4th UPDATE: U.S. Court Tosses EPA Rule That Helped Navistar
06/12/2012| 06:04pm US/Eastern
--Appeals court tosses EPA interim rule allowing Navistar to sell noncompliant engines
--Ruling is a victory for Navistar competitors Cummins, Volvo and Freightliner
--Navistar vows to continue selling engines
(Updates with reactions from Daimler North America and Department of Justice as well as additional analyst comment.)
By Brent Kendall and Bob Tita
WASHINGTON--A federal appeals court Tuesday struck down a temporary Environmental Protection Agency rule that has allowed truck maker Navistar International Corp. (>> Navistar International Corporation) to sell diesel engines that don't meet the agency's latest pollution-reduction regulations
The U.S. Court of Appeals for the District of Columbia ruled EPA didn't have sufficient justification for disregarding the agency's normal rules in allowing Navistar to pay about $2,000 for every heavy-duty truck engine that failed to comply with the EPA standard for nitrogen oxide in diesel exhaust. The ruling threatens to suspend sales of Navistar's engines, causing the company's stock to close Tuesday down 5.5% at $27.15.
But the court's decision is limited to the EPA's interim rule on the fines announced in January. The agency is in the process of adopting a final rule that could permit the Lisle, Ill., company to continue selling the engines.
"We expect that the EPA could issue a final ruling in the coming weeks, and although this could also be challenged in court, it would take time during which Navistar could be allowed to continue producing engines," said Stephen Volkmann, an analyst for Jefferies & Co., in a note to investors.
Navistar said Tuesday it disagreed with the court's decision and intends to petition for a rehearing. In the meantime, the company said it will continue to assemble and ship engines while waiting for further guidance from the EPA.
"Our customers will continue to receive the products they ordered," a spokeswoman for Navistar said. Navistar paid the EPA $10 million in fines during the quarter ended April 30.
The Department of Justice, which is representing the agency in the case, declined to comment on the court's decision.
Tuesday's ruling was a win for Navistar's competitors, which challenged the EPA's fine schedule for Navistar. Engine maker Cummins Inc. (CMI), and truck makers Volvo AB (VOLVY, VOLV-B.SK) and Daimler AG's (DDAIY, DAI.XE) Freightliner unit said they spent hundreds of millions of dollars to comply with the EPA's 2010 standard requiring an ulta-low level of nitrogen oxide in diesel exhaust. Navistar's engines have yet to be certified by the EPA as meeting the 2010 standard, prompting its rivals to argue that the agency's fines of about $2,000 an engine provides unfair assistance to Navistar.
"Our interest has always been ensuring that there's a level playing field, so we are pleased with this decision," Volvo said in a written statement.
Daimler Trucks North America, maker of Freightliner trucks, said it "applauds" the court for recognizing "the lack of due process and comment period prior to [the] interim rule" being imposed.
Navistar had been relying on pollution credits acquired previously to offset the company's lack of compliance with the nitrogen-oxide standard. But as Navistar's supply of credits dwindled early this year, the EPA gave the company the option of paying noncompliance fines on its engines. Navistar has been attempting to reach the standard by using an exhaust-treatment technology that is different from what the rest of the truck industry in North America is using. Certification of Navistar's 13-liter engine is pending before the EPA.
The EPA said in court papers that it moved quickly to adopt fines on an interim basis to address the "serious harm" facing Navistar. The agency said the suspension of Navistar's engine sales could cause layoffs to thousands of Navistar employees and the loss of billions of dollars in revenue.
The appeals court, however, said that harm wasn't severe enough to allow the EPA to depart from its normal practices, especially because the situation was "brought about by Navistar's own choice to continue to pursue a technology which, so far, is noncompliant."
"The rule does not stave off any imminent threat to the environment or safety or national security," Judge Janice Rogers Brown wrote for the court. "It does not remedy any real emergency at all, save the 'emergency' facing Navistar's bottom line."
After imposing the fines on an interim basis in January, the EPA initiated its regular rule-making process to finalize a new regulation. It has collected public comments on the issue, and a new rule is expected soon.
Nitrogen oxide is an ingredient in smog and contributes to the greenhouse gas blamed for global warming. The EPA has been tightening restrictions on nitrogen oxide from diesel engines for the past decade. Beginning in 2010, the agency lowered the standard to 0.2-gram of nitrogen oxide per brake-horsepower.
Navistar is attempting to reach the standard with a process known as exhaust-gas recirculation, or EGR. Engine exhaust is recirculated through the combustion process to cool it and lower the nitrogen-oxide content. Other truck makers have opted for a process known as selective catalytic reduction, or SCR, that filters hot exhaust through a urea solution that turns the nitrogen oxide into water and nitrogen.
Navistar executives have been adamant that EGR is a viable alternative to SCR. But EPA certification of Navistar's 13-liter is taking longer than the company expected, raising doubts about whether the engine will be able to reach the agency's 0.2-gram threshold.
Tuesday's court ruling further ratchets up the pressure on Navistar's engine strategy, causing some analysts to conclude the company will have difficulty certifying its entire engine lineup with EGR if the EPA's engine fines continue to be challenged in court.
"It's highly likely Navistar now pursues SCR technology," said David Leiker, an analyst for Robert W. Baird & Co.
Write to Bob Tita at firstname.lastname@example.org