# GAO

B-322279
August 30, 2011 The Honorable JeffBingaman Chairman The Honorable Lisa Murkowski Ranking Member Committee on Energy and Natural Resources United States Senate
The Honorable Fred Upton Chairman The Honorable HenryA. Waxman Ranking Member Committee on Energy and Commerce House of Representatives Subject: DepartmentofEnergy: Energy Conservation Program: Energy Conservation Standards forResidentialFurnaces andResidential Central AirConditioners andHeat Pumps
Pursuant to section 801(a)(2)(A)oftitle 5, United States Code,this is our report on a major rule promulgated by the Department of Energy (DOE), entitled "Energy Conservation Program: Energy Conservation Standards for Residential Furnaces and Residential Central Air Conditioners and Heat Pumps" (RIN: 1904-AC06). We received the rule on August 16, 2011. It was published in the FederalRegisteras a direct final rule on June 27, 2011. 76 Fed

. Reg

. 37,408. The direct final rule will be effective on October 25, 2011, unless adverse comment is received by October 17, 2011.
The final rule adopts amended energy conservation standards for residential furnaces and for residential central airconditioners and heat pumps. DOE published a notice of proposed rulemaking that proposes identical energy efficiency standards in the Federal Registeron the same day. DOE states that if it receives adverse comment and determines that such comment may provide a reasonable basis for withdrawing the direct final rule, thisfinal rule will be withdrawn, and DOE will proceed with the proposed rule.

GAO-11-884REnclosed is our assessment of DOE's compliance with the procedural steps required by section 801(a)(1)(8)(i) through (iv) oftitle 5 with respect to the rule. Our reviewof the procedural steps taken indicates that DOE complied with the applicable requirements. Ifyou have any questions about this report orwish to contact GAO officials responsible forthe evaluation work relating to the subject matterofthe rule, please contact ShirleyA. Jones, Assistant General Counsel, at (202) 512-8156.

Robert J

. Cramer Managing Associate General Counsel Enclosure

cc: Daniel Cohen Assistant General Counsel for Legislation,

Regulation and Energy Efficiency Department of Energy

Page 2 GAO-11-884RENCLOSURE REPORT UNDER 5 U.S.C. 

### § 801(a)(2)(A) ON A MAJOR RULE ISSUED BYTHE DEPARTMENT OF ENERGY ENTITLED "ENERGY CONSERVATION PROGRAM: ENERGY CONSERVATION STANDARDS FOR RESIDENTIAL FURNACES AND RESIDENTIAL CENTRAL AIR CONDITIONERS AND HEAT PUMPS" (RIN: 1904-AC06)

(j) Cost-benefit analysis DOE prepared a cost-benefit analysis in conjunction with the directfinal rule. DOE estimated that the economic impacts on individual consumers are generally positive, and estimated the average life-cycle cost (Lee) savings for consumers in various regions for each category of device covered underthe direct final rule. For the standards in this rule on energy efficiency, DOE expects that manufacturers may lose 5.6 to 10.6 percent oftheir industry net present value (INPV), or approximately $0.48 billion to $0.90 billion. Forthe standards in this rule on standby mode and off mode power, DOE expects that manufacturers may lose up to 2.9 percent oftheir INPV, orapproximately $0.25 billion.
In determining the national benefits, DOE calculated the monetized value using a 7- percentdiscount rate, and 3-percent discount rate. Using a 7-percent discount rate, DOE estimated thatthe cost ofthe standards in this rule is $527 million to $773 million per year in increased equipment costs ($566 million to $825 peryear using a 3-percentdiscount rate), while the annualized benefits are $837 million to $1106 million peryear ($1289 million to $1686 million peryear using a 3-percent discount rate) in reduced equipment operating costs, $140 million to $178 million ($140 million to $178 million using a 3-percent discount rate) in eo, reductions, and $5.3 million to $6.9 million ($7.9 million to $10.2 million using a 3-percent discount rate) in reduced NOx emissions. In this case, the net benefit amounts to $456 million to $517 million ($871 million to $1049 million peryear using a 3-percentdiscount rate) per year. DOE also calculated annualized net benefits using a range of potential electricity and equipment price trend forecasts. Given the range of modeled price trends, the range ofnet benefits in this case is from $295 million to $623 million per year ($601 million to $1260 million peryear using a 3-percent discount rate). The low estimate corresponds to a scenario with a low electricity price trend and a constant real price trend for equipment, while the high estimate reflects a high electricity price trend and a strong declining real price trend for equipment.

GAO-"·884R(ii) Agency actions relevant to the Regulatory Flexibility Act, 5 U.S.C. 

### §§ 603-605, 607, and 609 DOE prepared a final regulatory flexibility analysis in conjunction with the final rule in which it discussed the potential impacts on small residential furnace, central air conditioner, and heat pump manufacturers and alternatives that could minimize these impacts. DOE detenmined that there are only fourdomestic small business 

### manufacturers of central air conditioning products, but none ofthe efficiency levels applicable to the products made by the small manufacturers are subject to change in the direct final rule. Therefore, DOE does not anticipate any adverse impacts on these manufacturers. DOE determined that there are five domestic small business manufacturers of residential fumace products, All ofthese small business manufacturers have product lines that meetthe efficiency level adopted in the direct final rule, so DOE believes thatthe adopted standard level would be unlikely to cause the small manufacturerto incur significant conversion costs. (iii) Agency actions relevant to sections 202-205 ofthe Unfunded Mandates Reform Act of 1995, 2 U.S.C

. 

### §§ 1532-1535 DOE determined that the final rule will not result in the expenditure of more than $100 million or more in anygiven year by state, local, ortribal governments. DOE detenmined that the directfinal rule may impose expenditures ofmore than $100 million on the private sector and that such expenditures may include investment in research and development and in capital expenditures byfurnace, central air conditioner, and heat pump manufacturers in the years between the final rule and the compliance date for the new standards, and incremental additional expenditures by consumers to purchase higher-efficiency furnace, central air conditioner, and heat pump products starting atthe compliance date for the applicable standard. (jv) Other relevant information or requirements under acts and executive orders
Administrative Procedure Act, 5 U.S.C. 

### §§ 551 et seg. The Administrative Procedure Act generally requires an agency to issue a notice of proposed rulemaking and an opportunityfor public comment. However, the Energy Policy and Conservation Act of 1975 (EPCA), as amended bythe Energy Independence and SecurityAct of 2007 (EISA 2007), and codified at 42 U

.S.C. 6295(p)(4), grants DOE the authority to issue a directfinal rule establishing an energy conservation standard on receipt of a statement submitted jointly by interested persons that arefairly representative ofrelevant pOints ofview. DOE used this authority in issuing the direct final rule, and also, as required under EPCA, published simultaneously with the directfinal rule a notice ofproposed rulemaking with identical energy standards and provided a public comment period ofat least 110days. 76 Fed. Reg. 37,549. Ifby October 17, 2011, DOE has received one or more adverse comments or an alternative joint recommendation relating to the

Page 2 GAO-11-884Rdirect final rule, DOE will need to determine whetherthe comments provide a reasonable basis forwithdrawal, and ifso, DOE must withdrawthe direct final rule and proceed with the simultaneously published proposed rulemaking. DOE is required to publish in the Federal Registerthe reason why a directfinal rule was withdrawn. Paperwork Reduction Act, 44 U.S.C. 

### §§ 3501-3520 The final rule contains collection of information requirements underthe Paperwork Reduction Act. DOE estimates that the public reporting burden forthe certification to average 

### 20 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and ccmpleting and reviewing the ccllection of information. DOE has submitted the requirement to the Office of Management and Budget (OMB) for approval. Statutory authorization forthe rule
The directfinal rule is authorized bythe Energy Policy and Conservation Actof 1975, as amended, as codified at42 U.S.C. 

### §§ 6291-6309

. Executive Order No. 12,866 (Regulatory Planning and Review) DOE determined thefinal rule to be eccnomically significant underthe Order and has been reviewed by OMB.
Executive Order No. 13,132 (Federalism) DOE states that itfollowed its policy for the intergovernmental consultation process in developing the rule. EPCA governs and prescribes federal preemption of state regulations as to energy conservation forthe products that are the subjectofthe directfinal rule. States can petition DOE for exemption from such preemption to the exient, and based on the criteria, setforth in EPCA. (42 U.S.C. 

### § 6297).

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