Commonwealth Solar To achieve GovernorPatrick's goal of250 MW ofsolar PV installed in Massachusetts by 2017, DOER and the Renewable Energy Trusthave established Commonwealth Solar. Begun in January 2008, Commonwealth Solarprovides rebates for solar installations for residences, businesses, and public buildings backed by $68 million ofexisting renewable energy funds. As the rebate program expires, Commonwealth Solar will transitionto other forms ofsupport for solarpower, such as the solar carve-out within the Renewable Energy Portfolio Standard, as provided for in the Green Communities Act. In addition, the Commonwealth Solargoal will also be met by the new opportunity for ourregulated utilities to own and implement solar photovoltaic (PV) generation installations. In the first year ofits implementation, Commonwealth Solar doubled the installed capacity ofPV in the state, and is on the road to quadrupling by the end ofthis year. Electric Utility Long-Term Contracts for Renewable Energy The Green Communities Act requires thatthe electric distribution companies solicitproposals from renewable energy developers and enter into cost-effective long-term contracts for renewable energy, in orderto facilitate the financing ofrenewable energy generation within the Commonwealth, including state waters, or in adjacent federal waters. Long-term contracts assist renewable energy developers in obtaining financing, by providing assurance ofrevenues from sales over a number offuture years. Since the restructuring ofenergy markets in Massachusetts, power contracts have typically been for only six months to one year, far too shortto allow financing ofthe typically high capital costs involved in developing renewable generating facilities. Net-Metering Net-metering allows electricity customers who install distributed power generation, such as solar PV (photovoltaics), to sell electricity generated in excess oftheir own electricity consumption backto the electric distribution company. In the past, net-metering in Massachusetts was limited to customers whose generation capacity was below 60 kW, with customers paidthe wholesale price for surplus power. The Green Communities Act increases the net-metering capacity limitto 2 MW (about 33 times as high) and increases payments to the customerto the retail price. By requiring thatthe market accurately price distributed renewable power generation, net-metering provides greaterrevenue for**renewabl~** generators, thereby making such installations more costeffective.

12

### Transportation Federal CAFE Standard for LightVehicles The Corporate Average Fuel Economy (CAFE) standard was first enacted in 1975 and was establishedto reduce energy consumptionby increasing the fuel economy ofcars and lighttrucks on a fleetwide basis. The fuel economy standards are set by the National Highway Traffic Safety Administration, with the Environmental Protection Agency calculating the average fuel economy for each automobile manufacturer. Starting in 2004, the fleet average for passenger cars must exceed 27.5 mpg, and lighttrucks must exceed 20.7 mpg. Trucks under 8,500 pounds must average 22.5 mpg in 2008, 23.1 mpg in 2009, and 23.5 mpg in 2010. In addition, under a recently-reached agreement between the federal government and California, automakers are required to meet a 35 mpg fleet-wide average for passenger cars and light duty trucks by 2016- four years earlierthan underthe Energy Independence and Security Act of2007. This will require manufacturermiles per gallon ("MPG") levels that yield similarreductions in GHG emissions to California's vehicle GHG standards (see section below.) 

### California Vehicle Greenhouse Gas Standards Underthe federal Clean AirAct, states are preempted from adopting motor vehicle standards that vary from federal standards, except that California is allowed to adopt motor vehicle standards and enforce such standards ifa waiver is granted by EPA under section 209(b) ofthe Act. Other states are allowed to adopt California's standards under section 177 ofthe Act. Massachusetts Department ofEnvironmental Protection ("MassDEP") is required to adoptthe California standards under MGL c. 11 section 142Kunless such standards will not achieve greater emission reductions than federal standards. As a result, in December 2005, MassDEP adopted California's GHG standards for passenger cars, light duty trucks, and medium duty vehicles underthe low emission vehicle (LEV) program regulations, 310 CMR 7.40. The standards apply to model year 2009 and newer vehicles and will be fully phased-in for model year 2016. The standards·can be met through reduction ofvehicle-associated GHG in 4 areas: (1) tailpipe emissions ofcarbon dioxide (C02 ), methane (CI-4) and nitrous oxide (N20); (2) tailpipe emissions incurred by the load ofrunning air conditioning; (3) air conditioning system refrigerant leaks; and (4) upstream emissions associated with the production offuel. Nationwide, by calendar year 2020, California's more stringent limits will reduce cumulative GHG emissions in California and other LEV states by 450 MMTC02e. 

### Federal Renewable Fuel Standard Title II ofthe federal Energy Independence and Security Act of2007 creates a "renewable fuel standard," which requires that such fuel used in the U.S. will rise from 4.7 billion gallons in 2007 to 36 billion gallons in 2022. Ofthat, "advanced biofuel" must rise from 0.6 billion gallons in 2009 to 21 billion gallons in 2022, and cellulosic biofuel mustrise from 0.1 billion gallons in 2010 to 16 billion gallons in 2022. Renewable fuels must be produced from renewable biomass, 13replace othertransportation fuel, and achieve at least a 20% reduction in greenhouse gas emissions on a lifecycle basis for "new facilities. II (Existing facilities, and expansion ofsuch facilities, such as those producing com-based ethanol, are exempt from the greenhouse gas criterion.) Advancedbiofuel excludes ethanol derived from com starch, and must Yield at least a 50% lifecycle reduction in greenhouse gas emissions, while cellulosic biofuel must achieve a 60% reduction. The law contains provisions allowing the EPA administratorto reduce both the percentage greenhouse- gas reductions and the volumes ofproductionrequired. The three categories are not additive

-- cellulosic fuel counts as part ofadvanced fuel, and both count as part ofthe renewable fuel mandate. 

### Tax Exemption for Cellulosic Biofuel Section 1 ofthe Clean Energy Biofuels Act, 2008 Mass. Acts. Ch. 206, exempts cellulosic biofuel from the state's gasoline tax. This includes both ethanol derived from cellulosic sources and any other fuel derived from cellulosic sources that canbe used in place ofgasoline (or as part ofa blend). To be eligible for the tax exemption, the biofuel must yield at least a 60% reduction in lifecycle GHG emissions relative to petroleum-based fuel sold in 2005 (the same definition is used in Renewable Fuel Standardprovisions ofthe 2007 federal energy law). The tax exemption went into effect on Jan. 1, 2009, although no such fuel is yet being supplied in the state. 

### Low Carbon Fuel Standard Section 6 ofthe Clean Energy Biofuels Act requires the state to worktoward implementing a low carbon fuel standard (LCFS) for transportation fuels among the northeast states participating in the Regional Greenhouse Gas Initiative (RGGI). A LCFS, which is an idea first put into law by Executive Order in California, would require that the average carbon content of transportation fuels be reduced by a specific percentage by some future date. The Act requires that the GHG emissions be measured on a "full fuels cycle basis" (meaning the entire lifecycle) and that a progressively more stringent standard be set so that a 10% reduction in emissions is achieved. The state is also directed to make use ofanalysis done by the CaliforniaAirResources Board, ifapplicable, to determine the carbon intensity ofdifferent fuels. AtpresentNESCAUM (Northeast States for Coordinated AirUse Management) and MassDEP are leading regional discussions among the northeast states to develop a plan for a LCFS. In December 2008 environmental commissioners from the RGGI states and Pennsylvania signed a letter ofintent to develop a memorandum ofunderstanding by the end of2009 concerning the structure ofa regional LCFS. 

### Mandate for Biofuels Use in Diesel Motor Fuel and Home Heating Oil Sections 2 and 3 ofthe Clean Energy Biofuels Act instructs DOERto require that a percentage ofboth diesel motorfuel and home heating oil (number 2 oil) consist offuel derived from renewable biomass, which must also yield at least a 50% reduction in lifecycle GHG emissions14relative to petroleum-based fuel sold in 2005. The fraction begins at 2% on July 1,2010, and grows to 5% by July 1,2013. However, the Commissioner ofDOER is empowered to delay the requirement ifsufficient supplies ofeligible fuel are not available, due to lack ofsupply, lack of blending facilities, or unreasonable cost. The mandate sunsets ifand when a low carbon fuel standard that achieves equal or greater reductions in GHG emissions goes into effect. DOER shall also considerthe feasibility ofextending the mandate to number 4 and number 6 petroleum distillate fuels. Finally, DOER is instructed to study the feasibility ofmaking the mandate apply on a statewide average basis, ratherthan on each gallon offuel sold, making possible the development ofa credit trading system. Atpresent, the CaliforniaAirResources Board, on which Massachusetts has planned to rely (along with federal EPA) for estimates ofthe percentage lifecyc1e GHG reductions due to biofuels derived from different feedstocks and manufactured in different ways, has not yet completed its analysis. 

### Commonwealth Capital (Smart Growth/Smart Energy) Policy Commonwealth Capital explicitly endorses 32 land use planning and regulation practices that are consistentwith the Commonwealth's Sustainable Development Principles. (see http://www.mass.gov/?pageID=gov3subtopic&L=5&LO=Home&Ll=Key+Priorities&L2=Job+Creation+%26+Economic+Growth&L3=Clean+Energy+%26+Smart+GrowthSmart+Energy&L4=Commonwealth+CapitaI&sid=Agov3) The program makes available more than $600 million annually in grants and low interest loans for a variety ofcapital investments, in partbased on Commonwealth Capital scoring. The more smart growth/smart energy oriented a community is, the more likely it is to receive funding. Almost 300 (out of351) ofthe Commonwealth's communities have applied for funding, and municipal consistency with the Sustainable Development Principles has improved significantly, up 10% overthe past five years, with the·median score rising from 63 to 77 (out ofapossible 140). 

### Sustainable Development Principles The Patrick Administration utilizes a set ofSustainable Development Principles to guide the creation and implementation ofstate agency policies and programs, as well as investments in land and infrastructure. Municipalities, through policies like Commonwealth Capital, are also asked·to modifY theirplanning, regulatory, and funding actions to achieve consistency with the Principles. The state's Sustainable Development Principles include promoting clean energy, in the form ofenergy efficiency and renewable power generation, in orderto reduce greenhouse gas emissions and consumption offossil fuels. They also encourage the creation of"pedestrianfriendly" districts and neighborhoods that mix commercial, civic, cultural, educational, and recreational activities with parks and homes. In regard to housing, the Principles call for building homes "nearjobs, transit, and where services are available."

15

### Appendix A-Summary of2008 Legislation Green Communities Act, 2008 Mass. Acts Ch.169, 7/2/08 This Act significantly reforms the state's energy policy, andmakes large, new commitments to electric and natural gas energy efficiencyprograms, renewables, and clean fossil fuels like combinedheat and power. (Section 116 sets state renewable, alternative and energy efficiency goals.) The Actrequires the Executive Office ofEnergy and Environmental Affairs (EOEEA) to prepare a 5 yearplan to meet the energy efficiency and renewable/alternative energy goals. 

### Global Warming Solutions Act, 2008 Mass. Acts Ch. 298,8/7/08 This Act will spur investments in energy efficiency and conservation, encourage more renewable power and developments ofclean energy. The Act creates a new set ofenforceable state limits on greenhouse gas (GHG) emissions across all sectors ofthe economy. By 2050, itrequires adoption ofGHG emissions limit that is atleast 80% below 1990 GHG emissions. By 2020, emissions are limitedbetween 10 and 25 percentbelow 1990 levels, as set by EOEEA who also develops aplan by January 1,2011 for meeting that limitby January 1, 2011 and adopts interim limits for 2030 and 2040. 

### Green Jobs Act, 2008 Mass. Acts Ch. 307, 8/11/08 The gradual reduction ofemissions levels will spur innovation and entrepreneurship in clean energy technologies across the economy. To facilitate the innovation and economic developmentnecessary to meet those mandates, the Green Jobs Act will support research-anddevelopment, entrepreneurship, and workforce development in the clean-energy technology industry ofthe future. Thus, this Act works to help Massachusetts meet goals for reducing greenhouse gas emissions. 

### Clean Energy Biofuels, 2008 Mass. Acts Ch. 206, 7/28/08 This Act will help with GHG emissionreductions, lessen our dependency on oil and diversify ourfuel mix. Beginning inJuly 2010, the Actrequires the use of2% biodiesel (or other qualified petroleum sl;lbstitute biofue1) in #2 oil for residential, commercial and industrial heating· applications, and in diesel fuel; the percentage increases to 5% no laterthan July 1, 2013. The Actprescribes the use of"advanced biofuels" as characterized by at least a 50% reduction in greenhouse gas emissions relative to conventional fuel, inclusive ofindirect land use change impacts. 

### Ocean ManagementAct, 2008 Mass. Acts Ch. 114, 5/28/08 The goal ofthe Act is to establish a comprehensiveplan to manage development in and the use ofMassachusetts' ocean waters, balancing natural resource preservation with traditional and new uses, including renewable energy. 

### It is not intendedto create a new bureaucracy orpermitting 16process, but instead seeks to provide unifonn guidance to the currentregulatory agencies in their review ofocean uses and projects.

17

# ATTACHMENT C

THE COMMONWEALTH'S GAS FORECAST

## Massachusetts DepartmentofEnergyResources 

# Massachusetts Retail Natural Gas Forecast, 2009-2015
Introduction The Massachusetts Department of Energy Resources ("DOER") presents the forecast of retail natural gas sales for the years 2009 - 2015, as part of its State Energy Plan. This forecast indicates the scope and scale of natural gas sales for the purpose of estimating the extent and impact of energy efficiency programs throughout the forecast period. 

### Data Sources and Methods The forecast was developed for DOER by Optimal Energy of Bristol Vermont, and is based on the following sets of sales data: 1. Actual retail gas sales of each Massachusetts gas utility, obtained through a survey conducted by Optimal Energy; 2. Review ofthe Energy Information Administration's ("EIA") AnnualEnergy Outlook, which periodically publishes long term forecasts of natural gas expected sales; and 3. Review of EIA's Short Term Energy Outlookreport, which provides more frequent sampling ofthe gas market and was used by Optimal Energy, along with the other data sources, to construct an annual growth rate specifically for the Massachusetts gas utilities. Subsequent forecast revisions would use a similar method of long and short term forecasts, corrected by actual sales data provided by the utilities to increase forecast accuracy. 

### Eligible and**Non~Eligible** 

### Sales The report categorizes gas sales into "Eligible" and uNon-Eligible" categories. Eligible sales are those for which energy efficiency charges may be collected and for which customers may participate in the programs. Non-Eligible sales include certain transportation sales and sales to some large customers who are exempted via regulation from recovery for energy efficiency costs.

Massachusetts Natural Gas Sales Forecast 2009-2015 September 30, 2009 Page 1

### Forecast The chart below shows expected Eligible and Non Eligible sales through 2015.


## MassachusettsGas Retail Sales Forecasts 2009- 

## 2015 2.40 2.35 2.30 2.25
til E 2.20



### .... QJ .c I- 2.15 s:: Cii 2.10 2.05 2.00 1.95 1.90**r------~-~._._-** ..**--.-.--~--------~.-.** . j i i**i-----------------~~-.--.-.---.---.--** ..- i j**~--~_.~._.~** ....**~_** .._--

2009 2010 2011 2012 2013 2014 2015 !II Total Sales Volume (billion therms)

II Eligible sales volume (billion

therms)

Massachusetts Natural Gas Sales Forecast 2009-2015 September 30/ 2009 Page 2

# ATTACHMENT D

THE OPTIMAL REPORT

# ITNITED STATES DEPARTMENT OF ENERGY

Report and Analysis in Support ofthe Commonwealth of Massachusetts' Petition to Exempt from Federal Preemption Massachusetts' 90% Annual Fuel Utilization Efficiency Standard for Non-Weatherized Gas Furnaces.

Prepared for: 

### The Massachusetts Department ofEnergy Resources, a Department of the Massachusetts Executive Office ofEnergy & 

### Environmental Affairs and 

### Massachusetts Attorney General Martha Coakley By: 

### Tom Franks & 

### AlekAntczak Optimal Energy Inc. 14 School Street Bristol, Vermont 05443

Phone (802) 453-5100

Fax (802) 453-5001 September 30,2009

## Table ofContents Page I. Executive Summary 1 II. Massachusetts Faces Substantially Different Conditions From Those Prevailing in the United States Generally and Has a Compelling Need to Implement aNew, More StringentEnergy Efficiency Standard forNon-Weatherized Gas Furnaces 3 A. Massachusetts Has a HigherHeating Load Thanthe Average for the Nation as a Whole .3 

### B. Massachusetts Has Higher Fuel Costs Than The Average for the Nation as a Whole 3 C. The Energy Burden on CommonwealthResidents is Higher Than That Prevailing for the Nation Generally 4 D. Natural Gas Use for Residential Heating Has an Impact on OtherMarkets 7 E. The Residential Heating Equipment Marketis Difficult to**Influe~ce,** 

### Particularly for Rental Housing 8 F. Regulatory and Statutory Requirements......... 9 G. Summary...................................................... 10 III. Implementation ofthe Massachusetts Standard Will Not Adversely Affectthe Furnace Market.
............................................................ .. 10 A. Manufacturers Already Produce and Sell Products That Would Meetthe Commonwealth's Proposed Standard 11 1. The National Market Overview Shows Increasing National Shipments ofHigh Efficiency Furnaces 11 2. Federal ENERGY STARProgram Data Confirms That HighEfficiency Furnaces Are Readily Available.........
......... 13 B. A Massachusetts Market Overview Shows a Steady Increase in HighEfficiency Unit Sales in the Commonwealth, Approaching a LimitviaVoluntary Programs 14

- 1 -

### 1. Available Historic Data Confinns an Upward Trend in Sales 14 2. The Market for High Efficiency Furnaces in New and Existing Homes is SubstantiaL 16 a) Estimate ofthe Size ofthe Replacement Market 16 b) Estimate ofthe Size ofthe New Construction Market 18 3. Massachusetts Market Summary 20 C. OtherMarket Impacts ofthe Proposed Massachusetts Standard 21 1. 

### The Availability ofConsumer-desired Features Will Not Be Adversely Effected by 

### the Massachusetts Standard 21 2. Consumers Derive a Strong Net BenefitFrom the Application ofa More StringentFurnace Efficiency Standard 21 3. Installation, Operation, andMaintenance Procedures Would Not Be Adversely Affected by the Proposed Massachusetts Standard 23 D. Implementation ofthe Proposed Massachusetts Standard is Likely to Foster Other States' Adoption ofSimilar Standards, Not Disparate Ones 24 IV. Given the Relative Costs and Benefits, New Regulation is Preferable to the Universe ofAlternatives 26 A. ConsumerRebate Programs

- GasNetworks Program 27 B. Low-Income GrantPrograms

- HEARTWAP 28 C. Tax Incentives 29 D. Consumer Financing Programs

- HEAT Loan 29 E. Public Infonnation & 

### CustomerEducation Campaigns

- Residential Conservation Services 29 F. Alternatives Analysis Conclusion 29 V. Conclusion 30

- 11

-

# List ofFigures Figure 1 - Heating Degree Day Comparison 3 Figure 2 - Residential Natural Gas Price Comparison 3 Figure 3 - Residential Natural Gas Prices (US) 4 Figure 

### 4 - Average Energy Cost

- Low Income Households 5 Figure 5 - Affordability Gap 6**~igure** 6 - Massachusetts Energy Burden 6 Figure 7 - Natural Gas for Generation in Massachusetts 8 Figure 8 - Rental Housing Rates

- US 9 Figure 9 - National Shipments 11 Figure 10

- Distribution ofEfficiency 12 Figure 11

- ENERGY STAR Shipments 13 Figure 12

- Time Series Data 14 Figure 13

- High Efficiency Shipments 15 Figure 14

- Housing Unit Size Distribution 17 Figure 15

- Single Family Replacement Market 18 Figure 16

- Single Family and Duplex Replacement Market 18 Figure 17

- Shipments to Housing Starts (National) .19 Figure 18

- Massachusetts New Housing 19 Figure 19

- Estimate ofMA NWGF New Construction Market 20 Figure 20

- GAMA Verified NWGF Shipments 20 Figure 21

- DOE Summary 22

- 111

-Figure 22

- Massachusetts Share ofNational Shipments 25 Figure 23

- Massachusetts Share ofNew England Shipments 25 Figure 24- Estimated Success Rate ofAlternatives 27 Figure 25

- GasNetworks Summary 28

- IVI. 

### Executive Summary Optimal Energy Inc. ("Optimal") was engagedto assistthe Massachusetts Department ofEnergy Resources ("MassDOER"), a Department ofthe Massachusetts Executive Office ofEnergy & Environmental Affairs, and Massachusetts Attorney General Martha Coakley (collectively the "Commonwealth"), with an analysis ofthe potential benefits and consequences ofimplementing the Commonwealth's proposed efficiency standard for non-weatherized gas furnaces ("NWGF"). In 2005, the Commonwealth's Legislature revised Massachusetts General Laws ("M.G.L.") Chapter25B, 

### § 5, to provide thatto be eligible for sale in the Commonwealth, NWGF must meet or exceed annual fuel utilization efficiency ("AFUE") of90 percent.} Mass. Acts 2005, Ch. 139, Section 11. This is comparedto the current preemptive United States Department ofEnergy ("DOE") standard (hereafter "federal standard") for NWGF of80 percent AFUE.2 To implementthis standard (hereafterreferred to as the**~'high** efficiency**standard,'~** the "proposed standard," orthe "Massachusetts standard"), federal law requires thatthe Commonwealth first be granted a waiverfrom federal preemptionby DOE. Based on the data collection, research, and analysis that Optimal has done in connection with its engagement, Optimal has concludedthat implementation ofthe Massachusetts standard is the only feasible approach that would significantly increase the penetration ofhigh-efficiency furnaces in the Commonwealth; that implementation ofthe Massachusetts standard would not have a significant, adverse impact on manufacturers or distributors; and thatthere is no feasible alternative approach that would increase the penetration ofhigh-efficiency furnaces to the same degree because the Commonwealth has already ably implemented all feasible alternatives to the greatest extent possible. In order to obtain a waiverfrom federal preemptionunder § 327(d) ofthe Energy Policy and Conservation Act ("EPCAIt ) (42 U.S.C. 6297(d)), a petitioning state must show by apreponderance ofthe evidence thatthe proposed standard it wishes to implement is necessary to meet "unusual and compelling State or local energy ... interests." Optimal has concluded thatthe Commonwealth meets this statutory standard because there are applicable conditions that exist 

### in the Commonwealth that are substantially different from those thatprevail in the United States generally. These differences include, but are not limited to:
• a higher Commonwealth heating load;

• higher Commonwealth heating costs;

• thatthere is more competition in the Commonwealth for natural gas and propane resources;

1 A regulation implementing the change in the NWGF AFUE standard was promulgated thereafter at 225 Code ofMassachusetts Regulations ("C.M.R. II ) 9.03. 2 The rule fIrst promulgated in November of2007 was challenged in the Second Circuit, but is now on remand to DOE for further comment and rulemaking.
- 1 -• that the Commonwealth is a more difficult market to influence, especially because ofthe size and configuration ofthe rental housing market;

• that there are specific Commonwealthregulatory and statutory requirements that mustbe met; and

• that substantially higher market penetration makes it difficult and less cost-effective for voluntary programmatic efforts to further influence marketpenetration. These conditions, described below, create a synergistic effectthat inhibits the ability of the Commonwealthto capture significant netbenefits without a comprehensive, statewide, high efficiency NWGF standard. Through analysis offurnace sales nationally and in the Commonwealth, other market information, andprimary research, we have determined that the proposed Massachusetts standard will have no significant adverse impact on national manufacturers, local manufacturers, distributors, or installers. We further found that the proposed standard will have no adverse impact on furnace features available to customers. Finally, we determined that Commonwealth regulation in the fonn ofa more stringent 90% AFUE standard is preferable to the alternatives available to the Commonwealth. These alternatives include educational efforts, rebate programs, market channel interventions, and tax mechanisms. Ourresearch determined that the Commonwealth has already aggressively and comprehensively implemented alternative approaches to acquiring energy savings from the installation ofmore efficient gas furnaces. Optimal has prepared orreviewed numerous studies ofthe potential savings available from energy efficiency efforts in a wide variety of jurisdictions, and has reviewed verified energy savings from programs implemented overthe last two decades. In every case, there is a significant difference between the estimates ofcost-effective savings that couldbe achieved and the savings that are actually acquired. We are aware ofno instance where non-regulatory mechanisms have captured all available costeffective savings. In fact, we are aware ofregulatory mechanisms, specifically building codes in manyjurisdictions, that have failed to capture the levels ofsavings expected due to compliance and enforcementissues. Taking all ofthis information into consideration, it is ourprofessional opinion that the Commonwealth's previous non-regulatory efforts may have raised the penetration of90% AFUE NWGF to the theoretical maximum levels absent such regulation. 3

3 Potential studies and program evaluations rOlltinely show that at least twenty percent ofthe possible market for high efficiency furnaces is not capturedby program interventions. 

### - 2 -

### II. Massachusetts Faces Substantially Different Conditions From Those Prevailing in the United States Generally and Has a Compelling Need to Implement a New, More StringentEnergy Efficiency Standard for NonWeatherized Gas Furnaces. A. Massachusetts Has a HigherHeating Load Than the Average for the Nation as a Whole. A common measure ofheating loadis "heating degree days" ("HDD tt), defined as the difference between the mean temperature and 65 degrees Fahrenheit on a daily basis. As shown in Figure 1 - Heating Degree Day Comparison, below, residents in the Commonwealth face significantly colderweatherthan the average forthe Nation as a whole.4 D C D 1 H Igure - eatmS?; egree ay ompanson 

### Heating De2ree Days

- Massachusetts and Contiguous United States Year 2000 2001 2002 2003 2004 2005 2006 2007 US 4398 4160 4278 4469 4241 4246 3915 4259 MA 6253 5803 5884 6704 6463 6467 5709 6295 MA as % ofUS 142% 1390/0 138% 150% 152 % 1520/0 1460/0 148% Source: NOAA National Data Center

- Climate Data Online.
There is a direct correlation between HDD and fuel use. All otherthings being equal, the higherthe HDD total for an area, the more fuel will be required to maintain acceptable interiortemperatures. Itis significant thatthe Commonwealth averages approximately 40% more heating degree days than the rest ofthe Nation. Due to the physics ofheat transfer, this translates directly into greater fuel usage and a higherpublic interest in efficiency than exists in the Nation as a whole,


### B. Massachusetts Has HigherFuel Costs Than The Average for the Nation as a Whole. The Commonwealthhas substantially highernatural gas costs than-those prevailing in the United States generally. The chart and table below (Figures 2 & 3) were generated from datapublished by DOE's Energy Information Administration 

### C'EIA")5. F· 2 R 'd fiN t I G P' C

l1!ure 

## - eSI en la aura as rice ompanson MA Residential Delivered Natural Gas Price compared to the National**Avera~** e since 2000 Year 2000 2001 2002 2003 2004 2005 2006 2007 MA as % ofNat'1Average 125% 129% 119% 128% 130% 1]9% 123% 121% MA as % ofNat'1Median 130% 132% 124% 133% 133% 121% 124% 121%

4 Source: http://www7.ncdc.noaa.gov/CDO/CDODivisionaISelect.jsp, accessed 1/30/09 5 http://tonto.eia.doe.gov/dnav/ng/ngprisumaepgOprsdmcfa.htm

- 3 -Figure 3 - Residential Natural Gas Prices (US) Residential Delivered Natural Gas Price by State (2006) 22 20 1i) (I) 18 

# - 0 

### :s :J 16 0 0 0 q 14 0 12 10 

## • Mt- 

## • • 

# ......... ••••• 

# ••• •••••••••• ••••• 

# .... ••••• 

# •••• •

- , I I I I Note: Alaskahas the lowest and Hawaii has the highest natural gas prices due to Iocational factors. These states have been excluded as outliers. The price ofnatural gas in the Commonwealth is among the highest in the United States. In fact, it is over 20% higherthan both the average and median prices throughout the Nation as a whole. The Commonwealth's interest in furnace efficiency is greaterthan that in the Nation as a whole given the price its residents face for an essential commodity.


### C. The Energy Burden on Commonwealth Residents is Higher Than That Prevailing for the Nation Generally. Energy burden is an indicator that includes the amount ofenergy consumption required for a household to achieve a certain end, such as ahealthy indoortemperature, as well as the cost ofthe resources to achieve that end, or fuel cost, relative to that household's income. Low income households by definition have higher energy burdens than higher income households in aparticular state orregion and are particularly sensitive to the detrimental effects ofa high energy burden. They are forced to make choices between essentials, such as food, medicine, and heatthat are not necessary for non-low income households. To begin providing a picture ofenergy burdens on low-income households in the Commonwealth, the chart below (Figure 4) shows the average total energy cost (heating/cooking/lighting/miscellaneolls costs) oflow income households in the Commonwealth, which is among the highest in the Nation. 6

6Source: http://www.liheap.org/databook02/ accessed 1/26/09

- 4-Figure 4 - Average Energy Cost

- Low Income Households L1HEAP Eligible Households Average Annual Energy Cost by State· 2002 $2,400 $2,200 

### • • • $2,000

... A 

## ..

# .••• $1,800 

# ..."

# . $1,600 • 

### • 

### •• • •

### • • •

### • • $1,400 .... 

## .. ..

# ..

# .. • 

### •

### • • • 

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### •• 

### • $1.000 , 0°**~~** .$'**~o** «v *-C:J**~~ 0~**  0<:> 0'?- $**~0** o*-**~C:J ~'?-**  «'?- 

### ,,+ (}**<:>~** -fThatthe most economically vulnerable households in Massachusetts face one ofthe highest energy costs in the Nation is another component ofthe Commonwealth's compelling need for the proposed 90% AFUENWGF standard. The Low Income Home Energy Assistance Program ("LIHEAp II ) Databook (see fn. 5) shows thatthe energy burden for all Commonwealthhouseholds is 7% ofhousehold income, while the energy burden on those households who receive LIHEAP (fuel assistance) is 19.8%. By comparison, households in California, ourmostpopulous state and one almost atthe middle ofthe chart above, bear a much smaller energy burden ofonly 

### 4.20/0 statewide, and the LIHEAP-eligible households in Californiabear an energy burden of

### only 12.7%. Another way to understand the energy burden on low-income households is through "affordability gap" data. The firm ofFisher Sheehan Colton ("FSC") has been calculating the household energy affordability gap (the "Gap") since 2003. 7 8 The Gap captures the difference between a supportable level ofexpenditure ofhousehold income for energy and the required level ofexpenditure for low-income households. While specific to low-income households, the Gap also represents the relative cost ofenergy in each state for all households. It incorporates state-specific factors (e.g., income, fuel cost and fuel requirements) that span economic sectors. The chart below (Figure 5) shows thatthe Commonwealthhas one ofthe largest Gaps in the Nation and thatthis Gap has . 9 gotten worse over tIme.

7 Fisher Sheehan & Colton (http://www.fsconline.coml) is a well-recognized public finance and economics firm that has developed a specialty area in the quantification ofthe gap between affordable home energy bills and actual home energy bills. 8 http://www.homeenergyaffordabilitygap.comJO1_ WhatIsHEAG2.html 9 Average dollar amount by which actual home energy bills exceeded affordable home energy bills for households below 185% ofpoverty. .
- 5 -Figure 5

- Affordability Gap $3,500 US Low Income Household Energy Affordability Gap 2002 &. 2007 

# • $3,000

- 

# ..
.... 

### 1. 2002

### 1 

# .. $2 1500 /- 20071 $2,000 ••• 111 fl8 1111111111 II l1l'i II1II III $1 1500 _lIIII l1li 1IlI- Mil 1IlIIIIIII!lIIIIlll!lllllllllll·"- 1IlII1Il1llll1II'I

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... <::- ,::; '?It:; 0**ro~** ",e,<::' vO**~q; ~~** **~~ ~'O**  oro <:>e;**~<$' ~ro'3** **~(j ~~** **~e;**
FSC has detennined that an affordable energy burden for low income households is 6% ofannual income. The table below (Figure 6) shows the burden ofenergy costs on Massachusetts low-income households. tO

B d h tt E 6 M 19ure 

## - assac use s nergy ur en 

## Massachusetts Low Income Energy Burden

- 2007 Poverty Level (Income as % of #Households Home EnergyBurden (%of Federal PovertyLevel) annual income) Below 50% 109,900 87.30% 50 -74% 53,248 35.30% 75 -99% 67,654 25.300/0 100-124% 72,499 19.70% 125-149% 75,882 16.20% 150-185% 109,259 13.30% Total HHlWeighted Avg 488,442 35.41% F'

10 Source: http://www.homeenergyaffordabilitvgap.comldownloads/2007 Released Apr08/StateslMassachusetts.pdf accessed 3/9/09. Inreality, extremely low-income households do not spend 87.3% oftheir income on home energy, but instead face termination ofutility service and living without space heat because they cannot affordtheir energy bills.

- 6-The amount ofheating required, the price offuel, and the income level of Commonwealth residents combine to increase the Commonwealth's motivation to maximize the use ofhigh efficiency heating equipment.


### D. Natural 

### Gas Use for Residential Heating Has an Impact on Other Markets. Residential heating customers in Massachusetts account for only a portion ofthe natural gas load. The demand ofresidential heating customers somewhat competes with the demand ofnatural-gas fired electric powerplants. This does not mean that residential customers-have to make a decision betweenkeeping wann and keeping the lights on, because regulatory and operational structures strive to assure that their energy needs for both heat and light are met. 

### It does mean, however, that inefficient consumption of natural gas in home furnaces needlessly increases overall demand and thus raises prices for all users. Moreover, electric generating units on the natural gas system have a lower priority than residential heating customers, "accounting forthe likelihood that gas-fired generators' contracts for natural gas transportation couldbe interrupted during the winter months.,,11 This competition for the resource can affect both the cost ofnatural gas and the societal and individual value ofnatural gas savings. In a 2005 reportto the New England Governors' Conference that was focused primarily on electric generation, the first finding made was: ·'The concern for the reliability ofnatural gas supplies arises almost exclusively in the wintermonths when demand for this fuel for space heating increases dramatically and is coincidentwith demand from gas-fired electric generation.,,12 For more than a decade, the expansion of electric generating capacity inNew England and adjacent regions has been natural gasfired, as shown below in Figure 7. 13

11 O'Connor, David L. et a1. MeetingNew England's Future Natural GasDemands: Nine Scenarios and TheirImpacts. Boston, 2005. New England Governor's Conference. Page vii
.. 12 Op.Cit. Page 69 13 Source: http://www.eia.doe.gov/emeu/states/sep use/notes/use print2006.pdf, accessed 3/17/09 - 7 -Figure 7 - Natural Gas for Generation in Massachusetts Natural Gas Consumption by Electric Generation in Massachusetts
170**~--------------** 160 -1-------------- 4) 150 +--------------- <l> u.. 140 -1--------------- t) 

### :g 130 +----------- u 120 +----------- c 110 +----------- 100 +----------- 90 +------=----- 80 -t-,----'-------,-- 2000 2001 2002 2003 Year 2004 2005 2006

The Independent System Operator-NewEngland, responsible for regional transmission and reliability, noted in 2008 that the "region's heavy reliance on natural gas as the dominant generator fuel type has leftthe region vulnerable to fuel-supply risks, which can have an adverse impact on system reliability and lead to volatile and high electric energy costs associated with variations in natural gas prices.,,14 Fuel savings in the residential heating sectorhave a direct and tangible impact on the electric generation sector. The Commonwealth's disproportionate reliance on natural gas for electric generation and for home heating creates an unusual and compelling interest compared to the prevailing conditions in the rest ofthe Nation for a higher standard offumace efficiency. 

### E. The Residential Heating Equipment Market is Difficult to Influence, Particularly for Rental Housing. The Commonwealth's rate ofrental housing creates anotherunusual and compelling interest when compared to conditions prevailing in the United States generally. Efficiency efforts in the rental housing market experience aphenomenon known as "split incentives." Building owners are typically responsible for the capital costs ofthe heating equipment and building envelope, while building occupants are typically responsible for ongoing operation costs, which is primarily fuel. In the narrowest sense, a building owner's interest is in reducing first cost, that is, putting in the least expensive equipment and envelope. Occupant interest is focused on reducing operation cost, but atenant typically has neitherthe authority nor the resources to make the capital investment necessary to achieve this. The Commonwealthhas one ofthe higherrental housing rates in the country, which makes it significantly more challenging to influence purchasing decisions through means otherthan standards. The chart below (Figure 8) shows the range ofrental

14 ISO-NE Staff. 2008RegionalSystem Plan. Holyoke MA, 2008. Independent System Operator-New England. Page 3. - 8 -housing rates in the United States and highlights the Commonwealth's position in this range. I5 Figure 8 - Rental Housing Rates

- US
US Rental Housing Rates 2008 45%

_ 

## I • 40% 

### • 

## • 

## • MA 35%
. 

### ..... 

# --_. • • 

## • • • 

## •

# .

# .-- 30% 

### •••••••••• 

## •• • • • • • • • 25% •• II II II II •• II 

### • 20%
15%**~J..** $"**~'?-** *-e;, 0'?-**~<c ~v** **~~ ~Q**  cP XV**~'?-** 0-<- Q.'?- ,'?-**~0** e;,0 § Subsequent sections ofthis report and analysis describe the Commonwealth's efforts to increase the penetration ofNWGF with an efficiency rating higherthan the federal standard. These efforts have achievedrelatively high penetration ofhigh efficiency units in the overall Massachusetts market, but the rental housing sectorlikely represents a relatively larger share ofthe untapped potential energy savings, compared to owner-occupied housing. Because it is very hard to influence buying behavior in the rental market otherthan by state regulation, and the Commonwealthhas an unusually high rate ofrental housing, the Commonwealthhas a compelling state interest in implementing a higher standard for NWGF than prevails in the rest ofthe Nation. 

### F. Regulatory and Statutory Requirements. As mentioned above, M.G.L. c. 25B, § 5, and its implementing regulation set forth at 225 C.M.R. 9.03, require thatto be eligible for sale in the Commonwealth, NWGF must meet or exceed an AFUE of90 percent. The statute and regulation are complemented by other Commonwealth laws, which are more fully described the Massachusetts State Energy Plan submitted with the Petition for Waiver). The listed statutes and their implementing regulations constitute the Commonwealth's current energyplan. Some of these statutes and salient features are:

• the Green Communities Act, which sets aggressive energy use reduction targets for the state.

15http://www.census.gov/hhes/www/housinglhvs/rates/index.html- accessed 1/30/06. DC excluded.



### - 9-• the Global Wanning Solutions Act, which requires reduction of greenhouse gas emissions in 2050 to at least 80% below 1990 levels.

• the Regional Greenhouse Gas Initiative, which is intended to reduce greenhouse gas emissions through a binding, regional cap and trade mechanism. 

### G. Summary Optimal has concludedthat conditions and circumstances in the Commonwealth differ substantially from those prevailing across the Nation. These circumstances include a greaterneed for heating due to the Commonwealth's climate, higherunit costs for heating fuel, the more substantial impact ofthe total energy bill on vulnerable households, the impacts ofthe heating market on the electric generation sector, the larger proportion ofthe marketinrental housing that makes it harderto reach due to split incentives, and specific but as yet unmet objectives that are manifested inthe Commonwealth's statutes, regulations, and energy plans. Taken together, all ofthese factors amply demonstrate thatthe Commonwealthhas a compelling need to implement its new high-efficiency standard for NWGF.


### III. Implementation ofthe Massachusetts Standard Will Not Adversely Affect the Furnace Market. Optimal undertookprimary and secondary researchto evaluate the impact ofa higher standard for NWGF in the Commonwealth on the full range ofparticipants in this equipment market. We concluded, as shown in the sections below, that:

• Burdens on manufacturers offurnaces complying with the Massachusetts standard will be minimal, because these manufacturers already produce and sell products that would meet the Massachusetts standard, and this equipment already has a high penetrationlevel in the Commonwealth;

• Aside from efficiency, there is no significant difference in consumer desired features between equipment that meets the current federal 80% AFUE standard and equipment that wouldmeetthe proposed Massachusetts standard of

### 900/0 AFUE; and,

• There wouldbe no difference in the impact ofthe high efficiency standard between small and large manufacturers, orbetween manufacturers within or outside the Commonwealth.

- 10-

### A. Manufacturers Already Produce and Sell Products ThatWould Meet the Commonwealth's Proposed Standard. 1. 

### The National Market Overview Shows Increasing National Shipments ofHigh Efficiency Furnaces. Non-weatherized gas furnaces that would meet the proposed Massachusetts standardhave been manufactured and distributed widely for over a decade. Below (in Figure 9) is a snapshot ofthe furnace marketbetween 1995 and 2003. Figure 9 - National Shipments USANVVGF Shipments by Efficiency II Proposed MA Standard BUS Standard 1-------------------------,

o 3500000

1000000 2000000 2500000 3000000 +-------------==---

500000 1500000

1995 1996 1997 1998 1999 2000 2001 2002 2003 This data, provided in 2005 to DOE by the Gas Appliance Manufacturer's Association ("GAMA"), a predecessor organizationto the Air-Conditioning, Heating, and Refrigeration Institute ("AHRI"), and divided by furnace efficiencies above and below 

### 880/0, does not correlate directly to the difference between the national standard of

### 80% AFUE and the Commonwealth's proposed standard of

### 90% AFUE. 16 However, the same source states that units with efficiencies that fell between the national standard of

### 80% AFUE and the proposed standard of

### 900/0 AFUE account for only 4% ofthe shipped units in 2003. 17 This is shown in the following chart (Figure 10):

16 EE-RM/STD-OI-350 Comment 96 & 98, referenced as "GAMA Comment" 17 In the current market, the only furnaces that attain efficiencies greaterthan 85% AFUE use condensing technology, which invariably leads to efficiencies over 90% AFUE.

- 11

-Figure 10

- Distribution ofEfficiencyl8 Distribution of Shipped Unit Efficiency· 2003

Il 80% or less II Between 81 and 88% 090% 091%

D 092% 1m 93 to 96%

The national data for 2003 showthatthere are very few products sold in the gap between the national 80% standard and the Commonwealth's proposed standard of90%, and furthermore that "the overwhelming majority offurnace shipments within the range of78% to <90% AFUE fall into the 80% to <81 % bin." This data also shows that almost 90 percent ofthe furnaces shipped that exceededthe 80% federal standard (28% ofall furnaces shipped) also exceeded the Commonwealth's proposed standard of90% AFUE. These data show that furnaces able to meetthe proposed standard have been available and broadly distributed for over a decade. Hence, the Commonwealth's proposed standard would nothave required manufacturers to redesign their products, their manufacturing processes, ortheir distribution operations. The Commonwealthhas been unable to acquire a comparable data series for subsequentyears. 19 We present below, in Section III.A.2., the data that we were able to acquire to update the data series.

1& GAMA Data 19 Although MassDOER specifically requested from AHRI in October of2008 comparable data on shipments ofnon-weatherized natural gas furnaces nationally and in Massachusetts, AHRI declined to provide the information on grounds that it was confidential and proprietary. On March 27,2009, MassDOER and the Massachusetts Attorney General requested in writing that DOE obtain and supply to the Commonwealth certain comparable and more current information. By letter dated June 23,2009, DOE responded that some data sought was alreadypublicly available from DOE's rulemaking docket for residential furnaces and boilers, and also provided hard copies ofsome ofthe data to the Commonwealth.

- 12 -

### 2. Federal ENERGY STAR Program Data Confirms That High Efficiency Furnaces Are Readily Available. The United States Environmental Protection Agency ("EPA") developed an ENERGY STARprogram for furnaces and began tracking shipments in 2004?O The table below (Figure 11) shows the publically available data.

21 II ENERGY STAR Sh· Igure - Ipments 

### US EPA ENERGY STAR ShipmentData 2004 2005 2006 2007 Response Rate 96% 96% 96% 100% # ofPartners 23 24 24 26 ENERGY STARUnits Shipped 1,661,000 1,319,905 1,167,112 1,030,976 Total Units Shipped (Calculated) 3,534,043 3,567,311 3,334,606 3,221,800 ENERGY STAR Market Share 47% 370/0 350/0 32% F'

The ENERGY STARAFUE standard for NWGF is 90% orbetter, the same level that the Commonwealth seeks to make its operative efficiency standard. The GAMA data set forth above uses a threshold of88% AFUE to define high efficiency. Considering the relative lack ofunits on the marketbetween the current 80% AFUE federal standard and the ENERGY STAR 90% AFUE threshold

-- only 4%

-- the segmentation ofthe units shipped, as reported by GAMA, is for all intents and purposes equal to the segmentation used by the EPA. There currently are over 50 brands offering over 350 model series with efficiencies at 90% AFUE orbetter listedby the EPA.22 According to the ARRI publicly available database, there are 13,446 distinct models rated below 90% AFUE and 4,890 models rated at or above 90% AFUE.23 The AHRI data indicates that approximately 27% ofall models available would already meetthe proposed Massachusetts standard of 90%AFUE. The table below (Figure 12) displays a data series for national sales offurnaces segmented into two categories: those that meetthe current 80% AFUE federal standard, and those that would already meetthe proposed Massachusetts standard of90% AFUE.

20 From http://www.energystar.goY/index.c:fm?c=partners.unit_shipment_data_archives and http://www.energystar.goylindex.c:fm?c=partners.unit_shipment_data; accessed 12/11/08 21 "Response Rate" refers to the percentage ofENERGY STARpartners. The "Total Units" calculation is ENERGY STAR Units Shipped divided by ENERGY STAR Market Share. 22 http://www.energystar.gOYlia/products/prod _listslgas_furnaces-prod _list.xls: accessed 121II 108 23 http://re.gamanet.org: 80801gama

_cafsl sdpsearch/ search.jsp?table=Furnace: accessed I 114/08, search criteria "Natural gas orpropane" and AFUE below 90 & at 90 orbetter.

- 13

-F· 12 T' S' D t 24 19ure - lme erIes aa National ShipmentsofNWGFbyFederalandProposedMAStandardOverTime (1,000units) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 US Standard 2,020 2,196 2,071 2,283 2,398 2,404 2,209 2,311 2,240 1,873 2,247 2,167 2,191 ProposedMAStandard 581 675 702 688 729 733 854 890 1,024 1,661 1,320 1,167 1,031 TotalFurnaceSales 2,601 2,871 2,773 2,972 3,126 3,137 3,063 3,201 3,264 3,534 3,567 3,335 3,222 %!vfeetingMA Standard 22% 24% 25% 23% 23% 23% 28% 28% 31% 47% 37% 35% 32% HousingStarts 1,354 1,477 1,474 1,617 1,641 1,569 1,603 1,705 1,848 1,956 2,068 1,801 1,355 The data in this section supportthe following conclusions onboth the national level and for the Commonwealth in particular: • A significantportion offurnaces on the marketmeetthe proposed standard, and have metthat standard for over a decade.

• The proposed standard will not impose a burden on the supply chain, since it is already providing this equipment.

• The proposed standard of90% AFUE will have no, or at most a trivial, impact on the market segment between it and the 800/0 AFUE federal standard. Only 4% ofall products sold in 2003, the last year for which data are available, had AFUE ratings between 81 % and 88%. There is no evidence thatthis market segment has expanded in the intervening years. GAMA's coverletter for a 2002 data submission summarizes this key point in the following manner: "Notice the success ofcondensing furnaces in colder climates, the almosttotal absence ofgas furnace shipments between 80% and 90% AFUE. ,,25 ENERGY STAR is ajointprogram ofthe EPA and DOE. As such, it is a credible and reliable source ofdata. In the absence ofactual shipment or sales data for recent years, the Commonwealth offers the results from the ENERGY STARprogram as supporting evidence thatthere will be no adverse impact on manufacturers or distributors from the proposed Massachusetts standard.


### B. A Massachusetts Market Overview Shows a Steady Increase in High Efficiency Unit Sales in the Commonwealth, Approaching a Limitvia Voluntary Programs. 1. 

### Available Historic Data Confirms an Upward Trend in Sales. The market in the Commonwealth for high efficiency NWGF is substantially different from the national market. The penetration ofthis equipment in the

24 Sources: GAMA Data & EnergyStar data 25 Gas Appliance Manufacturers Association, April10, 2002, letterto Mr. Cyrus Nasseri re Docket No. EERM/STD-O1-350



### - 14-Commonwealthis substantially higherthan that which prevails in the Nation as a whole, and the penetration ofthese units appears to be reaching a plateau, as shown in Figure 13 below. Figure 13

- High Efficiency Shipments26 Share offurnaces 88% AFUE or Better
80% --;------------------------------------_
70% +------1
60%**+------------------=-IIJle=::---~----------------_____1**
50%**+-------------~---------------------------/**

20% +------'--'------,------------.----,-----,-------.---------.----,--------,---------...,----,-----_____1 30%**+-------------------------=-------==--=~",.."".--------I** 40%**+---------:o;o~------------------------______..fC----~.__________j**

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 This data shows that:

• High efficiency furnaces captured a biggermarket share in Massachusetts than in the rest ofthe Nation, on the order oftwo to one, inthe years preceding the ENERGY STAR initiative for this equipment;

• Afterthe inception ofthe ENERGY STARprogram, the Commonwealth still showed significantly higherpenetration ofhigh efficiency equipment than the rest ofthe Nation; and,

• The efficient furnace shipment curve in Massachusetts is comparable to the classic market diffusion curve. 

### It climbs relatively sharply inthe early years and thenplateaus over a period oftime. By comparison, the national curve appears relatively flat until the first year ofa national promotion effort and then falls sharply afterwards. High efficiency units have made up more than 60 percent ofall shipments to Massachusetts since 2000 and are aunique feature ofthe Commonwealth's market. Subsequent sections ofthis report address some ofthe causal components ofthe increase in sales ofhigh efficiency units. The key point ofthis section is thatthe

26 Massachusetts data supplied by GAMA to Keyspan; USA data from "GAMA Letter" and EnergyStar data.



### - 15

-Massachusetts market differs substantially from that ofthe Nation as a whole, and for this reason requires different approaches.


### 2. The Market for High Efficiency Furnaces in New and Existing Homes is Substantial. Optimal's research on market impacts ofthe proposed Massachusetts standard reflects that the marketis already providing this equipment and thatit can meet the requirements ofthe 90% AFUE standard. This section ofthe analysis quantifies the potential market inthe Commonwealth for efficient furnaces. 

### Itprovides the context for estimating net benefits ofthe proposed standard, as well as the impact ofthe standard on the total market. As with any kind ofcapital equipment, total sales offurnaces are measured by looking at two primary components: new purchases and the purchases ofreplacements for existing equipment. The replacementmarket correlates to the size ofthe existing housing market. Publicly available information from the United States Census Bureau and DOE are used in this analysis to estimate both the replacement market and the new construction market in the Commonwealth. 

### a) Estimate ofthe Size ofthe ReplacementMarket. The United States Census Bureaureports that between 2000 and 2007, the percentage ofCommonwealthhouseholds that used utility gas for heating rose from 43.9% to 46.6%.27 Gas is currently the heating fuel for approximately 1.2 million households, but this does not correlate to the market for residential furnaces. Many of these Commonwealth householdsare in buildings heated by equipment largerthan that covered by the current federal 80% AFUE standard orthe proposed Massachusetts 90% AFUE standard. These households are in multiple unitbuildings that have commercialsized heating plants. The distribution ofhouseholds by building unit size is shown below in Figure 14.

27 http://factfinder.census.gov: accessed 12/13/08



### - 16-Figure 14

- Housing Unit Size Distribution Massachusetts Housing Unit Size Distribution

Duplex 22% Single Family 57%

According to the ElA's 2005 Residential Energy Consumption Survey ('tRECS"), there were 44.7 million natural gas central warm-air furnaces in United States housing, of which 0.8 million were in the New England Census region?8 ElA's RECS also reported that gas was the heating fuel for steam orhot-water systems in approximately 8.2 million households nationally, including 1.3 million inNew England. Another factor necessary to determine the replacementmarket is the portion of existing equipmentthat would fail and be replaced by comparable equipment in a given year. A commonly accepted methodology for estimating this replacement market is based on the average lifetime ofthe equipmentunder discussion. Analyses commonly assume thatthe annual replacement is equal to one, divided by the equipment lifetime in years. Many efficiency programs setthe lifetime ofnatural gas furnaces at 20 years. However, much ofthe equipment still in service is significantly olderthan 20 years, and the RECS reports that approximately 21 % ofheating equipmenthas been in service for 20 years longer. The following tables (Figures 15 & 16) show estimates ofthe natural replacement market for NWGF. The first table is based on the assumption thatthe equipmentunder consideration is only applicable to single family residences. The secondtable includes duplex residences. Both tables show the market assuming 20-year and 25-year lifetimes.

28 http://www.eia.doe.gov/emeu/recs/recs2005/hc2005_tables/hc4spaceheating/excel/tablehc 11.4.xls: accessed 12/12/08



### - 17 -15 S' I F '1 R I F'

Igure 

### - mg:e amuy ep acemen ar e Estimation ofMassachusetts Annual Furnace Replacement Market

- Single Family Homes Year 2000 2001 2002 2003 2004 2005 2006 2007 Total Housing Units 2,625,040 2,637,393 2,648,959 2,660,758 2,675,383 2,692,235 2,709,365 2,722,190 Factor '.,\"'. '
...... ".> .•......,. : ...... i

. .

### ' ...• , <•....•\

. , .\' •... Homes 57% 1,505,869 1,512,955 1,519,590 1,526,358 1,534,748 1,544,415 1,554,242 1,561,599 % Heated by Gas 47% 702,260 705,564 708,659 711,815 715,728 720,236 724,819 728,250 % ofGas Furnaces 38% 267,528 268,786 269,965 271,168 272,658 274,376 276,121 277,428 Natural Replacement Market (20 yr life) 5% 13,376 13,439 13,498 13,558 13,633 13,719 13,806 13,871 Natural Replacement Market (25 yr ]ife) 4% 10,701 10,751 10,799 10,847 10,906 10,975 11,045 11,097

tM k t dD 1 R I 16 S' I F '1 Igure 

### - mgle amuyan upJex eplacemen ar e Estimation ofMassachusetts Annual Furnace Replacement Market

- Single Family Homes & Duplex Year 2000 2001 2002 2003 2004 2005 2006 2007 Total Housing Units 2,625,040 2,637,393 2,648,959 2,660,758 2,675,383 2,692,235 2,709,365 2,722,190 Factor ,', .. .... .•. .> ........ '. '.:\'. . .......•...........• <'" ..•.. , ......•..••...••..•. ." .•...... > '.' ......>.

,. Homes 79% 2,082,073 2,091,871 2,101,044 2,110,403 2)22,003 2,135,369 2,148,956 2,159,128 % Heated by Gas 47% 970,972 975,541 979,819 984,184 989,593 995,827 1,002,163 1,006,907 % ofGas Furnaces 38% 369,894 371,635 373,264 374,927 376,988 379,362 381,776 383,583 Natural Replacement Market (20 yr life) 5% 18,495 18,582 18,663 18,746 18,849 18,968 19,089 19,179 Natural Replacement Market (25 yr life) 4% 14,796 ]4,865 14,931 14,997 15,080 15,174 15,271 15,343 F'

The analysis indicates a replacement marketranging between roughly 10,000 and 19,000 units annually for the years after the data provided by GAMA in 2005. The next phase ofthe analysis addresses new construction. 

### b) Estimate ofthe Size ofthe New Construction Market. Datafrom the United States Census shows that the pattern ofnew home construction inthe Commonwealthroughly parallels the national pattern.30 A correlation between the number ofhousing starts and furnace sales is shown in the chartbelow (Figure17), comparing housing starts from the United States Census Bureau's database, to the total units shipped.31

29 Data for this and subsequent chart is derived from the US Census bureau data and RECS data. The 38% offurnaces is the furnace portion ofgas equipment in the New England census region. 30 http://factfinder.census.gov: accessed 12/13/08 31 http://www.census.gov/const/startsan.pdf: accessed 12/11/08

- 18

-Figure 17

- Shipments to Housing Starts (National) Housing Starts to Total Furnace Sales 3,700,-------------------------------------,- 2,200 3,500**+----------------------------..~~------'~-----+** 2,000 3,300 +------------------------,.F-.,F------
.......---+ 1,800 

### j w C 3,100 1,600 o 0 x

.... 0

2,900**hiiiiiii;ii.,,;=--~:----'--------r==========;_-----ltiiill1,400** g .....

.......Total Furnace Sales

- Housing Starts 2,700**+-------,~--------------"====~====='----------+** 1,200 2,500 +--------,---------.---..,....-------,-------.---.,---------,-------.---.,...-----,-----------.----.,...----+ 1,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Figure 18 below shows new housing units in the Commonwealth by year: Figure 18

- Massachusetts New Housing Massachusetts - New Housing Units 18,000 ,-----------------------------------------,

14,000**+-----------------iI''----------------~---_l**

11,000**+--------..,----------.....----------...,-------------r-------.-----------,---------~** 13,000 +--------------------,j_--------------------i 12,000 +-------==-=---=-------------t 15,000**+-------------------~'----------------~-------l** 

## I
....... New Housing Units 

### I 16,000**+--~=============:::::--.-------_______.;!':_------~-----_J** 17,000 +-------------------------1

2001 2002 2003 2004 2005 2006 2007

The table below (Figure 19) develops an estimate ofthe new construction market based on an analytic method similarto that applied to the replacement market. 

### It assumes thatthe new construction market is segmented in the same ratios as the existing housing market for the following factors:

• Portion ofsingle family and duplex residences

- 19-• Portion ofnatural gas heating

• Portion ofnatural gas furnaces to water-based systems These assumptions are arough approximation ofthe market. Optimal believes this approximation is conservative, or low, for two reasons. First, there has been an upward trend in the use ofnatural gas as a heating source. Second, there has been an upward trend in the installation ofcentral air conditioning in residential new construction. Taken together, these two trends increase the probability that the heating system will be a furnace, which can use the same distribution system as the air conditioning, as contrasted with a hydronic system thatrequires a separate water distribution system.

Igure - sirna eo ew ODS rue IOn ar e Estimation ofMassachusetts New Construction with NWGF Installation 2001 2002 2003 2004 2005 2006 2007 TotalNew Housing Units 12,353 11,566 11,799 14,625 16,852 17,130 12,825 Factor .' ,"" ), "".,,,' " ", '.'
...., ,,", ',">"
.',.'./,,<,,;',,'.' ",,: 

# .... '<)':'

..·····i .:'/:,:, SingleFamily 57% 7,086 6,635 6,769 8,390 9,667 9,827 7,357 % Heated by Gas 47% 3,305 3,094 3,157 3,913 4,508 4,583 3,431 % ofGas Furnaces 38% 1,259 1,179 1,202 1,490 1,7] 7 1,746 1,307 

### :"<".':.'.\ >,"',,' ...•', :.','<', '< ,'.}' .,' ','.'" ."....'.:, ,,:' 

### , .. ,.... 

# ':,'. "', .. " 

### ;',

..... , .,,;/'. ',',':'.>, ·/y'i.··",',,\(..< ,:;, " ,.",
...,<,,' 1 & 2 Family 79% 9,798 9)74 9,358 11,600 13,366 13,587 10,172 % Heated by Gas 47% 4,569 4,278 4,364 5,410 6,233 6,336 4,744 % ofGas Furnaces 38% 1,741 1,630 ],663 2,061 2,375 2,414 1,807 F' ] 9 Eft f MA NWGF Net f M k t

This analysis has developed estimates ranging between approximately 12,000 and 22,000 units for the period between 2001 and 2007. The GAMA data show below (Figure 20) reported shipments ofall furnaces to the Commonwealthranging between roughly 14,000 and 22,000 units for the years between 1995 and 2003, The historical data validates the range ofunit shipment developed by this analysis.

F' 20 GAMA V 'ft d NWGF Sh'

Igure 

### - er1 Ie Iprnents Massachusetts NWGF ShipmentData AFUE 1995 1996 1997 1998 1999 2000 2001 2002 2003 <88% (units) 9,362 9,736 7,843 9,269 8,803 8,725 8,335 8,954 10,241 Over 88% (units) 4,836 7,307 6,759 8,218 11,792 14,254 15,715 17,615 21,812

Over 88% (%) 34% 43% 46% 47% 57% 62% 65% 66% 68%



### 3. Massachusetts Market Summary. The preceding analysis ofthe Commonwealth for NWGF equipment shows that:

• The penetration ofhigh efficiency units is higher inthe Commonwealth than that whichprevails in the rest ofthe Nation.

- 20-• The distribution and installation infrastructure for high efficiency equipment already exists.

• The estimates ofthe total market size prepared in this analysis are consistent with existing data sources and serve as a credible basis for determining the impact ofthe Massachusetts standard.


### C. OtherMarket Impacts ofthe Proposed Massachusetts Standard. L The Availability ofConsumer-desired Features Will Not Be Adversely Effected by the Massachusetts Standard. The proposed Massachusetts standard for NWGF will notreduce the availability ofconsumer-desired features. Fromthe consumerperspective, furnaces are fungible. They are typically soldby contractors and service organizations with features like reliability and efficiency highlighted. The high efficiency units offer all ofthe features available in lower efficiency units, and in some cases may be bundled with features that offer enhanced value, such as differential temperature controls. These controls optimize the operation ofthe heating system by comparing the internal, external, and desired set pointtemperatures and by modifying the operation cycle to increase comfort and reduce fuel usage. 32 

### 2. Consumers Derive a Strong Net Benefit From the Application ofa More Stringent Furnace Efficiency Standard. DOE's Technical Support Document inDocketNumber EE-RM/STD-Ol-350 evaluatedthe impacts ofa variety ofTrial Standard Levels ("TSL") and design option levels. The current 80% AFUE federal standard is equivalentto TSL #A. The Massachusetts proposed standard of90% AFUE is equivalent to TSL #B for NWGF. The table below (Figure 21) is a summary from DOE's environmental analysis.33 DOE found that "the TSL projectedto yield the maximum consumerNPV [netpresent value] at sevenpercent discountrate for the cold climates (e.i.,**~5,OOO** heating degree days and**~6,000** heating degree days),,34 included NWGF standards at 90%.

32 See, for example, www.fumacecompare.com: "The Lennox G61 V is a variable-speed gas furnace with enhancedhumidity controls that operates at multiple speeds to regulate the air flow throughoutthe home. A SureLight® control board ensures easy and efficient functioning ofall systems. This furnace is Energy Star rated with an AFUE from 94.6 to 95%. It is atwo-stage heaterthat provides two levels ofheating for temperature control. The design ofthe Lennox G61 V Furnace is CSA certified and has obtained the Good Housekeeping Seal." 33 USDOE, TechnicalSupportDocument: Energy EfficiencyProgram For ConsumerProducts: Energy Conservation Standardsfor ResidentialFurnaces andBoilers, September 2007 available at http://wwwl.eere.energy.govlbuildings/appliance

_standards/residential/tb

_tsd _0907.html 34 72 Fed. Reg. 65151

- 21

-F' 21 DOE S Igure 

### - ummary 

### DOETSD Results Summary No- TSL Source Action A- Adopted 

### ...'/8**.~** '.MA;.Proposed*'. '. Cumulative Energy Saved

- All Equipment (1) NA 0.25 ·.},2}·

.... .' Table 10.4.3 :-. .... Cumulative Energy Saved

- NWGF NA 0.01 '. ..•........
...•2.99 :\. 

## ." Table 10.4.3 CumulativeNPV at 7% DiscountNWGF (2) NA $40
....

# , . .$12p···· '
. \, Table 10.4.5 CumulativeNPV at 3% DiscountNWGF NA $120 .....
. $8;200: .'. Table 10.4.6 Cumulative Emissions Reductions

- All Equipment C02 (Mt) NA 7.8 . \.' . . . "137.1.· 

## .... Table EA.16 U NOx (kt) NA 9.2 .....**·.·'164~.6** .:. '. Table EA.16 S 

## .. Cumulative Emissions Reductions

- NWGF A C02 (Mt) NA 0.2 94.2 Calculated (3) NOx (kt) NA 0.3 111.5 Calculated Socioeconomic Impacts

- NWGF (4) All Consumers NA $2 \i "$55 

# .' Table EA.22 ."" Low-income Sub-Group NA $2 (" ··....·$39.,· • Table EA.22 Senior Sub-Group NA $2 

### <'
..... $36· .'.....•...: <' Table EA.22 Cumulative Energy Saved NWGF(Quads) 0.01 \.'

... ( ,'.' "'\'1,45\



### ....-:'

. Table 10.5.2. N CumulativeNPV at 7% DiscountNWGF NA $30 I'."
..... : .•..•.. . $1240·
..':, Table 10.5.4

'....,...... \:. 0 CumulativeNPV at 3% DiscountNWGF NA $90 1< '-,'\', $6,350'

...... Table 10.5.4 R Cumulative Emissions Reductions

- NWGF T C02 (Mt) NA 0.2 :,
..(' .' '.45.7'- 

### .' Calculated (5)

.... :.,'.

" . H NOx (kt) NA 0.3

.... ... <., 54:1
.. .': ". "" Calculated Socioeconomic Impacts

- NWGF

- All Consumers NA $3 '

..............'

............. $212>····'·· Table 11.3.4 (6)
* - TSL Bis the lowest alternative considered that includes the MA proposed standard of90% AFUE for NWGF "NORTH" is defined as the cold climate region including with HDD >6,000 which more closely matches the conditions in MAthan the the alternative criteria of HDD>5,000. N (1)

- Cumulativetotal is quads over atime period starting in 2015 and ending in 2038. The reductions include impacts at power plants (both 0 physical reductions and emissions credits) and atthe household level T 2)

- Dollars are million 2006$ E (3)

- Calculated based on the ratio ofNWGF energy saVings to All EquipmentsaVings times the ratio ofemission pergigajoulefor natural gas to fuel as reported in AppendixW S 4)

- Values based on total costs overlifetime ofeauioment 5) - Calculated basd on the ratio ofthe North reQion to the total USA. (6)

-Table 11.3.4 lists equipment by AFUE, not byTSL. Values in this table were selected from the most cost effective option with an AFUE equivalent to theTSL. The values represent average.life cycle savinQs per household.
The difference between the current 80% federal standard (TSL A) and a standard for NWGF equivalentto the Massachusetts proposed standard of90% AFUE (TSL-B) is significant on a nationalleve1, butthe most significant differences are for the northern states. With the application ofthe high efficiency standard, lifetime energy savings increase by several orders ofmagnitude, from 0.01 quads to 1.45 quads. The netpresent values, depending on discountrate, increase by a factor ofat least 70. The netpositive lifetime impacts for the average consumer increases from $3 to $212. The original DOE analysis did not break out the low-income and senior sub-groups by the northern region. Considering the immense difference betweenthe savings for all United States consumers of$55 and the savings for northern consumers, and the significant gain the higher standard would have had on these subgroups across the Nation (from $2 to $39 or $36), it

- 22-seems reasonable that these sub-groups in the Commonwealth would experience a substantial netpositive benefit from the higher efficiency equipment. In fact, in the New England region, low-income households stand to benefit disproportionately from a standard thatrequires installation offurnaces ofat least 90% AFUE. Census data demonstrate that low-income households are disproportionately renters, not homeowners. (See Section II. E) These low-income renters mustrely on the property owner to replace theirheating systems. To the extentnewer, higher-efficiency furnaces are already inplace, they are disproportionately represented in single-family homes and higher-income households. Thus, lower-income tenants tend to live in units that have older, less efficient furnaces and stand to see the greatest efficiency gains and reductions in energy bills as those furnaces are replaced with units at 90% AFUE or higher due to the implementation ofthe Commonwealth's standard. The Technical Support Document did not estimate the impact ofvarious trial standard levels on specific states. The Appliance Standards Awareness Project and ACEEE issued a report in July 2009 that estimatedthe impact ofenhanced federal standards on a wide range ofproducts and disaggregated the impacts at the state level. The report estimated that a standard of90% AFUE for gas furnaces, implemented in 2013 would have the following impact in Massachusetts35 :

• Capture a netpresent value savings, in 2009 dollars, of$144,000,000 by 2030;

• Save 8.31 million therms ofnatural gas by 2020 and 19.4 million therms by 2030; and,

• Cut carbon dioxide emissions by 45,000 metric tons by 2020 and 105,100 tons by 2030. Independent analyses consistently find that the benefits ofthe Commonwealth's proposed standard overwhelm the cost.


### 3. Installation, Operation, and Maintenance Procedures Would Not Be Adversely Affected by 

### the Proposed Massachusetts Standard. To detennine the impact ofthe proposed standard on the contractor network, Optimal compiled a database offurnace contractors and vendors in the Commonwealth. The database was primarily compiled using phone records and internet searches, and was supplemented by referrals from othermarket actors. It is possible that a few contractors and vendors were overlooked, particularly part-time contractors and small vendors. However, with over 500 contractors and over 150 vendors, we are confidentthat the database captures the significantplayers in this market.

35 http://www.standardsasap.org/stateJ2009%20federal%20analysis/states/fedappl_ rna.pdf, accessed 8/17/09

- 23

-Optimal and MassDOER administered a qualitative survey instrumentto a small sample ofvendors and contractors. The survey's goals were three-fold: to increase understanding offurnace market conditions in the Commonwealth; to detennine ifthere are particular concerns about 90% AFUE furnaces in comparison to lower efficiency furnaces withregard to features, installation, operations, ormaintenance; and to detennine what concerns actors in the supply chain would have about a proposed increase to a 90% AFUE standard for NWGF. Telephone interviews and survey forms distributed at regularly scheduledtrade ally meetings were used to collect contractor opinions. The first set ofquestions attempted to control for our lack ofavailable data on current furnace sales. The survey tested respondents perceptions ofthe availability of efficient equipment and the effect on price from an increase to the 90% AFUE standard. The overwhelming response was that neither availability norprice would be adversely affected by a 90% AFUE standard. The next questions checked for issues uniquely associated with the installation and operation of900/0 AFUE furnaces that might make them less desirable than lower efficiency units. Respondents noted thatthere are certain issues thatmustbe addressed with the installation of90% AFUE furnaces, particularly providing drainage for the condensate produced by the nonna! functioning ofthe furnace. However, the overwhelming response was thatthere is nothing unique to 90% AFUE furnaces that would make them significantly more difficult or expensive to install or maintain. The reliability and necessary service intervals for higher efficiency equipment were reported to be comparable to those for equipmentjust meeting the current 80% AFUE federal standard. Some respondents noted that replacement components may be less available or more expensive for the high efficiency equipment, butthis was generally attributed to the relatively small installedbase of90% AFUE furnaces compared to 80% and lowerAFUE equipment. As the market share ofefficient equipment increases, respondents anticipated thatthese differences would decrease. The last set ofquestions asked the respondents to estimate the effects ofa higher standard on manufacturers in the Commonwealth and the adjacent states. No vendor was aware ofa manufacturer ofgas furnaces in the Commonwealth orthe adjacent states that would be adversely affected by the proposed standard.


### D. Implementation ofthe Proposed Massachusetts Standard is Likely to Foster Other States' Adoption ofSimilar Standards, Not Disparate Ones. In the Final Rule on Energy Conservation Standards for Residential Furnaces and Boilers issued by DOE on November 19, 2007 (72 Fed. Reg.**65136-65170)~** DOE recognized the potential benefit that couldbe achieved through the implementation of regional standards for residential furnaces and boilers, but detennined that it did not have the authority underEPCA to establish suchregional standards.36 Section 325(0)(6) of

36 72 Fed. Reg. 65151



### - 24-EPCA has since been amended by Congress to empower DOE to establish one additional regional standard for furnaces ifthe Secretary ofDOE determines that establishing an additional regional standard will produce significant energy savings in comparison to establishing only a single national standard, and regional standards are economically justified.3? Under the amendment, the Secretary must also considerthe impact ofthe additional regional standards on consumers, llfanufacturers, and othermarket participants, including product distributors, dealers, contractors, and installers. This powerto establish an additional regional standard exists side-by-side with DOE's authority to grant a waiver from federal preemption under § 327(d) of EPCA (42 U.S.C.6297(d)). In fact, 

### § 325(0)(6) provides in relevantpartthat nothing in**t~e** amended statute diminishes the authority ofa state to enforce a state regulation for which a waiver offederal preemption has been granted under 42 U.S.C. 6297(d). All this said, we have concluded that there is little concernthat the implementation ofthe Massachusetts standard

-- after the grant ofa waiver from federal preemption

-- would be likely to contribute significantly to a proliferation ofState appliance efficiency requirements. Our research. shows, to the contrary, that ifDOE were to grantthe Commonwealth a waiver from federal preemption, the implementation ofthe 90% AFUE standard would more likelyresult in a consolidation ofState standards. This is the case because the Commonwealth comprises the bulk ofthe market in New England for NWGF, and because otherNew England states that have passed statutory requirements for furnace efficiency have set them higher than the current federal 80% standard, at levels that are equal to the Commonwealth's proposed 90% standard. These Northeast states are Vennont, New Hampshire, Rhode Island and Maryland.38 The following tables (Figures 22 & 23) display Massachusetts shipments as a portion ofnational shipments and as a portion ofNew England shipments.39 fN' ISh' h tt Sh 22 M Igure - assac use s are 0 atlOna Ipmen s Massachusetts NWGF Shipment as Percent ofNational AFUE 1995 1996 1997 1998 1999 2000 2001 2002 2003 MA% of 88%+ 0.83% 1.08% 0.96% 1.19% 1.62% 1.94% 1.84% 1.98% 2.13% MA%of Total 0.55% 0.59% 0.53% 0.59% 0.66% 0.73% 0.79% 0.83% 0.98% F'

fN E I d Sh' h tt Sh 23 M F'

Igure 

### - assac use s are 0 ew ngJan Ipments Massachusetts Shipments as Percent ofNew England Shipments 1995 1996 1997 1998 1999 2000 2001 2002 2003 MA as % ofNE (units 88%+) 46% 50% 46% 41% 48% 55% 58% 57% 61% MA as % ofNE (total units) 49% 51% 48% 44% 43% 47% 53% 54% 57%

37 Pub.L. 110-140, effective December 20, 2007. 38 The standards in Maryland and New Hampshire are applicable to new construction only. 39 The tables are based on data from the previously reference 2002 GAMA submission to DOE.

- 25-From this evidence we conclude that: 1. Granting the Commonwealth a waiver from federal pre-emption will have a negligible impact on the national market, since the Commonwealth comprises such a small share ofthe total market and already has a greater percentage ofhigh efficiency units soldthan the national average. 2. Granting the Commonwealth a waiver from federal pre-emption is likely to lead to a consolidation ofstandards by state legislatures into a regional standard appropriate for New England and othernorthern states with comparable usage factors. With regard to New England, since the Commonwealth is roughly halfthe market for NWGF, due to market efficiency it is likely to become a defacto standard, even ifnot adopted as aregional standard. Withregard to northern states in otherparts ofthe Nation, granting this waiver could vastly simplify both the analytic and procedural burdens carrying outthe Congressional intentthat the Secretary considerregional standards where appropriate. In short, we conclude that granting the Commonwealth a waiver from federal preemption will notresult in the proliferation ofdisparate standards and is most likely to contribute to the adoption ofarational regional standard as permittedby the law.


### IV. Given the Relative Costs and Benefits, New Regulation is Preferable to the Universe ofAlternatives. The Commonwealth has undertaken a comprehensive analysis ofnon-regulatory alternatives for achieving the intendedbenefits ofthe proposed standard (entitled "Alternatives and Economic Analysis in Support ofthe Commonwealth of Massachusetts' Petitionto Exempt from Federal Preemption Massachusetts' 

### 900/0 Annual Fuel UtilizationEfficiency Standard for Non-Weatherized Gas Furnaces"), which is being submitted along with the Commonwealth's Petition for waiver (hereinafter, the "Alternatives Analysis ll ). The considered alternatives fall into five basic categories: A. Consumer rebate programs B. Low-income grantprograms C. Tax incentives D. Consumerfinancing programs E. Public information and customer education campaigns The Alternatives Analysis determined the contribution ofeach category to the total penetration, as shown in the table below.



### - 26-f RtfAlt 24 E t' t d S Igure 

### - sIma e uccess aeo erna Ives Contribution to Individual Alternative Total Market Penetration Penetration Consumer Rebate 55% 37% Financing Assistance 10% 7% Low Income Grant 5% 3% Tax Incentive 16% 11% Public Education 14% 9% Total 100% 67%
The Alternatives Analysis then estimated cost and time to achieve the objectives ofthe Commonwealth's proposed standard, incorporated in the sections below. The sections below highlight and, in some cases, complement the findings ofthis report. 

### A. Consumer Rebate Programs

- GasNetworks Program. Massachusetts has been attempting to capture the savings potential ofmore efficient gas furnaces since 2002. This program, called GasNetworks, is coordinated across the gas service territories ofmultiple utilities in Massachusetts. The program provided sliding scale rebates for furnaces with 90% AFUE orbetter. Components ofthe program include:

• marketing through websites, brochures, bill enclosures, customer call centers, e-mail, home shows, trade shows, trade ally events, and trade publications

• training seminars

• rebate application review/approval/processing

• customerinquiry and issue resolution

• onsite equipment installation verification

• managementreports/data tracking GasNetworks is a comprehensive and aggressive rebate program with statewide reach. The rebates were initially substantial, between $200 and $400 perunit, and extraordinarily well publicized. In 2004 the program raised the rebate threshold from 90% AFUE to 92% AFUE, which accounts for the drop in rebated units after 2003. The results ofthis program are summarized in the table below (Figure 25).



### - 27-Figure 25

- GasNetworks Summary Massachusetts GasNetWorks Rebate Program Summary Year 2002 2003 2004 2005 2006 2007 2008 (1/1-9/30) # Rebates 7,931 8,365 6,904 6,414 6,013 5,258 7,107

Budget $2,424,105 $1,015,750 $1,043,810 $1,053,920 $1,248,560 $1,130,805 $1,775,598 % High Efficiency Units Rebated

- 59% 60% 47% 44% 42% 39% N/A Lower Bound % High Efficiency Units Rebated

- 75% 76% 60% 56% 54% 49% N/A Upper Bound The bottomtwo rows ofthis table are estimates ofthe program participation measured as a percentage oftotal estimated sales derived from the estimates in Section III.B. The significance ofthe steady decline in rebate percentages afterthe implementation ofa higherthreshold criterionfor rebates cannotbe determined absent actual sales data. It could indicate declining sales ofefficient units, declining program participation as the market adopts the higher efficiency technology, declining sales of units at all efficiency levels as aresult ofeconomic conditions, or some combination of factors. The spike in participation for the first three quarters of2008 is likely a response to high fuel prices and other economic factors. The American Council for an Energy-EfficientEconomy ("ACEEE") has recognized GasNetworks as an exemplary residential natural gas efficiency program in 200340 and as an exemplary multi-utility collaborative in 200841

. The GasNetworks program is pushing the boundaries ofwhat canbe achieved through market-based programmatic approaches without substantial increase in effort, cost and time. The Alternatives Analysis concluded that achieving penetration of95% would take seven years and require an additional annual investment approximately ten times greaterthan the current level, or approximately $13 million annually.


### B. Low-Income Grant Programs

- HEARTWAP The Commonwealth's Heating Emergency Assistance RetrofitTask Weatherization Assistance Program ("HEARTWAP") provides heating system repair and replacementto low-income households. The Alternatives Analysis estimated that achieving 95% penetrationthrough this mechanism would require 63 years and an additional annual investment ofapproximately $58 million.

40 http://aceee.org/utilitv/ngbestprac/u035.pdf?CFID=2231283&CFTOKEN=63561545, accessed 3/17/09 41 http://aceee.orgipubs/u081/muni-programs.pdf, accessed 3/17/09



### - 28-

### C. Tax Incentives The Commonwealth implemented a tax incentive for 2005 through 2007. The program provides a tax credit ofthe lower of30% ofthe eligible expenditures or $600 for energy efficientheating items. The Alternatives Analysis estimated that ramping up this program to achieve 95% penetration would require an additional annual public investment ofapproximately $3 million and take 18 years.


### D. Consumer Financing Programs

- HEAT Loan The HEAT Loan Program offers qualified residential customers loans ofup to $15,000 with seven year tenns at zero percentinterest for energy efficiency improvements, including high efficiency furnaces. The Alternatives Analysis estimated that to achieve 95% penetrationthis program would need to add an additional $4.5 million annually for 27 years.


### E. Public Information & 

### CustomerEducation Campaigns

- Residential Conservation Services Residential Conservation Services**("RCS~')** is a component ofthe Commonwealth's comprehensive efficiency offering for non-low income residential energy customers. The programprovides on-site analysis, advice, and implementation assistance for energy efficiency upgrades and retrofits. The Analysis estimated that it would require 21 years and an additional annual investment of$23.6 million to achieve 95% penetration ofhigh efficiency furnaces.


### F. Alternatives Analysis Conclusion The Alternative Analysis concluded that to achieve a marketpenetration of950/0 would require between 6 to 63 years and cost between $2.99 million and $57.67 million. The Alternative Analysis approached each alternative as a stand-alone policy. It does not incorporate adjustments for interactive effects. 

### It also held the diffusion curves constant. These analytic approaches are conservative, in that they likely understate the cost and time required to achieve the same end as the Commonwealths proposed standard through alternative mechanisms.

- 29-

### V. Conclusion Based on our research, Optimal Energy Inc has determined that the Commonwealthhas an unusual and compelling interest that can only be served by the adoption ofan efficiency standard of

### 900/0 AFUE orbetter for non-weatherized gas furnaces. We have further determined that this standard will have no adverse impact on the market channel and will have a positive net benefit for consumers and residents.

- 30

-

# ATTACHMENT E

THE COMMONWEALTH'S ALTERNATIVES ANALYSIS

# UNITED STATES DEPARTMENT OF ENERGY

Alternatives and Economic Analysis in Support ofthe Commonwealth ofMassachusetts' Petition to Exemptfrom Federal Preemption Massachusetts' 90% Annual Fuel Utilization Efficiency Standard for Non-Weatherized Gas Furnaces.

Prepared

### by:


### The Massachusetts Department ofEnergy Resources, a Department of the Massachusetts Executive Office ofEnergy & Environmental Affairs VivekMohta, Director, Energy Reliability & 

### Markets and Vivek Sakhrani, Research Assistant, Massachusetts Department of Energy Resources September30,2009

## Table ofContents Page 1. 

### Introduction and Summary 1 

### 1.1 History ofthe Commonwealth's ProposedNew Standard and the Need for a Waiver ofFederal Preemption 1 1.2 Non-Regulatory Alternatives Studied by the Commonwealth.. .......... 1 1.3 The Commonwealth's Proposed 90% AFUE Standard is Overwhelmingly Preferable to the Alternatives 2 1.4 The Commonwealth's Specific Findings on Cost and Implementation Schedules 3 2. Methodology 4 

### 2.1 DiffusionTheory and Levels ofPenetration 4 2.2 CostperLevel ofPenetration 7 2.3 MaximumLevels ofPenetration 7 2.4 Cost Responsibility 8 2.5 Policy Interactions 8 3. Non-Regulatory Alternatives 9 

### 3.1 ConsumerRebate Programs

- GasNetworks 9 3.2 ConsumerFinancing Assistance

- HEAT Loan Program 12 3.3 Tax Incentives

- Heating Energy Assistance and Tax ReliefAct of2005 14 3.4 Low Income Assistance Program

- HEARTWAP 16 3.5 Public Education

- Residential Conservation Services 18 4. Regulatory Standard 

### 21 4.1 Rationale for the Standard 21 4.2 Cost ofthe Standard 22

- 1 -Page 5. Conclusions 23 5.1 Summary ofAnalysis 23 5.2 Limitations ofthe Analysis 24 References 25


## List ofFigures
Figure 1. Figure 2. Figure 

### 3. Figure 4. Figure 5. Figure 6. Figure 7.

Table 1. Table 2. Table 3.
Table 4. Market Penetration as a result ofExternal and Internal Influences 5 Dependence ofthe Level ofPenetration on the Success Rate 6 GasNetworks

- Market Penetration Curve 11 REAT Loan

- Market Penetration Curve 14 Tax Incentive

- Market Penetration Curve 16 HEARTW AP

- Market Penetration Curve 18 RCSlMassSAVE

- Market Penetration Curve 21



## List ofTables Non-regulatory Alternatives to Federal NWGF Standards 1 Estimated Success Rate ofAlternative based on Individual Penetration
...7 GasNetworks Rebates for Residential High-Efficiency Heating Equipment 9 High-efficiencyNWGF Rebates Awarded from 2002

- 2008 ($ nominal) 10

-11-Table 5. Table 6.
Table 7.
Table 8. Table 9.
Table 10. Table 11. Table 12. Table 13.

.Table 14. Table 15.
Table 16.
Table 17. Table 18. Page Estimated GasNetworks Program Administration Costs 10 GasNetworks

- Estimated Time andAdditional Costs Requirements.
........ .......... ..... ......... ..................... ............ ... 11 Energy Efficiency Improvements Eligible for the HEAT Loan Program 12 HEAT Loan Program Costs in 2008 .13 HEAT Loan

- Estimated Time and Additional Costs Requirements , 13 Heating Equipment Tax Incentives of2005-2007 15
. Tax Incentive

- Estimated Time and Additional Costs Requirements
..... 15 HEARTWAP High-EfficiencyNWGF Program Costs 2007-2009.
..... 17 HEARTWAP

- Estimated Time and Additional Costs Requirements
..... 17 TargetRCSlMassSAVE Energy Efficiency Improvements 19 RCSlMassSAVE Program Budget for the Commonwealth 2007-2009 20 RCSlMassSAVE

- Estimated Time andAdditional Cost Requirements.
................. ............ ....... ........... ... ........... 20 Estimated One-time Cost ofthe Standard 23 Estimated Time and CostRequirements for Non-regulatory Alternatives 23

- 111

-

# 1. Introduction and Summary 1.1 History of the Commonwealth'sProposedNew StandardandtheNeedfora Waiver of FederalPreemption. In 2005, the Legislature ofthe Commonwealth ofMassachusetts promulgated a revised statute, Massachusetts General Laws ("M.G.L.") Chapter 25B, 

### § 5, providing that to be eligible for sale in the Commonwealth, non-weatherized gas-fired, residential furnaces C1NWGF") mustmeet or exceed annual fuel utilization efficiency ("AFUE") of 90%, which is more stringentthan the United States Department ofEnergy's ("DOE") current 80% AFUE efficiency standard.! Mass. Acts 2005, Ch. 139, § 11. The Massachusetts Department ofEnergy Resources ("DOER"), which is a Department ofthe Massachusetts Executive Office ofEnergy & Environmental Affairs, implemented this statutory change by the passage ofregulations found at 225 Code ofMassachusetts Regulations ("C.M.R.") 9.03. This regulatory scheme cannot become effective, however, unless and illltil the United States Department ofEnergy ("DOEll) grants the Commonwealth a waiver from federal preemption pursuantto 

### § 327(d) ofthe Energy Policy and Conservation Act ('IEPCA") (42 U.S.C. 6297(d)), upon a showing, by a preponderance ofthe evidence, that the proposed standard is necessary to meet "unusual and compelling State or local energy ... interests." 

### 1.2 Non-RegulatoryAlternativesStudied by

### the Commonwealth. To supportthe instant Petition for a waiver offederal preemption, DOER and Massachusetts Attorney General Martha Coakley (collectively the "Commonwealth") have conducted this Analysis ofthe potential benefits and consequences ofimplementing the Commonwealth's proposed 90% AFUE high-efficiency standard for NWGF compared to othernon-regulatory alternative approaches. The Commonwealth has identifiedfive such alternatives to the new 90% AFUE standard, which are listed in the following Table 1: Table 1. Non-regulatory Alternatives to FederalNWGF Standards

• Consumerrebate programs

• Low-income grantprograms

• Tax incentives

• Consumer financing programs

• Public information and customer education campaigns

I To be precise, the 80% standard, first promulgated November 19, 2007, by DOE, was subsequently challenged in the Second Circuit Court ofAppeals. That rule has been voluntarily remanded to DOE for furtherrulemaking and comment'
. - 1 -

### 1.3 The Commonwealth's Proposed90%AFUEStandardis Overwhelmingly Preferable to theAlternatives. As described in more detail below, although the intended benefits ofthe proposed 90% AFUE NWGF standard may also be achieved through these kinds ofnon-regulatory alternative methods, the Commonwealthhas concluded thatthe cost ofimplementing the proposed 90% AFUE standard is significantly lowerthan the cost ofany ofthe considerednon-regulatory alternatives and would be the most timely policy to achieve maximum market penetration. We have reached this conclusion supporting the Commonwealth's waiver Petition in part because there has already beenhigh market penetration ofhigh-efficiency furnaces in Massachusetts, which makes it difficult and less cost-effective for voluntary programmatic efforts to further influence marketpenetration. This existing high market penetrationhas resulted, among otherreasons, from the Commonwealth's aggressive and comprehensive implementation ofalternative non-regulatory approaches for acquiring energy savings from the installation ofmore efficient gas furnaces, but those approaches have largely reached theirmaximum benefit. This lastpoint is critical for understanding the analysis that follows. The Commonwealth does notbelieve that it can actually attain the policy objective of95% penetration ofhigh-efficiency NGWF through any ofthe five alternatives analyzed below, nor is the Commonwealth aware ofany precedent in any other state that suggests 95% penetration could be achieved through non-regulatory approaches. Asjustnoted above, and as also discussed in section IILB.2. ofthe reportprepared by Optimal Energy Inc. for the Commonwealth,2 the Commonwealthbelieves thatpenetration ofhighefficiency NWGFs has reached a plateau which cannotbe significantly improved upon through voluntary, non-regulatory approaches. However, in orderto present an "applesto-apples" comparison ofwhat the costs would be to attain 95% penetration via the regulatory approach and the five alternatives listed in Table 1, above, the analysis in this report assumes that 95% penetration could be achieved through each ofthe alternatives. By making this analytic assumption in orderto derive hypothetical costs for each alternative, the Commonwealth is in no way expressing its opinion that such a high penetration level could in fact be achieved through any approach other than by mandatory regulation. Commonwealthregulationin the fonn ofa more stringent 90% AFUE standard is therefore preferable to the alternatives available to the Commonwealth as the most feasible and cost-effective way to further increase market penetration ofhigh efficiency furnaces. Inperfonning this Analysis, the Commonwealth has used the epidemic model, a widely used technology diffusion model, to approximate the level ofpenetration ofhighefficiencyNWGF in total NWGF sales in the Commonwealth, and the associated costs of

2 See also Figure 13 ofthe Optima Report.

- 2-the alternatives. The expected marketpenetration ofhigh-efficiencyNWGF due to the proposed regulation is assumed to be 95%. The analysis compares alternatives at 75%, 85% and 95% penetration and assumes that 95% is the maximum achievable penetration through the use ofanon-regulatory alternative. 

### 1.4 The Commonwealth's Specific Findings on CostandImplementation Schedules. Applying the model, the Commonwealthmade the following considered findings: 

### Costof the Regulation: Inclusive ofpromulgation, implementation and possible enforcement, the cost ofthe new 90% standard to achieve 95% marketpenetration is approximately $24,000, and is an initial, non-recurring expense. This contrasts withthe much greater costs ofimplementation ofvarious potential non-regulatory alternatives, which include: 

### ConsumerRebatePrograms: The GasNetworks program requires 3 to 7 years to achieve marketpenetrations of75-95% at additional costs in the range $5.5 to $12.8 million.

### ConsumerFinancingAssistance: The HEAT Loan program requires 4 to 27 years to achieve marketpenetrations of75-950/0 at additional costs in the range $0.67 to $4.49 million. 

### TaxIncentives: The heating assistance tax incentive requires 3 to 18 years to achieve marketpenetrations of75-95% at additional costs in the range $0.49 to $2.99 million. 

### LowIncome GrantProgram: The Heating Emergency Assistance Retrofit Task Weatherization Assistance Program ("HEARTWAP") requires 10 to 63 years to achieve marketpenetrations of75-95% at additional costs in the range $9.15 to $57.67 million. 

### PublicInformation andEducation Programs: The Residential Conservation Services ("RCS" )/MassSAVE programrequires 4 to 21 years to achieve market penetrations of75-950/0 at additional costs in the range of$4.50 to $23.64 million. Ofthe non-regulatory alternatives, the GasNetworks program requires the least implementation time, approximately 6 years,-for 95% penetration. Tax incentives require the least cost, $2.99 million, for a 95% penetration. Compared to the very low costs of implementing a regulatory standard that is expectedto achieve 95% penetration ofnew NWGF shipments upon the effective compliance date, none ofthe non-regulatory alternatives can be consideredreliable stand-alone policies. This alternative analysis overwhelmingly indicates that the new 90% AFUE regulatory standard would be the mosttimely and cost-effective policy to achieve maximummarketpenetration.

- 3 -

# 2. Methodology Section 2 ofthis Analysis describes the methodology employed to review the considered non-regulatory alternatives. 

### 2.1 Diffusion Theory andLevels of Penetration The extensive economic literature on the diffusion process ofnew products indicates thatthere are a number ofdrivers affecting the process. Some priorwork attempts to develop analytical models ofdiffusion patterns ofnew products.**However~** the diverse characteristics ofproducts and nature ofconsumer adoption make it difficult to develop models that are universally applicable. Despite this difficulty, theoretical predictions and empirical studies have led to the following recognitions. First, new technologies may notbe adopted by all potential users in the**market~** regardless oftheir economic benefits and technological merits. Therefore, market penetration is typically characterized by eventual saturation at less than 100% ofthe available market. Second, not all adopters purchase new products atthe same time. Early adopters purchase new products soon after invention and commercialization, while others respond slowly, waiting for products to become more mature. In fact, adoption can lag invention by as much as an order ofmagnitude ofdelay. Moreover, the adoption trends differby the nature ofthe product; for instance, consumerproducts are adopted at different rates than industrial products. Third, diffusionprocesses canbe approximately characterized by asymmetric "S-curves" that chart the rate ofadoption ofa technology overtime. The logistic function in Figure 1, below, is an example ofatypical S-curve. The epidemic model, a widely used technology diffusion model, is usedto approximate the level ofpenetration ofhigh-efficiencyNWGF intotal NWGF sales in the Commonwealth. The model assumes that all consumers value the benefits ofa highefficiencyNWGF identically and thatthe cost oftheNWGF is constant overtime. The factor that influences the customerto adopt a high-efficiency NWGF is information about the availability and the benefits ofthe product. That is, information diffusion drives new technology adoption by individual consumers. The model includes information diffusion from marketing efforts (modified exponential function ofexternal influences) and word ofmouth diffusion (logistic function ofinternal influences) from existing users.

-4-100% 9()O,/o**~~** c 

## .! 70%
lwI 6(}l>,/o 

### .... 4,l 

### =- 500'0



# ... 40010 J. 

## .:s 30% iI':. 2()4;O 10%**~'O** 0 10 15 Year 20 25 30
Figure 1. Market Penetration as a result ofExternal and Intemal Influences Source: Federal N\VGF Standard Regulatory ImpactAnalysis, DOE (2007) Determining the contribution from word ofmouth information diffusion to market penetration in the Commonwealth is difficult. The extent ofsuch infonnation diffusion depends on the propensity ofhigh-efficiency NWGF users to voluntarily communicate with and influence non-users and cannot be estimated orpredicted easily. The alternative analysis therefore assumes that word ofmouth infonnation diffusion cannotbe relied upon to significantly increase the penetration ofhigh-efficiency NWGFs. On the other hand, the marketing efforts ofwide-spread energy efficiency programs already implemented in the Commonwealth includes promotions ofhigh-efficiency NWGFs. Moreover, the costs ofmarketing efforts in any program alternative can be budgeted and considered before the selection ofthe alternative. The analysis therefore assumes that any change in the level ofmarketpenetration can only be attributed to the marketing efforts ofthe alternatives, i.e. the external influencers that can be controlled. We note that the analysis focuses only on new NWGF shipments. Thus, the marketpenetration value is the percentage ofhigh-efficiency furnaces oftotal new NWGF shipments in the Commonwealth. A key assumption ofthe external influence theory is the success rate ofthe influence, or in other words the percentage ofconsumers that adoptthe new technology upon receiving information about it. Figure 2 depicts the dependence ofthe level of penetration overtime on the success rate ofinformation diffusion.



### -5-Market Penetration under External Influence

-25% Influence -50% Influence -75% Influence

14 12 10 8 Time (Years) 6 4 2 100
90
80
70
60 c 0 

# .. e Gi 50 c 4> a. 'Z «l :!:

20**~f--I'----------------------------I** 10**+--"~-------------------------I**

Figure 2. Dependence ofthe Level ofPenetration on the Success Rate

Although predicting the success rate ofa policy alternative is difficult, the analysis makes assumptions about the rate based on the nature ofthe alternative and any available historical data on the programs under the alternative. The analysis assumes that the success rate for an alternative can be approximated by its contribution to the total currentmarketpenetration, The aggressive marketing efforts ofexisting programs in the Commonwealth have led to the observed market penetration of64 to 70% oftotal new NWGF shipments between 2001 and 2007.3 Therefore, the total currentmarket penetration in the Commonwealth is assumed to be 67%, the average ofthe 2001-2007 range. The estimated contribution ofeach existing policy alternative to the total market penetration, called the individualpenetration, is shown in Table 2.

3 See Report and Analysis in Support ofthe Commonwealth ofMassachusetts' Petition to Exempt from Federal Preemption Massachusetts' 90% Annual Fuel Utilization Efficiency Standard for Non-Weatherized Gas Furnaces, prepared by Tom Franks & Alek Antczak, Optimal Energy Inc., dated September 30,2009.

- 6 -Table 2. Estimated Success Rate ofAlternative based on Individual Penetration Source: Compiled from statistics provided by program administrators Contribution to Individual Alternative Total Market Penetration Penetration Consumer Rebate 55% 37% Financing Assistance 10% 7".10 Low Income Grant 5% 3% Tax Incentive 16% 110/0 Public Education 14% 9% Total 100% 67%

The cuttent individual penetration for each alternative is used to approximate the success rate for estimating the future levels ofmarketpenetration for that alternative. 

### 2.2 

### CostperLevelof Penetration The cost effectiveness ofalternatives is compared by calculating the costs ofeach alternative per level ofmarketpenetration. The method not only considers the historical costs ofthe alternatives implemented by the Commonwealth but also forecasts costs that are expected to be incurred with increasing marketpenetration. An approach that is different from the traditional benefit-to-costratio approach used for comparing policy alternatives is selectedto avoid the complications ofbenefit quantification. The method focuses on assessing the program costs ofthe alternatives, while normalizing the program benefits realized.4 This approach is possible because the program welfare benefits gained from a given level ofmarketpenetration are identical, irrespective ofthe policy alternative used to achieve that level ofpenetration. For example, assume that the desired share ofhigh efficiencyNWGF oftotal NWGF sales is 

### 75%. Then, the benefits obtained from the 

### 750/0 penetration are identical, irrespective of the choice ofalternative. Therefore, the analysis reduces to a comparison ofcosts for the same level ofpenetration across all the alternatives. 

### 2.3 Maximum Levels of Penetration The non-regulatory alternatives will always result in apenetration ofless than 

### 1000/0 due to the nature oftechnology diffusion, as described in Section 2.1. Thus, any realistic goal for the desired market penetrationthrough the use ofan alternative will have to be at less than 100%. Additionally, the cost ofimplementing a standard is the same, whetherthe desired market penetration is less than or equal to 100%. As aresult, it is almost certain that the standard is the best and most cost-effective method for

4 Private benefits in the form ofbill savings are also identical in all cases and exceed private costs, i.e. the incremental cost ofa high-efficiency NGWF, in all cases. Thus, private benefits and costs are excluded from this analysis ofalternatives. 

### - 7 -extremely high levels ofpenetration, close to 100%. Therefore, this analysis aims to validate the cost-effectiveness ofthe standard not only for high penetrations, but also for levels much lowerthan 100%
, for instance 75 or 85%. The nature ofthe market for NWGFs in the Commonwealth and issues associated with residential housing infrastructure imply that some new purchases will continue to be low-efficiencyNWGFs. It is expectedthat about 5% ofall new NWGF purchases will continue to be below 90% AFUE.5 The expected marketpenetration ofhigh-efficiency NWGFs due to the promulgated regulation is therefore 95%. The level ofpenetration ofhigh efficiencyNWGF as apercentage oftotal NWGF sales in Massachusetts was 64

- 70% between 2001 and 2007. The analysis described in this documenttherefore compares alternatives at 75%, 85% and 95% penetration and assumes that 95% is the maximum achievable penetrationthrough the use ofanonregulatory alternative. 

### 2.4 CostResponsibility Initially, program costs may be incurred by different entities depending upon the choice ofthe alternative. However, the costs ofimplementing a standard or any ofthe non-regulatory alternatives are eventually borne broadly by the public. For instance, state agencies will bearthe administrative cost ofimplementing the standard. Ifan alternative such as a rebate program is chosen, utilities will bearthe setup and customer support costs. Ifthe standard is implemented, the administrative costs will be supported by consumers through tax revenues. Ifa rebate program is selected, the total amount in rebates paid outby a utility's rebateprogramto will be distributed across and recovered from all rate-payers. Thus, the costperlevel ofpenetration method analysis uses the total program costs involved, irrespective ofthe entity which initially incurs them. In some cases, complete program cost infonnation is unidentifiable or unavailable. The analysis is still valid ifthe "incomplete" total costs for a level of penetration are greaterthan the cost ofthe standard. 

### 2.5 PolicyInteractions Certainpolicies are often most effective when implemented 

### in combinationto provide incentives, such as combining consumerrebates ortax incentives with puplic educationprograms. The existence ofmore than one policy may have a synergistic effect ofincreasing the level ofpenetration. In reality, however, measuring and predicting such synergistic effects is quite difficult. To avoid the pitfalls offorecasting synergistic effects, combinations ofalternatives are not considered. The impact on level of penetration ofhigh efficiency NWGF sales due to each alternative is assumed to be independent ofthe existence and interactions ofother alternatives. The cost per level of penetration is therefore calculated independently for each alternative.

5 Informationprovided by the Commonwealth's Department ofHousing and Community Development - 8 -

## 3. Non-RegulatoryAlternatives This section provides detailed information about existing programs in the Commonwealth that exemplify the non-regulatory alternatives listed in Table 1. A brief description ofeach program is provided, and recent cost data and estimated future costs for the scenarios of75, 85 and 95% ofmarketpenetration are analyzed. 

### 3.1 ConsumerRebatePrograms

- GasNetworks GasNetworks is a collaborative consisting oflocal natural gas utility companies serving residential and commercial & industrial customers throughoutNew England. The collaborative has been promoting energy efficiency and the use ofhigh efficiency natural gas technologies since 1997. In 1997, GasNetworks began the process of developing Energy Efficiency-Market Transformation programs. The original collaborative membership consisted ofrepresentatives from five Massachusetts gas utilities. Overthe past six years, the membership has been broadened to include additional utilities throughout New England. GasNetworks receives support and endorsements from DOER, Northeast Energy Efficiency Council, Massachusetts LowIncome Energy AffordabilityNetwork, Massachusetts Department of Telecommunications and Energy, Northeast Gas Association and the Office of Massachusetts Attorney General Martha Coakley. A central component ofthe GasNetworks initiative is its residential highefficiency heating equipmentrebate program. Rebates up to $1,300 are available for heating equipmentthat meets or exceeds the AFUE ratings as shown in Table 3. Table 3. GasNetworks Rebates for Residential High-Efficiency Heating Equipment Source: GasNetworks $100rebate S200rebate S400rebate
5500rebate S1000rebate $1300rebate \VannAirFurnaces**.2:92~~** AFUE rating SteamBoilers**~82~o** AFUErating ·Ularm
... .ljrFurnaces**~92%** AFUEfating equippedwithElectronic CommutatedMotor (EC1J1) ore.quiV3lentadvancedfurnace fansystem

ForcedHot\VaterBoilers**~85~1o** AFUErating ForcedHot\VaterBoilers 2:90% _AFUErating CombinedHigh-EfficiencyBoilerandVlatef"HeatingUnit**';;::90~'Q** AFUErating withhot waterstorageof2gallons orless

The rebates for NWGF require a minimum of92 percentAFUE and are $100 for warm air furnaces and $400 for warm air furnaces equipped with anElectronic Commutated Motor. Thus, the program already provides incentives for furnace efficiency levels that are higherthan the proposed standard of90 percent AFUE. The



### - 9-largest cost component ofthe GasNetworks residential rebate program for high-efficiency rebates is the rebates awarded by participating utilities as shown in Table 4. Program administration costs for GasNetworks are shown in Table 5.

Table 4. High-efficiency NWGF Rebates Awarded from 2002

- 2008 ($ nominal) Source: Analysis ofdata provided by GasNetworks, J\;1A DPU filings UtiIi1y 2003 2004 2006 200l 2008* 7YearTdaI**B3ySl:cte~** $540,000 $150,2Xl $166,900 $2)9,400 $241,5)0 $193,800 $175,400 $1,677,2lO BerkshireGas $54,000 $13.000 $13.000 $24,300 $28,100**$1~9OO** $20,700 $173,g)() KeySpa1 Energy $1,347,600 $597,000 $542,600 $558,200 $677,aJO $656,500 $0**~38O,mo** Fall RiverGBs $21,000 $3.310 $5,300 $5,600 $2,000 $5,900 $7,600 $51,000 RtdtJurg Gas $3,300 $2,000 $1,900 $3,500 $5X) $1,900 $2,700 $16,400**~D** $0 $0 W $0 $0 $7,000 $1,342,353**$1.~353** NSTAAGBs $313,200 $101,2Xl $191,100 $146,300 $187,400 $153,400 $103,000 $1,195,ti)() Tataf $2,279,100 $869,000**~20,800** $947,300**$1,1~,2Xl** $1,038,400 $1,651,753 $8,844553

*Jan 1-**~m,** 2008

Table 5. Estimated GasNetworks Program Administration Costs Source: Analysis ofdata provided by GasNetworks,}vIA DPU filings Utility 2002 2003 2004 2005 2006 2007 2008* 7 YearTotal Bay Stale Gas $151,043 $115,019 $102,142 $110,990 $104,828 $79,706 $65,407 $729,135 Berkshire Gas $23,Q63 $19,508 $15,953 $19,745 $19,003 $16,743 $16,664 $131,579 KeySpan Energy $363,711 $457,563 $334,639 $267,805 $285,264 $268,674 $0 $1,977,656 Fall River Gas $14,373 $11,450 $11,134 $11,608 $11,134 $11,134 $11,529 $82,362 Fitchburg Gas $9,712 $10,897 $9,870 $10,186 $9,238 $9,396 $9,791 $69,090 NGRID $0 $0 $0 $0 $0 $11,055 $452,665 $463,720 NSTAR Gas $91,319 $81,839 $98,350 $73,228 $81,997 $62,010 $42,576 $531,319 Total $653,221 $696,276 $572,088 $493,562 $512,364 $458,718 $598,632 $3,984,861

• Jan 1 - Sep 30, 2008 The analysis assumes thatthe average total annual cost of$1,832,773 for the program does not change in future years. Based on the available data about the current marketpenetration ofhigh-efficiencyNWGF, 37% ofthe penetration is attributed to the GasNetworks program. This individual penetration is also used to approximate the success rate for the program in future years. The resulting time requirement to achieve the desired levels ofpenetration of75, 85 and 95% is shown in Table 6. The time requirement in each case multiplied by the average total annual cost for the program gives the estimated additional cost per level ofpenetration. Under the stated assumptions, the GasNetworks programrequires 3 to 7 years to achieve market penetrations of75-95% at additional costs in the range $5.5 to $12.8 million.

- 10-Table 6. GasNetworks

- Estimated Time andAdditional Costs Requirements Average An nual Cost ($) $1,832,773 Success Rate (%) 37%

Penetration Level Expected Time Estimated Add itianal Cost (%) (years) ($) 75% 3 5,498,319 85% 4 7,331,092 95% 7 12,829,411
Figure 3 is a graphical depiction ofthe estimated marketpenetration curve for the GasNetworks program, assuming a success rate of

### 370/0.

Market Penetration vs. Time assuming a Success Rate =37%
100

95

90

0 l: .9 85 dl l: £ 

# .. 80 nI :i!; 75

70

65 0 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Time (years) Figure 3. GasNetworks

- Market Penetration Curve

- 11

-

### 3.2 ConsumerFinancingAssistance

-HEATLoan Program MassSAVE is an energy savings program for Massachusetts homeovvners and renters. It offers energy tips and information about free home energy assessments, energy-saving products, and loans, rebates, and otherincentives for energy-saving home improvements. MassSAVE is a partnership between the Massachusetts gas and electric utility companies and local sellers and installers ofhome energy conservationproducts. The HEAT Loan Program, a component ofMassSAVE, offers financing assistance to residential consumers. Table 7. Energy Efficiency Improvements Eligible for the HEAT Loan Program

• Attic, Wall, and Basement Insulation

• High Efficiency Heating Systems including Furnaces and Boilers

• High Efficiency Domestic Hot Water Systems

• SolarHot Water Systems

• Energy Star Windows

• Energy Star Thermostats The HEAT Loan Program provides customers the opportunity to apply for a 0% loan from participating lenders for the installation ofqualified energy efficient improvements in theirhomes. Loans ofup to $15,000 are available (depending on utility) with terms ofup to 7 years. To apply for the loan, the customer must own and reside in a one to four family residence and obtain a Home Energy Assessmentthrough the MassSAVE program. A customer can obtain a loan by completing the following process for any ofthe improvements listed in Table 7: 1. Customers must sign up for a Home Energy Assessment from an authorized MassSAVE vendor. 2. A MassSAVErepresentative will assess the customers' energy efficiency improvement needs and determine what improvements are eligible for financing. The representative will provide the customerwith HEAT Loan Intake Form, Program Steps and Minimum Standards and Requirements. 3. Customers may obtainpre-approval from a participating lender ifthey choose. 4. Customers obtain written contractorprice proposal(s) for the installation ofthe improvements. 5. Customers forward the proposal(s) for review and approval by their MassSAVE HEAT Loan administrator listed on their electric utility HEAT Loan Intake Form. 6. Once approved, customers will receive a HEAT Loan Authorization Form from the MassSAVE vendorthat authorizes the lender to process the REAT Loan.

- 12-7. Customers finalize the loan with a participating lender and obtain two party checks. 8. Measures are installed and MassSAVE conducts a post installation inspection on the installed improvements. The costs incurred to administerthe HEAT Loan program in 2008 are shown in Table 8. Ofthe total program costs for financing all eligible improvements, approximately 72%, or $1,847,766, were incurred to finance heating systems. Improvements involving NWGF of92 percent AFUE orbetter comprised 90/0 ofthe total program costs, or $166,299. Table 8. HEAT Loan Program Costs in 2008 Source: HEAT Loan program administrator Conservation Services Group Heating Gas Average Gas Total Amount Total Program System Heating System Furnace Furnace Financed Costs Share Program Costs Share Program Costs $ 8,379,780 $ 2,566,341 72% $ 1,847,766 9% $ 166,299

The analysis assumes that the 2008 annual cost of$166,299 for the program does not change in future years. Based onthe available data about the currentmarket penetration ofhigh-efficiencyNWGF, 7% ofthe penetration is attributed to the HEAT Loan program. This individual penetration is also used to approximate the success rate for the program in future years. The resulting time requirement to achieve the desired levels ofpenetration of75, 85 and 95% is shown in Table 9. The time requirement in each case multiplied by the 2008 annual cost for the program gives the estimated additional costper level ofpenetration. Under the stated assumptions, the HEAT Loan program requires 4 to 27 years to achieve marketpenetrations of75-95% at additional costs in the range $0.67 to $4.49 million.

Table 9. HEAT Loan

- Estimated Time and Additional Costs Requirements Average Annual Cost ($) $166,299 Success Rate (%) 7%

Penetration Level Expected Time Estimated Additional Cost (%) (years) ($) 75% 4 665,196 85% 12 1,995,588 95% 27 4,490,073

- 13

-Market Penetration vs. Time assuming a Success Rate

### = 7%
100 -r-------------------------------.......,

90

0 c: 0 85 a; c: 41 a.


### ... 80 <i> <II :2: 75

70

65 0 5 10 15 Time (years) 20 25 30 35 Figure 4. HEAT Loan

- Market Penetration Curve Figure 4 is a graphical depiction ofthe estimated market penetration curve for the HEAT Loan Program, assuming a success rate of7% ' 

### 3.3 TaxIncentives

- Heating EnergyAssistance and TaxRelief Act

### of 2005 An "Act Relative to Heating Energy Assistance and Tax Relief' ("the Act") was signed into law in the Commonwealth onNovember22,2005 (See St. 2005, c. 140). Under the Act, certain taxpayers subjectto the personal income tax imposed by M.G.L. c. 62 were eligible for a deduction for certain expenses for home heating, and for a credit for energy-efficient heating items installed in residential property located in Massachusetts. Also underthe Act, taxpayers subjectto the corporate excise imposed by M.G.L. c. 63 may have been eligible for a credit for energy-efficientheating items installed inresidential property located in Massachusetts. Subject to certain limitations, a person or entity subjectto taxation under M.G.L. c. 62 or M.G.L. c. 63 that is the owner ofresidential property located in Massachusetts could claim a credit in the amount ofthe net expenditure for energy-efficientheating items "purchased on or afterNovember 1,2005, but not laterthan March 31, 2006, for installation in said property." S1. 2005, Ch. 140, §§ 15 and 16. The Act defined "energyefficientheating items" as follows:**~'Energy** efficientheating items" shall include, but not be limited to, home insulation, new window installation, advanced programmable thermostats, fuel efficientfurnaces, boilers, oil, gas, propane, or electric heating

- 14-systems, solar domestic hot water systems, materials for insulation or sealing ofa duct, attic, basement, rimjoint or wall and pipe insulation for heating systems." To be a qualified purchase for purposes ofthe credit, the itempurchased must have been one ofthe items listed in the Act orthe item must similarly have related to heat conservation, as opposed to some othertype ofenergy-efficient items. The maximum aggregate amount ofthe energy-efficiency heating creditthat may have been claimed by a qualifying taxpayer for the cost ofenergy efficient heating items was the lesser of30% ofthe net expenditure for the qualifying purchases or $600 ($1,000 for a multi-unit dwelling). Table 10. Heating EquipmentTax Incentives of2005-2007 Source: :i\;fassachusetts Department ofRevenue Total Number Total Credit Assumption of Gas Credit for Gas Average of Filers Furnaces'Share Furnaces Annual Credit 121,383 $ 51,233,000 10% $ 5,123,300 $ 1,707,767

The provisions ofthe Act allowed tax filers to receive credit in the years 2005 through 2007. The total credit claimed overthe three-yearperiod amounted to $51,233,000 ofwhich the share ofhigh-efficiency NWGFs is assumed to be 10%.6 The average annual credits amounted to $1,707,767. (Table 10.)

Table 11. Tax Incentive

- Estimated Time and Additional Costs Requirements Average An nual Cost ($) $1,707,767 Success Rate (%) 11%

Penetration Level Expected Time Estimated Additional Cost (%) (years) ($) 75% 3 498,897 85% 8 1,330,392 95% 18 2,993,382 The analysis assumes that the average annual cost of$I,707,767 for the program does not change in future years. Based on the available data about the current market penetration ofhigh-efficiency NWGF, 11 % ofthe penetration is attributed to the tax incentive. This individual penetration is also used to approximate the success rate for the program in future years. The resulting time requirementto achieve the desired levels of

6 Data on existing programs in the Commonwealth such as the HEAT Loan and the Low Income grant program indicates that high-efficiency NWGF rebates or grants are approximately 10 % ofthe total award.

- 15

-penetration of75, 85 and 95% is shown in Table 11. The time requirement in each case multiplied by the average annual cost for the program gives the estimated additional cost per level ofpenetration. Under the stated assumptions, the tax incentive requires 3 to 18 years to achieve market penetrations of75-95% at additional costs in the range $ 0.49 to $ 2.99 million.

Market Penetration vs. Time assuming a Success Rate

### = 11%
100

95

90

l:: .2 85 

### E Q> C CD a. 

# - 80 CD lIS 75

70

65 0 5 10 Time (years) 15 20 25 Figure 5. Tax Incentive

- Market Penetration Curve Figure 5 is a graphical depiction ofthe estimated market penetration curve for Tax Incentives assuming a success rate of11 % 

### 3.4 LowIncomeAssistanceProgram

- HEARTW AP The Commonwealth's Heating Emergency Assistance Retrofit Task Weatherization Assistance Program ("HEARTW AP") provides heating system repair and replacement services to low-income households. The programis administered by a network oflocal agencies, and in most areas the same agency that administers the Low Income Home Energy Assistance Program ("LIHEAP" or "Fuel Assistance") program. HEARTWAP contracts with heating system service companies to complete the work for eligible households. Households that are eligible for LIHEAP with a gross annual income that does not exceed 60% ofthe Estimated State Median Income are eligible for HEARTWAP services. The program is designed primarily to serve homeowners. Landlords are required to maintain the heating system for theirtenants underthe Massachusetts State Sanitary Code.

- 16-Through the heating season, the program is primarily an emergency-based heating system repair program thathelps eligible homeowners pay to repair orreplace defective or unsafe heating systems. Ifsufficient funds are available after the heating season, HEARTW AP completes maintenance work (cleans and tunes) and replaces heating systems that are in poor condition and not worth repairing. There are maximum allowable expenditure limits for different types ofheating system activities. In some instances households may be required to provide a copayment. Local agencies attempt to utilize all available utility funds for system replacements in an effort to minimize the need for client contributions. Households are served based on need. Typically, a LIHEAP (Fuel Assistance) eligible homeowner who has a no-heat orunsafe heating system situation will call the local agency. The agency contracts with licensed and insured heating repair technicians to fix the problem. To the greatest extentpossible local agencies will work with the customer's service dealer ofrecord. The costs incurred to administer the high-efficiency NWGF component ofthe HEARTWAP program from 2007 to 2009 are shoWn 

### in Table 12. The average cost of the program overthe three-yearperiod was $915,463.

Table 12. HEARTWAP High-Efficiency NWGF Program Costs 2007-2009 Source: lVlassachusetts Department ofHousing and Community Development FY 2007 FY 2008 FY 2009* Numberof Installations 194 162 241 Average Nominal Cost $ 4,306 $ 4,366 $ 4,995 Total Nominal Cost $ 835,303 $ 707,292 $ 1,203,795 *Year-to-date Table 13. HEARTW AP

- EstimatedTime and Additional Costs Requirements Average Annual Cost ($) $915,463 Success Rate (%) 3%

Penetration Level Expected Time Estimated Additional Cost (%) (years) ($) 75% 10 9,154,630 85% 27 24,717,501 95% 63 57,674,169

- 17

-The analysis assumes that the average annual cost of$915,463 for the program does not change in future years. Based on the available data aboutthe current market penetration ofhigh-efficiency NWGF, 3% ofthe penetration is attributed to the HEARTWAP program. This individual penetration is also used to approximate the success rate for the program in future years. The resulting time requirementto achieve the desired levels ofpenetration of75, 85 and 95% is shown in Table 13. The time requirement in each case multipliedby the average annual cost for the program gives the estimated additional costperlevel ofpenetration. Underthe stated assumptions, the HEARTWAP programrequires 10 to 63 years to achieve marketpenetrations of75-95% at additional costs in the range $9.15 to $57.67 million.

Market Penetration vs. Time assuming a Success Rate =3%
100 -,------------------------------_

95 +----------------------------==-01
........=-------1

90

c :8 85 e: li c Q) a. li 80 <lI :2 75

70 +---I--------------------------------j

70 65 60 55 50 45 40 35 30 25 20 15 10 5 65 +------;-------.-------,------r---------,-------,,----.-------;-------,-----,------;------,---------,------l

o Time (years) Figure 6. HEARTWAP

- Market Penetration Curve Figure 6 is a graphical depiction ofthe estimated market penetration curve for the HEAR1WAP Program assuming a success rate of3%


### 3.5 Public Education -Residential Conservation Services The Residential Conservation Services ("ReS") program in the Commonwealth is administered under Chapter 465 ofthe Acts of 1980, and pursuantto M.G.L. c. 25A, § 11A. The initiatives underthe RCS program are collectively called MassSAVE. During the period 1980 through**2000~** the RCSlMassSAVE program was an educational program encouraging customers to upgrade the efficiency oftheirhomes. Beginning in 2001, the

- 18

-RCS/MassSAVE program began to change its emphasis from education only to education and measure implementation. Customers are now offered incentives to implement energy saving measures in their homes. The program targets all non-low income residential customers living in singlefamily houses or one- to four-unit multifamily buildings, whose primary heating source is natural gas. The program is administered within each service territory by its Program Administrator and is coordinated statewide through the Residential Management Committee ("RMC") that actively manages and steers the statewide MassSAVE program. The program is delivered by programvendors selected through a competitive bidding process. The cost-effective energy-saving improvements targetedby the program are listed in Table 14. Table 14. Target RCSjMassSAVE Energy Efficiency Improvements

• Building Envelope

• HVAC/Mechanical systems

• WaterHeating

• Energy saving appliances and lighting

• Deep retro fit measures

• Newtechnologies / renewables
All customers who contact MassSAVE to learn aboutthe program are asked several questions to determine their need for and general interest in making energyefficient improvements. Customers are guided to appropriate program services provided by energy efficiency vendors including targeted energy efficiency information, advanced diagnostics, efficiency rebates, and deep energy retrofit support. Low-income customers are referred to appropriate low-income programs. When appropriate, a series ofhome visits are offeredto further engage the customer and proceed in a logical and methodical process ofidentifying and informing customers ofall available energy savings opportunities. The home visits include: Screening Visit: An in-home visit designed to provide general information and education about energy efficiency and identify opportunities and challenges for energy saving installations. Customers' specific needs are identified and they are directed to other energy efficiency resources as appropriate. Diagnostic Visit: A comprehensive energy assessment including a variety of diagnostic techniques such as blower doortests, infrared scanning, and duct leakage testing (based on vendor determination). Wherever feasible, full installation ofair sealing, duct sealing, andprogrammable thermostats are provided atno cost to the customer. The savings from the direct install measures are designed to coverthe cost ofthe visit. Specific energy efficientupgrades that require professional contractors, as well as, a customer contribution are identified and recommended.

- 19-QualityAssurance Visit: A visit intended to verify that all energy efficiency measures were installed to the levels deemed appropriate by Program Administrators and to ensure Program savings. The Commonwealth's expended budget amounts for administering the RCS/MassSAVE program for the period 2005 to 2009 are shown in Table 15. Additionally, program administration and market transformation budgets for NSTAR and National Grid, the two utilities in the Commonwealth thatparticipate in the RCS/MassSAVE program, amounted to $926,835 in 2009. The resulting annual program cost in 2009 was therefore $1,125,835.

Table 15. RCSjMassSAVE Program Budgetfor the Commonwealth 2007

- 2009 Source: Utility energy efficiency filings, Massachusetts Department ofPublic Utilities 2005 2006 2007 2008 2009 Total ReS BUdget $ 183,000 $ 196,000 $ 194,000 $ 186,000 $ 199,000

Table 16. RCSjMassSAVE

- EstimatedTime and Additional Cost Requirements Average Annual Cost ($) $1,125,835 Success Rate (%) 9%

Penetration Level Expected Time Estimated Additional Cost (%) (years) ($) 75% 4 4,503,340 85% 9 10,132,515 95% 21 23,642,535

- 20-Market Penetration vs. Time assuming a Success Rate

### = 9%
100

95

90 

### g c: 85
CIl C Cl> D- 'S 80 t: <G :5

70 -t-#--------------------------------;

30 25 20 15 Time (years) 10 5 65 -1-----,---------------,---------,.---------,---------,---------1

o Figure 7. RCS/MassSA VE

- Market Penetration Curve Figure 7 is a graphical depiction ofthe estimated marketpenetration curve for the RCSjMassSAVE Program assuming a success rate of9% The analysis assumes that the average annual cost of$1,123,835 for the program does not change in future years. Based on the available data about the current market penetration ofhigh-efficiency NWGF, 90/0 ofthe penetration is attributed to the RCSIMassSAVE program. This individual penetration is also used to approximate the success rate for the program in future years. The resulting time requirement to achieve the desired levels ofpenetration of75, 85 and 95% is shown in Table 16. The time requirement in each case multiplied bythe average annual cost for the program gives the estimated additional cost per level ofpenetration. Under the stated assumptions, the RCSIMassSAVE program requires 4 to 21 years to achieve market penetrations of75- 95% at additional costs inthe range $4.50 to $23.64 million. 

## 4. Regulatory Standard 4.1 Rationaleforthe Standard A regulatory standard for appliance efficiency in a given market is effective in significantly increasing the appliance's market penetration when appliances that meet or exceed the standard are readily available and have already attained a high market

- 21

-penetrationthrough other market-based or voluntary methods. The analysis conducted by the Commonwealth in support ofits petition for a waiver indicates that the market penetration ofhigh-efficiency NWGF ofat least 900/0 AFUE in the Commonwealth was 67% on average between 2001 and 2007. Additionally, the analysis concluded that promulgating the standard would not negatively affect furnace manufacturers, other regional markets, or the national market because 

### it is widely available. In fact, highefficiency NWGFs are a majorproduct offering under the EnergyStarprogram. Furthermore, the descriptions ofthe five non-regulatory alternatives and the associated cost and penetration data in Section 3 demonstrate that these market-based and voluntary programs have been aggressively implemented in the Commonwealth. However, these programs 

### will have to overcome additional barriers ifthey are to significantly increase marketpenetration Lack ofawareness on the part ofsome consumers, difficulty in assessing life-cycle costs and the overall energy savings potential ofthe appliance, and small savings on individual purchases may result in a consumer decisionto purchase a low-efficiencyNWGF. A
.. regulatory standard that requires the sale ofonly highefficiencyNWGFs will decrease the decision making burden on consumers, and ensure a significant increase in market penetration. The nature ofthe market for NWGFs in the Commonwealth and issues associated with residential housing infrastructure imply that some new purchases will continue to be low-efficiencyNWGFs. It is expected that about 5% ofall new NWGF purchases will continue to be below 90% AFUE7

. The expected marketpenetration ofhigh-efficiency NWGFs due to the promulgated regulation is therefore 95%. The expectedpenetration will be realized after the compliance date ofthe standard, which will be selected to allow for notification ofand preparation by ofall Commonwealth, consumer, market, and industry stakeholder groups. 

### 4.2 Costof theStandard The cost ofthe standard primarily involves two components: promulgation and implementation. The costs ofpromulgation were incurred subsequentto the legislative change in 2005, when the Commonwealth's Legislature revised M.G.L. Chapter 25B, § 5, to provide that to be eligible for sale in the Commonwealth, NWGF must meet or exceed AFUE of90 percent. Mass. Acts 2005, Ch. 139, § 11, revising M.G.L. c. 25B, § 

### 5. The cost ofpromulgation is estimated at approximately $14,000 inclusive oflegal research, fonnulation, drafting, stakeholdermeetings and updates to the appropriate sections ofthe Massachusetts General Laws and to 225 C.M.R. 9.03. The future cost ofimplementation is estimated at $10,000, which includes marketing ofthe new standard and public notification ofall Commonwealth, consumer, market, and industry stakeholders. The total cost of$24,000 is an initial, non-recurring expense, as summarized in Table 17. Compliance with the standard is expected to come at little to no future costto the Commonwealth. In states that have adopted appliance efficiency standards, including the Commonwealth, compliance is required through manufacturer self-certification. However, these requirements will not burden manufacturers, because high-efficiency

7 Infmmationprovided by the Commonwealth's Department ofHousing and Community Development.

- 22-furnaces are already being manufactured, tested and supplied for sale in the Commonwealth. In cases where enforcement ofcompliance may be required, the cost of enforcement is expected to be ofthe same order ofmagnitude, that is, a few thousand dollars8

. Table 17. Estimated One-time Cost ofthe Standard Labor, Overhead & Incidentals (per hour) $ 200 Activity Hours Expense Legal Research and Form ulation 30 $ 6,000 Development and Prom ulgation 40 -$ 8,000 Public Notification and Marketing 

### - $ 10,000 Total $ 24,000

Inclusive ofpromulgation, implementation and possible enforcement, the cost of the standard for 95% penetration is significantly lowerthan the cost ofnon-regulatory alternatives for the 75, 85 or 95% level ofpenetration. 

# 5. Conclusions 5.1 Summary of Analysis The time and costrequirements ofthe five non-regulatory alternatives are compared in Table 18. The eventual cost requirement for each alternative is a function of the historical success rate ofinfluence ofthe marketing efforts ofthe program and the average annual cost ofthe program. For a 95% level ofmarketpenetration, the range of costs is $2.99 million to $57.67 million over a period of6 to 63 years.

Table 18. Estimated Time and Cost Requirements for Non-regulato1y Alternatives Gas Networks Heat Loan Tax Relief HEARTWAP ReS JMassSAVE Success Rate = 37% 7% 11% 3% 9%

Penetration Expected Estimated Expected Estimated Expected Estimated Expected Estimated Expected Estimated

Level Time Additional Cost Time Additional Cost Time Additional Cost Time Additional Cost Time Additional Cost (%) (years) ($) Iyears) ($) (years) ($) (years) ($) (years) ($) 75% 1 1,832,773 4 665,196 3 498,897 10 9,154,630 4 4,503,340 85% 3 5,498,319 12 1,995,588 8 1,330,392 27 24,717,501 9 10,132,515 95% 6 10,996,638 27 4,490,073 18 2,993,382 63 57,674,169 21 23,642,535

8 Appliance Standards Awareness Project, American Council for an Energy Efficient Economy (2005, 2009)

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-Ofthe non-regulatory alternatives, the GasNetworks program requires the least time, 6 years, for 95% penetration because ofits high success rate of37%. The tax incentive requires the least cost, $2.99 million ofall the alternatives compared for a 95% penetration. The comparison ofthe non-regulatory alternatives indicates that all the alternatives represent significant additional time and costrequirements to increase the desired level ofpenetration. Compared to the very low costs ofimplementing a regulatory standardthatis expected to achieve 95% penetration ofnew NWGF shipments afterthe effective compliance date, none ofthe non-regulatory alternatives canbe considered reliable stand-alone policies. The alternative analysis overwhelmingly indicates thatthe regulatory standard is the most timely and cost-effective policy to achieve the desired level ofpenetration. 

### 5.2 Limitations of theAnalysis Although the alternative analysis reflects historical cost data and market penetration trends, the following limitations were experienced in estimating future trends. The analysis assumes that information diffusion occurs only due to marketing efforts ofthe programs. In reality, word-ofmouth diffusion plays an important role in new technology adoption. Because ofthe nature ofthe technology, i.e. the highefficiencyNWGF that is not a retail consumerproduct, it is difficult to make any assumptions about word ofmouth diffusion inthe Commonwealth. However, even if such an influence were to be included, it cannot be relied upon as a successful influencer comparedto arebate ortax incentive. Program cost data are often aggregated across and reported for heating system equipment and improvements that include not only NWGFs but also boilers, windows, thermostats, insulation, venting, etc. Wherever available, cost datafor only highefficiencyNWGFs was used. In cases where a breakdownby equipment was not available, conservative estimates from the program administrators were obtained. However, it is likely that detailed cost datafor only NWGFs might 'increase the average annual cost values used, thereby increasing the cost ofthe alternatives. Success rates for market penetration were estimated from historical data about total high-efficiencyNWGF sales in the Commonwealth. The estimates assume thatthe policies do not interact with each other and thatthere are no synergies betweenpolicies, ifmore than one policy program has been implemented. In reality, the simultaneous existence ofthe five program alternatives may have led to the high penetrationrate of 67% in the Commonwealth. 

### It is likely thatthe penetration rate may have been much lower ifone ormore ofthe programs did not exist. Additionally, the realized success rate ofthe individual alternatives may be much lower. This reasoning supports the conclusion ofthe analysis that selecting any ofthe non-regulatory alternatives as a stand-alone policy overthe regulatory standard does not seemto be a reliable approach to achieving the desired level ofpenetration in atimely and cost-effective manner.



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# References American Council for an Energy EfficientEconomy and Appliance Standards Awareness Project, "Ka-Boom! The Power of Appliance Standards," (2009). American Council for an Energy EfficientEconomy and Appliance Standards Awareness Project, "Leading the Way: Continued Opportunities for New State Appliance and Equipment Efficiency Standards," (2005). Conservation Services Group, HEATLoan Statistics provided to MA DOER, 2009. GasNetworks, ResidentialHigh-EfficiencyPrograms, 2009. Geroski, 

### P. A. Models ofTechnology Diffusion. Research Policy. 2000. 29: pp. 603-625. Hall, B. H. and B. Khan. Adoption of New Technology. 2003. Department ofEconomics, University ofCalifornia, Berkeley, CA. Working PaperNo. E03-330. Koomey, J. G., "The Big Mistake" in forecasting technology adoption. Technological Forecasting andSocial Change, 2002.69(2002): pp. 511-518. Lawrence BerkeleyNational Laboratory-End-Use Forecasting Group, Analysis of Tax Creditsfor EfficientEquipment, 2005 Lekvall. P and C. Wahlbin. A Study ofSome Assumptions UnderlYing Innovation Diffusion Functions. SwedishJournal of Economics. 1973.75: pp. 362-377. Massachusetts Department ofRousing and Community Development, HEARTWAP Statistics provided to MA DOER, 2009. Massachusetts Department ofPublic Utilities, EnergyEfficiencyFilings, 2009. Massachusetts Department ofRevenue, HeatingEnergyAssistance andTax Relief Statistics provided to 

### MA DOER, 2009. Rufo, M. and Fred Coito., California's SecretEnergy Surplus: The Potential for Energy Efficiency., 2002. XENERGY Inc. Oakland, CA. Prepared for The Energy Foundation and The HewlettFoundation. U.S. Department ofEnergy-Office ofEnergy Efficiency and Renewable Energy, Technical SupportDocument: Energy Conservation Programfor ConsumerProducts; ResidentialFurnaces andBoilers, 2007. Washington, D.C. U.S. Environmental Protection Agency and U.S. Department ofEnergy, Energy Star Program, 2009.

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