LOS ANGELES -- A pending rule change by the California Air Resources Board could limit Tesla Motors' ability to earn money by selling zero-emissions credits -- a key factor in the company's first-quarter profit.
The agency is evaluating whether to eliminate the "fast-refueling" rule that allows electric vehicles with quick-swap batteries to gain bonus credits under CARB's regulations. Those zero-emissions credits are worth big money on the open market, bought by other automakers that can't comply with clean-air regulations because of the nature of their vehicle fleets.
Tesla's first-quarter profit -- the first in the company's history and key to the automaker's subsequent stock-price run-up -- resulted from being able to sell its ZEV credits.
Tesla's $11.2 million profit hinged on $67.9 million in ZEV credits, and "other regulatory credits" totaling $17.1 million. From operations, Tesla lost $73.8 million, compared with a first-quarter 2012 loss of $89.9 million.
The company declined to make an executive available to comment. But during the first-quarter earnings call, Tesla CEO Elon Musk said the emissions credits would decline during the year as more vehicles are sold overseas. He pledged that by the fourth quarter Tesla would be profitable purely on automotive operations.
CARB began discussions in May to eliminate the battery-swap rule. A decision should be made at the board's October meeting, said Analisa Bevan, chief of CARB's of sustainable transportation technology branch.
Earning the top level of ZEV credits requires an EV to achieve 300 miles of city-only range and refill to 95 percent capacity in 15 minutes. Tesla's 85kW Model S falls short of that requirement with its Supercharger plug-in network, but attains the top credit level by changing batteries.
"I won't presuppose what the outcomes are going to be," Bevan said in an interview. "We proposed eliminating the definition, but we have talked about a lot of possibilities in the interim."
Tesla's emissions credits would not be nullified retroactively, Bevan said. But should Tesla lose its bonus for quick-change batteries, the credits-per-car-sold would be worth substantially less.
In its first-quarter earnings statement, Tesla cautioned that "any inability to sell additional regulatory credits may negatively impact our ability to maintain profitability in the short term."
By 2018, the ruling will be moot, Bevan said, as all ZEV credits then will be based purely on range.
"I don't think [Tesla] did this just to get credits," Bevan said. "It's to get an additional market advantage, another feature to their car to make it acceptable to consumers. To put in battery-swap stations, that's a longer view than just getting credits."
As for why CARB might change the ruling, CARB spokesman David Clegern said, "We were worried an OEM might make the battery swappable, but not have any supporting locations or infrastructure available to the user."
When Tesla originally filed paperwork with CARB to start producing cars in California, there was no rule in place regarding quick-change batteries, so Tesla appealed to CARB to include it under fast-charging guidelines.
Tesla's upgrade request was approved on Sept. 18, 2012. On Dec. 18, CARB granted the three Model S trim levels updated ZEV credit levels from their existing level worth four credits per car. The 85kW version was given Tier V status, worth seven emissions credits, the 60kW version was Tier IV, worth five emissions credits, while the base 40kW version would remain at four credits.
Although Tesla said the credits sold were worth $67.9 million in its SEC filings, it did not have to disclose to whom it sold the credits, how many it sold, or how many credits it still has.
Based on R.L. Polk registration figures from the first quarter, Tesla would have gained about $19,000 in emissions credits for each of the 3,537 Model S sedans sold in the 14 states that follow CARB's emissions laws under so-called "Section 177" rules.
Tesla's first-ever profit got Wall Street's attention. From a price that was in the low-$30 range per share for most of a year, the stock jumped to more than $100 within a month. A recent warning from one analyst that the stock was superheated drove the stock from $127 a share to below $110, but it soon recovered. Last Thursday, the stock closed at $133.55 a share.
Whether Tesla remains a Wall Street darling could hinge on whether it continues to earn emissions credits. But Jefferies & Co. analyst Elaine Kwei noted that with alternative energy companies, "You have booms and busts when subsidies come and go."
She said that in pricing Tesla stock, analysts looked at more than the emissions credits. Hitting production targets and overcoming supplier inefficiencies, as well as bearish investors unloading a massive short position, have driven Tesla's stock price higher.
The company's shares closed today at $144.68, up 4.8 percent, or $6.68.
The company reports second-quarter earnings on Aug. 7.