Comment Log Display

February 26, 2008

Mary Nichols, Chairman of the Board
California Air Resources Board
1001 I Street
Sacramento, CA  95814

RE:	Comments on the Surplus Off-Road Opt-In for NOx (SOON)
Provisions of the
In-Use, Off-Road Diesel Regulation

Dear Chairman Nichols:

Since the early stages of development of the In-Use, Off-Road
Diesel Regulation the nearly 300 union-signatory contractor
members of the Engineering & Utility Contractors Association
(EUCA) have provided, in public forums and in writing, numerous
comments and recommendations designed to make the regulation
practical and compliance with the regulation feasible.  While it
remains questionable whether compliance with the regulation is
possible for many contractors, the proposed SOON provisions
present additional challenges that will make the regulation so
complex, costly and burdensome that it is almost assuredly doomed
to failure.

The SOON program was originally presented in the days leading up
to the July, 2007 Board Hearing as a voluntary, fully funded
effort to help two local air districts (South Coast Air Quality
Management District and San Joaquin Valley Air Pollution Control
District) achieve additional NOx reductions that they suggest are
needed to meet their 2014 deadline to achieve compliance with the
federal PM2.5 standard.  Industry stakeholders had little, if any,
opportunity to fully consider the potential impacts of the SOON
program prior to its consideration by your Board.  This lack of
opportunity for stakeholder input, as well as actions taken by the
Board at the July, 2007 hearing have made the SOON program
unworkable and have, as a result, made the already problematic
Off-Road Diesel Regulation even more difficult to comply with.

Unlike what stakeholders were presented originally, the SOON
program is mandatory beginning in 2009, not voluntary. 
Contractors are expected to contribute financially to the
“over-compliance” requirements of the SOON.  Participation in the
SOON will negatively impact equipment equity, borrowing ability,
bonding ability and the ability of contractors to dispatch
equipment to “where the work is” because of restrictions on use. 
The program requirements in the form of mandatory contract
participation and dedicated equipment operational commitments are
strong disincentives for virtually any contractor to participate. 
Additionally, the Board’s decision to allow districts other than
South Coast and San Joaquin to opt-in threaten to create a
patchwork of regulations throughout the state, all with different
compliance requirements.  Finally, the SOON program is projected
to continue well beyond 2014 whether or not South Coast and San
Joaquin achieve compliance with the federal PM2.5 standard.

Mandatory Participation
Contractors are required to participate in the SOON if, as of
January 1, 2008, on a statewide basis, the fleet consisted of more
than 40 percent Tier 0 and Tier 1 vehicles and the fleet has more
than 20,000 horsepower statewide.  No distinction is made
regarding whether the Tier 0 and Tier 1 equipment resides in the
district opting-in to the SOON.  Situations are likely to arise
where a contractor is required to participate in the SOON in one
district as a result of equipment operating in a completely
separate area of the state.  Particularly in 2014, even a fleet
completely comprised of Tier 2 equipment (equipment manufactured
as recently as 2005) will not meet the SOON fleet average targets.
 Further, no distinction is made between equipment that can be
repowered and equipment that can only be replaced.  Because the
districts view SOON as primarily a repower program only equipment
that can be repowered should be considered with respect to the 40
percent eligibility criteria.

Setting the benchmark for determining contractor SOON eligibility
at January 1, 2008 gave contractors very little time to plan and
places too large a period of time between the eligibility date and
the first compliance date.  Contractors did not have sufficient
time to alter their fleets to avoid SOON participation if that was
their desire.  Also, SOON does not recognize positive, aggressive
fleet improvement steps contractors may take between 2008 and the
first SOON compliance dates in 2011 and 2014.  To carry on with
the earlier example, a fleet may have been SOON-eligible on
January 1, 2008 but is able to take actions to achieve an all
Tier-2 fleet by 2014.  This would leave the fleet with zero
percent Tier 0 and Tier 1 vehicles, comfortably in compliance with
the NOx fleet average targets in the base regulation in 2011 and
2014 but still not in compliance with the SOON fleet average
targets in 2014.  This fleet will have expended tremendous
resources to comply with the base regulation only to be faced with
additional requirements in local air districts who still want them
to do more, and at a greater cost of compliance.

Contractors are Expected to Contribute Financially
Most contractors will not be able to afford the compliance costs
of the base Off-Road Diesel Regulation let alone the added costs
of the SOON program.  The requirement to provide matching funds
will be out of reach for most contractors.  The construction
industry is facing a severe economic downturn with makes the
survival of many companies a difficult challenge.  As a result, a
large percentage of the construction equipment fleet in California
currently sits idle or is being sold off out-of-state or
out-of-country resulting in the reduction in emissions CARB seeks
as a result of the Off-Road Diesel Regulation.  When the economy
improves and fleets begin to grow again the regulation will
require that Tier 2 or higher equipment be utilized to facilitate
this growth.  In other words, the bad economy in combination with
the Off-Road Diesel Regulation are working in tandem to lock in
long-term emission reductions from the off-road equipment fleets
operating in the state.

SOON Will Negatively Impact Contractors’ Financial Status and
Credit Worthiness
Heavy equipment ownership is a complicated business.  When it is
joined with contracting it becomes even more complicated.  EUCA,
individual contractors and other associations have tried
repeatedly to educate CARB and local air district staff about how
financing and bonding impacts the ability to purchase equipment
and perform work with little success to date.  The Tier 0 and Tier
1 equipment that both the base regulation and the SOON program
target is typically completely owned by the fleet owner with no
direct debt attached to this equipment.  The owner typically has a
line of credit with a lender that is backed by the equity in this
owned equipment.  This line of credit is used to support new
equipment purchases and to provide cash flow for day-to-day
operations.  In addition, the owner has a bonding capability based
on a balance sheet that uses the equity in this owned equipment as
a large part of the financial base of the company.  The real
equity base in the company is used by bonding companies to
determine the amount of bonding available to the owner.

The SOON will require contractors to repower or replace equipment
that they normally would not modify, even given the base
regulation.  The problem with this is that there is not a
dollar-for-dollar value added to the equipment by going forward
with these repower projects.  The value of the equipment is based
on the condition of the equipment and its engine(s), not on engine
Tier.  On the day a SOON repower project is performed the equipment
it is encumbered with a new liability in the amount of the
district’s contribution to the project.  The equipment owner has
also spent a considerable amount of his available cash (or access
to credit), further weakening his balance sheet.

Once this happens the finance company issuing the line of credit
will no longer attribute any equity to the SOON-repowered
equipment to support the line of credit because the ownership of
the machine is questionable given the district’s position.  The
equipment owner’s bonding company will follow the finance
company’s lead in terms of determining equity when calculating the
contractor’s ability to secure bonding.  There will be a direct,
significant reduction in the equipment owner’s bonding capacity.

Mandatory Contract Participation
The SOON program requires that equipment owners enter into
contracts with air districts whether they want to or not and
regardless of whether they are capable of meeting their financial
obligations as stated in the contract.  If an equipment owner is
unwilling to sign a contract he is potentially subject to
enforcement action by either CARB or a local air district.  Having
reviewed several potential air district contracts there are several
common terms that make signing the contract problematic.  For
example, contracts often include a provision that asks the
equipment owner to certify that he has had the contract reviewed
by counsel, but provides no relief in the event that the advice of
counsel is to not sign the contract.  Contracts also have language
with strong indemnity language in favor of the air district.  If
contract owners are compelled to sign the contracts they should be
indemnified by the air districts.  Finally, the typical insurance
requirements contained in the contracts are well in excess of
insurance many equipment owners would consider having on the
equipment.

The operational conditions in the contracts are also cumbersome
and add cost to compliance.  SOON contracts will require that
equipment operate a vast majority of the time in the air district
providing the funding, whether the equipment owner has work in
that air district or not.  These contracts may last up to seven
years and during the contract period the equipment owner cannot
account for the lower emissions from the SOON equipment with
respect to the base regulation.  There will be times when the
equipment owner has work outside of the air district providing the
SOON funding and no work within this air district.  The equipment
owner will then be faced with renting or purchasing new equipment
to perform this work even though he already owns equipment capable
of performing the work which is sitting idle and not generating
revenue.  Contractors need to maintain the flexibility to dispatch
equipment to locations where there is work for them to perform. 
The SOON greatly restricts this flexibility.  This represents an
additional compliance cost to the equipment owner.  An additional
consideration is one of competitiveness.  SOON-obligated companies
will often be faced with competing against fleets that are just
under 20,000 horsepower or just under 40 percent Tier 0 and Tier 1
for work.  These contractors who just barely miss the
SOON-obligation benchmarks will have a competitive advantage over
those that are forced to bear the additional costs and equipment
operation restrictions of the SOON.

EUCA is not aware of any authority that CARB or any local air
district has to force an equipment owner to involuntarily sign a
contract they knowingly are unable to comply with.

A Patchwork of Regulations
In allowing South Coast and San Joaquin Valley air districts to
develop SOON programs, contractors operating statewide have at
least three off-road diesel regulations to consider (the base
regulation, the South Coast SOON regulation and the San Joaquin
Valley SOON regulation).  The prospect of allowing air districts
beyond South Coast and San Joaquin to opt-in to the SOON program
makes a bad problem worse.  Statewide contractors may have several
different off-road regulations to consider, each with different
compliance requirements, contract provisions and equipment
operation restrictions.  To provide just a single example, the
equipment eligibility requirements differ in the proposed South
Coast and San Joaquin rules.  San Joaquin proposes that only
equipment operating more than 50 percent of the time in their air
district will be required to participate in their SOON program. 
The South Coast proposal would include any equipment operating
most of the time in the South Coast District, even if the
percentage of time is less than 50 percent.  This will result in
nearly impossible compliance burden where equipment owners will
have equipment sitting idle in one air district while renting
equipment to perform work in another air district only because the
SOON restricts the operation of a significant portion of their
fleet.

EUCA feels strongly that the SOON program as proposed is
unworkable and needs to be removed entirely from the Off-Road
Diesel Regulation.  Barring that, EUCA would like CARB to
reconsider allowing air districts other than South Coast and San
Joaquin Valley to opt-in to the SOON program.  CARB should also
require that South Coast and San Joaquin Valley harmonize the
requirements of their SOON programs to facilitate contractor
compliance.

These regulations are impacting the construction industry at a
time when many businesses are already facing financial challenges.
 Page 61 of the April, 2007 Initial Statement of Reasons for
Proposed Rulemaking states, “Staff also considered requiring
higher turnover rates and more stringent NOx averages, but the
higher costs would likely be more than the industry could bear.” 
This document is dated prior to the introduction of the SOON
program which includes the higher turnover rates and more
stringent NOx averages staff believes the industry cannot bear. 
By staff’s own estimation the SOON will produce an untenable
economic burden without even considering the other regulations the
construction industry is faced with including the Portable
Equipment Regulation Program (PERP) and the upcoming On-Road
(In-Use) Diesel regulation which promises to be even more costly
than the Off-Road Diesel Regulation.

The SOON is simply a bad idea proposed at the worst possible
time.

Sincerely,




Tara McGovern
Director of Government Relations

Cc:	All California Public Works Agency Directors (inc. cities,
counties and special districts)
	Members of the California State Assembly
	Members of the California State Senate
	The Honorable Arnold Schwarzenegger, Governor or California
	Cabinet Secretary, Dan Dunmoyer – Office of the Governor

The Engineering & Utility Contractors Association serves 400
union-affiliated contractors and vendor firms working in
California, Nevada, Utah, Hawaii and other areas of the U.S. 
Member firms employ over 25,000 workers. The association is the
most prominent and influential union contractors association in
the Western United States.