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U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Unless California Air
Resources Board Fully
Complies With Laws and
Regulations, Emission
Reductions and Human Health
Benefits Are Unknown
Report No. 14-R-0130	March 6, 2014

3GS21C

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Report Contributors:
Darren Schorer
Lela Wong
Abbreviations

CARB
California Air Resources Board
CFR
Code of Federal Regulations
DERA
Diesel Emissions Reduction Act
EPA
U.S. Environmental Protection Agency
FY
Fiscal Year
NOx
Nitrogen Oxide
NREC
National Railway Equipment Company
OIG
Office of Inspector General
OMB
Office of Management and Budget
Cover photo: An example of a BNSF Railway Company switch-yard locomotive located at
the Hobart rail yard in Commerce, California. (EPA photo)
Suggestions for Audits or Evaluations
To make suggestions for audits or evaluations,
contact us through one of the following methods:
email:	OIG WEBCOMMENTS@epa.gov
phone:	1-202-566-2391
fax:	1-202-566-2599
online:	http://www.epa.g0v/0ig/c0ntact.html#Full Info
write: EPA Inspector General
1200 Pennsylvania Avenue, NW
Mailcode 241OT
Washington, DC 20460
Hotline
To report fraud, waste or abuse, contact
us through one of the following methods:
email:	OIG Hotline@epa.gov
phone:	1-888-546-8740
fax:	1-202-566-2599
online:	http://www.epa.gov/oig/hotline.htm
write: EPA Inspector General Hotline
1200 Pennsylvania Avenue, NW
Mailcode 2431T
Washington, DC 20460

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ED STjf.
*. U.S. Environmental Protection Agency	14-R-0130
^	\ Office of Inspector General	March 6,2014
/ en
At a Glance
Why We Did This Review
The U.S. Environmental
Protection Agency (EPA) Office
of Inspector General (OIG)
conducted this examination to
determine whether the costs
claimed under cooperative
agreement 2A-00T13801
awarded under the American
Recovery and Reinvestment
Act of 2009 to the California Air
Resources Board (CARB)
were reasonable, allowable and
allocable in accordance with
applicable laws, regulations,
and cooperative agreement
terms and conditions. The OIG
also sought to determine
whether cooperative agreement
objectives were met.
This report addresses the
following EPA themes:
•	Addressing climate change
and improving air quality.
•	Making a visible difference
in communities across the
country.
For further information,
contact our public affairs office
at (202) 566-2391.
The full report is at:
www.epa.aov/oia/reports/2014/
20140306-14-R-0130.pdf
Unless California Air Resources Board Fully
Complies With Laws and Regulations, Emission
Reductions and Human Health Benefits Are Unknown
What We Found
CARB did not fully
comply with the
Energy Act and
cooperative agreement
requirements, resulting
in potential
overpayment of
$8,866,000.
Our examination disclosed material weaknesses in
CARB's compliance with laws, regulations, and the
terms and conditions of the cooperative agreement.
Specifically, CARB did not comply with the
requirement of the cooperative agreement and the
Energy Policy Act of 2005 to scrap or remanufacture
the old engines. CARB also did not accurately report
jobs created or retained or provide actual emissions
reduction calculations, as required under the cooperative agreement. In addition,
CARB paid contract costs that were not in accordance with contract terms.
CARB completed the locomotive repower according to the workplan. However,
CARB has not demonstrated that it met the cooperative agreement objective for
achieving significant emissions reduction as CARB did not provide actual
emissions benefit calculations.
Recommendations and Corrective Actions
For the contract terms issue, we recommended that the Region 9 Regional
Administrator disallow and recover ineligible costs of $94,109 claimed under the
cooperative agreement and require CARB to establish internal controls prior to
any future awards. In response to draft report, CARB repaid the $94,109 to the
EPA. CARB's contractor—BNSF Railway Company—also signed an agreement
on November 18, 2013, to scrap or remanufacture the replaced engines. We
recommend that the region verify that CARB and BNSF comply with the
agreement and document the scrap or remanufacture. The region should recover
the federal share of $8,771,891 claimed in the event CARB violates the
November 18, 2013, agreement.
We also made recommendations related to jobs reported as created or retained,
developing a more accurate calculation of project results based on actual fuel
usage, and adjusting the reporting of CARB's project results. In response to the
draft report, CARB submitted the job report corrections. Region 9 and CARB
disagreed with the two recommendations relating to project results.
Noteworthy Achievements
CARB and the BNSF Railway Company repowered 11 locomotives instead of the
eight required by the cooperative agreement because of cost reductions
achieved by the manufacturer and a higher contractor contribution percentage
than what was required under the agreement. The subcontractor also
accomplished construction of the 11 locomotives in less than 4 months in order to
meet the Recovery Act deadline of September 30, 2010.

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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
THE INSPECTOR GENERAL
March 6, 2014
MEMORANDUM
SUBJECT: Unless California Air Resources Board Fully Complies with Laws and Regulations,
Emission Reductions and Human Health Benefits Are Unknown
Report No. 14-R-0130
This is our report on the subject examination conducted by the Office of Inspector General (OIG) of the
U.S. Environmental Protection Agency (EPA). This report contains findings that describe problems the
OIG has identified and corrective actions the OIG recommends. This report represents the opinion of the
OIG and does not necessarily represent the final EPA position. In accordance with established audit-
resolution procedures, EPA managers will make final determinations on matters in this report.
Action Required
In accordance with EPA Manual 2750, you are required to provide us your proposed management
decision on the findings and recommendations contained in this report before you formally complete
resolution with the recipient. Your proposed management decision is due in 120 days, or on July 7, 2014.
To expedite the resolution process, please email an electronic version of your proposed management
decision to adachi.robert@epa.gov.
Your response will be posted on the OIG's public website, along with our memorandum commenting on
your response. Your response should be provided as an Adobe PDF file that complies with the
accessibility requirements of Section 508 or the Rehabilitation Act of 1973, as amended. The final
response should not contain data that you do not want to be released to the public; if your response
contains such data, you should identify the data for redaction or removal along with corresponding
justification. We will post this report to our website at http://www.epa.gov/oig.
If you or your staff have any questions regarding this report, please contact Rich Eyermann,
acting Assistant Inspector General for Audit, at (202) 566-0565 or evermann.richard@epa.gov;
or Robert Adachi, Product Line Director, at (415) 947-4537 or adachi.robert@epa.gov.
FROM
Arthur A. Elkins Jr.
TO
Jared Blumenfeld, Regional Administrator
Region 9

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Unless California Air Resources Board	14-R-0130
Fully Complies With Laws and Regulations,
Emission Reductions and Human Health Benefits Are Unknown
Table of Contents
Chapters
1	Independent Accountant's Report		1
2	Introduction		4
Purpose		4
Background		4
Noteworthy Achievements		5
3	Costs Claimed Were Not in Accordance With Contract Provisions		6
Costs Billed by the Contractor Exceeded Contribution Percentage		6
Conclusion	 8
Recommendations		8
EPA and Recipient Comments		8
OIG Response		8
4	Noncompliance With Laws, Regulations and
Cooperative Agreement Conditions		9
CARB Did Not Comply With Requirement to Scrap or Remanufacture		9
CARB Jobs Report Did Not Comply With OMB Requirements		11
Recommendations		12
EPA and Recipient Comments		12
OIG Response		13
5	CARB Did Not Provide Actual Emissions Reduction Calculations		14
CARB Calculated Emissions Reductions Using Estimated Fuel Usage		14
Conclusion	 15
Recommendations		15
EPA and Recipient Comments		16
OIG Response		16
Status of Recommendations and Potential Monetary Benefits		17
Appendices
A Agency's Comments on Draft Report	 18
B CARB's Comments on Draft Report	 24
C Distribution	 30

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Chapter 1
Independent Accountant's Report
As part of our oversight of assistance agreement awards made by the
U.S. Environmental Protection Agency (EPA), the EPA's Office of Inspector
General (OIG) examined the costs claimed under Cooperative Agreement No.
2A-00T13801 awarded to the California Air Resources Board (CARB). The OIG
conducted the examination to determine whether the costs claimed under the
cooperative agreement were reasonable, allowable and allocable in accordance
with the Code of Federal Regulations (CFR) under 40 CFR Part 31, Uniform
Administrative Requirements for Grants and Cooperative Agreements to State and
Local Governments; 2 CFR Part 225, Cost Principles for State, Local, and Indian
Tribal Governments (Office of Management and Budget Circular A-87); and the
terms and conditions of the cooperative agreement. We also reviewed CARB's
accomplishment of the cooperative agreement's objectives and compliance with
the following American Recovery and Reinvestment Act of 2009 requirements:
•	Buy American requirement under Section 1605.
•	Davis-Bacon Act wage requirements under Section 1606.
•	Job reporting requirements under Section 1512.
By accepting the funding provided through the cooperative agreement, CARB is
responsible for complying with these requirements. Our responsibility is to
express an opinion on CARB's compliance based on our examination.
We conducted our examination in accordance with generally accepted
government auditing standards issued by the Comptroller General of the United
States and the attestation standards established by the American Institute of
Certified Public Accountants. We examined, on a test basis, evidence supporting
management's assertions and performed such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
We conducted our audit work between March 11, 2013, and September 25, 2013.
We contacted representatives from the EPA's Region 9 to gather information on
criteria relevant to the cooperative agreement, obtain an understanding of the
proposed project, and gather information concerning CARB's performance.
Specifically, we performed the following steps:
•	Reviewed the EPA's project and cooperative agreement files.
•	Reviewed the application associated with the award.
•	Reviewed award documents, including amendments.
•	Reviewed CARB's original and revised work plans.
•	Conducted interviews with EPA Region 9 staff.
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On March 11, 2013, we made a site visit to CARB's office in
Sacramento, California, to conduct interviews and obtain documentation
needed to address our objectives. We performed the following steps:
•	Reviewed recipient cooperative agreement files and interviewed recipient
personnel to gain an understanding of the accounting system, internal
controls, and the costs reported and work performed under the cooperative
agreement.
•	Reviewed CARB's request for proposal, bids submitted, contracts and
subcontracts.
•	Reviewed costs claimed under the cooperative agreement to determine
whether the costs met applicable requirements under 40 CFR Part 31,
2 CFR Part 225, and the terms and conditions of the cooperative
agreement.
•	Reviewed CARB's compliance with Recovery Act requirements.
•	Conducted a site visit to the BNSF Railway Company's rail yards to verify
the existence of locomotives and completion of work in accordance with
the work plan.
•	Reviewed supporting documentation for reported emissions reductions.
CARB is responsible for establishing and maintaining effective internal control
over compliance with the requirements of 40 CFR Part 31,2 CFR Part 225, the
Recovery Act, and the terms and conditions of the cooperative agreement.
In planning and performing our examination, we considered CARB's internal
control over compliance with the requirements listed above as a basis for
designing our examination procedures for the purpose of expressing our opinion
on compliance, but not for the purpose of expressing an opinion on the
effectiveness of internal control over compliance. Accordingly, we do not express
an opinion on the effectiveness of CARB's internal control over compliance.
Our consideration of internal control over compliance was for the limited purpose
described in the preceding paragraph and was not designed to identify all
deficiencies in internal control over compliance that might be significant
deficiencies or material weaknesses; therefore, there can be no assurance that all
deficiencies, significant deficiencies or material weaknesses have been identified.
A significant deficiency is a deficiency in internal control, or combination of
deficiencies, that adversely affects that entity's ability to initiate, authorize,
record, process or report data reliably in accordance with the applicable criteria or
framework, such that there is more than a remote likelihood that a misstatement of
the subject matter that is more than inconsequential will not be prevented or
detected. A material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood that material
misstatement of the subject matter will not be prevented or detected.
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Our examination disclosed material weaknesses in CARB's compliance with
laws, regulations and cooperative agreement requirements. In particular, CARB:
•	Did not comply with the requirement of the cooperative agreement and the
Energy Policy Act to scrap or remanufacture the old engines.
•	Did not accurately report jobs created or retained.
•	Did not provide actual emissions reduction calculations.
Our examination also disclosed a significant deficiency in internal controls that
resulted in CARB paying contract costs that were not in accordance with contract
terms.
As a result of the issues noted above, we questioned the entire $8,866,000
claimed under the cooperative agreement. In our opinion, CARB has not
complied with the terms and conditions of cooperative agreement 2A-00T13801.
CARB completed the locomotive repower according to the workplan.
Specifically, CARB repowered 11 locomotives (three more than the eight required
under the cooperative agreement) using EPA-verified technology, and the
repowered locomotives were operating in the required area. However, CARB has
not demonstrated that it met the cooperative agreement objective for achieving
significant emissions reduction as CARB did not provide actual emission benefit
calculations.
Robert K. Adachi
Director, Forensic Audits
March 6, 2014
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Chapter 2
Introduction
Purpose
The EPA OIG conducted this examination to determine whether the costs claimed
under cooperative agreement 2A-00T13801 were reasonable, allocable and
allowable in accordance with applicable federal requirements and the terms and
conditions of the cooperative agreement. The OIG also reviewed CARB's
compliance with select Recovery Act requirements and the accomplishment of
cooperative agreement objectives.
Background
The Diesel Emissions Reduction Act (DERA) was signed into law in August 2005
under Title VII, Subtitle G, of the Energy Policy Act of 2005. DERA authorized
$200 million per year from fiscal years (FYs) 2007 through 2011 (a total of
$1 billion). The money enabled the EPA to fund programs to achieve significant
reductions in diesel emissions (e.g., tons of pollution produced and diesel-
emission exposures, particularly from fleets operating in areas designated by the
agency as poor air quality areas). Of the authorized DERA amount, 70 percent is
authorized for competitive national grants and low-cost revolving loans, as
determined by the EPA Administrator. The remaining 30 percent is for state
grants and loan programs. Congress appropriated a total of $219.1 million for the
EPA under DERA for FYs 2008 through 2011. Congress appropriated an
additional $300 million to the EPA in FY 2009 for DERA grants under the
Recovery Act.
On July 10, 2009, the EPA used Recovery Act funds to award cooperative
agreement 2A-00T13801 to CARB under the National Clean Diesel Funding
Assistance Program. This award authorized federal funds of $8,888,888 to
repower eight existing switch-yard locomotives with new Tier 3 nonroad engines.
Total project costs were $12,000,000, which included the authorized federal funds
and the recipient's share of $3,111,112. The project period was June 15, 2009,
through December 31, 2010.
CARB proposed operating the repowered locomotives within rail yards located in
the South Coast Air Basin. The EPA designated the South Coast Air Basin as a
particulate matter nonattainment area. CARB conducted health risk assessments
of 18 major rail yards and determined that 90 percent or more of switch-yard
locomotive emissions are generated in and around large rail yards in California.
CARB also determined that switch-yard locomotives can represent at least half of
the locomotive diesel particulate matter within and around rail yards.
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CARB estimates that a new locomotive engine could potentially provide up to a
90-percent reduction in nitrogen oxide (NOx) and particulate matter emissions
compared to an older engine. Specifically, a repowered locomotive could provide
reductions of up to 0.045 tons per day for NOx emissions and 0.0018 tons per day
for particulate matter emissions. A 90-percent reduction could provide substantial
cancer and noncancer health benefits to communities in the South Coast Air
Basin, which consists of parts of Los Angeles and San Bernardino counties and all
of Orange County (see figure 1 below).
Figure 1: Map of the South Coast Air Basin
Palmdale
Victorville
SAN BERNARDINO
.OS ANGELES
San Bernardino
Banni
Riverside
P&ko Springs
RIVERSIDE
ORANGE
I I South Coast Air Basin
1 Miles
Source: CARB website at www.arb.ca.gov/msproq/onroad/porttruck/maps/scab7map.pdf.
Noteworthy Achievements
CARB and BNSF repowered three locomotives in addition to the eight required
by the cooperative agreement. In addition, the federal share of the project cost
was $22,888 less than the authorized funding of $8,888,888. The additional
repowered locomotives and the reduction in the federal share was because of cost
reductions achieved by the manufacturer and because BNSF contributed funding
in excess of the recipient's share of 25.93 percent required by the cooperative
agreement. The subcontractor also accomplished construction of the
11 locomotives in less than 4 months in order to meet the Recovery Act deadline
of September 30, 2010.
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Chapter 3
Costs Claimed Were Not in Accordance
With Contract Provisions
Our examination disclosed that CARB paid contractor costs that were not in
compliance with contract provisions because CARB did not monitor contractor
billings to ensure compliance. Specifically, the contractor billed costs in excess of
CARB's share of the total costs, which included a remote-control system that was
not for the locomotives under the cooperative agreement. As a result, we
questioned $94,109 of the $8,866,000 claimed under the cooperative agreement.
Costs Billed by the Contractor Exceeded Contribution Percentage
Costs billed by BNSF to CARB were in excess of CARB's share of the actual
costs incurred by BNSF's subcontractor. The contract between CARB and BNSF
states that CARB agreed to reimburse BNSF for actual expenditures incurred in
accordance with the rates specified in the contract. The contract provided for a
cost of $1,430,000 for each locomotive, based on a price quote received from the
National Railway Equipment Company (NREC). The contract also included a
BNSF contribution percentage that ranged from 35 to 50 percent. Specifically,
BNSF agreed to pay 50 percent of the costs for six locomotives, 40 percent of the
costs for one locomotive, and 35 percent of the costs for four locomotives. Based
on these contract terms, total BNSF contribution is $6,864,000 and CARB or
federal contribution is $8,866,000.
Once the work started, BNSF billed CARB for costs based on invoices submitted
by NREC for each locomotive. BNSF also billed CARB for materials that BNSF
provided to NREC (at no cost to the subcontractor) for use in the construction of
the locomotives. BNSF billed NREC's costs using the contract-required
contribution percentages. However, BNSF did not invoice CARB for the BNSF-
provided materials using the contract-required contribution percentages. In
addition, BNSF invoiced CARB for a remote-control system that was not for the
locomotives repowered under the cooperative agreement.
We calculated the total cost for each locomotive based on the invoices submitted
by NREC and BNSF. We limited eligible costs for each locomotive to the
$1,430,000 rate noted in the contract between CARB and BNSF. The federal
share we calculated is shown in table 1.
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Table 1: OIG's calculation of federal share
Locomotive
Total cost
Eligible cost
per contract
Federal
percentage of
eligible costs
Federal
share
1293
$1,502,111
$1,430,000
50%
$715,000
1294
1,505,807
1,430,000
50%
715,000
1300
1,414,206
1,414,206
50%
707,103
1301
1,415,209
1,415,209
65%
919,886
1302
1,394,614
1,394,614
60%
836,768
1303
1,423,281
1,423,281
65%
925,133
1304
1,417,316
1,417,316
65%
921,255
1305
1,414,495
1,414,495
65%
919,422
1306
1,412,752
1,412,752
50%
706,376
1307
1,411,838
1,411,838
50%
705,919
1308
1,400,058
1,400,058
50%
700,029

$15,711,687


$8,771,891
Source: Total costs are from invoices submitted by NREC and BNSF. Federal percentages
are from the contract between CARB and BNSF. Eligible cost per contract and the federal
share are based on the OIG's analysis of the data.
The costs claimed and questioned are summarized below:
Table 2: Summary of questioned costs
Cost category
Amount
Total project costs3
$15,711,687
Amount claimedb
8,866,000
Federal share based on contribution share per locomotive c
8,771,891
Cumulative cash draw d
8,866,000
Amount due EPA c
$94,109
Source: See notes below.
a.	Total project costs amount is based on invoices BNSF submitted to CARB.
b.	Amount claimed is from the final federal financial report that CARB submitted
to the EPA under the cooperative agreement.
c.	Federal share and amount due EPA are based on the OIG's analysis of the
data provided by CARB.
d.	Cumulative cash draw is from EPA and CARB's accounting records.
CARB staff agreed with the total costs and percentages provided in table 1 above,
but believed the intent of the contract with BNSF was to reimburse BNSF for total
project costs without a ceiling amount for each locomotive. CARB staff said the
rate cited in the contract refers to the contribution percentage, not the cost per
locomotive. CARB believes the calculation for eligible costs should be based on
the total cost of the locomotive without the $1,430,000 ceiling.
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Conclusion
The OIG's analysis determined that eligible costs for each locomotive were
limited to the contract cost of $1,430,000 agreed to by CARB and BNSF. CARB
staff said the intent of the contract was to apply CARB's contribution percentage
to the total cost of the individual locomotives, regardless of whether the cost
exceeded $1,430,000. However, the contract does not specifically indicate that the
rates only apply to contribution percentages. Therefore, we believe the rates in the
contract refer to both the cost ceiling and the contribution percentage for each
locomotive. We believe $94,109 is ineligible.
Recommendations
We recommend that the Region 9 Regional Administrator:
1.	Recover the ineligible amount of $94,109 claimed under the cooperative
agreement from CARB.
2.	Require CARB to establish internal controls prior to any future awards, to
ensure that contractor billings comply with contract terms and conditions.
EPA and Recipient Comments
The OIG received comments on the draft report from Region 9 and CARB, as
shown in appendices A and B, respectively. Region 9 and CARB also provided
supplemental documentation as support for their comments, and although not
included in this report the supplemental documentation is available upon request.
Region 9 agreed with the recommendations and said that it will work with CARB
to ensure that contractor billings comply with EPA requirements and contract
terms and conditions. CARB acknowledged that BNSF erroneously billed a
remote control system that was not used for the locomotives repowered under the
project. However, CARB disagreed that $94,109 of the project costs is ineligible.
CARB said the issue is whether the contract ceiling is on each locomotive or on
the total projects. CARB believes it should be given the discretion to determine
the intent and interpretation of the contract provisions and managed the contract
based on a not-to-exceed total project cost ceiling of $8,866,000. However,
CARB acknowledges the basis for the questioned costs and the OIG's rationale.
OIG Response
The OIG's position remains unchanged. Region 9 concurred with our
recommendations. Although CARB disagreed that the $94,109 is ineligible,
CARB repaid the $94,109 to the EPA on January 9, 2014. We acknowledge the
repayment and consider recommendation 1 resolved.
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Chapter 4
Noncompliance With Laws, Regulations
and Cooperative Agreement Conditions
As part of our examination, we reviewed CARB's compliance with applicable
laws, regulations, and terms and conditions of the cooperative agreement.
We found that CARB and BNSF have not scrapped or remanufactured old
engines taken from the repowered locomotives in accordance with the cooperative
agreement and Energy Policy Act requirements because CARB allowed BNSF the
option to ban the old engines from operating in California as an alternative to
scrapping. CARB said it did not require BNSF to scrap or remanufacture the old
engines because of the unique nature of locomotives. CARB also believed the ban
option was approved by the EPA. The potential use of the old engines by BNSF
outside of California could offset emissions reductions gained by the newer
engines and result in no net environmental benefit being derived from the project.
As a result, we questioned the $8,866,000 claimed under the cooperative
agreement. Since $94,109 of the $8,866,000 claimed has already been questioned
in chapter 3 of this report, we are only questioning here the remaining $8,771,891.
In addition, CARB did not report jobs created or retained in accordance with
Office of Management and Budget (OMB) guidance. CARB reported jobs created
based on total hours expended on the project. OMB guidance requires that jobs
funded partially with Recovery Act funds only be counted based on the proportion
funded by the Recovery Act. During the course of the audit, CARB recalculated
the jobs created and agreed to work with EPA Region 9 to revise the number of
jobs reported.
CARB Did Not Comply With Requirement to Scrap or Remanufacture
CARB did not comply with requirements of the cooperative agreement and
Energy Policy Act to scrap or remanufacture the older locomotive engines. CARB
allowed BNSF the option to ban the use of the old engines in California as an
alternative because of the unique nature of locomotives. However, this option is
not provided for by the Energy Policy Act or the cooperative agreement.
CARB Provided Alternative to Scrapping and/or Remanufacturing
CARB's contract with BNSF to repower switch-yard locomotives provided the
option to ban or scrap older, existing engines from California operations. The
contract states that to use the ban option, the engines must be removed from older,
existing locomotives. The railroad company must also make sure that the original
older engines will not operate in California. The contract does not specifically
require remanufacturing of older engines under the ban option.
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In the project final report, CARB reported that BNSF retained possession of the
engines taken from the repowered locomotives. The report states that the engines
will be upgraded to the best possible emissions and performance standards as the
need arises. The engines will be placed in locomotives that will be banned from
operating in California. CARB stated that BNSF will notify CARB if an older
engine is placed in another locomotive. CARB can then track the locomotive to
ensure the locomotive is not observed operating in California during rail yard
inspections, field surveys or photographic tracking.
BNSF Requested Ban Option
CARB staff said BNSF raised concerns about the lack of flexibility when it comes
to provisions for the scrappage and remanufacture of older engines. BNSF
requested that CARB provide the option to ban the engines from California,
which is consistent with CARB's other funding programs using incentives
(e.g., Proposition IB and the Carl Moyer Program).
CARB believes that unique engine costs, the need to reuse engines for rebuilds,
and the ability to track locomotive operations provides the basis for the option to
ban older engines from California instead of scrapping or remanufacturing them.
CARB staff stated that due to the cost and size of locomotive engines, the engines
that are sent to scrap yards are typically overhauled or remanufactured. CARB
believes that banning the engines was an acceptable scrapping method in
accordance with the language of programmatic condition 10 of the cooperative
agreement.
CARB Believed EPA Region 9 Approved the Ban Option
CARB believes that EPA Region 9 provided oral approval for the option to ban
the locomotives and that the approval is consistent with the programmatic
language of the cooperative agreement. CARB staff also said that the EPA had
opportunities to review CARB's proposed ban option in its request for proposal
and contract with BNSF but the EPA did not question the option.
EPA Region 9 staff did not recall approving the ban option. Region 9 staff said
the options are well defined in the cooperative agreement and banning
locomotives is not an option.
Energy Policy Act and Cooperative Agreement Do Not Provide
Ban Option
Neither the Energy Policy Act nor the cooperative agreement allows for the
option to ban the use of older engines as described by CARB. The Energy Policy
Act, Title VII, subtitle G, section 793(d)(3), allows use of grant funds for certified
engine configurations. Section 791(2) requires that in the case of an engine
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configuration replacing an existing engine, the replaced engine should be returned
to the supplier for remanufacturing to a more stringent set of engine emissions or
be designated as scrappage. Programmatic condition 10 of the cooperative
agreement requires that the engine being replaced be scrapped within 90 days of
the replacement or be returned to the original engine manufacture for
remanufacturing to a cleaner standard.
Programmatic condition 10 provides for other acceptable scrapping methods with
EPA approval. However, the condition defines scrappage "as a permanently
disabled engine or vehicle, no longer suitable for use." CARB's option to ban the
older engines did not result in permanently disabling the engines. As explained in
the second paragraph of the subsection "CARB Provided Alternative to Scrapping
and/or Remanufacturing," BNSF has not permanently disabled the engines but
retains possession with the possibility of using the engines at a later date.
Conclusion
CARB and BNSF have not scrapped or remanufactured the engines taken from
the repowered locomotives in accordance with the cooperative agreement or
Energy Policy Act requirements. The ban option CARB allowed is not compliant
with the Energy Policy Act or the cooperative agreement. CARB staff stated that
the cooperative agreement did not provide a specific time frame for the
remanufacture. In our opinion, although the cooperative agreement did not
provide a specific time frame for remanufacturing the old engines, the cooperative
agreement stated that to be considered a repower, the purchase of new engines
must be accompanied by the scrappage or remanufacture of the old engines. In
addition, the cooperative agreement states that evidence of appropriate disposal is
required in a final assistance agreement report submitted to the EPA. We believe
that the cooperative agreement requirements express intent to complete
remanufacture prior to close-out of the cooperative agreement.
In response to the audit, CARB and BNSF signed a written agreement on
November 18, 2013, to scrap or remanufacture the 11 older locomotive engines
within 18 months of the agreement date. If there is a delay in the scrap or
remanufacturing process due to unforeseen circumstances, BNSF agreed to
inform CARB in writing the reason for the delay at least 90 days prior to the end
date of the scrap/remanufacture. BNSF may request a time extension in writing
with the consent of all signatories.
CARB Jobs Report Did Not Comply With OMB Requirements
CARB incorrectly reported the number of jobs created and retained under the
Recovery Act. Recovery Act Section 1512 requires each recipient receiving
Recovery Act funds from a federal agency to submit a quarterly report with an
estimate of the number of jobs created and the number of jobs retained by the
project. OMB issued various guidance documents to implement Recovery Act
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requirements. On December 18, 2009, OMB issued guidance M-10-8 to update,
among other things, the method for estimating the number of jobs created and
retained. The guidance defines jobs created or retained as those jobs funded in the
quarter by the Recovery Act. Jobs funded partially with Recovery Act funds will
only be counted based on the proportion funded by the Recovery Act.
CARB reported the number of jobs created using total hours NREC worked on
the locomotives. Recovery Act funds only provided approximately 56 percent of
the funding for the project. As a result, CARB overstated the number of jobs
reported. CARB recalculated the jobs created and has agreed to work with the
EPA to revise the number of jobs reported.
Recommendations
We recommend that the Region 9 Regional Administrator:
3.	Verify that CARB and BNSF scrap or remanufacture the old engines in
accordance with the November 18, 2013, agreement.
4.	Require CARB to provide documentation that the replaced engines were
scrapped or remanufactured in accordance with the November 18, 2013,
agreement.
5.	Recover the federal share of $8,771,891 claimed in the event CARB does
not scrap or remanufacture the engines in accordance with November 18,
2013, agreement.
6.	Require CARB to revise the jobs reported as created or retained to reflect
the number of jobs funded by the Recovery Act.
EPA and Recipient Comments
Region 9 concurred with the recommendations. CARB concurred with
recommendation 6, but did not state whether it concurred with recommendations
3 to 5. CARB reiterated that it was clear in its intent to allow BNSF to ban the
engines from operation in California and that the cooperative agreement and the
Energy Policy Act provided the flexibility to include alternatives to scrappage. In
the draft report, we recommended that the Region 9 Regional Administrator
require CARB to scrap or remanufacture the replaced engines in accordance with
the Energy Policy Act and the terms and conditions of the cooperative agreement.
In response to the recommendation, CARB and BNSF signed a written agreement
on November 18, 2013, to scrap or remanufacture the 11 older locomotive
engines within 18 months of the agreement date. If there is a delay in the scrap or
remanufacturing process due to unforeseen circumstances, BNSF agreed to
inform CARB in writing the reason for the delay at least 90 days prior to the end
date of the scrap/remanufacture. BNSF may request a time extension in writing
with the consent of all signatories. Region 9 and EPA headquarters support the
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agreement. Region 9 said it will continue to work with CARB to track progress.
Region 9 said the EPA does not anticipate the need to recover $8,771,891 based
on the terms of the agreement between CARB and BNSF. However, if BNSF
does not properly scrap or remanufacture the locomotives in compliance with the
terms and conditions of the agreement, Region 9 will seek to recover grant funds
from CARB.
To address recommendation 6, CARB provided the revised number of jobs
created and retained and Region 9 said it is in the process of reporting revised
numbers.
OIG Response
We acknowledge the November 18, 2013, written agreement from BNSF to scrap
or remanufacture the locomotive. We agree with Region 9's plan to track progress
until the recommendations are fully resolved. In the event CARB or BNSF does
not scrap or remanufacture the engines as required by the agreement, Region 9
should recover the $8,771,891 questioned.
Based on our research, Recovery Act Section 1512 quarterly reports for prior
periods cannot be amended. Since CARB has submitted the revised report and
explanations for the error, we consider recommendation 6 resolved.
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Chapter 5
CARB Did Not Provide Actual
Emissions Reduction Calculations
CARB did not provide actual emission benefit calculations as required by the
cooperative agreement. CARB staff said emissions reductions are based on
estimates of fuel usage because Class I railroads do not calculate or estimate
individual locomotive fuel consumption. As a result, CARB does not have
reasonable assurance that the repowered locomotives are achieving projected
emissions reductions and human-health benefits. Further, DERA program results
may be overstated or understated.
CARB Calculated Emissions Reductions Using Estimated Fuel Usage
For the final report, CARB calculated a range of emissions reductions for the
repowered locomotives based on estimated annual fuel usage and EPA-certified
emission factors for NOx and particulate matter. CARB used the emission
calculation methodology from California's Carl Moyer Program criteria and
guidelines. According to Region 9, the Carl Moyer guidelines are the EPA's
guidelines. The Carl Moyer methodology allows emissions reductions to be
calculated based on hours of operation, fuel consumption or miles traveled.
CARB used the fuel-consumption method, which uses the gallons per year and
emission factors, to determine the emissions reductions.
CARB staff stated they used several methods to determine an annual fuel-
consumption rate for switch-yard locomotive engines. For older engines, CARB
used the hourly fuel rate and estimated annual operation hours. CARB also
estimated annual fuel usage based on a 2004 inventory of intrastate locomotives
and the average fuel consumed. CARB estimated fuel usage for newer switch-
yard locomotives using a demonstration study of a Tier 4 locomotive in the South
Coast Air Basin. CARB also used fuel-consumption data provided by BNSF for
switch-yard locomotives operating in Texas. Based on these data, CARB's
estimated fuel usage ranges from 40,000 to 50,000 gallons per year for older
locomotives and 30,000 to 40,000 gallons per year for newer locomotives.
For the project final report, CARB used a range of potential reductions for NOx
and particulate matter based on the fuel usage estimates noted above. Estimated
NOx emissions ranged from 0.047 to 0.026 tons per day. CARB's estimated
particulate matter emissions ranged from 0.002 to 0.0011 tons per day. The
difference between the high end of the range and the low end represents a
45-percent variance. Table 3 summarizes the emissions reductions calculations.
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Table 3: CARB's calculation of potential emissions reductions

High end
of range
Low end
of range
Variance
Gallons per year (old engines)
50,000
40,000

Gallons per year (new engines)
40,000
30,000

NOx emissions (tons/day/locomotive)
0.047
0.026
45%
Particulate emissions (tons/day)
0.002
0.0011
45%
Source: Project final report submitted by CAR
B.


The cooperative agreement was expected to provide potential reductions of
approximately 0.045 and 0.0018 tons per day of NOx and particulate matter,
respectively. However, as illustrated by the data provided by CARB, fuel usage
varies significantly and the project may not achieve the emissions reduction target.
The cooperative agreement states the recipient will include "actual" emissions
benefit calculations in the final report. However, CARB has not required BNSF to
provide actual fuel consumption for the 11 locomotives repowered under the
cooperative agreement. CARB stated that Class I railroads do not calculate or
estimate individual locomotive diesel-fuel consumption in normal operations
because diesel-fuel consumption is normally calculated on a national basis.
BNSF's proposals stated that fuel records for currently operating switch
locomotives in its rail yards are not maintained. CARB staff said it is not realistic
to require BNSF to provide actual fuel usage, and the staff also believes that the
use of estimates provides an adequate surrogate for actual data.
Conclusion
CARB calculated potential emissions reductions for the repowered locomotives
based on estimates of fuel usage because actual fuel-usage data for individual
locomotives is not available. CARB provided a range of emissions reductions
based on estimated fuel usage. Unless CARB can provide actual fuel usage, the
EPA does not have reasonable assurance that the project will achieve projected
emissions reductions or expected environmental results and human-health benefits.
Recommendations
We recommend that the Region 9 Regional Administrator:
7.	Work with CARB to start collecting actual fuel usage data and develop a
more accurate calculation of project results based on actual fuel usage.
8.	Adjust DERA program reporting of CARB project results to reflect
recalculated results.
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EPA and Recipient Comments
Region 9 and CARB disagreed with the finding and recommendations. Region 9
said CARB provided the emission reduction calculations based on the most
accurate data available. CARB said it followed the industry standard practice by
using the EPA's emission reduction calculation methodology, which relies on fuel
consumption estimates and EPA-certified emission factors for NOx and
particulate matter.
Region 9 explained that the EPA's emission quantification models used various
assumptions to generate the emission factors for locomotive engines. Region 9
further said that estimates, not actual or quantifiable emission, are used in the
EPA's engine rules as well as the tool used for quantifying the emissions reductions
for DERA projects. Region 9 and CARB said that railroads rarely track or retain
data on fuel use for switcher locomotives because it represents a small percentage
of total Class I locomotive fuel use. CARB said this tracking is only done as a part
of a funded technology demonstration project and was unavailable for the
cooperative agreement. Region 9 said the U.S. Department of Transportation does
not require reporting annual fuel use for each locomotive. Region 9 and CARB said
the OIG's recommendation is not feasible because requiring railroads to track and
report fuel use data would be very time consuming and costly.
CARB said it relied on fuel use estimates from multiple correlative data sources
that represented the best available information. CARB said it sought out and
updated that data throughout the project to ensure the emission reduction
estimates from the project were the most accurate possible. As a result, CARB
said it does have assurance that the repowered locomotives are, in fact, achieving
the range of projected emission reductions and health benefits.
OIG Response
The OIG's position remains unchanged. The OIG has already addressed CARB's
calculation methodology in the draft report. The OIG does not question the
emission reduction calculation methodology or the use of estimated emission
factors for NOx or particulate matter. Our issue is the use of estimated, rather than
actual, fuel usage. We acknowledge that actual usage data does not currently exist
and collecting actual usage data may be costly. However, "actual" emissions
benefit calculations is expressly required under the cooperative agreement and
BNSF can collect this data. It collected this data for the locomotives operating in
Texas. While CARB stated that it has assurance that the repowered locomotives
are achieving the range of projected reduction and health benefits. However, the
range varies significantly. The variance between the high end and low end of the
range is approximately 45 percent. Unless CARB can provide actual fuel usage,
the EPA and the public do not have reasonable assurance that the project will
achieve projected emissions reductions or expected environmental results and
human-health benefits.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Planned
Completion
Action Official	Date
Claimed
Amount
Ag reed-To
Amount
8 Recover the ineligible amount of $94,109 claimed
under the cooperative agreement from CARB.
8 Require CARB to establish internal controls prior to
any future awards, to ensure that contractor billings
comply with contract terms and conditions.
12 Verify that CARB and BNSF scrap or
remanufacture the old engines in accordance with
the November 18, 2013, agreement.
12 Require CARB to provide documentation that the
replaced engines were scrapped or
remanufactured in accordance with the
November 18, 2013, agreement.
12 Recover the federal share of $8,771,891 claimed in
the event CARB does not scrap or remanufacture
the engines in accordance with the November 18,
2013, agreement.
12 Require CARB to revise the jobs reported as
created or retained to reflect the number of jobs
funded by the Recovery Act.
15 Work with CARB to start collecting actual fuel
usage data and develop a more accurate
calculation of project results based on actual fuel
usage.
15 Adjust DERA program reporting of CARB project
results to reflect recalculated results.
Region 9	12/31/13
Regional Administrator
Region 9
Regional Administrator
Region 9	5/18/15
Regional Administrator
Region 9	5/18/15
Regional Administrator
Region 9	5/18/15
Regional Administrator
Region 9	12/31/13
Regional Administrator
Region 9
Regional Administrator
Region 9
Regional Administrator
5,772
0 = Recommendation is open with agreed-to corrective actions pending.
C = Recommendation is closed with all agreed-to actions completed.
U = Recommendation is unresolved with resolution efforts in progress.
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Appendix A
Agency's Comments on Draft Report
mo Se1if
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
REGION 9
75 Hawthorne Street
San Francisco, CA 94105
December 9, 2013
MEMORANDUM
SUBJECT: Response to Office of Inspector General draft report Project No. OA-FY13-0210
"Weaknesses Disclosed in California Air Resource Board's Compliance with
Laws, Regulations and Recovery Act Requirements," September 25, 2013
FROM: Thomas McCullough
Assistant Regional Administrator
TO:	Robert Adachi
Thank you for the opportunity to respond to the issues and recommendations in the subject audit
report. Following is a summary of the Environmental Protection Agency Region 9's (Region 9)
overall position, along with our position on each of the report recommendations. For those
recommendations with which Region 9 agrees, we have provided high-level intended corrective
actions and estimated completion dates to the extent we can. For those report recommendations
with which Region 9 does not agree, we have explained our position and proposed alternatives to
the recommendations. For your consideration, we have included a Technical and Substantive
Comments Attachment 1 to supplement this response.
EPA REGION 9'S OVERALL POSITION
Region 9 shares your interest in ensuring we protect the integrity of our cooperative agreements
as we achieve environmental goals. We agree with most of the draft report recommendations,
and have noted the two recommendations with which we disagree. In addition, we have general
comments and recommended changes which are noted in the Technical and Substantive
Comments Attachment. For example, we propose the report title be revised with more neutral
wording to more accurately reflect the findings in the context of the positive results achieved.
We have moved forward to undertake many of the recommendations raised in your report, as
outlined below, and look forward to addressing and resolving other report recommendations.
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Director, Forensic Audits
Office of the Inspector General

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AGENCY'S RESPONSE TO REPORT RECOMMENDATIONS
Agreements
No.
Recommendation
High-Level Intended Corrective Actions
Estimated
Completion
1
Recover the ineligible
amount of $94,109
claimed under the
cooperative agreement
Region 9 agrees with this recommendation and is
working with the California Air Resources Board
(CARB) to return $94,109, or the full amount of the
ineligible funds. However, minor inaccuracies exist
in this section of the report (see the Technical and
Substantive Comments Attachment for rewording
suggestions).
1st Quarter
FY 14
2
Require CalARB to
establish internal controls
prior to any future awards,
to ensure that contract
billings comply with
contract terms and
conditions.
Region 9 agrees with this recommendation and
will work with CARB to ensure adequate internal
controls are put in place to ensure billing meets
EPA's requirements and terms and conditions.
2nd Quarter
FY 14
3
Require CalARB to scrap
or remanufacture the
replaced engines in
accordance with the
Energy Policy Act and the
terms and conditions of
the cooperative
agreement.
Region 9 agrees with this recommendation. On
November 18, 2013, EPA Region 9 received an
executed Closeout Agreement between CARB and
Burlington Northern Santa Fe (BNSF) which
details BNSF's plan to scrap and/or remanufacture
all of the 11 old locomotive engines (see
Attachment 2 Closeout Agreement between CARB
and BNSF). EPA Region 9 and Headquarters staff
supports this Agreement and will continue to work
with CARB to track progress.
3rd Quarter
FY 15 or no
later than
May 18,
2015
4
Require CalARB to
provide documentation
that the replaced engines
were scrapped or
remanufactured.
See response to Recommendation 3 above. The
Agreement between CARB and BNSF contains a
provision which states that CARB will meet the
requirements of Programmatic term and condition
P. 10 (Scrappage and/or Remanufacture
requirement). Region 9 will work with CARB to
ensure that proper scrapping and/or
remanufacturing of the eleven locomotives occurs.
3rd Quarter
FY 15 or no
later than
May 18,
2015
5
Recover $8,771,891 of the
remaining total federal
share of the claimed
costs, unless CalARB
complies with the
scrappage requirements.
Region 9 and Headquarters do not anticipate that
they will need to recover $8,771,891 based on the
terms of the Closeout Agreement referenced
above. However, if BNSF does not properly scrap
and/or remanufacture the engines pursuant to the
terms of the aforementioned Agreement, Region 9
will seek to recover grant funds from CARB.
3rd Quarter
FY 15 or no
later than
May 18,
2015
6
Require CalARB to revise
the jobs reported as
created or retained to
reflect the number of jobs
funded by the Recovery
Act.
Region 9 agrees with this recommendation. It
should be noted that CARB has provided the
revised jobs created and/or retained and Region 9
is in the process of reporting such.
1st Quarter
FY 14
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Disagreements
No.
Recommendation
Agency Explanation/ Response
Proposed
Alternative
7
Work with CalARB to
develop a more accurate
calculation of project
results based on actual
fuel usage.
Region 9 and Headquarters do not agree with
Chapter 5 since CARB provided the most accurate
emission reductions. Additional information,
including the industry standards for reporting these
types of results, is provided in the Technical and
Substantive Comments Attachment.
Delete
Chapter 5.
8
Adjust DERA program
reporting of CalARB
project results to reflect
recalculated results.
As mentioned above, Region 9 and Headquarters
do not agree with Chapter 5 since CARB provided
the most accurate emission reductions. Additional
information is provided in the Technical and
Substantive Comments Attachment.
Delete
Chapter 5.
CONTACT INFORMATION
If you have any questions regarding this response, please contact Ben Machol, Manager, Clean
Energy and Climate Change Office, Air Division at (415) 972-3770 or Machol Ben@EPA.gov.
Attachment 1: Technical and Substantive Comments
Attachment 2: Closeout Agreement with CARB and BNSF
cc:
Deborah Jordan, Director, Air Division, U.S. EPA Region 9
Ben Machol, Manager, Clean Energy and Climate Change Office, Air Division, U.S. EPA
Region 9
Jack Kitowski
Assistant Chief, Stationary Source Division
CA Air Resources Board
1001 I Street
PO Box 2815
Sacramento, CA 95812
Trina Martynowicz, Environmental Protection Specialist, Air-9, Region 9
Penelope McDaniel, Environmental Protection Specialist, Air-9, Region 9
Marie Ortesi, Team Lead, Audit Follow-up, MTSD-4-2, Region 9
Magdalen Mak, Audit Follow-up Coordinator, MTSD-4-2, Region 9
Lela Wong, Auditor, OIG
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Attachment 1: Technical and Substantive Comments
Response to Office of Inspector General (IG) Draft Report Project No. OA-FY13-
0210 "Weaknesses Disclosed in California Air Resource Board's Compliance with
Laws, Regulations and Recovery Act Requirements," September 25, 2013
EPA Region 9 and Headquarters are providing the following technical and substantive
corrections to the IG draft report:
1.	The project number is incorrectly referenced as "QA-FY13-0210" on the title page of the
report and should be changed to "OA-FY13-0210."
2.	The title of the report should be revised with more neutral wording to better reflect the
findings in the context of the positive results achieved, for example: "Examination of the
California Air Resource Board's Compliance with Laws, Regulations and Recovery Act
Requirements."
3.	A more common acronym for the California Air Resources Board is "CARB," not
CalARB, therefore "CalARB" should be revised throughout the report to "CARB."
4.	All sections of the report that discuss scrapping or remanufacturing the old locomotive
engines should be revised to state "scrapping and/or remanufacturing," since Burlington
Northern Santa Fe Railway Company (BNSF) may choose to undertake either or both of
these activities.
5.	CARB's original workplan included repowering eight locomotives, as mentioned in the
draft report. EPA recommends the IG include additional language to accurately highlight
these significant achievements. For example, in Chapter 2's Noteworthy Achievements,
the following language should be added: "Because BNSF repowered three additional
locomotives, significant air quality benefits were achieved by these emission reductions.
The communities surrounding these rail yards will experience improved air quality due to
the achievements by CARB, BNSF, and the engine manufacturer."
6.	The final sentence in the third paragraph on page 6 of the report should list the correct
funding amount that will be returned so that it reads: "CARB agreed with our issue on the
remote-control system and is currently working with Region 9 to refund to the EPA the
over-billed amount of $94,109."
7.	On the top of page 8 of the report, the final sentence of the first paragraph should be
changed to: "However, CARB has agreed to return the full ineligible amount of
$94,109."
8.	Under Recommendation number 1 on page 8 of the report, the IG recommends that the
Region 9 Regional Administrator recover the ineligible amount of $94,109 claimed under
the cooperative agreement. EPA Region 9 suggests adding the following information in
response to that recommendation: "CARB agrees with this recommendation and will
return the full ineligible amount of $94,109 to EPA Region 9."
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9.	Under Recommendation number 3 on page 12 of the report, the IG recommends that the
Regional Administrator require CARB to scrap or remanufacture the replaced engines in
accordance with the Energy Policy Act and the terms and conditions of the cooperative
agreement. On November 18, 2013, EPA Region 9 received an executed Closeout
Agreement between CARB and BNSF which details BNSF's plan to scrap and/or
remanufacture all of the 11 old locomotive engines (see Attachment 2 Closeout
Agreement with CARB and BNSF.) EPA Region 9 and Headquarters support this
agreement, and will continue to work with CARB to track progress to ensure that the
terms and conditions of the cooperative agreement are met. If BNSF decides to
remanufacture any locomotive engine BNSF will meet EPA's standards for
remanufactured engines. The final IG report should make note of the Closeout
Agreement. In addition, Region 9 recommends that item number 3 on page 12 of the
report be revised to read as follows: "The replaced engines will be scrapped and/or
remanufactured pursuant to the terms delineated in the November 18, 2013 Closeout
Agreement between CARB and BNSF." EPA Region 9 and Headquarters has highly
encouraged the old engines to be scrapped and/or remanufactured within one year of the
signed date of this Agreement, though Region 9 agreed to allow these activities to occur
within 18 months, or before May 18, 2015.
10.	Under Recommendation numbers 7 and 8 on page 14 of the report, the IG recommends
that EPA work with CARB to develop a more accurate calculation of project results
based on actual fuel usage and adjust the DERA program reporting to reflect these
recalculated results. EPA Region 9 and Headquarters disagrees with the IG's
recommendations and fully supports CARB's emission reduction calculation
methodology, which is based on the most accurate and available information. CARB
regularly updates their methodology and calculations for emission reductions and has
extensive experience calculating emission reductions from in-use and currently operating
locomotives. CARB provides approximately $90 million annually in grants for diesel
emission reductions activities through their Carl Moyer Program, including switcher
locomotives, similar to EPA's DERA program and this specific cooperative agreement.1
Therefore, CARB has a strong need to and has extensive past experience in accurately
calculate emission reductions from diesel projects. Additional information on the way in
which EPA and CARB calculate overall emission reductions, as well as typical industry
practice for quantifying fuel use are provided below.
EPA's emission quantification models, including those used for setting emission
standards for manufacturing locomotive engines, use various assumptions to generate the
emission factors. Estimates, not actual or quantifiable emissions are used in EPA's engine
rules, as well as EPA's Diesel Emission Quantifier (DEQ), the tool used for quantifying
the emission reductions for Diesel Emission Reduction Act (DERA) projects. As the
DEQ website states, this tool provides estimates of, not actual emission reductions.2
1	CARB's "Carl Moyer Memorial Air Quality Standards Attainment Program, "
http://www.arb. ca. gov/mspros/mover/moyer.htm.
2	EPA Nation Clean Diesel Campaign's "Diesel Emission Quantifier,"
http://www.epa.gov/cleandiesel/quantifier/.
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Because switcher locomotives represent such a small percent of the Class 1 locomotive
fleet's fuel use and the cost to maintain such records is so high, the railroads rarely track
or retain this data. Therefore, fuel usage estimates are used to quantify emission
reductions. EPA's methodology for calculating emission reductions describes how the
agency generates estimated, but never actual emission rates.3
The common Class 1 railroad practice of tracking and reporting fuel usage differs greatly
from other DERA recipients, such as long-haul truck or school bus fleets. Railroad
companies do not track nor regularly quantify the actual fuel consumed for each
locomotive. Unlike diesel-fueled trucks or school buses that fuel at a specific fueling
station owned by a third party, railroads have their own fueling stations located at the rail
yard for both switcher and line-haul locomotives.
Department of Transportation's (DOT) Surface Transportation Board requires all Class 1
railroads to report quarterly and annual fuel use for both switcher locomotives, which this
cooperative agreement funded, as well as line-haul locomotives.4 DOT does not mandate
reporting annual fuel use for each locomotive. BNSF switcher locomotives only
consumed approximately 3.5% of the total fuel used for all BNSF locomotives in 2012.5
Railroads purchase their fuel in bulk and quantify the amount of fuel used for all
locomotives, hardly ever for an individual locomotive. In addition, it is not common
industry practice for Class 1 railroads to monitor fuel consumption on a data log for a
given switcher locomotive due to the high cost of tracking, monitoring and reporting.
Meeting the IG's recommendation is not feasible. Requiring railroads to track and report
fuel use data would be very time consuming and costly and seen as a heavy
administrative burden for the old dirtier and/or new cleaner locomotives. Based on
common industry practices and the way in which EPA quantifies emission factors for
engines used in locomotives, CARB provided emission reduction calculations that are
acceptable. EPA Region 9 and Headquarters believes the emission reductions CARB
provided are the most accurate and available, therefore Chapter 5 of this draft report
should be deleted altogether. If the IG does not agree with Region 9's conclusion to
delete this section of the report, the Region will work with the IG to provide changes to
ensure the accuracy of this chapter.
3	EPA Office of Transportation and Air Quality's "Emission Factors for Locomotives," April 2009,
http://www.epa.gov/otaq/regs/nonroad/locomotv/420f09025.pdf.
4	DOT Surface Transportation Board's "Annual Reports R-l Selected Schedules and Complete
Annual Reports," http://www. stb.dot.gov/stb/industrv/econ reports.html.
5	BNSF's "Class I Railroad Annual Report Restatement To The Surface Transportation Board
For the Year Ending December 31, 2012," Page 91 "750. Consumption of Diesel Fuel,"
http://vvvvvv.bnsf.com/about-bnsf/financial-information/surface-transportation-board-
reports/pdf/12Rl .pdf.
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Appendix B
CARB's Comments on Draft Report
Mary D. Nichols, Chairman
1001 I Street • P.O. Box 2815
Sacramento, California 95812 • www.arb.ca.gov
Air Resources Board
Matthew Rodriquez
Secretary for
Environmental Protection
Edmund G.Brown Jr.
Governor
November 25, 2013
Mr. Robert Adachi
Director, Forensic Audits
U.S. Environmental Protection Agency
Office of the Inspector General
75 Hawthorne Street
y!h Floor, M/C IGA-1
San Francisco, California 94105
Dear Mr. Adachi:
The Air Resources Board (ARB) is documenting the actions we have taken to resolve
the issues raised in the draft findings and recommendations of the U.S. Environmental
Protection Agency (U.S. EPA) Office of Inspector General (OIG) audit report number
OA-FY13-0210. The OIG audit covers the American Recovery and Reinvestment Act
(ARRA) project award of $8.88 million to ARB under cooperative agreement
2A-OOT13801. The project achieved its objective to cut air pollution and health risk near
railyards in Southern California through incentives for BNSF Railway to replace old
locomotive engines with cleaner models.
Although we do not concur with the majority of the OIG conclusions, we appreciate that
the discussion in the draft report accurately characterizes the information we provided to
the auditors. ARB has addressed all of the issues raised by the OIG during the course
of this audit. This letter provides documentation and our commitment to follow through
with U.S. EPA to ensure the OIG concerns are fully resolved. I would like to specifically
highlight an edit we are requesting to the title of the draft audit report to be more
consistent with other published OIG reports-replacing "Weakness Disclosed in..." with
"Examination of..." in the title. Thank you for considering this edit. In addition to this
letter, please find copies of the following supporting documents enclosed:
•	Background and ARB's responses to each of the draft findings of the OIG audit.
•	The signed legal agreement between BNSF and ARB that requires BNSF to scrap or
remanufacture eleven older BNSF locomotive engines by May 18, 2013.
•	Documentation of payment to ARB of $94,109 by BNSF on November 18, 2013.
•	ARB letter to U.S. EPA Region 9 addressing several audit issues.
•	The U.S. EPA OIG draft audit report with ARB's suggested updates and factual
corrections identified in redline/strikeout format.
•	ARB's signed management representation letter.
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Mr. Robert Adachi, Director
November 25, 2013
Page 2
We remain convinced that the ARRA co-funded replacement of old engines with new
genset models in eleven locomotives was a successful, cost-effective project with
on-time delivery that continues to produce real emission reductions for communities
near Southern California railyards.
ARB appreciates the opportunity to provide the U.S. EPA OIG auditor with written
responses to the draft audit. If you have any questions, please contact
Mr. Jack Kitowski, Assistant Chief, Stationary Source Division at (916) 445-6102 or
jkitowsk@arb.ca.gov.
Richard W. Corey
Executive Officer
Enclosures
cc: Ms. Lela Wong, CPA, CFE
Project Manager, Office of Inspector General
U.S. Environmental Protection Agency
75 Hawthorne Street
San Francisco, California 94105
Ms. Deborah Jordan, Director
Air Division, Region 9
U.S. Environmental Protection Agency
75 Hawthorne Street
San Francisco, California 94105
Mr. Jack Kitowski
Assistant Chief
Stationary Source Division
Sincerely,
ti),
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RESPONSES TO DRAFT FINDINGS
I.	BACKGROUND
On July 10, 2009, U.S. EPA awarded ARB $8.88 million in ARRA funding under cooperative
agreement 2A-00T13801. The OIG audit project number is OA-FY13-0210. The purpose of
the ARRA award was to cut railyard locomotive emissions in the Basin through the repower or
replacement of old engines in eight (8) switch locomotives with much cleaner engines using
"genset" technology.
Genset switch locomotives, with the required use of ARB diesel, can reduce older
switch locomotive diesel particulate matter (PM) and oxides of nitrogen (NOx) emissions by
up to 90 percent, and significantly reduce the associated cancer risks, in and around California
railyards.
On October 1, 2009, ARB released a Request for Proposal (RFP) for qualifying
railroads in the Basin to compete for the ARRA funding. ARB received two proposals in
response to the ARB ARRA RFP from California's two Class I railroads - BNSF and Union
Pacific Railroad (UP).
ARB awarded the project to BNSF at a total project cost of $15.73 million. BNSF matched
$8.87 million of ARRA funds, which was less than the U.S. EPA ARRA award of $8.88M,
with $6.86 million in private funding and proposed to repower a total of eleven locomotives
because of a lower per locomotive cost estimate from the genset locomotive manufacturer
National Railway Equipment Company (NREC).
This project successfully repowered eleven locomotives by the ARRA project deadline of
September 30, 2010, delivering significant health benefits from day one. This was
accomplished by BNSF and NREC prioritizing and completing the genset switch locomotive
production, testing, and delivery within three months - a process that normally takes 12 to 18
months. We understand that this accomplishment makes the project part of the five percent
of all ARRA projects nationwide that were completed on time.
II.	ARB RESPONSES TO DRAFT OIG REPORT ITEMS
A Chapter 3: Costs Claimed Were Not in Accordance With Contract Provisions
1. Summary. The OIG identified two specific issues relating to the contractor's
billings. The first issue is the contractor's erroneous billing of a locomotive control system.
The second issue is whether or not the project billing is subject to a per locomotive cost cap,
or a total project cost cap, for federal funding. When taken together, these issues result in the
OIG recommendation that U.S.EPA Region 9 recover an ineligible amount of $94,109. While
ARB disagrees with the OIG's conclusion that $94,109 of project cost is ineligible, we
acknowledge the basis for the OIG's rationale. We have invoiced and received payment from
BNSF for the full amount of $94,109 (see enclosed).
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2. Discussion. ARB concurs that BNSF erroneously invoiced ARB for a remote
control system that was not used for the genset switch locomotives repowered under the
ARRA-funded project. This issue was acknowledged early in our discussions with U.S. EPA
Region 9 and the OIG. The second issue focused on whether or not the provisions within the
ARB/BNSF contract applied a "per locomotive" cost cap or a "total project" cost cap for the
federal share. While ARB is clearly in compliance with the U.S. EPA terms and conditions,
the difference comes in the interpretation of the ARB/BNSF contract. ARB believes it should
be given discretion as to the intent and interpretation of the ARB BNSF contract provisions.
As discussed in the draft audit report, ARB staff managed the ARB/BNSF contract based
on a not-to-exceed "total project" cost cap of $8,866,000, and specific per locomotive
cost share percentages.
ARB staff and BNSF regarded the reference in the contract to $1.43 million per genset switch
locomotive to be an estimate, with the understanding that each genset locomotive would have
unique design or mechanical differences (e.g., different number of traction motors, need for
Remote Control Locomotive (RCL) devices, etc.) that would result in differences in actual
costs. Thus, the total cost for each of the eleven genset switch locomotives would "average"
about $1.43 million, but the ARRA contribution in total could not exceed $8,866,000.
The $1.43 million per locomotive cost was clearly identified as an estimate in the
April 2009 ARB ARRA application and in the October 2009 BNSF proposal provided in
response to the ARB RFP. However, the tables in the ARB/BNSF contract did not include the
word "estimate," which led the OIG to conclude that there was a $1.43 million per locomotive
cap.
Based on the OIG auditor's interpretation that a per locomotive cost cap applies, ARB staff
agrees that there is a difference of $94,109, as compared to allowing a federal share of total
projects costs of up to $8,866 million. To implement the OIG auditor's interpretation, ARB
staff sent an invoice to BNSF for the full $94,109 difference on October 18, 2013.
We would like to note, however, that ARB previously denied BNSF's requests for
consideration of other eligible costs for nine of the genset switch locomotives with costs below
$1.43 million each. The other eligible costs that were incurred by BNSF during the project
were for locomotive paint and transportation. ARB denied BNSF's request for consideration
of these other eligible costs because, at that time, those costs would have exceeded the total
project cost share cap of $8.87 million. Had the project expenditures been tracked and
approved based on a per locomotive cap, these other eligible expenses would have more than
offset the $94,109. U.S. EPA Region 9 has informed us that since the project file is closed,
there is no longer opportunity to provide additional documentation of these other eligible costs.
B. Chapter 4: Noncompliance With Laws. Regulations and Cooperative
Agreement Conditions
1. Summary. The first issue is related to the requirement in the agreement
between U.S. EPA and ARB that the old locomotive engines be scrapped, remanufactured, or
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an alternative approved by U.S. EPA. The second issue is related to the scope of the job
creation estimates required by ARRA.
As to the first issue, ARB was clear and transparent in its intent to allow BNSF to ban the old
engines from operation in California as an alternative to scrappage, consistent with ARB's
approach on State incentive programs. This was premised on our mistaken belief that U.S.
EPA staff supported the approach. We acknowledge that we should have put our approach in
writing and requested written U.S. EPA approval to be certain all parties had the same
understanding. ARB and BNSF have since signed a legal agreement that requires BNSF to
scrap or remanufacture the old engines within 18 months to address the draft finding in the
audit.
On the second issue, ARB concurs that the job creation estimates provided by BNSF and
reported by ARB inadvertently included all of the job creation benefits associated with the
project, rather than the prorated benefits attributable to only the federally- funded portion of
the project cost. ARB has reported the corrected numbers to U.S. EPA.
2. Discussion. The draft OIG report questions ARB's compliance with the terms
and conditions of the ARRA cooperative agreement related to the scrap or remanufacture of the
older locomotive engines. While the language of the cooperative agreement and the Energy
Policy Act provides for the flexibility to include alternatives to scrappage, the OIG disagrees
that the option to ban the older locomotive engines from operations in California is allowed
under this flexibility.
As documented by the OIG report, ARB included the ban option based on a verbal discussion
with U.S. EPA Region 9 staff, after which ARB staff had the impression the ban option was
acceptable. ARB was transparent about this approach - the ban option was clearly stated in
the RFP for the project, and in the contract with BNSF. Both of these documents were
provided to Region 9 staff for advance review, but no issues were raised about allowing this
option.
However, the OIG has clarified that even if U.S. EPA had provided formal approval, the ban
option was not allowed under the Energy Policy Act, and would still have been subject to an
audit finding.
In response to this issue, ARB and BNSF have signed a written agreement committing BNSF
to scrap or remanufacture the eleven older locomotive engines within 18 months. A copy of the
agreement is attached to this letter. ARB has also forwarded a copy of the signed agreement to
U.S. EPA Region 9. When BNSF completes the scrap and/or remanufacture, ARB will
forward the appropriate documentation to U.S. EPA to demonstrate compliance.
For the second issue in Chapter 4, the updated estimates of the jobs created by the ARRA
funded portion of the project were relayed to U.S. EPA Region 9 and are included in this
package. The enclosed letter to U.S. EPA Region 9 documents ARB's
formal transmittal of the updates. At this time, we understand that U.S. EPA Region 9 is
working with headquarters to determine the appropriate forum to publish the revised job
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creation numbers since ARB can no longer access or update the project information on- line in
the federal database.
C. Chapter 5: CalARB Did Not Provide Actual Emissions Reduction Calculations
1.	Summary. The OIG draft report states that ARB does not have reasonable
assurance that the repowered locomotives are achieving the projected emission reductions and
human health benefits because actual fuel usage was not used to estimate emissions. ARB
staff strongly disagrees. Actual fuel use was unavailable for this project, and is cost prohibitive
for the railroads to collect on an ongoing basis for each locomotive. ARB staff relied on fuel
use estimates from multiple correlative data sources that represented the best available
information. ARB staff sought out and updated that data throughout the project to ensure the
emission reduction estimates from the project were the most accurate possible. As a result,
ARB does have assurance that the repowered locomotives are, in fact, achieving the range of
projected emission reductions and health benefits.
2.	Discussion. To estimate the project's emission reductions, ARB followed the
industry standard practice by using U.S. EPA's emission reduction calculation methodology
(http://www.epa.gov/otaq/regs/nonroad/locomotv/420fD9025.pdf). which relies on fuel
consumption estimates and U.S. EPA-certified emission factors for NOx and PM. Class I
railroads do not typically track or measure individual locomotive diesel fuel consumption in
normal operation due to the high associated cost of about $50,000 per year per locomotive.
This tracking is only done as a part of a funded technology demonstration project, and was
unavailable for this ARRA grant. As a result, ARB relied on several robust data sources to
estimate and corroborate the switch locomotive diesel fuel consumption figures used for this
project in the final report.
These data sources included information that increased the accuracy of the emission reduction
estimates, but were not available to ARB in early 2009, the time of ARB's original application
to U.S. EPA. These data sources included additional fuel consumption data in BNSF's grant
application to ARB in late 2009, and data obtained in 2010 at the completion of a switch
locomotive demonstration project.
The OIG has recommended that we work with U.S. EPA to develop a more accurate
calculation of project results based on actual fuel usage. ARB recognizes the value and is
committed to obtaining the best available information to estimate emission reductions.
As such, ARB has continuously strived to develop new and innovative methodologies and has
continued to fund numerous technology demonstrations that provide measured fuel and
emissions data. We commit to continue to work with U.S. EPA to improve on the existing
calculation methodologies in order to more accurately calculate locomotive emissions.
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Appendix C
Distribution
Regional Administrator, Region 9
Deputy Regional Administrator, Region 9
Assistant Regional Administrator, Region 9
Assistant Administrator for Air and Radiation
Director, Grants and Interagency Agreements Management Division, Office of Administration
and Resources Management
Director, Office of Transportation and Air Quality, Office of Air and Radiation
Agency Follow-Up Official (the CFO)
Agency Follow-Up Coordinator
Audit Follow-Up Coordinator, Office of Air and Radiation
Audit Follow-Up Coordinator, Office of Grants and Debarment, Office of Administration and
Resources Management
Audit Follow-Up Coordinator, Region 9
Chief, Administrative Services, California Air Resources Board
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