3 MR. HOGO: It would just delay the  if the 4 fiscal restraints are not there, then it would just delay 5 the process by a month. But if the fiscal restraints are 6 there, we would have to move a lot faster.

7 BOARD MEMBER BURKE: What if we did a 50 percent 8 of all the money to all the districts and then used the 9 next month for the amelioration of the other 50 percent?

10 Would that provide you with the ability to operate?

11 MR. HOGO: Yes, it would.

12 BOARD MEMBER BURKE: Okay.

13 CHAIRPERSON LLOYD: Yes. Professor Friedman.

14 BOARD MEMBER HUGH FRIEDMAN: I don't think this 15 is any way  you know, in all due respect, any way for us 16 to be adopting important policy. This was just handed to 17 us. This has been on our agenda for a long, long time.

18 All due respect, Mark  and I understand your 19 point. And my colleague from San Diego, we are sort of in 20 the same boat as the Bay Area. But unless the staff can 21 readily come up with some approach or formula during our 22 brief break, that we can really rally around and develop a 23 consensus, it seems to me that if we can defer a month or 24 whatever without any undue impact or harm to any of the 25 districts, that's one thing. And I don't know the answer PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 95 1 to that apparently. I don't know the effect of a delay of 2 30 days at this point, but  or one month to our next 3 meeting.

4 But I don't think we're in a position to adopt 5 anything today that's a major change in allocation of 6 funding when its just been raised, unless the staff has 7 some magic solution.

8 BOARD MEMBER DeSAULNIER: Mr. Chairman. I know 9 you want to go to break

10 BOARD MEMBER HUGH FRIEDMAN: So take a break, see 11 if people

12 CHAIRPERSON LLOYD: Supervisor DeSaulnier.

13 BOARD MEMBER DeSAULNIER: I just want to clarify.

14 For my position I'm not asking for support to change the 15 whole allocation. I'd like to have a month to see if we 16 can work on coming up with a couple of options, and then 17 we come back and talk about what's fair and we see where 18 the votes are.

19 CHAIRPERSON LLOYD: What I would suggest is 20 following what Professor Friedman mentioned earlier. If 21 we could take a 15 minute break  not for staff  so 22 that you could take a look at what's going on here. And 23 see if you can come back to reflect  you can see the 24 Board's concerns  I think to address the issue of how 25 can we get some of these funds out, can we get some PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 96 1 partially out? Maybe as Dr. Burke suggested, what do we 2 gather then? Or should we in fact hold a month without 3 penalizing and jeopardizing some of the funds? We clearly 4 know at this time in Sacramento that we need to get funds 5 so that we can be cleaning up the air as soon as possible.

6 So with that we'll take a 15 minute break. The 7 clock at the back  so we'll take till 11: 20.

8 For those of you who are also interested, there 9 is an overflow in the Coastal hearing room right next door 10 where there's audio and visual.

11 So thank you.

12 ( Thereupon a recess was taken.)

13 CHAIRPERSON LLOYD: We will continue with this 14 item.

15 I think before we hear from staff, Mr. McKinnon 16 had a  well, I guess wanted to put staff on alert to an 17 issue he wants to see covered.

18 Mr. McKinnon.

19 BOARD MEMBER McKINNON: Yeah, I'm going back to 20 our original debate on the school bus issue back a few 21 years ago where we ended up having quite a complete 22 discussion about the value of retrofits in cleaning up 23 more buses that affected more kids.

24 And I understand that there may be some 25 legislative sort of restrictions on how we deal with it.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 97 1 But there was a speaker earlier that talked about using 2 the administrative  or the matching amount and allowing 3 the matching funds to be retrofit.

4 And I guess if we end up taking more time to 5 figure this out, what I would like  and I don't know if 6 there are other Board members that agree with this  is 7 I'd like some approach at us figuring out how to get 8 retrofit back into this equation. I think we get more 9 done per dollar with retrofit. And I'm worried that we're 10 doing this without any retrofit in the picture.

11 Thanks.

12 CHAIRPERSON LLOYD: Thank you.

13 Ms. D'Adamo.

14 BOARD MEMBER D'ADAMO: Do we have the discretion 15 to do that?

16 EXECUTIVE OFFICER WITHERSPOON: The Legislature 17 was very clear that they expected us to purchase new buses 18 with the 20 percent of Prop 40 funds and not to engage in 19 retrofits. We do have the discretion on the matching 20 amount, I believe. However, we've cut the match to almost 21 nil wherever we could because of the financial constraints 22 of school districts.

23 So where there is some residual match 24 requirement, we can look at it. But that's probably not 25 going to result in a whole lot of retrofit activity.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 98 1 And I would say that staff agrees with Mr.

2 McKinnon, that retrofits are an extraordinarily cost 3 effective way to proceed. It's just that we're following 4 the direction from the Legislature on how they would wish 5 these funds be appropriated.

6 CHAIRPERSON LLOYD: So now we're coming back with 7 pearls of wisdom from the staff on how we address the 8 issue.

9 EXECUTIVE OFFICER WITHERSPOON: What we would 10 like to propose to you is that you approve the school bus 11 portion of the item today, because the school bus 12 allocations are already based on population only. They do 13 not have an M4 multiplier.

14 And then we would return to you in April with 15 Carl Moyer alone and with various options for the funding 16 criteria, including what you have today, population only,

17 and versions in between.

18 During the break we consulted with our own 19 administrative services staff with many of the districts 20 who receive these funds to find out if we were creating an 21 unmanageable problem at the receiving end. And we were 22 assured that a one month delay will not damage the program 23 in any way, that they can deal with that change in 24 schedule.

25 CHAIRPERSON LLOYD: Yes. Supervisor DeSaulnier.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 99 1 BOARD MEMBER DeSAULNIER: I think that's fine,

2 Mr. Chairman. I would move the staff recommendations,

3 including the amendments that Catherine Witherspoon just 4 mentioned. But I would ask that  obviously we'll get 5 engaged by the folks from the Bay Area legislative 6 delegation and the issues that have been brought up by my 7 colleagues up here.

8 CHAIRPERSON LLOYD: I would also like  could I 9 just add one point?

10 BOARD MEMBER RIORDAN: You need a second for the 11 motion, Mr. Chair. I was just

12 CHAIRPERSON LLOYD: I guess we do.

13 Well, I got two seconds here.

14 BOARD MEMBER RIORDAN: Okay. That's fine.

15 CHAIRPERSON LLOYD: I had just one comment to 16 staff, I think, that I would like to take advantage of Mr.

17 Hogo's suggestion that we make sure that we actually get 18 the cleanest CNG buses possible and put the oxi cat on 19 there would be good.

20 BOARD MEMBER D'ADAMO: Mr. Chairman?

21 CHAIRPERSON LLOYD: Yes, Ms. D'Adamo.

22 BOARD MEMBER D'ADAMO: Yeah, and if I could just 23 add to the suggestion by Supervisor DeSaulnier. I know we 24 were all kind of surprised by receiving this letter. And 25 as I understand it  from the Bay Area delegation. As I PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 100 1 understand it, this just moved within the last couple of 2 days. I suspect that there are a number of individuals,

3 key legislators in the valley, that may also have 4 concerns. So I would just suggest to staff that they 5 contact some of those individuals, such as Senator Flores.

6 And also would like to suggest that staff contact 7 Supervisor Patrick since she didn't have the opportunity 8 to be here today.

9 BOARD MEMBER DeSAULNIER: That's fine with me.

10 We always want to get along with our neighbors.

11 CHAIRPERSON LLOYD: Supervisor Roberts and also 12 Mr. McKinnon.

13 BOARD MEMBER ROBERTS: No, we always want to get 14 along with our neighbors too, so I agree with that.

15 CHAIRPERSON LLOYD: Mr. McKinnon.

16 BOARD MEMBER McKINNON: Yeah, I'm sure 17 unintentionally, by moving it, we haven't dealt with the 18 retrofit issue. And what I would like is to have it 19 considered a friendly amendment that we include retrofit 20 as one of the things that qualifies as matching funds.

21 BOARD MEMBER DeSAULNIER: That's fine.

22 CHAIRPERSON LLOYD: Okay.

23 BOARD MEMBER ROBERTS: I'd like to see that, I 24 think  you know, I've got a strong interest in the 25 retrofit, and I think his comments are well made.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 101 1 CHAIRPERSON LLOYD: And I think that would also 2 help to address one of the comments made earlier.

3 Well, we've got a motion, we've got a seconder.

4 All in favor say aye.

5 ( Ayes.)

6 CHAIRPERSON LLOYD: Anybody against?

7 Seeing none, unanimously passed.

8 And thank you, staff. And we look forward to you 9 coming back next month.

10 With that we'll take just a short break before we 11 move into the major feature of the day.

12 ( Thereupon a short break was taken.)

13 CHAIRPERSON LLOYD: Okay. If my colleagues could 14 take their seats. And I'd like to begin this item.

15 Agenda item 03 2 4. Public hearing to consider 16 amendments to the California Zero Emission Vehicle 17 Regulation. I recognize this is the one you've been

18 most of you have been waiting for.

19 I'd just like to say at the beginning also, we're 20 expecting a large number of witnesses. If in fact we can 21 keep those comments as short as possible for the bulk of 22 witnesses. They're going to try to hold most people to 23 three minutes.

24 But we have a lot of witnesses to get through.

25 It sounds like close to 100 witness. So we have a really PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 102 1 long day ahead of us.

2 We also will find that we don't intend to take a 3 break for lunch. And so you will see Board members 4 disappearing at various times. If you happen to be 5 testifying, there's no slight meant to you. It's a matter 6 of the Board members getting hungry. But we can see and 7 hear in the back. So we will be rotating on that.

8 Again, I think right at the outset I want to 9 dispel any concern here that the Board is backing down.

10 We are committed to the goal of zero emission vehicles.

11 ( Applause.)

12 CHAIRPERSON LLOYD: And it's very clear that, as 13 we understand the issues, for example, of estimating 14 on road vehicle emissions, particularly in the South Coast 15 and other areas, it's very important to get to zero as 16 fast as possible.

17 Of course we also recognize that substantial 18 progress has been made in bringing these vehicles to as 19 close to zero as possible. And I'll say a little bit more 20 about that.

21 Again, I think the  I'd also like to thank 22 staff for their outstanding efforts they've made to craft 23 a more flexible practical path ahead.

24 And I think that  also it's not true, that we 25 read in the L. A. Times editorial, the staff in fact is not PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 103 1 worn down by the auto industry. How could they? In fact,

2 we brought up reinforcements. We brought a new 3 battle hardened executive officer. She cannot be worn out 4 after two months.

5 ( Laughter.)

6 CHAIRPERSON LLOYD: So, in fact, I say we're 7 really trying to do our best. And I know, I've sat for 8 hours with them and they've sat for many more hours, that 9 they've really tried to work diligently.

10 And I'd also like to thank all the other 11 stakeholders, particularly also the auto industry who is 12 going to also have a major impact here. They have also 13 tried to work with us in a constructive way, clearly 14 looking at their interests as well. But we've come a long 15 way I think in a mutual understanding.

16 And I hope that we can move ahead in a manner in 17 which we can actually work together, practically, and in 18 fact continue our dialogue and continue the progress to 19 meeting our air quality goals. The health data, some of 20 which you heard today, indicates that we have an 21 obligation to protect public health.

22 I am encouraged by the way we have worked 23 together. You'll hear today some more about the fuel 24 cell. I can attest firsthand, what I've learned working 25 with a fuel cell partnership over the last number of PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 104 1 years, both technically and also working together as 2 colleagues. And I can't overstress that piece because 3 that's going to come up here.

4 While we recognize that this technology is not 5 there today, we also recognize  there's a major 6 commitment from all the stakeholders  this is a 7 technology which also will bring us to zero emission 8 technology.

9 This is a technology which Governor Davis 10 mentioned when the California Fuel Cell Partnership was 11 initiated. And I think this had  also rose to the 12 global stage when President Bush mentioned the promise and 13 reality of hydrogen fuel cells not too long ago.

14 And so I am really excited about that aspect.

15 And I say, I'm really encouraged about the way in which 16 we're working with the auto companies.

17 However, we also recognize that we have a major 18 obligation to the Board, that we cannot wait for the 19 promise, which I think will be real; that we have to do 20 whatever we can now to continue that effort. I'm 21 delighted to see the progress that we've made through all 22 the electric drive technologies, and encouraging those 23 technologies, and in some cases requiring those 24 technologies.

25 I think it's very important that we continue PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 105 1 that. And I think it's  no doubt in my mind that since 2 the inception of the program, that we've had a major 3 impact.

4 One of the things that we've found  and we've 5 been asked, " What has changed in the last two years? Why 6 are we doing certain things?" And that will be addressed 7 by the staff. And I'm sure my colleagues will address it 8 as we go through.

9 What I would say there, that our commitment to 10 clean air and to zero is steadfast. However, based on 11 data, I do not feel that I will be serving myself, my 12 colleagues, or the State of California if I do not take 13 that into account as we move ahead. And to me that's a 14 very important issue.

15 So while air quality and public health are our 16 major goals, we also have to recognize the best way of 17 getting there.

18 I think the last 13 years we have seen a real 19 focused effort with the industry and with all stakeholders 20 to try to get us to our goals as identified in 1990. That 21 is, where in fact gasoline vehicles now we've seen that 22 progress, now only just in zero, but the near zero. So we 23 have through the PZEVs virtually lifetime warranties, and 24 we have both from the tail pipe and also from evaporative 25 emission.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 106 1 And then we've got the advanced technology 2 through the partial zero emission hybrid vehicles and 3 natural gas vehicles.

4 Again, I would say obviously this program has 5 created more debate and discussion than probably any 6 regulation that they ARB has put forward. And it's 7 commonly known as the ZEV Program. But I think, as we 8 will hear from the staff, has accomplished many things 9 apart from the true zero emission vehicle. So now the 10 delta between the cars on the road and also the true zero 11 is very small, but it is significant. Our ability to 12 characterize on road vehicle emissions  if you've got 13 aftertreatment on there, you're still worried about that 14 potential decay. And as I indicated earlier, and I think 15 we'll here from people testifying, in the South Coast AQMD 16 our ability to characterize on road vehicle emissions is 17 limited. And of course if we start off with something at 18 zero at zero miles, zero to a hundred thousand miles,

19 we're far better off.

20 Again when we looked in 2001, I was hopeful that 21 would be the last time where we would actually address 22 this issue. Unfortunately that didn't happen. There are 23 many reasons why it didn't happen. I won't go into that.

24 But on the other hand, since we are back here today, then 25 we are talking about some significant changes.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 107 1 I think  it would be tempting I think to not 2 ask some of the tough questions, to just move ahead and 3 try to just address some of the legal issues. But as I 4 indicated before, that flies in the face of all the things 5 we've known. So I think that we will hear I think today 6 from staff a program that's committed to the ultimate 7 goal, a real and robust Zero Emission Vehicle Program.

8 I think It's important we have the debate. I 9 will be looking particularly today, and I'm sure my 10 colleagues will also, particularly from the industry, some 11 of the flexibility that we've given this program and 12 whether they intend to take care of some of that  take 13 advantage of some of that flexibility, and also whether 14 they're committed to working with us in this continued 15 goal.

16 I was reminded just this week, as I was looking 17 at this program, there's somewhat jeopardy in going back 18 in this time of battle, et cetera, to John Lennon's 19 comment, Give peace a chance." I would hope in this case 20 as we move ahead, give the engineers a chance. We need to 21 work together. We owe this to the people of California.

22 We owe it to ourselves.

23 So I hope that we can change the dialogue here.

24 And I certainly want to state that on behalf of myself and 25 my colleagues and for Secretary Hickox and the Governor,

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 108 1 we really want to work together to continue the progress 2 that has being made to date.

3 I'm sure we'll have a wide range of comments 4 today regarding staff's proposal. We don't have all the 5 answers. Staff doesn't have all the answers. But what 6 you cannot criticize is their effort, their desire to put 7 together to craft a program, to be the very strongest 8 possible, recognizing our lessons to date.

9 With that, I would like to turn it over to Ms.

10 Witherspoon to begin the staff's presentation.

11 EXECUTIVE OFFICER WITHERSPOON: Thank you,

12 Chairman Lloyd.

13 The ZEV Program is an integral part of ARB's 14 efforts to reduce emissions from passenger cars and 15 light duty trucks. As part of our low emission vehicle 16 program, the ZEV component seeks to commercialize new 17 vehicle technologies that eliminate not only tailpipe 18 emissions, but also emissions from evaporation and from 19 the in use deterioration of vehicle emission control 20 systems.

21 The current regulatory process before us today 22 was initiated in response to litigation and a court order 23 enjoining ARB from enforcing the 2001 ZEV amendments.

24 However, opening the regulation to cure its legal 25 deficiencies led to a broader staff evaluation of where PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 109 1 things stand and what else needs the Board's input and 2 potential correction. As such, this rulemaking became an 3 opportunity to address the current state of technology 4 development and ZEV percentage requirements in the near,

5 mid, and longer term.

6 The proposal before you today would eliminate all 7 references to efficiency and fuel economy in the ZEV rule,

8 substituting alternate credit mechanisms for ZEV enabling 9 componentry.

10 The proposal would also create an alternative 11 compliance path to give auto manufacturers greater 12 flexibility; would establish a new independent review 13 panel, like our prior battery panel, to advise the Board 14 on the status of development of all ZEV technology types 15 as we move ahead; and would fix the number of smaller 16 implementation issues that have been brought to staff's 17 attention since the 2001 hearing.

18 If approved by the Board, the proposed amendments 19 would resolve the current legal issues in the federal 20 court case and would enable us to resume ZEV 21 implementation by 2005. The proposal also reduces ozone 22 precursor emissions to a greater degree than the 2001 23 amendments at a reduced cost.

24 Based on the outcomes I just described, staff 25 believes it has brought the Board a solid, balanced PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 110 1 proposal for proceeding with the ZEV regulation. In our 2 view the proposed changes are rational, reasonable and 3 defensible from a technological feasibility standpoint.

4 However, staff readily admits there is still a 5 great deal of controversy over what we have proposed from 6 both sides. The most prominent issue is whether the Board 7 should mandate a growing volume of pure ZEV technologies 8 in 2009 and beyond. There is also the perennial issue of 9 whether California should have a ZEV mandate at all.

10 The proposed changes to the ZEV regulation 11 reflect a series of very difficult discussions, both 12 internally and with interested stakeholders. Throughout,

13 staff's objective was to define changes that would 14 maintain pressure on the industry to pursue true ZEVs,

15 while acknowledging the challenges associated with the 16 current state of technology and its cost.

17 Staff believes the proposed modifications will 18 continue to advance pure ZEV technology research and 19 development, support the commercialization of ZEV enabling 20 advanced technology vehicles, and achieve significant 21 criteria pollutant emission reductions.

22 Chuck Shulock of the Mobile Source Control 23 Division will now begin the staff's presentation.

24 VEHICLE PROGRAM SPECIALIST SHULOCK: Good 25 morning, Mr. Chairman and members.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 111 1 I will begin our staff presentation with some 2 background on the zero emission vehicle program and why 3 we're here today recommending changes.

4 Analisa Bevan and Craig Childers of our staff 5 will then describe the various proposed changes.

6 Following their summary I'll conclude our presentation 7 with a discussion of the major open issues and our staff 8 recommendation.

9 To set the stage for your consideration of 10 program changes I will first give you a brief recap of the 11 structure of the regulation and its goals. Next I will 12 summarize some of the achievements of the program to date.

13 I then will discuss why we believe that changes are needed 14 and the objectives that we had in mind when we prepared 15 our suggested modifications.

16  o0o

17 VEHICLE PROGRAM SPECIALIST SHULOCK: As you may 18 recall, the basic requirement is that 10 percent of the 19 vehicles sold by manufacturers must be ZEVs. Over the 20 course of its history this requirement has been modified 21 several times to provide additional flexibility and to 22 take advantage of emerging technologies. There are now 23 three categories of vehicles in the program.

24 At least 20 percent of the requirement, or 2 25 percent of sales, must be pure ZEVs, vehicles with no PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 112 1 tailpipe emissions. This is commonly referred to as the 2 gold category, and it's the circle on the left on the 3 slide before you.

4 Another 6 percent may be met by vehicles known as 5 partial zero emission vehicles, or PZEVs. These are 6 extremely clean conventional gasoline vehicles. We refer 7 to this as the bronze category, in the upper right.

8 The third category, which may account for another 9 2 percent, consists of vehicles known as advanced 10 technology PZEVs, or AT PZEVs. These are vehicles that 11 meet the stringent criteria for PZEV status and also uses 12 ZEV like technology such as electric drive or gaseous fuel 13 storage. This is known as the silver category.

14  o0o

15 VEHICLE PROGRAM SPECIALIST SHULOCK: This next 16 slide lists some of the vehicle types commonly found in 17 each category. The gold or pure ZEV category contains 18 vehicles with no emissions, such as battery EVs or 19 hydrogen fuel cell vehicles.

20 The silver category is home to advanced 21 technology PZEVs. Examples of such vehicle types include 22 CNG, hybrid electric, hydrogen internal combustion,

23 grid connect hybrid, and methanol fuel cell vehicles.

24 The bronze category consists of basic PZEVs.

25 These are extremely clean gasoline vehicles and are also PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 113 1 quite advanced.

2  o0o

3 VEHICLE PROGRAM SPECIALIST SHULOCK: As a 4 starting point for our substantive discussion it's helpful 5 to take a step back and review the overall goals of the 6 ZEV Program.

7 First and foremost the program is designed to 8 achieve significant air quality benefits through 9 deployment of zero and near zero emission vehicles. This 10 is achieved through the production and placement of a 11 variety of extremely clean vehicles in all three of the 12 program categories that I mentioned.

13 Second, the program pushes the research 14 development and deployment of zero emission vehicles.

15 This is the focus of the pure ZEV, or gold portion of the 16 program.

17 Finally, the program seeks to encourage ZEV 18 commercialization through the introduction of ZEV enabling 19 technologies such as hybrid electric and alternative fuel 20 vehicles. Such vehicles will develop a manufacturing and 21 supplier base for technologies that ultimately will be 22 used by pure ZEVs. This is the purpose of the silver 23 category.

24  o0o

25 VEHICLE PROGRAM SPECIALIST SHULOCK: Progress has PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 114 1 been made on each of these goals. Since its enactment in 2 1990 the ZEV Program has resulted in a number of benefits,

3 including significant efforts to advance battery 4 technology  more than 2,500 full sized Battery Electric 5 Vehicles leased or sold in California, plus many thousands 6 of Neighborhood Electric Vehicles  ten near zero 7 emission PZEV models currently certified; three hybrid 8 electric vehicles on sale and others announced; and air 9 quality benefits from the deployment of all of these 10 extremely clean vehicles.

11  o0o

12 VEHICLE PROGRAM SPECIALIST SHULOCK: Meanwhile 13 there have been other developments that are not directly 14 related to this regulation, but are working towards the 15 same end. The most noteworthy example is the California 16 Fuel Cell Partnership, which is a path breaking 17 collaboration of auto companies, fuel providers, fuel cell 18 technology companies, and government agencies, that is 19 placing fuel cell electric vehicles on the road in 20 California. The partners include 20 companies and 21 organizations from around the world.

22  o0o

23 VEHICLE PROGRAM SPECIALIST SHULOCK: Another 24 recent event that is worthy of note is the announcement of 25 the Freedom Car and Fuel Initiative by the federal PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 115 1 government, as the Chairman mentioned.

2 This program will invest federal funds over the 3 next five years to develop hydrogen powered fuel cells,

4 hydrogen infrastructure, and advanced automotive 5 technologies.

6 There have also been other national and 7 international commitments to ZEV technology. So in 8 general there is now considerable momentum behind the push 9 towards zero emission vehicles.

10 So if all is proceeding so well, why are we here 11 before you recommending changes?

12  o0o

13 VEHICLE PROGRAM SPECIALIST SHULOCK: We have two 14 fundamental reasons. We would like to address legal 15 challenges that have been raised and we seek to better 16 align the regulatory requirements with technology and 17 market status.

18  o0o

19 VEHICLE PROGRAM SPECIALIST SHULOCK: First of 20 all, staff believes that it would be prudent to address 21 legal challenges that have been raised regarding the 2001 22 amendments. The first case is a federal preemption 23 lawsuit filed in January of 2002. On June 11, 2002, a 24 federal strict judge issued a preliminary injunction that 25 prohibits the ARB's executive officer from enforcing the PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 116 1 2001 ZEV amendments with respect to the sale of new motor 2 vehicles in the 2003 or 2004 model years. This is pending 3 final resolution of the case.

4 Two other lawsuits have been filed in state 5 court, one addressing broader aspects of the regulation 6 and one challenging the date by which vehicles must be 7 placed in service in order to qualify for early 8 introduction multipliers.

9 Staff also believes that there is a need to 10 better align the regulatory requirements with technology 11 and market status. The next few slides go through this 12 issue in more detail.

13 With respect to Battery Electric Vehicles, during 14 the 2001 rulemaking staff estimated an incremental cost of 15 $ 7,000 to $ 9,000 in volume production for battery packs 16 sufficient in size to power full function vehicles. Since 17 that time there have been advances in cycle life which 18 would increase the life of the battery pack and thereby 19 reduce or eliminate the need to purchase a replacement 20 pack. Even so, however, cost challenges remain.

21 In addition, based on recent experience the 22 sustainable demand for Battery Electric Vehicles in the 23 near term appears to be small.

24 As a result of these issues and their own 25 judgment as to the long term commercialization prospects,

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 117 1 major manufacturers have now ceased production of Battery 2 Electric Vehicles.

3 Later on today you will hear testimony by Dr.

4 Menahem Anderman, one of the experts who served on our 5 2001 Battery Technical Advisory Panel. Staff contracted 6 with Dr. Anderman to assess whether in his view the 7 conclusions reached by the battery panel in 2001 still 8 hold. And he'll provide his testimony later.

9  o0o

10 VEHICLE PROGRAM SPECIALIST SHULOCK: On the fuel 11 cell side there is considerably more optimism and 12 activity. The technology shows great promise and 13 manufacturers appear to see a business case that they will 14 eventually be able build the vehicles at a cost the market 15 will bear.

16 Clearly, however, there are significant costs,

17 manufacturing, and performance challenges that stand in 18 the way. The bottom line is that fuel cell ZEVs are not 19 yet ready for volume production.

20 In summary then it is staff's view that 21 additional development is needed before any ZEV technology 22 will be ready for mass deployment. As a result, the 2001 23 requirements are too ambitious. This has several 24 implications. First of all, because it is not feasible to 25 produce fuel cell vehicles at the numbers needed to fully PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 118 1 satisfy the 2001 requirement, some manufacturers would in 2 effect be forced to restart battery EV production 3 regardless of their views as to the long term prospects 4 for commercial success. This is difficult to sustain and 5 could also have the undesirable effect of diverting 6 engineering resources away from meeting fuel cell 7 challenges.

8 There's one other point that I would like to 9 emphasize here, one that is central to the staff's view of 10 how to proceed. The pace of future technical development 11 is very difficult to predict, particularly for the 12 significant development steps that are relevant here.

13 Minor near term vehicle improvements, such as those needed 14 to meet incrementally more stringent tailpipe standards,

15 follow a well understood path and, in general, have been 16 achieved more quickly and at less cost than the original 17 staff estimates.

18 Going to zero is different. Bringing a 19 fundamentally different technology such as battery 20 electric or fuel cell vehicles to market requires 21 advancements on a number of fronts. And experience to 22 date has shown that these developments do not necessarily 23 proceed at the peace predicted by staff.

24  o0o

25 VEHICLE PROGRAM SPECIALIST SHULOCK: In contrast,

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 119 1 progress in the silver category has been dramatic. There 2 are CNG vehicles in commercial production. Three hybrid 3 electric vehicles are on the market today and others have 4 been announced. These vehicles are not all PZEVs, but in 5 most cases there are no significant technical barriers to 6 achieving PZEV status and we expect that future versions 7 would qualify.

8 Other AT PZEV technologies are not yet 9 commercialized but are receiving attention. Hydrogen 10 internal combustion vehicles have been demonstrated by 11 several automakers. And plug in hybrid vehicles are being 12 actively studied in a variety of settings.

13  o0o

14 VEHICLE PROGRAM SPECIALIST SHULOCK: PZEVs are 15 also achieving considerable success. Ten models have been 16 certified. And our best information is that some 140,000 17 PZEVs are expected to be sold in model year 2003.

18 In our meetings with automakers we're sometimes 19 told that PZEV technology does not get the respect it 20 deserves. So let me emphasize for the record here that 21 the emission performance of these vehicles is remarkable 22 and represents a significant achievement on the part of 23 the automakers. Such vehicles likely would not exist if 24 we had not had the technology forcing function of the ZEV 25 mandate. So the widespread deployment of these vehicles PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 120 1 is one of the program's early achievements.

2  o0o

3 VEHICLE PROGRAM SPECIALIST SHULOCK: With all of 4 that as a back drop I would now like to share with you the 5 objectives that we as staff are hoping to achieve with 6 these modifications.

7 First of all, we want to restart the program.

8 Restarting the program has obviously benefits. It will 9 allow us to take maximum advantage of the technologies 10 that are in showrooms today and, thereby, capture the 11 greatest possible air quality benefit. It will also help 12 build the manufacturing and supplier base for future pure 13 ZEV technologies.

14  o0o

15 VEHICLE PROGRAM SPECIALIST SHULOCK: Our next 16 major objective has already been mentioned. We want to 17 avoid a mismatch both now and in the long term between the 18 program requirements and the technology status.

19  o0o

20 VEHICLE PROGRAM SPECIALIST SHULOCK: Next we want 21 to ensure that the program recognizes successful 22 compliance under the 2001 rules. Those manufacturers that 23 move forward under the 2001 rules should not be forced to 24 revise their plans.

25 Finally, we want to provide a pathway that PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 121 1 recognizes the aggressive pursuit of fuel cell 2 commercialization as a viable compliance options. In 3 other words if a manufacturer wants to pursue fuel cell 4 development and not simultaneously pursue battery EVs, in 5 the staff view that should be adequate.

6 That concludes my introduction. I will now turn 7 it over to Analisa Bevan, who will begin our summary of 8 the proposed amendments.

9 ZEV IMPLEMENTATION MANAGER BEVAN: Thank you,

10 Chuck.

11 I'd like to begin by reviewing the process by 12 which staff has developed the proposal before you today.

13 As Mr. Shulock described, a set of events and issues 14 combined to cause the staff to recommend regulatory 15 amendments to the ZEV Program.

16  o0o

17 ZEV IMPLEMENTATION MANAGER BEVAN: Starting in 18 the fall of 2002 the staff issued a straw man proposal 19 outlining possible changes to the regulation for 20 stakeholders' consideration prior to a December workshop.

21 The well attended workshop provided valuable feedback to 22 staff going into the development of an initial statement 23 of reasons and proposed regulatory amendments which were 24 issued on January 10th, 2003, for a 45 day comment period.

25 In the initial statement of reasons staff PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 122 1 identified a number of open issues for which comments and 2 ideas were solicited. During the 45 day comment period 3 sufficient constructive comments were received, and staff 4 research and thinking evolved to a point that suggested 5 modifications to the initial January proposal were 6 warranted. To provide ample time to develop the suggested 7 modifications and to provide our stakeholders with time to 8 consider these changes, the public hearing to consider 9 amendments to the ZEV regulation was postponed one month 10 to today's hearing.

11 The description of the proposed modifications and 12 staff's rationale for changes to the proposal were 13 published on March 5th, 2003.

14 I will now turn to a description of staff's 15 proposal. My description will be a composite of the 16 initial January proposal and the March modifications to 17 staff's proposal.

18  o0o

19 ZEV IMPLEMENTATION MANAGER BEVAN: Broadly, the 20 proposed amendments to the ZEV regulation cover the start 21 date of the regulation, the category percentages, and the 22 methods for calculating credits for different vehicle 23 types.

24 Additionally, the staff is proposing a number of 25 amendments that clarify the intent of the regulation and PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 123 1 amendments that, when looking at the regulation as a 2 whole, balance the program.

3 The ZEV regulation requirements were set to begin 4 in 2003. Subject to federal and state preliminary 5 injunctions, the Board is prevented from implementing or 6 enforcing the regulation for the 2003 and 2004 model 7 years. Although staff's intent in proposing amendments to 8 the regulation is to address the legal issues that brought 9 about these injunctions, it is believed that the earliest 10 practical start date for the program is now 2005. A 2005 11 program start allows adequate lead time.

12 When considering a modification in the program 13 start, staff had two choices: To shift the program out 14 two years, including application of phase in multipliers 15 and early introduction credits; or to start in 2005 as if 16 resuming the 2001 amendments. The staff proposes the 17 later approach, as it resumes the pace of the program 18 rather than delaying completely the benefits and progress 19 of the program.

20 Linked to both the restart date of the regulation 21 and to the current status of manufacturer actions to 22 comply with the regulation is the expectation of how many 23 of what kind of vehicles California can expect to see in 24 the coming years.

25 One of the issues identified through staff's PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 124 1 development process was the existence of substantial 2 banked ZEV credits resulting from production in the years 3 prior to the regulation start up. These banked credits 4 provide manufacturers with the ability to comply solely 5 with banked credits rather than with new vehicle 6 production for some years into the program.

7 It was suggested that the Board consider a 8 requirement for new vehicle production beginning in 2005 9 to ensure continued product availability. The 10 counter opinion to that suggestion was that for those 11 manufacturers who have expended considerable effort to 12 build up credit balances to ensure compliance strategy for 13 their company, changing the rules in such a fundamental 14 way was not fair. The Board had, after all, heavily 15 incentivized early production in the hopes that 16 manufacturers would provide  would begin to build market 17 for ZEVs prior to the implementation date.

18 In response to these comments, staff devised a 19 two path system referred to as the base path and the 20 alternative compliance path.

21  o0o

22 ZEV IMPLEMENTATION MANAGER BEVAN: The base path 23 preserves the category structure of the 2001 amendments.

24 Shown in this slide is a summary of the make up of the 25 credit category structure for the ZEV Regulation. Of the PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 125 1 10 percent compliance obligation manufacturers must meet 2 at least 2 percent with gold credit vehicles.

3 Manufacturers may meet up to 2 percent of their obligation 4 with silver vehicles. And up to 6 percent of a 5 manufacturer's obligation maybe met with bronze vehicles.

6 The structure described in the previous slide 7 applies to model years 2005 through 2008.

8  o0o

9 ZEV IMPLEMENTATION MANAGER BEVAN: As amended in 10 the 2001 Board hearing, the overall percentage 11 requirements increase over time, eventually reaching 16 12 percent in 2018.

13 The bronze category percentage stays constant at 14 6 percent, and the remainder of the obligation is split 15 between gold and silver categories.

16  o0o

17 ZEV IMPLEMENTATION MANAGER BEVAN: As I 18 mentioned, the 2001 amendment category structure is 19 preserved for those manufacturers choosing to take the 20 base path. The base path also preserves a manufacturer's 21 ability to use banked credits to meet all or part of their 22 ZEV compliance obligation.

23 At this time staff are aware of some 24 manufacturers who are able to comply with the base path 25 with banked credits through 2008. Under these PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 126 1 circumstances it may be attractive for these manufacturers 2 to use the base path.

3 The other option offered to manufacturers under 4 staff's proposal is called the alternative compliance 5 path. The alternative compliance path was conceived as an 6 improved approach to achieving the goals of the ZEV 7 Program, as outlined earlier by Mr. Shulock.

8  o0o

9 ZEV IMPLEMENTATION MANAGER BEVAN: A manufacturer 10 choosing the alternative compliance path must produce 11 their market share of 250 Type 3 ZEVs or fuel cell 12 vehicles between 2001 and 2008. In exchange for this 13 floor production of new vehicles, manufacturers may meet 14 their remaining gold requirement with silver vehicles. If 15 a manufacturer chooses to change paths from the base to 16 the alternative at any time during the 2005 through 2008 17 phase, they must produce the entire market share 18 obligation of Type 3 ZEVs by 2008.

19 The alternative compliance path supports the ZEV 20 Program goals through challenging manufacturers to commit 21 significant quantities of pure ZEVs to support emerging 22 ZEV technology through this developmental phase, pressing 23 increased silver category production to support ZEV 24 technology development and increasing the air quality 25 benefits of the program.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 127 1 Staff's proposal does not lay out a requirement 2 for ZEVs after the 2008 demonstration stage. Instead 3 staff recommends a process through which the Board would 4 determine the appropriate next step in ZEV 5 commercialization.

6  o0o

7 ZEV IMPLEMENTATION MANAGER BEVAN: In this slide 8 I've illustrated the market share obligation of 250 9 vehicles by manufacturer. Under the alternative 10 compliance path these are the total volumes each 11 manufacturer would be responsible for in the 2001 through 12 2008 timeframe.

13  o0o

14 ZEV IMPLEMENTATION MANAGER BEVAN: As I 15 mentioned, the proposed requirement for pure ZEVs in the 16 post 2008 timeframe is yet to be determined. The key 17 purpose of most technology development and demonstration 18 stages is to learn from them before moving on to the next 19 stage of development or commercialization.

20 Staff is recommending that the Board take this 21 approach with the ZEVs. To accomplish this staff 22 recommends that the Board establish an independent expert 23 review panel comprised of independent automotive experts 24 who do not have industry ties to assess ZEV technologies 25 and report back to the Board prior to the establishment of PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 128 1 the next phase of ZEV requirements.

2  o0o

3 ZEV IMPLEMENTATION MANAGER BEVAN: Staff proposes 4 that the independent expert review panel review all ZEV 5 technologies and enabling technologies to assess their 6 technological readiness and their commercialization 7 readiness. Clearly in the case of fuel cell technology,

8 the California Fuel Cell Partnership will be a key 9 resource of learning and information for the Board and for 10 the independent expert review panel.

11  o0o

12 ZEV IMPLEMENTATION MANAGER BEVAN: The 13 independent expert review panel would report to the Board 14 sufficiently before the Board would need to take action to 15 set requirements for the post 2008 timeframe. I would 16 like to point out that it is not expected that the 17 independent expert review panel would make recommendations 18 to the Board regarding the next phase of requirements, but 19 rather the panel would provide the Board with information 20 and tools necessary for the Board to determine the 21 appropriate course of action.

22  o0o

23 ZEV IMPLEMENTATION MANAGER BEVAN: I will turn 24 now to a discussion of the methods proposed to calculate 25 credit for various types of vehicles under the proposal.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 129 1 Staff are proposing changes to both the gold and the 2 silver credit calculations to remove efficiency 3 multipliers and generally improve comparison of technology 4 types.

5  o0o

6 ZEV IMPLEMENTATION MANAGER BEVAN: In the 2001 7 amendments the credit received by a gold category vehicle 8 was calculated based on its range and its efficiency. In 9 early implementation, the more range a vehicles had, the 10 higher the credit. As the program matured, the grange 11 multiplier was phased out and replaced by an efficiency 12 multiplier.

13 In removing the efficiency multiplier staff has 14 simplified the calculation of gold vehicle credit by 15 establishing ZEV types, described in detail on the next 16 slide. Each ZEV type earns a specified credit, and 17 credits for all ZEV types are phased down over time.

18  o0o

19 ZEV IMPLEMENTATION MANAGER BEVAN: Five new ZEV 20 types are proposed. Their definitions are based on range 21 and on fast refueling capability.

22 NEVs remain a part of the gold category. NEVs 23 are classified as low speed vehicles with a top speed of 24 25 miles per hour. They are restricted to use on roadways 25 with speed limits of 35 miles per hour or less.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 130 1 Staff is not proposing to change the credit 2 structure established in the 2001 amendments. To date a 3 number of NEV models have been marketed.

4 Type Zero NEVs are described as utility ZEVs. A 5 Type Zero ZEV is a ZEV with a range of less than 50 miles.

6 At this time there are no examples of Type Zero ZEVs and,

7 frankly, staff doesn't expect such vehicles to be 8 developed or marketed. The definition is created for 9 completeness.

10  o0o

11 Type 1 ZEVs are ZEVs with range between 50 and 12 100 miles. They are not capable of fast refueling.

13 Typically we think of city electric vehicles as fitting 14 into this category. Limited demonstrations of this type 15 of EV have been conducted to date, and we are not aware of 16 any active production for the California market.

17 Type 2 ZEVs are defined as having driving range 18 greater than 100 miles and are not fast refueling capable.

19 Example Type 2 ZEVs are what we call full function 20 electric vehicles. Significant demonstration and 21 marketing has been conducted with these vehicles in 22 California to date, thanks to the memorandum of agreement 23 with the six largest manufacturers and to pre regulation 24 ZEV production. At this time there is no current 25 marketing of Type 2 ZEVs in California.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 131 1 Type 3 ZEVs are defined as having greater than 2 100 miles driving range and are fast refueling capable.

3 Examples of such vehicles would be hydrogen fuel cell 4 vehicles. Demonstration of prototype and pre commercial 5 models has been conducted to date, with significant 6 development work underway to ultimately reach production 7 volumes.

8  o0o

9 ZEV IMPLEMENTATION MANAGER BEVAN: This table 10 lays out the credits proposed per vehicle for each ZEV 11 type. The credits earned by each ZEV type phase down over 12 time. And as can be seen in the 2012 timeframe, Type 3 13 fuel cell vehicles are earning the same credit as Type 2 14 Battery Electric Vehicles.

15 I will now turn the presentation to Craig 16 Childers for a description of the proposed amendments to 17 the calculation of credits for silver vehicles.

18 MR. CHILDERS: Thank you, Analisa.

19 The next set of slides deals with proposed 20 changes to the AT PZEV portion of the regulation.

21 I will close with several specific examples to 22 illustrate the effect of the changes we are proposing.

23 AT PZEV credit is intended to encourage the 24 development, deployment, and increased production 25 efficiencies of technologies that contribute to the PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 132 1 commercialization of pure ZEV vehicles.

2 AT PZEVs earn a PZEV base credit of .2, but they 3 also earn an additional credit in three attribute 4 categories. These are zero emission range credit,

5 advanced ZEV componentry credit, and low fuel cycle 6 emissions credit.

7 The most desirable AT PZEV attribute is for 8 vehicles that demonstrate zero emission range. Vehicles 9 capable of traveling 10 or more miles with zero emissions 10 or those with zero emissions of 1 regulated pollutant are 11 eligible for this credit.

12 The next AT PZEV attribute, advanced ZEV 13 componentry, rewards vehicles with components that are 14 either shared with ZEVs or lead to the development of 15 components that are needed for ZEVs. These include hybrid 16 electric drive systems and gaseous or hydrogen fuel 17 storage systems.

18  o0o

19 MR. CHILDERS: With hybrids the electric drive 20 systems are smaller versions of the same systems that will 21 be used in ZEVs. In several soon to be introduced hybrid 22 electric vehicles the drive components will be large 23 enough for direct application in city EVs.

24 The final AT PZEV attribute, low fuel cycle 25 emissions, assigns credit to vehicles which make use of PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 133 1 fuels with low production and fueling infrastructure 2 emissions. These include hydrogen, methanol, and natural 3 gas.

4  o0o

5 MR. CHILDERS: Staff proposes modifications to 6 all three of these AT PZEV credit components.

7 Staff proposes to change the method for 8 determining advanced componentry credit for hybrid 9 electric vehicles. In the 2001 amendments hybrid electric 10 vehicles earned credit according to CO2 reduction, percent 11 peak power, or efficiency.

12 In the proposed amendments credit is based only 13 on the attributes of the electric drive system, including 14 system voltage, peak power rating, and other ZEV like 15 attributes.

16 Staff believes hybrid vehicles exhibiting these 17 attributes are ZEV enabling because they lead directly to 18 performance improvements and more cost effective electric 19 drive systems for ZEVs.

20 Qualifying hybrid drive systems must also 21 demonstrate the ability to provide traction drive boost,

22 regenerative braking, an idle stop start capability.

23 These are all ZEV features which staff would like to 24 encourage in hybrids.

25  o0o

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 134 1 MR. CHILDERS: Staff proposes to assign 2 hybrids  qualifying hybrids to three categories. These 3 are: Low voltage / low power, high voltage, and high 4 voltage / high power.

5 The top two rows of this table describe the 6 system voltages and peak power levels for each hybrid 7 type. All three types of hybrids must exhibit the ZEV 8 attributes shown in the next three rows of the table.

9 Low voltage systems operate at 60 volts or less 10 and feature an electric drive system with at least four 11 kilowatt maximum output. Forty two volt starter generator 12 systems are expected to become commonplace in the next ten 13 years. And many of these hybrids would qualify in this 14 first category.

15 Low voltage hybrids will not earn advanced 16 componentry credit, but they will count towards AT PZEV 17 obligations through model year 2008.

18 The second hybrid category, or high voltage 19 hybrid, must have drive systems with at least 10 kilowatt 20 rated output. An example of this class of hybrid is the 21 Honda Civic HEV.

22 The third category, high voltage / high power,

23 are those with high voltage drive systems and at least 50 24 kilowatt rated power output. An example of this hybrid is 25 the upcoming Lexus RX330 HEV. Note, that these high power PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 135 1 drive systems would be appropriate for use as stand alone 2 drive systems in small full function ZEVs and would be 3 more than adequate in city class ZEVs.

4 The total AT PZEV credit shown on the bottom row 5 of this table also includes the base credit of .2 that is 6 earned by all PZEVs.

7 The HEV advanced componentry credit values shown 8 are for model year 2005 through 2007. These values 9 decrease in two steps and end up at .25 and .35 in model 10 year 2012.

11  o0o

12 MR. CHILDERS: Staff also proposes several other 13 modifications to AT PZEV credit determination.

14 For zero emission range credit the formula for 15 credit determination has changed, and the maximum credit 16 has been capped at l. 5.

17 Advanced componentry credit may now be combined 18 with the zero emission range credit, where formerly these 19 were alternate options.

20 Hydrogen storage technology credit has increased 21 from .2 to .3. And buy fuel storage systems that store 22 hydrogen now also earn .3 credit.

23 The battery warranty requirements for hybrids has 24 been reduced from 15 year / 150,000 miles to 10 year /

25 150,000 miles.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 136 1  o0o

2 MR. CHILDERS: Finally, staff proposes that the 3 maximum low fuel cycle emissions credit be increased from 4 .2 to .3.

5 The next several slides illustrate the combined 6 effect of these proposed changes for some selected AT 7 PZEVs.

8  o0o

9 MR. CHILDERS: This table shows how the proposed 10 modifications would affect credit determination for 11 compressed natural gas vehicles. Again, all AT PZEVs earn 12 the same .2 base credit as PZEVs, but with additional 13 credit for zero emission range, advanced componentry, and 14 low fuel cycle emissions.

15 CNG AT PZEVs would benefit from increases in both 16 the advanced componentry and low fuel cycle emissions 17 credits, resulting in an overall credit increase from .5 18 to .7. An example of a dedicated CNG production vehicle 19 eligible for this credit is the Honda Civic GX shown on 20 this slide.

21  o0o

22 MR. CHILDERS: This table shows how the proposed 23 modifications would affect credit determination for 24 hydrogen internal combustion engine vehicles. Hydrogen 25 ICEs benefit from increases in each of the AT PZEV PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 137 1 attribute credits. And from the proposed change that 2 would allow them to earn credit for both zero emission 3 range and advanced componentry.

4 The bottom row of this table also shows credit 5 that would be earned by hybrid electric hydrogen internal 6 combustion vehicle. Because of an additional .5 credit 7 for advanced componentry for its electric drive system,

8 total credit would increase from 2.3 to 2.7, which is more 9 than 4 1/ 2 times the credit for a gasoline hybrid.

10 An example of a hydrogen ICE hybrid electric 11 vehicle that could be eligible for this credit would be 12 the prototype Ford Model U shown on the slide.

13  o0o

14 MR. CHILDERS: Plug in hybrid electric vehicles 15 also benefit from proposed modifications in each AT PZEV 16 category. But their largest increase comes from the 17 opportunity to earn both zero emission range and advance 18 componentry credit.

19 Credit values shown in this table are for a P20,

20 or plug in hybrid, capable of 20 miles of all electric 21 range. This hybrid would earn 3 1/ 2 times more credit 22 than a conventional hybrid. An example of a plug in HEV 23 is this UC Davis prototype built on a Ford Explorer 24 platform.

25  o0o

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 138 1 MR. CHILDERS: The last proposed change to AT 2 PZEV credit is to extend the early introduction 3 multipliers for emerging technology vehicles. All of the 4 previous slides have discussed raw AT PZEV credit without 5 the application of early intro multipliers.

6 This chart shows the overall AT PZEV credits 7 earned after the application of early intro multipliers 8 for a variety of AT PZEV types.

9 The emerging technology vehicles shown in the 10 upper group on this chart all earn zero emission range 11 credit. And they include the hydrogen ICE, plug in 12 hybrids, and indirect methanol fuel cell vehicles. The 13 lower set of lines represents CNG and non plug hybrids,

14 which have already been commercialized by some automakers.

15 Staff proposes to extend the early introduction 16 multiplier for the emerging technology AT PZEVs so that a 17 multiplier of 6 is now applied through 2008. This results 18 in approximately 20 times more credit for a P20 plug in 19 hybrid than that for a non plug hybrid.

20  o0o

21 MR. CHILDERS: The early introduction multiplier 22 of 3 is now extended through 2011 for the emerging 23 technology group, which means that a P20 plug in hybrid 24 would earn about 10 times more credit than a non plug 25 hybrid.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 139 1 And, finally, eventually all AT PZEVs earn less 2 than 3 credits, with the hydrogen ICE and grid hybrids 3 earning somewhere between 2 and 3 credits.

4 Now, Analisa Bevan will continue and discuss the 5 remaining proposed amendments.

6 ZEV IMPLEMENTATION MANAGER BEVAN: Thank you,

7 Craig.

8  o0o

9 ZEV IMPLEMENTATION MANAGER BEVAN: Another issue 10 resulting from the delay in program start up was the 11 potential loss of emission benefits that could be gained 12 from early production of bronze vehicles. With the 13 regulation so close to implementation before the 14 preliminary junctions, many manufacturers had already 15 demonstrated and began marketing of PZEVs. With the 16 program start delayed until 2005 staff was interested in 17 finding a way to incentivize manufacturers to maximize 18 production of PZEVs prior to the regulations start date.

19 If a manufacturer produces 2003 and/ or 2004 PZEV 20 credits in excess of 6 percent of their sales volume,

21 staff proposes that those excess credits be allowed to be 22 used as silver credits for the 2005 and 2006 model years.

23 It is hoped that this incentive will encourage 24 manufacturers to maximize their PZEV marketing efforts in 25 these early years.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 140 1  o0o

2 ZEV IMPLEMENTATION MANAGER BEVAN: As described 3 in my overview, staff also proposed a number of clarifying 4 and balancing amendments. Several amendments are proposed 5 to clarify the Board's intent with regard to specific 6 elements of the regulation as demonstrated by issues that 7 have arisen since the adoption of the 2001 amendments. A 8 number of additional amendments are proposed that balance 9 out the regulation, given the more major amendments 10 already described.

11 I will now briefly cover the more significant 12 proposals.

13  o0o

14 ZEV IMPLEMENTATION MANAGER BEVAN: Under Section 15 177 of the Clean Air Act other states may adopt 16 California's motor vehicle standards. Several states,

17 including New York and Massachusetts, have chosen to adopt 18 the low emission vehicle NCEV regulations. This has the 19 effect of increasing a manufacturer's compliance 20 obligation with respect to ZEV production. The 21 manufacturers have referred to this issue as travel.

22 When the Board considers vehicle regulations,

23 consideration of technological feasibility is often a key 24 component in judging a proposal's appropriateness. When 25 considering the goals of the ZEV Program, staff have PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 141 1 identified a target vehicle volume for Type 3 ZEVs under 2 the alternative compliance path that is considered 3 feasible.

4 However, if that volume requirement is applied to 5 all states with a ZEV Program, the total number of Type 3 6 ZEVs increases by 1.7 times, to 425 fuel cell vehicles.

7 Under a demonstration and development phase such 8 as the alternative compliance path, staff questions the 9 incremental benefit of the increased volume required in 10 this scenario. Therefore, staff is proposing to address 11 the issue of travel by allowing Type 3 ZEVs placed in any 12 state that has adopted the ZEV regulation to count towards 13 compliance with California's obligation. In this proposal 14 a fuel cell vehicle placed in New York would count towards 15 a manufacturer's requirement to place their market share 16 of 250 fuel cell vehicles under the alternative compliance 17 path.

18  o0o

19 ZEV IMPLEMENTATION MANAGER BEVAN: In 2001 the 20 Board directed staff to include the Light Duty Truck 2 21 category in manufacturers' sales base for calculation of 22 ZEV obligations. Since that time issues have been raised 23 regarding the Board's intent with regard to that directive 24 and with noticing requirements for that rulemaking.

25 Therefore, staff is asking the Board to reaffirm inclusion PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 142 1 of the Light Duty Truck 2 category in the sales base in 2 this rulemaking.

3  o0o

4 ZEV IMPLEMENTATION MANAGER BEVAN: In the 2001 5 amendments the Board recognized significant value in 6 establishment of intelligent transportation systems 7 utilizing ZEV Program vehicles by awarding additional ZEV 8 credit for such programs. The availability of such 9 credits was to sunset in 2008. Staff continues to support 10 development of transportation systems using ZEV Program 11 vehicles an proposes to extend the availability of extra 12 credits for transportation systems until 2011.

13  o0o

14 ZEV IMPLEMENTATION MANAGER BEVAN: The ZEV 15 regulation provides an incentive to manufacturers to 16 produce and place ZEVs early through application of early 17 introduction multipliers. These multipliers are applied 18 only when a vehicle is placed in service.

19 In the past year there have been discussions 20 regarding the date by which a vehicle must be placed in 21 service in order to earn the early introduction 22 multipliers.

23 In order to address these issues, on November 24 21st, 2002, the executive officer issued a letter to 25 affected vehicle manufacturers, informing them that early PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 143 1 introduction credits would be available through March 2 31st, 2003, with a similar sell through period for the 3 remainder of the early introduction credits.

4 On December 24th, 2002, a lawsuit was filed by 5 Daimler Chrysler and General Motors, and a Fresno court 6 judge issued a temporary restraining order enjoining ARB 7 from implementing the provisions of the November advisory.

8 To provide regulatory certainty and clarification 9 on this issue the staff proposes a modification providing 10 that a 2001 2002 model year ZEV qualifies for early 11 introduction multipliers if placed in service by September 12 30th, 2003.

13 Staff proposes that for 2003 subsequent model 14 year ZEVs a vehicle be considered placed in service for 15 purposes of application of multipliers if placed in 16 service in California by June 30th following the 17 applicable model year. Staff believes this is appropriate 18 in light of the challenges faced in placing ZEVs and the 19 expectations of manufacturers regarding the application of 20 the regulation.

21  o0o

22 ZEV IMPLEMENTATION MANAGER BEVAN: The 2001 23 amendments established a cap on the use of NEV credits 24 banked from model years 2001 through 2005.

25 Beginning in model year 2006 manufacturers could PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 144 1 satisfy no more than 75 percent of any program category,

2 gold, silver, or bronze, using banked NEV credits. The 3 maximum allowable use of banked NEV credits decreased to 4 50 percent in any program category for the 2007 and later 5 model years.

6 Staff proposes amendments removing the caps from 7 the bronze category and delaying the imposition of the cap 8 until 2009 silver category. Thus under the modifications 9 manufacturers could satisfy no more than 75 percent of the 10 AT PZEV category using banked NEV credits in the 2009 11 model year, with the percentage decreasing to 50 percent 12 in 2010 and subsequent years.

13 Staff proposes this change in order to ensure 14 some minimum level of AT PZEV production in 2009 and later 15 years without regard to the availability of NEV credits,

16 while providing lead time and flexibility in the years 17 prior to 2009 for manufacturers that may not have 18 sufficient AT PZEV products available in that timeframe.

19 The 2001 amendments did not include severability 20 clauses. A severability clause expresses the intent that 21 if one element of a regulation is invalidated, the 22 remainder can still be enforced. The key question before 23 a court considering the severability of a portion of a 24 regulation is what would the agency have done if precluded 25 from adopting the invalid provision.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 145 1  o0o

2 ZEV IMPLEMENTATION MANAGER BEVAN: The federal 3 court trial held that the AT PZEV provisions for hybrid 4 electric vehicles were not severable. It was not clear to 5 the Court whether the Board would have proceeded with the 6 regulation if the regulation did not result in improved 7 fuel economy.

8 Additionally, it appeared that the AT PZEV 9 provisions were critical to intended reductions in the 10 number of pure ZEVs.

11  o0o

12 ZEV IMPLEMENTATION MANAGER BEVAN: The proposed 13 regulation amendments contain both a general severability 14 clause and an additional clause specifically addressing AT 15 PZEV provisions on hybrids. The proposed resolution 16 contains a finding that if AT PZEV provisions are found 17 preempted, the Board chooses to enforce the remainder of 18 the 2003 amendments rather than falling back on the 19 current ZEV regulation if enforcement and implementation 20 have been enjoined.

21 This concludes our summary of proposed changes.

22 I will now turn the presentation back to Mr. Shulock to 23 summarize the impacts and issues surrounding the proposed 24 amendments.

25 VEHICLE PROGRAM SPECIALIST SHULOCK: Thank you,

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 146 1 Analisa and Craig.

2 There'll be a pop quiz on all of this in 3 mid afternoon, so study up.

4 The final section of our presentation begins with 5 a summary of the effects of the proposed changes in terms 6 of the number of vehicles and air quality. We will then 7 devote a fair amount of attention to the major issues that 8 are facing you today. We will conclude with our staff 9 recommendation.

10 Regarding the number of vehicles, the most 11 important point to bear in mind is that it is not possible 12 to provide firm estimates. The program provides great 13 flexibility, and thus the outcome will vary according to 14 different strategies that manufacturers might pursue.

15 In addition, in our staff proposal the post 2008 16 ZEV requirement under the alternative compliance option is 17 yet to be determined.

18 In broad terms, however, the overall effect of 19 the staff proposal is to reduce the number of ZEVs and 20 increase the number of AT PZEVs. The number of PZEVs is 21 not significantly affected by our proposal.

22  o0o

23 VEHICLE PROGRAM SPECIALIST SHULOCK: Bearing in 24 mind that any estimates are uncertain, we have put 25 together scenarios that allow us to make an PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 147 1 apples to apples comparison of the effect of different 2 regulatory approaches. This slide presents an overview of 3 the total number of extremely clean vehicles  ZEVs, plus 4 AT PZEVs, plus PZEVs  using one such set of assumptions.

5 The slide compares production under the 2001 regulation 6 and the 2003 revised staff proposal.

7 As you can see, the total number of clean 8 vehicles increases under the 2003 staff proposal. This is 9 due to the fact that silver category vehicles can be used 10 in place of gold. And this is not a one for one 11 substitution. Rather, several AT PZEVS are needed to 12 replace one ZEV.

13 I'll speak to some of the underlying assumptions 14 in more detail in a minute.

15  o0o

16 VEHICLE PROGRAM SPECIALIST SHULOCK: Looking 17 specifically at ZEVs, on the base path the requirement is 18 2 percent in the gold category, increasing over time.

19 Banked credits may be used to fulfill that obligation.

20 This is the same approach as was used in the 2001 21 regulation.

22 On the alternative compliance path the total 23 across all large manufacturers would be 250 fuel cell 24 vehicles 2001 and 2008 if all manufacturers choose this 25 option.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 148 1 The production level for 2009 and beyond would be 2 determined by the Board following input from the 3 independent expert review panel.

4  o0o

5 VEHICLE PROGRAM SPECIALIST SHULOCK: For AT PZEVs 6 in the near term the number that will be produced will 7 depend on the manufacturer's capability to produce such 8 vehicles and their strategy regarding the use of banked 9 credits.

10 In the long term the AT PZEV total will change in 11 response to the gold requirement or ZEV requirement that 12 is in effect at that time.

13 This slide shows more specifically the number of 14 AT PZEVs that would be produced using our base case 15 assumptions under the staff proposal versus under the 2001 16 regulation. Again, the increase under the 2003 proposal,

17 the upper line, is due to AT PZEVs being substituted for 18 ZEVs. In this illustration there is complete 19 substitution. There is no ZEV requirement in the 20 out years. This assumes that the Board never takes an 21 action to impose a ZEV requirement under the alternative 22 compliance strategy for 2009 and beyond. We recognize 23 that this is not likely to occur, but would show the case 24 as a bounding exercise.

25  o0o

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 149 1 VEHICLE PROGRAM SPECIALIST SHULOCK: This slide 2 looks in more detail at the interaction between the ZEV 3 requirements and the number of AT PZEVs. The top line,

4 called  and it might not be visible  but called " full 5 use of silver and gold," corresponds to the no ZEV 6 requirement case that you were just shown. This assumes 7 full substitution of silver for gold throughout the life 8 of the program.

9 The bottom line, entitled " no use of silver and 10 gold based program," shows the AT PZEV totals if one 11 assumes that ZEV technology continues to advance, and as a 12 result there's a 2 percent gold requirement in effect in 13 all years. As you can see, having a larger gold 14 requirement dramatically reduces the number of silver 15 vehicles.

16 In summary, under the staff proposal the AT PZEV 17 numbers would be at least as high as under the 2001 18 regulation and even higher to the extent that silver 19 vehicles continue to be allowed to substitute for gold.

20  o0o

21 VEHICLE PROGRAM SPECIALIST SHULOCK: From an air 22 quality standpoint the 2003 proposal results in additional 23 emission reductions as compared to the 2001 regulation.

24 This difference is driven by the assumed increase in AT 25 PZEV production that I just discussed.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 150 1 For ROG the proposal results in an additional .03 2 tons per day in 2010 and .04 tons per day in 2020. For 3 NOx the results are .06 and .17 tons per day,

4 respectively.

5  o0o

6 VEHICLE PROGRAM SPECIALIST SHULOCK: A 7 different  the gold and silver procedures  would lead 8 to somewhat different results.

9 The final portion of our staff presentation we'll 10 walk through some of the major issues related to the staff 11 proposal. Ms. Witherspoon mentioned some of these at the 12 beginning. I will focus on four:

13 The size of the ZEV requirement under the 14 alternative compliance option in model years 2009 and 15 beyond, the role of battery electric vehicles, the 16 long term production levels for silver vehicles, and the 17 possibility of granting ZEV credit for infrastructure.

18 In each case I will describe the issue, summarize 19 stakeholder views, outline the options available, and 20 provide our staff response.

21 In the staff proposal the ZEV requirement for the 22 alternative compliance option for model years 2009 and 23 beyond is to be determined. The requirement would be set 24 by the Board at a future meeting, following input from the 25 independent expert review panel. Staff recommends this PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 151 1 approach because the timing for a ramp up of vehicle 2 production is difficult to predict. We can say with 3 confidence that production will need to go through several 4 stages of increasing volume on the way to 5 commercialization. What is less clear is when those 6 stages will occur.

7 For each of the issues that we will be describing 8 we've attempted to summarize into a few key points the 9 comments we have received from various stakeholders. If 10 we fail to accurately characterize anyone's position, let 11 me apologize in advance. In any event, the stakeholders 12 will have a chance later on to speak for themselves, and 13 you'll hear their views very clearly. Our intent here is 14 to give you a preview of the main points.

15 Turning to the ZEV requirement for 2009 and 16 beyond. This appears to be the most controversial of all 17 the issues before you today.

18 From the environmental side we've been told it is 19 important to keep the pressure on, that a long term 20 technology forcing goal is needed to promote competition 21 to achieve the next generation of ZEV technologies.

22 They've also noted that manufacturer public statements 23 have predicted rapid fuel cell development.

24  o0o

25 VEHICLE PROGRAM SPECIALIST SHULOCK: The PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 152 1 automakers, in contrast, have stated that the appropriate 2 goal for 2009 will vary, depending on future developments,

3 and cannot be predicted at this time. In their view an 4 overly ambitious goal is not credible. They would expect 5 it to be relaxed in the future.

6 If such a goal is maintained and ultimately is 7 enforced, the manufacturers argue that it would waste 8 resources by requiring vehicle totals beyond what is 9 needed for technology development purposes.

10  o0o

11 VEHICLE PROGRAM SPECIALIST SHULOCK: The options 12 before you are controversial, no doubt, but relatively 13 straightforward. You could retain the staff proposal 14 under which the 2009 total is to be determined at a later 15 date.

16 You could require that a demonstration level 17 quantity, for example, another 250 vehicles, be continued 18 in the next phase. This would seem to be the minimum 19 number that would be necessary on any path towards 20 commercialization.

21 Or you could establish some higher target level,

22 for example, a 10 fold increase from the first stage.

23  o0o

24 VEHICLE PROGRAM SPECIALIST SHULOCK: Our staff 25 observations on this point are as follows:

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 153 1 It is clear and not disputed that in order to 2 achieve commercialization a ramp up in production must 3 occur. It also seems to be generally accepted that it 4 makes sense to think of the ramp stages in multiples of 5 ten, moving from tens of vehicles, to hundreds, to 6 thousands.

7 What is less clear is when such increases will 8 occur. You will hear considerable testimony, no doubt, on 9 this point.

10 Staff has explained the rationale for our 11 approach, under which the requirement for 2009 and beyond 12 would be determined at a future Board meeting. We 13 recognize, however, that the Board may wish for a variety 14 of reasons to establish a firm target at this time.

15 The next issue involves how battery electric 16 vehicles fit into our alternative compliance option and 17 into the staff proposal generally.

18  o0o

19 VEHICLE PROGRAM SPECIALIST SHULOCK: Under the 20 staff proposal manufacturers must build Type 3 ZEVs, which 21 today means fuel cells, in order to qualify for the 22 alternative compliance option. The question that has been 23 raised is whether other types of ZEVs should also count 24 towards that requirement.

25  o0o

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 154 1 VEHICLE PROGRAM SPECIALIST SHULOCK: The 2 stakeholders that have weighed in on this issue feel that 3 the proposed requirement does not provide an incentive for 4 ongoing development of battery EV technology.

5 I should note that staff actually raised this 6 issue ourselves in our March staff document. At that time 7 we were aware of the issue and were generally supportive 8 of the point being made. But we wanted to get stakeholder 9 input before working through all of the implications.

10  o0o

11 VEHICLE PROGRAM SPECIALIST SHULOCK: From an 12 option standpoint one way to address this issue is to 13 require battery EV production in addition to fuel cells.

14 This has been suggested by the EV Drivers Group.

15 Alternatively you could allow Battery Electric 16 Vehicles to meet some portion of the required minimum 17 production requirement under the alternative compliance 18 option.

19  o0o

20 VEHICLE PROGRAM SPECIALIST SHULOCK: From the 21 staff's standpoint this issue should be addressed. We 22 would recommend that battery EV's other than NEVs be 23 allowed to satisfy a portion of the minimum production 24 requirement. This provides additional flexibility and 25 also provides an incentive to pursue a broader range of PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 155 1 technologies.

2 We recommend, however, that BEV substitution be 3 treated as an option rather than as a requirement, for all 4 of the reasons that we discussed earlier, we do not 5 believe it is appropriate to require that manufacturers 6 simultaneously pursue battery EV and fuel cell production.

7 If they wish to do so, that's fine. But we would not 8 propose that it be a requirement.

9 We would further recommend that the proposal 10 require some minimum number of fuel cells, for example,

11 one half of the original obligation.

12 Finally, it will be necessary to set an 13 appropriate credit ratio between battery EVs and fuel 14 cells to ensure that this approach if pursued by 15 manufacturers would result in a meaningful number of BEVs.

16 For example, the credit levels could be set such 17 that if followed by all manufacturers, this option would 18 result in production of several thousand battery EVs in 19 the 2005 through 2008 time period.

20  o0o

21 VEHICLE PROGRAM SPECIALIST SHULOCK: The next 22 issue involves future production levels for silver 23 category vehicles. As you may recall from the discussion 24 of vehicle volumes, long term silver production levels 25 will vary with the ZEV requirement. If the future gold PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 156 1 requirement is large, the need to use silver vehicles to 2 backfill would be small. On the other hand, if the future 3 gold requirement remains small, it would result in 4 significant quantities of silver vehicles in 2012 and 5 beyond.

6 In thinking about this issue, it is important to 7 keep in mind that the purpose of the silver category is to 8 push design improvement and cost reduction for 9 ZEV enabling technologies such as batteries, motors, and 10 electronic controls. That is what should ultimately guide 11 the appropriate silver volume.

12  o0o

13 VEHICLE PROGRAM SPECIALIST SHULOCK: On this 14 issue automakers have commented that the long term silver 15 production levels referenced in the staff report exceed 16 what is needed to achieve design improvements and 17 economies of scale. They also make the point that the 18 market may not readily absorb the required number of 19 vehicles.

20  o0o

21 VEHICLE PROGRAM SPECIALIST SHULOCK: Environmental 22 representatives have stated that a high volume of silver 23 production will be needed until ZEV costs have been 24 brought down to affordable levels. They also have argued 25 that the requirements should be more stringent in some PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 157 1 respects, not less.

2  o0o

3 VEHICLE PROGRAM SPECIALIST SHULOCK: One possible 4 approach that could be adopted here is to use the 5 independent expert review panel to assess the status of 6 silver technology development. Or you could take action 7 today to directly amendment the future silver requirement.

8  o0o

9 VEHICLE PROGRAM SPECIALIST SHULOCK: Before going 10 to our recommendation I would first like to point out that 11 the silver production levels shown in the staff report 12 assume no future ZEV production. Thus those levels would 13 decline as ZEV production expands. In addition any 14 requirement would be spread across a number of 15 manufacturers and platforms such that the actual number of 16 any particular vehicle would be smaller than the totals 17 shown in the graphs that I showed previously.

18 Nevertheless we recognize that this issue merits 19 attention. We, therefore, recommend that the long term 20 status of silver category vehicles be included in the 21 review conducted by the independent expert review panel.

22 This is consistent with our approach towards the ZEV 23 category.

24 Let's take another look in the future when more 25 information is available. The panel could address PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 158 1 questions such as: Have full economics of scale been 2 achieved? Is the technology optimized from a design 3 standpoint? And most fundamentally, given all of the 4 above, would additional silver production continue to 5 contribute to the goal of ZEV commercialization?

6  o0o

7 VEHICLE PROGRAM SPECIALIST SHULOCK: The final 8 issue that we would like to bring to your attention 9 involves infrastructure and, more broadly speaking, the 10 relationship between the ZEV Program and efforts to 11 promote smart mobility concepts. There's considerable 12 emerging interest in what have been termed smart mobility 13 built corridors. Board Member DeSaulmier has been playing 14 a leadership role in this area. In brief, the notion is 15 to define specific corridors to serve as demonstrations 16 and test beds for what could be achieved with innovative 17 approaches to transportation, smart growth, clean fuels in 18 vehicles, and system management and integration tools.

19 For example, a corridor could include provisions 20 for transit, smart parking signage, car sharing, and clean 21 vehicles. The specific features employed would depend on 22 the needs at that location.

23 The existing ZEV regulation already supports some 24 aspects of this approach. For example, the regulation 25 provides additional ZEV credit for vehicles employed in PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 159 1 car sharing or station car applications. And clearly the 2 regulation supports the development of clean vehicles.

3 The question here is are there opportunities for further 4 synergy between the ZEV regulation and the smart mobility 5 corridor concepts. One possible area of such overlap is 6 the provision of hydrogen infrastructure.

7  o0o

8 VEHICLE PROGRAM SPECIALIST SHULOCK: We 9 originally posed the issue of hydrogen infrastructure in 10 our November 2002 strawman document. We have received 11 very little comment on the issue. One thing we were told 12 by several automakers is that the regulatory structure 13 should not imply that infrastructure is a manufacturer 14 responsibility. They say that they have their hands full 15 building the vehicles and that fuel providers should be 16 active on the infrastructure front.

17 We have, however, received some informal 18 indications of interest  potential interest if the 19 program were properly defined and structured.

20  o0o

21 VEHICLE PROGRAM SPECIALIST SHULOCK: We have 22 likewise gotten just limited comment from environmental 23 supporters along the lines that providing such an option 24 would increase manufacturer flexibility and help enable 25 ZEV commercialization.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 160 1  o0o

2 VEHICLE PROGRAM SPECIALIST SHULOCK: If you 3 choose to address this issue, the primary option that 4 we're aware of today would be to allow ZEV credit for 5 placement of hydrogen infrastructure, perhaps in 6 conjunction with the smart corridor concepts mentioned 7 above. In addition, it would be possible to explore other 8 incentives and non regulatory approaches.

9  o0o

10 VEHICLE PROGRAM SPECIALIST SHULOCK: Staff 11 believes that this is a fruitful area to investigate.

12 There are, however, many complex issues involves. We 13 propose that staff be directed to investigate all of these 14 issues and report back to the Board in three months' time 15 as to possibilities for further action.

16  o0o

17 VEHICLE PROGRAM SPECIALIST SHULOCK: In 18 conclusion, staff recommends approval of the proposed 19 amendments. They provide an increased air quality 20 benefit, they address the pending litigation issues, and 21 they maintain progress towards transforming California's 22 vehicle fleet to zero emissions.

23 Thank you. We're available to respond to any 24 questions that you may have.

25 CHAIRPERSON LLOYD: Thank you very much for that PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 161 1 extensive, thorough, and very explicit staff presentation.

2 What I would like to do  I was being rather 3 selfish by saying we wouldn't take a break, not realizing 4 our court reporter has to take a break, because he has to 5 be fed.

6 So what I will do, I'll ask my colleagues if we 7 can hold on to questions. But before the break, I would 8 like to invite the head of the California Power Authority,

9 David Freeman, who's, as you know, long committed to this 10 subject.

11 David, I know you have to leave for another 12 engagement. But we appreciate you coming and we'd like to 13 afford you the opportunity to kick off the testimony.

14 MR. FREEMAN: Thank you, Mr. Chairman. I 15 especially appreciate your courtesy in light of the fact 16 that you know that everything I say will not be music to 17 your ears. It shows your impartiality and your fairness,

18 and I really appreciate that.

19 I appear today not on behalf of an agency of the 20 state government, not on behalf of the environmentalists,

21 not on behalf of the automobile companies, but as a 22 concerned citizen of 77 years old that has spent the last 23 25 years being actively involved in this subject. And 24 perhaps my views might have some added weight because I 25 don't represent anyone else. I hope so.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 162 1 I was present at the creation when this Board 2 stood tall in the saddle and embarked on this great 3 adventure, of which of you should be very, very proud.

4 Perhaps you don't realize fully what you've accomplished.

5 I was into the electric car game in a sense way before 6 1990. In fact when I was the Chairman of the Board of the 7 Tennessee Valley Authority under President Carter, I had a 8 letter from the president of General Motors in 1979 9 promising me an electric car in every GM showroom by 1984.

10 ( Laughter.)

11 MR. FREEMAN: We labored in these vineyards 12 virtually all alone until California took the stand that 13 you did with the ZEV mandate and with the Board's decision 14 in 1990. And I might say that you had very little other 15 than the analysis of the staff, who  there were no cars,

16 there was no technology. There was a need in the public 17 interests for the health of the children and grownups of 18 California to have a bunch of the cars having zero 19 emission with them. And you made that stand and you stood 20 by your stand through all these years, through all sorts 21 of administrations. And you alone are responsible for the 22 fact that we have these hybrid cars with the electric 23 drive, that wouldn't have been there but for this Board,

24 and that we are now on the move toward cleaner cars.

25 Now is the time to catch the falling flag. I PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 163 1 don't think your staff is tired. I think your staff is 2 very bright and very caring. But the history of 3 agencies  and I've watched all of them over the years

4 is that the people that you regulate tend to make their 5 case over and over again, you get so sick and tired of 6 having to listen to them that you finally pay a little bit 7 of attention to them. It's just human nature.

8 And, you know, the irony of it all is that you've 9 got electric cars that are out there on the road that 10 work. The technology  you know, you're right at the 11 doorsteps of success. And your staff rightfully brags 12 about all this and then reaches the wrong conclusions.

13 ( Applause.)

14 MR. FREEMAN: It kind of breaks your heart to see 15 people that have been so successful and  and every one 16 of the little points in this  thank God we don't have to 17 take a pop quiz  of your program are logical, rational,

18 but they add up to punting when we're on the one yard 19 line. There is no reason in the world why the mandate 20 that you started with, now, can't just be implemented.

21 Now, frankly, I'm going to surprise you because I 22 think that you have a situation where the perfect is the 23 enemy of the good. A ZEV needs to be further defined as a 24 car that is run by fuel that is carbon free and has maybe 25 only a tiny bit of oxides of nitrogen. Of course you get PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 164 1 that when it rains too. Maybe we abolish rain in this 2 state. I don't know.

3 But a car that runs on hydrogen is  90 some odd 4 percent is clean as an electric  it's cleaner than an 5 electric car. And I hate to say this, but an electric car 6 that gets its electricity from coal is much more pollutant 7 than a hydrogen vehicle based upon renewable energy. So I 8 think it's time to stick by your guns, but recognize that 9 electric cars will be and can be a major part of the 10 family.

11 But we need to have the hydrogen economy now, not 12 20 years from now. I hate to put it this way, but I will.

13 I first started the research on fuel cells when I was in 14 the White House under Lyndon Johnson back in ' 68. And I 15 had the old Office of Coal Research start putting some 16 money into fuel cells. I have a lifetime achievement 17 award from the fuel cell people. But, quite frankly, we 18 are now worshiping at the alter of a graven called the 19 fuel cell. We don't need to wait for the fuel cell to get 20 cars that are virtually clean.

21 The internal combustion engine runs very well on 22 hydrogen. It's not a military secret. You're entitled to 23 know that. The whole world is entitled to know that. And 24 a hydrogen hybrid car that's a plug in would be a car that 25 could be developed in this decade. And perhaps we need to PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 165 1 go back to the Legislature and redefine a ZEV as being a 2 car that is virtually, virtually free of pollution in the 3 whole fuel cycle, except for maybe a tiny bit of oxides of 4 nitrogen. We have to take a look at how  the entire 5 fuel cycle, because if we're going to really have clean 6 air in California, we've got to get off of fossil fuels 7 and recognize that renewable energy can now be put in the 8 gas tank in the form of solar and wind being converted to 9 hydrogen and running our motor vehicles.

10 This Board has always had more vision than 11 everybody else put together. This is now a time to exert 12 that vision.

13 And let me just say one more thing. Something 14 happened since the last time we met. We had some stupid 15 arguments before you last time. Remember, it was the 16 middle of the energy crisis and some of these automobile 17 companies were trying to tell you we shouldn't have 18 electric cars or else there won't be enough electricity?

19 Well, it's two years later, and we are in no danger of 20 being blacked out by electric cars.

21 Also they raise this aggravating issue about 22 environmental justice. And of course it's  it was just 23 maddening that they would raise a serious issue like that 24 with respect to something that was going to clean up the 25 air for everyone.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 166 1 But I think it's very, very important to 2 recognize that since 9/ 11 what you're talking about is not 3 just cleaner air, but you're talking about the security of 4 this country. Oil is very much a part of our problems 5 today as we wage war in the middle east. And this country 6 needs to peak out on how much oil we use. And, therefore,

7 cars without oil are consistent with your mandate.

8 And when you get down and you give 40 credits for 9 the car of the future 20 years from now, the fuel cell 10 car, and give a maximum of 16 credits for a car that would 11 run on hydrogen, you're going down the right path but you 12 all haven't gotten there yet. I mean it is time to 13 recognize that there is new technology that could be put 14 into the family. You don't need to abandon your vision.

15 You need to enlarge your vision. And if you think  your 16 lawyers think that it takes a slight amendment to the ZEV 17 statute in order to include a car that's run on renewable 18 hydrogen, I think you ought to seriously consider doing 19 that.

20 And then all these numbers  and it's 21 interesting to me how a group of people who say they don't 22 know enough to know what the standards ought to be can 23 give us all these charts to tell us what's going to 24 happen. It's just pretty hard for me to reconcile that.

25 You all are smarter and better than you think you are.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 167 1 You've just had too much time with the automobile 2 industry. It's just plain and simple.

3 ( Applause.)

4 MR. FREEMAN: Thank you very much.

5 CHAIRPERSON LLOYD: Thank you, David. And I'm 6 sure on some of those points you'll get agreement with the 7 auto industry.

8 With that, any comments or questions from my 9 colleagues? Otherwise we're going to take a 15 minute 10 break for the court reporter. So come back at 1: 20. And 11 then we will take any comments from the Board at this time 12 or questions of staff. And then we will begin testimony.

13 And the first will be Dr. Anderman, Dr. Frank,

14 and Amanda Miller.

15 ( Thereupon a lunch break was taken.)

16 17 18 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 168 1 AFTERNOON SESSION 2 CHAIRPERSON LLOYD: Would staff and colleagues on 3 the Board please take their seats so we can resume.

4 First off I would like to ask the ombudsman,

5 would you please describe the public participation process 6 that occurred while this item was being developed, and 7 share any concerns or comments with the Board at this 8 time.

9 OMBUDSMAN TSCHOGL: Thank you, Chairman Lloyd and 10 members of the Board.

11 The proposed amendments to the zero emission 12 vehicle regulations were developed through interactions of 13 ARB staff with representatives of the automotive industry,

14 environmental organizations, utilities, air pollution 15 control agencies within California as well as from other 16 states, electric vehicle advocates and drivers, and other 17 interested parties.

18 Over the course of developing this proposal staff 19 held more than 70 meetings and conference calls with 20 various stakeholders, along with literally hundreds of 21 informal telephone conversations and E mail exchanges.

22 In preparation for this Board hearing, originally 23 planned for February, staff developed an initial proposal 24 that was presented and discussed at a workshop on December 25 5th, 2002. This proposal addressed issues raised as a PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 169 1 result of industry, litigation, and also attempted to 2 address fundamental concerns regarding the state of pure 3 ZEV technologies.

4 Subsequent to the workshop staff conducted 5 numerous meetings with affected stakeholders and 6 interested parties, and received considerable written 7 comment, all of which was used in developing the staff 8 report. The notice for today's meeting and the staff 9 report were mailed and posted ARB's website January 10th,

10 2003.

11 As noted in the January 10 staff report, there 12 were several additional issues that needed further 13 consideration. While working to resolve these issues it 14 became apparent to staff the Board meeting should be 15 postponed by one month to ensure stakeholders had adequate 16 time for review and comment. Staff used this additional 17 time to continue discussions with stakeholders to resolve 18 key issues.

19 Staff released a set of additional proposed 20 modifications as part of a new document released on March 21 5th, 2003.

22 In summary, staff has worked with stakeholders 23 through workshops, conference calls, focused meetings, and 24 one on one communications to develop the amendments you 25 are considering today.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 170 1 Thank you.

2 CHAIRPERSON LLOYD: Thank you very much.

3 Do any of my colleagues have any comments at this 4 time of staff or the staff presentation?

5 Mr. Calhoun.

6 BOARD MEMBER CALHOUN: One of the statements you 7 made, Chuck, during your presentation was that it made 8 sense for ramp up to be in multiples of 10 or something 9 like this. It's logical. I'm trying to understand and 10 have an appreciation for the logic.

11 So can you explain it to me?

12 VEHICLE PROGRAM SPECIALIST SHULOCK: The thinking 13 there is that, in that first generation, you're testing 14 the concept and, you know, a lot of things in play. Those 15 vehicles are hand built, extremely expensive, and you're 16 learning a lot as you go along. Then once you figured 17 that out and get to the next generation, things begin to 18 get more optimized, the cost comes down. Then you're 19 starting to ask different questions, maybe durability,

20 performance type questions. And so a larger fleet is 21 needed to really deal with those issues. And then as you 22 get beyond that and you're really starting to talk about 23 real world drivability and the cost has come down further,

24 it's appropriate to have a larger number.

25 Now, is it multiples of 10 versus multiples of 9 PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 171 1 versus multiples of 11. There's  I don't think there's 2 any magic to that. But in our dealings with manufacturers 3 and the fuel cell suppliers in conversations that we've 4 had, in general terms this notion of 10, 100, 1,000 seemed 5 to be something that people thought made sense.

6 With one other  let me throw one other caveat.

7 It's conceivable that you might build 10, and based upon 8 that you need to start over again and build 10 more. You 9 know, the stages don't necessarily move inexorably, but 10 that there are different stages at which you're learning 11 different things and you have different cost targets.

12 BOARD MEMBER CALHOUN: I won't argue with you 13 about it. It's just amusing to  and I guess it makes as 14 much sense as going up in 10 or 15 or 20. So I won't 15 question that.

16 CHAIRPERSON LLOYD: Supervisor Roberts.

17 BOARD MEMBER ROBERTS: Yeah. Mr. Chairman,

18 yesterday when we were talking, we were talking about a 19 Department of energy timeline. And if that was shared 20 with us, I didn't see it. But I was wondering, maybe if 21 that's available

22 CHAIRPERSON LLOYD: I think staff has that.

23 EXECUTIVE OFFICER WITHERSPOON: You also have it 24 in packets at your desk, or you should. It looks like 25 this. And it's in a yellow folder along with

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 172 1 VEHICLE PROGRAM SPECIALIST SHULOCK: Catherine,

2 we're told that they do not have it.

3 Excuse me.

4 EXECUTIVE OFFICER WITHERSPOON: Okay. We'll make 5 sure that you get it.

6 But briefly to summarize, the DOE has also 7 characterized different demonstrations at 5500, 5,000,

8 with various performance parameters to have been met, sort 9 of gateways before you move to the next phase. And in our 10 conversations with automakers, they have not objected to 11 that scaling logic. Really the conversations have been 12 about when. And not a lot of certainty today, but 13 logically it doesn't seem to offend them, that assumption.

14 BOARD MEMBER CALHOUN: I was just trying to 15 understand his rationale for it. It just didn't make 16 sense. And so I suppose it does make sense, or it doesn't 17 make sense.

18 EXECUTIVE OFFICER WITHERSPOON: It seems to make 19 sense. They're far more focused on whether or not we're 20 ready at a particular moment in time to move to the next 21 phase. And then we can discuss what the actual numbers 22 are. But, you know, just moving from tens of vehicles, to 23 hundreds, to thousands, you know  that things have to 24 have changed before you move to the next step in their 25 view.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 173 1 BOARD MEMBER CALHOUN: All right. Thanks.

2 CHAIRPERSON LLOYD: Think I can get a copy of 3 that proposal?

4 Professor Friedman.

5 BOARD MEMBER HUGH FRIEDMAN: I just have a couple 6 questions for clarification.

7 In the staff presentation, you left open a number 8 of areas for further consideration or at least for options 9 for us working with you to determine. And on slide, I 10 guess it's 68, the role of Battery Electric Vehicles, the 11 options set out are to consider requiring BEV production 12 in addition to fuel cells, or to allow battery electrics 13 to meet some portion of the required minimum fuel cell 14 requirement, which I understand to be 250 for these 15 interim years, a short term in years.

16 VEHICLE PROGRAM SPECIALIST SHULOCK: That is 17 correct.

18 BOARD MEMBER HUGH FRIEDMAN: Total, 250 aggregate.

19 I assume if the staff is  and then the next 20 slide, the staff's response was to suggest  recommend 21 that battery electrics be allowed to satisfy a portion of 22 that 250 fuel cell requirement, or each manufacturer's 23 allocated portion of that could be satisfied, to some 24 extent to be determined, by alternative battery electric.

25 VEHICLE PROGRAM SPECIALIST SHULOCK: That is PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 174 1 correct.

2 BOARD MEMBER HUGH FRIEDMAN: As an option, not a 3 requirement. But they could choose to do that.

4 But there ought to at least be half their quota 5 be satisfied with fuel cell to keep some minimum fuel cell 6 technology development.

7 VEHICLE PROGRAM SPECIALIST SHULOCK: Exactly.

8 BOARD MEMBER HUGH FRIEDMAN: So I guess subsumed 9 in that thinking must be the idea that if all the 10 manufacturers elected that option, to only do half of 11 their fuel cell quota, and the rest with battery electric,

12 that 125 fuel cells among all manufacturers over the 13 four year period, five year period, or whatever it is,

14 would be adequate to serve as a demonstration and to 15 advance the technology to test it out.

16 What would that do if, for example, we wanted to 17 impose a fixed number in 2009 for zero emitting vehicles?

18 And assuming they would all  presumably the choice would 19 be fuel cell. Not necessarily, but presumably.

20 VEHICLE PROGRAM SPECIALIST SHULOCK: I'm not sure 21 I understand the question.

22 BOARD MEMBER HUGH FRIEDMAN: Well, do you think 23 125 fuel cells over these years until 2009 would be 24 adequate as a predicate, let's say, a scientific predicate 25 to support some order of magnitude of requirement imposed PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 175 1 in 2009 and other out years increasingly of zero emission 2 vehicles production?

3 VEHICLE PROGRAM SPECIALIST SHULOCK: Catherine,

4 were you going to

5 EXECUTIVE OFFICER WITHERSPOON: Yeah, Professor 6 Friedman, let me try

7 BOARD MEMBER HUGH FRIEDMAN: Am I making any 8 sense?

9 EXECUTIVE OFFICER WITHERSPOON: No, I understand 10 your  you are making sense.

11 Staff believes that each manufacturer is going to 12 make a certain number of fuel cell vehicles anyway for 13 competitive reasons, you know, on the order of 10 to 20.

14 And the effect of the alternative compliance pathway is to 15 push them all the way to the stretch goal, a higher 16 complement at the market share. And were you to establish 17 a target in the next interval of time, ' 09 through ' 11, we 18 would continue whatever decision you made I believe for 19 this first set, and you could do BEV substitution in the 20 next set as well. Then we'd need to think about the 21 ratios because we're rationing in large part based on the 22 cost of building one versus the other. And so we would 23 want to keep those cost comparisons accurate and current 24 as we moved forward in time.

25 Did I answer your question?

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 176 1 BOARD MEMBER HUGH FRIEDMAN: Yeah, I think so,

2 sort of.

3 But you  another recommendation at the last one 4 was set an appropriate credit ratio, and you're addressing 5 that.

6 Do you have any feel  are you thinking that 7 should be based on comparative costs?

8 EXECUTIVE OFFICER WITHERSPOON: We're thinking 9 about comparative costs in 2008 when the majority of the 10 fuel cell vehicles would actually be built. And we've 11 been talking about 20 to 1. We're still refining  20 to 12 1 with a city car, substituting for a single fuel cell 13 vehicle. But we haven't settled on exactly what the right 14 number is. And we would ratio fuel  full function EVs a 15 little less than that because they cost more. That kind 16 of thought.

17 BOARD MEMBER HUGH FRIEDMAN: Well, if we wanted 18 to pursue that, and I'm only speaking for myself, how 19 would we go about that? I mean we haven't gotten anything 20 definitive to adopt now.

21 EXECUTIVE OFFICER WITHERSPOON: If you decided 22 you wanted us to pursue this option, we would develop a 23 proposal as part of the 15 day changes and send it out for 24 comment, and then move forward on a final regulation.

25 We've given you in rough terms what we think it ought to PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 177 1 look like, that there should be a ratio, that there should 2 be a minimum number of fuel cells. And we proposed half.

3 And any advice you had to give us about those general 4 parameters or more specific ones, we would

5 BOARD MEMBER HUGH FRIEDMAN: Two to one  it was 6 2 to 1 or

7 EXECUTIVE OFFICER WITHERSPOON: Well, for  no,

8 for BEVs, 20 to 1.

9 BOARD MEMBER HUGH FRIEDMAN: Twenty to one. I'm 10 sorry. Yeah, 20 to 1.

11 Well, I just raised it because I hope I'll hear 12 from anyone who's interested on that.

13 And the other question I had was on credits for 14 infrastructure. Maybe that's not where it belongs, but it 15 seems to sort of fit. If we wanted to talk about and have 16 the staff analyze and make a recommendation on credit for 17 a stationary fuel cell distributed generation systems,

18 even though they're not mobile, but if they're the 19 equivalent  functional equivalent of the mobile fuel 20 cell stack and some basis for some kinds of relative 21 credits, but not only for a portion of anyone's quota or 22 mandate, and with some kind of a sunset, we could ask  I 23 guess the way to do it would we to ask the staff to 24 consider that if that were the desire.

25 EXECUTIVE OFFICER WITHERSPOON: We could PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 178 1 definitely look into that. You know, one possibility is 2 as an analog to BEV substitution. Though we're still 3 pondering what the ratios would be, and if there's any 4 unintended consequences we haven't imagined. The one 5 possibility or one reason to combine it with the 6 infrastructure analysis is that people have talked about 7 co location of hydrogen power generation with hydrogen 8 fueling. And so that would give us a chance to look at 9 the full picture here and make sure we captured every 10 conceivable credit scenario before we reported back to you 11 on specific numbers. So we'd be happy to do that.

12 BOARD MEMBER HUGH FRIEDMAN: Thank you.

13 CHAIRPERSON LLOYD: Ms. D'Adamo and then 14 Supervisor DeSaulnier.

15 BOARD MEMBER D'ADAMO: I know we'll be talking 16 about this as we go forward today, and just have  I 17 would like to follow up on Professor Friedman's questions 18 regarding BEVs. I for one am not ready to close the door 19 on that technology. I think that we've

20 ( Applause.)

21 BOARD MEMBER D'ADAMO: I think that we've come a 22 long way. And I think obviously we've got a lot further 23 to go. But I'm real nervous about abandoning a technology 24 that has continued to progress. Maybe I'd feel 25 differently if it just stood still in time. But every PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 179 1 hearing that I've attended since being involved with this 2 I continue to see improvements. And I look forward to

3 I guess there's going to be a presentation by a committee 4 that did some work on batteries. So look forward to 5 hearing about that.

6 But my question to staff and of any witnesses 7 that are going to be addressing the point on BEVs is this:

8 How do we incentivize a BEV component enough so that when 9 the independent review board or  I don't recall if 10 that's the name or not  but when the Board or the 11 committee reviews the technology, that it is comparing 12 technology of fuel cells and other technologies that are 13 out there and on batteries, that it's comparing a 14 technology that is not frozen in time as of this date, but 15 a technology that is really given the chance to continue 16 to progress, whatever that progression may be, that we 17 somehow incentivize it so that it is a true comparison?

18 And I guess that's like looking into a crystal ball to try 19 and figure out where that technology would be. But I 20 think we need to incentivize it enough, what that ratio 21 is, so that we continue to see progress.

22 I see here on slide 69 that there's a suggestion 23 that we keep a minimum number of fuel cells. I'd just 24 like to throw it out there, can we do the same for BEVs,

25 so that it's a fair comparison?

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 180 1 ( Applause.)

2 EXECUTIVE OFFICER WITHERSPOON: The issue of 3 keeping a minimum requirement for BEVs, you have that on 4 your base regulation, that it is a BEV requirement on the 5 base. If you have a minimum requirement in the 6 alternative compliance path, you've turned it into a 7 mandate rather than an option, I think. And you have to 8 ask whether that's appropriate for an auto company that 9 wishes to concentrate on fuel cells alone, whether they 10 should be obligated to have both BEVs and fuel cells 11 rather than the choice to do a mixture if that works with 12 their own compliance plan.

13 BOARD MEMBER D'ADAMO: I don't want to intrude 14 upon the efforts by many. And I know the Chairman really 15 deserves to be complimented for his push on fuel cells.

16 But if there would be a requirement for a minimum 17 number  I'm not even saying a 50/ 50 split  but just a 18 minimum level to keep BEVs in the mix. Unless that 19 incentive on the ratio can be enough that we can trust 20 that we are going to continue to see progress on BEVs.

21 EXECUTIVE OFFICER WITHERSPOON: It is staff's 22 intent to have the ratio be favorable to BEVs and have the 23 costs work out such that it's slightly cheaper to go the 24 BEV route, and hope that that's incentive enough that 25 someone might choose it.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 181 1 BOARD MEMBER D'ADAMO: Okay. And then just one 2 other question  clarification. What happens to the 3 electric vehicles that were placed into lease and now at 4 this time or at some point in the future the lease has run 5 out? Is there anything that we can do to incentivize the 6 reissuance of those vehicles, either by future leases or,

7 better yet, somehow incentivize that they be sold or they 8 be placed in long term leases in California?

9 ( Applause.)

10 VEHICLE PROGRAM SPECIALIST SHULOCK: Under the 11 2001 regulation and continued on in our staff proposal 12 vehicles that are placed on the road and have been there 13 for three years earn additional credit if they're kept on 14 the road in year four, year five, year six. So there's 15 already a mechanism there to encourage those vehicles to 16 be kept on the road. That is available for vehicles 17 placed through 2005. So there's already something there 18 that provides that credit. The credit that they earn is 19 one tenth per year of what it would earn new. So if the 20 vehicle's kept on the road for three more years, it would 21 earn three tenths  it would be worth three tenths of a 22 new vehicle.

23 BOARD MEMBER D'ADAMO: Then I guess my question 24 would be, should we explore extending that out further?

25 Would there be any value? Or are those  extending it PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 182 1 out to 2005, is that going to be enough encouragement to 2 keep those vehicles on the road in California?

3 VEHICLE PROGRAM SPECIALIST SHULOCK: Well, the

4 BOARD MEMBER D'ADAMO: Worried about a car crush 5 program.

6 VEHICLE PROGRAM SPECIALIST SHULOCK: Let me 7 clarify how we're doing  if the vehicle is originally 8 placed prior to ' 05, that vehicle can earn credit however 9 long. If it's kept on the road for 20 years, it would 10 earn credit for all 20 of those years. So once the 11 vehicle  if the vehicle is placed, it can continue to 12 earn that credit. What we cut off is we're saying if the 13 vehicle was placed in 2006, it's not eligible to earn that 14 extra credit in the fourth year of its useful life. And 15 reason we did that  actually in 2001 we didn't have this 16 cutoff. The reason we did it is when we looked at what it 17 means to keep track of this and, you know, how many 18 vehicles are still on the road and how do you know, et 19 cetera, it looked like it was an administrative headache;

20 and so once  it seemed like it made sense to do that in 21 these initial years, but at some future date that it would 22 no longer be necessary. So that's what drove us to cut it 23 off in 2005.

24 CHAIRPERSON LLOYD: Can I just add to that,

25 Chuck? Since we don't have a 2001 regulation that we can PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 183 1 enforce, I would like to follow up on DeDe's point a 2 little bit more specifically; and, that is, is there any 3 way in which we can compel those vehicles to be continued 4 in operation without crushing them? I mean maybe we 5 can't.

6 VEHICLE PROGRAM SPECIALIST SHULOCK: Is that a 7 question for our attorneys?

8 You know, programmatically, you could structure 9 very generous incentives that would certainly make it 10 worth their while to keep them on the road. Rather than 11 one tenth per year

12 CHAIRPERSON LLOYD: So maybe the question is,

13 rather than trying to get you to answer it, for the OEM's.

14 When then OEM's come up, what incentive would be necessary 15 for them to keep them on the road? And I'm giving fair 16 warning to maybe Dave and others back there to be able to 17 address that question. Because, again, I realize that we 18 really should be asking them.

19 Supervisor DeSaulnier.

20 BOARD MEMBER DeSAULNIER: Just briefly, Mr.

21 Chairman. I realize we have a lot of public speakers.

22 But I have one question and then a comment in relation to 23 Hugh's questions.

24 As someone who likes to worship to graven images,

25 could you respond to Mr. Freeman's comment about why are PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 184 1 16 credits for a hydrogen internal combustion engine 2 appropriate versus 40 for a fuel cell? Where did we come 3 up with those numbers?

4 VEHICLE PROGRAM SPECIALIST SHULOCK: The logic 5 that we followed really started in, let's say, 2012,

6 saying that any of those non ZEVs should not be worth more 7 than a ZEV. So we kind of started by saying here's what a 8 ZEV is worth in 2012, and then these other alternatives 9 need to be beneath that. And then we tried to come up 10 with some sort of ratio amongst the different options.

11 Hybrid ICE versus a regular hybrid versus a grid connect.

12 What sort of ratios seemed to make sense given their 13 relative state of development and the cost that seemed to 14 be involved.

15 And then we went backwards from there saying 16 well, earlier in time it's going to be harder to do those 17 sorts of things, so the number needed to be inflated. As 18 far as how we ended up at exactly 16 again versus 14 or 19 18, I don't think there's any powerful math involved 20 there. It seemed like that a large incentive was needed.

21 And in the context of everything else that's happening

22 if you recall the graph that had one group way up high and 23 then the other things way down low, there's a very 24 significant incentive provided in those early years. And 25 that's what we were  we were trying to make sure that PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 185 1 the margin between the two was very large. And so just 2 looking at the numbers, that seemed to be a reasonable 3 level.

4 BOARD MEMBER DeSAULNIER: Well, we'll have this 5 discussion later. I'm a little concerned about the ratio 6 because of the infrastructure question and trying to get 7 hydrogen moving along and not waiting for what may or may 8 not be a graven image in regards to the development of 9 fuel cells.

10 And regards, Hugh, to your question. The smart 11 mobility project came out  and I'll do this in a cliff 12 notes version because we've had multiple dozen meeting on 13 this. But it came out of the ZEV hearing in 2001 where 14 Allen gave me some instruction to go spend some time. And 15 it resulted in an indoor agency agreement between us, the 16 Energy Commission, and CalTrans. And it's resulted in a 17 partnership between those three agencies plus the four UC 18 transportation schools.

19 And the interesting thing about what you brought 20 up  would be interesting in terms of the commentary from 21 the different car operators is in the staff report we talk 22 about the reluctance of the auto manufacturers being 23 interested in credits for infrastructure, yet we have GM 24 interested in this particular. And in conversation with 25 air products, for instance, and projects they've had in PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 186 1 Las Vegas and Chicago where they've done big demonstration 2 projects that allow for the kind of multiple uses that Ms.

3 Witherspoon was talking about. Those are the things, at 4 least for me, that we have an interest in pursuing.

5 And there's something  ZEV Net is interesting.

6 If any of you've seen the New York Times magazine the last 7 month, the last  two weeks ago Toyota had a wonderful 8 two page  which we all should get copies of, by the 9 way  advertisement extolling the virtues of their 10 involvement in ZEV Net. And it was a series of pictures 11 from overhead with a Prius hybrid parked, a RAV4 parked

12 an EV RAV4, and then an ECOM. And I can't tell whether 13 the ECOM's coming into the parking space or leaving. We 14 want it to be coming in rather than leaving, but there's 15 some question there. But it's a great commercial talking 16 about these kind of demonstration projects, with a 17 potential for using these sort of multimedia approaches.

18 So I just wanted to bring that up.

19 Thank you, Mr. Chairman.

20 CHAIRPERSON LLOYD: Mr. Calhoun.

21 BOARD MEMBER CALHOUN: Yes, two questions. One 22 goes back to Professor Friedman's statement earlier when 23 he asked the staff about taking a look at stationary fuel 24 cells. And I believe, Catherine, you said we could come 25 back some time with the report on that.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 187 1 And how soon would you expect to do that?

2 EXECUTIVE OFFICER WITHERSPOON: In three months.

3 BOARD MEMBER CALHOUN: Three months. Okay.

4 Then my next question pertains to batteries. I 5 met with one of the local representatives, and he informed 6 me that we had not gotten all of the facts on the status 7 of battery technology. And I notice that we do have a 8 recent report by EPRI. And if battery technology is 9 worthwhile, then obviously no one would want to see it go 10 away. But I think the option of choosing batteries or 11 fuel cells to meet some of our regulatory requirements 12 ought to be left up to the manufacturer as opposed to us 13 dictating to him what he has to use.

14 EXECUTIVE OFFICER WITHERSPOON: With respect to 15 the battery report, you will be hearing testimony on the 16 results, both from our own contractor, Menahem Anderman,

17 and from EPRI, which is here to testify. And we've 18 grouped them with other witnesses who will speak to those 19 technologies specifically. And that's early on the 20 witness list.

21 And I guess we agree with you on the optional 22 versus mandate approach on combining BEVs and fuel cells.

23 BOARD MEMBER HUGH FRIEDMAN: Just quickly one 24 more question.

25 I just sort of intuitively thought in my own PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 188 1 thinking that the plug in electric hybrid that you could 2 just plug into your garage outlet made a lot of sense. I 3 get the impression that the auto manufacturers are not 4 terribly interested in that for various reasons.

5 And I'm wondering how you arrived  what the 6 rationale is for the credit system that you're proposing 7 for the plug in HEVs. It's on slide 40. I just wanted to 8 know how you arrived at that.

9 VEHICLE PROGRAM SPECIALIST SHULOCK: Similar to 10 the answer on the previous question.

11 BOARD MEMBER HUGH FRIEDMAN: Apparently it's not 12 enough.

13 VEHICLE PROGRAM SPECIALIST SHULOCK: Well, you 14 gave us direction in 2001. There was a question, should 15 they be counted in the gold category or not? And the 16 direction from the Board was, no, they should not be 17 involved, but they should receive a very health incentive 18 in that silver category. We did that

19 BOARD MEMBER HUGH FRIEDMAN: So this is a 20 carry over?

21 VEHICLE PROGRAM SPECIALIST SHULOCK: Well, we did 22 that in 2001. And we've even increased it further this 23 time around, trying to make it attractive to the 24 manufacturers vis a vis their other options. And when 25 we  you know, when you look at the cost side of it, it PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 189 1 looks like it could be attractive vis a vis the other 2 options given the credits that are provided. Now, is that 3 enough to make someone want to go down that road, again 4 maybe that's a question for the automakers.

5 BOARD MEMBER HUGH FRIEDMAN: Okay. I just 6 wondered what the thinking was.

7 Thank you.

8 CHAIRPERSON LLOYD: Dr. Burke, Mr. McKinnon.

9 BOARD MEMBER BURKE: Two quick questions. One 10 is, for those of us who are facing constituency on the 11 ground, how do we explain giving credit for a vehicle 12 delivered in New York for credit in California?

13 ( Applause.)

14 BOARD MEMBER BURKE: And I appreciate the 15 support. But, you know, I don't think we need to  we 16 all know where we're going here. So thanks, but no thanks 17 on the applause.

18 CHIEF DEPUTY EXECUTIVE OFFICER CACKETTE: The 19 issue  to frame the issue, the law  the federal law 20 works such that other states can adopt California's 21 programs. And they do

22 BOARD MEMBER BURKE: We all understand that.

23 CHIEF DEPUTY EXECUTIVE OFFICER CACKETTE: It's 24 got to be Identical.

25 BOARD MEMBER BURKE: We're talking to someone in PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 190 1 East Los Angeles about delivering a car in New York and 2 giving him credit in California. They don't want to hear 3 from federal law. How do I explain it to them?

4 CHIEF DEPUTY EXECUTIVE OFFICER CACKETTE: The 5 programs have to be identical in the two states. That has 6 to be known before I can answer the question.

7 BOARD MEMBER BURKE: Has any of the other states 8 given credit for any vehicles delivered in California?

9 CHIEF DEPUTY EXECUTIVE OFFICER CACKETTE: Under 10 this provision, that would happen also.

11 BOARD MEMBER BURKE: Have they done it already?

12 CHIEF DEPUTY EXECUTIVE OFFICER CACKETTE: Under 13 this proposal? Not under this  not yet, no, they have 14 not, because it doesn't work that way.

15 BOARD MEMBER BURKE: Yeah, I understand that.

16 Second question is: We took a couple months to 17 work this out, and I know it has been extremely difficult.

18 But of the five hours of testimony which we're about to be 19 blessed with

20 ( Laughter.)

21 BOARD MEMBER BURKE:  we have four people out 22 of 78 who are supporting this proposal. We have 22 people 23 or organizations, including the car manufacturers, who are 24 neutral on this proposal. We have 52 people testifying 25 who are against it.

PETERS SHORTHAND REPORTING CORPORATION ( 916) 362 2345 191 1 How did we end up with this?

2 EXECUTIVE OFFICER WITHERSPOON: I think you'll 3 find when we get through the witness list that a majority 4 of the opponents to the staff proposal are the early 5 adopters of battery electric technology and are deeply 6 disappointed that it has not come to fruition as quickly 7 as we are ourselves had hoped it would.

8 And so we don't have fuel cell advocates in the 9 room in as large of numbers as we have battery electric 10 advocates. And that's probably what explains the 11 percentage you just described.