United States        Air and Radiation       EPA420-D-02-001
           Environmental Protection                 January 2002
           Agency
svEPA     D raft Tec h n i ca I
           Support Document:
           Nonconformance
           Penalties for 2004
           Highway Heavy Duty
           Diesel Engines
                                 > Printed on Recycled Paper

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                                                            EPA420-D-02-001
                                                                 January 2002
                 Nonconformance              for
         2004 Highway  Heavy Duty          Engines
                      Assessment and Standards Division
                    Office of Transportation and Air Quality
                     U.S. Environmental Protection Agency
                                 NOTICE

   This technical report does not necessarily represent final EPA decisions or positions.
It is intended to present technical analysis of issues using data that are currently available.
        The purpose in the release of such reports is to facilitate the exchange of
     technical information and to inform the public of technical developments which
      may form the basis for a final EPA decision, position, or regulatory action.

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                             Table of Contents
CHAPTER 1:  INTRODUCTION  	Page -4-
      I.     Background on Nonconformance Penalties	Page -4-
            A.     Clean Air Act Requirements 	Page -4-
            B.     Previous NCP Rulemakings and Regulations  	Page -5-
      II.    Promulgation of 2004 Emission Standards 	Page -7-
            A.     1997 FRM  	Page -7-
            B.     2000 FRM  	Page -7-
      in.    Characterization of the Heavy duty Engine and Vehicle Industries	Page -7-
            A.     Vehicle Applications and Classes  	Page -7-
            B.     Engine and Vehicle Manufacturers 	Page -8-
      IV.    Heavy Duty Diesel Consent Decrees	Page -10-
      References for Chapter 1 	Page -12-

CHAPTER 2: TECHNOLOGIES NEEDED TO MEET 2004 STANDARDS  	Page -13-
      I.     Projections of Technologies from 2000 FRM	Page -13-
            A.     Cooled Exhaust Gas Recirculation 	Page -13-
            B.     Improved Fuel Injection Systems	Page -14-
            C.     Exhaust Aftertreatment Systems  	Page -14-
      II.    Current Manufacturer Projections	Page -14-
      in.    Fuel Consumption Impacts 	Page -15-
      Chapter 2 References	Page -17-

CHAPTER 3:  COMPLIANCE COSTS	Page -18-
      I.     Methodology  	Page -18-
            A.     General Methodology	Page -18-
            B.     Net Present Value of Costs  	Page -18-
            C.     Costs Included	Page -18-
            D.     Upper Limit Engine	Page -20-
            E.     Use of Optional Standard	Page -20-
      II.    Manufacturer Cost Data	Page -21-
      in.    Analysis of Costs	Page -25-
            A.     COC50	Page -29-
            B.     COC90	Page -33-
            C.     MC50 and F	Page -37-
            D.     Urban Buses	Page -38-
      Chapter 3 References	Page -40-

CHAPTER 4: REGULATORY PARAMETERS FORNCPs	Page -41-
      I.     NCP Equations and Parameters	Page -41-
      II.    Refund for Engineering and Development Costs  	Page -45-

APPENDIX A:  FUEL CALCULATIONS	Page -46-

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APPENDIX B: SAMPLE COST CALCULATIONS	Page -50-
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                                                             Chapter 1: Introduction

                   CHAPTER 1:   INTRODUCTION
       The Technical Support Document (TSD) for this proposal  presents analyses and
supporting data for the provisions EPA used for establishing the proposed nonconformance
penalties for model year 2004 and later on-highway heavy duty diesel engines.

I.      Background on Nonconformance Penalties

       A.     Clean Air Act Requirements

       Section 206(g) of the Clean Air Act (the Act), 42 U.S.C. 7525(g), requires EPA to
establish nonconformance penalties for HDEs or HDVs which exceed the applicable emissions
standard, provided that their emissions do not exceed an appropriate upper limit.  Congress
adopted section 206(g) in the Clean Air Act Amendments of 1977 as a response to perceived
potential for problems with technology-forcing heavy-duty emissions standards. Following
International Harvester v. Ruckelshaus, 478 F.2d 615 (D.C. Cir. 1973), Congress realized the
dilemma that technology-forcing standards were likely to cause.  If strict standards were
maintained, then some manufacturers, "technological laggards," might be unable to comply
initially and would be forced out of the marketplace. NCPs were intended to remedy this
potential problem. The laggards would have a temporary alternative that would permit them to
sell their engines or vehicles by payment of a penalty.  At the same time, conforming
manufacturers would not suffer an economic disadvantage compared to nonconforming
manufacturers, because the NCP would be based, in part, on money saved by the technological
laggard and its customer from the nonconforming engine or vehicle.  The resulting provisions of
the Act require that NCPs account for the degree of emission nonconformity; increase
periodically to provide incentive for nonconforming manufacturers to achieve the emission
standards; and, most importantly, remove any competitive disadvantage to conforming
manufacturers.

       Under section 206(g)(l), NCPs may be offered for HDVs or HDEs. The penalty may
vary by pollutant and by class or category of vehicle or engine. HDVs are defined by section
202(b)(3)(C) as vehicles in excess of 6,000 pounds gross vehicle weight rating  (GVWR).  The
light-duty truck (LOT) classification includes trucks that have a GVWR of 8500 Ibs or less.
Therefore, certain LDTs may be classified as HDVs. Historically, LDTs up through 6000 Ibs
GVWR have been considered "light light-duty trucks" (LLDTs) and LDTs between 6,001 and
8,500 pounds GVWR have been considered "heavy light-duty trucks" (HLDTs). Based on
various new requirements established by the Clean Air Act Amendments of 1990, each of these
two light truck categories has been further subdivided into groups by weight. The LLDTs are
classified by weight based on "loaded vehicle weight," or LVW, which maintains its current
definition: curb weight plus 300 Ibs.  The trucks up through 3750 Ibs LVW make up a subclass

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                                                              Chapter 1: Introduction

called light-duty-trucks-1, or LDT1. Those greater than 3750 Ibs LVW but less than or equal to
6000 Ibs GVWR are the subclass light-duty-trucks-2, or LDT2.  The HLDTs are divided at 5750
Ibs "adjusted loaded vehicle weight," or ALVW. Adjusted loaded vehicle weight is the average
of the curb weight and the GVWR.  The HLDTs that are up through 5750 Ibs ALVW are called
light-duty trucks-3, or LDT3. Those above 5750 Ibs ALVW but less than or equal to 8500 Ibs
GVWR are light-duty-trucks-4, or LDT4. The LDT3 and LDT4 subclasses make up the HLDT
vehicle class.

       Section 206(g) authorizes EPA to require testing of production vehicles or engines in
order to determine the emission level on which the penalty is based. If the emission level of a
vehicle or engine exceeds an upper limit of nonconformity established by EPA through
regulation, the vehicle or engine would not qualify for an NCP under section 206(g) and no
certificate of conformity could be issued to the manufacturer. If the emission level is below the
upper limit but above the standard, that emission level becomes the "compliance level," which is
also the benchmark for warranty and recall liability; the manufacturer who elects to pay the NCP
is liable for vehicles or engines that exceed the compliance level in-use, unless, for the case of
HLDTs, the compliance level is below the in-use standard. The manufacturer does not have
in-use warranty or recall liability for emissions levels above the standard  but below the
compliance level.

       B.    Previous NCP Rulemakings and Regulations

       The generic NCP rule (Phase I) was promulgated August 30, 1985 (50 FR 35374).  It
established regulations for calculating NCPs in 40 CFR Part 86 Subpart L. It also established
three basic criteria for determining the eligibility of emission standards for nonconformance
penalties in any given model year. First, the emission standard in question must become more
difficult to meet.  This can occur in two ways, either by the emission standard itself becoming
more stringent, or due to its interaction with another emission standard that has become more
stringent.  Second, substantial work must be required in order to meet the emission standard.
EPA considers "substantial work" to mean the application of technology not previously used in
that vehicle or engine class/subclass, or a significant modification of existing technology, in
order to bring that vehicle/engine into compliance. EPA does not consider minor modifications
or calibration changes to be classified as substantial work.  Third, a technological laggard must
be likely to develop. A technological laggard is defined as a manufacturer who cannot meet a
particular emission standard due to technological (not economic) difficulties and who, in the
absence of NCPs, might be forced from the marketplace. EPA will make  the determination that a
technological laggard is likely to develop, based in large part on the above two criteria. However,
these criteria are not always sufficient to determine the likelihood of the development of a
technological laggard. An emission  standard may become more difficult to meet and substantial
work may be required for compliance, but if that work merely involves transfer of
well-developed technology from another vehicle class, it is unlikely that a technological laggard
would develop.

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                                                             Chapter 1:  Introduction

       The above criteria were used to determine eligibility for NCPs during Phase II of the NCP
rulemaking process (50 FR 53454, December 31, 1985).  NCPs were offered for the following
1987 and 1988 model year standards: the particulate matter (PM) standard for 1987 diesel-fueled
light-duty trucks with loaded vehicle weight in excess of 3750 pounds (LDDT2s), the 1987
gasoline-fueled light HDE (LHDGE) HC and CO emission standards, the 1988 diesel-fueled
HDE (HDDE) PM standard, and the 1988 HDDE NOx standard.  As discussed in the Phase H
rule, NCPs were considered, but not offered, for the 1987 HLDT NOx standard and the 1988
(later, the 1990) gasoline-fueled HDE (HDGE) NOx standard.

       The availability of NCPs for 1991 model year HDE standards was addressed during
Phase IE of the NCP rulemaking (55 FR 46622, November 5, 1990). NCPs were offered for the
following: the 1991 HDDE PM standard for petroleum-fueled urban buses, the 1991  HDDE PM
standard for petroleum-fueled vehicles other than urban buses, the 1991 petroleum-fueled HDDE
NOx standard, and the PM emission standard for 1991 and later model year petroleum-fueled
light-duty diesel trucks greater than 3750 Ibs loaded vehicle weight (LDDT2s). As  discussed in
the Phase HI rule, NCPs were also considered, but not offered for the methanol-fueled
heavy-duty diesel engine and heavy-duty gasoline engine standards as it was concluded that those
standards did not meet the eligibility criteria established in the generic rule.  In addition, Phase HI
of the NCP rulemaking described how NCPs would be integrated into the HDE NOx and PM
averaging program.

       The availability of NCPs for HDVs and HDEs subject to the 1994 and later model year
emission standards for particulate matter (PM) was addressed by Phase IV of the NCP
rulemaking (58 FR 68532, December 28, 1993). NCPs were offered for the following: the 1994
and later model year PM standard for heavy-duty diesel engines (HDDEs) used in urban buses,
and the 1994 and later model year PM standard for HDDEs used in vehicles other than urban
buses.  NCPs were also considered, but not offered, for the 1994 and later model year
methanol-fueled HDE PM standard and the 1994 and later model year cold carbon  monoxide
(CO) standard for heavy light-duty gasoline fueled trucks.

       The availability of NCPs for HDVs and HDEs subject to the 1998 and later model year
emission standards for NOx was addressed by Phase V of the NCP rulemaking (61 FR 6949,
February 23, 1996).  NCPs were offered for the following: the 1998 and later model year NOx
standard for heavy duty diesel engines (HDDEs), the 1996 and later model year for Light-Duty
Truck 3 (LDT3) NOx standard, and the 1996 and later urban bus PM standard. A concurrent but
separate final rule (61 FR 6944, February 23, 1996) established NCPs for the 1996 LDT3 PM
standard and discussed other standards for which NCPs were considered.
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                                                               Chapter 1:  Introduction

II.     Promulgation of 2004 Emission Standards

       A.     1997 FRM

       On October 21, 1997, EPA issued a final rule (62 FR 54694). The rule established a NOx
+ NMHC standard of 2.4 g/bhp-hr (or 2.5 g/bhp-hr with a 0.5 g/bhp-hr NMHC cap) for 2004 and
later model year heavy-duty diesel-cycle engines.  The rule also adopted other related compliance
provisions for diesel-cycle heavy-duty engines beginning with the 2004 model year, as well as
revisions to the useful life for the heavy heavy-duty diesel engine service class.  The feasibility
and cost-effectiveness analyses for that rule were described in the  1997 Regulatory Impact
Analysis (RIA). We have placed a copy of the 1997 RIA into the docket for this proposal.

       B.     2000 FRM

        The 1997 FRM included a commitment by EPA to review in 1999 the technological
feasibility of the NMHC+NOx standard and its appropriateness under the Clean Air Act.  EPA
published an FRM in 2000 that reaffirmed the technical and economic feasibility of the 2004
model year diesel NOx + NMHC standard (64 FR 58472, October 29, 1999). The reanalysis of
the feasibility and cost-effectiveness of these standards were described in the 2000 Regulatory
Impact Analysis (RIA). That 2000 RIA can be found in the docket for this proposal.

III.    Characterization of the Heavy duty Engine and Vehicle Industries

       A.     Vehicle Applications and Classes

       Heavy duty engines are used in a wide variety of vehicle applications. Smaller engines
are used in large pickup trucks, vans and other vehicles using those same chassis. At the other
extreme, the largest engines are used in cement mixers, garbage trucks, and line-haul trucks.  In
matching the engines to the vehicles, the minimum requirement is that the engine would be large
enough to power a fully-loaded truck up a hill.  More typically, especially for the larger trucks,
the engine is selected to provide the best fuel consumption. In other cases, especially for light-
heavy duty, larger engines are used to provide additional performance.

       In applying heavy duty emission standards, EPA categorizes heavy duty vehicles into
three classes: light-heavy duty; medium-heavy duty; and heavy-heavy duty.  Light-heavy duty
includes pickup trucks and vans. Medium-heavy duty includes delivery trucks and recreational
vehicles (RVs). Heavy-heavy duty includes buses and line-haul trucks.
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                                                               Chapter 1: Introduction
                                       Table 1-1
                         Service Classes of Heavy Duty Vehicles
Service Class
Light
Medium
Heavy
Typical
Vehicle Class
2B-5
6-7
8
Typical GVWR
(Ibs.)
8,500- 19,500
19,501 -33,000
33,001 +
       B.     Engine and Vehicle Manufacturers

       Table 1-2 shows the major heavy duty engine and vehicle manufacturers for the U.S. and
Canada.  It also illustrates the degree to which vehicle manufacturers buy engines from different
engine manufacturers. The industry operates so that the vehicle manufacturer decides during the
design stage which engines it will make available in its vehicles, and the ultimate customer
chooses its engine from among the available options.  The result is that most of the vehicle
manufacturers use engines from two or more engine suppliers. This practice make the industry a
very competitive marketplace.  This is particularly true for the medium-heavy and heavy-heavy
market place.  The light-heavy market is dominated by exclusive relationships between vehicle
manufacturers and engine manufacturers, specifically: General Motors historically supplied their
own diesel engines in the light-heavy pick-up trucks offered by GMC and Chevrolet (such a
relationship  continues today between General Motors and Isuzu); Ford exclusively offers
Navistar/International diesel  engines in their light-heavy pick-up truck and van models, and
DaimlerChrysler subsidiary Dodge exclusively uses Cummins supplied diesel engines in their
light-heavy pick-up trucks. However, in the medium-heavy and heavy-heavy vehicle market,
there is a wide range of engines available to choose from for the same vehicle, for example, a
end-user can purchase a Western Star vehicle with either a Caterpillar, Cummins, or a Detroit
Diesel engine in it.  In this sense, it has been common practice in the medium-heavy and heavy-
heavy marketplace to treat the engine almost as a commodity.
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                                                               Chapter 1:  Introduction
                                        Table 1-2
                     1999 U.S./Canada Diesel Engine Market Share1
'chicle
Hake
Chevrolet
)odge

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                                                               Chapter 1: Introduction
similar manner to the HD engine market, the HD truck market is a competitive marketplace with
a number of players, particularly in the medium-heavy duty and heavy-heavy duty categories.

                                        Table 1-3
                      1999 U.S./Canada Factory Sales of Diesel Trucks2
Manufacturer
Total DaimlerChrysler
Dodge
Freightliner
Sterling
Ford
Total General Motors
Chevrolet
CMC
Mack
Navistar/International
Total Paccar
Kenworth
Peterbuilt
Volvo
Western Star
Other
1999 Totals
Light-Duty
Units % Total
43,643 14.5
42,832 14.2
811 0.3
208,314 69.2
48,923 16.3
32,817 10.9
16,106 5.4
300,880 100
Medium-Duty
Units % Total
50,762 26.4
44,548 23.2
6,214 3.2
32,129 16.7
33,866 17.6
9,955 5.2
23,911 12.5
72,549 37.8
2,745 1.4
1,298 0.7
1,447 0.8
192,051 100
Heavy Duty
Units % Total
107,592 35.5
88,338 29.1
19,254 6.4
38,528 12.7
50,151 16.5
63,746
32,320 10./
31,426 10.4
34,751 11.5
7,207 2.4
1,175 0.4
303,150 100
IV.    Heavy Duty Diesel Consent Decrees

       On October 22, 1998, the Department of Justice and the Environmental Protection
Agency announced settlements with seven major manufacturers of diesel engines. The
settlements resolved claims that they installed illegal computer software on heavy duty diesel
engines that turned off the engine emission control system during highway driving in violation
of CAA§203(a)(3), which prohibits the use of defeat devices. The settlements were entered by
the Court on July 1, 1999.

       These Consent Decrees are relevant with respect to this rulemaking because of their
impact on the heavy-heavy duty diesel engines sold in the U.S. today. The Consent Decrees
allow currently certified heavy-heavy service class diesel engines to continue to use emission
control strategies which result in very high NOx emissions when the engines operate in the real
world. Even though these engines pass the current FTP emission standard of 4.0 g/bhp-hr NOx
when operated over the FTP duty-cycle in the laboratory, when operated in-use these engines can
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                                                             Chapter 1: Introduction

have NOx emission levels as high as 6 or even 7 g/bhp-hr NOx. The heavy-heavy market place
is dominated by Consent Decree companies, such that the vast majority (>95%) of model year
2000 heavy-heavy engines produced for the U.S. market were manufactured by Consent Decree
companies. As specified in the Consent Decrees, these heavy-heavy service class engines must
currently comply with the 4.0 g/bhp-hr NOx standard when tested over the FTP, and in addition
they also must meet an emission limit of 6.0 g/bhp-hr NOx when tested over the Euro-3 steady-
state test cycle, and an emission limit of 7.0 g/bhp-hr NOx when tested over the not-to-exceed
test procedure.3  The docket for this rulemaking contains  a memorandum summarizing engine
certification data for model year 2001 heavy duty diesel engine families which includes test data
from both the FTP and the Euro-3 test procedures.4  The "baseline" engine which these
companies will need to modify in order to comply with the 2004 FTP standard is therefore
represented by engines with NOx emission performance well above the FTP emission standard.
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                                                            Chapter 1: Introduction

References for Chapter 1

1.  2000 Wards Automotive Yearbook, page 59.

2.  2000 Wards Automotive Yearbook, page 59.

3.  A copy of the Consent Decree between the United States and Volvo has been placed in the
docket for this rulemaking, EPA Air Docket A-2001-30.. Though there are differences between
the various Consent Decrees, with respect to the heavy-heavy service class emission limits and
test procedures the various Consent Decrees contain the same requirements.

4.  EPA Technical Memorandum "Summary of Model Year 2001 Heavy Duty Diesel Engine
Certification Data", copy available in EPA Air Docket A-2001-25.
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                         Chapter 2: Technologies Needed To Meet 2004 Standards

   CHAPTER 2:  TECHNOLOGIES NEEDED TO MEET

                            2004 STANDARDS


I.      Projections of Technologies from 2000 FRM

       In the 2000 FRM which affirmed the technical feasibility of the new HDDE 2004
NMHC+NOx emission standards (64 FR 58472, October 29, 1999), EPA presented a detailed
discussion of the technologies we believed would enable a HDDE manufacturer to achieve the
2.5 g/bhp-hr NMHC+NOx standard.  The following discussion will briefly summarize the
technological feasibility discussion contained in the 2000 FRM, and the reader is refereed to the
Regulatory Impact Analysis document of the previous rulemaking for a detailed discussion.1

       A.     Cooled Exhaust Gas Recirculation

       EPA projected that cooled exhaust gas recirculation (cooled EGR) would be the principal
technology used to reduce NOx emissions from the 1998 HDDE standard of 4.0 g/bhp-hr to the
combined 2004 NMHC+NOx standard of 2.4 g/bhp-hr.  Non-methane hydrocarbon emissions
from modern on-highway HDDEs is relatively small, generally less than 0.5 g/bhp-hr, and it is
expected that approximately a 50 percent reduction in NOx emissions will be necessary to
achieve the 2004 NMHC+NOx standard. Cooled EGR lowers NOx emissions principally by
replacing a portion of the fresh intake air oxygen with exhaust by-products and  other inert gases,
such as CO2, water vapor, and N2. These inert gases dilute the in-cylinder mixture and reduce the
peak cylinder temperatures during the combustion process and thus reduce NOx formation.
Thus, a cooled EGR system must be capable of routing exhaust gas from the exhaust system to
the intake system, as well as cooling the exhaust during that process.

       The cooled EGR technology projected by EPA to be used be engine manufacturers
consists of several major hardware components, including an EGR cooler, EGR piping, and an
electronically controlled EGR valve, as well as appropriate sensors to estimate the rate of EGR
gas flow, such as a delta-pressure sensor.

       One of the difficulties with using EGR in a turbocharged diesel engine is that for a large
portion of the engines operating map (as represented by a full-load torque map), the intake
manifold pressure is greater than the exhaust pressure, and therefore no EGR will flow into the
intake manifold without some additional mechanism to change the pressure differential. In the
RIA for the 2000 FRM we discussed several methods to overcome this pressure differential.
However, for the Agency's cost estimate in the 2000 FRM we assumed manufacturers would use
a new turbocharger technology, variable geometry turbocharger (VGT), to assist in delivering
and controlling EGR.  A VGT, unlike the conventional fixed geometry turbochargers, provides
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                          Chapter 2: Technologies Needed To Meet 2004 Standards

some level of control over either the turbine vanes or the turbine exit geometry which provides a
means to create additional back pressure in the exhaust system to drive EGR.

       B.     Improved Fuel Injection Systems

       The Agency also predicted in the RIA of the 2000 FRM that manufacturers would use
next-generation fuel injection technology in order to achieve the new 2004 NMHC+NOx
standard.  Relatively recent improvement in fuel injection systems for HDDEs, such as the
common-rail system or advanced electronically controlled unit injectors, provide engineers with
the ability to perform pilot injection, ramped injections, and post injections (in some cases
multiple pilot and/or post injections).  They can also provide engineers with complete control in
some cases over injection pressure and duration.  These systems provide important flexibilities
for design engineers, including the ability for improved NOx and PM emissions performance.

       C.     Exhaust Aftertreatment Systems

       The RIA for the 2000 FRM discussed several types of aftertreatment technologies which
could be used with today's on-highway fuel sulfur levels, including diesel oxidation catalysts and
lean NOx catalysts. In both cases, EPA did not predict that these technologies would be the
prime technologies which would enable manufacturers to achieve the new 2004 NMHC+NOx
standards, however, both technologies could provide modest emission reductions which could be
combined with other technologies to achieve the necessary emission reductions.

       Diesel oxidation catalysts (DOCs) are capable of oxidizing the soluble organic fraction
(SOF) of diesel particulate matter as well as the hydrocarbons present in diesel exhaust.  The
SOF fraction of PM varies from engine to engine, but is typically on the order of 10 to 30 percent
of the total parti culate matter, which a DOC can essentially eliminate. As mentioned previously,
NMHC from modern diesels is typically less than 0.5  g/bhp-hr, and a well functioning DOC can
eliminate a significant portion of these hydrocarbons.

       Lean NOx catalysts continue to offer limited NOx reduction capability when considered
across the entire temperature operating range encountered by HD diesel engines, while peak
reduction capabilities may approach 60 percent under limited operating range, overall reductions
on the U.S. HD FTP continue to be modest, between 10 and 30 percent.

II.     Current Manufacturer Projections

       Engine manufacturers generally agree with us  that cooled EGR is one of the principal
technologies capable of achieving the 2004 emission standards.  In the past several months, a
number of engine manufacturers have announced they are pursuing cooled EGR technology as
their principle means of complying with the 2004 standards.2  In addition, at least one engine
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                          Chapter 2: Technologies Needed To Meet 2004 Standards

manufacturer has announced they are pursuing an alternative technology for complying with the
2004 HDDE standards which does not include the use of cooled EGR.3

III.    Fuel Consumption Impacts

       As is described in the next chapter, changes in fuel consumption are projected to be a
significant component of the cost of compliance, in particular for medium-heavy and heavy-
heavy duty diesel engines. We believe there are a number of reasons why some manufacturers
are projecting a fuel consumption increase for their 2004 model year engines as compared to
today's engines, as discussed below.

       In the 2000 final rule RIA which affirmed the appropriateness of the 2004 standards, we
discussed a number of technologies which manufacturers could use to meet the new
NMHC+NOx standard. In that RIA, we discussed cooled EGR, improved fuel injection systems,
advanced turbochargers, and next generation electronic controls. Of these technologies, EGR in
particular has the potential to increase fuel consumption, if it is incorporated in isolation as an
add-on component, and is not integrated successfully into a well designed system with the
additional technologies. For on-highway HDDEs, a positive pressure differential exists between
the exhaust manifold and the intake manifold over a large part of the engine map, which means
that exhaust gases must be forced from the exhaust manifold to the intake manifold.  This
requires energy which can negatively impact efficiencies. However, we also discussed changes
which can improve fuel efficiency, such as using better fuel systems which have a more favorable
NOx-fuel economy trade-off, and the use of variable geometry turbochargers, which have the
potential to provide efficiency gains in the air-handling system of the engine. For current
engines, which do not incorporate these advanced NOx controls, manufacturers have relied
heavily on timing retard to meet the applicable FTP emission standards. These current engines
relying on injection timing for NOx control are now near the limits of the NOx reduction
potential which can be achieved without excessive fuel economy penalties or adverse impacts on
PM and durability.

       The incorporation of all of these technologies (i.e., EGR, improved fuel systems, VGT,
improved ECMs) into a HDDE is not a simple task,  and it requires several years of research and
development. In general, we expect manufacturers to design their engines by first installing the
hardware needed to achieve the new emission standards, and then to change EGR rates, VGT
vane position, and/or fuel injection parameters (injection timing, injection rate, post/pre injection
events) to optimize fuel consumption rates while maintaining NOx, HC, and PM control. This
was discussed in both the  1997 final rule which established the 2004 standards, as well as the
2000 final rule which affirmed the new standards. During those rules, we estimated there would
be no net long-term change in the fuel consumption performance of HDDEs, but there was a
potential for higher fuel consumption rates in the short term. To the extent a manufacturer is
unable to optimize its control system to meet the emission standards with the addition of the new
hardware (e.g., EGR,  fuel system improvements, and turbocharger improvements), they may be

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                          Chapter 2: Technologies Needed To Meet 2004 Standards

forced to rely more on fuel injection timing retard in the short term as their initial means of
meeting the emission standards.

       Based on the most recent information from engine manufacturers, including both public
company announcements as well as the data presented in the next chapter, we see a wide range of
estimated fuel economy impacts from companies. In the light-heavy market, we see some
companies are predicting an improvement in fuel efficiency as compared to the current
technology engines. In the medium-heavy and heavy-heavy markets, we see that while some
companies are predicting no change  in fuel economy for the 2004 model year, others are
predicting decreased fuel efficiency's, in some cases up to 5 percent.  In large part, this range
reflects the differing degrees to which manufacturers have invested in the research and
development needed to optimize fuel consumption for their various products. We believe that a
fully optimized EGR engine (or other advanced engines) will rely less on timing retard and will
not experience any net fuel consumption increase compared to 4.0 g/bhp-hr NOx engines.

       It is important to note that our analysis of fuel consumption impacts for heavy-heavy duty
engines is affected by our setting the Upper Limit at 6.0 g/bhp-hr NMHC+NOx (which is
discussed in more detail in the next chapter and in the preamble for this proposal). This 6.0
g/bhp-hr level is significantly greater than the current FTP NOx standard of 4.0g/bhp-hr, but it is
representative of how current heavy-heavy duty engines operate in the field. This difference is
largely due to how the engines are calibrated with respect to injection timing. There is also a
corresponding difference in fuel consumption rates, with fuel consumption tending to be lower
with 6.0 g/bhp-hr NMHC+NOx emissions. In the 1997 and 2000 rulemakings which established
and affirmed the 2004 standard, we did not analyze the fuel economy impacts of reducing
emissions from 6.0 g/bhp-hr NMHC+NOx to the 2004 standards. Thus we did not analyze in
these previous rules the short-term or long-term fuel economy impacts for which manufactures
are now providing us estimates. However, even for these heavy-heavy engines, at least one
manufacturer has indicated that any increase in fuel consumption would be short-term in nature.4
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                         Chapter 2: Technologies Needed To Meet 2004 Standards

References for Chapter 2

1.  "Regulatory Impact Analysis Document: Control of Emissions of Air Pollution from Highway
Heavy-duty Engines", Chapter 3, EPA Publication # EPA-420-R-00-010, July 2000. Copy
available in the Docket for this rule, EPA Air Docket A-2001-25.

2.  "Documentation of Industry Press Releases Regarding Compliance with highway HD 2004
Standards in 2002", EPA Memorandum from William Charmley. Copy available in the docket
for this rule, EPA Air Docket A-2001-25.

3.  "Introducing Clean Power by Caterpillar", Caterpillar brochure. Copy available in the docket
for this rule, EPA Air Docket A-2001-25.

4.  "Documentation of Industry Press Releases Regarding Compliance with highway HD 2004
Standards in 2002", EPA Memorandum from William Charmley. See specifically press release
from Detroit Diesel Corporation. Copy available in the docket for this rule, EPA Air Docket A-
2001-25.
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                                                        Chapter 3: Compliance Costs

               CHAPTER 3:   COMPLIANCE COSTS
       This chapter describes our analysis of the costs of compliance.  The analysis is based on
our projections of actual measurable costs to manufacturers and operating costs for vehicle
owners. It does not include any analysis of pricing or vehicle purchaser perceptions that could
affect purchase decisions.

I.      Methodology

       A.    General Methodology

       This chapter describes our analysis and projection of the costs of compliance for model
year 2004, which are the primary inputs for determining NCPs.  This analysis differs from the
analyses for the model year 2004 standard-setting rulemakings in three basic ways:

       (1)    The goal of this analysis is to estimate manufacturer and operator costs during the
             first year of the new standards rather than to project the long-term societal costs.
       (2)    The baselines for calculation of compliance costs differ significantly.
       (3)    We now have more detailed information about costs identified in the earlier
             analysis, as well as cost categories not previously included.

       The model year 2004 standard-setting analyses were based on a uniform emission control
strategy for designing the  different categories of engines to meet the standards. More
specifically, we estimated the cost of developing an EGR system for a typical engine within a
service class, and applied  that per engine cost to all  engines within the service class. However,
for this NCP proposal, we considered the compliance costs on an engine model-by-engine model
basis (or as close to that as possible based on the available data). We requested this information
from several of the engine manufacturers for each engine model that they plan to produce for
model year 2004. These data are described in Section II.  We used these manufacturer estimates,
along with other available information to estimate the average and 90th percentile compliance
costs. In addition, it is necessary for this NCP analysis to focus  solely on the compliance costs
associated with the first year of production, while standard-setting analyses require a longer term
view. This is most significant with respect to the costs associated with hardware, reliability
(warranty, repairs, and associated costs), and fuel consumption.  Manufacturers often make
significant progress in reducing these costs with additional time. For example, in the recent final
rule in which we affirmed the appropriateness of the 2004 NMHC+NOx standard, we suggested
that in the short-term fuel consumption could increase by up to 1.0 percent, but in the long-term
fuel consumption would remain either unchanged, or potentially decrease by up to 1.5 percent.
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                                                        Chapter 3: Compliance Costs

       There is another important reason why the analysis for this specific NCP proposal is
different from the analysis performed for the standards-setting rules.  As is discussed later in this
document, the engine designs currently produced and marketed under the Consent Decrees lead
us to propose an Upper Limit value of 6.0 g/bhp-hr NMHC+NOx, for the heavy-heavy duty
service class, which fundamentally changes the cost analysis. The rationale for the heavy-heavy
service class 6.0 g/bhp-hr NMHC+NOx upper limit is discussed in detail in Section ni(A)(l) of
the Preamble. The penalty rate factors are based on the compliance costs associated with
lowering the emissions from Upper Limit to the standard.  For heavy-heavy duty engines the
NCPs are therefore based on the compliance costs associated with lowering the emissions from
6.0 g/bhp-hr NMHC+NOx to the 2004 standard of 2.5g/bhp-hr NMHC+NOx. This analysis was
not performed in the standards-setting rules, and therefore the costs estimates in the
standard-setting rule and this NCP proposal are not comparable.  For the standard-setting rules,
we estimated the compliance costs associated with bringing an engine which meets the current
NOx standard of 4.0 g/bhp-hr into compliance with the 2.5g/bhp-hr NMHC+NOx.  This
difference in baseline (6.0 vs. 4.0), has a significant impact on every cost category we have
considered in this proposal, including the fixed,  hardware, operating (including fuel
consumption), and vehicle manufacturer costs.

       Even for the other service classes, where we have proposed an Upper Limit based directly
on the 4.0 g/bhp-hr NOx standard, the impact on engine designs of the alleged defeat device
strategies used by a number of engine manufacturers over the past decade makes comparison
between the standard-setting rule cost analysis and this analysis difficult. If such strategies had
never been used, as was assumed in the standard-setting analyses, manufacturers would have
optimized their  current engines differently than their current products.  Thus the two approaches
for estimating compliance costs rely on different "baselines". A number of the manufacturers
who submitted cost information on light-heavy and medium-heavy products are also companies
who signed consent decrees with the government.  The model year 2001 light-heavy and
medium-heavy engines from Consent Decree companies must meet off-cycle emission
performance which is equal to or comparable to the 4.0 g/bhp-hr NOx standard. However, in the
past a number of these products were equipped with engine strategies whose use resulted in high
NOx emission performance relative to the applicable emission standard. Manufacturers are
continuing to spend research, development, and  hardware money in order to address durability
and other performance issues as a result of designing engines to meet the 2004 standards. It is
likely that in some cases the issues that manufacturers are spending resources to address are
partially a result of the fact they can no longer use the problematic control strategies which were
used in the past.

       Finally,  for this NCP proposal we have received new information since the
standard-setting FRMs. This included more detailed estimates of actual manufacturer costs, plus
data on a few additional cost items which were not part of the standards-setting rulemaking
analysis. Manufacturers are now able to provide more  detailed cost information than they did
during the earlier rulemakings because they are farther  along the development path for

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                                                        Chapter 3: Compliance Costs

compliance. They also now have a clearer understanding of the potential for additional costs.
Specifically, we have included new cost items for vehicle manufacturer costs, post-warranty
repairs, and revenue impacts.  We did not have this information during the standard-setting rule.
We have not evaluated whether post-warranty repairs and revenue impact costs would be
significant over the longer term.  However, we believe that it is appropriate to include them in
this analysis.  The operator's perception of these costs is likely to affect the purchase decision,
especially for the first model year of production.  Based on submissions from manufacturers,
however, it is clear that repair rates will decrease significantly within the first few years of
production.

       B.    Net Present Value of Costs

       All costs are presented in 2001 dollars.  Because the NCP is paid by the manufacturer in
the year that the engine is sold we need to account for cost differences at the point of sale. All
costs were converted to net present value (NPV) for calendar year 2004.  Appendix B contains
sample calculations showing how we dealt with the time value of money. Costs that occur prior
to production (e.g., research and development) are adjusted upward by 7.0 percent per year.
Costs that occur after production (e.g., fuel costs) are discounted by 7.0 percent per year.   It is
also important to remember that since all costs are presented in terms of constant 2001 dollars,
the discount rate does not include the time-value  of money with respect to the rate of inflation. If
we had performed the analysis in terms of actual  dollars, then time-value of money would be the
discount rate plus the rate of inflation.

       C.    Costs Included

       This section describes the cost categories that we included in our analysis. These cost
include engine manufacturing costs, vehicle manufacturing costs, and operating costs. Engine
manufacturer costs of control include variable costs (for incremental hardware, assembly, and
associated markups), fixed costs (for tooling, R&D, etc.), and warranty costs. Vehicle
manufacturers are also expected to incur some variable hardware costs, and may include some
fixed costs.  Owner costs include  fuel costs, maintenance and repair costs, and costs associated
with any time that the vehicle is down for repair.

       We typically markup the variable hardware costs (or material  costs) to the engine
manufacturer at a rate of about 30 percent in our analyses. We do this to account for the engine
manufacturer's overhead and profit that are associated with producing the new hardware.  For this
analysis, we asked engines manufacturers to include their markups in their estimates.  Based  on
input from engine and vehicle manufacturers, we believe that in some cases, vehicle
manufacturers will need to make modifications to their vehicle designs to accommodate the new
engines.  Such changes could include larger cooling systems, or even larger engine
compartments. We included these costs separately where applicable. We do not include any
general vehicle manufacturer markup of engine manufacturer costs. We only included actual

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                                                         Chapter 3: Compliance Costs

identifiable costs for the vehicle manufacturers, such as increased radiator size.  It is appropriate
to include a vehicle manufacturer markup for these costs, since these items are actually produced
by the vehicle manufacturer to a large extent.

       Fixed costs for R&D are incurred by the manufacturer several years before the standards
take effect. Tooling costs are generally incurred at least one year ahead of initial production.
Both kinds of fixed costs need to be increased for every year before the start of production to
reflect the time value of money. We used a seven percent annual rate for these adjustments, so
costs incurred n years before 2004 are multiplied by 1.07" (i.e., 1.07 raised to the nth power). For
example, fixed costs incurred in 2002 are converted to be equivalent to costs incurred in 2004 by
multiplying them by 1.072. The fixed cost estimates reported by the manufacturers should
account for this by specifying the costs in terms of NPV for calendar year 2004.  In general, we
amortized this total pre-production cost at three percent interest over a five-year period during
which the manufacturer would be able to recoup the fixed costs. We did not include certification
costs because manufacturers would incur these costs whether or not they used NCPs.  Appendix
B shows a sample calculation of how we accounted for the time value of fixed costs.

       Manufacturers would generally be expected to incur additional warranty costs due to the
addition of new components.  For this analysis, the relevant costs would be the total warranty
cost to the engine manufacturer for the first model year of production.  Typically, this would
cover the costs of repairs that are need within the first two calendar years of vehicle life (the
typical warranty period for heavy duty engines). These new systems can incur other additional
maintenance costs that are projected  to be incurred at regular mileage intervals throughout the
vehicle life, or at rebuild. There can also be additional unscheduled repairs to the new hardware.
Considered from the point of purchase (i.e., 2004), these repair and maintenance costs are future
costs and thus are discounted in this analysis. For both warranty repairs and post-warranty
repairs,  there are also real costs incurred by the vehicle owners for demurrage (i.e., the time
during which the vehicle is out of service).

       Manufacturers have indicated that they expect some of the new compliant engines to have
different fuel consumption rates than the noncompliant engines. We projected the changes in
lifetime brake-specific fuel consumption that will  occur for vehicles produced in the first model
year of production.

       Both the maintenance  and fuel costs are dependent on the number of miles projected to be
driven by the vehicles.  For this analysis, we used the same projected mileage accumulation rates
that we have used in previous rulemakings.  These projections are shown in Appendix A, along
with projection of vehicle survival fractions that are based on projected scrappage rates. These
projections are described in a  2001 EPA Technical Report.1 We use the survival fractions to
weight the mileage rates to estimate the number of miles driven by typical vehicles within each
service class. These estimates do not distinguish between miles driven before rebuild and miles
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                                                       Chapter 3: Compliance Costs

driven after rebuild.  These newer mileage estimates are slightly different from the estimates used
in the 2004 FRM.

       D.    Upper Limit Engine

       The upper limit is an important aspect of the NCP regulations not only because it
establishes an emission level above which no engine can be certified, but it is also a critical
component of the cost analysis used to develop the NCP factors.  The regulations specify that the
relevant NCP costs for determining the COC50 and the COC90 factors are the difference between
an engine at the upper limit and one that meets the new standards (see 40 CFR 86.1113-87).  We
are proposing upper limits that we believe could be met by all manufacturers (including
technological laggards), based on our understanding of manufacturers' current products and the
state of their technology development.  A full discussion of the rational  for the Upper Limit
proposed for each service class is contained in the Preamble for this proposal.

       Upper Limit for Heavy-Heavy Duty

       As described in the Preamble for this proposal, we believe that an NMHC+NOx value of
6.0 g/bhp-hr is the appropriate upper limit for heavy-heavy duty engines.

       Upper Limit for Light-Heavy Duty, Medium-Heavy Duty, and Urban Buses

       As described in the Preamble for this proposal, we believe that an NMHC+NOx value of
4.5 g/bhp-hr is the appropriate upper limit for light-heavy duty, medium-heavy duty, and urban
buses.

       E.    Use of Optional Standard

       The 2004 standard has two forms.  The first form is 2.4 g/bhp-hr NOx+NMHC for
combined emissions, with no constraint specific to either NOx or NMHC. The second form is an
optional 2.5 g/bhp-hr NOx+NMHC for engine families that meet a 0.5 g/bhp-hr NMHC cap.  As
described above, we expect that all manufacturers will meet 0.5 g/bhp-hr NMHC cap, whether
they use NCPs or not. It is also our understanding that all of the compliance costs that we
received were for compliance with the  second form. Thus, we have based our analysis on the
second form of the standard.

       We are proposing that the same NCP parameters (for UL, COC50, COC90, MC50, and F)
would apply for all engines, without regard to form of the standard to which the manufacturer
certifies. The effect of this would be that the X  value for engines certified to the first form
(without the NMHC  constraint) would be 0.1 g/bhp-hr lower than the values listed in Chapter 4.
This would have the effect of raising the penalty level slightly for any given NOx+NMHC
compliance level.

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                                                       Chapter 3: Compliance Costs
II.
Manufacturer Cost Data
       We requested from several of the engine manufacturers detailed cost estimates for each
compliant engine model that they plan to produce for model year 2004. We requested that all
costs be presented in 2001 dollars, and adjusted to their net present value for the year 2004.  We
also requested that manufacturers include only emission-related costs. The companies that we
contacted  are listed in a memorandum to the docket for this rulemaking.2 That memorandum
also includes more details about our request. Table 3-1 shows the sample data table that we sent
to the manufacturers.

                                       Table 3-1
                Example of Cost Data provided for One Engine Configuration
Item
Family Name or Identifier
Engine Configuration Description
Technology Description
Value of Fixed Costs -NPV 2004
- research & development
- tooling
- others
2004 Hardware Cost-NPV 2004
2004 Warranty Cost - NPV 2004
Maintenance/Operating Cost - NPV 2004
Brake-Specific Fuel Consumption (Ib/bhp-hr)
U.S. Sales
Vehicle packaging costs
Baseline Engine



N/A
N/A

N/A


N/A
2004 Engine










       We received responses from most of the manufacturers that we contacted, representing
the majority of the current U.S. heavy duty diesel engine market. However, all of the data that
we received were identified as confidential business information (CBI). Therefore, we cannot
include details of the submissions in this document. Instead we are presenting only the summary
shown in Tables 3-2 through 3-4. This summary format was approved by all of the
manufacturers that provided CBI data for this rulemaking. However, one manufacturer requested
that their estimates of operating costs not be included in these summary tables, therefore those
numbers do not appear in the tables.
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                                                        Chapter 3: Compliance Costs

       With the exception of fixed costs, the manufacturer data presented in these tables were
provided to EPA on a consistent basis for model year 2004.  However, in some cases, fixed costs
were adjusted as necessary and amortized to fit the format described above.  Total fixed costs for
each manufacturer were divided by the manufacturers' actual reported sales for model year 2000
to determine per engine fixed costs These data are rank-ordered from the highest value to the
lowest value from right to left independently for each cost category (e.g., heavy-heavy fixed
costs). Thus, a column of data does not represent any specific engine manufacturer's estimates.
We have done this in order to maintain the confidential nature of the cost data manufacturers
submitted to EPA.  It is also important to note that though we requested data from manufacturers
on all heavy duty service classes, we received no data specific to urban buses.
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                                                               Chapter 3:  Compliance Costs
                                             Table 3-2
              Engine Manufacturer Cost Submissions for Light-Heavy Service Class
Cost Category
Fixed Costs ($/engine)
Hardware Costs, includes
engine manufacture markup
Warranty
Operating Costs
(excluding fuel economy impacts)
Fuel Consumption Impact
Vehicle Manufacturing Cost
($/engine) includes vehicle
manufacture markup
Manufacturer Data - per Engine Costs
unknown at this time
$530
no change or better than
today's product
unknown at this time
unknown at this time
$0
$382
$793
unknown at this time
unknown at this time
2 % improvement
unknown at this time
$401
$1,512
$115
estimate not releasable*
2 % improvement
$130
      * Detailed inputs provided on change in oil change intervals, demurrage (i.e., down time), and repairs outside the
warranty period, but manufacturer did not allow cost estimate to be placed in the public record.
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                                                                Chapter 3:  Compliance Costs
                                             Table 3-3
             Engine Manufacturer Cost Submissions for Medium-Heavy Service Class
Cost Category
Total Fixed Costs ($/engine)
lardware Costs, includes engine
nanufacturer markup
Warranty
Operating Costs
excluding fuel economy impacts)
jOst Revenue due to increased
:ngine weight
ruel Consumption Impact
Vehicle Manufacturing Cost
($/engine) includes vehicle
manufacture markup
Manufacturer Data - per Engine Costs
no estimate
provided

$223
unknown at this
time

$0
no estimate
provided
no change


$0
$244

$433
$0

unknown at this
time
no estimate
provided
unknown at this
time


unknown at this
time
$353

$750
$10

unknown at this
time
no estimate
provided
3% worse


unknown at this
time
$766

$793
$10

$1,672
no estimate
provided
4 to 5% worse


$100
$802

$1,500
$765

estimate not
releasable*
$196
5% worse


$155
      * Detailed inputs provided on change in oil change intervals, demurrage (i.e., down time), repairs outside the warranty
period, and revenue impacts from increased engine weight, but manufacturer did not allow cost estimate to be placed in the
public record.
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                                                            Chapter 3: Compliance Costs
                                          Table 3-4
             Engine Manufacturer Cost Submissions for Heavy-Heavy Service Class
Cost Category
Amortized Fixed Costs
Hardware Costs,
includes engine
manufacture markup
Warranty
Operating Costs:
(excluding fuel
economy impacts)
Lost Revenue due to
increased engine weight
Fuel Consumption
Impact
Vehicle Manufacturing Cost
($/engine),
includes vehicle
manufacture markup
Manufacturer Data - per Engine Costs
$273
$1,100
$0
$0
no estimate provided
no change
$150
$323
$1,169
$23
$0
no estimate
provided
2 percent worse
$195
$424
$1,972
$188
unknown at
this time
no estimate
provided
2.5 percent
worse
$250 to $350
$814
$2,053
$360
$429
no estimate
provided
3 percent
worse
$408
$1,775
$2,899
$1,680
estimate not
releasable*
$871
3 to 5 percent
worse
$500
     * Detailed inputs provided on change in oil change intervals, demurrage (i.e., down time), repairs outside the warranty period, and
revenue impacts from increased engine weight, but manufacturer did not allow cost estimate to be placed in the public record.
III.    Analysis of Costs

       Our estimated average compliance costs (COC50) and 90th percentile costs (COC90) are
shown in Tables 3-5 through 3-7. These estimates are based on the data provided by
manufacturers, independent cost analyses, and the Agency's technical judgement. The derivation
of these estimates is described in detail below. The estimated 90th percentile cost is conceptually
equivalent to high-mileage vehicles from a high-cost manufacturer, although not necessarily the
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                                                             Chapter 3: Compliance Costs

highest cost manufacturer.  This concept is described in detail in the COC90 section below.
Derivation of these parameters for urban buses is described separately at the end of this section.
                                           Table 3-5
                            Light-Heavy COC50 and COC90 Estimates
                            (Net Present Value to 2004 in 2001 Dollars)

Per Engine Fixed Cost
Hardware Cost
Warranty Cost
Operating Costs:
Scheduled Maintenance
Operating Costs:
Post- Warranty Repairs
Operating Costs:
Demurrage
Fuel Cost (%)
Fuel Cost ($)@$1. 55 /gal(a)
Operating Costs:
Revenue Impact
Vehicle Manufacturing Costs
Total
COC50
$390
$810
$30
$0
$30
$20
209,000 miles 2% better
($330)
$0
$130
$1,080
COC90
$400
$1,500
$120
$0
$150
$100
280,000 miles @ 1% worse
$210
$0
$130
$2,610
       (a) As discussed in Section III(A) of this Chapter under the heading "Fuel Costs", fuel costs were estimated using a
price of $1.50/gallon for 2004 and 2005, and $1.55/gallon for 2006 and beyond.
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                                                               Chapter 3: Compliance Costs
                                             Table 3-6
                             Medium-Heavy COC50 and COC90 Estimates
                              (Net Present Value to 2004 in 2001 Dollars)

Per Engine Fixed Cost
Hardware Cost
Warranty Cost
Operating Costs:
Scheduled Maintenance
Operating Costs
Post- Warranty Repairs
Operating Costs:
Demurrage
Fuel Cost (%)
Fuel Cost ($)@$1. 55 /gal(a)
Operating Costs:
Revenue Impact
Vehicle Manufacturing Costs
Total
COC50
$560
$920
$260
$70
$230
$150
262,000 miles @ 2.5% worse
$910
$130
$130
$3,360
COC90
$1,000
$1,500
$750
$80
$900
$520
343,000 miles @ 4% worse
$1,800
$170
$150
$6,870
        (a) As discussed in Section III(A) of this Chapter under the heading "Fuel Costs", fuel costs were estimated using a
price of $1.50/gallon for 2004 and 2005, and $1.55/gallon for 2006 and beyond.
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                                                               Chapter 3: Compliance Costs
                                             Table 3-7
                              Heavy-Heavy COC50 and COC90 Estimates
                              (Net Present Value to 2004 in 2001 Dollars)

Per Engine Fixed Cost
Hardware Cost
Warranty Cost
Operating Costs:
Scheduled Maintenance
Operating Costs:
Post- Warranty Repairs
Operating Costs:
Demurrage
Fuel Cost (%)
Fuel Cost ($)@$1. 55 /gal(a)
Operating Costs:
Revenue Impact
Vehicle Manufacturing Costs
Total
COC50
$600
$2,030
$670
$380
$560
$320
767,000 miles @ 2.5% worse
$3,620
$480
$280
$8,940
COC90
$700
$2,400
$1,000
$740
$1,130
$560
1,000,000 miles @ 4% worse
$7,130
$630
$500
$14,790
        (a) As discussed in Section III(A) of this Chapter under the heading "Fuel Costs", fuel costs were estimated using a
price of $1.50/gallon for 2004 and 2005, and $1.55/gallon for 2006 and beyond.
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                                                        Chapter 3: Compliance Costs

       A.     COC50

       Fixed Costs and Hardware Costs

       Average per-engine fixed costs were calculated as the sales-weighted average of the
manufacturer data shown in Tables 3-2 through 3-4.  The average hardware costs were calculated
as the sales-weighted average of the engine hardware costs provided by manufacturers.

       Warranty Costs

       The estimates of expected incremental warranty costs provided by manufacturers covered
a wide range. In some cases, they provided us with detailed  analyses. We sales-weighted the
manufacturers  information to estimate the average warranty costs.  The average warranty costs
were divided by estimated repair costs of $300, $500 and $700 per repair for light-, medium- and
heavy-heavy duty, respectively, to estimate the repair rates in Table 3-8. These estimated repair
rates during the warranty periods are used to estimate repair costs after the warranty period,
which is included as part of the maintenance costs described in the next sub-section titled
"Operating Costs: Post-Warranty Repairs, Demurrage, and Scheduled Maintenance Costs".

       Operating Costs: Post-Warranty Repairs, Demurrage, and Scheduled Maintenance
       Costs

       We asked manufacturers to provide us with estimates of the incremental maintenance
costs that would be associated with their new engines.  However, not all of the manufacturers
provided estimates.  Some only provided qualitative  descriptions, while others provided no
estimates.  Also, some included maintenance costs with demurrage, while others did not.  After
reviewing these different estimates, it became clear that they were not consistent, and that we
needed to  estimate maintenance and demurrage costs separately.

       Based on the confidential submissions from the manufacturers (that is, the detail behind
the manufacturers cost information in Tables 3-2 through 3-4) , we estimate that for the first
model year, the incremental rate of repairs (repairs per vehicle-mile) after the warranty period
would be one-half of the rate within the warranty period.  This is a reasonable expectation
because during the warranty period when repairs are  performed, manufacturers  often will
incorporate additional, preemptive repairs which the  engine manufacturer has learned is needed,
but did not cause a failure on the vehicle/engine.  One manufacturer suggested this decrease in
repair rates outside the warranty period was approximately 50 percent. We also estimate that the
typical warranty period would be two years.3  Given the projected mileage accumulation rates
listed in Appendix A, this would mean that the number of miles covered within the warranty
period would be about 55,000  miles for light-heavy duty, 70,000 miles for medium-heavy duty,
and 215,000 miles for heavy-heavy duty.  The post-warranty period is estimated to be the


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                                                        Chapter 3: Compliance Costs

difference between these mileages and the typical lifetime mileages from Appendix A (209,000,
262,000 and 767,000 miles)

       For both warranty and post-warranty repairs, we estimated the cost associated with
demurrage (i.e., the cost of the vehicle being out of service), assuming that each repair removes
the vehicle for service for one day. This estimate of the removal of the vehicle for service for
one day is based on the per repair cost estimate discussed under the Warranty Costs sub-section
above, in which we estimated the average per-repair cost to be $300,  $500 and $700 per repair
for light-, medium- and heavy-heavy duty, respectively. Based on these costs, which would
include labor and parts, we would expect such repairs could be performed in one day, or less.
Our estimated demurrage costs are equal to the approximate cost of renting a vehicle for one
day4, plus $30.00 for insurance and $50.00 for administrative costs (including the labor cost
associated with picking up and returning the vehicle), but not including a rental mileage charge.
Mileage rates charged by rental fleets are typically roughly equivalent to the price of the vehicle
divided by the number of miles expected for its lifetime (e.g., $50,000 / 300,000 miles = 17 cents
per mile for a typical medium-heavy duty vehicle).  Thus, the cost of mileage to a fleet operator
would be comparable whether the miles were driven in a rental vehicle or in its own vehicle. The
demurrage cost does not include costs associated with failures that occur on the road, and which
cause the vehicle to cease being operational until repaired.  The estimated costs associated with
incremental post-warranty repairs are shown in Table 3-9.

       We estimated the incremental cost of scheduled maintenance  in the 2000 FRM. That
analysis projected that additional maintenance costs would be incurred for medium- and heavy-
heavy duty engines when they are rebuilt to ensure proper functioning of the EGR systems. No
similar costs were estimated for light-heavy duty engines because of the lower mileage
accumulation rates and the much lower rate of engine rebuilding.  We are projecting these costs
to occur at mileages equal to the length of the engine's useful life (185,000 and 435,000 miles).
The NPV of these costs (adjusted to 2001 dollars) are shown in Table 3-10. It is important to
note that at least one manufacturer has indicated that it will not use cooled-EGR.  We do not
have information about the rebuild costs associated with these non-EGR systems.  Therefore, we
are using the EGR-based rebuild costs for the average incremental costs during rebuild.

       At least one of the manufacturers indicated that they will recommend shorter oil change
intervals for their EGR-equipped engines to address problems with soot loading and
acidification. However, most manufacturers did not provide specific comments regarding oil
change intervals. We are projecting that this effect will be negligible for the average light- and
medium-heavy duty engine over its lifetime. For heavy-heavy duty, we are projecting that the
typical engine will require about 2 additional oil changes over its lifetime.  This is equivalent to
an engine requiring an oil change every 32,000 miles instead of every 35,000 miles.  We estimate
                                        Page -32-

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                                                         Chapter 3: Compliance Costs
the cost of an oil change to be $180.l  The net present value of this would be about $270 per
engine.
                                        Table 3-8
                  Estimated Average Warranty Costs and Repair Rates


Light Heavy
Medium Heavy
Heavy Heavy
Average Warranty
Cost per Engine

$30
$260
$670
Warranty Miles

55,000
70,000
215,000
Cost per
Repair

$300
$500
$700
Incremental
Repairs per
Vehicle Within
Warranty Period
0.10
0.52
0.96
                                        Table 3-9
             Estimated Average Demurrage and Post-Warranty Repair Costs

Light Heavy
Medium Heavy
Heavy Heavy
Post-Warranty
Miles
154,000
192,000
555,000
Incremental
Repairs per
Vehicle After
Warranty Period
0.14
0.71
1.23
Cost per
Repair
$300
$500
$700
Demurrage
Cost per
Repair
$120
$170
$200
NPVof
Repair and
Demurrage
Costs
$80
$380
$880
(1)  Our estimate is based on estimates provided by one engine manufacturer, one national fleet operator, and one
independent truck service center. These estimates were $120, $176, and $195 per oil change (including labor, oil,
and filters).
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                                                       Chapter 3: Compliance Costs
                                      Table 3-10
                    Estimated Average Scheduled Maintenance Costs

Light Heavy
Medium Heavy
Heavy Heavy
Increased Oil
Change
$0
$0
$270
EGR Maintenance
at Rebuild
$0
$70
$110
Average Scheduled
Maintenance Cost
per Engine
$0
$70
$380
       Fuel Costs

       We estimated fuel penalties using VMT (vehicle-miles traveled) patterns listed in
Appendix A and the estimates of expected changes in fuel consumption listed in Table 3-11.
These estimates fall within the range of estimates provided by manufacturers, and though they
are not sales weighted, we believe our estimates are reasonable based on the manufacturers
submissions. We calculated the NPV of these impacts using a fuel price of $1.50  per gallon for
calendar years 2004 and 2005, and a fuel price of $1.55 per gallon for later calendar years to
account for the introduction of lower sulfur fuel.  The $1.50 price represents the EIA estimated
average price of on-highway diesel fuel in 2000 plus 43 cents for federal and state tax, and
adjusted to be equivalent to 2001 dollars. Appendix A contains a detailed description of the
estimated mileage accumulation rates that we used in our analysis.

                                      Table 3-11
           Estimated Average Lifetime Mileage and Fuel Consumption Change

Light Heavy
Medium Heavy
Heavy Heavy
VMT for Average
Vehicle
209,000
262,000
767,000
Average Change in
Fuel Consumption
-2%
+2.5%
+2.5%
2004 NPV of
Fuel Impact
($330)
$910
$3,620
       Operating Costs: Revenue Impacts

       One engine manufacturer suggested that there could be some increase in engine/vehicle
weight (on the order of 100 Ibs) as a result of the new standards which could have a small impact
                                       Page -34-

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                                                        Chapter 3: Compliance Costs

on revenue for trucks operating at their weight limit. One manufacturer estimated that the impact
would be more than $1000 over the life of a heavy-heavy duty truck.  Assuming that freight
revenue is between 5  and 10 cents per ton-mile, and that these trucks operate at their weight limit
between 10 and 30 percent of the time, 100 additional pounds could cost the truck operator
between $190 and $1,140 over a typical vehicle life of 760,000 miles. Because we only received
input on potential revenue impacts from one engine manufacturer, for this analysis we are
projecting that average revenue impact for heavy-heavy duty will be the midpoint of this range,
rather than the high end which is closer to the manufacturers estimate. Expressed as NPV this
impact would be $480.  For medium-heavy duty, we estimate that the average freight revenue is
between 15 and 20 cents per mile, and that the typical vehicle spends 5 to  10 percent of its time
at its weight limit. Thus we estimate the range of revenue impacts to be between $98 and $262
over a typical vehicle life of 262,000 miles.  Lacking confirmation that this increased weight
would be expected from other engine manufacturers, we used the midpoint of this range, thus the
estimated NPV revenue impact for medium-heavy duty would be $130.  We project that there
would not be any significant impacts for light-heavy duty, since they are not generally
constrained by weight and are not typically used for moving freight.

       Vehicle Manufacturing Costs

       Engine manufacturers estimated increased vehicle manufacturing costs of up to $500 for
vehicles changes such as bigger fans  and radiators.  We estimated the average incremental
vehicle cost to be equal to the sales-weighted average of the engine manufacturer's estimates.
which are  $130 for light-heavy duty,  $130 for medium-heavy duty, and $280 for heavy-heavy
duty.  These estimates include a vehicle manufacturer markup.

       B.      COC90

       The estimated 90th percentile cost is conceptually equivalent to high-mileage vehicles
from a high-cost manufacturer. However, we did not base this on the highest mileage vehicle
and the highest cost vehicles, since that would result in the 99th percentile costs.  Given the
relative market shares of the various engine manufacturers,  as well as the relative importance of
fuel costs and engine  manufacturer costs, we determined that it would be appropriate to use the
70th percentile mileage accumulation rates to calculate changes in fuel consumption and other
operating costs which are proportional to mileage, such as post-warranty repair rates and revenue
impacts. Assuming no co-dependence of the distributions, we would need to target the 67th
percentile  of engine manufacturer costs (and other manufacturer specific parameters, such as
percent  change in fuel consumption)  to result in precisely 10 percent of the model year 2004 fleet
                                       Page-3 5-

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                                                           Chapter 3: Compliance Costs

having both mileage accumulations and engine costs at least this high.2 Unfortunately, given
concerns about protecting confidential business information, as well as the fact that we did not
receive information for every manufacturer, we cannot describe our COC90 analysis in terms of
actual cost data from a specific manufacturer. Instead, we used in our COC90 analysis
representative numbers from the higher cost manufacturer(s), as described below.

       We have attempted to estimate costs representative of the 67th percentile engine
manufacturer costs for fixed costs, hardware costs, warranty costs and vehicle manufacturer
costs.  Similarly, we attempted to estimate rates representative of the 67th percentile engine for
post-warranty repair rates (repairs per mile,  not the repair costs), decreased oil change intervals,
revenue impact due to weight increase, and  change in fuel consumption rate (percent change).
For most inputs, we used values representative of the highest two or three manufacturer values.

       Fixed Costs and Hardware Costs

       We estimated the COC90 fixed  costs and hardware costs from the same manufacturer
estimates used to calculate the COC50 estimates.  In general, we estimated the COC90 cost to be
between the two highest estimates.  However, the estimated fixed cost for heavy-heavy engines is
between the second and third highest manufacturer estimates because the manufacturer data with
the highest fixed cost estimate represents a relatively small fraction of the heavy-heavy duty
market.

       Warranty Costs

       We estimated COC90 warranty  costs based on the two highest warranty estimates
provided by manufacturers.  These costs are shown in  Table 3-12.

       Operating Costs: Post-Warranty Repairs, Demurrage, and Scheduled Maintenance
       Costs
(2)  Assuming no co-dependence between manufacturing costs and mileage accumulation rates, 90th percentile
costs occur when the product of (100%-manufacturing cost percentile) and (100%-mileage percentile) is equal to
10%.  For example, for 70th percentile mileage rates, the manufacturing cost percentile that would correspond to
ten percent of the fleet would be the 67th percentile; (100% - 67%) X (100%-70%) = 0.33X0.30 = 0.10 =10%.
Thus, 1/3 of the model year's production will have manufacturing costs at least as high as the 67th percentile, and 30
percent of those engines (or 10 percent of the total) will have lifetime mileage accumulation at least as high as the
70th percentile value.  Similarly, for 80th percentile mileage rates, the manufacturing cost percentile that would
correspond to ten percent of the fleet would be the 50th percentile;  (100% - 50%) X (100%-80%) = 0.50 X 0.20 =
0.10 =10%. However, based on the cost information provided by manufacturers, the ten percent of the fleet captured
by this 50/80 analysis would have lower costs than the ten percent of the fleet captured by the 67/70 analysis used
here.

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                                                       Chapter 3: Compliance Costs
       We estimated 90th percentile post-warranty repair rates in the same manner as the
average rates. However, we based the repair frequency (repairs per mile) on this COC90 warranty
cost estimate, and on the 70th percentile mileage rates. For scheduled maintenance, we estimated
COC90 costs in the same manner as COC50 costs. We estimated no increase in the number of
rebuilds, or the incremental cost of rebuild, so the estimated COC90 cost for rebuild is the same as
for COC50.  Post-warranty costs are shown in Tables 3-13 and 3-14.

       We estimate that, for the heavy-heavy COC90 engine, there will be 5 more oil changes
over the life of the vehicle (for 70th percentile mileage rates). This is equivalent to an engine
requiring an oil change every 30,000 miles instead of every 35,000 miles.  We estimated the cost
of an oil change to be $180. The net present value of this would be about $630 per engine. We
are projecting that this effect will be negligible for the average light- and medium-heavy duty
engines.

                                      Table 3-12
                 Estimated Warranty Costs  and Repair Rates for COC90


Light Heavy
Medium Heavy
Heavy Heavy
Warranty Cost
per Engine

$120
$750
$1,000
Warranty Miles

55,000
70,000
215,000
Cost per Repair

$300
$500
$700
Incremental
Repairs per
Vehicle Within
Warranty Period
0.40
1.50
1.43
                                      Table 3-13
           Estimated Demurrage and Post-Warranty Repair Costs for COC90





Light Heavy
Medium Heavy
Heavy Heavy
Post-
Warranty
Miles


225,000
273,000
785,000
Incremental
Repairs per
Vehicle After
Warranty
Period
0.182
2.93
2.61
Cost per
Repair



$300
$500
$700
Demurrage
Cost per
Repair


$120
$170
$200
NPVof
Repair and
Demurrage
Costs

$250
$1,420
$1,690
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                                                     Chapter 3: Compliance Costs
                                     Table 3-14
                  Estimated Scheduled Maintenance Costs for COC
                                                               90

Light Heavy
Medium Heavy
Heavy Heavy
Increased Oil
Change
$0
$0
$630
EGR Maintenance
at Rebuild
$0
$80
$110
Average Scheduled Maintenance
Cost per Engine
$0
$80
$740
      Fuel Costs

      We estimated 90th percentile fuel costs in the same manner as the average rates.
However, we based the percentile change on the COC90 engines (e.g., a HHDDE with a 4% fuel
consumption increase), and used the 70th percentile mileage rates. The estimated impacts are
shown in Table 3-15. This analysis is shown in Appendix A.

                                     Table 3-15
          Estimated Lifetime Mileage and Fuel Consumption Change for COC90

Light Heavy
Medium Heavy
Heavy Heavy
VMT for Average
Vehicle
280,000
343,000
1,000,000
Change in Fuel
Consumption
+1%
+4%
+4%
2004 NPV of Fuel
Impact
$210
$1,800
$7,130
      Operating Costs: Revenue Impacts

      We estimated the COC90 revenue impact to equal to the COC50 estimate on a per-mile
basis. Thus, given the higher mileage rates for the COC90 engines, we estimate the revenue
impacts to be $170 for medium-heavy duty and $630 for heavy-heavy duty.
                                     Page-3 8-

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                                                        Chapter 3: Compliance Costs

       Vehicle Manufacturing Costs

       We estimated the COC90 vehicle cost as approximately the highest estimate provided by
engine manufacturers.

       C.    MC50 and F

       MC50 and F are two parameters used in the existing regulations in the calculation of the
value X (see 40 CFR 86.1113-87 (a)(4)).  X is the compliance level(g/bhp-hr) above the standard
where the penalty equals COC50 This section describes the derivation of MC50 and F for light-,
medium-, and heavy-heavy duty engines.  The values for urban buses are described in a later
section.
       Estimated value ofMC
                           50
       MC50 is the marginal cost of compliance for the average vehicle, expressed in terms of
dollars per gram of NMHC+NOx emission controlled.  In concept, it would be based on the
difference in total compliance costs for an engine that had emissions equal to the standard (i.e.,
2.5 g/bhp-hr) and an engine that had emission slightly above the standard. For example, if we
had an estimate of the total cost of compliance for a typical  engine with emissions equal to 2.6
g/bhp-hr, then we would calculate MC50 as the difference between that cost and the average
divided by the difference in emissions (0.1 g/bhp-hr). However, in the case of this rulemaking,
we do not have such detailed information. Therefore, we have estimated MC50 based on the
estimated costs of those control strategies that we believe will be used by manufacturers to
achieve marginal NOx or NMHC control  near the 2.5 g/bhp-hr standard.

       We are aware of two studies that investigated the effect of injection timing retard on NOx
emissions and fuel consumption for HDDEs with emission performance on the order of 2.5
g/bhp-hr NOx.5'6 These studies showed marginal fuel consumption changes of 0.2 to 0.8 percent
increase in fuel consumption for each 0.1  g/bhp-hr of NOx reduction. Similar effects have been
observed with changes in EGR rate.7 For this analysis, we are estimating that the average
marginal  cost of achieving the last 0.1 g/bhp-hr of NOx reduction for light-, medium-,  and heavy-
heavy duty is equivalent to a 0.5 percent increase in fuel consumption, or $80, $180, and $720,
respectively, based on the midpoint of the observed range from the data cited above.

       We are also aware that at least one manufacturer is considering using a diesel oxidation
catalyst (DOC) to reduce NMHC emissions from light-heavy duty engines. Based on
information provided by light-heavy duty engine manufacturers, we have estimated cost
effectiveness of using DOCs to  reduce hydrocarbons by about 0.2 g/bhp-hr. In a 1998
submission to EPA, the Manufacturers of Emission Control Associations (MECA) estimated a
range of costs for a DOC for a light-heavy duty engine to be between  $230 and $500 (1998
dollars),  using typical engine displacement, engine family production volumes, and industry

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                                                        Chapter 3: Compliance Costs

wide production volumes for the light-heavy duty diesel engine market.8 Based on this
information and the recent manufacturer data, we estimate that the marginal cost of compliance
would be $200 per 0.1 g/bhp-hr of NMHC+NOx reduced (in 2001 dollars). We are using this
value to estimate MC50 for light-heavy duty engines since this cost is higher than the cost of a 0.5
percent increase in fuel consumption for light-heavy duty engines.

      Based on the preceding analysis, we estimate MC50 for light-, medium-, and heavy-heavy
duty to be $2000, $1800, and $7200, respectively.  It is useful to compare these values to the
minimum values of MC50 (i.e., the average cost of compliance (COC50) divided by the difference
between the standard and the upper limit).  MC50 would equal the minimum value if all of the
emission controls were equally cost  effective.  Given our estimates of COC50, and our upper
limits, the minimum values for MC50 are $540, $1680, and $2550 for light-, medium-, and
heavy-heavy duty vehicles.

      Estimated value ofF

      The parameter F is defined in the existing regulations as a value from 1.1 to 1.3 that
describes the ratio of the 90th percentile marginal cost (MC90) to MC50.  Given that the MC50 for
medium- and heavy-heavy duty is estimated to be equivalent to a 0.5 percent increase in fuel
consumption per 0.1 g/bhp-hr, we considered the F values that would be associated with the
observed experimental range of fuel consumption impacts described above.7'8 The high end of
the range of 0.8 percent increase per 0.1 g/bhp-hr would be equivalent to an F value of 1.6, which
is outside of the range allowed by the existing regulations. An F value of 1.3 would be
equivalent to a 0.65 percent increase per 0.1 g/bhp-hr. We believe that the true value of MC90 is
likely to be between these two estimates, and therefore are proposing to set F equal to 1.3.

      For light-heavy duty, a catalyst at the upper range of the MECA cost ($545 in 2001
dollars) that would reduce NMHC emissions by 0.2 g/bhp-hr would result in an F value of 1.36.
Thus, we are proposing to set F at the maximum level of 1.3 for light-heavy duty.

      D.    Urban Buses

      We did not receive any cost information specific to urban buses.  Therefore, we are
basing our cost estimates on the information provided for heavy-heavy duty engines because an
urban bus is a sub-category of the heavy-heavy service class. We estimate that the per-engine
fixed  costs, hardware costs, and vehicle costs will be the same for buses as for other heavy-heavy
duty engines.  We estimate that there would be no revenue impact. Our estimated warranty and
maintenance costs were derived using the same per-mile costs as for other heavy-heavy duty
engines.  However, we estimated no cost associated with demurrage. We estimated MC50 and F
in the same manner as we did for the heavy-heavy duty service class, but used the bus-specific
fuel consumption costs.
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                                                      Chapter 3: Compliance Costs
                                     Table 3-16
             Estimate of Warranty Costs, Post-Warranty Repair Costs, and
                   Maintenance Costs (Oil Changes for Urban Buses


Warranty Period
Miles
Warranty Cost
Post-Warranty
Miles
Post-Warranty
Repair Cost
Total Life Miles
Oil Cost
COC50 Estimates
Urban Bus
89,000
$280
501,000
$510
590,000
$210
Other HHDV
215,000
$670
552,000
$560
767,000
$270
COC90 Estimates
Urban Bus
89,000
$410
511,000
$740
600,000
$380
Other HHDV
215,000
$1,000
785,000
$1130
1,000,000
$630
       The fuel costs were calculated using the bus-specific mileage estimates in Appendix A,
and our estimates of the bus-specific fuel consumption rate impacts shown in Table 3-17.  These
estimates (0.5 percent for COC50 and 2.0 percent for COC90) are 2.0 percent lower than the
corresponding rates estimated for other heavy-heavy duty engines. This difference reflects the
effect of setting the upper limit at 4.5 instead of 6.0.
                                     Table 3-17
               Estimated Lifetime Mileage and Fuel Consumption Change

COC50
COC90
VMT
590,000
600,000
Change in Fuel
Consumption
+1/2%
+2%
2004 NPV of
Fuel Impact
$490
$1,990
                                      Table 3-18
                           Urban Bus COCSO and COC90 Estimates
                          (Net Present Value to 2004 in 2001 Dollars)
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              Chapter 3: Compliance Costs

Per Engine Fixed Cost
Hardware Cost
Warranty Cost
Operating Costs:
Scheduled Maintenance
Operating Costs:
Post- Warranty Repairs
Operating Costs:
Demurrage
Fuel Cost (%)
Fuel Cost
Operating Costs:
Revenue Impact
Vehicle packaging costs
Total
COC50
$600
$2,030
$280
$210
$510
$0
590,000 miles @ 0.5%
$490
$0
$280
$4,400
COC90
$700
$2,400
$410
$380
$740
$0
600,000 miles @ 2%
$1,990
$0
$500
$7,120
Page-42-

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                                                      Chapter 3: Compliance Costs

References for Chapter 3

1.  "Fleet Characterization Data for MOBILE6: Development and Use of Age Distributions,
Average Mileage Accumulation Rates and Projected Vehicle Counts for Use in MOBILE6",
EPA420-R-01-047, September 2001.

2.  "Collection of Compliance Cost Estimates for the Purpose of Establishing NCPs for the
2004 Heavy duty Diesel NMHC+NOx Emission Standard", Roberts French, EPA Memorandum,
copy available in the docket for this rulemaking.

3.  "Heavy-duty Diesel Engine Warranty Information", Charles Moulis, EPA Memorandum,
copy available in the docket for this rulemaking.

4.  Estimated rental prices are based on prices published at www.ryder.com. a copy of the
published prices has been placed in the docket for this rulemaking.

5.  "Cooled EGR - A Key Technology for Future Efficient HD Diesels", P. Zelenka et. al.
Society of Automotive Engineers Technical Paper # 980190, February 1998.

6.  "Gaseous Emissions from a Caterpillar 3176 (with EGR) Using a Matrix of Diesel Fuels
(Phase 2)",  Southwest Research Institute, September 1999. Copy available in the docket for this
rulemaking.

7.  "Gaseous Emissions from a Caterpillar 3176 (with EGR) Using a Matrix of Diesel Fuels
(Phase 2)",  Southwest Research Institute, September 1999. Copy available in the docket for this
rulemaking.

8.  "Report  on Agreed-Upon Procedures", Manufacturers of Emission Control Associations,
December 17, 1998, Available in EPA Air Docket A-98-32, Docket Item # H-D-09.
                                      Page-43-

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                                      Chapter 4: Regulatory Parameters for NCPs

CHAPTER 4:  REGULATORY PARAMETERS FOR NCPs


I.     NCP Equations and Parameters

      EPA's existing regulations for calculating NCPs are contained in 40 CFR Part 86 Subpart
L.  NCP schedules can be calculated from those same equations using the Upper Limit, COC50,
COC90, MC50, and F values from the previous chapter, and a standard level (S) of 2.5 g/bhp-hr
NMHC+NOx. The values for X are calculated using these values and the following equation
from Subpart L:

      X = (COC50 / F / MC50) + S

The purpose of this equation is to achieve a penalty curve in which the slope for engines with
compliance levels near the standard is equal to the 90th percentile marginal cost of compliance
(MC90 equals MC50 times F).

                                     Table 4-1
                       Proposed Parameters for NCP Equations

COC50
COC90
MC50
F
UL
X
Light-Heavy
$1080
$2610
$2000
per g/bhp-hr
1.3
4.5
2.9
Medium-Heavy
$3360
$6870
$1800
per g/bhp-hr
1.3
4.5
3.9
Heavy-Heavy
$8940
$14790
$7200
per g/bhp-hr
1.3
6.0
3.5
Urban Bus
$4400
$7120
$4900
per g/bhp-hr
1.3
4.5
3.2
When the factors listed in Table 4-1 are input into the existing NCP equations specified in 40
CFR 86.1113(a)(l) and (2), for year n=l (that is, the first year the penalties are used, thus the
annual adjustment factor is equal to 1), the resulting penalty vs. compliance level for each service
class are shown in Figures 4-1 through 4-4.
                                     Page-44-

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            Chapter 4: Regulatory Parameters for NCPs
Figure 4-1: Light-heavy Penalty Curve
2004 Light-heavy Duty Diesel Engine NCPs

*
C '
0)
Q.
C * 'OUU
'5>
.2J ipljUUU
$o:
2
J
^^^^
^^^^
^^^^
X
/
I
5 3.0 3.5 4.0 4.5
NMHC+NOx Compliance Level (g/bhp-hr)
           Page-45-

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                             Chapter 4: Regulatory Parameters for NCPs
            Figure 4-2: Medium-heavy Penalty Curve
$/engine penalty
2004 Medium-heavy Duty Diesel Engine NCPs

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                       Chapter 4: Regulatory Parameters for NCPs
          Figure 4-4: Urban Bus Penalty Curve
   2004 Urban Bus Heavy-duty Engine NCPs
2.5
3.0            3.5           4.0
NMHC+NOx Compliance Level (g/bhp-hr)
4.5
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                                        Chapter 4: Regulatory Parameters for NCPs

II.     Refund for Engineering and Development Costs

       Section 1113-87(h) of the existing regulations specify provisions under which a
manufacturer that pays NCPs can recover some of the amount it has paid, provided it certifies a
conforming replacement for the engines which used the NCPs. The maximum amount that can
be recovered is limited to 90 percent of the portion of the penalty which EPA determines to be
related to engineering and development.  Thus, it is necessary for EPA to establish in each NCP
rule a factor for each service class (FE&D) which define the fractions of the NCP which is
considered to be related to engineering and development. We are proposing that these factors be
equal to the ratio  of the projected average fixed costs per engine divided by the COC50 for each
class. The proposed factors are listed in Table 4-2.

                                      Table 4-2
                     Engineering and Development Refund Factors
Light-Heavy Duty
Engines
Medium-Heavy Duty
Engines
Heavy-Heavy Duty
Engines
Urban Bus
Engines
0.333
0.167
0.067
0.136
III.   Penalty Sensitivity to Discount Rate
       The figures in Table 4-1 above are calculated using a 7.0 percent discount rate. If a
smaller discount rate was used for both pre-production and operating costs, the NPV of the fixed
costs would be lower, but the NPV of the operating costs would be higher. The net effect of a
smaller discount rate would generally be penalties that were higher. For example, Table 4-3
shows the penalty parameters that would result from using a three percent discount rate.
                                       Page-48-

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                        Chapter 4: Regulatory Parameters for NCPs




Table 4-3: NCP Calculation Parameters with 3% Discount Rate
Parameter
COC50
COC90
MC50
F
UL
Light Heavy-Duty
Diesel Engines
$1000
$2710
$2000 per gram per
brake-horsepower-
hour
1.3
4.5
Medium Heavy-Duty
Diesel Engines
$3590
$7510
$2 150 per gram per
brake-horsepower-
hour
1.3
4.5
Heavy Heavy-Duty
Diesel Engines
$9810
$16920
$ 8480 per gram per
brake-horsepower-
hour
1.3
6.0
Urban Bus
Engines
$4580
$7850
$ 6 180 per gram per
brake-horsepower-
hour
1.3
4.5
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                                        Chapter 4: Regulatory Parameters for NCPs

             APPENDIX A:  FUEL CALCULATIONS

       This appendix lists the inputs used to project fuel costs.  It also details an analysis of the
net present value (NPV) of changes in fuel consumption. The projected fuel cost changes are
shown for one percent changes in fuel consumption rates. These resulting NPV projections are
directly proportional to the percent change in fuel consumption, whether it is positive or
negative.

       The first table lists the inputs used for the analysis.  The second table shows the weighted
average VMT rates and the project change in annual fuel cost for a typical vehicle.  The weighted
average VMT rates are the products of the  "Annual VMT" and "Survival Fraction" entries from
Table A-l. Thus, Table A-2 represents the fleet average of all 2004 model year vehicles within a
given class (e.g., light-heavy duty diesel vehicles). With the exception of urban buses, Table A-3
represents individual 2004 model year vehicles that remain in service for 19 years.  Our data
indicate that 70 percent of these vehicles remain in service for 19 years or less.  Thus, we project
that 30 percent of model year 2004 heavy duty vehicles would have fuel cost impacts equal to or
greater than those listed at the bottom of Table A-3 for each one percent change in their fuel
consumption rates. For urban buses Table A-3  represents individual 2004 model year buses that
remain in service for 17 years.
                                      Page-50-

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              Chapter 4: Regulatory Parameters for NCPs
            Table A-l
Inputs Used for Fuel Consumption Analysis

3ase fuel economy, mi/gallon
3ercent increase in fuel consumption
Light
HDDV
14
1.0%
Medium
HDDV
8.0
1.0%
Heavy
HDDV
6.0
1.0%
NPV Discount Rate = 0.07
Cost of Diesel Fuel = 1.55/gallon
(Includes 5 cents/gal for low sulfur
after 2005)

Annual VMT and Fraction of Vehicle Remaining in the Fleet vs. Vehicle Age

Vehicle
Age
1
2
o
6
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Light HDDV
Annual
VMT
28,951
26,479
24,226
22,173
20,301
18,593
17,035
15,613
14,314
13,128
12,043
11,052
10,146
9,317
8,558
7,864
7,227
6,645
6,111
5,622
5,173
4,762
4,384
4,038
3,720
3,427
3,159
2,913
2,686
2.477
Survival
Fraction
1.000
1.000
0.932
0.870
0.811
0.756
0.705
0.657
0.613
0.572
0.533
0.497
0.464
0.432
0.403
0.376
0.351
0.327
0.305
0.284
0.265
0.247
0.231
0.215
0.207
0.194
0.177
0.167
0.153
0.119
Medium HDDV
Annual
VMT
36493
33203
30221
27519
25069
22849
20836
19012
17359
15861
14502
13271
12155
11145
10228
9397
8644
7962
7342
6782
6274
5814
5396
5017
4674
4363
4082
3826
3595
3385
Survival
Fraction
1.000
1.000
0.935
0.875
0.818
0.765
0.715
0.669
0.626
0.585
0.547
0.512
0.478
0.447
0.418
0.391
0.366
0.342
0.32
0.299
0.28
0.262
0.245
0.229
0.218
0.204
0.179
0.179
0.165
0.151
Heavy HDDV
Annual
VMT
113,208
102,211
92,288
83,332
75,250
67,954
61,369
55,424
50,059
45,214
40,840
36,892
33,327
30,107
27,200
24,575
22,204
20,063
18,129
16,382
14,804
13,379
12,091
10928
9877
8928
8069
7294
6595
5962
Survival
Fraction
1.000
1.000
0.935
0.875
0.818
0.765
0.716
0.670
0.626
0.586
0.548
0.513
0.479
0.448
0.419
0.392
0.367
0.343
0.321
0.300
0.281
0.263
0.246
0.230
0.220
0.207
0.179
0.179
0.165
0.152
Urban Bus
Annual
VMT
45171
43731
42337
40987
39681
38416
37191
36005
34857
33746
32670
31629
30620
29644
28699
27784
26898
26041
25211
24407
23629
22875
22146
21440
20757
20095
19454
18834
18234
17652
Survival
Fraction
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
0.999
0.996
0.989
0.970
0.925
0.832
0.662
0.413
0.197
0.161
0.132
0.108
0.089
0.072
0.059
0.065
0.033
0.033
0.033
0.016
0.016
            Page-51-

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                      Chapter 4: Regulatory Parameters for NCPs
                     Table A-2
Average Per Vehicle Cost From 1% Increase in Fuel Consumption

Age
1
2
o
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Total
NPV
Light HDDV
VMT
28,951
26,479
22,579
19,291
16,464
14,056
12,010
10,258
8,774
7,509
6,419
5,493
4,708
4,025
3,449
2,957
2,537
2,173
1,864
1,597
1,371
1,176
1,013
868
770
665
559
486
411
295
209,205

Fuel
Penalty
$31
$28
$25
$21
$18
$16
$13
$11
$10
$8
$7
$6
$5
$4
$4
$3
$3
$2
$2
$2
$2
$1
$1
$1
$1
$1
$1
$1
$0
$0
$230
$166
Medium HDDV
VMT
36,493
33,203
28,257
24,079
20,506
17,479
14,898
12,719
10,867
9,279
7,933
6,795
5,810
4,982
4,275
3,674
3,164
2,723
2,349
2,028
1,757
1,523
1,322
1,149
1,019
890
731
685
593
511
261,692

Fuel
Penalty
$68
$62
$55
$47
$40
$34
$29
$25
$21
$18
$15
$13
$11
$10
$8
$7
$6
$5
$5
$4
$3
$3
$3
$2
$2
$2
$1
$1
$1
$1
$503
$363
Heavy HDDV
VMT
113,208
102,211
86,289
72,916
61,555
51,985
43,940
37,134
31,337
26,495
22,380
18,926
15,964
13,488
11,397
9,633
8,149
6,882
5,819
4,915
4,160
3,519
2,974
2,513
2,173
1,848
1,444
1,306
1,088
906
766,554

Fuel
Penalty
$283
$256
$223
$188
$159
$134
$114
$96
$81
$68
$58
$49
$41
$35
$29
$25
$21
$18
$15
$13
$11
$9
$8
$6
$6
$5
$4
$3
$3
$2
$1,962
$1,446
Urban Bus
VMT
45,171
43,731
42,337
40,987
39,681
38,416
37,191
35,995
34,847
33,707
32,547
31,273
29,692
27,427
23,876
18,381
11,115
5,136
4,070
3,228
2,559
2,028
1,605
1,275
1,353
655
634
614
297
288
590,116

Fuel
Penalty
$113
$109
$109
$106
$103
$99
$96
$93
$90
$87
$84
$81
$77
$71
$62
$47
$29
$13
$11
$8
$7
$5
$4
$3
$3
$2
$2
$2
$1
$1
$1,517
$979
                     Page-52-

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                        Chapter 4: Regulatory Parameters for NCPs
                       Table A-3
High Case per Vehicle Cost From 1% Increase in Fuel Consumption
             For 30 Percent Remaining in Fleet

Age
1
2
o
6
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Total
NPV
Light HDDV
VMT
28,951
26,479
24,226
22,173
20,301
18,593
17,035
15,613
14,314
13,128
12,043
11,052
10,146
9,317
8,558
7,864
7,227
6,645
6,111
0
279,776

Fuel
Penalty
$31
$28
$27
$25
$22
$21
$19
$17
$16
$15
$13
$12
$11
$10
$9
$9
$8
$7
$7
$0
$308
$909
Medium HDDV
VMT
36,493
33,203
30,221
27,519
25,069
22,849
20,836
19,012
17,359
15,861
14,502
13,271
12,155
11,145
10,228
9,397
8,644
7,962
7,342
0
343,068

Fuel
Penalty
$68
$62
$59
$53
$49
$44
$40
$37
$34
$31
$28
$26
$24
$22
$20
$18
$17
$15
$14
$0
$660
$451
Heavy HDDV
VMT
113,208
102,211
92,288
83,332
75,250
67,954
61,369
55,424
50,059
45,214
40,840
36,892
33,327
30,107
27,200
24,575
22,204
20,063
18,129
0
999,646

Fuel
Penalty
$283
$256
$238
$215
$194
$176
$159
$143
$129
$117
$106
$95
$86
$78
$70
$63
$57
$52
$47
$0
$2,564
$1 789
Urban Bus
VMT
45171
43731
42337
40987
39681
38416
37191
36005
34857
33746
32670
31629
30620
29644
28699
27784
26898
0
0
0
600,066

Fuel
Penalty
$113
$109
$109
$106
$103
$99
$96
$93
$90
$87
$84
$82
$79
$77
$74
$72
$69
$0
$0
$0
$1,543
$995
1
                      Page -53-

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                                         Appendix B: Sample Cost Calculations

     APPENDIX B:  SAMPLE COST CALCULATIONS

      This appendix shows sample calculations for some of the cost components used in the
analysis. It shows how fixed costs were adjusted to constant 2001 dollars, and how they were
amortized. It also shows how per-mile fuel cost impacts were calculated.  The last table shows
the annual cost stream from the owner's perspective. Manufacturer costs are expressed as retail
price equivalents, without regard to the extent to which the manufacturers  actually pass the costs
on to the customers.
                                   Page-54-

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                                  Appendix B: Sample Cost Calculations
             Sample Calculation of NPV Fixed Costs from
              Annual Fixed Costs from a Manufacturer
Calendar
Year That
Money Is
Spent

1998
1999
2000
2001
2002
2003

Research
Spending1

$5,000,000
$5,000,000
$10,000,000
$10,000,000
$10,000,000
$10,000,000

Tooling
Costs1





$1,000,000
$3,000,000

Total Fixed
Costs for
Calendar
Year

$5,000,000
$5,000,000
$10,000,000
$10,000,000
$11,000,000
$13,000,000

Value of
Dollars for
Reported
Costs2

1998
1999
2000
2001
2001
2001

* Costs for 2001 - 2003 are projected costs, costs for 1998 - 2000
arp artiial msts
CPI
Adjustment
to 2001
Dollars

.09
.07
.03
.00
.00
.00


Total Annual
Fixed Cost in
2001 Dollars2
NPV of Annual
Fixed Costs3

$5,450,000
$5,350,000
$10,300,000
$10,000,000
$11,000,000
$13,000,000

Total NPV =
$8,178,980
$7,503,652
$13,501,199
$12,250,430
$12,593,900
$13,910,000

$67,938,161
1 Costs for 2001 - 2003 are projected costs, costs for 1998 - 2000
are actual costs.
2 Actual costs were generally reported in terms of actual dollars
spent in a calendar year without adjusting for inflation.  These
costs were adjusted upwards based on the Consumer Price Index to
be equivalent to 2001 dollars.  Projected costs are generally
reported in terms of current year dollars.
The net present value of these costs were calculated by multiplying
the cost (in 2001 dollars) by 1.07", where n = (2004 - the year of
the cost).

    Sample Amortization of Fixed Costs1 for a Manufacturer
Total Fixed Costs (2004 NPV)
Recovery Period (years)
Recovery Rate
Amortized Cost
Sales per Year
Amortized Cost per Engine
I 1
$67,938,161
5
7%
$16,569,485
30000
$552

              Total NPV fixed costs are amortized to be recovered
              as equal annual payments at the end of calendar years
              2004, 2005, 2006, 2007, and 2008 with a return of 7%
              of the outstanding balance at the beginning of the year.
                           Page-55-

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                   Appendix B: Sample Cost Calculations




Sample Calculation of Per Mile Fuel Costs
Fuel Economy
(miles/gal)
Fuel Consumption
(gal/mile)
Increase in Fuel Consumption
(%)
Increase in Fuel Consumption
(gal/mi)
Increased Fuel Cost
f$/1000 miles^


=1/6.0


= (0.167) x (0.01)
= (0.00167)x($1.55)x(1000)
6.0
0.17
2.5%
0.0042
$6.46
              Page-56-

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                                       Appendix B: Sample Cost Calculations

            Annual Costs for an Average Model Year 2004 Vehicle1

2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
NPV
f-9004^
Amortized
Fixed
$522





























$522
Engine
Manufacturer
Hardware
$1,300





























$1,300
Manufacturer
Warranty
Cost
$100
$100




























$193
Vehicle
Manufacturer
Cost
$100





























$100
Fuel
Cost
$708
$639
$557
$471
$398
$336
$284
$240
$202
$171
$145
$122
$103
$87
$74
$62
$53
$44
$38
$32
$27
$23
$19
$16
$14
$12
$9
$8
$7
$6
$3,615
Other
Operating
$118
$106
$224
$189
$274 2
$135
$114
$96
$81
$69
$58
$49
$41
$35
$30
$25
$21
$18
$15
$13
$11
$9
$8
$7
$6
$5
$4
$3
$3
$2
$1,232
1  Costs are presented on a fleetwide average basis. As shown in Appendix A, estimates of annual
   miles traveled account for the number of miles traveled by vehicles in the fleet and the fraction of
   vehicles remaining in the fleet.
2  Includes cost for rebuild at end of useful life.
                               Page-57-

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