Tier 2: no big deal - Railroad Financial Desk Book 2004

Railway Age, Oct, 2003

Depending on just who is talking, the Environmental Protection Agency's Tier 2 compliance rules for locomotive emissions (in effect for units manufactured beginning Jan. 1, 2005) are either the beginning of a new, less efficient, more costly locomotive product--or no big deal.

Before we attempt to explore this issue, a little background: Several years ago, the EPA established a tiered series of increasingly strict emissions requirements for new locomotives and locomotives undergoing major overhauls. There were exclusions for locomotives built before 1973 and locomotives in service at small railroads. There were also rules set up to let operators of locomotives built before the rules went into effect know when an overhaul was so substantial in nature as to require that the resulting rebuilt engine meet the initial-tier emissions standards.

For locomotives built new after the rules went into effect, various tiers of compliance were established (Tier 0, Tier 1, Tier 2) that depended upon when the unit was built. Once in compliance with the appropriate date-set tier, the locomotive would never have to be rebuilt to a higher standard. Locomotives built, for instance, in 2002, 2003, and 2004 are subject to Tier 1 rules. Locomotives built after 2004 are subject to Tier 2 rules. It is reasonable, we are told, to assume that locomotives built in compliance with Tier 2 likely will be somewhat more costly than similar units built prior to the Tier 2 requirements, and, possibly, less efficient than units built under earlier tiers.

Interestingly, the two OEMs--General Motors Electro-Motive Division and GE Transportation Systems--have taken different routes to dealing with the onset of the EPA's Tier 2 requirements. EMD has reengineered its existing 710 engine to a new standard that gives it a "robust" margin of compliance with Tier 2. GETS, on the other hand, is fielding a totally new unit, the Evolution, that is currently being tested by several railroads. Initially, both the EMD and the GE units are high horsepower a.c.-traction locomotives.

Cost? It has been reported that GE expects pricing for its Tier 2 a.c. unit to be slightly higher than that of its current a.c. products. EMD will say nothing more than it expects to remain "competitive" with its entrant into the Tier 2 locomotive sweepstakes.

What, then, does all of this really mean to railroads? What about finance and operating lessors with existing investments in older locomotives and opportunities, potentially, to invest in the newest Tier-2-compliant power for their railroad customers?

Simply put, no one knows. Assuming that both OEM's locomotives meet the Tier 2 guidelines as predicted--and we have little doubt that they, will--how will the units perform over the long haul? The locomotive building industry as a whole has a rather unfortunate history of transitioning from one generation of locomotive to another by building new units that seem to spend a long time in "shakedown" mode. Put another way, new designs sometimes become ill-favored orphans due to performance and reliability issues. GETS, in particular, is taking this bogeyman squarely head on by having built a larger than normal test fleet to assure performance and customer satisfaction. EMD is banking on fielding a compliant unit with existing, proven technology. We'll see.