Bad cop, bad cop.

Automakers Get Caught Not Breaking EPA Rules

Edward Niedermeyer, an auto-industry analyst, is the co-founder of Daily Kanban and the former editor of the blog The Truth About Cars.
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U.S. Attorney General Eric Holder rained magisterial judgment this week on Hyundai Motor Co. and Kia Motors Corp., which the U.S. claimed had overstated their cars' fuel economy on the vehicles' window stickers. He said the government's $350 million settlement with the South Korean automakers "will send an important message to automakers around the world that they must comply with the law." Holder emphasized the importance of a level playing field in fuel-economy testing, slamming Hyundai and Kia for "systemic" and "egregious" discrepancies in their efficiency ratings.

The record fine and public tongue-lashing may have grabbed the headlines, but the situation Holder and Co. seek to address is nowhere near as simple as they would have it appear. Hyundai and Kia -- which share engines, model platforms and a chairman -- acknowledged no actual breach of Environmental Protection Agency rules in the settlement; the automakers are just two of several to fall afoul of the EPA's vague and abuse-prone efficiency-testing protocols in recent years. Beneath Holder's unequivocal rhetoric lies a regulatory morass that says far more about the U.S.'s fuel-efficiency testing regime than about automakers themselves.

EPA officials couldn't help but mitigate their chastisement of Hyundai and Kia, acknowledging that wider problems exist in their fuel-efficiency testing standards. After all, the automakers' overstatement of miles-per-gallon ratings was simply the most visible example of issues that have ensnared Mercedes-Benz, Mini and Ford in recent years. All three have had to restate official MPG ratings for a variety of products, and several have faced consumer civil suits as a result. But only Hyundai and Kia have been singled out for public denouncement. The government's claim that the automakers were outliers -- and that their failures were more "systemic" than their competitors' -- is hardly enough to overcome the fact that it couldn't force them to acknowledge any actual breach of the law.

In fact, scrutinizing the alleged misdeeds reveals how vague the line is between a sales-boosting fuel-efficiency score and the ignominy the automakers now find heaped upon them. Government lawyers argue that Hyundai and Kia used the best data from their efficiency tests, performed the tests in ideal simulated weather conditions, and used the wrong-size tires. Hyundai's response: While admitting that it had allowed a "data processing error related to the coastdown testing method," the automaker argued in a statement that its "process for testing the fuel economy of our vehicles was -- and is -- consistent with government regulations and guidance, which have always afforded broad latitude to vehicle manufacturers in determining test conditions."

This "broad latitude" is the fundamental problem with the U.S. fuel-economy testing scheme; that automakers exploit it is neither surprising nor new. Few people outside the industry realize that the tests are not performed by the EPA itself but by automakers, let alone that the standards for such testing are so vague. The EPA currently only spot-checks "about 10-15 percent" of vehicles each year, giving automakers even more leeway to create "official" MPG numbers that may be nearly impossible to achieve in the real world. Far from the clearly defined "even playing field" Holder says the Hyundai-Kia settlement upholds, the EPA's fuel-economy testing standards allow automakers to test under varied conditions and post the numbers they think they can get away with, while the agency only verifies a limited number of "official numbers" each year. Rather than creating a clearly defined and universally applicable regime, the EPA and the Justice Department are stuck trying to patrol an unmarked border between reasonable variance and outright cheating.

This might be a reasonable strategy if the EPA's standards consistently delivered MPG ratings that reflect real-world driving, but the ratings simply don't do that. Consumer Reports has shown that 55 percent of hybrid vehicles fall short of their EPA ratings by 10 percent or more in independent testing, while 28 percent of cars with turbocharged engines have the same problem. The EPA itself acknowledged this shortcoming earlier this year, when it proposed "in-use auditing" -- testing vehicles on the road -- to verify window-sticker numbers as part of its broader effort to bring its test results closer in line with real-world efficiency.

Fuel-economy ratings are a tool for consumers, and the fact that the EPA acknowledges that its tests fail to reflect the numbers consumers are likely to see on window stickers is the real scandal. Rather than shaming Hyundai and Kia for exploiting "latitude" in their testing standards, the EPA should work to eliminate that latitude as part of a wider effort to make its ratings reflect real-world use. In addition to tightening test-condition standards, the EPA should consider verifying a higher percentage of tests, creating a strong in-use auditing regime, and even ditching the nonlinear miles-per-gallon measurement for the stronger gallons-per-mile one (or liters per 100 kilometers, as is used in Europe).

After all, creating a fair and representative efficiency-testing regime is a task on which automakers and the government must work together -- and for which consumers, not the attorney general, should be the ultimate judges of success or failure.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Edward Niedermeyer at edward.niedermeyer@gmail.com

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net