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The Future, The Deficit and the Federal Budget

Financial Executive...September 2010


When Rep. Bart Gordon (D-TN) introduced his America COMPETES reauthorization bill (H.R. 5116) on April 22, 2010, he had high hopes for the bill's trouble- free passage through the House. The bill jacked up spending on research programs at three federal agencies and departments, and was designated a "key vote" by at least three business groups, including the Chamber of Commerce, who hoped it would eventually add up to new jobs and new products for American companies.

Gordon thought his bill threaded the political needle; business support meant Republicans would fall into line, increased federal spending meant Democratic support.
Instead of threading that needle, however, Gordon jabbed himself with it.

Republicans and even some Democrats took immediate issue with the cost of the brimming $96 billion bill at a time when the federal deficit was projected to hit $1.3 trillion. Gordon's reauthorization bill pumped up budgets for programs at the Departments of Energy, Commerce and the National Science Foundation at a rate of 8-10 percent a year over a five-year period. He topped that off with dollops of new spending on new programs, some of them seemingly duplicative of existing programs in each place. The annual cost for Gordon's bill was $17.2 billion a year, compared to $8 billion a year for the original bill passed in 2007 in response to a 2005 National Academy of Sciences (NAS) committee report called Rising Above the Gathering Storm, which said the U.S. industrial/exporting/high-paying job sector "appears to be on a losing path."

Three years later, not much had changed. "There is disturbing evidence that our overall innovation lead has not only been lost, but that we are continuing to rapidly lose ground," says Robert D. Atkinson, president, ITIF. Information Technology and Innovation Foundation (ITIF).

But here was Gordon, back with the same basic bill, only fatter. The big budget increases for existing programs during fiscal 2011-2015 seemed particularly irresponsible since Congress had not appropriated funds at the authorization levels for those programs during fiscal 2008-2010. So why even suggest higher authorizations? It was as if Gordon, who is retiring at the end of this session, was sending a message that the deficit be damned. The new programs Gordon insisted on authorizing such as Energy Innovation Hubs and Energy Frontier Research Centers seemed especially excessive given that the marquee new energy program authorized in the 2007 bill-- an Advanced Research Projects Agency-Energy, meant to reproduce the kind of results that the Defense version, called DARPA--had barely gotten off the ground because of Congress's refusal to appropriate funds for it.

The deficit headwinds forced Gordon a month after introduction of the bill to cut its $96 billion, five -year price tag by 10.2 percent. But when that $86 billion bill went to the House floor on May 19, Republicans offered what is called a "motion to recommit" which lopped $40 billion off the bill's price tag by cutting some new programs and freezing spending. It passed by a vote of 292 to 126, the margin in part reflecting inclusion of an amendment--which would have been hard to vote against-- authorizing firing of federal employees who look at pornography on taxpayers' time. The Democratic House leadership then pulled the bill off the floor, found a parliamentary way around the pornography amendment, and brought the $86 billion bill back to the House floor on May 28 when it passed by a vote of 262-150 with some GOP support.

Sen. Jay Rockefeller (D-W. Va.), chairman of the Senate Commerce Committee, and sponsor of the Senate version of America COMPETES, has made it clear that the House bill is unaffordable.
The debate in the House and now the Senate over the America COMPETES reauthorization illustrates how concern over the federal budget deficit is strewing rocks in front of all sorts of key business-favored legislation which would have had a smooth ride through Congress just a few years before. But business groups are responsible for some of the bumps. On the one hand, groups like the Chamber and National Association of Manufacturers (NAM) press legislators such as Gordon to authorize new programs like the Energy Innovation Hubs, Energy Frontier Research Centers and loan guarantees for small- and medium-sized manufacturers included in the America COMPETES reauthorization while at the same time calling for federal spending discipline to reduce the $1.3 trillion deficit.

Asked to reconcile higher federal spending and deficit reduction, Jeff Ostermayer, senior media strategist for the NAM, says, "We have always held the position that the federal government has a role to play to help spur investment and foster economic growth. With our economy still recovering we have supported policies that will help stimulate economic growth and create jobs."
But how to reconcile spending with deficit reduction, that is the question.

President Obama and other world leaders took up that question a month after the House passed the expensive America COMPETES reauthorization during the Group of 20 meeting in Toronto. The agenda there focused on how the world's biggest economies could coordinate to defeat both the global economic slowdown and the looming worldwide deficit debacle. The final G20 communiqué pledged the signatories to a goal of cutting government deficits in half by 2013 and stabilizing the ratio of public debt to gross domestic product by 2016. Although Obama insisted emphatically that there was “violent agreement” on the need to reduce debt over time, the final communiqué included a delicately worded call for deficit reduction “tailored to national circumstances.”

The U.S. national debt stands at $12.88 trillion and the Congressional Budget Office (CBO) expects the nation to add another $1 trillion a year for another decade. Obama, though, hopes to put the debt on a diet; the White House has forecast the projected 2010 deficit of $1.3 trillion will be reduced to $700 billion by 2013.The CBO has given credence to that Obama prediction, prophesying that the deficit will shrink from 10 percent of the economy today to about 4.5 percent in 2013 under Obama's long-range budget blueprint. But reaching that short-term goal depends on Obama's projected budget cuts and tax increases coming to fruition. Moreover, the CBO's June 2010 report The Long Term Budget Outlook calls the long-term budget outlook "daunting."

Obama's big push is toward 2015 when he wants to have a balanced budget excluding interest on the national debt. He has set up a bipartisan National Commission on Fiscal Responsibility and Reform to make recommendations on how that balanced budget can be achieved. Fourteen of the 18 members would have to agree on a package of domestic spending cuts and tax increases for Obama to then submit the recommendations to Congress for approval. Matt Miller, senior director for government affairs at FEI, expects the commission to engage in some good, open-ended dialogue focused on entitlement programs and revenue and tax policy. "A lot of times in these kinds of exercises you will see tight parameters for discussion," he explains. "This is a good inquiry. But it will be extremely difficult for the commission to put forth numerous serious recommendations."

Marty Sullivan, a contributing editor at Tax Analysts, a non-profit publisher of tax information and publications, explains just how extremely difficult it will be for the Commission to prescribe a palatable deficit Rx. "The changes needed to get to a balanced budget in 2015 excluding interest on the debt are earth shaking," Sullivan avers. What might be possible, he says, is to reduce the ratio of U.S. debt to gross domestic product (GDP) from today's level of 65-70 percent. To do that would mean reducing the deficit from its current 10 percent of GDP last year to three percent in 2015. Sullivan estimates that reduction would mean the U.S. would have to cut the federal budget by about $500 billion by 2015. Sullivan posits seven options for performing that gastric surgery:

1) raising all personal income taxes by 30 percent
2) raising all taxes, personal and corporate income taxes, estate taxes, Social Security taxes, etc. by 15 percent
3) cutting Medicare, Medicaid and Social Security spending by 25 percent
4) cutting all discretionary spending by 40 per, including defense, (but not "entitlement" spending such as Medicare, Medicaid and Social Security)
5) cutting all spending, entitlement and discretionary by 13 percent
6) cutting all taxes by 8 percent and all spending by 7 percent
7) imposing a new value added tax at 8 percent

" The current deficit is unsustainable and unprecedented." states Sullivan. "Congress is just taking baby steps. It needs to think outside the box just to get to a minimum level of sustainability."

Of course, the dimensions of the expanding federal deficit and needed solutions were pretty clear before the creation of the National Commission on Fiscal Responsibility and Reform. The long term outlook as viewed by the non-partisan CBO resembles nothing more than the blackening skies in the Wizard of Oz before the tornado swept Dorothy to Oz. And it is going to take more than some short guy with a booming voice behind a curtain to significantly reduce the deficit. The June 2010 CBO report looked at spending trends for Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and insurance subsidies that will be provided through the exchanges created by the recently enacted health care legislation. Under both of CBO’s scenarios, total outlays for those health programs would roughly double as a share of GDP over the next 25 years, from 5.5 percent in 2010 to about 10 percent or 11 percent in 2035. Spending on Social Security would rise much more slowly, from almost 5 percent of GDP in 2009 to about 6 percent in the 2030s and beyond.

Some of the ways of cutting spending on those programs are obvious. J.D. Foster, Norman B. Ture Senior Fellow in the Economics of Fiscal Policy, The Heritage Foundation, says there is agreement "right to left" on the need for Medicare reform. "On the benefit side, every beneficiary is getting a federal subsidy of $6000," he states. " It makes sense to subsidize the health care of low- or middle-income seniors but does it make sense to subsidize Medicare for rich seniors?"

Maya MacGuineas, president, Committee for a Responsible Federal Budget and director, fiscal program policy, New America Foundation, suggests even more radical solutions. "Over time, it would be advisable to fundamentally restructure Medicare to provide a voucher program, which would introduce more cost consciousness and cost controls. Given the progress in creating exchanges in the recent health reforms, this is now more of a possibility. Broad spending controls will have to be introduced to federal health care spending, including a cap on spending growth and triggers to ensure that projected health care savings are realized."

The CBO estimates that these kinds of spending reductions would stabilize the debt-to-GDP ratio at 67 percent for the next decade only if the Bush tax cuts approved in 2001 and 2003 are allowed to expire, if provisions designed to limit the reach of the alternative minimum tax (AMT) are allowed to expire and if annual appropriations drop below the pace of growth of GDP. If some or all of those things don't happen, the public debt would reach almost 90 percent of GDP in 2020. Experts like MacGuineas say the debt ratio should be at 40 percent.

A failure to tame the federal deficit would have myriad unappetizing implications. Most obviously, bills such as America COMPETES will not pass Congress and even if they do appropriators won't approve annual budgets up to the authorization levels. It is interesting to note that when Sen. Jay Rockefeller (D-W. Va.) introduced his version of the America COMPETES reauthorization in mid-July, the bill had a three-year authorization--not five years as in the House--as a way of cutting the bill's cost.

On the tax side, an out-of-control deficit means Congress won't even consider a reduction in the corporate income tax, which even many Democrats support. Nearly everyone with an eye on the global competitive situation understands that American companies are at a severe disadvantage when the U.S. corporate rate is at 39 percent, where it has remained for two decades, compared to the average rate of 26 percent for countries in the Organization for Economic Cooperation and Development (OECD). The only OECD country with a higher rate than the U.S., Japan at 40 percent, recently announced a planned, phased reduction in its corporate income tax as one way of jolting Japan out of its long-term economic malaise, although those plans are somewhat indistinct. But at least the recognition is there.

Not only does a yawning deficit mitigate against corporate tax cuts and an ensuing expansion of capital spending and investment, it also insures expanded borrowing by the U.S. Treasury. That leads to lower national saving which also leads to lower domestic investment. Then there is the whole suite of unappetizing "Greece-like" scenarios revolving around investor confidence and interest rates.

Some Democrats and Republicans in Congress have paid lip service to the need to cut federal spending and, to a much lesser extent, to raise taxes. It didn't go unnoticed in June when House majority Leader Rep. Steny Hoyer (D-MD) raised the possibility of raising the retirement age for Social Security as well as breaking President Obama's presidential campaign promise not to raise taxes on those earning less than $250,000. But even there Hoyer was tentative, saying President Bush's "middle class" tax cuts, which expire at the end of 2010, should be extended but only for one year, which was a way of saying that this Congress didn't have the courage to make that move, but maybe the next Congress would. Then, a week later, Rep. John Boehner (R-Ohio), the House Republican leader, said he favored raising the Social Security retirement age, too, and tying cost-of-living increases to the consumer price index rather than wage inflation and trimming benefits for retirees with substantial non-Social Security income.

But talk has clearly not translated into action, as House passage of the arguably bloated America COMPETES reauthorization proved. Neither the House nor the Senate has considered Obama's "Reduce Unnecessary Spending Act of 2010." The bill would give the president, whomever he or she is, the authority to delete spending from a recently-passed appropriations bill and send that bill back to Congress. The legislation would require the Congress to vote up or down on the presidential cuts. However, a president's spending cuts would be limited to discretionary programs, meaning excluding Social Security, Medicare, Medicaid; tax cut bills would also be off limits. The Obama-proposed authority is far weaker than the line-item veto power a GOP-dominated Congress gave President Clinton in 1996. Under that bill, before it was struck down by the Supreme Court in 1998, Clinton's line-item vetoes automatically went into effect unless overturned by a two-thirds vote of both the House and Senate. It is highly unlikely Congress will pass even Obama's diluted proposal which, as of the end of July, had not moved forward one inch.

Congress's refusal to entertain the Obama bill is just one example of its inability to confront the deficit issue. There are starker examples. In July, it became clear the House would not, for the first time since 1974, introduce, much last pass, a budget resolution. These are annual bills laying out five-year spending and tax plans which serve as a guideline for the Appropriations Committees in both houses. They indicate the size of the federal deficit over that period. The failure of the House to produce a budget resolution was a result of a split within the Democratic caucus. Conservative Blue Dog Democrats wanted a budget resolution which produced, again symbolically, cuts in some federal programs between fiscal 2011 and 2015, showing significant progress toward Obama's goal of a balanced budget minus interest on the federal debt.

Progressive Democrats wanted the resolution to reflect even greater deficits in the short term as a way of jolting the economy out of its continuing doldrums and producing more jobs. House Democrats produced instead what is called a "deeming" resolution which sets targets for only the next fiscal year.
Of course it is not just the Democrats who are hiding from the deficit problem. Republicans resolutely oppose any tax increases. Sullivan argues that the Republicans would be more willing to countenance a tax increase if business groups supported the idea. He notes that the Business Roundtable has at least opened the door to consideration of a value-added tax (VAT) in the U.S. Almost all European countries have one in the area of 15-20 percent. Imposition of a VAT, says Sullivan, would allow Corporate America to demand in return a reduction in the corporate income tax. "Obviously, there have to be spending cuts first," Sullivan notes. "But the second phase has to be broad-based tax increases." He explains that without those tax increases, President Obama and congressional Democrats will continue to look to business for new tax income each year. "It is death by a million cuts," he states. Other countries have recognized the link between lower corporate income taxes and a higher VAT. The new Japanese prime minister has just proposed a cut in that country's 40 percent corporate income tax as part of an increase from 5 to 10 percent in the Japanese VAT.

The new Great Britain government of Prime Minister David Cameron has taken a similar step to address that country's deficit problem. Cameron's plan, agreed to by his coalition of Conservatives and Liberal Democrats, cuts the budgets of most government departments by 25 percent over the next five years. The steps outlined to the House of Commons by George Osborne, the chancellor of the Exchequer, would cut the annual government deficit by nearly $180 billion over the next five years. Great Britain will increase its VAT to 20 percent from 17.5 percent and raise its capital gains tax to a new high of 28 percent. In exchange, the corporate income tax rate will be reduced over a five-year period to 24 percent from 28 percent.
MacGuineas says Great Britain has the formula for austerity about right mixing four pounds in spending cuts for every pound in tax increases. "That is the right model for the U.S." she says. "Although some of the spending cuts have not be specified, what the British government has done is quite remarkable. They are off to a credible start."

She pauses, then adds, " It would be nice if the U.S. were off to any start. It is sort of shameful to watch other countries get their act together while we squabble over petty partisan problems."

Grappling with Retiree Health

Human Resource Executive...August 2010

While it’s still too soon to tell exactly how healthcare reform will affect retiree health, here are a few known facts—pro and con—to base a few predictions on.


BY STEPHEN BARLAS
The primary rationale for the health-insurance-reform bill Congress passed in March was to provide medical, hospital and drug care for the employed uninsured—meaning the self-employed and workers in small companies whose employers did not offer insurance.
But the provisions in the Patient Protection and Affordable Care Act, which kick in first, focus on retirees who already have insurance through their employers. Moreover, the two provisions that got out of the gate first take off in opposite directions: One is a boon to many companies and their retirees; the other is a bust, albeit with a possible silver lining.
The two PPACA provisions include the elimination of a tax deduction for corporations that provide non-Medicare Part D drug coverage for retirees and the establishment of a $5 billion federal fund companies can tap into, either to reduce the subsidies the company pays for healthcare for early retirees—ages 55 to 64—or for the premiums and co-pays the early retirees pay themselves.
Companies that have been providing drug coverage to retirees through private, non-Medicare plans have been receiving 28-percent subsidies for every retiree’s costs from the federal government, and have been able to deduct from corporate taxes what amounts to a $600-per-retiree drug subsidy. The loss of deductibility of the $600 subsidy happens in 2013; but the PPACA provision caused immediate corporate heartburn because accounting rules require employers that receive an RDS and deduct it to record an accounting charge in their first-quarter 2010 financial results to reflect the impact of the change in RDS tax status.
External sources estimated these charges cumulatively at more than $14 billion nationally. So that provision drew blood immediately.
“That had a major impact on many of the companies affected. It was real money and [would] show up in their tax bill,” says Mike Thompson, a principal at PricewaterhouseCoopers.
Medco Health Solutions estimates that, starting in 2013, when the RDS tax liability kicks in, the cost to the average taxable RDS plan sponsor will be in the range of $14 to $21 per member per month (assuming a 35-percent tax rate)—which, for a typical plan, means millions to tens of millions of dollars in lost value annually. The estimated 1,400 U.S. companies that will be affected have a number of options including moving retirees into one of the Medicare Part D options. Most companies, however, are taking a wait-and-see approach. Says Steve Wojcik, vice president of public policy at the Washington-based National Business Group on Health: “No one is rushing to make an immediate decision.”
Some company retirees are already in Part D, perhaps receiving a corporate subsidy for premiums, perhaps not, but with the former employer subsidizing a “wrap-around” supplemental drug plan that kicks in when the retiree enters the so-called “doughnut hole.” Medicare subscribers who spend $2,830 on subsidized prescription drugs must then pay the full amount on all their prescriptions until they reach the next threshold of spending, which begins at $4,550—called the “catastrophic coverage” level. The PPACA gives seniors affected by the coverage gap a $250 rebate in 2010. From 2011 on, those reaching the “doughnut hole” will receive a 50 percent discount on their prescription-drug costs.
As a result, employers are likely to end subsidization of supplemental Part D plans. So that will be a net corporate savings. The filling of the doughnut hole is also another reason—there are actually multiple reasons—why companies with non-Medicare retiree-drug plans will undoubtedly move retirees into Medicare Part D drug coverage, which offers at least four permutations: (1) a conventional prescription drug plan purchased directly by the individual; (2) an employer-group-waiver plan (also known as an EGWP or “egg whip”), by which the employer contracts with a PDP on behalf of retirees; (3) a plan in which the employer sets up its own EGWP and administers it (very few companies have done this); and (4) a plan in which the employer contracts with a Medicare Advantage-Prescription Drug plan, which provides both medical and drug benefits.
EGWPs seem to be the popular choice for companies seeking to move retirees into a Part D option. The advantage of an EGWP is that an employer can shape that drug plan to look exactly like its current retiree drug plan. Employers can often provide as much or as little per-employee subsidies as they want, as long as the benefits are equal to those in an individual PDP. Employers also get federal subsidies for retirees in EGWPs. However, instead of a per-retiree subsidy based on claims incurred by the individual under an RDS, which is up to a $600 subsidy, under a Part D EGWP, the employer gets a subsidy up front based on a “national-average” subsidy set by the government. That “prospective” EGWP subsidy is then adjusted based on the demographics of the group members, etc.
The benefits of the EGWP, according to Steve Wogen, vice president of Medco Retiree Solutions, are that the value of the per-retiree subsidy to the employer may very well exceed the value of the RDS subsidy once RDS tax deductibility is lost in 2013. Moreover, in some cases, employers will lose that $600 subsidy completely in the 2013-2014 period because their per-retiree contributions will have reached a ceiling, causing them to fail the gross- and net-benefit tests employers have to meet to qualify for the RDS subsidy.

On the Plus Side …
To the extent that the loss of RDS tax deductibility means higher corporate costs, at least on its face, the availability of a new $5 billion federal Early Retiree Reinsurance Program means higher corporate revenue. The money ostensibly became available as of June 21, 2010. But the Department of Health and Human Services won’t actually be dispensing payments until companies submit claims, which won’t be for some time. Reinsurance reimbursements will be issued on a per-retiree basis, for 80 percent of the medical, surgical or drug costs between $15,000 and $90,000 in a given year. Companies can use those payments to lower health-insurance costs for employees or to reduce corporate subsidies paid to the early retirees for premiums, co-insurance and deductibility requirements.
While the funds look enticing, not all eligible companies will apply. “Companies will make a decision on whether to apply based on the number of early retirees they have. If they have a small number of pre-65 retirees, the claims submissions, audits and other requirements for the program may not make applying worth it,” PwC’s Thompson says. He adds, however, that companies that do apply, and are accepted into the program, would generally expect to receive somewhere between 30 percent and 35 percent of their expenditures back. How that money is distributed is up to the company; the HHS has apparently set no requirements one way or the other. However, the retirees’ essential benefits cannot be reduced.
The concern has been that the $5 billion won’t last until 2014, when the fund disappears. The Employee Benefit Research Institute threw gasoline on that fire with a report in June saying $2.5 billion of the available $5 billion would be exhausted in the first year of the program—that is, in the year beginning June 21, 2010. No money would be left by the time 2012 rolled around, EBRI hypothesized.
But Paul Fronstin, director of the EBRI health research and education program, admits his prognostication rests on assumptions that very well may not bear out. In calculating the drawdown of the $5 billion, assuming all companies that are eligible to apply would apply, they would be approved and they would be reimbursed at the maximum for each early retiree’s eligible costs.
“Is it reasonable to expect that?” says Fronstin. “Probably not.” He admits the HHS could cap per-individual payments, or company payments, or allot $1.25 billion in each of the four years Congress says money could be available. The HHS has not tipped its hand on any of that yet. The department has said that the $5 billion will be available on a first-come, first-served basis, and that has created anxieties in the corporate world, especially among companies that, for whatever reason, could be laggard applicants.
Companies have to meet a number of requirements in order for the HHS to approve an application. First and foremost, a company must have in place a cost-containment plan for high-cost chronic diseases. That could be a diabetes-management program, for example. The key language here is that the HHS expects employers to “take a reasonable approach when identifying such conditions and selecting programs and procedures to lower the cost of care.” The HHS will audit these measures, and companies will have to prove—and there is some wiggle room here—that their cost-containment measures “have generated or have the potential to generate savings,” the HHS literature reads.
Although the program started on June 21, companies with calendar-2010 plan years can use costs incurred by an employee between Jan. 1, 2010 to June 21, 2010 toward the $15,000 floor. But only costs incurred after June 21, 2010 are eligible for 80 percent reimbursement. Those eligible expenditures must be “net” any negotiated rebates from the health-insurance company or any drug rebates. Those rebates are often paid after the plan year. So the HHS will specify the form and manner of such disclosures in future guidance.

Drug Package Serialization

Contract Pharma magazine...June 2010

THE FDA’S PUBLICATION OF THE FINAL guidance on a standard
numerical identifier (SNI) for pharmaceutical packages
at the end of March awoke the drug industry from
its track and trace slumber. Manufacturers, distributors, pharmacies
and their vendors had been snoozing since September
2008, when California pushed back its e-Pedigree implementation
date, an action with significant national implications.
Instead of having to put unique serial numbers on packages
starting January 1, 2011, California, responding to pleas from
an ill-prepared drug industry, pushed back that e-Pedigree
deadline to January 1, 2015. One-half of all drug packages
arriving in the state on that date will have to have unique serial
numbers printed on them. The other half will have to follow
suit one year later.
“Everybody took a deep breath when the California Board of
Pharmacy delayed its e-Pedigree requirement,” agreed Ruby
Raley, director, healthcare solutions, Axway, a company that
provides the software to run the data repositories that hold
information about drug package pedigrees as an individual
package moves from the manufacturer to (perhaps) a repackager
to a wholesaler and on to the retail or hospital pharmacy.
Axway is involved in numerous track and trace pilots with comTHE FDA’S PUBLICATION OF THE FINAL guidance on a standard
numerical identifier (SNI) for pharmaceutical packages
at the end of March awoke the drug industry from
its track and trace slumber. Manufacturers, distributors, pharmacies
and their vendors had been snoozing since September
2008, when California pushed back its e-Pedigree implementation
date, an action with significant national implications.
Instead of having to put unique serial numbers on packages
starting January 1, 2011, California, responding to pleas from
an ill-prepared drug industry, pushed back that e-Pedigree
deadline to January 1, 2015. One-half of all drug packages
arriving in the state on that date will have to have unique serial
numbers printed on them. The other half will have to follow
suit one year later.
“Everybody took a deep breath when the California Board of
Pharmacy delayed its e-Pedigree requirement,” agreed Ruby
Raley, director, healthcare solutions, Axway, a company that
provides the software to run the data repositories that hold
information about drug package pedigrees as an individual
package moves from the manufacturer to (perhaps) a repackager
to a wholesaler and on to the retail or hospital pharmacy.
Axway is involved in numerous track and trace pilotswith companies
such as AstraZeneca, Johnson & Johnson, and Glaxo-
SmithKline. “Nothing happened last year,” she remarked.
Now, publication of an FDA-approved package serialization
scheme has given the pharmaceutical industry a reason to
restart its version of California Here I Come. Whereas the
California Board of Pharmacy provided no specifics on package
serialization, the FDAhas; manufacturers no longer have to
wait and guess what might be acceptable in the Golden State
come January 1, 2015, a date that, given the complexities of e-
Pedigree compliance, isn’t so far away.
James McCrory, vice president, products and technology at
rfXcel Corp., said, “The SNI guidance is a big deal in three
ways. It reflects new interest in federal government safety of
prescription drugs, provides endorsement of GS1, which is
pretty big since people have been hanging back waiting to see
what happens, and matches what leaders and distributors and
manufacturers are doing in their own pilots.” The SNI essentially
endorses the serialization standard adopted by the international
standards group GS1. GS1 has one serialization standard
for numbers printed in 2D barcodes (GT10) and a second
one for numbers printed on radio frequency identification
(RFID) tags (G10).
An agreed-upon format for an item-level SNI is only the first
step in a closed-loop e-Pedigree (often used synonymously
with track and trace) system such as the one adopted
by California, and likely to be endorsed by Congress. Other
follow-on elements include:• security framework for data exchange,
• record retention policies,
• SNIs at the pallet and case level,
• standardized chain-of-custody data to be tracked by
logistical units,
• standardized electronic data exchange format,
• data carriers with specific encoding formats identified,
• guidelines for reporting exceptions noted by supply chain
participants, and
• hierarchy of the SNIs expected in a shipment.
The FDA SNI provides a first-step level of certainty to manufacturers,
in terms of compliance with federal expectations,
and assures them that the U.S. is moving in the same basic
direction as other countries, many of whom are far more
advanced in their national track and trace requirements. That is
all true despite the limitations of the FDA guidance: it is a suggested
package identification formula. There is no federal
requirement that drug manufacturers follow it, much less put a
serial number on each item-level package. The limits of the FDA guidance, some of its nuances and its
failure to address the important issue of which technology
should be used to print the SNI have all combined, apparently,
to seal the lips of pharmaceutical manufacturers who just three
years ago were touting their track and trace efforts. Prominent
proselytizers such as Pfizer, Abbott and Purdue Pharma have
declined to comment on the FDA final guidance on an SNI. “I
ran this request up the flag pole and have learned that we are
unable to grant interviews on this topic,” explained Libby
Holman, spokeswoman for Purdue Pharma, which has been an
aggressive track and trace experimenter because of its manufacture
of OxyContin, a popular target of drug diverters.
Tom McPhillips, vice president, U.S. Trade Group, Pfizer
Inc., did not return an e-mail requesting comment. Mr.
McPhillips, in his comments to the FDA after the draft guidance
was published, asked the agency not to require manufacturers
to print the national drug code (NDC) as part of both the
machine readable and human readable SNI. The FDA rejected
that request.
Nonetheless, manufacturers support the specificity of the
SNI, and its agreement with GS1 standards, which gives them
more certainty than California’s prescription for a unique serial
number. The only guidance in the Golden State law, according
to Virginia Herold, executive officer of the California Board
of Pharmacy, is that the number be part of an “interoperable”prospective impact of counterfeit drugs on public health and
safety. The 2007 Heparin recall underlined the value of track
and trace (had it been deployed by the pharmaceutical chain)
with regard to drug recalls. Preventing thefts is an important
affiliate benefit, too. In March, thieves broke into an Eli Lilly
warehouse in Enfield, CT and stole $75 million worth of prescription
drugs. The crooks took pallets of the anti-cancer
drugs Gemzar and Alimta, the schizophrenia drug Zyprexa,
the antidepressant Cymbalta and other prescription medicines.
Theoretically, those stolen drugs could not come back into the
legal distribution chain if they had SNIs printed on 2D barcodes
or RFID tags on each package’s label.
It is clear that manufacturers are the big winners, relatively
speaking, from the final guidance. Scott Melville, senior vice
president for government affairs for the Healthcare
Distribution Management Association (HDMA), said, “The
FDA guidance provides manufacturers and the entire pharmaceutical
supply chain with needed. But while the HDMA has
welcomed the guidance, it clearly did not get everything it
wanted. For example, the HDMA had not wanted the FDA to
endorse an ‘alphanumeric’ as a serial number option.”
However, Anita Ducca, senior director, regulatory affairs at
HDMA, acknowledged the FDAwas responsive to her group’s
concerns. “We had a number of things we wanted the FDA to
change fromits draft guidance and for themost part the agency did that,” she states. “Our members are ready and willing to
work within the parameters of the guidance.”
Neither did hospitals and pharmacies get exactly what they
wanted. Some pharmacy groups had also pushed for a different
SNI. The American Society of Health System Pharmacists
(ASHP) had urged the FDAto modify the NDC number so that
its components included the RxNorm CUI as the drug/form/
dose component of the code. Justine Coffey, JD, LLM, director,
federal regulatory affairs, said, “Currently, ASHP members are
struggling with inconsistencies relating to the National Drug
Code (NDC) and its application to barcode point-of-care, clinical
information systems, and hospital financial systems.”
Axway’sMs. Raley noted that hospitals are particularly concerned
about avoiding medication errors, especially given the
passage of the health care reform bill, which mandates a number
of new payment methodologies based on the hospital
reducing errors of all kinds. She explained that many drugs
come in many formulations and doses, information which will
not be gleaned from the SNI endorsed by the FDA. Ms. Raley
pointed out that hospitals are particularly sensitive to this issue
given the publicity generated by the misadministration of
Heparin to twins born in November 2007 to the actor Dennis
Quaid and his wife.
Minor reservations aside, the HDMA’s Mr. Melville emphasized
that the final guidance allows his members and everyone
else to move forward. “The first step in an e-Pedigree system is
putting a number on the package,” he said. “The second step is
what you do with that number.”
For distributors a big issue is how the SNI is printed on the
item-level package label. The two options that have emerged
over the past half-decade are a 2D barcode or a radio frequency
identification (RFID) tag. Distributors have generally favored
RFID tagging, since they could check in packages to their warehouses
without a reader having to be “in the line of sight” with
the individual package. This saves them time, which is important
because any e-Pedigree requirement costs the distributor
money and earns the company no profit. But RFID tags are
expensive, and manufacturers have generally pushed for printing
serial numbers within 2D barcodes, not just because the
labels are cheaper, but because the packaging lines can run
faster than they could if RFID tags are printed on the package.
Moreover, RFID tags cannot be used on some products.
The final guidance on the SNI appears, however, to endorse
2D barcode serialization without actually saying so. “The FDA
landed on 2D,” stated Ms. Raley. “It is very clear they talked
about the total acceptability of 2D although they did not rule out RFID.” RFID does have some significant shortcomings when it
comes to package use, such as its deleterious effect on biologics.
Robert Celeste, director, healthcare, GS1 US, said that in fact
all the manufacturers who have done pilots, and are doing
them now, are putting serial numbers on packages via 2D barcodes.
Some are also putting RFID tags on the product label,
and on cartons and pallets. He believes it is possible that RFID
tags on item-level packages may have utility—if their per unit
price comes down — in certain applications, for example,
where products must be kept at certain temperatures.
The final guidance, however, is silent on serialization of cartons
and pallets, which the California Board of Pharmacy, just
to cite one interested party, had pushed for, and on which the
FDA had asked for comments.
While the pharmaceutical supply chain now knows that the
SNI is the baseline for complying with California’s e-Pedigree
requirement, everyone up and down the chain is pushing for
federal legislation that would make the California requirement,
or some close version of it, national law and might resolve outstanding
technology questions as well. The 2007 congressional
law that required the FDAto publish some sort of SNI within 30
months—it did not specify guidance versus more legal regulation
— also told the FDA to “develop standards and identify
and validate effective technologies for the purpose of securing
the drug supply chain against counterfeit, diverted, subpotent,
substandard, adulterated, misbranded, or expired drugs.” The
FDAreceived comments but has done nothing to impose a technology
solution, which various players in the drug distribution
chain would probably oppose, but which is clearly necessary.
In the 2007-2008 session of Congress, Reps. Steve Buyer (RIN)
and Jim Matheson (D-UT) introduced the Safeguarding
America’s Pharmaceuticals Act, which would have established
a federal e-Pedigree mandate. That law has not been reintroduced
in the current Congress, perhaps, suggested Ms. Herold
of California’s Board of Pharmacy, because members of the
House and Senate have been overwhelmed with healthcare
reform, financial reform and economic recovery. Also, the same
sense of urgency that disappeared in California in September
2008 disappeared from Congress at about the same time.
As the HDMA’sMr.Melville put it, “We want a uniformfederal
pedigree standard. We can’t have barriers to movement of
products.” He added that Reps. Buyer andMatheson, at a hearing
onMarch 10, stated they are working on a redrafted version
of their bill. “We are very hopeful it will be reintroduced soon,”
said Mr. Melville. “We expect it to look like the California
implementation schedule.”

Performance Metrics

Energy Biz Magazine...May-June 2010

FERC Takes Stock

by Stephen Barlas

Retail, municipal and industrial consumers of electricity are pressing the Federal Energy Regulatory Commission (FERC) to impose new "performance metric" reporting requirements on Regional Transmission Organizations (RTOs), the big grid management organizations who wholesale energy to about two-thirds of the users in the United States. Ultimately, the aim of groups such as the Electricity Consumers Resource Council (ELCON) and American Public Power Association (APPA) is to get more information on electric generator costs and pricing to prove their suspicion that RTO rates are unreasonably high.
A rulemaking is expected this year as the result of FERC's issued on February 3 of 14 draft metrics in three categories: reliability, market and organization. One market performance metric, for example, would be market pricing, where the RTOs and ISOs would have to report three things, including load-weighted locational marginal price. Publication of those draft metrics, which are only a first cut, was FERC's response to a Government Accountability Office (GAO) report in 2008 whose conclusion stated: "It has been over 10 years since major federal electricity restructuring was introduced and some of the first RTOs were developed to facilitate it, yet there is little agreement about whether restructuring and RTOs have been good for consumers, how they have affected electricity prices, and whether they have produced the benefits FERC envisioned."
Barbara Connors, a FERC spokeswoman, says the commission is reviewing the comments it received on its draft metrics and is determining its next step. The GAO report was requested by Sens. Joseph Lieberman (Ind.-CT) and Susan Collins (R-ME). They are the chairman and top GOPer on the Senate Committee on Homeland Security and Governmental Affairs. "They are watching what FERC is doing," says one consumer lobbyist.
The RTOs have been in operation since 1999 when the FERC issued Order 2000 to encourage the formation of independent entities to manage regional networks of electric transmission lines. FERC estimated the benefits of RTOs would be at least $2.4 billion annually, due to cost savings from the improved operational efficiency of generators, easier access to transmission service, and other factors. The Independent System Operators (ISOs) were formed prior to Order 2000, and are very similar to RTOs except they cover single states; but FERC and everyone else uses the terms RTO to encompass ISOs.
FERC has approved six RTOs: ISO New England, Midwest ISO, PJM Interconnection, Southwest Power Pool, California ISO and New York ISO. The Electric Reliability Council of Texas, an Independent System Operator, is primarily regulated by the Public Utility Commission of Texas.
The draft metrics FERC released on February 3 became the major controversy at a February 4 technical conference called to examine a second RTO issue related to organizational governance. At that meeting, John Anderson, president of ELCON, complained that the metrics FERC had suggested the day before had no metric devoted to electric generators. "Our organizations strongly believe that measurement of the revenues and production costs of the generators selling power into RTO markets is highly relevant to the questions the GAO posed,” Anderson said.
But FERC Chairman Jon Wellinghoff responded, “Now my colleagues may differ with me, but I will tell you today personally that I don’t think that metric is one that I’m going to be advocating for unless you can somehow compellingly convince me that it is, and right now, today, I’m not convinced.”
Joe Nipper, senior vice president of the APPA, says his group was "distressed" by Wellinghoff's comments. Consumers want generator metrics in order to prove their suspicion, buttressed by previous though inconclusive studies, that electric rates inside RTOs are higher than outside RTOs. But given Wellinghoff's stated position and the fact that Commissioners Moeller and Spitzer are not considered APPA allies, the odds of FERC mandating generator-specific metrics seem low.
Tara Ormond, director of regulatory affairs for the Electric Power Supply Association, which represents most of the large electric generators and transmission companies participating in RTOs, says, "There is a huge divergence between APPA, ELCON and us. They want sweeping changes." She adds that some of the metrics FERC proposed are good, some might be detrimental. More broadly, she states, "Consumers are better served by RTOs given that there is little transparency on rates in bilateral markets."

Under 26 Coverage?

Treasury & Risk Magazine...May 2010

Companies struggle with ambiguity as they figure out how to implement the healthcare reform law's first provisions.


By

* Stephen Barlas



Companies putting together 2011 health benefits—and many have already begun the process—are in the uncomfortable position of having to make big-dollar decisions before some of the blurry language in the healthcare reform bill is clarified. The first complicated requirements set by the Patient Protection and Affordable Care Act go into effect for plan years starting after Sept. 23. “People are not appreciating how much of this law we won’t know for a long time,” says Susan Relland of the law firm Miller & Chevalier, who’s a board member at the American Benefits Council.

Probably the most significant provision says employees’ children under 26 who are not enrolled in another group plan must be allowed to enroll in company plans in the next plan year, which for most companies probably starts Jan. 1, 2011. Beginning in 2014, plans must cover children up to age 26 whether or not they have access to another plan. Companies are considering whether to face the administrative hassle of determining whether adult children have access to other plans or just let all employees’ children up to age 26 participate starting with the next plan year, explains Relland.

“Inclusion of adult children up to age 26 has been the No. 1 question raised by our clients,” says Randall Abbott, senior consultant at Towers Watson. However, he doubts companies will decide to cover all adult children. One scenario, Abbott says, is that a company could set up a separate rate category for adult children and levy a different charge.

Further complicating the issue, says Gretchen Young, senior vice president for health policy at the ERISA Industry Committee (ERIC), is uncertainty about whether the new law requires adult offspring to be dependents for tax purposes to qualify for the health coverage.

Another major provision outlaws lifetime and annual limits for essential benefits in plan years starting after Sept. 23. The Department of Health and Human Services will define which benefits are essential. Non-essential benefits might include chiropractic, occupational therapy or fertility services. “If employers have to eliminate annual limits for those ancillary benefits, they may choose to simply eliminate the coverage completely,” explains Relland.

“This is a huge issue in terms of cost control,” says Young. ERIC’s biggest concern is how HHS defines the term “grandfathered,” she says, since grandfathered plans will not have to comply with the law’s requirements that plans immediately eliminate co-pays for preventive care, ditch separate plans for higher-paid executives and other provisions.

Natural Gas Companies Wary of EPA involvement in Fracturing Regulation

Pipeline & Gas Journal...March 2010


The Mobil/Exxon purchase of XTO Energy has sparked new congressional interest in the environmental safety of horizontal shale gas drilling, a concern also lately exhibited by the Environmental Protection Agency (EPA) which has urged New York State to expand its analysis of the impact of shale gas drilling in the Marcellus area. A House energy & environment subcommittee held hearings on the XTO saloe on January 20 where the heads of both companies--Exxon Mobil and XTO--said they had a problem with a new piece of congressional legislation requiring natural gas producers to disclose the chemicals they use when fracturing gas deposits in shale. Both men said they had no problem making the disclosure; however, they would oppose including that disclosure requirement in the Safe Drinking Water Act, a law enforced by the EPA.
That is what the Fracturing Responsibility and Awareness of Chemicals Act (FRAC ACT) would do. It was introduced in both the House and Senate last summer. Both Rex Tillerson, Chairman and CEO, ExxonMobil Corporation and Bob R. Simpson, Chairman of the Board and Founder, XTO Energy Inc. opposed the bill. Tillerson explained he opposed EPA's involvement because "the devil is always in the details." Pressed by Rep. Diana DeGette (D-CO), one of the key sponsors, on what he meant by that, Tillerson expanded on his original statement by saying, "It means I don't know how the EPA is going to enact or implement the regulation that you are promoting in your bill." Neither the House nor the Senate has held hearings on the FRAC Act much less has a vote been taken.
The back-and-forth between DeGette and Tillerson is important because Exxon-Mobil insisted that a clause be put in the contract allowing ExxonMobil to cancel the deal if Congress passes a law making hydraulic fracturing "illegal or commercially impracticable." Neither Tillerson nor Simpson said the DeGette bill would do that; but Tillerson clearly implied that EPA regulatory involvement in hydraulic fracturing could be a problem.
Any congressional legislation seen as hamstringing new shale gas development would be a crimp in some pipeline expansions, undoubtedly. For example, Texas Eastern has announced two separate projects in anticipation of bountiful Marcellus shale gas. One expansion project could handle 300 million cubic feet of gas a day, the second 500 million cubic feet. According to Spectra Energy Corp. (which owns Texas Eastern) spokeswoman Wendy Olson, Marcellus gas would account for 80 percent of the first project's contracts and "a significant amount" in the second instance.
The production of Marcellus gas in New York State is already a red-hot political issue there.
There are only 15 shale gas wells in New York State, all of them vertical, according to Yancey Roy, spokesman for the NY Department of Environmental Conservation. That is what makes New York's draft Supplemental Generic Environmental Impact Statement (dSGEIS) for horizontal shale gas fracturing so important. It was published last September 30. The comment period closed at the end of December. Roy says the department is going through the 13,000 comments it received, some of them "ganged" signatures on single pieces of correspondence. Once the document becomes final, natural gas companies will be able to drill horizontally in Marcellus, and for the first time. The dSGEIS proposes first-time permitting conditions for horizontal hydraulic fracturing, including disclosure of liquids used.
New York City has already weighed in against drilling in sections of Marcellus containing drinking water sources for the city. Steven Lawitts, the city's top environmental official, said hydraulic fracturing represented “unacceptable threats to the unfiltered fresh water supply of 9 million New Yorkers.” Roy explains that New York City water sources account for a small portion of the Marcellus area.
Chesapeake Energy, a major producer in New York but not yet in the shale game there, complained that the dSGEIS's proposed regulatory requirements and mitigation measures "are both costly and, in some cases, unnecessarily onerous...and have left New York with relatively few producers willing to devote scarce capital to New York." However, the comments went on to say "Chesapeake is prepared to meet the extraordinarily high bar proposed in the dSGEIS."

Feds Encourage Annuities

Human Resource Executive online...March 3, 2010

The federal government's ostensible plan to begin selling annuities to both corporations and their employees through company-sponsored retirement plans has raised many concerns in the HR community.

By Stephen Barlas

The federal government seems ready to start "selling" annuity policies to American companies and their employees. The Departments of Labor and Treasury have asked for industry comment in an under-noticed "request for information" issued on Feb. 2 on how they can encourage employers to offer annuities to workers mostly with defined-contribution pension plans.

The concern -- especially after the 2008 market slide -- is that retirees are leaving the workforce with pensions that will be depleted before the end of their lives. Annuities, which both employers and employees have long turned their noses up at, are seen as a solution.

The RFI has produced some consternation in the business community, which is worried that the Obama administration might issue some sort of mandate, or de facto mandate, with regard to the inclusion of annuities in pension offerings. Kathryn Ricard, vice president for retirement policy at the ERISA Industry Committee, predicts a lot of businesses and trade association will respond to the RFI. Besides opposing any mandates, employers will argue that any new latitude for corporate "encouragement" of annuities should be done via clear rules, particularly in the area of company liability.

Besides the mandate and liability issues, employers will be worried about any additional costs they might face from incorporating annuities into pension offerings. Jody Strakosch, national director for MetLife's retirement products group, acknowledges that there may be corporate costs associated with establishingrecord-keeping platforms whereby corporate 401(k) managers such as Hewitt, Mercer and Vanguard increase their charges to reflect the additional cost of keeping up with the annuity portion of an individual's defined contribution plan.

But Strakosch doesn't think those costs would be substantial.

The Treasury, through the Internal Revenue Service, and Labor, through the Employee Benefits Security Administration, could conceivably change federal rules on either taxation and or ERISA without congressional action.

Modifications could be as simple as changing EBSA's Interpretative Bulletin 96-1, which details four general "safe harbors," pension-related areas that companies can educate employees about without straying into "investment advice" for which liability would be a concern. The Federal Register notice the two departments issued in conjunction with the RFI alluded to two ERISA Advisory Council reports issued in the past few years that endorsed the updating and expanding of 96-1 to respond to innovations in the financial marketplace as well as the baby boomer generation's move into the de-cumulation phase of their pensions.

Both Phyllis Borzi, assistant secretary at the EBSA, and Mark Iwry, deputy assistant Treasury secretary for retirement and health policy, have spoken publicly about wanting to encourage greater use of lifetime payments as part of pension plans.

"They have both told us that bigger changes will require legislation, but that this is the beginning of the process," says Ricard. "The chances of them moving forward on this are very high. The fact [that] you saw them working together on this detailed RFI -- which contained 39 questions -- this early in their tenure showed they are pretty invested in this."

Both Ricard and Robyn Credico, director of the plan-management group in North America for Towers Watson, say companies have included annuities in pension-plan offerings in the past, but that take-up has been minimal, and for a number of reasons. Those include the often-confusing nature of the policies, their cost, difficulty of comparing products and concern that a policy holder might die soon after buying an annuity, and the more recent concern, buoyed by the AIG headlines, that insurance companies could fold, making any annuities worthless.

Beyond those concerns, adds Credico, companies that listed annuities in their plan documents either didn't know how to deliver them or else had a hard time finding a provider. "Now we all decide that it is a good idea to put annuities back in pension plans," she says, chuckling. "It is like fashion, where the lengths of hemlines change."

Credico does note, however, that insurance companies have reworked their annuity offerings to respond to some employer/employee concerns. For example, some policies offer death benefits. In fact, MetLife and Prudential, among the major annuity providers to employers, have -- over the past half-decade -- offered a number of new annuity products with various wrinkles.

Strakosch points out that, when 401(k) plans became popular a few decades ago, some plan participants were confused about the differences in equity classes and how mutual funds work. She says the confusion about annuities is at that same point, and will be erased as companies and industries do a better job of educating and communicating with employees.

Comments on the RFI are due May 3, 2010; see:
http://www.regulations.gov/search/Regs/home.html#documentDetail?R=0900006480a898af


March 3, 2010

Weighing the A/C facts

Aftermarket Business/February 2010

The Environmental Protection Agency (EPA) seems ready to inhibit retail sales of the soon-to-be-approved air-conditioning refrigerant expected to replace R-134a. The agency is about to publish a significant new use rule (SNUR) regarding HFO1234yf (R-1234), the R-134a replacement. The SNUR is half of a two-part regulatory approval process.

The other half is EPA approval of R-1234 within its significant new alternatives policy (SNAP) program. The SNAP proposed rule implied that the SNUR would restrict use of R-1234 by do-it-yourselfers (DIYers).

At the end of 2009, the EPA extended the comment period on the SNAP proposed rule to Feb. 1, 2010 because of a request from the Automotive Refrigerant Products Institute and the Automotive Aftermarket Industry Association (AAIA). Michael Conlon, a Washington attorney who represents the groups, asked for the delay because the aftermarket industry wants to be able to review the SNUR before commenting on SNAP requirements. At the time of publication, Conlon expected the SNUR to come out soon in the form of a direct final rule, meaning any DIYer restrictions would be a done deal, unless opponents raised their voices. “Procedurally, if someone objects to a direct final rule, EPA has to withdraw it and start over,” Conlon explains.

Margaret Sheppard, the EPA official heading the SNUR, did not respond to a request on that announcement’s timeline.

We already reported on the proposed SNAP, approving R-1234 as the “green” successor to R-134a, the current global auto air-conditioning refrigerant of choice, which is being phased out in Europe and is likely to disappear in the U.S. soon, in part because of the EPA’s vehicle emissions rulemaking, which aims to improve mileage and decrease GHG emissions from vehicle tailpipes.

SNAP and SNUR regulatory proceedings are “inextricably intertwined,” according to a letter sent to the EPA by the Automotive Refrigerant Products Institute (ARPI) and AAIA, because the SNAP proposed rule said: “Consumer exposure from filling, servicing or maintaining MVAC systems without professional training and the use of section CAA Section 609 certified equipment may cause serious health effects.” In their letter, the two trade groups argued that the EPA cannot regulate a new refrigerant under its new chemical program unless it finds that Section 609’s refrigerant regulations (within SNAP) are insufficient to the task. The stratospheric protection division, which has authority over Section 609, has done numerous previous rulemakings on alternative vehicle refrigerants, and has the technical expertise to decide whether R-1234 requires limitations on “do-it-yourselfer” (DIYer) use.

The EPA concern is that consumers who buy R-1234 and then work with their vehicle’s air-conditioning system might be overcome by the chemical’s toxicity, or its flammability. But DIYers would only be using a couple of cans to service their own auto. Moreover, a study done for the Society of Automotive Engineers by Gradient Corporation found that there was little if any risk of an explosion under the hood caused by R-1234. If there were flammability concerns, it would be with large quantities stored in a warehouse, or in a retailer’s backroom; but even that threat would be remote. EPA concern about toxicity seems a stretch, too, as an argument it leans on is that there is a danger when a refrigerant can is held upside down for a period, but not when it is right-side up.

Aside from DIYer use restrictions, which could be included in the upcoming SNUR, there is continuing concern with the proposed conditions of use in the SNAP proposal, which includes requiring automobile manufacturers to make changes to the design of air-conditioning systems to mitigate any potential leakages of R-1234. If those steps are finalized, that would mean that all the cars on the road today using R-134a COULD NOT be retrofitted to use R-1234 for reasons having to do with engineering complexity.

U.S. to work with China on EV development

Automotive Engineering/January 2010

The U.S.-China electric-vehicles initiative announced while President Obama was in China in November caught some in the American vehicle industry by surprise. The initiative covers four areas, initially thought to include standards, with the details of exactly what is going to be done in each still to be worked out. Extensive work already has been done in some of those areas within the U.S. auto community, and without Chinese participation.

There were mixed reactions to the announcement. One spokesman for a U.S. company says there was little "substance or thought behind it." He views the initiative as a public relations gesture.

But Brian Wynne, President of the Electric Drive Transportation Association, is very positive. He says the four areas were developed at a forum in Beijing in September organized by the U.S. Department of Energy and its Chinese counterpart, the China Ministry of Science and Technology. There were about 50 U.S. participants at that meeting.

"Listening to the Chinese talk was an enlightening experience," said Wynne. "Their industry is facing the same challenges from an economic and technical standpoint as our industry. If we can help each other, we will get there faster."

To the extent that there was some confusion or uncertainty about the announcement, it may have been because of some unclear verbiage in the White House press release, which mentioned as the four areas of cooperation joint standards, joint demonstrations, joint public awareness and engagement, and a joint technical roadmap.

Phyllis Yoshida, Deputy Assistant Secretary for International Energy Cooperation at the DOE, is intimately familiar with the initiative. She said the White House statement on the four areas should not have mentioned standards. In an interview with AEI, she emphasized there was no thought of forcing SAE International or any other EV standards group to go back and get Chinese input into nearly completed standards.

"Hopefully, we will get the Chinese to adopt the SAE standards," she said.

Instead of mentioning standards, the White House statement should have listed the testing of standards as one of the four areas, said Yoshida, adding that the U.S. is doing something similar with European countries and hybrids at Argonne National Laboratory.

Jack Pokrzywa, SAE Director of Ground Vehicle Standards at SAE, said SAE technical standards committees are on the cusp of delivering about 20 EV-related standards in the near term. He pointed out that the standards have been vetted by experts from countries around the globe.

SAE standards such as J2836/1 through /5 “Use Cases for Communication between Plug-in Vehicles and the Utility Grid"; SAE J2847/1 through /5 “Communication between Plug-in Vehicles and the Utility Grid”; and SAE J1772 “SAE Electric Vehicle Conductive Charge Coupler” provide foundation to the rest of the standards suite. "SAE and their partners—the Chinese Automotive Technology and Research Center (CATARC)—have a good working relationship focused on standards development, among other initiatives," Pokrzywa added.

Yoshida explained that the next step in implementation of the U.S.-China EV initiative is to sit down and talk again with the Chinese about specifics. "There has been some activity," she said. "We are already talking to them about cities in both countries which could participate in demonstrations."

Of course, the Big Three U.S. automakers are already deep into EV demonstrations funded in 2008 by the George W. Bush DOE. This past August, Ford Motor Co. announced it was moving forward with its demonstration project involving Escape plug-in hybrids using an intelligent vehicle-to-grid communications and control system. This new technology—which builds on Ford’s advancements such as SYNC, SmartGauge with EcoGuide, and Ford Work Solutions—allows the vehicle operator to program when to recharge the vehicle, for how long, and at what utility pricing rate.

Any joint U.S.-China EV demonstrations may be worth more to smaller, entrepreneurial U.S. EV start-ups such as Coda, Tesla, and Fisker, who have a much smaller presence, if they have one at all, in the booming Chinese market, as opposed to General Motors, Ford, and Chrysler, who have marketing arms, joint R&D operations, and other contractual links there.

Mark Duvall, Director of Electric Transportation, Electric Power Research Institute, which is a participant in two of the three DOE-funded EV demonstrations, explained that the Chinese and Americans have taken a different approach to vehicle electrification. Duvall was in Beijing for the September forum. The Chinese have taken a bottom-up approach, starting with scooters but have not taken a major step into manufacturing full function EVs, which is where the Big Three and even Tessler, Coda, and the other smaller companies have begun. So Duvall sees an opening for the smaller companies in China.

"Who is to say Tesla, Coda, Fisker, or someone else can't have a showroom in downtown Beijing," Duvall said.