A. Hybrid Truck and Bus Voucher Incentive Project (HVIP) Proposed Funding: $25 million

A. Hybrid Truck and Bus Voucher Incentive Project (HVIP) Proposed Funding: $25 million Overview Hybrid medium- and heavy-duty vehicle technology can significantly reduce criteria pollutant, air toxic and greenhouse gas emissions particularly in refuse trucks, work trucks, delivery vans, urban buses, and other vehicles with high stop-and-go or idling duty cycles. Hybrid vehicles can also provide significant fuel economy benefits and fuel cost savings relative to their non-hybrid counterparts. Hybrid trucks and buses are now on the market in multiple vehicle configurations and classes. Technology and production capacity for these vehicles has reached a stage of significant growth potential, but low initial production volumes mean today s typical hybrid vehicle costs $30,000 to $80,000 more than its non-hybrid counterpart (depending upon vehicle size and configuration). This incremental cost is generally too high to justify the vehicle s purchase based on fuel economy benefits alone. A large and carefully-crafted hybrid truck and bus voucher project will not only accelerate the immediate commercialization of these vehicles, but would also have significant multiplier benefits. As more vehicles are produced, production costs and sales price should decline to the point where hybrid trucks and buses are costcompetitive with their non-hybrid counterparts (when fuel economy benefits are considered), ultimately eliminating the need for incentives. Incentives for new vehicle purchases will also accelerate the development and commercialization of cleaner and more efficient hybrid vehicles, and hybrids in less traditional applications, such as offroad equipment, marine vessels, and locomotives. An incentive program would also help pave the way for the medium- and heavy-duty hybridization measure identified in ARB s Climate Change Scoping Plan. 1 While the Climate Change Scoping Plan dos not yet have an adoption or implementation date for this measure, near-term incentives could help accelerate the emission reductions achieved from this sector and increase the feasibility of an eventual mandatory measure. Over 1,200 hybrid trucks and buses are on the road nationally in part because of incentive programs in New York, Michigan and other states while less than 50 have been sold in California. Project Funding Staff is proposing a $25 million hybrid truck and bus voucher project as the cornerstone of the FY 2009-10 AQIP Funding Plan. This funding would accelerate the deployment of approximately the first thousand vehicles in California. The proposed HVIP is structured to be as straightforward and accessible as possible in order to facilitate purchaser and dealer participation and most effectively jump start the hybrid truck and bus market. 1 ARB, Climate Change Scoping Plan, December 11, 2008; www.arb.ca.gov/cc/scopingplan/document/scopingplandocument.htm

Hybrid trucks and buses are also eligible for a federal tax credit of between $3,000 and $12,000, based upon the vehicle s fuel economy benefits. 2 However, these credits are not available for public fleets and are insufficient to significantly alter consumers purchase decisions. Vehicles receiving the federal tax incentive would not be prohibited from also receiving an HVIP rebate. Local air districts or other public agencies could also augment the HVIP rebate to further buy-down the incremental cost of these vehicles in their regions. Project Structure Figure IV-1 describes a hypothetical truck dealer sale and voucher reimbursement transaction to illustrate how the HVIP will be implemented. The HVIP would enable the buyer of an eligible hybrid truck or bus to receive a voucher for the incentive amount, which would be redeemable at the time of the vehicle delivery and purchase. The HVIP website will include a list of eligible hybrid trucks and buses, as well as the eligible voucher amount for each vehicle. The webpage will include a voucher request form for the dealer (in concert with the purchaser) to submit at the time a specific vehicle is ordered, with the voucher to be redeemable at the time the vehicle is delivered. A similar structure would also apply for vehicles which are ordered directly from a hybrid truck manufacturer or a truck equipment manufacturer. 2 Credit for New Qualified Alternative Motor Vehicles, Internal Revenue Service Bulletin 2006-06; www.irs.gov/irb/2006-26_irb/ar13.html

Figure IV-1: Potential Hybrid Truck or Bus Purchase Transaction Customer visits dealer to purchase a hybrid truck. Dealer visits HVIP website to verify that funds are available and review the list of eligible vehicles. Customer selects eligible truck and completes the voucher request form with the dealer. Dealer orders the truck, submits the voucher request form, and receives a voucher. Truck is delivered to the dealer. Dealer completes the voucher disbursement form with the customer, customer pays for and takes possession of the Customer is responsible for meeting terms of the voucher disbursement form. Dealer submits voucher disbursement form and other documentation, and is reimbursed by HVIP administrator. Vehicle Incentive Amounts Hybrid vehicles would be eligible for the funding amounts identified in Table IV-1. These voucher amounts correspond to approximately one-half of the incremental cost of a hybrid truck or bus. Staff believes this is the minimum voucher amount needed to make the business case for purchase of a hybrid truck or bus.

Table IV-1: Staff Recommended Hybrid Vehicle Incentive Amounts Vehicle Weight Base Vehicle Incentive 1 Additional Incentive for ARB Vehicle Certification 10,001 14,000 lbs. $10,000 14,001 26,000 lbs. $20,000 $5,000 26,001 33,000 lbs. $25,000 > 33,000 lbs. $35,000 1 The first HVIP-eligible hybrid truck or bus purchased by any fleet would be eligible for an additional $5,000 voucher. To further encourage participation by small fleets, staff is also recommending the first HVIP-eligible hybrid truck or bus purchased by any fleet receive an additional $5,000 voucher. 3 For example, a truck owner-operator purchasing just one truck would be eligible for an additional $5,000 voucher for that vehicle, while a larger fleet buying several trucks would also receive one $5,000 voucher for the first vehicle purchased. Staff believes this approach will encourage purchase and acceptance of hybrids across more fleets and ultimately help the market for these vehicles grow. Since these vehicles emission reductions are closely tied to how they are driven, vehicles in smaller fleets (where the owner has bought into the vehicle purchase) also have the potential for more air quality benefits than those in larger fleets where drivers may rotate between hybrid and non-hybrid trucks. To ensure that funds are not monopolized by a single fleet, staff is also recommending that no entity be eligible to receive more than 100 hybrid vehicle vouchers. Qualifying Vehicles Dozens of hybrid truck and bus configurations from Freightliner Custom Chassis Corporation, International Truck and Engine Corporation, Kentworth Truck Company, Peterbilt Engine Corporation, and other manufacturers are available today. These vehicles can be found in both public and private fleets and functions as varied as beverage and package delivery vehicles, utility vehicles, work vehicles, refuse trucks, school and transit buses, and line-haul trucks. ARB staff is proposing that for the FY 2009-10 Funding Plan, hybrid trucks and buses eligible for the federal hybrid medium- and heavy-duty vehicle tax credit be eligible for the HVIP, if the vehicle meets additional ARB requirements (described in Appendix A) to ensure the California-certified engine and after-treatment devices shall continue to function as required. A vehicle must also draw propulsion energy from onboard sources of stored energy that are both an internal combustion or heat engine using consumable fuel, and a rechargeable energy storage system. Staff proposes that an additional $5,000 per vehicle incentive be provided to ARBcertified hybrid trucks and buses (as shown in Table IV-1), since their criteria pollutant emission reductions will have been verified, and these vehicles will have met ARB 3 For the purposes of the HVIP, all vehicles under the fiduciary control of a project participant are considered part of the same fleet. Additional guidance regarding this concept will be provided as part of the HVIP solicitation.

durability requirements. This flexible approach is needed to ensure availability of eligible vehicles that achieve real emission reductions in the project s first year while encouraging vehicle certification. If the HVIP continues to receive AQIP funding in FY 2010-11, staff expects to recommend that only ARB-certified trucks and buses be eligible for project funds as part of that year s Funding Plan. More information regarding the federal tax incentive and ARB certification of hybrid trucks and buses can be found in Appendix A. Additional Eligibility Criteria To be eligible for a voucher, staff recommends the following hybrid vehicle and purchaser requirements: 1. The vehicle must have a gross vehicle weight rating (GVWR) of at least 10,000 pounds, and must be used for commercial purposes. 2. The chassis must be titled and licensed in California, and the vehicle must be California-registered. 3. The purchaser must be: a) a California-based business, non-profit, or government entity, or b) a business, non-profit, or government entity operating in California for at least two years prior to the vehicle purchase order. 4. The purchaser must commit to keep the new vehicle for at least five years after the vehicle delivery date. 5. One-hundred percent of the vehicle s operation must occur within California for at least five years after the vehicle delivery date. Additional hybrid vehicle and participant requirements may be included in the HVIP solicitation. Project Solicitation ARB will issue an HVIP solicitation to select an entity to implement the HVIP. The HVIP solicitation would be open individuals, federal, state, or local government entities or agencies, and organizations with California heavy-duty vehicle, vehicle incentive program, or air quality expertise. An implementing agency would be chosen by ARB via a competitive solicitation and be responsible for running the HVIP statewide. The selected entity also be responsible for project outreach, with outreach efforts focused on those air basins with the worst air quality. Staff s proposed project solicitation criteria are described in Appendix A, and a proposed project solicitation schedule is included in Chapter V. Staff recommends allowable costs for administration and outreach of this project be capped at five percent.

Appendix A: Hybrid Truck and Bus Voucher Incentive Project Q & A What kind of hybrid trucks and buses are available today? Over 1,200 hybrid trucks and buses are on the road nationally in part because of incentive programs in New York, Michigan and other states while less than 50 have been sold in California. Dozens of hybrid truck and bus configurations from Freightliner Custom Chassis Corporation, International Truck and Engine Corporation, Kentworth Truck Company, Peterbilt Engine Corporation, and other manufacturers are available today. These vehicles can be found in both public and private fleets and functions as varied as beverage and package delivery vehicles, utility vehicles, work vehicles, refuse trucks, school and transit buses, and line-haul trucks. Are hybrid trucks and buses required to be ARB-certified to be sold in California? ARB requires that all truck and bus engines be certified to be eligible for sale in California. Hybrid vehicles are not required to be ARB-certified as long as they use an ARB-certified engine. However, ARB s process for certifying hybrid trucks and buses helps ensure the vehicle and engine durability, and that the emission reductions from the engine and after-treatment are maintained in a hybrid platform. No medium- or heavy-duty hybrid vehicles are ARB certified (as of March 1, 2009), but several have applied for and are being evaluated for certification. Does ARB require that vehicles be ARB-certified to be eligible for the HTIP? To jump start the program, staff is recommending the HTIP provide two options for determining vehicle eligibility. First, hybrid trucks or buses which are ARB-certified would be eligible for the base voucher amount plus an extra $5,000. This additional $5,000 reflects both the additional manufacturer cost in certifying the vehicle (which could be reflected in the vehicle price), as well as the additional certainty associated with ARB-certified emission reduction and warranty requirements. Secondly, vehicles which are on the IRS list of vehicles eligible for a federal tax credit would be eligible for funding if they meet additional ARB criteria to ensure the vehicle emission reductions are achieved and maintained. These additional criteria are: 1. The vehicle must use a California certified engine. 2. The engine and vehicle primary intended service class must match (light heavyduty diesel engine is used in vehicle with a gross vehicle weight rating (GVWR) of 14,001-19,500 lbs, a medium heavy-duty diesel engine is used in vehicle with a GVWR of 19,501-33,000, and a heavy heavy-duty diesel engine is used in vehicle with a GVWR of >33,000). ARB will provide for some flexibility for engines a few thousand pounds over each class range. 3. No modifications to the engine hardware and related aftertreatment. The vehicle must meet the engine manufacturer s build requirements. 4. No modification to the engine software calibrations. The vehicle must meet the engine manufacturer s build requirements. 5. The hybrid vehicle operation must not change the engine s certified regeneration cycles/events (vehicle must be representative of engine s regeneration adjustment factors (UAF/DAF)).

6. The hybrid vehicle operation is capable to meet the engine s temperature requirements (ADT). 7. The engines AECD criteria must remain the same during hybrid operations. (The hybrid vehicle must not operate most of the time in modes where AECDs reduce the effectiveness of emission controls and thus emissions would increase.) ARB will work with vehicle manufacturers and other stakeholders prior to the HVIP solicitation to determine how the above criteria can be reported in a simple and userfriendly manner. Staff expects that if the HVIP is funded in FY 2010-11, all vehicles will be required to be ARB-certified to receive funding. What is ARB s process for certifying a medium- or heavy-duty hybrid vehicle? ARB s medium- and heavy-duty hybrid vehicle certification process is intended to demonstrate the emission control systems durability and emission standards compliance of the auxiliary power unit (APU) and hybrid powertrain and battery systems for the useful life of the hybrid vehicle. The certification and test procedures for certifying a hybrid heavy-duty vehicle can be found at: www.arb.ca.gov/regact/bus02/ip.pdf. The certification and test procedures for certifying a hybrid medium-duty complete vehicle under the chassis test procedure can be found at: http://www.arb.ca.gov/msprog/levprog/cleandoc/clean_2003_zev_tps.pdf. For certifying a hybrid medium-duty incomplete vehicle under the engine test procedure, contact the On-Road Certification/Audit Section. For more information regarding ARB certification of hybrid trucks and buses, please contact Tom Chang at (626) 575-6809 or ychang@arb.ca.gov, or Tsatsu Nukunya at (626) 350-6424 or tnukunya@arb.ca.gov. What hybrid truck and bus types have been approved by the IRS to receive a federal tax credit? Private fleets that purchase a new hybrid truck or bus are eligible to receive a federal tax credit of between $3,000 and $12,000, depending upon the vehicle s fuel economy benefits. Appendix A-2 lists the vehicles eligible for this credit as of March 1, 2009. What are the criteria pollutant benefits of hybrid trucks and buses? Dynamometer test data from a variety of hybrid truck and bus vehicle types indicates these vehicles can significantly reduce NOx emissions relative to their non-hybrid counterparts. However, since none of these vehicles have been ARB-certified to date, staff recommends utilizing a 25 percent assumed NOx emission reduction from hybrid trucks and buses identified in the California Interim Certification Procedures for 2004 and Subsequent Model Hybrid Electric Vehicles, in the Urban Bus and Heavy-Duty Vehicle Classes. 4 This NOx emission benefit is consistent with the latest emissions test data for hybrid trucks and buses. Staff does not recommend identifying a specific PM or ROG emissions benefit, since the emission benefits for these pollutants are less certain. Staff will utilize emissions test data submitted by manufacturers over the next year to update emission benefit assumptions for the HVIP as needed in the FY 2010-11 AQIP Funding Plan (assuming the HVIP is continued). 4 California Air Resources Board, California Interim Certification Procedures for 2004 and Subsequent Model Hybrid Electric Vehicles, in the Urban Bus and Heavy-Duty Vehicle Classes, October 24, 2002.

How were vehicle incentive amounts determined? The incentive amounts identified in this Funding Plan reflect approximately half the incremental purchase cost of these vehicles, based upon data provided by vehicle manufacturers and other stakeholders. This amount is based on the business case needed induce prospective vehicle buyers to consider buying a hybrid vehicle. On average, fleets can make the business case pay for a more expensive vehicle if the investment can be recouped within a three to five year period. Assuming the cost of diesel is $2.50 per gallon, it would take a typical hybrid truck or bus purchaser six to ten years to recoup the higher purchase cost of a new vehicle from the vehicle s fuel cost savings. An incentive for about half the incremental cost of a hybrid truck and bus purchase is needed to reduce the potential payback period accrued from fuel cost savings from six to ten years to three to five years. Can local or federal incentive funds be mixed with HVIP funds? The HVIP is intended to allow public agencies and private fleets to augment HVIP funds with their own funding. Examples of funds that could be combined with the HVIP include: Lower-Emission School Bus Program: The Lower-Emission School Bus Program (LESBP) provides up to $140,000 per bus to help replace an existing older school bus with a new diesel or alternative fueled school bus. However, this funding amount does not cover the cost of a typical hybrid school bus, which typically costs about $200,000. The HVIP would allow for LESBP and HVIP funds to be combined to pay for up to the full cost of a new hybrid school bus. Local Air District Funds: Local air districts may opt to augment HVIP vouchers with additional funding for hybrid trucks or buses in their district, effectively offering an additional buy-down of the vehicle incremental cost. Federal Stimulus Package: The American Recovery and Investment Act of 2009 has over $1 billion in funds nationally for energy conservation and air quality improvement incentives. Local air districts, public agencies, and public fleets may combine federal hybrid truck and bus funding with HVIP funding to further buy-down the incremental cost of these vehicles. This ability to combination state and federal hybrid trucks and buses incentive funding will help ensure more federal dollars are directed to California fleets by further reducing the purchase price of these vehicles. HVIP funds cannot be combined with Carl Moyer Program funds due to the Carl Moyer Program s enabling statute. Details regarding combination of HVIP funds with other funding sources are to be included in the HVIP solicitation. Are urban transit buses eligible for HVIP funding? The Federal Transit Administration (FTA) provides grants for up to 80 percent of the incremental cost of a new urban transit bus. A bus receiving the federal grant is still eligible for the HVIP, but the HVIP voucher would be reduced to reflect half of the

remaining incremental cost. For example, an urban bus that receives the full 80 percent grant from the FTA would be eligible for 20 percent of the full HVIP voucher amount. Are plug-in hybrid trucks and buses eligible for the HVIP? Yes, plug-ins that meet the definition of a hybrid truck or bus identified in Chapter X are eligible for the HVIP. Staff will work with hybrid technology and vehicle manufacturers to ensure the HVIP solicitation includes project criteria to allow funding for plug-in medium- and heavy-duty hybrids. Are truck and bus leasing companies eligible for the HVIP? Yes. However a vehicle leasing company that utilizes the HVIP must disclose the voucher amount to the leasee and ensure the leasee meets all applicable program requirements (including that the vehicle remain in California for at least five years). What are the vehicle purchaser reporting requirements for the HVIP? Hybrid truck and bus purchasers must submit a usage survey three times at one, three, and five years after funding. This brief survey will help verify funded vehicles are being kept in California, and be used in estimating program emission benefits. The survey will be sent to the program participant at the appropriate intervals. Why are participating hybrid trucks and buses required to operate in California 100 percent of the time? The HVIP is intended to be as to be straightforward and simple as possible for vehicle purchasers, with the minimal recordkeeping and monitoring requirements that still ensure emission benefits for California. Compliance with a requirement that a vehicle remain in California 100 percent of the time is easier to monitor and enforce than a requirement for some lesser percentage. The vast majority of vehicles participating in the HVIP in FY 2009-10 are likely to be urban work vehicles, delivery vans, and other vehicles that wouldn t typically travel out of state. Staff is committed to working with stakeholders prior to issuing project solicitations to evaluate whether to provide case-bycase flexibility for fleets operating near border regions or in other specific situations. How can ARB ensure that the voucher amount will be disbursed to dealers or vehicle purchasers quickly? The HVIP must turn around voucher payment requests from dealers quickly in order for the project to be successful. Dealers are more likely to deduct the HVIP voucher amount from the vehicle purchase price and allow the purchaser to take possession of a vehicle if the HVIP reimburses the dealer within one to two weeks. In order to ensure voucher payments are not delayed, the project administrator will be advanced up to ten percent of HVIP funding at project inception and adequate additional funds as needed monthly from ARB to immediately pay off voucher requests from dealers, without having to go to ARB for payment reimbursement. The HVIP solicitation and grant agreement will include additional criteria to ensure the project is streamlined enough to meet participants needs and that project funds are safeguarded. Who is eligible to apply for this project?

ARB will issue an HVIP solicitation to select an entity to implement the HVIP. The HVIP solicitation would be open individuals, federal, state, or local government entities or agencies, and organizations with California heavy-duty vehicle, vehicle incentive program, or air quality expertise. An implementing agency would be chosen by ARB via a competitive solicitation and be responsible for running the HVIP statewide. The selected entity also be responsible for project outreach, with outreach efforts focused on those air basins with the worst air quality. Is there a match funding requirement for this project? The agency selected to implement this project would not be required to provide matching funds. However, vehicle purchasers would generally provide project cofunding by providing part of the new vehicle s incremental cost. What criteria will be used to score applications for this project? Applications to implement the HTIP would be scored according to the following criteria: Scoring Criteria Points Demonstrable Resources and Experience with Hybrid Technology, 30 points Manufacturers and Vendors to Successfully Implement a California Statewide Program Project Implementation Plan 15 points Contribution to Regional Air Quality Improvements 10 points Potential Emission Reductions 10 points Cost-Effectiveness 10 points Project Simplicity and Transparency 10 points Application Completeness 10 points Ability to Promote the Use of Alternative Fuels and Vehicle 5 points Technologies TOTAL 100