Friday,

October 6, 2006

Part

Department of

Energy

Office of Energy Efficiency and

Renewable Energy

10 CFR Part 430

Energy Conservation Program for

Consumer Products: Energy Conservation

Standards for Residential Furnaces and

Boilers; Proposed Rule

EE-RM/STD-01-350 COMMENT 104.1
59204 Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules

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.

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: ResidentialFBNOPR

Comments@ee.doe.gov. 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, C. Background

U.S. Department of Energy, Building 1. Current Standards

Technologies Program, Mailstop EE-2J, 2. History of Standards Rulemaking for

NOPR for Residential Furnaces and Residential Furnaces and Boilers Process

Boilers, Docket Number EE-RM/STD- D Improvement D. Negotiated Boiler Standards Agreement

01-350 and/or RIN number 1904-AA78, III. General Discussion

1000 Independence Avenue, SW., A. General Issues

Washington, DC 20585-0121. Please 1. Impact of Furnace and Boiler Standards

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.

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

Docket: For access to the docket to b. Life-Cycle Costs

read background documents or c. Energy Savings

comments received, visit the U.S. d. Lessening of Utility or Performance of

Department of Energy, Forrestal Products

Building, Room 1J-018 (Resource Room e. Impact of Any Lessening of Competition

of the Building Technologies Program), f. Need of the Nation to Conserve Energy

2

1000 Independence Avenue, SW., 2.. Rebuttable

Other

ttaabl ble e Presumption

Washington, DC 20585-0121, (202) 586- IV. Methodology and Discussion of

2945, between 9 a.m. and 4 p.m., Comments

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:

Mohammed.Khan@ee.doe.gov.

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:

Francine.Pinto@hq.doe.gov.

SUPPLEMENTARY INFORMATION:

Table of Contents

1. Summary of the Proposed Rule

II. Introduction

A. Consumer Overview

B. Authority

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

EE-RM/STD-01-350 COMMENT 104.1
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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

1. 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

1. 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 1.1.-PROPOSED STANDARD

LEVELS FOR FURNACES AND BOILERS

Product class

Non-weatherized gas furnaces .....

Weatherized gas furnaces ............

Mobile home gas furnaces ...........

Oil-fired furnaces ..........................

Gas boilers ...................................

Oil-fired boilers .............................

AFUE

(%)

80

83

80

82

84

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-costsavings 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.

59205

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 (CO2) from 2015

to 2038. Additionally, the standard

would result in 13.0 thousand tons (kt)

of nitrogen oxides (NOx) emissions

reductions or generate a similar amount

of NOx emissions allowance credits in

areas where such emissions are subject

to emissions caps. The standard would

also generate 1.5 kt of sulfur dioxide

(SO2) 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

(AE02005). In addition, the Department

performed a sensitivity analysis to

assess the impacts of the standard using

the Annual Energy Outlook 2006

(AE02006) 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 (threepercent 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

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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 11.1. 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 11.1.-PROPOSED STANDARD

LEVELS FOR FURNACES AND BOILERS

Product class

Non-weatherized gas furnaces .........

Weatherized gas furnaces ................

Mobile home gas furnaces ...............

Oil-fired furnaces ..............................

Gas boilers .......................................

Oil-fired boilers .................................

AFUE

(%)

80

83

80

82

84

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 rebuttablepresumption 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)(1))

In determining whether a performancerelated 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

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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." 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))

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

I 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.

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

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.

2Pub. 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.

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

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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appendices that explain in detail the

design and use of the spreadsheets.

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.

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 schedulesetting, the Department received

comments from GAMA and the

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.lbi.gov/EA/EMP/repoifs/56756. pd f).

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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.

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)

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-thanaverage, 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.? (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

75 at p. 1; National Association of Boilers held in Washington, DC, 9/29/2004, which

Regulatory Utility Commissioners is document number 59. 8 in the docket of this

(NARUC), No. 77 at p. 5; ACEEE, No. rulemaking. This particular notation refers to a

59.8 at 36 s and 165; Individual ,

No. comment (1) by the American Council for an

pp. Energy-Efficient Economy (ACEEE), (2) in the

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

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.

6State, 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/Climatenormols/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.

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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.

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

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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 nonweatherized 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 nonweatherized 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

111.1 lists the max tech levels that the

Department determined for this

rulemaking.

TABLE 111.1.-MAX TECH LEVELS CONSIDERED IN FURNACE AND BOILER

RULEMAKING

Product class

Non-weatherized gas furnaces .....

Weatherized gas furnaces ............

Mobile home gas furnaces ...........

Oil-fired furnaces ..........................

Gas boilers ...................................

Oil-fired boilers .............................

AFUE

(%)

96

83

90

85

99

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

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(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 AE02005.8

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.

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

"The Department conducted an energy price

sensitivity analysis using EIA's AE02006. Section

IV.C.4 provides further explanation and details of

the energy price sensitivity analysis.

`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.

10EIA, Price Responsiveness in the AE02003

NEMS Residential and Commercial Buildings

Sector Models (p. 3).

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 simplepayback-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

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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 AE02005

version with minor modifications." 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.

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

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 NEMSBRS.

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discussed in the 1993 ANOPR. In 1987, ANOPR, the Department expanded the weatherized or non-weatherized). Table

the Act set the initial Federal energy product classes to differentiate fuel IV.1 lists the product classes DOE

conservation standard, which covered type, heat transfer medium (i.e., hot initially considered in this rulemaking.

furnaces, boilers, mobile home furnaces, water or steam for boilers), and outdoor

and "small" furnaces. In the 1993 and indoor installation suitability (i.e.,

TABLE IV.1.-PRODUCT CLASSES CONSIDERED IN FURNACE AND BOILER RULEMAKING

Product

Gas furnaces ............................................................................................

Oil-fired furnaces ................................... ...................................................

Mobile home furnaces ..............................................................................

Electric resistance furnaces ... ..................................................................

Hot water boilers ................................... ...................................................

Steam boilers ............................................................ ................................

Characteristics

Non-weatherized and weatherized.

Non-weatherized and weatherized.

Gas and oil-fired.

Electric.

Gas and oil-fired.

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 hotwater oil-fired boilers. The Department's

analysis of these product classes was

similar to its analysis of nonweatherized 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 oilfired 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-percentAFUE 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 efficiencylevel 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 costassessment (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.

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TABLE IV.2.-APPROACH AND DATA USED To DERIVE THE INPUTS TO THE ENGINEERING ANALYSIS

Input

Equipment Cost ..................................................

Markups .... ..........................................................

Installation Cost ..................................................

Maintenance Costs .............................................

Annual Energy Use* ...........................................

Energy Prices* ....................................................

2004 ANOPR analysis

For the most widely used efficiency levels,

used a cost model of manufacturing costs

created by tear-down analysis; for the remaining levels, used design-opinion analysis. Incorporated industry feedback from

GAMA and individual manufacturers to generate manufacturing-cost-versus-efficiency

curves.

Derived markups from 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.

Used a distribution of weighted-average installation costs from the Installation Model.

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.

Used Gas Research Institute data for gas furnaces and boilers, water heater rulemaking

survey results for oil-fired equipment, and

data from the 1993 rulemaking for mobile

home furnaces.

Calculated energy use using the DOE test

procedure.**

AE02003 forecast prices for year 2012 ..........

Proposed rule analysis

59215

Added cost of drip pan for condensing units.

Some units omit a combustion air pipe. Updated underlying metal and cost data to

2004 via Consumer Price Index. Did not

consider design options at 82-percent and

83-percent AFUE for non-weatherized gas

furnaces due to potential safety hazards.

Updated manufacturing-cost-versus-efficiency curves.

No change.

Same method; new assumption that all 81-

percent AFUE gas furnaces use double wall

vents.

Same sources, but accounted for higher

maintenance frequency for modulating design option, and used same costs for condensing and non-condensing equipment.

No change.

AE02005 forecast prices for 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

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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-domesticproduct implicit-price deflator.

The Department created two scenarios

for the material-price sensitivity

analysis: a low-bound and a highbound. 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 (outbound) 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 airconditioning (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

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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 noncondensing equipment falls into

Category I (high temperature, negative

pressure). Most condensing equipment

falls into Category IV (low temperature,

positive pressure), but some noncondensing 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 nonweatherized gas furnaces. The

Department used RS Means, a wellknown 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 nonconventional 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 nonweatherized 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 noncondensing 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-percentAFUE 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 steadystate 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-percentAFUE 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

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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 newhome 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

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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 higherefficiency 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 FuelBurning 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, oilfired 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 noncondensing 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 noncondensing 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 rebuttablepresumption 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 AE02005 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.)

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

12 Although the Department conducted an energy

price sensitivity analysis using ETA's AE02006, it

did not perform a sensitivity analysis to determine

the effect of AE02006 energy prices on the

rebuttable-presumption payback period.

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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.

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TABLE IV.3.-SUMMARY OF INPUTS AND KEY ASSUMPTIONS USED IN THE LCC AND PAYBACK PERIOD ANALYSES

Inputs 2004 ANOPR description

Affecting Installed Costs

Equipment Price .................................................

Installation Cost ..................................................

Derived by multiplying manufacturer cost by

manufacturer, distributor, contractor, and

builder markups and sales tax, as appropriate.

Used a distribution 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 .............................................

Annual Heating Load ..........................................

Annual Energy Use ............................................

Energy Prices* ...................................................

Used GRI data for gas furnaces and boilers,

water heater rulemaking survey results for

oil-fired equipment, and data from the 1993

rulemaking for mobile home furnaces.

Calculated heating and cooling loads using

1997 RECS data. Assumed the furnace

input capacity versus airflow capacity based

on the vintage of the equipment and characteristics of each house.

Used 26 virtual models that captured the

range of common furnace sizes. Energy

calculations used annual heating load for

each housing unit.

Calculated 1998 average and marginal energy

prices for each sample house. Used

AE02003 forecasts to estimate future average and marginal energy prices.

Changes for proposed rule

No change.

No change.

Same sources, supplemented with new information that indicates higher maintenance

frequency for modulating equipment, and

identical maintenance costs for condensing

and non-condensing equipment (See TSD,

Chapter 5).

Calculated heating loads using 2001 RECS

data (cooling loads not considered). Incorporated adjustment to account for change

in new home size and shell performance

between 2001 and 2015 (See TSD, Chapter 7).

Same method, using RECS 2001 data.

Calculated 2001 average and marginal energy

prices for each sample house. Used

AE02005 forecasts to estimate future average and marginal energy prices.

Affecting Present Value of Annual Operating Cost Savings

Lifetime.. ..............................................................

Discount Rate .....................................................

Used 2001.58(9) Appliance Magazine survey

results.

Applied data from 1998 Survey of Consumer

Finances and other sources to estimate a

discount rate for each house. (See ANOPR

TSD, Chapter 8).

Same, except for boilers, for which DOE developed new estimates based on a literature review (See TSD, Chapter 8).

Same sources; used more recent data (See

TSD, Chapter 8).

* The Department used the AE02006 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 reverseengineering 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 nonweatherized 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

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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, oilfired 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

±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 AE02005

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 twostage 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.) 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 ratesa 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 AE02006 did not

change substantially for electricity after

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2015, the effective date of this

rulemaking, the natural gas price

forecasts were significantly different

when compared to the energy price

forecast in AE02005. The natural gas

price forecasts in the AE02005 are

consistently lower by an average of

$1.40 after 2015 than the natural gas

price forecasts in the AE02006. The oil

price forecasts in the AE02005 are

consistently lower by an average of

$4.60 after 2015 than the oil price

forecasts in the AE02006 by an average

of $4.60 after 2015. On average, the

AE02006 forecasts show approximately

a 20-percent increase in energy prices

over those in AE02005. 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 AE02006

scenario. The energy price sensitivity

analysis uses recently published energy

prices, housing starts, and site-to-source

conversion factors based on the

AE02006. 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 AE02006 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

AE02005. 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 newhousing 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 CircularA-4,

Regulatory Analysis, September 17,

2003. (OMB Circular A-4, § 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 airconditioning 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 newhome 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

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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-energyefficient 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 energyexpense 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-paybackperiod 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 AE02005, 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

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.

'-'The Department assumed the same

disbursement of condensing furnaces, 35 percent,

within the sampled housing units for nonweatherized gas furnaces in the energy price

sensitivity analysis, which it based on AEO2006.

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 basecase 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 moreefficient condensing furnaces. Evidence

for this trend can be seen in the GAMA

data, which show a large increase in

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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 noncondensing furnaces is possible or

economically attractive. The

Department corrected replacements in

subsequent years to avoid doublecounting 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 nonweatherized 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.)

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TABLE IV.4.-APPROACH AND DATA USED To DERIVE THE INPUTS TO THE SHIPMENTS ANALYSIS

Input

Shipments* .........................................................

Replacements in kind .........................................

Conversions ........................................................

Installations in new housing ...............................

Gas furnace early replacement ..........................

Conversion from non-central gas heating to

central heating with a gas furnace.

2004 ANOPR description

Calculated total shipments for replacements

based on past shipments and retirement

function , and for new homes based on projection of new housing from AEO2003. The

projected market shares in new homes

were a function of relative heating equipment prices. Based conversions-upon-replacement on historic survey data.

Replacement of worn-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.

Replacement of worn-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.

Installation of 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.

Not applied ...................................... .................

Not applied .......................................................

Changes for proposed rule

Same approach as ANOPR, with updated

shipments data from GAMA. Included shipments for mobile home furnace replacement. Projection of new housing updated to

AEO2005. Market share projection used reestimated parameters. Model used two additional shipment categories to calibrate

with GAMA data.

No change.

No change.

No change.

Early replacement of 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 gas heating 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.

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.)

14 The following States average 5000 or more Massachusetts , Michigan , Minnesota, Missouri, Pennsylvania, Rhode Island , South Dakota, Utah,

HDDs: Alaska, Colorado, Connecticut, Idaho, Montana, Nebraska, New Hampshire, New Jersey, Vermont, Washington, West Virginia, Wisconsin,

Illinois, Indiana, Iowa, Kansas, Maine, New York, North Dakota, Ohio, Oregon, and Wyoming.

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TABLE IV.5.-APPROACH AND DATA USED To DERIVE THE INPUTS TO THE NATIONAL ENERGY SAVINGS AND NET

PRESENT VALUE ANALYSES

Input 2004 ANOPR description Changes for proposed rule

Shipments ...........................................................

Date Products Must Meet Standard ...................

Annual UEC ( Unit Energy Consumption) ...........

Installed Cost per Unit ........................................

Maintenance Cost per Unit ................................

Energy Prices * ..................................................

Energy Site-to-Source Conversion .....................

Discount Rate .....................................................

Present Year ......................................................

Annual Shipments form shipments model .......

2012 .................................................................

Annual weighted-average values were a function of efficiency level. Base case UEC for

non-weatherized gas furnaces accounted

for projected share of condensing furnaces.

Annual weighted-average values were a function of efficiency level (established from the

LCC analysis).

Annual weighted-average values were a function of efficiency level (established from the

LCC analysis).

AE02003 forecasts to 2025 and extrapolation

beyond 2025.

Generated by DOE/EIA's National Energy

Modeling System (includes electric generation, transmission, and distribution losses).

7-percent and 3-percent real ...........................

Future expenses discounted to year 2001 ......

See Table IV.4.

2015.

No change. Projected share of condensing

furnaces reflected recent shipments data.

No change.

No change.

AE02005 forecasts to 2025 and extrapolation

beyond 2025.

No change.

No change.

Future expenses discounted to year 2004.

* For the energy price sensitivity analysis, the Department used AE02006 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 AE02005 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

15 The Department assumed the same

disbursement of condensing furnaces, 35 percent,

within the sampled housing units for nonweatherized gas furnaces in the energy price

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.

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

AE02005 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.

4. Installed Equipment Costs

Average installed equipment costs for

the base-case forecast and each

efficiency level came from the LCC

sensitivity analysis. In other words , the Department

did not update this percentage based on AE02006

for the energy price sensitivity analysis.

15 For the energy price sensitivity analysis, the

Department derived the annual site-to-source

conversion factors using the NEMS AE02006

Reference Case.

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 AE02005. In the

energy price sensitivity analysis, DOE

calculated the NES and NPV using the

recently-published energy price

projections from AE02006. For the

years after 2025, DOE applied the

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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 AE02005

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 AE02005,

including the High and Low Economic

Growth Cases. For the energy price

sensitivity analysis, the Department

used the price forecasts from AE02006,

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 CircularA-4,

Regulatory Analysis, September 17,

2003. (OMB Circular A-4, §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-cashflow 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.

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

"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.eeie.energy.gav/buildings/

applicance_standards/resid ential/

furnace_boil erfmme woik_mtg.h tml.

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

EE-RM/STD-01-350 COMMENT 104.1
59230 Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules

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 nonweatherized 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]

Product class

Non-weatherized gas furnaces ........................................................................................

Weatherized gas furnaces ...............................................................................................

Mobile home gas furnaces ..............................................................................................

Oil-fired furnaces ..............................................................................................................

Gas boilers .......................................................................................................................

Oil-fired boilers ...........................................................................................................:.....

Base

case

2.77

0.196 I

TSL 1 TSL 2 TSL 3 TSL 4

2.77 I 2.77 I 2.76 I 2.74

0.424

0.195 I 0.195 I 0.192 I 0.182 I

0.0879

0.279

0.12

TSL 5

2.67

0.182

As described above, manufacturers understated the decline in shipments at some manufacturers commented that at

stated during interviews that the NES increased efficiency levels. In particular, trial standard level 4 and above, for nonEE-RM/STD-01-350 COMMENT 104.1
Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Proposed Rules 59231

weatherized gas furnaces, they expect

consumers to switch to heat pumps or

repair their existing equipment due to

the increased cost of condensing nonweatherized gas furnaces.

Manufacturers also suggested that there

will be a market shift away from nonweatherized 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 airconditioning 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 moreefficient 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

Non-weatherized gas furnaces ........................................................................................

Weatherized gas furnaces ...............................................................................................

Mobile home gas furnaces ..............................................................................................

Oil-fired furnaces .............................................................................................................

Gas boilers ......................................................................................................................

Oil-fired boilers ................................................................................................................

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

NAECA

2.77

0.196

0.0879

0.279

0.12

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

TSL 1

2.77

0.195

0.088

0.279

0.12

TSL 2 TSL 3

2.77 I 2.76

0.424

0.195 I 0.192

0.088

0.251

0.12

0.088

0.251

0.12

TSL 4

2.33

0.182

0.086

0.251

0.12

TSL 5

1.49

0.182

0.082

0.223

0.096

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.)

EE-RM/STD-01-350 COMMENT 104.1
59232 Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules

TABLE IV.8.-SUMMARY OF MARKUP SCENARIO BY PRODUCT CLASS

Product class

Flat markup

(Markup ap- Two-tier markup

Three-tier

markup

Constant price

markup plied)

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 threetier 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 onetime 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 moreefficient 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 personalcomputer-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, indirectemployment impacts of potential

furnace and boiler efficiency standards

on employment by sector.

EE-RM/STD-01-350 COMMENT 104.1
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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

AE02005 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 moreefficient 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

CO2 and NOx using the NEMS-BT

computer model. The NEMS-BT is

similar to the AE02005 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 AE02005 Reference Case. NEMS-BT

tracks CO2 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

59233

alternative price forecasts for use by

NEMS-BT, corresponding to the High

and Low Economic Growth sensitivity

cases found in AE02005, 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 SO2 because any such

reduction resulting from an efficiency

standard would not affect the overall

level of SO2 emissions in the U.S. The

Clean Air Act Amendments of 1990 set

an SO2 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 SO2 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

SO2 emissions from electricity savings

as long as emission ceilings are binding.

However, although there may not be an

environmental benefit from reduced SO2

emissions from electricity savings, there

still may be an economic benefit.

Electricity savings can decrease the

need to purchase or produce SO2

emissions allowance credits, which

decreases the costs of complying with

regulatory caps on emissions. The

Department reports household SO2

emissions savings, because the SO2

emissions caps do not apply to

household emissions.

Power sector NOx 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 NOx in

28 eastern states and the District of

Columbia. 70 FR 25162 (May 12, 2005).

As with SO2 emissions, a cap on NOx

emissions means that equipment

efficiency standards may result in no

physical effects on these emissions.

When NOx emissions are subject to

emissions caps, the Department's

emissions reduction estimate

corresponds to incremental changes in

emissions allowance credits in cap-andtrade 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 environmentalrelated 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 CO2, NOx,

EE-RM/STD-01-350 COMMENT 104.1
59234 Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules

and SO2 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 CO2, NOx, and SO2, 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

Product classes

Non-weatherized gas furnaces ........................................................................................................

Weatherized gas furnaces ...............................................................................................................

Mobile home gas furnaces ..............................................................................................................

Oil-fired furnaces ..............................................................................................................................

Gas boilers .......................................................................................................................................

Oil-fired boilers .................................................................................................................................

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 nonweatherized 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 sevenpercent discount rate and only

considering non-condensing

technologies.1' (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.

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

15 The Department established the efficiency

levels in each TSL based on the analysis using

AE02005 energy price forecasts.

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

TSL I

80

80

80

80

82

83

Trial standard levels

(AFUE, %)

TSL 2

80

83

80

82

84

83

TSL 3

81

83

81

82

84

83

TSL 4

90

83

90

84

84

84

TSL 5

96

83

90

85

99

95

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 AE02005

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.

EE-RM/STD-01-350 COMMENT 104.1
Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Proposed Rules 59235

The annual energy consumption consumption used in the LCC analysis. longer than the rebuttable payback

calculated from the test procedure is Therefore, the mean payback periods periods, which use the test procedure

greater than the annual energy calculated for the LCC analysis are energy consumption results.

TABLE V.2.-SUMMARY OF LCC AND PAYBACK PERIOD RESULTS FOR NON-WEATHERIZED GAS FURNACES

[AE02005 energy price forecast]

LCC Payback

Efficiency period

Trial level LCC LCC Net cost No impact Net benefit standard level (AFUE) savings

(%) years

2004$ 2004$ % % %

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

[AE02005 energy price forecast]

LCC Payback

Efficiency period

Trial

standard level

level

(AFUE)

LCC LCC

savings Net cost No impact Net benefits

(%) 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

[AE02005 energy price forecast]

LCC Payback

Efficiency period

Trial

standard level

level

(AFUE) LCC LCC

savings Net cost No impact Net benefit

(%) years

2004$ 2004$ % % %

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

[AE02005 energy price forecast]

LCC Payback

Efficiency period

Trial level LCC LCC Net cost No impact Net benefit standard level (AFUE) savings

(%) years

2004$ 2004$ % % %

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

EE-RM/STD-01-350 COMMENT 104.1
59236 Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules

TABLE V.6.-SUMMARY OF LCC AND PAYBACK PERIOD RESULTS FOR GAS BOILERS

[AE02005 energy price forecast]

LCC Payback

Efficiency period

Trial level LCC LCC Net cost No impact Net benefit standard level (AFUE) savings

(%) years

2004$ 2004$ % % %

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

[AE02005 energy price forecast]

LCC Payback

Efficiency period

Trial level LCC LCC Net cost No impact Net benefit standard level (AFUE) savings

(%) years

2004$ 2004$ % % %

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 and a net benefit (i.e., positive savings) savings represent an increase in LCC.)

show LCC results for the energy price at each trial standard level for each of The tables also show the mean payback

sensitivity analysis. They list the mean the product classes, based on energy period at each trial standard level.

LCC savings and the percent of price forecast from AE02006. (Values in

households with a net cost, no impact, parentheses in the columns for LCC

TABLE V.8.-SUMMARY OF LCC AND PAYBACK PERIOD RESULTS FOR NON-WEATHERIZED GAS FURNACES IN THE

ENERGY PRICE SENSITIVITY ANALYSIS

[AE02006 energy price forecast]

LCC Payback

Efficiency period

Trial level LCC LCC Net cost No impact Net benefit standard level (AFUE) savings

/o years

2004$ 2004$ % % %

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

[AE02006 energy price forecast]

LCC Payback

Efficiency period

Trial level LCC LCC Net cost No impact Net benefit

standard level (AFUE) savings

ears

(%)

y

2004$ 2004$ % % %

Baseline Unit ............................................ 78 8,898 .................... .................... .................... .................... ....................

1 ............................................................... 80 8,809 2 0 98 2 1.4

9 --_____ .................... 83 8.698 86 5 0 95 4.0

EE-RM/STD-01-350 COMMENT 104.1
Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules 59237

TABLE V.9.-SUMMARY OF LCC AND PAYBACK PERIOD RESULTS FOR WEATHERIZED GAS FURNACES IN THE ENERGY

PRICE SENSITIVITY ANALYSIS-Continued

[AE02006 energy price forecast]

LCC Payback

Efficiency period

Trial level LCC LCC Net cost No impact Net benefit

standard level (AFUE) savings

(%) ears

2004$ 2004$ % % %

y

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

[AE02006 energy price forecast]

LCC Payback

Efficiency period

Trial standard level level

(A FUE) LCC savings Net cost No impact Net benefit

(%) 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.1 1.-SUMMARY OF LCC AND PAYBACK PERIOD RESULTS FOR OIL-FIRED FURNACES IN THE ENERGY PRICE

SENSITIVITY ANALYSIS

[AEO2006 energy price forecast]

LCC Payback

Efficiency period

Trial standard level (Alevel

FUE) LCC savC gs Net cost No impact Net benefit

(%) 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

Efficiency period

Trial standard level (Alevel

FUE) LCC savings Net cost No impact Net benefit

(%) years

2004$ 2004$ % % %

Baseline Unit ............................................ 80 17,772 .................... .................... .................... .................... ....................

I ............................................................... 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

EE-RM/STD-01-350 COMMENT 104.1
59238 Federal Register /Vol. 71, No. 194/Friday, October 6, 2006/Proposed Rules

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 level LCC LCC Net cost No impact Net benefit

standard level (AFUE) savings

/a years

2004$ 2004$ % % %

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 nonweatherized 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 AE02005 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

Efficiency period

Trial standard level (AFUE)

LCC savings Net cost No impact Net benefit

ears

(%)

y

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

E c ffi iency period

Trial standard level (AFUE)

%

LCC saVCngs Net cost No impact Net benefit

ears

( ) 2004$ 2004$ % % %

Y

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 energy price sensitivity analysis. standards for non-weatherized gas

the LCC subgroup results by region for The tables indicate the impact of the furnaces on Southern and Northern

EE-RM/STD-01-350 COMMENT 104.1
Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules

households, based on the AE02006

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.)

59239

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

[AE02006 energy price forecast]

LCC Payback

Efficiency period

Trial standard level (A

level

FUE) LCC savmgs

Net cost No impact Net benefit

ears (%)

2004$ 2004$ % % %

y

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

[AE02006 energy price forecast]

LCC Payback

Efficiency period

Trial standard level (A

level

FUE)

LCC savings Net cost No impact Net benefit

(%) years

2004$ 2004$ % % %

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

Product class

Non-weatherized Gas Furnaces ......................................................................................................

Weatherized Gas Furnaces .............................................................................................................

Mobile Home Gas Furnaces ............................................................................................................

Oil-fired Furnaces ............................................................................................................................

Gas Boilers ......................................................................................................................................

Oil-fired Boilers ................................................................................................................................

Payback period (years)

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

0.9 0.9 na na na

0.8 na na na na

2.5 2.5 na na na

0.1 0.2 0.2 na na

na na na na na

0.4 0.4 0.4 na na

EE-RM/STD-01-350 COMMENT 104.1
59240 Federal Register /Vol. 71, No. 194/Friday, October 6, 2006/Proposed Rules

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 casethus, the scenario assumes a constant

TABLE V.19. CHANGES IN INDUSTRY NET PRESENT VALUE, NON-WEATHERIZED GAS FURNACES

NES shipments

TSL

Base case ....................................................................................................................

2 ...................................................................................................................................

3 ...................................................................................................................................

4 ...................................................................................................................................

5 ...................................................................................................................................

Flat markup Two-tier mark p

Change in INPV Change in INPV

INPV from base INPV from base

$MM $MM

$MM %

change $MM %

change

1,044

1,044

1,044

974

1,056

1,258

Manufacturers' shipments

TSL

Base case ....................................................................................................................

2 ...................................................................................................................................

3 ...................................................................................................................................

4 ...................................................................................................................................

5 ...................................................................................................................................

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

INPV

$MM

1,068

1,068

1,068

998

980

807

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.

1,010

0 1,010 0 0

0 0 1,010 0 0

(69) -7 938 (72) -7

13 1 801 (209) -21

214 21 824 (186) -18

Flat markup

Change in INPV

from base

$MM %

change

0

0

(71)

(88)

(261)

0

0

-7

-8

- 24

Two-tier mark

INPV

$MM

Change i

from b

$MM

1,073

1,073

1,073

1,000

777

575

0

0

(73)

(295)

(498)

P

1 INPV

ase

%

change

0

0

-7

- 28

- 46

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

EE-RM/STD-01-350 COMMENT 104.1
Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules

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-percentAFUE), 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

59241

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 flatmarkup and the constant-price

scenario-both using NES shipments

forecasts. The flat-markup and NESshipments 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

TSL

Base case ........................................................................................................................

1 .......................................................................................................................................

2 .......................................................................................................................................

3 .......................................................................................................................................

4 .......................................................................................................................................

5 .......................................................................................................................................

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

Flat markup Constant price m arkup

INPV

Change

from

i n INPV

b ase INPV

Change

from

n INPV

base

$MM

$MM change

$MM

$MM %

change

246

220

199

199

199

199

and capital conversion expenses of $28

million. Negative cash flows peak at

approximately $5 million from a basecase 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

(27)

(47)

(47)

(47)

(47)

-11

-19

-19

-19

-19

246

215

167

167

167

167

(31)

(79)

(79)

(79)

(79)

-13

- 32

- 32

- 32

- 32

product-conversion and capitalconversion 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

EE-RM/STD-01-350 COMMENT 104.1
59242 Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules

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

TSL

Base case ........................................................................................................................

1 ......................................................................................................................................

2 .......................................................................................................................................

3 .......................................................................................................................................

4 .......................................................................................................................................

5 .......................................................................................................................................

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

INPV

$MM

21

21

21

18

12

12

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 flatmarkup and NES-shipments scenario,

and the constant-price and NESshipments 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 NESshipments 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

Change in INPV

from base

$MM %

change

0

0

(3)

(9)

(9)

0

0

-14

- 42

- 42

Manufacturers' shi

INPV

$MM

Change

from

$MM

21

21

21

18

11

11

0

0

(3)

(10)

(10)

pments

n INPV

)ase

change

0

0

-14

- 49

- 49

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

TSL

Base case ........................................................................................................................

1 .......................................................................................................................................

2 .......................................................................................................................................

3 .......................................................................................................................................

4 .......................................................................................................................................

5 .......................................................................................................................................

Flat markup Constant price m arkup

Change in INPV Change n INPV

INPV from base INPV from )ase

$MM $MM

$MM %

change $MM %change

36 36

34 (2) -5 34 (2) -5

33 (3) -8 31 (4) -12

33 (3) -8 31 (4) -12

29 (7) -19 26 (10) - 27

28 (8) -21 23 (12) - 35

At trial standard level 1 (80-percent from approximately $2 million to $1 $3 million and capital requirements to

AFUE), DOE estimates the INPV impacts million in 2014. The Department total $1 million.

to be - 5 percent for oil-fired furnaces. estimates product-conversion costs to be At 82-percent AFUE, trial standard

Cash flow is cut approximately in half, levels 2 and 3, DOE estimates the INPV

EE-RM/STD-01-350 COMMENT 104.1
Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules 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 productconversion 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 threetier markup, both using manufacturersupplied 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

TSL

Base case ........................................................................................................................

1 .......................................................................................................................................

2 .......................................................................................................................................

3 .......................................................................................................................................

4 .......................................................................................................................................

5 .......................................................................................................................................

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 capitalconversion 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 standingpilot versions of these products would

be eliminated.

INPV

$MM

167

166

155

155

155

140

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 capitalconversion 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.

Change in INPV

from base

$MM %

change

(1)

(12)

(12)

(12)

(27)

-1

-7

-7

-7

-16

Three-tier mark

INPV

$MM

Change

from

$MM

167

163

148

148

148

83

(4)

(20)

(20)

(20)

(84)

up

in INPV

base

change

-3

-12

-12

-12

- 50

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

EE-RM/STD-01-350 COMMENT 104.1
59244 Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules

information on the range of typical associated with each level for oil-fired

AFUE levels for each of the three tiers boilers. Table V.24 shows the changes in

and the change in profitability 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

TSL

Base case ........................................................................................................................

1 .......................................................................................................................................

2 .......................................................................................................................................

3 .......................................................................................................................................

4 .......................................................................................................................................

5 .......................................................................................................................................

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 productconversion 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 productconversion 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

INPV

$MM

84

82

82

82

82

69

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 outsource heat exchangers to European

countries.

c. Impacts on Subgroups of

Manufacturers. Using average cost

assumptions to develop an industrycash-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

Flat markup

Change in INPV

from base

$MM change

(3)

(3)

(3)

(2)

(16)

-3

-3

-3

-2.5

-19

Three-tier markup

INPV

$MM

Change

ba

$MM

n INPV

;e

change

84

73

73

73

72

46

(11)

(11)

(11)

(12)

(38)

-13

-13

-13

-14

- 45

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

EE-RM/STD-01-350 COMMENT 104.1
Federal Register /Vol. 71, No. 194 /Friday, October 6 , 2006 / Proposed Rules

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.

59245

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 AE02005 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)

[AE02005 energy price forecast]

Trial standard level

National energy savings

(quads)

Primary 3%

discounted

7%

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 AE02006 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)

[AE02006 energy price forecast]

Trial standard lev l

National energy sav

(quads)

ngs

e

Primary 3% 7%

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

EE-RM/STD-01-350 COMMENT 104.1
59246 Federal Register /Vol. 71, No. 194 /Friday, October 6, 2006 /Proposed Rules

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 AE02005. 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 AE02006.

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)

[AE02005 energy price forecast]

Trial standard

level

Primary energy savings

(quads)

Northern

region

1 ........................

2 ........................

3 ........................

4 ........................

5 ........................

0.01

0.01

0.2

1.72

3.16

Southern

region

0.004

0.004

0.12

1.04

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)

[AE02006 energy price forecast]

Trial standard

Primary energy savings

(quads)

level Northern

region

Southern

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 pretax basis for the last 30 years.

Table V.29 shows the forecasted NPV

at each of the trial standard levels, based

on the AE02005 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

AE02006. Table V.30 exhibits the

forecasted NPV at each trial standard

level, based on the AE02006 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)

[AE02005 energy price forecast]

Trial standard

level

NPV (billio

7%

discount

rate

n 2004$)

3%

discount

rate

1 ........................

2 ........................

3 ........................

4 ........................

5 ........................

0.33

0.65

0.53

0.06

-17.53

1.24

2.48

3.00

8.37

-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)

[AE02006 energy price forecast]

Trial standard

level

NPV (billio

7%

discount

rate

n 2004$)

3%

discount

rate

1 ........................

2 ........................

3 ........................

4 ........................

5 ........................

0.43

0.82

0.90

1.83

-13.49

1.53

3.02

4.12

13.64

-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 AE02005

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 AE02006 energy price forecasts.

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3%

discount

rate

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)

[AE02005 energy price forecast]

NPV (billion 2004$)

Trial standard level

1 .......................................................................................................................................

2 .......................................................................................................................................

3 .......................................................................................................................................

4 .......................................................................................................................................

5 .......................................................................................................................................

Northern region

7%

discount

rate

0.02

0.02

0.11

0.79

-6.85

0.07

0.07

0.72

5.99

-7.77

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)

[AE02006 energy price forecast]

NPV (billion 2004$)

Trial standard level

Northern region

7%

discount

rate

1 .......................................................................................................................................

2 .......................................................................................................................................

3 .......................................................................................................................................

4 .......................................................................................................................................

5 .......................................................................................................................................

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

0.02

0.02

0.18

1.41

-5.07

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

3%

discount

rate

0.07

0.07

0.92

7.70

-3.00

Southern

7%

discount

rate

0.01

0.01

-0.1

-0.82

-8.29

Southern

7%

discount

rate

0.01

0.01

-0.01

-0.08

-7.74

59247

region

3%

discount

rate

0.03

0.03

0.11

1.10

-13.90

region

3%

discount

rate

0.04

0.04

0.38

3.51

-11.8

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

1.3

TSL2

2.9

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))

TSL3

9.7

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.

TSL4

18

TSL5

20.1

(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.

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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 CO2,

SO2, and NOx 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 C02, NOx, and SO2

emissions reductions range up to 341.0

Mt, 203.4 kt, and 69.0 t, respectively.

The Department reports annual CO2,

SO2, and NOx 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 SO2 emissions reductions at the

household level instead of reporting

these emissions from power plants. The

reported NOx emissions reductions do

include the impacts of each trial

standard level at power plants. If NOx

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 CO2,

NOR, and SO2. 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

AE02005 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 AE02006 energy

price forecast, are provided in sections

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V.B.1.a., V.B.1.b., V.B.3.a., and V.B.3.b., burdens and benefits that affect the ability to replace a furnace or boiler

above. economic justification. This includes with a new, more efficient product,

In addition to the quantitative results, the potential impacts on safety, without having to make any significant

the Department also considers other reliability and consumers' utility (i.e., modifications to the existing dwelling).

TABLE V.36.-SUMMARY OF RESULTS BASED UPON THE AE02005 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***:

C02 (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 AE02005 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 C02,19 203 kt of NOx,20

and 69.0 kt of SO2.21 Total generating

capacity in 2030 increases by 4.0

gigawatts (GW) under trial standard

level 5, due to projected switching from

'a For all of the TSLs, CO2 emissions impacts

include physical reductions at power plants and

households.

20 For all of the TSLs, 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.

21 For all of the TSLs, SO2 emissions impacts

include physical reductions at households only.

gas furnaces to electric heating

equipment.

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 lifecycle net cost. The Department's lifecycle 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

22Non-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.

more than $500 and a small (fourpercent), 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.

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

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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 nonweatherized 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 multibillion dollar negative net economic

cost to the Nation, the economic burden

on consumers, and the large capitalconversion 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 gasfired 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 CO2, 113 kt of NOx, and

12.7 kt of SO2. 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 lifecycle costs for oil-fired furnaces and a

decrease in life-cycle costs for the other

five product classes. Purchasers of nonweatherized 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 nonweatherized gas furnaces would

experience a net gain.

The Department also examined the

regional impacts to consumers of nonweatherized gas furnaces in Northern

and Southern climates separately.

Because TSL 4 requires the use of

condensing technology for nonweatherized 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 nonweatherized 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 nonweatherized 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 nonweatherized 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 nonweatherized 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 nonweatherized 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 nonweatherized 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 heatexchanger 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 nonweatherized 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,

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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

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 C02,

24.5 kt of NOx, and 2.7 kt of SO2. 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 lifecycle 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-

23 The Department further examined its decision

to reject TSL 4 in the energy price sensitivity

analysis using AE02006. 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.

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 CO2,

13.0 kt of NOx, and 1.5 kt of SO2. 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 nonweatherized 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.

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TABLE V.37.-SUMMARY OF RESULTS BASED ON THE AE02006 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 AE02005 Reference Case.

In addition to the Department's NOPR

analyses based on the AE02005 energy

price forecast, the Department analyzed

the impact of the AE02006 energy price

forecasts on the LCC and PBP analysis

and the national impact analysis. Table

V.37 presents a summary of the results

using AE02006. As explained in section

IV.C.4., AE02006 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 AE02006 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 AE02006 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 AE02005). 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 AE02005

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 nonweatherized gas furnaces in the

Northern and Southern climate zones

separately for the energy price

sensitivity analysis using the AE02006

energy price forecast. Just as the

AE02005 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 nonweatherized 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 AE02005 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 AE02005

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 AE02005 and AE02006 analysis

results showed. Even though DOE

forecasts the price of energy to increase

significantly in the energy price

sensitivity analysis using AE02006,

many consumers in the South will still

experience an increase in life-cycle-cost.

Consequently, the Department's lifecycle 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

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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 AE02005 analysis, the Department

estimates, using the AE02006 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,

AE02006, 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 AE02006

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:

• No new regulatory action;

• Consumer rebates;

• Consumer tax credits;

• Manufacturer tax credits;

• Voluntary energy-efficiency targets;

• Bulk government purchases;

• Early replacement incentives; and

• 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

Policy alternatives

No new regulatory action .............................................................................................. .............................

Consumer Rebates .... ................................................................................................................................

Consumer Tax Credits ...............................................................................................................................

Manufacturer Tax Credits ..........................................................................................................................

Voluntary Energy-Efficiency Targets .........................................................................................................

Early Replacement incentives ........................................ ...........................................................................

Bulk Government Purchases .....................................................................................................................

Regional Performance Standards for NWGF***:

Cold States (?5000 HDD) (TSL 4) .....................................................................................................

Warm States (<5000 HDD) (TSL 2) ...................................................................................................

Regional Performance Standards for NWGF***:

Cold States (?6000 HDD) (TSL 4) .....................................................................................................

Warm States (<6000 HDD) (TSL 2) ...................................................................................................

Energy

savings*

(quads)

0

0.078

0.047

0.023

0.046

0.025

0.005

1.72

0.004

0.2

0.01

Net present value**

(billion $)

7% 3%

discount discount

rate rate

0 0

0.086 0.37

0.052 0.22

0.026 0.11

0.074 0.3

0.059 0.16

0.006 0.026

0.79 5.99

0.01 0.03

0.04 0.59

0.02 0.07

* 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 rebates or tax credits) are not included benefits of the payments. The following

in Table VI.1 refer to the NPV for in the costs for the NPV since, on paragraphs discuss each of the policy

residential consumers. The costs to the balance, consumers are both paying for alternatives listed in Table VI.1. (See

government of each policy (such as (through taxes) and receiving the TSD, RIA.)

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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 moreefficient 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 energyefficiency 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 shipmentweighted 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 energyefficiency 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

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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 casecold 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.

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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

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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.

59257

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.

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59258 Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Proposed Rules

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 handdeliver 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: Brenda.Edwardsjones@ee.doe.gov.

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:

ResidentialFBNOPR

Comments@ee.doe.gov. 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 EERM/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 nonweatherized 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 nearcondensing levels.

VIII. Approval of the Office of the

Secretary

The Secretary of Energy has approved

publication of this proposed rule.

EE-RM/STD-01-350 COMMENT 104.1
Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Proposed Rules

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:

§ 430.32 Energy conservation standards

and effective dates.

* *

59259

(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.

Product class AFUEi

(percent)

Effective

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

EE-RM/STD-01-350 COMMENT 104.1