NEW YORK (TheStreet) -- BMW's (Xetra:BMW) Tesla-challenger, the i3, was engineered to get special regulatory status in California to enable it to compete effectively against the Tesla (TSLA) - Get Report Model S. Just in time for BMW's customers to start placing their orders, this critical BMW selling point has been removed, resulting in a huge victory for Tesla as well as BMW's other competitors.

So what does this mean for investors and consumers?

Let's start with California's incentives for buying a plug-in electric car, and why it's so important for sales.

California is by far the largest market for plug-in electric cars in the world. It is estimated that some 40% of GM's (GM) - Get Report electric car sales are to California, and 50% of Tesla's. The numbers are probably almost as high for GM's and Tesla's main electric car competitors -- Ford (F) - Get Report, Nissan NSANY and Toyota (TM) - Get Report.

While there are many reasons for this, including technology and culture, a major incentive for buying a plug-in car in California is the right to drive in the carpool lane solo during rush hour. Anecdotally, Chevrolet car dealers have told me that approximately half of Volt buyers come into the store asking for "the carpool lane car."

However, there are two kinds of carpool lane stickers in California. The first one is the "white sticker" for pure electric cars and natural gas cars. The second one is the "green sticker" for plug-in hybrid cars.

The crux of the matter is that the green-sticker category is limited to the first 40,000 cars that apply. The white-sticker category is unlimited in quantity. As of November 8, 2013, 24,452 green stickers had been issued. One can reasonably assume that the 40,000 limit may be reached by the middle of 2014. Here are the current numbers, directly from California government.

As I was the first to report in November 2012, BMW found a way to work with California's regulatory bureaucrats to create a new class of car that would be eligible for the coveted white sticker. This new class would have a gasoline engine, but a very limited one.

Unlike a Chevrolet Volt or equivalent, this new class would have a tiny engine (650cc, 35 HP two-cylinder in BMW's case) with a tiny gasoline tank (2.4 gallon) and the gasoline engine could only be used to keep the battery from going below the 5% level, not to charge it any higher than that. Furthermore, it could not have a range longer than the battery-powered range, and under no circumstances longer than 100 miles.

In BMW's case, it would work like this: You would drive the BMW i3 for the first 90 miles on electric power. Then the tiny motorcycle-style engine would kick in and propel the car for another 90 miles or less. You could of course refuel the gasoline at any time.



This "range extender" gas engine increases the range of the car substantially.

The idea behind this new class of car was that you could always feel safe in driving down the battery level to zero and not worry about getting stuck. On the other hand, it was still relatively inconvenient to refuel the tiny tank (2.4 gallon), so you would be driving on electric power the vast majority of the time anyway, perhaps 99% for many people.

The idea was brilliant. It would greatly enhance the attractiveness of driving an electric car. BMW essentially co-developed this law with California's bureaucrats in a decision formalized two years ago, in January 2012.

This new law would then enable BMW to compete effectively against Tesla, because BMW could sell the i3 with range-extender as eligible for the carpool lane. Plus the car would have long range (around 180 miles) with the ability to refuel in one minute for another 90 miles of range. In addition, the BMW i3 would be eligible for a $2,500 tax rebate in California, on top of the Federal $7,500 tax credit.

In the last week of 2013, BMW started taking orders for the i3. For the relevant version of the i3 -- the one with the range extender (or REx in industry parlance) -- the price would begin around $45,000 and top at $56,000 for a fully loaded version. In other words, around $20,000 to $30,000 less than the starting prices for Tesla's two main models.

The first California delivery of the BMW i3 would take place in May 2014. It would be one of Tesla's first major competitors, aside from the Cadillac ELR, which just like its sister car the Chevrolet Volt would only be available for the green sticker anyway.

Those in California who are placing orders for the BMW i3 with the range-extender functionality -- and they are estimated to be the majority -- were of course expecting to get the white sticker. That's the key reason for getting the car, in the eyes of many consumers. It would have been the only car that you could refuel with gasoline and still be eligible for the white sticker.

Those BMW customers are now going to get hit with a double-whammy. First, the i3 with range-extender won't be eligible for the California white sticker, period. Second, by the time you get your i3 with range-extender in California, the 40,000 green stickers may have already run out, unless you are both lucky with the timing of the 40,000 quota and among the very first people to take delivery.

This is an absolute catastrophe for some BMW i3 buyers in California. It's like having paid for a five-star hotel suite, but when you show up at the hotel, first you get downgraded to a bunk-bed in the basement, and then you get downgraded from there to the trash chute, all in two swift steps.

Ouch.



As a result, Tesla as well as the other plug-in electric car competitors are now no longer at a regulatory disadvantage compared to BMW. Of course, they too could have developed a similar car to fit this new class of car regulation. But in reality BMW had at least a one to two year head start, as it was working with regulators to define this new category despite the other companies' opposition.

BMW was, as of a month or so ago, in the regulatory catbird seat to compete with Tesla in California. Now the California government took a chainsaw and cut down the tree on which BMW was sitting.

Why did they do it?

I don't know. I have reached out to the California Air Resources Board, which decides these things, but have not yet received any reply.

Did BMW do something to break the agreement with the government? Did the government decide to pull the rug from under BMW for no good reason?

In the end, if you want your BMW i3 with the range-extender in California -- and that's likely what most prospective BMW i3 customers wanted -- you're not going to get the white sticker. You're not going to get the $2,500 government rebate. And soon, when the 40,000 green stickers run out, you won't get the green sticker either.

Long story short: Tesla is laughing all the way to the bank about this very sad news for BMW.

At the time of publication, the author held no positions in any of the stocks mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.