Other Developments:
EVs: Biden Admin Finalizes Fuel Efficiency Rules Through 2026
- On Friday, April 1, the U.S. Department of Transportation issued a final rule tightening fuel efficiency standards for cars and light trucks, dovetailing with a related rule issued by EPA back in December.
- The standards are perhaps the leading policy driver pushing automakers towards electrification of the U.S. fleet, with the $7,500 EV tax credit and subsidies for EV charging infrastructure notable but more incremental.
- Automakers are all-in on the switch to EVs, and we don’t have much doubt about the policy direction at this point. However, investors should expect speed bumps for the EV transition, which will take decades to play out.
Some climate policy advocates are criticizing the new rules as not going far enough, although they are more stringent than what was proposed last year. Automakers will be required to increase average fuel economy by 8% each year through 2026, which is, generally speaking, beyond the capacity of internal combustion engines in a normal car under current technology.
More to the point, however, is that the industry has moved on. Last year GM announced they would be all-EV by 2035; Stellantis says Chrysler will be all-EV by 2028; and other OEMs are similarly positioned. Given the retooling and retraining requirements, the inertia in the direction of EVs may be irrevocable, regardless if the U.S. government were to reverse course yet again on the policy question of fuel efficiency standards.
The bigger questions have to do with the fundamental economics of the auto industry. Will consumer uptake match the new options automakers want to give them? Will EVs perform at mass scale for more downscale consumers? In cold weather? What will the power demand be like? Where will the industry source the rare earths for battery production?
All of these questions are solvable, but none without serious work over a period of years. In particular, if materials sourcing for EVs spikes costs of the cars themselves, it could slow consumer uptake and distort the economics of the transition.
Related to this: We expect to see something of a political inversion as the EV transition picks up steam, as early as the mid-2020s or possibly in the 2030s. In the U.S., it’s been mostly Democrats that have championed supports for EVs, while Republicans have been skeptical. As we start to shift towards EVs being a dominant form of road transportation, it will likely be the Republicans championing additional mining and power generation to support EVs, while Democrats may express greater concern about the environmental impacts of the battery lifecycle chain.
Franchising/Gig Economy Rules Face a Tough Road
- On March 30, in a surprise, the U.S. Senate rejected a nominee for a key position at the U.S. Department of Labor. At issue was a long-running battle over the gig economy and franchising.
- Headlines in this area tend to focus on Uber and Lyft, but we see more specific relevance to many other businesses affected by contracting and franchising, including contract drivers in the package delivery and trucking space (AMZN, FDX, UPS).
- The Biden administration is not going to abandon efforts to curtail what it sees as abuses of independent contracting and franchising. However, the franchise industry may see a slight boost in outlook, with courts more likely than not to ultimately side with franchisors and independent contractors.
During the Obama administration, Dr. David Weil was confirmed by the U.S. Senate to be the Administrator of the Wage & Hour Division of USDOL, a role he would hold from 2014-2017. During that time, he was a key champion of efforts to rethink franchise law and the status of independent contractors. For the past year, the Biden administration has been trying to get Weil confirmed into the same role.
Weil is the author of The Fissured Workplace, which essentially argues that franchising is generally being abused by large companies. The theory is that, by franchising out to small businesses, the company illegitimately avoids government regulations and unfairly makes it harder to unionize.
Similarly, Weil and others argue that the independent contractor model is being abused by companies to label workers as contractors when they really should be categorized as employees.
The policy vector of Obama-era labor agency leadership, including both USDOL and the National Labor Relations Board (NLRB), has been to tighten standards for being considered an independent contractor or a franchisee. The term of art here is that franchisors in most cases should be considered “joint employers” with a given franchisee for purposes of being held liable for benefits and unionization activities, with a much higher bar for considering franchisees as independent businesses.
The franchise industry has argued that the predictable effect of such a change would be to gut franchising entirely. If large companies are forced to integrate liability for every franchisee employee, they argue, it would lead to the large companies eventually removing any franchisee discretion. This would reduce opportunities for small business entrepreneurs while, they further argue, damaging the overall economy by making it less nimble and more bureaucratic.
In 2014, fears over this potentially radical change were less on the radar screen. Democrats held a 55-45 edge in the Senate on the day Weil was confirmed by a 51-42 vote. Last week, with the Senate split 50-50, Weil’s nomination was effectively defeated on a procedural vote where Sens. Joe Manchin (D-WV), Kyrsten Sinema (D-AZ), and Mark Kelly (D-AZ) defected to join all 50 Republicans on a 53-47 vote.
Next steps. We expect the Biden DOL will not miss a beat in continuing its efforts on regulations on gig economy, franchising, and independent contractors. They argue that these changes are critical for workers to gain more protections across a variety of health, safety, and labor regulatory fronts. However, the real fight over these rules will be in the courts, and it will likely take several years to resolve. Interested parties should also watch closely for the Supreme Court’s ruling in West Virginia v EPA, which could have an impact on how much deference regulatory agencies enjoy at the court: what’s known as Chevron deference. Should Chevron be reduced or eliminated, it could suggest an even tougher road for regulators trying to change independent contractor rules.
Historical note. In a coincidence, and for the trivia-lovers among our readers, the last time a nominee failed on the floor of the Senate was also by a 53-47 vote. In 1989, President George H.W. Bush tapped Sen. John Tower (R-TX) to be Secretary of Defense, but allegations of alcohol abuse sank his nomination. Technically, since the vote on March 30 was a cloture vote and not an actual vote on Weil’s nomination, Tower remains the most recent presidential nominee to be rejected outright by the Senate. Following the Tower defeat, Bush would go on to pick Dick Cheney, then a congressman from Wyoming, to be Defense Secretary.
Biden Budget Messages on Climate, Equity, and Supply Chain
- President Biden’s budget for FY23 largely mirrors new funding approved as part of the infrastructure bill, while focusing on ports, climate policy, safety (including automation), and equity.
- The budget released by the White House each year typically gets altered substantially by Congress according to its own priorities, but it’s worth a look to see key themes and trends.
- We expect the administration’s climate agenda to focus on transit and passenger rail as well as the EV transition. The equity agenda will involve a renewed focus on urban transit affecting minority and historically underserved areas, although rural funding will also receive a boost. Permitting reform, or the lack of it, will continue to be a factor in infrastructure development, but we’re hopeful the administration will make this a focus as well.
On March 28, President Biden requested $142.1 billion for the U.S. Department of Transportation as part of his Fiscal Year 2023 budget. Any given administration’s proposed budget often bears little resemblance to the funding ultimately appropriated by Congress. However, the overall amount Biden is requesting for FY23 is similar to the enacted amount for DOT following passage of the FY22 appropriations earlier this year, which itself follows the enactment last November of the Infrastructure Investment & Jobs Act (IIJA), also known as the bipartisan infrastructure bill.
The FY23 request highlights that $36.8 billion of the DOT total derives from IIJA, building on a similarly-sized IIJA tranche appropriated for FY22. Congress is beginning work now on FY23 appropriations, but is unlikely to approve any FY23 appropriations by the fiscal year’s start on October 1. Still, the DOT request serves as a messaging vehicle for Biden’s priorities for DOT on supply chain, climate policy, safety, and equity.
On strengthening the supply chain, the administration highlights its request for $680 million for grants to improve port infrastructure and facilities, which includes $230 million for the Port Infrastructure Development Program and $450 million in advanced appropriations derived from IIJA. Biden’s request mentions “$23.6 billion for the Federal Aviation Administration to modernize facilities and operations,” but that figure represents the FAA’s entire budget request. Airport infrastructure grants account for $3 billion of that total, the same amount authorized by IIJA and recently enacted for FY22.
The administration casts their combined $39 billion requests for rail-regulating agencies as mitigating climate change, under the heading of “low and no-emissions transportation,” and also boasts of the first-ever federal investment – $100 million – in a long-sought, new Hudson River commuter rail tunnel as part of the New York City region’s Gateway Program. However, the more forward-looking piece of the request relating to climate policy may be Biden’s $1 billion request for the National Electric Vehicle Infrastructure Formula Program and $400 million for the Charging and Fueling Infrastructure Grants Program.
These efforts seek to create a nationwide network of EV charging stations, especially in rural and underserved areas. The administration also requests $27.5 million to establish the next phase of CAFE standards for light vehicles and for medium- and heavy-duty trucks.
The chief impacts in the Biden budget request for automation in vehicles fall under the “safety” category. The administration is requesting $49.8 million for NHTSA’s Vehicle Safety Research, including $18.1 million for Advanced Driver Assistance Systems, $3.1 million for Heavy Vehicle Safety Technologies Programs (covering passenger vehicles, large trucks, and buses), and $11.8 million for Automated Driving Systems research surrounding highly and fully automated vehicles. The Biden request for FMCSA specifically also includes a $7.5 million plus up for operations and $10 million for grants, signaling renewed interest in safety enforcement for trucking.
The administration styles a portion of its request for infrastructure as advancing “equity” – such as $4 billion total for the Rebuilding American Infrastructure with Sustainability and Equity (RAISE) discretionary grants and the new National Infrastructure Project Assistance (Mega) Grant program, which includes $2.5 billion in advanced appropriations under IIJA. Additionally, Biden’s request highlights equity-promoting requests for $110.7 million for “Thriving Communities” (climate-friendly infrastructure for disadvantaged areas) and $350 million for the Rural Surface Transportation Grant Program.
DOT’s 2022-2026 Strategic Plan, also released March 28, dovetails with the budget request’s key themes, laying out strategic goals under categories of Safety, Economic Strength and Global Competitiveness, Equity, Climate and Sustainability, Transformation, and Organizational Excellence. While the document lacks an overarching category relating to “supply chains,” DOT appears keen to tie that issue to goals relating to competitiveness, technological innovation, and climate resilience.
