But under the “corporate average fuel efficiency” rules – the standards mandating fuel-efficiency forcars and trucks sold in the United States, called the CAFE rules – General Motors Corp. counts its Geo Prizm as a “domestic” car, while Toyota Motor Corp. lists its Corolla as “foreign.”

The opposite designations, both possible under the complex CAFE regulations, are crucial to the grand strategies of the two auto companies. The cars made in Fremont are highly economical, getting 29 miles per gallon of gasoline, well above the 27.5 mpg standard set by the government.

Under CAFE, the domestic designation allows GM to use the high-mileage Prizms as a credit against the less fuel-efficient – but much more profitable – big cars that it makes in the United States. Toyota’s “foreign” Corollas made in California permit the Japanese automaker to maintain its own large bank of CAFE credits so that it can export more large – and profitable – cars to the United States from its manufacturing base in Japan.

Welcome to the Byzantine world of “CAFE gaming,” a practice that many industry observers say undermines the effectiveness of a law that is supposed to reduce America’s consumption of gasoline and the country’s dependence on foreign oil. This summer, lawmakers on Capitol Hill are considering several bills to toughen federal fuel-economy standards. The most controversial one, offered by Sen. Richard H. Bryan (D-Nev.), would force automakers to improve the fuel economy of cars by 40 percent by the year 2001, regardless of where those companies are today in meeting fuel-efficiency requirements. The Bryan proposal could require U.S. auto companies to average 39 miles to the gallon in their fleets and could require Japanese companies to reach 45 miles to the gallon. But some say that the whole concept of CAFE – and not just the fuel efficiency levels themselves – is flawed and in need of rethinking. Statistics show that the 1975 Energy Policy and Conservation Act, which laid the groundwork for the first CAFE standards, has made American cars and trucks more economical to drive. CAFE has pushed the fuel economy of the average new car sold in the United States to 28 mpg, up from 14 mpg in 1975. Without CAFE, U.S. gasoline consumption undoubtedly would be much higher than it is today, what with a big increase in the number of vehicles on the road.

But if the goal of CAFE was to reduce overall gas use, that hasn’t happened, statistics show. U.S. gasoline consumption is slightly higher than it was in 1975, and U.S. dependence on foreign oil has risen steadily in the last five years. Despite CAFE, the average fuel efficiency of the entire U.S. fleet of cars and trucks has leveled out since the mid-1980s, as American consumers switched to higher-horsepower cars and trucks and as the fuel-efficiency of the foreign vehicle fleet declined. A Paradoxical Impact CAFE, some experts assert, has had a paradoxical impact on the driving public: It has encouraged motorists to use their vehicles more because they are more efficient. As fuel efficiency of domestic autos improved in the mid-1980s, owners put more miles on them. What has had a major impact on fuel consumption, the statistical record shows, are sporadic increases in gasoline prices. According to a survey by Arthur D. Little Inc., it cost an average 12 cents in gasoline to travel a mile in 1981; in 1990, it was 5 cents. “A market-based approach to energy conservation is superior in effectiveness to regulation of the corporate average fuel economy of new vehicles,” according to a report on CAFE effectiveness published last year by Boston University. The report, “Conserving Energy: Is There a Better Way?,” said that the imposition of CAFE rules in an era of consistently low gasoline prices has encouraged consumers to engage in “gaming” of their own. “To the limited extent that CAFE regulation results in vehicles getting better fuel economy, it actually encourages more fuel use,” said the report, authored by Robert A. Leone, a business professor at Boston University, and Thomas W. Parkinson, a principal in the Boston-based business and economic consulting firm of Putnam, Hayes & Bartlett Inc. Fuel-efficiency in the absence of higher fuel prices means that “people drive farther, keep old vehicles longer, drive at higher speeds and so on,” Leone and Parkinson wrote in their report, which has circulated widely among foreign and domestic car companies. James F. Mulhall Jr., spokesman for Bryan, said the arguments in the Boston University report are seriously flawed. “Absolutely, CAFE works,” said Mulhall. “Does it work better with increasing gasoline prices? No one here would argue otherwise. But is there any stomach anywhere within the federal government for a hefty gasoline tax? I think the answer is no.” He cited the extreme difficulty that Congress had last year in passing a 5-cent-a-gallon gas tax as part of the federal budget agreement. That lack of political will leaves the nation relying on CAFE standards that distort markets, affect trade flows, influence the investment decisions of the auto companies, encourage gaming and often achieve the opposite of what was intended, according to many congressional, federal regulatory and auto industry sources who are intimately familiar with the real-life, daily implementation of present CAFE rules. “Establishing different standards for different companies creates inherent incentives for manufacturers to `game’ the system and, thereby, frustrate the desired energy conservation goals,” said James R. Olson, vice president for external and governmental affairs for Toyota Motor Sales U.S.A., Toyota’s sales arm in the United States. Compliance with CAFE is measured by the average fuel economy of all the new cars that an automobile company sells in the United States in a calendar year. Currently, a fleet of new cars sold in this country must average 27.5 miles per gallon. This means that General Motors can use Prizms, which get 29 miles to the gallon, to offset its U.S.-made Chevrolet Caprice, which averages 21 mpg. A lower CAFE standard of 20.5 mpg applies to light trucks – vans, minivans, pickups and “sport utility vehicles” such as Chrysler Corp.’s Jeep. Automakers cannot mix cars and trucks in their calculations of CAFE compliance. Automakers must also keep their “foreign” and “domestic” fleets in the United States separate for the purposes of CAFE. A foreign car is considered one in which less than 75 percent of the value of the components comes from North America, regardless of whether the whole vehicle is made at a plant in the United States or abroad. But under one of the wrinkles of CAFE regulations, even a car that has more than three-quarters American-made parts can be counted as foreign if the automaker is exporting an identical car to the United States with mostly foreign parts. Thus, the Toyota Corollas made in California are averaged in with the Corollas imported from Japan and are considered “foreign.” Unions Feared Imports The domestic-foreign distinction was put in the CAFE law at the insistence of the United Auto Workers union, which feared that, lacking such a provision, American car manufacturers would try to meet federal fuel economy standards by importing small cars from abroad. U.S. automakers wound up bringing in large numbers of foreign small cars anyway – including the Ford Festiva from South Korea and the Geo Metro from Japan. U.S. automakers sold such models as “foreign” cars. This has allowed one company to do something that the drafters of the CAFE law did not foresee. To take advantage of the CAFE credits it built up in its foreign fleet, Ford Motor Co. now produces its full-size Crown Victoria and Grand Marquis passenger cars in Ontario, Canada, using 73 percent U.S. content and going to suppliers in Japan, Mexico, England, Spain and Germany for the rest. These popular models, with their 190-horsepower V-8 engines, get only 21 miles per gallon. But because they are classified as foreign cars, they cannot be used to degrade the gas mileage of Ford’s domestic car fleet under CAFE. Hypothetically, U.S. automakers note, they could switch the foreign or domestic designation of cars in their factories just by altering the mix of parts arriving at the assembly line. In the case of New United Motor Manufacturing Inc. – the Toyota-GM joint venture in California – the content of the hybrid Prizm-Corollas had been less than 75 percent domestic until this year. Increasing the content above that figure required drawn-out negotiations between the two partners because of the potential impact it could have on their CAFE standing. Companies that fall below the standards are assessed a CAFE penalty of $5 for each one-tenth of a mile per gallon by which the standard is missed. But CAFE, as illustrated by the Ford and GM cases, allows plenty of escape routes. In the case of some major European car companies, the CAFE penalties have posed no apparent incentive to comply with the law. European automakers such as Mercedes-Benz, BMW and Volvo offer what are reputedly some of the safest cars in the world. But the safety accoutrements – air bags, anti-lock braking systems and heavy door and roof construction – add weight and increase fuel consumption. In addition, the high-performance engines on those makes also reduce economy. The result is that they routinely fall below annual CAFE standards. Lacking CAFE credits to cushion the blow, they pay the penalties anyway – and keep selling the cars here. Mercedes-Benz’s fines under CAFE last year amounted to $17.5 million. “They see it as part of their normal cost of doing business in the United States,” said Diane Steed, a former head of the National Highway Traffic Safety Administration, which administers CAFE laws. “The alternative is for them not to sell cars here,” said Steed, who now directs a Washington coalition opposed to toughening of CAFE rules. Britain’s Jaguar PLC had paid similar penalties since 1985. But last year it was bought by Ford and its name was changed to Jaguar Cars Inc. Now, because Jaguar’s poor CAFE performance is mixed in with the rest of the Ford foreign fleet – which averages some 32 mpg, according to analysts – Jaguar will no longer pay penalties. Rolls-Royce cars sold in the United States seldom do better than 12 miles per gallon. But the British automaker, which has no U.S. partner, appears nowhere on CAFE penalty lists. Under CAFE, Rolls-Royce is considered a “low-volume” manufacturer, which sells less than 10,000 cars here yearly and is exempt from CAFE standards. CAFE’s effect on the composition of cars built in the United States can be seen in the case of the Japanese automakers producing vehicles here. As now structured, the CAFE standards appear to provide a disincentive to these companies to “buy American” when they shop for key components and parts. As long as they stay under the 75 percent domestic content ceiling, they can keep their products in their “foreign fleet,” which is still rich in CAFE credits because of the predominance of small, fuel-efficient cars. Thus, not one of the eight Japanese automakers building cars in the United States makes a car under its own name that is considered “domestic” for the purposes of CAFE. Without domestic credits, Japanese automakers run the risk of incurring CAFE fines on any under-27.5 mpg, 75 percent domestic-content car they sell in America. Under such circumstances, the Ohio-built Honda Accord, which averages 25 mpg, could become liable for CAFE fines if it became a “domestic” car. Representative of Japanese automakers resent the pressure that comes from not using enough U.S. parts and components. “You have the Department of Commerce pressuring us to make our cars `American’ to protect American jobs,” said one Japanese auto official who asked that neither he nor his company be named. “But as soon as we get one of our best-selling cars up 75 percent, it’s whammo! Another federal agency hits us with a CAFE penalty for trying to be `American.’ Where’s the fairness in that?” Analysts say that actually some of the most astute “CAFE gaming” goes on in new-car showrooms, where consumers looking for roomy, powerful, multipurpose vehicles are buying more light trucks, the category that includes vans and minivans. The reason, according to experts, is that gasoline cost per mile generally has drifted down, encouraging consumers to buy bigger, more fuel-hungry vehicles. Light truck sales – led by minivans – have grown dramatically over the past decade, rising to 30 percent of U.S. vehicle sales in 1990 from a 17 percent share in 1980. This trend toward trucks has been good for the auto companies, which make bigger profit margins on trucks than cars. At the same time, by opting for a minivan instead of a big car, the consumer helps the CAFE standing of the manufacturer. A big-car sale would give a CAFE demerit; but the minivan purchase gives the same manufacturer a CAFE credit in the separate, truck category.

Within that category, minivans, getting as much as 23 mpg – well above the 20.5 mpg truck standard – produce a CAFE credit.

In that sense, the customer has become a CAFE hero for the hard-pressed automakers.