12 BOARD MEMBER BURKE: You know, I'm willing to 13 take that. I don't want to belabor this point. But if 14 there's only four people out of almost 100, you know, the 15 fuel cell people are  you know, I would think they would 16 be here. You know, it should give the Board some concern.

17 CHAIRPERSON LLOYD: Yeah, I don't think  I 18 think it's more constructive at this time to hear what the 19 people say on that. I think that's an interesting 20 observation. We'll here the comments. It's not 21 surprising to me with something as complex as this, when 22 you're only given a limited number of choices, you've got 23 to check one box or another. But I think the Board

24 we'll understand which parts they agree with, which parts 25 they don't, et cetera.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 192 1 Mr. McKinnon.

2 BOARD MEMBER McKINNON: I have a short question 3 and then a comment. And the short question goes back to 4 the question DeDe asked a few minutes ago about giving 5 credits for keeping existing BEV vehicles in the state,

6 hopefully long  you know, fairly lengthy leases or 7 allowing  setting up a situation where people can 8 purchase the vehicles.

9 And sort of my understanding of the dynamic of 10 that problem is that those cars get cleaned up and taken 11 to another state and given credit in another state.

12 Is that a fair analysis of why what we have in 13 terms of credits doesn't work?

14 EXECUTIVE OFFICER WITHERSPOON: That's part of 15 the answer why it doesn't work. The other part of the 16 answer is that some manufacturers are taking the cars back 17 and not releasing them at all, not reconditioning, not 18 putting new batteries in, and want to be out of the BEV 19 business.

20 VEHICLE PROGRAM SPECIALIST SHULOCK: Just one 21 clarification. If a car is placed new in California and 22 then cleaned up and moved to another state, it would not 23 receive the full new vehicle credit in that other state.

24 BOARD MEMBER McKINNON: Okay. Well, that is my 25 question. And what kind of credit does it get in another PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 193 1 state?

2 VEHICLE PROGRAM SPECIALIST SHULOCK: It would be 3 similar to what's happening here. In year four one tenth 4 of the credit it would earn as a new vehicle.

5 Now, there could be  if they put in a new 6 battery pack or  you know, it depends on what you mean 7 by clean up. If it's rebuilt in some fashion, there may 8 be other issues involved. But if the vehicle is just 9 removed from California and then put in another state, it 10 is not treated as a new vehicle.

11 BOARD MEMBER McKINNON: Okay. But it can be 12 treated as a new vehicle if a new battery's put in and 13 it's upgraded and  okay. That answers my question.

14 Here's my comment. And the comment is, being 15 fair  I want to be fair to all parties involved, staff,

16 the automakers, the engineers, the people that bought the 17 cars  everybody, we have come a long, long way. A lot 18 happened over this last decade or so. And I think 19 everybody involved can be proud of that.

20 With that said, I am very, very interested in the 21 numbers, in the end game here. The idea of it's so 22 flexible that we don't have numbers in the out years is 23 just really unappealing to me. I think we're setting up a 24 dynamic that is far worse than the one we have now where 25 we have a challenge every couple of years and we have to PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 194 1 have hearings. Then we're going to have hearings to be 2 able to up the numbers. It will be portrayed as unfair to 3 the automakers not getting a timeline that tells them 4 what's expected. It will cause more delays. And I 5 really, really have a problem with no numbers in the 6 out years. I think we're asking for worse than sort of 7 the trouble we've had along the way here.

8 And worse is not placing blame on anybody.

9 Technology changed. Nobody thought about hybrids back in 10 1990. You know, in listening to Dr. Freeman  I was 11 around in 1990. I was around watching CalStart be formed,

12 and followed this very, very closely in 1990.

13 And so while I'm proud of the accomplishment, I 14 too worry that we're giving up BEV too early. And I guess 15 my only sort of difference is that I don't have a problem 16 leaving the mix between BEVs and fuel cells on the 17 alternative path to a mix that's determined by the 18 manufacturers, so long as we do a credit scheme that is a 19 fair credit scheme.

20 And so with that, what I'm really saying  and I 21 said it to the auto manufacturers last week  what I want 22 to hear about is numbers. Because if anybody thinks I'm 23 going to vote for it without numbers, I'm not voting for 24 this without numbers. As far as I'm concerned, we need to 25 have solid numbers at the end of these hearings that we're PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 195 1 voting on. And maybe there's some amendment in the 45 day 2 period. But to walk away from here without some 3 expectations for everybody involved, the little folks that 4 produce parts to the cars, the people that are developing 5 technology, it is just plain unfair and unmanageable to 6 come out without having some numbers that set a course of 7 where we're going.

8 CHAIRPERSON LLOYD: Yeah, I don't think you're 9 alone in that, Mr. McKinnon. I think you'll find all your 10 colleagues feel the same way.

11 Seeing no other questions, we'll continue with 12 Dr. Anderman, wherever he is. Oh, there he is, back 13 there.

14 Dr. Anderman, Dr. Frank, Louis Browning.

15 I understand Dr. Anderman has got a PowerPoint 16 presentation.

17 Do you have any approximate timeframe?

18 DR. ANDERMAN: Fifteen minutes, I was told.

19 CHAIRPERSON LLOYD: Well, I'm not going to 20 disagree with staff if they told you 15 minutes.

21 ( Thereupon an overhead presentation was 22 Presented as follows.)

23 DR. ANDERMAN: Good Afternoon.

24 I was asked by  I am a member of the

25 BOARD MEMBER HUGH FRIEDMAN: Pull it closer.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 196 1 DR. ANDERMAN: I was a member of the BTAP 2000 2 panel. And I was asked in the beginning of the year to 3 provide a very brief review of the progress in EV battery 4 technology since June 2000 publication of that panel.

5 It's a report of that panel.

6 The views here are my own. Even though it's a 7 follow up work, it's a work I've done on my own and it 8 does not represent a follow up of the whole group.

9  o0o

10 CHAIRPERSON LLOYD: Done on your own, but 11 supported by ARB?

12 DR. ANDERMAN: Supported by ARB, yes, for sure.

13 Contracted and supported by ARB.

14 Thank you.

15 Source of information. The main source of 16 information is a study I've done between April 2001 and 17 really April 2002, and then follow up meetings during 2002 18 and early this year. But the status of the advanced 19 vehicle and the parcels that are going to power those 20 advanced vehicle, an advanced vehicle being a mostly 21 hybrid and much lower to a smaller degree as far as the 22 study, a battery EV and fuel cell EV.

23 That study was a multi plan study with, by now 60 24 subscribers. But more importantly I interviewed 30 25 companies in 50 some visits around the world. And when I PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 197 1 say interview, it's anywhere from a two hour meeting to a 2 full day plus dinner meeting, reviewing where they are as 3 far as batter technology and advanced vehicles.

4 Of course it's full participation in conference 5 with the active industry an have conference myself about 6 the subject. And the work this year was really limited to 7 a couple of weeks of  the type sent to the major battery 8 development, battery development for EVs and got answers 9 from six of those major developers.

10  o0o

11 DR. ANDERMAN: The highlight of the finding.

12 One, direct effort to develop EV batteries have 13 generally declined over the last three years.

14 Two, battery development for hydro electric 15 vehicle application continues to gain momentum.

16 Three, steady and predictable progress, but no 17 breakthrough in battery technology.

18 And four, and probably very important for this 19 hearing, improvement made through the hydro electric 20 vehicle battery effort will have a significant positive 21 effect on the cost to implement of electric vehicle 22 batteries.

23  o0o

24 DR. ANDERMAN: Add I will go and look at the two 25 main conclusions of the BTAP June 2000 report, and give PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 198 1 you a comment about where we are today around two and a 2 half or three years later.

3 The first conclusion was That Nickel Metal 4 Hydride batteries show good characteristics and 5 reliability in EV application with a life expectancy 6 exceeding six years.

7 The second one the, specific energy approaching 8 70 watt hours per kilogram. That translated to real life 9 branch of practical midsize car, like the RAV4 or EV Plus 10 of 70 to 100 miles.

11 Price for a typical 30 kilowatt hour pack was 12 projected at the time to drop to about $ 15,000 per pack.

13 That's a production of volume of 7,000 per year. From 14 that number to as low as potential $ 9,000 at volumes of 15 hundred of thousands per year. And the third number 16 should not be there.

17  o0o

18 DR. ANDERMAN: Comments where we are today, 2003.

19 Nickel metal hydride batteries continue to show good 20 performance and good life. Improvement in specific energy 21 are only incremental in the few percent  probably below 22 10 percent, which means no significant change in range 23 capability.

24 While life may be longer than six years there is 25 still no data to support a battery life that will last for PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 199 1 the life of the car, which mean 10 or 15 years. Though 2 there is hope.

3 For low pricing and was the pricing that was 4 suggested in the BTAP report, one of both of those two 5 very significant events have to happen. One is 6 significant reduction in the price of nickel metal, which 7 is a key raw material into several of the material that is 8 going into nickel metal hydride battery. However, that 9 price is independent of the market, so we cannot predict 10 it or focus based on changes there. The price today is 11 relatively low in comparison to the last 10 or 15 years.

12 And the second one is relocation of production to 13 China or equivalent low cost labor area that may change 14 some of the rules of the economic. And still probably 15 have limitation because in our BTAP estimate we assume 16 material cost responsible for 70 percent of product cost.

17 And so it material cost don't change, you have relatively 18 limited amount of additional reduction possible by 19 reducing labor and overhead.

20  o0o

21 DR. ANDERMAN: Conclusion 2 of the BTAP report:

22 Current lithium ion electric vehicle battery do not have 23 adequate durability. Safety under severe abuse is not yet 24 fully proven. Early cost of this battery is expected to 25 be considerably higher than that of nickel metal hydride PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 200 1 EV battery. And Even in true mass production the cost of 2 lithium ion batteries is unlikely to drop below those of 3 nickel metal hydride without major advances in material 4 and manufacturing technology.

5  o0o

6 DR. ANDERMAN: Where we are today 2 1/ 2 years 7 later: Improvement in life of lithium ion are occurring,

8 but a bit too early to quantify if we want to project 8,

9 10, or 12 years life. There are two chemistry involved in 10 lithium ion battery  two common chemistry:

11 One, based on nickel  lithium nickel cathode.

12 And this one increase your potential for significant 13 improvement of life over what we have seen three or three 14 or four years ago. And over five and up to six, eight, or 15 possibly ten years life may be possible, though definitely 16 is far from being proven today.

17 The other cathode that's been used by many of the 18 manufacturers is based on manganese chemistry. And this 19 one still suffer from short life at moderately elevated 20 temperature; probably less than five years still today.

21  o0o

22 DR. ANDERMAN: Abuse tolerance work mostly for 23 hybrid electric vehicle implication is showing steady 24 progress. And I would dare to say that we are fairly 25 comfortable that with a lithium manganese based chemistry PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 201 1 the safety of the battery will be manageable. However,

2 unfortunately this is the same cathode where we did not 3 get the life. So the chemistry is not helping us in this 4 case.

5 For the nickel based lithium batteries, there is 6 no satisfactory safety or abuse tolerance data as of yet.

7 And there is a lot of progress, but we are still far from 8 being there, with being able to manage a battery under 9 abuse conditions, and fires is a main concern.

10 Cost is dropping, though no major breakthrough in 11 material selection or processing. In other words are we 12 are seeing fairly rapid reduction in cost both in the 13 consumer market and the hybrid electric vehicle market for 14 the batteries, but the basic material that have been used 15 five years ago are still being used now with no 16 breakthrough, which mean it's unlikely that we will see

17 with existing design that we will see pricing lower than 18 nickel metal hydride. Probably relatively similar. But 19 lower is unlikely.

20  o0o

21 DR. ANDERMAN: So here is a summary of the key 22 characteristics for EV battery. And I only include here 23 three chemistry.

24 The lead acid: Was limited specific energy.

25 Probably two to five year life. And cost today in the PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 202 1 $ 4,000 to $ 6,000, and projected to be closer to $ 3,000 if 2 the volume goes to hundreds of thousands per year.

3 Nickel metal hydride: Specific energy almost 4 double, about 65 watt hours per kilogram. Operating life 5 for only five to ten years. Cost today, $ 15,000 to 6 $ 25,000. And you're shown here number  it is actually a 7 little higher than what we saw in 2001. The reason is 8 that there hasn't been any scale up in the major 9 manufacturing to higher volume. And basically the RAV4 10 battery will produce on the same line it produces the MOA 11 battery of ' 98. They have not scaled up to thousands per 12 year. This line can make maybe 1,000 per year. At 13 hundred thousands the price estimate is the same that we 14 had three years ago. Safety is not a problem. Technology 15 is maturing.

16 For lithium ion it was with two different 17 cathode:

18 With manganese about 90 watt hour per kilogram.

19 Two to five years life. And cost, very high today, but 20 could go down to about the same range as nickel metal 21 hydride.

22 With the nickel chemistry specific energy's 23 higher, 130 watt hour per kilogram. Operating life, I'm 24 saying four to ten years. And there is hope that ten 25 years may be possible. Much higher cost today. And cost PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 203 1 in the future, probably slightly higher than a manganese 2 chemistry. However, safety is still a concern, and the 3 status is development.

4  o0o

5 DR. ANDERMAN: I would like to move now and talk 6 about what the implication of the battery  of the hybrid 7 electric battery development to EV batteries. And that's 8 an area that we just touch upon in the report in 2000.

9 And we basically say that there is no doubt that the 10 development of EV battery supported the development of AGV 11 battery. And we expect that the opposite will be true as 12 well.

13  o0o

14 DR. ANDERMAN: And I'm basically saying that it 15 is clear that continued research and development work on 16 hybrid electric vehicle battery by auto maker, battery 17 producer, material developers, and research organization 18 around the world, along with the increasing hybrid 19 Electric vehicle filled application experience will 20 improve the key characteristics of this battery, which in 21 turn will improve the future viability for EV application.

22  o0o

23 DR. ANDERMAN: And I will try to be specific.

24 There is more technical detail here that most of you are 25 probably interested to know. But I will just give the PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 204 1 highlight to you. I'm comparing an AGV nickel metal 2 hydride battery to EV nickel metal hydride battery as far 3 as key development area.

4 Start is material cost driver. In this case the 5 top six material cost driver for EV battery are identical 6 and of the same order as the top six material cost driver 7 for hybrid electric vehicle battery. So any work on the 8 right side of this table will directly benefit the left 9 side of this table.

10 2) Life driver. Nickel metal hydride corrosion 11 being the main fading mechanism for both EV and AGV 12 application. Venting of hydrogen being the second fading 13 mechanism for both EV and AGV application. Any work to 14 extend the life of hybrid electric vehicle battery would 15 directly impact the life of EV battery.

16 3) Performance driver. Here we are showing 17 improved efficiency is important for both. For EV battery 18 specific energy is the second important. For AGV battery,

19 low temperature power.

20 So basically out of ten criteria, the areas that 21 battery developers are working  battery developer,

22 material developer are working on, nine of the ten are 23 identical for EV battery an AGV battery.

24  o0o

25 DR. ANDERMAN: Here is a same comparison for PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 205 1 lithium ion. I will not go through the detail. The cell 2 design are basically the same, except of course for high 3 power we are using much thinner electrodes. The same 4 chemistry's involved.

5 Material cost driver, basically the same, maybe 6 slightly different order. Life driver, similar, maybe 7 different order. And, again, safety being a significant 8 issue for both EV battery and AGV battery. And the amount 9 of work that going today to improve the safety of 10 nickel based lithium ion battery for hybrid electric 11 vehicle is most significant at any work I've seen in 12 battery development in the past. And I have several 13 client working on different aspect of improving the safety 14 of this chemistry.

15  o0o

16 DR. ANDERMAN: I'd last like to point here that 17 there are several approaches to vehicle liberalization.

18 And today we are even seeing some attempt in 12 volt that 19 will be very low power, going to 42 volt with different 20 design, high voltage power assist, and plug in hybrid.

21 And the point I would like to make that still 22 today U. S. and European car company are struggling with 23 establishing business cases for all or any of the above 24 hybrid vehicles.

25 And I would like to make the point that when I PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 206 1 asked developers, car  automakers, what are the main 2 challenges for hybrid electric vehicle, regardless any of 3 those six or seven groups that I put there, battery life 4 and battery cost always come at the top  top three or 5 top four. System cost is often the third one.

6 So this is not an easy area. And even a $ 500 or 7 a $ 1,000 battery, if it's only going to last 5 or 6 year 8 rather than 10 or 15 years is a significant business risk 9 for the auto maker, because none of us who like to replace 10 a $ 600 component that may cost three or four times that in 11 the aftermarket and when we have a four or five year old 12 car.

13  o0o

14 DR. ANDERMAN: Environmental value of vehicle 15 retrofit, and that follow some of the comments were made 16 by Chuck and other people in the room before today,

17 including Dr. Lloyd  electrical power and drive train,

18 electrical assist turbocharger and electrical valve 19 actuation, electrical power steering, air condition, ABS,

20 four wheel drive, fans and pumps. All above auxiliaries 21 contribute to reducing emission. And the mass 22 introduction in hybrid electric vehicle will increase a 23 valuable position of battery or fuel cell EV.

24  o0o

25 DR. ANDERMAN: There was a discussion here in PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 207 1 December where several people have trivialized the fact 2 that hybrid electric vehicles are here, and so we need to 3 focus on full electric vehicle. And Of course we need to 4 focus on full electric vehicle for the future. But I made 5 the point that hybrid electric vehicles are really not 6 quite here as far as the U. S. and European market.

7 And here are the six  seven programs that were 8 active program in January 2001. Several of them have 9 actually been announced in the January Los Angeles auto 10 show as a way that automaker and Detroit will improve the 11 fuel efficiency of SUV. We have here Daimler Chrysler 12 from Europe. But then Daimler Chrysler didn't want to go 13 forward. Volvo  General Motors Silverado, and PSA, that 14 was a leading company at the time. January 2001 we have 15 here six cars that were supposed to be on the market by 16 the end of this year basically. And here we are where we 17 were 18 months or 2 years later, four of those six program 18 have been cancelled by auto maker because they could not 19 provide enough business case to go to production.

20 So what's Toyota and Honda doing has not been 21 totally caught up in the eyes of the auto maker. And even 22 though we have new announcement now for cars for 2006 or 23 7, those are still  most of them are still 3, 4, 5 years 24 out. And based on history, I would not count on those 25 programs to go into volume production. And incentive of PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 208 1 any kind from this Board could help make that happen. And 2 I believe we all want to make that happen.

3  o0o

4 DR. ANDERMAN: Just to summarize. Those are the 5 companies I visited over the last two years, several of 6 them two, three, or four times, particularly the car 7 company and the major battery developer.

8 The list of other 30 companies are all involved 9 in advanced vehicle, the vehicles themselves, the 10 electrical system, or the power source, mainly the 11 battery.

12 And those are the six company who provides 13 specific information for this update. I think the 14 majority of the car  of the MRA cars in California use 15 battery made by one of those companies. And they 16 represent lead acid, nickel metal hybrid, and lithium ion 17 EV battery producer.

18 Thank you.

19 CHAIRPERSON LLOYD: Clarify  I wasn't quite 20 sure what you were saying. Did you say that no incentive 21 from this Board could help or that incentive can help?

22 DR. ANDERMAN: Incentive will help. Whichever 23 way, regulation, incentive, taxation. That's your field,

24 not mine. But this is right on the edge where $ 500,

25 $ 1,000, $ 1500 for making business case for some of those PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 209 1 vehicle. And this is a case where government  could 2 work to make it a reality and have California lead again 3 by becoming the major market for hybrid electric vehicles.

4 CHAIRPERSON LLOYD: So credits can help, you're 5 saying?

6 DR. ANDERMAN: Yes.

7 CHAIRPERSON LLOYD: The other one you make the

8 two other comments. You make the observation on the 9 implication of the development of HEVs for EV batteries 10 contrasting the 2001 statement with the 2003. And the way 11 you've posed the conclusion there, you know, is a very 12 good research thing. But I'd be very surprised if the 13 answer to that wasn't  it has to be yes. If it 14 doesn't  in other words the way you phrase it, you 15 assume that continued research and development work on HEV 16 batteries by automakers, battery producers, material 17 development, research organization around the world, along 18 with the increasing HEV application experience will 19 improve the key characteristics of these batteries, which 20 in turn will improve their future viability for EV 21 applications.

22 Seems to me that that  you know, I can't see 23 any circumstance it would not help.

24 DR. ANDERMAN: It definitely will. And I made 25 those two tables to show you how close development work is PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 210 1 relevant. Even though the optimization of the battery for 2 hybrid has to do with power and for electric vehicle with 3 range, which means specific energy, the actual component 4 that need to be worked on and are being worked on,

5 including material cost, life, and safety, are the same.

6 And it's not on  of course it's not the car company.

7 It's the battery developer. And even more important, the 8 material developer, because this is where you have the 9 real capital. It's a major chemical company and material 10 company, that see a market, that are willing to put their 11 own company earn the money to advance technology because 12 they see competitive market that they can in the future 13 participate or that already participate, they want to 14 improve their position and make money. It is the chemical 15 companies, the material company, of course the battery 16 companies as well.

17 CHAIRPERSON LLOYD: And your slide 8 where you 18 look at the lifetime  typical lifetime of the batteries.

19 What I'd like to relate that to is an initial staff 20 proposal that on hybrid electric batteries the battery 21 also have I think a 15 year warranty.

22 DR. ANDERMAN: Yes.

23 CHAIRPERSON LLOYD: We have now reduced that I 24 think to 10 years.

25 DR. ANDERMAN: Yes.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 211 1 CHAIRPERSON LLOYD: But given the way you pose 2 that, that's also a significant challenge for the auto 3 companies.

4 DR. ANDERMAN: Yes, I believe that at least in 5 one of the cases the refusal of the battery company to 6 give 8 to 10 years warranty for the battery was a 7 significant factor in canceling one of the programs that 8 you have seen out there on the slide before. The battery 9 company could not afford to take the risk and give an 8 or 10 10 year warranty. The car company did not feel that they 11 can fill the vehicle with a $ 2,000 battery with the risk 12 of having to replace that 7 or 8 years later. When they 13 use a multiplication factor for an aftermarket part is 3 14 to 1, which mean if they pay $ 2,000, they assume the 15 customer will have to pay 6. And so this is a very 16 significant business risk for the car company. And the 17 battery company cannot afford to and they're refusing to 18 put to show them and put a fuel into a product that 19 they've only been under development for three or four and 20 five years.

21 And to give a full warranty on something like 22 this, they will have to assume that 99 percent of the 23 product will meet that warranty. And there is no data 24 whatsoever to suggest that today. There is progress, and 25 we hope that we can get to 10 years. But it's  we're PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 212 1 very far from it, from proving that at least today.

2 CHAIRPERSON LLOYD: Thank you.

3 Questions from my colleagues?

4 Thank you very much indeed. Thank you.

5 And I appreciate the way you presented your 6 conclusions compared to 2001. It was very helpful.

7 Now we have Councilman Henry Perea, City of 8 Fresno.

9 COUNCILMAN PEREA: Hi. Good  is it still 10 morning, or what time do we have here?

11 CHAIRPERSON LLOYD: It's morning for us.

12 COUNCILMAN PEREA: Good morning, Mr. Chairman,

13 members of the Board. My name is Henry T. Perea, and I'm 14 a city councilman from the City of Fresno.

15 I stand before you today on behalf of the sixth 16 largest city in the State of California, with a population 17 of half a million people, in urging you to oppose any 18 changes or modifications in the ZEV program that would 19 weaken the program. And I'm not here alone. Our city 20 council passed a resolution two weeks ago urging your 21 opposition to this. I have given that to you. I did FAX 22 it to you yesterday, as well as had copies made for you 23 today.

24 For the Central Valley we see this issue as a 25 very important issue, and that's why the Central Valley PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 213 1 sent me here today. We see this issue in several 2 different ways.

3 First and foremost is air quality. It's no 4 secret in this nation and I'm sure in this room that the 5 Central Valley is fast becoming on its way to one of the 6 worst air basins in the nation. Our air board  our 7 local air board is currently looking at changing our 8 designation to becoming the worst air in the nation. Of 9 course the only other city that has this dubious honor is 10 the City of Los Angeles. So from our perspective, passing 11 any changes that would weaken a program that has been so 12 beneficial and it has the potential of becoming so much 13 more beneficial is ludicrous. We can't  we as a city 14 and as a region will not stand for any board or any 15 elected official to weaken such a good program.

16 From another standpoint we see this issue as 17 through economic development. As you may know, the 18 Central Valley struggles every year to attract new jobs.

19 Now we're struggling to even retain the industries that we 20 do have.

21 And air pollution has become such a serious 22 problem, that we have been featured in magazines and in 23 newspapers throughout the country. So, please, I urge you 24 to cast a " no" vote and oppose any changes that would 25 affect the lives and the people in the Central Valley.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 214 1 The vote you cast either today or tomorrow will have a 2 huge impact on all the children and all those senior 3 citizens that have asthma and that have respiratory 4 problems in our community.

5 So I'd just keep my comments brief. Thank you.

6 I appreciate your time. And thank you for having me here 7 today.

8 CHAIRPERSON LLOYD: Thank you for coming.

9 Dr. Frank, Louis Browning, Amanda Miller.

10 DR. FRANK: Hello, everybody. You've seen me 11 here before. We know each other well.

12 I have just a couple of objectives in this talk.

13 Fundamentally I'd like to see the Board move towards

14 CHAIRPERSON LLOYD: Can you speak a little bit 15 closer?

16 Thanks, thanks.

17 DR. FRANK: Fundamentally I'd like to see the 18 Board move towards a ZEV in a progressive way. And I'll 19 outline some suggestions.

20 Most important thing is we have come a long ways.

21 And everybody has said this. I just want to be sure that 22 we continue. So where the original mandate has 23 succeeded  we developed advanced batteries. We just 24 heard that. We developed the concept of hybrid electric 25 vehicles. That didn't come from nowhere either. That's PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 215 1 in part due to what we've done here. We've introduced the 2 plug in concept, at least I have. And

3 ( Laughter.)

4 DR. FRANK:  we've introduced the world to do 5 propulsion concepts. And this couldn't have happened 6 without the Board initiation way back in 1990.

7  o0o

8 DR. FRANK: Now, where is the mandate going and 9 where will it lead us next? Let's create the mandate

10 by the way, I said I supported the Board and the staff,

11 and I really do. I just want to be sure that whatever 12 evolves out of staff and the Board is going to continue 13 this leadership to industry to continue the advancement of 14 automotive technology into the next decade. But please 15 focus on the near term and not the long term.

16 We just heard from Fresno. I think that 17 Fresno  the valley is getting polluted much quicker than 18 our mandate is providing zero emission and clean vehicles.

19 And I think this is a key. We need to focus on the near 20 term more importantly than the distant future.

21 The mandate should provide a schedule to approach 22 pure ZEV in the future with an annual overall emissions 23 decrease including the full fuel cycle. I think we need 24 to analyze that carefully, and I'm suggesting the staff do 25 that.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 216 1 Lets do it right this time. But the key is let's 2 take our time. Let's not rush into this, an consider all 3 options.

4  o0o

5 DR. FRANK: Just to  I just want to reiterate 6 some of the things that we have done in the passed. The 7 Hybrid Electric Vehicle Working Group, which EPRI and 8 CARB  yourselves  South Coast Air Quality, USDOE, GM,

9 Ford, research groups from the National Labs, ARGON,

10 Handrail, Southern California Edison, SMUD, New York

11 this was a comprehensive study that we did. And I just 12 want to reiterate some of the results and maybe give you a 13 slight different slant on the results.

14 Here's the greenhouse gas emissions, one of 15 CARB's new charges. We're comparing here both the 16 conventional gasoline and renewable gasoline or renewable 17 fuels; we're comparing the conventional vehicle; the zero 18 range to 20 mile range plug in hybrid; 60 mile range 19 plug in hybrid; and a hybrid electric vehicle special,

20 which is a 60 mile range but with new advanced 21 technologies and body and so on; and the battery electric.

22 What we can do in this horizontal axis, we could 23 simply substitute time for that horizontal axis. HEV Zero 24 is today, HEV  that's current hybrids of the 25 conventional kind; 20 mile range hybrid is maybe two PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 217 1 years, five years from now when production can come up;

2 60 mile range another two or three years out; and the 3 special hybrid by 2010, something like that.

4 So what we see here is a gradual reduction of CO2 5 emissions.

6 When we look at the criteria emissions, NOx and 7 ROG, same sort of thing. So, once again, we can 8 substitute on the horizontal axis time. And this is 9 something that staff can work with.

10  o0o

11 DR. FRANK: Societal benefits for just a small 12 battery, 20 mile range plug in hybrid, for 150,000 total 13 vehicle miles you will have achieved 33 to 66,000 zero 14 emission miles. Now, isn't that better than a pure ZEV?

15 This is halfway to a pure ZEV. And 100,000 or more AT 16 PZEVs. So this technology is here almost today.

17 Thirty to forty percent less NOx and ROG; this is 18 better than the HEV Zero. Twenty to thirty percent CO2;

19 less than HEV Zero to current hybrids that don't use a 20 plug. Forty two percent less petroleum. And, don't 21 forget, 42 percent less petroleum means fewer trips to the 22 gas station. Similar market potential as a zero range 23 Hybrid. And retail prices, $ 1600 more than a zero range 24 hybrid. And that's 6 percent more. That's a mistake on 25 the slide. I'm sorry. Six percent more than a PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 218 1 conventional hybrid. That means instead of buying the sun 2 roof, you could have a 20 mile range plug in hybrid.

3  o0o

4 DR. FRANK: Now, here are some of the cars that 5 we constructed. I had them downstairs. But due to the 6 speed of this hearing, I asked my  my students had to go 7 back. They have to take classes unfortunately.

8  o0o

9 DR. FRANK: Some other additional

10 CHAIRPERSON LLOYD: Can you

11 Dr. FRANK: Yeah, I can wind it up. And 12 actually  in fact I can wind it up right here.

13 In the printout you've got some additional 14 slides. But here are some vehicles that we have 15 constructed at the UC Davis. And our objective at UC 16 Davis is to demonstrate to both the Board, staff, and the 17 public that these kinds of cars can be built by lowly 18 graduate students and even undergraduate students and 19 university. If we can do it, the car companies can do it,

20 and at a reasonable cost.

21 Thank you.

22 CHAIRPERSON LLOYD: Thank you.

23 Mr. McKinnon.

24 BOARD MEMBER McKINNON: Yeah, I just want to 25 thank you for your presentation. In the last two hearings PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 219 1 on this subject I've tried to move amendments to make a 2 plug in hybrid get mere credit.

3 I just really believe that a plug in hybrid is 4 equivalent to a BEV. And the reason is that I am certain 5 that people that drive BEVs in many cases change cars and 6 get into a gasoline automobile to do other things, like go 7 on longer trips or go to the mountains. And in this case 8 you're flipping a switch. And I think for middle income 9 families it's a lot more realistic that you're going to 10 have a car that you flip a switch instead of two cars.

11 And In terms of acceptability, I think they just 12 really have a lot of merit. And I thank you for your 13 presentation.

14 DR. FRANK: May I make a quick comment?

15 The way we've designed these cars there's no 16 switch. And ours switches automatically. So you just 17 drive it like a regular car. And the only thing that's 18 required is to plug it in every day. And if you do that,

19 it's like being able to buy gasoline at 50 cents a gallon.

20 ( Applause.)

21 CHAIRPERSON LLOYD: Dr. Browning. Then Amanda 22 Miller, Dave Hermance.

23 ( Thereupon an overhead presentation was 24 Presented as follows.)

25 CHAIRPERSON LLOYD: Dr. Browning, again, I've PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 220 1 read your conclusions. I would appreciate if you could 2 summarize this in three minutes.

3 DR. BROWNING: In three? Oh, okay.

4 CHAIRPERSON LLOYD: Well, because the way I read 5 the conclusion is very similar to Dr. Frank's.

6 DR. BROWNING: I thought I had 10.

7 But basically what I'm here to talk about is the 8 EPRI study on breakthroughs on battery technology and a 9 life cycle cost analysis.

10  o0o

11 DR. BROWNING: How do I do this?

12 CHAIRPERSON LLOYD: Because we also have a copy 13 of your slides.

14 DR. BROWNING: There we go.

15 Okay. There are two things that I think are new 16 here is there's exciting new news on increased nickel 17 metal hydride battery life that's emerged in the last 18 three years. In addition, production plans for engine 19 hybrid electric vehicles by major vehicle manufacturers 20 will quickly bring down costs of power batteries, electric 21 motors, and electric controllers.

22 These two factors have big implications,

23 especially by the end of the decade.

24 DR. BROWNING: Well, I'll go by that one.

25 Basically on battery life  there's  three Toyota RAV4 PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 221 1 EVs have accumulated over 100,000 miles on the original 2 nickel metal hydride pack. Two more have reached 85,000 3 miles. These five vehicles are projected to go from 130 4 to 150,000 miles on the original battery pack.

5 New improved positive electrode technology will 6 increase battery life and will reduce the need for costly 7 battery cooling. New control strategy will increase 8 battery life. And basically this means that the cycle 9 lives that were originally predicted by the 2000 battery 10 panel of experts, 6,000 to 12,000, are greatly 11 underestimated.

12  o0o

13 DR. BROWNING: This is one of the EV RAV4' s

14 this shows a lab test done by Ford on three battery types.

15 And I think the important thing here is that nickel metal 16 hydride batteries, as you lower the depth of discharge, in 17 other words the amount you discharge them on a cycle, the 18 cycle life increases significantly. And one of the things 19 we found is these Ford tests shows as much as 8,000 cycles 20 to failure when discharged from 80 percent to 20 percent,

21 or a 60 percent depth of discharge.

22 We've seen data from Saft and Anderman that have 23 said 3,000 to 4,000 cycles in an 80 to 20 percent state of 24 charge. Cal Hammer and SAE high mileage tests have shown 25 2,000 plus on an 80 percent depth of discharge.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 222 1 CHAIRPERSON LLOYD: You've got 30 seconds.

2 DR. BROWNING: Oh, okay. Well, then I'll move on 3 here quickly.

4 CHAIRPERSON LLOYD: Because Dr. Anderman covered 5 a lot of the material you were talking about.

6 THE AUDIENCE: He's still got a presentation.

7 CHAIRPERSON LLOYD: Please, I'm listening to the 8 witness.

9 DR. BROWNING: Okay. I wanted to go over the 10 life cycle cost, because I think that's pretty important.

11 Could I have a minute to do that?

12 CHAIRPERSON LLOYD: We've got the copies here, if 13 you'd read it quickly.

14 DR. BROWNING: Okay. Basically the life cycle 15 cost analysis using basically a modified CARB methodology 16 shows that at 100,000 units per year the life cycle costs 17 for an engine dominant hybrid is about $ 500 less than a 18 CV. The plug in hybrid is about $ 1200 less.

19  o0o

20 DR. BROWNING: And basically if you look at cost 21 parity, we reach cost parity at about 50,000 units per 22 year with a battery electric vehicle, and at battery 23 module costs of about 450, 470 a kilowatt hour, which is 24 considerably higher than was originally determined.

25  o0o

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 223 1 DR. BROWNING: So

2 CHAIRPERSON LLOYD: Can conclude please?

3 DR. BROWNING: I'll move on to the conclusions.

4 Basically HEV Zero's engine dominant hybrids,

5 plug in hybrids, and battery electric vehicles can reach 6 cost parity with conventional vehicles at much higher 7 battery prices.

8 Plug in hybrids can reduce greenhouse gas and 9 criteria emissions. Because life cycle parity can be 10 reached with PHEVs, the emission benefits come at no cost 11 to the consumers.

12  o0o

13 DR. BROWNING: Production plans for 14 engine dominant hybrids by major vehicle manufacturers 15 will quickly bring down the cost of power batteries,

16 electric motors, and electric controllers.

17 Battery technology has advanced so costly battery 18 replacements are minimized or avoided. And battery 19 leasing can turn up front battery costs into operating 20 expenses, making PHEVs more attractive to consumers. And 21 I think there is a business case for hybrids and plug in 22 hybrids.

23 Thank you.

24 CHAIRPERSON LLOYD: I think staff recognizes 25 that, at least they've given the opportunity. And we'll PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 224 1 be happy to ask each auto manufacturer their plans for 2 plug in hybrids.

3 Next, Dr. Amanda Miller.

4 Then I think we have Toyota  we have Dave 5 Hermance, Mary Nickerson, and Joe Tomita. I understand 6 you're going to come together.

7 ( Thereupon an overhead presentation was 8 Presented as follows.)

9 CHAIRPERSON LLOYD: And I'd appreciate if you'd 10 respect us with time.

11 DR. MILLER: Yes, quite.

12 I'm representing the same EPRI HEV working group,

13 which was the consensus study on the adoption of both 14 plug in and non plug in hybrids. And I was responsible 15 for the market research on the customer acceptance of 16 these vehicles.

17  o0o

18 DR. MILLER: And the focus was to understand if 19 there would be mainstream potential for these vehicles,

20 that  you know, would people who aren't early adopters 21 actually be willing to plug their vehicles in, would they 22 be willing to use them?

23  o0o

24 DR. MILLER: What we found is that, yes, in fact 25 customers were interested in plug in hybrids, that they PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 225 1 appreciated many of the benefits, in particular avoiding 2 going to gas stations.

3 And the participants were asked whether they 4 preferred plugging in over going to a gas station, on a 5 1 to 9 scale, given these two statements right here: " I 6 would prefer to fuel my vehicle with gas at this gas 7 station" versus " I would prefer to fuel my vehicle by 8 plugging it in at home." And what we found is that 9 respondents showed a strong preference for plugging in,

10 with as many as 56percent and 63 percent among midsize 11 consumers.

12  o0o

13 DR. MILLER: The other thing that we did was we 14 built a very sophisticated market model that predicted the 15 relative market shares of the HEV Zero, which is the 16 non plug in hybrid, and the 20 mile electric range hybrid 17 and the 60 mile electric range hybrid versus the 18 conventional vehicle. Under the scenario that you could 19 go out and if what you were looking for was a Civic, you 20 could get any of the four types. So you got the same 21 vehicle, same behavior. It's just that engine differed.

22 Respondents were told that in order to get the 23 benefits for the HEV 20 and 60 they had to plug in. And 24 in fact we saw that the market preference for plug in HEVs 25 was around 40 percent.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 226 1 If gas prices go up, of course that's higher.

2  o0o

3 DR. MILLER: So that is my presentation. I 4 appreciate your time.

5 Thank you.

6 CHAIRPERSON LLOYD: Thank you very much.

7 Appreciate your keeping to the time.

8 Any questions?

9 Of course gas is  have you actually monitored 10 any behavior  I've seen in the papers increased behavior 11 for just hybrids given the increased price of gas.

12 DR. MILLER: Yeah, I think we'd find if we did 13 the research over that some of the benefits about 14 independence from foreign oil would come out stronger than 15 we saw in the research we did.

16 CHAIRPERSON LLOYD: Thank you.

17 We have Toyota.

18 MR. TOMITA: Good afternoon, Chairman Lloyd and 19 ladies and gentlemen of the Board. My name is Joe Tomita.

20 I'm a group vice president for the technical and 21 regulatory at Toyota North America.

22 ( Thereupon an overhead presentation was 23 Presented as follows.)

24 MR. TOMITA: I've had the pleasure of meeting 25 many of you in my role as head of Toyota's communication PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 227 1 team to the ARB, along with my colleague Dave Hermance,

2 and I thank you for this opportunity to speak to today.

3  o0o

4 MR. TOMITA: As you know, Toyota has responded to 5 your call to do what it can to reduce vehicle emissions by 6 providing many of the technologies contemplated under the 7 ZEV Program. We worked for five years to lease the RAV4 8 EV electric vehicle to  and sold and leased this vehicle 9 at retail last year.

10  o0o

11 MR. TOMITA: We are also the first in the world 12 to mass produce a gas electric hybrid vehicle, the Toyota 13 Prius. And we will have an announcement concerning the 14 next generation of the Prius, which will be an AT PZEV, at 15 the New York auto show next month.

16  o0o

17 MR. TOMITA: We will also have 20,000 PZEV 18 Camry's on California's roads in the ' 03 model year and 19 40,000 in ' 04 model year.

20  o0o

21 MR. TOMITA: Finally, you also may have heard 22 that we have and will continue to place fuel cell hybrid 23 vehicles in demonstration programs in California.

24  o0o

25 MR. TOMITA: Beyond vehicles there is also an PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 228 1 active member of the California  partnership and a 2 founding partner of ZEV Net, the innovative station car 3 program underway in Irvine. Through these projects we 4 have worked closely with your staff. And in the case of 5 station cars, also worked directly with Board member 6 DeSaulnier, who has been a tremendous catalyst for sharing 7 these transportation initiatives in California.

8  o0o

9 MR. TOMITA: We have three main issues to share 10 with you today. First, our experience with retail sales 11 and marketing of the RAV EV. Second, our thoughts on fuel 12 cells and their challenges. And, third, the value of 13 hybrids, both as a bridge to and essential component of 14 the zero emission future.

15 A representative from Toyota Motor Sales, Mary 16 Nickerson, will cover the first topic with you, and Dave 17 Hermance from the Toyota Technical Center will cover fuel 18 cells and hybrids.

19  o0o

20 MR. TOMITA: Before I turn to Mary, however, I 21 would like to acknowledge the efforts of your staff in 22 working to inject more technical and commercial 23 feasibility into the regulation.

24 As you will hear from us, some issues remain.

25 But overall, since no one has a clear crystal ball on the PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 229 1 automobile future, we think to continue to focus on the 2 quality of vehicles and vehicle interactions rather than 3 shear quantities of cars in any particular category is a 4 move in the right direction.

5 Mary Nickerson from our sales department will now 6 speak to you about our retail program for the RAV4 EV.

7 Thank you again.

8 CHAIRPERSON LLOYD: Thank you for the positive 9 comments, Joe. Appreciate it.

10 MS. NICKERSON: Good afternoon. My name is Mary 11 Nickerson, and I'm the National Marketing Manager for 12 Advanced Technology Vehicles at Toyota Motor Sales U. S. A.

13 I've had the opportunity to meet and speak with 14 many of you in the past year. And thank you for the 15 opportunity to speak today.

16 In August 2001, Toyota decided to fully engage in 17 a proactive sales effort for full function electric 18 vehicles. The purpose of my presentation is to present 19 the program's elements and results.

20 First, I'd like to take a few moments to review 21 these program elements, including the vehicle, our 22 distribution model, pricing and warranty, and specifics 23 about the marketing efforts.

24  o0o

25 MS. NICKERSON: Toyota offered the RAV4 EV based PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 230 1 on its popular RAV4 IC platform, known in the marketplace 2 for its utility.

3 We utilized a proven internet based business 4 model for the Prius that accomplished two key objectives.

5 First, the system streamlined the distribution 6 process; and, second, the on line nature allowed these 7 customers to have easy access to all information on the 8 web.

9 This system proved its mettle with Prius by 10 successfully introducing new technology and attaining our 11 sales goals for the launch and the 18 months that 12 followed. U. S. sales for Prius are now greater than 13 45,000, with about 15,000 in California.

14 Toyota also established a statewide sales network 15 of 25 self selected dealers who were already successful at 16 selling Prius and a comprehensive EV sales and service 17 training for the dealers and their associates, with 18 participation of an ARB representative. Toyota provided a 19 demonstration unit to each dealer to allow customers to 20 test drive the vehicle.

21  o0o

22 MS. NICKERSON: Toyota established a third party 23 business partnership with Clean Fuel Connection to 24 streamline the distribution and installation of chargers.

25 Toyota also created an attractive pricing offer PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 231 1 that included the charger. This price was well below the 2 cost per unit, but provided the dealer substantial margins 3 to provide motivation. We offered customers the option to 4 purchase or lease. And our lease options were equivalent 5 to the Prius, $ 329 a month price after the loan fall 6 incentives were included.

7 Toyota also included a 3 year, 36,000 mile 8 warranty, prepaid maintenance, and a complimentary 9 roadside assistance program. In addition, a 5 year,

10 60,000 mile main battery and powertrain warranty was 11 provided to each customer.

12 Finally, Toyota focused on building high 13 awareness with a targeted multimedia marketing campaign 14 based on the successful Prius, which I'll now describe in 15 more detail.

16  o0o

17 MS. NICKERSON: Fifty thousand promotional 18 brochures were distributed with a two percent response 19 rate. A TV spot was developed which aired on select cable 20 channels. Magazine media included California Editions and 21 11 national magazines. In addition, full page newspaper 22 ads were placed in major metropolitan areas. Outdoor 23 media was also used in San Francisco, L. A., and Berkeley.

24 Interactive media was widespread with a click 25 through to the RAV4 EV site. RAV EV advertising campaign PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 232 1 generated almost 800 million impressions in California,

2 which was double the Prius impressions nationally.

3  o0o

4 MS. NICKERSON: Our marketing activities paid off 5 in generating a very high awareness level. Almost 800,000 6 visits to TOYOTA. COM were directed at the RAV4 EV web 7 page, as compared to about 500,000 visits for Prius.

8  o0o

9 MS. NICKERSON: Despite the high awareness of the 10 RAV EV, the sales pace was disappointingly low. These 11 results shared with ARB in mid October reflect the sales 12 pace over time. You can see that after the initial 13 pent up demand of 47 units in the first two weeks, the 14 average demand was about six units per week. The demand 15 for RAV4 EV remained small and did not increase.

16  o0o

17 MS. NICKERSON: Let's now look at another metric,

18 the ratio of consumer purchase interest to actual 19 purchases. This chart shows the number of individuals in 20 California who registered their interest on our website.

21 You can see that the number of interested customers was 22 over 2 1/ 2 times that of the RAV4 EV customers. But a far 23 smaller percentage actually went through with the purchase 24 of the RAV4 EV than the Prius. The fallout rate was 87 25 percent for RAV4 EV and only 27 percent for Prius. This PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 233 1 is perhaps more dramatic when comparing sales volume of 2 individual dealers.

3 This chart shows RAV4 EV and Prius sales by 4 dealer. As you can see, despite the availability of a 5 two times greater financial incentive for dealers to sell 6 RAV4 EV's, every dealer in the program sold more Prius 7 than it did RAV4 EV.

8 Toyota of Berkeley, one of our top Prius dealers 9 in the nation, sold 108 Prius and 6 RAV4 EVs during that 10 period.

11 In summary, Toyota's retail market program was 12 based on a proven internet business model, a motivated 13 dealer network, an attractive pricing and warranty 14 program, and an extensive multimedia marketing plan. On a 15 per vehicle basis media spending during the program was 16 more than 15 times that of Prius, and intelligently 17 targeted at customers most likely to be interested in an 18 electric vehicle. These marketing efforts were successful 19 in generating high awareness, as shown in our website 20 traffic data, but sales remained low and did not increase 21 over time.

22 To conclude, with the only full function electric 23 vehicle available to the market, Toyota only sold at an 24 annualized pace of 300 vehicles per year.

25 Thank you for the opportunity to share our PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 234 1 perspective. And now if you have any questions related to 2 the EV sales effort, I'd be happy to answer them at this 3 time.

4 BOARD MEMBER HUGH FRIEDMAN: Are there any 5 questions?

6 BOARD MEMBER McKINNON: My first question is:

7 Was this presentation made at the workshops or other 8 places for the public for the public to kind of view and 9 get a grip on?

10 MS. NICKERSON: The presentation that we 11 presented to ARB was presented to the ARB members.

12 BOARD MEMBER McKINNON: I understand. I was in 13 one of the meetings where it was presented. What I'm 14 wondering is whether or not the public has seen it before 15 today?

16 MS. NICKERSON: I think only a limited number may 17 have seen it.

18 BOARD MEMBER McKINNON: Okay. The other question 19 I have  and I'm willing to  you know, if it's more 20 appropriate to ask the next speaker, let me know that.

21 The issue that was talked about a little while ago about 22 some of the used vehicles being sold or leased or 23 re leased, where is Toyota on that issue?

24 MS. NICKERSON: Currently our fleet of vehicles 25 that are coming off lease, many of those are being PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 235 1 re leased by those fleet customers, of which the majority 2 of those are in California. And for leased vehicles in 3 the retail program, customers have the option to purchase 4 those vehicles at the end of the lease.

5 BOARD MEMBER McKINNON: Thank you.

6 CHAIRPERSON LLOYD: Any other questions?

7 Thank you very much.

8 MR. HERMANCE: Good afternoon. I'm Dave 9 Hermance. Afternoon to the Board. I suspect many of you 10 know me. I'm with Toyota's Technical Center. And my 11 purpose in this threesome is to review Toyota's take on 12 the regulatory proposal.

13 We're almost about to get a slide.

14  o0o

15 MR. HERMANCE: Toyota supports many of staff's 16 observations, particularly among those  and reinforced 17 by Dr. Anderman's observations  battery cost and 18 performance have not evolved as hoped. There have been 19 small incremental improvements, but there have been no 20 breakthroughs in the battery technology as we had all 21 hoped in the early stages of this process.

22 Further, there is no significant element on the 23 element on the horizon that suggests that this situation 24 will soon change.

25 Further, as reviewed by Mary Nickerson, the EV PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 236 1 market as tested is small; and at the price point  or 2 the cost of manufacture of the vehicle is not a 3 sustainable market.

4 Finally, we agree that the fuel cell vehicle is 5 not yet ready for commercialization. And I have a little 6 more information with regard to fuel cell.

7  o0o

8 MR. HERMANCE: As an independent developer of 9 fuel cell technology, Toyota supports the vision of a 10 future in fuel cell transportation. Toyota began fuel 11 cell development in 1992, evaluating not only the basic 12 system components but fuels and fuel storage options over 13 a series of vehicles that were both for demonstration 14 purposes and for internal use.

15 We have announced a program of approximately 20 16 vehicles to be located in California and in Japan as the 17 first phase of a test outside of the parent organization.

18 Sometimes it's necessary to have customers other than the 19 engineers developing the product, give us some feedback 20 with regard to the acceptability of the product to the 21 future mass market. We just began this phase in December 22 of last year, and the rest of the vehicles will be placed 23 through the balance of this year.

24 These vehicles are being placed on a 30 month 25 lease. At the end of that period of time, or earlier if PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 237 1 we get additional information, we'll begin to feed that 2 information back into the ongoing development process and 3 make decisions then about what is the next appropriate 4 step.

5 The bottom line though is that additional vehicle 6 placements will be driven by the needs of the development 7 process rather than by the need to satisfy a set number of 8 vehicles. The development process has its own timing and 9 pace, which may not always agree with the regulatory 10 desire.

11  o0o

12 MR. HERMANCE: Let me talk briefly about fuel 13 cell  this slide actually says challenges. Engineers 14 prefer to refer to these as opportunities. There are 15 literally thousands of opportunities associated with the 16 ongoing development of fuel cells.

17 The first grouping of these opportunities are 18 those within the control and purview of the manufacturers 19 and their supplier community. They deal with the basic 20 elements of the system: The fuel cell stack, which is the 21 core of the technology; the hydrogen storage, which is a 22 major challenge because hydrogen is significantly less 23 dense an energy carrier than are liquid fuels; and then 24 what are universally referred to as balance of plant,

25 those auxiliary systems necessary to make the whole system PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 238 1 work as a fuel cell engine. They include principally air 2 management systems, fuel management systems, and water 3 management systems.

4 As you have heard, the only byproduct of 5 operation of a fuel cell vehicle is water. The downside 6 of having water as the only byproduct is in low 7 temperature environments, some of which are in California 8 and more of which are in other parts of this country.

9 There is a significant engineering challenge to manage 10 that water vapor to keep it from freezing in a point in 11 the system that you don't want it frozen in.

12 The next group of challenges are those in which 13 the auto manufacturers have a role, but also they need 14 support from other organizations outside the industry.

15 These are in regard to codes and standards. For example,

16 there are codes and standards necessary for the 17 development of the core technology, the vehicle and the 18 components of the vehicle. And those will largely be 19 worked through the Society of Automotive Engineers and 20 other international standards organizations. But to the 21 broader issues of the interface of the vehicle to the 22 refueling infrastructure and of the building safety

23 building codes and standards, there are an almost infinite 24 number of standard setting organizations in the world.

25 Largely this work is being pushed forward through the PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 239 1 California Fuel Cell Partnership, which has been very 2 valuable in pulling together the diverse interests. But 3 this is work that's done not only by the industry, but by 4 many others as well.

5 The other item within the  not wholly within 6 the control of the auto industry is public awareness and 7 acceptance. There was an unfortunate incident many years 8 ago that unfortunately is brought to mind by many people 9 when you talk about hydrogen  that, by the way, was 10 directly related to a static discharge igniting the paint 11 on the big bag that held all that hydrogen. It was not a 12 hydrogen incident. But that is the hurdle that has to be 13 jumped with the public for the perception of safety for 14 the vehicles.

15 Then the one other issue that's wholly outside 16 the purview of the manufacturers, other than we have to 17 buy some of it in order to run our limited number of 18 vehicles, is infrastructure. This area of opportunity 19 falls to government and the energy industry to provide the 20 ubiquitous refueling structure customers have come to 21 expect in their impersonal mobility.

22  o0o

23 MR. HERMANCE: Let's talk for a second about fuel 24 cells as an enabler of this  or hybrids as an enabler of 25 the fuel cell future. We agree with staff's position that PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 240 1 hybrids are a significant enabler of the fuel cell future.

2 Several key systems developed for hybrid vehicles will be 3 directly applicable to the future fuel cell vehicles.

4 These include power electronics, secondary batteries, more 5 efficient drive motors, and overall control.

6  o0o

7 MR. HERMANCE: That's perhaps easier seen in this 8 diagram, which  if I can get the LASER pointer to work.

9 No, it will not work. Never mind.

10 Okay. The system in  power control electronics 11 use sophisticated power devices called insulated gate 12 bipolar transistors. They are common between hybrid 13 vehicles and fuel cell vehicles. The battery in a 14 hybrid  or in a fuel cell vehicle, at least in the case 15 of our fuel cell vehicle, is exactly the same battery 16 taken from a Prius. The drive motors, although they are 17 larger in the fuel cell, are of the same design character 18 with the objectives of high efficiency and minimum weight 19 and space. So  and the overall control system,

20 including regenerative braking, is directly comparable 21 from vehicle to vehicle.

22  o0o

23 MR. HERMANCE: One small quibble with the staff's 24 evaluation, not based on Toyota's data but based on 25 third party data. A contractor to the California Energy PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 241 1 Commission, K. G. Duleep of E. E. A., did a cost analysis for 2 the petroleum dependent study ordered by CEC. This is 3 data extracted from his report from March of 2002.

4 It suggests the cost at today's prices and the 5 cost at 100,000 units per year volumes of the various 6 technologies. These are the tiers of advanced technology 7 components arrayed in the staff report for credit as 8 advanced components in the AT PZEV category.

9 If you look at the Tier 2 category, the mature 10 cost at 100,000 units is $ 1600, and the Tier 3 is $ 2400.

11 That suggests to me that the staff's evaluation of the AT 12 PZEV credit for Tier 3 needs to be incremented by a tenth 13 to get cost equity among the two technologies.

14  o0o

15 MR. HERMANCE: Toyota is committed to hybrid 16 vehicles, both as a great technology today and as a bridge 17 to the fuel cell future.

18 A note of caution, however. This technology is 19 not free. Today it is not even cheap. Even in the future 20 in high volumes it will not be free. The cost, translated 21 to the price of the vehicle, and the volume, mandated 22 by  or required by the regulation as proposed, will pose 23 a significant challenge for manufacturer and marketing of 24 that number of premium cost vehicles. Some manufacturers 25 will be better positioned to respond to that challenge PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 242 1 than others. But state or federal incentives would 2 significantly reduce the hurdle to be jumped to get to 3 that point.

4  o0o

5 MR. HERMANCE: And then the conclusion slide.

6 At the highest levels of the corporation, Toyota 7 is committed to reducing the footprint of our products on 8 the environment. We look forward to working with staff,

9 the Board, and other stakeholders in the ongoing 10 regulatory process to clean California's air.

11 I'd be glad to take questions if you have them.

12 CHAIRPERSON LLOYD: Mr. McKinnon.

13 BOARD MEMBER McKINNON: Whatever disagreement I 14 might have with the staff proposal and whatever 15 disagreement we may have in how this gets resolved, I 16 think it's really necessary to say to you and Joe and 17 Mary, it's very clear to me as a Board member that Toyota 18 has done the very best job of any of the companies working 19 on this zero emission problem.

20 MR. HERMANCE: Thanks.

21 CHAIRPERSON LLOYD: Can I ask you, Dave, two 22 questions which are relevant to previous testimony. And,

23 again, I'd like to ask all the manufacturers  although I 24 won't get a chance to talk to General Motors and 25 Daimler Chrysler.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 243 1 But do you think the credits for plug in hybrids 2 are adequate? Under what circumstances would you see a 3 benefit in plug in  would convince you to get into 4 plug in hybrids?

5 MR. HERMANCE: The credit structure appears to be 6 significantly generous and should inspire someone to 7 participate in that arena.

8 The reality, however, is that the development job 9 is somewhat more difficult than characterized by studies 10 of those who don't have to develop vehicles. There are 11 significant test procedure issues that have to be resolved 12 that are impossible to resolve until you have a vehicle to 13 review with regulatory staff to get concurrence that the 14 systems aren't defeat devices, that they are getting 15 appropriate test methods that correctly credit their 16 emissions performance.

17 So I believe that it will come. It will not come 18 soon. The near term market is for the grid independent 19 vehicle. Longer term, with that credit structure, I would 20 be surprised if a manufacturer didn't go there.

21 CHAIRPERSON LLOYD: Second question.

22 What about hydrogen IC engine that Mr. Freeman 23 spoke so eloquently about?

24 MR. HERMANCE: I don't know about those graven 25 images.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 244 1 In any event, hydrogen ICE engines could indeed 2 provide a bridge if the infrastructure were to develop 3 ahead of the fuel cell. I think the task to develop 4 hydrogen vehicles  hydrogen ICE vehicles  it's 5 complicated when you add hybridization to it. But pure 6 hydrogen ICE vehicles is somewhat less daunting than the 7 challenge to deploy the infrastructure. If there's 8 infrastructure in need of use and fuel cells aren't ready,

9 then I think hybrid ICE could be a viable candidate.

10 CHAIRPERSON LLOYD: Supervisor DeSaulnier.

11 BOARD MEMBER DeSAULNIER: Well, first off I'd 12 like to echo what Matt had to say. And I appreciate the 13 nice comments by Joe. It's been a pleasure working with 14 Toyota for these many years. And, Dave, I enjoyed our 15 train trip in Japan. It was a good philosophical 16 discussion.

17 But follow up to the Chairman's comment, it does 18 get into a chicken egg problem that we've talked about in 19 terms of infrastructure. But the opportunity for internal 20 combustion engine, hydrogen, would beg to at least 21 intuitively encourage infrastructure in hydrogen 22 refueling.

23 MR. HERMANCE: You're right. It is chicken and 24 egg. It's which do you want first. Who makes

25 BOARD MEMBER DeSAULNIER: We want both.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 245 1 MR. HERMANCE: Then if the infrastructure appears 2 to be developing a pace and fuel cells are not, I'm sure 3 that industry will be inspired to provide hydrogen ICE 4 vehicles. There are manufacturers who are already 5 pursuing hydrogen ICE as an independent technology. More 6 of them would become interested were there an 7 infrastructure in place.

8 BOARD MEMBER DeSAULNIER: And what about hydrogen 9 hybrids?

10 MR. HERMANCE: The challenge there is you have 11 now two technologies that add premium costs to the system.

12 You have a hydrogen storage challenge that you have to 13 address. And you have to make space for the hybrid 14 components, the batteries and whatnot. You're now adding 15 complications. But certainly it's a more efficient 16 vehicle. You'd have to do the trade offs of the specific 17 design to determine whether you wanted to hybridize or 18 not.

19 BOARD MEMBER DeSAULNIER: How long would it take 20 to take something like a Prius, if you made that decision,

21 and actually make hydrogen hybrids?

22 MR. HERMANCE: I understand one of our 23 competitors took one of our vehicles and did that.

24 BOARD MEMBER DeSAULNIER: How long did it take 25 them?

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 246 1 MR. HERMANCE: I don't know what the development 2 time  I haven't even seen the vehicle. I just heard 3 about it.

4 BOARD MEMBER DeSAULNIER: Okay. Thanks, David.

5 Thank you, Mr. Chairman.

6 CHAIRPERSON LLOYD: Supervisor Roberts.

7 BOARD MEMBER ROBERTS: Yeah, the comment and the 8 suggestion the Tiered 3 credit, I wondered, is the staff 9 going to respond to that, the difference in the .5 and .6?

10 CHIEF DEPUTY EXECUTIVE OFFICER CACKETTE: Yes, we 11 created the three different categories with different 12 credits. It was not precisely derived from the kind of 13 cost analysis that Dave Hermance presented. We were 14 looking at  more at what is the relative difference in 15 technology and its ability to force or move ZEV like 16 technology to the future.

17 And the two vehicles that we were kind of 18 comparing between the Tier 3 that me mentioned and the 19 Tier 2 was the Honda Civic and the Prius. And while some 20 of their characteristics are different, motor power,

21 things like that, we didn't think they were that different 22 that it required a  that it would justify two tenths 23 difference in credit. So we picked one tenth difference 24 in credit.

25 BOARD MEMBER ROBERTS: The philosophy is I guess PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 247 1 different from what we discussed earlier in the signing of 2 the credits. We were looking at the cost, and that's what 3 was driving the Toyota one or whatever it was.

4 CHIEF DEPUTY EXECUTIVE OFFICER CACKETTE: Yeah,

5 that was on the battery vehicles versus the hybrid 6 vehicles  or the fuel cell vehicles. And, yeah, there 7 was a different philosophy at stake there. There it was 8 trying to see that  I guess it's our view that none of 9 the manufacturers are going to build battery electric 10 vehicles in these early years. They're going to go with 11 fuel cells. But there are secondary manufacturers out 12 there who are anxious to build battery electric vehicles.

13 And so to get them into the marketplace by making their 14 credits worthwhile, we had to create a price structure 15 that would say if you didn't want to make one extra fuel 16 cell vehicle and you chose to make 20  buy 20 credits 17 from a secondary battery electric vehicle manufacturer,

18 that would  there'd be an economic case to do that.

19 So in that case it was an economic comparison 20 much like Dave also tried to apply to the hybrids. But in 21 the hybrid case that's not what we're looking at. We're 22 trying to figure out how to move those hybrid components 23 into the marketplace into volumes such that they will 24 support at a later year battery electric vehicles or fuel 25 cell vehicle production.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 248 1 And so it was a different, more of a 2 technological based rationale than an economic based 3 rationale.

4 CHAIRPERSON LLOYD: Bob, I'd like to ask you a 5 question  Bob Cross.

6 If my memory serves me correctly, I saw an E mail 7 from you yesterday which had some first  some emissions 8 data on hydrogen IC engines. And I don't know again what 9 the aftertreatment now what it was. But the numbers

10 despite what David Freeman said, the numbers were 11 non trivial.

12 MOBILE SOURCE CONTROL DIVISION CHIEF CROSS: The 13 staff actually had a very hard time getting hydrogen data.

14 We pursued it with both BMW and Ford, which are the ones 15 which are doing development.

16 CHAIRPERSON LLOYD: Is your mike on?

17 MOBILE SOURCE CONTROL DIVISION CHIEF CROSS: It 18 should be.

19 I have the wimpy mic of the day, I guess.

20 We contacted both BMW and Ford, which have 21 development programs going on hydrogen vehicles. And BMW 22 refused to provide us the data, saying that it wasn't 23 representative of what could be done with hydrogen.

24 And Ford provided us with the data, and it was 25 not impressive when you look at the LEV brothers emission PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 249 1 standards. And I think that one can argue that they can 2 do better, as you probably hear. But I think the issue 3 with hydrogen becomes that what they do is they get the 4 engines  to get the NOx down they get them extremely 5 lean. And then they run into drivability problems.

6 And so their  they have a different combustion 7 regime than what people are used to running our 8 conventional vehicles in, and there's more development 9 work that may need to be done there. So it's not a slam 10 dunk to do hydrogen, because if you want  if you want 11 good fuel economy and good emissions, you have to be in 12 this lean regime. And you have fuel storage problems 13 because hydrogen's so hard to store. If you bring it down 14 to the technological approach we all know, which is 15 three way catalysts, then you consume the hydrogen too 16 fast. So that it's not going to be just ask for it kind 17 of technology, we don't think.

18 And there's a one pager in your folder discussing 19 the numbers.

20 CHAIRPERSON LLOYD: Do you agree with that, Dave?

21 MR. HERMANCE: I'd have to suggest that I'd have 22 to find somebody else in the company to respond. I 23 haven't done any hydrogen development. Sorry.

24 CHAIRPERSON LLOYD: Well, Kelly's coming up. So 25 I'm sure Kelly will have the answer to

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 250 1 BOARD MEMBER DeSAULNIER: What's he driving?

2 CHAIRPERSON LLOYD: Ben Knight, Honda; and then 3 Kelly Brown, Ford.

4 And then we're going to take a ten minute break 5 for the court report before we get into additional 6 witnesses.

7 With this batch we will finish the testimony from 8 the auto manufacturers.

9 ( Thereupon an overhead presentation was 10 Presented as follows.)

11 MR. KNIGHT: I'm Ben Knight with Honda R& D 12 Americas. On behalf of Honda, I appreciate this 13 opportunity to give you comments. And we've also 14 submitted written comments.

15 Honda has demonstrated a longstanding commitment 16 to the advancement of cleaner technology in the light duty 17 fleet. This includes our efforts to advance battery EV 18 technology, near zero emission natural gas vehicles,

19 hybrid electric vehicles, as well as near zero emission 20 gasoline vehicles like the Accord PZEV.

21 In addition, we've recently certified and 22 introduced the Honda FCX fuel cell vehicle that's now 23 seeing daily use with the City of Los Angeles. So when we 24 talk about what is working and what has not worked and 25 what pathways can be effective to technology advancement PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 251 1 goals and air quality, we speak from real experience with 2 these technologies.

3 We're also familiar with some of the latest 4 ongoing research on real world emission performance of 5 near zero emission gasoline vehicles. Now, these vehicles 6 are now demonstrating real world emission reductions far 7 below what was considered possible just a few years ago.

8 They have air quality impacts that are similar to battery 9 electric vehicles when you take into account upstream.

10 This really is startling news and very positive 11 news. And clearly this is the fastest and most effective 12 path to improve air quality.

13 We also actively participate in the California 14 Fuel Cell Partnership. This unique partnership promotes 15 technology advancement, cooperation on broad issues to 16 prepare the infrastructure and market, and facilitates 17 fleet trials of vehicles and infrastructure as the next 18 important step. Key international players, OEMs,

19 component suppliers, and energy companies, including 20 hydrogen providers, are actively participating in this 21 partnership and developing the pathway towards commercial 22 success. It's an organization that is one of champions.

23 It has been working. And the progress is worthy of your 24 respect. In my career I'm seeing better results from this 25 partnership in success than most any other.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 252 1 There's not been a lack of progress on technology 2 addressing clean air goals. On the contrary, the options 3 in past cleaner air are broader and more successful than 4 anticipated in the original ZEV regulation. This has been 5 reflected in changes in the ZEV Program.

6 Staff's direction as developed in the March 5th 7 regulatory proposal is a positive direction. More 8 effective and realistic technologies and pathways are 9 promoted. Yet further ZEV progress through the 10 demonstration of a limited number of zero emission fuel 11 cell vehicles and advance in air quality goals and 12 technology pathways through the promotion of near zero 13 emission hybrid EV's, natural gas vehicles, and 14 clean burning gasoline PZEVs. These are technologies and 15 directions which Honda believes are worth pursuing.

16 We do have some specific comments to improve the 17 regulation. We note that the volume of AT PZEVs required 18 in the out years grows perhaps unrealistically large.

19 These are very ambitious numbers for products whose mass 20 market consumer acceptance is still unclear. Note that 21 the four percent requirement grows rapidly to ten percent,

22 and the credits for hybrids decrease over time.

23 We suggest the Board ask staff to reconsider the 24 limited and declining credit values or add a review 25 perhaps within this decade.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 253 1 Second, regarding hydrogen fuel cell vehicles.

2 There's good reason why staff's plan could not find 3 volumes for industry for 2009. It's simply premature to 4 realistically meaningfully determine these volumes. We 5 strongly support staff's direction to leave it to be 6 determined. That's not zero. It's to be determined. And 7 it's not clear at the moment exactly how fuel cells and 8 hydrogen infrastructure will develop. An independent 9 panel of scientists and experts can help determine a 10 status and fairly advise the Board on the progress and 11 effort that has been going on.

12 A third positive comment. PZEVs offer truly 13 outstanding emission reductions. Their near zero emission 14 performance real world use is being confirmed by research 15 at the universities. When this science based assessment 16 is taken into account, PZEV credit values may be at least 17 0.5 credits. This may be justified in light of the air 18 quality impact of these vehicles. Board should encourage 19 staff to reconsider these credit values as credible data 20 as provided for justification. There's a full spectrum of 21 ZEV technologies now that can be studied. We're in a very 22 different era from 1990, and it's very exciting.

23 I do have a couple slides to show on the internal 24 combustion.

25  o0o

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 254 1 MR. KNIGHT: But first the slide shows some of 2 the key clean air technologies Honda's doing. It is a 3 wide spectrum. All of these vehicles are near zero 4 emission. They're PZEVs or SULEVs pure ZEVs. And there 5 has been a synergy, and it's helped us identify pathways 6 that work.

7  o0o

8 In the next couple decades if we want to make 9 rapid improvements in air quality and, frankly, have a 10 good chance to be further validated but a good chance of 11 meeting air quality goals, light duty component internal 12 combustion engine vehicles need to play a role.

13  o0o

14 MR. KNIGHT: We've continued our investments here 15 and address cold start emissions, which have always been 16 thought to be the most difficult of the problem. But now 17 there's some real solutions that are very effective.

18 Catalyst deficiencies are approaching 100 percent. And 19 this is over the useful life, of the full life of the 20 vehicle.

21 Robust real world control. What's the real world 22 emissions like? What if the air conditioning's on or you 23 go on an upgrade, you go uphill, you accelerate rapidly?

24 These are real issues, but again we're seeing dramatic 25 excellent results and very durable systems that are PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 255 1 warranteed for 150,000 miles.

2  o0o

3 MR. KNIGHT: One of the ways we're confirming 4 this is through on board instrumentation. We've done this 5 both at Honda, and the universities our in a third 6 generation of this, where they're using equipment that can 7 measure less than a part per million at a part per billion 8 level. They can measure at ambient levels even if you 9 drive along the seashore with an ocean breeze passing, you 10 know, from the ocean into the city. And they can measure 11 that ambient level.

12  o0o

13 MR. KNIGHT: There's a slide showing an Accord 14 with  driven for one hour on road, real world, air 15 conditioning on, hills, on ramps, freeway on ramps,

16 high speed cruising, whatever the traffic demanded. And 17 what's startling is the ambient level of hydrocarbons is 18 in red and the car is shown in green. And this is one 19 hour of driving and measurement.

20 CHAIRPERSON LLOYD: Does this have the Premier 21 catalyst?

22 MR. KNIGHT: This is the exhaust. And Premier is 23 another way to even further enhance the performance of 24 these vehicles toward air quality.

25  o0o

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 256 1 MR. KNIGHT: Let me expand a portion of this in 2 the next slide just to show you how the car is performing 3 right at zero even on transients.

4  o0o

5 MR. KNIGHT: Dr. Lloyd, I thought I would stop 6 the slides there. But actually I'd love to give equal 7 time to ZEVs and fuel cell vehicles, if you indulge me.

8 CHAIRPERSON LLOYD: I will.

9 MR. KNIGHT: So I'll skip rapidly through 10 hybrids. I'd like to give all these equal time because we 11 have equal enthusiasm within Honda.

12 Hybrid vehicles really are advancing the electric 13 technologies, motor, transmission, power electronics, and 14 electrical energy storage on a right battery unit in order 15 control. Very high tech cars that we try to make 16 transparent to the user.

17  o0o

18 MR. KNIGHT: Honda has two of these now in 19 service. And if the Insight showed the public that these 20 can be exciting vehicles with tremendous performance and 21 air quality value, the civic five passenger car broadens 22 that market.

23  o0o

24 MR. KNIGHT: Motor  is the highest density 25 motor in the world, very high torque, very effective for PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 257 1 regen and propulsion.

2  o0o

3 MR. KNIGHT: And different  on the second point 4 here I do want to say that different than generally 5 anticipated, the emission performance is largely 6 independent of the hybridization. And I think you can see 7 that from the earlier slide on an Accord.

8  o0o

9 MR. KNIGHT: Key issue with the hybrids right now 10 is seeing larger market penetration of value, of cost 11 pricing to the customer. That'll be the key to advancing 12 the market. And right now it is  they are expensive.

13 They carry a premium price.

14  o0o

15 MR. KNIGHT: This is Honda's fuel cell vehicle 16 that is now with the City of Los Angeles. It's the first 17 car in the world that's been certified and put into 18 commercial use. We've had to go through all the hoops at 19 EPA and Department of Energy, and were tested there in 20 Michigan by EPA where they gave it fuel efficient  well,

21 it has a window label just like a conventional car because 22 it went through the full process.

23  o0o

24 MR. KNIGHT: We had a great event launching it 25 with L. A. City on December 2nd. It was well attended.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 258 1  o0o

2 MR. KNIGHT: Just to go back to that. The mayor 3 and his staff is driving the car on a daily basis, as well 4 as other people who have access. We'll have five cars 5 there by the end of June. Just part of their fleet.

6  o0o

7 MR. KNIGHT: And this is the layout of the car.

8 It's an electric vehicle. The motor about the size of a 9 basketball now. And everything's under the floor. And 10 the hydrogen tanks are well packaged. And we're getting 11 good mileage, serviceable range. This is double the range 12 we ever had with the electric vehicle. We can recharge in 13 four or five minutes. So it's very exciting to keep 14 pushing this technology forward and make it practical and 15 affordable, which is going to take a lot more time.

16  o0o

17 MR. KNIGHT: We're also using an ultracapacitor 18 on board to extend the range, increase the performance.

19 And this substitute for a battery. It has higher 20 efficiency and higher output than the battery, so it's 21 perfect for this application. I just want to point out 22 that there's several pathways to our objectives. And we 23 think this technology's a very interesting one, so we'll 24 keep working with it.

25  o0o

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 259 1 MR. KNIGHT: And, finally, the approach is so 2 important. And the fuel cell partnership has been good 3 for us and been very motivating to Honda. And it's great 4 to have top champions of the world at one place and have 5 thorough discussions for moving on to real world 6 applications. Infrastructure should be matched to these 7 fuel cell vehicles carefully as we progress and evolve on 8 the technology and issues.

9  o0o

10 MR. KNIGHT: I also want to add that natural gas 11 vehicles are even cleaner than the internal combustion 12 gasoline car upstream. It's not exotic. It doesn't have 13 a great image to people. But from an air quality 14 viewpoint, it's tremendous. The market's very limited.

15 It relates to infrastructure. Difficult issues even for 16 natural gas, which is economically well priced. Honda is 17 working on that with other parties in North America. In 18 fact, some ways, depending on the boundaries of the 19 analysis, if you do a well to wheel analysis, the natural 20 gas vehicle exceeds or maybe farther exceeds the battery 21 electric unit's air quality value. So ultimately 22 performance based evolution of ZEV policy more fairly 23 recognize the real contributions of these vehicles.

24 In summary, staff's ZEV Program direction 25 emphasizing or creating optional pathways based on fuel PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 260 1 cell vehicle technology advancement and demonstration and 2 near zero emission hybrid EV's, natural gas vehicles, and 3 near zero emission gasoline PZEVs more closely matches the 4 clean technologies and pathways that are more effective 5 and realistic than achieving ZEV Program goals.

6 Staff's left a placeholder for fuel cell volumes 7 in 2009 and beyond, and that's appropriate. Insertion of 8 an arbitrary vehicle number at this time can be very 9 counterproductive to the advancement of the technology.

10 So leave this to be determined.

11 Honda has concern for the post 2010 ramp ups.

12 And we want to nurture these markets carefully, and so 13 reviews I think make a lot sense and we forward to that in 14 the future.

15 Based on this, we expect CARB's ZEV Program to 16 move toward performance matrix for credits as data becomes 17 available. And Market incentives encourage the advanced 18 technology vehicles. They can be very effective. We all 19 want to see those succeed in the marketplace.

20 Thank you.

21 CHAIRPERSON LLOYD: Thank you, Ben, for you and 22 your team's leadership in many of these areas in the full 23 spectrum of advanced technology. Again, I think you do a 24 great job there.

25 And with that, Mr. McKinnon.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 261 1 And then I have a couple of questions too.

2 BOARD MEMBER McKINNON: I'm going to ask you a 3 question that's redundant to each auto company. That is,

4 what are your plans with respect to the vehicles when you 5 bring them back from lease? Are you willing to re lease 6 or sell them to the lessees?

7 MR. KNIGHT: We certainly went beyond the MOA 8 program. We intended a real world test, went all out on 9 that program. And when it was concluded we continued

10 we set up a re lease program even before there were 11 credits. So we've been extending the lease term for one 12 or two years  actually more than two years. And so we 13 still have over 100 vehicles on the road. There are 14 technical issues that limit the life of those vehicles,

15 mainly related to battery performance. But we're so far 16 keeping them on the road. And of course there are some 17 credits for doing that now.

18 BOARD MEMBER McKINNON: Thanks.

19 CHAIRPERSON LLOYD: Could I also ask, Ben, two of 20 the questions I asked Dave.

21 How do you see plug in hybrids and also how do 22 you see hydrogen IC engines?

23 MR. KNIGHT: You know, plug in hybrids has been 24 an exciting concept. But I think we've learned a lot by 25 developing both battery EV and Hybrids in many PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 262 1 configurations. And the plug in hybrid actually if you 2 wanted to run all electric range you need about a full 3 electric motor, a full size battery like a battery EV.

4 Even on our EV we had a 25 percent power down switch.

5 Even our customers mostly did not want to use that. It 6 didn't have enough acceleration in so many normal traffic 7 situations getting on freeways. And so that plug in 8 hybrid even with a large electric motor is going to kick 9 on the engine, you're going to have a cold start emission.

10 So, first, I don't think the emission performance 11 is necessarily better or different because that's going to 12 kick on on every on ramp, you know, every time you get 13 into the USO6 kind of modes. A little bit higher speeds 14 on the freeway, very normal speeds or accelerations.

15 Secondly, to get battery life  we can do it on 16 a hybrid when we just tap the sweet spot of the battery.

17 And that's what we're doing on our hybrids, and Toyota's 18 doing. Then you can get a very long battery life. It 19 works well. But you get high chemical stress when you 20 bring it up to full charge or deeply discharge it. And 21 that you need to do everyday. So it's really an issue of 22 battery technology not being there for that type of 23 configuration.

24 CHAIRPERSON LLOYD: Hydrogen IC?

25 MR. KNIGHT: Hydrogen ICE. You know, if we had a PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 263 1 perfect renewable grid it would be very exciting to work 2 on that. Right now, the environmental performance of 3 those vehicles I think does not compare to our natural gas 4 vehicle. So we're using natural gas directly in the 5 vehicle. And near zero emissions, zero toxics, zero 6 particulate matter. Just absolutely starting emissions 7 performance, upstream and downstream.

8 And with a hydrogen vehicle range gets much 9 shorter because the density is a third. And that's why 10 hydrogen is a great pick for the fuel cell. They really 11 go together. We've got in our car today 2 1/ 2 times the 12 efficiency of a conventional vehicle. So we're getting up 13 to a serviceable range, at least for the City of L. A.

14 Maybe not for consumers yet.

15 And so I think that you  one concept is to 16 promote the hydrogen internal combustion vehicles as if 17 they'll pull through the infrastructure. But I think from 18 what we know today, it makes much more sense to work on 19 the infrastructure technologies options. They're so 20 exciting. Work on that in tandem with the fuel cell 21 vehicles, match them up, and step by step decide what 22 halfway really makes sense.

23 So I would just urge a little caution there.

24 CHAIRPERSON LLOYD: What's your annual sales of 25 natural gas vehicles in California?

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 264 1 MR. KNIGHT: In California, well, we work hard

2 it's a couple hundred vehicles per year. And we're going 3 to try to increase that with the home refueling option in 4 the future. We think that could bring alternative fuel 5 like natural gas to a consumer market, have a new 6 convenience.

7 CHAIRPERSON LLOYD: And your sales of EVs when 8 you had them there?

9 MR. KNIGHT: The sales of EV'S, to the consumer's 10 side we're less than 100 a year. And we had a 11 full fledged program for two full years with newspaper ads 12 in all the major California cities, magazines for two,

13 three full years coming out every week. Direct mail 14 campaigns. And we saw so few customers.

15 CHAIRPERSON LLOYD: Dr. Burke.

16 BOARD MEMBER BURKE: Everybody knows David 17 Freeman's a real close personal friend of mine. But I 18 have to take unabridged with his statement " not in my 19 lifetime." Well, when you're 77, that's a pretty safe 20 statement to make about anything.

21 ( Laughter.)

22 BOARD MEMBER BURKE: I had the good fortune 23 wearing my South Coast Air Quality Management hat to go to 24 the presentation at the city hall for the FCX. It 25 obviously created a lot of interest and curiosity of the PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 265 1 first commercially used fuel cell car in California.

2 But my concern was durability. And my concern 3 was, you know, did it really have a place in real life 4 market today.

5 So what I did was  last Wednesday I had one of 6 my staff  because I didn't think that if I called, I'd 7 get the real answer. I had one of my staff call the 8 maintenance department of the City of Los Angeles and ask 9 the maintenance director what he thought of the FCX. And 10 he said, " There's only one problem." And the guy said,

11 " Well, what was that?" He says, " I don't have a hundred 12 of them." He said, " This thing"  he said, " This is it."

13 He said, " If I had a hundred of these"  he said, " My 14 problem is keeping the councilmen off me because they want 15 them." Well, it wasn't five minutes later that my phone 16 didn't ring. It was one of the city councilmen calling,

17 he says, " Look, man, I want to get one of those fuel cell 18 cars. I want you to call Ben Knight out at Honda." So 19 thank God, Ben wasn't at his desk.

20 ( Laughter.)

21 BOARD MEMBER BURKE: So I left the councilman's 22 name and phone number in his voice mail and told him to 23 contact him.

24 But I just think that Honda's work on this fuel 25 cell thing has been phenomenal. And anybody who says that PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 266 1 fuel cells can't work in cars needs to go see this vehicle 2 and ride in it.

3 CHAIRPERSON LLOYD: All right. I think also last 4 night a couple of the Board members had a chance to go out 5 to the partnership. And we'll probably get into that.

6 After you drive some of those vehicles  and they're all 7 excellent vehicles.

8 So we appreciate it. And thank you very much.

9 Any other questions from the Board?

10 Thanks, Ben.

11 Kelly, before the break. And, by the way, you 12 really didn't need the armed guard to come today.

13 MR. BROWN: It may be too early to tell, Mr.

14 Chairman.

15 ( Laughter.)

16 BOARD MEMBER DeSAULNIER: Wait until we make our 17 decision.

18 MR. BROWN: I asked them who called them in 19 actually.

20 BOARD MEMBER McKINNON: He works for the great 21 State of California, so we're clear that he's one of us.

22 I play ball at his academy every Wednesday night.

23 So we welcome him here. And I'm sure after he's heard us 24 all get miserable about, you know, what little quantities 25 when he's out doing patrol and he sees a car smoking and PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 267 1 spewing, remember us.

2 MR. BROWN: For the record, my name's Kelly 3 Brown. I'm Director of Vehicle Environmental Engineering 4 for Ford Motor Company.

5 I left the products lights at home this time.

6 The last time I remember, Dr. Lloyd, you told me not to 7 turn it into a sales pitch.

8 CHAIRPERSON LLOYD: Well, if you're still selling 9 the city car and whatnot, we're okay.

10 ( Laughter.)

11 MR. BROWN: Just as a little background. I have 12 a couple of background slides. And then I'll get into the 13 meat.

14 There have been a lot of air quality 15 improvements. We all know this but tend to forget it.

16 The South Coast, for example, has cleaned up dramatically 17 in the last 20 years or so. Still isn't down to where it 18 needs to be, but it's a dramatic improvement. And the 19 reason I bring that up is we also sometimes forget that 20 our industry played a part in that.

21  o0o

22 MR. BROWN: Occasionally, we hear how much the 23 stationary source has done. And I don't think people 24 really realize how much our product as an industry, not 25 just my company but my competitor's too, have done. If PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 268 1 you look at the chart on the left to see where we've come 2 from uncontrolled just on hydrocarbons, for example, and 3 then moving to the right. I stopped it at 1993, because 4 if you try and put it in there, you can't find it. So we 5 blew that up on the right as to what happened from ' 93 on.

6 And as you move out to the right  and I think I 7 was probably the guy that Chuck Shulock was talking about,

8 the PZEV guy. In fact, I thought at the beginning, Mr.

9 Chairman, you said give PZEVs a chance. Was that what you 10 said?

11 ( Laughter.)

12 CHAIRPERSON LLOYD: That's good.

13 MR. BROWN: I'm the type of guy that thinks that 14 PZEVs are kind of the Rodney Dangerfield of our 15 profession.

16 If you look there just on hydrocarbons  and 17 this isn't the best example for a PZEV, if you look at the 18 hydrocarbons on the PZEV versus a ZEV with the powerplant 19 emissions, You can see it's pretty darn close. So PZEVs 20 aren't something to wrap the fish in. They're good 21 products.

22  o0o

23 MR. BROWN: Mrs. Ford was insistent on getting an 24 electric vehicle, even though it was competitive because 25 she didn't like internal combustion engines. But she PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 269 1 bought from a family friend, Thomas Edison. And this is 2 her car up here. And this is a truly ZEV, because they 3 lived on the Rouge River and he put his own powerplant in.

4 He dammed the river, and you didn't need permits then.

5 And so this is truly a zero emission vehicle.

6 And I put in the charging station on the right just to 7 show that it doesn't conform to the CARB standards.

8 ( Laughter.)

9 MR. BROWN: But the bottom line of the 10 presentation I really think the staff as much as I like to 11 get my licks in, just like everybody else who piles on 12 with them, did a good job of trying to not please 13 everybody, and sometimes you don't please anybody.

14 But in the near term the requirements are 15 achievable, at least out through 2008. We have plans in 16 place and we can deliver that.

17 The longer term 2009 and beyond there's some 18 pieces of that that aren't sustainable. And the minimum 19 ZEV requirement needs some evaluation. I'm going to go 20 into each of these in a little more detail.

21  o0o

22 MR. BROWN: The longer term requirement I thin a 23 lot of you have heard me say this before, if you look at 24 the curve on the right, a lot of this happened after the 25 last board meeting, in the 11th hour. There was confusion PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 270 1 over adding more trucks.

2 This is a manufacturer that looks an awful lot 3 like my company, and that's just the AT PZEV and PZEV 4 requirement ramp up on the right. And the reasons for the 5 ramp up are shown on the left. First, the mandating 6 increases from 10 percent to 16 percent, inclusion of 7 light trucks which, in my company's case, about doubles 8 the volume. Collection of manufacturers. We just 9 happened to have the fortune to buy up a bunch companies 10 recently.

11 And while all this is happening, it's almost 12 like the perfect storm, the vehicle credits per unit are 13 dropping down. They phase out. So as the demand for 14 credits goes up, the vehicle credits decrease.

15 And the last point as some in, I think, the 16 public sector once we referred to as the credit glut. By 17 2008, most of the credit glut, if there is one, should be 18 done.

19  o0o

20 MR. BROWN: First the AT PZEV volumes. The long 21 term AT PZEV volumes don't reflect a market demand. And I 22 think I can sea how this happened. If you keep 10 percent 23 mandate you cap PZEVs at 6 percent, and you drop the pure 24 ZEV to zero or near zero, that only leaves the silver to 25 grow. I mean It's a zero sum game.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 271 1 And in retrospect, we were a little surprised as 2 we ran the out years and saw how big that got. So I don't 3 think that was done with any great malice in mind. I 4 think it was just an artifact of changing ga lot of 5 numbers.

6 But one way we can handle that is PZEVs could 7 handle greater than 6 percent. It's something that we 8 haven't solved in all our products, but it's something,

9 again, that's very close to ZEV, it's darn near a ZEV.

10 It is from an emissions standpoint, it's dead on 11 equal to an AT PZEV. So there's no  if you let more 12 PZEVs satisfy the AT PZEV category, you don't lose 13 anything from an environmental basis. They're dead on 14 even. They're both PZEVs.

15 The PZEV standards, again, were set to 16 approximate the powerplant emissions to recharge a ZEV.

17 And I'm not saying here to give up on the  you have to 18 give up on the zero program. All, I'm saying is in the 3 19 binning you've got you can do some reshuffling and make 20 the program more sustainable, and you don't have to give 21 up on your principles.

22 The long term requirement, this is where it gets 23 a little tougher. We think it makes sense to allow 24 greater flexibility to use mixes of ZEVs, AT PZEVs' and 25 PZEVs. Part of the reason the staff had such a hard time PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 272 1 trying to figure out what to do, we in industry tried to 2 see if we could come to one mind to make it simpler to 3 tell you what we want.

4 And the companies' positions are so different 5 that there's no one scheme that fits all companies. And I 6 guess that's good news that we are competing. And when 7 you're in small niche markets, when everybody piles into 8 one area, we've seen what that does, it destroys the 9 product. Because we all end up with fire sales, giving 10 them away and it damages the credibility of the product.

11  o0o

12 MR BROWN: The minimum ZEV requirement. Here's 13 where we get to the controversial piece and you're all 14 starting to smile or frown. We think the staff has taken 15 a correct approach. And I tried putting your hat on to 16 think of how I'd deal with this too.

17 It's too difficult to determine how many ZEVs 18 make sense, especially they're bound to be fuel cells I 19 think, in the 2009 and beyond period. We support the 20 expert review panel. We also think that that panel and 21 the staff and the Board can make use of the fuel cell 22 partnership as input to learn, because we're going to be 23 making this up as we go along. And this would avoid 24 having you pull a number out of the air and running the 25 risk that in all likelihood unless you were very lucky,

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 273 1 it's going to be wrong and we're going to have to do 2 something again in a few months.

3 The requirements in 2009 ought to be based on the 4 conclusions of that panel, but I'm not suggesting you 5 abdicate your authority either to the panel, the process.

6 And I think this is what staff envisioned, is to include a 7 to be determined in the ZEV revisions.

8 I think a lot of people read the 2009 and beyond 9 as zero, but I don't think that's what the staff 10 envisioned. I read it as to be determined, it's a number 11 to be set later. The expert staff would do the study.

12 And I think the battery panel was probably one of the 13 better examples of a credible, independent review. The 14 battery panel, I think, was very thoughtful and pretty 15 honest on both sides.

16 The staff would then consider the input from the 17 review. They'd obviously put their own input to it, take 18 the  but not necessarily be bound to take their 19 conclusions and recommendations. And then again the staff 20 would make recommendations to the Board, and you've never 21 been shy if you disagree to say so.

22 I think that's a good process and it sends the 23 right message to all the parties. If you pick a number 24 out of the air, as a company, the senior management of a 25 company is it's not their money, it's stockholder's money.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 274 1 And if they know it's just a number that's picked out of 2 the air, and it looks unreasonable and it's probably going 3 to be changed, they shouldn't waste a lot of stockholder's 4 money shooting for that number, they've got to wait and 5 see what the real number is going to be.

6 Not because they're evil pull, but because they 7 have no other choice. If there's a reasoned number that 8 comes out of a good process, and it's a fair number,

9 they're going to shoot for it and they're going to compete 10 hard against the competitors.

11 It also sends the right message, I think, to the 12 suppliers. If you tell somebody in this business that 13 even if you don't improve your product and the 14 improvements we need in fuel cells are to get  mainly to 15 get the cost down. It's manufacturing improvements and 16 some design improvements to get the cost down. If you 17 send a signal to the supplier community that no matter 18 what do over the next few years, these guys are going to 19 have buy them and they're going to have to buy them on 20 your price and terms, it doesn't give them an incentive to 21 be hungry. And right now, we want them to be hungry and 22 working hard and to see their future is linked with ours 23 in trying to solve the open issues.

24 So sometimes the message you send isn't the 25 message that's received.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 275 1 With that I'll take some questions, including 2 hydrogen questions.

3 CHAIRPERSON LLOYD: Thanks very much, Kelly.

4 Those are very constructive comments there.

5 Questions from my colleagues?

6 Mr. Calhoun.

7 BOARD MEMBER CALHOUN: If I were to summarize 8 your testimony, Kelly, I would, in effect, say that the 9 alternative compliance step that's currently allowed is 10 the best of the two options that are available to you; is 11 that correct?

12 MR BROWN: I'll make that decision when we're 13 done, and to see what all the requirements are including 14 the out years. And then we'll make a decision as to which 15 path we can go down.

16 Actually, if it went as currently written, we 17 could go either way.

18 BOARD MEMBER CALHOUN: Thank you.

19 CHAIRPERSON LLOYD: Mr. McKinnon.

20 BOARD MEMBER McKINNON: Yeah. I have a little 21 bit of trouble understanding the logic that a 22 stockholder's investment, that officers of a company won't 23 invest stockholder's money in development if we put a 24 number. That somehow to be determined would work better.

25 Because frankly to be determined means I don't PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 276 1 invest until it's determined. You understand what I'm 2 saying.

3 MR. BROWN: Yeah, I'm not talking about the 4 investment. The investment if going to go on no matter 5 what you do here. Even if you wiped it out, our 6 investment is going to go on.

7 BOARD MEMBER McKINNON: For competitive.

8 MR. BROWN: Yeah. I'm talking about putting 9 programs in place to try and meet a number. If you just 10 pick a number out of the air, and people know that it's a 11 number that's picked out of the air, you have to spend a 12 lot of money to hit that number. And if you think, after 13 you spend the money, there's good reason to believe that 14 you probably did the wrong program, because that number 15 isn't real you wouldn't do that.

16 BOARD MEMBER McKINNON: Okay, well, I guess, you 17 know, something I tossed out to the industry the other 18 day, and we've seen the Department of Energy steps, the 19 sort of steps, is that somewhere along the line here we 20 need to come up with a rational number for those steps,

21 and a date that has some reasonable rational place, and 22 then think about someway, if it doesn't work, that  if 23 there's some failure in the development of technology,

24 then, of course, we have a discussion.

25 So I'm really clear about what sort of my PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 277 1 fundamental disagreement is, is I think if we say 2 to be determined, we may get sort of the U. S. fuel cell 3 development stuff going on and the partnership and we may 4 have really small quantities. And I that's a real 5 different thing than getting to commercialize, you know,

6 people buy them product.

7 And I think until we push numbers, we don't head 8 there. And so we disagree on that.

9 But All I'm asking is help us with rational 10 numbers. If we're out of line, and if we're way out of 11 line, then talk to us about that. And I think there's 12 going to be numbers coming up as the day goes on, and you 13 know we do respect your opinion about it.

14 MR. BROWN: And not to be repetitive, but the 15 reason we suggested the independent panel approach is,

16 one, right now, I don't know enough to give you numbers.

17 We could, you know, pick a number out of the air. I don't 18 think anybody does, to be honest with you. We have our 19 first vehicles that are just now being used.

20 The way you normally do a development program and 21 I think if you heard a little bit of this in the Toyota 22 testimony too, you put the first sets of vehicles out and 23 you learn what you've got to learn. And then you figure 24 out what do we do for the next generation. And then how 25 many of those do we need in order to evaluate that group.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 278 1 That hasn't been done yet. That, if we go 2 through the process of getting the feedback back from the 3 early vehicles, go through the independent panels so that 4 people don't see that it's just the auto industry putting 5 the input in and come back with the numbers, I agree with 6 you. I think the only place we really disagree is should 7 we try and do it today on a knowledge basis zero or should 8 we do it in, like, maybe 2 years from now when we actually 9 have some reasonable to believe that what we're doing 10 makes sense.

11 CHAIRPERSON LLOYD: Kelly, you just to follow up 12 on that, you say we don't know what's going to be post 13 2009. And yet you say you know that the numbers for AT 14 PZEVs post 2009 is too high. How do you know that?

15 ( Laughter.)

16 MR BROWN: How do I know  oh, that's real 17 simple. And if it's not clear, I'll be glad to clear it 18 up. The uncertainty I mentioned in answering Mr.

19 Calhoun's question, largely had to do with the number.

20 That will have a great bearing as to which path we take.

21 The HEV piece or AT PZEV which is really HEV,

22 that's too big regardless of what number you put in there.

23 There's more  as you get in the out years of the HEV,

24 there's more numbers in there than think any of us ever 25 conceived of doing. If you look at the numbers for Ford PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 279 1 Motor Company, it's about five times our wildest dreams.

2 And so we know that's too big. And the other two 3 qualifying pieces are CNG, which we have and we sell on 4 the hundreds of units per year. Every year it's a few 5 hundred units a year, so that's not going to help.

6 And hydrogen, which without a refueling 7 infrastructure, we're not going to sell many of those. So 8 it's really an HEV requirement.

9 CHAIRPERSON LLOYD: So are you going to get to 10 the other two questions I had

11 MR. BROWN: But I have a fix though. I didn't 12 just raise a problem. I have a fix too. The fix is we can 13 make more than 6 percent of PZEVs. ANd that was my whole 14 reason for going through the background saying that 15 they're not as bad as one of the Board members, the one 16 who's grinning thinks.

17 CHAIRPERSON LLOYD: Well, would it also be 18 helpful if staff proposed the review panel would also 19 assess the appropriateness.

20 MR. BROWN: Oh, absolutely. Thank you. I meant 21 to bring that up because I listened very carefully to the 22 staff proposal and then forgot to mention it. Thank you.

23 Yes, it does sound like the right thing, because 24 it's not something we have to know tomorrow. It's not the 25 snake that's closest to our door right now. We've got a PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 280 1 lot of other things to worry about and there is time to do 2 that.

3 CHAIRPERSON LLOYD: So you come and are you going 4 to build hydrogen IC engine?

5 MR. BROWN: If we have infrastructure and if we 6 can get the NOx down.

7 CHAIRPERSON LLOYD: So you a NOx is an issue.

8 MR BROWN: Yeah. But I wouldn't say stop based 9 on that. Because in 1990 if you asked me the same thing 10 about CNG I would have said I don't know how we're going 11 to get the NOx down and we did. And the issue is very 12 similar, you're running so lean that typical catalysis 13 doesn't help you.

14 The numbers that we sent to Bob, there is no 15 add on emission controls to that engine. Because when 16 you're running that lean, a three way catalyst, it's very 17 similar to the problem that diesel guys have. When you're 18 running that lean, a conventional three way catalyst 19 doesn't work.

20 CHAIRPERSON LLOYD: Then what about plug in 21 hybrids?

22 MR BROWN: We've wrestled with that so often.

23 And the biggest reason why we never went down that path is 24 we looked  when we started to go to a hybrid, we wanted 25 to get ride of all the things that customers didn't like.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 281 1 And the things that customers didn't like is when they 2 have to do something that they don't normally do.

3 If they to stop at a refueling station more often 4 just for regular gasoline, they don't like. If they have 5 to hunt around to find like CNG or methanol or something 6 like that, they don't like that. If they have to run 7 around and find a plug to plug in, they don't like that.

8 The benefit of the type of hybrid that we're 9 going to do is the customer doesn't have to do anything 10 other than buy one and drive it and like it and stop for 11 gas less than they normally do.

12 CHAIRPERSON LLOYD: Supervisor Roberts,

13 Supervisor DeSaulnier.

14 MR. BROWN: It's not a technical issue.

15 BOARD MEMBER ROBERTS: Just a quick question.

16 I'm trying to figure out what the difference might be in 17 setting a number and reviewing it in a couple years or not 18 setting a number and review it in a couple years. And 19 what I'm hearing from you in a couple years we're going to 20 have some perspective that's going to affect, even if we 21 were to put something in today, that it seems that is 22 probably going to force us to review anyway.

23 And I'm wondering if there's a down side to 24 setting a number and then reviewing that every two years 25 as opposed to not setting any number and reviewing  and PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 282 1 trying to set it in two years.

2 MR BROWN: The only thing from our standpoint 3 there's a number out there, and then we have to decide is 4 that a real number or not. Depending on the size of the 5 number, it will probably make a difference as to how you 6 execute the program or programs. And if the number is too 7 big, then we just throw our arms up and say okay now what 8 do we do. Do we hope that that the next time they're in a 9 better mood or do we wait a little while and there's 10 another administration, and the next board, I've done that 11 before, and it didn't work.

12 BOARD MEMBER DeSAULNIER: It didn't work.

13 ( Laughter.)

14 BOARD MEMBER DeSAULNIER: A lot of us have been 15 through that.

16 ( Laughter.)

17 MR. BROWN: In fact I just saw your predecessor 18 in the back of the room a little while Alan, I thanked him 19 for being here again.

20 CHAIRPERSON LLOYD: I saw him too.

21 BOARD MEMBER DeSAULNIER: We're fuel neutral.

22 BOARD MEMBER ROBERTS: You know, I know there are 23 people that would disagree with me, but I think if there's 24 anything that we learned, if just setting a number was 25 going to give us a solution, we'd be all driving electric PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 283 1 cars today. Setting the number didn't all of sudden set 2 aside the laws of physics and everything so all this stuff 3 is working.

4 But I'm just wondering in terms of a strategy,

5 and part of the reason why I asked for the Department of 6 Energy time line, I'm trying to figure our where our we 7 between now and then. And do we known and what do we know 8 it. And, you know, how clear is this in two years, how 9 clear is it in four years. It's very easy to set a 10 number.

11 And, in fact, if the research is done and we're 12 very successful and it happens very quickly, any number we 13 set is probably  maybe we've blow right through that and 14 we sort of laugh, because we set a number so low. On the 15 other hand, if it doesn't come out, if not this Board,

16 some future Board is going to be having this same hearing,

17 same meeting, saying well these were all  this was the 18 promise. This is where we had hoped to be. These are all 19 the things that we had hoped would happen that didn't 20 happen.

21 I've been through that once. And I'm trying to 22 figure out what I've learned from that, and maybe what 23 we've learned from that as a board. But I'm almost not 24 seeing the difference between saying you have a number.

25 You're going to review it in a couple of years or you PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 284 1 don't set a number and you're going to set in a couple of 2 years.

3 CHAIRPERSON LLOYD: Well, I think we're going to 4 hear a number of witnesses who would provide an 5 explanation for why we should set something.

6 BOARD MEMBER ROBERTS: That's what I'm trying to 7 bring into this discussion and get a response back. I 8 mean, we haven't talked about a number. And we're going 9 to get to the end of a very long hearing and we're going 10 to have heard from the industry. And then all of a sudden 11 somebody is going to put a number out and put it on the 12 table. And, you know what, what he's saying is right,

13 it's going to be arbitrary.

14 CHAIRPERSON LLOYD: Well, I don't think, again,

15 we haven't got a number yet, so I don't think it's 16 arbitrary. Also, I do think

17 BOARD MEMBER ROBERTS: It will be when it comes 18 later today, watch.

19 CHAIRPERSON LLOYD: Professor Friedman. Mr.

20 McKinnon.

21 BOARD MEMBER HUGH FRIEDMAN: I was going to wait 22 a little longer on this, but since we're on the point. I 23 wasn't around. Were you, Ron, when this mandate was first 24 adopted.

25 BOARD MEMBER ROBERTS: Not in 1990.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 285 1 BOARD MEMBER HUGH FRIEDMAN: It seems to me that 2 nothing could have been more arbitrary than to say that in 3 12 years, more speculative, more aspirational, but without 4 any real fundamental scientific basis than to say that ten 5 percent or what some percent of all sales in California of 6 motor vehicles were going to be zero.

7 And so from the get go this was aspirational.

8 It's like in 10 years, we're going to have a man on the 9 moon or by the end of the decade. That's identifying a 10 specific thing in space, and it's a specific timeline.

11 And it seems to me that the tradition and what 12 we're continuing is an aspiration. And we have a lot more 13 data and information now. We read that CEOs of major auto 14 companies are talking about specific numbers. They're not 15 committing, obviously, but they're stating this is their 16 goal. By the year 2010 we're going to have 10,000 fuel 17 cell vehicles. Now, nobody is going to say that that's a 18 contrary, that's legally enforceable, but it's 19 aspirational.

20 So what's wrong with an aspiration, setting a 21 goal, whatever it is, 250 is what the staff's proposing 22 starting in 2009. That's the way I read it anyway.

23 Am I wrong?

24 And whatever the number is, as a signal that this 25 is what California wants, and expects at a minimum, and PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 286 1 then have an expert panel advise us or our successors and 2 have a review and listen to the industry as we've 3 listened. I've been through two of these now. And we've 4 paid attention.

5 We've questioned whether you made every possible 6 college effort try to sell, to market what you did 7 develop. And we've heard Toyota's case on the RAV4. And 8 we appreciate what is being done, and the way you're 9 developing things. But what's wrong with taking a number?

10 BOARD MEMBER ROBERTS: That's what I was asking.

11 CHAIRPERSON LLOYD: I think. Well, I think

12 MR. BROWN: It's A good question and it deserves 13 an honest answer. And I hope it doesn't offend anybody.

14 It's not intended to be offensive. It's's the answer. It 15 has to do with credibility. This isn't the first time 16 we've gone back to the well. And our management is 17 skeptical. My management is. And I suppose the 18 management of the other companies are.

19 If we come back and they say I've got some good 20 news and some bad news. And, you know, tonight I've got 21 to  or tomorrow you know whenever this ends, I've got to 22 write something up and try and explain what happened,

23 other than just saying it was 3 to 97 and we got killed.

24 If I say, that it's 2,500 or 6,000 or 9,000 or 25 some of the other numbers I've heard, they'd say where did PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 287 1 that come from? And I'd say well, it just came out of the 2 air. And they put it in there.

3 And they'd say based on what? And I'd based on 4 nothing. Didn't you tell them? Yeah, I told them. I 5 suggested we go through this panel. They didn't listen?

6 No, they didn't listen.

7 And they'll say, so what do we do? And I've got 8 to tell you what I'd tell them and that is we've got to 9 wait and find out what the real number is.

10 CHAIRPERSON LLOYD: Not so many years ago your 11 CEO was also claiming large numbers in much sooner than 12 2010. How did you address that point?

13 MR BROWN: I had the distinct privilege of going 14 in and telling the guy who's name is bolded to the 15 building that that wasn't a good number. I don't want to 16 do that again, either.

17 ( Laughter.)

18 MR. BROWN: I think you get to do it once.

19 CHAIRPERSON LLOYD: Supervisor DeSaulnier.

20 BOARD MEMBER DeSAULNIER: Actually thanks for 21 asking that question, because Kelly you remember in 2001 I 22 went outside during a break and mentioned to you that your 23 now Chairman had made a public pronouncement that by 2020 24 Ford wouldn't be making internal combustion engines any 25 longer.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 288 1 So when he asks where they come up with the 2 number, we followed his lead was part of the answer.

3 ( Laughter.)

4 ( Applause.)

5 MR. BROWN: I'll quote you on that. I won't say 6 I immediate that up myself.

7 BOARD MEMBER DeSAULNIER: Well, you probably 8 won't be able to spell my name, so that's fine.

9 ( Laughter.)

10 BOARD MEMBER DeSAULNIER: Are you the one who has 11 got Dave's car? Are you the one who's interested in 12 producing a hydrogen Prius or is that another auto 13 manufacturer, Kelly?

14 MR. BROWN: I don't know who it was. I'll find 15 it.

16 CHAIRPERSON LLOYD: The Ucar. Ucar.

17 MR BROWN: No, we've got our own.

18 BOARD MEMBER DeSAULNIER: So in regards to what 19 Alan was asking about in terms of infrastructure and the 20 chicken and egg, are you interested in the idea of 21 pursuing credit for infrastructure, hydrogen 22 infrastructure?

23 MR BROWN: No, and for two reasons. The first of 24 which is I've learned that all the alternative fuel 25 programs that we've been through, we're not fuel PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 289 1 providers. And if we start getting into that business,

2 All we have is public relations sessions. We don't 3 actually accomplish something.