Overview of Ecos Consulting’s Presentation

1. Overview of Ecos Consulting’s Presentation • Provide market context • Identify the scale and type of market opportunity presented by the state fleet • Discuss test procedure recommendations • Report findings from rolling resistance data collected so far • Identify remaining data needs • Gather input from manufacturers and other stakeholders

2. Process Ecos Consulting was hired by CEC to conduct outreach to manufacturers, obtain rolling resistance data, & make technical and program design recommendations. Ecos specializes in the process of transforming markets for energy efficient products: 1. Research to identify the technological & market opportunities 2. Establishing manufacturer and retailer relationships and links to “public purpose” objectives 3. Understanding marketing leverage points for an efficiency message. 4. Creating a standardized test procedure and efficiency benchmark to facilitate fair, open competition. 5. Implementing a program (incentives, education, training, etc.) with trade allies to accelerate sales of the efficient products.

3. SB 1170 Overview • Passed by Legislature in September 2001 and signed by Governor shortly thereafter • Key provisions: • Fuel-efficiency specifications by 1/31/03 governing motor vehicles and tires • Reduce petroleum consumption “to the maximum extent practicable and cost-effective.” • Goal is to reduce energy consumption of the state vehicle fleet by at least 10% by 1/1/05 (state buys about 1,500 vehicles and 5,000 replacement tires per year).

5. Key Market Stats • Total North American tire sales: $24 billion per year • 60+ million OEM and 200+ million replacement tires sold per year (CA market alone 20+ million units per year) • At least 28 brands and 700 models of replacement tires for sale • Many complex partnerships among manufacturers and brands

6. Top Four Manufacturing Partnerships (Michelin/BFGoodrich/Uniroyal, Goodyear/Dunlop, Bridgestone/Firestone, Cooper) Hold ~ 56% Share of Replacement Tire Market Source: tirebusiness.com

7. Rolling Resistance Is a Factor in the Competitive Marketplace • Michelin/BFGoodrich/Uniroyal played a leading role in the development of a new rolling resistance test procedure, has won 81% of JD Power’s tire customer satisfaction awards, and invests the greatest percentage of its revenues in tire R&D. • Goodyear has developed GT3 bioTRED models with very low rolling resistance and corn starch-based polymers. • Branded LRR tires for electric and hybrid vehicles, such as Bridgestone/Firestone’s ECOPIA.

10. Replacement Tire Characteristics • Market dominated by all-season radials (90+%) • About 80% of tires now carry speed ratings • Federal government mandates ratings for traction, treadwear, temperature resistance, size, max pressure, max load, and other attributes

11. OE / Replacement Tire Differences • Original Equipment Tires • Low rolling resistance sought for CAFE • Short lifetimes (~2 years) typical – (new cars driven heavily; tire warranty separate from car’s) • About 42% of buyers will replace OE tires at end of life with the same brand • Replacement Tires • Low cost and longevity more important in marketing than low rolling resistance • Lifetimes longer than 2 years • About 35% of buyers will replace their second set of tires at end of life with the same brand

12. The Market Opportunity: Bringing Low Rolling Resistance to the Replacement Market • Ongoing improvements continue from changes in tire chemistry and design. The most efficient tires cut RR by 30% or more, saving 2-6% of fuel use. • Market opportunity to increase sales volumes of OE tires in the replacement market, rather than limiting low RR tires to the OE market only • May be able to increase brand loyalty & repeat purchases if customers can readily buy the same replacement tires that were on their new car • Customers already pay more for better performance, durability, and brand. With the right marketing, customers would invest in fuel efficiency as well.

13. The Retail Side • About 50% of all replacement tires are sold through local dealers and another 25% through regional and national dealers. Bridgestone/Firestone is largest national retailer. • General merchandise sellers like Wal-Mart, Sam’s Club, Costco are only about 11-18% market share, but are expanding. • Internet sites like tirerack.com also growing in importance – allow extensive comparative research across brands and models before purchasing. • Minimal marketing of rolling resistance at present.

15. From an Energy Consumption Standpoint, Tire Use Dwarfs Manufacturing, Shipping and Recycling Source: Pirelli

16. The California Fleet Market Opportunity

17. U.S. Market Share Estimates for Replacement Tires by Size Source: tirebusiness.com

19. Rolling Resistance Test Procedure Options • SAE J1269 • Originally developed in 1979 • Only tests at one speed (80 kph) • SAE J2452 • Developed in 1999 • Tests at 6 speeds between 115 kph and 15 kph • Used by GM, Ford, and Daimler/Chrysler for OEM tires • Used by NREL in ADVISOR modeling to estimate fuel economy impacts • Other Approaches • Coast down measurements by EPA on a test track (SAE J2263) • Track testing of fuel consumption in pairs of identical vehicles with different tires

20. After extensive research, Ecos recommended the use of J2452 to the CEC • Results more predictive of real-world performance than J1269 • Actions by the state would be consistent with testing processes already in use between automakers and OE tire manufacturers • Coast-down and test-track measurements can be substantially more expensive and difficult, not yet widely in use in industry • Linkage to NREL’s ADVISOR permits straightforward fuel economy impact assessments

21. Variations Identified in the J2452 Testing Process: May Need Adjustments Options to True-Up Tire Test Results from Different Manufacturers: • Centralized Testing • Trust but Verify • Trust and Adjust • Take the Tire Challenge

22. Centralized Testing Main elements: • Competitively selected independent testing lab • Manufacturers submit tires for testing • Reports sent to CEC • Testing costs to be paid by manufacturers who wish to sell in California

23. Trust But Verify Main elements: • Manufacturers provide CEC with self-tested tire data • CEC selects random models for testing • Independent results replace manufacturer results if they are less favorable

24. Trust and Adjust Main elements: • CEC assumes car mfr function of adjusting data submitted by tiremakers • Sends tire samples to each tire mfr to test • Analyzes submitted results • Creates adjustment factors • Standardize rolling resistance data before publication

25. Tire Challenge Main elements • Manufacturers submit data to CEC • Any result can be formally challenged by another manufacturer • Sample tested at CEC-selected independent test lab • If results come equal or better, test paid for by challenger • If results come out worse, test paid for the manufacturer that was challenged

32. Relational Tire Database

33. How Will the Database be Used? • Allows investigation of correlations between rolling resistance and other tire performance metrics (traction, tread wear, temperature resistance, etc.) • Helps fleet buyers determine which efficient tires are available for which vehicle types • Possible front-end for consumer education website (vehicle/tire matching) • Assists with cost effectiveness calculations – comparing incremental cost of efficient tires to lifetime fuel savings • Allows comparison of test lab results, possible adjustments as needed

34. Remaining Data Needs • Only have 9 data points for J2452 and 15 data points for J1269 – Need far more tire data • OE and replacement tires needed • Industry research on synergies and interactions between RR and other tire attributes • Information about industry marketing of low RR replacement tires so far • Incremental costs • Opportunities for listing in Green Seal Choose Green report