Diesel-powered trucks and SUVs from Fiat Chrysler Automobiles (NYSE:FCAU) emitted pollution at far above U.S. legal limits, according to new testing related this week.
FCA is already facing a civil lawsuit filed by the U.S. Department of Justice that alleges the company used illegal "defeat devices" to cheat on emissions testing, and has been working with regulators for months to bring its diesels' software into compliance with the Clean Air Act.
If the results of these new tests hold up, it could undermine that work and lead to a very big fine for FCA -- and a situation that would probably clobber the company's stock price.
The tests show FCA's diesels are polluting
FCA's vehicles were tested by the same researchers who first recorded the emissions violations in diesel-powered vehicles made by Volkswagen AG (NASDAQOTH:VLKAY).
Those researchers, at West Virginia University's Center for Alternative Fuels, Engines, and Emissions (CAFEE), said that on-road tests of the emissions from diesel-powered Jeep Grand Cherokees and Ram 1500 pickups found nitrogen oxides at three to 20 times the levels permitted by the Clean Air Act. Nitrogen oxides cause smog.
The researchers tested five Jeep and Ram vehicles from the 2014 and 2015 model years in their labs and on the road, and noted that the vehicles' on-road emissions were notably higher than in the laboratory testing.
FCA: These test results may be misleading
In a statement on Tuesday, FCA pushed back hard against the test report:
Based upon court filings and discussions with CAFEE, this testing appears to have been commissioned by a plaintiffs' law firm for purposes of litigation.
The company said that CAFEE has been unwilling to discuss the details of the report with FCA, and called into question the methodology the researchers used. Specifically, FCA said that CAFEE's tests differed from the U.S. Environmental Protection Agency's (EPA) standard testing in ways that could have increased the levels of emissions detected:
The CAFEE report implies it would be appropriate to compare its on-road test results with those of one of five required EPA test procedures -- each of which is conducted off-road, under laboratory conditions. However, CAFEE's reported on-road results fail to consider that its tests were conducted:
- at average speeds more than 50% greater than those in the EPA test procedure
- with 600-700 lbs. more payload than is used in the EPA test procedure
- under road conditions (e.g., grades) that are not representative of those in the EPA test procedure
Each of the above may increase emissions readings, therefore rendering invalid a comparison of on-road and off-road test results [emphasis added].
Taken together, FCA's arguments suggest that CAFEE may have had incentive to do the testing in ways that were more likely to produce a negative outcome.
The stakes here could be huge
FCA is pushing back aggressively against the CAFEE test report because it could throw a significant wrench into a situation that the company appears to have been handling effectively.
FCA said that it has been working with the EPA and the powerful California Air Resources Board (CARB) to ensure that its diesel-powered Ram 1500s and Jeep Grand Cherokees comply with all applicable regulatory rules. The work follows allegations made by the regulators that FCA's diesel emissions-control software wasn't in compliance with regulations. FCA's diesel-powered Ram 1500, called EcoDiesel, was highly touted for its impressive fuel economy and power output when it was first introduced for the 2014 model year.
FCA said that after "many months of close collaboration" with EPA and CARB, it has submitted "updated emissions software calibrations" for 2017-model-year versions of its diesel vehicles. It also said that it plans to recall 2014 -2016 models to install that same modified software once it has been approved by the EPA and CARB.
That would be a relatively inexpensive recall (as recalls go), and with luck it would allow FCA to resolve the matter without the huge fines and costs that were imposed on Volkswagen. Volkswagen has spent billions to buy back its affected vehicles and to settle civil and criminal charges in the U.S.
Why FCA isn't in VW's hot water -- yet
The difference between VW and FCA -- so far -- is that VW had clear intent to violate U.S. laws. At the moment, FCA's ongoing work with the regulators is more of a technical disagreement. No allegations of bad faith have yet been made.
But if CAFEE's testing leads regulators to the conclusion that FCA hasn't been forthcoming, things could get ugly -- and expensive -- for FCA very quickly. That's the fear, and it's why FCA investors should continue to watch this situation very closely.