59590 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

DEPARTMENT OF ENERGY

Office of Energy Efficiency and

Renewable Energy

10 CFR Part 430

[Docket Number EE–RM–97–500]

RIN: 1904–AA77

Energy Conservation Program for

Consumer Products: Central Air

Conditioners and Heat Pumps Energy

Conservation Standards

AGENCY: Office of Energy Efficiency and

Renewable Energy, Department of

Energy.

ACTION: Notice of proposed rulemaking

and public hearing.

SUMMARY: Pursuant to the Energy Policy

and Conservation Act, as amended, the

Department of Energy (DOE,

Department, or we) is proposing to

amend the energy conservation

standards for residential central air

conditioners and heat pumps to require

them to be more energy efficient, and is

announcing a public hearing on the

proposal.

DATES: Comments must be received on

or before December 4, 2000. DOE is

requesting a signed original, a computer

diskette (WordPerfect 8) and 10 copies

of the written comments. The

Department will also accept e-mailed

comments, but you must send a signed

original. Oral views, data, and

arguments may be presented at the

public hearing (workshop) in

Washington, DC beginning at 9 a.m. on

November 16, 2000.

The Department must receive requests

to speak at the public hearing and a

copy of your statements no later than 4

p.m., November 1, 2000, and we request

that you provide a computer diskette

(WordPerfect 8) of each statement at that

time.

ADDRESSES: Please submit written

comments, oral statements, and requests

to speak at the public hearing to: Brenda

Edwards-Jones, U.S. Department of

Energy, Office of Energy Efficiency and

Renewable Energy, Energy Conservation

Program for Consumer Products: Central

Air Conditioners and Heat Pumps,

Docket No. EE-RM/STD–97–500, 1000

Independence Avenue, SW.,

Washington, DC 20585–0121. You may

send emails to: brenda.edwardsjones@ee.doe.gov.

The hearing will begin at 9 a.m., in

Room 1E–245 at the U.S. Department of

Energy, Forrestal Building, 1000

Independence Avenue, SW.,

Washington DC. You can find more

information concerning public

participation in this rulemaking

proceeding in Section VIII, ‘‘Public

Comment Procedures,’’ of this notice of

proposed rulemaking.

You may read copies of the public

comments, the Technical Support

Document for Energy Efficiency

Standards for Consumer Products:

Central Air Conditioners and Heat

Pumps (TSD), the transcript of the

public hearing, and previous workshop

transcripts in this proceeding at the

DOE Freedom of Information (FOI)

Reading Room, U.S. Department of

Energy, Forrestal Building, Room 1E–

190, 1000 Independence Avenue, SW.,

Washington, DC 20585, (202–586-3142,

between the hours of 9 a.m. and 4 p.m.,

Monday through Friday, except Federal

holidays. You may obtain copies of the

TSD and analysis spreadsheets from the

Office of Energy Efficiency and

Renewable Energy’s (EERE) web site at:

http://www.eren.doe.gov/buildings/

codes_standards/applbrf/

central_air_conditioner.html.

FOR FURTHER INFORMATION CONTACT: Dr.

Michael E. McCabe, U.S. Department of

Energy, Office of Energy Efficiency and

Renewable Energy, Forrestal Building,

EE–41, 1000 Independence Avenue,

SW., Washington, DC 20585–0121, (202)

586–0854, e-mail:

michael.e.mccabe@ee.doe.gov, or

Edward Levy, Esq., U.S. Department of

Energy, Office of General Counsel,

Forrestal Building, GC–72, 1000

Independence Avenue, SW.,

Washington, DC 20585, (202) 586–9507,

e-mail: edward.levy@hq.doe.gov.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of Proposed Rule

II. Introduction

A. Authority

B. Background

1. Current Standards

2. History of Previous Rulemakings

3. Process Improvement

III. General Discussion

A. Test Procedures

B. Technological Feasibility

1. General

2. Maximum Technologically Feasible

Levels

C. Energy Savings

1. Determination of Savings

2. Significance of Savings

D. Rebuttable Presumption

E. Economic Justification

1. Economic Impact on Manufacturers and

Consumers

2. Life-Cycle Costs

3. Energy Savings

4. Lessening, If Any, of Utility or

Performance of Products

5. Impact of Any Lessening of Competition

6. Need of The Nation to Conserve Energy

7. Other Factors

IV. Methodology

A. Life-Cycle-Cost and Payback Period

Analysis

B. National Energy Savings and Net Present

Value Analysis

C. Manufacturer Impact Analysis

1. Phase 1, Industry Profile

2. Phase 2, Industry Cash Flow Analysis

3. Phase 3, Sub-Group Impact Analysis

4. GRIM Analysis

D. NEMS Environmental Analysis

V. Discussion of Comments

A. Engineering Cost Data

1. Reverse Engineering Cost Estimates

2. Productivity Efficiency Improvements

3. Emerging Technologies

4. HFC-Based Engineering Analysis

B. Life-Cycle-Cost Parameters

1. Extended Warranty and Service Costs

2. Residential Energy Consumption Survey

(RECS)

3. Equipment Lifetime

4. Commercial Applications

5. Marginal Electricity Prices

6. Forecast of Future Electricity Prices

7. Discount Rates

8. Percentage of Households with LCC

Savings

9. Regional Analysis

10. Rebuttable Payback

11. Sensitivity Analyses

C. Shipments Analysis

1. Forecasted Housing Shifts

2. Elasticities

3. Equipment Efficiency

4. Fuel Switching

D. National Energy Savings Analysis

1. Uncertainty in NES Results

2. Site-to-Source Conversion

E. Consumer Sub-Group Analysis, Low

Income Renters

F. Utility and Environmental Analysis

1. Peak Power Impacts, Reliability

2. Quantitative Assessment of Impacts on

Peak Demand

3. Qualitative Assessment of Air

Conditioning Standards Impact on Power

System Reliability

4. Competitive Residential Market

G. Manufacturer Impact Analysis—Low

Volume Manufacturers

H. Markups

I. EER-Based Efficiency Standard

1. Current Relationship between SEER and

EER

2. Options for Possible EER Standards

J. Niche Products

1. Ductless Split Air Conditioners and Heat

Pumps

2. Small Duct High Velocity Air

Conditioners

3. Vertical Packaged, Wall Mounted

4. Through-the-Wall Condensers

5. Non-Weatherized Single-Package Unit,

Mounted Entirely within the Structure

6. Request for Comments Regarding Niche

Product Standards

K. Thermostatic Expansion Valves

L. Other Comments

1. Latent Heat Removal

2. 3-Phase Equipment

3. SEER-HSPF Relationship

4. Max Tech

VI. Analytical Results

A. Trial Standard Levels

B. Significance of Energy Savings

C. Payback Period

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59591

1SEER, Seasonal Energy Efficiency Ratio, is the

Department’s measure of energy efficiency for the

seasonal cooling performance of central air

conditioners and heat pumps.

2HSPF, Heating Seasonal Performance Factor, is

the Department’s measure of energy efficiency for

the seasonal heating performance of heat pumps.

3Quad, means quadrillion (1015 Btus).

4EER, Energy Efficiency Ratio, is a steady-state

measure of energy efficiency which measures

efficiency at a prescribed outdoor temperature

(95°F), and is one of the test conditions in the

Department’s test procedure used to develop the

SEER.

5Part B of Title III of the Energy Policy and

Conservation Act, as amended by the National

Energy Conservation Policy Act, the National

Appliance Energy Conservation Act, the National

Appliance Energy Conservation Amendments of

1988, and the Energy Policy Act of 1992, is referred

to in this notice as the ‘‘Act,’’ or ‘‘EPCA.’’ Part B

of Title III is codified at 42 U.S.C. 6291 et seq. Part

B of Title III of the Energy Policy and Conservation

Act, as amended by the National Energy

Conservation Policy Act only, is referred to in this

notice as the National Energy Conservation Policy

Act.

D. Economic Justification

1. Economic Impact on Manufacturers

2. Life-Cycle Cost

3. Net Present Value and Net National

Employment

4. Impact on Utility or Performance of

Products

5. Impact of Any Lessening of Competition

6. Need of the Nation to Save Energy

7. Other Factors

E. Conclusion

VII. Procedural Issues and Regulatory Review

A. Review Under the National

Environmental Policy Act

B. Review Under Executive Order 12866,

‘‘Regulatory Planning and Review’

C. Review Under the Regulatory Flexibility

Act

D. Review Under the Paperwork Reduction

Act

E. Review Under Executive Order 12988,

‘‘Civil Justice Reform’’

F. ‘‘Takings’’ Assessment Review

G. Review Under Executive Order 13132

H. Review Under the Unfunded Mandates

Reform Act

I. Review Under the Treasury and General

Government Appropriations Act of 1999

J. Review Under the Plain Language

Directives

VIII. Public Comment

A. Written Comment Procedures

B. Public Workshop/Hearing

1. Procedure for Submitting Requests to

Speak

2. Conduct of Hearing

C. Issues for Which DOE Seeks Comment

I. Summary of Proposed Rule

The Department is proposing to raise

the energy efficiency standards for

residential air conditioners and central

air conditioning heat pumps (heat

pumps) to 12 SEER1 for air conditioners

and to 13 SEER/7.7 HSPF 2 for heat

pumps. The proposed standards would

apply to all covered products offered for

sale in the United States, effective on

January 1, 2006. The proposed standard

for split system air conditioners, the

most common type of residential air

conditioning equipment represents a

20% improvement in energy efficiency.

For split system heat pumps, the new

standards would represent a 30%

improvement in cooling efficiency and

a 13% improvement in heating

efficiency. The proposed standards

would also increase the efficiency of

packaged air conditioners and packaged

heat pumps by 24% and 17%,

respectively. Finally, the Department is

proposing provisions for some special

products to ensure that more efficient

versions remain available for niche

applications.

The proposed standards would save a

significant amount of energy and, as a

result of less electricity being produced,

result in a cleaner environment. In the

25-year period after the new standards

become effective, the nation would save

over 3.4 Quads 3 of primary energy,

equivalent to all the energy consumed

by nearly 18 million American

households in a single year. These

energy savings would also significantly

reduce the emissions of air pollutants

and greenhouse gases associated with

electricity production, by avoiding the

emission of 56 million tons (Mt) of

Carbon and 52 thousand tons (kt)

nitrogen oxides (NOX). Also, the

standards are expected to eliminate the

need for the construction of

approximately 31 (4 coal-fired and 27

natural gas-fired) new large, 400

megaWatt (MW), power plants in 2020.

In addition to the increase proposed

in SEER and HSPF, we are proposing

and requesting public comments on a

proposal to adopt a standard for steadystate cooling efficiency, EER.4 A

requirement on EER would ensure more

efficient operation at high outdoor

temperature, during periods when

electricity use by air conditioners is at

its peak. This would help to further

alleviate the need for new electric

power plants and reduce the demands

placed on the electric transmission and

distribution systems during periods of

high usage, thereby, improving system

reliability.

Finally, consumers would see benefits

from the proposed standards. For

example, while the initial cost of a

typical central air conditioner would

increase by $122 to $153 or about 10–

12%, the higher efficiency equipment

would save enough over its life to pay

for the increase in the price of the

equipment plus an extra $45. Many

consumers, especially air conditioner

owners in warmer parts of the country

and heat pump owners, would save

even more.

While the higher efficiency units are

widely available today and promoted

through the Department of Energy and

the Environmental Protection Agency

(EPA) Energy Star  program, as well as

utility rebate programs, manufacturers

would be redesigning their product line

to meet the efficiency standards. At the

same time they would be redesigning

their products to respond to the phaseout hydrochloroflourocarbons (HCFC’s)

refrigerants required by EPA. By making

both changes at once, i.e., efficiency and

HCFC refrigerants, manufacturers will

be able to plan and apply their resources

in a cost-effective manner, resulting in

lower burdens and costs.

II. Introduction

A. Authority

Part B of Title III of the Energy Policy

and Conservation Act (EPCA), Pub. L.

94–163, as amended by the National

Energy Conservation Policy Act of 1978,

Pub. L. 95–619, the National Appliance

Energy Conservation Act, Pub. L. 100–

12, the National Appliance Energy

Conservation Amendments of 1988,

Pub. L. 100–357, and the Energy Policy

Act of 1992, Pub. L. 102–486 5 created

the Energy Conservation Program for

Consumer Products other than

Automobiles. The consumer products

subject to this program (often referred to

hereafter as ‘‘covered products’’)

include central air conditioners and

heat pumps. EPCA section 322(a)(4), 42

U.S.C. 6292(a)(4).

Under the Act, the program consists

essentially of four parts: testing,

labeling, Federal energy conservation

standards, and certification and

enforcement procedures. The Federal

Trade Commission 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 central air

conditioners and heat pump test

procedures appear at title 10 Code of

Federal Regulations (CFR) part 430,

subpart B, Appendix M.

The Act prescribes initial Federal

energy conservation standards for each

of the listed covered products, except

television sets. EPCA section 325 (b)–

(k), 42 U.S.C. 6295 (b)–(k). For central

air conditioners and heat pumps, EPCA

section 325(d)(3)(A) specifies that the

59592 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

standards are to be reviewed by the

Department no later than January 1,

1994. 42 U.S.C. 6295(d)(3)(A).

Any new or amended standard must

be designed so as to achieve the

maximum improvement in energy

efficiency that is technologically

feasible and economically justified.

EPCA section 325(o)(2)(A), 42 U.S.C.

6295(o)(2)(A). Moreover, the

Department may not prescribe a

standard for: (1) Certain products,

including central air conditioners and

heat pumps, if no test procedure has

been established for the product, or (2)

any product, if DOE determines by rule

that a standard for the product either

would not result in significant

conservation of energy, or is not

technologically feasible or economically

justified. EPCA section 325(o)(3), 42

U.S.C. 6295(o)(3).

Section 325(o)(2)(B)(i), 42 U.S.C.

6295(o)(2)(B)(i) provides that DOE must

determine whether a standard is

economically justified, after receiving

comments on the proposed standard,

and whether the benefits of the standard

exceed its burdens, based, to the greatest

extent practicable, on a weighing of the

following seven factors:

‘‘(1) The economic impact of the standard

on the manufacturers and the consumers of

the products subject to such standard;

(2) The savings in operating costs

throughout the estimated average life of the

covered product in the type (or class)

compared to any increase in the price of, or

in the initial charges for, or maintenance

expenses of, the covered products which 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.’’

In addition, Section 325(o)(2)(B)(iii) of

the Act, 42 U.S.C. 6295(o)(2)(B)(iii),

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

* * * ’’ The rebuttable presumption

test is an alternative path to establishing

economic justification.

Section 327 of the Act, 42 U.S.C.

6297, provides that generally the

Federal energy efficiency requirements

supersede State laws or regulations

concerning energy conservation testing,

labeling, and standards, and specifies

limited exceptions to this general rule.

EPCA Section 327(a) through (c), 42

U.S.C. 6297 (a) through (c). The

Department can grant a waiver of

preemption in accordance with the

procedures and other provisions of

Section 327(d) of the Act. 42 U.S.C.

6297(d).

B. Background

1. Current Standards

The existing standards for residential

central air conditioners and heat pumps

have been in effect since 1992. Energy

efficiency for air conditioner and heat

pump cooling has been defined by the

descriptor SEER. Energy efficiency for

heat pumps has been defined by the

descriptor, Heating Seasonal

Performance Factor (HSPF) while

operating during the heating season and

by SEER while operating during the

cooling season. The current central air

conditioners and heat pumps efficiency

standards are as follows:

—Split system air conditioners and heat

pumps—10 SEER/6.8 HSPF

—Single package air conditioners and

heat pumps—9.7 SEER/6.6 HSPF

2. History of Previous Rulemakings

On September 8, 1993, DOE

published an Advance Notice of

Proposed Rulemaking (ANOPR)

announcing the Department’s intention

to revise the existing central air

conditioner and heat pump efficiency

standard. (58 FR 47326). On November

24, 1999, DOE published a

Supplemental ANOPR (hereinafter

referred to as the Supplemental

ANOPR). 64 FR 66306. In the

Supplemental ANOPR and during the

December 9, 1999, public workshop, we

provided interested persons an

opportunity to comment on several

issues, including:

(1) The product classes that the

Department planned to analyze;

(2) The analytical framework, models

(e.g., the Government Regulatory Impact

Model (GRIM)), and tools (e.g., a Monte

Carlo sampling methodology, and the

life-cycle cost (LCC) and national energy

savings (NES) spreadsheets) that the

Department was using in performing

analyses of the impacts of energy

conservation standards;

(3) The results of preliminary analyses

for the engineering, LCC, payback and

NES; and

(4) The candidate energy conservation

standard levels that the Department had

developed from these analyses.

3. Process Improvement

The fiscal year (FY) 1996

appropriations legislation imposed a

moratorium on proposed or final rules

for appliance efficiency standards for

FY 1996. Pub. L. 104–134. During the

moratorium, the Department examined

the appliance standards program and

how it was working. Congress advised

DOE to correct the standards-setting

process and to bring together

stakeholders (such as manufacturers and

environmentalists) for assistance.

Therefore, we consulted with energy

efficiency groups, manufacturers, trade

associations, state agencies, utilities and

other interested parties to provide input

to the process used to develop appliance

efficiency standards. As a result, on July

15, 1996, the Department published a

final rule: Procedures for Consideration

of New or Revised Energy Conservation

Standards for Consumer Products

(referred to as the Process Rule) (61 FR

36974), codified at 10 CFR part 430,

subpart C, Appendix A.

The Process Rule states that for

products, such as central air

conditioners and heat pumps, for which

DOE issued a proposed rule prior to

August 14, 1996, DOE would conduct a

review to decide whether any of the

analytical or procedural steps already

completed should be repeated. (61 FR

36982). DOE completed this review and

decided to use the Process Rule, to the

extent possible, in the development of

the revised central air conditioners and

heat pumps standards.

We developed an analytical

framework for the central air

conditioners and heat pumps standards

rulemaking for our stakeholders, which

we presented during a workshop on

June 30, 1998. The analytical framework

described the different analyses (e.g.,

LCC, payback and manufacturing

impact analyses (MIA)) to be conducted,

the method for conducting them, the use

of new LCC and NES spreadsheets, and

the relationship of the various analyses.

III. General Discussion

A. Test Procedures

Section 7(b) of the Process Rule states

that necessary modifications to test

procedures concerning efficiency

standards will be proposed before

issuance of a proposed rule. Section 7(c)

of the Process Rule states that a final

modified test procedure will be issued

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59593

6For this calculation, the Department calculated

cost-of-operation based on the DOE test procedure,

with the test procedure assumed annual hours of

operation. Consumers that use the central air

conditioner or heat pump fewer hours will

experience a longer payback while those that use

them more will have a shorter payback.

prior to issuing a proposed rule

regarding energy conservation

standards. The residential central air

conditioner and heat pump test

procedure is being revised to improve

its organization and ease of use, with a

proposed rule to be published. This

revision of the test procedure is not

expected to alter the measured

efficiencies as determined under the

existing test procedure. Therefore, the

revised test procedure would not affect

development of revised efficiency

standards. For these reasons, revisions

to the test procedure are not a

‘‘necessary modification’’ as that term is

used in the Process Rule, but rather a

routine update, and hence need not be

finalized before issuance of the

proposed rule for these standards.

B. Technological Feasibility

1. General

There are central air conditioners and

heat pumps in the market at all of the

efficiency levels analyzed in today’s

notice. The Department, therefore,

believes all of the efficiency levels

discussed in today’s notice are

technologically feasible.

2. Maximum Technologically Feasible

Levels

The Act requires the Department, in a

proposed rule that sets forth new or

amended standards, to ‘‘determine the

maximum improvement in energy

efficiency * * * that is technologically

feasible for each type (or class) of

covered products.’’ EPCA section 325

(p)(2), 42 U.S.C. 6295(p)(2).

Accordingly, for each class of product

under consideration in this rulemaking,

a maximum technologically feasible

(Max Tech) level was identified.

As previously stated in Section II.B,

residential central air conditioner and

heat pump cooling efficiency is

expressed as a SEER. Heating efficiency

is expressed as a HSPF. The most

efficient technology presently available

is a 3-ton 18 SEER central air

conditioner. The Department has

determined that at this time 18 SEER is

the Max Tech level for cooling

efficiency for all product classes and

capacities in this analysis. The Max

Tech level for heating efficiency,

corresponding to the 18 SEER level, is

9.4 HSPF which is the highest HSPF

rating currently available in residential

heat pumps.

C. Energy Savings

1. Determination of Savings

The Department estimated energy

savings through the use of the NES

spreadsheet, which forecasted energy

savings over the period of analysis for

candidate standards relative to the base

case. The Department quantified the

energy savings that would be

attributable to a standard as the

difference in energy consumption

between the candidate standards case

and the base case. The base case

represents the forecast of energy

consumption in the absence of amended

mandatory efficiency standards.

The NES spreadsheet model is

described in Section IV.B of this notice,

Appendix of the Technical Support

Document and also in the Supplemental

ANOPR. (64 FR 66306). The NES

spreadsheet model calculates the energy

savings in site energy or kilowatt-hours

(kWh). Site energy is the energy directly

consumed at building sites by the

central air conditioner or heat pump.

National energy savings are expressed in

terms of the source energy savings

which is the savings in energy used to

generate and transmit the electricity

consumed at the site. Chapter 7 of the

TSD contains a table of factors used to

convert kWh to Btu. These conversion

factors, which change with time, are

derived from DOE’s Energy Information

Administration’s (EIA) Annual Energy

Outlook 2000 (AEO2000).

2. Significance of Savings

The Act prohibits the Department

from adopting a standard for a product

if that standard would not result in

‘‘significant’’ energy savings. EPCA

section 325(o)(3)(B), 42 U.S.C.

6295(o)(3)(B). While the term

‘‘significant’’ is not defined in the Act,

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 all of the trial standard levels

considered in this rulemaking are nontrivial and therefore we consider them

‘‘significant’’ within the meaning of

section 325 of the Act.

D. Rebuttable Presumption

The National Appliance Energy

Conservation Act established new

criteria for determining whether a

standard level is economically justified.

EPCA section 325(o)(2)(B)(iii) states:

‘‘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, there

shall be a rebuttable presumption that such

standard level is economically justified. A

determination by the Secretary that such

criterion is not met shall not be taken into

consideration in the Secretary’s

determination of whether a standard is

economically justified.’’

If the increase in initial price of an

appliance due to a conservation

standard would repay itself to the

consumer in energy savings in less than

three years, then we presume that such

standard is economically justified.6 This

presumption of economic justification

can be rebutted upon a proper showing.

E. Economic Justification

As noted earlier, section

325(o)(2)(B)(i) of the Act provides seven

factors to be evaluated in determining

whether a conservation standard is

economically justified.

1. 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 efficiency standards. The

provisions of the rule have direct

bearing on the implementation of

manufacturer impact analyses. First, the

Department will use an annual cash

flow approach in determining the

quantitative impacts on manufacturers.

This includes 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 comes into

effect, and a long-term assessment.

Impacts analyzed include industry net

present value, cash flows by year,

changes in revenue and income, and

other measures of impact, as

appropriate. Second, the Department

will analyze and report the impacts on

different types of manufacturers, with

particular attention to impacts on small

manufacturers. Third, the Department

will consider the impact of standards on

domestic manufacturer employment,

manufacturing capacity, plant closures

and loss of capital investment. Finally,

the Department will take into account

cumulative impacts of different DOE

regulations on manufacturers.

For consumers, measures of economic

impact are the changes in installed cost

and annual operating costs, i.e., LCC.

The life-cycle cost of the product at each

standard level are presented in Chapter

59594 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

7 ‘‘Report of the U.S. Department of Energy’s

Power Outage Study Team: Findings and

Recommendations to Enhance Reliability from the

Summer of 1999’’, March 2000.

5 of the TSD. Under section 325 of the

Act, the life-cycle cost analysis is a

separate factor to be considered in

determining economic justification.

2. Life-Cycle Costs

The life-cycle cost is the sum of the

purchase price, including the

installation, and the operating expense,

including operating energy,

maintenance, and repair expenditures,

discounted over the lifetime of the

appliance.

For each central air conditioner and

heat pump product class, we calculated

both life-cycle costs and life cycle cost

savings for the following space-cooling

efficiency levels: 11, 12, 13, and 18

SEER. For heat pumps, the following

space-heating efficiency levels

correspond to the above SEER values:

7.1, 7.4, 7.7, and 8.8 HSPF, respectively.

The calculated life-cycle cost savings is

given as a distribution, with a mean

value and a range. We used a

distribution of real discount rates

ranging from 0.1 to 18% for the

calculations. The assumption is that the

consumer purchases the central air

conditioner and/or heat pump in 2006.

For the probability-based LCC analysis,

a building-by-building analysis is

performed for purposes of generating a

distribution of life-cycle costs for each

efficiency level analyzed. The building

stock is composed of both residential

and commercial buildings under the

assumption that 90% of single-phase

central air conditioners and heat pumps

are utilized in residential buildings with

the remaining 10% in commercial

buildings. The 1997 Residential Energy

Consumption Survey (RECS) is used to

represent the residential building stock

while 77 commercial buildings are used

to represent the commercial building

stock based on assumptions consistent

with those used in the process to update

ASHRAE Standard 90.1–1999. Annual

energy costs are based on marginal

electricity prices which are developed

for each residential and commercial

building. Electricity price forecasts are

taken from the AEO2000 (DOE/EIA–

0383). The LCC calculations include

markup structures developed for both

the new construction and replacement/

retrofit markets. Chapter 5 of the TSD

contains the details of the LCC

calculations including those considered

under factor seven below.

3. 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

revised standards. The Department used

the NES spreadsheet results, discussed

earlier, in its consideration of total

projected savings. The savings are

provided in section V of this notice.

4. Lessening, if Any, of Utility or

Performance of Products

This factor cannot be quantified. In

establishing classes of products, and in

evaluating design options and the

impact of potential standard levels, the

Department tried to eliminate any

degradation of utility or performance in

the products under consideration in this

rulemaking. None of the proposed trial

standard levels reduces the performance

of central air conditioners and heat

pumps.

5. 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

further directs the Attorney General to

determine the impact, if any, of any

lessening of competition likely to result

from a proposed standard and 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. Section 325(o)(2)(B)(i)(V) and

(B)(ii), 42 U.S.C. 6295(o)(2)(B)(i)(V) and

(B)(ii).

In order to assist the Attorney General

in making such a determination, the

Department has provided the Attorney

General with copies of this notice and

the Technical Support Document for

review.

6. Need of the Nation To Conserve

Energy

We report the environmental effects

from each standard level for each

product under this factor in Section VI

of this notice.

7. Other Factors

During the extreme periods of heat

and humidity that took place in the

summer of 1999, electric power outages

and other system disturbances disrupted

the lives of millions of people and

thousands of businesses in various

regions of our country. In response to

public concerns about this problem, the

Secretary of Energy formed a team of

experts to investigate the problem and

to recommend actions that the Federal

government can take to help avoid

future power outages by improving the

reliability of the U.S. electric power

system. One of the actions proposed by

the Secretary at that time was to

accelerate the rulemaking process and

advance the publication of a final rule

for central air conditioners by six

months.

The Final Report 7 by the team of

experts, issued in March, 2000,

included the recommendation to

increase the energy efficiency of central

air conditioners as one means for

enhancing reliability. The report stated,

‘‘Technologies and practices that reduce

loads during times of peak demand,

such as high-efficiency air conditioning

and lighting equipment, are especially

valuable.’’ This was based on the

finding that in several of the affected

regions ‘‘Retail customers have limited

mechanisms and incentives to conserve

energy or resort to alternatives during

electricity shortages.’’ Included in the

federal activities that promote energy

efficiency recommended to the

Secretary was to promulgate standards

for more efficient technologies.

As an additional element to consider

under this factor, the Secretary has

decided to evaluate the life-cycle cost

impacts on those subgroups of

consumers who are at or below the

poverty line (e.g., for a family of four,

this constitutes a household income of

less than $16,036).

IV. Methodology

The Process Rule outlines the

procedural improvements identified by

the interested parties. 61 FR 36974. The

process improvement effort also

included a review of the: (1) Economic

models; (2) analytical tools; (3)

methodologies; (4) non-regulatory

approaches; and (5) prioritization of

future rules.

The Department continues to use two

spreadsheet tools to meet the objectives

of the Process Rule. The first

spreadsheet calculates life-cycle-costs

and payback periods of potential new

energy conservation standards. The

second conducts shipments forecasts

and then calculates national energy

savings and net present value impacts of

potential new energy conservation

standards. The Department also

completely revised the methodology

used in assessing manufacturer impacts

including the adoption of the GRIM.

Additionally, DOE has estimated the

impacts of central air conditioner and

heat pump energy efficiency standards

on electric utilities and the

environment. The Department used a

version of EIA’s National Energy

Modeling System (NEMS) for the utility

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59595

8EIA approves use of the name NEMS to describe

only an AEO version of the model without any

modification to code or data. Because our analysis

entails some minor code modifications and the

model is run under various policy scenarios that

deviate from AEO assumptions, the name NEMS–

BRS refers to the model as used here. For more

information on NEMS, please refer to the National

Energy Modeling System: An Overview 1998. DOE/

EIA–0581 (98), February, 1998. BRS is DOE’s Office

of Building Research and Standards.

9The number of households actually used in the

central air conditioner and heat pump LCC and

Payback period analyses were 1218 and 308,

respectively. Some central air-conditioned

households were dropped from the analysis for one

or more of the following reasons: (1) The central air

conditioner was not used, (2) a room air conditioner

was present and used, or (3) marginal energy prices

could not be determined for the household. With

regard to households with heat pumps, they were

dropped from the analysis for one or more of the

following reasons: (1) The heat pump was not used

or (2) marginal energy prices could not be

determined for the household.

and environmental analyses. NEMS

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.

NEMS produces a widely-known

baseline forecast for the U.S. through

2020 that is available in the public

domain. The version of NEMS used for

appliance standards analysis is called

NEMS–BRS,8 and is based on the

AEO2000 version with minor

modifications. NEMS offers a

sophisticated picture of the effect of

standards since its scope allows it to

measure the interactions between the

various energy supply and demand

sectors and the economy as a whole.

A. Life-Cycle Cost and Payback Period

Analysis

This section describes the LCC and

payback period analysis and the

spreadsheet model used for analyzing

the economic impacts of possible

standards on individual residential and

commercial consumers. Details of the

spreadsheet model can be found in

Chapters 5 in the TSD. We conduct the

LCC and payback period analysis with

a spreadsheet model developed in

Microsoft Excel for Windows 95 or

above. When combined with Crystal

Ball (a commercially available software

program), the LCC and payback period

generates a Monte Carlo simulation to

perform the analysis by incorporating

uncertainty and variability

considerations.

The LCC is the total consumer

expense over the life of the appliance,

including purchase expense and

operating costs (including energy

expenditures). Future operating costs

are discounted to the time of purchase

and summed over the lifetime of the

appliance. 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. For today’s

proposed rule, both the LCC and

payback period are based on a buildingby-building analysis of a nationally

representative set of residential and

commercial buildings.

The set of residential buildings are

taken from those households in the 1997

RECS equipped with either a central air

conditioner or heat pump. Of the 5,900

households surveyed in the 1997 RECS,

2,003 households representing 37.6% of

the housing population have a central

air conditioner while 579 households

representing 11.1% of the housing

population have heat pumps.9 RECS

specifies the annual space-cooling

energy consumption and, in the case of

heat pumps, the annual space-heating

energy consumption associated with the

space-conditioning equipment. Also

provided is the age of the spaceconditioning equipment which, when

coupled with historical equipment

efficiency data provided by the AirConditioning and Refrigeration Institute

(ARI), allows for the imputation of the

household’s space-conditioning

equipment efficiency (i.e., the SEER

and, in the case of heat pumps, the

HSPF). With both the annual energy use

and the efficiency of the central air

conditioner or heat pump specified, the

annual energy use associated with

equipment at higher efficiency levels is

simply determined by multiplying the

household’s existing annual energy use

by the ratio of the existing equipment

efficiency divided by the efficiency of

the more efficient equipment.

Household utility billing data in RECS

allows for the determination of average

and marginal electricity prices. The

electricity price data along with the

annual energy use data allows for the

determination of annual electricity cost

savings for any efficiency level.

The set of commercial buildings are

based on assumptions consistent with

those used to develop the American

Society of Heating, Refrigerating, and

Air-Conditioning Engineers’ (ASHRAE)

Standard 90.1–1999. The commercial

building data set consists of seven

building types located in eleven

different geographic regions yielding a

total of 77 buildings. An hourly

simulation program is used to calculate

the annual full-load equivalent

operating hours (FLEOH) of the spacecooling and space-heating equipment in

each building. The FLEOHs are used

with the Department of Energy’s test

procedure equations for central air

conditioners and heat pumps to obtain

each building’s annual space-cooling

and space-heating energy consumption.

Similar to the analysis for residential

buildings, the energy use associated

with equipment at higher efficiency

levels is simply determined by

multiplying the building’s simulated

annual energy use by the ratio of the

building’s assumed equipment

efficiency (i.e., 10 SEER) divided by the

efficiency of the more efficient

equipment. Average and marginal

electricity prices for each commercial

building are determined by applying a

national sample of electric utility tariffs

to the simulated load and demand. The

electricity price data along with the

annual energy use data allows for the

determination of annual electricity cost

savings for any efficiency level for each

commercial building.

The probability-based LCC and

payback period analysis samples

buildings from the residential and

commercial building data set in order to

produce a distribution of LCC results for

a given standard level. The LCC and

payback period analysis takes 10,000

samples to create a distribution of

results based on the assumption that

90% of the single-phase central air

conditioning and heat pump equipment

stock are in residential buildings with

the remaining 10% in commercial

buildings.

The spreadsheet model is organized

so that ranges or distributions can be

entered for each input variable needed

to perform the calculations. The LCC

and payback period output can be either

a point value when we use the average

value of the inputs or a distribution

when we use distributions for some or

all of the inputs. Inputs for determining

the total installed cost include: Baseline

manufacturer costs, manufacturer cost

multipliers for each efficiency level,

manufacturer markups, distributor or

wholesaler markups, dealer or

contractor markups, builder markups,

sales taxes, and installation costs. Of the

above total installed cost inputs, the

manufacturer, dealer, distributor, and

builder markups, as well as the sales tax

and installation price are described with

distributions. Inputs for determining

operating expenses include: Annual

energy consumption, average electricity

prices, marginal electricity prices,

electricity price projections, repair

costs, maintenance costs, equipment

lifetime, discount rates, and the year

standards take effect. Of the above

operating expense inputs, the discount

rate and equipment lifetime are

described with distributions (note that

neither the discount rate nor lifetime are

needed to determine the payback

period). Operating expense, annual

59596 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

10Under the NAECA scenario, equipment

efficiencies after the adoption of new standards are

forecasted to change in the same pattern as the

efficiency changes that occurred in 1992 when

minimum efficiency standards first took effect. This

results in weighted average equipment efficiencies,

based on minimum efficiency standards of 11, 12,

and 13 SEER, of 11.6 SEER, 12.4 SEER, and 13.4

SEER, respectively.

11Under the Roll-up scenario, equipment that in

the base case were forecast to be less efficient than

the trial standard level are assumed to move up to

the standard level, and equipment forecasted in the

base case to be at or above the trial standard level

are assumed not to increase in efficiency. This

results in weighted-average equipment efficiencies,

based on minimum efficiency standards of 11, 12,

and 13 SEER, of 11.5 SEER, 12.3 SEER, and 13.3

SEER, respectively.

12Under the Shift scenario, equipment

efficiencies after the adoption of new standards are

forecast to have the same pattern, at and above the

standard levels, as the current distribution of

efficiencies. This results in weighted-average

equipment efficiencies, based on minimum

efficiency standards of 11, 12, and 13 SEER, of 11.7

SEER, 12.7 SEER, and 13.7 SEER, respectively.

energy use and electricity prices,

although represented by point-values for

each residential and commercial

building, are highly variable when

looking at the entire building data set.

Chapter 5 of the TSD contains the

details of all the inputs to the LCC and

payback period analysis.

In addition to determining payback

periods with the spreadsheet model, the

Act requires us to determine a

rebuttable payback period. The Act

requires the Department to examine

payback periods to determine if the

three year rebuttable presumption of

economic justification applies. As

prescribed by the Act, the rebuttable

payback period is ‘‘calculated under the

applicable test procedure, * * * .’’

The annual space-cooling and spaceheating energy consumption calculated

based on the Department’s test

procedure are on the order of 50%

greater than the weighted-average values

from the LCC analysis (i.e., analyses

based on the 1997 RECS for residential

buildings and hourly simulations for

commercial buildings). As will be

shown in Section VI (Analytical

Results), the payback value calculated

from the Department’s test procedure

equations will be significantly lower

than the average payback value

calculated from the LCC analysis, for

any standard level.

B. National Energy Savings and Net

Present Value Analysis

In order to make the analysis more

accessible and transparent to all

stakeholders, we continue to use an

Excel spreadsheet model to calculate the

energy savings and the national

economic costs and savings from new

standards. Various input quantities

within the spreadsheet can be changed.

Unlike the LCC analysis, the NES

spreadsheet does not use distributions

for inputs or outputs. We conduct

sensitivities by running different

scenarios.

DOE uses the NES spreadsheet to

perform calculations of energy savings

and net present value (NPV) based on

user inputs similar to those for the LCC

spreadsheet. The energy savings, energy

cost savings, equipment costs, and NPV

of benefits for several product classes

are forecast from the chosen start year

through 2030. The forecasts provide

annual and cumulative values for all

four output parameters.

The Department calculates the

national energy savings by subtracting

energy use under a standards scenario

from energy use in a base case (no new

standards scenario). Energy use is

reduced when the baseline central air

conditioner or heat pump (i.e, 10 SEER)

is replaced by a more efficient piece of

equipment. Unit energy savings for each

product class are the same weightedaverage values as calculated in the LCC

and Payback period spreadsheet.

Additional information about the NES

spreadsheet can be found in Chapter 7

of the TSD.

User inputs include: (1) A choice from

among several electricity price

projections: (2) effective date of the

central air conditioners and heat pumps

standard; (3) discount rate and discount

year; (4) a standards case efficiency

level; (5) an equipment price; (6) an

equipment price and housing

projection; and (7) an efficiency

scenario. Additionally, we use a time

series of conversion factors to change

from site to source energy.

The efficiency scenario specifies the

equipment efficiency distribution after

new standards would take effect. Three

efficiency scenarios were used to

forecast the impact new standards

would have after they take effect: (1)

National Appliance Energy

Conservation Act (NAECA) scenario,10

(2) Roll-up scenario,11 and (3) Shift

scenario.12 As opposed to the

Supplemental ANOPR where weightedaverage equipment efficiencies were

forecasted, an actual distribution of

efficiencies (i.e., the percentage of

shipments which occur in incremental

SEER bins over the range from the

minimum standard to 18 SEER) were

used in the analysis for the proposed

rule.

One of the more important

components of any estimate of future

impact is shipments. Forecasts of

shipments for the base case and

standards case are determined within

the NES spreadsheet. The shipments

portion of the spreadsheet forecasts

central air conditioner and heat pump

shipments from 2000 to 2030.

Shipments forecasts are developed by

accounting for: (1) The combined effects

of equipment price, operating cost, and

household income; (2) different market

segments (e.g., new housing,

replacement decisions, and non-owners

adding a central air conditioner or heat

pump); (3) decisions to repair rather

than replace; and (4) different

equipment age categories. Additional

details on the various shipments

forecasts are provided in Chapter 6 of

the TSD.

C. Manufacturer Impact Analysis

The MIA estimates the financial

impact of standards on manufacturers

and calculates impacts on employment

and manufacturing capacity.

The Department published the

proposed MIA approach as part of the

Federal Register publication of the

Supplemental ANOPR, and received no

comments suggesting substantive

changes in the methodology. As

proposed, the MIA was conducted in

three phases. Phase 1, ‘‘Industry

Profile,’’ consisted of the preparation of

an industry characterization. Phase 2,

‘‘Industry Cash Flow,’’ focused on the

industry as a whole, including both

major and niche-product manufacturers.

The GRIM was used to prepare an

industry cash flow analysis. The

Department used publicly available

information developed in Phase 1 to

adapt the GRIM structure to facilitate

the analysis of new central air

conditioner and central air conditioning

heat pump standards.

In Phase 3, ‘‘Sub-Group Impact

Analysis,’’ the Department conducted

interviews with several niche-product

manufacturers to determine the

financial impacts of revised standards.

Phase 3 also entailed documenting

additional impacts on employment and

manufacturing capacity through a

structured interview process.

1. Phase 1, Industry Profile

Phase 1 of the MIA consisted of

preparing an Industry Profile. Prior to

initiating the detailed impact studies,

DOE collected information on the

present and past structure and market

characteristics of the central air

conditioning industry. This activity

involved both quantitative and

qualitative efforts to assess the industry

and products to be analyzed. The

information collected included

manufacturer market shares and

characteristics and financial

information, market trends, and product

characteristics.

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59597

The industry profile included a topdown cost analysis of the central air

conditioner manufacturing industry that

was used to derive cost and financial

inputs for the GRIM, e.g., revenues, and

material, labor, overhead, depreciation,

Sales General & Administration (SG&A),

and Research & Development (R&D)

expenses. The Department also utilized

additional sources of information to

further characterize the industry. These

included company Securities and

Exchange Commission (SEC) 10–K

reports, Moody’s company data reports,

Standard & Poor’s (S&P) stock reports,

Value Line industry composites, and

Dow Jones Financial Services.

2. Phase 2, Industry Cash Flow Analysis

Phase 2 of the MIA focused on the

financial impacts of new standards on

the industry as a whole. The analytical

tool used for calculating the financial

impacts of standards on manufacturers

is the GRIM. As part of the analysis,

DOE interviewed several of the major

manufacturers. For the Industry Cash

Flow Analysis, DOE used the financial

values determined during Phase 1 and

the shipment scenarios used in the LCC

and NES analyses.

3. Phase 3, Sub-Group Impact Analysis

The Department has received many

comments during workshops and

interviews, and in writing, suggesting

that manufacturers of niche products,

representing less than 3% of industry

shipments, could be more negatively

impacted by new standards than major

manufacturers. To assess the differential

impacts, the Department interviewed

two manufacturers of niche products, in

addition to those conducted during the

Engineering Analysis. The focus of the

interviews was to determine which

GRIM parameters differed for niche

manufacturers by virtue of their smaller

revenue base and more limited markets.

From a financial standpoint, the

common distinguishing characteristic of

niche product manufacturers was their

need to spread the costs of converting to

new standards over smaller production

volumes, as well as the product size

constraints identified during the

Engineering Analysis which make their

shipments more sensitive to increases in

product size. During the interviews,

small manufacturers demonstrated that

several of the costs necessary to meet

any new regulation are largely

independent of the product volume

produced. The most apparent are the

costs necessary to design a new product

meeting the proposed energy standards.

Other costs, such as plant engineering,

some tooling, and other capital costs,

have significant portions that are

independent of final production

volumes.

4. GRIM Analysis

An increase in standards affects a

manufacturer’s cash flow in three

distinct ways: (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 the changes

in cash flow that result in a higher or

lower industry value.

The GRIM analysis uses a number of

inputs—annual shipments; prices;

manufacturer costs such as materials

and labor, selling and general

administration costs, taxes, and capital

expenditures—to arrive at a series of

annual net cash flows beginning today

and continuing ten years past the

implementation of new standards. This

information was collected from a

number of sources, including publically

available data, as well as interviews

with of the major manufacturers and

two specialty manufacturers. Industry

net present values are calculated by

discounting and summing the annual

net cash flows. Additional information

about the GRIM spreadsheet can be

found in Chapter 8 of the TSD.

D. NEMS Environmental Analysis

The environmental analysis provides

estimates of changes in emissions of

nitrogen oxides (NOX) and carbon from

carbon dioxide (CO2). The Department

used NEMS–BRS for central air

conditioner and heat pump analyses (as

well as the utility analyses). NEMS–BRS

is run similar to the AEO2000 NEMS

except that central air conditioner and

heat pump energy usages are reduced by

the amount of energy (electricity) saved

due to the proposed trial standard

levels. The input of energy savings are

obtained from the NES spreadsheet. For

the environmental analysis, the output

is the forecasted physical emissions.

The net benefits of the standard is the

difference between emissions estimated

by NEM–BRS and the AEO2000

Reference Case.

The environmental analysis is

relatively straightforward from NEMS–

BRS. Carbon emissions are tracked in

NEMS–BRS using a detailed carbon

module that provides robust results

because of its broad coverage of all

sectors and inclusion of interactive

effects. The only form of carbon tracked

by NEMS–BRS is CO2. However, in this

report the carbon savings are reported as

elemental carbon.

The two airborne pollutant emissions

that have been reported in past analyses,

sulfur dioxide (SO2) and NOX, are

reported by NEMS–BRS. NOX results are

based on forecasts of compliance with

existing legislation. In the case of SO2,

the Clean Air Act Amendments of 1990

set an emissions cap on all power

generation. The attainment of this target,

however, is flexible among generators

and is enforced by applying market

forces, through the use of emissions

allowances and tradable permits. As a

result, accurate simulation of SO2

trading tends to imply that physical

emissions effects will be zero because

emissions will always be at, or near, the

ceiling. This fact has caused

considerable confusion in the past.

There is virtually no real possible SO2

environmental benefit from electricity

savings as long as there is enforcement

of the emission ceilings. See the TSD,

Environmental Assessment, for a

discussion of this issue.

Alternative price forecasts

corresponding to the high and low

economic growth side cases found in

AEO 2000 have also been generated for

use by NEMS–BRS, and were used as

alternative scenarios, and are presented

in the TSD. (See TSD, Environmental

Assessment.)

V. Discussion of Comments

As noted above, DOE published the

Supplemental ANOPR regarding central

air conditioners and heat pumps on

November 24, 1999, and conducted a

public workshop to present the analyses

and to solicit comments on December 9,

1999. The Department requested

comments on the following twelve

issues:

1. Differences between the industry

and the reverse engineering cost data:

2. The incorporation of emerging

technologies into the Engineering

Analysis;

3. The assessment of the impacts on

steady-state efficiency, i.e. EER, due to

increases in the SEER;

4. For heat pump systems, the

relationship between SEER and HSPF;

5. Additional product classes based

on system capacity;

6. Niche product classes

(a) Ductless split

(b) High-velocity, small-duct

(c) Vertical-package, wall-mounted

(d) Split, through-the-wall-condenser;

7. The impact of alternative

refrigerants for HCFC–22;

8. Data on retail mark-up

assumptions;

9. Information relating to the

determination of price and operating

cost elasticities in conducting shipment

forecasts;

10. Data on the possible adverse

affects of standards on identifiable

groups of consumers that experience

below-average utility or usage rates;

59598 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

11. Information on what nonregulatory alternatives to standards need

to be reviewed; and

12. Comments on the candidate

standard levels and the alternative

standard scenarios.

Based on responses and comments

received since that workshop, we

provide the following discussion.

A. Engineering Cost Data

1. Reverse Engineering Cost Estimates

The Department’s reverse engineering

analysis prepared as a basis for the

Supplemental ANOPR received a broad

range of comments, both supportive and

critical. ARI and the Natural Resources

Defense Council (NRDC) commented on

the apparent accuracy of the split air

conditioner cost estimates and the ease

with which the results are able to be

scrutinized by outside parties. (Wethje,

ARI, Transcript, p. 42; ARI, No. 11 at 1;

Goldstein, NRDC, Transcript, p. 94).

The Department also received

comments criticizing the reverse

engineering results for split heat pumps

and for packaged air conditioners and

heat pumps, noting the lack of design

detail and the aggregation of the results

into an efficiency level-based analysis.

(Hodges, ARI, Transcript, p. 85; Madera,

York International (York), Transcript,

pp. 90, 91, 93; Goldstein, NRDC,

Transcript p. 96 and California Energy

Commission (CEC) No. 47 at 7). The

comments observed that the relative

cost results for split heat pumps and

packaged equipment differed

significantly from those of split air

conditioners, and that those analyses

were less rigorous than the split air

conditioner analysis. They also noted

that the split heat pump and packaged

equipment analysis was based on fewer

equipment samples; did not include a

detailed tear-down of a 10 SEER split

heat pump or packaged air conditioner;

and was based on questionable

production volume assumptions.

The Department agreed that those

deficiencies were likely to cause some

of the differences between the ARI cost

and the reverse engineering cost

estimates, and revised its analysis of

split heat pumps and packaged

equipment.

In responding to the comment on

sample size for split heat pumps and

packaged equipment, the Department

took guidance from a review of the

engineering analysis performed by DOE

consultant, Joseph Pietsch. Mr. Pietsch

presented five guidelines for comparing

the production cost of equipment for

different product classes. (Pietsch, No

36 at 2–5).

• At each cooling capacity and SEER

level, the same outside unit will likely

be used for split air conditioners

(fancoil) and split air conditioners

(cased coil);

• At each cooling capacity and SEER

level, the same fancoil will likely be

used for split air conditioners (fancoil)

and split heat pumps;

• At each cooling capacity and SEER

level, the same cabinet will likely be

used for packaged air conditioners and

packaged heat pumps;

• There should be some degree of

consistency in the cost to ‘‘convert’’ an

air conditioner into a heat pump; and

• Split systems with fan coils and

single package units at the same cooling

capacity and SEER level should have

nearly identical costs for the major

functional components.

Based on the above guidelines, DOE

revised the analysis of split heat pumps

and packaged equipment. Table V.1

provides the original and the revised

production dollar cost estimates

resulting from this new approach. Table

V.2 provides the same information, but

in terms of relative costs. Revised

production costs are generally lower

than the original costs, particularly at

the baseline 10 SEER level. The most

significant change is that the new

analysis includes nine additional

estimates that were not presented

originally.

TABLE V.1.—ENGINEERING PRODUCTION COST ESTIMATES FOR 3-TON UNITARY EQUIPMENT

Efficiency level

(SEER)

Split air conditioner

(cased coil)

Split air conditioner

(fancoil)

Split heat pump Packaged air

conditioner

Packaged heat pump

Original Revised Original Revised Original Revised Original Revised Original Revised

10 ............................. $367 $367 $456 $449 $622 $572 $552 $511 $643 $593

11 ............................. 412 412 550 519 ................ 602 ................ 555 ................ 638

12 ............................. 468 468 ................ 563 690 648 627 595 708 668

13 ............................. 529 529 756 637 840 743 809 730 ................ 820

14 ............................. 588 588 802 815 1,011 1,023 ................ 889 ................ 1,029

15 ............................. ................ ................ 893 893 1,147 1,107 ................ 955 ................ 1,100

The only significant departures are found in split air conditioners with fancoils, where the new estimates are lower,

and in 14 SEER and 15 SEER equipment where the new results are higher.

TABLE V.2.—REVISED REVERSE ENGINEERING PRODUCTION

Efficiency leval

(SEER)

Split air conditioner

(cased coil)

Split air conditioner

(fancoil)

Split heat pump Packaged air

conditioner

Packaged heat pump

Original Revised Original Revised Original Revised Original Revised Original Revised

10 ............................. 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

11 ............................. 1.12 1.12 1.21 1.16 ................ 1.05 ................ 1.09 ................ 1.08

12 ............................. 1.28 1.28 ................ 1.25 1.11 1.13 1.14 1.16 1.10 1.13

13 ............................. 1.44 1.44 1.66 1.42 1.35 1.30 1.47 1.43 ................ 1.38

14 ............................. 1.60 1.60 1.76 1.82 1.63 1.79 ................ 1.74 ................ 1.74

15 ............................. ................ ................ 1.96 1.99 1.84 1.94 ................ 1.87 ................ 1.86

In response to comments on its

production volume assumptions prior to

the publication of the Supplemental

ANOPR, the Department had reduced its

heat pump production volume from

125,000 units per year to 25,000 units

per year. However, since heat pumps

and air conditioners are typically

produced with the same plant

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59599

equipment, reducing the production

volume significantly increases the

overhead allocated to each heat pump

produced. The higher overhead

allocation raises the cost of the baseline

heat pump, lowering the relative cost of

producing equipment at higher

efficiency levels. To compensate for this

overestimate of overhead allocation, we

set the split heat pump overhead

allocation equal to that of the split air

conditioner at each efficiency level.

The Department believes that the

revisions to the split heat pump and

packaged equipment production costs

have improved the cost estimates for

those product classes and that no

additional equipment samples need to

be subjected to tear-down or reverse

engineering analysis. The revised

reverse engineering cost estimates were

used in the analysis for today’s

proposed rule.

2. Productivity Efficiency Improvements

According to the American Council

for an Energy Efficient Economy

(ACEEE), Census Bureau Current

Industrial Report (CIR) data suggest that

the unit price of equipment shipments

below 65,000 Btu/hr fell in real terms

between 1992 and 1997. (ACEEE, No. 43

at 4). ACEEE suggested that the

Department apply an annual deflator of

1.7% to projected prices to account for

this apparent productivity

improvement.

For other rulemakings, the

Department has used production input

costs and production technologies based

on the best information available at the

time. DOE has not made any

assumptions about productivity

improvements and material cost

changes over time. The Department does

not believe historical price trends for

unitary air conditioners, or other

products, can be applied to forecast

equipment costs where there are no data

to indicate the trends will continue.

Therefore, without specific data on the

likely costs to manufacture a product,

the Department will not apply a

productivity improvement factor in this

rulemaking or other rulemakings.

3. Emerging Technologies

Emerging technologies that are not

established in the residential central air

conditioning market have the potential

to lower the cost of achieving higher

efficiency. In the Supplemental ANOPR,

we considered advances in variable

speed and variable capacity

compressors, and reductions in the cost

of variable speed fan motors and

parallel-flow, microchannel heat

exchangers to be potentially viable

methods for increasing the efficiency of

equipment at a lower cost than currently

established methods.

Bard Manufacturing (Bard), Unico,

Inc. (Unico) and NRDC disagreed with

this approach, questioning whether

some of the technologies considered

were commercially and technically

viable, but proposed no other

technologies for consideration. (Bard

Manufacturing, No. 28 at 4; Unico, No.

34 at 1; NRDC No. 35 at 11–12). ARI

stated that they considered some

compressor and motor advances but not

microchannel heat exchangers in their

relative production cost data. (ARI No.

48 at 3). The Trane Company (Trane)

and Edison Electric Institute (EEI) also

expressed concern over some apparent

inconsistencies in the emerging

technologies analysis presented in Table

4.16 and the use and calculation of the

Carnot efficiency on page 4–27 of the

Supplemental ANOPR TSD. (Trane, No.

23 at 2; and EEI No. 20 at 3).

Pacific Gas and Electric (PG&E)

voiced concern that new technologies,

such as the Bristol modulating

compressor, could reduce costs to the

point that manufacturers may use them

at lower SEER levels resulting in a

negative impact on peak loads and

electrical system reliability. (PG&E, No.

31 at 3).

The emerging technology analysis

based on reverse engineering

information seems to confirm that, of

the technologies considered, only

variable capacity compressors and

variable speed fan motors have the

potential to be cost options for

providing additional efficiency

compared to today’s established

technologies. This provides evidence

that ARI is justified in not considering

the potential benefits of microchannel

heat exchangers as part of its relative

cost data submission. Therefore, we will

apply emerging technologies only to the

reverse engineering results and consider

the ARI relative cost multipliers to

already include the effects of emerging

technologies.

We do not believe our original

emerging technology analysis was

inconsistent, as expressed by Trane and

EEI above, although we do recognize

that combining the effects of component

efficiency improvements does not

necessarily lead to a cumulative

improvement in the system. The intent

of the analysis is not to provide a

definitive estimate of the impact of any

or all emerging technologies on system

cost. It is to provide evidence as to the

extent to which reverse engineering

overestimates the cost of higher

efficiency equipment by neglecting

emerging technologies. Therefore, the

method used previously for portraying

and combining the potential effects of

emerging technologies on system costs

is carried forward into today’s rule.

Chapter 2 of the TSD provides the

details of the revised emerging

technologies analysis.

4. HFC-Based Engineering Analysis

ARI and Trane supported the

Department’s decision not to explicitly

examine the effects of the HCFC

phaseout on equipment cost and

efficiency. (Wethje, ARI, Transcript p.

145; Crawford, Trane, Transcript p.

143). The Oregon Energy Office (OEO)

and NRDC urged the Department to

reconsider, given that a large fraction of

the equipment sold under the new

efficiency standard will likely use a

refrigerant other than HCFC–22, even

prior to the 2010 phaseout date.

(Stevens, OEO, Transcript, p. 144;

NRDC, No. 35 at 11–12).

To date, no data presented to the

Department indicate that the

incremental cost for increasing the

efficiency of equipment using either

HFC–407c or HFC–410a refrigerants will

differ significantly from the incremental

cost of increasing efficiency using

HCFC–22 equipment. Although the base

cost may differ somewhat, the

incremental cost determines the lifecycle-cost savings. Furthermore, the

Department continues to receive

information that much of the market is

changing to HFC–410a and that HFC–

410a offers little, if any, efficiency

benefit over HCFC–22 at the same

equipment cost.

For these reasons, the Department

will not perform additional engineering

analysis related to alternate refrigerants.

The costs to manufacturers related to

their conversion to the new refrigerant

will be considered in the Manufacturer

Impact Analysis.

B. Life-Cycle-Cost Parameters

1. Extended Warranty and Service Costs

Energy Market and Policy Analysis,

Inc. (EMPA) noted that the Life Cycle

Cost analysis did not explicitly address

extended warranty and service costs and

asserted that they should be taken into

account. (Schleede, EMPA, Transcript,

p. 221). The Alliance to Save Energy

(ASE) stated that the inclusion of

extended warranty and service costs

would have the impact of reducing

repair and maintenance costs. (Prindle,

ASE, Transcript, p. 222). Industry

consultant Joseph Pietsch stated that

manufacturers may provide longer-term

warranties for high efficiency systems

that cover a wider range of components,

to alleviate customer concerns regarding

possible future repair cost of the more

59600 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

13 ‘‘Bucher, M.E., Grastataro, C.M., and Coleman,

W.R., ‘‘Heat Pump Life and Compressor Longevity

in Diverse Climates.’’ ASHRAE Transactions, 1990.

96(1): p. 1567–1571.

complex systems. (Pietsch, No. 36 at

22).

Air conditioner manufacturers

warranty their equipment against

defects, and contractors typically

guarantee performance and installation.

Manufacturer warranties typically cover

parts and labor for one year, with longer

warranties applying to the compressor.

Mr. Pietsch noted that compared to lowSEER products, high-SEER products

have more components, many of which

have a relatively short history.

Reliability patterns of these new

components are less known, so warranty

accruals may be significantly higher for

these products. (Pietsch, No. 36 at 22).

Dealers also may offer extended

warranties which are usually

underwritten by the manufacturer or a

third party.

A product that is less reliable or

contains more expensive components

will have a higher cost of repair over its

lifetime. Either the consumer or the

warranty provider will bear that added

cost directly through more frequent

service calls or higher repair costs. If the

cost is covered by warranty, however,

the warranty provider passes it back to

future warranty holders in the form of

slightly higher warranty prices. DOE

believes the incremental increase in the

price of the warranty is equal to, or just

slightly higher, than the discounted

present value of the incremental repair

costs over the life of the warranty. Over

the long term then, the average

consumer always incurs the cost of

higher repair costs, either directly or

through higher warranty prices. Since

our analysis considers the present value

of consumer life cycle costs on the

average consumer, incremental repair

costs and incremental warranty costs are

the same, and interchangeable.

Since consideration of repair costs is

satisfied by considering either repair

costs or extended warranties, we limited

our consideration to repair costs, which

are slightly easier to estimate,

communicate, and incorporate into the

analysis. Considering them both would

require a much more rigorous analysis

of service costs since we would have to

estimate the service cost incurred on a

year-by-year basis. That additional

analysis would likely not produce

significantly different results.

Comments are welcome as to whether

explicit consideration of extended

warranties would produce significantly

different results from those based on

service costs alone which we have

assumed rise in proportion to the price

of the equipment. Since more efficient

equipment is also more expensive, we

have included the higher cost of repair,

or equivalently, the higher warranty cost

associated with more efficient

equipment, as part of the lifecycle cost

analysis.

2. Residential Energy Consumption

Survey (RECS)

Both NRDC and EMPA asserted that

RECS’’ method for estimating end-use

energy consumption (i.e., conditional

demand analysis) yields unreliable and

flawed results. NRDC added that

conditional demand analysis methods

inherently underestimate central air

conditioner energy use due to its

treatment of internal loads. EMPA stated

that the RECS household sample size is

too small to be used in the manner in

which it is being treated in the life-cycle

cost analysis. (NRDC, No. 35 at 6–7;

EMPA, No. 33 at 4–6; Schleede, EMPA,

Transcript, pp. 160–161). Virginia

Power, EEI, and EMPA all requested

that the analysis be updated to use

RECS 1997 data rather than RECS 1993

data. EEI added that actual submetered

end-use data should be used if possible

rather than the end-use data in RECS.

(Virgina Power, No. 27 at 2; EEI, No. 20

at 5, Schleede, EMPA, Transcript, pp.

160–161).

As part of the process to improve the

new energy efficiency standards

analysis, we are committed to use

sensitivity analysis tools to evaluate the

potential distribution of impacts among

different subgroups of consumers. The

Department believes that RECS provides

a nationally representative household

data set which is suited for conducting

the type of sensitivity analyses

suggested by the Process Rule. Limiting

the RECS households to those equipped

with either central air conditioners or

heat pumps, the LCC analysis performs

a household-by-household analysis that

predicts the percentage of households

that will incur net life-cycle cost savings

or costs from an increased efficiency

standard.

End-use energy consumption data

from past RECS surveys have been

compared to submetered end-use data

for purposes of validating their

conditional demand analysis estimates.

Central air conditioning and spaceheating energy data from the 1990 RECS

were shown to differ by 5% to 22%

compared to submetered end-use data

from five utility service areas. The

Department believes that this range of

difference is acceptable considering that

the conditional demand analysis

utilized by RECS is fully capable of

estimating the energy consumption of

equipment throughout the nation.

Because RECS is a very well suited

source of data for performing the

analyses suggested by the Process Rule

and RECS has been shown to provide

reasonable estimates of end-use energy

consumption, we will continue to rely

on RECS for providing the annual

energy consumption data necessary for

conducting the life-cycle cost analysis.

The analysis conducted in support of

this proposed rule has been revised

based on data from the 1997 RECS

rather than the 1993 RECS.

3. Equipment Lifetime

Virginia Power, EEI, ARI, Unico,

Rheem Co., and Trane commented that

the average equipment lifetime of 18.4

years assumed in the Supplemental

ANOPR was incorrect, and suggested an

actual lifetime between 12 and 15 years.

(Virginia Power, No. 27 at 2; EEI, No. 20

at 10; ARI, No. 48 at 3; Unico, No. 34

at 3; Lux, Rheem Co., Transcript, p. 165;

Foster, EEI, Transcript, p. 170;

Crawford, Trane, Transcript, p. 191;

Wethje, ARI, Transcript, p. 193). EMPA

asserted that the length of first

ownership should be used as the basis

for equipment lifetime. (EMPA, No. 33

at 3, Schleede, EMPA, Transcript, p.

162).

NRDC, ACEEE, and the Vermont

Energy Investment Corporation (VEIC)

all believed that the 18.4 year

equipment lifetime was reasonable.

They reasoned that a shorter or longer

average equipment lifetime would result

in less accurate estimates of historical

shipments. ACEEE added that unless

manufacturers can provide new data,

the 18.4 year average lifetime should be

retained. (NRDC, No. 35 at 7–8; ACEEE,

No. 43 at 6–7; VEIC, No. 32 at 7).

The Department notes that the basis of

the 18.4 year equipment lifetime was a

survey conducted on more than 2,100

heat pumps in a seven state region of

the U.S.13 The survey determined not

only the lifetime of a complete heat

pump system, but the life of the original

compressor as well. Although the

system lifetime is on average over 18

years, the survey also showed that the

original compressor lifetime was, on

average, 14 years. Thus, the survey

indicated that essentially all heat pump

owners replaced their original

compressor once in the lifetime of

system.

In the LCC analysis conducted for the

Supplemental ANOPR, we did not

include any repair costs associated with

replacing the compressor. But since the

heat pump survey clearly indicates that

the original compressor is replaced once

in a system’s life, the analysis was

revised to include a repair cost for the

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59601

compressor. Conducting the analysis in

this manner retains the average system

lifetime of 18.4 years but explicitly

addresses the replacement cost of the

compressor, which is the most

expensive component of a system. As

indicated by the survey data, the

compressor was assumed to be replaced

in the 14th year of the system’s life. In

addition, because more efficient systems

tend to use more efficient and, thus,

more expensive compressors, the

compressor replacement cost was

assumed to vary with system efficiency.

Although the revised LCC analysis

assumed an 18.4 year average

equipment life and one compressor

replacement, a shorter equipment

lifetime was investigated as an

alternative scenario. In this alternative

scenario, a retirement function yielding

an average lifetime of 14 years was used

and compressor replacement costs were

not considered. The shorter equipment

lifetime is plausible assuming that most,

if not all, consumers when faced with

replacing a failed compressor would

choose to replace the entire system

rather than replace the compressor in a

relatively old system. LCC results based

on both the 18.4 year and 14 year

average equipment lifetimes are

provided in Section VI as well as

Chapter 5 of the TSD.

4. Commercial Applications

NRDC, ACEEE, VEIC, CEC, and the

Northwest Power Planning Council

(NPPC) commented that DOE should

analyze the application of residential

central air conditioners and heat pumps

(i.e., single-phase equipment) in

commercial buildings. All stated that

there is a significant portion of this type

equipment being used in small

commercial buildings. They argued that

since the energy use patterns in

commercial buildings are distinctly

different than those in households, the

analysis should include residential

equipment use in commercial

applications. (NRDC, No. 35 at 12–13;

ACEEE, No. 43 at 2; VEIC, No. 32 at 6–

7; CEC, No. 47 at 8; Tom Eckman, NPPC,

Transcript, p. 166).

EEI requested clarification as to how

the commercial application analysis was

conducted for the Department’s January

14, 2000, LCC Sensitivity Analysis. (EEI,

No. 20 at 10).

For today’s proposed rule, the use of

residential equipment in commercial

buildings was analyzed assuming that

10% of all central air conditioners and

heat pumps are used in commercial

applications. This figure is based on

ARI’s estimate that approximately 10%

of single-phase air conditioning and

heat pump shipments are used in

commercial buildings. The annual

energy consumption of commercially

applied air-conditioning and heat pump

equipment was based on the simulation

of 77 nationally representative

commercial buildings consistent with

the approach and assumptions utilized

to develop the American Society of

Heating, Refrigerating and AirConditioning Engineers’ (ASHRAE)

Standard 90.1–1999. Both average and

marginal electricity rates were

developed by matching a set of

commercial electric utility tariffs to the

above simulated building loads and

demands.

The LCC spreadsheet models were

modified so that commercial buildings

with their corresponding annual energy

consumption and marginal and average

electricity costs represent 10% of the

entire residential and commercial

building population. Complete details

on the procedure to incorporate

commercial applications are included in

Chapter 5 of the TSD.

5. Marginal Electricity Prices

NRDC, ACEEE, CEC, PG&E, NPCC,

and ASE commented that the

Supplemental ANOPR analysis

underestimated future marginal

electricity prices. Several of the

comments stated the belief that

deregulation of the electric utility

industry would result in greater

volatility of electricity pricing that

eventually would translate into higher

electricity prices during peak power

periods. (Goldstein, NRDC, Transcript,

p. 175; ACEEE, No. 43 at 6; CEC, No. 47

at 8; PG&E, No. 31 at 6–7; Eckman,

NPPC, Transcript, pp. 167–168; Prindle,

ASE, Transcript, p. 168).

ARI and EEI were not convinced that

a deregulated electric utility industry

would result in higher electricity prices

in the future. ARI noted that under a

peak pricing scenario consumers may

decline to operate their air-conditioning

equipment to avoid incurring high

electricity bills. EEI added that

currently, there is no mechanism to

capture utility capital costs for

providing peak power in residential

pricing. (Wethje, ARI, Transcript, pp.

168–169; Foster, EEI, Transcript, pp.

169, 175–176).

The current method for establishing

marginal electricity prices only allows

for defining marginal prices for those

years in which data are available. In the

case of residential pricing, the data for

establishing marginal prices (the 1997

RECS) was taken from the year 1997.

The same can be said for commercial

buildings. The utility tariffs used to

establish marginal prices (as described

earlier) were collected in the year 1997.

On average, residential marginal prices

for households with central air

conditioners are 3% lower than average

rates while for households with heat

pumps marginal prices are 7% lower.

Space-cooling marginal prices in

commercial buildings are on average 2%

greater than average commercial rates.

Future marginal prices were in turn

based upon the Reference Case

electricity price forecast from the

AEO2000. The Reference Case forecasts

declining electricity rates through the

year 2020. Although it is certainly

possible that future electricity rates may

increase in a deregulated climate, the

evidence to date (i.e., residential

marginal prices are actually lower than

average rates and AEO 2000 forecasts

project declining electricity rates)

convinces us that our current methods

for establishing marginal prices are

reasonable. To state that future prices

may decrease or increase is speculative.

Even in the case of commercial

buildings where demand pricing already

exists, marginal prices are only 2%

greater than average electricity rates.

This reenforces our conviction to keep

our current methodology for

establishing marginal prices. However,

the Department seeks comments on its

methodology and data for determining

the appropriate marginal energy costs to

use in future analysis.

6. Forecast of Future Electricity Prices

EMPA asserted that the EIA’s forecast

of electricity prices as found in the

Annual Energy Outlook underestimates

the future drop in electricity rates.

(EMPA, No. 33 at 2–3; Schleede, EMPA,

Transcript, p. 185). Don Dasher stated

that any forecast of electricity prices

should capture the future use of

renewable energy and emerging

technologies for generating power.

(Dasher, Transcript, pp. 192–193).

Future marginal prices are based upon

the Reference Case electricity price

forecast from the AEO 2000. The

Reference Case forecasts declining

electricity rates through the year 2020.

Although it is certainly possible that

future electricity rates may increase in

a deregulated climate, the evidence to

date (i.e., residential marginal prices are

actually lower than average rates and

current AEO forecasts project declining

electricity rates) leads us to believe that

our current methods for establishing

future marginal prices are reasonable.

In addition to the Reference Case,

DOE analyzed the effects of two other

energy price forecasts, the AEO 2000

High Growth and Low Growth cases.

(See TSD, Chapter 5.)

59602 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

7. Discount Rates

NRDC, ACEEE, VEIC, PG&E, and CEC

believe that the discount rate used in

the Supplemental ANOPR analysis was

too high. Their primary criticism

pertained to the breakdown of finance

methods which were assumed for

establishing the discount rate. The

Supplemental ANOPR analysis assumed

that 35% of consumers purchasing a

central air conditioner or heat pump

used a credit card to finance their

purchase. The comments argued for a

much lower percentage and cited a

recent PG&E survey that demonstrated

that only 5% of consumers used credit

cards. VEIC also cited a survey by

Potomac Electric Power Company

(PEPCO) that reported lower purchases

with credit cards. (NRDC, No. 35 at 10–

11; ACEEE, No. 43 at 3; VEIC, No. 32 at

3–4; Neme, VEIC, Transcript, pp. 186–

187; PG&E, No. 31 at 7; CEC, No. 47 at

7). Counter to the above assertion, Trane

maintained that the Supplemental

ANOPR’s assumption regarding the

percentage of consumers using credit

cards to purchase equipment was

correct, based on the number of

consumers in the U.S. that carry credit

card debt. (Crawford, Trane, Transcript,

p. 191–192). EEI commented that the

interest rates associated with credit card

and cash purchases needed to be

revisited. (EEI, No. 20 at 6). EMPA

asserted that with higher cost air

conditioners, consumers’ after tax

income would be reduced, requiring

them to forego the purchase of various

household necessities such as food,

clothing, and shelter. (EMPA, No. 33 at

3).

The Department performed an

extensive review and revision to the

methodology that determines consumer

discount rate. The Supplemental

ANOPR established the share of various

finance methods used for purchasing

air-conditioning equipment and

determined the associated interest rates

for each of the finance methods. For

equipment obtained through the

purchase of a new home, second

mortgage, or home equity lines of credit,

this approach is reasonable. But for

purchases made to replace old or failed

equipment where cash or some form of

credit is used to finance the acquisition,

we determined it more appropriate to

establish how the purchase affects a

consumer’s overall household financial

situation. For example, even though the

purchase might be financed through a

dealer loan or some other low interest

financing vehicle, the more probable

effect of the purchase is to either cause

the consumer to incur additional credit

card debt or forego their investment in

some type of savings-related asset. Cash

that was once available to either pay for

household necessities or to invest in an

asset like the stock market or a simple

savings account now must be earmarked

to pay off the equipment purchase loan,

thus, either causing the consumer to

incur additional credit card debt or to

lose the opportunity to earn income

from their assets. For today’s proposed

rule, we have decided to use the above

methodology for defining the discount

rate for central air conditioner and heat

pump purchases. The 1998 Survey of

Consumer Finances (SCF) was used to

estimate the percentage of households

that used second mortgages to finance

their equipment purchase as well as

those households that either would

incur more credit card debt or be forced

to forgo their normal course of

investing. Data from the Air

Conditioning, Heating, and Refrigeration

News (December 12, 1998) established

the percentage of shipment going to new

homes.

After establishing the share captured

by each finance method, the range of

interest rates due to each method were

developed. The 1998 SCF established

the range of interest rates for new home

mortgages, second mortgages, and credit

cards. Rates of return on certificates of

deposit, savings bonds, and bonds were

based on historical interest rates. A

weighted-average discount rate of 5.6%

is calculated from the mean interest

rates for each finance method. A more

detailed discussion of the data sources

and how the interest rates were derived

is found in Chapter 5 of the TSD.

8. Percentage of Households With LCC

Savings

For the Supplemental ANOPR, all

consumers having an LCC increase

resulting from the standard were

considered to be adversely impacted.

Several comments expressed concern on

how we would use this information on

adverse consumer impacts in selecting

minimum efficiency standards. ARI,

Unico and EMPA asserted that a

majority of households would need to

benefit from the standard in order to

justify its selection. (ARI, No. 48 at 5;

Unico, No. 34 at 3; EMPA, No. 33 at 2).

NRDC stated that the percentage of

households with LCC savings or costs

relative to the baseline level should not

be a criterion in basing a standard’s

economic justification. NRDC stated that

variations in electricity pricing make it

nearly impossible to determine

consumer costs on a disaggregated level.

(NRDC, No. 35 at 12–15). PG&E

commented that the percentage of

households at any particular standard

level with net LCC costs actually

overstates the significance of the

negative LCC impacts. Most consumers

experience LCC increases of only a few

dollars over the life of the equipment.

(PG&E, No. 31 at 8).

The Department agrees with PG&E’s

comment and in formulating today’s

proposed rule, DOE has redefined the

criteria for determining negative

impacts. Noting that the baseline LCC is

approximately $5,000 for central air

conditioners and $10,000 for heat

pumps, previously all consumers

incurring an LCC increase as small as

$10 were considered to be adversely

impacted by an increase in the standard.

In the revised LCC analysis, the

Department defines consumers impacts

as follows: consumers who achieve

significant net LCC savings (i.e., LCC

savings greater than 2% of the baseline

LCC), consumers who are impacted in

an insignificant manner by having either

a small reduction or small increase in

LCC (i.e., within ±2% of the baseline

LCC), or consumers who achieve a

significant net LCC increase (i.e., an LCC

increase exceeding 2% of the baseline

LCC). Consequently, only consumers

(both residential and commercial)

having an LCC increase greater than 2%

of the baseline are considered to be

negatively impacted.

9. Regional Analysis

At the December 9, 1999, public

workshop, NRDC and CEC requested

further information on regional

distributions of households with net

LCC savings or costs relative to the

regional baseline level. (Goldstein,

NRDC, Transcript, pp. 188–189; Martin,

CEC, Transcript, p. 274). The

Department responded by conducting

additional analysis, which was posted

to our web site on January 14, 2000, and

included LCC analysis disaggregated by

region into census divisions. From this

regional analysis it could be determined

how different parts of the country

would be impacted by an increase in the

minimum efficiency standard.

10. Rebuttable Payback

EEI asked why the rebuttable payback

period is not determined with annual

energy use data from RECS. They also

requested clarification as to how

rebuttable payback periods will factor

into the decision to select a new

minimum efficiency standard. (EEI, No.

20 at 7–8).

As prescribed by section

325(o)(2)(B)(iii) of EPCA, the rebuttable

payback period is calculated under the

applicable test procedure. Thus, all

rebuttable payback periods are based on

an annual energy consumption that is

determined through the current

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59603

14 Jeffrey A. Dubin, Allen K. Miedema, and Ram

V. Chandran, 1986. ‘‘Price effects of energy-efficient

technologies: a study of residential demand for

heating and cooling,’’ Rand Journal of Economics,

Vol 17, No. 3, Autumn, pp 310–324.

Department of Energy test procedure for

central air conditioners and heat pumps.

The resulting annual energy use as

determined by the test procedure is

significantly greater than what is

indicated by RECS. Thus, the rebuttable

payback periods are significantly shorter

than those based on the RECS annual

energy consumption data.

The rebuttable presumption test does

not consider the full range of impacts of

standards, including manufacturer

impacts and energy savings. Therefore,

the Department bases its decision

primarily on the seven factors specified

in section 325(o) of the Act.

11. Sensitivity Analyses

ACEEE recommended that several

sensitivity analyses be conducted to

determine how the LCC varies with

changes in certain input variables.

(Nadel, ACEEE, Transcript, pp. 233–

236; ACEEE, No. 43 at 10). NRDC also

requested some of the sensitivity

analyses described by ACEEE. (NRDC,

No. 35 at 12–13). Trane went on the

record as not endorsing all of ACEEE’s

requested sensitivities. (Crawford,

Trane, Transcript, p. 237).

We conducted several of the

requested LCC sensitivity analyses, as

well as the previously described

regional analyses, and posted the results

to our web site on January 14, 2000. The

sensitivities examined how the LCCs for

central air conditioners and heat pumps

were impacted by changes in the

following: dealer markups, builder

markups, repair costs, lifetime,

emerging technologies, and the use of

single-phase central air conditioning

and heat pump equipment in

commercial applications. Of the

sensitivities examined, the assumption

of fixed margins (i.e., no variation in the

difference between the equipment price

to the consumer and the cost to

manufacture with increased efficiency)

had the largest impact on the LCC

results. Changes in the lifetime had a

noticeable affect but not the same order

of magnitude as the fixed margin

assumption. All other sensitivities had

only minor impacts on the LCC results.

In preparing the sensitivity analyses,

we found reason to revise our

assumptions regarding markups,

compressor replacement, and

commercial applications. Those

revisions are incorporated into the

analysis that supports today’s proposed

rule and are discussed elsewhere in this

Section.

C. Shipments Analysis

1. Forecasted Housing Shifts

Both the OEO and NPPC stated that

there will likely be significant shifts in

regional housing populations. For

example, future housing shifts may

result in more housing in warmer

weather climates where central air

conditioning is more prevalent and used

more often, thus, impacting the nation’s

future space-conditioning energy use.

Since the Shipment Analysis does not

account for regional housing shifts, OEO

and NPPC request that it be accounted

for in the analysis. (Stephens, OEO,

Transcript, pp. 171–172; and Eckman,

NPPC, Transcript, pp. 216–217).

Preliminary analysis of regional

housing shifts has been examined and

determined to have a relatively small

effect (i.e., a maximum change of 2% in

the cumulative amount of monetary

energy savings). This is primarily due to

the large size of the housing stock and

the fact that changes in the housing

stock occur over a long time scale

resulting in slow changes in regional

housing shifts. A preliminary analysis of

historical housing data coupled with

worst case forecasts of regional housing

and air-conditioning market share shifts

demonstrated the small impact on

national NPV due to changes in regional

housing.

New housing starts are only about 2%

of existing housing stock and this is

forecast to decrease to about 1% of

housing stock by 2030. Historical data

over the period from 1980 to 1990

showed the shift in regional shares of

housing stock changed by less than 2%

(decreased by 1.2% and 1.7% in the

Northeast and Midwest, respectively,

and increased by 1.7% and 1.2% in the

South and West, respectively). If these

changes continue at a steady rate, the

housing share of the Northeast will

decrease another 3.6% over three

decades. This translates to a relative

decrease of 17% in the Northeast’s airconditioning market share. If the entire

loss in the Northeast’s market share goes

to that portion of the South with the

highest annual energy use (Census

Region 7), the absolute market share of

this region would increase from 15.7%

to 17.7%. The result of this change is

that the dollar value of energy savings

at a 12 SEER standard level would

increase from $5.73 billion to $5.85

billion, or about a 2% increase in the

dollar energy savings. The actual impact

on dollar savings would likely be less

than half of this because the above

housing shift was assumed to be

immediate and to the highest energy use

area of the South. As a result, the actual

impact would likely be less than 1% on

the dollar value of the energy savings.

For these reasons, the Department has

not revised its Shipments Analysis to

account for shifts in regional housing

populations.

2. Elasticities

Both ACEEE and NRDC note that the

purchase price elasticities are based on

data from the 1970s and are likely no

longer applicable to current market

conditions. Both stated that price

elasticities should be developed from

more recent data. (ACEEE, No. 43 at 10;

Nadel, ACEEE, Transcript, p. 211;

Goldstein, NRDC, Transcript, pp.211–

212).

This has been corrected for in the

analysis underlying today’s proposed

rule. We have calibrated elasticity for

price relative to household income, with

historical data from 1970 to 1996. It is

worth noting that for forecasting future

shipments, consumer purchase

decisions are based upon sensitivities to

changes in product life-cycle cost

relative to income. Life-cycle cost

changes are dependent on the purchase

price and the present worth of operating

cost savings. Operating cost savings are

in turn dependent on electricity prices.

As electricity prices are forecasted to

decrease over time (based on the Annual

Energy Outlook 2000), operating cost

savings due to a particular increase in

equipment efficiency will in turn

decrease over time and have less of an

impact on consumer purchase

decisions.

Usage elasticity expresses how

changes in equipment efficiency

resulting from higher standards changes

consumer behavior regarding air

conditioners and heat pumps usage.

Because of lower operating costs,

consumers may change thermostat

settings and/or operate the systems for

longer hours to achieve greater comfort.

Direct evidence of the magnitude of this

effect is limited and the Department is

interested in receiving comments. One

study 14 indicated that in summer

months consumers may take 1–2% of

the cooling energy savings back in

increased usage, and 9–13% in winter

months. Usage elasticity has not been

considered in the current analysis but

will be considered in the Final Rule.

3. Equipment Efficiency

Several comments received

questioned the use of a weightedaverage equipment efficiency equaling

the SEER of the standard level for

59604 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

15For more information on NEMS, please refer to

the U.S. Department of Energy, Energy Information

Administration documentation. A useful summary

is National Energy Modeling System: An Overview

1998, DOE/EIA–0581(98), February, 1998. DOE/EIA

approves use of the name NEMS to describe only

an official version of the model without any

modification to code or data. Because our analysis

entails some minor code modifications and the

model is run under various policy scenarios that are

variations on DOE/EIA assumptions, the name

NEMS-BRS refers to the model as used here (BRS

is DOE’s Building Research and Standards office,

under whose aegis this work has been performed).

forecasting shipments and national

energy savings. All asserted that in the

event of an increase in the minimum

efficiency standard, the actual weightedaverage efficiency of equipment in the

marketplace would be greater than the

minimum efficiency standard. For

example, if a 12 SEER standard was set

as the new minimum, the weightedaverage efficiency would be equal to a

value which was greater than 12 SEER.

(Neme, VEIC, Transcript, pp. 214, 226–

227; Nadel, ACEEE, Transcript, p. 228;

NRDC, No. 35 at 8–9; PG&E, No. 31 at

6–7).

The Department has modified several

assumptions with regard to future

equipment efficiencies. The Shipments

Model no longer simply forecasts a

weighted-average equipment efficiency,

but rather, an actual distribution of

efficiencies i.e., the percentage of

shipments which occur in incremental

SEER bins over the range of the

minimum standard 10 to 18 SEER).

Also, as discussed in Section IV, three

efficiency scenarios are provided to

model future equipment efficiencies.

The impact of the three different

scenarios on national energy savings

and national net present values are

discussed in Section VI.

EEI asked the reason for assuming the

weighted-average efficiency remains

fixed at the same SEER level from the

year 1997 to the assumed effective date

of standard (2006). (EEI, No. 20 at 7–8).

Historical data from the years 1994

through 1997 indicate that shipmentweighted efficiencies have remained

essentially flat. As a result, weightedaverage efficiencies were assumed to

remain constant from 1997 through

2006.

4. Fuel Switching

EEI, York, Virginia Power and

Southern Company stated that shipment

forecasts must account for any fuel

switching that might occur as a result of

increased heat pump prices to the

consumer. The concern is that an

increase in the total installed price of a

heat pump would cause some

consumers to choose a gas-space heating

appliance rather than an electric heat

pump. (Foster, EEI, Transcript, p.263;

Madera, York, Transcript, p.264;

Virginia Power, No.27 at 2–3; Southern

Company, No. 29 at 1–2). ACEEE stated

that any incorporation of fuel switching

into the Shipments Model must account

for future changes in gas-fired spaceheating minimum efficiency standards.

(Nadel, ACEEE, Transcript, p.266).

Our examination of the historical data

tends to indicate that the relative

installed price of heat pumps is not the

primary driver in heat pump vs. gas

furnace purchase decisions. The more

important factor in these decisions

seems to be the availability of gas

service. In the middle 1980’s, there was

a large peak in gas prices relative to

electricity, but only a small, delayed

increase in the relative market share of

heat pumps. Besides this one historical

event, the relative market share of heat

pumps has been relatively constant from

1977 to the present.

D. National Energy Savings Analysis

Changes to the LCC assumptions

impact the NES and the National Net

Present Value (NPV) analyses directly as

the NES analysis uses the same basic

data as the LCC analysis for the energy

use and cost of the central airconditioning and heat pump equipment.

As previously mentioned, estimates of

NES and NPV also depend on the

distribution of product efficiencies

among units sold after a standard takes

effect in the marketplace. For the

Supplemental ANOPR, the assumed

product efficiency distribution was

based on a weighted-average equipment

efficiency equal to the SEER of the new

standard level.

1. Uncertainty in NES Results

EEI believes that due to the

uncertainty in the electric utility

industry and its impact on future

electricity prices it is more appropriate

to represent the NES results with some

degree of uncertainty. (EEI, No. 20 at 8).

Although NES results presented in the

Supplemental ANOPR were based only

on electricity price estimates from the

Reference Case forecast from the 1999

Annual Energy Outlook, our NES

spreadsheets have provided users with

five different options for estimating

future electricity prices; 1999 AEO

Reference Case forecast, 1999 AEO High

Growth Case forecast, 1999 AEO Low

Growth Case forecast, 1998 Gas

Research Institute (GRI) forecasts, and

constant electricity prices. Providing a

number of options for forecasting future

prices recognizes the uncertainty in the

electric utility industry and how that

uncertainty can impact the NES results.

The NES uses single point values rather

than ranges as used in LCC;

consequently, NES provided single

point results rather than a range.

However, in order to account for the

uncertainty in electricity price forecasts,

DOE evaluated three energy price

scenarios in the NES. The NES

Spreadsheets have been made available

to all interested parties via our web site

to facilitate analysis of sensitivities for

assumptions different than those for the

Supplemental ANOPR. For today’s

proposed rule, we continue to provide

the same options for forecasting future

electricity prices with the exception that

AEO 1999 forecasts have been replaced

with those from the AEO 2000 as well

as the five options for energy prices as

described above.

2. Site-to-Source Conversion

Both the Southern Company and EEI

questioned the validity of the site-tosource conversions used in the NES

spreadsheet model. The Southern

Company and EEI asserted that

hydroelectric power and renewable

forms of electric energy are assigned

fossil fuel-fired power plant heat rates.

(Southern Company, No. 29 at 4–5; EEI,

No. 20 at 7).

We estimated the effects of proposed

central air conditioner and heat pump

standard levels on both the gas and

electric utility industries using a variant

of DOE/EIA’s NEMS–BRS, together with

some exogenous calculations.15 NEMS–

BRS is used to determine site-to-source

conversion factors and does not assign

fossil-fuel-fired power plant heat rates

to hydroelectric or renewable power

plants. The site-to-source conversion

factors used in the Supplemental

ANOPR are average annual values for

the residential sector. The average

conversion factors are based on all

forms of electricity generation with their

corresponding heat rates (e.g., heat rates

are assigned to fossil-fuel fired power

plants which are much different than

those assigned to other types of power

plants). As a result, the site-to-source

conversion factors are significantly

lower than if all power plants were

assigned the heat rates associated with

fossil fuel-fired power plants. For

today’s proposed rule, site-to-source

conversion factors are based on

recommendations of the Advisory

Committee on Appliance Energy

Efficiency Standards. In this analysis,

heat rates are based on determining how

a deviation in national energy

consumption due to standards impacts

the type of electricity generation. In

other words, heat rates are based on

those power plants which are avoided

as a result of the standard.

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59605

E. Consumer Sub-Group Analysis-Low

Income Renters

NRDC stated that impacts on lowincome renters should be investigated,

because such renters do not purchase

their space-conditioning equipment and

they have no choice as to the efficiency

of the equipment which is used to

space-condition their home. (NRDC, No.

35 at 9).

We have investigated the economic

impact of standards on low-income

households, and have included such

impacts in section VI.D.7 of today’s

proposed rule and in Chapter 10 of the

TSD. But we have not investigated the

impacts on low-income renters

separately. Renters at each income level

are considered to have the same choice

in efficiency as new home purchasers at

the same level. Regardless of whether a

household is occupied by an owner or

a renter, we implicitly assume that the

occupant incurs all costs of ownership,

either directly or through rent

payments. Therefore, we believe that

our consideration of low income

households generally applies to renters

as well as owners.

F. Utility and Environmental Analysis

1. Peak Power Impacts—Reliability

The CEC raised concerns over peak

power by stating that the western region

of the U.S. will soon face a capacity

shortfall which will necessitate

reductions in peak demand (CEC, No. 47

at 2–4). Leon Neal, Advanced Energy

Corporation (AEC), stated that because

of a relationship between SEER, EER,

and equipment capacity which is not

captured by using only the ‘‘nominal 3

ton’’ unit and SEER analyses, there were

important factors not addressed in the

DOE analysis. They argued that with

larger capacity units at higher SEER, it

is economic for manufacturers to use

multi-compressor units and multi-speed

compressor units, which results in a

penalty in EER. They noted major

national trends, i.e., increasing average

size of residential dwellings, the

tendency to sell bigger systems to

increase profits and compensate for

poor installations, and the distrust of

contractors for higher efficiency

equipment. (AEC, No. 17 at 1). EEI

stated that the consideration of peak

power impacts in setting new efficiency

standards departs from the Department’s

statutory mandate. (Foster, EEI,

Transcript, p. 176).

With regard to AEC’s concern that an

increase in the efficiency standard

would be accompanied by an increased

air-conditioning power demand, we are

not convinced that this situation would

occur. Over the last 20 years, while

shipment-weighted efficiency has

continually increased, usage has

remained relatively constant. Therefore,

we see no reason that a significant jump

in system usage would occur in

conjunction with higher efficiency

standards.

Regarding EEI’s claim that the

consideration of peak power impacts

departs from the Department’s statutory

mandate, section 325(o)(2)(B)(i)(VII) of

the Act, 42 U.S.C. 6295(o)(2)(B)(i)(VII),

allows the Secretary to consider other

factors deemed relevant for updating

minimum efficiency standards,

including peak power impacts.

2. Quantitative Assessment of Impacts

on Peak Demand

For purposes of estimating peak

demand impacts from an increase in the

central air conditioner and heat pump

energy efficiency standard, we are using

a version of the NEMS, called NEMS–

BRS. NEMS–BRS is run similar to the

AEO2000 NEMS except that central air

conditioner and heat pump energy

usages are reduced by the amount of

energy (electricity) saved due to the

proposed trial standard levels. The

input of energy savings are obtained

from the NES spreadsheet.

NEMS estimates peak power impacts

by determining the reduction in

installed generation capacity due to an

increase in the minimum efficiency

standard. For central air conditioners

and heat pumps, NEMS uses a single

nationally representative end-use load

shape to estimate peak power impacts.

The overall end-use load shape is

reduced in proportion to the amount of

energy savings achieved through an

increase in the standard. The reduction

in power demand achieved by shaving

the end-use load shape is extrapolated

to a national scale to come up with

nationally representative peak power

impacts. Thus, NEMS does not use the

equipment’s EER performance, per se, to

estimate peak power impacts. Rather,

because the load shape is shaved in

proportion to the energy savings, the

EER is implicitly assumed to increase in

proportion to the SEER.

The forecasted peak impacts using

NEMS–BRS are presented in Section VI

of today’s proposed rule.

3. Qualitative Assessment of Air

Conditioning Standards Impact on

Power System Reliability

We also recognize that reducing

growth in electricity demand during

peak periods may improve the

reliability of the U.S. electric power

system. But there are number of factors

with the electric power system itself

that may overwhelm any effect that an

improvement in residential air

conditioning efficiency might offer.

First, investment in system expansion

has fallen behind demand growth, and

future development may be limited by

siting constraints. Second, industry

restructuring requires the development

of new technologies, operating

procedures, and regulatory structures to

meet peak demands. And third, the

strong demand expansion of recent

years may well continue into the future.

Within this environment, the potential

benefits of a central air conditioner and

heat pump standard that could lower

growth in peak demand could be

desirable. But, due to the existing

problems with the electric power system

described above, it is difficult to assess,

in quantitative terms, the impact of an

air conditioner standard on system

reliability. Thus, in addition to the

planned activities to improve NEMS to

forecast more credible peak demand

impacts, we plan to assess the reliability

of the U.S. electric system to determine

what connection exists between end-use

peak demand reductions and system

reliability. The assessment will focus on

three areas: (1) Defining reliability, (2)

historic performance of the utility

system, and (3) analyzing near- and

long-term utility changes and how they

might impact reliability. In defining

reliability, we will use typical threats

(e.g., weather, tree falls, excess load, and

inaccurate demand forecasts) to put

system reliability into context. In

addition, industry indices for the

frequency of failures and the number of

customers affected will be used. With

regard to historic performance, we will

attempt to analyze the history of system

disturbances and estimate their

economic consequences. Finally, we

will look at the changes occurring in the

utility industry such as restructuring

and increasing demand growth to

determine to try and assess how these

future changes might impact reliability.

4. Competitive Residential Market

EEI asked whether NEMS, the model

which is used for forecasting utility and

environmental impacts, will be adapted

to model more accurately the

deregulated electric utility industry. As

part of the deregulated industry, EEI

stated that consumers will have choice

of electricity providers. In addition, the

industry will likely build more

merchant power plants. (EEI, No. 20 at

9).

Although we recognize that NEMS

may not be entirely accurate in its

modeling of the changing electric utility

industry, we believe it is still the best

tool for forecasting the impacts due to

increased central air conditioner and

59606 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

heat pump standards. We also recognize

the difficulty for any model or tool to

forecast changes in the utility industry.

Thus, the results from NEMS are used

to provide a gross picture of the impacts

that can be expected from the

imposition of new efficiency standards

for central air conditioners and heat

pumps. Sensitivities are conducted with

the AEO High Growth and Low Growth

cases to capture the variability that

could arise from changes in the electric

utility industry.

G. Manufacturer Impact Analysis—Low

Volume Manufacturers

First Company (First Co.) and

National Comfort Products commented

that the assumptions used in the

engineering analysis were not

applicable for low volume

manufacturers and urged the

Department to consider the situations of

all firms in the industry. (First Co., No.

40 at 10; National Comfort Products, No.

30 at 1).

Since the engineering analysis is used

to assess the impacts on consumers and

the nation, it is more appropriate to rely

on assumptions reflective of larger

manufacturers who control more than

95% of the market. However, we did

consider the special circumstances of

lower volume manufacturers as part of

the manufacturer impact analysis. We

interviewed the major manufacturers as

well as two smaller manufacturers, and

based on this information, estimated the

impact of standards on both large and

small manufacturers separately.

H. Markups

The Supplemental ANOPR’s

engineering analysis estimated the cost

of producing baseline air conditioners

and heat pumps and also estimated the

series of markups on that product cost

that yield the price of the equipment to

the consumer. Four markups were

applied: Manufacturer markup (1.18),

distributor/wholesaler markup (1.37),

dealer/contractor markup (1.54), and

sales tax (1.07). In general, these were

based on financial reports for each

group on a national basis.

NRDC, ACEEE and VEIC commented

that instead of applying average

markups to the incremental increase in

costs resulting from new standards, it

was more reasonable to apply a lower

markup to those incremental costs.

Otherwise, companies would receive a

windfall from the new standard, which

would surely not be the case in a

competitive industry such as heating,

ventilation, and air conditioning.

(NRDC, No. 35 at 6, ACEEE, No. 43 at

2, VEIC, No. 32 at 2). NRDC also

advocated the use of a fixed gross

margin in dollars rather than a fixed

percentage (NRDC, No. 35 at 6), while

EEI stated that the fixed percentage

assumption is unreasonable. (EEI, No.

20 at 10). ARI supported the markups

the Department used. (ARI, No. 48 at 4).

Department consultant Joseph Pietsch

stated that at the distributor level, since

no labor is involved to modify the

product, the markup is applied to a

well-documented material cost.

However, the distributor’s markup

percentage may vary by product type. If

the distributor’s mark-up prices to the

installing trade are not competitive in

the market served, the distributor might

have to seek price adjustments from the

manufacturer. Further, installing

contractors typically use a markup

procedure for labor that is most likely be

at a different percentage than a markup

for materials. (Pietsch, No. 36 at 23).

Finally, prompted by comments we

received, we now distinguish markups

based on whether products are sold into

new homes or as replacements or

retrofits. (Nadel, ACEEE, Transcript pp.

122–123; and Eckman, NPPC, Transcript

p. 152–153; CEC, No. 47 at 7).

After reviewing the comments and

publishing an interim analysis with

fixed dollar margin, the Department

undertook a thorough review of its

markup assumptions and made one

minor and one major revision.

First, at the manufacturer level, the

markups were raised slightly (from 1.18

to 1.24) partially to reflect new financial

data for a manufacturer who recently

completed an initial public offering, and

partially to incorporate results from the

MIA. The MIA suggests that firms

accrue a higher profit margin on

baseline equipment than the

conservative 1% assumed for the

Supplemental ANOPR’s Engineering

Analysis.

Second, at the distributor and dealer

levels, analysis of U.S. Census Bureau

data and recent industry financial

reports suggest that markups on changes

in the unit price of equipment are less

than the average markups for those

industries. In light of these new

findings, the markups for the

distributors and dealers on the

incremental increase in equipment cost

were lowered from 1.37 to 1.09 and 1.54

to 1.27, respectively. For the distributor,

the markup on the portion of equipment

cost equal to the cost of the baseline

equipment remains at 1.37. For the

dealer, the 1.27 markup is applied to the

total cost. The original 1.54 assumption

included the markup on the labor

portion of installation, which is not

appropriately applied to equipment. We

increased our estimate of the markup on

installation labor slightly to compensate

for the lower markup on equipment

price, keeping the overall installed price

the same. The Department’s pricing

information indicates that the total

installed price of baseline equipment is

accurate as published in the

Supplemental ANOPR. The overall

effect of these changes is to slightly

decrease distributor and dealer

equipment markups as the standard

level rises.

We introduced a new builder markup

of 1.27 for new construction markets

only and applied the sales tax rate of

1.07 in only replacement/retrofit

markets.

Table V.3 summarizes the changes in

markups. The Technical Support

Document (Chapter 5) provides more

details on the derivation of these new

estimates.

TABLE V.3.—COMPARISON OF REVISED MARKUPS AND SUPPLEMENTAL ANOPR MARKUPS

Type Revised analysis

markup

Supplemental

ANOPR markup

Manufacturer Markup ..................................................................................................................................... 1.23 ................... 1.18

Wholesaler/Distributor Markups:

10 SEER ................................................................................................................................................. 1.37 ................... 1.37

11 SEER ................................................................................................................................................. 1.33 ................... ..............................

12 SEER ................................................................................................................................................. 1.30 ................... ..............................

13 SEER ................................................................................................................................................. 1.26 ................... ..............................

Dealer/Contractor:

Equipment Markup .................................................................................................................................. 1.27 ................... 1.55

Installation Labor: a

Air Conditioner ................................................................................................................................. $1,279/$1,367 ... $1,190

Heat Pump ....................................................................................................................................... $2,280/$2,160 ... $2,035

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59607

TABLE V.3.—COMPARISON OF REVISED MARKUPS AND SUPPLEMENTAL ANOPR MARKUPS—Continued

Type Revised analysis

markup

Supplemental

ANOPR markup

Builder Markup ............................................................................................................................................... b 1.09 ................. c 1.00

Sales Tax ....................................................................................................................................................... b 1.04 ................. d 1.07

Overall Markup:

10 SEER ................................................................................................................................................. 2.42 ................... 2.68

11 SEER ................................................................................................................................................. 2.35 ................... 2.68

12 SEER ................................................................................................................................................. 2.30 ................... 2.68

13 SEER ................................................................................................................................................. 2.23 ................... 2.68

aFor revised analysis, first value pertains to split systems and second value pertains to single package systems.

bWeighted-average markups representing both the new construction and replacement markets.

cFor the SANOPR, builder markups were not considered.

dFor the Supplemental ANOPR, sales taxes representing only the replacement market were used.

I. EER-Based Efficiency Standard

The Department received numerous

comments on the relationship of steady

state efficiency (EER) to increases in

SEER. NRDC, ACEEE, VEIC, PG&E, CEC,

OEO, Unico and Southern Company

support the establishment of minimum

efficiency standards based on EER at an

outdoor temperature of 95°F,

(EER(95°F)) in lieu of, or in addition to,

SEER, which is based largely on an

outdoor temperature of 82°F. (NRDC,

No. 35 at 15–16; ACEEE, No. 43 at 8–

9; VEIC, No. 32 at 5; PG&E, No. 31 at

1–4; CEC, No. 47 at 5; OEO, No. 46 at

10–12; Unico, No. 34 at 2; Southern

Company, No. 29 at 3).

Their concern is that an increase in

SEER does not necessarily correspond to

an increase in EER, and that a 95°F

rating condition better represents the

performance of an air conditioner on hot

days when electricity demand is at its

highest. They believe that residential air

conditioners contribute significantly to

this peak demand, particularly in

warmer regions of the country. Since

electricity generation, transmission, and

distribution capacity is determined by

the electrical load served during these

peak demand times, products that

demonstrate improved efficiency under

peak conditions can reduce the need for

added electrical system capacity. They

also believe that reducing peak demand

is an important component of any

integrated plan to improve the

reliability of the nation’s electrical

system. Recently there have been

several well-publicized blackouts and

brownouts following, or in the midst of,

hot periods. Advocates of an EER-based

standard believe that a SEER-only

standard does not guarantee the desired

improvement in peak-period

performance.

1. Current Relationship Between SEER

and EER

It is certainly true that SEER is not an

ideal indicator of system efficiency in

very hot weather, and SEER may not be

the best indicator of the seasonal

efficiency for equipment operating in

the warmest regions of the country.

However, the relationship between

efficiency at 82°F and at 95°F is fairly

close for single-speed, single-capacity

equipment, which represents the vast

majority of unitary equipment in the

marketplace. For other equipment,

including variable or multi-speed

equipment or equipment with

modulating capacity, the 82°F test point

is given a great deal of weight in

determining the SEER rating. In these

cases, the relationship between SEER

and EER(95°F) is less certain, and

manufacturers have some flexibility and

incentive to improve SEER without

improving EER(95°F).

The SEER test, representing

equipment performance over the entire

cooling season, encourages

manufacturers to design equipment that

consumes less energy throughout the

cooling season for the average user. The

EER(95°F) test, which is a measure of

steady-state performance under only

one set of climatic conditions, cannot

provide insight into cyclical

performance or cooling efficiency at

cooler temperatures which represent the

bulk of the cooling season nationwide.

The Department, therefore, maintains

that a SEER-based standard is essential

to its effort to reduce national energy

consumption. Further, we assume that

peak demand savings would accompany

any seasonal energy savings resulting

from an increase in the required SEER

level, because of the relationship

between SEER and EER(95°F), and the

costs of increasing EER(95°F) are

already incorporated into the analysis.

However, the Department is

particularly interested in ensuring that

the current relationship between

EER(95°F) and SEER will remain intact

under new efficiency standards,

resulting in reduction in growth of peak

demand. This additional reduction in

peak demand growth would benefit

utilities through an eventual and

incremental reduction in the need for

new capacity. Maintaining higher

EER(95°F) would also benefit

consumers. Since the cost of electricity

is highest during periods of peak

demand, any decrease in electricity

consumption during peak-periods,

could reduce the user’s annual

electricity bill, particularly if the user

pays time-of-day or seasonal rates.

2. Options for Possible EER Standards

The Department has at least four

options for ensuring that EER(95°F)

performance is maintained under new

SEER standards. First, the Department

could rely on the physical relationship

between EER(95°F) and SEER to ensure

that an increase in SEER would result in

a corresponding increase in EER. The

Department is not aware of any

modulating, multi-speed, or variable

speed air conditioners (hereafter

referred to collectively as modulating

equipment) being offered below 13

SEER, and very few of the available 13

SEER products are modulating

equipment. Therefore, SEER and EER

are closely related in equipment

currently available at the efficiency

levels that, as discussed below, the

Department is proposing today to adopt

as minimum levels—12 SEER for air

conditioners and 13 SEER for heat

pumps. Assuming that relationship

holds under such new standards, EER

would increase as SEER increases.

The second option would be to

establish an EER(95°F) floor that must

be met by modulating equipment only

or, alternately, all equipment.

The third option would be to establish

a minimum EER requirement at each

SEER level, even for products exceeding

the minimum SEER level. Again, this

could be established for modulating

equipment only or for all equipment.

The fourth option would be to alter

the SEER test procedure to rely more on

95°F performance and less on

performance at cooler temperatures.

This would provide incentive for

59608 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

manufacturers to optimize their designs

to favor the warmer part of the cooling

season and warmer regions of the

country.

We consider the second and third

options to be the most attractive. While

we believe that the first option, relying

on the current relationship between EER

and SEER, would satisfy our concerns in

the foreseeable future, this option

provides no assurance that

manufacturers would not develop and

promote equipment in the long term

that would seriously reduce EER ratings.

The fourth option, altering the SEER test

procedure to favor higher temperatures,

would require us to embark on a new

rulemaking to establish those new

procedures and then to redo this rule to

incorporate the new SEER values. We

would prefer to avoid those delays and

the design uncertainty associated with

altering the procedures.

Both the second and third options,

mandating minimum EER ratings,

would guarantee that products under

new standards would achieve the same

EER ratings as they do today without

altering the test procedures. The third

option is more aggressive since it would

require that products of higher SEER

ratings must also meet increasingly

stringent EER ratings.

Within the second and third options,

we could establish EER requirements of

varying degrees of stringency. For

example, we could select EER levels

equivalent to the ratings of the

minimum EER rating of available

equipment today at the proposed

standard level, the median EER rating,

anywhere in between, or even higher.

We prefer the second option,

establishing an EER floor equal to the

median EER ratings of equipment

currently available at each standard

level. That would result in a substantial

improvement in the EER ratings of the

typical product sold while still

providing manufacturers with the

flexibility to raise SEER ratings through

modulation rather than EER

improvements in higher efficiency

products.

The concern that prevents us from

fully endorsing the third option is that

it would discourage the development

and sale of modulating capacity and

variable speed equipment. Modulating

equipment realizes a benefit in the SEER

test, allowing manufacturers to reduce

the cost of the core components

compared to non-modulating

equipment. This cost reduction partially

offsets the cost of the modulation,

making modulating equipment more

affordable for consumers. Being

required to meet the same EER

standards as non-modulating equipment

would negate this cost benefit.

The Department wishes to encourage,

not discourage, the development and

sale of modulating equipment.

Consumers value the added benefits of

modulation, and manufacturers realize

this value in the form of higher

revenues. For consumers and the nation,

modulation mitigates the inefficiencies

caused by oversizing the system during

installation. Oversizing is a widespread

problem that causes frequent equipment

cycling, increasing energy consumption.

Furthermore, oversizing arguably

contributes more to peak power demand

than does any reduction in EER

associated with modulating equipment.

For DOE to require products to meet

median EER values rather than less

stringent EER values would also raise

some concerns. First, the cost-efficiency

relationships used in our analysis may

underestimate costs of manufacturing

such products, since we did not include

the costs of a minimum EER. Second, if

an EER standard increases product cost,

it would discourage the development

and sale of modulating equipment at the

baseline levels. We expect any cost

increases required to meet median EER

levels, however, would be slight and

would not significantly alter our

analysis.

To determine what the appropriate

EER(95°F) requirement might be, the

Department assessed ARI performance

data on residential unitary equipment

certified as of February 1998. The

median EERs available for each product

class at the minimum SEER levels DOE

proposes today, are identified in Table

V.4 as the ‘‘Median Available EER at

Proposed Minimum SEER.’’ In addition

to the minimum SEER proposal

contained in this notice, the Department

is inclined to adopt in the Final Rule

minimum EER(95°F) requirements equal

to these values. However, since there are

very few packaged heat pumps available

from which to draw a conclusion

concerning EER, DOE believes the

minimum EER requirement for

packaged heat pumps should be the

same as split heat pumps less the 0.3

EER offset seen between packaged and

split air conditioners.

TABLE V.4.—MEDIAN AVAILABLE ENERGY EFFICIENCY RATINGS (EER) AND PROPOSED MINIMUM EERS IN RESIDENTIAL

UNITARY EQUIPMENT (1998)

Product class

Proposed

minimum

SEER

Lowest

available

EER at

proposed

minimum

SEER

10th

percentile

available

EER at

proposed

minimum

SEER

Median

available

EER at

proposed

minimum

SEER

Proposed

minimum

EER

Split Air Conditioners ............................................................................... 12.0 10.1 10.5 10.8 10.8

Packaged Air Conditioners ...................................................................... 12.0 10.1 10.3 10.5 10.5

Split Heat Pumps ..................................................................................... 13.0 10.8 11.1 11.9 11.9

Packaged Heat Pumps ............................................................................ 13.0 11.0 11.0 11.0 11.6

We encourage comments regarding

the burdens and benefits that would

result from including an EER

requirement in the final rule. Of

particular interest are comments

regarding burdens on manufacturers and

benefits regarding reduction in peak

electricity demand, including the effect

of an EER minimum on costs, on

availability and sales of modulating

equipment, and on electrical system

reliability. In addition, comments are

welcome to discuss the pros and cons of

any of the other options described

above.

J. Niche Products

Several types of central air

conditioners and heat pumps are used

in particular or unusual applications

and have features that differ from those

of the vast majority of products

available in the marketplace. We refer to

these as ‘‘niche products.’’ Included are

single package units that are designed to

be mounted within or immediately

adjacent to a fixed-size opening in an

outside wall of the structure and split

systems where the outdoor unit is

designed to be mounted in the same

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59609

manner. This would be comparable to

the classes that have been established

for room air conditioners that are

defined as ‘‘without louvered sides.’’

Also included are non-ducted mini-split

air conditioners and heat pumps, and

high-velocity, small-duct systems.

Typical applications for of niche

products may include: existing single

family buildings without air ducts and

multi-family buildings with fixed-area

wall openings and both new and

existing manufactured homes.

Several manufacturers have claimed

that certain niche products would not

be viable if required to meet higher

efficiency standards, and have asked the

Department to establish new classes for

these products, with efficiency

standards maintained at current levels.

All 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. Further, each is

a product with some unique utility.

Earlier in this rulemaking the

Department sought information on

whether higher standards would

eliminate these products from the

marketplace because of the severity of

their constraints.

1. Ductless Split Air Conditioners and

Heat Pumps

Ductless split systems, or mini-splits

as they are commonly known, consist of

a single outdoor unit and one or more

indoor fan coil units, each located in the

conditioned space. Since consumers

may consider the interior units to be

more intrusive than a ducted system,

manufacturers strive to make them as

compact as possible. This cabinet size

constraint combined with efficiency

losses due to heat transfer between

refrigerant lines puts pressure on

equipment efficiency.

Mitsubishi and EnviroMaster

International (EMI), manufacturers of

ductless split systems, commented that

ductless products should be assigned a

separate product class with a lower

standard. (Mitsubishi, No. 18 at 1 and

EMI, No. 26 at 1). Their arguments for

a separate class are:

• Ductless units are operated like

room air conditioners, because the

‘‘compressor delivering air conditioning

to a particular room operates only when

necessary rather than when a central

thermostat calls for cooling in another

area;’

• Ductless units do not have the duct

losses of a central air conditioning

system, and so have greater installed

system efficiency. Mitsubishi claims

that: ‘‘a 10 SEER ductless unit may be

virtually equivalent or even higher in

efficiency than a 12 SEER ducted unit’;

• The overwhelming portion of the

market of ductless mini-splits is in

capacities of 18,000 Btu/hr and less.

Making significant increases in the

efficiency of motors and compressors

used in these small units is difficult;

• Ductless air conditioners frequently

employ variable speed control of the

compressor motors. Mitsubishi claims:

‘‘Controlling the speed of the

compressor by inverter will not benefit

the 100% capacity rating but it has a

tremendous benefit when the

compressor begins slowing down.

During 50% capacity operation the

SEER level would be several points

above the 100% capacity SEER. This

results in more energy savings, quieter

operation, less peak load demands.’’

Mitsubishi also argued that an EER

rating, like a room air conditioner,

would be more appropriate because of

the inverter driven system’s low cyclic

losses; and

• Per ton, (of cooling capacity) a

ductless air conditioning system is one

of the most expensive HVAC systems in

the U.S. today. Some of the reasons for

high production costs are: low volumes

in the United States, the indoor unit is

a ‘‘finished’’ product fully visible to the

customer so it requires additional

cosmetic expenses, and the unit must be

small, so complex design of coils is

necessary.

After review of the available

information, the Department does not

believe a separate class is warranted for

these products. The evidence presented

in the comments does not convince us

that these products would not be able to

meet the proposed standard level. The

constraints on increasing the size of the

indoor fan coil units are primarily

esthetic, and the Department is unaware

of technological limitations to

increasing minimum efficiency

standards for these products. The

esthetic disadvantage of larger cabinet

size would be compensated by higher

efficiency and lower cost of operation.

While the claim that the small

capacities make increased efficiencies

difficult is a reasonable one, the

Department is aware that systems with

capacities of up to 44,000 Btu/h are

available and believes that providing an

exemption for all systems because of

difficulty with smaller systems is not

justified.

2. Small Duct High Velocity Air

Conditioners

Small-duct, high-velocity (SDHV)

systems target primarily the retrofit

market, where they are installed in attic

or closet spaces and distribute

conditioned pressurized air through

round ducts small enough to fit inside

stud walls. Compared with conventional

air conditioners and heat pumps that

use large ducts, the indoor coil section

of an SDHV system is compactly

designed to facilitate retrofit installation

in tight spaces, resulting in smaller face

area and more rows of tubing than

conventional systems. The compact fan

coil design and small ducts contribute

to high static pressure loss that must be

overcome by the blower, requiring

greater fan power. Manufacturers claim

the greater energy consumption of these

blower motors and the limited space for

installing the fan coils makes it more

difficult for SDHV systems to increase

energy efficiency. To mitigate the

burden on the blowers, designers reduce

the required air volume by cooling it

more than a conventional air

conditioner, which offers an associated

benefit of enhanced humidity removal

but increases cost. In order to meet the

current 10 SEER standard,

manufacturers of SDHV systems

typically pair the fan coil with high

efficiency condensing units (typically

13—14 SEER).

Unico described a number of

alternatives to increase system

efficiency for their product, including a

larger heat exchanger, an improved

blower design and a more efficient

blower motor, and concluded that the

burden of increased initial cost would

outweigh the benefits of increased

system efficiency. (Unico, No.60 at 5).

Unico asked the Department to either:

(1) Exempt them from any increase in

standards; (2) allow a 15% SEER credit

for reduced duct losses associated with

their type of system; or (3) allow their

system to be tested as a coil only

(without a blower) at a conventional

airflow, using the test procedure’s

default fan power to establish a SEER

rating but allow them to install systems

with a high pressure blower. (Unico, No.

61 at 3).

SpacePak, another major

manufacturer of this type of product,

commented that they have made the

investment to produce more efficient

systems. (SpacePak, No. 39 at 1).

SpacePak also provided ARI directory

data indicating the higher efficiency of

their designs. SpacePak claimed to offer

many equipment combinations in the 11

to 12 SEER range, with only 17% of

their ARI listings at the 10 SEER

minimum. (Space Pak, No. 52 at 1).

After review of the available

information, the Department does not

believe a separate class with an

efficiency standard below 12 SEER or a

15% SEER credit, is warranted for these

products. Regarding Unico’s third

59610 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

alternative, i.e., revise the DOE test

procedure to allow SDHV systems to be

tested as coil-only products, the

Department believes that such a change

would recognize the improvements in

delivered efficiency of the SDHV system

because of reduced duct losses. We are

therefore proposing to modify the DOE

test procedure to allow small-duct high

velocity system manufacturers to test

their products as coil only products. We

estimate that the impact of this

allowance will be 1 to 2.5 SEER points;

i.e., a 10 SEER system would become an

11 to 12.5 SEER system. The

Department seeks comments on whether

the test procedure revision or other

proposed changes are needed to

maintain the viability of the small-duct,

high-velocity systems in the market

place.

3. Vertical Packaged, Wall Mounted

These products are factory-assembled

single packaged vertical air-conditioners

and heat pumps using single phase

power but intended for use in

commercial and industrial heating and

cooling applications. The difficult air

flow configuration (each of the

condenser and evaporator

compartments takes air in and exhausts

it through the same face) combined with

the attempt to minimize size constrains

the ability of these units to attain higher

SEERs.

The Department understands that

single-package vertical air-conditioners

and heat pumps are not distributed for

personal use or consumption by

individuals, and therefore believes that

at present they are commercial products

covered by EPACT and not by

residential energy efficiency standards.

Accordingly, vertical packaged, wall

mounted equipment would not be

covered by today’s proposed rule for

residential products.

4. Through-the-Wall Condensers

Through-the-wall (TTW) condensers

were popular in new multistory

residential construction in the 1960s

and 1970s. Major manufacturers have

since abandoned the replacement

market, providing an opportunity for

lower volume manufacturers. Most

equipment is in the 11⁄2 to 21⁄2 ton

capacity range. These systems take in air

through only one face and exhaust air

through the same face resulting in

reduced efficiency because of increased

fan power consumption. Some shortcircuiting of exhaust air into the intake

may also occur.

Replacements for through-the-wall

condensers must fit within the same

wall opening as the original units, even

though original units may be half as

efficient as the new units. Residents or

building owners are particularly

sensitive to any increase in price or to

the cost of enlarging the wall opening to

accommodate a larger condenser. Since

repair is the only other cost effective

alternative to replacement, a new

standard that increases cabinet size or

results in a significant price increase

could be counterproductive, preventing

the turnover of old, inefficient

equipment.

According to submitted data, 10 SEER

TTW split condensing air-conditioners

with fan coils (when scaled up to 3-

tons) are $206 more expensive

(manufacturer price) than 10 SEER padmounted split systems. Under a 12

SEER standard for pad-mounted split air

conditioners, the $206 differential

would be maintained if TTW Condenser

systems had to meet an 11 SEER rating

(also based on submitted data). This

differential increases when wall

modifications are necessary. DOE

believes 11 SEER is technologically

feasible at this time for most

configurations of TTW split equipment.

TTW condensers come in three sizes

(height × weight exterior to the

building): 32′′ × 24′′ (768 sq. in.); 28′′ ×

26′′ (721 sq. in.); and 23′′ × 30′′ (679 sq.

in.). First Co. commented that imposing

higher efficiency standards would

eliminate through-the-wall products

from the marketplace because of the

significant increase in the price with a

correspondingly small operating cost

savings. (First Co., No. 40 at 1).

TTW packaged systems are intended

for both new construction and retrofit.

First Co’s dimensions (new

construction) are 43′′ × 28′′ (1,204 sq.

in.). Skymark’s retrofit unit is 15′′ × 55′′

(825 sq. in.). TTW packaged equipment

for new construction, which is not

severely size-constrained, should be

able to reach 12 SEER in its current

configuration with component

upgrades. The current manufacturer

price differential (First Co.) between

TTW packaged and conventional

packaged equipment (scaled to 3-tons) is

$430. According to First Co. data, that

differential would be maintained under

an 11 SEER standard for TTW packaged

with a 12 SEER for conventional

packaged.

The Department proposes to establish

a separate class for TTW equipment

(including packaged and split, cooling

only and heat pump) based on a

maximum combined surface area of the

air inlet and outlet of the condenser of

830 square inches, and a maximum

capacity of 30,000 Btu/hr. The purpose

of the maximum capacity requirement is

to ensure that if new technology reduces

the size of the condenser, manufacturers

will not offer 3-ton equipment that fits

the definition but is intended for use in

conventional applications. To maintain

the price differential between this new

class and conventional equipment, we

propose a standard of 11 SEER. Because

electric strip heat is popular in TTW

equipment, the 11 SEER standard would

also apply to TTW heat pumps.

5. Non-Weatherized Single-Package

Unit, Mounted Entirely Within the

Structure

Another niche product, which was

not discussed in the Supplemental

ANOPR, is a non-weatherized singlepackage unit, mounted entirely within

the structure (in an attic, basement, or

closet), with outdoor air ducted to and

from the unit. This unit is used in highrise and garden apartments,

manufactured homes, and other

residential applications where locations

for placement of outdoor units may be

unavailable or too remote, where

architectural aesthetics may be

compromised by visible outdoor units,

where vandalism or theft of outdoor

units is a potential problem, or where

compliance with local sound ordinances

restricts the placement of outdoor air

conditioning equipment.

Consolidated Technologies, Inc.,

manufacturer of the INSIDER,

commented, ‘‘For the INSIDER to be

used in Manufactured Housing and

Modular housing it is important to have

the smallest footprint possible.’’

(Consolidated Technologies, Inc., No. 42

at 2).

The Department recognizes that this

product has space constraints, albeit not

as severe as products that must fit a wall

opening. Products at the 12 SEER level

(the proposed air conditioning standard

level) are currently on the market. A

very difficult obstacle to establishing a

separate class for this product is a

definition that could not be used as a

loophole to use its lower standard for

conventional products. Its salient

feature is its indoor location; product

class definitions should be based on

physical characteristics, and it is nearly

impossible to define physical

characteristics that would ensure

products be installed in a particular

location. No separate class is proposed

for this product.

6. Request for Comments Regarding

Niche Product Standards

The Department encourages

comments regarding whether the

proposed standards concerning highvelocity, vertically-packaged wallmounted equipment, and through-thewall equipment provide a significant

advantage to those products versus

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59611

16 D. Godwin. 1998. ‘‘Latent Capacity of Unitary

Equipment.’’ ASHRAE Transactions 98(2).

competing products, whether they are

sufficient to preserve the unique

features of those products, and whether

improvements in the definitions are

needed to prevent loopholes. For

ductless split equipment and nonweatherized vertical packaged

equipment, additional comment is

welcome on the impacts that meeting

the new standards would have on the

availability of those products.

K. Thermostatic Expansion Valves

VEIC, NRDC, ACEEE, and CEC

requested that a design standard

requiring the use of thermostatic

expansion valves (TXVs) be adopted to

ensure that energy savings expected

from an increase in the minimum

efficiency standard are realized in the

field. Several of the comments cited

studies which demonstrate that TXVs

can mitigate adverse effects on

efficiency due to field installation

problems such as inadequate evaporator

airflow and improper refrigerant charge.

CEC suggested that separate classes be

established for systems with and

without TXVs and that more stringent

minimum efficiency standards be

established for classes not utilizing

TXVs, and VEIC suggested mandating

the use of TXVs in all new equipment.

(VEIC, No. 32 at 4–5; Neme, VEIC,

Transcript, pp. 187–189; NRDC, No. 35

at 11–12; ACEEE, No. 43 at 5–6; CEC,

No. 47 at 5–6).

At least two regulatory options exist

for encouraging the use of TXVs. The

first is to require that all equipment

contain TXVs, hereafter called TXV

requirement. The second is to establish

a separate product class for TXV-bearing

equipment and to reduce the minimum

SEER requirements for those classes

from the levels in today’s proposed rule.

The EPCA allows the Department to

issue a requirement such as mandating

the use of TXVs if the Secretary

determines that such a requirement is

necessary to ensure that the product

meets its performance-based standard.

In the case of TXVs, the Department’s

current opinion is that products can

meet the proposed SEER requirements

without TXVs. This is certainly true in

the laboratory. In the field, although

many installations could undoubtedly

benefit from TXVs, it is unclear whether

we could find that TXVs are needed for

those systems to perform at their rated

efficiencies.

Regarding the second option, EPCA

requires the Department to establish

separate product classes for products

based on a performance related feature

(such as a TXV) if the Secretary

determines that a higher or lower

efficiency standard is justified for those

products. Evidence indicates that TXVs

maintain system efficiency better than

do fixed orifices or capillary tube

expansion devices in cases where split

system equipment is over- or undercharged with refrigerant. This

apparently includes most installations.

To encourage the use of TXVs we could

consider establishing lower SEER

standards for products containing TXVs.

While the evidence of the potential

energy-saving benefits of TXVs is

certainly persuasive, the current SEER

test procedures already encourage their

use. For rating a manufacturer’s

condenser with the evaporator of a

different manufacturer, the SEER

determination procedures provide a

credit for systems that incorporate

TXVs. For matched systems, the use of

TXVs typically lowers the degradation

coefficient, resulting in higher SEER

results.

We hesitate to provide stronger

support for TXV-bearing equipment

than that which is already granted

through the test procedures. Unlike

fixed orifices, TXVs are mechanical

components. Some manufacturers avoid

their usage because of reliability

concerns, and the additional repair costs

incurred by consumers could outweigh

their energy-saving benefits.

Furthermore, contractors are able to

adjust the factory-set TXV in the field,

and it is possible that alleviating

problems due to over- or under-charging

by encouraging the use of TXVs could

create another problem—improperly set

TXVs. Also, it is not clear that TXVs are

the only, or even the best, option for

maintaining equipment efficiency in the

field. For example, technologies that

could mitigate dirty coils or prevent

improper charging and airflow may be

more attractive options, and we would

not want to discourage their

development or use by mandating the

use of TXVs.

In any case, manufacturers may well

find that the SEER benefits offered by

TXVs are compelling enough under the

new efficiency standards that they

would offer TXVs in a substantial

amount of baseline equipment without

further encouragement by the

Department. The Engineering Analysis

suggests that manufacturers are

currently more likely to incorporate

TXVs into their 12 SEER and 13 SEER

products than in their 10 SEER

products. We would expect, therefore,

that TXV use would be much more

prevalent under higher efficiency

standards.

For these reasons, the Department

feels that the current test procedure

provides the proper encouragement for

manufacturers to incorporate TXVs into

their products, and that neither a TXV

requirement nor a lower standard for

TXV-bearing products are justified at

this time. We welcome additional

comments on this issue, particularly

regarding whether our concerns

regarding the perceived reliability

problems and potential misuses

associated with widespread use of TXVs

are valid.

L. Other Comments

1. Latent Heat Removal

The Southern Company, Virginia

Power, and R.B. Stotz insisted that

increased equipment efficiency impacts

the equipment’s ability to properly

dehumidify (i.e., remove latent heat).

Virginia Power specifically wants

assurances that any increase in the

standard will maintain current humidity

control capabilities. In addition, it

asserts that the costs of maintaining

humidity control should be included in

the analysis. (Virginia Power, No. 27 at

2). The Southern Company claims that

higher SEER values will lead to larger

indoor coils which in turn will result in

higher air temperatures leaving the

indoor coil. The higher the air

temperature, the less dehumidification

occurs. They also claim that while more

efficient systems may dehumidify

properly at rated test conditions, their

ability to dehumidify under high indoor

humidity conditions are worse than less

efficient equipment. (Southern

Company, No. 29 at 3–4; R.B. Stotz, No.

24 at 1). Trane counters the claims made

by the Southern Company and Virginia

Power by stating that there is absolutely

no evidence to support the claim that

more efficient equipment has less latent

heat removal capability. (Crawford,

Trane, Transcript, pp. 272–273).

Trane’s claim that there is no

relationship between equipment

efficiency and its ability to dehumidify

is substantiated by research conducted

by ARI. From this research, ARI

demonstrated for hundreds of systems

that latent heat removal is not obviously

impacted by increases in equipment

efficiency at rated conditions (i.e., 95°F

outdoor temperature). 16 Not to dismiss

the concerns of Virginia Power and the

Southern Company, we recognize the

humidity control problems that exist in

the southern region of the U.S. For the

excessive humidity conditions

commonly experienced in the South,

the equipment may very likely not

provide adequate dehumidification. But

rather than focusing on the equipment

efficiency as the source of the problem,

59612 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

proper installation and maintenance

practices also likely play a large role in

the equipment’s performance. Other

factors to consider are the duct system

as well as the building shell

characteristics. All these factors play a

role in how a system dehumidifies. To

lay blame only on the efficiency of the

equipment ignores how other factors

contribute to the system’s ability to

properly dehumidify.

2. 3-Phase Equipment

ACEEE asserted that if an identical

standard is to be set for both singlephase and 3-phase central air

conditioners and heat pumps under

65,000 Btu/hr, then 3-phase equipment

should be incorporated into the

rulemaking analysis. Alternatively, if 3-

phase equipment is excluded from the

analysis, it should be made clear that a

new standard on 3-phase equipment

will be set based on a new analysis

covering 3-phase equipment.

EPACT provides for DOE to amend

the standards for these products when

ASHRAE amends the standards found

in ASHRAE Standard 90.1. When

ASHRAE has completed its

consideration of standards for these

products, DOE will analyze 3-phase

equipment under a separate rulemaking

pertaining to commercial airconditioning and heat pump equipment.

3. SEER–HSPF Relationship

ARI supported the Department’s

HSPF–SEER standard pairings proposed

in the Supplemental ANOPR. (ARI No.

48 at 4). Pietsch proposed maintaining

the current minimum requirements for

HSPF at 6.8 for future levels of

minimum SEER, which would allow

manufacturers to continue to place more

emphasis on improving SEER. He based

this recommendation on the strong

competition that heat pumps face in the

market place with electric resistance

heat, noting that the increased first-cost

of heat pumps that have higher

minimum HSPFs makes it more difficult

for heat pumps to compete against the

much lower first-cost of electric

resistance heating systems. (Pietsch No.

36 at 41). ACEEE, VEIC, and PG&E

noted that the Department’s definition

of HSPF–SEER pairing for the standard

levels it analyzed seemed arbitrary or

too lenient and preferred that the

Department establish higher HSPF

levels. (ACEEE, No. 43 at 5; VEIC, No.

32 at 6; PG&E, No. 31 at 4).

The Department plotted the

relationship between HSPF and SEER

for all 3-ton split heat pumps listed in

the Spring 1998 ARI Directory of

Certified Unitary Equipment. At 10

SEER, the difference between the

minimum HSPF (6.8) and the median

(7.1) was 0.3 HSPF. The Department

then determined the equation of the line

that ran generally parallel with the

median HSPF at each SEER level, while

passing through the 10 SEER, 6.8 HSPF

point. Table V.5 reviews the derivation

of the SEER–HSPF pairings.

TABLE V.5.—COMPARISON OF PROPOSED HSPF STANDARD LEVELS WITH MEDIAN HSPFS OF EQUIPMENT LISTED IN THE

ARI UNITARY DIRECTORY

Cooling efficiency (SEER) 10 11 12 13 14 15 16 17

Median Heating Efficiency

(HSPF) .......................... 7.1 7.4 7.9 7.9 7.9 8.9 8.2 8.4

Recommended Heating

Efficiency Standard

(HSPF) .......................... 6.8 7.1 7.4 7.7 8.0 8.2 8.4 8.6

Offset from Median

(HSPF) .......................... ¥0.3 ¥0.3 ¥0.5 ¥0.2 +0.1 ¥0.7 +0.2 +0.2

Even though the Department does not

have information on the distribution of

heat pump sales by HSPF at each SEER

level, it is apparent that the market

currently favors products that exceed

the minimum allowable HSPF level.

This is due both to the natural

relationship between HSPF and SEER

and the preference in the market for

high HSPF heat pumps in cooler

climates. The Department believes that

establishing an HSPF standard equal to

the current median at a given SEER

level would impose an undue design

constraint on manufacturers, adding to

the cost and burden of designing,

producing, testing, and qualifying the

product without resulting in a

significant increase in the average HSPF

of equipment sold. Also, the Department

does not want to encourage substitution

of electric resistance heating systems for

heat pumps. Without further

information on the cost of attaining

higher HSPFs or the shipments of heat

pumps by HSPF level, the Department

has no basis for modifying its current

HSPF–SEER standard combinations.

4. Max Tech

The Supplemental ANOPR analysis

proposed a Max Tech level of 20 SEER.

ARI, Trane, and York commented that a

prototype hasn’t been built that has

exceeded 18 SEER. (Wethje, ARI,

Transcript p. 66; Crawford, Trane,

Transcript p. 69; and Madera, York,

Transcript p. 71). The Department also

understands that 18 SEER is the highest

efficiency level currently available for

sale.

While the Department believes

improvements to the 18 SEER design are

certainly possible, it agrees with the

industry that any analysis based on a

design higher than 18 SEER would be

pure speculation. Therefore, the

Department considers 18 SEER to be the

Max Tech at this time for cooling

performance. The Max Tech level for

heating efficiency is 9.4 HSPF, which is

the highest HSPF rating currently

available in residential heat pumps. Any

parties possessing knowledge of

prototype central air conditioners or

heat pumps that exceed 18 SEER or 9.4

HSPF levels are encourage to provide

such information in comment on today’s

proposed rule.

DOE does not have relative cost data

for 18 SEER units as ARI did not

provide the Department data for

equipment exceeding 15 SEER. In lieu

of performing a reverse engineering

analysis on an 18 SEER design, the

Department is proceeding as if the 18

SEER equipment cost and price were

equal to those of the 15 SEER

equipment. DOE believes the 18 SEER

cost would be higher because the

product is more complex.

VI. Analytical Results

A. Trial Standard Levels

Table VI.1 presents the trial standards

levels analyzed for today’s proposed

rule and the corresponding efficiency

level for each class of product. Trial

standard level 5 is the max tech level for

each class of product.

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59613

TABLE VI.1.—TRIAL STANDARDS LEVELS FOR CENTRAL AIR CONDITIONERS AND HEAT PUMPS (SEER)

Trial standard level Split air

conditioners

Packaged

air

conditioners

Split heat

pumps

Packaged

heat pumps

1 ....................................................................................................................................... 11 11 11 11

2 ....................................................................................................................................... 12 12 12 12

3 ....................................................................................................................................... 12 12 13 13

4 ....................................................................................................................................... 13 13 13 13

5 ....................................................................................................................................... 18 18 18 18

B. Significance of Energy Savings

To estimate the energy savings

through 2030 due to revised standards,

we compared the energy consumption

of central air conditioners and heat

pumps under the base case to energy

consumption of central air conditioners

and heat pumps under the revised

standard. We examined five standard

levels. For each trial standard examined,

several different scenarios were

analyzed consisting of variations on: (1)

Electricity price and housing

projections; (2) equipment efficiency

distributions; (3) manufacturer cost

estimates; (4) equipment lifetime; and

(5) societal discount rate. Electricity

price and housing projections were

based on three different AEO 2000

forecasts: (1) Reference Case, (2) High

Growth Case, and (3) Low Growth Case.

We analyzed three efficiency scenarios,

each of which assumed a different

efficiency distribution after new

standards would take effect: (1) NAECA

scenario, (2) Roll-up scenario, and (3)

Shift scenario. Manufacturer costs were

based on ARI-provided mean cost data.

Since several comments suggested that

the industry-provided cost estimates

were overstated, cost data from the

reverse engineering analysis were

analyzed as an alternative scenario.

Equipment lifetime was based on a

retirement function with an 18.4 year

average lifetime coupled with the

inclusion of compressor replacement

costs. However, since several comments

suggested that the equipment life is

actually shorter, a retirement function

yielding an average lifetime of 14 years

without the inclusion of compressor

replacement costs was analyzed as an

alternative scenario.

For calculating NPV, a societal

discount rate of 7% was assumed.

However, a 3% value was investigated

as an alternative scenario in accordance

with the Office of Management and

Budget’s (OMB) Guidelines to

Standardize Measures of Costs and

Benefits and the Format of Accounting

Statements.

Table VI.2 shows the range of energy

savings for each of the three shipments

scenarios for each trial standard level

based on varying electricity and housing

projections. The energy savings assume

the ARI mean manufacturer cost

estimate, an 18.4-year average lifetime

with compressor replacement and a 7%

societal discount rate. The electricity

scenarios are the AEO 2000 Reference,

High Growth, and Low Growth cases.

TABLE VI.2.—ENERGY SAVINGS BASED ON ARI MEAN MANUFACTURER COSTS, 18.4 YEAR RETIREMENT FUNCTION WITH

COMPRESSOR REPLACEMENT, AND A 7% DISCOUNT RATE

[Energy savings for units sold from 2006 to 2030]

Trial standard level

Energy savings (quads)

NAECA Roll-up Shift

1 ................................................................ 1.7 to 1.8 ................................................... 1.5 to 1.6 ................................................... 1.9 to 2.0

2 ................................................................ 2.9 to 3.2 ................................................... 2.8 to 3.0 ................................................... 3.4 to 3.6

3 ................................................................ 3.4 to 3.6 ................................................... 3.3 to 3.5 ................................................... 3.8 to 4.1

4 ................................................................ 4.2 to 4.5 ................................................... 4.1 to 4.4 ................................................... 4.6 to 4.9

5 ................................................................ 8.1 to 8.7 ................................................... 8.1 to 8.7 ................................................... 8.1 to 8.7

Table VI.3 shows how each of the three scenarios described above (reverse engineering costs, 14 year average life,

and 3% discount rate) impact the energy savings. The three scenarios were investigated only for the NAECA efficiency

scenario and the AEO 2000 Reference Case electricity price and housing projection.

TABLE VI.3.—ENERGY SAVINGS BASED ON THE NAECA EFFICIENCY SCENARIO AND AEO REFERENCE CASE

[Energy savings for units sold from 2006 to 2030]

Trial standard level

Energy savings (quads)

Reverse

engineering

manufacturing cost

14 year

lifetime

3% discount

rate

1 ............................................................................................................................................................... 1.7 1.7 1.7

2 ............................................................................................................................................................... 3.0 2.9 3.0

3 ............................................................................................................................................................... 3.5 3.4 3.5

4 ............................................................................................................................................................... 4.3 4.2 4.3

5 ............................................................................................................................................................... 8.7 8.2 8.3

59614 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

C. Payback Period

As discussed above, the Act requires

the Department to examine payback

periods to determine if the three year

rebuttable presumption of economic

justification applies. As prescribed by

the Act, the rebuttable payback period is

‘‘calculated under the applicable test

procedure, * * *’’.

The annual space-cooling and spaceheating energy consumption calculated

based on the hours of use in the test

procedure are on the order of 50%

greater than the weighted-average values

from the LCC analysis (i.e., analyses

based on the 1997 RECS for residential

buildings and hourly simulations for

commercial buildings). This means that,

for any given standard level, the

payback period calculated from the test

procedure will be significantly shorter

than the average payback value

calculated from the LCC analysis which

was based on the 1997 RECS data.

In Table VI.4a, we list the median

payback periods for product classes and

efficiency levels according to the

methods employed by the LCC analysis.

Table VI.4b is the rebuttable

presumption payback period based on

the Department of Energy’s test

procedure.

TABLE VI.4A.—SUMMARY OF LCC PAYBACK MEDIAN PERIOD

Product class Efficiency level ARI mean manufacturing cost 1

Reverse engineering manufacturing cost

scenario 1

14-year lifetime

scenario/ARI

mean manufacturing cost

Split System Central Air Conditioner 11 10.6 7.8 10.5

12 12.6 9.8 12.8

13 16.0 11.3 16.2

18 36.0 19.6 50.4

Split System Heat Pump 11 5.5 2.7 5.5

12 7.2 3.9 7.3

13 9.3 6.4 9.5

18 17.3 14.0 19.9

Single Package Air Conditioner 11 6.1 7.7 16.6

12 14.0 7.5 14.2

13 21.8 14.5 21.8

18 48.8 25.1 88.1

Single Package Heat Pump 11 8.1 4.6 8.1

12 8.7 4.0 8.7

13 13.2 8.4 13.4

18 19.4 12.8 23.1

1Assumes a 18.4-year lifetime with a compressor replacement at 14 years.

TABLE VI.4B.—SUMMARY OF REBUTTABLE PAYBACK PERIOD

Product class Efficiency level

ARI mean

manufacturing

cost 1

Split System Central Air Conditioner ....................................................................................................................... 11 4.7

12 5.8

13 7.6

18 11.3

Split System Heat Pump ......................................................................................................................................... 11 2.5

12 3.3

13 4.5

18 6.8

Single Package Air Conditioner ............................................................................................................................... 11 7.3

12 6.2

13 9.8

18 13.3

Single Package Heat Pump .................................................................................................................................... 11 3.7

12 4.0

13 6.5

18 7.2

1Assumes a 18.4-year lifetime with a compressor replacement at 14 years.

D. Economic Justification

1. Economic Impact on Manufacturers

a. Background. We performed a

Manufacturer Impact Analysis (MIA) to

estimate the impact of higher efficiency

standards on air conditioner

manufacturers. The TSD explains the

analysis in further detail. As part of the

MIA, we discussed potential impacts

with six major manufacturers

responsible for approximately 90% of

the residential air conditioner and heat

pump sales. We also interviewed two

niche manufacturers to understand how

their financial situation differs from that

of their larger counterparts. These

interviews are in addition to those we

conducted as part of the Supplemental

ANOPR. The interviews provided

valuable information used to evaluate

the impacts of a new standard on

manufacturers’ cash flows,

manufacturing capacities and

employment levels.

The MIA has both quantitative and

qualitative aspects. Quantitative

analysis primarily relies on the GRIM,

an industry cash flow model customized

for this rulemaking. The GRIM inputs

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59615

are assumptions regarding the industry

cost structure, shipments, and revenues.

The key output is the industry net

present value (INPV). Different sets of

assumptions (scenarios) produce

different results as described below.

In the GRIM we evaluated each of the

shipment scenarios, i.e., ‘‘NAECA’’,

‘‘Rollup’’, and ‘‘Shift’’. Changes in

efficiency mix by efficiency standard

level are a key driver of manufacturer

finances since costs and revenues are

both tied to shipments.

Two cost scenarios, ‘‘Industry

Relative Cost’’ and ‘‘ReverseEngineering Relative Cost’’, were also

examined. These relative costs are also

used as the basis for deriving the

production costs of equipment above

the minimum efficiency level. The

‘‘Reverse-Engineering Relative Cost’’

scenario was applied only to the

‘‘NAECA’’ product mix scenario in

order to determine the effects of lower

production costs on the MIA results.

The equipment lifetime scenarios

assumptions, ‘‘18-year life’’ and ‘‘14-

year life’’, were considered. The ‘‘14-

year life’’ assumption applied only to

the ‘‘NAECA’’ and ‘‘Industry Relative

Cost’’ scenarios to isolate the effects of

a shorter product life on the results.

The interviews revealed that

manufacturers use different pricing

strategies and place different levels of

emphasis on the sale of higher

efficiency products. Manufacturers fall

into two basic groups in this regard. The

first group has lower operating and

production costs than its competitors

and targets such price-sensitive

consumers as new home builders. This

focus on low price limits the ability and

desire of these manufacturers to sell

premium equipment. Because they have

a cost advantage over their competitors,

the lower cost manufacturers can

achieve a higher operating profit margin

on their baseline equipment and still

maintain a price advantage. They then

apply a fairly consistent markup across

efficiency levels.

The higher cost manufacturers

typically place more of an emphasis on

marketing, service, and research than do

their lower cost competitors. Faced with

stiff price competition from the lower

cost manufacturers in price-sensitive

markets, the higher cost manufacturers

are forced to reduce their price (and

markup) on their baseline equipment to

the minimum level sustainable. They

then target less price sensitive

customers by offering products with

premium features and higher efficiency.

These products carry higher markups.

Since higher efficiency standards will

affect each group of manufacturers

differently, we set up two versions of

the GRIM to model each group

independently. To represent the lower

cost manufacturers, we reduced the

operating expense ratio and research

and development expense ratio to below

the industry averages. We also assumed

that a single markup applies to products

across all efficiency levels. To model

higher cost manufacturers, we raised the

operating expense ratio and research

and development ratios to above the

industry average. We then assumed that

markups increase roughly linearly as the

efficiency level increases. This

represents two effects: selling a greater

fraction of higher margin premium

product as efficiency level rises, and

being able to secure a higher profit

margin on products by virtue of the

higher efficiency.

To represent the industry in aggregate,

we combined the results of the two

GRIM versions, giving 25% weight to

the results of the lower-operating-cost

group and 75% weight to the results of

the higher-operating-cost group. This

ratio reflects the prevalence of each

strategy in the marketplace. Many

companies may pursue both strategies

simultaneously through different brands

and divisions.

b. Industry Cash Flow Analysis

Results. Tables VI.5 through VI.7

present the GRIM results for the unitary

air conditioning industry for the three

shipment scenarios based on the

industry provided mean cost multipliers

and an 18-year product life. The

corporate discount rate used in the

analysis is 6.2% based on an estimate of

the weighted average cost of capital for

the industry over a five-year period.

Results assume that manufacturers with

lower operating costs control 25% of the

market and those with higher operating

costs control 75%. Since we did not

collect information regarding the cost or

investments involved in manufacturing

product at 18 SEER, we did not assess

impacts under Max Tech.

TABLE VI.5.—CHANGES IN INDUSTRY NET PRESENT VALUE—INDUSTRY RELATIVE COST, 18 YEAR LIFE, NAECA

EFFICIENCY MIX

Standard level

Industry net

present value

($ million)

Change in INPV from base

case

$ million Percent

Base ............................................................................................................................................. 1,603 ........................ ........................

1 ................................................................................................................................................... 1,566 (37) ¥2

2 ................................................................................................................................................... 1,417 (186) ¥12

3 ................................................................................................................................................... 1,406 (197) ¥12

4 ................................................................................................................................................... 1,420 (183) ¥11

TABLE VI.6.—CHANGES IN INDUSTRY NET PRESENT VALUE—INDUSTRY RELATIVE COST, 18 YEAR LIFE, ROLL-UP

EFFICIENCY MIX

Standard level

Industry net

present value

($ million)

Change in INPV from base

case

$ million Percent

Base ............................................................................................................................................. 1,603 ........................ ........................

1 ................................................................................................................................................... 1,422 (181) ¥11

2 ................................................................................................................................................... 1,241 (362) ¥23

3 ................................................................................................................................................... 1,236 (367) ¥23

4 ................................................................................................................................................... 1,268 (335) ¥21

59616 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

TABLE VI.7.—CHANGES IN INDUSTRY NET PRESENT VALUE—INDUSTRY RELATIVE COST, 18 YEAR LIFE, SHIFT EFFICIENCY

MIX

Standard level

Industry net

present value

($ million)

Change in INPV from base

case

$ million Percent

Base ............................................................................................................................................. $1,603 ........................ ........................

1 ................................................................................................................................................... 1,740 $137 9

2 ................................................................................................................................................... 1,825 222 14

3 ................................................................................................................................................... 1,854 251 16

4 ................................................................................................................................................... 1,914 311 19

The NAECA and Roll-up scenarios

reduce INPV while the Shift scenario

increases INPV. This result occurs

because we assume the higher-operating

cost manufacturers accrue much of their

profits from the sale of higher efficiency

equipment. As the standard level

increases, they earn lower profit

margins on that equipment. The loss in

profits can be offset by the combination

of more sales and more expensive

equipment. The Shift scenario provides

a much more favorable projection of

high-efficiency equipment sales than do

the NAECA and Rollup scenarios.

Tables VI.8 and VI.9 present the

results for the 14-year life assumption

and the Reverse Engineering Relative

Cost scenario with the NAECA

Efficiency Mix scenario.

TABLE VI.8.—CHANGES IN INDUSTRY NET PRESENT VALUE—INDUSTRY RELATIVE COST, 14 YEAR LIFE, NAECA

EFFICIENCY MIX

Standard level

Industry net

present value

($ million)

Change in INPV from base

case

$ million Percent

Base ............................................................................................................................................. $1,726 ........................ ........................

1 ................................................................................................................................................... 1,701 $ (25) ¥1

2 ................................................................................................................................................... 1,558 (168) ¥10

3 ................................................................................................................................................... 1,555 (171) ¥10

4 ................................................................................................................................................... 1,598 (128) ¥7

TABLE VI.9.—CHANGES IN INDUSTRY NET PRESENT VALUE—REVERSE ENGINEERING RELATIVE COST, 18 YEAR LIFE,

NAECA EFFICIENCY MIX

Standard level

Industry net

present value

($ million)

Change in INPV from base

case

$ million Percent

Base ............................................................................................................................................. $1,539 ........................ ........................

1 ................................................................................................................................................... 1,509 $ (30) ¥2

2 ................................................................................................................................................... 1,380 (159) ¥10

3 ................................................................................................................................................... 1,368 (171) ¥11

4 ................................................................................................................................................... 1,370 (169) ¥11

Table VI.10 presents the differential

impacts between the groups of

manufacturers with lower and higher

operating costs. The lower operating

cost manufacturers benefit under all

scenarios and trial standard levels, and

the higher operating cost manufacturers

benefit only under the Shift scenario.

The reason, again, is that we assume

that lower operating cost manufacturers

accrue the same profit margin regardless

of the efficiency level, so as the cost of

the product increases, profits also

increase. The higher operating cost

manufacturers, on the other hand, lose

profits as the standard level rises and

the products face pricing pressure from

the lower cost manufacturers.

TABLE VI.10.—CHANGE IN INDUSTRY NET PRESENT VALUE (%) RELATIVE TO BASE—COMPARISON BETWEEN LOWER AND

HIGHER COST MANUFACTURERS

Standard level

Industry relative cost 1 Reverse engineering relative cost

NAECA NAECA—14 year

life Roll-up Shift NAECA

Lower

cost

Higher

cost

Lower

cost

Higher

cost

Lower

cost

Higher

cost

Lower

cost

Higher

cost

Lower

cost

Higher

cost

1 ................................................... 5 ¥5 6 ¥4 3 ¥16 7 9 5 ¥4

2 ................................................... 7 ¥17 9 ¥16 5 ¥31 12 14 7 ¥16

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59617

TABLE VI.10.—CHANGE IN INDUSTRY NET PRESENT VALUE (%) RELATIVE TO BASE—COMPARISON BETWEEN LOWER AND

HIGHER COST MANUFACTURERS—Continued

Standard level

Industry relative cost 1 Reverse engineering relative cost

NAECA NAECA—14 year

life Roll-up Shift NAECA

Lower

cost

Higher

cost

Lower

cost

Higher

cost

Lower

cost

Higher

cost

Lower

cost

Higher

cost

Lower

cost

Higher

cost

3 ................................................... 9 ¥19 11 ¥16 6 ¥32 14 16 8 ¥17

4 ................................................... 15 ¥19 19 ¥16 13 ¥31 21 19 12 ¥18

1 18-year lifetime unless otherwise noted.

For the group most negatively

impacted, i.e., the higher cost group,

Table VI.11 presents the Return on

Invested Capital (ROIC) associated with

the base case, and with each new

standard level for the NAECA and Rollup efficiency mix scenarios, for industry

relative costs and an 18-year lifetime. A

reduction in ROIC increases the

likelihood that the company will choose

to exit the market or sell its assets rather

than to make the investments required

to move to the new efficiency level.

TABLE VI.11.—RETURN ON INVESTED CAPITAL (ROIC) IN 2011 FOR HIGHER COST MANUFACTURERS

Standard level NAECA

(in percent)

Roll-up

(in percent)

Base ......................................................................................................................................................................... 13.3 13.3

1 ............................................................................................................................................................................... 12.3 10.7

2 ............................................................................................................................................................................... 10.2 8.4

3 ............................................................................................................................................................................... 10.0 8.3

4 ............................................................................................................................................................................... 9.6 8.3

Table VI.12 provides a summary of

the total investment required for each

trial standard level. Product conversion

expenses include mostly product

development and testing costs. Capital

investments include new equipment,

tooling, and floor space. Since these

investments occur in the years leading

up to the effective date of the new

standard, larger investments equate to a

more serious strain on cash flows in the

near-term.

TABLE VI.12.—MANUFACTURER EXPENDITURES RELATED TO NEW EFFICIENCY STANDARDS (MILLION 1999 $)

Trial standard level

Product conversion expenses

Capital

investments

Total

investment

Base ............................................................................................................................................. ........................ ........................ ........................

1 ................................................................................................................................................... $ 31 $ 54 $ 85

2 ................................................................................................................................................... 93 109 202

3 ................................................................................................................................................... 110 138 248

4 ................................................................................................................................................... 157 167 324

The TSD which accompanies today’s

proposed rule provides more details on

the MIA assumptions, methodology,

results, and conclusions, including the

assessments of impacts on lower volume

equipment manufacturers and

compressor manufacturers, which we

estimate to be similar in proportion to

the impacts described above.

c. Impacts on Employment.

Manufacturers stated uniformly that

labor requirements track materials costs.

Since a new standard will increase the

amount and cost of material in each

product, labor requirements are

expected to rise proportionally.

However, the industry has recently been

experiencing rapid growth in sales

volume and is now faced with

production capacity constraints. Since

new efficiency standards will increase

the product’s size and complexity, many

manufacturers will need to add

additional capacity to accommodate the

new products and retain their sales

volumes. It is possible that those

companies will choose to add the new

capacity outside of the United States.

This effect could keep domestic

employment levels flat or result in

employment loss if companies choose to

shift current production to new facilities

in other countries.

d. Impacts on Manufacturing

Capacity. It is likely that a central air

conditioner and heat pump standard

would increase central air conditioner

and heat pump production capacity in

the United States. Since more efficient

conventional heat exchangers are also

larger, plants that now face capacity

constraints will be unable to produce as

many heat exchangers as they can under

existing standards. Five of the six

manufacturers we interviewed

identified capacity constraints during

peak production periods.

e. Impact on Lower Volume

Manufacturers. Converting from a

company’s current basic product line

involves creating, testing, and moving a

new design into production. These tasks

have associated capital investments.

Manufacturers of niche products and

those who produce only coils and

fancoils, because of their need to spread

these investments over smaller

59618 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

production volumes, may be affected

more negatively than major

manufacturers by an increase in

efficiency standards. This is particularly

true for those manufacturers that

compete head-to-head with major

manufacturers in some product lines,

and less true for coil-only

manufacturers. These results occur

separately from any technical

considerations related to the

manufacturer’s ability to modify its

products to bring them into compliance

with a new standard. Technical

considerations are typically more

important for niche manufacturers than

for major manufacturers and have more

severe consequences related to

increased production costs or loss of

sales volume due to increased price.

Overall, if provisions are made in the

standard for niche products that face

severe technological constraints, we

would not expect the impacts on lowervolume manufacturers as a group to be

disproportionate with those of the

industry as a whole.

2. Life-Cycle Cost

More efficient central air conditioners

and heat pumps would affect consumers

in two ways: Annual operating expense

would decrease and purchase price

would increase. We analyzed the net

effect by calculating the LCC. Inputs

required for calculating LCC include

total installed costs (i.e., equipment

price plus installation costs), annual

energy savings, average and marginal

electricity rates, electricity price trends,

repair costs, maintenance costs,

equipment lifetime, and discount rates.

The output of the LCC model is a

mean LCC savings for each product

class as well as a probability

distribution or likelihood of LCC

reduction or increase. The LCC analysis

for today’s proposed rule introduces a

new concept with regard to the

percentage of consumers (both

residential and commercial) that are

negatively impacted by an increase in

the minimum efficiency standard. (For

the Supplemental ANOPR, all

consumers that would incur an LCC

increase were considered to be

adversely impacted by an increase in

the standard. This included even

consumers that would incur a relatively

small LCC increase e.g., as small as $10,

as compared to a relatively large

baseline level total LCC. Note that the

baseline LCC is approximately $5,000

for central air conditioners and $10,000

for heat pumps.)

The revised analysis defines negative

impacts by including in this category

only those consumers which incur LCC

increases greater than 2% of the

baseline LCC. For central air

conditioners, this translates to an LCC

increase of approximately $100 or an

annual expense of approximately $5

over the lifetime of the system. Table

VI.13 summarizes the baseline LCCs for

split system and single package central

air conditioners and heat pumps and

also provides the 2% threshold at which

consumers are considered to be

adversely impacted.

TABLE VI.13.—BASELINE LIFE-CYCLE COSTS AND THRESHOLD FOR ADVERSE IMPACTS

Product class Baseline lifecycle cost

Threshold for

adverse impacts: 2% of

Baseline LCC

Split Air Conditioners ............................................................................................................................................... $5,170 $103

Split Heat Pumps ..................................................................................................................................................... 9,679 194

Single Package Air Conditioners ............................................................................................................................. 5,629 113

Single Package Heat Pumps ................................................................................................................................... 9,626 193

Table VI.14 depicts the LCC results

for split system and single package

central air conditioners and heat pumps.

The table shows the average LCC values

for the baseline and each Trial Standard

Level. Since manufacturer cost data

were not available for the 18 SEER

efficiency levels, 15 SEER cost data

were used for all 18 SEER calculations

resulting in 18 SEER LCC results which

underestimate their true cost level.

Table VI.14 also provides for each

product class the difference in LCC at

each efficiency level relative to the

baseline. The differences represent

either an LCC savings or an LCC cost

increase. In addition, the table shows

the subset of consumers (both

residential and commercial) at each

efficiency level who are impacted in one

of three ways: Consumers who achieve

significant net LCC savings (i.e., LCC

savings greater than 2% of the baseline

LCC), consumers who are impacted in

an insignificant manner by having either

a small reduction or small increase in

LCC (i.e., within ±2% of the baseline

LCC), or consumers who achieve a

significant net LCC increase (i.e., an LCC

increase exceeding 2% of the baseline

LCC).

TABLE VI.14.—SUMMARY OF LCC RESULTS BASED ON ARI MEAN MANUFACTURER COSTS AND A 18.4 YEAR AVERAGE

LIFETIME

Product class Efficiency

level

Average

LCC

Average LCC

(savings)

costs

Percent of consumers with

Net savings

(>2%)

No significant impactNet costs

(>2%)

Split System Central Air Conditioner ............................. 10 $5,170 ...................... .................... .................... ....................

11 5,126 ($44) 23 68 9

12 5,125 (45) 27 34 39

13 5,199 29 25 17 58

18 5,725 555 15 4 81

Split System Heat Pump ................................................ 10 9,679 ...................... .................... .................... ....................

11 9,529 (150) 30 70 0

12 9,437 (242) 42 55 3

13 9,464 (215) 39 39 22

18 9,955 276 23 11 66

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59619

TABLE VI.14.—SUMMARY OF LCC RESULTS BASED ON ARI MEAN MANUFACTURER COSTS AND A 18.4 YEAR AVERAGE

LIFETIME—Continued

Product class Efficiency

level

Average

LCC

Average LCC

(savings)

costs

Percent of consumers with

Net savings

(>2%)

No significant impactNet costs

(>2%)

Single Package Air Conditioner ..................................... 10 5,629 ...................... .................... .................... ....................

11 5,649 20 16 47 37

12 5,600 (29) 26 30 44

13 5,804 175 18 11 71

18 6,370 741 12 4 84

Single Package Heat Pump ........................................... 10 9,626 ...................... .................... .................... ....................

11 9,492 (134) 28 72 0

12 9,372 (254) 44 49 7

13 9,514 (112) 33 31 36

18 9,922 296 24 10 66

As discussed previously for the

presentation of energy savings and

payback period results, we have

investigated two scenarios where lower

estimates of the manufacturer costs

(reverse engineering) and system

lifetime (retirement function with 14

year average lifetime without

compressor replacement costs) were

analyzed. Table VI.15 presents the

results for the manufacturer cost

scenario while Table VI.16 presents the

results for the lifetime scenario.

TABLE VI.15.—SUMMARY OF LCC RESULTS BASED ON REVERSE ENGINEERING MANUFACTURER COSTS

Product class Efficiency

level

Average

LCC

Average LCC

(savings)

costs

Percent of consumers with

Net savings

(>2%)

No significant impactNet costs

(>2%)

Split System Central Air Conditioner ............................. 10 $5,170 ...................... .................... .................... ....................

11 5,095 ($75) 28 70 2

12 5,057 (113) 35 40 25

13 5,057 (113) 34 27 39

18 5,307 137 25 7 68

Split System Heat Pump ................................................ 10 9,679 ...................... .................... .................... ....................

11 9,470 (209) 40 60 0

12 9,314 (365) 58 42 0

13 9,307 (372) 52 42 6

18 9,720 41 28 15 57

Single Package Air Conditioner ..................................... 10 5,629 ...................... .................... .................... ....................

11 5,551 (78) 27 72 1

12 5,466 (163) 40 51 9

13 5,600 (29) 28 20 52

18 5,905 276 21 6 73

Single Package Heat Pump ........................................... 10 9,626 ...................... .................... .................... ....................

11 9,419 (207) 39 61 0

12 9,205 (421) 66 34 0

13 9,273 (353) 50 38 12

18 9,460 (166) 37 15 48

TABLE VI.16.—SUMMARY OF LCC RESULTS BASED ON ARI MEAN MANUFACTURER COST AND 14-YEAR AVERAGE

LIFETIME

Product class Efficiency

level

Average

LCC

Average

LCC (savings) costs

(in dollars)

Percent of consumers with

Net savings

(>2%)

No significant impactNet costs

(>2%)

Split System Central Air Conditioner ............................... 10 $4,682 .................... .................... .................... ....................

11 4,650 $(32) 22 69 9

12 4,672 (10) 24 31 45

13 4,769 87 21 15 64

18 5,336 654 12 3 85

Split System Heat Pump .................................................. 10 8,747 .................... .................... .................... ....................

11 8,623 (124) 27 73 0

12 8,587 (160) 35 58 7

13 8,630 (117) 33 37 30

18 9,184 437 18 9 73

Single Package Air Conditioner ....................................... 10 5,150 .................... .................... .................... ....................

11 5,182 32 14 46 40

59620 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

TABLE VI.16.—SUMMARY OF LCC RESULTS BASED ON ARI MEAN MANUFACTURER COST AND 14-YEAR AVERAGE

LIFETIME

Product class Efficiency

level

Average

LCC

Average

LCC (savings) costs

(in dollars)

Percent of consumers with

Net savings

(>2%)

No significant impactNet costs

(>2%)

12 5,157 7 22 29 49

13 5,378 228 14 10 76

18 6,011 861 9 3 88

Single Package Heat Pump ............................................. 10 8,747 .................... .................... .................... ....................

11 8,623 (124) 27 73 0

12 8,587 (160) 35 58 7

13 8,630 (117) 33 37 30

18 9,184 437 18 9 73

3. Net Present Value and Net National

Employment

The net present value analysis is a

measure of the cumulative benefit or

cost to the Nation of standards. As with

the determination of national energy

savings, five different scenarios were

analyzed for each trial standard level

consisting of variations on: (1)

Electricity price and housing

projections; (2) equipment efficiency

distributions; (3) manufacturer cost

estimates; (4) equipment lifetime; and

(5) societal discount rate. Electricity

price and housing projections were

based on three different AEO 2000

forecasts: (1) Reference Case, (2) High

Growth Case, and (3) Low Growth Case.

Three efficiency scenarios were

analyzed which forecast the equipment

efficiency distribution after new

standards were assumed to take effect:

(1) NAECA scenario, (2) Roll-up

scenario, and (3) Shift scenario.

Manufacturer costs were based on ARI

mean cost estimates. Equipment lifetime

was assumed to be 18.4 years, coupled

with the inclusion of compressor

replacement costs. A societal discount

rate of 7 was assumed. The range of

NPVs are reported in Table VI.17.

TABLE VI.17.—NET PRESENT VALUE VARIATION WITH ELECTRICITY PRICE AND HOUSING PROJECTIONS

Trial standard level

Net present value for units sold from 2006 to 2030

(billion 98$) 1

NAECA Roll-up Shift

1 ....................................................................................... 0 ......................................... 1 ......................................... 0 to –1.

2 ....................................................................................... –1 ....................................... 0 to 1 ................................. –3 to –4.

3 ....................................................................................... –1 to –2 ............................. 0 to –1 ............................... –5.

4 ....................................................................................... –5 to –6 ............................. –4 ....................................... –10.

5 ....................................................................................... –22 ..................................... –22 ..................................... –22.

1Based on ARI mean manufacturer costs, 18.4-year retirement function with compressor replacement, and a 7% discount rate.

In order to show the significance of

the NPVs in Table V.17 to the various

input assumptions, Tables VI.18

through VI.21 report the range of NPV

results for a range of assumptions and

scenarios relative to the total national

equipment and operating costs for all

central air-conditioning and heat pump

equipment under the base case (i.e., in

the absence of new efficiency

standards). The results in Table VI.18

are based on the AEO 2000 Reference

Case forecast of electricity prices and

housing. The total costs are presented

for the base case and each Trial

Standard Level. In addition, the NPV

(the difference in total costs between the

base case and trial standard level), as

well as the NPV as a percentage of the

‘‘Base Case Total Costs,’’ are calculated

for each trial standard level.

TABLE VI.18.—NET PRESENT VALUES RELATIVE TO BASE CASE TOTAL EQUIPMENT AND OPERATING COSTS 1

TSL

Base case

total costs

(billion

98$)

Efficiency scenario

NAECA Roll-up Shift

Total costs

(billion

98$)

NPV

Total costs

(billion

98$)

NPV

Total costs

(billion

98$)

NPV

(billion

98$)

as percent

of base

case total

(billion

98$)

as percent

of base

case total

(billion

98$)

as percent

of base

case total

1 ............................................ 381 381 0 0.0 381 1 0.2 385 0 –0.1

2 ............................................ 381 382 –1 –0.3 381 0 0.0 388 –3 –0.9

3 ............................................ 381 383 –2 –0.5 382 –1 –0.2 390 –5 –1.4

4 ............................................ 381 387 –5 –1.4 386 –4 –1.1 395 –10 –2.5

5 ............................................ 381 403 –22 –5.8 403 –22 –5.8 407 –22 –5.8

1Based on AEO 2000 Reference Case, ARI mean manufacturer costs, 18.4-year retirement function with compressor replacement, and a 7% discount rate. Values

rounded to the nearest $1 billion.

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59621

17A societal discount rate of 3% value was

investigated as a scenario in accordance with the

Office of Management and Budget’s (OMB) Guidelines to Standardize Measures of Costs and

Benefits and the Format of Accounting Statements.

Tables VI.19 through VI.21 show how

the three scenarios, i.e., reverse

engineering costs, 14-year average life,

and 3% discount rate,17 impact the net

present value. The three scenarios were

investigated only for the NAECA

efficiency scenario and the AEO

Reference Case electricity price and

housing projection.

TABLE V.19.—NET PRESENT VALUES RESULTS BASED ON REVERSE ENGINEERING MANUFACTURER COSTS 1

Trial standard level

Base case

total costs

(billion 98$)

Trial standard level

Total cost

(billion 98$)

Net present

value

(billion 98$)

As percent of

base case

total costs

1 ....................................................................................................................... 379 378 2 0.4

2 ....................................................................................................................... 379 377 2 0.5

3 ....................................................................................................................... 379 378 1 0.4

4 ....................................................................................................................... 379 379 0 0.0

5 ....................................................................................................................... 379 390 –10 –2.7

1Based on AEO 2000 Reference Case, NAECA efficiency scenario, 18.4-year retirement function with compressor replacement, and a 7% discount rate. Values rounded to the nearest $1 billion.

TABLE V1.20.—NET PRESENT VALUES RESULTS BASED ON 14-YEAR AVERAGE LIFETIME 1

Trial standard level

Base case

total costs

(billion 98$)

Trial standard level

Total cost

(billion 98$)

Net present

value

(billion 98$)

As percent of

base case

total costs

1 ....................................................................................................................... 363 364 0 0.0

2 ....................................................................................................................... 363 365 –2 –0.5

3 ....................................................................................................................... 363 366 –3 –0.8

4 ....................................................................................................................... 363 370 –7 –1.9

5 ....................................................................................................................... 363 389 –25 –6.9

1Based on AEO 2000 Reference Case, NAECA efficiency scenrio, ARI mean manufacturer costs, and a 7% discount rate. Values rounded to

the nearest $1 billion.

TABLE VI.21.—NET PRESENT VALUES RESULTS BASED ON 3% DISCOUNT RATE 1

Trial standard level

Base case

total costs

(billion 98$)

Trial standard level

Total cost

(billion 98$)

Net present

value

(billion 98$)

As percent of

base case

total costs

1 ....................................................................................................................... 712 708 3 0.5

2 ....................................................................................................................... 712 708 4 0.5

3 ....................................................................................................................... 712 708 3 0.4

4 ....................................................................................................................... 712 714 –3 –0.4

5 ....................................................................................................................... 712 746 –35 –4.9

1Based on AEO 2000 Reference Case, NAECA efficiency scenario, ARI mean manufacturer costs, and 18.4-year retirement function with

compressor replacement. Values rounded to the nearest $1 billion.

The Department committed in its

1996 Process Improvement Rule to

develop estimates of the employment

impacts of proposed standards in the

economy in general. 61 FR 36983.

As discussed above, energy efficiency

standards for central air conditioners

and heat pumps are expected to reduce

electricity bills for residential and

commercial consumers. The resulting

net savings are expected to be redirected

to other forms of economic activity.

These shifts in spending and economic

activity are expected to affect the

demand for labor, but there is no

generally accepted method for

estimating these effects.

One method to assess the possible

effects on the demand for labor of such

shifts in economic activity is to compare

sectoral employment statistics

developed by the Labor Department’s

Bureau of Labor Statistics (BLS). The

BLS regularly publishes its estimates of

the number of jobs per million dollars

of economic activity in different sectors

of the economy, as well as the jobs

created elsewhere in the economy by

this same economic activity. BLS data

indicate that expenditures in the electric

sector generally are associated with

fewer jobs (both directly and indirectly)

than expenditures in other sectors of the

economy. There are many reasons for

these differences, including the capitalintensity of the utility sector and wage

differences.

In developing this proposed rule, the

Department attempted a more precise

analysis of the impacts on national labor

demand using an input/output model of

the U.S. economy. The model

characterizes the interconnections

among 35 economic sectors using the

data from the Bureau of Labor Statistics.

Since the electric utility sector is more

capital-intensive and less laborintensive than other sectors (see Bureau

of Economic Analysis, Regional

Multipliers: A User Handbook for the

59622 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

Regional Input-Output Modeling System

(RIMS II), Washington, D.C., U.S.

Department of Commerce, 1992), a shift

in spending away from energy bills into

other sectors would be expected to

increase overall employment. But for

this analysis, since the increased

manufacturing costs to the nation of

meeting a new efficiency standard are

relatively large, there is an overall

decrease in national employment. The

results of the Department’s analysis are

shown in Chapter 12 of the TSD.

While this input/output model

suggests the proposed central air

conditioner and heat pump standards

are likely to decrease the net demand for

labor in the economy, the losses would

most likely be very small relative to

total national employment. For several

reasons, however, even these modest

losses are in doubt:

• Unemployment is now at the lowest

rate in 30 years. If unemployment

remains very low during the period

when the proposed standards are put

into effect, it is unlikely that the

standards alone could result in any net

decrease in national employment levels.

• Neither the BLS data nor the inputoutput model used by DOE include the

quality or wage level of the jobs. One

reason that the demand for labor

decreases in the model may be that the

jobs expected to be created pay more

than the jobs being lost. The losses from

any potential employment reduction

would be offset if job quality and pay

are increased.

• The net benefits from potential

employment changes are a result of the

estimated net present value of benefits

or losses likely to result from the

proposed standards. It may not be

appropriate to separately identify and

consider any employment impacts

beyond the calculation of net present

value.

Taking into consideration these

concerns regarding the interpretation

and use of the employment impacts

analysis, the Department concludes only

that the proposed central air conditioner

and heat pump standards are likely to

result in no appreciable job losses to the

nation.

Public comments are solicited on the

validity of the analytical methods used

and the appropriate interpretation and

use of the results of this analysis.

4. Impact on Utility or Performance of

Products

As detailed in Section V, in

establishing classes of products we have

tried to eliminate any degradation of

utility or performance in the products

under consideration in this rulemaking.

5. 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

further directs the Attorney General to

determine the impact, if any, of any

lessening of competition likely to result

from a proposed standard and 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. EPCA section 325(o)(2)(B)(i)(V)

and (B)(ii), 42 U.S.C. 6295(o)(2)(B)(i)(V)

and (B)(ii).

In order 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.

At DOE’s request, the DOJ reviewed the

manufacturer impact analysis interview

questionnaire to ensure that it would

provide insight concerning any

lessening of competition due to any

proposed trial standard levels.

6. Need of the Nation to Save Energy

Enhanced energy efficiency improves

the nation’s energy security, and

reduces the environmental impacts of

energy production. Improved efficiency

of central air conditioners and heat

pumps is also likely to improve the

reliability of the nation’s electric

system. The energy savings from central

air conditioner and heat pump

standards result in reduced emissions of

carbon and NOX. Cumulative emissions

savings over the 16-year period modeled

are shown in Table VI.22. Emission

savings are based on the use of: (1) The

ARI mean manufacturer cost data and

(2) an 18.4–year average lifetime. The

results presented in Table VI.22 are

based only on the AEO 2000 Reference

Case for electricity price and housing

projections and the NAECA efficiency

scenario.

TABLE VI.22.—CUMULATIVE EMISSIONS REDUCTIONS BASED ON AEO 2000 REFERENCE CASE AND NAECA EFFICIENCY

SCENARIO (2006–2020)

Trial standard level

Emissions reductions

Carbon (Mt) NOX (kt)

1 ............................................................................................................................................................................... 13.4 37.2

2 ............................................................................................................................................................................... 23.7 67.9

3 ............................................................................................................................................................................... 27.4 78.8

4 ............................................................................................................................................................................... 33.6 102.5

5 ............................................................................................................................................................................... 63.7 193.7

The impact of varying electricity price and housing projections (i.e., different AEO cases) as well as different efficiency

scenarios were considered only for the Trial Standard Level 3. Table VI.23 shows how carbon and NOX emissions

are impacted by the different projections and scenarios.

TABLE VI.23.—CUMULATIVE EMISSIONS REDUCTIONS FOR PROPOSED STANDARD (2006–2020) AND THE IMPACT OF

DIFFERENT ELECTRICITY PRICE/HOUSING PROJECTIONS AND EFFICIENCY SCENARIOS

Electricity price and housing projection Efficiency scenario

Emission

Carbon (Mt) NOX (kt)

AEO Reference Case ...................................... NAECA 27.4 78.8

AEO Reference Case ...................................... Roll-up 26.2 77.8

AEO Reference Case ...................................... Shift 30.2 89.3

AEO Low Growth Case ................................... NAECA 23.4 80.8

AEO High Growth Case .................................. NAECA 34.1 75.8

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59623

18Million metric tons (Mt).

19Thousand metric tons (kt).

20Approximately 7% of the RECS 97 households

with central air conditioners and 9% of the

households with heat pumps met this criteria.

The annual carbon emission

reductions range up to 6.6 Mt in 2020

and the NOX emissions reductions up to

24.5 kt in 2015.; 18 19 Total carbon and

NOX emissions for each trial standard

level are reported in the Environmental

Assessment, in the TSD.

7. Other Factors

This provision allows the Secretary of

Energy, in determining whether a

standard is economically justified, to

consider any other factors that the

Secretary deems to be relevant. EPCA

Section 325(o)(2)(B)(i)(VI), 42 U.S.C.

6295(o)(2)(B)(i)(VI). The Secretary has

decided that the impacts of the

proposed standards on peak power

requirements and electric utility system

reliability, the impacts of proposed

standards on those subgroups of

consumers who are at or below the

poverty line, and the impacts of

proposed standards on consumers and

manufacturers which might be required

by proposed environmental regulations

to incorporate ozone reduction

technologies in air conditioning and

heat pump equipment, are relevant to

the economic justification of the

standards, and has decided to consider

such impacts in this rulemaking.

Peak power impacts are determined as

part of the analysis to estimate impacts

on electric utilities from increases in the

central air conditioner and heat pump

standard. NEMS–BRS is used to

estimate peak power impacts by

calculating the reduction in installed

generation capacity due to an increase

in the minimum efficiency standard.

Table VI.24 shows the estimated

reductions in installed generation

capacity, in giga-watts (GW), in the year

2020 due to each of the trial standard

levels. Of the installed generating

capacity avoided, 13% would have been

provided by coal power plants. The

remaining percentage (87%) would have

been supplied by either gas-fired, oilfired, or dual-fired power plants. The

results presented in Table VI.24 are

based only on the AEO 2000 Reference

Case for electricity price and housing

projections and the NAECA efficiency

scenario.

TABLE VI.24.—INSTALLED GENERATION

CAPACITY REDUCTIONS IN THE YEAR

2020 BASED ON AEO 2000 REFERENCE CASE AND NAECA EFFICIENCY SCENARIO

Trial standard level

Installed generating capacity reduction

(GW)

1 ............................................ 6.4

2 ............................................ 10.6

3 ............................................ 12.3

4 ............................................ 15.4

5 ............................................ 28.6

The impact of varying electricity price

and housing projections (i.e., different

AEO cases) as well as different

efficiency scenarios were considered

only for the proposed standard (trial

standard level 3). Table VI.25 shows

how installed generation capacity is

impacted by the different projections

and scenarios.

TABLE VI.25.—INSTALLED GENERATION CAPACITY REDUCTIONS IN THE YEAR 2020 FOR TRIAL STANDARD LEVEL 3 AND

THE IMPACT OF DIFFERENT ELECTRICITY PRICE/HOUSING PROJECTIONS AND EFFICIENCY SCENARIOS

Electricity price and housing projection Efficiency

scenario

Installed generating capacity reduction (GW)

AEO Reference Case .............................................................. NAECA .......................................................................... 12.3

AEO Reference Case .............................................................. Roll-up ........................................................................... 11.9

AEO Reference Case .............................................................. Shift ................................................................................ 13.6

AEO Low Growth Case ........................................................... NAECA .......................................................................... 11.4

AEO High Growth Case .......................................................... NAECA .......................................................................... 12.5

As discussed above, the impact of the

peak power requirements of any single

end-use on electric utility system

reliability is highly uncertain. Thus, we

plan on conducting further research to

determine what connection, if any,

exists between end-use peak demand

reductions and system reliability. If

such research is completed and

applicable to this rulemaking, we will

make it available for public review

during the comment period on today’s

proposed rule.

Consumer subgroup impacts have

been estimated by determining the LCC

impacts of the trial standard levels on

those consumers who are at or below

the poverty line (e.g., for a family of

four, this constitutes a household

income of less than $16,036). To

perform this calculation, we used the

subset of RECS 97 data for households

that are considered low-income.20 Table

VI.26 summarizes the LCC impacts on

those low-income consumers who

utilize central air conditioners and heat

pumps. The results in Table VI.26 are

based on ARI mean manufacturer costs

and an 18.4-year average lifetime.

TABLE VI.26.—SUMMARY OF LCC RESULTS ON LOW-INCOME CONSUMERS BASED ON ARI MEAN MANUFACTURER COSTS

AND AN 18.4-YEAR AVERAGE LIFETIME

Product class Efficiency

level

Average

LCC

Average

LCC (savings) costs

Percent of consumers with

Net savings

(>2 %)

No significant impactNet costs

(>2 %)

Split System Central Air Conditioner ............................... 10 $4,906

11 4,887 (19) 17 66 17

12 4,903 (3) 20 29 51

13 5,007 101 17 14 69

18 5,598 692 10 2 88

Split System Heat Pump .................................................. 10 8,965

59624 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

TABLE VI.26.—SUMMARY OF LCC RESULTS ON LOW-INCOME CONSUMERS BASED ON ARI MEAN MANUFACTURER COSTS

AND AN 18.4-YEAR AVERAGE LIFETIME—Continued

Product class Efficiency

level

Average

LCC

Average

LCC (savings) costs

Percent of consumers with

Net savings

(>2 %)

No significant impactNet costs

(>2 %)

11 8,890 (75) 16 84 0

12 8,862 (103) 27 64 9

13 8,948 (17) 25 40 35

18 9,610 645 11 8 81

Single Package Air Conditioner ....................................... 10 5,327

11 5,283 (44) 11 42 47

12 5,313 (14) 20 27 53

13 5,568 241 12 9 79

18 6,158 831 10 2 88

Single Package Heat Pump ............................................. 10 9,149

11 9,057 (92) 21 78 1

12 8,973 (176) 35 53 12

13 9,145 (4) 25 27 48

18 9,619 470 18 8 74

In comparing the LCC results on the

subgroup of consumers who are lowincome (Table V.26) versus all central

air conditioner and heat pump

consumers (Table V.14), it appears that

low-income consumers have lower

savings at the different trial standard

levels than the general population of

central air conditioner and heat pump

consumers. Table V.27 directly

compares the LCC impacts of the

proposed standard on low-income and

all consumers.

TABLE VI.27.—COMPARISON OF LCC IMPACTS OF THE PROPOSED STANDARD ON ALL CONSUMERS VS. LOW-INCOME

CONSUMERS

Product class Efficiency level

Average LCC (savings) costs Percent of consumers with net

costs (>2 % of baseline LCC)

All consumers Low-income All consumers Low-income

Split System Central Air Conditioner ................................... 12 ($45) ($3) 39 51

Split System Heat Pump ...................................................... 13 (215) (17) 22 35

Single Package Air Conditioner ........................................... 12 (29) (14) 44 53

Single Package Heat Pump ................................................. 13 (112) (4) 36 48

The U.S. Environmental Protection

Agency (EPA) requires states to develop

a state implementation plan (SIP) for

most areas that are not in compliance

with the National Ambient Air Quality

Standards (NAAQS), or classified as

nonattainment. In Texas, four areas are

in nonattainment of the EPA’s one-hour

NAAQS for ozone: Beaumont-Port

Arthur, El Paso, Dallas-Fort Worth, and

Houston-Galveston. On August 9, 2000,

The Texas Natural Resource

Conservation Commission (TNRCC), the

lead environmental agency for the state

of Texas, approved for publication and

public hearing proposed revisions to the

state implementation plan (SIP), in

order to reduce ground-level ozone in

the Houston/Galveston (HGA), Dallas/

Fort Worth (DFW), and Beaumont/Port

Arthur (BPA) ozone nonattainment

areas, as well as in the 95-county central

and eastern Texas. The proposed rules

consist of 23 separate requirements

applying to various regions of the state.

One of the proposals mandates the use

of a technology in the affected areas that

will reduce ozone from ambient air that

is drawn across the external heat

exchanger units of air-cooled air

conditioning units, including heat

pumps. The proposed rule would

require, after January 1, 2002, that all

central air conditioners sold in the

specified areas of Texas have ozone

reduction technology installed.

The ozone reduction technology is a

proprietary catalyst called PremAir,

manufactured by the Engelhard

Corporation. The catalyst is

incorporated in air conditioners in two

ways: by coating the condenser coils, or

by installing an insert next to the

condenser coil. The Department is

required, by the Process Rule, to

understand the costs and benefits of

standards, and the distribution of those

costs among consumers, manufacturers

and others, and the uncertainty

associated with these costs and benefits.

Any adverse impacts on significant

subgroups and uncertainty concerning

adverse impacts must be fully

considered in selecting a standard. If the

introduction of this technology in

Texas, and possibly other jurisdictions,

would create new consumer subgroups

or would significantly change the ability

of equipment manufacturers to meet the

new efficiency standard or the cost

required to do so, the Department would

factor that information into its decision

making for this rule.

This technology has the potential for

affecting the price and efficiency of

central air conditioners. For example,

DOE is aware of a range of estimates of

what this technology would add to the

cost of central air conditioners. The

costs of this technology are estimated to

range between $42 and $446 per 12,000

Btu/hr of air conditioner capacity. As to

possible effects of the technology on the

efficiency of central air conditioners,

DOE understands several designs of

catalyst-treated air conditioners have

been tested by Intertek Testing Services

(ITS). DOE understands the test results

show no impact on efficiency for coated

condenser coils, and a roughly 2%

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59625

21All cumulative effects that are not monetary are

not discounted. Monetary effects are discounted to

1998 dollars.

reduction in efficiency for the catalyst

insert.

Manufacturers could also be affected

by the ozone reduction requirement.

The higher purchase costs of new air

conditioners could alter consumers’

decisions on repairing or replacing

equipment, which would affect air

conditioner sales and impact

manufacturers. If the effect applies to a

significant fraction of units sold each

year, the Department’s current

manufacturer impact analysis may

underestimate the impact on

manufacturers.

After reviewing the available

information, DOE is not certain as to the

impacts of any ozone reduction

requirements that the TNRCC may

adopt. The proposal is one of 23

requirements TNRCC may adopt and it

is uncertain whether this requirement

will be included in their final rule. Even

if the requirement is adopted, it is

unclear what, if any, effect the

requirement would have on efficiency.

Finally, DOE believes such a

requirement may have an impact on

manufacturers. DOE estimates a

potential impact on 800,000 central air

conditioner shipments per year covered

by the TNRCC proposal, or

approximately 13% of total shipments.

This potential requirement was not

included in today’s proposed rule

because of uncertainty about whether

the TNRCC will include the catalyst

requirement in their SIP. DOE invites

comments on the status of the TNRCC

deliberations and whether this potential

requirement should be considered.

E. Conclusion

Section 325(o)(2)(A) of the Act, 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 which 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. EPCA

section 325(o)(2)(B)(i), 42 U.S.C.

6295(o)(2)(B)(i). The amended standard

must ‘‘result in significant conservation

of energy.’’ EPCA section 325(o)(3)(B),

42 U.S.C. 6295(o)(3)(B).

We consider the impacts of standards

at each of five trial standards levels,

beginning with the Max Tech Level, i.e.,

Trial Standard Level 5. We then

consider less efficient levels. Trial

Standard Level 3 is a combination of

different efficiency levels for the

different classes. It combines the SEER

values for air conditioners from Trial

Standard Level 2 (12 SEER) with the

SEER values for heat pumps from Trial

Standard Level 4 (13 SEER). By

combining efficiency levels in this way,

the Department is able to evaluate the

impacts of different combinations of

standard levels to make an informed

decision on the merits of different

efficiency combinations.

To aid the reader as we discuss the

benefits or burdens of the trial levels,

we have included a summary of the

analysis results in Tables VI.28 and

VI.29.21 Table VI.28 presents a summary

of analysis results based on ARI mean

manufacturing costs, NAECA and Rollup efficiency scenarios and 7% and 3%

societal discount rate scenarios. Table

VI.29 presents a summary of analysis

results based on manufacturing costs

obtained from the reverse engineering

analysis for the NAECA efficiency

scenario and 7% and 3% societal

discount rate scenario. Both tables

assume an 18.4-year equipment lifetime,

including one compressor replacement.

The reverse engineering scenario results

in Table VI.29 are limited to single

scenarios which highlight the impact of

manufacturing costs on the consumer,

manufacturers, national energy savings,

and NPV.

TABLE VI.28.—SUMMARY OF ANALYSIS RESULTS BASED ON ARI MEAN MANUFACTURER COSTS 1

Trial std 1 Trial std 2 Trial std 3 Trial std 4 Trial std 5

Total Quads Saved 2 ............................................................ 1.7–1.8 2.9–3.2 3.4–3.6 4.2–4.5 8.1–8.7

Generation Capacity Offset (GW)3 ...................................... 6.4 10.6 12.3 15.4 28.6

NPV ($billion): 4

7% Discount Rate ......................................................... 0 ¥1 ¥1 to ¥2 ¥5 to ¥6 ¥22

3% Discount Rate ......................................................... 3 4 3 ¥3 ¥35

Emissions: 5

Carbon Equivalent (Mt) ................................................. 13.4 23.7 27.4 33.6 63.7

NOX (kt) ........................................................................ 37.2 67.9 78.8 102.5 193.7

Cumulative Change in INPV ($ million): 6

NAECA .......................................................................... (37) (186) (197) (183)

Roll-up ........................................................................... (181) (362) (367) (335)

Life Cycle Cost ($):

Split AC ......................................................................... ($44) ($45) ($45) $29 $555

Packaged AC ................................................................ $20 ($29) ($29) $175 $741

Split HP ......................................................................... ($150) ($242) ($215) ($215) $276

Packaged HP ................................................................ ($134) ($254) ($112) ($112) $296

Payback (years):

Split AC ......................................................................... 10.6 12.6 12.6 16 36

Packaged AC ................................................................ 16.1 14 14 21.8 48.8

Split HP ......................................................................... 5.5 7.2 9.3 9.3 17.3

Packaged Heat Pump ................................................... 8.1 8.7 13.2 13.2 19.4

1Estimates are based on 18.4-year lifetime.

2Based on AEO 2000 reference, high and low growth cases, and NAECA efficiency distributions.

3 Reductions in installed generation capacity in the year 2020, based on AEO 2000 reference case, NAECA efficiency scenario.

4Based on NAECA efficiency distribution and 7 % discount rate. Range reflects AEO 2000 reference, high and low growth cases.

5Based on AEO 2000 reference case, NAECA efficiency scenario, and ARI mean manufacturing costs.

6 Not calculated at Trial Standard Level 5.

59626 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

22 DOE estimates 9 coal-fired power plants and 64

gas-fired power plants can be avoided. See TSD,

Chapter 11 and Appendix H.

23Consumers would experience a $137 increase

in life-cycle-costs based on the Department’s

reverse engineering manufacturing costs.

24Consumers would experience a $41 increase in

life-cycle-costs based on the Department’s reverse

engineering manufacturing costs.

25At the 3% societal discount rate scenario, the

nation would have a net cost of 35 billion dollars.

With the reverse engineering equipment cost, the

NPV is a net cost of 10 to 11 billion dollars at the

7% discount rate and 8 billion dollars at 3%.

26 DOE estimates 5 coal-fired power plants and 34

gas-fired power plants can be avoided. See TSD,

Chapter 11 and Appendix H.

27At the 3% societal discount rate scenario, the

nation would have a net cost of 3 billion dollars.

With the reverse engineering equipment cost, the

NPV has a no net cost at the 7% discount rate and

a savings of 9 billion dollars at 3%.

28Consumers would experience a $372 savings in

life-cycle-costs based on the Department’s reverse

engineering costs.

29Consumers would experience a $133 savings in

life-cycle-costs based on the Department’s reverse

engineering manufacturing costs.

TABLE VI.29.—SUMMARY OF ANALYSIS RESULTS BASED ON REVERSE ENGINEERING MANUFACTURING COSTS) 1

Trial std 1 Trial std 2 Trial std 3 Trial std 4 Trial std 5

Total Quads Saved 2 ............................................................ 1.7–1.8 2.9–3.2 3.4–3.7 4.3–4.6 8.4–9.0

Generation Capacity Offset (GW) 3 ..................................... 6.4 10.6 12.3 15.4 28.6

NPV ($billion):

7% Discount Rate 2 ....................................................... 1 to 2 2 1 to 2 0 to 1 ¥10 to ¥11

3% Discount Rate ......................................................... 6 10 10 9 ¥8

Emissions: 3

Carbon Equivalent (Mt) ................................................. 13.4 23.7 27.4 33.6 63.7

NOX (kt) ........................................................................ 37.2 67.9 78.8 102.5 193.7

Cumulative Change in INPV ($ million):

NAECA .......................................................................... (30) (159) (171) (169)

Roll-up 3 ........................................................................ (181) (362) (367) (335)

Life Cycle Cost ($):

Split AC ......................................................................... ($75) ($113) ($113) ($113) $137

Packaged AC ................................................................ ($78) ($163) ($163) ($29) $276

Split HP ......................................................................... ($209) ($365) ($372) ($372) $41

Packaged HP ................................................................ ($207) ($421) ($353) ($353) ($166)

Payback (years):

Split AC ......................................................................... 7.8 9.8 11.3 11.3 19.6

Packaged AC ................................................................ 7.7 7.5 7.5 14.5 25.1

Split HP ......................................................................... 2.7 3.9 6.4 6.4 14.0

Packaged Heat Pump ................................................... 4.6 4.0 8.4 8.4 12.81

1Based on 18 year lifetime, NAECA efficiency scenario and AEO 2000 reference case.

2Variation based on AEO 2000 reference, low and high growth case.

3Based on ARI mean manufacturer costs as reported in Table VI.28.

First we considered Trial Standard

Level 5, the most efficient level for each

of four classes, representing uniform 18

SEER requirements. Trial Standard

Level 5 saves between 8.1 and 8.7

Quads of energy, a significant amount.

The estimated reduction in installed

generating capacity is 28.6 GW, or

roughly 73 large, 400 megawatt, power

plants.22 The forecasted reduction in

generating capacity is approximately

3.7% of current installed generating

capacity and more than 13% of the

anticipated growth in capacity needed

by 2020. The emissions reductions of

63.7 Mt of carbon equivalent and 193.7

kt of NOX are also significant. However,

at this level, the vast majority of

consumers would experience an

increase in LCC costs. Purchasers of

split central air-conditioners, the

predominate class of central air

conditioner with 65% of the sales of

central air conditioners and heat pumps,

would lose $555 over the life of their

appliance.23 Purchasers of split heat

pumps, the predominate class of heat

pump, would lose $276.24 Moreover, the

Department believes these LCC results

overstate the benefits of this trial

standard level. Because we did not have

equipment cost estimates at this level,

we used instead the costs of 15 SEER

equipment. DOE believes the costs of 18

SEER equipment would be higher than

the 15 SEER costs and that, as a result,

the increase in life-cycle-costs would

actually be greater than our LCC

analysis indicates. For the nation as a

whole Trial Standard Level 5 would

have a net cost 22 billion dollars in

NPV.25 The Department did not

calculate manufacturer impacts at this

trial standard level. The Department

concludes that at this trial standard

level, the benefits of energy savings,

generating capacity reductions and

emission reductions would be

outweighed by the negative economic

impacts to the nation, to the vast

majority of consumers and to the

manufacturers. Consequently, the

Department concludes Trial Standard

Level 5, the Max Tech Level, is not

economically justified.

Next, we considered Trial Standard

Level 4. This level specifies 13 SEER

equipment for all product classes and

would save between 4.2 and 4.5 Quads

of energy, a significant amount. The

estimated reduction in installed

generating capacity is 15.4 GW, or

roughly 39 large, 400 megawatt, power

plants.26 The forecasted reduction in

generating capacity is approximately

2% of current installed generating

capacity and more than 7% of the

anticipated growth in capacity needed

in 2020. The emissions reductions

would also be significant: 33.6 Mt of

carbon equivalent and 102.5 kt of NOX.

The NPV of Trial Standard Level 4

would have a net cost of between 5 and

6 billion dollars.27 The average LCC

savings for consumers with split heat

pumps would be $215, based on ARI

equipment costs.28 Owners of split air

conditioners could see their LCC

increase by $29, based on ARI costs.29

Under Trial Standard Level 4, the air

conditioning industry would experience

a NPV loss of between 169 and 335

million dollars. The range of impacts is

driven primarily by the assumption

regarding the distribution of air

conditioner and heat pump efficiencies

in the market after implementation of

the standard (NAECA or Roll-up). The

Department recognizes that the ability to

maintain a full product line is more

difficult at higher standard levels and

therefore places more weight on the

Roll-up scenario at Trial Standard Level

4. The Department concludes that at

Trial Standard Level 4 the benefits of

energy savings, generating capacity

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59627

30 DOE estimates 4 coal-fired power plants and 27

gas-fired power plants can be avoided. See TSD,

Chapter 11 and Appendix H.

31At the 3% societal discount rate scenario, the

nation would have a net savings of 3 billion dollars.

With the reverse engineering equipment cost, the

NPV has a net savings of 1 billion dollars at the 7%

discount rate and 10 billion dollars at 3%.

32 DOE observes that the average LCC savings for

all classes at this trial standard level are positive

and at the same time the NPV is negative. This is

a counterintuitive result since the NPV can be

described as a sum of individual consumer LCCs.

The negative NPV is caused by a number of factors,

including the assumption in the NES that some

consumers will purchase more efficient products

than is required by the standard, e.g., 14 SEER.

Since the NES uses average usage rates and average

marginal energy prices for these consumers, it may

overstate the life-cycle-costs for consumers that

voluntarily purchase products which, based on

average values, would seem not to be cost-effective.

Furthermore, the NES does not consider factors

such as utility rebate programs which would have

a effect on total discounted costs.

33Consumers would experience a $113 savings in

life-cycle-costs based on the Department’s reverse

engineering costs.

34Consumers would experience a $372 increase

in life-cycle-costs based on the Department’s

reverse engineering costs.

35 DOE estimates one coal-fired power plants and

four gas-fired power plants can be avoided.

36At the 3% societal discount rate, the national

NPV is reduced by 1 billion dollars. With the

reverse engineering equipment cost, the NPV is not

changed.

37The total national discounted cost of owning

and operating central air conditioners and heat

pumps at this Trial Standard Level 3 is 382 billion

dollars.

38Using the reverse engineering costs the savings

are increased by $7.

39 It is possible the NPV does not include the

value of avoided power plants. It should be

36At the 3% societal discount rate, the national

NPV is reduced by 1 billion dollars. With the

reverse engineering equipment cost, the NPV is not

changed.

reductions and emission reductions and

the reduction in LCC for some

consumers are outweighed by the

negative economic impacts on the

nation, increase in LCC for most

consumers and manufacturer loss in

NPV. Consequently, the Department

concludes Trial Standard Level 4 is not

economically justified.

Next, we considered Trial Standard

Level 3. This level specifies 12 SEER for

air conditioners and 13 SEER for heat

pumps. The energy savings are

estimated to be between 3.4 and 3.6

quads, a significant amount. The

estimated reduction in installed

generating capacity is 12.3 GW, or

roughly 31 large, 400 megawatt, power

plants.30 The forecasted reduction in

generating capacity is approximately

1.6% of current installed generating

capacity and more than 5% of the

anticipated growth in capacity needed

in 2020. The emissions reductions

would also be significant: 27.4 Mt of

carbon equivalent and 78.8 kt of NOX.

The national NPV of this trial standard

level has a range of net costs from 1 to

2 billion dollars, using ARI costs.31 32

All classes of product would have mean

LCC savings. The average LCC savings

for consumers with split air

conditioners would be $45, using ARI

costs.33 The average LCC savings for

consumers with split heat pumps would

be $215, using ARI costs.34 As an

additional LCC analysis, DOE

considered the effect of standards on

low-income consumers. DOE expects

low-income consumers will experience

less savings than the population as a

whole. (See TSD, Chapter 10). Under

this trial standard level, the air

conditioning industry would experience

a NPV loss of between 171 and 367

million dollars depending on whether

the Roll-up or NAECA efficiency

distribution scenario is considered.

Given the benefits and burdens of

Trial Standard Level 3 as discussed

above, and observing the reduction in

NPV compared to Trial Standard Level

2, the Department compared the benefits

and burdens of the two trial standard

levels. Adopting Trial Standard Level 3,

instead of Trial Level 2, would save the

nation an additional 0.5 Quads of

energy, and further reduce installed

generating capacity by 1.7 GW, or

roughly 5 large, 400 megawatt, power

plants.35 The incremental emission

reductions of carbon equivalent and

NOX are 3.7 Mt and 10.9 kt,

respectively. Trial Standard Level 3

would, however, reduce the national

NPV by up to 1 billion dollars,

depending on the cost estimates

used.36 37 The consumer LCC savings

are not changed for central air

conditioners, but are reduced by $27 for

split heat pumps using ARI costs.38

In determining the economic

justification of Trial Standard Level 3,

the Department has weighed the

benefits of energy savings, generating

capacity reductions, reduced average

consumer LCC, and emissions

reductions against the burdens of a loss

in manufacturer net present value,

consumer LCC increases for some

households and the potential loss in

national NPV. We find the benefits to be

substantial. Although the loss in

manufacturer net present value is also

substantial, the projected LCC increases

and loss in national NPV are relatively

small, and these burdens of Trial

Standard Level 3 would be outweighed

by its benefits. Moreover, in light of the

reverse engineering analysis, we believe

the equipment costs will be lower than

the ARI estimates on which we have

relied and that the loss in national NPV

would be less than estimated.

Comparing Trial Standard Level 3 to

Trial Standard Level 2, DOE found the

potential decrease in national NPV is

outweighed by other factors not

included in the national NPV

calculations. For example, the national

NPV calculation does not include

quantitative estimates for the value of

emission reductions.39 Furthermore, as

an added benefit, the standard may

improve the reliability of the electric

distribution system. The Department

finds that, compared with Trial

Standard Level 2, the incremental

benefits of generating capacity

reductions and emission reductions of

Trial Standard Level 3 to be greater than

the potential loss in national NPV and

increase in life-cycle-costs to some

consumers, including a relatively small

number of low-income consumers.

After considering the benefits and

burdens of Trial Standard Level 3 and

comparing the impacts of Trial Standard

Levels 2 and 3, the Department finds

Trial Standard Level 3 to be maximum

improvement in efficiency that is

technologically feasible and

economically justified. Therefore, the

Department today proposes to adopt the

energy conservation standards for air

conditioners and heat pumps at Trial

Standard Level 3.

VII. Procedural Issues and Regulatory

Review

A. 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 Energy

Conservation Standards for central air

conditioners and heat pumps, pursuant

to the National Environmental Policy

Act of 1969 (NEPA) (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 NEPA

(10 CFR Part 1021).

B. Review under Executive Order 12866,

‘‘Regulatory Planning and Review’’

The Department has determined

today’s regulatory action is a significant

regulatory action within the scope of

section 3(f)(1) of Executive Order 12866,

‘‘Regulatory Planning and Review.’’ (58

FR 51735, October 4, 1993). Therefore,

this proposal requires a regulatory

analysis. Such an analysis presents

major alternatives to the proposed

regulation that could achieve

substantially the same goal, as well as

a description of the cost and benefits

59628 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

(including potential net benefits) of the

proposed rule. Accordingly, the Office

of Information and Regulatory Affairs

(OIRA) reviewed today’s action under

the Executive Order.

There were no substantive changes

between the draft we submitted to OIRA

and today’s action. The draft and other

documents we submitted to OIRA for

review are a part of the rulemaking

record and are available for public

review in the Department’s Freedom of

Information Reading Room, 1000

Independence Avenue, SW.,

Washington, DC 20585, between the

hours of 9:00 a.m. and 4:00 p.m.,

Monday through Friday, except Federal

holidays, telephone (202) 586–3142.

The following summary of the

Regulatory Impact Analysis (RIA)

focuses on the major alternatives

considered in arriving at the proposed

approach to improving the energy

efficiency of consumer products. The

reader is referred to the complete RIA,

which is contained in the TSD, available

as indicated at the beginning of today’s

proposed rule. 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 economic

impact of the proposed standard.

The RIA calculates the effects of

feasible policy alternatives to central air

conditioner and heat pump energy

efficiency standards, and provides a

quantitative comparison of the impacts

of the alternatives. We evaluate each

alternative in terms of its ability to

achieve significant energy savings at

reasonable costs, and we compare it to

the effectiveness of the proposed rule.

We created the RIA using a series of

regulatory scenarios (with various

assumptions), which we used as input

to the shipments model for central air

conditioners and heat pumps. We used

the results from the shipments model as

inputs to the NES spreadsheet

calculations.

DOE identified the following seven

major policy alternatives for achieving

consumer product energy efficiency.

These alternatives include:

• No New Regulatory Action

• Informational Action

—Product Labeling

—Consumer Education

• Prescriptive Standards

• Financial Incentives

—Tax credits

—Rebates

—Low income and seniors subsidy

• Voluntary Energy Efficiency Targets

(5 Years, 10 Years)

• Mass Government Purchases

• The Proposed Approach (Performance

Standards)

We have evaluated each alternative in

terms of its ability to achieve significant

energy savings at reasonable costs

(Table VII.1), and have compared it to

the effectiveness of the proposed rule.

All of the results below have been

determined with the AEO Reference

Case and the NAECA efficiency

scenario.

TABLE VII.1.—ALTERNATIVES CONSIDERED

Policy alternatives NPV

(billions 98$)

Energy

Savings

(Quads)

Consumer Product Labeling .................................................................................................................................... 0 0.1

Consumer Education ............................................................................................................................................... 0 0.1

Prescriptive Standards ............................................................................................................................................. 0 1.1

Consumer Tax Credits ............................................................................................................................................. 0 0.1

Consumer Rebates .................................................................................................................................................. 0 0.2

Manufacturer Tax Credits ........................................................................................................................................ 0 0.0

Voluntary Efficiency Target (5 year delay) .............................................................................................................. ¥1 3.1

Voluntary Efficiency Target (10 year delay) ............................................................................................................ ¥1 1.9

Low Income Subsidy ............................................................................................................................................... 0 0.1

Mass Government Purchases ................................................................................................................................. 0 0

Performance Standards ........................................................................................................................................... ¥2 4.4

NPV = Net Present Value (2006–2030, in billion 1998$) (does not include government expenses).

Savings = Energy Savings (Source Quads).

If we imposed no new regulatory

action, then we would implement no

new standards for this product. This is

essentially the ‘‘base case’’ for central

air conditioners and heat pumps. In this

case, between the years 2006 and 2030,

there would be an expected energy use

of 39 Quads of primary energy, with no

energy savings and a zero NPV.

We grouped several alternatives to the

base case under the heading of

informational action. They include

consumer product labeling and DOE

public education and information

programs. Both of these alternatives are

already mandated by, and are being

implemented under EPCA sections 324

and 337, 42 U.S.C. 6294, 6297. One base

case alternative would be to estimate the

energy conservation potential of

enhancing consumer product labeling.

To model this possibility, the

Department estimated that 5% of the

consumers purchasing 10 SEER

equipment and 5% of the consumers

purchasing 12 SEER equipment would

change their decisions and purchase 12

SEER and 13 SEER systems,

respectively. It is assumed that the

program would last six years and upon

its expiration consumers would revert

back to their prior purchase decisions.

The consumer product labeling

alternative resulted in 0.1 Quad of

energy savings with no impact on the

NPV.

Another approach, called consumer

education, is to consider an Energy

Star program for 12 SEER and 13 SEER

central air conditioners and heat pumps.

We assume, under this program, there

would be a 20% increase in the sales of

both 12 SEER and 13 SEER systems. As

with the consumer product labeling

program, it is assumed that the

education program would last six years

and upon its expiration sales would

drop back to their market share levels

prior to the program’s implementation.

This consumer education program

results in energy savings equal to 0.1

Quad with no impact on the NPV.

Another method of setting standards

would entail requiring that certain

design options be used on each product,

i.e., for DOE to impose prescriptive

standards. For this approach, we assume

that a prescriptive standard is

implemented to ensure that all central

air conditioners and heat pumps are

equipped with thermostatic expansion

valves (TXVs). The resulting efficiency

increase is 0.5 SEER. That is, the

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59629

baseline efficiency of 10 SEER is

assumed to increase to 10.5 SEER as a

result of the prescriptive standard.

Manufacturer costs associated with this

standard were arrived by linearly

interpolating between those costs

associated with the baseline (i.e., 10

SEER) and 11 SEER efficiency levels.

This resulted in energy savings of 1.1

Quad and no impact on the NPV.

We tested various financial incentive

alternatives. These included tax credits

and rebates to consumers, as well as tax

credits to manufacturers. We assumed

the tax credits to consumers were 50%

of the incremental purchase price for

higher energy-efficiency equipment. The

incremental price is based on the

difference between the 2006 baseline

price and the price of 12 SEER

equipment. We estimate the impact of

this policy would be to move 5% of the

market share from the 2006 baseline to

12 SEER models. These tax credits

would start in 2006 and run for six

years. We assume people stop buying

these more efficient and more expensive

central air conditioners and heat pumps

when the tax credits stop. The tax

credits to consumers showed a change

from the base case, saving 0.1 Quad

with no impact to the NPV.

To estimate the impact of consumer

rebates, we assumed rebates of 35% of

the incremental retail prices for higher

energy-efficiency equipment. The

incremental cost is based on the

difference between the 2006 baseline

cost and the cost of 12 SEER equipment.

We estimate the impact of this policy

would be to move 10% of market share

from the 2006 baseline to the 12 SEER

models. These rebates would start in

2006 and run for six years. We assume

people stop buying these more efficient

and more expensive central air

conditioners and heat pumps when the

rebates stop. The rebates to consumers

showed a change from the base case,

would save 0.2 Quad with no impact to

the NPV.

Another financial incentive we

considered was a tax credit to

manufacturers for the production of

energy-efficient models of central air

conditioners and heat pumps. We

assumed an investment tax credit of

20%, applicable to the tooling and

machinery costs of the manufacturers.

These are tooling costs as they relate to

producing 12 SEER central air

conditioners and heat pumps. We

estimate the impact of this policy would

be to move 1% of the market share from

the 2006 baseline to the 12 SEER

models. These tax credits would start in

2006 and run for six years. We assume

no persistence in the market once they

stop. Tax credits to manufacturers

would save no energy and have no

impact on the NPV. The impact of this

scenario would be negligible because

the investment tax credit was applicable

only to the tooling and machinery costs

of the firms. The firms’ fixed costs and

some of the design improvements that

would likely be adopted to manufacture

more efficient versions of this product

would involve purchased parts.

Expenses for purchased parts would not

be eligible for an investment tax credit.

We examined two scenarios of

voluntary energy efficiency targets. In

the first one, we assumed all the

relevant manufacturers voluntarily

adopted the proposed energy

conservation standards in five years. In

the second scenario, we assumed the

proposed standards were adopted in 10

years. In these scenarios, voluntary

improvements having a five-year delay,

compared to implementation of

mandatory standards, would result in

energy savings of 3.1 Quads and ¥$1

billion NPV; voluntary improvements

having a 10-year delay would result in

1.9 Quads being saved and ¥$1 billion

NPV. These scenarios assume that there

would be universal voluntary adoption

of the energy conservation standards by

these appliance manufacturers, an

assumption for which there is no

assurance.

One of the market barriers to higher

efficiency central air conditioners and

heat pumps is the expense to upgrading

to a more efficient system. Since these

expenses can be a particular burden on

low income households, we considered

a low income subsidy of $500 to make

higher efficiency central airconditioning and heat pump equipment

available and cost effective for these

households. We determined the number

of low income households with central

air-conditioning from the RECS public

use data. We assumed that half of these

households would take advantage of the

program. The program would start in

2006 and run for six years. This subsidy

would save 0.1 Quad with no impact to

the NPV.

Another policy alternative we

reviewed was that of large purchases of

high efficiency central air conditioners

and heat pumps by Federal, State, and

local governments. We modeled this

policy by assuming these governmental

entities (e.g., U.S. Department of

Housing and Urban Development at the

Federal level) purchased 12 SEER

equipment for 5% of the low income,

rented housing stock utilizing central

air-conditioning and heat pump

equipment. This policy alternative

resulted in no energy savings with no

impact to the NPV.

Lastly, all of these alternatives must

be gauged against the performance

standards we are proposing in today’s

proposed rule. Such performance

standards would result in energy

savings under the AEO Reference Case

and NAECA efficiency scenario of 3.5

Quads, and the NPV estimates range

from an increase of $3 billion to a cost

of $2 billion.

As indicated in the paragraphs above,

none of the alternatives we examined

for these products would save as much

energy as today’s proposed rule. Also,

several of the alternatives would require

new enabling legislation, since authority

to carry out those alternatives does not

presently exist.

C. Review Under the Regulatory

Flexibility Act

The Regulatory Flexibility Act of 1980

(Pub. L. 96–354) requires an assessment

of the impact of regulations on small

businesses. For air conditioning and

warm air heating equipment

manufacturing, a ‘‘firm’’ is defined by

the Small Business Administration as a

small business if it (including affliates)

has 750 or fewer employees.

The residential air-conditioner

industry is characterized by seven firms

accounting for nearly 95% of sales. DOE

understands that each of these firms,

including its affiliates, has more than

750 employees. Smaller businesses and

firms, which make specialty airconditioning products and supply niche

markets, share 5% of the market.

In this industry, average production

cost is inversely related to firm size. The

industry displays economies of scale,

and large firms (to the extent that their

facilities are modernized) have lower

average production costs than small

firms. This fact, coupled with increasing

competitiveness of the national market,

probably accounts for the consolidation

that has occurred for several decades.

The fact that the consolidation has been

producing larger firms strongly

corroborates the finding that large firms

have a cost advantage.

A principal implication of

consolidation is that the smaller of the

firms will be, on average, more

vulnerable to the financial impacts of

higher efficiency standards. Any

decrease in average profitability is more

likely to mean the difference between

success and failure for a smaller firm.

The impact of higher efficiency

standards on small firms is likely to be

mixed. Those firms that face a large

technological challenge in meeting the

new standards may face a

disproportionate burden, because

smaller firms have more limited

research and development capabilities

59630 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

than their larger competitors. Some

smaller manufacturers indicated the

potential for a negative economic

impact of any higher standard level on

their firms. However, since these

concerns apply primarily to small

manufacturers of niche products, they

benefit from the provisions proposed by

the Department to somewhat protect

those products from the new standards.

For example, a separate product class is

being proposed for through-the-wall

equipment, many of which are

manufactured by small manufacturers.

Also, the Department has acknowledged

that small manufacturers of high

velocity distribution systems may

potentially be adversely affected by the

proposed standard level. The

Department is considering

modifications to the SEER test

procedure, which would grant these

manufacturers some relief. Verticalpackaged, wall-mounted equipment is

another product manufactured by small

firms, and, as stated in Section V.J.3 of

this notice, the Department intends to

consider those to be commercial

products under EPACT. These

provisions should eliminate any

potential for significant economic

impact on small manufacturers related

to the proposed standard level.

Many small manufacturers produce

coils only. Since there are no intensive

incremental technological or capital

requirements for these companies to

increase the efficiency of their products,

we do not expect them to face any

incremental burden as a result of the

new standards.

In view of these conclusions, the

Department has determined and hereby

certifies pursuant to section 605(b) of

the Regulatory Flexibility Act that, for

this particular industry, the proposed

standard levels in today’s proposed rule

will not ‘‘have a significant economic

impact on a substantial number of small

entities,’’ and it is not necessary to

prepare a regulatory flexibility analysis.

D. Review Under the Paperwork

Reduction Act

No new information or record keeping

requirements are proposed in this

rulemaking. Accordingly, no Office of

Management and Budget clearance is

required under the Paperwork

Reduction Act. 44 U.S.C. 3501 et seq.

E. Review Under Executive Order 12988,

‘‘Civil Justice Reform’’

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 Executive 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. With regard to

the review required by Section 3(a),

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. DOE reviewed today’s proposed

rule under the standards of Section 3 of

the Executive Order and determined

that, to the extent permitted by law, the

regulations meet the relevant standards.

F. ‘‘Takings’’ Assessment Review

The Department has determined

pursuant to 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 that might require

compensation under the Fifth

Amendment to the United States

Constitution.

G. Review Under Executive Order 13132

Executive Order 13132 (64 FR 43255,

August 4, 1999) requires agencies to

develop an accountable process to

ensure meaningful and timely input by

State and local officials in the

development of regulatory policies that

have ‘‘federalism implications.’’

Agencies are required to examine the

constitutional and statutory authority

supporting any action that would limit

the policymaking discretion of the

States and carefully assess the necessity

for such actions. DOE 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. State regulations

that may have existed on the products

that are the subject of today’s proposed

rule were preempted by the Federal

standards established in NAECA 1987.

States can petition the Department for

exemption from such preemption based

on criteria set forth in EPCA. No further

action is required by Executive Order

13132.

H. Review Under the Unfunded

Mandates Reform Act

With respect to a proposed regulatory

action that may result in the

expenditure by State, local, and tribal

governments, in the aggregate, or by the

private sector, of $100 million or more

(adjusted annually for inflation) in any

one year, section 202(a) of the Unfunded

Mandates Reform Action of 1995

(UMRA), 2 U.S.C. 1531 et seq. requires

a Federal agency to publish a written

statement concerning estimates of the

resulting costs, benefits and other effects

on the national economy. 2 U.S.C.

1532(a),(b). DOE estimates that the

proposed standards, if adopted, would

not result in the expenditure by the

private sector of $100 million or more

in a year, with the possible exception of

one year in which industry

expenditures could total approximately

$110 million.

Section 202 of UMRA authorizes an

agency to respond to the content

requirements of UMRA in any other

statement or analysis that accompanies

the proposed rule. 2 U.S.C. 1532(c). The

content requirements of section 202(b)

of UMRA relevant to a private sector

mandate substantially overlap the

economic analysis requirements that

apply under section 325(o) of EPCA and

Executive Order 12866. The

Supplementary Information section of

the Notice of Proposed Rulemaking and

‘‘Regulatory Impact Analysis’’ section of

the TSD for today’s proposed rule

responds to those requirements.

DOE is obligated by Section 205 of

UMRA, 2 U.S.C. 1535, to identify and

consider a reasonable number of

regulatory alternatives before

promulgating a rule for which a written

statement under section 202 is required.

From those alternatives, DOE must

select the least costly, more costeffective or least burdensome alternative

that achieves the objectives of the rule,

unless DOE publishes an explanation of

why a different alternative is selected.

As required by section 325(o) of the

Energy Policy and Conservation Act (42

U.S.C. 6295(o)), this proposed rule

would establish energy conservation

standards for central air conditioners

and heat pumps that are designed to

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59631

achieve the maximum improvement in

energy efficiency that DOE has

determined to be both technologically

feasible and economically justified. A

full discussion of the alternatives

considered by DOE is presented in the

‘‘Regulatory Impact Analysis’’ section of

the TSD for this notice.

I. Review Under the Treasury and

General Government Appropriations

Act of 1999

Section 654 of the Treasury and

General Government Appropriations

Act, 1999 (Pub. L. No. 105–277) requires

Federal agencies to issue a Family

Policymaking Assessment for any

proposed rule or policy that may affect

family well-being. Today’s proposal

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.

J. Review Under the Plain Language

Directives

Section 1(b)(12) of Executive Order

12866 requires that each agency draft its

regulations to be simple and easy to

understand, with the goal of minimizing

the potential for uncertainty and

litigation arising from such uncertainty.

Similarly, the Presidential

memorandum of June 1, 1998 (63 FR

31883) directs the heads of executive

departments and agencies to use, by

January 1, 1999, plain language in all

proposed and final rulemaking

documents published in the Federal

Register, unless the rule was proposed

before that date.

Today’s proposed rule uses the

following general techniques to abide by

section 1(b)(12) of Executive Order

12866 and the Presidential

memorandum of June 1, 1998 (63 FR

31883):

• Organization of the material to

serve the needs of the readers

(stakeholders).

• Use of common, everyday words in

short sentences.

• Shorter sentences and sections.

We invite your comments on how to

make this proposed rule easier to

understand.

VIII. Public Comment

A. Written Comment Procedures

The Department invites interested

persons to participate in the proposed

rulemaking by submitting data,

comments, or information with respect

to the proposed issues set forth in

today’s proposed rule to Ms. Brenda

Edwards-Jones, at the address indicated

at the beginning of this notice. We will

consider all submittals received by the

date specified at the beginning of this

notice in developing the final rule.

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 one complete copy of the

document and ten (10) copies, if

possible, from which the information

believed to be confidential has been

deleted. The Department of Energy will

make its own determination with regard

to the confidential status of the

information and treat it according to its

determination.

Factors of interest to the Department

when evaluating requests to treat as

confidential information that has been

submitted include: (1) A description of

the items; (2) an indication as to

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) an indication as to when

such information might lose its

confidential character due to the

passage of time; and (7) whether

disclosure of the information would be

contrary to the public interest.

B. Public Workshop/Hearing

1. Procedure for Submitting Requests To

Speak

You will find the time and place of

the public hearing listed at the

beginning of this notice. We invite any

person who has an interest in today’s

notice, or who is a representative of a

group or class of persons that has an

interest in these issues, to request an

opportunity to make an oral

presentation. If you would like to attend

the public hearing, please notify Ms.

Brenda Edwards-Jones at (202) 586–

2945. You may hand deliver requests to

speak to the address indicated at the

beginning of this notice between the

hours of 8 a.m. and 4 p.m., Monday

through Friday, except Federal holidays.

You may also send them by mail or Email to brenda.edwardsjones@ee.doe.gov.

The person making the request should

state why he or she, either individually

or as a representative of a group or class

of persons, is an appropriate

spokesperson, briefly describe the

nature of the interest in the rulemaking,

and provide a telephone number for

contact. We request each person

selected to be heard to submit an

advance copy of his or her statement at

least two weeks prior to the date of this

hearing as indicated at the beginning of

this notice. At our discretion, we may

permit any person who cannot do this

to participate if that person has made

alternative arrangements with the Office

of Building Research and Standards in

advance. The request to give an oral

presentation should ask for such

alternative arrangements.

2. Conduct of Hearing

The Department will designate a

Department official to preside at the

workshop and we may also use a

professional facilitator to facilitate

discussion. The workshop will not be a

judicial or evidentiary-type hearing, but

the Department will conduct it in

accordance with 5 U.S.C. 553 and

Section 336 of the Act and a court

reporter will be present to record the

transcript of the workshop. We reserve

the right to schedule the presentations

by workshop participants, and to

establish the procedures governing the

conduct of the workshop.

The Department will permit each

participant to make a prepared general

statement, limited to five (5) minutes,

prior to the discussion of specific topics.

The general statement should not

address these specific topics, but may

cover any other issues pertinent to this

rulemaking. The Department will permit

other participants to briefly comment on

any general statements. We will divide

the remainder of the hearing into

segments, with each segment consisting

of one or more of the following specific

topics covered by this notice:

• Engineering analysis, including

mark-up;

• Life-Cycle-Cost and payback

analysis;

• National Energy Savings and Net

Present Value;

• Manufacturer impacts;

• Utility impacts;

• Proposed standards, including an

EER-based standard and TXV

considerations; and

• Other issues.

The Department will introduce each

topic with a brief summary of the

relevant parts of our analysis and of the

proposed rule, and the significant issues

involved. We will then permit

participants in the hearing to make a

prepared statement limited to five (5)

minutes on that topic. At the end of all

prepared statements on a topic, the

Department will permit each participant

to briefly clarify his or her statement

and comment on statements made by

59632 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

others. Participants should be prepared

to answer questions by us and by other

participants concerning these issues.

Our representatives may also ask

questions of participants concerning

other matters relevant to the hearing.

The total cumulative amount of time

allowed for each participant to make

prepared statements will be 20 minutes.

The official conducting the hearing

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,

needed for the proper conduct of the

hearing.

We will make the entire record of this

rulemaking, including the transcript,

available for inspection in the

Department’s Freedom of Information

Reading Room. Any person may

purchase a copy of the transcript from

the transcribing reporter.

C. Issues for Which DOE Seeks

Comment

The Department is particularly

interested in receiving comments and

views of interested parties concerning:

(1) Whether explicit consideration of

extended warranties would produce

significantly different results from those

based on service costs alone;

(2) The Department’s methodology

and data for determining the

appropriate marginal energy costs;

(3) The burdens and benefits that

would result from including an EER

requirement in the final rule. Of

particular interest are comments

regarding burdens on manufacturers,

benefits regarding reduction in peak

electricity demand, the effect of more

stringent standards on the cost and

availability of modulating equipment,

and the effect that an EER floor would

have on electrical system reliability. In

addition, comments are welcome to

discuss the pros and cons of any of the

options described in Section V.I.2

above, as well as other approaches;

(4) Whether the proposed standards

concerning high-velocity, verticallypackaged wall-mounted equipment, and

through-the-wall equipment provide a

significant advantage to those products

versus competing products and are

sufficient to preserve the unique

features of those products, and whether

improvements in the definitions are

needed to prevent loopholes. For

ductless split equipment and nonweatherized vertical packaged

equipment, additional comment is

welcome on the impacts that meeting

the new standards would have on the

availability of those products;

(5) The issue of thermal expansion

valves (TXV), particularly whether our

concerns regarding the perceived

reliability problems and potential

misuses associated with widespread use

of TXVs are valid;

(6) The validity of the analytical

methods used and the appropriate

interpretation and use of the results of

this analysis;

(7) The Draft Environmental

Assessment, which is printed within the

TSD prepared for today’s proposed rule;

and

(8) The impacts on manufacturers and

consumers if the levels in today’s

proposed rule were applied to

commercial three-phase unitary air

conditioners less than 65K Btu/hr as

well.

List of Subjects in 10 CFR Part 430

Administrative practice and

procedure, Energy conservation,

Household appliances.

Issued in Washington, DC, on September

27, 2000.

Dan W. Reicher,

Assistant Secretary, Energy Efficiency and

Renewable Energy.

For the reasons set forth in the

preamble Part 430 of Chapter II 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 430.2 is amended by

adding a definition for ‘‘through-thewall air conditioner and heat pump’’ in

alphabetical order to read as follows:

§ 430.2 Definitions.

* * * * *

Through-the-wall air conditioner and

heat pump means a central air

conditioner or heat pump, having a

rated capacity between 18,000 Btu/hr

and 30,000 Btu/hr that is:

(1) Designed to be installed partially

within, or mounted against, a fixed-size

opening in an exterior wall; and

(2) Designed so that air for the

outdoor coil is taken in and discharged

at the same surface.

* * * * *

3. Section 430.32 of Subpart C is

amended by revising paragraph (c) to

read as follows:

§ 430.32 Energy and water conservation

standards and effective dates.

* * * * *

(c) Central air conditioners and

central air conditioning heat pumps. (1)

Split system central air conditioners and

central air conditioning heat pumps

manufactured after January 1, 1992, and

before January 1, 2006, and single

package central air conditioners and

central air conditioning heat pumps

manufactured after January 1, 1993, and

before January 1, 2006, shall have

Seasonal Energy Efficiency Ratio and

Heating Seasonal Performance Factor no

less than:

Product class

Seasonal

energy efficiency ratio

Heating

seasonal

performance

factor

1. Split systems 10.0 6.8

2. Single package systems .. 9.7 6.6

(2) Central air conditioners and

central air conditioning heat pumps

manufactured on or after January 1,

2006, shall have Seasonal Energy

Efficiency Ratio and Heating Seasonal

Performance Factor no less than:

Product class

Seasonal

energy efficiency ratio

(SEER)

Heating

seasonal

performance

factor

(HSPF)

1. Split system

air conditioners ........... 12 ....................

2. Split system

heat pumps ... 13 7.7

3. Single package air conditioners ........... 12 ....................

4. Single package heat

pumps ........... 13 7.7

5. Through the

wall air conditioners and

heat pumps ... 11 7.1

* * * * *

[FR Doc. 00–25336 Filed 9–29–00; 9:42 am]

BILLING CODE 6450–01–P