## DEPARTMENTOFJUSTICE AntitrustDivision


### JOELI.KLEIN AssistantAttorneyGeneral

MainJustice Building 950Pennsylvania Avenue,N.W. Washington,D.C.20530-0001 (202)514-2401/(202)616-2645(f) antitrust@justice.usdoj.gov(interet) http:/www.usdoj.gov(WorldWide Web)



### July 10, 2000

MaryAnne Sullivan, General Counsel Department of Energy Washington, D.C. 20585

Dear General Counsel Sullivan:

I am responding to your May 10, 2000 letter seeking the views of theAttorney General about the potential impact on competition of the proposed energy efficiency standards for water heaters, Docket No. EE-RM-97-900. Your request was submitted pursuant to Section 325(o)(2)(B)(i) of the Energy Policy and ConservationAct, 42 U.S.C. §6291, 6295, which requires the Attorney General tomake adeterminationof the impact of any lessening of competition that is likely to result from the imposition of proposed energy efficiency standards. TheAttorney General's responsibility for responding to requests from other departments about the effect of aprogram on competition has been delegated to theAssistant Attorney General for the Antitrust Division in 28 CFR § 0.40(g).

We have reviewed the proposed standards, the supplementary informationpublished in the Federal Register notice, the Technical Support Document, and information fromwaterheater manufacturers, their suppliers, and other interested parties. The Antitrust Division has concluded that the proposed standards couldhave anadverse effect on competitionbecause waterheater manufacturers mayhave to use an input that will be producedby only one source. We do not anticipate that the proposed standard will affect competition among waterheatermanufacturers.Page 2

Rather, competition to provide heater manufacturers with blowing agents could be adversely affected, with resulting cost increases to consumers.

In the analysis of the proposed standard that the Department of Energy published in the Federal Register, the only design options for affected electric water heaters that meet the DOE's proposed standard require use of HFC-245fa as a blowing agent for insulation. Insulation is an essential part of a water heater, and HFC-245fa is a patented product that has only one supplier. DOE's published analysis further concludes that gas-fired water heaters have design options that would eliminate the need for HFC-245fa, but at significant added costs.

Water heater manufacturers have objected to the proposed standard on the grounds that their need to rely on a sole source will make themvulnerable to supply disruptions and monopoly pricing. Based on the analysis that DOE published, the concerns of water heater manufacturers regarding HFC-245fa, and our interviews with industryparticipants, the Antitrust Division has concluded that competition couldbe adversely affected by the adoption of the proposed standard.' The Department urges the Department of Energy to take into account this impact on competition in determining its final energy efficiency standard for water heaters and to consider altering the standard so that manufacturers may meet the standard for all affectedmodels using blowing agents for insulation other than HFC-245fa without adding significantly to the costs of manufacturing water heaters.

oel I. Klein

' e note that somemanufacturers have suggested that DOE underestimated the performance capabilities of alternative blowing agents. If these suggestions prove correct, water heater manufacturers may in fact be able to comply with the proposed standard for more models, while using water-based blowing agents. We also note that it's possible that manufacturers may in fact be able to engineer design options using water-basedblowing agents with a greater performance capability or lower cost than theynow anticipate.