[Federal Register Volume 69, Number 78 (Thursday, April 22, 2004)]
[Notices]
[Pages 21883-21899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8975]


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DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

[Docket No. NHTSA 2004-17015; Notice 2]


Nissan North America, Inc.; Petition for Exemption From Two-Fleet 
Rule Affecting Compliance With Passenger Automobile Fuel Economy 
Standards

AGENCY: National Highway Traffic Safety Administration (NHTSA), 
Department of Transportation.

ACTION: Grant of petition for exemption from two-fleet rule.

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SUMMARY: Nissan North America, Inc. (Nissan) filed a petition 
requesting exemption from the two-fleet rule for the 2006-2010 model 
years. The two-fleet rule, which is contained in the corporate average 
fuel economy (CAFE) statute, requires that a manufacturer divide its 
passenger automobiles into two fleets, a domestically-manufactured 
fleet and a non-domestically manufactured fleet, and ensure that each 
fleet separately meets the CAFE standards for passenger automobiles.
    Nissan filed the petition because a change under the statute in the 
treatment of value added to a vehicle in Mexico will cause one of that 
company's passenger automobiles, which is manufactured in Mexico, to be 
reclassified from non-domestic to domestic. The loss of these 
automobiles, which are relatively fuel-efficient, will cause its non-
domestic fleet to fail to comply with the CAFE standards for passenger 
automobiles.
    The CAFE statute requires the agency to grant such a petition 
unless it finds that doing so would result in reduced employment in the 
U.S. related to motor

[[Page 21884]]

vehicle manufacturing. To determine if such a reduction would result, 
NHTSA compared vehicle prices and sales under two scenarios: a baseline 
scenario in which Nissan would not have an exemption and would need 
either to pay penalties for noncompliance or adopt any one of a number 
of optional courses of action to achieve compliance; and a scenario in 
which Nissan would have an exemption and would not bear any of the 
costs of the baseline scenario. The agency then attempted to estimate 
the effect of the sales changes on employment for each of the options. 
The analysis indicated virtually no employment effect for the option 
most likely (on the basis of cost) to be chosen by Nissan and only 
slight negative employment effects for the other options.
    Nissan also pointed out employment effects that are not accounted 
for in our economic analysis. If we deny the petition, Nissan would 
likely purchase fewer parts from U.S. suppliers and more parts from 
foreign suppliers in order to recontent one of its vehicles. The result 
would be fewer American workers producing components to be used in 
Nissan cars. We are unable to quantify with precision the number of 
jobs potentially lost from denying the petition. It is likely, however, 
that more jobs would be lost if we deny the petition than would be lost 
if we grant it.
    In sum, the evidence does not support a finding that granting the 
petition would reduce motor vehicle manufacturing employment in the 
U.S. The evidence suggests instead that granting the petition would 
likely help retain American jobs that might otherwise be sent overseas. 
Accordingly, the agency will permit Nissan to combine its domestic and 
non-domestic passenger automobile fleet for model years 2006-2010.

DATES: Effective Date: October 1, 2005.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Glossary
II. Statutory Background of the Two-fleet Rule
    A. Energy Policy and Conservation Act, as Originally Enacted in 
1975
    B. 1980 Amendments
    C. 1994 Amendments
III. Nissan's Petition for Exemption
    A. Statutorily Caused Change in Sentra's Classification from 
Non-domestic to Domestic
    B. Nissan's Assessment of Employment Impacts of Not Granting its 
Petition
IV. Notice of Petition and Request for Comments
V. Public Comments Submitted in Response to Notice of Petition
VI. Additional Information Submitted by Nissan
VII. Agency Evaluation of Merits of Nissan's Petition
    A. Eligibility of Nissan to Petition for Exemption
    B. Extent of the Agency's Discretion to Grant or Deny Nissan's 
Petition
    1. Discretion to Deny only upon Finding of Adverse Employment 
Impact
    2. Probability of Adverse Employment Impact must be Reasonably 
High
    C. Consistency of Nissan's Petition with Congressional Intent
    D. Methodology for Determining Net Employment Impacts
    1. Rationale for the Analysis
    2. Outline of Analytical Steps
    E. Details of the Analysis
    1. Potential Compliance Options Nissan Could Choose
    i. Options in Nissan's Petition
    ii. Additional Options Considered by the Agency
    2. Effects of Options on Prices of Nissan's Models
    3. Impacts of Price Changes on Automobile Sales
    i. Estimation of Impacts Due to Price Changes
     ii. The Import Buyer Phenomenon
    4. Net Impact on Employment
VIII. Agency Decision
    A. If Not Exempted, Nissan would be Most Likely to Select Least 
Cost Options
    B. Agency Analysis of Least Cost Options Shows Granting Petition 
is Unlikely to Impact Employment
    C. Unaccounted for Upstream Supplier Employment Impacts of Least 
Cost Options are Likely to be Positive
    D. Net Employment Impacts of Granting Nissan's Petition are 
Likely to be Positive
    E. Conclusion
IX. Analyses and Impacts

I. Glossary

    We are providing a glossary to define some of the key terms in this 
notice. Some of the terms are used in a way that is broader (domestic 
automobile and domestic content) or narrower (non-domestic automobile 
and non-domestic content) than the meaning they are given in the 
dictionary or common usage. Most notably, ``domestic content'' refers 
to content from not only the U.S., but also Canada and, beginning in 
the next model year, Mexico as well. Thus, beginning in the 2005 model 
year, ``non-domestic content'' will refer to content from countries 
other than the U.S., Canada and Mexico. In other words, domestic 
content will mean North American content.
    These departures from ordinary meaning are necessary because of the 
special meaning given the terms by statute. In particular, their 
meanings are governed by the provisions of the CAFE statute, i.e., the 
Energy Policy and Conservation Act (EPCA), as modified by the 
Automotive Fuel Efficiency Act of 1980 and the 1994 amendments 
implementing the North American Free Trade Agreement (NAFTA).
    As used in this notice, these terms have the following meanings:
    Assembly: a part of an automobile made within the U.S., Canada, or 
Mexico whose component parts are substantially transformed by the 
manufacturing process into a new and different article of commerce.
    Baseline scenario: the state of the world if Nissan does not have 
an exemption during model years 2006-2010.
    Domestic content: beginning in model year 2005, components that are 
wholly grown, produced or manufactured in the U.S., Canada or Mexico or 
substantially transformed during the manufacturing process in the U.S., 
Canada or Mexico into a new and different article of commerce.
    Domestic passenger automobile: a passenger automobile with 75 
percent or more domestic content.
    Exemption scenario: the state of the world if Nissan has an 
exemption during model years 2006-2010.
    Non-domestic passenger automobile: a passenger automobile with less 
than 75 percent domestic content.
    North America: within the borders of U.S., Canada, or Mexico.
    Recontenting: replacing domestic content of a passenger automobile 
with non-domestic content for the purpose of causing the automobile to 
be classified as a non-domestic automobile.

II. Statutory Background of the Two-fleet Rule

A. Energy Policy and Conservation Act, as Originally Enacted in 1975

    In 1975, Congress enacted the Energy Policy and Conservation Act 
(EPCA), mandating that passenger automobiles and non-passenger 
automobiles meet CAFE standards. Pub. L. 94-163. See 49 U.S.C. 32901 et 
seq. When Congress was considering EPCA, it was concerned that U.S. 
manufacturers might aid their efforts to comply with the standards by 
importing and selling increasing numbers of fuel-efficient passenger 
automobiles manufactured abroad. The importation and sale by U.S. 
manufacturers of such passenger automobiles would have helped them to 
meet fuel economy standards, but at the cost of decreasing employment 
in the U.S. automobile industry. To forestall this possibility, 
Congress adopted a provision, known as the ``two-fleet rule,'' 
requiring that each manufacturer's passenger automobiles be separated 
into two fleets, domestic and non-domestic, and that each of the

[[Page 21885]]

fleets separately comply with the fuel economy standards for passenger 
automobiles. See 49 U.S.C. 32904(b)(1).
    Under the ``two-fleet rule,'' as enacted in 1975, an automobile was 
considered to be domestically manufactured, and included in a 
manufacturer's domestic fleet, if at least 75% of cost to the 
manufacturer of manufacturing the automobile was attributable to value 
added in the U.S. or Canada. The rule treated passenger automobiles not 
meeting this 75% threshold as non-domestically manufactured, even if 
they were assembled in the U.S. or Canada.

B. 1980 Amendments

    The two-fleet rule initially did not affect foreign manufacturers 
of passenger automobiles. All of their automobiles were manufactured 
abroad using assemblies and parts made abroad and thus were classified 
as non-domestic.
    However, within several years of the enactment of EPCA, one foreign 
manufacturer, Volkswagen, began manufacturing passenger automobiles in 
the U.S. Although these passenger automobiles were assembled in the 
U.S., and a significant portion of their content was domestic, they 
were treated as non-domestic because they had less than 75% of their 
value added in the U.S. or Canada.
    These passenger automobiles, which were more fuel-efficient than 
other Volkswagen's non-domestic passenger automobiles, helped 
Volkswagen's overall non-domestic fleet comply with CAFE standards. 
Although using U.S. or Canadian components might have been cheaper than 
using non-domestic ones, Volkswagen restricted the use of U.S. or 
Canadian components in those passenger automobiles to keep those U.S.-
built passenger automobiles from switching from non-domestic to 
domestic under the two-fleet rule.
    Volkswagen's restricting the use of parts made or assembled in the 
U.S. or Canada in passenger automobiles produced in a U.S. assembly 
plant demonstrated that the two-fleet rule, which was intended to 
prevent job losses in the U.S. automobile industry, could also operate 
to prevent increases in new U.S. jobs. Foreign manufacturers wishing to 
avoid undesirable impacts of the two-fleet rule might either limit or 
forego the use of U.S. or Canadian parts in passenger automobiles 
manufactured in U.S. plants or simply choose not to invest in building 
those plants.\1\
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    \1\ Conference Committee Report No. 96-1402. p. 12 (1980)
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    Concerned that the two-fleet rule might have the unintended effect 
of discouraging foreign manufacturers from producing passenger 
automobiles in the U.S. or encouraging them to limit artificially the 
amount of U.S. or Canadian parts if they did, Congress authorized 
exemptions from the two-fleet rule in the Automotive Fuel Efficiency 
Act of 1980 (1980 amendments). (Pub. L. 96-425.) The amendments made 
manufacturers that either began manufacturing automobiles in the U.S. 
after December 22, 1975, and before May 1, 1980, or began manufacturing 
automobiles in the U.S. after April 30, 1980 and completed at least one 
model year of production before December 31, 1985 eligible to petition 
NHTSA for relief from the two-fleet rule. The amendments also provided 
that the agency must grant a manufacturer's petition unless it 
determines that doing so would result in reduced employment in the U.S. 
related to motor vehicle manufacturing.\2\ See 49 U.S.C. 
32904(b)(6)(B).\3\
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    \2\ We interpret ``employment * * * related to motor vehicle 
manufacturing'' as including employment directly as well as 
indirectly involved in motor vehicle manufacture. Senate Committee 
on Commerce, Science and Transportation, Senate Report No. 96-642, 
pp. 6-7. Both are fall within the broad standard of being ``related 
to motor vehicle manufacturing.'' (Emphasis added.) Further, in its 
discussion of the background and need for the 1980 amendments, the 
House report on those amendments makes specific reference to 
employment in the supplier industry. House Committee on Interstate 
and Foreign Commerce, H. Rep. No. 96-1026, p. 10.
    \3\ To ensure that granting an exemption actually achieved the 
desired effect of increasing employment, the 1980 amendments 
required that a report examining the effects of an exemption be 
included in the annual fuel economy report to Congress required by 
Sec.  32916(a). See 49 U.S.C. 32916(b). However, Section 3003 of the 
Federal Reports Elimination and Sunset Act of 1995 (P.L. 104-66; 31 
U.S.C. 1113 note) terminated the requirement that NHTSA file an 
annual fuel economy report as of December 21, 1999. This termination 
date was later changed to May 15, 2000 by Sec.  236 of the District 
of Columbia Appropriations Act of 2000 (P.L. 106-113; November 29, 
1999).
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    The agency must publish its decision whether to grant or deny a 
petition by the 90th day after the receipt of an exemption petition or 
the petition is deemed granted by operation of law. See 49 U.S.C. 
32904(b)(6)(C). To alleviate concerns that granting an exemption from 
the two-fleet rule might provide a foreign manufacturer with an 
opportunity to earn or use credits not available to its domestic 
counterparts, Congress also provided that any manufacturer receiving an 
exemption could not earn or use credits during any year that the 
exemption was in effect.\4\ See 49 U.S.C. 32904(b)(8).
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    \4\ H. Rep. No. 96-1026, p. 16.
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    The 1980 amendments contained a number of other provisions intended 
to foster job growth in the U.S. motor vehicle industry. In an effort 
to foster joint ventures between U.S. and foreign manufacturers while 
providing opportunities for increased jobs in the U.S., the 1980 
amendments allowed domestic manufacturers to include, on a one-time 
basis, up 150,000 non-domestic passenger automobiles in their domestic 
fleets for up to four years if certain conditions were met. One of the 
conditions was that the automobiles have at least 50% domestic content 
in the first model year and 75% domestic content before the end of the 
4th model year. See 49 U.S.C. 32904(b)(5).

C. 1994 Amendments

    In adopting legislation implementing the North American Free Trade 
Agreement (NAFTA), Congress amended the two-fleet rule in 1994 to 
provide, beginning not later than the 2005 model year, that a passenger 
automobile is considered to be ``domestically manufactured'' if at 
least 75 percent of the cost to the manufacturer of that automobile is 
attributable to value added in the U.S., Canada or Mexico. See 49 
U.S.C. 32904(b)(3)(A). Thus, beginning in that model year, value added 
in Mexico will no longer be treated as non-domestic content. Instead, 
it will be treated as domestic content.\5\
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    \5\ Consistent with the NAFTA amendments, the EPA regulations 
provide that for any model year commencing after January 1, 2004, 
components manufactured in the U.S., Canada, or Mexico will be 
considered to be domestic content for the purposes of determining if 
a vehicle manufactured in any of these three countries has 
sufficient domestic content to be classified as a domestic 
automobile. See 40 CFR Sec.  600.511-80(b)(3). Therefore, for any 
model year beginning after January 1, 2004, vehicles with 75% or 
more of their content originating in North America, will be 
considered to be part of a manufacturer's domestic fleet. Moreover, 
parts originating in Mexico will also be considered to be domestic 
content. Therefore, for any model year after January 1, 2004, a 
manufacturer wishing to keep its Mexican-built vehicles in its non-
domestic fleet would need to replace North American components with 
ones manufactured outside of the U.S., Canada, or Mexico.
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III. Nissan's Petition for Exemption

A. Statutorily Caused Change in Sentra's Classification from Non-
domestic to Domestic

    Nissan submitted a petition for exemption from the two-fleet rule 
on January 23, 2004. It requested exemption for the 2006-2010 model 
years or until circumstances remove the need for an exemption. Nissan 
noted that, beginning in the 2005 model year (MY), the Sentra, which is 
manufactured in Mexico, will switch from its non-domestic fleet to its 
domestic fleet because the value added

[[Page 21886]]

in Mexico will change from non-domestic to domestic content. The Sentra 
is one of the more fuel-efficient passenger automobiles in Nissan's 
current non-domestic fleet. This switch will lower the CAFE of Nissan's 
non-domestic fleet below the CAFE standard for passenger automobiles 
and raise the CAFE of Nissan's domestic fleet well above the 
standard.\6\
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    \6\ A manufacturer's fuel economy performance is measured as a 
production-weighted harmonic average of the fuel economies of the 
vehicles in its fleet. In MY 2003, Nissan's non-domestic fleet 
consisted of two 350Z variants (24.8 and 26 mpg), the Infiniti G35 
(26 mpg), the Infiniti G35 (24.6 mpg), the Infiniti I35 (25.9 mpg), 
the Infiniti M45 (23 mpg), the Infiniti Q45 (23 mpg), two versions 
of the Maxima (27.7 and 25.9 mpg), and five versions of the Sentra 
(30.3, 36.8, 30.1, 28.8 and 36.1 mpg). Nissan's non-domestic fleet 
CAFE was 27.4 mpg, one-tenth below the required passenger car 
standard of 27.5 mpg. Transfer of the Sentra to Nissan's domestic 
fleet would have caused Nissan's non-domestic fleet CAFE to fall 
further below the applicable standard. Confidential data submitted 
by Nissan indicates that the contribution made by the Sentra to the 
CAFE of its non-domestic fleet would become increasingly important 
in coming years.
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    Nissan said:

* * *[I]t may be forced to decrease domestic content and outsource 
the production of one or all of its domestically manufactured 
vehicles--i.e., the Sentra, Altima or Maxima--in order to offset 
this imbalance. Decreasing the domestic content level of the Sentra 
could result in a decrease in the use of U.S.-made components, such 
as radiators, air conditioners, suspensions, engine parts and some 
engines, currently used in the Sentra. Likewise, decreasing the 
domestic content level of the Altima or Maxima, which currently make 
up Nissan's domestic fleet, would mean decreasing production at 
NNA's [Nissan's] Smyrna, Tennessee plant and reducing domestic 
engine production at the Decherd, Tennessee plant. Such reductions 
in domestic production of the Altima or Maxima could likely lead to 
reduction in employment at Nissan's Tennessee plants. Accordingly, 
an exemption from the [two-fleet] provision is necessary for Nissan 
to maintain existing levels of Sentra production in Mexico, and 
Altima and Maxima production at Smyrna, Tennessee, as well as the 
corresponding levels of engine and component production in Decherd, 
Tennessee. (at 4)

    Nissan said further:

[A]n exemption from separate calculations under the CAFE program 
will allow Nissan to continue its current pace of expansion in U.S. 
production in model years 2006-2010 and to increase the level of 
local content beyond 75% in additional vehicles, without becoming 
subject to CAFE penalties. Failure to grant the petition will force 
Nissan to reconsider the current ramp up in U.S. investment as 
resources are diverted from expansion in the United States to 
addressing the CAFE issue. (at 8)

B. Nissan's Assessment of Employment Impacts of Not Granting Its 
Petition

    Nissan's petition states that recontenting some of its passenger 
automobiles would reduce employment by the U.S. automobile equipment 
suppliers (at 14). Although Nissan's petition did not provide any 
estimates of costs (or savings) that might be associated with any such 
recontenting, the company later submitted data regarding this issue at 
NHTSA's request.
    Its petition also states (at 18) that even if the agency does not 
grant the requested exemption and the sale of Nissan's imported 
passenger automobiles decline as a result, ``it is unlikely that 
domestic manufacturers would capture these lost sales'' because 
``Nissan purchasers typically prefer import vehicles.''

IV. Notice of Petition and Request for Comments

    NHTSA published a notice announcing receipt of Nissan's petition on 
February 5, 2004 (69 FR 5654). The notice briefly summarized Nissan's 
petition and solicited comments on the effect that granting the 
petition might have on motor vehicle manufacturing related employment 
in the U.S. The notice discussed two approaches NHTSA might take in 
considering the Nissan petition. We described an analytic approach 
under which NHTSA would determine the difference between projected 
total motor vehicle-related employment in the U.S. if the petition were 
denied, and the projected total level of U.S. motor vehicle-related 
employment if the petition were granted.
    The agency sought specific information from manufacturers of 
passenger automobiles within the same market segments as Nissan's 
passenger automobiles. In order to better assess Nissan's claim in its 
petition that removing domestic parts from a domestic vehicle model and 
substituting non-domestic parts--thereby moving domestic vehicles into 
its non-domestic fleet--would be prohibitively expensive, we asked 
manufacturers to provide information regarding costs or savings likely 
to result from different degrees of recontenting.
    We also solicited comments on the contention in Nissan's petition 
that it would be unlikely that domestic manufacturers would capture 
sales lost by Nissan if its petition were denied and Nissan's vehicles 
became more expensive because ``Nissan purchasers typically prefer 
import vehicles.'' We requested that commenters address the extent to 
which any such import buyer preference might be relevant to the post-
2005 marketplace. In particular, we asked for information regarding any 
vehicle models expected to compete, even partially, with any Nissan 
passenger automobiles.
    The notice also set forth and explained our preliminary 
determination that no environmental impact analysis would be required 
under existing law. We noted that although NHTSA prepared an 
environmental assessment of the effects of granting a Volkswagen 
petition under Sec.  32904(b)(6) in 1981, several U.S. Circuit Courts 
of Appeals have since held that compliance with the National 
Environmental Policy Act is unnecessary in instances in which an agency 
has little or no discretion regarding the decision it is making.\7\ We 
noted further that under the CAFE statute, the only issue the agency is 
permitted to consider in deciding whether to grant or deny Nissan's 
petition is the impact on U.S. automobile manufacturing-related 
employment. The notice observed that NHTSA is required to grant the 
petition unless it finds that doing so would reduce such employment. It 
noted further that if we took no action in the time prescribed by the 
statute, the statute provides that the petition is automatically 
granted. Accordingly, we concluded that granting the petition would not 
be a ``major Federal action'' within the meaning of NEPA.
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    \7\ Citizens Against Rails-to-Trails v. Surface Transp. Bd. 267 
F.3d 1144, 1153 (D.C. Cir. 2001). Sac & Fox Nation of Missouri v. 
Norton, 240 F.3d 1250, 1262 (10th Cir. 2001); Sierra Club v. 
Babbitt, 65 F.3d 1502, 1513 (9th Cir. 1995)
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    The notice also set forth and explained our preliminary 
determination that no regulatory impact analysis, other than that 
specified in Sec.  32904(b)(6), would be required under existing law. 
We said that since our decision would not result in the issuance of a 
``rule'' within the meaning of the Administrative Procedure Act or 
Executive Order 12866, Regulatory Planning and Review, neither the 
requirements of the Executive Order nor those of the Department's 
regulatory policies and procedures apply.

V. Public Comments Submitted in Response to Notice of Petition

    NHTSA received two comments in response to its February 5, 2004 
notice. The United Automobile Workers (UAW) filed comments. Three 
manufacturers, General Motors (GM), DaimlerChrysler (DC) and the Ford 
Motor Company (Ford), collaborated in the filing of a single joint set 
of comments. An array of elected officials, Governor Haley

[[Page 21887]]

Barbour of Mississippi, Governor Phil Bredesen of Tennessee, U.S. 
Senators Trent Lott, William H. Frist, Lamar Alexander, and Thad 
Cochran, and U.S. Representatives Chip Pickering, Bart Gordon, and 
Lincoln Davis, also submitted letters, all of which supported Nissan's 
petition.
    Focusing on Nissan-related automotive employment in the U.S., the 
elected officials compared employment levels now, prior to the change 
in treatment of value added in Mexico, to employment levels that might 
exist after the change, in the absence of an exemption. Senators Lott 
and Cochran stated that automobile industry employment in the U.S. 
would suffer if Nissan were denied the exemption. In their view, 
denying the exemption would make it necessary for Nissan to pay CAFE 
civil penalties or reduce the domestic content of their vehicles. 
Either course would result in reduced automobile manufacturing 
employment in the U.S. However, they said that granting the exemption 
would allow Nissan to continue expansion of U.S. production and 
employment.
    Senators Frist and Alexander submitted a joint letter expressing 
support for the Nissan petition. The letter stated that the impact of 
the NAFTA amendments could reduce the amount of American components in 
Nissan's Mexican-built passenger automobiles or lead Nissan to reduce 
production of its U.S. built passenger automobiles. Either case would 
lead to U.S. job losses and harm to the U.S. automobile industry. The 
letter also said that the exemption provision in the 1980 amendments 
was created expressly to address the situation now faced by Nissan. 
Given Nissan's plans to expand U.S. production, both Senators indicated 
that granting the exemption would, in their view, further stimulate 
growth in the U.S. automobile industry.
    The other elected officials, Governors Bredesen and Barbour and 
Representatives Pickering, Gordon, and Davis, expressed similar 
sentiments. Governors Bredesen and Barbour also supported granting 
Nissan's request on the grounds that doing so would increase employment 
in their States and the U.S. automobile industry as a whole.
    The UAW submitted comments opposing Nissan's request. The UAW 
stated first that Nissan, like other manufacturers affected by the 
NAFTA amendments, had over ten years to plan for the change in 
treatment of value added in Mexico. Accordingly, the organization 
argued that Nissan should not be granted any special relief. The UAW 
also argued that Nissan could take other steps to avoid CAFE penalties 
besides seeking exemption for the two-fleet rule. One option suggested 
by the UAW was that Nissan could shift production of the 350ZX vehicles 
and its Infiniti line to the U.S. According to the UAW, such shifts 
would allow Nissan to avoid CAFE penalties and increase domestic auto-
related employment.
    The organization also argued that granting Nissan's petition would 
provide Nissan with a distinct competitive advantage over other 
manufacturers by allowing Nissan to avoid CAFE compliance costs that 
other manufacturers must bear. According the UAW, this competitive 
advantage would harm employment in the U.S. automobile manufacturing 
sector by causing the loss of sales by other manufacturers, both 
foreign-based and U.S.-based, whose automobiles have higher domestic 
content than those produced by Nissan. Moreover, even if Nissan buyers 
prefer to buy Japanese nameplate vehicles, the UAW contends that two 
Japanese producers, Toyota and Honda, have higher domestic content than 
Nissan. Therefore, even if Nissan's sales increases came only at the 
expense of Toyota and Honda, U.S. employment would still suffer. The 
UAW also argued that the idea that ``import buyers'' will only buy 
other imports might be outmoded. Increases in quality and product 
offerings by Detroit-based producers have, in the UAW's view, narrowed 
the differences between foreign and domestic brands to the degree that 
the ``import buyer'' phenomenon may no longer exist.
    The joint comment filed by GM, Ford, and DC also opposed the Nissan 
petition. These manufacturers stated that the legislative history of 
the 1980 amendments, which authorized the exemption, demonstrates that 
Congress intended to encourage foreign manufacturers to begin producing 
vehicles in the U.S., rather than provide a benefit to manufacturers 
with established U.S. assembly plants.
    As Nissan has been producing vehicles in U.S. plants for many 
years, GM, DC and Ford argued that granting the petition would 
accomplish little more than providing the company with a competitive 
advantage not envisioned by Congress when it authorized the exemptions. 
According to GM, DC and Ford, this competitive advantage would include 
avoiding the administrative costs of maintaining two fleets and gaining 
the flexibility of being able to combine all of its annual production 
into a single fleet.
    GM, DC, and Ford also stated, as did the UAW, that granting the 
petition would be inequitable. They stated that Nissan had ample notice 
of the eventual effects of the NAFTA amendments. Accordingly, they said 
that Nissan should bear the brunt of those effects, particularly since 
it already knew about those effects when it moved the production of the 
Sentra from Tennessee to Mexico.
    None of the comments or letters submitted to the agency contained 
any data responsive to several requests in the agency's notice for 
data. The agency's notice specifically requested that commenters 
provide data regarding the costs or savings of changing the content of 
their vehicles from domestic to non-domestic sources. The notice also 
requested that commenters provide information and data about vehicles 
expected to compete with Nissan automobiles and solicited views 
regarding the existence and impact of the ``import buyer'' phenomenon 
cited by Nissan in its petition. No views on competing vehicles or that 
phenomenon were submitted.

VI. Additional Information Submitted by Nissan

    In response to an agency request, Nissan submitted additional data 
regarding its projected CAFE on February 19, 2004. On February 24, 
2004, the agency met with representatives of Nissan and requested 
additional data to assist the agency in evaluating the petition. To 
allow the agency to calculate Nissan's future CAFE, the potential for 
penalties, and the cost of various options that Nissan might pursue if 
there were no exemption, we requested that Nissan provide information 
regarding product plans, disaggregated sales information, and 
disaggregated fuel economy information for the 2004 through 2010 MYs. 
In order to evaluate the impacts of shifting different models from the 
domestic to the non-domestic fleet, the agency also requested specific 
information about changing the content of the Sentra, Altima and 
Maxima, including how allocation of costs impacts prices of Nissan 
vehicles.
    Nissan responded to the agency's requests by providing several 
written submissions, including ones on March 4, and March 15, 2004. 
Each of the submissions was accompanied by a request that portions of 
the data be granted confidential treatment by the agency. Public 
versions of these submissions and its earlier February 19 submission 
have been placed in the docket.
    Nissan's March 15, 2004 submission contained additional data 
regarding the dollar value, on a per-vehicle basis, of the domestic 
content that would need to

[[Page 21888]]

be replaced by non-domestic content for the vehicle that would be the 
most likely candidate for this strategy. Nissan also described how this 
recontenting would affect the costs of building this vehicle on a per-
vehicle basis. Nissan then compared the costs of pursuing the 
recontenting option with the costs of paying CAFE penalties.
    Nissan also revisited its contention if it lost sales due to the 
cost effects of the NAFTA amendments, its lost customers were more 
likely to purchase import nameplate vehicles than domestic nameplate 
brands. In Nissan's view, this ``import buyer'' phenomenon would result 
in a loss of jobs in the U.S. automotive industry if Nissan were not 
exempted and were instead to pursue a recontenting option or choose to 
pay CAFE penalties.
    Although it did not provide any data supporting these arguments, 
Nissan presented two scenarios in support of its argument that the 
``import buyer'' phenomenon would contribute to the loss of U.S. jobs 
if its petition were denied. In one scenario, Nissan assumed that it 
would choose to pay CAFE penalties for its non-domestic fleet and that 
the costs of these penalties would be allocated to the models in that 
fleet (350Z, Infiniti G35, G35 Coupe, Infiniti M45, and Infiniti Q45). 
Nissan then asserted that its own internal sales research indicated 
that buyers of these models would most likely be diverted to imported 
vehicles rather than domestically produced import nameplate models and 
traditional domestic brands. Even if lost Nissan sales resulted in 
increased sales of domestically produced vehicles, Nissan contended 
that these sales increases would be diffused across a number of vehicle 
models and brands. In Nissan's view, this wide distribution of 
increased sales would, at best, result in such small increases in sales 
of different vehicle models that the manufacturers of these vehicles 
would not need to hire new workers to meet additional demand.
    The second scenario discussed by Nissan was based on the outcomes 
resulting from its recontenting a particular vehicle. Nissan presented 
data showing the dollar value of domestic parts that would need to be 
replaced with non-domestic parts to reduce the vehicle's domestic 
content to less than 75%. According to Nissan, this recontenting 
scenario would result in the loss of hundreds of American jobs, even if 
only some of the domestic content in the vehicles originated in the 
U.S. Nissan also stated that recontenting would make such job losses 
almost inevitable, since the loss of business would impact a small 
number of supplier firms that produce high volumes of parts for a 
single customer and could not readily replace the work done for that 
customer with work for another customer.

VII. Agency Evaluation of Merits of Nissan's Petition

A. Eligibility of Nissan To Petition for Exemption

    Determining the eligibility of a manufacturer to petition for 
exemption from the ``two-fleet'' rule requires examination of the 
agency's statutory authority for granting such relief. Section 
32904(b)(6)(A) provides that authority as follows:

(6)(A) A manufacturer may file with the Secretary of Transportation 
a petition for an exemption from the requirement of separate 
calculations under paragraph (1)(A) of this subsection if the 
manufacturer began automobile production or assembly in the United 
States--

    (i) After December 22, 1975, and before May 1, 1980; or
    (ii) After April 30, 1980, if the manufacturer has engaged in 
the production or assembly in the United States for at least one 
model year ending before January 1, 1986.

    Section 32904(b)(6)(A) states that in order for a manufacturer to 
be eligible to petition for exemption, the manufacturer must either 
have begun producing or assembling automobiles in the U.S. after 
December 22, 1975, and before May 1, 1980, or have begun manufacturing 
automobiles in the U.S. after April 30, 1980 and completed at least one 
model year of production before December 31, 1985. Nissan meets 
subparagraph (ii) of Sec.  32904(b)(6)(A). Nissan began automobile 
production in the U.S. after April 30, 1980. It did so by beginning to 
produce trucks in Tennessee in 1983.\8\ By January 1, 1986, it had 
completed ``three model year's worth of automobile production after 
April 30, 1980 and before January 1, 1986.'' (Nissan petition, at p. 4)
---------------------------------------------------------------------------

    \8\ As used in EPCA, ``automobiles'' include passenger cars, 
vans, SUVs, and pickup trucks.
---------------------------------------------------------------------------

B. Extent of the Agency's Discretion To Grant or Deny Nissan's Petition

    If a manufacturer meets the threshold eligibility requirements in 
Sec.  32904(b)(6)(A), the agency must then consider the extent of its 
discretion to grant or deny a petition under Sec.  32904(b)(6)(B). That 
discretion, and thus the scope of the agency's inquiry, is very 
limited. Section 32904(b)(6)(B) provides

    (B) The Secretary of Transportation shall grant the exemption 
unless the Secretary finds that the exemption would result in 
reduced employment in the United States related to motor vehicle 
manufacturing during the period of the exemption. * * * \9\
---------------------------------------------------------------------------

    \9\ The Secretary of Transportation has delegated the authority 
in Sec.  32904 to the NHTSA Administrator. 49 CFR 1.50.

(Emphasis added.)
    There are two particularly important aspects of that provision.
1. Discretion To Deny Only Upon Finding of Adverse Employment Impact
    The first is that Congress did not simply mandate that employment 
impacts be considered in deciding whether to grant or deny a petition, 
thus leaving open the possibility that other factors could be 
considered. It went much further, saying that the only circumstance in 
which the agency may deny a petition is if the agency is able to find 
and does find that granting an exemption would result in an adverse 
impact on employment. The directive in Sec.  32904(b)(6)(B) is clear, 
unambiguous and free of any language permitting or implying that any 
issues other than the impact on employment may factor in the agency's 
decision. The only statutorily relevant issue is the impact on 
employment.
    Accordingly, the agency is foreclosed from basing its decision 
whether to grant or deny on additional factors as suggested by the UAW 
and GM, DC and Ford. The UAW urged us to take into consideration 
whether Nissan had adequate notice that the NAFTA amendments would 
eventually operate so as to shift its Mexican production from one fleet 
to another. We are also constrained from considering, beyond the impact 
that granting the exemption may have on employment, whether granting 
Nissan's petition might otherwise be inequitable in some fashion.
2. Probability of Adverse Employment Impact Must Be Reasonably High
    The second is Congress provided that in order to make a finding 
sufficient to enable the agency to deny a petition, NHTSA must find 
that an adverse employment effect ``would'' result from granting an 
exemption, not merely that such an effect might or could result. We 
believe it insufficient for the agency to find that there is a mere 
possibility of an adverse employment effect or even that such an effect 
is more likely than not. The agency would need to find a still higher 
degree of likelihood, a reasonable certainty, that an adverse effect 
would result from granting an exemption.\10\
---------------------------------------------------------------------------

    \10\ See Usery v. Hermitage Concrete Pipe Co., 584 F.2d 127 (6th 
Cir. 1978), where the court stated that the Occupational Safety and 
Health Review Commission imposed too stringent a degree of 
probability in resolving that the Secretary of Labor failed to prove 
a serious violation of the Occupational Safety and Health Act of 
1970 by virtue of manufacturer's failure to protect its employees 
from silica dust exposure by requiring Secretary to show that 
silicosis, and hence serious bodily injury or death, ``would,'' as 
opposed to ``could,'' result from condition. Occupational Safety and 
Health Act of 1970, Sec.  17(k) as amended 29 U.S.C.A. Sec.  666(k). 
The court noted that the Commission employed a more restrictive 
standard than that which is called for by the Act. The court went on 
to say that the Commission appears to have ignored the standard that 
there be ``a substantial probability that death or serious physical 
harm could result from a condition which exists.'' Instead, a 
majority of the Commission, by consistent employment of the term 
``would'' in place of ``could,'' appears rather clearly to have 
required a greater degree of certainty. The court noted that the 
distinction is not merely one of semantics.
    In FTC v. Heinz, 246 F.3d 708 ( D.C. Cir. 2001), the court 
discussed the standard of review under Section 7 of the Clayton Act 
which prohibits acquisitions, including mergers, ``where in any line 
of commerce or in any activity affecting commerce in any section of 
the country, the effect of such acquisition may be substantially to 
lessen competition, or to tend to create a monopoly'' [Emphasis 
added] 15 U.S.C. Sec.  18. With respect to the term ``may,'' the 
court quoted two sources of guidance. First, in Brown Shoe Co. v. 
U.S., 370 U.S. 294, at 323, (1962), the Court stated that ``Congress 
used the words `may be substantially to lessen competition,' to 
indicate that its concern was with probabilities, not certainties.'' 
Second, the legislative history reads: ``The use of these words 
[``may be''] means that the bill, if enacted, would not apply to the 
mere possibility but only to the reasonable probability of the 
proscribed effect * * *'' See S. Rep. No. 1775, at 6 (1950), U.S. 
Code Cong. & Admin. News at 4293, 4298.

---------------------------------------------------------------------------

[[Page 21889]]

C. Consistency of Nissan's Petition With Congressional Intent

    In their joint comment, GM, DC and Ford contended that the 
legislative history of the exemption provision compels the agency to 
consider the Nissan petition as untimely and inconsistent with 
statutory intent. Relying primarily on an excerpt from the House 
Committee Report on the 1980 amendments stating that the exemption 
provision was ``designed to provide incentives to new domestic 
manufacturers'' (H. Rep. No. 96-1026, at 14 (1980)), these 
manufacturers stated that Congress meant for Sec.  32904(b)(6)(B) to 
operate only as an incentive to induce manufacturers to build new 
plants in the U.S. during a limited time period from 1975 to 1986. 
Since the window for building such plants has long been closed, GM, DC 
and Ford argued that allowing Nissan to benefit from an exemption in 
2004 ``stretches'' the statutory intent of the 1980 Amendments.
    Neither the language of the statute nor the legislative history 
demonstrates that Congress intended to restrict the operation of this 
``job related'' provision once a manufacturer began producing 
automobiles between 1975 and 1986. Congress did specify certain time 
limits, e.g., that a qualifying manufacturer must have begun or must 
begin U.S. production within a specific period. To encourage foreign 
manufacturers to begin production in the U.S., Congress limited the 
opportunity to petition for exemption from the two-fleet rule to only 
those manufacturers that began production within that 10-year window. 
Congress also specified that an exemption would ordinarily be effective 
for five model years. However, it did not place any time limits on when 
a qualifying manufacturer may apply for an exemption. The absence of 
such a limit in the statute, particularly when other time limits are 
present, provides compelling evidence that Congress did not intend to 
set a time limit restricting when qualifying manufacturers could apply.
    This conclusion is reinforced by the conference report on the 1980 
amendments:

The conference substitute allows manufacturers to petition for an[d] 
receive an exemption any time after the date of enactment of the 
Act.
(H. Rep. No. 96-1402, at 12 (1980)). (Emphasis added.)
    The joint comment of GM, DC and Ford cite an excerpt from the 
House Committee report, (at 14), to support their assertion that the 
exemption provision was intended primarily to encourage the building 
of new vehicle plants.\11\ However, examination of the entire 
paragraph from which this excerpt was drawn reinforces our view that 
the primary purpose of the exemption provision is to preserve or 
expand employment in the U.S. automobile industry when the two-fleet 
rule would otherwise limit the use of components made in the U.S. or 
Canada in U.S. assembly plants:
---------------------------------------------------------------------------

    \11\ The agency believes that the meaning of Sec.  32904(b)(6) 
is clear, and therefore that further inquiry into the legislative 
history is unnecessary.

Section 4(a) of the Committee Amendment is designed to provide 
incentives to new domestic manufacturers to increase the local 
content of their vehicles, as recommended by DOT. It is a ``job 
---------------------------------------------------------------------------
related'' provision.

(H. Rep. No. 96-1026, at 14 (1980)).
    The Conference report contained similar language:

The purpose of this provision is to encourage increased employment 
in the United States * * *.

(at 13) Employment in the U.S. could be benefited not only by inducing 
foreign manufacturers to begin production in the U.S., but also by 
granting petitions for exemptions from the two-fleet rule any time that 
the rule would encourage a manufacturer to limit or reduce the domestic 
content of its vehicles, thus adversely affecting employment related to 
motor vehicle manufacturing in the U.S.

D. Methodology for Determining Net Employment Impacts

1. Rationale for the Analysis
    As noted above, the statute requires that we grant Nissan's 
petition unless we find that doing so would result in reduced 
employment related to motor vehicle manufacturing in the U.S. To assess 
whether such a reduction would result, we needed to examine two 
different scenarios: a baseline scenario in which there was no 
exemption and a scenario in which there was an exemption.
    In the baseline scenario, Nissan would remain subject to the two-
fleet rule and continue to be required to ensure that its domestic and 
non-domestic fleets separately comply with the CAFE standard for 
passenger automobiles. The increase in domestic content of Sentra due 
to the operation of the 1994 amendments would cause that vehicle model 
to shift from that company's non-domestic fleet to its domestic fleet, 
causing its non-domestic fleet to fall below the CAFE standard. Nissan 
would need either to pay penalties for noncompliance or implement 
options that would enable it to eliminate the CAFE deficit. Our 
analysis assumes that Nissan will pass the costs of those actions along 
to consumers in the form of higher automobile prices.
    In the exemption scenario, the petition would be granted, exempting 
Nissan from the two-fleet rule. Since Nissan would have a single fleet 
that would meet the CAFE standard for passenger automobiles, Nissan 
would not need to take any of the actions described in the baseline 
scenario. Thus, Nissan would not incur any costs that it would need to 
pass along to consumers by raising prices. Compared to the baseline 
scenario, this would put Nissan in a more advantageous position vis 
[agrave] vis its competitors, possibly inducing consumers to buy more 
Nissan automobiles and fewer competing automobiles.
2. Outline of Analytical Steps
    The following steps were taken in conducting our analysis.\12\
---------------------------------------------------------------------------

    \12\ Economists at DOT's Volpe National Transportation System 
Center participated in conducting the analysis.
---------------------------------------------------------------------------

    (i) First, the Agency investigated the costs of Nissan's options 
under the baseline scenario: paying penalties for noncompliance or 
taking one of several alternative courses of action to comply with the 
CAFE standard. Nissan described three options in the petition. We 
considered Nissan's three options,

[[Page 21890]]

plus three additional options. We dropped one of the additional options 
on the grounds of prohibitive cost, and included the remaining five 
options in our analysis. We then made assumptions about how the cost of 
each option in our analysis would affect the price of Nissan's 
products.
    (ii) Second, we identified automobiles that compete with Nissan's 
automobiles. This was accomplished using six different market 
classifications defined by Automotive News (small economy, sporty 
touring, mid-range standard, mid-range premium, upscale near luxury, 
and upscale luxury). These automobiles were judged to be close 
competitors of the Nissan automobiles whose prices would be affected by 
our granting the petition. A list of these automobiles, arranged by 
category, is contained in Appendix A of this notice.
    (iii) Third, in order to predict the substitution of automobiles 
that would occur annually as a result of lower prices of Nissan 
automobiles in the exemption scenario, the agency employed statistical 
models known as multinomial logit (MNL) models. These models predict 
how Nissan's cost savings and resulting lower prices would impact sales 
within these discrete market segments.\13\ Six MNL models were 
estimated, one for each market classification.\14\ These models predict 
the number of competitors' sales that are lost, given a reduction in 
the price of one or more Nissan automobiles.
---------------------------------------------------------------------------

    \13\ A multinomial logit model is a form of what are known as 
discrete choice models. These models are widely used in economic, 
marketing, transportation and other fields to represent the choice 
of one among a set of mutually exclusive alternatives. As purchasing 
a vehicle represents a discrete choice and that choice, for all but 
the most wealthy or irrational consumers, is mutually exclusive, the 
agency chose to use a multinomial logit model to predict the car 
buying choices consumers would make under the most likely set of 
outcomes that would result from granting Nissan's petition. A more 
detailed explanation of this model is contained in Appendix A.
    \14\ Analyzing the choices that consumers will make requires 
knowledge of the options or alternatives available to the consumers. 
The set of options or alternatives are known as a ``choice set.''
---------------------------------------------------------------------------

    (iv) Lastly, we converted the annual changes in automobile sales 
into annual changes in employment. Using data showing the U.S. man-
hours expended in the assembly of automobiles and the production of 
engines and transmissions, we computed total U.S. jobs in both the 
baseline scenario and the exemption scenario. Our analysis also 
accounted for impacts on suppliers of engines and transmissions, but 
not other ``upstream'' parts suppliers. The difference of the two is 
the net employment impact of granting the petition.\15\
---------------------------------------------------------------------------

    \15\ See Part VII.E.4 below for a discussion of the effects of 
the various assumptions in this analysis on the estimated employment 
impacts and Part VIII.C. below for a discussion of the supplier and 
parts producer jobs not included in this analysis of net employment 
impact.
---------------------------------------------------------------------------

E. Details of the Analysis

1. Potential Compliance Options Nissan Could Choose
    In performing the baseline analysis, NHTSA assumed that Nissan 
would react to the statutorily caused change in the composition of its 
non-domestic and domestic fleets as any rational profit maximizing 
automobile manufacturer would, i.e., by evaluating the options 
available to it and selecting the lowest cost option that enables its 
non-domestic passenger automobile fleet to comply with CAFE standards. 
Nissan identified three options in its petition: (1) & (2) reduce the 
domestic content in either the Sentra or Altima so it is reclassified 
as a non-domestic vehicle, or (3) pay CAFE penalties. In deciding which 
options to include in its analysis, NHTSA examined these options, plus 
three others: move Infiniti and 350ZX production to the U.S. (causing 
those relatively fuel-inefficient vehicles to become domestic), improve 
the CAFE of its non-domestic fleet sufficiently to eliminate the CAFE 
shortfall, or improve the CAFE of its non-domestic fleet up to the 
point that paying CAFE penalties becomes less expensive than the cost 
of further improvements and then pay those penalties.
i. Options in Nissan's Petition
    Nissan's petition listed three potential compliance options it 
would consider if its petition were denied. One option would be to move 
the Sentra from its domestic fleet to its non-domestic fleet by 
replacing domestic content with non-domestic content. A second option 
would be to move the Altima to its non-domestic fleet by reducing the 
domestic content of that automobile. A third option would be to pay 
CAFE penalties.
    The first two options involve reducing the domestic content of 
either the Altima, currently built in the U.S., or the Sentra, 
currently built in Mexico. In either case, the automobiles' domestic 
content would be reduced to less than 75%, making these automobiles 
part of Nissan's non-domestic fleet, thereby balancing the CAFEs of the 
two fleets and making Nissan compliant with the current standard. If 
the domestic content of the Mexican built Sentra were reduced to below 
75% so that it is reclassified as a non-domestic automobile, Nissan 
would comply with 27.5-mpg passenger automobile standard in both of its 
fleets. The same is true if the domestic content of the U.S. built 
Altima and Maxima were reduced to below 75%.
    Nissan's petition states that the company's most likely response to 
not obtaining an exemption would be to remove domestic content from the 
Sentra. Although NHTSA solicited comments and data regarding the costs 
of removing domestic content in its February 5, 2004 notice, we did not 
receive any information in response to that request. At the agency's 
request, Nissan later provided that information for its vehicles.
    Because the agency does not have the data needed to determine the 
costs of content shifting, we relied on an analysis of these costs 
submitted by Nissan. In that analysis, Nissan provided estimates of the 
per-vehicle costs and the dollar value of the components and domestic 
labor that must be shifted from domestic sources to non-domestic 
sources to reduce the domestic content of the Sentra to less than 75%. 
A similar analysis was provided for the domestic Altima. Upper bounds 
of the cost estimates for the two content shifting options appear in 
Table 1. Although the per-vehicle costs for the two options are 
similar, the total costs are different due to the number of each 
automobile produced. Nissan also claims that content shifting must be 
done to the entire production of a particular model line.
    The third option discussed by Nissan was that the company could 
simply maintain its current product plans and pay whatever CAFE 
penalties it would incur as a result of its non-domestic fleet failing 
to meet the standard. For each model year it falls short of the 
standard, Nissan would need to apply credits, pay a penalty, or, if its 
credits were not sufficient to address the shortfall, pay penalties and 
apply credits at the same time. If it were to rely on credits, Nissan 
would, for each model year it has a shortfall, either need to apply 
credits it has earned in the three previous model years or file a plan 
with NHTSA seeking approval to apply credits it would earn in the next 
three years. See 49 U.S.C. 32903.
    The data provided by Nissan related to its non-domestic fleet show 
that, by MY 2006, the company will not have any credits available from 
past years, or based on its present product plans, be in a position to 
file a plan to use credits from future model years. Nissan claims that 
paying penalties is not a likely course of action: ``For a variety of 
reasons, however, including economic

[[Page 21891]]

considerations and publicity, Nissan is not likely to pursue this 
option.'' (p. 13). However, given that a number of manufacturers 
routinely pay CAFE penalties and doing so may be an option that a 
rational manufacturer would consider, the agency decided that this 
option is sufficiently viable for it to be included in the agency's 
analysis.
    For passenger automobiles, CAFE penalties for each model year are 
calculated by applying a penalty of $5.50 for each tenth of a mile of a 
gallon that the CAFE for a manufacturer's fleet is less than the 
current standard of 27.5 mpg and multiplying the resulting figure by 
the number of automobiles manufactured in that fleet in that year. See 
49 U.S.C. 32912(b) and 49 CFR 578.5(h)(2). Nissan provided a projection 
of its future CAFE performance to the agency in its supplemental 
submissions. Based on these data, the shift of the Mexican Sentras to 
the domestic fleet, and Nissan's not taking any other measures to 
improve non-domestic fleet, we estimated that Nissan's potential CAFE 
penalty liability ranges from $25.0 million for MY 2006 to $12.0 
million in MYs 2008 and 2010. These costs, along with the potential 
costs of other options we considered as likely to be chosen by Nissan, 
are summarized in Table 1.
ii. Additional Options Considered by the Agency
    NHTSA also considered three additional options that were not 
identified in Nissan's petition. First, we considered, as the U.A.W. 
suggested in its comments, the possibility that Nissan could improve 
its non-domestic fleet average by relocating production of 350ZX and 
Infiniti automobiles to the U.S., thereby increasing their domestic 
content above the 75% threshold, and changing their classification to 
domestic. Relocating production of the 350ZX and Infiniti passenger 
automobile lines to the U.S. might offset the loss of the Mexican-built 
Sentras from Nissan's non-domestic fleet. We have determined, however, 
that no rational, profit-maximizing manufacturer would pursue this 
strategy.
    North American sales of the 350ZX and Infiniti lines are relatively 
small compared to those of the Sentra, Altima, or Maxima. Relocating 
production of these vehicles to North America would have several 
impacts. The plants now producing them would have to be closed or used 
at less than full capacity. Production of the 350ZX and Infiniti lines 
would have to either be incorporated into existing North American 
production lines, which may exceed capacity and require substantial 
investment, or opening. Shifting the production of these automobiles 
would entail significant capital expenditures to construct a new plant 
in North America to build them. The expenditures would be in the 
hundreds of millions of dollars.\16\ The shift would also lead to an 
under-utilization of existing plants in Japan. For these reasons, the 
agency did not consider it worthwhile to quantify the costs of this 
option since a profit-maximizing manufacturer would not be likely to 
choose it.
---------------------------------------------------------------------------

    \16\ Construction of BMW's Spartanburg, South Carolina assembly 
plant, which produces premium vehicles similar to the Infiniti and 
350ZX lines, involved an investment well over $500 million dollars. 
http://www.autointell-news.com/european_companies/BMW/bmw3.htm.
---------------------------------------------------------------------------

    The agency also considered two options that involve the addition of 
fuel saving technology to Nissan's non-domestic fleet so that it 
complies with the CAFE standard. Adding technology to a domestic fleet 
containing the Sentra would not be necessary, as that fleet would meet 
the 27.5-mpg standard. To aid it in analyzing what technologies might 
be added, NHTSA used a report by the National Academy of Sciences 
(NAS).\17\ Responding to a Congressional directive in the FY 2001 DOT 
Appropriations Act (Pub. L. 106-346), the NAS completed a review of 
fuel economy standards in 2002. This review included an examination of 
technologies that could be used to increase the fuel economy of new 
light duty automobiles. The NAS did not discuss all possible 
technologies, but rather listed about two-dozen specific technologies 
and groups of technologies that it considered as technically feasible 
and cost-effective. The NAS report has received extensive external 
review, and is considered to be a reasonable and reliable appraisal of 
the range of technologies, the resulting improvement in fuel 
consumption improvement, and costs. A list of these technologies, their 
costs ranges and resulting improvements in fuel economy appear in 
Appendix B.
---------------------------------------------------------------------------

    \17\ ``Effectiveness and Impact of Corporate Average Fuel 
Economy (CAFE) Standards,'' (2002).
---------------------------------------------------------------------------

    In its analysis, the agency added NAS report fuel efficiency 
technologies to the technologies already in Nissan's non-domestic 
passenger automobiles, beginning with those technologies that provided 
the most improvement for the least cost, and continuing with those 
technologies that produced progressively less return in fuel efficiency 
for the incurred cost.\18\ Under this methodology, we considered that 
Nissan would pursue one of two options. One option--which our analysis 
termed the ``technology with cost minimization'' approach--would be to 
add technology until the cost of doing so equals or exceeds the cost of 
paying penalties. At that point, we assumed Nissan would elect to pay 
the penalties rather than pay for the relatively more expensive 
technology. The second option, which takes into account Nissan's 
representation that it would exhaust other options before paying CAFE 
penalties, estimated Nissan's costs if it used all available 
technologies, regardless of cost, to achieve compliance. This approach 
is termed the ``technology only'' approach in Table 1.
---------------------------------------------------------------------------

    \18\ The agency used a similar methodology, which we referred to 
as the ``Volpe Analysis,'' in promulgating the light truck fuel 
economy standards for MYs 2005-2007 (68 FR 16867; April 7, 2003).
---------------------------------------------------------------------------

    Our analysis showed that technology with cost minimization option 
would not yield a significant change in the CAFE of Nissan's non-
domestic fleet. Using the mid-range of cost and fuel consumption 
improvement estimates from the NAS report demonstrated that applying 
any but the most inexpensive technologies (i.e., use of low friction 
lubricants) exceeded the costs of paying penalties. Given the 
relatively low cost of paying penalties instead of investing in more 
fuel-efficient technologies, we estimated that Nissan would only be 
able to improve its non-domestic fleet fuel economy by one to five 
percent under this option. Therefore, if the benefits of better fuel 
economy are ignored, this option simply becomes the same as the paying-
the-penalties option since only a small amount of technology would be 
used before paying penalties becomes less expensive.
    The agency believes that increased fuel-efficiency provides 
benefits that are valued by consumers. Consumers will realize benefits 
from lower operating costs if they choose a more fuel-efficient 
automobile over a less-efficient one. Since this benefit might induce 
purchasers to choose to buy a Nissan automobile instead of a 
competitor's product, we assume that Nissan would choose to add 
additional technology to provide this additional benefit to its 
potential customers. Under the technology with cost minimization 
option, Nissan will add technology until the incremental cost of 
technology, less the benefits of increased fuel economy, exceeds the 
cost of paying the penalty. This fuel savings benefit was calculated 
using a price of $1.50 per gallon over a 4.5-year time horizon, 
discounted at

[[Page 21892]]

7%.\19\ If Nissan chose to expend additional sums to provide this fuel 
savings benefit, it would spend more than it would if it simply chose 
to pay penalties. Table 1 shows annual costs would vary from $32.8 
million in 2006 to $19.4 million in 2008. These costs are slightly 
higher than the technology only option for which total costs range from 
$19.9 million in 2010 to $44.8 million in 2009. This option uses 
technology, no matter what the cost, to avoid paying penalties.
---------------------------------------------------------------------------

    \19\ For this analysis, NHTSA assumed a gasoline price of $1.50 
per gallon. This is about $0.04 per gallon higher than NHSTA assumed 
when preparing its analysis of the recently-promulgated changes to 
the CAFE standard for light trucks. By comparison, the Energy 
Information Administration's latest Annual Energy Outlook (AEO 2004) 
forecasts that gasoline prices will eventually tend toward a stable 
$1.49 per gallon.

                     Table 1.--Total Cost of Options
                        [in millions of dollars]
------------------------------------------------------------------------
               Reduce      Reduce
              domestic    domestic      Pay     Technology w/ Technology
 Model year  content of  content of   penalty       cost         only
             Sentra \1\  Altima \2\             minimization
------------------------------------------------------------------------
      2006         <$10        <$20      $25.0        $32.8        $39.6
      2007         <$10        <$20       13.5         20.2         38.3
      2008         <$10        <$20       12.0         19.4         43.9
      2009         <$10        <$20       13.5         21.5         44.8
      2010         <$10        <$20       12.0         19.9        44.3
------------------------------------------------------------------------
\1\ A range is used to preserve the confidentiality of data submitted by
  Nissan.

2. Effects of Options on Prices of Nissan's Models
    The agency's analysis concluded that in the baseline scenario, 
Nissan would likely adopt one of five options to address the CAFE 
shortfall in its non-domestic fleet: Recontent the Sentra or Altima, 
pay CAFE penalties, improve fuel economy until the cost of doing so 
equaled penalty costs less gains to the consumer, and improve fuel 
economy using technology regardless of cost. Taking the total estimated 
costs provided in Table 1 and projections of Nissan sales for each of 
the 2006 through 2010 MYs, we calculated the increased cost per 
automobile under two different cost recovery assumptions. The first 
assumption is that compliance costs attributable to a particular model 
are recovered by passing them directly on to the buyers of that model 
in the form of a higher price for each sale of that model. The second 
assumption is that compliance costs are spread out evenly across the 
entire fleet incurring them.
    In its March 15, 2004 response to our request for supplemental 
data, Nissan stated that it passes compliance costs on exclusively to 
the models that incur them. For example, if recontenting the Sentra 
were to cost $8 million in 2006 and 100,000 are produced, the price 
increase for a Sentra would be $8 million divided by 100,000, or 
approximately $80 per automobile.
    However, the agency believes that a rational profit-maximizing firm 
in the same position as Nissan might allocate compliance costs across 
its entire fleet. The demand for an economy passenger automobile such 
as a Nissan Sentra is more likely to be driven by price than the demand 
for a higher priced luxury passenger automobile such as the Infiniti 
Q45. Raising the price of luxury Nissan automobiles by $80, or even 
$160, would be a small change in their overall prices and would 
probably have little impact on demand. On the other hand, raising 
Sentra prices by $80 may have a relatively larger impact on sales. 
Based on these considerations, we considered a variation of the 
recontenting option in which the costs incurred by Nissan under the 
baseline were allocated evenly across its non-domestic fleet. For 
example, if recontenting the Sentra cost $8 million in 2006 and 200,000 
passenger automobiles were produced for Nissan's non-domestic fleet, 
all the automobiles in that fleet, from the Sentra to the most 
expensive Infiniti, would increase in price by $40.
    The agency's estimates of the price changes per automobile under 
these two different cost recovery assumptions are shown below in Tables 
2A and 2B. The options are listed from left to right in the order of 
their cost:

Table 2A.--Per automobile price increases under the direct cost recovery
                             assumption \1\
------------------------------------------------------------------------
               Reduce
              domestic     Reduce                    Add          Add
 Model year  content of   domestic      Pay     technology w/ technology
               Senatra   content of   penalty       cost         only
                 \2\     Altima \2\             minimization
------------------------------------------------------------------------
      2006     $25-$150    $25-$150    $0-$262      $0-$344    $174-$344
      2007       25-150      25-150      0-240        0-358      174-384
      2008       25-150      25-150      0-231        0-371      174-384
      2009       25-150      25-150     34-379       61-602      174-384
      2010       25-150      25-150     32-361       59-596     174-384
------------------------------------------------------------------------
\1\ In this table, we assumed that costs are distributed to models that
  accrue them. Since different models accrue different compliance costs,
  these price increases appear as ranges showing the minimum and maximum
  price increase. All price increases are rounded to the nearest dollar.
 
\2\ Since only one model line is altered, these prices only apply to the
  Sentra and Altima respectively. A range is used to preserve the
  confidentiality of data submitted by Nissan.


Table 2B.--Per automobile price increases under the direct cost recovery
                             assumption \1\
------------------------------------------------------------------------
               Reduce
              domestic     Reduce                    Add          Add
 Model year  content of   domestic      Pay     technology w/ technology
               Senatra   content of   penalty       cost         only
                 \2\     Altima \2\             minimization
------------------------------------------------------------------------
      2006      $0-$100     $0-$100       $196         $256         $310

[[Page 21893]]

 
      2007        0-100       0-100        113          169          319
      2008        0-100       0-100         89          143          324
      2009        0-100       0-100         93          147          307
      2010        0-100       0-100         83          137         306
------------------------------------------------------------------------
\1\ In this table, we assumed costs are evenly distributed over the
  fleet that incurs them. In the case of reducing domestic content in
  the Sentra (Altima), the Sentras (Altimas) are assumed to be part of
  the import fleet. In all other cases, both the Sentras and Altimas are
  assumed to be part of the domestic fleet. In all cases, costs are
  incurred and spread across the import fleet. All price increases are
  rounded to the nearest dollar.

3. Impacts of Price Changes on Automobile Sales
i. Estimation of Impacts Due to Price Changes
    Whatever option Nissan chooses under the baseline scenario will 
cause an increase in the price of Nissan passenger automobiles. Because 
the per automobile price increases shown in Tables 2A and 2B are small 
relative to the price of a new passenger automobile, we assume that 
total automobile sales would remain constant regardless of which option 
Nissan chooses. If Nissan automobiles become more expensive, some 
consumers will forego buying Nissans and choose some other automobile. 
Therefore, sales losses by Nissan translate into increased sales for 
its competitors.
    To predict shifts in automobile purchases as a result of price 
changes, we utilized a multinomial logit (MNL) model. MNL models are 
commonly used in the economics literature to estimate demand in 
situations in which only one good is chosen from a larger choice set. 
They have been used to model the demand for automobiles, durable goods 
and travel mode. This type of model is especially appropriate for 
automobile purchases because consumers rarely buy more than one 
automobile at a time.
    To construct the model, all relevant automobiles need to be grouped 
into ``choice sets''. A choice set is a grouping of automobiles that 
are considered to be direct competitors, or close substitutes. For the 
analysis, we use market classifications defined by Automotive News in 
2003.\20\ A table of these choice sets and an explanation of MNL models 
appears in Appendix A.
---------------------------------------------------------------------------

    \20\ http://www.autonews.com/images/dataCenter/1365.
---------------------------------------------------------------------------

    When the price of Nissan automobiles increases, the MNL model will 
predict that fewer Nissan automobiles will be sold. The loss in sales 
to Nissan will be offset by an increase in sales of competitor's 
automobiles. For example, if one of the options pursued by Nissan 
resulted in the price of Sentras being $80.00 higher during each model 
year from 2005 through 2010, the agency's MNL model predicts changes in 
sales of competing vehicle models as illustrated in Table 3.

                           Table 3.--Example Showing Sales Shifts Resulting from a Hypothetical $80 Price Increase for Sentra
--------------------------------------------------------------------------------------------------------------------------------------------------------
                  Manufacturer                                   Nameplate                   2004     2005     2006     2007     2008     2009     2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Dodge...........................................  Neon SRT-4.............................        0       28       22       27       27       27       27
Mitsubishi......................................  Lancer ES..............................        0       13       10       13       13       13       12
Ford............................................  Focus ZX3 Hatchback....................        0       23       18       22       22       22       22
Mazda...........................................  Mazda3.................................        0       35       27       34       34       34       33
Chevrolet.......................................  Aveo...................................        0       18       14       17       17       17       17
Chevrolet.......................................  Cavalier Base 2dr Coupe................        0       21       17       21       21       21       20
Pontiac.........................................  Vibe AWD 4dr Wagon.....................        0        9        7        9        9        9        9
Saturn..........................................  Ion 1 Style Sedan......................        0       15       12       15       15       15       15
Hyundai.........................................  Elantra GT Hatchback...................        0       24       18       23       23       23       22
Kia.............................................  Optima EX..............................        0       13       10       13       13       12       12
Nissan..........................................  Sentra 1.8/2.0.........................        0     -236     -242     -231     -231     -227     -223
Nissan..........................................  Sentra 2.5 S...........................        0      -77        0      -75      -75      -74      -73
Suzuki..........................................  Aerio LX Fwd Sedan.....................        0       21       16       21       21       20       20
Suzuki..........................................  Aerio Wagon............................        0       19       15       19       19       18       18
Toyota..........................................  Corolla CE.............................        0       55       42       54       54       53       52
Toyota..........................................  Matrix Base Fwd Wagon..................        0       19       15       19       19       18       18
--------------------------------------------------------------------------------------------------------------------------------------------------------

ii. The Import Buyer Phenomenon
    Nissan's petition alleged that purchasers of their products are 
more likely to purchase an ``imported'' automobile than one 
manufactured by one of the traditional domestic manufacturers, i.e., 
Ford, GM or Chrysler. This ``import buyer'' phenomenon, according to 
Nissan, influences purchasing decisions and supports the notion that 
lost sales by Nissan will not necessarily result in increased sales by 
domestic manufacturers. Nissan further noted that the agency 
acknowledged the existence of this ``import buyer'' effect when it 
issued its decision granting Volkswagen's petition in 1981. (p. 18). 
However, Nissan did not submit any data or studies quantifying the 
scope or impact of this ``import buyer'' phenomenon.\21\
---------------------------------------------------------------------------

    \21\ We also note that Nissan's own marketing efforts 
acknowledge that domestic nameplate vehicles are legitimate 
competitors for Nissan customers. Nissan's web page contains 
comparisons of several of its passenger automobiles to domestic 
nameplate vehicles. The Nissan Sentra is compared to the Chevy 
Cavalier, the Saturn Ion and the Ford Focus. The Nissan Maxima is 
compared to the Chrysler 300M, the Altima is compared to the U.S. 
built Mazda 6, and the Infiniti I30 is compared to the Lincoln LS 
V6. (http://us.nissan.clientsites.carspecs.jato.com/us.nissan/comparison.asp)
---------------------------------------------------------------------------

    NHTSA believes that to the extent an ``import buyer'' preference 
exists, the

[[Page 21894]]

effects of this phenomenon are vastly different today than they were 
when Volkswagen made a similar argument over 20 years ago. In contrast 
to 1981, when Volkswagen was the only ``import'' manufacturer building 
passenger automobiles in the U.S., there are now eight ``import'' 
manufacturers producing passenger automobiles in the U.S., either in 
their own plants, or in plants that are joint ventures with domestic 
nameplate manufacturers. These manufacturers include Mazda, BMW, Honda, 
Mercedes-Benz, Mitsubishi, Toyota, Nissan, and Subaru. Excluding 
Nissan, the U.S. production of these ``import'' brands is approximately 
two million passenger automobiles each year.
    Many of these automobiles, particularly those made by Honda and 
Toyota, are direct competitors of the Nissan Sentra and Altima. As 
shown in Table 3 above, a price increase in the Sentra, even without 
accounting for the ``import buyer'' phenomenon, shifts most sales to 
the Toyota Corolla, which is manufactured in the U.S. Moreover, the 
domestic content of some of these competing models, regardless of their 
nameplate, is comparable to, or higher than, the domestic content of 
the Nissan automobiles in the same market segment. Therefore, an 
increase in the price of a Nissan automobile that induces consumers to 
choose a domestically produced import nameplate automobile could raise 
U.S. employment.
    In certain market segments, particularly those in which import 
manufacturers do not sell passenger automobiles produced in the U.S., 
the ``import buyer'' phenomenon may have more impact. Import nameplate 
passenger automobiles produced outside of the U.S. predominate in two 
of the six market segments used as choice sets by the agency's MNL 
models. In these segments, (Upscale Cars--Near Luxury and Upscale Cars-
Luxury), the lack of domestic nameplate competitors and the preferences 
of consumers indicate that any ``import buyer'' phenomenon may have 
more impact. In these markets, price increases in Nissan products would 
not necessarily translate into increased sales of domestic nameplate 
passenger automobiles or increases in U.S. employment.
4. Net Impact on Employment
    As noted above, section 32904(b)(6)(B) directs us to grant an 
exemption petition unless we find that doing so would result in reduced 
employment related to motor vehicle manufacturing in the U.S. In order 
to determine if granting the Nissan petition would result in such 
reduced employment during model years MYs 2006-2010, after estimating 
the cost and price differences between the baseline and exemption 
scenarios, and using the price differences to estimate the sales 
differences between the scenarios, the agency converted the sales 
differences into employment differences.
    In order to do this, the agency needed to develop a means of 
translating changes in automobile sales into changes in employment. In 
our 1981 analysis of the Volkswagen petition, NHTSA determined that the 
additional sale of 12 automobiles in each year would generate one new 
job in that year. In that analysis, we then adjusted that figure by the 
percentage of domestic content in each automobile to determine the 
number of U.S. jobs involved.
    NHTSA considered a similar approach for analyzing employment 
impacts in considering Nissan's petition. Current CAFE reporting 
requirements define domestic content as value added from both Canadian 
and U.S. sources. Since our decision must be based on the impact the 
exemption will have on employment in the U.S. alone, we sought to 
develop and analyze data that would distinguish between domestic 
content originating in the U.S., and not in Canada. As noted above, 
although we asked manufacturers for U.S. content data in our notice of 
petition, the agency did not receive any response.
    In order to develop a means of accurately estimating impacts that 
changes in sales would have on U.S. employment, NHTSA purchased data 
from Harbour and Associates listing the number of U.S. man-hours 
expended in the assembly of automobiles and the production of engines 
and transmissions. Although these data do not capture the man-hours 
used to produce an entire automobile, it does represent a large 
proportion of the labor expended in building one.\22\ Additionally, the 
data obtained from Harbour and Associates are collected and maintained 
so that it is possible to differentiate accurately the relative 
efficiency of the various producers.\23\
---------------------------------------------------------------------------

    \22\ The data includes final assembly of vehicle. It also 
includes production of engine and transmission, but excludes 
production of all other parts.
    \23\ While the agency's analysis in 1981 assumed all 
manufacturers were equally efficient, this approach captures the 
variability of labor used by different manufacturers and provides 
differential data across the various models made by the same 
manufacturer.
---------------------------------------------------------------------------

    Using the Harbour and Associates data described above, we 
calculated employment impacts by multiplying the number of U.S. hours 
of labor per automobile times the change in automobile sales predicted 
by the MNL model. For example, when the price of the Sentra increases 
by $80, the resulting sales shifts are shown on Table 3. Many of the 
automobiles that compete with the Sentra have no U.S. labor associated 
with them. Examples are the Mazda3, Kia Optima, Hyundai Elantra and 
Suzuki Aerio. Others such as the Toyota Corolla, Dodge Neon, Ford Focus 
and Saturn Ion have substantial U.S. labor inputs. Summing the changes 
in labor associated with each model provides the net labor change.
    For each of the five options Nissan could adopt in the baseline 
scenario, the net employment impacts of granting Nissan's petition are 
shown below in Tables 4A and 4B. The options are listed from left to 
right in the order of their cost (see Tables 2A and 2B above):

      Table 4A.--Number of U.S. Automobile Industry-Related Jobs Gained or Lost (-) if Petition is Granted
                                             [Direct Cost Recovery]
----------------------------------------------------------------------------------------------------------------
                                                                                             Add
                                                       Recontent  Recontent     Pay     technology w/     Add
                         Year                            Sentra     Altima   penalties      cost      technology
                                                                                        minimization     only
----------------------------------------------------------------------------------------------------------------
2006.................................................         -2          1        -41          -54          -67
2007.................................................         -2          1        -31          -46          -69
2008.................................................         -2          1        -29          -46          -69
2009.................................................         -2          1        -21          -34          -68
2010.................................................         -2          1        -17          -29          -67
----------------------------------------------------------------------------------------------------------------


[[Page 21895]]


      Table 4B.--Number of U.S. Automobile Industry-Related Jobs Gained or Lost (-) if Petition is Granted
                               [Costs Allocated Evenly Across Non-Domestic FLeet]
----------------------------------------------------------------------------------------------------------------
                                                                                             Add
                                                       Recontent  Recontent     Pay     technology w/     Add
                         Year                            Sentra     Altima   penalties      cost      technology
                                                                                        minimization     only
----------------------------------------------------------------------------------------------------------------
2006.................................................         -1        -10        -48          -63          -76
2007.................................................         -1        -10        -28          -41          -78
2008.................................................         -1        -10        -22          -35          -79
2009.................................................         -1        -10        -23          -36          -74
2010.................................................         -1        -10        -20          -33          -72
----------------------------------------------------------------------------------------------------------------

    Several points about Tables 4A and 4B should be noted. First, the 
Tables show that the differences between the costs of the baseline 
options and between the two methods of allocating those costs have a 
very substantial impact on the effects that each of these options has 
on motor vehicle manufacturing related employment in the U.S. In the 
baseline scenario, recontenting the Altima and allocating the cost of 
doing so to the Altima alone would have the least effect on costs, 
prices, and sales. If that option is used as the basis for comparison, 
granting the petition results in a gain of one additional job per year 
in motor vehicle manufacturing related employment. At the opposite end 
of the spectrum, choosing to apply fuel saving technologies to Nissan's 
non-domestic fleet would cause Nissan to incur the greatest costs, 
raise prices the most, and consequently lose the most sales. Granting 
the petition would remove the necessity of pursuing this option and 
would allow Nissan to increase sales in comparison to the baseline 
scenario, causing decreased sales for competitors and consequent losses 
(over 70 jobs) in motor vehicle manufacturing related employment.
    Second, those tables also indicate that under the direct cost 
recovery approach that Nissan said it would use, estimated job impacts 
would exceed one or two jobs per year only for the three most costly 
options in the baseline scenario--paying CAFE penalties, adding 
technology to its non-domestic fleet until the point at which it is 
less costly to pay penalties, and adding technologies without regard to 
cost.
    Third, the results of the analysis depend on the assumptions made 
in predicting changes in the demand for vehicles and the resulting 
impacts on employment. These assumptions include the definition of 
market segments, technology/compliance costs, pricing strategies, 
specification of the MNL models, restrictions on substitution of 
vehicles across market segments, the decision to hold total vehicle 
purchases constant, and the choice of employment data. Changes in any 
of these assumptions might change the employment outcome. For 
employment outcomes very near zero, a job loss could be changed into a 
job gain or vice versa. However, it is doubtful that the magnitude of 
the estimated impact would change. Small changes in vehicle prices will 
inevitably lead to small changes in demand and small employment 
impacts.

VIII. Agency Decision

    Taken together, the results of our analysis of the options do not 
point uniformly toward any particular conclusion about an increase or 
decrease in employment as a result of granting the petition. The 
analysis indicates that there would be a small reduction in employment 
for some options, but effectively no reduction for either of the 
available recontenting options.

A. If Not Exempted, Nissan Would Be Most Likely To Select Least Cost 
Options

    The agency cannot give all options equal weight and simply 
calculate an average of the mixed projections about their employment 
effects for the various options because the options differ with respect 
to their likelihood of being chosen by Nissan in the absence of an 
exemption. As noted above, a rational, profit-maximizing manufacturer 
will select the least cost way of effectively achieving a goal. It is 
reasonable to conclude that Nissan is such a manufacturer and that it 
would not choose any of the more expensive options in the baseline 
scenario since less costly options (the recontenting options) to 
achieve the same goal are available. Indeed, the list of options that 
Nissan included in its petition did not include either of the two most 
expensive options in our analysis. Of the three most costly options in 
our analysis, Nissan's petition indicated that the company considered 
only the least expensive--paying CAFE penalties--as an alternative to 
recontenting. Nissan stated that it is likely to pursue this option for 
both economic and public relations reasons.\24\ Applying technology to 
improve the fuel economy of its non-domestic fleet would, in the 
instance in which technology is applied only until it ceases to become 
cost effective compared to paying penalties, place Nissan in the 
position in which it would spend more and still bear whatever stigma 
would be associated with being subject to those penalties. The final 
option, applying technology regardless of cost, would result in 
Nissan's expending anywhere from $14 to $22 million per year more than 
it would if it simply paid penalties. Based on the confidential data 
submitted by Nissan, the latter option is many times more costly than 
the costs associated with recontenting.
---------------------------------------------------------------------------

    \24\ The history of the CAFE program indicates that some 
manufacturers, particularly those producing imported luxury and high 
performance automobiles, routinely pay CAFE penalties. Other 
manufacturers, particularly ``full line'' manufacturers making a 
wide variety of automobiles, have not historically paid CAFE 
penalties. If Nissan were to choose to pay penalties in lieu of 
complying with CAFE standards, it would be the first ``full line'' 
Japanese manufacturer to do so.
---------------------------------------------------------------------------

    For these reasons, NHTSA believes that Nissan would be likely to 
choose recontenting instead of any of the three most costly options. 
Nissan would incur significantly less cost by choosing the recontenting 
options than any of the three most costly options.

B. Agency Analysis of Least Cost Options Shows Granting Petition Is 
Unlikely To Impact Employment

    If either of the recontenting options is used as the basis for 
estimating the effect of granting Nissan's petition, the resulting 
impacts on employment are virtually non-existent. If Nissan were to 
recontent either the Sentra or the Altima, the changes in motor vehicle 
manufacturing related employment in the U.S. estimated through our 
analysis would range from a gain of 1 job per year to a loss of 10 jobs 
per year. As noted above, under the cost recovery approach favored by 
Nissan, the

[[Page 21896]]

estimated changes in motor vehicle manufacturing related employment 
would range from a gain of 1 job to a loss of 2 jobs per year.
    Our MNL model assumes that any price change will cause some 
impact--even if just a de minimis one--on employment. Accordingly, the 
model predicts negligible impacts from the minimal price changes 
associated with the two recontenting options. NHTSA deems it unlikely 
that the small estimated sales impacts associated with either of those 
two options would result in actual changes in employment. As a 
practical matter, we believe any rational manufacturer faced with 
having either to increase or decrease productivity for the number of 
man-hours represented by up to 10 jobs per year would employ options 
other than hiring or firing workers. We therefore conclude that, under 
any of the recontenting scenarios under our analysis, granting Nissan's 
petition would not have an impact on motor vehicle manufacturing 
related employment in the U.S.

C. Unaccounted for Upstream Supplier Employment Impacts of Least Cost 
Options Are Likely To Be Positive

    In its March 15, 2004 submission, Nissan provided confidential data 
indicating that if we deny the petition, Nissan would likely purchase 
fewer parts from U.S. suppliers and more parts from foreign suppliers 
in order to recontent one of its vehicles. Nissan indicated that the 
result would be several hundred fewer American workers producing 
components to be used in Nissan cars. The economic analysis described 
above does not account for these employment effects. More specifically, 
our analysis does not address the ``upstream employment'' by suppliers 
of items such as door handles, seats, and instrument panels. We are 
unable to quantify with precision the number of jobs potentially lost 
from denying the petition. The agency could not identify or develop 
data showing the contribution of U.S. suppliers to the overall domestic 
content of automobiles built in the U.S.
    Nevertheless, the agency believes that even the small price changes 
associated with the recontenting scenarios are likely to cause a shift 
in Nissan's upstream employment to another manufacturer. None of the 
recontenting cases would result in a large enough increase in the sales 
of any particular competing automobile to enable former U.S. parts 
suppliers to Nissan, who would suffer lost business for an entire 
model, to make up that lost business. Therefore, using the least cost 
(recontenting) options as the basis for comparison, the agency 
concludes that the upstream supplier employment impacts of granting the 
petition are likely to be positive.

D. Net Employment Impacts of Granting Nissan's Petition Are Likely To 
Be Positive

    Given that the agency's analysis of least cost options shows that 
granting the petition is unlikely to impact U.S. employment, and given 
that upstream U.S. supplier employment impacts of those options, which 
are not accounted for in that analysis, are likely to be positive, it 
is likely, therefore, that more American jobs would be lost if we deny 
the petition than would be lost if we grant it.

E. Conclusion

    In sum, the evidence does not support a finding that granting the 
petition would reduce motor vehicle manufacturing employment in the 
U.S. The evidence suggests instead that granting the petition would 
likely help retain American jobs that might otherwise be sent overseas. 
Accordingly, the agency will permit Nissan to combine its domestic and 
non-domestic passenger automobile fleet for model years 2006-2010.

IX. Analyses and Impacts

    The agency's notice of petition preliminarily concluded that 
preparation of an environmental assessment is unnecessary where, as in 
this case, the agency action at issue involves little or no discretion 
on the part of the agency.\25\ We also noted that since this proceeding 
will not result in the issuance of a ``rule'' within the meaning of the 
Administrative Procedure Act or Executive Order 12866, neither the 
requirements of that Executive Order nor those of the Department's 
regulatory policies and procedures apply. Our notice said that, for the 
same reasons, the requirements of the Regulatory Flexibility Act do not 
apply.
---------------------------------------------------------------------------

    \25\ Citizens Against Rails-to-Trails v. Surface Transp. Bd. 267 
F.3d 1144, 1153 (D.C. Cir. 2001). Sac & Fox Nation of Missouri v. 
Norton, 240 F.3d 1250, 1262 (10th Cir.2001); Sierra Club v. Babbitt, 
65 F.3d 1502, 1513 (9th Cir.1995).
---------------------------------------------------------------------------

    In that notice, NHTSA stated that it would conduct further analyses 
of these impacts in conjunction with its final decision if comments or 
other information developed during the agency's analysis indicated such 
action would be appropriate. None of the individuals or entities 
submitting comments in response to that notice addressed or took issue 
with the agency's preliminary conclusion that it need not perform an 
environmental assessment. Similarly, none of the commenters questioned 
or offered any views on our preliminary determination that the 
requirements of Executive Order 12866, the Department's regulatory 
policies and procedures and the Regulatory Flexibility Act did not 
apply to his action.
    After performing our analysis and reaching our decision on the 
merits of Nissan's petition, the agency has determined that there is no 
need to perform an environmental assessment. NHTSA's granting of this 
petition was, as required by statute, based on the consideration of a 
single issue--whether doing so would result in decreased employment in 
the U.S. automobile manufacturing industry. Since we cannot conclude 
that granting Nissan's petition would result in such a decrease, we 
were required by statute to grant the petition. Given this lack of 
discretion, the agency's granting this petition is not a ``major 
Federal action'' within the meaning of NEPA. After consideration of the 
comments and our analysis, we have also concluded that this action is 
not a ``rule'' and within the meaning of the Administrative Procedure 
Act, Executive Order 12866, the Department's regulatory procedures or 
the Regulatory Flexibility Act.

Appendix A

Description of the Multinominal Logit Model

    In this analysis, we utilize a multinomial logit (MNL) model to 
estimate consumer responses to price changes. MNL models are 
commonly used in the economics literature to estimate demand in 
situations in which only one good is chosen from a larger set of 
choices. They have been extensively used to model the demand for 
vehicles, durable goods and mode of travel.
    In this instance, the agency sought to determine consumer 
response to price changes in Nissan passenger automobiles. In order 
to determine what choices a potential purchaser of a particular 
Nissan vehicle might have when deciding to buy a passenger 
automobile, we relied on vehicle classifications developed by an 
automobile industry trade publication. This publication, Automotive 
News, identified six market segments in which Nissan vehicles 
compete with similar vehicles. These market segments, presented in 
Table A, serve as the choice sets that typical consumers of 
automobiles would confront when choosing a vehicle and are used by 
the agency to estimate the MNL models.

[[Page 21897]]



                                                       Table A.--Competitors by Market Segment \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
             Small cars                    Sporty cars                       Mid-range cars                                 Upscale cars
--------------------------------------------------------------------------------------------------------------------------------------------------------
              Economy                        Touring                Standard                Premium              Near luxury               Luxury
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nissan Sentra......................  Nissan 350Z...........  Nissan Altima.........  Nissan Maxima........  Nissan Murano........  Infiniti Q45.
Chevrolet Cavalier.................  Ford Mustang..........  Acura RSX.............  Audi A4/S4...........  Infiniti FX45........  Infiniti M45.
Chevrolet Prizm....................  Mazda Miata...........  Buick Century.........  Buick Regal..........  Infiniti I35.........  Acura RL.
Dodge Neon.........................  Mazda RX8 (2004)......  Chevrolet Impala......  Infiniti G20.........  Infiniti G35.........  Audi allroad.
Ford Escort ZX2....................  Mini Cooper...........  Chevrolet Monte Carlo.  Mazda Millenia.......  Acura CL.............  Audi A8/S8.
Ford Focus.........................  Mitsuibishi Eclipse...  Chrysler Sebring coupe  Mercedes-Benz C230...  Acura TL.............  BMW 5 series.
Hyundai Elantra....................  Pontiac GTO...........  Chrysler Sebring sedan  Mitsubishi Diamante..  Audi A6/S6...........  BMW 7 series.
Kia Optima.........................  Toyota Celica.........  Dodge Intrepid........  Oldsmobile Intrigue..  BMW 3 series.........  BMW M3.
Mazda Protege......................  Toyota MR2............  Dodge Stratus coupe...  Saab 9-3.............  Buick Park Avenue....  Cadillac DeVille.
Mitisubishi Lancer.................  Spyder................  Dodge Stratus sedan...  Volkswagen Passat....  Cadillac CTS.........  Cadillac Seville.
Mitsubishi Mirage..................  Volkswagen Cabrio.....  Ford Taurus...........  Volvo 40 series......  Chrysler 300M........  Jaguar S-type.
Pontiac Vibe.......................                          Honda Accord..........  Volvo 60 series......  Chrysler Pacifica....  Jaguar XJ.
Saturn Ion.........................                          Hyundai XG350.........                         Jaguar X-type........  Lexus GS 300.
Suzuki Aerio.......................                          Mazda 6...............                         Lexus ES 300.........  Lexus GS 430.
Suzuki Esteem......................                          Mercury Sable.........                         Lexus IS 300/Sport     Lexus LS 430.
                                                                                                             Cross.
Toyota Corolla.....................                          Mitsubishi Galant.....                         Lincoln LS...........  Lexus SC 430.
Toyota Matrix......................                          Pontiac Grand Prix....                         Mercedes C class.....  Lincoln Continental.
                                                             Subaru Baja...........                         Oldsmobile Aurora....  Lincoln Town Car.
                                                             Subaru Forester.......                         Saab 9-5.............  Mercedes CLK.
                                                             Subaru Legacy.........                         Volvo Cross Country..  Mercedes E class.
                                                             Toyota Camry..........                         Volvo 70 series......  Mercedes S-class.
                                                             Toyota Camry Solara...                         Volvo 80 series......  Volkswagen Phaeton.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As employed by NHTSA in this case, vehicles fall into six 
discrete market segments distinguished by significant differences in 
cost and attributes. Changes in the attributes of vehicles in one 
choice set are assumed to have no impact on the distribution of 
sales in the other market segments. Within those six market 
segments, the MNL model assumes that consumers react to vehicle 
attributes when deciding which passenger automobile to purchase. The 
model estimates the probability of selecting a certain vehicle as a 
linear function of these attributes. As independent variables, if 
one or more of the attributes changes in magnitude, the vehicle 
selection probabilities change--resulting in a different 
distribution of passenger automobiles being selected by consumers. 
The attributes used by NHTSA were derived from a vehicle comparison 
table used by a Web site whose target audience is consumers seeking 
information about new vehicles (http://www.edmunds.com/). The 
dependent variable, total model year 2004 vehicle sales, was taken 
from pre-model year fuel economy reports filed with NHTSA by vehicle 
manufacturers.
    Parameter estimates, which weight the relative importance of 
each attribute to consumers, are presented in Table B. Sales price, 
which in this case is an estimate of actual sales price rather than 
the manufacturer's suggested retail price, appears in every model. 
Other attributes include curb weight, the ratio of horse-power to 
vehicle weight, combined city/highway fuel economy, front shoulder 
room, rear leg room and luggage capacity. All these parameter 
estimates are statistically different from zero at well below the 
one percent confidence level. Attributes were chosen in terms of 
their ability to improve overall model fit and significance levels. 
The number of attributes varies from simply price and the horsepower 
to weight ratio for sporty touring passenger automobiles, to the 
full set for upscale luxury passenger automobiles.

                                                  Table B.--Multinomial Logit Model Estimation Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Market Segment
                                 -----------------------------------------------------------------------------------------------------------------------
        Vehicle attribute             Small cars          Sporty cars                 Mid-range cars                           Upscale cars
                                 -----------------------------------------------------------------------------------------------------------------------
                                        Economy             Touring            Standard             Premium           Near luxury           Luxury
--------------------------------------------------------------------------------------------------------------------------------------------------------
Price ($).......................  -0.000024.........  -0.000116.........  -00.00091.........  -00.000119........  -0.000139.........  -0.000040
Curb Weight (lbs)...............  N/A...............  N/A...............  N/A...............  N/A...............  0.00264 [withheld]  0.00107
                                                                                                                   \1\.
Horse Power/Weight (Total/lbs)..  52.14890            56.4525 [withheld]  N/A...............  59.6702...........  80.1067...........  5.1241
                                   [withheld] \1\.     \1\.
Combined Fuel Economy (mpg).....  0.280446..........  N/A...............  0.209363            0.142656            0.0985491.........  0.437070
                                                                           [withheld] \1\.     [withheld] \1\.
Front Shoulder Room (sq inches).  0.321310..........  N/A...............  0.251289..........  0.142840..........  N/A...............  0.292574
Rear Leg Room (sq inches).......  N/A...............  N/A...............  N/A...............  N/A...............  N/A...............  0.008040
                                                                                                                                       [withheld] \1\
Luggage Capacity (sq inches)....  0.008917..........  N/A...............  0.041169..........  0.058315..........  N/A...............  0.022454
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ NHTSA has withheld the values of certain parameters in this table to protect confidential information that could be derived through reverse-
  engineering the MNL models.


[[Page 21898]]

    Before the MNL model was used to predict shifts in numbers of 
vehicles in each choice set, NHTSA considered how compliance costs 
would be spread across Nissan's fleet. In response to a request for 
supplemental data, Nissan responded that compliance costs are passed 
on exclusively to the vehicles that incur them. For example, if 
reductions in the domestic content of the Sentra were to cost $7.4 
million in 2006 and 112,695 are produced, the price change for a 
Sentra would be $7.4 million divided by 112,695, or approximately 
$65 per vehicle.
    Although Nissan suggests a ``pay as you go'' approach to 
spreading compliance costs, our review of economic literature 
suggests that profit maximizing firms would ``cross-subsidize'' 
compliance costs incurred by cheaper, price sensitive commodities by 
raising the price of expensive, price insensitive commodities. In 
the case of automobiles, the demand for an economy passenger 
automobile such as a Nissan Sentra is likely to be much more driven 
by the price of the vehicle than the demand for a high priced luxury 
passenger automobile such as the Infiniti Q45 or IG35. Raising the 
price of luxury Nissan vehicles by $65, or even $130 would reflect a 
small change in their overall prices and would probably have little 
impact on the demand for these vehicles. On the other hand, raising 
Sentra prices by $65 may have a relatively larger impact on the 
sales of that vehicle.
    Changes in vehicle sales resulting from price changes were 
estimated by NHTSA by estimating the distribution of vehicles within 
each choice set before any price change. This is simply the 
probability that each passenger automobile is selected (from the MNL 
model) times the total number of vehicles in the choice set. As 
changes in the price of Nissan vehicles resulted in changes to the 
probabilities of vehicle choices, we then estimated the new 
distribution of vehicles after the price change. The new 
distribution of vehicles is simply the probability each vehicle is 
selected times the total number of vehicles in the choice set.
    A more detailed description of the MNL model used by NHTSA is 
presented below:
    To model the vehicle selection process, individuals are assumed 
to derive utility from vehicle attributes. Let qj 
represent the choice of purchasing the j-th vehicle with a vector of 
m = 1, . . . ,M attributes [xj1, xj2, . . . 
,xjM]. To evaluate the utility derived from purchasing 
this vehicle, assume ql = 0 for all l not equal to j. The 
resulting optimization problem is:

    (1) Max u{0, 0, . . ., qj(xj1, 
xj2, . . . ,xjM), . . . ,0{time}  subject to: 
y  cj,

where y is the individual's income, cj is the price of the j-th 
vehicle and u(.) is the individual's utility function. Solving (1) 
yields the bundle of attributes that would be purchased if 
individual were constrained to purchase the j-th vehicle. 
Substituting the demand functions into the utility function results 
in a conditional indirect utility function:

    (2) Vj = Vj(x1j, . . . 
,xjM,y,cj) + ej,

where ej is an error term that reflects uncertainty on 
the part of the investigator, not the individual. This conditional 
indirect utility function is typically written as a linear function 
of attributes Xj = [x1j, . . . 
,xjM,], and income less vehicle cost (y - cj):

    (3) Vj = AXj + B(y - cj) + 
ej,

where A and B are parameters to be estimated. The parameter B has 
the interpretation of the marginal utility of income. The choice of 
which vehicle to purchase is made by choosing among the conditional 
indirect utility functions. The j-th vehicle will be chosen if:

    (4) AXj + B(y - cj) + ej 
 AXl + B(y - cl) + el,) 
for all j not equal l..

If the error terms are independently and identically distributed 
extreme value random variables, then the parameters of the indirect 
utility function can be estimated using a multinomial logit model 
(MNL):
    (5) P(j) = exp(Vj)/[exp(Vl) + . . . . + 
exp(Vn) for all l = 1, . . . ,K

where P(j) denotes the probability of choosing the j-th vehicle and 
K denotes the size of the choice set (number of different models). 
The resulting likelihood function is globally concave and easily 
estimated using any number of optimization techniques. MNL models 
are widely used to estimate demand when one, or a few items are 
chosen from a larger set of substitutable goods. These situations, 
commonly referred to as corner solutions, create difficulties in 
applying conventional demand estimation methods. In this 
application, estimating the demand for buying a particular vehicle 
would be difficult due to the fact that most individuals only 
purchase one vehicle. This results in a situation of zero demand for 
many vehicles at the consumer level. If the choice set is small, a 
switching regression approach can be applied. When the choice set 
exceeds three or four elements, this approach becomes very 
difficult. MNLs offer an attractive utility theoretic alternative to 
demand systems. Some applications of these models include automobile 
choice, transportation route and mode choice, recreational site 
choice, and food stamp program participation.

Appendix B

                            National Academy of Sciences (NAS) Fuel Economy Estimates
----------------------------------------------------------------------------------------------------------------
                                                                  FC (mpg)            Cost
                         Technology                          ------------------------------------  Availability
                                                                Low      High     Low      High
----------------------------------------------------------------------------------------------------------------
Production-Intent Engine:
    Engine Friction Reduction...............................     1.0%     5.0%      $35     $140            2002
    Low Friction Lubricants.................................      1.0      1.0        8       11            2002
    Multi-Valve, Overhead Camshaft..........................      2.0      5.0      105      140            2002
    Variable Valve Timing...................................      2.0      3.0       35      140            2002
    Variable Valve Lift & Timing............................      1.0      2.0       70      210            2002
    Cylinder Deactivation...................................      3.0      6.0      112      252            2002
    Engine Accessory Improvement............................      1.0      2.0       84      112            2002
    Engine Supercharging & Downsizing.......................      5.0      7.0      350      560            2002
Production-Intent Transmission:
    5-Speed Automatic Transmission..........................      2.0      3.0       70      154            2002
    Continuously Variable Transmission......................      4.0      8.0      140      350            2002
    Automatic Transmission w/ Agressive Shift Logic.........      1.0      3.0        0       70            2002
    6-Speed Automatic Transmission..........................      1.0      2.0      140      280            2002
Production-Intent Vehicle:
    Aero Drag Reduction.....................................      1.0      2.0        0      140            2002
    Improve Rolling Resistance..............................      1.0      1.5       14       56            2002
Emerging Engine Technology:
    Intake Valve Throttling.................................      3.0      6.0      210      420       2007-2012
    Camless Valve Actuation.................................      5.0     10.0      280      560       2007-2012
    Variable Compression Ratio..............................      2.0      6.0      210      490       2007-2012
Emerging Transmission Technology:
    Automatic Shift Manual Transmission (AST/AMT)...........      3.0      5.0       70      280       2007-2012
    Advanced CVTs...........................................      0.0      2.0      350      840       2007-2012
Emerging Vehicle Technology:
    42 Volt Electrical Systems..............................      1.0      2.0       70      280       2007-2012
    Integrated Starter/Generator............................      4.0      7.0      210      350       2007-2012

[[Page 21899]]

 
    Electric Power Steering.................................      1.5      2.5      105      150       2007-2012
    Vehicle Weight Reduction................................      3.0      4.0      210      350      2007-2012
----------------------------------------------------------------------------------------------------------------
 FC = Fuel Consumption Improvement


    Authority: 49 U.S.C. 32904, delegations of authority at 49 CFR 
1.50.

    Issued on April 15, 2004.
Jeffrey W. Runge,
Administrator.
[FR Doc. 04-8975 Filed 4-20-04; 3:05 pm]
BILLING CODE 4910-59-P