 17Z

   33 Technical Report Ten: Analysis of Alternative-fuel Fteet Requirements. U.S. DOE, p. 25, April

Final Report * * * September 28,1992                                                 35

                                    CHAPTER 6
      Both the Gaseous Fuels and the Clean Fuel Fleet regulations will require that
aftermarket conversions be performed with kits that have been certified by EPA to meet the
applicable emissions standards. In addition, each converted clean fuel fleet vehicle may be
required to pass a tailpipe test to ensure that the certified kit used for the conversion has
been installed correctly.

     These requirements will impose costs at three levels:

      •    An $80,000 durability test to "prove" a basic technology;

      •    A $10,000 low-mile emission test for each kit/engine family combination; and

      •    A $5 • $25 tailpipe test on each converted vehicle to verify the kit was properly

For each of these levels, the following sections describe the requirements, assumptions
regarding unit testing costs, projected number of tests, and impacts of the costs on the
model firms.

6.1   Emission Tests

     Given the relatively low annual  sales expected for each kit/vehicle engine family
combination, gaseous conversion kit makers will be considered small volume manufacturers
for certification purposes. They will therefore be required to conduct low-mileage tests only
for any kit using "proven technology." Kits using "unproven technology," on the other hand,
will  require a durability test to determine deterioration factors, in addition to meeting the
standards at low mileage.

6.1.1  Unit Cost

     Once a particular technology has undergone a durability test, the technology it uses will
be considered "proven." Subsequent kits certified using the same technology will therefore
be required to pass a low-mile emission test only.  EPA has estimated that each durability test
will  cost approximately $80,000, and that low mile emission tests for conversions will cost
about $10,000.

6.1.2  Total Costs

     EPA anticipates defining individual technologies broadly, meaning that a relatively small
number of basic technologies will suffice to cover all conversion kits.  While the exact number
of technologies  that will be used is necessarily uncertain given ongoing progress in the

Final Report * * * September 28, 1992                                               36

 industry, ICF expects the total number of basic technologies to range between 3 and 10.
 Thus, given per-test costs of $80,000, the total cost of the durability tests will range from
 S240.000 to $800,000 for the industry.

 6.1.3       Incidence and Impact of Coats

      Given that the technologies used for kits aimed at the Federal CFF standards are likely
 to overlap substantially with the technologies used for kits affected by the Gaseous Fuels
 standards,  there is no meaningful way to attribute the costs of the durability tests to one set
 of rules or the other.

      The total costs of the durability tests are minor when compared to the total number of
 conversions expected, or to the total revenues of the conversions industry.  Assume the
 testing costs can be  amortized over a five year period, they will amount to between $63,000
 and $210,000 per year.34  Given that the volume of gaseous fuel conversions is expected to
 be in the range of 150,000 units per year, the durability testing costs will add less that two
 dollars per unit.  This cost increase is an insignificant fraction of the $3,000 or greater cost of
 a typical conversion.

      Because there  are no statutory mechanisms to require sharing of the costs of durability
 tests,  all of the costs will be bom by the first firms to certify a kit using each basic technology.
 Other kit makers certifying kits that use the same technology  as one of the "pioneering* firms
 will have the advantages of durability tests while incurring none of the costs. On the other
 hand, the pioneering firms will  have the advantage of introducing a new technology
 somewhat earlier that the firms that follow.

      Because durability testing costs are imposed only on the first firm to employ each
 technology, they take on the characteristics of sunk costs.  A firm that has incurred a sunk
 cost (that is, a cost that is unrelated to its production volume) will not have an increased
 incentive to raise prices to recover them.  Rather, the firm will want to keep its prices low, in
 order to generate enough  sales volume to spread the up-front costs over more units. Thus, it
 is more appropriate to compare the testing costs to the assets and anticipated profits of the
firms most likely  to incur them  than to compare these costs to revenues, or to estimate the
 increase in revenues  needed to cover the costs.

      Large kit makers and engineered converters are the most likely candidates for
 leadership in certifying unproven technologies. Estimates of the assets and profits of kit
 makers and engineered converters are presented in Exhibits 3.1.2 and 3.2.1. The large model
 firms in each of that* industry segments are relatively similar  in scale, with assets dose to
 $20,000,000 and profits on the order of $800,000.  For these firms, the costs of performing a
 durability test would dearly be manageable. A cost of $80,000 would be less than half of one
 percent of assets, indicating that financing the test would not be a problem, and the
 annualized cost of a test (of about $22,000) would have a minimal impact on profits of less
 than three percent Even if a median small company found it necessary to perform a
   34 Assumes that costs $240,000 to $800,000 are amortized over five years at a 10 percent
      discount rate.

Final Report • • * September 28,1992                                                 37

durability test, the impacts on assets and profits would be relatively low:  $80,000 is on the
order of a few percent of the assets of median small kit makers and engineered converters,
and the annualized testing cost of $22,000 is no more than a tenth of profits, which are
currently strong for firms of this size.
6.2   Low-mile Certification Tests

      Low-mileage certification tests will be required both for gaseous fuel and clean fuel fleet
conversions kits.  An attempt is made to separate the costs attributable to these two
programs individually, though there is likely to be considerable overlap in the demand for
vehicles certified under the two programs.  The cost of each test is expected to be about
$10,000.  While a given kit may be applied with minimal changes to several engine families, a
separate low-mileage certification test is required for each kit sold for each engine family. We
first examine costs for light-duty vehicles, and then consider the costs for the smaller heavy-
duty vehicle segment.

6.2.1 Estimation of Total Costs for Low-mileage Tests for Light-duty Vehicles

      The number of tests for light-duty vehicles, and thus the total costs,  depends on how
many engine families for which the kit makers decide to offer kits. The number of potential
engine families is quite large, if there are no constraints on a kit maker adding additional
families.  For example, ANGI has offered (and has certified) kits for over 100 different engine
families in the State of Colorado. If every kit maker and engineered converted offered  kits for
100 different engine families, the total number of low-mile tests would range into the

      ICF considers it unrealistic to assume that all kit makers would certify kits for all
possible engine families if a low-mile test were required.  The reason is three-fold:

      (1)    Firms will not spend $10,000 on a test for a given  engine family, in addition to the
           costs of calibrating the kit for the particular needs  of that engine family, if they
            cannot recoup that investment by charging more for each kit sold for that family.

      (2)    Not every engine family offers the same sales potential for kit makers. The
           lowest-volume engines may provide such low kit sales that recouping a $10,000
           testing investment would  require a prohibitive increase in the cost of the kit.

      (3)    Due to their size or other operational or technological constraints, some families
           such as diesels or those intended for subcompacts are not good candidates for

      This reasoning is illustrated by Exhibit 6-1, "Distribution of Sales by Engine Family.' The
chart is based  on sales share data for heavy-duty diesel engines, though the concept it
illustrates is likely to hold  for light-duty engine as well. The chart shows the sales shares for
Final Report * * * September 28,1992                                                 38

 all but the highest-selling engines.35 The engine families are ranked by sales share, with
 the lowest-selling engines (e.g., numbers 60 through SO) at the right.  Sales shares decline
 very regularly; in fact, the assumption that each additional engine family sells about six
 percent less than the one before it seems reasonable.  This pattern is illustrated by the
 regression line superimposed on the bars.

      The point that can be made with the bar chart is as follows: firms can ensure that they
 have sales great enough to pay for their low-mile tests and calibration costs if they
 concentrate largely on the high-volume engine families to the left, and decline to test kits to fit
 the majority of the low-volume families to the right.

      tCF has made some estimates of the costs per conversion that kit makers would have
 to pass along to cover the costs of low-mile tests.  It was assumed that

      •    A low-mile test  costs $10,000;

      •    Calibration costs (that is, the development costs to ensure that the kit/engine
           combination will work and will meet emissions standards) will cost an additional
           $20.000 per kit;36 and

      •    Both costs could be amortized over five years at a 10 percent discount rate; a
           total of $30,000 spread over five years  at a 10 percent discount rate equals  about
           $8,000 per year.

      If sales for a particular kit maker's kit for a particular engine family are too low, it will
become impossible to pass on the full costs of the calibration and testing. For this analysis,
we are assuming that this threshold will come at the point where the per-krt cost of the test
and the development costs is about $20.

     To cover  a total cost of $8,000 per year without exceeding $20 per unit would require
sales of 400 units per year. This sales volume will be easily exceeded by the larger
manufacturers for the best-selling engine families, assuming fairly large total numbers of
conversions.  For less popular engine families, and for small manufacturers whose conversion
kits will have more limited market penetration, sales of an individual kit could easily drop
below 400 units per year.
   35 Gaseous-fueled versions of the best-selling engine families will probably be offered by OEMs,
      and so do not represent an attractive market for converters in the long run.  Even though it is
      believed that OEMs will offer dedicated CNQ vehicles for some of the higher sales engine
      families, there will still be many engine families for medium to high sales volume for which kits
      will be offered.

   30 Conversation with Christopher Weaver, EF&EE.

Final Report * * * September 28,1992                                                 39

                                   Exhibit 6-1

                          Ranked in Order of Sales, Not Including Top Sellers

"8 2%
"i » »
"i» N
» » »

                  4 •?•« « ," .«
                  ' ? 4 4 ," '
                  i ;< ;v|< |< («
                     ,",1.«,«;««.•••.»:»;»;»; >;»;»; -j »jj
           9  12  15 18 21  24  27 30 33  36 39 42 45 48 51  54  57 60 63  66 69 72  75 78

                                Engine Families, Ranked by Sales
                                    Curve fit to data

      There is no way to make solid predictions at this time as to how many kits could be
offered that would sell more than 400 units per year.  ICF has developed a simple
methodology, however,  based on plausible assumptions, that generates estimates of the
number of kits with sales of at least 400 units as a function of total sales of conversion kits.
The methodology makes the following assumptions about the distribution of sales:

      *    Sales of conversion kits are limited to the 70 most popular fleet engine families,
           not counting a  handful of the top selling families, for which less expensive factory
           versions will be available (this assumption has only a small effect on the results);

      •    Sales of conversion kits are roughly proportional to sales of the engines
           themselves, meaning that popular engines wilJ offer the greatest  conversion kit
           sales potential;

      •    Sales of conversion kits (by ail kit makers and engineered converters) across
           engine families are distributed so that sales of kits for any given  engine family will
           be about six percent more than the sales for the next highest-selling engine family
           (estimated from Exhibit 6-1). In other words, if the total demand  for all conversion
           kits for the best selling engine family equals 3,000, then the demand for the
           second-best selling family will equal six percent less or 2,820; demand for the
           third-best seller will be about 2,650, and so on.

      •    For any given engine family, sales will be divided as follows:  a third of sales will
           go to the largest firms; just under half will go to relatively small firms; and the
           remainder (about a fifth) will go to the smallest firms.

      •    There are a total of 23 kit makers and engineered conveners: three large; ten
           relatively small; and ten very small firms (based on the current size distribution of

      •    Each firm will offer at most one kit for a given engine family;  thus, there will be no
           more than 23 kits certified for each engine family.

      •    If total sales for an engine family  are insufficient to provide all 23 sellers with  sales
           of 400 per year (taking into account the assumption that each size group's share
           of the sales  is limited), then some firms will decline to offer kits (that is, drop  out
           of the sales  competition) for that  engine family.  Enough firms are assumed to
           drop out of competition for each  engine family to provide sales of at least 400 for
           each firm still offering a kit for that family. For example, if total sales for a family
           art Maumed to be 2,200, and the smallest firms split 22 percent of the total,  then
           the total share of the smallest firms will be 484.  This will be enough for one very
           smaH firm to have sales of 400, but not enough for more than one.   It is assumed,
           then, that only one very small firm will offer a kit for this engine family. A similar
           calculation is made for large and moderately small firms, yielding an estimate of
           the total number of kits offered for that family.

      Applying this methodology yields a relationship between the total number of conversion
kits sold for which federal low-mile tests are needed and the total number of engine families

Final Report • • • September 28,1992                                                  41

for which kits are offered (and tests are performed). This methodology also yields estimates
of the average number of kits offered (and tests performed) by firms in different size classes.

      The exhibits show the result of applying this methodology for varying levels of total
conversion kit sales.  The levels of 35,000 and 150,000 highlighted in the exhibit are related to
the sales for the federal CFF program and the total number of conversions (not counting the
California clean fuel fleet program) anticipated for the year 2000.

      It is difficult to attribute numbers of tests and total costs to the Federal CFF standards
as opposed to the Gaseous Fuels standards, in pan because kits that have been certified
under the CFF program can presumably be used  to certify vehicles under the Gaseous Fuels
program as well. In this report, ICF calculates impacts as though the Federal CFF program is
introduced first, and imputes the costs of the tests generated by the annual CFF sales (about
35,000 per year in 2000) to the Federal CFF program.   ICF then attributes to the Gaseous
Fuels program all of the costs of the additional  low-mile emission tests that manufacturers
would choose to perform in light of the additional  conversions demand due to the state clean
air initiatives and the economically driven demand (an  additional 115,000 conversions per
year, for a total  of about 150,000 conversions in 2000).
                                      Exhibit 6-2
       Low Mile Tests for Light-Duty Vehicles Per Firm as a Function of Total Sales
Total Annual
Total Number of
Low-Mile Tests
Tests per
Large Firm
Tests per
Small Firm
Tests per
Very Small
      Exhibit 6-2 shows that because the Federal CFF standards will generate conversion
sales of just over 35,000 light-duty vehicles per year in 2000, kit makers and engineered
converters are likely to perform about 74 low-mile tests:  eight per large firm, three per small
firm, and two per very small firm.  Because the total annual sales of non-California
conversions are projected to total 150,000 (including the Federal CFF demand, non-California
state-driven demand, and economically driven demand), kit makers and engineered
converters are projected to perform a total of 323 low-mile tests: 27 per large firm, 16 per
small firm, and 8 per very small firm. The incremental number of tests attributable to the
Gaseous Fuels program is the difference between the total number of tests and the tests for
Final Report * * • September 28,1992

the Federal CFF program: 249 incremental tests in all; 19 per large firm; 13 per small firm;
and 6 per very small firm.

      In spite of limited coverage by each seller, choices by consumers will be affected to a
very small degree only.  First, even if only a fraction of all engine families are covered by any
one kit maker, most of the total sales volume will be covered because kit makers will
concentrate on the best-selling engines.  Second, because there are 15 competing kit makers
(in addition to eight engineered converters),  kits for virtually all engine families are likely to be
offered by at least one kit maker as the competitors seek "niches" to exploit.

6.2.2 Estimation of Total Costs for Low-mileage Tests for Heavy-duty Vehicles

      Testing costs will be increased somewhat by the need to conduct low-mile tests for
heavy-duty vehicles.  The heavy-duty conversion market will be much smaller than the light-
duty market, so the total costs for low-mile testing for this segment will almost certainly be
much smaller. In recognition of the smaller size of this segment, ICF has not developed a
separate methodology for estimating numbers of tests. Rather, ICF has used EPA's estimate
that there will be 10 low-mile tests in all to cover the 1,500 heavy-duty conversions for the
federal CFF program per year by the year 2000.37 These ten tests equal about an eighth of
the 75 tests for light-duty CFF vehicles. For simplicity, ICF is assuming that tests for heavy-
duty vehicles will also represent an eighth of the light-duty tests  done for the Gaseous Fuels
regulations.  Thus,  because there are projected to be 249 tests for light-duty vehicles under
the Gaseous Fuels programs, ICF estimates that there will be roughly 30 tests for heavy-duty
vehicles.  Adding these 30 tests to the  10 tests for the CFF program yields an estimated total
of 40 low mile tests for heavy-duty vehicles.

      ICF assumes, again for simplicity, that the low-mile tests for heavy-duty vehicles are
distributed across firms in the same proportions as the tests for light-duty vehicles. Tests for
each size of firm are assumed to increase by about one eighth:  for the CFF program, the
number of tests is assumed to go up by one for a model large firm, one for a model median
small firm (a slight exaggeration), and none for a model very small firm.  Similarly, for the
gaseous fuels program, the number of  heavy-duty low miles tests are assumed to be two per
model large firm, one per model median small firm, and one per model very small firm. These
increased tests, and increased costs, are incorporated into the tables that follow.
   37 Memorandum from Bryan Manning, QMS, to Barry Qalef, ICF, -Estimates of Gaseous Fuels
      OEMs and Conversions.' July 9,1992.

Final Report * * * September 28,1992                                                43

                                      Exhibit 6-3
            Low Mile Tests Costs, Light and Heavy-duty Vehicles Combined
Federal CFF
Gaseous Fuels
Total Cost of
Low-Mile Tests
Costs per
Large Firm
Costs per
Small Firm
Costs per
Very Small
6.2.3 Low-mile Test Costs Per Vehicle and Per Firm

      Costs per conversion average about $6 for the industry as a whole, both for the Federal
CFF vehicles and the Gaseous Fuels vehicles.  Costs per conversion are projected to be
somewhat smaller for the largest firms. These costs, which amount to less than half of one
percent of the total cost of a conversion, are too small to affect industry sales significantly.

      ICF expects that the cost of the low-mile tests can be largely passed on to the
purchasers of converted vehicles.  While in a competitive market a fixed cost is difficult to
pass on to consumers due to the pressure to keep prices low and increase sales volumes,
the aftermarket  conversion industry is unlikely to be competitive enough to prevent the pass-
through of testing costs.  If only about 85 kits have been certified for light and heavy-duty
CFF conversions, and a total of about 360 kits have been certified for both CFF and gaseous
fuels conversions for the approximately 70 engine families commonly used for fleets, the
choice of kits for most engine families will be sharply limited.  Given limited competition
among kit makers and engineered converters for any engine  family, it is likely that a per-kit
testing cost on the order of $6 per conversion can be passed on to purchasers.

      The cost of low-mileage testing  per conversion will vary across engine families, with
higher costs for engine families with lower sales volumes. This tendency will be muted by
market forces:  numerous kit makers are likely to offer certified kits for those engine families
that are popular for fleet use, while for many of the less popular engine families there will be
no more than a single certified kit on the market. The reduced competition for the lowest
volume engine families is likely to help kit makers spread their testing costs and reduce the
competitive pressure to avoid passing on the testing costs as price increases.

      Costs will not necessarily be spread evenly across firms.  Exhibit 6-4 shows the
distribution of costs across firms of different sizes  of kit makers in comparison to profits and
assets.  Relative costs are expected to be similar for engineered converters as well, given that
they are similar in size to the kit makers.
Final Report * * * September 28,1992

                                      Exhibit 6-4
                 Low Mile Testing Costa Compared to Model Kit Makers
Number of Low-
Mileage Tests
Total Cost per Firm
Annualized Cost per
Cost as a
Percentage of
Annualized Cost as
a Percentage of
Cost per Kit Sold
(Average Price
Increase Needed to
Recover Costs)
Median Large Kit
Median Small Kit
Lower Quartile
Small Kit Makers
Source:    EPA and ICF Analysis
      Overall, the comparisons shown in Exhibit 6-4 suggest that while financing the initial
costs of the tests will be slightly less burdensome for the largest firms in the industry than for
the small firms, all sizes of firms are likely to have ample resources for conducting the tests.
In addition, coati per kit are small in comparison to the total cost of the typical conversion,
and are relatively constant across firm sizes. Given that the small and relatively uniform costs
of testing can pmtoabty be passed through to purchases in the prices of the conversions, the
low-mile test* are unlikely to have a permanent impact on the financial strength of the firms in
the industry.
6.3  Tailpipe Teals for CFF VeWdee

     Tail-pipe tests to ensure that a certified kit was installed correctly are likely to be an
important element of the industry's marketing and quality assurance strategy, even if they are
not required by law. Costs are estimated to fall between $5 and $25 per vehicle at an I&M
Final Report * * * September 28,1992

test station.  Where test stations are available, this cost will not have a significant impact on
the market for several reasons.  First, the tests add value to the conversion in most cases
(that is, where the vehicle can be certified as a clean-fuel vehicle after it has been tested).
Second, the costs appear to be minor-less than one percent of the total cost of the
conversion.  Given that ICF estimates the demand elasticity for gaseous conversions to be
moderately low (between -1 and -2), there will an impact on sales of less than two percent,
which will  be insignificant in a growing market.
      For  the small segment of the industry that is devoted to CFF kit installations but is
outside of the non-attainment areas where test stations are generally available, however, it is
somewhat more difficult to estimate the impacts of the  testing requirement.  On one hand, it
seems likely that vehicles to be converted to  meet the clean fuel  fleet standards will be used
in areas with I&M stations available, even if these stations are not available where the
conversion is performed. Thus, the purchasers would  be able to have these tests performed
in their city as a final condition of delivery, and the need to have  the tests performed at an
l&M station would not have a greater impact  on small entities without access to sophisticated
testing equipment.  In addition, because kit suppliers are likely to have a strong interest in the
correct installation of their kits (to preserve their reputation for quality), they are likely to
require their installers to have available the equipment needed to ensure that the conversions
have been performed correctly.  As described in Chapter 5, this means that installers have to
have available a dynamometer and equipment to analyze exhaust gases.

      On the other hand, to the extent that converters will need to test and possibly adjust
the vehicles they have converted before releasing them to the fleet owners,  small converters
would be at a disadvantage if they could not  afford testing equipment equivalent to that
provided by a high-technology I&M station. For a volume of 1,000 vehicles  per year, high-
technology transient tests have been estimated to cost a total of $57.05 per vehicle for
equipment alone; for smaller volumes (e.g., 300 clean-fuel vehicles) this cost would become
prohibitive (an added $200 or more).  These smaller converters might be limited to serving the
market for non-clean fuel fleet vehicles. EPA  does not  expect, however, that tail-pipe testing
will demand equipment that is more sophisticated than the installers will already have
6.4   Summary of Estimated Regulatory Costa

      This section summarizes the regulatory costs presented in the previous sections in two
ways.  First, it presents per-vehicle regulatory costs for the model firm kit makers.  Second, it
presents estimates of annual program costs in the year 2000 for the proposed Clean Fuel
Fleet and Gaseous Fuels regulations.

      Exhibit 6-5 summarizes the per-vehide regulatory costs for kit makers.  The
methodology used in developing these estimates was presented earlier in this chapter and,
therefore, will not be stated in detail here. As shown in this exhibit, per-vehicle costs for the
CFF program are approximately $20 for all three model firms, including tailpipe test costs. As
explained earlier, we have assumed that only larger kit makers will undertake emissions tests
to prove a technology, that each large firm will, on average, conduct two emissions tests, and
that these costs will be spread evenly over both CFF and Gaseous Fuels kit sales. This

Final Report • • • September 28,1992                                                 46

                                        Exhibit 6-5
                 Summary of Per-Vehlcle Compliance Costs for Kit Makers
                                        ($ per Vehicle)

Emission Test
Low-Mile Test
Tailpipe Test*
Clean Fuel Fleet Program
Large Co.
Small Co.
Lower Quartlle
Small Co.
Large Co.

MOM Fueta Program
Small Co.
Lower QuarMa
If required.

results in per-vehicle emission test costs of $2.11 for large firms and zero for other firms. CFF
low-mile tests will result in roughly comparable per-vehicle costs for small and large kit
makers ($4.75 versus $5.28); small firms have lower sales over which to spread test costs,
but may choose to minimize testing costs by performing fewer low-mile tests.  Per-vehicle
tailpipe costs are approximately $1S.38  It should be noted that kit makers may not pay for
the tailpipe test if the kit is installed by another company  or if the customer pays for it directly.
Nevertheless, we have  included it because it is a per-vehicle regulatory cost.

      Per-vehicle costs from the Gaseous Fuels regulations are approximately one-quarter the
costs of the Clean Fuel Fleet program.  This difference is primarily due to the fact that the
Gaseous Fuels regulations do not require tailpipe tests, although many companies may opt to
conduct them anyway to verify the quality of their work. Per-vehicle emissions costs are
assumed to be the same as for the Clean Fuel Fleet program ($2.11 for the large model firm).
Low-mile test costs per-vehicle for the model firms are similar for both programs.  While sales
will be higher under the Gaseous Fuels program than the CFF program, all model firms are
projected to incur more low-mile testing costs under the Gaseous  Fuels program in an effort
to secure a larger share of this market.

      Exhibit 6-6 presents estimated total program costs for the year 2000. To  calculate
these estimates, we multiplied the test cost annualized  over a 5-year period by the number of
each test required under the two regulations.  As shown in this exhibit, annualized program
costs for each regulation are approximately $830,000.  However, the portion of costs
attributable to each test vary significantly between the two programs.  If tailpipe tests are
required, their costs will fall only on the  CFF program.  The larger sales of the Gaseous  Fuels
program will result in larger total costs for the emissions and low-mile tests.
                                      Exhibit 6-6

                      Summary of Estimated Total Program Costa
                             (Annual Cost for the Year 2000)

Emissions Test
Low-Mile Test
Tailpipe Test*
Cost per Test
Clean Fuel Fleet
P »*••••«_
Gaseous Fuels
  If required.
   38 Tailpipe costs are estimated to be between $5 and $25; we have used $15 for simplicity.

Final Report * * * September 28,  1992                                                 48

6.5   Cut-off Points

      EPA has considered proposing a requirement for all Clean Fuel Fleet conversions to be
tested, and has also considered providing entities performing 300 or fewer conversions per
calendar year (and who do not have access to an I/M facility) with an exemption from these
testing requirements. ICF's judgment is that the proposed 300 conversion cut-off is not
unreasonable for the following reasons.

      First, the proposed cut-off is at a level where it will help the smallest installers but will
not be a blanket exemption for the majority of the industry (see Exhibit 3-4).  Second, the
proposed cut point is financially plausible. Installation and emissions testing equipment costs
are approximately $50,000.39  If amortized over five years, at a 10 percent discount rate,
equipment costs amount to about $13,000 per year.  If a company performs 300 conversions
per year, costs would amount to approximately $45 per conversion - a relatively small fraction
of the total cost for a conversion. If the exemption were placed considerably lower (e.g., 50
conversions per year), however, the cost of testing equipment becomes prohibitive ($300 per

      Moreover, the number of companies using the exemption is not expected to be very
sensitive to the cut-off for the following reasons:

      •   The more prominent kit  makers require emissions testing to assure the quality of
          the installation. Thus, many installers will perform CO emissions tests regardless
          of the federal exemption.

      •   The fact that installation of kits in accordance with the Gaseous  Fuels NPRM
          necessitates the use of certain equipment (e.g., a dynamometer) means that
          almost all installation companies will have adequate test equipment to perform
          CO emissions tests.

      •   Even if the cut point were set too high, many companies would opt not to use the
          exemption because it is a good selling point to show the customer that a vehicle
          has been fully tested and meets the required standards.

      •   Setting the cut-off much lower than 300 conversions  (e.g., fewer than 100) would
          make the exemption irrelevant, because companies with very  low volumes are
          unlikely to be competitive in this industry.

      •   TtMf* are expected to be relatively few installation companies outside non-
          atWnment areas.
   38 Section 5.2 of our report

Final Report • * * September 28,1992                                                49

                                   Appendix A
                               Glossary of Terms
                     Alternative fuel vehicle.

                     Advanced fuel metering control in which, through the use of an
                     oxygen sensor and microchip processor, the air/fuel ratio of a vehicle
                     is constantly and dynamically controlled to give optimal performance.

                     Compressed natural gas, mainly methane (CH^.

                     Refers to an engine capable of operating on two separate fuels, one
                     a traditional fuel such as gasoline or diesel fuel, and the other an
                     alternative fuel, such as CNG or LPG.

                     Liquified petroleum gas, mainly propane (C3Hg).

                     Natural gas vehicle.

                     Geographic area officially designated as exceeding federal air quality
                     emissions standards.

                     Oxides of nitrogen

                     Original equipment manufacturer.

                     Carburettor), in which the carburetor is throttle controlled.

Closed Loop





Non-attainment Area



Open Loop
Reformulated gasoline Conventional gasoline with one or more components changed or
                     modified to reduce emissions levels, typically benzene, aromatics,
                     lead, detergents, and oxygen content, among other components.
Final Report
            * * *
                September 28, 1992

                                   Appendix B
                      Assessment of Demand Elasticity
      No direct empirical measures of the sensitivity of demand for conversions to changes in
their cost (i.e.,  the price elasticity of demand) are available. As a general rule, demand
elasticity for a product is higher if there are more and better substitutes for that product.
Thus, we can expect that demand elasticity for gaseous-fueled vehicles will be higher if they
are in competition with both electric vehicles and with reformulated gasoline fueled vehicles,
than if their competition were limited to electric vehicles.  Similarly, demand elasticity is
probably much higher for a single supplier of gaseous vehicle conversions or kits than for the
industry as a whole, because a single supplier has many more competitors offering good
substitutes than does the entire industry.

      Though there are no empirical estimates of demand elasticity for the conversion
industry, it is possible to predict an approximate range for the elasticities on the basis of the
underlying economics and by drawing on studies of dosely related industries. This appendix
presents the methodology used to project demand elasticities tor firms in the gaseous fuel
conversions in competition with reformulated gasoline fleet vehicles; with electric vehicles;
and with other gaseous fuel converters. All of these estimates are subject to considerable
uncertainty, and all could be improved with additional data and analysis.

      Demand Elasticity for Gaseous Fual in Competition wfth Qaaoline

      A rough  estimate of the sensitivity of gaseous-fueled vehicle sales to changes in their
prices can be made by estimating the fraction of the potential fleet for which a given price
increase would eliminate the cost-effectiveness of changing fuels. For example, there might
be 100,000 vehicles for which the economic benefits of CNG  outweigh the costs,  but only
90,000 vehicles for which the benefits outweigh the costs by at least $100. In this case, we
can predict that a $100 increase in price wilt make a CNQ conversion uneconomic for ten
percent of the  potential customers-that is, for the 10,000 vehicles for which the net benefits of
a CNG conversion were less than $100 before the price went up.

      To inlhuats the percent of vehicles for which a $100 increase in conversion costs
would detsmtilfwhether or not a CNG conversion would be cost effective,  ICF used data on
the per-mfle fuel cost advantage of CNG compared to gasoline, and the distribution of miles
traveled per year by cars and vans in fleets.  Because of CNG's price advantage of about 50
cents per gaflon equivalent  (or two cents per mile for a vehicle that gets 25 miles per gallon),
a CNG conversion is more cost-effective if the vehicle is used intensively. At a savings of two
cents per mite, CNG provides an extra $20 per year for a vehicle that is driven 1,000 miles
more per year. At a real discount rate of 10 percent per year and a vehicle life of eight years,
an extra $20 per year has a present value of just over $100.  Thus, increasing the price of a
conversion by $100 will raise the threshold at which CNG becomes cost-effective by 1,000

Final Report * * * September 28,1992                                                51

miles traveled per year:  if a CNG conversion had been economical for all vehicles used more
than 25.000 miles per year, a price increase of $100 means that CNG will be economical only
for vehicles used more than 26,000 miles per year.

     Two question remain: (1) where is the threshold, in terms of miles travelled per year, at
which a CNG conversion become economical at present; and (2) what percentage of fleet
vehicles above that threshold are within 1,000 miles per year of the threshold? By answering
these two questions,  it is possible to estimate the percentage of the potential conversion
market that might be  eliminated by a $100 price increase.

     About half of fleet cars (54 percent) are driven an average of 60 or more miles per day,
or more than about 22,000 miles per year according to a report on electric and hybrid
vehicles by William Hamilton (Table 2.3 of Hamilton, p. 30).  ICF assumes that the threshold at
which CNG conversions  become cost-effective is at that point or higher, given that a
conversion  is relatively expensive, and therefore cannot be justified on economic grounds for
vehicles that are used sparingly. The data presented by Hamilton (p.  30) show that the usage
range of 60 to 90 miles per day, or about 22,000 to 33,000 miles per year, encompasses
about 22 percent of all fleet vehicles. A range of 1,000 miles per year (e.g., between 22,000
and 23,000 miles per  year,  or one-eleventh of the range from 22,000 to 33,000 miles per year)
probably encompasses, therefore, about two percent of all  fleet vehicles (one-eleventh  of 22
percent). Thus, raising the economical conversion threshold by 1,000 miles per year (through
a $100 price increase) probably reduces the stock of potential conversions by about two
percent of the total population of fleet vehicles.

     If half of all fleet vehicles are above the threshold for  conversion, a change in demand
of two percent of the  all fleet vehicles would equal four percent of all potential conversions.
Similarly, if only a fourth of  all fleet vehicles  are above the threshold (as would be the case if
the threshold were somewhat above 33,000 miles per year), cutting demand by two per cent
of the fleet would amount to cutting demand for conversions by eight percent.

     If a $100 price increase on a $2,500 conversion, which is a four percent price increase,
cuts the quantity demanded by four percent, the demand elasticity is equal to -1. Similarly, if
the four percent price increase leads to an eight percent drop in quantity demanded, the
elasticity equals -2.
Estimating the BMtictty of Demand Facing a Single Supplier

     If the price were increased by $100 only one supplier, instead of by all CNG converters,
the elasticity would almost certainly be five to ten times larger, because the substitutes for a
the products of a single supplier are much better and more numerous than the substitutes for
the products of an entire industry.  One indirect estimate of the demand elasticity facing a
single truck engine manufacturer found an elasticity of -5, as compared to an empirical
Final Report * * * September 28, 1992                                                52

 estimate of dose to -0.5 for trucks as a whole.40  A reasonable estimate might be that a
 $100 price increase by a single supplier would cut potential sales by between 20 percent and
 80 percent, rath«r than by four to eight percent.  Estimates of elasticities of demand faced by
 individual suppliers, however,  are considerably more difficult to predict, due to their
 dependence on the perceived differences among the products and services offered by
 different suppliers.
Assessment of Elasticity for Gaseous Fueled Vehicles in Comparison to Electric Vehicles

      In situations in which gaseous fuel vehicles are in competition with electric vehicles
only, a measure of demand elasticity for gaseous fueled vehicles can be inferred from a
measure of the price sensitivity for electric vehicles because a decline in sales for one would
imply an increase for the other.  Figure 2-4 of Hamilton's report on electric and hybrid
vehicles shows the results of a survey analysis of demand for electric vehicles (EVs).  It
shows that a reduction of five percent in the life-cycle cost of electric vehicles relative to their
competition would increase their penetration by about 15 percent of its initial value (e.g., from
47 percent to 55 percent, for  an EV with a 50 mile range). As the life-cycle costs of an EV are
almost $25,000 a five percent change in costs relative to other vehicle types amounts to
$1,250.41  If a $1,250 change in relative costs causes a 15 percent change in  electric
vehicle penetration, and if electric vehicles and gaseous fueled vehicles shared the market
equally at first, a $1,250 change in costs might also cause a 15 percent change in sales for
gaseous fueled vehicles. Because $1,250 is 50 percent of the cost of a gaseous fuel
conversion costing $2,500, the  implied price elasticity is -15%/50% or -0.3. This order-of-
magnitude estimate is consistent with the prediction that elasticity will be low if substitutes are
few and imperfect.
   40 The Economic Impacts of NO, and Paniculate Matter Emissions Regulations on the Heaw-Outv
     Diesel Enolns Industry. Sobotka & Company, Inc., pp. 0-2 and E-3, for U.S. EPA, September

   41 Table 3-2 'Estimated Life-cycle Costs for Electric and QasoHne Cars,' p. 3-9 of Methodology for
     Anatvano the Environmental and Economic Effects of Electric Vehicles: An Illustrative Study.
     ICF Inc., prepared for E.S. EPA, Office of Mobile Sources, September 1991. Present value of
     armuateed costs of $4,882,  assessed at a discount rate of 12 percent over eight years, equal

Final Report * * * September 28,1992                                                 53