[Federal Register Volume 71, Number 194 (Friday, October 6, 2006)]
[Proposed Rules]
[Pages 59204-59259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-8431]



[[Page 59203]]

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Part II





Department of Energy





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Office of Energy Efficiency and Renewable Energy



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10 CFR Part 430



Energy Conservation Program for Consumer Products: Energy Conservation 
Standards for Residential Furnaces and Boilers; Proposed Rule

Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / 
Proposed Rules

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DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 430

[Docket Number EE-RM/STD-01-350]
RIN 1904-AA78


Energy Conservation Program for Consumer Products: Energy 
Conservation Standards for Residential Furnaces and Boilers

AGENCY: Office of Energy Efficiency and Renewable Energy, Department of 
Energy.

ACTION: Notice of proposed rulemaking and public meeting.

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SUMMARY: The Energy Policy and Conservation Act (EPCA or the Act) 
prescribes energy conservation standards for various consumer products 
and commercial and industrial equipment, and requires the Department of 
Energy (DOE or the Department) to determine if amendments to increase 
the stringency of the standards are technologically feasible and 
economically justified, and if they would save a significant amount of 
energy. In this notice, the Department is proposing to amend the energy 
conservation standards for residential furnaces and boilers and is 
announcing a public meeting.

DATES: The Department will hold a public meeting on October 30, 2006, 
from 9 a.m. to 4 p.m., in Washington, DC. The Department must receive 
requests to speak at the public meeting before 4 p.m., October 16, 
2006. The Department must receive a signed original and an electronic 
copy of statements to be given at the public meeting before 4 p.m., 
October 16, 2006.
    The Department will accept comments, data, and information 
regarding the notice of proposed rulemaking (NOPR) before and after the 
public meeting, but no later than January 15, 2007. See section VII, 
``Public Participation,'' of this notice for details.

ADDRESSES: You may submit comments, identified by docket number EE-RM/
STD-01-350 and/or regulatory information number (RIN) 1904-AA78, by any 
of the following methods:
    1. Federal eRulemaking Portal: http://www.regulations.gov. Follow 
the instructions for submitting comments.
    2. E-mail: <a href="/cdn-cgi/l/email-protection#0b596e78626f6e657f626a674d4945445b59486466666e657f784b6e6e256f646e256c647d"><span class="__cf_email__" data-cfemail="ebb98e98828f8e859f828a87ada9a5a4bbb9a88486868e859f98ab8e8ec58f848ec58c849d">[email protected]</span></a>. Include 
docket number EE-RM/STD-01-350 and/or RIN number 1904-AA78 in the 
subject line of the message.
    3. Mail: Ms. Brenda Edwards-Jones, U.S. Department of Energy, 
Building Technologies Program, Mailstop EE-2J, NOPR for Residential 
Furnaces and Boilers, Docket Number EE-RM/STD-01-350 and/or RIN number 
1904-AA78, 1000 Independence Avenue, SW., Washington, DC 20585-0121. 
Please submit one signed original paper copy.
    4. Hand Delivery/Courier: Ms. Brenda Edwards-Jones, U.S. Department 
of Energy, Building Technologies Program, Room 1J-018, 1000 
Independence Avenue, SW., Washington, DC 20585-0121. Telephone: (202) 
586-2945. Please submit one signed original paper copy.
    Instructions: All submissions received must include the agency name 
and Docket Number or RIN for this rulemaking. For detailed instructions 
on submitting comments and additional information on the rulemaking 
process, see section VII, ``Public Participation,'' of this notice for 
details.
    Docket: For access to the docket to read background documents or 
comments received, visit the U.S. Department of Energy, Forrestal 
Building, Room 1J-018 (Resource Room of the Building Technologies 
Program), 1000 Independence Avenue, SW., Washington, DC 20585-0121, 
(202) 586-2945, between 9 a.m. and 4 p.m., Monday through Friday, 
except Federal holidays. Please call Ms. Brenda Edwards-Jones at the 
above telephone number for additional information regarding visiting 
the Resource Room. Please note: The Department's Freedom of Information 
Reading Room (formerly Room 1E-190 at the Forrestal Building) is no 
longer housing rulemaking materials.

FOR FURTHER INFORMATION CONTACT: Mohammed Khan, Project Manager, Energy 
Conservation Standards for Residential Furnaces and Boilers, U.S. 
Department of Energy, Energy Efficiency and Renewable Energy, Building 
Technologies Program, EE-2J, 1000 Independence Avenue, SW., Washington, 
DC 20585-0121, (202) 586-7892, e-mail: <a href="/cdn-cgi/l/email-protection#eea381868f83838b8ac0a5868f80ae8b8bc08a818bc0898198"><span class="__cf_email__" data-cfemail="9cd1f3f4fdf1f1f9f8b2d7f4fdf2dcf9f9b2f8f3f9b2fbf3ea">[email protected]</span></a>.
    Francine Pinto, Esq., U.S. Department of Energy, Office of the 
General Counsel, GC-72, 1000 Independence Avenue, SW., Washington, DC 
20585-0121, (202) 586-9507, e-mail: <a href="/cdn-cgi/l/email-protection#e7a1958689848e8982c9b78e899388a78f96c9838882c9808891"><span class="__cf_email__" data-cfemail="abedd9cac5c8c2c5ce85fbc2c5dfc4ebc3da85cfc4ce85ccc4dd">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of the Proposed Rule
II. Introduction
    A. Consumer Overview
    B. Authority
    C. Background
    1. Current Standards
    2. History of Standards Rulemaking for Residential Furnaces and 
Boilers
    3. Process Improvement
    D. Negotiated Boiler Standards Agreement
III. General Discussion
    A. General Issues
    1. Impact of Furnace and Boiler Standards on Future Natural Gas 
Prices
    2. Inclusion of Electricity Consumption in Furnace and Boiler 
Standards
    3. Separate Standards for Equipment Installed in New Homes and 
as Replacements
    4. Separate Standards for Different Regions
    B. Test Procedures
    C. Technological Feasibility
    1. General
    2. Maximum Technologically Feasible Levels
    D. Energy Savings
    1. Determination of Savings
    2. Significance of Savings
    E. Economic Justification
    1. Specific Criteria
    a. Economic Impact on Manufacturers and Consumers
    b. Life-Cycle Costs
    c. Energy Savings
    d. Lessening of Utility or Performance of Products
    e. Impact of Any Lessening of Competition f. Need of the Nation 
to Conserve Energy
    g. Other Factors
    2. Rebuttable Presumption
IV. Methodology and Discussion of Comments
    A. Product Classes
    B. Engineering Analysis
    1. Manufacturing Costs
    2. Markups
    3. Installation Costs
    a. Non-Weatherized Gas Furnaces
    b. Other Product Classes
    4. Maintenance Costs
    5. Rebuttable-Presumption Payback Period
    C. Life-Cycle Cost and Payback Period Analysis
    1. Equipment Prices
    2. Installation Costs
    3. Household Annual Energy Consumption
    4. Energy Prices
    5. Maintenance Costs
    6. Equipment Lifetime
    7. Discount Rates
    8. Effective Date of the New Standards
    9. Inputs to Payback Period Analysis
    10. Base-Case Equipment
    D. National Impact Analysis--National Energy Savings and Net 
Present Value Analysis
    1. Shipments, National Energy Savings, and Net Present Value
    2. Annual Unit Energy Consumption
    3. Site-to-Source Conversion Factors
    4. Installed Equipment Costs
    5. Maintenance Costs
    6. Energy Prices
    7. Discount Rates
    E. Consumer Subgroup Analysis
    F. Manufacturer Impact Analysis
    1. General Description
    2. Industry Profile
    3. Industry Cash Flow Analysis
    4. Subgroup Impact Analysis

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    5. Government Regulatory Impact Model Analysis
    6. Manufacturer Interviews
    a. Issues
    b. GRIM Scenarios and Key Inputs
    1. Shipments Forecast
    2. Markups
    3. Product and Capital Conversion Costs
    G. Employment Impact Analysis
    H. Utility Impact Analysis
    I. Environmental Analysis
V. Analytical Results
    A. Trial Standard Levels
    B. Economic Justification and Energy Savings
    1. Economic Impacts on Consumers
    a. Life-Cycle Cost and Payback Period
    b. Consumer Subgroup Analysis
    c. Rebuttable-Presumption Payback
    2. Economic Impacts on Manufacturers
    a. Industry Cash Flow Analysis Results
    i. Non-Weatherized Gas Furnaces
    ii. Weatherized Gas Furnaces
    iii. Mobile Home Gas Furnaces
    iv. Oil-Fired Furnaces
    v. Gas Boilers
    vi. Oil-Fired Boilers
    b. Impacts on Manufacturing Capacity
    c. Impacts on Subgroups of Manufacturers
    d. Cumulative Regulatory Burden
    3. National Impact Analysis
    a. Significance of Energy Savings
    b. Net Present Value
    c. Impacts on Employment
    4. Impact on Utility or Performance of Products
    5. Impact of Any Lessening of Competition
    6. Need of the Nation to Conserve Energy
    7. Other Factors
    C. Proposed Standard
VI. Procedural Issues and Regulatory Review
    A. Review Under Executive Order 12866
    B. Review Under the Regulatory Flexibility Act
    C. Review Under the Paperwork Reduction Act
    D. Review Under the National Environmental Policy Act
    E. Review Under Executive Order 13132
    F. Review Under Executive Order 12988
    G. Review Under the Unfunded Mandates Reform Act of 1995
    H. Review Under the Treasury and General Government 
Appropriations Act of 1999
    I. Review Under Executive Order 12630
    J. Review Under the Treasury and General Government 
Appropriations Act of 2001
    K. Review Under Executive Order 13211
    L. Review Under the Information Quality Bulletin for Peer Review
    M. Review Under Executive Order 12898
VII. Public Participation
    A. Attendance at Public Meeting
    B. Procedure for Submitting Requests to Speak
    C. Conduct of Public Meeting
    D. Submission of Comments
    E. Issues on Which DOE Seeks Comment
VIII. Approval of the Office of the Secretary

I. Summary of the Proposed Rule

    The Energy Policy and Conservation Act (EPCA or the Act), as 
amended, specifies that any new or amended energy conservation standard 
the Department of Energy (DOE or the Department) prescribes for 
consumer products shall be designed to ``achieve the maximum 
improvement in energy efficiency * * * which the Secretary determines 
is technologically feasible and economically justified.'' (42 U.S.C. 
6295(o)(2)(A)) Furthermore, the new or amended standard must ``result 
in significant conservation of energy.'' (42 U.S.C. 6295(o)(3)(B)) In 
accordance with these and other statutory criteria discussed in this 
notice, the Department proposes to amend the residential furnace and 
boiler energy conservation standards and raise efficiency levels as 
shown in Table I.1. The proposed standards would apply to all covered 
furnaces and boilers offered for sale in the United States, effective 
on January 1, 2015.

      Table I.1.--Proposed Standard Levels for Furnaces and Boilers
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                        Product class                           AFUE (%)
------------------------------------------------------------------------
Non-weatherized gas furnaces.................................         80
Weatherized gas furnaces.....................................         83
Mobile home gas furnaces.....................................         80
Oil-fired furnaces...........................................         82
Gas boilers..................................................         84
Oil-fired boilers............................................         83
------------------------------------------------------------------------
AFUE = annual fuel utilization efficiency.

    The Department's analyses indicate that the proposed standards 
would save a significant amount of energy--an estimated 0.41 
quadrillion British thermal units (Btu), or quads, of cumulative energy 
over 24 years (2015-2038). For comparison, approximately six quads are 
used annually for space heating in U.S. homes. The economic impacts on 
consumers--i.e., the average life-cycle cost (LCC) savings--are 
positive.
    The cumulative national net present value (NPV) of total consumer 
costs and savings of the proposed standard (DOE's trial standard level 
2, or TSL2) from 2015 to 2038, in 2004$, ranges from $650 million 
(seven-percent discount rate) to $2.48 billion (three-percent discount 
rate). This is the estimated total value of future operating-cost-
savings minus the estimated increased equipment costs, discounted to 
2004. The Department estimated the furnace and boiler industry net 
present value (INPV) to be approximately $1.6 billion in 2004$. If the 
Department adopts the proposed standard, it expects manufacturers will 
lose 4.1 to 7 percent of the INPV, which is approximately $65-114 
million. The NPV for consumers (at the seven-percent discount rate) 
exceeds industry losses due to energy efficiency standards by about 
seven times.
    The proposed standard will lead to reductions in greenhouse gas 
emissions, resulting in cumulative (undiscounted) emission reductions 
of 19.6 million tons (Mt) of carbon dioxide (CO<INF>2</INF>) from 2015 
to 2038. Additionally, the standard would result in 13.0 thousand tons 
(kt) of nitrogen oxides (NO<INF>X</INF>) emissions reductions or 
generate a similar amount of NO<INF>X</INF> emissions allowance credits 
in areas where such emissions are subject to emissions caps. The 
standard would also generate 1.5 kt of sulfur dioxide (SO<INF>2</INF>) 
emissions reductions from 2015 to 2038. Most of the energy saved is 
natural gas. In addition, the Department expects the energy savings 
from the proposed standards to eliminate the need for approximately 14 
megawatts (MW) of generating capacity by 2030.
    The above results reflect the Department's use of energy price 
projections from the U.S. Energy Information Administration (EIA)'s 
Annual Energy Outlook 2005 (AEO2005). In addition, the Department 
performed a sensitivity analysis to assess the impacts of the standard 
using the Annual Energy Outlook 2006 (AEO2006) energy price forecasts. 
In this sensitivity analysis, the proposed standards would save the 
same amount of energy (0.41 quads) over 2015-2038. The cumulative NPV 
of total consumer costs and savings of the proposed standard from 2015 
to 2038, in 2004$, ranges from $820 million (seven-percent discount 
rate) to $3.02 billion (three-percent discount rate). The other results 
are approximately the same as in the analysis using AEO2005.
    The Department has found the proposed standard represents the 
maximum improvement in energy efficiency that is technologically 
feasible and economically justified. The Department found the benefits 
to the Nation of the proposed standard (energy savings, consumer 
average LCC savings, national NPV increase, and emission reductions) 
outweigh the costs (loss of manufacturer NPV, and LCC increases for 
some consumers). The Department considered higher energy efficiency 
levels as trial standard levels; however, it found the burdens of the 
higher efficiency levels (loss of manufacturer NPV, LCC increases for 
some consumers, and safety concerns) outweigh the benefits (energy 
savings, LCC savings for some consumers, national NPV increase, and 
emission reductions). The Department concludes that the proposed 
standard is economically justified. Furthermore, DOE has found that the 
proposed standard is technologically feasible since products achieving 
these

[[Page 59206]]

efficiencies already are commercially available.

II. Introduction

A. Consumer Overview

    The Department is proposing to raise the energy conservation 
standard levels for residential furnaces and boilers as shown above in 
Table II.1. The proposed efficiency standard would apply to all covered 
furnaces and boilers offered for sale in the United States, effective 
on January 1, 2015. Relative to the current standard levels, the 
proposed levels for residential furnaces and boilers represent an 
improvement in energy efficiency of one to five percent, depending on 
the product class.

     Table II.1.--Proposed Standard Levels for Furnaces and Boilers
------------------------------------------------------------------------
                                                                   AFUE
                         Product class                             (%)
------------------------------------------------------------------------
Non-weatherized gas furnaces...................................       80
Weatherized gas furnaces.......................................       83
Mobile home gas furnaces.......................................       80
Oil-fired furnaces.............................................       82
Gas boilers....................................................       84
Oil-fired boilers..............................................      83
------------------------------------------------------------------------
AFUE = annual fuel utilization efficiency.

B. Authority

    Title III of EPCA sets forth a variety of provisions designed to 
improve energy efficiency. Part B of title III (42 U.S.C. 6291-6309) 
provides for the Energy Conservation Program for Consumer Products 
other than Automobiles. The program covers consumer products (referred 
to hereafter as ``covered products''), including residential furnaces 
and boilers. (42 U.S.C. 6292(a)(5))
    Under the Act, the program consists essentially of these parts: 
Testing, labeling, and Federal energy conservation standards. The 
Federal Trade Commission (FTC) is responsible for labeling, and DOE 
implements the remainder of the program. Section 323 of the Act 
authorizes the Department, with assistance from the National Institute 
of Standards and Technology (NIST) and subject to certain criteria and 
conditions, to develop test procedures to measure the energy 
efficiency, energy use, or estimated annual operating cost of each 
covered product. (42 U.S.C. 6293) The furnace and boiler test 
procedures appear at Title 10 of the Code of Federal Regulations (CFR) 
part 430, subpart B, Appendix N.
    EPCA provides criteria for prescribing new or amended standards for 
covered products. As indicated above, any new or amended standard for a 
covered product must be designed to achieve the maximum improvement in 
energy efficiency that is technologically feasible and economically 
justified. (42 U.S.C. 6295(o)(2)(A)) EPCA precludes the Department from 
adopting any standard that would not result in significant conservation 
of energy. (42 U.S.C. 6295(o)(3)(B)) Moreover, the Department may not 
prescribe a standard: (1) For certain products, if no test procedure 
has been established for the product, or (2) if DOE determines by rule 
that the standard is not technologically feasible or economically 
justified. (42 U.S.C. 6295(o)(3)(B) The Act (42 U.S.C. 
6295(o)(2)(B)(i)) also provides that, in deciding whether a standard is 
economically justified, DOE must, after receiving comments on the 
proposed standard, determine whether the benefits of the standard 
exceed its burdens by considering, to the greatest extent practicable, 
the following seven factors:

    (1) The economic impact of the standard on manufacturers and 
consumers of the products subject to the standard;
    (2) The savings in operating costs throughout the estimated 
average life of the covered products in the type (or class) compared 
to any increase in the price, initial charges, or maintenance 
expenses for the covered products that are likely to result from the 
imposition of the standard;
    (3) The total projected amount of energy savings likely to 
result directly from the imposition of the standard;
    (4) Any lessening of the utility or the performance of the 
covered products likely to result from the imposition of the 
standard;
    (5) The impact of any lessening of competition, as determined in 
writing by the Attorney General, that is likely to result from the 
imposition of the standard;
    (6) The need for national energy conservation; and
    (7) Other factors the Secretary considers relevant.

    EPCA contains what is commonly known as an ``anti-backsliding'' 
provision. (42 U.S.C. 6295(o)(1)) This provision mandates that the 
Secretary not prescribe any amended standard that either increases the 
maximum allowable energy use or decreases the minimum required energy 
efficiency of a covered product. Also, the Secretary may not prescribe 
an amended or a new standard if interested persons have established by 
a preponderance of the evidence that the standard is likely to result 
in the unavailability in the United States of any covered product type 
(or class) with performance characteristics, features, sizes, 
capacities, and volume that are substantially the same as those 
generally available in the United States. (42 U.S.C. 6295 (o)(4))
    In addition, section 325(o)(2)(B)(iii) of EPCA establishes a 
rebuttable-presumption that a standard is economically justified if the 
Secretary finds that ``the additional cost to the consumer of 
purchasing a product complying with an energy efficiency standard level 
will be less than three times the value of the energy * * * savings 
during the first year that the consumer will receive as a result of the 
standard, as calculated under the applicable test procedure * * *.'' 
The rebuttable-presumption test is an alternative path to establishing 
economic justification. (42 U.S.C. 6295(o)(2)(B)(iii))
    Section 325(q)(1) of EPCA is applicable to promulgating a standard 
for a type or class of covered product that has two or more 
subcategories. The Department must specify a different standard level 
than that which applies generally to such type or class of products 
``for any group of covered products which have the same function or 
intended use, if * * * products within such group--(A) Consume a 
different kind of energy from that consumed by other covered products 
within such type (or class); or (B) have a capacity or other 
performance-related feature which other products within such type (or 
class) do not have and such feature justifies a higher or lower 
standard'' that applies or will apply to the other products. (42 
U.S.C.6295(q)(l)) In determining whether a performance-related feature 
justifies such a different standard for a group of products, the 
Department must consider ``such factors as the utility to the consumer 
of such a feature'' and other factors DOE deems appropriate. Any rule 
prescribing such a standard must include an explanation of the basis on 
which such higher or lower level was established. (42 U.S.C. 
6295(q)(2))
    Federal energy conservation requirements generally supersede State 
laws or regulations concerning energy conservation testing, labeling, 
and standards. (42 U.S.C. 6297 (a)-(c)) The Department can, however, 
grant waivers of preemption for particular State laws or regulations, 
in accordance with the procedures and other provisions of section 
327(d) of the Act. (42 U.S.C. 6297(d)) Specifically, States with a 
regulation that provides for an energy conservation standard for any 
type of covered product for which there is a Federal energy 
conservation standard may petition the Secretary for a DOE rule that 
allows the State regulation to become effective with respect to such 
covered product. The Department must prescribe a rule granting the 
petition if the State establishes by a preponderance

[[Page 59207]]

of the evidence that its regulation is needed to meet ``unusual and 
compelling State or local energy * * * interests.'' (42 U.S.C. 
6297(d)(1)(B))

C. Background

1. Current Standards
    EPCA established an energy conservation standard for residential 
furnaces and boilers.\1\ It set the standard in terms of the annual 
fuel utilization efficiency (AFUE) descriptor at a minimum value of 78 
percent for most furnaces. It set the minimum AFUE at 75 percent for 
gas steam boilers and 80 percent for other boilers. For mobile home 
furnaces, EPCA set the minimum AFUE at 75 percent. These standards 
became effective on January 1, 1992, with the exception of the standard 
for mobile home furnaces, for which the effective date was September 1, 
1990. (42 U.S.C. 6295(f)(1)-(2))
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    \1\ EPCA states that a ``furnace'' includes forced-air and 
gravity central furnaces and low-pressure steam and hot water 
boilers, and that it must have a heat input rate of less than 
225,000 Btu/h for forced-air and gravity central furnaces, and less 
than 300,000 Btu/h for boilers. (42 U.S.C. 6291(23)) However, in 
this notice, DOE has adopted the terminology used in the heating, 
ventilating, and air conditioning industry, which considers furnaces 
and boilers as separate categories.
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2. History of Standards Rulemaking for Residential Furnaces and Boilers
    For ``small'' gas furnaces (those having an input rate of less than 
45,000 Btu per hour), the Department published a final rule on November 
17, 1989, in which it set the minimum AFUE for these products at 78 
percent, effective January 1, 1992. 54 FR 47916.
    For mobile home furnaces, the Department issued an advance notice 
of proposed rulemaking (ANOPR) on September 28, 1990 (55 FR 39624), 
followed by a proposed rule on March 4, 1994. 59 FR 10464. The Interior 
and Related Agencies Appropriations for Fiscal Year 1996 (Pub. L. 104-
34) included a moratorium on appliance standards rulemakings, 
preventing DOE from finalizing the standards on mobile home furnaces. 
The Department responded to the moratorium by developing an improved 
process, known as the Process Rule, for its energy conservation 
standards rulemakings (Procedures for Consideration of New or Revised 
Energy Conservation Standards for Consumer Products, Title 10 CFR part 
430, Subpart C, Appendix A). 61 FR 36974. The Process Rule provided 
guidance on how DOE prioritizes its standards rulemakings. As a result, 
the Department pursued standards rulemakings for other products rather 
than finalizing the proposed standard for mobile home furnaces. 
Therefore, the Department did not publish a final rule for amending 
mobile home furnace standards and the minimum energy conservation 
standard remained at 75 percent AFUE.
    The Act also directed the Department to publish a final rule to 
determine whether the standards should be amended for all furnaces and 
boilers. (42 U.S.C. 6295(f)(3)(B)) On September 8, 1993, the Department 
published an ANOPR (hereafter referred to as the September 1993 ANOPR) 
in which it presented the product classes for furnaces that it planned 
to analyze, and a detailed discussion of the analytical methodology 
that it expected to use in this rulemaking. 58 FR 47326. The Department 
invited stakeholders to submit comments and data on the planned 
methodology. However, the 1996 moratorium on appliance standards 
rulemakings prevented DOE from proceeding further with the rulemaking 
process.\2\
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    \2\ Pub. L. 104-34, the Department of the Interior and Related 
Agencies Appropriations Act for Fiscal Year 1996 which included a 
moratorium on proposing or issuing energy conservation appliance 
standard for FY 1996.
---------------------------------------------------------------------------

    In the fiscal year 2001 Priority Setting for the Appliance 
Rulemaking Process, DOE assigned a high level of priority to a 
rulemaking to consider amendments to the energy conservation standards 
for residential furnaces and boilers, including mobile home furnaces. 
On June 13, 2001, DOE published a Framework Document for Residential 
Furnaces and Boilers Standards Rulemaking (Framework Document). The 
Department held a public meeting on July 17, 2001, to discuss the 
procedural and analytical approaches in this rulemaking, and to seek 
stakeholder comments on the Framework Document.
    The Department held another public meeting on May 8, 2002, to 
receive and discuss comments on issues related to venting 
installations. In June 2002, the Gas Appliance Manufacturers 
Association (GAMA) commented on DOE's analysis of manufacturing costs. 
In August 2002, GAMA convened a meeting with DOE and the American 
Council for an Energy-Efficient Economy (ACEEE) to discuss approaches 
for analyzing electricity use in furnaces. In September 2002, the 
Department posted its engineering analysis and received stakeholder 
comments. The Department published an ANOPR on July 29, 2004 (hereafter 
referred to as the 2004 ANOPR), and held a public meeting on September 
29, 2004, to present the methodology and results of the ANOPR analyses. 
69 FR 45419.
    As set forth in the updated rulemaking timeline published in the 
Department's Semi-annual Regulatory Agenda on December 13, 2004, DOE 
expects to issue a final rule in 2007. 69 FR 72713. The effective date 
for any new standards for furnaces and boilers published in 2007 would 
be 2015, or eight years after publication as a final rule in the 
Federal Register. (42 U.S.C. 6295 (f)(3)(B))
3. Process Improvement
    The Process Rule applies to the development of energy conservation 
standards for all consumer products, including those for residential 
furnaces and boilers. 61 FR 36974. In this notice, the Department 
describes the framework and methodologies by which it is developing the 
standard. The framework and methodologies reflect improvements made and 
steps taken in accordance with the Process Rule, including the use of 
improved economic models and analytical tools. The rulemaking process 
is dynamic, and as timely new data, models, or tools that enhance the 
development of standards become available, the Department will 
incorporate them into the rulemaking.
    In response to the DOE's 2004 ANOPR, the American Gas Association 
(AGA) asserted that the spreadsheets used by the Department do not meet 
the requirements of the Process Rule, which specifies the use of 
transparent and robust analytical methods ``that are fully documented 
for the public and that produce results that can be explained and 
reproduced * * *.'' AGA suggested that DOE (1) explore simpler 
analytical methods for its analyses, or (2) provide stakeholders with 
more direct means of testing alternate assumptions and sensitivities. 
(AGA, No. 78 at p. 2) \3\ Southern Company (Southern) commented that it 
would be helpful if DOE provided tools for the review of its analysis 
results that could be used more easily. (Southern, No. 71 at p. 3) 
After the 2004 ANOPR, DOE improved the design and user-friendliness of 
the analytical spreadsheets by creating process diagrams and by adding 
additional summary worksheets, help screens to assist the user, and 
input screens to allow the testing of alternate assumptions. The 
Department also expanded its documentation by adding

[[Page 59208]]

appendices that explain in detail the design and use of the 
spreadsheets.
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    \3\ A notation in the form ``AGA, No. 78 at p. 2'' identifies a 
written comment the Department has received and has included in the 
docket of this rulemaking. This particular notation refers to a 
comment (1) By the American Gas Association (AGA), (2) in the 
document number 78 in the docket of this rulemaking (maintained in 
the Resource Room of the Building Technologies Program), and (3) 
appear on page 2 of document number 78.
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    GAMA commented that there should be more informal communication 
between DOE and the furnace industry during the course of the 
rulemaking. (GAMA, No. 67 at p. 8) In accordance with the Process Rule, 
DOE sought stakeholder review at several points in the rulemaking and 
organized public meetings, webcasts, and conference calls to discuss 
important issues. The Department recognizes the value of having 
informal, open communication with stakeholders, as stakeholder input 
can contribute significantly to the quality of the Department's 
analyses and improve the Department's decision making. However, the 
open nature of the process has introduced substantial delays in the 
Department's rulemaking schedules. Such delays have been an unintended 
consequence of the Process Rule. The Department therefore, recognizes 
the need for a balance in the allowance of stakeholder input and 
maintaining rulemaking schedules, and will better integrate stakeholder 
input and expert review within the scope of the structured notice-and-
comment rulemaking process.

D. Negotiated Boiler Standards Agreement

    On July 14, 2006, GAMA and ACEEE, on behalf of 28 residential 
boiler manufacturers and four energy efficiency organizations, 
submitted a negotiated agreement recommending new national standards 
for residential boilers that would consist of a performance requirement 
(minimum AFUE levels) and design requirements. The recommended 
performance levels are the maximum that the industry feels would 
safeguard against corrosion and ensure safe venting. Both GAMA and 
ACEEE believe that the design requirements would bring about 
additional, non-trivial energy savings.
    For gas-fired boilers, both water and steam types, the agreement 
calls for a ban on standing pilots. For gas-fired water boilers only, 
there are two design requirements. In addition to the ban on standing 
pilots, the agreement also requires a ``temperature reset'' feature 
that automatically adjusts the boiler output according to the outdoor 
ambient air temperature. For oil-fired water boilers, the agreement 
contains the design requirement for the same ``temperature reset'' 
feature.
    The Department sincerely appreciates the effort stakeholders have 
made to propose an agreement for the boiler portion of this rulemaking. 
However, the Department has determined that the recommended standards 
in the negotiated agreement are beyond the scope of its legal 
authority. The Energy Policy and Conservation Act (EPCA) authorizes the 
Secretary to amend energy conservation standards for specified 
products. (42 U.S.C. 6295) Section 321(6) of the EPCA defines the term 
``energy conservation standard'' as
    (A) A performance standard which prescribes a minimum level of 
energy efficiency or a maximum quantity of energy use, * * * or
    (B) A design requirement for the products specified in paragraphs 
(6), (7), (8), (10), (15), (16), (17), and (19) of section 322(a) * * * 
[of this title.]

(42 U.S.C. 6291(6))

    The language of EPCA authorizes the Department to establish a 
performance standard or a single design standard. EPCA's list of 
specified products for which a design standard can be established does 
not include residential furnaces and boilers. As such, a standard that 
establishes both a performance standard and a design requirement is 
beyond the scope of the Department's legal authority. In the case of 
gas-fired water boilers, the agreement recommends two design 
requirements which is contrary to EPCA's limit of one design 
requirement for the specified covered products.
    The Department's staff met with representatives from GAMA and ACEEE 
on August 1, 2006, and August 7, 2006, respectively, to discuss the 
Department's legal position on the negotiated agreement. The Department 
regrets that this negotiated agreement does not meet the statutory 
criteria in EPCA and therefore cannot be accepted. The Department 
strongly encourages stakeholders to continue to work together to 
propose agreements to the Department in the future, understanding that 
the Department must comply with EPCA's statutory requirements.

III. General Discussion

A. General Issues

    The Department received comments on several general issues related 
to the furnace and boiler rulemaking. Those issues are related to the 
impact of the standards on future natural gas prices, furnace 
electricity consumption, separate standards for equipment in new homes 
and replacements, and separate standards for different regions.
1. Impact of Furnace and Boiler Standards on Future Natural Gas Prices
    The Natural Resources Defense Council (NRDC), American Chemistry 
Council (ACC), ACEEE, and Dow Chemical Company commented that more 
stringent furnace and boiler standards may result in lower natural gas 
prices in the future, and that DOE should account for the associated 
benefit for all gas consumers. (NRDC, No. 52 at p. 2; ACC, No. 62 at p. 
3; ACEEE, No. 84 at p. 9; and Joint Comment by NRDC and Dow, No. 64 at 
p. 3) The impact of appliance standards on energy prices has not 
historically been a part of DOE's analysis. Estimating such impacts 
would require new analytical methods. The Department evaluated a recent 
study that includes consideration of the impacts of furnace and boiler 
standards on natural gas prices.\4\ While this study finds that 
standards could result in a small decrease in natural gas prices, the 
Department's review of the study reveals that there is no conclusive 
evidence that furnace and boiler standards will affect overall natural 
gas prices. If the stakeholders' assertion is correct, then consumer 
gas prices will decrease, in turn decreasing the income of gas 
utilities--resulting in a transfer of benefits from the natural gas 
producers to the consumers. However, on a societal level, there is no 
clear evidence that there will be any impact on natural gas prices 
resulting from the furnace and boiler standards. Furthermore, DOE 
believes it is currently impossible, within the framework of a 
standards rulemaking, to estimate the possible impact of energy 
conservation standards on utility prices. Therefore, the Department did 
not consider these impacts in the current rulemaking.
---------------------------------------------------------------------------

    \4\ Wiser, R., M. Bolinger, M. St. Clair. Easing the Natural Gas 
Crisis: Reducing Natural Gas Prices through Increased Deployment of 
Renewable Energy and Energy Efficiency. LBNL. January 2005. (http://eetd.lbl.gov/EA/EMP/reports/56756.pdf).
---------------------------------------------------------------------------

2. Inclusion of Electricity Consumption in Furnace and Boiler Standards
    The Department received a number of comments regarding the 
inclusion of furnace and boiler electricity consumption in amended 
standards for furnaces and boilers. The Department was recently given 
authority to regulate the electricity consumed by furnaces for the 
purposes of circulating air by the Energy Policy Act of 2005, Pub. L. 
104-58 (EPACT 2005). EPACT 2005, section 135(c), amended section 325 of 
EPCA (42 U.S.C. 6295(f)(3)) to include the following: ``[T]he Secretary 
may consider and prescribe energy conservation standards or energy use 
standards for electricity used for purposes of circulating air through 
duct work.'' However, at the November 15, 2005, public meeting to 
discuss DOE's appliance-standards-program schedule-setting, the 
Department received comments from GAMA and the

[[Page 59209]]

Appliance Standards Awareness Project (ASAP) urging the Department to 
complete the AFUE standard rulemaking as soon as possible. Furthermore, 
GAMA and ASAP expressed their preference that DOE address furnace 
blower electricity consumption separately from the AFUE standard 
rulemaking. Since adding electricity consumption standards to this 
rulemaking would likely cause further substantial delay in the 
rulemaking process, the Department accepts the recommendations from 
GAMA and ASAP and has decided not to address furnace electricity 
consumption in this rulemaking. It will consider furnace electricity 
consumption separately to enable it complete the furnace and boiler 
AFUE rulemaking as expeditiously as possible.
3. Separate Standards for Equipment Installed in New Homes and as 
Replacements
    ACEEE suggested that DOE consider separate standards for new 
construction and retrofits. (ACEEE, No. 53 at p. 5) EPCA directs the 
Department to establish performance standards that prescribe minimum 
levels of energy efficiency or maximum levels of energy use for covered 
products. The Act does not authorize DOE to set multiple levels of 
efficiency for a given covered product, depending on where the product 
is installed--either in terms of a given region of the country or in 
terms of home type, i.e., new or existing. (42 U.S.C. 6291(6)(A)) The 
Department believes it does not have the authority to set separate 
standards for furnaces and boilers for new homes and for existing homes 
and, therefore, rejects the suggestion that it consider separate 
standards for new construction and retrofits.
4. Separate Standards for Different Regions
    The Department received numerous comments regarding the setting of 
separate furnace and boiler standards for different regions of the 
country. Some of the commentators expressed reasons why separate 
standards would be beneficial or asked if DOE had the authority to set 
regional standards. (Ohio Consumers' Counsel (OCC), No. 70 at p. 5; 
Individuals, No. 73 at p. 1; Baltimore Gas and Electricity (BGE), No. 
75 at p. 1; National Association of Regulatory Utility Commissioners 
(NARUC), No. 77 at p. 5; ACEEE, No. 59.8 at pp. 36 \5\ and 165; 
Individual, No. 87 at p. 1; Northeast Energy Efficiency Partnerships 
(NEEP), No. 55 at pp. 2 and 3; NRDC, No. 59.8 at pp. 29 and 33, and No. 
63 at p. 9; Oregon Department of Energy (ODOE), No. 61 at p. 2; 
National Consumer Law Center (NCLC), No. 66 at pp. 7 and 8; New Jersey 
Board of Public Utilities (NJBPU), No. 83 at p. 1; Izaak Walton League 
of America (IWL), No. 88 at p. 1; Southern, No. 71 at p. 21 and No. 
59.8 at p. 219; Trane, No. 59.8 at p. 207; GAMA, No. 59.8 at pp. 206 
and 217; York, No. 65 at p. 2; Edison Electric Institute (EEI), No. 69 
at p. 2; Manufactured Housing Institute (MHI), No. 89 at p. 2; National 
Propane Gas Association (NPGA), No. 72 at p. 2; AGA, No. 59.8 at p. 40; 
Alliance to Save Energy (ASE), No. 80 at p. 2; North American 
Insulation Manufacturers Association (NAIMA), No. 60 at p. 1; and 
Lennox, No. 79 at p. 3)
---------------------------------------------------------------------------

    \5\ A notation in the form ``ACEEE, No. 59.8 at p. 36,'' 
identifies a comment in the transcript of the Public Meeting on 
Standards for Furnaces and Boilers held in Washington, DC, 9/29/
2004, which is document number 59.8 in the docket of this 
rulemaking. This particular notation refers to a comment (1) by the 
American Council for an Energy-Efficient Economy (ACEEE), (2) in the 
document number 59.8 in the docket of this rulemaking (maintained in 
the Resource Room of the Building Technologies Program), and (3) 
appearing on page 36 of document number 59.8.
---------------------------------------------------------------------------

    As discussed in the 2004 ANOPR, the Department has determined that 
EPCA does not authorize DOE to set regional energy conservation 
standards; instead, the Department can only establish national 
standards. 69 FR 45419. None of the comments received in response to 
the 2004 ANOPR provided a basis for changing that determination.
    However, the Department notes that EPCA allows states to seek from 
the Department a waiver of Federal preemption of state or local energy 
conservation standards. Section 327(d) of EPCA, ``Waiver of Federal 
Preemption,'' states that, ``Any State * * * with a State regulation 
which provides for any energy conservation standard * * * for any type 
* * * of covered product for which there is a Federal energy 
conservation standard * * * may file a petition with the Secretary 
requesting a rule that such State regulation become effective with 
respect to such covered product.'' (42 U.S.C. 6297(d)(1)(A)) Within a 
maximum of one year, DOE must act on any such petition. (42 U.S.C. 
6297(d)(2))
    The Department must prescribe a rule granting a waiver from Federal 
preemption if, subject to the condition specified in section 327(d), 
the State establishes by a preponderance of the evidence that its 
regulation is needed to meet ``unusual and compelling State or local 
energy * * * interests.'' (42 U.S.C. 6297(d)(1)(B)) The statute states 
that the phrase ``unusual and compelling State or local energy * * * 
interests'' means interests which:

    (i) Are substantially different in nature or magnitude than 
those prevailing in the United States generally; and (ii) are such 
that the costs, benefits, burdens, and reliability of energy * * * 
savings resulting from the State regulation make such regulation 
preferable or necessary when measured against the costs, benefits, 
burdens, and reliability of alternative approaches to energy * * * 
savings or production, including reliance on reasonably predictable 
market-induced improvements in efficiency of all products subject to 
the State regulation.
    The factors described in clause (ii) shall be evaluated within 
the context of the State's energy plan and forecast, and, with 
respect to a State regulation for which a petition has been 
submitted to the Secretary * * * [42 U.S.C. 6297(d)(1)(c)]

    In evaluating the evidence that a State regulation is needed to 
meet unusual and compelling State energy interests, the Department will 
consider the factors described in 42 U.S.C. 6297(d)(1)(C)(i) and (ii). 
It appears to the Department that in the context of residential 
furnaces and boilers, where regional climatic effects can have 
significant impact on whether a specified energy conservation standard 
would be technologically feasible and economically justified in that 
region, such regional climatic effects will be important in DOE's 
assessment of whether there are ``unusual and compelling State or local 
energy interests'' for State energy conservation standards. States 
having higher-than-average, population-weighted heating degree days 
(HDDs) based on long-term National Oceanic and Atmospheric 
Administration data \6\ would seem to have the best prospects for 
demonstrating ``unusual and compelling'' interests to support a waiver 
of preemption in the particular circumstances presented here.\7\ (In 
conducting its analysis, the Department used average heating degree 
days within a State to divide States into groups for purposes of 
assessing standards.) States with significantly higher heating 
requirements have significantly higher furnace use. This may indicate 
that, for

[[Page 59210]]

those States, a State energy conservation standard which is higher than 
the Federal standard would be cost-effective and would provide 
significantly more energy savings than the Federal standard. If those 
States, particularly the ones most severely affected, adopted standards 
higher than DOE's proposed standards, and sought waivers, it could 
result in certain contiguous States with higher requirements, which 
would lessen the impact on manufacturers.
---------------------------------------------------------------------------

    \6\ State, Regional, And National Monthly Heating Degree Days 
Weighted By Population (2000 Census), 1971--2000 (and previous 
normal periods). Historical Climatography Series No. 5-1. National 
Environmental Satellite, Data, and Information Service, National 
Oceanic and Atmospheric Administration. Available at: http://www5.ncdc.noaa.gov/climatenormals/hcs/HCS_51.pdf.
    \7\ Nationwide, the U.S. averages 5528 HDDs. The following 
States average 6000 or more HDDs: Alaska, Colorado, Connecticut, 
Idaho, Illinois, Iowa, Maine, Massachusetts, Michigan, Minnesota, 
Montana, Nebraska, New Hampshire, New York, North Dakota, South 
Dakota, Utah, Vermont, Wisconsin, and Wyoming.
---------------------------------------------------------------------------

    Another way to address the benefits and costs of proposed State 
regulations with higher energy conservation standards would be for a 
State in its application for a waiver of preemption to identify the 
saturation of homes with products that already meet those higher 
standards. For example, a State could provide evidence that a 
significant percentage of gas furnaces sold today in that State already 
meets, for example, a 90-percent-AFUE condensing standard.
    A State applying to DOE for a preemption waiver also could identify 
any subsidies and/or incentives, such as tax rebates or purchase price 
rebates, that the State or other entities are offering. To the extent 
States demonstrate that these programs have not worked, they may be 
able to show that ``the costs, benefits, burdens, and reliability'' of 
energy savings from mandatory State energy conservation regulations 
make such regulations preferable to their voluntary programs.
    EPCA section 327(d)(3) further provides that DOE may not grant a 
waiver if interested persons establish by a preponderance of the 
evidence that the State regulation would significantly burden 
manufacturing, marketing, distribution, sale, or servicing of the 
covered product on a national basis. (42 U.S.C. 6297(d)(3)) In 
determining whether the State regulation meets this criterion, the 
Department must consider the extent to which the State regulation 
addresses several factors.
    The first factor is ``the extent to which the State regulation will 
increase manufacturing or distribution costs of manufacturers, 
distributors, and others * * *.'' (42 U.S.C. 6297(d)(3)(A)) In 
addressing this factor, a State seeking a waiver of federal preemption 
likely would want to address the extent to which manufacturers already 
produce and sell products that would meet the State's proposed 
standard. This description also could include information describing 
how efficiencies of shipments to that State already vary from current 
DOE efficiency levels.
    The second factor is ``the extent to which the State regulation 
will disadvantage smaller manufacturers, distributors, or dealers or 
lessen competition in the sale of the covered product in the State * * 
*.'' (42 U.S.C. 6297(d)(3)(B)) Similar to the prior factor, in 
addressing this factor, a State seeking a waiver of federal preemption 
might wish to provide evidence with its petition that demonstrates that 
there are no, or just insignificant, differences between small and 
large manufacturers with respect to producing and selling furnaces in 
that State. A State also could offer other evidence as to why its 
regulation would not disadvantage these entities or lessen competition, 
based on the particular circumstances in that State. For example, a 
State could seek to demonstrate that the differences (or lack of 
differences) between small and large manufacturers, with respect to 
producing and selling furnaces in that State, indicate that the 
regulation would not disadvantage the smaller manufacturers.
    The third factor is ``the extent to which the State regulation 
would cause a burden to manufacturers to redesign and produce the 
covered product type * * *, taking into consideration the extent to 
which the regulation would result in a reduction (i) in the current 
models, or in the projected availability of models, that could be 
shipped on the effective date of the regulation to the State and within 
the United States; or (ii) in the current or projected sales volume of 
the covered product type * * * in the State and the United States * * 
*.'' (42 U.S.C. 6297(d)(3)(c)) In addressing this factor, a State 
seeking a waiver of federal preemption might seek to demonstrate that 
high-efficiency heating equipment, such as condensing furnaces, already 
have achieved significant market shares in that State. In some 
relatively cold States with significant heating requirements, sales of 
condensing furnaces are reported to be on the order of 50 percent. A 
State also might wish to submit other information that addresses why it 
believes its regulation would not affect sales volumes or the number of 
models available (except for elimination of lower efficiency models).
    The fourth factor is ``the extent to which the State regulation is 
likely to contribute significantly to a proliferation of State 
appliance efficiency requirements and the cumulative impact such 
requirements would have.'' (42 U.S.C. 6297(d)(3)(D)) In addressing this 
factor, a State seeking a waiver from DOE may wish to seek to 
demonstrate, for example, the extent to which it has chosen identical 
standard levels as other States that have developed proposed 
regulations or States that have regulations already in place.
    An additional factor DOE must consider is the extent to which ``the 
State regulation is likely to result in the unavailability in the State 
of any covered product type * * * of performance characteristics 
(including reliability), features, sizes, capacities, and volumes that 
are substantially the same as those generally available in the State * 
* *.'' (42 U.S.C. 6297(d)(4)) A State seeking preemption waiver may 
wish to explain in its petition or accompanying documents why it 
believes its regulation would not affect the characteristics and 
features (other than efficiency) of the furnaces that would be offered 
for sale in that State. It might seek to demonstrate, for example, that 
among products currently offered for sale in that or other States, high 
efficiency furnaces already have all of the characteristics and 
features available in less efficient furnaces sold in that State.
    The Department recognizes that States have set, or are considering, 
standards for furnaces and that some may wish to seek a determination 
from DOE that their standards are needed to meet ``unusual and 
compelling State or local energy interests.'' The Department encourages 
States to coordinate among themselves the submission of any waiver 
petitions they may wish to file. The Department will consider an 
aggregate petition from multiple States as long as the petition 
individually addresses the statutory criteria for each of the States. 
The Department believes the approach taken in evaluating the regional 
impacts of standards in its analysis represents a reasonable approach 
for estimating the national impacts of having a Federal standard and 
one or more higher State energy conservation standards for furnaces and 
boilers. All petitions for waivers also must comply with requirements 
as described in 10 CFR Part 430.41(a)(1).

B. Test Procedures

    Section 7(b) of the Process Rule provides that the Department will 
propose necessary modifications to the test procedures for a product 
before issuing the proposed rule concerning energy conservation 
standards for that product. For furnaces and boilers, the Department 
believes modifications are not currently necessary, so it has not 
proposed to modify the existing test procedure.

C. Technological Feasibility

1. General
    The Department considers a design option to be technologically 
feasible if it is in use by the respective industry or

[[Page 59211]]

if research has progressed to the development of a working prototype. 
The Process Rule sets forth a definition of technological feasibility 
as follows: ``Technologies incorporated in commercial products or in 
working prototypes will be considered technologically feasible.'' 10 
CFR part 430, Subpart C, Appendix A, section 4(a)(4)(i).
    In each standards rulemaking, the Department conducts a screening 
analysis, which it bases on information gathered regarding existing 
technology options and prototype designs. In consultation with 
manufacturers, design engineers, and other stakeholders, the Department 
develops a list of design options for consideration in the rulemaking. 
Once the Department has determined that a particular design option is 
technologically feasible, it further evaluates each design option in 
light of the other three criteria in the Process Rule. 10 CFR part 430, 
Subpart C, Appendix A, section 4(a)(3) and (4). The three additional 
criteria are: (a) Practicability to manufacture, install, and service, 
(b) adverse impacts on product utility or availability, or (c) health 
or safety concerns that cannot be resolved. All design options that 
pass these screening criteria are candidates for further assessment.
    As discussed in the 2004 ANOPR, the Department is not considering 
the following design options because they do not meet one or more of 
the screening criteria: self-generation of electric power, fuel-driven 
heat pumps, flue-gas recirculation, and smart valves. 69 FR 45387. In 
this notice, DOE has not changed the list of technology options that it 
screened out of the analysis. (See the Technical Support Document (TSD) 
accompanying this notice, Chapter 4.)
    Lennox, Carrier, Trane, York, NPGA, Alagasco, and MHI commented 
that the maximum efficiency level considered for non-condensing, non-
weatherized gas furnaces should be 80-percent AFUE. They contended 
that, at 81-percent AFUE, there would be a significant increase of risk 
to the consumer because of an increased potential for vent-system 
failure. These comments cited concerns regarding corrosion in vents 
from condensation, and noted that conditions under which consumers use 
the product are much more severe than lab conditions. (Lennox, Public 
Meeting Transcript, No. 59.8 at p. 27 and No. 79 at p. 1; Carrier, 
Public Meeting Transcript, No. 59.8 at p. 188 and No. 68 at p. 1; 
Trane, Public Meeting Transcript, No. 59.8 at p. 227; York, No. 65 at 
p. 7; NPGA, No. 72 at p. 3; Alagasco, No. 82 at p. 2; and MHI, No. 89 
at p. 4) NAIMA, OCC, and NJBPU disagreed with limiting consideration to 
an 80-percent-AFUE level. (NAIMA, No. 60 at p. 1; OCC, No. 70 at p. 5; 
and NJBPU, No. 83 at p. 2) The Department has reviewed the manufacturer 
literature and found that products at 81-percent AFUE are available for 
sale. It believes the fact that such products are being offered for 
sale demonstrates that they are practicable to manufacture, install, 
and service and cannot be excluded from consideration in this 
rulemaking.
    The Department recognizes that this AFUE level of 81 percent may 
pose health or safety concerns in certain conditions, but it believes 
that the concerns can likely be resolved with proper equipment and 
venting system design, as discussed in section IV.B.3. Therefore, DOE 
considered 81-percent AFUE in its analysis for non-weatherized gas 
furnaces, and took into account the stakeholders' concerns.
    The 2004 ANOPR analysis included non-weatherized gas furnaces at 82 
and 83-percent AFUE. However, because it is well understood that 
significant vent system corrosion problems, which can lead to potential 
safety issues, may exist at these efficiency levels for non-weatherized 
gas furnaces, the Department does not believe these products can be 
mass-produced and be reliable to install and service on the scale 
necessary to serve the relevant market by the effective date of the 
proposed standard. Therefore, DOE did not consider non-weatherized gas 
furnaces at 82 and 83-percent AFUE in the analysis for today's proposed 
rule.
    The evaluated technologies all have been used (or are being used) 
in commercially available products or working prototypes. The designs 
all incorporate materials and components that are commercially 
available in today's furnace and boiler supply market. The Department 
believes all of the efficiency levels evaluated in this notice are 
technologically feasible.
2. Maximum Technologically Feasible Levels
    In developing today's proposed rule, the Department followed the 
provisions of section 325(p)(2) of the Act, which states that, when the 
Department proposes to adopt, or to decline to adopt, an amended or new 
standard for each type (or class) of covered product, ``the Secretary 
shall determine the maximum improvement in energy efficiency or maximum 
reduction in energy use that is technologically feasible * * * .'' The 
Department determined the maximum technologically feasible (``max 
tech'') efficiency level in the engineering analysis using the most 
efficient design parameters that lead to the creation of the highest 
equipment efficiencies achievable. (See TSD Chapter 6.) Table III.1 
lists the max tech levels that the Department determined for this 
rulemaking.

     Table III.1.--Max Tech Levels Considered in Furnace and Boiler
                               Rulemaking
------------------------------------------------------------------------
                        Product class                           AFUE (%)
------------------------------------------------------------------------
Non-weatherized gas furnaces.................................         96
Weatherized gas furnaces.....................................         83
Mobile home gas furnaces.....................................         90
Oil-fired furnaces...........................................         85
Gas boilers..................................................         99
Oil-fired boilers............................................         95
------------------------------------------------------------------------

    For all product classes, products with these efficiency levels 
already are being sold in small quantities. (There is one weatherized 
gas furnace listed in the GAMA directory at 82.8-percent AFUE.) No 
production models or prototypes of equipment at higher efficiency 
levels are currently available. For weatherized gas furnaces, the 
Department recognizes that the 83-percent-AFUE level may pose health or 
safety concerns in certain installations. DOE believes these concerns 
can be resolved with proper equipment and system design and proper 
installation.

D. Energy Savings

1. Determination of Savings
    The Department used its national energy savings (NES) spreadsheet 
to estimate energy savings from amended standards for furnaces and 
boilers. (The NES Spreadsheet Model is described in section IV.D of 
this notice.) The Department forecasted energy savings over the period 
of analysis (beginning with 2015, the year that amended standards would 
go into effect, and ending in 2038) for each trial standard level, 
relative to the base case. It quantified the energy savings 
attributable to amended energy conservation standards as the difference 
in energy consumption between the standards case and the base case. The 
base case represents the forecast of energy consumption in the absence 
of amended energy conservation standards. The base case considers 
market demand for more-efficient products; for example, in the case of 
non-weatherized gas furnaces, the base case forecasts an increase in 
the market share of condensing furnaces by 2015.
    The NES Spreadsheet Model calculates the electricity savings in 
``site energy'' expressed in kilowatt-hours

[[Page 59212]]

(kWh). Site energy is the energy directly consumed on location by the 
furnace or boiler. The Department reports national energy savings in 
terms of the source energy savings, which is the savings of the energy 
that is used to generate and transmit the energy consumed at the site. 
(See TSD, Chapter 10.) The Department derived these conversion factors, 
which change with time, from the EIA's AEO2005.\8\
---------------------------------------------------------------------------

    \8\ The Department conducted an energy price sensitivity 
analysis using EIA's AEO2006. Section IV.C.4 provides further 
explanation and details of the energy price sensitivity analysis.
---------------------------------------------------------------------------

    AGA commented that DOE should consider the ``rebound effect'' that 
may occur as a result of more intensive use of a more energy-efficient 
appliance, leading to higher energy consumption. (AGA, No. 54 at p. 3) 
ACEEE stated that the rebound effect has often been hypothesized, but 
actual field experience indicates that there is rarely a rebound effect 
resulting from use of more-efficient appliances. (ACEEE, No. 84 at p. 
13)
    The Department examined a summary of the literature regarding the 
rebound effect in relation to space heating equipment.\9\ Based on five 
studies chosen for their robust methodology, the summary concluded 
that, for a 100 percent increase in fuel efficiency, values of ``take-
back'' or rebound for space heating are between 10 and 30 percent of 
the energy consumption savings. The National Energy Modeling System 
(NEMS), which is used for developing EIA's AEO, incorporates a rebound 
effect for space heating. According to an EIA report,\10\ the rebound 
effect for the residential module in NEMS results in a 0.15 percent 
increase in energy consumption for a 1 percent increase in efficiency. 
In keeping with EIA's approach, the Department chose to apply a rebound 
effect of 15 percent (for a 100 percent increase in efficiency) in its 
analysis of furnace and boiler standards. That is, DOE reduced the 
calculated energy savings and associated emissions reductions by 15 
percent.
---------------------------------------------------------------------------

    \9\ Greening, L.A., D.L. Greene, and C. Difiglio. Energy 
efficiency and consumption--the rebound effect--a survey. Energy 
Policy. 2000. 28: pp. 389-401.
    \10\ EIA, Price Responsiveness in the AEO2003 NEMS Residential 
and Commercial Buildings Sector Models (p. 3).
---------------------------------------------------------------------------

    The take-back in energy consumption associated with the rebound 
effect provides consumers with increased value (e.g., a warmer indoor 
environment, since the increased efficiency enables consumers to use 
their heating equipment more intensively). The impact on consumers is 
thus the sum of the change in the cost of owning the heating equipment 
(i.e., life-cycle cost) and the increased value for the warmer indoor 
environment. However, the Department is unable to monetize this 
increase in consumer value in the LCC analysis. The Department believes 
that, if it were able to monetize the increased value to consumers 
added by the rebound effect, this value would be at least as great as 
the value of the foregone energy savings. For this analysis, the 
Department estimates that this value is equivalent to the monetary 
value of the energy savings that would have occurred without the 
rebound effect. Therefore, the economic impacts on consumers with or 
without the rebound effect, as measured in the LCC and NPV analyses, 
are the same.
2. Significance of Savings
    Section 325 of the Act prohibits the Department from adopting a 
standard for a product if that standard would not result in 
``significant'' energy savings. (42 U.S.C. 6295(o)(3)(B)) While the Act 
does not define the term ``significant,'' the U.S. Court of Appeals, in 
Natural Resources Defense Council v. Herrington, 768 F.2d 1355, 1373 
(D.C. Cir. 1985), indicated that Congress intended ``significant'' 
energy savings in this context to be savings that were not ``genuinely 
trivial.'' The energy savings for energy conservation standards at each 
of the trial standard levels considered in this rulemaking are 
nontrivial, and therefore the Department considers them ``significant'' 
within the meaning of section 325 of the Act.

E. Economic Justification

1. Specific Criteria
    As noted earlier, EPCA provides seven factors to be evaluated in 
determining whether an energy conservation standard is economically 
justified. (42 U.S.C. 6295(o)(2)(B)) The following sections discuss how 
the Department has addressed each of those seven factors in this 
rulemaking.
    a. Economic Impact on Manufacturers and Consumers. The Process Rule 
established procedures, interpretations, and policies to guide the 
Department in the consideration of new or revised appliance energy 
conservation standards. The provisions of the rule have direct bearing 
on the implementation of the manufacturer impact analysis (MIA). First, 
as provided in Section 10 of the Process Rule (Principles for the 
Analysis of Impacts on Manufacturers), the Department uses an annual-
cash-flow approach in determining the quantitative impacts of a new or 
amended standard on manufacturers. This includes both a short-term 
assessment, based on the cost and capital requirements during the 
period between the announcement of a regulation and the time when the 
regulation becomes effective, and a long-term assessment. The impacts 
analyzed include INPV, cash flows by year, changes in revenue and 
income, and other measures of impact, as appropriate. Second, the 
Department analyzes and reports the impacts on different types of 
manufacturers, with particular attention to impacts on small 
manufacturers. Third, the Department considers the impact of standards 
on domestic manufacturer employment, manufacturing capacity, plant 
closures, and loss of capital investment. Finally, the Department takes 
into account cumulative impacts of different DOE regulations on 
manufacturers.
    For consumers, measures of economic impact include the changes in 
LCC and payback period for each trial standard level. As the Act sets 
forth, the LCC is one of the seven factors to be considered in 
determining economic justification. (42 U.S.C. 6295(o)(2)(B)(i)(II)) It 
is discussed in detail in the section below.
    ODOE commented that the simple payback period is not a useful 
metric, since it fails to take into account the rising costs of fuel. 
(ODOE, No. 61 at p. 10) The Department uses simple-payback-period 
results as one of the factors in evaluating the economic impacts of 
standards on consumers, but it relies more heavily on the impacts on 
LCC to take into account the changing cost of fuel.
    b. Life-Cycle Costs. The LCC is the sum of the purchase price of 
equipment, including the installation, and the operating expense, 
including energy and maintenance expenditures, discounted over the 
lifetime of the equipment. Where possible in estimating the energy 
costs in the LCC calculation, DOE uses consumer marginal energy rates, 
which are the energy rates that correspond to incremental changes in 
energy use.
    For each furnace and boiler product class, the Department 
calculated both LCC and LCC savings for various efficiency levels. The 
LCC analysis estimated the LCC for representative equipment in housing 
units that are representative of the segment of the U.S. housing stock 
that uses furnaces and boilers. To account for uncertainty and 
variability in specific inputs, such as equipment lifetime and discount 
rate, it used a distribution of values with probabilities attached to 
each value. For each housing unit, DOE sampled the values of these 
inputs from the probability distributions. As a result, the

[[Page 59213]]

analysis produced a range of LCCs. A distinct advantage of this 
approach is that DOE can identify the percentage of consumers achieving 
LCC savings or attaining certain payback values due to an increased 
energy conservation standard, in addition to the average LCC savings or 
average payback for that standard. The Department gives the LCC savings 
as a distribution, with a mean value and a range. The Department 
assumed in its analysis that the consumer purchases the furnace or 
boiler in 2015.
    c. Energy Savings. While significant conservation of energy is a 
separate statutory requirement for imposing an energy conservation 
standard, the Act requires DOE, in determining the economic 
justification of a standard, to consider the total projected energy 
savings that are expected to result directly from the standard. (42 
U.S.C. 6295(o)(2)(B)(i)(III)) The Department used the NES Spreadsheet 
results in its consideration of total projected savings.
    d. Lessening of Utility or Performance of Products. In establishing 
classes of products, and in evaluating design options and the impact of 
potential standard levels, the Department aimed to develop standards 
for residential furnaces and boilers which would not lessen the utility 
or performance of the products under consideration in this rulemaking. 
(42 U.S.C. 6295(o)(2)(B)(i)(IV)) None of the considered trial standard 
levels would reduce the utility or performance of furnaces and boilers. 
The efficiency levels considered in this rulemaking do not involve 
changes in equipment design or unusual installation requirements that 
could reduce the utility or performance of furnaces and boilers.
    e. Impact of Any Lessening of Competition. The Act directs the 
Department to consider any lessening of competition that is likely to 
result from standards. It directs the Attorney General to determine the 
impact, if any, of any lessening of competition likely to result from a 
proposed standard and to transmit such determination to the Secretary, 
not later than 60 days after the publication of a proposed rule, 
together with an analysis of the nature and extent of such impact. (42 
U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii)) The Department has transmitted 
a copy of today's proposed rule to the Attorney General and has 
requested that the Department of Justice (DOJ) provide its 
determination on this issue.
    f. Need of the Nation To Conserve Energy. The non-monetary benefits 
of the proposed standard are likely to be reflected in improvements to 
the security and reliability of the Nation's energy system--namely, 
reductions in the overall demand for energy will result in reduced 
costs for maintaining reliability of the Nation's electricity system. 
The Department conducts a utility impact analysis to estimate how 
standards may impact the Nation's needed power generation capacity. 
This analysis captures the effects of efficiency improvements on 
furnace electricity consumption, as well as impacts associated with the 
market shift from natural gas heating to electric heating that DOE 
estimates will occur at higher gas-furnace efficiency levels. This 
market shift more than offsets the electricity savings from more 
efficient furnace designs, resulting in an increase in projected 
generating capacity for the higher trial standard levels.
    The Department has determined that the energy conservation 
standards proposed today would result in reductions in greenhouse gas 
emissions. The Department quantified a range of primary energy 
conversion factors and estimated the emissions reductions associated 
with the generation displaced by the energy conservation standards. The 
Department reports the environmental effects of amended energy 
conservation standards at each trial standard level for this equipment 
in the TSD environmental assessment.
    g. Other Factors. The Act allows the Secretary of Energy, in 
determining whether a standard is economically justified, to consider 
any other factors the Secretary deems to be relevant. (42 U.S.C. 6295 
(o)(2) (B)(i)(VII)) Under this provision, the Department considered the 
potential for furnace and boiler standards to pose public health risks 
due to carbon monoxide release into the home as a result of venting 
system failure.
2. Rebuttable Presumption
    As set forth in section 325(o)(2)(B)(iii) of EPCA, 42 U.S.C. 
6295(o)(2)(B)(iii), there is a rebuttable presumption that an energy 
conservation standard is economically justified if the increased 
installed cost for a product that meets the standard is less than three 
times the value of the first-year energy savings resulting from the 
standard. However, although the Department examined the rebuttable-
presumption criteria, it determined economic justification for the 
proposed standard levels through a more detailed analysis of the 
economic impacts of increased efficiency as described above, pursuant 
to section 325(o)(2)(B)(i) of EPCA. (42 U.S.C. 6295(o)(2)(B)(i)) The 
rebuttable presumption payback calculation is discussed in section 
IV.B.5 of this notice.

IV. Methodology and Discussion of Comments

    The Department used spreadsheet models to meet certain objectives 
of the Process Rule for this rulemaking. It used the Engineering 
Spreadsheet to develop the relationship between cost and efficiency for 
furnaces and boilers and to calculate the simple payback for the 
purposes of satisfying the rebuttable payback requirements. The LCC 
Spreadsheet calculates the consumer benefits and payback periods for 
amended energy conservation standards. The National Impact Analysis 
Spreadsheet provides shipments forecasts and then calculates NES and 
NPV impacts of potential amended energy conservation standards. The 
Department also assessed manufacturer impacts, largely through the use 
of the Government Regulatory Impact Model (GRIM).
    Additionally, DOE estimated the impacts of residential furnace and 
boiler energy conservation standards on utilities and the environment. 
The Department used a version of EIA's NEMS for the utility and 
environmental analyses. The NEMS model simulates the energy economy of 
the U.S. and has been developed over several years by the EIA primarily 
for the purpose of preparing the AEO. The NEMS produces forecasts for 
the U.S. that are available in the public domain. The version of NEMS 
used for appliance standards analysis is called NEMS-BT, and is 
primarily based on the AEO2005 version with minor modifications.\11\ 
The NEMS offers a sophisticated picture of the effect of standards, 
since it accounts for the interactions between the various energy 
supply and demand sectors and the economy as a whole.
---------------------------------------------------------------------------

    \11\ The EIA approves the use of the name NEMS to describe only 
an AEO version of the model without any modification to code or 
data. Because the present analysis entails some minor code 
modifications and runs the model under various policy scenarios that 
deviate from AEO assumptions, the name NEMS-BT refers to the model 
as used here. For more information on NEMS, refer to The National 
Energy Modeling System: An Overview. DOE/EIA-0581 (98), February, 
1998. BT is DOE's Building Technologies Program. NEMS-BT was 
formerly called NEMS-BRS.
---------------------------------------------------------------------------

    The Department invites comments on the validity of the analytical 
methods used in this rulemaking and the appropriateness of the 
interpretation and use of the results of the analysis.

A. Product Classes

    For this rulemaking, the Department initially considered the 
product classes

[[Page 59214]]

discussed in the 1993 ANOPR. In 1987, the Act set the initial Federal 
energy conservation standard, which covered furnaces, boilers, mobile 
home furnaces, and ``small'' furnaces. In the 1993 ANOPR, the 
Department expanded the product classes to differentiate fuel type, 
heat transfer medium (i.e., hot water or steam for boilers), and 
outdoor and indoor installation suitability (i.e., weatherized or non-
weatherized). Table IV.1 lists the product classes DOE initially 
considered in this rulemaking.

Table IV.1.--Product Classes Considered in Furnace and Boiler Rulemaking
------------------------------------------------------------------------
                Product                          Characteristics
------------------------------------------------------------------------
Gas furnaces...........................  Non-weatherized and
                                          weatherized.
Oil-fired furnaces.....................  Non-weatherized and
                                          weatherized.
Mobile home furnaces...................  Gas and oil-fired.
Electric resistance furnaces...........  Electric.
Hot water boilers......................  Gas and oil-fired.
Steam boilers..........................  Gas and oil-fired.
------------------------------------------------------------------------

    Based on the market assessment and stakeholder comments, the 
Department grouped the product classes into three categories for the 
analysis for today's proposed rule. The first category consists of the 
most widely used product class, non-weatherized gas furnaces.
    The second category consists of those classes that have fewer 
shipments, but typically more than 100,000 per year: Weatherized gas 
furnaces, mobile home gas furnaces, non-weatherized oil-fired furnaces, 
hot-water gas boilers, and hot-water oil-fired boilers. The 
Department's analysis of these product classes was similar to its 
analysis of non-weatherized gas furnaces.
    The third category includes product classes for which DOE did not 
perform analyses and is not proposing an amendment to the current 
standards for these products. This category includes steam gas boilers 
and steam oil-fired boilers, which have annual shipments below 40,000 
units and show a declining trend of shipments. This category also 
includes weatherized oil-fired furnaces, mobile home oil-fired 
furnaces, and electric furnaces. Weatherized oil-fired furnaces and 
mobile home oil-fired furnaces have very low shipments and are 
represented by only a few models in the GAMA directory; promulgating a 
higher standard for these products would result in de minimis energy 
savings. Additionally, all of the GAMA-listed models for weatherized 
oil-fired furnaces and mobile home oil-fired furnaces exceed the 
current 78-percent-AFUE standard. Therefore, for these classes, DOE is 
not proposing an update of the existing standard. The Department did 
not consider electric furnaces since their efficiency approaches 100-
percent AFUE and improvements to them would also have de minimis 
energy-savings potential. Therefore, for electric furnaces, DOE is not 
proposing a standard.

B. Engineering Analysis

    The purpose of the engineering analysis is to characterize the 
relationship between efficiency and cost of furnaces and boilers. The 
Department used this efficiency/cost relationship as input to the 
payback period, LCC, and NES analyses.
    The engineering analysis develops data that can be used to 
establish the consumer price of more-efficient equipment. These data 
include manufacturing costs, markups, installation costs, and 
maintenance costs.
    To generate the manufacturing costs, the Department identified 
three basic methodologies: (1) The design-option approach, which 
provides the incremental costs of adding design options to a baseline 
model that will improve efficiency; (2) the efficiency-level approach, 
which provides the incremental costs of moving to higher energy-
efficiency levels, without regard to the particular design option(s) 
used to achieve such increases; and (3) the cost-assessment (or 
reverse-engineering) approach, which provides ``bottom-up'' 
manufacturing cost assessments for achieving various levels of 
increased efficiency, based on detailed data on costs for parts and 
material, labor, shipping/packaging, and investment for models that 
operate at particular efficiency levels.
    The Department began the manufacturing cost analysis by exploring 
how manufacturers would likely design products to perform at the 
various efficiency levels considered and to thoroughly understand the 
relationships between different equipment configurations and 
efficiency. The Department initially considered several design options 
that could meet each considered efficiency level. It selected the 
design option(s) it believed manufacturers would most likely implement 
to achieve a given considered energy efficiency level. To estimate the 
manufacturing costs of these design options, the Department relied 
primarily on the cost-assessment (or reverse-engineering) approach, but 
also used the design-option approach.
    To compare the total additional consumer cost of improved equipment 
efficiency, the Department defined a baseline design for each product 
class. The baseline model establishes the starting point for analyzing 
technologies that provide energy-efficiency improvement. Based on its 
market assessment and input provided by GAMA, the Department defined a 
baseline model as an appliance with an efficiency at the minimum level 
prescribed by EPCA (i.e., 78-percent AFUE for non-weatherized gas 
furnaces), and having commonly available features and technologies.
    The Department next determined markups, installation cost, and 
maintenance cost to complete the engineering analysis. It estimated 
markups using publicly available corporate and industry data and, for 
mobile home furnaces, data from MHI. To estimate installation costs, 
DOE created an Installation Model to assess venting costs, and verified 
it against known existing data. It estimated maintenance costs using 
publicly available industry data.
    Table IV.2 summarizes the approach and data DOE used to derive the 
inputs to the engineering analysis for the 2004 ANOPR analysis, and the 
changes made in the analysis for today's proposed rule. Discussion of 
the changes follows in the sections below.

[[Page 59215]]



     Table IV.2.--Approach and Data Used To Derive the Inputs to the
                          Engineering Analysis
------------------------------------------------------------------------
                                                        Proposed rule
            Input              2004 ANOPR analysis        analysis
------------------------------------------------------------------------
Equipment Cost..............  For the most widely   Added cost of drip
                               used efficiency       pan for condensing
                               levels, used a cost   units. Some units
                               model of              omit a combustion
                               manufacturing costs   air pipe. Updated
                               created by tear-      underlying metal
                               down analysis; for    and cost data to
                               the remaining         2004 via Consumer
                               levels, used design-  Price Index. Did
                               opinion analysis.     not consider design
                               Incorporated          options at 82-
                               industry feedback     percent and 83-
                               from GAMA and         percent AFUE for
                               individual            non-weatherized gas
                               manufacturers to      furnaces due to
                               generate              potential safety
                               manufacturing-cost-   hazards. Updated
                               versus-efficiency     manufacturing-cost-
                               curves.               versus-efficiency
                                                     curves.
Markups.....................  Derived markups from  No change.
                               an analysis of
                               corporate financial
                               data. Multiplied
                               manufacturing costs
                               by manufacturer,
                               distributor,
                               contractor, and
                               builder markups,
                               and sales tax, as
                               appropriate, to get
                               equipment price.
Installation Cost...........  Used a distribution   Same method; new
                               of weighted-average   assumption that all
                               installation costs    81-percent AFUE gas
                               from the              furnaces use double
                               Installation Model.   wall vents.
                               Installation
                               configuration are
                               weight-averaged by
                               frequency of
                               occurrence in the
                               field, and vary by
                               installation size.
                               The Installation
                               Model is based on a
                               commonly used cost-
                               estimation method
                               and is comparable
                               to available, known
                               data.
Maintenance Costs...........  Used Gas Research     Same sources, but
                               Institute data for    accounted for
                               gas furnaces and      higher maintenance
                               boilers, water        frequency for
                               heater rulemaking     modulating design
                               survey results for    option, and used
                               oil-fired             same costs for
                               equipment, and data   condensing and non-
                               from the 1993         condensing
                               rulemaking for        equipment.
                               mobile home
                               furnaces.
Annual Energy Use*..........  Calculated energy     No change.
                               use using the DOE
                               test procedure.**
Energy Prices*..............  AEO2003 forecast      AEO2005 forecast
                               prices for year       prices for
                               2012.                 effective date of
                                                     2015.
------------------------------------------------------------------------
* Inputs required to calculate rebuttable-presumption payback period.
  For more details on the rebuttable-presumption payback period, refer
  to section IV.B.5.
** The Department uses field-representative energy use values in the LCC
  and payback period analysis. Refer to section IV.C.3. for more
  details.

    The Department received comments concerning the efficiency levels 
it should consider in the engineering analysis.
    GAMA and Rheem expressed concern about producing an entire family 
of gas furnaces at 81-percent AFUE and suggested that, for some, and 
not all, furnace models within a given family, it is possible to design 
and produce units that can safely perform at the 81-percent level. They 
indicated that developing a complete family of furnaces, spanning the 
full range of capacities, in which all units could safely operate at 
81-percent AFUE, would be difficult due to confining design and 
manufacturing procedures. (GAMA, Public Meeting Transcript, No. 59.8 at 
p. 177; Rheem, Public Meeting Transcript, No. 59.8 at p. 179) In 
response to these comments, DOE conducted an analysis evaluating 
approaches necessary to manufacture a full line of product that can 
perform at 81-percent AFUE and the additional costs involved for 
producing such a family of furnaces.
    To perform this analysis, the Department identified an approach to 
manufacturing an entire furnace family at 81-percent AFUE without 
posing unacceptable safety and reliability risks. The Department 
identified two potential cases for producing an entire family of 81-
percent AFUE non-weatherized gas furnaces, and the additional per-unit 
cost associated with each case. The Department based the estimates for 
both cases on manufacturer-provided data, which an independent 
consultant reviewed. The first case, estimate case 1, includes SKU cost 
(Stock Keeping Unit and customization development cost), parts cost 
increases, and vent connector cost; case 2, in addition to the above 
costs, assumes that a heat exchanger redesign cost would be needed. The 
estimated additional per-unit cost for producing a family of furnaces 
that can achieve reliable, safe operation at 81-percent AFUE is $47.20 
for case 1 (the default case) and $88.70 for case 2.
    York asserted that DOE cannot set the proposed standard for mobile 
home furnaces above 80-percent AFUE, since section 325(o)(4) of EPCA, 
42 U.S.C. 6295(o)(4), provides that DOE may not prescribe an amended 
standard if ``the standard is likely to result in the unavailability in 
the United States of any covered product type (or class) of performance 
characteristics (including reliability), features, sizes, capacities, 
and volumes that are substantially the same as those generally 
available in the United States.'' York also stated that there are no 
non-condensing mobile home furnaces currently available on the market 
that exceed 80-percent AFUE. Additionally, York stated that their 
interpretation of this EPCA provision also applies to 90-percent AFUE 
units for mobile home furnaces. (York, No. 65 at p. 7)
    After considering the comments from York, DOE concluded that 
section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), does not require it to 
set a new or amended energy conservation standard either at an 
efficiency level currently available in the U.S., or at an efficiency 
level that would ensure all products meeting the standard would have 
all of the attributes of currently available products. The 
``performance characteristics'' and ``features'' referred to in section 
325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), do not include efficiency or 
energy-use levels. Rather, these terms refer to other types of product 
characteristics of concern to consumers, such as features affecting 
temperature control or user comfort. To

[[Page 59216]]

interpret section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), otherwise 
would bar DOE from ever prescribing higher minimum standard levels, 
because any such higher levels necessarily result in new energy-
efficiency-improving technologies incorporated into the product and the 
unavailability of products including less efficient technologies. This 
interpretation would be inconsistent with EPCA's other provisions and 
its purpose of improving product efficiencies. Thus, the lack of 
currently available, non-condensing, mobile home furnaces above 80-
percent AFUE does not mean that section 325(o)(4) of EPCA, 42 U.S.C. 
6295(o)(4), bars DOE from adopting a level higher than that as a 
minimum standard for this product class. Thus, DOE believes that 
section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), does not preclude DOE 
from considering efficiencies for mobile home furnaces above a given 
level, such as 80-percent AFUE. As discussed in section III.C.2 above, 
DOE identified 90-percent AFUE as the maximum technologically feasible 
level for mobile home furnaces. The Department analyzed efficiency 
levels that include 80-percent and 90-percent AFUE for mobile home 
furnaces and the results are presented in section V.C.
1. Manufacturing Costs
    The Department adjusted its engineering cost model based on cost 
data received from several individual manufacturers, and used the model 
to create new cost-efficiency curves for the industry. The Department 
then used these cost-efficiency curves as manufacturing cost inputs for 
the MIA. Details of the MIA are in Chapter 12 of the TSD.
    Lennox, York, and GAMA commented that the cost of materials in the 
2004 ANOPR TSD was outdated. (Lennox, Public Meeting Transcript, No. 
59.8 at p. 66; York, No. 65 at p. 3; and GAMA, No. 67 at p. 6) For the 
2004 ANOPR engineering analysis, reviewed by manufacturers, the 
Department used a five-year average of material prices from years 2000 
through 2004. In response to various comments, the Department reviewed 
material-cost data from the first quarter of 2005 and found prices 
higher than those in the reference scenario that it used in the 2004 
ANOPR analysis. Based on the more recent data, DOE updated the five-
year average prices used in the analysis for this notice and conducted 
a material price sensitivity analysis with two additional material-
price scenarios. The reference case uses a revised five-year average of 
material prices from years 2000 through 2004. The new prices of copper, 
aluminum, steel, and stainless steel reflect prices from the Bureau of 
Labor Statistics (BLS) Producer Price Indices (PPIs) spanning 2000-
2004. The Department used the PPIs for copper rolling, drawing, and 
extruding, and for steel mill products, and adjusted them to 2004$ 
using the gross-domestic-product implicit-price deflator.
    The Department created two scenarios for the material-price 
sensitivity analysis: a low-bound and a high-bound. It calculated the 
low-bound scenario by finding the lowest price per pound of M6 core 
steel between 2000 and 2004. The lowest price of M6 core steel on a 
per-pound basis occurred in 2002. Then, DOE applied a 15-percent 
reduction to each of the raw material costs in that same year. It used 
these prices to determine their effect on the cost-efficiency 
relationship. Likewise, DOE calculated the high-bound scenario using 
the average price for each of the raw materials from the first quarter 
of 2005, when prices of raw materials were uncharacteristically high. 
The Department evaluated the results of the material price sensitivity 
analysis, using all three material-cost scenarios, in the engineering 
analysis and then used them as inputs for the LCC analysis. The results 
for the material-price-sensitivity analysis are presented in Appendix Z 
of the TSD.
    GAMA stated that DOE's cost estimate for modulating furnaces is 
about 30 percent too low because of faulty assumptions regarding the 
cost of upgrading the controls. (GAMA, No. 67 at p. 2) The Department 
reviewed its cost estimate for modulating furnaces. Based on market 
data, it determined that the cost of the components for the evaluated 
design (two-stage modulation) is slightly higher than the cost used in 
the ANOPR analysis. Consequently, the Department implemented this small 
change in price for the NOPR analysis.
    Carrier stated that improving efficiency with modulation assumes 
maintaining constant excess air when switching from high fire to low 
fire. Carrier further stated that a brushless, direct-current (DC) 
draft inducer motor is required to maintain constant excess air, so DOE 
should include the cost of brushless, DC draft inducers in its 
analysis. (Carrier, Public Meeting Transcript, No. 59.8 at p. 181) To 
some extent, DOE did this in the analysis for the 2004 ANOPR. Current 
modulating furnaces have a two-stage motor for the draft inducer, and 
DOE included the cost of this motor in analyzing the cost of achieving 
that level of efficiency. The Department has revised its analysis for 
the proposed rule to account for the cost of the two-stage modulation 
design option components, including the cost of the draft inducer as 
advocated by Carrier, for all products that achieve higher efficiencies 
using modulation.
2. Markups
    Using the cost data, DOE developed estimates of the consumer price 
of furnaces and boilers. To estimate prices, DOE determined typical 
markups at each stage of the distribution chain, from the manufacturer 
to the consumer. In addition to estimating average markups, the 
Department characterized the markups with probability distributions 
through a statistical analysis of U.S. Census data and used these 
distributions in the LCC analysis. (See TSD, Chapter 5.)
    The Department estimated the manufacturer markup based on analysis 
of corporate financial records. It included the following expenses in 
the determination of the manufacturer markup: research and development 
(R&D), net profit, general and administrative costs, warranty expenses, 
taxes, and sales and marketing costs. It excluded shipping expenses 
(out-bound) because these expenses were included in the manufacturing 
cost. The Department determined R&D expenses by assuming that 
engineering budgets would be reallocated from value engineering and 
new-feature development to product development and redesign.
    The Department based the wholesale and contractor markups on firm 
balance sheet data. It estimated builder markup (applied to new 
construction installations only) from U.S. Census data for the 
residential and commercial building construction industry and from 
heating, ventilating, and air-conditioning (HVAC) industry data. The 
Department used recent State and local sales tax data to estimate sales 
taxes (applied to replacement installations only).
    For mobile home furnaces, the distribution chain is shorter than 
the distribution chains for other product classes. The heating 
equipment manufacturer sells to the manufactured housing maker, who 
installs the furnace at the factory. In this case, the Department 
estimated markups using information from MHI.
    The overall markups are lower for new construction installations 
than for replacement installations. For wholesalers and contractors, 
the markup on incremental costs (i.e., the costs over and above the 
costs for a baseline model) is lower than the markup on the baseline 
model cost. The reason is that only wholesalers' and contractors' 
profits and other operating costs

[[Page 59217]]

typically scale with the price they pay for the products they sell. 
Trane questioned the assumption that incremental markups should be 
lower than baseline markups. (Trane, Public Meeting Transcript, No. 
59.8 at p. 147) AGA said that wholesalers, contractors, and builders 
will base markups not on incremental costs of the technology, but on 
the economic value of the product in the supply chain. (AGA, No. 78 at 
p. 4) The Department evaluated the markup chain and found that the 
markup on incremental costs is lower than the baseline markup for 
wholesalers and contractors, so the Department did not change its 
application of markups. (See TSD, Chapter 5.)
3. Installation Costs
    The Department defines the installation cost as the expense to the 
consumer for professional installation of a furnace or a boiler. The 
installation cost is not part of the equipment's retail price. The cost 
of installation covers all labor and material costs associated with the 
installation of a new unit or the replacement of an existing one, 
excluding the cost of the unit itself. For furnaces and boilers, the 
installation cost is typically the largest single component of the 
total cost to the consumer and is greater than the equipment price.
    The predominant part of the installation cost is the venting 
system. The American National Standards Institute (ANSI) standard 
Z21.47-1993 defines four furnace and boiler categories (I-IV) with 
respect to the venting system. The categories are defined based on the 
operating pressure and temperature of the combustion gases inside the 
vent. Most non-condensing equipment falls into Category I (high 
temperature, negative pressure). Most condensing equipment falls into 
Category IV (low temperature, positive pressure), but some non-
condensing boilers are in Category III (high temperature, positive 
pressure). Category III venting requires stainless steel material 
(AL29-4C) and sealed joints.
    The Department devoted considerable effort to identifying 
appropriate cost figures to use in its analysis. In the process, DOE 
found that there is no complete, up-to-date data source for 
installation costs for the product classes under consideration. 
Therefore, DOE developed its own Installation Model to determine 
installation costs for non-weatherized gas furnaces. The Department 
used RS Means, a well-known construction-cost-estimation method, to 
develop labor costs, and obtained quotes from national distributors to 
develop material costs. The Installation Model weight-averages the 
detailed costs for a large variety of typical installations in the 
field, including both new construction and retrofit installations; 
single and multifamily housing; plastic, metal, and masonry chimney 
vents; single- and double-wall vent connectors; and common venting with 
other appliances. Chimney relining practices and orphaned water heaters 
are explicitly modeled. The Department modified certain assumptions to 
apply the Installation Model to oil-fired furnaces and gas- and oil-
fired boilers.
    In their comments, Carrier, Lennox, Alagasco, and York addressed 
space constraints and other issues related to the cost of installing 
furnaces and boilers. Carrier stated that, in southern and western 
markets, many furnaces are installed in attics, and if the furnace is 
more than 21 inches wide, it will not fit into the attic through the 
attic access. (Carrier, Public Meeting Transcript, No. 59.8 at p. 51) 
Lennox asked that the installation analysis account for non-
conventional installations of very large units. (Lennox, Public Meeting 
Transcript, No. 59.8 at p. 75) Lennox commented that, with regard to 
oil-fired furnaces, because of the larger heat exchangers, the physical 
size of the furnace cabinet can cause space constraint problems. 
(Lennox, No. 79 at p. 2) Alagasco stated that DOE's installation model 
underestimates costs associated with the installation of gas furnaces, 
especially for replacement markets. (Alagasco, No. 82 at pp. 1-2) 
Finally, York stated that, due to the large size of residences in some 
areas of the country, more than one furnace system may be installed in 
a dwelling, and installing or changing multiple systems has a different 
cost impact than changing or installing a single system. (York, Public 
Meeting Transcript, No. 59.8 at p. 74) The Department's Installation 
Model includes a wide variety of installation situations, as mentioned 
above, and accounts for most situations where space constraints may be 
an issue.
    a. Non-Weatherized Gas Furnaces. In the 2004 ANOPR, DOE estimated 
that eight percent of all installations of non-weatherized gas furnaces 
at 81-percent AFUE will require Category III venting. It based this 
estimate on the fact that if the steady-state efficiency of a non-
condensing furnace exceeds 83 percent, it must be vented with a 
Category III venting system to prevent condensation problems. The 
Department arrived at the eight-percent value by considering the 
difference between the steady-state efficiency and the AFUE for actual 
models, based on the model information listed in the GAMA directory. 
Carrier and Lennox commented that the Department did not appropriately 
account for the fraction of 81-percent-AFUE furnaces that would require 
Category III venting and recommended that the eight-percent number be 
raised considerably. (Lennox, Public Meeting Transcript, No. 59.8 at p. 
89 and No. 79 at p. 2; and Carrier, Public Meeting Transcript, No. 59.8 
at p. 89) GAMA and Carrier stated that DOE's approach underestimates 
the fraction of Category III models because there is at least 0.5-
percent difference between the steady-state efficiency as measured by 
the DOE test procedure and as measured in the ANSI Z21.47 
categorization test. (The ANSI Z21.47 test is applied by manufacturers 
to identify venting categories to develop information for the 
manufacturers' installation manuals.) (GAMA, Public Meeting Transcript, 
No. 59.8 at p. 85 and No. 67 at p. 5; and Carrier, Public Meeting 
Transcript, No. 59.8 at p. 93 and No. 68 at p. 1)
    In the analysis for this proposed rule, DOE did not directly 
estimate the fraction of Category III models by considering the 
difference between the steady-state efficiency and the AFUE for actual 
models. For this analysis, DOE investigated existing models and 
manufacturers' installation manuals. It determined that non-weatherized 
gas furnaces at 80- and 81-percent AFUE, when applied in vertical 
venting installations, fall into Category I. When 81-percent-AFUE 
furnaces replace 80-percent-AFUE furnaces, a significant fraction of 
installations requires an update from a single-wall to a Type-B, 
double-wall vent connector. In the case of replacement installations, 
the Department added the cost of a Type-B, double-wall vent connector 
to 40-percent of the installations. When applied in horizontal venting 
installations, furnaces at 80 and 81-percent AFUE are either in 
Category III or are in Category I using a power venter. The cost for 
these two venting methods is similar. Since horizontal installations 
account for a negligible fraction of all non-condensing furnace 
installations (estimated at less than 0.1-percent), DOE did not include 
this type of installation in its analysis.
    Carrier, NPGA, and Lennox commented that lack of knowledge on the 
part of installers regarding proper installation practices for 81-
percent-AFUE furnaces could result in incorrect installation and unsafe 
conditions for the consumer. (Carrier, Public Meeting Transcript, No. 
59.8 at p. 83; NPGA, No. 72 at p. 4; and Lennox, No. 79 at p. 2) York 
and Alagasco stated that there are

[[Page 59218]]

issues regarding long-term safety, reliability, and performance of the 
Category III venting materials or systems available on the market 
today, and this is a major concern if thousands of installations across 
the country will require such systems. (York, No. 65 at p. 3; Alagasco, 
No. 82 at p. 2) Carrier, Rheem, and York commented that they do not 
offer Category III appliances, and stated that Category III venting is 
not used for 81-percent-AFUE models. (Carrier, Public Meeting 
Transcript, No. 59.8 at p. 115; Rheem, Public Meeting Transcript, No. 
59.8 at p. 117; and York, No. 65 at p. 3) The Department recognizes the 
stakeholders' concerns. As discussed above, however, analysis for this 
proposed rule indicated that Category III venting would be required for 
a negligible fraction of installations of 81-percent-AFUE gas furnaces. 
Furthermore, based on the existing use of Category III venting, 
particularly for high-efficiency boilers, the Department believes that 
the relevant stainless steel materials (AL29-4C) would perform with an 
acceptable degree of safety and reliability for Category III furnaces.
    The ODOE commented that the assumed overall cost for condensing 
furnace installation is too high, as it fails to account for the 
expected growth in the share of condensing furnaces that are for the 
replacement market, and the relatively small installation cost for 
replacing a condensing furnace. (ODOE, No. 61 at pp. 7-8) NRDC noted 
that installation costs will decline when replacement of 90-percent-
AFUE furnaces becomes widespread. (NRDC, No. 528 at p. 4) The 
Department adjusted its estimate of installation costs for condensing 
furnaces to account for a higher share of replacements in total 
installations of condensing furnaces in 2015. With regard to the cost 
for replacing a condensing furnace, the Department did not find any new 
data to justify a change to the cost used in the 2004 ANOPR analysis.
    AGA stated that installation costs for condensing furnaces are 
incompletely represented in the 2004 ANOPR, since installation codes 
require that condensing appliances be provided with an auxiliary drain 
pan to prevent damage to building components in the event of a blockage 
in the condensate drain piping system, and an estimated 40-percent of 
all condensing furnace installations need drain pans. (AGA, No. 78 at 
p. 5) The Department adjusted its Installation Model to account for the 
use of drain pans in 40 percent of condensing furnace installations.
    In addition, the Department recognizes that some consumers may 
experience additional costs that exceed those used in the Department's 
analysis to address necessary structural changes for installing a 
condensing furnace, primarily for the vent systems associated with non-
weatherized gas furnaces and for mobile home gas furnaces at or above 
90-percent-AFUE. The Department understands that, for some dwellings, 
it may be necessary to make ``structural'' changes, such as the removal 
or penetration of an interior wall, exterior wall, or roof, to 
accommodate new vent systems (and combustion air intakes). While the 
Department has no data to quantify the number of consumers that may be 
affected in this manner and the cost magnitude, it believes the 
possible cost impacts may be significant enough to warrant 
consideration in evaluating the adoption of a standard level that would 
require condensing technology. The Department invites comments on the 
number of consumers that may be affected by structural changes for 
installing a condensing furnace and the cost magnitude of any 
structural changes.
    b. Other Product Classes. For weatherized gas furnaces, the 
Department estimated the installation cost for the baseline model using 
data from Section 400 of the 2002 RS Means Mechanical Cost Data. The 
assumption that installation costs remain mostly constant as efficiency 
increases seems reasonable for single-package systems. The increases in 
size and weight for more-efficient systems are small relative to the 
large size and weight of the baseline model unit.
    For mobile home gas furnaces in new homes, installation costs are 
part of the equipment cost because mobile home gas furnaces are 
assembled in the factory rather than in the field. The Department 
included these factory assembly costs in the manufacturer markup. With 
respect to mobile home gas furnaces for replacement, the Department did 
not find any new data to estimate an installation cost, so it used the 
same approach as for new-home furnaces.
    York, GAMA, and MHI commented on venting issues related to mobile 
home furnaces. GAMA and York suggested that DOE did not sufficiently 
explore vent corrosion issues related to mobile home furnaces and 
weatherized furnaces in the 2004 ANOPR analysis. (GAMA, Public Meeting 
Transcript, No. 59.8 at p. 228; and York, No. 65 at p. 5) York, GAMA, 
and MHI noted that approved venting materials for Category III venting 
are not available for mobile home furnace installations. (York, No. 65 
at p. 5; GAMA, No. 67 at p. 6; and MHI, No. 89 at p. 3) York also 
stated that condensation and resulting corrosion must be considered for 
weatherized furnaces, along with the cost impact of materials having 
more corrosion-resistant properties. (York, No. 65 at p. 8) GAMA agreed 
with DOE that it is appropriate not to include venting costs for 
weatherized products, but stated that there is a need to capture the 
increased likelihood of heat exchanger and flue corrosion resulting in 
premature failure. (GAMA, No. 67 at p. 6) In conducting its analysis 
for this notice, DOE reviewed the issue of vent corrosion for mobile 
home furnace installations and included a cost to account for proper 
venting system installation. For weatherized furnaces, the Department 
reviewed corrosion issues and found that current models having an AFUE 
of up to 82 percent do not have special requirements to address 
corrosion issues. Therefore, the Department did not change its cost 
estimates for this product class for this proposed rule.
    For gas hot water boilers, the 2004 ANOPR analysis used a uniform 
assumption that 20-percent of installations would require Category III 
venting at 80-84-percent-AFUE levels. GAMA, ACEEE, and AGA commented 
that the analysis should include a gradually increasing share of 
Category III venting as the AFUE rises. (GAMA, Public Meeting 
Transcript, No. 59.8 at p. 111; ACEEE, Public Meeting Transcript, No. 
59.8 at p. 113; and AGA, No. 78 at p. 5) GAMA asked that DOE's analysis 
use GAMA's data showing the fraction of gas hot water boiler models 
vented with Category III by efficiency level. (GAMA, Public Meeting 
Transcript, No. 59.8 at p. 107) AGA stated that manufacturers' 
installation instructions for a number of gas hot water boilers in the 
range of 83-84-percent AFUE do require Category III venting, and 
recommended that DOE consider these requirements. (AGA, No. 78 at p. 5)
    In the analysis for today's proposed rule, DOE used data provided 
by GAMA on the fraction of installations at each efficiency level that 
would require Category III venting. The Department also conducted a 
sensitivity analysis using similar assumptions as in the 2004 ANOPR. 
This analysis reflected current construction practices, which use 
Category III venting for horizontal venting installations at all 
efficiency levels.
    GAMA and ACEEE commented that DOE should further investigate 
installation practices for oil-fired equipment at various efficiency 
levels. (GAMA, Public Meeting Transcript, No. 59.8 at pp. 112 and No. 
67 at p. 4; and ACEEE, No. 53 at p. 6) ACEEE stated

[[Page 59219]]

that DOE's analysis for oil systems does not fully account for the fact 
that exhaust from oil systems is generally at a higher temperature and 
has lower moisture content than exhaust from gas systems. (ACEEE, No. 
84 at p. 11) Carrier urged DOE to perform vent condensation analyses on 
higher-efficiency oil furnace designs. (Carrier, No. 68 at p. 4)
    The 2004 ANOPR analytical approach for oil-fired furnaces assumed 
that all installations of 83-percent-AFUE, or lower efficiency, 
equipment would be vented using Type L vents, and all installations of 
84-percent-AFUE, or higher efficiency, equipment would be vented using 
316-grade stainless steel vent systems. For this notice, the Department 
consulted Brookhaven National Laboratory and other experts, and also 
reviewed the National Fire Protection Association (NFPA) standards 
NFPA-31 Standard for the Installation of Oil-Burning Equipment and 
NFPA-11 Standard for Chimneys, Fireplaces, Vents, and Solid Fuel-
Burning Appliances. The analysis for today's proposed rule has taken 
into consideration the NFPA-31 standard, which provides that Type L 
vents can be used safely with products of up to 88 percent, steady-
state efficiency (or 87-percent AFUE), depending on the vent 
configurations and equipment size. The Department used a gradual 
increase in the number of 316-grade stainless steel vent installations 
from zero percent at 80-82-percent AFUE to 100-percent at 86-percent 
AFUE. The mid-point of the range is 50 percent at 84-percent AFUE. This 
assumption accounts for the NFPA-31 recommendations at the upper end of 
the range. The Department used a similar approach for oil-fired 
boilers, but shifted the above AFUE values upward by one AFUE 
efficiency point, in accordance with the NFPA-31 standard. The approach 
DOE used in this proposed rule accounts for the fact that exhaust from 
oil systems is generally at a higher temperature and has lower moisture 
content than exhaust from gas systems. It also addresses vent 
condensation on higher-efficiency, oil-fired furnace designs.
4. Maintenance Costs
    Maintenance costs are the costs of regular maintenance of a furnace 
or boiler when it fails, including all associated labor and material 
costs. For non-weatherized and weatherized gas furnaces and gas 
boilers, in the 2004 ANOPR analysis, DOE used data on the cost and 
frequency of maintenance that were provided in the Gas Research 
Institute (GRI)-94/0175 topical report Assessment of Technology for 
Improving the Efficiency of Residential Gas Furnaces and Boilers. The 
Department used this information to estimate required minimum 
maintenance frequencies of once every five years for all equipment 
without modulation, and once every four years for all equipment with 
modulation, to account for the greater complexity of the modulation 
feature. For oil-fired furnaces and oil-fired boilers, DOE applied the 
results of a survey performed for its previous water heater rulemaking. 
For mobile home furnaces, DOE used data from the Technical Support 
Document: Energy Efficiency Standards for Consumer Products, DOE/EE-
0009, published in November 1993. (See TSD, Chapter 6.)
    The ODOE and York stated that the GRI data DOE used are outdated. 
(ODOE, No. 61 at p. 9; and York, No. 65 at p. 6) GAMA stated that 
maintenance costs should at least scale with the cost of the product, 
if not meet some other more rigorous assumption. (GAMA, Public Meeting 
Transcript, No. 59.8 at p. 165) ODOE commented that, unless DOE can 
provide data that support its contention that the maintenance costs 
vary proportionally to the efficiency of the furnace, using the same 
maintenance costs would be appropriate for all furnaces. (ODOE, No. 61 
at p. 9) In its review of these comments, DOE confirmed that 
maintenance frequency, and therefore cost, does not necessarily vary 
with AFUE. Rather, the greater complexity of the modulation feature 
causes furnaces with this feature to require more frequent maintenance 
and thus incur higher maintenance costs.
    The ODOE disagreed with how the 2004 ANOPR analysis represented 
maintenance costs for condensing equipment in terms of maintenance 
contracts. (ODOE, No. 61 at p. 9) In the 2004 ANOPR, DOE used a value 
for condensing equipment from the GRI report that represented the cost 
of a service contract that includes a specified set of routine repairs. 
In the analysis for this notice, the Department compared maintenance 
instructions for non-condensing and condensing gas furnaces from 
manufacturers' manuals, researched RS Means literature for maintenance 
differences between non-condensing and condensing gas furnaces, and 
collected opinions from several furnace installation and maintenance 
experts. It found, as asserted by ODOE, that annual maintenance 
contracts are not commonly applicable to condensing gas furnaces, and 
it did not find evidence of differences in maintenance requirements 
between condensing and non-condensing designs. Thus, in accordance with 
ODOE's comment, the Department used the same maintenance cost data for 
condensing and non-condensing furnaces, and it applied the same 
considerations to gas boilers.
5. Rebuttable-Presumption Payback Period
    Section 325(o)(2)(B)(iii) of the Act establishes a rebuttable-
presumption that a standard is economically justified if the Secretary 
finds that ``the additional cost to the consumer of purchasing a 
product complying with an energy conservation standard level will be 
less than three times the value of the energy * * * savings during the 
first year that the consumer will receive as a result of the standard, 
as calculated under the applicable test procedure * * *.'' (42 U.S.C. 
6295(o)(2)(B)(iii))
    The Department defines the rebuttable-presumption payback period as 
the length of time it takes the consumer to recover the higher 
installed cost of more-energy-efficient equipment through lowering 
operating costs. Numerically, the rebuttable-presumption payback period 
is the ratio of the increase in total installed cost (including the 
purchase price and installation cost) to the decrease in operating 
expenses (including maintenance). Energy expenses are the primary 
component of operating expenses. The Department determines the changes 
in total installed cost and operating expenses relative to the baseline 
for each product class (i.e., the current standard level). Energy-
expense savings are the first year's energy savings multiplied by the 
average energy prices forecast for the year in which a new standard is 
expected to take effect--in this case, the year 2015. The Department 
used energy price forecasts from the AEO2005 to estimate the energy 
price in the year 2015.\12\ To calculate energy-expense savings at each 
efficiency level, the Department uses the DOE test procedure for 
calculating annual energy consumption. (See TSD, Chapter 6.)
---------------------------------------------------------------------------

    \12\ Although the Department conducted an energy price 
sensitivity analysis using EIA's AEO2006, it did not perform a 
sensitivity analysis to determine the effect of AEO2006 energy 
prices on the rebuttable-presumption payback period.
---------------------------------------------------------------------------

C. Life-Cycle Cost and Payback Period Analysis

    In response to the requirements of section 325(o)(2)(B)(i) of the 
Act, the Department conducted an LCC and payback period analysis to 
evaluate the economic impacts of possible new furnace and boiler energy 
conservation standards on individual consumers. This section of this 
notice describes the

[[Page 59220]]

LCC and payback period analysis. The Department conducted the analysis 
using a spreadsheet model developed in Microsoft (MS) Excel for Windows 
2000 or XP. (See TSD, Chapter 8.)
    The LCC is the total consumer expense over the life of the furnace 
or boiler, including purchase and installation expense and operating 
costs (energy expenditures and maintenance costs). To compute LCCs, the 
Department discounted future operating costs to the time of purchase 
and summed them over the lifetime of the furnace or boiler. The payback 
period is the change in purchase expense due to an increased efficiency 
standard, divided by the change in annual operating cost that results 
from the standard. Otherwise stated, the payback period is the number 
of years it would take for the consumer to recover the increased costs 
of a higher-efficiency product through energy savings.
    The Department measures the change in LCC and the change in payback 
period associated with a given efficiency level relative to a base case 
forecast of equipment efficiency. The base case forecast reflects the 
market in the absence of amended mandatory energy conservation 
standards. It depicts the current status of the market, including the 
existing demand for products that exceed the current energy 
conservation standards.
    The Department calculated the LCC and payback periods for a 
nationally representative set of housing units. It selected the 
representative sample of households from EIA's Residential Energy 
Consumption Survey (RECS). Whereas the 2004 ANOPR used the 1997 RECS, 
the analysis for today's proposed rule used the 2001 survey (RECS 
2001), which are the most recent data available. For each sampled 
household, DOE determined the energy consumption and energy price for 
either a furnace or a boiler. Thus, by using a representative sample of 
households, the analysis allowed for the capture of the wide 
variability in energy consumption and energy prices associated with 
furnace and boiler use. The Department determined the LCCs and payback 
periods for each sampled household using the furnace or boiler energy 
consumption and energy price unique to each household, as well as other 
input variables. As discussed below, DOE characterized the other input 
variables with probability distributions. The Department calculated the 
LCC associated with the baseline furnace or boiler in each household. 
To calculate the LCC savings and payback period associated with more-
efficient equipment (i.e., equipment meeting higher efficiency 
standards), DOE substituted the baseline unit with a more efficient 
design.
    Inputs for determining the total installed cost include equipment 
prices--which account for manufacturer costs, manufacturer markups, 
distributor and wholesaler markups, builder or contractor markups, and 
sales taxes--and installation costs. Inputs for determining operating 
expenses include annual household energy consumption, marginal natural 
gas and electricity prices, natural gas and electricity price 
projections, maintenance costs, equipment lifetime, discount rates, and 
the year standards take effect.
    To account for uncertainty and variability in certain inputs, the 
Department created distributions of values with probabilities attached 
to each value. Of the listed installed cost inputs, DOE characterized 
the manufacturer, dealer, distributor, and builder markups, as well as 
the sales tax and installation price, with distributions. Of the 
operating cost inputs, it characterized the discount rate and the 
equipment lifetime with distributions. For each housing unit, DOE 
sampled and randomly selected the values of these inputs from the 
distributions, according to their probability. With regard to energy 
consumption and energy price, as noted earlier, DOE determined unique 
values for each sampled household. Although DOE did not characterize 
energy consumption and energy price with probability distributions, it 
captured the variability of these inputs by using a representative set 
of households in the LCC and payback period analysis. The LCC and 
Payback Period Model uses a Monte Carlo simulation to incorporate 
uncertainty and variability into the analysis when combined with 
Crystal Ball (a commercially available software program). The Monte 
Carlo simulations sampled input values randomly from the probability 
distributions. The model calculated the LCC and payback period for each 
design option for 10,000 housing units per simulation run.
    AGA commented that it appeared DOE was using Monte Carlo analysis 
for variables that are independent and for which DOE did not account 
for the correlation. (AGA, No. 54 at p. 3) For those variables that it 
characterized with probability distributions, DOE had no evidence to 
suggest that any of the variables--for example, discount rates and 
equipment lifetime--were correlated with each other. Thus, DOE assigned 
the discount rate associated with any given household based on its 
probability of occurrence, without consideration of the assumed 
lifetime for the furnace or boiler in that household. In the case of 
energy consumption and energy price, because DOE determined unique 
values for each sampled household rather than assigning them using 
probability distributions, it in effect correlated energy consumption 
and energy price for each household.
    AGA also said that probability distributions for a number of 
variables used in the uncertainty analysis appear to be unjustified by 
data. (AGA, No. 54 at p. 2) In constructing probability distributions 
for the variables, the Department used the most recent data from 
multiple sources (See TSD, Chapters 7 and 8). The Department reviewed 
the data used to develop the probability distributions for all of the 
variables. The Department believes that the distributions are supported 
by the available data.
    GAMA commented that the LCC analysis should include financing 
costs, since many consumers use some form of credit to purchase a 
furnace or boiler. (GAMA, Public Meeting Transcript, No. 59.8 at p. 
153) The Department implicitly accounts for financing costs in its 
application of discount rates. As discussed in section IV.C.7, the 
discount rate for equipment purchased as part of a new home is based on 
mortgage rates, and the discount rate for replacement equipment 
considers interest rates for a number of loan and credit types. Using 
these rates, the discounted sum of annual payments on a loan or credit 
amount would be equal to the total installed cost if it were paid in 
full at the time of purchase. Therefore, the Department believes it is 
not necessary to separately account for financing costs.
    Table IV.3 summarizes the approach and data DOE used to derive the 
inputs to the LCC and payback period calculations for the 2004 ANOPR, 
and the changes it made for today's proposed rule. Discussion of the 
inputs and the changes follows in the sections below.

[[Page 59221]]



 Table IV.3.--Summary of Inputs and Key Assumptions Used in the LCC and
                         Payback Period Analyses
------------------------------------------------------------------------
                                   2004 ANOPR       Changes for proposed
           Inputs                  description              rule
------------------------------------------------------------------------
                        Affecting Installed Costs
------------------------------------------------------------------------
Equipment Price.............  Derived by            No change.
                               multiplying
                               manufacturer cost
                               by manufacturer,
                               distributor,
                               contractor, and
                               builder markups and
                               sales tax, as
                               appropriate.
Installation Cost...........  Used a distribution   No change.
                               of weighted-average
                               installation costs
                               from the
                               Installation Model.
                               Weight-averaged
                               installation
                               configuration by
                               frequency of
                               occurrence in the
                               field.
------------------------------------------------------------------------
                        Affecting Operating Costs
------------------------------------------------------------------------
Maintenance Costs...........  Used GRI data for     Same sources,
                               gas furnaces and      supplemented with
                               boilers, water        new information
                               heater rulemaking     that indicates
                               survey results for    higher maintenance
                               oil-fired             frequency for
                               equipment, and data   modulating
                               from the 1993         equipment, and
                               rulemaking for        identical
                               mobile home           maintenance costs
                               furnaces.             for condensing and
                                                     non-condensing
                                                     equipment (See TSD,
                                                     Chapter 5).
Annual Heating Load.........  Calculated heating    Calculated heating
                               and cooling loads     loads using 2001
                               using 1997 RECS       RECS data (cooling
                               data. Assumed the     loads not
                               furnace input         considered).
                               capacity versus       Incorporated
                               airflow capacity      adjustment to
                               based on the          account for change
                               vintage of the        in new home size
                               equipment and         and shell
                               characteristics of    performance between
                               each house.           2001 and 2015 (See
                                                     TSD, Chapter 7).
Annual Energy Use...........  Used 26 virtual       Same method, using
                               models that           RECS 2001 data.
                               captured the range
                               of common furnace
                               sizes. Energy
                               calculations used
                               annual heating load
                               for each housing
                               unit.
Energy Prices *.............  Calculated 1998       Calculated 2001
                               average and           average and
                               marginal energy       marginal energy
                               prices for each       prices for each
                               sample house. Used    sample house. Used
                               AEO2003 forecasts     AEO2005 forecasts
                               to estimate future    to estimate future
                               average and           average and
                               marginal energy       marginal energy
                               prices.               prices.
------------------------------------------------------------------------
        Affecting Present Value of Annual Operating Cost Savings
------------------------------------------------------------------------
Lifetime....................  Used 2001.58(9)       Same, except for
                               Appliance Magazine    boilers, for which
                               survey results.       DOE developed new
                                                     estimates based on
                                                     a literature review
                                                     (See TSD, Chapter
                                                     8).
Discount Rate...............  Applied data from     Same sources; used
                               1998 Survey of        more recent data
                               Consumer Finances     (See TSD, Chapter
                               and other sources     8).
                               to estimate a
                               discount rate for
                               each house. (See
                               ANOPR TSD, Chapter
                               8).
------------------------------------------------------------------------
* The Department used the AEO2006 forecasts to estimate future average
  and marginal energy prices for the energy price sensitivity analysis.
  Section IV.C.4. provides further explanation of the rationale and
  methodology for the energy price sensitivity analysis.

1. Equipment Prices
    As described in section IV.B.1 above, the Department determined 
manufacturing costs reflecting different efficiency levels using a 
reverse-engineering cost analysis for one size of equipment 
representative of each product class. To derive the manufacturing costs 
for other sizes of furnaces and boilers, DOE scaled the costs from the 
sizes used in the engineering analysis.
    To develop a range of equipment sizes for non-weatherized gas 
furnaces that represent the majority of combinations of input capacity 
and nominal maximum airflow, the Department developed generic models to 
represent 26 different combinations of those two variables. The 
Department derived the models from baseline models with the most 
commonly occurring input capacities and corresponding maximum nominal 
airflow rates. To develop the manufacturing cost for each model, DOE 
took the cost from the engineering analysis for a model with a typical 
capacity, scaled the cost for other input capacities, and adjusted 
costs for furnaces with different-size blowers.
    For the analysis of weatherized gas furnaces, DOE used the same 
generic models as in the analysis of non-weatherized gas furnaces. For 
the analysis of mobile home furnaces, the Department used a subset of 
those models. For the analysis of oil-fired furnaces and gas- and oil-
fired boilers, the Department used a number of different sizes derived 
from the distribution of models in the GAMA March 2005 directory. For 
all of these product classes, DOE scaled the cost for each input size 
from the cost identified for a typical model for the specific product 
class in the engineering analysis.
    The Department applied markups to the manufacturer cost of each 
virtual model to arrive at the equipment price paid by the purchaser. 
It determined markups on each stage of the distribution chain from the 
manufacturer to the consumer. (See TSD, Chapter 5.) In addition to 
estimating average markups, the Department characterized the markups 
with probability distributions through a statistical analysis of U.S. 
Census data. The markups assigned to units in the new construction 
subsample include a builder markup. The markups assigned to units in 
the replacement equipment subsample include sales taxes. The Department 
determined that the markup

[[Page 59222]]

for wholesalers and contractors on incremental costs for higher 
efficiency equipment is lower than the markup on the cost of a baseline 
model. Thus, for calculating the equipment cost of baseline equipment, 
the Department used the distribution of baseline markups. For the 
incremental cost of equipment at efficiency levels above the baseline, 
the Department applied incremental markups.
2. Installation Costs
    The LCC and payback period analysis drew on the engineering 
analysis for installation costs at various efficiency levels. The 
Department assigned each household an installation cost from a 
distribution of weight-averaged values. For non-weatherized gas 
furnaces, oil-fired furnaces, and gas- and oil-fired boilers, DOE 
calculated the distribution using its Installation Model. For 
weatherized gas furnaces, DOE used calculations based on the RS Means 
approach to determine a mean value and assigned a triangular 
distribution of <plus-minus>15-percent around the mean. For mobile home 
furnaces, it included the installation cost in the manufacturer markup.
3. Household Annual Energy Consumption
    The Department calculated furnace fuel and electricity use by 
considering how furnaces operate in the sample housing units. (See TSD, 
Chapter 7.) While the AFUE measure does not consider electricity use, 
it is necessary to include it in the LCC analysis because both fuel and 
electricity consumption change with AFUE and these changes together 
determine the overall energy savings. The Department recognizes that 
the heat from a furnace blower contributes to heating the conditioned 
space. It included this effect in its LCC analysis to capture all 
operating expenses and completely evaluate the impact of new furnace 
standards on consumers.
    The LCC and payback period analysis calculated furnace and boiler 
energy consumption under field conditions for a representative sample 
of housing units. These conditions included the climate conditions 
during the heating season and the size of the house, which influence 
the number of hours the equipment operates.
    The calculation of furnace or boiler energy consumption required an 
estimate of the annual heating load for each housing unit (the amount 
of heat needed to keep it comfortable over an entire year). Determining 
the annual heating load for a housing unit required making assumptions 
about its size and construction, thermal efficiency, and geographical 
location. In the 2004 ANOPR analysis, DOE used data associated with the 
sample houses from the 1997 RECS. North Star Energy Group (NSEG) and 
Lennox commented that DOE's estimation of heating loads should account 
for improvement in thermal shells and changes in home size that are 
likely by the effective date of new standards. (NSEG, Public Meeting 
Transcript, No. 59.8 at p. 195; Lennox, Public Meeting Transcript, No. 
59.8 at p. 166) In the analysis for today's proposed rule, the 
Department adjusted heating loads calculated for new construction 
housing units using data from AEO2005 that projected changes in the 
thermal efficiency and the floor area of new houses. While thermal 
efficiency is projected to improve somewhat, the impact on heating load 
is roughly balanced by an expected increase in floor area. The 
Department applied these adjustment factors to the calculated heating 
loads for those RECS houses designated as representative of new houses.
    Determination of the energy consumption of the equipment installed 
in each sampled housing unit also required estimating the input 
capacity and efficiency of the existing furnace. The Department then 
calculated how much energy furnaces with various improved designs would 
need to meet the heating load of the sampled housing unit.
    The Department received several comments suggesting that it re-
examine its 2004 ANOPR calculation of the energy consumption impacts of 
two-stage modulation. (GAMA, Public Meeting Transcript, No. 59.8 at p. 
177; Individual, Public Meeting Transcript, No. 59.8 at p. 183; Lennox, 
Public Meeting Transcript, No. 59.8 at p. 152; York, No. 65 at p. 3; 
Carrier, No. 68 at p. 68; AGA, No. 78 at p. 4; and Alagasco, No. 82 at 
p. 2) For today's proposed rule, DOE took into account these comments 
and revised the energy consumption calculation. It used the 2004 public 
review draft of the proposed update of the American Society of Heating, 
Refrigerating and Air-Conditioning Engineers (ASHRAE) SPC 103 test 
procedure, ``Method of Testing for Annual Fuel Utilization Efficiency 
of Residential Central Furnaces and Boilers,'' which accounts for the 
effects of two-stage modulation. The results now show that this design 
option does not provide efficiency benefits unless an electronically 
commutated blower motor is used.
    ACEEE and ODOE commented that DOE's electricity consumption results 
in the 2004 ANOPR LCC analysis appear to be inconsistent with the data 
on average annual auxiliary electricity consumption (E<INF>ae</INF>) as 
reported in the GAMA directory of models. (ACEEE, No. 53 at p. 3; and 
ODOE, No. 61 at p. 4) For this proposed rule, DOE revised its approach 
for calculating electricity consumption for the LCC analysis. It based 
the revised calculations on data on the most current manufacturer 
product literature. (See TSD, Chapter 7) The resulting electricity 
consumption values are consistent with the data in the GAMA directory.
4. Energy Prices
    The Department used average energy prices to calculate the energy 
costs of the base-case equipment and marginal energy prices for the 
cost of saved energy associated with higher-efficiency equipment. 
Marginal energy prices reflect a change in a consumer's bill associated 
with a change in energy consumed, and thus such prices capture the 
value of the increment of energy saved as a result of standards. 
Consumer gas bills typically have multiple rates--a base rate for the 
first block of gas used and different rates for further increments. 
Increased efficiency will impact the gas use at the rate applied to the 
last incremental consumption. For oil-fired furnaces and boilers, as 
well as gas furnaces using liquefied petroleum gas (LPG), the 
Department used average fuel prices for both base-case and higher-
efficiency equipment, since consumers typically purchase fuel oil and 
LPG in bulk amounts, and the energy saved is based on the price paid 
for the bulk amount.
    For each household sampled from the RECS database, DOE identified 
the average gas and electricity prices either from that household's 
data, if available, or from another household in the same Census 
division for which both prices were available. The Department estimated 
marginal energy prices from the RECS monthly billing data. The 
estimated marginal prices are very close to average prices. The 
Department invites comments on the methodology and data it used to 
determine marginal energy prices.
    As in past rulemakings, the Department used price forecasts by the 
EIA to estimate the future trend in energy prices. It multiplied the 
average or marginal prices by the forecasted annual price changes in 
the Reference Case forecast in AEO2005.
    EIA published its Annual Energy Outlook for 2006, AEO2006, after 
DOE had completed much of the analysis for this proposed rule. While 
the energy price forecast in AEO2006 did not change substantially for 
electricity after

[[Page 59223]]

2015, the effective date of this rulemaking, the natural gas price 
forecasts were significantly different when compared to the energy 
price forecast in AEO2005. The natural gas price forecasts in the 
AEO2005 are consistently lower by an average of $1.40 after 2015 than 
the natural gas price forecasts in the AEO2006. The oil price forecasts 
in the AEO2005 are consistently lower by an average of $4.60 after 2015 
than the oil price forecasts in the AEO2006 by an average of $4.60 
after 2015. On average, the AEO2006 forecasts show approximately a 20-
percent increase in energy prices over those in AEO2005. Since most of 
the energy used by furnaces is natural gas (and oil), this change could 
impact the analysis results. To account and assess the possible impact 
of these increases in projected energy prices, the Department conducted 
an energy price sensitivity analysis using the AEO2006 scenario. The 
energy price sensitivity analysis uses recently published energy 
prices, housing starts, and site-to-source conversion factors based on 
the AEO2006. It examines the impact of these changes on the LCC and 
Payback Period, Consumer Subgroup, and National Impact analyses. The 
results of each analysis are shown in sections V.B.1.a., V.B.1.b., 
V.B.3.a., and V.B.3.b., respectively. For the AEO2006 energy price 
sensitivity analysis, the Department determined that the consumers' 
purchasing decisions in the base case (i.e., in the case where no 
change in standards is assumed to occur) would be similar to those as 
in the energy price trajectory using AEO2005. The Department welcomes 
comment on the determination of the forecast of the gas furnace 
shipments as a function of the energy prices. Furthermore, the 
Department intends to use the most recent energy price forecasts from 
the EIA in its revised analyses for the final rule.
5. Maintenance Costs
    For the LCC analysis, DOE used the maintenance cost data derived in 
the engineering analysis. Based on a sensitivity analysis in a 1994 GRI 
report and on engineering judgment, the Department assumed a triangular 
distribution for maintenance costs to capture the variability of these 
costs among homes, with a minimum at 80 percent of the average cost and 
a maximum at 120 percent of the average cost. The Department is not 
aware of any recent data that provide a distribution of maintenance 
costs.
6. Equipment Lifetime
    The Department defines the equipment lifetime as the age at which a 
furnace or boiler is retired from service. Because none of the 
available data on equipment lifetime show a clear relationship between 
efficiency and lifetime, DOE assumed that equipment lifetime is 
independent of efficiency. The Department used a triangular probability 
distribution from the range for each product class to assign a lifetime 
to individual furnaces and boilers in the sample housing units.
    In the 2004 ANOPR, DOE used an average lifetime of 20 years for gas 
furnaces, 15 years for oil-fired furnaces and boilers, and 17 years for 
gas boilers. ACEEE commented that DOE's equipment lifetime estimates 
appeared to be somewhat short, and were a significant change from 
values used in the last DOE rulemaking on these products. ACEEE 
recommended that DOE look for field data on actual average equipment 
lifetime. (ACEEE, No. 84 at p. 11) The Department conducted a 
literature review to obtain estimates of boiler lifetime. Based on the 
information found, it increased the lifetimes used for gas- and oil-
fired boilers to 25 years.
7. Discount Rates
    The Department derived the discount rates for the LCC analysis from 
estimates of the finance cost to purchase a furnace or boiler. New-
housing equipment is purchased as part of the home, which is almost 
always financed with a mortgage loan. Therefore, the Department 
estimated discount rates for new-housing equipment using the effective 
mortgage rate for home buyers, not simply the nominal rate. For the 
consumer life-cycle-cost calculation, the effective rate corresponds to 
the interest rate after deduction of mortgage interest for income tax 
purposes. Such adjustment is not appropriate for the NPV calculations. 
As described in section IV.D.7., for the NPV calculations the 
Department used discount rates of both seven percent and three percent, 
in accordance with the Office of Management and Budget (OMB)'s 
guidelines contained in Circular A-4, Regulatory Analysis, September 
17, 2003. (OMB Circular A-4, Sec.  E (September 17, 2003)).
    Households use a variety of methods, the prevalence of which may 
change over time, to finance a replacement furnace or boiler. The 
shares of different financing vehicles in total replacement equipment 
purchases are unknown, so the Department identified all possible 
customary sources of acquiring funds for purchase of replacement 
furnaces, including household assets that might be sold to raise funds. 
The Department then estimated the shares of the various debt and equity 
classes in the average U.S. household equity and debt portfolios using 
data from the 1998 and 2001 Federal Reserve Board's Survey of Consumer 
Finances (SCF) (See TSD, Chapter 8.) The Department estimated a 
distribution of interest or return rates associated with each type of 
equity and debt from the SCF and other sources, and then developed a 
distribution of weighted-average finance costs for replacement 
equipment.
    NRDC commented that DOE's approach for deriving discount rates in 
the 2004 ANOPR analysis had shortcomings that resulted in the use of 
rates that were too high. (NRDC, No. 63 at p. 12) The Department 
acknowledges there are diverse views on selecting discount rates for 
household purchase of appliances, but the approach DOE used for 
furnaces and boilers is consistent with the method it used for its 
rulemaking for residential air-conditioning equipment. For this notice, 
DOE incorporated more recent data on consumer finances, mortgage rates, 
other debt interest rates, and rates of return on equity classes. The 
resulting discount rates are lower than those used in the 2004 ANOPR 
analysis for new-home furnace and boiler purchases (See TSD, Chapter 
8.)
    GAMA commented that using a different discount rate for each 
household is questionable. (GAMA, No. 67 at p. 7) The Department 
disagrees. Since the finance cost for purchasing a furnace or boiler 
varies among households depending on their financial situation, the 
Department found that using different discount rates was appropriate.
8. Effective Date of the New Standards
    Generally all covered products to which a new or amended energy 
conservation standard applies must comply with the standard if they are 
manufactured or imported on or after a specified date. (42 U.S.C. 
6291(10), 6295 (b)-(k)) Section 325(f)(3)(B) of EPCA directs that DOE 
is to publish a final rule for furnaces and boilers by January 1, 1994, 
and that any amendment shall apply to products manufactured on or after 
January 1, 2002. The Department has applied this eight-year 
implementation period to determine the effective date of any standard 
prescribed by this rulemaking. Since DOE expects to issue a final rule 
in 2007, the effective date for this rulemaking will be 8 years from 
the date of publication of the final rule, that is, in 2015. Thus, the

[[Page 59224]]

Department calculated the LCC and payback period for all consumers as 
if each one purchased a new residential furnace or boiler in 2015.
9. Inputs to Payback Period Analysis
    The payback period is the length of time it takes the consumer to 
recover the higher installed cost of more-energy-efficient equipment 
through lower operating costs. Numerically, the payback period is the 
ratio of the increase in total installed cost (including the purchase 
price and installation cost) to the decrease in operating expenses 
(including maintenance). Thus, similar to the LCC, the payback period 
is based on the total installed cost and the operating expenses. 
However, unlike for the LCC, DOE considers only the first year's 
operating expenses in the calculation of the payback period. Because 
DOE considers only the first year's operating expenses, the payback 
period does not take into account changes in operating expense over 
time or the time value of money; that is, electricity price trends and 
discount rates are not required inputs. Energy expenses are the primary 
component of operating expenditures. The Department determines the 
energy-expense savings for the payback period as the first year's 
energy savings multiplied by the energy prices for the year in which a 
new standard is expected to take effect, in this case the year 2015.
    The energy consumption DOE used to calculate the payback period for 
the LCC analysis reflects current field conditions for a representative 
sample of housing units. This approach to determining energy 
consumption and savings is in contrast to the rebuttable-payback-period 
calculations in the engineering analysis, which use the DOE test 
procedure's method for calculating annual energy consumption. The 
change in the annual energy consumption (otherwise called the energy 
savings) between the base-case furnace or boiler and a more efficient 
unit, as calculated in the LCC analysis, is smaller than the change in 
the energy consumption calculated from the DOE test procedure. Because 
smaller energy savings result in smaller decreases in operating 
expenses, the payback periods calculated for the LCC analysis are 
longer than the rebuttable-payback periods.
10. Base-Case Equipment
    The base-case forecasts equipment that consumers are expected to 
purchase in the absence of new standards. In the 2004 ANOPR analysis, 
DOE developed the base-case forecast for each product class using the 
available data on shipments of furnaces and boilers by efficiency 
levels. For non-weatherized gas furnaces, the Department forecasted the 
base-case share of condensing furnaces based on the average growth rate 
for the period 1991-2000. The projected condensing furnace market share 
increased from 24 percent in the late 1990s to 27 percent in 2015. The 
Gas Technology Institute (GTI), ACEEE, NSEG, AGA, GAMA, York, and 
Lennox commented that DOE should account for recent market trends that 
are leading to greater sales of condensing gas furnaces. (GTI, No. 74 
at p. 2; ACEEE, No. 84 at p. 13; NSEG, Public Meeting Transcript, No. 
59.8 at p. 23; AGA, No. 59.8 at p. 42; GAMA, Public Meeting Transcript, 
No. 59.8 at p. 158; York, No. 65 at p. 2; and Lennox, 79 at p. 3) The 
Department agrees that use of the most recent data is important. In its 
analysis for this notice, the Department revised its assignment of gas 
furnaces to sampled housing units in the base case to reflect the 
recent trend toward a higher market share for condensing furnaces, as 
shown in shipments data through 2003 provided by GAMA. There is a 
strong correlation between condensing furnace market share and the 
natural gas price for the 1990-2003 period. The Department based the 
projected market share of condensing furnaces in 2015 on an evaluation 
of this correlation, projected natural gas prices from AEO2005, and 
market factors that could sustain the condensing furnace market share 
even with a lower gas price. The projected condensing furnace market 
share for 2015 is 35 percent. Therefore, for the LCC analysis base 
case, the Department assigned condensing furnaces to 35 percent of the 
sampled housing units with non-weatherized gas furnaces.\13\
---------------------------------------------------------------------------

    \13\ The Department assumed the same disbursement of condensing 
furnaces, 35 percent, within the sampled housing units for non-
weatherized gas furnaces in the energy price sensitivity analysis, 
which it based on AEO2006.
---------------------------------------------------------------------------

    GAMA commented that the 2004 ANOPR analysis does not draw a 
correlation between an individual household's characteristics and the 
furnace it would have bought under the base case. (GAMA, Public Meeting 
Transcript, No. 59.8 at p. 158) The Department's analysis does 
correlate the type of furnace assigned as base-case equipment with 
certain household characteristics. Specifically, in assigning 
condensing furnaces as base-case equipment, the Department used a 
ranking of the RECS sample housing units by heating degree days to 
assign condensing furnaces to households in colder climates.
    For other product classes, the Department assigned base-case 
equipment to the sampled housing units from a distribution of AFUEs 
that is representative of current shipments for each product class. The 
assignment of equipment efficiency took climate into account.

D. National Impact Analysis--National Energy Savings and Net Present 
Value Analysis

1. Shipments, National Energy Savings, and Net Present Value
    The Department calculated the NES and the NPV of total customer 
costs and savings expected to result from new standards at specific 
efficiency levels, defined as a difference between a base-case forecast 
(without new standards) and the standards case (with new standards). 
The NES refers to cumulative energy savings from 2015 through 2038. The 
Department calculated net monetary savings in each year relative to the 
base-case as the difference between total operating-cost savings and 
increases in total installed cost. Cumulative savings are the sum of 
the annual NPV over the specified time period. The Department accounted 
for operating-cost savings until all the equipment installed through 
2038 is retired.
    An important element in the estimate of the future impact of a 
standard is product shipments. The shipments portion of the NES 
Spreadsheet uses historical data as a basis for projecting furnace and 
boiler shipments. Furnace and boiler shipments comprise units used to 
replace retired units of the same type or of another fuel type, as well 
as units installed in new homes. (See TSD, Chapter 9.)
    In the 2004 ANOPR analysis, the Department estimated retirements 
based solely on past shipments and the assumed equipment lifetimes. For 
gas furnaces (all three product classes together), the resulting total 
shipments in the 1993-2001 period were less than those reported by 
GAMA. (GAMA, No. 24) For today's proposed rule, the Department added 
two additional components of gas furnace shipments in this period, 
early retirement and fuel switching, which brought the shipments 
estimated by the model into closer agreement with the GAMA data. (GAMA, 
No. 94)
    The first added component of gas furnace shipments is the early 
retirement of non-condensing furnaces and their replacement with more-
efficient condensing furnaces. Evidence for this trend can be seen in 
the GAMA data, which show a large increase in

[[Page 59225]]

condensing furnace shipments in this period in response to rising 
natural gas prices. The second added component is conversion from non-
central gas heating to central heating with a gas furnace. There is 
evidence for this conversion in the RECS data, which show a large 
increase between 1993 and 2001 in homes with central gas heating that 
were built before 1990, as well as in the trade literature. The 
shipments from these additional components are most likely to be non-
weatherized gas furnaces, because they account for about 90 percent of 
all gas furnace shipments. The Department assumed that shipments from 
these additional components follow a normal distribution, rising 
gradually from 1993, reaching a maximum value, and then decreasing 
again. It assumed that shipments from these additional components 
gradually taper off due to a decline in the number of homes for which 
conversion from non-central gas heating or early retirement of non-
condensing furnaces is possible or economically attractive. The 
Department corrected replacements in subsequent years to avoid double-
counting due to furnaces being removed from the stock before the end of 
their lifetime. The Department also estimated the annual number of 
replacements based on past shipments, projected shipments to new 
housing construction over the next decade, and equipment retirement 
rates.
    York stated that the 2004 ANOPR analysis neglected the market for 
replacement of furnaces in mobile homes. (York, No. 65 at p. 5) In the 
NES calculations for the proposed rule, the Department included 
estimated shipments for replacement of furnaces in mobile homes.
    To estimate future conversions to natural gas, DOE used data from 
utility surveys conducted by the AGA that report the numbers of 
households that converted to natural gas space heating. ACC commented 
that DOE should consider expected relative prices of natural gas and 
electricity in estimating future conversions. (ACC, No. 62 at p. 3) The 
Department estimated the annual conversions to natural gas as a 
constant percentage of projected replacements using data from the 1985-
1995 period. The trend in relative energy prices in this period is 
similar to the trend of projected energy prices.
    EEI commented that DOE should address the impact of DOE's new 
energy conservation standard for heat pumps on heating system 
conversions after January 2006. (EEI, No. 69 at p. 2) The Department 
believes few existing houses with a heat pump that is due to be 
replaced would be likely to convert to a combination of a gas furnace 
and central air conditioner, even if the price of a new heat pump is 
several hundred dollars more after the new central air conditioner/heat 
pump standard goes into effect. Houses with a heat pump typically lack 
venting systems, and/or access to a source of natural gas, which are 
necessary to convert to gas heating. Therefore, the Department did not 
include conversions from heat pumps to natural gas equipment in its 
analysis.
    The Department also estimated the number of annual shipments of 
each product class going to new housing units as a function of the 
market share estimated for each product class. For non-weatherized and 
mobile home gas furnaces, the Department estimated market-shift effects 
from changes in relative fuel prices and from equipment price increases 
expected from higher efficiency standards. In forecasting gas furnace 
market shares, the Department assumed an impact of higher installed 
costs due to standards would be a decrease in market share held by gas 
furnaces in new construction, in favor of electric heating. The 
Department accounted for these market shift effects in the calculation 
of NES and NPV by considering the differential in energy consumption, 
utility bills and equipment cost between households with gas heating 
and those with electric heating. The Department based its estimates on 
the current market share of heat pumps and electric furnaces in 
households with electric space heating, as provided by RECS 2001. For 
non-weatherized gas furnaces, DOE assumed that heat pumps account for 
54 percent of the additional electric heating equipment purchased due 
to market shift, and electric resistance furnaces account for 46 
percent. It based these values on equipment shares in homes built in 
1999-2003. For mobile home gas furnaces, the assumed shares of 
additional electric heating equipment purchased due to market shift are 
41 percent for heat pumps and 59 percent for electric resistance 
furnaces. In determining market shift effects, the Department assumed 
the above shares of heat pumps and electric resistance furnaces 
remained constant over the analysis period. The Department invites 
comments on its assumption of constant heat pump and electric 
resistance furnace market shares in order to calculate the market shift 
effects on NES and NPV.
    NPGA, Laclede, and NSEG recommended that DOE analyze the potential 
for a market shift from gas furnaces to electric heating equipment 
resulting from new gas furnace standards. (NPGA, No. 72 at p. 4; 
Laclede, No. 76 at p. 3; and NSEG, Public Meeting Transcript, No. 59.8 
at p. 24) Similarly, EEI commented that DOE should consider how the 
increased energy-efficiency standards for heat pumps in 2006 will shift 
market shares in new construction from electric to gas space-heating 
systems. (EEI, No. 69 at p. 2) In the analysis for this notice, the 
Department used the same approach to evaluate market shifts as in the 
2004 ANOPR analysis, but it used more recent data on heating equipment 
prices. (See TSD, Chapter 9.) The Department also included the impact 
of projected higher heat pump prices after 2006. (See TSD, Chapter 9.) 
Projected market share shifts are reflected in the MIA.
    Southern and Carrier commented that standards for gas furnaces 
could induce switching to combination space- and water-heating 
appliances. (Southern, Public Meeting Transcript, No. 59.8 at p. 200; 
and Carrier, Public Meeting Transcript, No. 59.8 at p. 198) The 
Department believes that the historical market data necessary for 
estimating the potential for consumers to switch to combination space- 
and water-heating appliances do not exist. Therefore, DOE was not able 
to include this potential market effect in the shipments projection.
    The Department estimated the future market shares of oil-fired 
furnaces and gas- and oil-fired boilers in total new housing 
completions based on their average shares in homes built in the 1999-
2003 period. For new homes that use oil-fired equipment, gas is 
generally not available, so the Department considered the market shares 
to be independent of changes in equipment price due to the 
implementation of standards. Gas boilers in new homes are associated 
with specific types of heating systems, such as hydronic radiators or 
radiant floors, so substitution of alternative equipment is unlikely. 
Therefore, the Department assumed that the market share would not be 
affected by changes in equipment price due to standards.
    Table IV.4 summarizes the approach and data DOE used to derive the 
inputs to the shipments analysis for today's proposed rule, and the 
changes made in the analysis for this proposed rule. (See TSD, Chapter 
9.)

[[Page 59226]]



     Table IV.4.--Approach and Data Used To Derive the Inputs to the
                           Shipments Analysis
------------------------------------------------------------------------
                                   2004 ANOPR       Changes for proposed
            Input                  description              rule
------------------------------------------------------------------------
Shipments*..................  Calculated total      Same approach as
                               shipments for         ANOPR, with updated
                               replacements based    shipments data from
                               on past shipments     GAMA. Included
                               and retirement        shipments for
                               function, and for     mobile home furnace
                               new homes based on    replacement.
                               projection of new     Projection of new
                               housing from          housing updated to
                               AEO2003. The          AEO2005. Market
                               projected market      share projection
                               shares in new homes   used re-estimated
                               were a function of    parameters. Model
                               relative heating      used two additional
                               equipment prices.     shipment categories
                               Based conversions-    to calibrate with
                               upon-replacement on   GAMA data.
                               historic survey
                               data.
Replacements in kind........  Replacement of worn-  No change.
                               out heating
                               equipment with unit
                               of same equipment
                               type (i.e., furnace
                               versus boiler) and
                               same fuel (natural
                               gas or oil).
                               Applies a
                               replacement
                               probability
                               distribution based
                               on equipment
                               lifetime.
Conversions.................  Replacement of worn-  No change.
                               out heating
                               equipment with
                               equipment utilizing
                               a different fuel.
                               Based on utility
                               surveys conducted
                               by AGA that report
                               the numbers of
                               households that
                               converted from oil
                               or electricity to
                               natural gas space
                               heating. Source:
                               AGA House Heating
                               Survey 1985-1995.
Installations in new housing  Installation of       No change.
                               heating equipment
                               into new single-
                               family, multi-
                               family or mobile
                               homes according to
                               construction rates
                               and equipment type
                               market shares. Used
                               housing completions
                               according to DOE
                               forecast and
                               modeled market
                               shares according to
                               energy and
                               equipment price
                               trends.
Gas furnace early             Not applied.........  Early replacement of
 replacement.                                        non-condensing
                                                     furnaces with more
                                                     efficient
                                                     condensing
                                                     furnaces. Model
                                                     calibrated to GAMA
                                                     data, which show a
                                                     large increase in
                                                     condensing furnace
                                                     shipments in
                                                     response to rising
                                                     natural gas prices.
Conversion from non-central   Not applied.........  Conversion from non-
 gas heating to central                              central gas heating
 heating with a gas furnace.                         to central heating
                                                     with a gas furnace.
                                                     Model used RECS
                                                     data, which show a
                                                     large increase
                                                     between 1993 and
                                                     2001 in homes with
                                                     central gas heating
                                                     that were built
                                                     before 1990.
------------------------------------------------------------------------
*For the energy price sensitivity analysis, the Department based its new
  housing projections on forecasts from the AEO2006. Section V.B.3.a
  presents the results of the energy price sensitivity analysis.

    To make the analysis more accessible and transparent to 
stakeholders, the Department used an MS Excel spreadsheet model to 
calculate the NES and NPV. MS Excel is the most widely used spreadsheet 
calculation tool in the U.S. and there is general familiarity with its 
basic features. Thus, the Department's use of MS Excel for the 
spreadsheet models provides stakeholders access to the models within a 
familiar context. In addition, the TSD and other documentation that DOE 
provides during the rulemaking explain the models and how to use them, 
and stakeholders can review DOE's analyses by changing various input 
quantities within the spreadsheet. Unlike the LCC analysis, the NES 
Spreadsheet does not use distributions for inputs. The Department 
examined the sensitivity of monetary savings by applying different 
scenarios of energy prices and societal discount rates. (See TSD, 
Chapter 10.)
    In addition to analyzing national impacts, the Department analyzed 
the NES and NPV for the Southern and Northern regions. The Department 
defined the Southern region as including those States that have an 
average of less than 5,000 heating degree-days. The Department defined 
the Northern region as including those States that have an average of 
more than 5,000 heating degree-days.\14\ See section III.A.4 for a list 
of States that fall under the Northern or Southern regions.
---------------------------------------------------------------------------

    \14\ The following States average 5000 or more HDDs: Alaska, 
Colorado, Connecticut, Idaho, Illinois, Indiana, Iowa, Kansas, 
Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, 
Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, 
Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, 
Washington, West Virginia, Wisconsin, and Wyoming.
---------------------------------------------------------------------------

    Table IV.5 summarizes the approach and data DOE used to derive the 
inputs to the NES and NPV analyses for the 2004 ANOPR, and the changes 
made in the analyses of the proposed rule. (See TSD, Chapter 10.)

[[Page 59227]]



Table IV.5.--Approach and Data Used To Derive the Inputs to the National
              Energy Savings and Net Present Value Analyses
------------------------------------------------------------------------
                                   2004 ANOPR       Changes for proposed
            Input                  description              rule
------------------------------------------------------------------------
Shipments...................  Annual Shipments      See Table IV.4.
                               form shipments
                               model.
Date Products Must Meet       2012................  2015.
 Standard.
Annual UEC (Unit Energy       Annual weighted-      No change. Projected
 Consumption).                 average values were   share of condensing
                               a function of         furnaces reflected
                               efficiency level.     recent shipments
                               Base case UEC for     data.
                               non-weatherized gas
                               furnaces accounted
                               for projected share
                               of condensing
                               furnaces.
Installed Cost per Unit.....  Annual weighted-      No change.
                               average values were
                               a function of
                               efficiency level
                               (established from
                               the LCC analysis).
Maintenance Cost per Unit...  Annual weighted-      No change.
                               average values were
                               a function of
                               efficiency level
                               (established from
                               the LCC analysis).
Energy Prices *.............  AEO2003 forecasts to  AEO2005 forecasts to
                               2025 and              2025 and
                               extrapolation         extrapolation
                               beyond 2025.          beyond 2025.
Energy Site-to-Source         Generated by DOE/     No change.
 Conversion.                   EIA's National
                               Energy Modeling
                               System (includes
                               electric
                               generation,
                               transmission, and
                               distribution
                               losses).
Discount Rate...............  7-percent and 3-      No change.
                               percent real.
Present Year................  Future expenses       Future expenses
                               discounted to year    discounted to year
                               2001.                 2004.
------------------------------------------------------------------------
* For the energy price sensitivity analysis, the Department used AEO2006
  forecasts to derive its energy prices up to 2025 and extrapolated
  beyond 2025. The rationale and methodology for the energy price
  sensitivity analysis is further explained in Section V.B.3.a.

2. Annual Unit Energy Consumption
    The annual unit energy consumption (UEC) values for the base-case 
forecast and each higher efficiency level come from the LCC analysis. 
Each UEC includes a value for gas (or oil) consumption. The base-case 
forecast reflects the expected pattern of equipment purchases in the 
absence of any new standards. Since there is little evidence of change 
in recent years in the average AFUE for each product class, DOE used 
the average values from recent GAMA shipments data for each year of the 
base-case forecast. In particular, for non-weatherized gas furnaces, 
DOE took into account the considerable rise in the market share of 
condensing furnaces in 2001-2003 shown in data provided by GAMA. This 
increase (to 31 percent) corresponds to the sharp rise in the average 
residential gas price in this period. Given that the price forecast in 
the AEO2005 shows a residential gas price in future years that is 
considerably lower than in 2003, one might expect the condensing 
furnace market share to be lower in the future than in 2003. However, 
other factors could potentially sustain the condensing furnace market 
share even with a lower gas price (such as the greater acceptance of 
condensing furnaces among homebuilders). Therefore, the Department 
projected that the share remains at slightly above the 2003 level (35 
percent) throughout the considered period.\15\ The Department also 
evaluated alternative scenarios of the future condensing furnace market 
share. Appendix R of the TSD describes these scenarios and presents the 
NES and NPV results for non-weatherized gas furnaces using the 
alternative scenarios. The Department invites comments on its 
assumption of constant condensing furnace market share in its default 
scenario for calculating annual unit energy consumption.
---------------------------------------------------------------------------

    \15\ The Department assumed the same disbursement of condensing 
furnaces, 35 percent, within the sampled housing units for non-
weatherized gas furnaces in the energy price sensitivity analysis. 
In other words, the Department did not update this percentage based 
on AEO2006 for the energy price sensitivity analysis.
---------------------------------------------------------------------------

3. Site-to-Source Conversion Factors
    Primary energy consumption includes energy used and lost in the 
production and transmission of the energy consumed at the site. The 
Department derived annual site-to-source conversion factors using the 
NEMS AEO2005 Reference Case and estimated energy savings and system 
load impacts as a result of possible standards for each year.\16\ The 
factors the Department used are marginal values, which represent the 
response of the system to an incremental decrease in consumption 
associated with energy conservation standards. Natural gas losses 
include pipeline leakage, pumping energy, and transportation fuel.
---------------------------------------------------------------------------

    \16\ For the energy price sensitivity analysis, the Department 
derived the annual site-to-source conversion factors using the NEMS 
AEO2006 Reference Case.
---------------------------------------------------------------------------

4. Installed Equipment Costs
    Average installed equipment costs for the base-case forecast and 
each efficiency level came from the LCC analysis. Total equipment costs 
for each efficiency level equal the average cost multiplied by 
shipments in each year. The Department assumed no change in real 
equipment costs at each level after 2015. In cases where a market shift 
away from gas furnaces is projected, DOE accounted for the equipment 
costs of the electric heating equipment purchased instead.
5. Maintenance Costs
    The Department took average annualized maintenance costs for the 
base-case forecast and each efficiency level from the LCC analysis. It 
considers the annualized maintenance cost to be an operating cost that 
is applied for each year that the equipment remains in the stock. The 
Department assumed no change in real maintenance costs after 2015.
6. Energy Prices
    The NPV calculation used energy prices to value energy savings for 
natural gas and electricity. It used average energy prices for fuel oil 
and LPG, since consumers typically purchase fuel oil and LPG in bulk 
amounts, and the energy saved is based on the price paid for the bulk 
amount. The Department used 2001 energy prices for the RECS housing 
sample in the LCC analysis. To project prices out to 2025, DOE used 
energy price projections from AEO2005. In the energy price sensitivity 
analysis, DOE calculated the NES and NPV using the recently-published 
energy price projections from AEO2006. For the years after 2025, DOE 
applied the

[[Page 59228]]

average annual growth rate in 2010-2025 for gas and heating oil prices 
and the average annual growth rate in 2015-2025 for electricity prices 
in both cases.
    The Northwest Power and Conservation Council (NPCC) asked if NEMS 
(used for the AEO2005 projections) has a feedback loop between gas 
consumption and the forecast of future prices for natural gas. (NPCC, 
Public Meeting Transcript, No. 59.8 at p. 245) NEMS does incorporate 
such feedback.
    Southern, ACEEE, and ODOE commented that DOE should conduct a 
sensitivity analysis using a greater range of fuel prices, and 
independent forecasts, such as forecasts prepared by Energy and 
Environmental Analysis, Inc. (Southern, No. 71 at p. 3; ACEEE, Public 
Meeting Transcript, No. 59.8 at p. 163; and ODOE, No. 61 at p. 10) The 
Department used for today's analysis price forecasts from the AEO2005, 
including the High and Low Economic Growth Cases. For the energy price 
sensitivity analysis, the Department used the price forecasts from 
AEO2006, including the High and Low Economic Growth Cases. The range of 
prices in these forecasts, especially for natural gas, is quite wide 
and encompasses the scenarios in the AGA's ``Natural Gas Outlook to 
2020'' (February 2005), which were prepared by the Energy and 
Environmental Analysis, Inc. Therefore, the Department concludes that 
its analysis encompasses a reasonable range of future energy prices.
    GTI commented that the analysis should consider reallocation of gas 
utility distribution costs in the case where furnace standards result 
in lower natural gas demand. (GTI, No. 51 at p. 2) Historically, DOE 
has used the same energy price forecasts for standards cases as for the 
base case. Lower natural gas demand due to furnace standards could lead 
to higher fixed-cost charges for natural gas consumers, but such 
charges are subject to State regulation and the Department is not aware 
of a reliable method for estimating the magnitude of the impact on 
average retail prices. Since developing a reliable method for 
evaluating such costs is outside the scope of the rulemaking, DOE has 
not included this factor in its analysis.
7. Discount Rates
    To discount future impacts, the Department used discount rates of 
both seven percent and three percent, in accordance with the Office of 
Management and Budget (OMB)'s guidelines contained in Circular A-4, 
Regulatory Analysis, September 17, 2003. (OMB Circular A-4, Sec.  E 
(September 17, 2003)). For the purpose of this analysis, the Department 
used 2005 as the reference year for discounting because it concluded 
the analysis in this year.

E. Consumer Subgroup Analysis

    In analyzing the potential consumer impact of new or amended 
standards, the Department evaluated the impact on identifiable groups 
of consumers (i.e., subgroups) that may be disproportionately affected 
by a national standard level. The Department analyzed the potential 
effect of standards on households with low income levels and households 
occupied by seniors, two consumer subgroups of interest. The Department 
defined seniors as those households having a head of household over age 
65, and defined low income as those households at or below 100 percent 
of the poverty level. (See TSD, Chapter 11.)
    The Department also analyzed the potential effect of standards on 
Southern and Northern households. For this analysis, the Department 
defined Southern households as those households located in States that 
have an average of less than 5,000 heating degree-days. The Department 
defined Northern households as those households located in States that 
have an average of more than 5,000 heating degree-days. See section 
III.A.4 for a list of States that fall under the Northern or Southern 
regions.
    EEI commented that DOE should examine the same subgroups that it 
analyzed for the residential air conditioner and heat pump rulemaking. 
(EEI, No. 69 at p. 5) The Department analyzed households with low 
income levels and households occupied by seniors in the furnace and 
boiler analysis, as it did in the residential air conditioner and heat 
pump rulemaking. NSEG suggested that DOE use discount rates specific to 
each subgroup. (NSEG, No. 51 at p. 6) The Department's analysis uses a 
distribution of discount rates that accounts for all consumer 
subgroups.

F. Manufacturer Impact Analysis

1. General Description
    In determining whether a standard for a covered product is 
economically justified, the Secretary of Energy is required to consider 
``the economic impact of the standard on the manufacturers and on the 
consumers of the products subject to such standard.'' (42 U.S.C. 
6295(o)(2)(B)(i)(I)) The statute also calls for an assessment of the 
impact of any lessening of competition as determined by the Attorney 
General. (42 U.S.C. 6295(o)(2)(B)(i)(V)) The Department conducted the 
MIA to estimate the financial impact of efficiency standards on the 
residential furnace and boiler industry and to assess the impact of 
such standards on employment and manufacturing capacity.
    The MIA has both quantitative and qualitative components. The 
quantitative part of the MIA primarily relies on the GRIM, an industry-
cash-flow model adapted for this rulemaking. The key GRIM inputs relate 
to industry cost structure, shipments, and pricing strategies. The 
GRIM's key output is the INPV. The model estimates the financial impact 
of higher efficiency standards by comparing changes in INPV between the 
baseline and the various trial standard levels. The qualitative part of 
the MIA addresses factors such as product characteristics, 
characteristics of particular firms, and market and product trends, and 
includes an assessment of the impacts of standards on subgroups of 
manufacturers. (See TSD, Chapter 12.)
    On July 17, 2001, the Department prepared a Framework Document 
entitled Framework Document for Residential Furnaces and Boilers Energy 
Conservation Standards Rulemaking.\17\ This document outlined the 
procedural and analytical approaches to be used in the MIA. Later in 
the rulemaking, the 2004 ANOPR further discussed the three-step process 
involved in determining the impact of new residential furnace and 
boiler standards on manufacturers. 69 FR 45451. This process is 
detailed below. In response to the 2004 ANOPR documentation and public 
meeting, the Department received specific comments on the MIA, which 
are addressed in this section.
---------------------------------------------------------------------------

    \17\ U.S. Department of Energy, Framework Document for 
Residential Furnaces and Boilers Energy Conservation Standards 
Rulemaking, July 17, 2001. This document is available at http://www.eere.energy.gov/buildings/applicance_standards/residential/furnace_boiler_framework_mtg.html.
---------------------------------------------------------------------------

    As outlined, the Department conducted the MIA in three phases. 
Phase 1, Industry Profile, consisted of preparing an industry 
characterization, including data on market share, sales volumes and 
trends, pricing, employment, and financial structure. Phase 2, Industry 
Cash Flow, focused on the industry as a whole. In this phase, DOE used 
the GRIM to prepare an industry-cash-flow analysis. Using publicly 
available information developed in Phase 1, the Department adapted the 
GRIM's generic structure to perform an analysis of residential furnace 
and boiler energy conservation

[[Page 59229]]

standards. In Phase 3, Subgroup Impact Analysis, DOE conducted 
interviews with manufacturers representing over 80 percent of domestic 
furnace and boiler sales. This group included large and small 
manufacturers of furnaces and boilers, providing a representative 
cross-section of the industry. During these interviews, the Department 
discussed engineering, manufacturing, procurement, and financial topics 
specific to each company and also obtained each manufacturer's view of 
the industry as a whole. The interviews provided valuable information 
that the Department used to evaluate the impacts of a standard on 
manufacturers' cash flows, manufacturing capacities, and employment 
levels.
2. Industry Profile
    In Phase 1 of the MIA, the Department prepared a profile of the 
residential furnace and boiler industry that built on the market and 
technology assessments originally prepared for the 2004 ANOPR analysis 
and subsequently updated for today's proposed rule. Before initiating 
the detailed impact studies, DOE collected information on the present 
and past structure and market characteristics of residential furnace 
and boiler manufacturing. The information DOE collected at that time 
included market share, product shipments, markups, and cost structure 
for various manufacturers. The industry profile includes further detail 
on product characteristics, estimated manufacturer market shares, the 
financial situation of manufacturers, trends in the number of firms, 
the market, and product characteristics of the residential furnace and 
boiler industry.
    The industry profile included a topdown cost analysis of 
residential furnace and boiler manufacturers that DOE used to derive 
cost and preliminary financial inputs for the GRIM (e.g., revenues; 
material; labor; overhead; depreciation; selling, general, and 
administrative expenses; and R&D expenses). The Department also used 
public sources of information to expand its initial characterization of 
the industry, including 10-K reports from the Securities and Exchange 
Commission, Moody's company data reports, Standard & Poor's stock 
reports, Value Line industry composites, corporate annual reports, the 
U.S. Census Bureau's Economic Census, Dun & Bradstreet reports, and 
industry analysis from Ibbotson Associates and Dow Jones Financial 
Services.
3. Industry Cash Flow Analysis
    Phase 2 of the MIA focused on the financial impacts of new 
standards on the industry as a whole. Energy conservation standards can 
affect furnace and boiler manufacturers in three distinct ways, 
including: (1) Increased investment; (2) higher production costs per 
unit; and (3) altered revenue by virtue of higher per-unit prices and 
changes in sales volumes. The analytical tool DOE uses for calculating 
the financial impacts of standards on manufacturers is the GRIM. To 
quantify these impacts in Phase 2 of the MIA, the Department performed 
a cash flow analysis of the residential furnace and boiler industry 
using the GRIM.
4. Subgroup Impact Analysis
    Using average cost assumptions to develop an industry-cash-flow 
estimate is not adequate for assessing differential impacts among 
subgroups of manufacturers. Small manufacturers, niche players, or 
manufacturers exhibiting a cost structure that largely differs from the 
industry average could be more negatively affected. The Department used 
the results of the industry characterization to group manufacturers 
exhibiting similar characteristics. In the Framework Document and at 
the 2004 ANOPR public meeting, the Department invited stakeholders to 
comment on the manufacturing subgroups that should be analyzed for the 
MIA. The Department had established six subgroups corresponding to each 
of the product classes in the 2004 ANOPR. It did not receive comments 
at the public meeting or in response to either the Framework Document 
or the 2004 ANOPR. Consequently, the Department decided to use the six 
subgroups that correspond to each of the product classes in the MIA, 
based on the market assessment.
    Based on this decision, the Department prepared two different 
interview guides--one for furnace manufacturers and one for boiler 
manufacturers. The Department used these interview guides to tailor the 
GRIM to incorporate unique financial characteristics from both 
industries. Within each of these industries, the Department contacted 
companies from its database of manufacturers, which provided a 
representation of each subgroup. It interviewed small and large 
companies, subsidiaries and independent firms, and public and private 
corporations. The Department also made an effort to interview companies 
that had previously participated in the Department's rulemaking process 
for residential furnaces and boilers. The purpose of the meetings was 
to enhance the Department's understanding of how manufacturer impacts 
vary with the trial standard levels. During the course of the MIA, the 
Department held nine interviews with furnace manufacturers and five 
interviews with boiler manufacturers, together representing over 80 
percent of domestic furnace and boiler sales. Finally, DOE developed a 
GRIM for each of the six subgroups.
    The Department also evaluated the impact of the energy conservation 
standards on small businesses. Small businesses, as defined by the 
Small Business Administration (SBA) for the furnace and boiler 
manufacturing industry, are manufacturing enterprises with 750 or fewer 
employees. The Department created a version of the interview guide 
tailored for small furnace and boiler manufacturers, and contacted 11 
small businesses to determine if they were interested in discussing 
differential impacts standards would have on their companies. (See TSD, 
Chapter 12.)
5. Government Regulatory Impact Model Analysis
    A higher energy conservation standard can affect a manufacturer's 
cash flow in three distinct ways, resulting in: (1) Increased 
investment; (2) higher production costs per unit; and (3) altered 
revenue by virtue of higher per-unit prices and changes in sales 
volumes. As mentioned, the Department uses the GRIM to quantify changes 
in cash flow that result in a higher or lower industry value. The GRIM 
analysis uses a standard, annual-cash-flow analysis that incorporates 
manufacturer prices, manufacturing costs, shipments, and industry 
financial information as inputs and models changes in costs, 
distribution of shipments, investments, and associated margins that 
would result from new regulatory conditions (in this case, standard 
levels). The GRIM spreadsheet uses a number of inputs to arrive at a 
series of annual cash flows, beginning with the base year of the 
analysis, 2004, and continuing to 2038. The Department calculated INPVs 
by summing the stream of annual discounted cash flows during this 
period.
    The Department used the GRIM to calculate cash flows using standard 
accounting principles and to compare changes in INPV between a baseline 
and different trial standard levels for energy conservation standards 
(the standards case). Essentially, the difference in INPV between the 
baseline and the standards case represents the financial impact of the 
new standard on manufacturers. The Department collected this 
information from a number of sources, including publicly available data 
and interviews

[[Page 59230]]

with several manufacturers. (See TSD, Chapter 12.)
    GAMA asked if the MIA included consideration of cumulative 
regulatory burden. (GAMA, Public Meeting Transcript, No. 59.8 at p. 
241) The Department considered the impacts of cumulative regulations in 
the MIA. Section V.B.2.d of this notice and Chapter 12 of the TSD 
summarize these impacts.
6. Manufacturer Interviews
    As part of the MIA, DOE discussed potential impacts of standards 
with manufacturers responsible for a majority of residential furnace 
and boiler sales. The manufacturers interviewed comprise 82 percent of 
the gas furnace market, close to 100 percent of the mobile home furnace 
market, 61 percent of the oil-fired furnace market, and 79 percent of 
the boiler market. These interviews were in addition to those the 
Department conducted during the 2004 ANOPR as part of the engineering 
analysis. The interviews provided valuable information that DOE used to 
evaluate the impacts of new standards on manufacturers' cash flows, 
manufacturing capacities, and employment levels.
    a. Issues. Venting was the most common concern discussed by 
manufacturers, both at the 2004 ANOPR public meeting and during the 
manufacturer interviews. Proper venting is necessary because of the 
safety and reliability issues associated with corrosion that is caused 
from condensation within the venting systems at certain efficiency 
levels. Due to this concern, many manufacturers commented that 
residential furnaces and boilers cannot be properly or safely vented at 
certain AFUE levels. Instead, some manufacturers stated that they would 
choose not to manufacturer an entire line of products at those 
efficiency levels for which the safety concerns exceed the benefits. To 
address these concerns, the Department requested additional information 
from manufacturers. For example, for non-weatherized gas furnaces, the 
Department requested information from manufacturers on the costs for 
designing, manufacturing, and selling an entire furnace family at an 
81-percent-AFUE efficiency level. The Department used manufacturer 
responses to update product costs in the engineering analysis and 
investment figures in the MIA. However, this still does not fully 
address manufacturer concerns with venting because some manufacturers 
stated they are not willing to bear the increased risk at any cost. 
(See TSD, Chapter 12.)
    Manufacturers of furnaces and boilers stated that the development, 
manufacture, sale, and use of the products at near-condensing levels 
would increase the risk of warranty and product liability claims, and 
that such claims could be substantial and have a significant adverse 
effect on their future profitability. During the interviews, 
manufacturers indicated that their warranty costs could double or even 
triple. Considering that earnings before interest and taxes are 
typically about seven percent for manufactures of furnaces and boilers, 
this level of increase in warranted costs could reduce profits by 
twenty percent or more. Although DOE attempted to quantify the 
financial impacts resulting from warranty cost increases, it did not 
consider these costs in its assessment of INPV due to insufficient 
information relating to changes in equipment failure rates and their 
associated costs. The Department seeks comment and information which 
would help to monetize these impacts. (See TSD, Chapter 12.)
    Another concern expressed by the manufacturers during the 
interviews centered on the shipments forecasted by the NES model. The 
NES model forecasts the total number of products sold and the 
efficiency distribution of these products for the base case and all 
trial standard levels. During the course of the interviews, DOE asked 
manufacturers to comment on the NES forecasts. For many product 
classes, manufacturers generally agreed with the projected impacts of 
standards on total shipments and the distribution mix of efficiencies. 
However, most manufacturers stated that DOE overestimated the shipment 
levels predicted at higher efficiency levels (trial standard levels 4 
and 5). In some cases, they maintained that consumers would stop buying 
furnaces and boilers and would choose heat pumps and/or combination 
systems instead. The manufacturers expressed a common view that new 
construction markets and southern States are most susceptible to 
product switching. They also noted that higher efficiency standards 
will affect replacement market sales, where consumers may be more 
inclined to repair their existing system than to purchase a new system 
with a costly installation. Finally, manufacturers commented on the 
predicted distribution of products by efficiency level for the year 
2015. In several instances, they provided revised estimates, which the 
Department used to revise the shipment forecasts in the GRIM. The next 
section provides further details on the manufacturers' shipments 
forecast and the NES shipments forecast.
    b. GRIM Scenarios and Key Inputs.
    1. Shipments Forecast. The GRIM estimates manufacturer revenues 
based on total-unit-shipment forecasts and the distribution of these 
values by AFUE levels. Changes in the efficiency mix by standard level 
are a key driver of manufacturer finances. For this analysis, the GRIM 
used both NES and manufacturers' shipments forecasts for each product 
from 2004 to 2038. Total shipments forecasted by the NES for all trial 
standard levels in 2015 are shown in Table IV.6 and are further 
detailed in this section of this proposed rule.

                               Table IV.6.--Total NES-Forecasted Shipments in 2015
                                                   [Millions]
----------------------------------------------------------------------------------------------------------------
                                                              Base
                       Product class                          case    TSL 1    TSL 2    TSL 3    TSL 4    TSL 5
----------------------------------------------------------------------------------------------------------------
Non-weatherized gas furnaces..............................     2.77     2.77     2.77     2.76     2.74     2.67
Weatherized gas furnaces..................................                          0.424
Mobile home gas furnaces..................................    0.196    0.195    0.195    0.192    0.182    0.182
Oil-fired furnaces........................................                         0.0879
Gas boilers...............................................                          0.279
Oil-fired boilers.........................................                          0.12
----------------------------------------------------------------------------------------------------------------

    As described above, manufacturers stated during interviews that the 
NES understated the decline in shipments at increased efficiency 
levels. In particular, some manufacturers commented that at trial 
standard level 4 and above, for non-

[[Page 59231]]

weatherized gas furnaces, they expect consumers to switch to heat pumps 
or repair their existing equipment due to the increased cost of 
condensing non-weatherized gas furnaces. Manufacturers also suggested 
that there will be a market shift away from non-weatherized gas 
furnaces at 90-percent AFUE and above in the southern climates, where 
heat pumps are more feasible. One manufacturer expects on the order of 
a 50-percent drop in shipments at trial standard level 5 and a 25-
percent drop in shipments at trial standard level 4 for non-weatherized 
gas furnaces. Manufacturers also expressed their concern that, at trial 
standard levels 1, 2, and 3, equipment switching alone would cause 
shipment drops that did not seem to be characterized by the NES.
    For weatherized gas furnaces, some manufacturers stated that there 
would be a decline in shipments for all efficiency levels above the 
current standard, with more significant declines at 83-percent AFUE. 
One manufacturer commented that consumers would be more likely to 
purchase heat pumps because of their reliability, and because of the 
increased risk of condensation with 83-percent-AFUE furnaces. However, 
some manufacturers acknowledged that consumers usually buy weatherized 
gas furnaces with an air-conditioning unit, and the air-conditioning 
unit is the key driver in consumers' decision.
    Manufacturers expressed similar concerns for mobile home furnaces 
as they did for non-weatherized gas furnaces at and above 90-percent 
AFUE. They commented that consumers will switch to heat pumps or 
combination systems rather than make an increased investment in more-
efficient mobile home furnaces. For oil-fired furnaces, manufacturers 
suggested that the industry for this equipment will begin to shrink at 
trial standard levels 4 and 5. In addition, they foresee a drop in 
shipments at higher efficiency levels because consumers will either 
change to alternative heating sources like heat pumps or use propane. 
Finally, manufacturers of boilers expressed concern that the NES 
analysis did not forecast any decline in shipments at any of the trial 
standard levels. They stated that, because of increased first cost, 
consumers are more likely to choose radiant or electric furnaces than 
more-efficient boiler systems. One manufacturer recognized that there 
had already been consolidation within the boiler industry and predicted 
that increased efficiency standards would cause further consolidation 
within the boiler industry. Furthermore, other manufacturers stated 
that they believe that the industry would continue to move toward 
consolidation even in the absence of increased energy efficiency 
standards.
    The Department took into consideration all of the manufacturers' 
concerns with the NES shipments forecast and derived an alternative 
shipments forecast (referred to as ``manufacturers forecast'') for each 
product class, based on information received during the manufacturer 
interviews. Table IV.7 shows the alternative shipments forecast for all 
trial standard levels in 2015 by product class.

                         Table IV.7.--Total Manufacturers' Forecasted Shipments in 2015
                                                   [Millions]
----------------------------------------------------------------------------------------------------------------
                       Product class                         NAECA    TSL 1    TSL 2    TSL 3    TSL 4    TSL 5
----------------------------------------------------------------------------------------------------------------
Non-weatherized gas furnaces..............................     2.77     2.77     2.77     2.76     2.33     1.49
Weatherized gas furnaces..................................                          0.424
Mobile home gas furnaces..................................    0.196    0.195    0.195    0.192    0.182    0.182
Oil-fired furnaces........................................   0.0879    0.088    0.088    0.088    0.086    0.082
Gas boilers...............................................    0.279    0.279    0.251    0.251    0.251    0.223
Oil-fired boilers.........................................     0.12     0.12     0.12     0.12     0.12    0.096
----------------------------------------------------------------------------------------------------------------

    The manufacturers' shipments forecast shows increased declines over 
the declines forecasted by the NES model for most product classes at 
increased efficiency levels. Trial standard level 5 shows a more 
significant decline for all product classes except weatherized gas 
furnaces. For non-weatherized gas furnaces, the difference between the 
decline forecasted by the manufacturers' shipments and the decline 
forecasted by the NES shipments for trial standard levels 4 and 5 is 
approximately -14 percent and -44 percent, respectively. For 
weatherized gas furnaces, the Department used the NES shipments 
forecast because the prices of the products did not largely vary across 
trial standard levels and, thus, the Department would not expect a 
decline in the total shipments. Finally, based on its analysis of the 
furnace and boiler industry, DOE assumed that shipments at lower 
efficiencies were most likely to be rolled up into higher efficiency 
levels in response to increases in the efficiency standard. In other 
words, at an increased minimum standard level, the shipments at 
efficiencies below the new minimum standard level will be added to the 
shipments at the new minimum standard level. The Department took both 
the NES shipments forecast and the manufacturers' shipments forecast 
into consideration when assessing impacts on the industry.
    2. Markups. During the interviews, manufacturers commented on the 
differentiation between basic and premium products. Manufacturers 
generally stated that they differentiate between basic and premium 
products and include both in their mix of product offerings. To 
accomplish this differentiation, manufacturers usually offer higher 
efficiency levels and more features for premium products, which 
increases their profitability for these types of products. To estimate 
the manufacturer price of the equipment sold, DOE applied different 
markups to the production costs estimated in the engineering analysis.
    For the MIA analysis, DOE considered up to four distinct markup 
scenarios to bound the range of expected product prices following 
standards. For each product class, the Department used the markup 
scenarios that best characterize the markup conditions described by 
manufacturers, and that reflect the type of market responses 
manufacturers expect as a result of standards. Table IV.8 summarizes 
the markup scenario DOE used for each product class and the markup 
applied for the flat markup scenario. (See TSD, Chapter 12.)

[[Page 59232]]



                            Table IV.8.--Summary of Markup Scenario by Product Class
----------------------------------------------------------------------------------------------------------------
                                                 Flat markup
                Product class                      (Markup     Two-tier markup     Three-tier     Constant price
                                                  applied)                           markup           markup
----------------------------------------------------------------------------------------------------------------
Non-weatherized gas furnaces.................             1.4               x
Weatherized gas furnaces.....................             1.4                                                 x
Mobile home gas furnaces*....................            1.29
Oil-fired furnaces...........................             1.4                                                 x
Gas boilers..................................            1.44                                x
Oil-fired boilers............................            1.44                                x
----------------------------------------------------------------------------------------------------------------
* For mobile home gas furnaces, the Department used flat markup scenario only.

    For the flat markup scenario, the Department applied a uniform 
``flat markup'' across all products, which it calculated from industry 
data. A flat markup assumes no differentiation in gross-margin 
percentage across product efficiency levels. The Department based the 
two-tier markup on the assumption that manufacturers differentiate 
between baseline and premium products--giving a baseline product one 
markup and a premium product another, higher markup. The Department 
used the three-tier markup assumption for boilers, based on the 
information the manufacturers provided during the interviews regarding 
the change in profitability for different efficiency levels. Finally, 
since some manufacturers commented that they will not be able to 
recover any of the incremental product cost resulting from new 
standards for some product classes, the Department used a constant 
price markup and modeled this situation by assuming manufacturers' 
baseline prices remain unchanged even if the baseline efficiency level 
is increased.
    3. Product and Capital Conversion Costs. Energy conservation 
standards typically cause manufacturers to incur one-time conversion 
costs to bring their production facilities and product designs into 
compliance with the new regulation. For the purpose of the MIA, DOE 
classified these one-time conversion costs into two major groups. 
Product conversion expenses are one-time investments in research, 
development, testing, and marketing, focused on making product designs 
comply with the new efficiency standard. Conversion-capital 
expenditures are one-time investments in property, plant, and equipment 
to adapt or change existing production facilities so that new product 
designs can be fabricated and assembled.
    The Department assessed the R&D expenditures manufacturers would be 
required to invest at each trial standard level. It obtained financial 
information through manufacturer interviews and compiled the results in 
an aggregated form to mask any proprietary or confidential information 
from any one manufacturer. For each product class and trial standard 
level, DOE considered a number of manufacturer responses. The 
Department estimated the total product conversion expenditures by 
gathering the responses received during the manufacturer interviews, 
then weighed these data by market share for each industry and, finally, 
extrapolated each manufacturer's R&D expenditures for each product.
    The Department also evaluated the level of conversion-capital 
expenditures needed to comply with new energy conservation standards. 
It prepared preliminary estimates of the capital investments required 
using the manufacturing cost model. The Department then used the 
manufacturer interviews to gather additional data on the level of 
capital investment required at the various efficiency levels. 
Manufacturers explained how different trial standard levels impacted 
their ability to use existing plants, warehouses, tooling, and 
equipment. From the interviews, the Department was able to estimate 
what portion of existing manufacturing assets needed to be replaced 
and/or reconfigured, and what additional manufacturing assets were 
required to manufacture the higher efficiency equipment. In most cases, 
higher standards required the replacement of a larger proportion of 
existing assets.

G. Employment Impact Analysis

    The Process Rule includes employment impacts among the factors that 
DOE considers in selecting a proposed standard. Employment impacts 
include direct and indirect impacts. Direct employment impacts are any 
changes in the number of employees for furnace and boiler 
manufacturers. Indirect impacts are those changes of employment in the 
larger economy that occur due to the shift in expenditures and capital 
investment that is caused by the purchase and operation of more-
efficient furnace and boiler equipment. The MIA addresses direct 
employment impacts; this section describes indirect impacts.
    Indirect employment impacts from furnace and boiler standards 
consist of the net jobs created or eliminated in the national economy, 
other than in the manufacturing sector being regulated, as a 
consequence of: (1) Reduced spending by end users on energy 
(electricity, gas--including LPG--and oil); (2) reduced spending on new 
energy supply by the utility industry; (3) increased spending on the 
purchase price of new furnaces and boilers; and (4) the effects of 
those three factors throughout the economy. The Department expects the 
net monetary savings from standards to be redirected to other forms of 
economic activity. The Department also expects these shifts in spending 
and economic activity to affect the demand for labor in the short term.
    In developing this proposed rule, the Department estimated indirect 
national employment impacts using an input/output model of the U.S. 
economy, called IMBUILD (impact of building energy efficiency 
programs). The Department's Office of Building Technology, State, and 
Community Programs (now the Building Technologies Program) developed 
the model. IMBUILD is a personal-computer-based, economic-analysis 
model that characterizes the interconnections among 35 sectors of the 
economy as national input/output structural matrices, using data from 
the U.S. Bureau of Labor Statistics (BLS). The IMBUILD model estimates 
changes in employment, industry output, and wage income in the overall 
economy of the United States resulting from changes in expenditures in 
the various sectors of the economy. The Department estimated changes in 
expenditures using the NES Spreadsheet. Using IMBUILD, it then 
estimated the net national, indirect-employment impacts of potential 
furnace and boiler efficiency standards on employment by sector.

[[Page 59233]]

    While both the IMBUILD input/output model and the direct use of BLS 
employment data suggest the proposed furnace and boiler standards could 
increase the net demand for labor in the economy, the gains would most 
likely be very small relative to total national employment. The 
Department therefore concludes only that the proposed furnace and 
boiler standards are likely to produce employment benefits that are 
sufficient to offset fully any adverse impacts on employment in the 
furnace and boiler or energy industries. (See TSD, Chapter 14.)
    The Department did not receive stakeholder comments on these 
indirect employment impact methods, which it proposed in the 2004 ANOPR 
for use in the today's analysis.

H. Utility Impact Analysis

    The utility impact analysis estimates the change in the forecasted 
power generation capacity for the Nation. This analysis separately 
determines the changes to supply and demand as a result of natural gas, 
fuel oil, LPG or electricity residential consumption savings due to the 
standard. The Department calculated this change using the NEMS-BT 
computer model. The NEMS-BT models certain policy scenarios such as the 
effect of reduced energy consumption per trial standard level by fuel 
type. The analysis output provides a forecast for the needed generation 
capacities at each trial standard level. The estimated net benefit of 
the standard is the difference between the forecasted generation 
capacities by NEMS-BT and the AEO2005 Reference Case.
    The Department obtained the energy savings inputs associated with 
electricity and natural gas consumption savings from the NES analysis. 
These inputs reflect the effects of efficiency improvement on furnace 
energy consumption, both fuel (natural gas, fuel oil, and LPG) and 
electricity. The inputs also reflect the impacts associated with the 
market shift from natural gas heating to electric heating projected to 
occur at trial standard levels that have an increased installed cost 
for gas furnaces. At trial standard levels 4 and 5, the electricity 
consumption due to the market shift more than offsets the electricity 
savings through more-efficient furnace designs. This effect results in 
an overall increase in projected generating capacity. The results 
represent the corresponding changes to utility sector supply and demand 
as a result of natural gas, fuel oil, LPG, or electricity residential 
consumption savings (or in some cases increases). Chapter 13 of the TSD 
presents results of the utility impact analysis.
    AGA stated that the impact of market shifts from natural gas 
heating to electric heating on natural gas utilities should be 
developed in the utility impact analysis. (AGA, Public Meeting 
Transcript, No. 59.8 at p. 41) Historically, the Department's approach 
for the utility impact analysis has only evaluated the impact of market 
shifts associated with standards on energy consumption, which is 
related to utility sales. The evaluation of other types of utility 
impacts that result from declines in the sales of natural gas or other 
forms of energy is not part of the analysis methodology; thus, DOE did 
not perform this type of evaluation in the utility impact analysis for 
the furnace and boiler standards rulemaking.
    EEI commented that DOE should evaluate the direct impact of new 
standards on the peak loads of the natural gas grid and oil supply 
chain in the United States, in addition to any analysis on the indirect 
impacts on the electric system. (EEI, No. 69 at p. 5) The utility 
impact analysis used NEMS to account for electricity peak load impacts. 
It did not consider peak load impacts on the natural gas grid and oil 
supply chain because these systems have sufficient storage to avoid 
peak demand impacts.

I. Environmental Analysis

    Under 42 U.S.C. 6295(o)(2)(B)(i)(VI), the Department determined the 
environmental impacts of the proposed standard. The Department 
estimated direct emissions impacts at the household level as well as 
impacts on power plant emissions. While the Department is not proposing 
to regulate furnace and boiler electricity use, the electricity use of 
these appliances affects power plant emissions.
    The Department calculated the reduction in power plant emissions of 
CO<INF>2</INF> and NO<INF>X</INF> using the NEMS-BT computer model. The 
NEMS-BT is similar to the AEO2005 NEMS, except that furnace and boiler 
energy usage is reduced by the amount of energy (by fuel type) saved 
due to the trial standard levels. The Department obtained the input of 
energy savings from the NES Spreadsheet. For the environmental 
analysis, the output is the forecasted physical emissions. The net 
impact of the standard is the difference between emissions estimated by 
NEMS-BT and the AEO2005 Reference Case. NEMS-BT tracks CO<INF>2</INF> 
emissions using a detailed module that provides robust results because 
of its broad coverage of all sectors and inclusion of interactive 
effects. The Department also generated alternative price forecasts for 
use by NEMS-BT, corresponding to the High and Low Economic Growth 
sensitivity cases found in AEO2005, and used them as alternative 
scenarios. The Department presents these forecasts in the environmental 
assessment in the TSD.
    The Department does not report an estimated reduction in power 
plant emissions of SO<INF>2</INF> because any such reduction resulting 
from an efficiency standard would not affect the overall level of 
SO<INF>2</INF> emissions in the U.S. The Clean Air Act Amendments of 
1990 set an SO<INF>2</INF> emissions cap on all power generation. The 
attainment of this target is flexible among generators and is enforced 
through the use of emissions allowances and tradable permits. Accurate 
simulation of SO<INF>2</INF> trading implies that the effect of 
efficiency standards on physical emissions will be near zero because 
emissions will always be at or near the allowed ceiling. Thus, there 
may not be an actual reduction in SO<INF>2</INF> emissions from 
electricity savings as long as emission ceilings are binding. However, 
although there may not be an environmental benefit from reduced 
SO<INF>2</INF> emissions from electricity savings, there still may be 
an economic benefit. Electricity savings can decrease the need to 
purchase or produce SO<INF>2</INF> emissions allowance credits, which 
decreases the costs of complying with regulatory caps on emissions. The 
Department reports household SO<INF>2</INF> emissions savings, because 
the SO<INF>2</INF> emissions caps do not apply to household emissions.
    Power sector NO<INF>X</INF> emissions impacts will be affected by 
the Clean Air Interstate Rule (CAIR), which the U.S. Environmental 
Protection Agency (EPA) issued on March 10, 2005. CAIR will permanently 
cap emissions of NO<INF>X</INF> in 28 eastern states and the District 
of Columbia. 70 FR 25162 (May 12, 2005). As with SO<INF>2</INF> 
emissions, a cap on NO<INF>X</INF> emissions means that equipment 
efficiency standards may result in no physical effects on these 
emissions. When NO<INF>X</INF> emissions are subject to emissions caps, 
the Department's emissions reduction estimate corresponds to 
incremental changes in emissions allowance credits in cap-and-trade 
emissions markets rather than physical emissions reductions. Therefore, 
while the emissions cap may not result in physical emissions reduction 
from the proposed standards, it does produce an environmental-related 
economic benefit in the form of emissions allowance credits.
    In addition to electricity, the operation of furnaces and boilers 
requires use of fossil fuels, and results in household emissions of 
CO<INF>2,</INF> NO<INF>X,</INF>

[[Page 59234]]

and SO<INF>2</INF> at the sites where appliances are used. NEMS-BT 
provides no means for estimating such household emissions. Therefore, 
DOE calculated separate estimates of the effect of the proposed 
standard on household emissions of CO<INF>2,</INF> NO<INF>X,</INF> and 
SO<INF>2,</INF> based on emissions factors derived from the literature.
    The Department invites comments on the environmental assessment 
that is published with the TSD.

V. Analytical Results

A. Trial Standard Levels

    The Department analyzed the benefits and burdens of the five trial 
standard levels considered in today's proposed rule. Table V.1 presents 
the five trial standard levels and the corresponding product class 
efficiencies.

                           Table V.1.--Trial Standard Levels for Furnaces and Boilers
----------------------------------------------------------------------------------------------------------------
                                                                           Trial standard levels  (AFUE, %)
                          Product classes                           --------------------------------------------
                                                                      TSL 1    TSL 2    TSL 3    TSL 4    TSL 5
----------------------------------------------------------------------------------------------------------------
Non-weatherized gas furnaces.......................................       80       80       81       90       96
Weatherized gas furnaces...........................................       80       83       83       83       83
Mobile home gas furnaces...........................................       80       80       81       90       90
Oil-fired furnaces.................................................       80       82       82       84       85
Gas boilers........................................................       82       84       84       84       99
Oil-fired boilers..................................................       83       83       83       84       95
----------------------------------------------------------------------------------------------------------------

    Trial standard level 1 represents the most common product 
efficiencies of the current market, based on the NES shipments 
forecast. (See TSD, Chapter 9.) For example, for non-weatherized, gas-
fired furnaces, trial standard level 1 is 80-percent AFUE. The 
Department also examined the 2005 GAMA directory and compared the 
number of models listed in the directory to the NES shipments forecast. 
For non-weatherized gas furnaces, 80-percent AFUE also represents the 
highest number of models listed in the 2005 GAMA directory. 
Furthermore, trial standard level 1, 80-percent AFUE, for non-
weatherized gas furnaces represents a two-percent increase in AFUE 
compared to the current base-case standard level for these products.
    Trial standard level 2 is the set of efficiencies for all product 
classes that yields the maximum NPV as calculated in the NES analysis, 
assuming a seven-percent discount rate and only considering non-
condensing technologies.\18\ (See TSD, Chapter 10.) For example, for 
weatherized gas furnaces, 83-percent AFUE represents the efficiency 
level that corresponds to the maximum NPV calculated in the NES. Trial 
standard level 2, 83-percent AFUE, also corresponds to the maximum 
technologically feasible level for weatherized gas furnaces.
---------------------------------------------------------------------------

    \18\ The Department established the efficiency levels in each 
TSL based on the analysis using AEO2005 energy price forecasts.
---------------------------------------------------------------------------

    Trial standard level 3 consists of the efficiency ratings that 
correspond to the maximum NPV as defined by the selection criteria for 
trial standard level 2, except that the efficiency levels for non-
weatherized gas furnaces and mobile home furnaces are adjusted to 81-
percent AFUE. The Department recognizes there is a potential for 
increased safety risk to consumers at 81-percent AFUE for non-
weatherized gas furnaces and mobile home furnaces because of a higher 
potential for vent system and heat exchanger corrosion failure. In its 
2004 ANOPR analysis, the Department found that as many as eight percent 
of the installations could pose increased risk of vent and heat 
exchanger failure. 69 FR 45419. The Department believes the increased 
safety risk can likely be resolved through the use of venting materials 
that are impervious to the corrosive effects of condensate and improved 
heat exchanger designs. It included the cost of implementing such 
techniques in its analysis for trial standard level 3. In addition, DOE 
recognizes that, in some instances, consumers could instead elect to 
install a more efficient, condensing gas-fired furnace. The 
Department's analysis did not capture that possibility.
    Trial standard level 4 consists of efficiency ratings that 
correspond to the maximum efficiency level that has positive NPV 
calculated by the NES, assuming a three-percent discount rate. For 
example, oil-fired boilers at trial standard level 4, or 84-percent 
AFUE, represent the maximum efficiency level for which there would 
still be positive savings between the standards case and the base case. 
At efficiency levels above trial standard level 4, there are negative 
consumer impacts as shown by the negative NPVs.
    Trial standard level 5 is the maximum technologically feasible 
level. It represents condensing technologies for all classes, except 
weatherized gas-fired furnaces and oil-fired boilers.

B. Economic Justification and Energy Savings

1. Economic Impacts on Consumers
    a. Life-Cycle Cost and Payback Period. To evaluate the net economic 
impact of the standards on consumers, the Department conducted an LCC 
and payback period analysis for each of the trial standard levels. 
Higher-efficiency furnaces and boilers would affect consumers in two 
ways: Annual operating expense would decrease and purchase price and 
payback period would increase. The payback period is an economic 
benefit-cost measure that uses benefits and costs without discounting. 
Section IV.C discusses the inputs used for calculating the LCC and 
payback period.
    For each trial standard level and for all product classes, the LCC 
analysis estimates the fraction of households for which the LCC will 
either decrease (net benefit), or increase (net cost), or exhibit no 
change (no impact) relative to the base case equipment forecast. No 
impacts occur when the equipment efficiencies of the base case forecast 
already equal or exceed the considered trial standard level efficiency.
    Tables V.2 through V.7 show the mean LCC savings and the percent of 
households with a net cost, no impact, and a net benefit (i.e., 
positive savings) at each trial standard level for each of the product 
classes, using the AEO2005 energy prices forecast. (Values in 
parentheses in the columns for LCC savings represent an increase in 
LCC.) The tables also show the mean payback period at each trial 
standard level.

[[Page 59235]]

    The annual energy consumption calculated from the test procedure is 
greater than the annual energy consumption used in the LCC analysis. 
Therefore, the mean payback periods calculated for the LCC analysis are 
longer than the rebuttable payback periods, which use the test 
procedure energy consumption results.

                                 Table V.2.--Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces
                                                             [AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         LCC                                   Payback
                                                              Efficiency ------------------------------------------------------------------    period
                   Trial  standard level                        level         LCC       LCC savings    Net cost    No impact   Net benefit -------------
                                                              (AFUE) (%) ------------------------------------------------------------------
                                                                             2004$         2004$          %            %            %           years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit..............................................           78        9,985  ............  ...........  ...........  ...........  ............
1..........................................................           80        9,834            2             0           98            2           1.5
2..........................................................           80        9,834            2             0           98            2           1.5
3..........................................................           81        9,826            2            32           36           32          26
4..........................................................           90        9,753            5            39           35           25          23
5..........................................................           96       10,521         (731)           88            4            8          88
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                   Table V.3.--Summary of LCC and Payback Period Results for Weatherized Gas Furnaces
                                                             [AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                           -----------------------------------------------------------------    period
                                                                Efficiency      LCC          LCC        Net cost    No impact       Net     ------------
                     Trial standard level                         level    -------------   savings   --------------------------   benefits
                                                                (AFUE) (%)              -------------                          -------------    years
                                                                               2004$        2004$          %            %            %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           78        8,256  ...........  ...........  ...........  ...........  ...........
1............................................................           80        8,179            2            0           98            2          1.6
2............................................................           83        8,085           73            6            0           94          4.6
3............................................................           83        8,085           73            6            0           94          4.6
4............................................................           83        8,085           73            6            0           94          4.6
5............................................................           83        8,085           73            6            0           94          4.6
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                   Table V.4.--Summary of LCC and Payback Period Results for Mobile Home Gas Furnaces
                                                             [AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                Efficiency -----------------------------------------------------------------    period
                    Trial  standard level                         level         LCC      LCC savings    Net cost    No impact   Net benefit ------------
                                                                (AFUE) (%) -----------------------------------------------------------------
                                                                               2004$        2004$          %            %            %          years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           75        7,930  ...........  ...........  ...........  ...........  ...........
1............................................................           80        7,600           51            1           85           14            5
2............................................................           80        7,600           51            1           85           14            5
3............................................................           81        7,635           18           71            5           24           31
4............................................................           90        7,524          124           42            5           53           25
5............................................................           90        7,524          124           42            5           53           25
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                      Table V.5.--Summary of LCC and Payback Period Results for Oil-Fired Furnaces
                                                             [AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                Efficiency -----------------------------------------------------------------    period
                    Trial  standard level                         level         LCC      LCC savings    Net cost    No impact   Net benefit ------------
                                                                (AFUE) (%) -----------------------------------------------------------------
                                                                               2004$        2004$          %            %            %          years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           78       11,593  ...........  ...........  ...........  ...........  ...........
1............................................................           80       11,418            7            0           96            4          0.3
2............................................................           82       11,257          113            0           30           70          0.8
3............................................................           82       11,257          113            0           30           70          0.8
4............................................................           84       11,425         (23)           54           15           31           18
5............................................................           85       11,518        (109)           67            7           25           22
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 59236]]


                                          Table V.6.--Summary of LCC and Payback Period Results for Gas Boilers
                                                             [AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                Efficiency -----------------------------------------------------------------    period
                    Trial  standard level                         level         LCC      LCC savings    Net cost    No impact   Net benefit ------------
                                                                (AFUE) (%) -----------------------------------------------------------------
                                                                               2004$        2004$          %            %            %          years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           80       15,847  ...........  ...........  ...........  ...........  ...........
1............................................................           82       15,416          158           11           44           46           12
2............................................................           84       15,334          232           18           15           67           12
3............................................................           84       15,344          232           18           15           67           12
4............................................................           84       15,344          232           18           15           67           12
5............................................................           99       16,412        (795)           77            3           20           40
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                       Table V.7.--Summary of LCC and Payback Period Results for Oil-Fired Boilers
                                                             [AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                Efficiency -----------------------------------------------------------------    period
                    Trial  standard level                         level         LCC      LCC savings    Net cost    No impact   Net benefit ------------
                                                                (AFUE) (%) -----------------------------------------------------------------
                                                                               2004$        2004$          %            %            %          years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           80       16,896  ...........  ...........  ...........  ...........  ...........
1............................................................           83       16,506           40            0           84           16          1.2
2............................................................           83       16,506           40            0           84           16          1.2
3............................................................           83       16,506           40            0           84           16          1.2
4............................................................           84       16,606            1           24           61           15           27
5............................................................           95       17,775       (1070)           90            0           10           36
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Similarly, Tables V.8 through V.13 show LCC results for the energy 
price sensitivity analysis. They list the mean LCC savings and the 
percent of households with a net cost, no impact, and a net benefit 
(i.e., positive savings) at each trial standard level for each of the 
product classes, based on energy price forecast from AEO2006. (Values 
in parentheses in the columns for LCC savings represent an increase in 
LCC.) The tables also show the mean payback period at each trial 
standard level.

             Table V.8.--Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces in the Energy Price Sensitivity Analysis
                                                             [AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                               Efficiency ------------------------------------------------------------------    period
                    Trial  standard level                        level         LCC      LCC  savings    Net cost    No impact   Net benefit ------------
                                                              (AFUE)  (%) ------------------------------------------------------------------
                                                                              2004$         2004$          %            %            %          years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit...............................................           78       11,214  ............  ...........  ...........  ...........  ...........
1...........................................................           80       11,038            2             0           98            2          1.6
2...........................................................           80       11,038            2             0           98            2          1.6
3...........................................................           81       11,018            8            30           36           34           22
4...........................................................           90       10,850           63            35           35           29           20
5...........................................................           96       11,564         (626)           85            4           12           75
--------------------------------------------------------------------------------------------------------------------------------------------------------


               Table V.9.--Summary of LCC and Payback Period Results for Weatherized Gas Furnaces in the Energy Price Sensitivity Analysis
                                                             [AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                           -----------------------------------------------------------------    period
                                                                Efficiency      LCC          LCC        Net cost    No impact   Net benefit ------------
                    Trial  standard level                         level    -------------   savings   ---------------------------------------
                                                               (AFUE)  (%)              -------------                                           years
                                                                               2004$        2004$          %            %            %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           78        8,898  ...........  ...........  ...........  ...........  ...........
1............................................................           80        8,809            2            0           98            2          1.4
2............................................................           83        8,698           86            5            0           95          4.0

[[Page 59237]]

 
3............................................................           83        8,698           86            5            0           95          4.0
4............................................................           83        8,698           86            5            0           95          4.0
5............................................................           83        8,698           86            5            0           95          4.0
--------------------------------------------------------------------------------------------------------------------------------------------------------


              Table V.10.--Summary of LCC and Payback Period Results for Mobile Home Gas Furnaces in the Energy Price Sensitivity Analysis
                                                             [AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                           -----------------------------------------------------------------    period
                                                                Efficiency      LCC          LCC        Net cost    No impact   Net benefit ------------
                     Trial standard level                         level    -------------   savings   ---------------------------------------
                                                                (AFUE) (%)              -------------                                           years
                                                                               2004$        2004$          %            %            %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           75        9,399  ...........  ...........  ...........  ...........  ...........
1............................................................           80        8,940          $71            1           85           14          3.6
2............................................................           80        8,940           71            1           85           14          3.6
3............................................................           81        8,964           49           64            5           31           28
4............................................................           90        8,764          240           32            5           63           21
5............................................................           90        8,764          240           32            5           63           21
--------------------------------------------------------------------------------------------------------------------------------------------------------


                 Table V.11.--Summary of LCC and Payback Period Results for Oil-Fired Furnaces in the Energy Price Sensitivity Analysis
                                                             [AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                           -----------------------------------------------------------------    period
                                                                Efficiency      LCC          LCC        Net cost    No impact   Net benefit ------------
                     Trial standard level                         level    -------------   savings   ---------------------------------------
                                                                (AFUE) (%)              -------------                                           years
                                                                               2004$        2004$          %            %            %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           78       14,946  ...........  ...........  ...........  ...........  ...........
1............................................................           80       14,690           10            0           96            4          0.2
2............................................................           82       14,453          167            0           30           70          0.6
3............................................................           82       14,453          167            0           30           70          0.6
4............................................................           84       14,548           90           39           15           46           13
5............................................................           85       14,606           37           52            7           41           15
--------------------------------------------------------------------------------------------------------------------------------------------------------


                     Table V.12.--Summary of LCC and Payback Period Results for Gas Boilers in the Energy Price Sensitivity Analysis
                                                             [AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                           -----------------------------------------------------------------    period
                                                                Efficiency      LCC          LCC        Net cost    No impact   Net benefit ------------
                     Trial standard level                         level    -------------   savings   ---------------------------------------
                                                                (AFUE) (%)              -------------                                           years
                                                                               2004$        2004$          %            %            %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           80       17,772  ...........  ...........  ...........  ...........  ...........
1............................................................           82       17,193          196            9           44           47           10
2............................................................           84       17,074          299           15           15           70           10
3............................................................           84       17,074          299           15           15           70           10
4............................................................           84       17,074          299           15           15           70           10
5............................................................           99       17,922        (508)           70            3           27           35
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 59238]]


                 Table V.13.-- Summary of LCC and Payback Period Results for Oil-Fired Boilers in the Energy Price Sensitivity Analysis
                                                             [AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         LCC                                   Payback
                                                              Efficiency ------------------------------------------------------------------    period
                    Trial standard level                        level         LCC       LCC savings    Net cost    No impact   Net benefit -------------
                                                             (AFUE)  (%) ------------------------------------------------------------------
                                                                             2004$         2004$          %            %            %           years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit..............................................           80       22,527  ............  ...........  ...........  ...........  ............
1..........................................................           83       21,937           61             0           84           16           0.8
2..........................................................           83       21,937           61             0           84           16           0.8
3..........................................................           83       21,937           61             0           84           16           0.8
4..........................................................           84       21,973           47            17           61           22          19
5..........................................................           95       22,542         (471)           72            0           28          26
--------------------------------------------------------------------------------------------------------------------------------------------------------

    b. Consumer Subgroup Analysis. Using the LCC Spreadsheet Model, the 
Department determined the impact of the standards for non-weatherized 
gas furnaces on the following consumer subgroups: Low-income 
households, senior-only households, and Southern and Northern 
households. The results for low-income and senior-only households 
indicate that the LCC impacts on these subgroups and the payback 
periods are similar to the LCC impacts and payback periods on the full 
sample of residential consumers. Thus, the proposed furnace and boiler 
standards would have an impact on low-income households and senior-only 
households that would be similar to their impact on the general 
population of residential consumers. (See TSD, Chapter 11.)
    The Department also determined the impact of the standards for non-
weatherized gas furnaces on Southern and Northern households. Tables 
V.14 and V.15 show the mean LCC savings and the percent of households 
with a net cost, no impact, and a net benefit (i.e., positive savings) 
at each trial standard level for non-weatherized gas furnaces, using 
the AEO2005 energy prices forecast. (Values in parentheses in the 
columns for LCC savings represent an increase in LCC.) The tables also 
show the mean payback period at each trial standard level.

                     Table V.14.--Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces in the Northern Region
                                                             [AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                           -----------------------------------------------------------------    period
                                                                Efficiency      LCC          LCC        Net cost    No impact   Net benefit ------------
                     Trial standard level                         level    -------------   savings   ---------------------------------------
                                                               (AFUE)  (%)              -------------                                           years
                                                                               2004$        2004$          %            %            %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           78       11,383  ...........  ...........  ...........  ...........  ...........
1............................................................           80       11,202            2            0           99            1          0.6
2............................................................           80       11,202            2            0           99            1          0.6
3............................................................           81       11,179           10           23           48           30           17
4............................................................           90       10,990           79           24           48           28           15
5............................................................           96       11,695        (582)           85            6            9           65
--------------------------------------------------------------------------------------------------------------------------------------------------------


                     Table V.15.--Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces in the Southern Region
                                                             [AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                           -----------------------------------------------------------------    period
                                                                Efficiency      LCC          LCC        Net cost    No impact   Net benefit ------------
                     Trial standard level                         level    -------------   savings   ---------------------------------------
                                                               (AFUE)  (%)              -------------                                           years
                                                                               2004$        2004$          %            %            %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................          78%        8,359  ...........  ...........  ...........  ...........  ...........
1............................................................           80        8,242            1            0           98            2          2.1
2............................................................           80        8,242            1            0           98            2          2.1
3............................................................           81        8,250          (9)           44           20           35           32
4............................................................           90        8,305         (79)           57           19           23           29
5............................................................           96        9,140        (894)           91            1            7          110
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Similarly, Tables V.16 and V.17 show the LCC subgroup results by 
region for the energy price sensitivity analysis. The tables indicate 
the impact of the standards for non-weatherized gas furnaces on 
Southern and Northern

[[Page 59239]]

households, based on the AEO2006 energy price forecast, in terms of the 
mean LCC savings and the percent of households with a net cost, no 
impact, and a net benefit (i.e., positive savings) at each trial 
standard level. (Values in parentheses in the columns for LCC savings 
represent an increase in LCC.) The tables also show the mean payback 
period at each trial standard level.

  Table V.16.-- Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces in the Northern Region Evaluated as part of the Energy Price
                                                                  Sensitivity Analysis
                                                             [AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                Efficiency -----------------------------------------------------------------    period
                     Trial standard level                         level         LCC      LCC savings    Net cost    No impact   Net benefit ------------
                                                               (AFUE)  (%) -----------------------------------------------------------------
                                                                               2004$        2004$          %            %            %          years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           78       12,835  ...........  ...........  ...........  ...........  ...........
1............................................................           80       12,625            2            0           99            1          0.5
2............................................................           80       12,625            2            0           99            1          0.5
3............................................................           81       12,588           17           21           48           32           15
4............................................................           90       12,286          138           20           48           32           13
5............................................................           96       12,926        (471)           81            6           13           55
--------------------------------------------------------------------------------------------------------------------------------------------------------


  Table V.17.-- Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces in the Southern Region Evaluated as part of the Energy Price
                                                                  Sensitivity Analysis
                                                             [AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          LCC                                  Payback
                                                                Efficiency -----------------------------------------------------------------    period
                     Trial standard level                         level         LCC      LCC savings    Net cost    No impact   Net benefit ------------
                                                               (AFUE)  (%) -----------------------------------------------------------------
                                                                               2004$        2004$          %            %            %          years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................           78        9,274  ...........  ...........  ...........  ...........  ...........
1............................................................           80        9,139            1            0           98            2          1.9
2............................................................           80        9,139            1            0           98            2          1.9
3............................................................           81        9,137          (2)           42           20           38           28
4............................................................           90        9,122         (20)           53           19           27           25
5............................................................           96        9,916        (796)           89            1           10           95
--------------------------------------------------------------------------------------------------------------------------------------------------------

    c. Rebuttable-Presumption Payback. As set forth in section 
325(o)(2)(B)(iii) of EPCA, 42 U.S.C. 6295(o)(2)(B)(iii), there is a 
rebuttable presumption that an energy conservation standard is 
economically justified if the increased installed cost for a product 
that meets the standard is less than three times the value of the 
first-year energy savings resulting from the standard. However, while 
the Department examined the rebuttable-presumption criteria, it 
determined economic justification for the proposed standard levels 
through a weighting of the benefits and burdens of increased efficiency 
in accordance with section 325(o)(2)(B)(i) of EPCA. (42 U.S.C. 
6295(o)(2)(B)(i))
    The Department calculated a rebuttable-presumption payback period 
for each trial standard level to determine if DOE could presume that a 
standard at that level is economically justified. Table V.18 shows the 
rebuttable-presumption payback periods. Rather than using distributions 
for input values, DOE used discrete values and, as required by EPCA, 
based the calculation on the DOE furnace and boiler test procedure 
assumptions. As a result, the Department calculated a single 
rebuttable-presumption payback value, and not a distribution of payback 
periods, for each standard level.

                   Table V.18.--Rebuttable-Presumption Payback Period Using DOE Test Procedure
----------------------------------------------------------------------------------------------------------------
                                                                                Payback period (years)
                           Product class                            --------------------------------------------
                                                                      TSL 1    TSL 2    TSL 3    TSL 4    TSL 5
----------------------------------------------------------------------------------------------------------------
Non-weatherized Gas Furnaces.......................................      0.9      0.9       na       na       na
Weatherized Gas Furnaces...........................................      0.8       na       na       na       na
Mobile Home Gas Furnaces...........................................      2.5      2.5       na       na       na
Oil-fired Furnaces.................................................      0.1      0.2      0.2       na       na
Gas Boilers........................................................       na       na       na       na       na
Oil-fired Boilers..................................................      0.4      0.4      0.4       na       na
----------------------------------------------------------------------------------------------------------------


[[Page 59240]]

2. Economic Impacts on Manufacturers
    The Department performed an MIA to estimate the impact of higher 
efficiency standards on furnace and boiler manufacturers. (See TSD, 
Chapter 12.)
    a. Industry Cash Flow Analysis Results. The Department used the 
INPV in the MIA to compare the financial impacts of different trial 
standard levels on furnace and boiler manufacturers. The INPV is the 
sum of all net cash flows discounted at the industry's cost of capital, 
or discount rate. Because the INPV applies only to the furnace and 
boiler manufacturing industry, the INPV is different from the NPV that 
the Department used to assess the cumulative benefit or cost of 
standards to consumers on a national basis. The GRIM estimated cash 
flows between 2004 and 2038 and found them to be consistent with the 
forecast period used in the national impact analysis.
    The Department compared the INPV of the base case (no new 
efficiency standard) to that of each trial standard level. The 
difference in INPV is an estimate of the economic impacts that 
implementing that particular standard would have on the entire 
industry. To evaluate the range of cash flow impacts on the industry, 
the Department constructed up to four different GRIM scenarios for each 
product class that used different assumptions for markups and 
shipments, as described above.
    i. Non-Weatherized Gas Furnaces. For non-weatherized gas furnaces, 
the Department considered four cash flow scenarios:
    The flat markup and two-tier markup scenarios are each combined 
with NES shipment forecasts and manufacturers' shipment forecasts. To 
assess the lower end of the range of potential impacts, the Department 
used the flat markup and NES shipments scenario, which represents an 
optimistic situation where shipments are not greatly affected by even a 
large increase in cost to the consumer. In addition, this scenario 
assumes that manufacturers do not differentiate their baseline products 
from their premium products, either in the base case or the standards 
case--thus, the scenario assumes a constant markup across all 
efficiencies. The Department did not reduce this profit margin to 
offset some of the price burden passed on to the consumer in the 
standards case. Consequently, some of the manufacturer impacts on INPV 
are positive.
    To assess the higher end of the range of potential impacts, the 
Department used the manufacturers' shipments forecast and modeled a 
two-tiered markup structure. The two-tier scenario assumes that the 
proportion of premium-margin sales will be reduced by the ``roll-up'' 
of lower efficiency products to the new standard level. The 
manufacturers' shipments forecast assumes an increased drop in 
shipments for trial standard levels 4 and 5 due to equipment switching 
and an increase in repairs of current systems. As can be observed from 
the cash flow results, both the shipment scenario and the markup 
scenario have a significant impact on the results. Table V.19 shows the 
manufacturer impacts for each of the four scenarios.

                 Table V.19. Changes in Industry Net Present Value, Non-Weatherized Gas Furnaces
----------------------------------------------------------------------------------------------------------------
                                                                               NES shipments
                                                         -------------------------------------------------------
                                                                  Flat markup               Two-tier markup
                                                         -------------------------------------------------------
                           TSL                                       Change in INPV              Change in INPV
                                                                       from base                   from base
                                                            INPV  -------------------   INPV  ------------------
                                                            $MM                 %       $MM                 %
                                                                      $MM     change              $MM     change
----------------------------------------------------------------------------------------------------------------
Base case...............................................    1,044  ........  .......    1,010  ........  .......
1.......................................................    1,044        0         0    1,010        0         0
2.......................................................    1,044        0         0    1,010        0         0
3.......................................................      974      (69)       -7      938      (72)       -7
4.......................................................    1,056       13         1      801     (209)      -21
5.......................................................    1,258      214        21      824     (186)      -18
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                                                         Manufacturers' shipments
                                                         -------------------------------------------------------
                                                                  Flat markup               Two-tier markup
                                                         -------------------------------------------------------
                           TSL                                       Change in INPV              Change in INPV
                                                                       from base                   from base
                                                            INPV  -------------------   INPV  ------------------
                                                            $MM                 %       $MM                 %
                                                                      $MM     change              $MM     change
----------------------------------------------------------------------------------------------------------------
Base case...............................................    1,068  ........  .......    1,073  ........  .......
1.......................................................    1,068        0         0    1,073        0         0
2.......................................................    1,068        0         0    1,073        0         0
3.......................................................      998      (71)       -7    1,000      (73)       -7
4.......................................................      980      (88)       -8      777     (295)      -28
5.......................................................      807     (261)      -24      575     (498)      -46
----------------------------------------------------------------------------------------------------------------

    At trial standard levels 1 and 2 (80-percent AFUE), the impact on 
INPV and cash flow would be slight, since the bulk of the product being 
sold is already at the 80-percent AFUE level; thus, industry revenues 
and costs are not significantly negatively impacted. Furthermore, 
little investment is required to meet the standard.
    At trial standard level 3 (81-percent AFUE), concern over safety 
and reliability associated with corrosion due to condensation is the 
dominant issue for manufacturers of non-weatherized gas furnaces. Based 
on information submitted by industry, to mitigate theses concerns a 
standard at trial standard level 3 would require a

[[Page 59241]]

complete redesign of furnace heat exchangers, entailing $60 million in 
product conversion expenses and a $121-million investment in new 
tooling and equipment. Furthermore, manufacturers maintain that this 
capital outlay does not fully address their safety, reliability, and 
equipment longevity concerns. Finally, manufacturers stated that, at 
trial standard level 3, they must address additional liability impacts 
that are not illustrated by the quantitative results presented here. 
The impact on INPV at trial standard level 3 is -7 percent and cash 
flow in the year leading to the effective date would be reduced to 
approximately zero from a base case value of $67 million.
    Trial standard level 4 requires the production of 90-percent-AFUE 
condensing, non-weatherized gas furnaces. If manufacturers lose the 
ability to market and sell premium products, such as high AFUE 
condensing products, then DOE expects the impact on INPV to be larger. 
Another key uncertainty in future profitability is the market response 
to the higher price and corresponding energy savings of the condensing 
product. Manufacturers predict a much greater drop in unit sales than 
the NES analysis forecasted. The INPV impacts range from +1-percent to 
-28 percent. The required product and capital conversion costs are 
significant and estimated to be $82 million and $174.3 million, 
respectively, because of the need for a secondary heat exchanger. At 
this level, the industry cash flow becomes slightly negative, -$1 
million, compared to the base case value of $67 million in the year 
leading up to the standards.
    At trial standard level 5 (96-percent-AFUE), the impact on INPV 
would range between +21 percent and -46 percent, depending on markup 
and shipment assumptions. The industry would experience an increase in 
value if it were able to fully pass through to consumers the 
incremental production costs and associated markups, and the shipments 
were reduced according to the forecasts in the NES shipments model. 
However, there is a risk of very large negative impacts if shipments 
were reduced according to manufacturers' expectations and in the very 
likely situation that manufacturers were no longer able to offer 
premium products at higher margins. During the interviews, 
manufacturers expressed disbelief at the possibility of manufacturing 
an entire product line at 96-percent AFUE, since there is only one 
model currently being manufactured at this efficiency level. Most 
manufacturers did not provide DOE with projected product conversion 
costs or capital conversion costs at this level, since they could not 
conceive of what designs might reach this efficiency level. The 
Department estimated the required product and capital conversion costs, 
based on limited input, to be $144 million and $705 million, 
respectively for TSL 5. The impact on annual cash flow from product 
conversion and capital expenditures prior to the standard would be 
severe. The peak negative cash flow would be approximately four times 
the magnitude of the base-case positive cash flow.
    ii. Weatherized Gas Furnaces. For weatherized gas furnaces, the 
Department considered two cash flow scenarios, which include the flat-
markup and the constant-price scenario--both using NES shipments 
forecasts. The flat-markup and NES-shipments scenario represents a 
situation where shipments are not greatly affected, even by a large 
increase in cost to the consumer. In the second scenario, the constant-
price aspect assumes that manufacturers of weatherized gas furnaces 
will not be able to recover the incremental product costs resulting 
from increased standards. The Department used these two markup 
scenarios because manufacturers currently do not differentiate between 
baseline and premium products, since condensing technologies are not 
used in weatherized gas furnaces and therefore are not a 
differentiating feature that requires a premium markup. Consequently, 
the Department did not consider a two-tier markup scenario. Table V.20 
shows the weatherized gas furnace industry impacts using the two 
scenarios.

                  Table V.20.--Changes in Industry Net Present Value, Weatherized Gas Furnaces
----------------------------------------------------------------------------------------------------------------
                                                                                NES shipments
                                                           -----------------------------------------------------
                                                                   Flat markup           Constant price markup
                                                           -----------------------------------------------------
                            TSL                                        Change in INPV            Change in INPV
                                                                         from base                  from base
                                                              INPV  ------------------   INPV  -----------------
                                                              $MM                %       $MM                %
                                                                       $MM     change             $MM     change
----------------------------------------------------------------------------------------------------------------
Base case.................................................      246  .......  .......      246  .......  .......
1.........................................................      220     (27)      -11      215     (31)      -13
2.........................................................      199     (47)      -19      167     (79)      -32
3.........................................................      199     (47)      -19      167     (79)      -32
4.........................................................      199     (47)      -19      167     (79)      -32
5.........................................................      199     (47)      -19      167     (79)      -32
----------------------------------------------------------------------------------------------------------------

    The impact on INPV for weatherized gas furnaces at trial standard 
level 1 (81-percent AFUE) ranges between -11 percent and -13 percent. 
Even with the flat-markup assumption and accepting the NES-shipments 
forecast unaltered, the industry value drops because of the large 
conversion costs relative to industry revenues. To achieve 81-percent 
AFUE, manufacturers estimate product conversion costs of $49 million 
and capital conversion expenses of $28 million. Negative cash flows 
peak at approximately $5 million from a base-case value of $17 million 
in 2014.
    At 83-percent AFUE, trial standard levels 2-5, DOE forecasts that 
the INPV will drop between 19 percent and 32 percent. At 83-percent 
AFUE, investment in corrosion-resistant materials must be made. The 
Department estimates the required product-conversion and capital-
conversion costs at $70 million and $61 million, respectively. 
Manufacturers stated that this is primarily due to the need for 
stainless steel heat exchangers. Net cash flow would drop to 
approximately -$25 million, a drop of $40 million from the base case.
    iii. Mobile Home Gas Furnaces. For mobile home furnaces, the 
Department considered two cash flow scenarios: the

[[Page 59242]]

flat-markup and NES-shipments scenario, and the flat-markup and 
manufacturers' shipments scenario. The flat-markup and NES-shipments 
scenario represents a situation where shipments are not greatly 
affected by a large increase in cost to the consumer. The Department 
used the flat-markup because it does not believe there is a large 
variation in gross margin across all available efficiency levels. To 
represent the higher range of potential impacts, the Department used 
the flat-markup and manufacturers' shipments scenario. The 
manufacturers' shipments forecast shows a decline in mobile home 
furnace shipments at trial standard levels 4 and 5. Manufacturers 
stated that consumers are more likely to choose heat pumps, combination 
systems, electric furnaces, or electric strip heaters, instead of 
buying the more efficient, more costly mobile home furnaces at trial 
standard levels 4 and 5. Table V.21 shows the manufacturer impacts for 
mobile home gas furnaces.

                  Table V.21.--Changes in Industry Net Present Value, Mobile Home Gas Furnaces
----------------------------------------------------------------------------------------------------------------
                                                                                 Flat markup
                                                           -----------------------------------------------------
                                                                  NES shipments         Manufacturers' shipments
                                                           -----------------------------------------------------
                            TSL                                       Change in INPV             Change in INPV
                                                                         from base                  from base
                                                              INPV  ------------------   INPV  -----------------
                                                              $MM                %       $MM                %
                                                                       $MM     change             $MM     change
----------------------------------------------------------------------------------------------------------------
Base case.................................................       21  .......  .......       21  .......  .......
1.........................................................       21        0        0       21        0        0
2.........................................................       21        0        0       21        0        0
3.........................................................       18      (3)      -14       18      (3)      -14
4.........................................................       12      (9)      -42       11     (10)      -49
5.........................................................       12      (9)      -42       11     (10)      -49
----------------------------------------------------------------------------------------------------------------

    At 80-percent AFUE, trial standard levels 1 and 2, the INPV and 
cash flow impacts are negligible, and little investment is required to 
meet the standard.
    At trial standard level 3, DOE estimates that the INPV will drop by 
14 percent. It estimates product-conversion and capital-conversion 
costs at $1.7 million and $6 million, respectively. Net cash flow drops 
precipitously from +$1 million to slightly negative values in the year 
2014.
    At 90-percent AFUE, trial standard levels 4 and 5, product-
conversion costs of $6.7 million and capital expenditures of $12 
million contribute to lowering INPV by 42-49 percent. Net cash flow 
becomes negative by a factor of more than seven times the base-case 
value.
    iv. Oil-Fired Furnaces. For oil-fired furnaces, the Department 
considered two cash flow scenarios: The flat-markup and NES-shipments 
scenario, and the constant-price and NES-shipments scenario. The flat-
markup and NES-shipments scenario represents a situation where 
shipments are not greatly affected by increased cost to the consumer. 
For the second scenario, the Department also used the NES-shipments 
forecast and applied a constant-margin assumption. While the Department 
realizes that there will be a drop in shipments at trial standard 
levels 4 and 5 due to equipment switching, the Department used the NES-
shipments forecast because the difference between the NES shipments and 
the manufacturers' shipments was small and some manufacturers stated 
that they expected a small drop in shipments at higher proposed 
standard levels. Furthermore, the Department does not expect a change 
in shipments when applying a constant-price assumption, because there 
will be no change in the product costs as a result of new efficiency 
standards. Table V.22 displays the impacts on INPV for the oil-fired 
furnace industry for both scenarios.

                     Table V.22.--Changes in Industry Net Present Value, Oil-Fired Furnaces
----------------------------------------------------------------------------------------------------------------
                                                                                NES shipments
                                                           -----------------------------------------------------
                                                                   Flat markup           Constant price markup
                                                           -----------------------------------------------------
                            TSL                                       Change in INPV             Change in INPV
                                                                         from base                  from base
                                                              INPV  ------------------   INPV  -----------------
                                                              $MM                %       $MM                %
                                                                       $MM     change             $MM     change
----------------------------------------------------------------------------------------------------------------
Base case.................................................       36  .......  .......       36  .......  .......
1.........................................................       34      (2)       -5       34      (2)       -5
2.........................................................       33      (3)       -8       31      (4)      -12
3.........................................................       33      (3)       -8       31      (4)      -12
4.........................................................       29      (7)      -19       26     (10)      -27
5.........................................................       28      (8)      -21       23     (12)      -35
----------------------------------------------------------------------------------------------------------------

    At trial standard level 1 (80-percent AFUE), DOE estimates the INPV 
impacts to be -5 percent for oil-fired furnaces. Cash flow is cut 
approximately in half, from approximately $2 million to $1 million in 
2014. The Department estimates product-conversion costs to be $3 
million and capital requirements to total $1 million.
    At 82-percent AFUE, trial standard levels 2 and 3, DOE estimates 
the INPV

[[Page 59243]]

impacts to range from -8 percent to -12 percent for oil-fired furnaces. 
Cash flow would be slightly positive in 2014, a drop of $2 million from 
the base case. The Department estimates product-conversion costs to be 
$4.5 million and capital requirements to total $3.6 million. At 82-
percent AFUE, one manufacturer indicated the firm would not invest the 
necessary capital, since it could not justify the investment.
    At trial standard level 4 (84-percent AFUE), the INPV impacts range 
from -19 percent to -27 percent, and at trial standard level 5 (85-
percent AFUE) the impacts range from -21 percent to -35 percent. 
Achieving these efficiency levels would require new heat exchanger 
designs, which raises the product conversion costs to $8.5 million at 
both trial standard level 4 and trial standard level 5. Total capital 
requirements rise to $7 million at trial standard level 4 and $8 
million at trial standard level 5. Net cash flow is reduced by nearly 
200 percent to -$3.4 million at TSL 4.
    Other considerations from the standpoint of manufacturers of oil-
fired furnaces include the possibility of implementing a de-rating 
strategy at trial standard levels 1, 2, and 3 to reduce capital costs. 
A de-rating strategy aims to achieve higher efficiency levels by using 
a larger capacity furnace compensated with a downsized burner. This 
would reduce the span of the product line through elimination of some 
higher capacity models. In addition, for oil-fired furnaces at 82-
percent AFUE, some manufacturers expressed concerns about increased 
maintenance costs due to sulfur in the fuel and exhaust gas. This 
sulfur can form a residue that potentially would increase maintenance 
costs as efficiency rises.
    v. Gas Boilers. For gas boilers, the Department considered two cash 
flow scenarios: the flat markup and the three-tier markup, both using 
manufacturer-supplied shipment estimates. The Department did not use 
NES shipments in the GRIM, since they did not demonstrate any price 
responses by shipments--even at very high efficiency levels. 
Manufacturers stated that shipments would decrease with increases in 
efficiency, particularly at the higher levels where consumers would 
repair existing systems rather than replace them.
    The Department therefore defines the two scenarios by the assumed 
markup strategy--a flat markup or a three-tiered markup. The Department 
learned from manufacturers that the pricing of boilers is determined on 
the basis of three product tiers. During the MIA interview, 
manufacturers provided information on the range of typical AFUE levels 
for each of the three tiers and the change in profitability associated 
with each level for gas boilers. Table V.23 displays the manufacturer 
impacts on the gas boiler industry for both scenarios.

                         Table V.23.--Changes in Industry Net Present Value, Gas Boilers
----------------------------------------------------------------------------------------------------------------
                                                                          Manufacturers' shipments
                                                           -----------------------------------------------------
                                                                   Flat markup             Three-tier markup
                                                           -----------------------------------------------------
                            TSL                                       Change in INPV             Change in INPV
                                                                         from base                  from base
                                                              INPV  ------------------   INPV  -----------------
                                                              $MM                %       $MM                %
                                                                       $MM     change             $MM     change
----------------------------------------------------------------------------------------------------------------
Base case.................................................      167  .......  .......      167  .......  .......
1.........................................................      166      (1)       -1      163      (4)       -3
2.........................................................      155     (12)       -7      148     (20)      -12
3.........................................................      155     (12)       -7      148     (20)      -12
4.........................................................      155     (12)       -7      148     (20)      -12
5.........................................................      140     (27)      -16       83     (84)      -50
----------------------------------------------------------------------------------------------------------------

    At trial standard level 1 (82-percent AFUE), the impact on INPV 
ranges from -0.9 percent to -3 percent for gas boilers. The Department 
estimates the product-conversion costs and capital-conversion costs at 
$7.5 and $9.5 million, respectively. Net cash flow is reduced from $10 
million to $9 million in 2014.
    At 84-percent AFUE, trial standard levels 2, 3, and 4, the impact 
on INPV for gas boilers ranges from -7 percent to -12 percent. The 
Department estimates product-conversion costs to be $8.7 million and 
capital requirements to total $12.5 million. Cash flow is reduced from 
$10 million to $8 million in 2014. Several manufacturers stated that, 
at this efficiency level, there is a high risk of safety and 
reliability issues. There is also a great likelihood that standing-
pilot versions of these products would be eliminated.
    At trial standard level 5 (99-percent AFUE), the impact on INPV for 
gas boilers ranges between -16 percent and -50 percent. During the 
interviews, manufacturers stated that this level is simply not 
achievable with current technologies and is beyond the maximum 
technologically feasible level. Instead, some manufacturers recommended 
that the max tech level would more reasonably be 96-percent or 97-
percent AFUE. In addition, some manufacturers would not provide 
product-conversion cost or capital-conversion costs at this level, 
since they could not conceive what designs might reach this efficiency 
level. Consequently, with limited responses from manufacturers, DOE 
estimated the required product and capital conversion costs to be $20 
million and $150 million, respectively. The net cash flow is reduced to 
nearly -$45 million.
    vi. Oil-Fired Boilers. For oil-fired boilers, the Department 
considered two cash flow scenarios: The flat markup and the three-
tiered markup, both using manufacturer-supplied shipment estimates. The 
Department considered only manufacturer-supplied shipment estimates for 
the same reasons given for gas boilers. Manufacturers stated that 
shipments would decrease for oil-fired boilers at higher efficiency 
levels, because the market would move toward radiant or electric 
furnaces and consumers would repair rather than replace their existing 
boilers.
    Thus, similarly to the markups defined for gas boilers, DOE defines 
the two scenarios by the assumed markup strategy--a flat markup or a 
three-tiered markup. The Department learned from manufacturers that the 
pricing of boilers is determined on the basis of three product tiers. 
During the MIA interviews, manufacturers provided

[[Page 59244]]

information on the range of typical AFUE levels for each of the three 
tiers and the change in profitability associated with each level for 
oil-fired boilers. Table V.24 shows the changes in INPV as compared to 
the base case for each trial standard level for oil-fired boiler 
manufacturers.

                      Table V.24.--Changes in Industry Net Present Value, Oil-Fired Boilers
----------------------------------------------------------------------------------------------------------------
                                                                          Manufacturers' shipments
                                                           -----------------------------------------------------
                                                                   Flat markup             Three-tier markup
                                                           -----------------------------------------------------
                            TSL                                       Change in INPV             Change in INPV
                                                                         from base                    base
                                                              INPV  ------------------   INPV  -----------------
                                                              $MM                %       $MM                %
                                                                       $MM     change             $MM     change
----------------------------------------------------------------------------------------------------------------
Base case.................................................       84  .......  .......       84  .......  .......
1.........................................................       82      (3)       -3       73     (11)      -13
2.........................................................       82      (3)       -3       73     (11)      -13
3.........................................................       82      (3)       -3       73     (11)      -13
4.........................................................       82      (2)     -2.5       72     (12)      -14
5.........................................................       69     (16)      -19       46     (38)      -45
----------------------------------------------------------------------------------------------------------------

    --At 83-percent AFUE, trial standard levels 1, 2, and 3, the impact 
on INPV ranges from -3 percent to -13 percent for oil-fired boilers. At 
trial standard level 4 (84-percent AFUE), the impact on INPV ranges 
from between -2.5 percent to -14 percent. The Department estimates 
product-conversion costs and capital-conversion costs to be $4 million 
and $3.2 million, respectively, for trial standard levels 1, 2, and 3. 
For trial standard level 4, DOE estimates product-conversion costs and 
capital-conversion costs to be $4.1 million and $3.4 million, 
respectively. At these levels, manufacturers would likely use a de-
rating strategy to reduce capital costs. This would reduce the span of 
the product line through elimination of some higher capacity models. 
Cash flow is reduced from $5 million to $4 million in 2014 for trial 
standard levels 1 through 4.
    At trial standard level 5 (95-percent AFUE), the impact on INPV 
ranges from -19 percent to -45 percent. Net cash flow would be reduced 
to approximately -$22 million. The Department estimates product-
conversion and capital-conversion costs to be $10.3 and $70.4 million, 
respectively. At this level, manufacturers expect complete loss of 
sales to competing products.
     b. Impacts on Manufacturing Capacity. To the extent that more 
stringent energy conservation standards increase the size of the heat 
exchanger, they could reduce plant throughput, particularly for those 
plants that are constrained in their heat exchanger fabrication area. 
The standards thus could necessitate that manufacturers add floor space 
to their existing plants and warehouses. In addition, assembly and 
fabrication times could increase for the larger equipment. In an 
attempt to recoup capacity, manufacturers might need to invest in 
productivity, or equipment, or consider outsourcing some heat exchanger 
production.
    It is not clear that all new capacity would be added in the United 
States. During the MIA interviews, several manufacturers stated that 
there has been a trend in the industry to move production facilities to 
overseas locations where labor markets offer cost savings. Some of 
these companies commented that new standards could speed up this trend.
    For condensing gas boilers, in particular, the European market is 
as large as the non-weatherized gas furnace market in the United 
States, with attendant high-volume pricing and large company suppliers. 
If standards were to require condensing technology, it is likely that 
manufacturers would out-source heat exchangers to European countries.
    c. Impacts on Subgroups of Manufacturers. Using average cost 
assumptions to develop an industry-cash-flow estimate is not adequate 
for assessing differential impacts among subgroups of manufacturers. 
Small manufacturers, niche players, or manufacturers exhibiting a cost 
structure that differs largely from the industry average could be 
affected differently. The Department used the results of the industry 
characterization to group manufacturers exhibiting similar 
characteristics.
    The Department evaluated the impact of new energy conservation 
standards on small businesses, as defined by the SBA for the furnace 
and boiler manufacturing industry as manufacturing enterprises with 750 
or fewer employees. The Department created a more tailored version of 
the interview guide for small furnace and boiler manufacturers, and 
contacted small businesses to determine if they were interested in 
discussing differential impacts that standards would have on their 
companies. The Department received feedback from five manufacturers, 
which suggested that impacts on them would not differ from impacts on 
larger companies within the industry. (See TSD, Chapter 12.)
    During the manufacturer interviews, the Department also identified 
several types of residential furnaces and boilers that are used in 
particular or unusual applications, have features that differ from 
those of the vast majority of products available on the marketplace, 
and have some unique utility. The Department refers to these as ``niche 
products.'' In the TSD, DOE presents niche product classes that the 
Department identified and further considered. During the manufacturer 
interviews, several manufacturers claimed that certain niche products 
would not be viable if required to meet higher efficiency standards. 
All of these products serve relatively small niche markets and, as 
such, the efficiency standards established for these products will have 
little effect on national energy savings. Some of the niche products 
have very similar characteristics to the product class they belong to, 
and will not be disproportionately affected or threatened by new 
standards. (See TSD, Chapter 12.)
    d. Cumulative Regulatory Burden. One aspect of the assessment of 
manufacturer burden is the cumulative impact of multiple DOE standards 
and the regulatory actions of other Federal agencies and States that 
affect the manufacture of a covered product. The Department believes 
that a standard level is not economically justified if it contributes 
to an unacceptable

[[Page 59245]]

cumulative regulatory burden. While any one regulation may not impose a 
significant burden on manufacturers, the combined effects of several 
impending regulations may have serious consequences for some 
manufacturers, groups of manufacturers, or an entire industry. 
Assessing the impact of a single regulation may overlook this 
cumulative regulatory burden.
    Companies that produce a wider range of regulated products may be 
faced with more capital and product development expenditures than their 
competitors. This can prompt those companies to exit the market or 
reduce their product offerings, potentially reducing competition. 
Smaller companies can be especially affected, since they have lower 
sales volumes over which to amortize the costs of meeting new 
regulations.
    The most significant regulatory actions affecting the furnace and 
boiler industries are compliance with more stringent Federal energy 
conservation standards for residential and commercial air conditioners, 
and the EPA-mandated phase out of hydrofluorocarbon (HFC) and 
hydrochlorofluorocarbon (HCFC) refrigerants. Manufacturers of 
residential furnaces and boilers also manufacturer approximately 82 
percent of the residential central air conditioners and heat pumps and 
many of these manufacturers also manufacture commercial unitary air 
conditioners and heat pumps. The effective date for the residential AC 
rulemaking was January 23, 2006. Manufacturers were working to redesign 
all of the product lines and have allocated most of their capital 
resources for redesigning and retooling of their production lines to 
meet the new minimum efficiency standard. The effective date for the 
new commercial unitary air conditioner and heat pump standards is 
January 1, 2010, as specified in EPACT 2005. Manufacturers are now re-
designing their product offerings and will need to retool to meet those 
standards. In addition, the EPA-mandated refrigerant phase out comes 
into effect on January 1, 2010, and is expected to have the biggest 
cumulative impact on residential furnace and boiler manufacturers. 
Chapter 12 of the TSD quantifies the anticipated level of investments 
needed to meet each of these regulatory burdens.
3. National Impact Analysis
    a. Significance of Energy Savings. To estimate the energy savings 
through 2038 due to amended energy conservation standards, the 
Department compared the energy consumption of furnaces and boilers 
under the base case to energy consumption of furnaces and boilers under 
the five trial standard levels. As discussed in section III.D.1, the 
results account for a rebound effect of 15 percent (i.e., 15 percent of 
the total savings from higher equipment efficiency are ``taken back'' 
by consumers to provide more heating service). Table V.25 shows the 
forecasted national energy savings at each of the trial standard levels 
calculated using the AEO2005 energy price forecast. The table also 
shows the magnitude of the energy savings if the savings are discounted 
at rates of seven and three percent. Each trial standard level 
considered in this rulemaking would result in significant energy 
savings, and the amount of savings increases with higher efficiency 
standards. (See TSD, Chapter 10.)

     Table V.25.--Summary of Cumulative National Energy Savings for
  Residential Furnaces and Boilers (Energy Savings for Units Sold From
                              2015 to 2038)
                     [AEO2005 energy price forecast]
------------------------------------------------------------------------
                                      National energy savings  (quads)
                                  --------------------------------------
       Trial standard level                          3%           7%
                                     Primary     discounted   discounted
------------------------------------------------------------------------
1................................         0.18         0.09         0.03
2................................         0.41         0.19         0.08
3................................         0.69         0.33         0.13
4................................         3.19         1.52         0.61
5................................         6.22         2.95         1.18
------------------------------------------------------------------------

    For the energy price sensitivity analysis, the Department also 
estimated the energy savings through 2038 due to amended energy 
conservation standards based on the AEO2006 energy price forecasts. 
Table V.26 shows the results for the national energy savings in the 
energy price sensitivity analysis, which are slightly different for 
trial standard levels 3, 4, and 5.

     Table V.26.--Summary of Cumulative National Energy Savings for
  Residential Furnaces and Boilers (Energy Savings for Units Sold From
                              2015 to 2038)
                     [AEO2006 energy price forecast]
------------------------------------------------------------------------
                                      National energy savings  (quads)
                                  --------------------------------------
       Trial standard level                          3%           7%
                                     Primary     discounted   discounted
------------------------------------------------------------------------
1................................         0.18         0.09         0.03
2................................         0.41          0.2         0.08
3................................          0.7         0.33         0.13
4................................          3.2         1.52         0.61
5................................         6.31            3          1.2
------------------------------------------------------------------------


[[Page 59246]]

    In addition to examining cumulative energy savings as a nation for 
residential furnaces and boilers, the Department looked at the 
cumulative energy savings by region. The Department defined the same 
two regions for the regional energy savings analysis as it used in the 
Consumer Subgroup analysis. Table V.27 shows the forecasted energy 
savings at each of the trial standard levels for the Northern and 
Southern regions based on the AEO2005. In addition, the Department also 
examined the cumulative energy savings by region in the energy price 
sensitivity analysis. Table V.28 shows the forecasted energy savings at 
each of the trial standard levels for the Northern and Southern regions 
based on the AEO2006.

     Table V.27.--Summary of Cumulative Energy Savings by Region for
 Residential Non-Weatherized Gas Furnaces (Energy Savings for Units Sold
                           From 2015 to 2038)
                     [AEO2005 energy price forecast]
------------------------------------------------------------------------
                                                 Primary energy savings
                                                         (quads)
             Trial standard level              -------------------------
                                                  Northern     Southern
                                                   region       region
------------------------------------------------------------------------
1.............................................         0.01        0.004
2.............................................         0.01        0.004
3.............................................          0.2         0.12
4.............................................         1.72         1.04
5.............................................         3.16         1.71
------------------------------------------------------------------------


     Table V.28.--Summary of Cumulative Energy Savings by Region for
Residential Non-Weatherized Gas Furnaces in the Energy Price Sensitivity
       Analysis (Energy Savings for Units Sold From 2015 to 2038)
                     [AEO2006 energy price forecast]
------------------------------------------------------------------------
                                                 Primary energy savings
                                                         (quads)
             Trial standard level              -------------------------
                                                  Northern     Southern
                                                   region       region
------------------------------------------------------------------------
1.............................................         0.01        0.004
2.............................................         0.01        0.004
3.............................................         0.19         0.13
4.............................................         1.64         1.12
5.............................................            3         1.78
------------------------------------------------------------------------

    b. Net Present Value. The NPV analysis is a measure of the 
cumulative benefit or cost of standards to the Nation. In accordance 
with OMB's guidelines on regulatory analysis (OMB Circular A-4, section 
E, September 17, 2003), DOE calculated NPV using both a seven-percent 
and a three-percent real discount rate. The seven-percent rate is an 
estimate of the average before-tax rate of return to private capital in 
the U.S. economy, and reflects the returns to real estate and small 
business capital as well as corporate capital. The Department used this 
discount rate to approximate the opportunity cost of capital in the 
private sector, since recent OMB analysis has found the average rate of 
return to capital to be near this rate. In addition, DOE used the 
three-percent rate to capture the potential effects of standards on 
private consumption (e.g., through higher prices for equipment and the 
purchase of reduced amounts of energy). This rate represents the rate 
at which ``society'' discounts future consumption flows to their 
present value. This rate can be approximated by the real rate of return 
on long-term government debt (i.e., yield on Treasury notes minus 
annual rate of change in the Consumer Price Index), which has averaged 
about three-percent on a pre-tax basis for the last 30 years.
    Table V.29 shows the forecasted NPV at each of the trial standard 
levels, based on the AEO2005 energy price forecasts. Use of a three-
percent discount rate increases the present value of future equipment-
purchase costs and operating-cost savings. However, because annual 
operating-cost savings in later years grow at a faster rate than annual 
equipment-purchase costs, use of a three-percent discount rate 
increases the NPV at most trial standard levels. (See TSD, Chapter 10.) 
Similarly, the Department also calculated the forecasted NPV in the 
energy price sensitivity analysis based on the AEO2006. Table V.30 
exhibits the forecasted NPV at each trial standard level, based on the 
AEO2006 energy price forecasts.

  Table V.29.--Summary of Cumulative Net Present Value for Residential
     Furnaces and Boilers (Impacts for Units Sold From 2015 to 2038)
                     [AEO2005 energy price forecast]
------------------------------------------------------------------------
                                                   NPV (billion 2004$)
                                               -------------------------
             Trial standard level                    7%           3%
                                                  discount     discount
                                                    rate         rate
------------------------------------------------------------------------
1.............................................         0.33         1.24
2.............................................         0.65         2.48
3.............................................         0.53         3.00
4.............................................         0.06         8.37
5.............................................       -17.53       -22.42
------------------------------------------------------------------------


  Table V.30.--Summary of Cumulative Net Present Value for Residential
 Furnaces and Boilers in the Energy Price Sensitivity Analysis (Impacts
                    for Units Sold From 2015 to 2038)
                     [AEO2006 energy price forecast]
------------------------------------------------------------------------
                                                   NPV (billion 2004$)
                                               -------------------------
             Trial standard level                    7%           3%
                                                  discount     discount
                                                    rate         rate
------------------------------------------------------------------------
1.............................................         0.43         1.53
2.............................................         0.82         3.02
3.............................................         0.90         4.12
4.............................................         1.83        13.64
5.............................................       -13.49       -10.34
------------------------------------------------------------------------

    In addition to national net present value, the Department examined 
the regional effects of standards on the net present value. Table V.31 
shows the forecasted NPV at each of the trial standard levels for the 
Northern and Southern regions based on the AEO2005 energy price 
forecasts. In addition, the Department examined the NPV by region in 
the energy price sensitivity analysis. Table V.32 shows the NPV at each 
of the trial standard levels for the Northern and Southern regions 
based on the AEO2006 energy price forecasts.

[[Page 59247]]



   Table V.31.--Summary of Cumulative Net Present Value by Region for Residential Non-Weatherized Gas Furnaces
                                   (Impacts for Units Sold From 2015 to 2038)
                                         [AEO2005 energy price forecast]
----------------------------------------------------------------------------------------------------------------
                                                                              NPV (billion 2004$)
                                                             ---------------------------------------------------
                                                                   Northern region           Southern region
                    Trial standard level                     ---------------------------------------------------
                                                                   7%           3%           7%           3%
                                                                discount     discount     discount     discount
                                                                  rate         rate         rate         rate
----------------------------------------------------------------------------------------------------------------
1...........................................................         0.02         0.07         0.01         0.03
2...........................................................         0.02         0.07         0.01         0.03
3...........................................................         0.11         0.72         -0.1         0.11
4...........................................................         0.79         5.99        -0.82         1.10
5...........................................................        -6.85        -7.77        -8.29       -13.90
----------------------------------------------------------------------------------------------------------------


 Table V.32.--Summary of Cumulative Net Present Value by Region for Residential Non-Weatherized Gas Furnaces in
                the Energy Price Sensitivity Analysis (Impacts for Units Sold From 2015 to 2038)
                                         [AEO2006 energy price forecast]
----------------------------------------------------------------------------------------------------------------
                                                                              NPV (billion 2004$)
                                                             ---------------------------------------------------
                                                                   Northern region           Southern region
                    Trial standard level                     ---------------------------------------------------
                                                                   7%           3%           7%           3%
                                                                discount     discount     discount     discount
                                                                  rate         rate         rate         rate
----------------------------------------------------------------------------------------------------------------
1...........................................................         0.02         0.07         0.01         0.04
2...........................................................         0.02         0.07         0.01         0.04
3...........................................................         0.18         0.92        -0.01         0.38
4...........................................................         1.41         7.70        -0.08         3.51
5...........................................................        -5.07        -3.00        -7.74        -11.8
----------------------------------------------------------------------------------------------------------------

    c. Impacts on Employment. In accordance with the Process Rule, 
section 4(d)(7)(vi), the Department estimated the employment impacts of 
the proposed standard on the economy in general. 61 FR 36983. As 
discussed above, the Department expects energy conservation standards 
for residential furnaces and boilers to reduce energy bills for 
consumers, and the resulting net savings to be redirected to other 
forms of economic activity. The Department also realizes that these 
shifts in spending and economic activity could affect the demand for 
labor. To estimate these effects, the Department used an input/output 
model of the U.S. economy using BLS data (as described in section 
IV.G). (See TSD, Chapter 14.)
    This input/output model suggests the proposed furnace and boiler 
standards are likely to slightly increase the net demand for labor in 
the economy. Neither the BLS data nor the input/output model used by 
DOE includes the quality or wage level of the jobs. As shown in Table 
V.33, the Department estimates that net indirect employment impacts 
from a proposed furnace and boiler energy-efficiency standard are 
positive.

  Table V.33.--Net National Change in Indirect Employment, Thousands of
                              Jobs in 2038
------------------------------------------------------------------------
                Trial standard level  (thousands of jobs)
-------------------------------------------------------------------------
     TSL1           TSL2           TSL3           TSL4          TSL5
------------------------------------------------------------------------
       1.3            2.9            9.7             18          20.1
------------------------------------------------------------------------

4. Impact on Utility or Performance of Products
    As presented in section III.E.1.d, of this notice, DOE concluded 
that none of the efficiency levels considered in this notice reduce the 
utility or performance of residential furnaces and boilers. 
Furthermore, furnace and boiler manufacturers currently offer products 
that meet or exceed the proposed standards. (42 U.S.C. 
6295(o)(2)(B)(i)(IV))
5. Impact of Any Lessening of Competition
    The Department considers any lessening of competition that is 
likely to result from standards. The Attorney General determines the 
impact, if any, of any lessening of competition likely to result from a 
proposed standard, and transmits such determination to the Secretary 
together with an analysis of the nature and extent of such impact. (See 
42 U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii))
    To assist the Attorney General in making such a determination, the 
Department has provided the Department of Justice (DOJ) with copies of 
this notice and the TSD for review. The Department will consider DOJ's 
comments on the proposed rule in preparing the final rule.

[[Page 59248]]

6. Need of the Nation To Conserve Energy
    Enhanced energy efficiency also produces environmental benefits. 
The expected energy savings from higher furnace and boiler standards 
will reduce the emissions of air pollutants and greenhouse gases 
associated with energy production and household use of fossil fuels. 
Table V.34 shows cumulative CO<INF>2,</INF> SO<INF>2,</INF> and 
NO<INF>X</INF> emissions reductions over the analysis period. As 
discussed in section III.D.1, the results account for a rebound effect 
of 15 percent. The cumulative CO<INF>2,</INF> NO<INF>X</INF>, and 
SO<INF>2</INF> emissions reductions range up to 341.0 Mt, 203.4 kt, and 
69.0 t, respectively. The Department reports annual CO<INF>2,</INF> 
SO<INF>2,</INF> and NO<INF>X</INF> emissions reductions for each trial 
standard level in the environmental assessment, a separate report in 
the TSD.
    As discussed in section IV.I, DOE reports SO<INF>2</INF> emissions 
reductions at the household level instead of reporting these emissions 
from power plants. The reported NO<INF>X</INF> emissions reductions do 
include the impacts of each trial standard level at power plants. If 
NO<INF>X</INF> emissions are subject to emissions caps in the 
evaluation period, the Department assumes that the reported emissions 
reductions correspond to the production of emissions allowance credits.

                Table V.34.--Summary of Emissions Reductions for Residential Furnaces and Boilers
                            [Cumulative reductions for units sold from 2015 to 2038]
----------------------------------------------------------------------------------------------------------------
                           Emissions                              TSL 1     TSL 2     TSL 3     TSL 4     TSL 5
----------------------------------------------------------------------------------------------------------------
CO2 (Mt)......................................................       9        19.6      37       171.1     341
NOX (kt)......................................................       6        13        24.5     113       203.4
SO2 (kt)......................................................       0.7       1.5       2.7      12.7      69
----------------------------------------------------------------------------------------------------------------

    The Department also presents its results for discounted emissions 
of CO<INF>2,</INF> NO<INF>X,</INF> and SO<INF>2.</INF> The Department 
used the same discount rates that it used in calculating the NPV (seven 
percent and three percent real) to calculate discounted cumulative 
emission reductions. Table V.35 shows the discounted cumulative 
emissions impacts for residential furnaces and boilers. The Department 
intends the seven-percent and three-percent real discount rate values 
to capture the present value of costs and benefits associated with 
projects facing an average degree of risk. Other discount rates may be 
more applicable to discount costs and benefits associated with projects 
facing different risks and uncertainties. The Department seeks input 
from interested parties on the appropriateness of using other discount 
rates in addition to seven percent and three percent real to discount 
future emissions reductions.

          Table V.35.--Summary of Discounted Emissions Reductions for Residential Furnaces and Boilers
                            [Cumulative reductions for units sold from 2015 to 2038]
----------------------------------------------------------------------------------------------------------------
                            Emissions                                TSL 1    TSL 2    TSL 3     TSL 4    TSL 5
----------------------------------------------------------------------------------------------------------------
7% Discount Rate:
    CO2 (Mt).....................................................       1.7      3.6      6.9      31.8     63.2
    NOX (kt).....................................................       1        2.2      4.1      18.9     33.5
    SO2 (kt).....................................................       0.1      0.3      0.5       2.4     12.5
3% Discount Rate:
    CO2 (Mt).....................................................       4.1      8.9     16.9      78.1    155.3
    NOX (kt).....................................................       2.6      5.6     10.6      49       87.2
    SO2 (kt).....................................................       0.3      0.7      1.3       5.8     31.2
----------------------------------------------------------------------------------------------------------------

7. Other Factors
    The Secretary of Energy, in determining whether a standard is 
economically justified, may consider any other factors that the 
Secretary deems to be relevant. (42 U.S.C. 6295(o)(2)(B)(i)(VII)) The 
Department recognizes the importance of incorporating safe venting 
systems with the use of residential furnace and boilers. Consequently, 
safety was one of the factors DOE identified for consideration in 
weighing the benefits and burdens of the trial standards.

C. Proposed Standard

    The Act, at 42 U.S.C. 6295(o)(2)(A), specifies that any new or 
amended energy conservation standard for any type (or class) of covered 
product shall be designed to achieve the maximum improvement in energy 
efficiency that the Secretary determines is technologically feasible 
and economically justified. In determining whether a standard is 
economically justified, the Secretary must determine whether the 
benefits of the standard exceed its burdens. (42 U.S.C. 
6295(o)(2)(B)(i)) The new or amended standard also must ``result in 
significant conservation of energy.'' (42 U.S.C. 6295(o)(3)(B))
    The Department considers the impacts of standards beginning with 
the maximum technologically feasible level, i.e., trial standard level 
5, to determine whether that level was economically justified. The 
Department then considers less efficient levels until it reaches the 
level which is technologically feasible and economically justified and 
saves a significant amount of energy.
    To aid the reader as the Department discusses the benefits and/or 
burdens of each trial standard level, Table V.36 presents a summary of 
quantitative analysis results for each trial standard level based on 
the assumptions and methodology discussed above. These include 
manufacturing cost estimates, equipment lifetimes, and energy prices 
based on the reference case from the AEO2005 energy price forecast. 
Additional quantitative results, including regional impacts and the 
results of the energy price sensitivity analysis, including the life-
cycle-cost, national energy savings, and regional analyses based on the 
AEO2006 energy price forecast, are provided in sections

[[Page 59249]]

V.B.1.a., V.B.1.b., V.B.3.a., and V.B.3.b., above.
    In addition to the quantitative results, the Department also 
considers other burdens and benefits that affect economic 
justification. This includes the potential impacts on safety, 
reliability and consumers' utility (i.e., the ability to replace a 
furnace or boiler with a new, more efficient product, without having to 
make any significant modifications to the existing dwelling).

                                      Table V.36.--Summary of Results Based Upon the AEO2005 Energy Price Forecast*
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             TSL 1                   TSL 2                   TSL 3                  TSL 4                  TSL 5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Primary energy saved (quads)......  0.18                    0.41                    0.69                    3.19                   6.22
7% Discount rate..................  0.03                    0.08                    0.13                    0.61                   1.18
3% Discount rate..................  0.09                    0.19                    0.33                    1.52                   2.95
Generation capacity change (GW)**.  0                       0                       0                       0.1                    4
NPV (2004$billion):
    7% Discount rate..............  0.33                    0.65                    0.53                    0.06                   -17.5
    3% Discount rate..............  1.24                    2.48                    3                       8.37                   -22.4
Industry impacts:
    Industry NPV (2004$million)...  (33) to (48)            (65) to (114)           (137) to (190)          (64) to (425)          107 to (720)
    Industry NPV (% Change).......  (2%) to (3%)            (4%) to (7%)            (9%) to (12%)           (4%) to (26%)          7% to (44%)
Cumulative emissions impacts***:
    CO2 (Mt)......................  9                       19.6                    37                      171                    341
    NOX (kt)......................  6                       13                      24.5                    113                    203
    SO2 (kt)......................  0.7                     1.5                     2.7                     12.7                   69
Mean life-cycle cost savings
 (2004$):
    Non-Weatherized Gas Furnaces..  2                       2                       2                       5                      -731
    Weatherized Gas Furnaces......  2                       73                      73                      73                     73
    Oil-Fired Furnaces............  7                       113                     113                     -23                    -109
    Gas Boilers...................  158                     232                     232                     232                    -795
    Oil-Fired Boilers.............  40                      40                      40                      1                      -1070
    Mobile Home Gas Furnaces......  51                      51                      18                      124                    124
Mean Payback Period (years):
    Non-Weatherized Gas Furnaces..  1.5                     1.5                     26                      23                     88
    Weatherized Gas Furnaces......  1.6                     4.6                     4.6                     4.6                    4.6
    Oil-Fired Furnaces............  0.3                     0.8                     0.8                     18                     22
    Gas Boilers...................  12                      12                      12                      12                     40
    Oil-Fired Boilers.............  1.2                     1.2                     1.2                     27                     36
    Mobile Home Gas Furnaces......  5                       5                       31                      25                     25
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative (-) values.
** Reductions in installed generation capacity by the year 2030 based on AEO2005 Reference Case.
*** CO2 emissions impacts include physical reductions at power plants and households. NOX emissions impacts include physical reductions at power plants
  and households as well as production of emissions allowance credits where NOX emissions are subject to emissions caps. SO2 emissions impacts include
  physical reductions at households only.

    First, the Department considered trial standard level 5, the 
maximum technologically feasible level, for each product class. Trial 
standard level 5 will likely save 6.22 quads of energy through 2038, an 
amount the Department considers significant. Discounted at 7 percent, 
the energy savings through 2038 would be 1.18 quads. For the Nation as 
a whole, trial standard level 5 would result in a net cost of $17.5 
billion in NPV. The emissions impacts are 341 Mt of CO<INF>2</INF>,\19\ 
203 kt of NO<INF>X</INF>,\20\ and 69.0 kt of SO<INF>2</INF>.\21\ Total 
generating capacity in 2030 increases by 4.0 gigawatts (GW) under trial 
standard level 5, due to projected switching from gas furnaces to 
electric heating equipment.
---------------------------------------------------------------------------

    \19\ For all of the TSLs, CO<INF>2</INF> emissions impacts 
include physical reductions at power plants and households.
    \20\ For all of the TSLs, NO<INF>X</INF> emissions impacts 
include physical reductions at power plants and households as well 
as production of emissions allowance credits where NO<INF>X</INF> 
emissions are subject to emissions caps.
    \21\ For all of the TSLs, SO<INF>2</INF> emissions impacts 
include physical reductions at households only.
---------------------------------------------------------------------------

    At trial standard level 5, the average consumer would experience a 
significant increase in life-cycle costs for most product classes. 
Purchasers of non-weatherized gas furnaces would lose on average $731 
over the life of the product in present value terms and purchasers of 
gas-fired boilers would lose on average $795 in present value 
terms.\22\ The Department found at trial standard level 5 that 91 
percent of households in the South have a life-cycle net cost. The 
Department's life-cycle cost analysis shows that over 80 percent of all 
non-weatherized gas furnace consumers in the southern region 
(approximately 16 million households) would experience net increases in 
their life-cycle costs of more than $500 and a small (four-percent), 
but significant percentage of these households might experience net 
increases in life-cycle costs of over $1700. Furthermore, the life-
cycle cost analysis indicates that on average, the mean LCC savings 
would be negative for 88 percent of households in the Nation with non-
weatherized gas furnaces at TSL 5. Reinforcing the primary LCC result, 
the Department estimates that the mean payback period of all product 
classes except for weatherized gas furnaces would be substantially 
longer than the mean lifetime of these furnaces.
---------------------------------------------------------------------------

    \22\ Non-weatherized gas furnaces are the most prominent class 
of residential furnaces and boilers accounting for approximately 72 
percent of the total industry sales and approximately 81 percent of 
residential furnace sales. Gas-fired boilers are the most prominent 
class of residential boilers accounting for 6 percent of the total 
industry sales and 61 percent of residential boiler sales.
---------------------------------------------------------------------------

    The change in industry value (INPV) ranges from an increase of $107 
million to a decrease of $720 million. The magnitude of the impacts is 
largely determined by the cashflow results for the non-weatherized gas 
furnaces. For this product class, the impacts are driven primarily by 
the assumptions regarding future product shipments and the ability to 
offer differentiated products that command a premium mark-up. The 
Department recognizes the significant difference between the

[[Page 59250]]

shipments forecasted by the NES and those anticipated by manufacturers. 
The Department is concerned with an increase in total installed cost of 
$1519 for non-weatherized gas furnaces, or 82 percent. With an increase 
of that size, there is a significant risk of consumers switching to 
other heating systems, including heat pumps and electric resistance 
heating. The Department also recognizes that the ability to maintain a 
full product line is more difficult at higher standard levels. 
Therefore, the Department places more weight on the two-tiered markup 
scenario for non-weatherized gas furnaces at trial standard level 5. In 
particular, if the high range of impacts is reached as DOE expects, 
trial standard level 5 could result in a net loss of $498 million to 
the non-weatherized gas furnace industry.
    After carefully considering the analysis, comments on the ANOPR, 
and the benefits versus burdens, the Secretary concludes that at trial 
standard level 5 the benefits of energy savings and emissions impacts 
would be outweighed by the potential multi-billion dollar negative net 
economic cost to the Nation, the economic burden on consumers, and the 
large capital-conversion costs that could result in the large reduction 
in INPV for manufacturers. Consequently, the Secretary has concluded 
that trial standard level 5, the maximum technologically feasible 
level, is not economically justified.
    Next, the Department considered trial standard level 4, which 
specifies a 90-percent AFUE for non-weatherized gas furnaces and 85-
percent AFUE for gas-fired boilers. Primary energy savings would likely 
be 3.19 quads of energy through 2038, which the Department considers 
significant. Discounted at 7 percent, the energy savings through 2038 
would be 0.61 quad. For the Nation as a whole, trial standard level 4 
would result in a net savings of $0.06 billion in NPV. The emissions 
impacts are 171 Mt of CO<INF>2</INF>, 113 kt of NO<INF>X</INF>, and 
12.7 kt of SO<INF>2</INF>. Total generating capacity in 2030 under 
trial standard level 4 would increase by 0.1 GW. This would be due to 
the projected switching from gas furnaces to electric heating 
equipment.
    At trial standard level 4, consumers would experience an increase 
in life-cycle costs for oil-fired furnaces and a decrease in life-cycle 
costs for the other five product classes. Purchasers of non-weatherized 
gas furnaces would save, on average, $5 over the life of the product in 
present value terms, and purchasers of gas-fired boilers would save, on 
average, $232 over the life of the boiler in present value terms. The 
Department found that 39 percent of households with non-weatherized gas 
furnaces would experience a net cost, and 25 percent of households with 
non-weatherized gas furnaces would experience a net gain.
    The Department also examined the regional impacts to consumers of 
non-weatherized gas furnaces in Northern and Southern climates 
separately. Because TSL 4 requires the use of condensing technology for 
non-weatherized gas furnaces, a majority of the affected consumers in 
the South would experience a significant increase in total installed 
cost. Sixty-three percent of consumers in the South with non-
weatherized gas furnaces would experience an increase in total 
installed cost greater than $500, while a small, but significant 
(approximately 2 percent) of these consumers would experience an 
increase in total installed cost of more than $900. In the Southern 
region, where the operating cost savings of condensing technology are 
less important, these substantial increases in total installed costs 
lead to increased life-cycle costs. The Department found that the 
majority, 57 percent, of households in the South with a non-weatherized 
gas furnace would experience a life-cycle net cost, while 23 percent 
would experience a net gain. At trial standard level 4, the average net 
LCC increase to the Southern consumer with a non-weatherized gas 
furnace is $79, while the average net decrease to the Northern consumer 
with a non-weatherized gas furnace is $79. Almost half of the consumers 
in the northern region with a non-weatherized gas furnace would not be 
affected by the standard because the equipment the household currently 
uses already meets or exceeds the trial standard level 4 efficiency 
level (i.e., 90-percent AFUE). However, 81 percent of Southern 
consumers with a non-weatherized gas furnace would be impacted by the 
standard. Seventy percent of those Southern consumers with non-
weatherized gas furnace impacted by the standard would experience an 
increase in life-cycle cost. The Department's life-cycle cost analysis 
shows that ten percent of all non-weatherized gas furnace consumers in 
the southern region (approximately 2 million households) would 
experience net increases in their life-cycle costs of more than $500 
and a small (seven percent), but significant percentage of these 
households would experience net increases in life-cycle costs of over 
$700. Reinforcing this primary LCC result, the Department estimates 
that the mean payback period of non-weatherized gas furnaces in the 
Southern climate would be substantially longer than the mean lifetime 
of these furnaces.
    The Department also considers the impact of proposed standard level 
TSL 4 on industry. The change in industry value ranges from a loss of 
$64 million to a loss of $425 million, which could potentially cause up 
to a 26 percent drop in total industry value. The magnitude of impacts 
is still largely determined by the cashflow results for the non-
weatherized gas furnaces. For this product class, the impacts continue 
to be driven primarily by the assumptions regarding future product 
shipments and the ability to offer differentiated products. Although 
the impacts will not be as severe as expected for TSL 5 for the non-
weatherized gas furnace industry, the magnitude of the impacts would 
still be determined primarily by the assumptions regarding future 
product shipments and the ability to offer differentiated products that 
command a premium markup. Although the range of possible impacts is not 
as large as TSL 5, the Department still recognizes the significant 
differences between the shipments forecast by the NES analysis and 
those anticipated by manufacturers. Furthermore, the Department 
believes that with an increase in total installed cost of $571 for non-
weatherized gas furnaces, or 31 percent, for example, there is a 
significant risk of consumers switching to other heating systems, 
including heat pumps and electric resistance heating. Additionally, 
some product classes would require large, product-conversion costs 
because the products would require new heat-exchanger designs to meet 
the efficiency requirements established in trial standard level 4. Even 
though the ability for manufacturers to differentiate products is 
greater at TSL 4 than at TSL 5, it will still be harder for 
manufacturers to differentiate products because all of the products 
offered in TSL 4 for non-weatherized gas furnaces use condensing 
technology. In particular, if the high range of impacts is reached as 
DOE expects, trial standard level 4 could result in a net loss of $295 
million to the non-weatherized gas furnace industry.
    After carefully considering the results of the analysis, comments 
on the ANOPR, and the benefits versus burdens, the Secretary concludes 
that at trial standard level 4, the benefits of energy savings and 
emissions impacts would still be outweighed by the economic burden on 
consumers as indicated by large increase in total installed cost, the 
high percentage of,

[[Page 59251]]

and disproportionate negative life-cycle cost impacts to Southern 
households, and the large capital conversion costs that could result in 
the large reduction in INPV for manufacturers. Consequently, the 
Secretary has concluded that trial standard level 4 is not economically 
justified.\23\
---------------------------------------------------------------------------

    \23\ The Department further examined its decision to reject TSL 
4 in the energy price sensitivity analysis using AEO2006. A 
discussion of the results for the energy price sensitivity analysis 
and the rationale for rejection based on these results are presented 
at the end of this section.
---------------------------------------------------------------------------

    Next, the Department considered trial standard level 3. Trial 
standard level 3 will likely save 0.69 quad of energy through 2038, an 
amount the Department considers significant. Discounted at 7 percent, 
the energy savings through 2038 would be 0.13 quads. For the Nation as 
a whole, trial standard level 3 would result in a net benefit in NPV of 
$0.53 billion. The emissions impacts are 37.0 Mt of CO<INF>2</INF>, 
24.5 kt of NO<INF>X</INF>, and 2.7 kt of SO<INF>2</INF>. Total 
generating capacity in 2030 under trial standard level 3 is unchanged 
compared to the base case.
    At trial standard level 3, purchasers of non-weatherized gas 
furnaces would save, on average, $2 over the life of the product and 
purchasers of gas-fired boilers would save, on average, $232. At trial 
standard level 3, the Department found that 44 percent of households in 
the South with a non-weatherized gas furnace would experience a net 
life-cycle cost. Nationwide, the Department estimates that 32 percent 
of households with non-weatherized gas furnaces would experience a net 
cost. Of these affected households, the increase in net cost is a 
result of the increased unit installation costs, which account for 
equipment redesign to adequately address the safety of these products 
at 81-percent AFUE for non-weatherized gas furnaces and mobile home 
furnaces. Reinforcing the primary LCC result, the Department estimates 
that the mean payback period for two of the product classes to be 
substantially longer than the mean lifetime of these products.
    Additionally, trial standard level 3 includes a standard for non-
weatherized gas furnaces and for mobile home gas furnaces at 81-percent 
AFUE. The Department is concerned that at this level, there may be an 
increased risk of safety concerns with this equipment due to venting 
issues. Some manufacturers believe that the margin of safety is 
diminished in many instances at 81-percent AFUE, and some manufacturers 
commented that they would not be willing to accept the risk and/or cost 
involved in producing a full line or family of products at 81-percent 
AFUE. This potential safety concern is a factor that the Secretary 
considers relevant. Based on the Department's evaluation of all the 
information considered during the rulemaking, the Department believes 
that a standard at 81-percent AFUE could pose a potential for safety 
problems for some consumers as discussed in section IV.B.3.
    The change in INPV ranges between a loss of $190 million and a loss 
of $137 million. Furthermore, some manufacturers stated they would 
likely use a de-rating strategy to reduce the increased capital costs 
associated with trial standard level 3. Consequently, the variety of 
products offered by the manufacturers would be reduced by eliminating 
some of the higher-capacity models to reduce the negative impacts. 
Consumers would experience an increase in total installed cost of $77 
for non-weatherized gas furnaces, or 4 percent, as provided in Chapter 
8 of the TSD. Consequently, based on the information provided by 
manufacturers, there could be a risk of consumers switching to other 
heating systems, including heat pumps and electric resistance heating, 
as further detailed in the shipments forecast discussion in section 
IV.F.6. For the furnace industry alone, the industry value would 
decrease from 9.1 percent to 11.6 percent.
    After carefully considering the analysis, comments on the ANOPR, 
and the benefits versus burdens, the Secretary concludes that, at trial 
standard level 3, the benefits of energy savings and emissions impacts 
would be outweighed by the burdens of negative economic impacts to some 
consumers and to the manufacturers, and in particular, the potential 
for safety problems for some consumers. Consequently, the Secretary has 
concluded that trial standard level 3 is not economically justified.
    Next, DOE considered trial standard level 2. Primary energy savings 
at this level would likely be 0.41 quad of energy through 2038, which 
the Department considers significant. Discounted at 7 percent, the 
energy savings through 2038 would be 0.08 quad. For the Nation as a 
whole, trial standard level 2 would result in a net savings of $0.65 
billion in NPV. The emissions impacts are 19.6 Mt of CO<INF>2</INF>, 
13.0 kt of NO<INF>X</INF>, and 1.5 kt of SO<INF>2</INF>. Total 
generating capacity in 2030 under trial standard level 2 is unchanged 
compared to the base case.
    At trial standard level 2, purchasers of non-weatherized gas 
furnaces would save, on average, $2 over the life of the product and 
purchasers of gas-fired boilers would save, on average, $232. The 
Department's analysis indicates that no households with non-weatherized 
gas furnaces would experience a net life-cycle cost at TSL 2, including 
Southern households. The mean payback periods are less than the average 
equipment lifetime for all product classes at trial standard level 2. 
For example, the mean payback period for non-weatherized gas furnaces 
at trial standard level 2 is 1.5 years.
    The change in industry value ranges from a loss of INPV of $114 to 
a loss of $65 million. Trial standard level 2 could cause up to a 6-
percent loss in INPV for the furnace industry and up to a 12-percent 
loss in INPV for the boiler industry. Furthermore, the Department 
believes manufacturers of non-weatherized gas furnaces would still be 
able to differentiate their premium products and retain profitability 
margins.
    Trial standard level 2 includes a standard for non-weatherized gas 
furnaces and for mobile home gas furnaces at 80-percent AFUE. Based on 
its evaluation of all the information considered during the rulemaking, 
the Department believes that a standard at 80-percent AFUE would not 
result in safety problems for consumers. However, trial standard level 
2 also includes a standard for weatherized gas furnaces at 83-percent 
AFUE. The Department is concerned with the safety and cost of ensuring 
the safety of weatherized gas furnaces at this level, due to possible 
condensation in the heat exchanger, and is seeking comment on this 
issue.
    After carefully considering the analysis, comments on the ANOPR, 
and the benefits and burdens, the Secretary concludes that this 
standard saves a significant amount of energy and is technologically 
feasible and economically justified. Therefore, the Department today 
proposes to adopt the energy conservation standards for residential 
furnaces and boilers at trial standard level 2.

[[Page 59252]]



                  Table V.37.--Summary of Results Based on the AEO2006 Energy Price Forecast *
----------------------------------------------------------------------------------------------------------------
                                                                 TSL 1     TSL 2     TSL 3     TSL 4     TSL 5
----------------------------------------------------------------------------------------------------------------
Primary energy saved (quads).................................      0.18      0.41      0.7       3.2        6.31
7% Discount rate.............................................      0.03      0.08      0.13      0.61       1.2
3% Discount rate.............................................      0.09      0.2       0.33      1.52       3
NPV (2004$billion):
    7% Discount rate.........................................      0.43      0.82      0.9       1.83     -13.5
    3% Discount rate.........................................      1.53      3.02      4.12     13.6      -10.3
Mean life-cycle cost savings (2004$):
    Non-Weatherized Gas Furnaces.............................      2         2         8        63       -626
    Weatherized Gas Furnaces.................................      2        86        86        86         86
    Oil-Fired Furnaces.......................................     10       167       167        90         37
    Gas Boilers..............................................    196       299       299       299       -508
    Oil-Fired Boilers........................................     61        61        61        47       -471
    Mobile Home Gas Furnaces.................................     71        71        49       240        240
Mean Payback Period (years):
    Non-Weatherized Gas Furnaces.............................      1.6       1.6      22        20         75
    Weatherized Gas Furnaces.................................      1.4       4         4         4          4
    Oil-Fired Furnaces.......................................      0.2       0.6       0.6      13         15
    Gas Boilers..............................................     10        10        10        10         35
    Oil-Fired Boilers........................................      0.8       0.8       0.8      19         26
    Mobile Home Gas Furnaces.................................      3.6       3.6      28        21         21
----------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative (-) values.
** Reductions in installed generation capacity by the year 2030 based on AEO2005 Reference Case.

    In addition to the Department's NOPR analyses based on the AEO2005 
energy price forecast, the Department analyzed the impact of the 
AEO2006 energy price forecasts on the LCC and PBP analysis and the 
national impact analysis. Table V.37 presents a summary of the results 
using AEO2006. As explained in section IV.C.4., AEO2006 provides a 
significantly higher price forecast for natural gas and fuel oil over 
the analysis period. The Department took into consideration the effect 
that these increased energy prices would have on the analysis at each 
trial standard level through an energy price sensitivity analysis and 
presented the results in sections V.B.1.a., V.B.1.b., V.B.3.a., and 
V.B.3.b. In particular, the Department was interested in seeing whether 
the results from the energy price sensitivity analysis would change the 
Department's proposed standard level (TSL 2) as presented above. The 
Department believes that the results from the energy price sensitivity 
analysis warrant the most discussion in its rejection of TSL 4. Based 
on the AEO2006 energy price forecast, the consumer economics at TSL 5 
are still unattractive, especially for non-weatherized gas furnaces and 
gas boilers (the prominent product classes). At TSL 3, although the 
consumer economics are attractive based on the energy price sensitivity 
analysis using the AEO2006 energy price forecast, the Department is 
unwilling to impose the associated safety risk on consumers as 
explained above.
    At TSL 4, the Department found that the nation as a whole would 
experience a net savings of $1.83 billion in NPV using the energy price 
sensitivity analysis (compared to $0.06 billion in NPV based on 
AEO2005). This is a significant increase in national savings as a 
result of increased energy prices. In addition, the consumer, on 
average, would save $58 more in life-cycle savings as compared to the 
AEO2005 analysis. Purchasers of non-weatherized gas furnaces would 
save, on average, $63 over the life of the product and purchasers of 
gas-fired boilers would save, on average, $299 over the life of the 
boiler. However, the Department found that 35 percent of households 
with non-weatherized gas furnaces across the nation would still 
experience a net cost.
    The Department also examined the regional impacts to consumers of 
non-weatherized gas furnaces in the Northern and Southern climate zones 
separately for the energy price sensitivity analysis using the AEO2006 
energy price forecast. Just as the AEO2005 regional analysis showed, 
the Department found differential impacts between Northern and Southern 
consumers using non-weatherized gas furnaces in the energy price 
sensitivity analysis. While only 20 percent of households with non-
weatherized gas furnaces in the Northern region would be negatively 
impacted by TSL 4, a majority of households in the Southern region with 
non-weatherized gas furnaces (53 percent) would be negatively impacted 
by a condensing standard. The consumer in the South with a non-
weatherized gas furnace, on average, would experience an increase in 
LCC of $20, while the Northern consumer with a non-weatherized gas 
furnace, on average, would experience a decrease in LCC of $138. Almost 
half of the consumers in the North with a non-weatherized gas furnace 
(48 percent) would not be affected by the standard because the 
equipment that the household currently uses already meets or exceeds 
the trial standard level 4 efficiency level (i.e., 90-percent AFUE), 
just as the AEO2005 analysis showed. In contrast, 81 percent of 
Southern consumers with a non-weatherized gas furnace would be impacted 
by the standard. Of those 81 percent impacted consumers with a non-
weatherized gas furnace in the Southern region, 65 percent would 
experience an increase in LCC and 33 percent would experience a 
decrease in LCC. This is only a five percentage point decrease in the 
number of adversely impacted Southern consumers as compared to the 
AEO2005 analysis results. Most consumers in the South with a non-
weatherized gas furnace would experience an increase in total installed 
cost of at least $500, as the AEO2005 and AEO2006 analysis results 
showed. Even though DOE forecasts the price of energy to increase 
significantly in the energy price sensitivity analysis using AEO2006, 
many consumers in the South will still experience an increase in life-
cycle-cost. Consequently, the Department's life-cycle cost analysis 
shows that 8 percent of all non-weatherized gas furnace consumers in 
the southern climate zone (approximately 1.6 million consumers) would 
experience net increases in their life-cycle costs of more than $500 
and

[[Page 59253]]

7 percent of these consumers (approximately 100,000 households) would 
experience a significant net increase in life-cycle-costs over $700. 
Reinforcing its primary LCC result and the AEO2005 analysis, the 
Department estimates, using the AEO2006 energy price forecast, that the 
mean payback period of non-weatherized gas furnaces in the Southern 
climate would still exceed the mean lifetime of these furnaces.
    While the Secretary recognizes the increased economic benefits to 
the nation as a result of TSL 4 under the increased energy price 
forecast, AEO2006, as captured by the energy price sensitivity 
analysis, the Secretary still concludes that the benefits of a federal 
standard at TSL 4 would still be outweighed by the economic burden that 
would be placed upon consumers in the South. Consequently, the 
Secretary has concluded that the energy price sensitivity analysis 
which addresses the effects of the AEO2006 energy price forecast does 
not change the Department's rejection of TSL 4, and its choice of TSL 2 
as the proposed standard level.

VI. Procedural Issues and Regulatory Review

A. Review Under Executive Order 12866

    The Department has determined today's regulatory action is an 
``economically significant'' action'' under section 3(f)(1) of 
Executive Order 12866, ``Regulatory Planning and Review.'' 58 FR 51735 
(October 4, 1993). Accordingly, today's action required a regulatory 
impact analysis (RIA) and, under the Executive Order, was subject to 
review by the Office of Information and Regulatory Affairs (OIRA) in 
the OMB. The Department presented to OIRA for review the draft proposed 
rule and other documents prepared for this rulemaking, including the 
RIA, and has included these documents in the rulemaking record. They 
are available for public review in the Resource Room of DOE's Building 
Technologies Program, Room 1J-018, 1000 Independence Avenue, SW., 
Washington, DC, (202) 586-9127, between 9 a.m and 4 p.m., Monday 
through Friday, except Federal holidays.
    The RIA is contained in the TSD prepared for the rulemaking. The 
RIA consists of: (1) A statement of the problem addressed by this 
regulation, and the mandate for government action; (2) a description 
and analysis of the feasible policy alternatives to this regulation; 
(3) a quantitative comparison of the impacts of the alternatives; and 
(4) the national economic impacts of the proposed standard.
    The RIA calculates the effects of feasible policy alternatives to 
residential furnace and boiler standards, and provides a quantitative 
comparison of the impacts of the alternatives. The Department evaluated 
each alternative in terms of its ability to achieve significant energy 
savings at reasonable costs, and compared it to the effectiveness of 
the proposed rule. The Department analyzed these alternatives using a 
series of regulatory scenarios as input to the NES/Shipments Model for 
furnaces and boilers, which it modified to allow inputs for these 
measures.
    The Department identified the following major policy alternatives 
for achieving increased furnace and boiler energy efficiency:
    <bullet> No new regulatory action;
    <bullet> Consumer rebates;
    <bullet> Consumer tax credits;
    <bullet> Manufacturer tax credits;
    <bullet> Voluntary energy-efficiency targets;
    <bullet> Bulk government purchases;
    <bullet> Early replacement incentives; and
    <bullet> Regional performance standards (climates >=5000 heating 
degree days and climates >=6000 heating degree days).
    The Department evaluated each alternative in terms of its ability 
to achieve significant energy savings at reasonable costs, and compared 
it to the effectiveness of the proposed rule.

          Table VI.1.--Non-Regulatory Alternatives to Standards
------------------------------------------------------------------------
                                                   Net present value**
                                      Energy           (billion $)
        Policy alternatives          savings*  -------------------------
                                      (quads)   7% discount  3% discount
                                                    rate         rate
------------------------------------------------------------------------
No new regulatory action..........           0        0            0
Consumer Rebates..................       0.078        0.086        0.37
Consumer Tax Credits..............       0.047        0.052        0.22
Manufacturer Tax Credits..........       0.023        0.026        0.11
Voluntary Energy-Efficiency              0.046        0.074        0.3
 Targets..........................
Early Replacement Incentives......       0.025        0.059        0.16
Bulk Government Purchases.........       0.005        0.006        0.026
Regional Performance Standards for
 NWGF***:
    Cold States (>=5000 HDD) (TSL         1.72        0.79         5.99
     4)...........................
    Warm States (<5000 HDD) (TSL         0.004        0.01         0.03
     2)...........................
Regional Performance Standards for
 NWGF***:
    Cold States (>=6000 HDD) (TSL          0.2        0.04         0.59
     4)...........................
    Warm States (<6000 HDD) (TSL          0.01        0.02         0.07
     2)...........................
------------------------------------------------------------------------
* Energy savings are in source quads.
** Net present value is the value in the present of a time series of
  costs and savings. The Department determined the net present value
  from 2015 to 2038 in billions of 2004 dollars.
*** For non-weatherized gas furnaces (NWGF) only with national
  performance standard set at TSL 2, the energy savings is 0.01 quads.
  The net present value is $0.03 billion with a 7-percent discount rate
  and $0.10 billion with a 3-percent discount rate. The Department
  analyzed two scenarios, the first with cold states having 5000 heating
  degree days (HDD) or more and the second with 6000 HDD or more.

    The net present value amounts shown in Table VI.1 refer to the NPV 
for residential consumers. The costs to the government of each policy 
(such as rebates or tax credits) are not included in the costs for the 
NPV since, on balance, consumers are both paying for (through taxes) 
and receiving the benefits of the payments. The following paragraphs 
discuss each of the policy alternatives listed in Table VI.1. (See TSD, 
RIA.)

[[Page 59254]]

    No new regulatory action. The case in which no regulatory action is 
taken with regard to furnaces and boilers constitutes the ``base case'' 
(or ``No Action'') scenario. In this case, between the years 2015 and 
2038, furnaces and boilers are expected to use 101 quads of primary 
energy. Since this is the base case, energy savings and NPV are zero by 
definition.
    Rebates. If consumers were offered a rebate that covered a portion 
of the incremental price difference between products meeting baseline 
efficiency levels and those meeting the energy efficiency levels in 
trial standard level 2, the Department estimates that the percentage of 
consumers purchasing the more-efficient products would increase by 2 
percent to 34 percent, depending on the product class. The Department 
assumed the impact of this policy would be to permanently transform the 
market so that the shipment-weighted efficiency gain seen in the first 
year of the program would be maintained throughout the forecast period. 
At the estimated participation rates, the rebates would provide 0.078 
quads of national energy savings and an NPV of $0.086 billion (at a 
seven-percent discount rate). Although DOE estimates that rebates will 
provide national benefits, they are much smaller than the benefits 
resulting from national performance standards. Thus, the Department 
rejected rebates as a policy alternative to national performance 
standards.
    Consumer Tax Credits. If consumers were offered a tax credit 
equivalent to the amount mentioned above for rebates, the Department's 
research suggests that the number of consumers buying a furnace or 
boiler that would take advantage of the tax credit would be 
approximately 60 percent of the number that would take advantage of 
rebates. Thus, as a result of the tax credit, the percentage of 
consumers purchasing the more-efficient products would increase by 1 
percent to 20 percent, depending on the product class. The Department 
assumed the impact of this policy would be to permanently transform the 
market so that the shipment-weighted efficiency gain seen in the first 
year of the program would be maintained throughout the forecast period. 
The Department estimated that tax credits would yield a fraction of the 
benefits that rebates would provide. The Department rejected rebates, 
as a policy alternative to national performance standards, because the 
benefits that rebates provide are much smaller than those resulting 
from performance standards. Thus, because consumer tax credits provide 
even smaller benefits than rebates, the Department also rejected 
consumer tax credits as a policy alternative to national performance 
standards.
    The Energy Policy Act of 2005 includes tax credits for very high 
efficiency furnaces and boilers with AFUE of 95 percent or higher. 
Although the Department recognizes this requirement, this RIA focuses 
only on non-regulatory approaches to promoting the proposed standard, 
which is well below 95-percent AFUE. Thus, the Department's action to 
promote 95-percent-AFUE products does not affect this RIA.
    Manufacturer Tax Credits. The Department believes even smaller 
benefits would result from availability of a manufacturer tax credit 
program that would effectively result in a lower price to the consumer 
by an amount that covers part of the incremental price difference 
between products meeting baseline efficiency levels and those meeting 
trial standard level 2. Because these tax credits would go to 
manufacturers instead of consumers, the Department believes that fewer 
consumers would be aware of this program relative to a consumer tax 
credit program. The Department assumes that 50 percent of the consumers 
who would take advantage of consumer tax credits would buy more-
efficient products offered through a manufacturer tax credit program. 
Thus, as a result of the manufacturer tax credit, the percentage of 
consumers purchasing the more-efficient products would increase by 0.6 
percent to 10 percent (i.e., 50 percent of the impact of consumer tax 
credits), depending on the product class.
    The Department assumed the impact of this policy would be to 
permanently transform the market so that the shipment-weighted 
efficiency gain seen in the first year of the program will be 
maintained throughout the forecast period. The Department estimated 
that manufacturer tax credits would yield a fraction of the benefits 
that consumer tax credits would provide. The Department rejected 
consumer tax credits as a policy alternative to national performance 
standards because the benefits that consumer tax credits provide are 
much smaller than those resulting from performance standards. Thus, 
because manufacturer tax credits provide even smaller benefits than 
consumer tax credits, the Department also rejected manufacturer tax 
credits as a policy alternative to national performance standards.
    Voluntary Energy-Efficiency Targets. The Federal government's 
Energy Star program currently has voluntary energy-efficiency targets 
for non-weatherized gas furnaces and gas boilers. Equipment purchases 
that result from the Energy Star program, and hence the impact of that 
program, already are reflected in the Department's ``base case'' 
scenario. The Department evaluated the potential impacts of increased 
marketing efforts within the Energy Star program that would encourage 
purchase of products meeting the trial standard level 2 efficiency 
levels. The Department modeled the voluntary efficiency program based 
on this scenario and assumed that the resulting shipment-weighted 
efficiency gain would be maintained throughout the forecast period. The 
Department estimated that the enhanced effectiveness of voluntary 
energy-efficiency targets would provide 0.046 quads of national energy 
savings and an NPV of $0.074 billion (at a seven-percent discount 
rate). Although this would provide national benefits, they are much 
smaller than the benefits resulting from national performance 
standards. Thus, the Department rejected use of voluntary energy-
efficiency targets as a policy alternative to national performance 
standards.
    GAMA commented that, when DOE considers voluntary programs, it 
should survey the types of the programs used in various States, and 
extrapolate those results to other States and regions that do not avail 
themselves of voluntary programs or whose programs are less successful. 
(GAMA, No. 67 at p. 8) The Department considered State voluntary 
programs in the RIA.
    Early Replacement Incentives. This policy alternative envisions a 
program to replace old, inefficient furnaces and boilers with models 
meeting the efficiency levels in trial standard level 2. The Department 
modeled this policy by projecting an increase in the number of such 
replacements equal to 20 percent of the number of replacements for 
failed equipment. It assumed the program would last as long as it takes 
to completely replace all of the eligible existing stock in the year 
that the program begins (2015). The Department estimated that such an 
early replacement program would provide 0.025 quads of national energy 
savings and an NPV of $0.059 billion (at a seven-percent discount 
rate). Although DOE estimates that this early replacement program will 
provide national benefits, they are much smaller than the benefits 
resulting from national performance standards. Thus, the Department 
rejected early replacement incentives as a policy alternative to 
national performance standards.
    Bulk Government Purchases. Under this policy alternative, the 
government sector would be encouraged to purchase

[[Page 59255]]

increased amounts of equipment that meet the efficiency levels in trial 
standard level 2. Federal, State, and local government agencies could 
administer such a program. At the Federal level, this would be an 
enhancement to the existing Federal Energy Management Program (FEMP). 
The Department modeled this program by assuming an increase in 
installation of equipment meeting the efficiency levels of trial 
standard level 2 among those households for whom government agencies 
purchase or influence the purchase of furnaces and boilers. The 
Department estimated that bulk government purchases would provide 0.005 
quads of national energy savings and an NPV of $0.006 billion (at a 
seven-percent discount rate), benefits which are much smaller than 
those estimated for national performance standards. The Department 
rejected bulk government purchases as a policy alternative to national 
performance standards.
    Regional Performance Standards. The Department considered two 
alternatives based on heating degree days. These alternatives 
contemplate efficiency standards for non-weatherized gas furnaces only, 
depending on the region of the country. The Department modeled the 
policy of regional performance standards by aggregating States into two 
broad geographic regions based on climate (i.e., based on heating 
degree days). In the first alternative, DOE defines the cold climate as 
having 5,000 or more heating degree days and would include the cold-
climate States, including the New England, Middle Atlantic, East North 
Central, West North Central, Mountain (northern part only including 
Colorado, Idaho, Montana, Utah, Wyoming), and Pacific Census divisions 
(northern part only including Alaska, Oregon and Washington), and West 
Virginia; and warm-climate States would include the South Atlantic 
(with the exception of West Virginia), East South Central, Mountain 
(southern part only including Arizona, Nevada and New Mexico), West 
South Central, and Pacific (southern part only including California and 
Hawaii) Census divisions. For the second alternative, greater than 6000 
heating degree days, the cold-climate States do not align closely with 
the Census divisions and include the states of Alaska, Colorado, 
Connecticut, Idaho, Illinois, Iowa, Maine, Massachusetts, Michigan, 
Minnesota, Montana, Nebraska, New Hampshire, New York, North Dakota, 
South Dakota, Utah, Vermont, Wisconsin, Wyoming; the warm-climate 
States would include the rest of U.S. States.
    The Department selected the efficiency level for this alternative 
based on maximizing consumer NPV. The standard that yields the maximum 
consumer NPV at a seven-percent discount rate for the cold-climates 
(i.e., >=5,000 heating degree days and >=6,000 heating degree days) is 
trial standard level 4, with trial standard level 2 for the warm 
climates. Both alternatives yield greater energy savings and national 
NPVs than the standards proposed today. However, as discussed above, 
the Department lacks authority to adopt regional standards, so it must 
reject these alternatives. (42 U.S.C. 6291(6)(A))
    However, DOE does have authority to grant State petitions for an 
exemption from Federal preemption of higher State standards, if the 
State filing the petition demonstrates that its higher standards are 
needed to meet State or local energy interests that (1) are 
substantially different from those in the U.S. generally and (2) are 
such that the costs, benefits, burdens, and energy savings resulting 
from the State's standards, considered in light of the State's energy 
plan, would outweigh the costs, benefits, burdens, and energy savings 
of alternative approaches. (42 U.S.C. 6297(d)) In addition, the 
Department must reject the petition if ``interested persons'' establish 
that the State regulation would ``significantly burden manufacturing, 
marketing, distribution, sale or servicing'' of the covered equipment 
on a national basis. (42 U.S.C. 6297(d)) Each of the regional standards 
alternatives evaluated, DOE believes, is representative of the energy 
and national NPV impacts that would occur if States in the cold-climate 
regions were to make a case that unusual and compelling State or local 
energy interests exist and DOE were to grant State petitions for 
exemption from Federal standards. In the first case--cold climate 
greater or equal to 5,000 heating degree days--the regional standards 
would save 1.72 quads of energy for non-weatherized gas furnaces only, 
which compares to 0.01 quads forecasted to be saved by today's proposed 
rule. In the second case--cold climate greater or equal to 6,000 
heating degree days--DOE found that the regional standards would save 
0.20 quads of energy.
    National Performance Standards (TSL 2). The Department proposes to 
adopt the efficiency levels listed in section V.C. As indicated in the 
paragraphs above, with the exception of regional performance standards 
which the Department has determined it cannot promulgate, none of the 
alternatives DOE examined would save as much energy as the proposed 
standards. Also, several of the alternatives would require new enabling 
legislation, such as consumer or manufacturer tax credits, since 
authority to carry out those alternatives does not presently exist.

B. Review Under the Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
preparation of an initial regulatory flexibility analysis for any rule 
that by law must be proposed for public comment, unless the agency 
certifies that the rule, if promulgated, will not have a significant 
economic impact on a substantial number of small entities. As required 
by Executive Order 13272, Proper Consideration of Small Entities in 
Agency Rulemaking, 67 FR 53461 (August 16, 2002), DOE published 
procedures and policies on February 19, 2003 to ensure that the 
potential impacts of its rules on small entities are properly 
considered during the rulemaking process. 68 FR 7990. The Department 
has made its procedures and policies available on the Office of General 
Counsel's Web site: http://www.gc.doe.gov.
    The Department reviewed today's proposed rule under the provisions 
of the Regulatory Flexibility Act and the procedures and policies 
published on February 19, 2003. 68 FR 7990. A regulatory flexibility 
analysis examines the impact of the rule on small entities and 
considers alternative ways of reducing negative impacts.
    The Department used the small business size standards published on 
January 31, 1996, as amended, by the Small Business Administration to 
determine whether any small entities would be required to comply with 
the rule. 61 FR 3286 and codified at 13 CFR part 121. The size 
standards are listed by North American Industry Classification System 
(NAICS) code and industry description. Residential furnace 
manufacturing is classified under NAICS 333415 and residential boiler 
manufacturing is classified under NAICS 333414. To be categorized as a 
small business, a manufacturer of residential furnaces and/or boilers 
and its affiliates may employ a maximum of 750 employees. The 
residential furnace and boiler industry is characterized by many 
different domestic manufacturers. However, consolidation within the 
industry has reduced the number of parent companies that manufacture 
similar equipment under different affiliates and labels.

[[Page 59256]]

    The Department surveyed GAMA's Consumers' Directory of Certified 
Efficiency Ratings for Heating and Water Heating Equipment (2005) and 
created a list of every manufacturer that had certified product ratings 
in the directory. The Department also asked stakeholders and GAMA 
representatives within the residential furnace and boiler industry if 
they were aware of any other small manufacturers. The Department then 
looked at publicly available data and contacted manufacturers, where 
needed, to determine if they meet the SBA's definition of a small 
manufacturing facility and have their manufacturing facilities located 
within the U.S. Based on this analysis, the Department estimates that 
there are 11 small manufacturers of residential furnaces and boilers. 
The Department then contacted all 11 small manufacturers. It 
subsequently conducted two on-site interviews and three phone 
interviews with small manufacturers to determine if there are 
differential impacts on these companies that may result from the 
standard.
    The Department found that, in general, small manufacturers have the 
same concerns as large manufacturers regarding energy conservation 
standards. In addition, the Department found no significant differences 
in the R&D emphasis or marketing strategies between small business 
manufacturers and large manufacturers. Therefore, for the classes 
comprised primarily of small businesses, the Department believes the 
GRIM analysis, which models each product class separately, is 
representative of the small businesses affected by standards.
    On the basis of the foregoing, DOE certifies that this proposed 
rule, if promulgated, will have no significant economic impact on a 
substantial number of small entities. Accordingly, DOE has not prepared 
a regulatory flexibility analysis for this rulemaking. The Department 
will transmit the certification and supporting statement of factual 
basis to the Chief Counsel for Advocacy of the Small Business 
Administration for review under 5 U.S.C. 605(b).

C. Review Under the Paperwork Reduction Act

    This rulemaking will impose no new information or record keeping 
requirements. Accordingly, Office of Management and Budget clearance is 
not required under the Paperwork Reduction Act. (44 U.S.C. 3501 et 
seq.)

D. Review Under the National Environmental Policy Act

    The Department is preparing an environmental assessment of the 
impacts of the proposed rule and DOE anticipates completing a Finding 
of No Significant Impact (FONSI) before publishing the final rule on 
residential furnaces and boilers, pursuant to the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.), the 
regulations of the Council on Environmental Quality (40 CFR parts 1500-
1508), and the Department's regulations for compliance with the 
National Environmental Policy Act (10 CFR part 1021).

E. Review Under Executive Order 13132

    Executive Order 13132, ``Federalism,'' 64 FR 43255 (August 4, 
1999), imposes certain requirements on agencies formulating and 
implementing policies or regulations that preempt State law or that 
have federalism implications. The Executive Order requires agencies to 
examine the constitutional and statutory authority supporting any 
action that would limit the policymaking discretion of the States and 
to carefully assess the necessity for such actions. The Executive Order 
also requires agencies to have an accountable process to ensure 
meaningful and timely input by State and local officials in the 
development of regulatory policies that have federalism implications. 
On March 14, 2000, DOE published a statement of policy describing the 
intergovernmental consultation process it will follow in the 
development of such regulations. 65 FR 13735. The Department has 
examined today's proposed rule and has determined that it would not 
have a substantial direct effect on the States, on the relationship 
between the national government and the States, or on the distribution 
of power and responsibilities among the various levels of government. 
EPCA governs and prescribes Federal preemption of State regulations as 
to energy conservation for the products that are the subject of today's 
proposed rule. States can petition the Department for exemption from 
such preemption to the extent, and based on criteria, set forth in 
EPCA. (42 U.S.C. 6297) No further action is required by Executive Order 
13132.

F. Review Under Executive Order 12988

    With respect to the review of existing regulations and the 
promulgation of new regulations, section 3(a) of Executive Order 12988, 
``Civil Justice Reform'' (61 FR 4729, February 7, 1996) imposes on 
Federal agencies the general duty to adhere to the following 
requirements: (1) Eliminate drafting errors and ambiguity; (2) write 
regulations to minimize litigation; and (3) provide a clear legal 
standard for affected conduct rather than a general standard and 
promote simplification and burden reduction. Section 3(b) of Executive 
Order 12988 specifically requires that Executive agencies make every 
reasonable effort to ensure that the regulation: (1) Clearly specifies 
the preemptive effect, if any; (2) clearly specifies any effect on 
existing Federal law or regulation; (3) provides a clear legal standard 
for affected conduct while promoting simplification and burden 
reduction; (4) specifies the retroactive effect, if any; (5) adequately 
defines key terms; and (6) addresses other important issues affecting 
clarity and general draftsmanship under any guidelines issued by the 
Attorney General. Section 3(c) of Executive Order 12988 requires 
Executive agencies to review regulations in light of applicable 
standards in section 3(a) and section 3(b) to determine whether they 
are met or it is unreasonable to meet one or more of them. The 
Department has completed the required review and determined that, to 
the extent permitted by law, this proposed rule meets the relevant 
standards of Executive Order 12988.

G. Review Under the Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4) (UMRA) requires each Federal agency to assess the effects of Federal 
regulatory actions on State, local, and Tribal governments and the 
private sector. For a proposed regulatory action likely to result in a 
rule that may cause the expenditure by State, local, and Tribal 
governments, in the aggregate, or by the private sector of $100 million 
or more in any one year (adjusted annually for inflation), section 202 
of UMRA requires a Federal agency to publish a written statement that 
estimates the resulting costs, benefits, and other effects on the 
national economy. (2 U.S.C. 1532(a),(b)) The UMRA also requires a 
Federal agency to develop an effective process to permit timely input 
by elected officers of State, local, and Tribal governments on a 
proposed ``significant intergovernmental mandate,'' and requires an 
agency plan for giving notice and opportunity for timely input to 
potentially affected small governments before establishing any 
requirements that might significantly or uniquely affect small 
governments. On March 18, 1997, DOE published a statement of policy on 
its process for intergovernmental consultation under

[[Page 59257]]

UMRA. 62 FR 12820. (Also available at http://www.gc.doe.gov.)
    Today's proposed rule will not likely result in a final rule that 
could impose expenditures of $100 million or more in a given year in 
the furnace and boiler manufacturing industry before or after the 
effective date of the proposed standard. The proposed rule also does 
not contain a Federal intergovernmental mandate. Thus, DOE is not 
required by UMRA to prepare a written statement assessing the costs, 
benefits and other effects of the proposed rule on the national 
economy.
    Although not required by UMRA, DOE has estimated the costs, 
benefits, and other effects of the proposed standards on manufacturers, 
consumers, and the nation, and it has considered regulatory 
alternatives (see section VI.A.). As required by section 325(o) of EPCA 
(42 U.S.C. 6295(o)), today's proposed energy conservation standards for 
residential furnaces and boilers would achieve the maximum improvement 
in energy efficiency that DOE has determined to be both technologically 
feasible and economically justified. DOE may not select a regulatory 
alternative that does not meet this statutory standard.

H. Review Under the Treasury and General Government Appropriations Act 
of 1999

    Section 654 of the Treasury and General Government Appropriations 
Act, 1999 (Pub. L. 105-277) requires Federal agencies to issue a Family 
Policymaking Assessment for any rule that may affect family well-being. 
This rule would not have any impact on the autonomy or integrity of the 
family as an institution. Accordingly, DOE has concluded that it is not 
necessary to prepare a Family Policymaking Assessment.

I. Review Under Executive Order 12630

    The Department has determined, under Executive Order 12630, 
``Governmental Actions and Interference with Constitutionally Protected 
Property Rights,'' 53 FR 8859 (March 18, 1988), that this regulation 
would not result in any takings which might require compensation under 
the Fifth Amendment to the United States Constitution.

J. Review Under the Treasury and General Government Appropriations Act 
of 2001

    Section 515 of the Treasury and General Government Appropriations 
Act, 2001 (44 U.S.C. 3516, note) provides for agencies to review most 
disseminations of information to the public under guidelines 
established by each agency pursuant to general guidelines issued by 
OMB. The OMB's guidelines were published at 67 FR 8452 (February 22, 
2002), and DOE's guidelines were published at 67 FR 62446 (October 7, 
2002). The Department has reviewed this notice under the OMB and DOE 
guidelines and has concluded that it is consistent with applicable 
policies in those guidelines.

K. Review Under Executive Order 13211

    Executive Order 13211, ``Actions Concerning Regulations That 
Significantly Affect Energy Supply, Distribution, or Use,'' 66 FR 28355 
(May 22, 2001), requires Federal agencies to prepare and submit to the 
Office of Information and Regulatory Affairs (OIRA), Office of 
Management and Budget, a Statement of Energy Effects for any proposed 
significant energy action. A ``significant energy action'' is defined 
as any action by an agency that promulgated or is expected to lead to 
promulgation of a final rule, and that: (1) Is a significant regulatory 
action under Executive Order 12866, or any successor order; and (2) is 
likely to have a significant adverse effect on the supply, 
distribution, or use of energy, or (3) is designated by the 
Administrator of OIRA as a significant energy action. For any proposed 
significant energy action, the agency must give a detailed statement of 
any adverse effects on energy supply, distribution, or use should the 
proposal be implemented, and of reasonable alternatives to the action 
and their expected benefits on energy supply, distribution, and use.
    Today's regulatory action would not have a significant adverse 
effect on the supply, distribution, or use of energy and, therefore, is 
not a significant energy action. Accordingly, DOE has not prepared a 
Statement of Energy Effects.

L. Review Under the Information Quality Bulletin for Peer Review

    On December 16, 2004, the Office of Management and Budget (OMB), in 
consultation with the Office of Science and Technology (OSTP), issued 
its Final Information Quality Bulletin for Peer Review (the Bulletin). 
(70 FR 2664, January 14, 2005) The Bulletin establishes that certain 
scientific information shall be peer reviewed by qualified specialists 
before it is disseminated by the Federal government, including 
influential scientific information related to agency regulatory 
actions. The purpose of the bulletin is to enhance the quality and 
credibility of the Government's scientific information.
    The Department's Office of Energy Efficiency and Renewable Energy, 
Building Technologies Program, held formal in-progress peer reviews 
covering the analyses (e.g., screening/engineering analysis, life-cycle 
cost analysis, manufacturing impact analysis, and utility impact 
analysis) used in conducting the energy efficiency standards 
development process on June 28-29, 2005. The in-progress review is a 
rigorous, formal and documented evaluation process using objective 
criteria and qualified and independent reviewers to make a judgment of 
the technical/scientific/business merit, the actual or anticipated 
results, and the productivity and management effectiveness of programs 
and/or projects. The Building Technologies Program staff is preparing a 
peer review report which, upon completion, will be disseminated on the 
Office of Energy Efficiency and Renewable Energy's Web site and 
included in the administrative record for this rulemaking.

M. Review Under Executive Order 12898

    The Department considers environmental justice under Executive 
Order 12898, ``Federal Actions to Address Environmental Justice in 
Minority Populations and Low-Income Populations,'' 59 FR 7629 (February 
16, 1994). The Executive Order requires Federal agencies to assess 
whether a proposed Federal action causes any disproportionately high 
and adverse human health or environmental effects on low-income or 
minority populations. The Department evaluated the socioeconomic 
effects of standards on low-income households.

VII. Public Participation

A. Attendance at Public Meeting

    The time and date of the public meeting are listed in the DATES 
section at the beginning of this notice of proposed rulemaking. The 
public meeting will be held at the U.S. Department of Energy, Forrestal 
Building, Room E-245, 1000 Independence Avenue, SW., Washington, DC 
20585-0121. To attend the public meeting, please notify Ms. Brenda 
Edwards-Jones at (202) 586-2945. Foreign nationals visiting DOE 
Headquarters are subject to advance security screening procedures, 
requiring a 30-day advance notice. Any foreign national wishing to 
participate in the meeting should advise DOE of this fact as soon as 
possible by contacting Ms. Brenda Edwards-Jones to initiate the 
necessary procedures.

[[Page 59258]]

B. Procedure for Submitting Requests To Speak

    Any person who has an interest in this notice, or who is a 
representative of a group or class of persons that has an interest in 
these issues, may request an opportunity to make an oral presentation. 
Such persons may hand-deliver requests to speak, along with a compact 
disc (CD) in WordPerfect, Microsoft Word, PDF, or text (ASCII) file 
format to the address shown in the ADDRESSES section at the beginning 
of this notice of proposed rulemaking between the hours of 9 a.m. and 4 
p.m., Monday through Friday, except Federal holidays. Requests may also 
be sent by mail or e-mail to: <a href="/cdn-cgi/l/email-protection#d193a3b4bfb5b0ff94b5a6b0a3b5a2fc9bbebfb4a291b4b4ffb5beb4ffb6bea7"><span class="__cf_email__" data-cfemail="b8facaddd6dcd996fddccfd9cadccb95f2d7d6ddcbf8dddd96dcd7dd96dfd7ce">[email protected]</span></a>.
    Persons requesting to speak should briefly describe the nature of 
their interest in this rulemaking and provide a telephone number for 
contact. The Department requests persons selected to be heard to submit 
an advance copy of their statements at least two weeks before the 
public meeting. At its discretion, DOE may permit any person who cannot 
supply an advance copy of their statement to participate, if that 
person has made advance alternative arrangements with the Building 
Technologies Program. The request to give an oral presentation should 
ask for such alternative arrangements.

C. Conduct of Public Meeting

    The Department will designate a DOE official to preside at the 
public meeting and may also use a professional facilitator to aid 
discussion. The meeting will not be a judicial or evidentiary-type 
public hearing, but DOE will conduct it in accordance with 5 U.S.C. 553 
and section 336 of EPCA, 42 U.S.C. 6306. A court reporter will be 
present to record the proceedings and prepare a transcript. The 
Department reserves the right to schedule the order of presentations 
and to establish the procedures governing the conduct of the public 
meeting. After the public meeting, interested parties may submit 
further comments on the proceedings as well as on any aspect of the 
rulemaking until the end of the comment period.
    The public meeting will be conducted in an informal, conference 
style. The Department will present summaries of comments received 
before the public meeting, allow time for presentations by 
participants, and encourage all interested parties to share their views 
on issues affecting this rulemaking. Each participant will be allowed 
to make a prepared general statement (within time limits determined by 
DOE), before the discussion of specific topics. The Department will 
permit other participants to comment briefly on any general statements.
    At the end of all prepared statements on a topic, DOE will permit 
participants to clarify their statements briefly and comment on 
statements made by others. Participants should be prepared to answer 
questions by DOE and by other participants concerning these issues. 
Department representatives also may ask questions of participants 
concerning other matters relevant to this rulemaking. The official 
conducting the public meeting will accept additional comments or 
questions from those attending, as time permits. The presiding official 
will announce any further procedural rules or modification of the above 
procedures that may be needed for the proper conduct of the public 
meeting.
    The Department will make the entire record of this proposed 
rulemaking, including the transcript from the public meeting, available 
for inspection at the U.S. Department of Energy, Forrestal Building, 
Room 1J-018 (Resource Room of the Building Technologies Program), 1000 
Independence Avenue, SW., Washington, DC, (202) 586-9127, between 9 
a.m. and 4 p.m., Monday through Friday, except Federal holidays. Any 
person may buy a copy of the transcript from the transcribing reporter.

D. Submission of Comments

    The Department will accept comments, data, and information 
regarding the proposed rule before or after the public meeting, but no 
later than the date provided at the beginning of this notice of 
proposed rulemaking. Please submit comments, data, and information 
electronically. Send them to the following e-mail address: 
<a href="/cdn-cgi/l/email-protection#6c3e091f0508090218050d002a2e22233c3e2f0301010902181f2c090942080309420b031a"><span class="__cf_email__" data-cfemail="dc8eb9afb5b8b9b2a8b5bdb09a9e92938c8e9fb3b1b1b9b2a8af9cb9b9f2b8b3b9f2bbb3aa">[email protected]</span></a>. Submit electronic comments 
in WordPerfect, Microsoft Word, PDF, or text (ASCII) file format and 
avoid the use of special characters or any form of encryption. Comments 
in electronic format should be identified by the docket number EE-RM/
STD-01-350 and/or RIN number 1904-AA78, and wherever possible carry the 
electronic signature of the author. Absent an electronic signature, 
comments submitted electronically must be followed and authenticated by 
submitting the signed original paper document. No telefacsimiles 
(faxes) will be accepted.
    According to 10 CFR 1004.11, any person submitting information that 
he or she believes to be confidential and exempt by law from public 
disclosure should submit two copies: One copy of the document including 
all the information believed to be confidential, and one copy of the 
document with the information believed to be confidential deleted. The 
Department of Energy will make its own determination about the 
confidential status of the information and treat it according to its 
determination.
    Factors of interest to the Department when evaluating requests to 
treat submitted information as confidential include: (1) A description 
of the items; (2) whether and why such items are customarily treated as 
confidential within the industry; (3) whether the information is 
generally known by or available from other sources; (4) whether the 
information has previously been made available to others without 
obligation concerning its confidentiality; (5) an explanation of the 
competitive injury to the submitting person which would result from 
public disclosure; (6) when such information might lose its 
confidential character due to the passage of time; and (7) why 
disclosure of the information would be contrary to the public interest.

E. Issues on Which DOE Seeks Comment

    The Department is particularly interested in receiving comments and 
views of interested parties concerning:
    (1) The number of consumers that may be affected by structural 
changes for installing a condensing furnace and the cost magnitude of 
any structural changes;
    (2) The assumption of constant heat pump and electric resistance 
furnace market shares over the analysis period in order to calculate 
the possible market shift effects of non-weatherized gas furnace energy 
conservation standards on NES and NPV;
    (3) The assumption of constant condensing furnace market share over 
the analysis period in the base case forecast in order to calculate the 
annual unit energy consumption of non-weatherized gas furnaces;
    (4) The feasibility and safety of weatherized gas furnaces at trial 
standard level 2 (83-percent AFUE), due to possible condensation in the 
heat exchanger; and
    (5) Information that would allow the Department to monetize changes 
in warranty costs resulting from the installation of products at near-
condensing levels.

VIII. Approval of the Office of the Secretary

    The Secretary of Energy has approved publication of this proposed 
rule.

[[Page 59259]]

List of Subjects in 10 CFR Part 430

    Administrative practice and procedure, Energy conservation, 
Household appliances.

    Issued in Washington, DC, on September 25, 2006.
Alexander A. Karsner,
Assistant Secretary, Energy Efficiency and Renewable Energy.

    For the reasons set forth in the preamble, Part 430 of Title 10, 
Code of Federal Regulations, is proposed to be amended as set forth 
below.

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

    1. The authority citation for Part 430 continues to read as 
follows:

    Authority: 42 U.S.C. 6291-6309, 28 U.S.C. 2461 note.
    2. Section 430.32(e) of subpart C is amended by adding new 
paragraphs (e)(1) and (2) and revising the table to read as follows:


Sec.  430.32  Energy conservation standards and effective dates.

* * * * *
    (e) * * *
    (1) The annual fuel utilization efficiency of furnaces and boilers 
shall not be less than the following for products manufactured on or 
after the indicated dates.
    (2) The annual fuel utilization efficiency of furnaces and boilers, 
except mobile home oil-fired furnaces, weatherized oil-fired furnaces, 
and gas steam boilers, and oil-fired steam boilers, shall not be less 
than the following for products manufactured on or after the indicated 
dates. Standards for mobile home oil-fired furnaces, weatherized oil-
fired furnaces, gas steam boilers, and oil-fired steam boilers, remain 
as in paragraph (e)(1) of this section.

------------------------------------------------------------------------
                                                   AFUE1      Effective
                 Product class                   (percent)       date
------------------------------------------------------------------------
1. Non-weatherized gas furnaces...............           80   XX/XX/2015
2. Weatherized gas furnaces...................           83   XX/XX/2015
3. Mobile home gas furnaces...................           80   XX/XX/2015
4. Oil-fired furnaces.........................           82   XX/XX/2015
5. Gas hot-water boilers......................           84   XX/XX/2015
6. Oil-fired hot-water boilers................           83   XX/XX/2015
------------------------------------------------------------------------
\1\ Annual Fuel Utilization Efficiency, as determined in section
  430.22(n)(2) of this part.

* * * * *
[FR Doc. 06-8431 Filed 10-5-06; 8:45 am]
BILLING CODE 6450-01-P


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