U.S. launches investigation into Tesla Model S fires

U.S. auto safety regulators have launched an investigation into electric sports car maker Tesla Motors Inc's (TSLA.O) luxury Model S sedan after three car fires in six weeks, and Tesla announced it is raising the vehicle's ground clearance.

Tesla shares fell in premarket trading on Tuesday following the news but they were up 3.5 percent in early-afternoon dealings.

The U.S. National Highway Traffic Safety Administration has opened a preliminary evaluation of the risks associated with highway debris striking the underbody of the 2013 Model S, the agency said on its website on Tuesday. (r.reuters.com/cys74v)

Late on Monday, Tesla said it would push out a software update to the Model S air suspension that will give the car more ground clearance at highway speeds, and will amend its warranty policy to cover fire damage even if it is due to driver error.

Investors appeared unfazed by the NHTSA investigation. Stifel analyst James J. Albertine said price volatility surrounding the probe "amounts to nothing more than noise."

The investigation could be a blessing in disguise because it could lead to a result that "could restore Tesla's safety reputation," S&P analyst Efraim Levy said.

The probe comes after a wave of bad publicity for Tesla - not only the fires, but an accident at its Fremont, California, factory that burned three workers; results and forecasts from the company earlier this month that disappointed investors; and even a complaint from actor George Clooney about being stuck on the side of the road in a Tesla Roadster sports car. Tesla's share price has dropped by more than a third since the end of September, wiping some $8 billion off the company's market value.

Chief Executive Elon Musk Tweeted on Tuesday that last Friday the company's head of regulatory affairs, Jim Chen, "invited NHTSA senior staff to conduct a review of Model S."

But David Strickland, administrator of NHTSA, was quoted by the Detroit News as saying Tesla did not ask for the government probe.

A preliminary evaluation by NHTSA can lead to a recall. The investigation, which the agency started last Friday, focuses on two Model S fires that happened after the vehicles ran over debris on U.S. highways.

The third Model S fire, which is not part of the NHTSA probe, occurred when a vehicle hit a concrete wall in Mexico.

In both U.S. incidents, the Model S battery monitoring system provided visual and audible warnings that allowed the driver to stop the car and leave the vehicle before the fire.

"The subject vehicles caught fire after an undercarriage strike with metallic roadway debris," NHTSA said. "The resulting impact damage to the propulsion battery tray (baseplate) initiated thermal runaway."

In a blog post late Monday, Musk said the company asked the NHTSA to conduct a full investigation of the Model S fires to correct the "false impression" that electric cars are more dangerous than gas-powered vehicles.

He also disclosed the software update and amended warranty.

"If a false perception about the safety of electric cars is allowed to linger, it will delay the advent of sustainable transport and increase the risk of global climate change," Musk wrote.

Tesla shares were up $4.21 at $125.79 in afternoon Nasdaq trading.

Tesla's decision to change the design of the Model S suspension to provide more clearance between the undercarriage and the road "is about reducing the chances of underbody impact damage, not improving safety," Musk said.

A software update in January, he added, would give drivers more control over suspension ride height.

There are 19,000 Model S sedans on the road, according to Musk. In the latest incident, a Model S caught fire after a highway accident in Tennessee on November 7.

Musk, a billionaire entrepreneur who made his mark as a co-founder of Pay Pal, said last week that the Model S fires would "definitely" not lead to a recall.

(Corrects market value lost in seventh paragraph)