A three-year-old internal review over emissions certifications is likely to result in an EPA fine for Cummins Inc.

Cummins officials briefly discussed the issue during the company’s recent conference call with investor analysts after the investigation was discussed in the company’s filings with the federal Securities and Exchange Commission. According to the SEC filing, the issue began with a review of emission standards compliance for model year 2019 RAM 2500 and 3500 trucks. Regulators then expanded their review to the 2013-18 Ram 2500 and 3500 as well as Nissan Titan engines for 2016-19.

“There is one last matter I would like to bring to your attention,” said Mark Smith, Cummins chief financial officer. “You will see in our Form 10-Q to be filed later today that we have updated our risk factor disclosure related to our ongoing discussions with the EPA and CARB on their review of our emission systems, most notably our pickup truck applications. We understand that these agencies are likely to propose resolving this matter by requesting in the relatively near future that we agree to one or more consent decrees and pay certain civil penalties. We are not able to estimate the amount of these penalties today, but we anticipate that the amount is likely to be material. We look forward to providing additional information on this topic when we reach a resolution.”

EPA regulations apply to virtually every vehicle, engine and type of transportation fuel sold in the United States. The EPA uses a variety of testing and reporting programs to monitor compliance with emissions regulations. The programs may apply to vehicles and engines before they are produced (pre-production), while they are in production and after they are in customer service (post-production). The Clean Air Act requires that all engines and vehicles be covered by a certificate of conformity before they can enter into commerce. A certificate of conformity demonstrates that the respective engine or vehicle conforms to all of the applicable emission requirements.

The certificate represents engines and vehicles covered by a specific engine family or, in the case of light-duty vehicles, a specific test group for each manufacturer. At the same time, the California Air Resources Board (CARB) evaluates the emission control systems of new vehicles and engines, and evaporative emission control systems of engine-equipped devices. When CARB finds that the vehicle/engine/evaporative emission control system complies with all of California’s emission standards and emissions-related requirements, the vehicle/engine/evaporative emission control system may be produced for California sale. Meeting California’s standards is important for vehicle makers because California’s emissions standards are so stringent.

In 2018, Cummins recalled nearly 500,000 vehicles from the roads across the United States to correct an emissions control device that was releasing pollutants instead of a faulty engine system in trucks produced from 2010 through 2015. A catalytic reduction system to control nitrogen oxide was defective and degrading a few years after installation rather than lasting the full useful life of the vehicle.

The 2018 issue did not, according to the EPA, involve a defeat device like the type used to mask pollution levels during emissions tests as Volkswagen had done. Volkswagen’s use of defeat devices resulted in a nearly $30 billion in fines and additional costs to the company. According to Cummins’ SEC filing this week, however, EPA and CARB regulators raised concerns that certain aspects of Cummins’ emissions systems may reduce the effectiveness of emissions control systems and thereby act as defeat devices that counteract emissions controls.

Cummins officials said in their most recent SEC filing they CARB and EPA regulators have now raised concerns regarding the completeness of Cummins’ disclosures in emissions certification applications for RAM 2500 and 3500 trucks for 2013 through 2023. That prompted Cummins to reach out to Environmental and Climate Change Canada regarding similar issues relating to those platforms. In connection with these and other ongoing discussions with the EPA and CARB, Cummins is developing a new software calibration and will recall model year 2013 through 2018 RAM 2500 and 3500 trucks.

“I do want to start by saying that Cummins is fully committed to emissions compliance,” said Jennifer Rumsey, Cummins president and chief executive officer. “We have been and we’ll continue to cooperate with agencies all along and work through this matter to the best of our abilities. And our updated disclosure today is consistent with what we’ve done since we first announced our voluntary internal review in 2019 of disclosing transparently throughout this process. So, as Mark said, we think that we are nearing the end. It’s premature to speculate though exact timing or exact amount at this point. We feel like the business is well positioned in a strong financial position and continuing to generate strong returns.”