CHAPTER 2. ANALYTIC FRAMEWORK

TABLE OF CONTENTS

2.1 INTRODUCTION ..................................................... 2-1

2.2 BACKGROUND ...................................................... 2-4

2.3 MARKET AND TECHNOLOGY ASSESSMENT ........................... 2-4

2.3.1 Market Assessment .............................................. 2-4

2.3.2 Technology Assessment ........................................... 2-4

2.3.3 Product Classes ................................................. 2-5

2.4 SCREENING ANALYSIS .............................................. 2-5

2.5 ENGINEERING ANALYSIS ............................................ 2-6

2.5.1 Baseline Models ................................................. 2-6

2.5.2 Manufacturing Cost Analysis ...................................... 2-6

2.5.3 Markup Analysis ................................................ 2-7

2.5.4 Installation Cost Analysis ......................................... 2-7

2.6 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS .................. 2-8

2.7 NATIONAL IMPACT ANALYSIS ....................................... 2-9

2.7.1 Shipments Analysis .............................................. 2-9

2.7.2 National Energy Savings Analysis .................................. 2-9

2.7.3 Net Present Value Analysis ....................................... 2-10

2.8 CONSUMER SUBGROUP ANALYSIS .................................. 2-10

2.9 MANUFACTURER IMPACT ANALYSIS ................................ 2-11

2.9.1 Industry Characterization ......................................... 2-11

2.9.2 Industry Cash Flow ............................................. 2-11

2.9.3 Manufacturer Subgroup Analysis .................................. 2-12

2.9.4 Interview Process ............................................... 2-12

2.9.5 Competitive Impact Assessment ................................... 2-13

2.10 UTILITY IMPACT ANALYSIS ......................................... 2-13

2.11 EMPLOYMENT IMPACT ANALYSIS ................................... 2-14

2.12 ENVIRONMENTAL ASSESSMENT .................................... 2-15

2.13 REGULATORY IMPACT ANALYSIS ................................... 2-16

LIST OF FIGURES

Figure 2.1.1 Analytic Framework for Residential Furnaces and Boilers Rulemaking ....... 2-3

 EE-RM/STD-01-350 COMMENT 164

CHAPTER 2. ANALYTIC FRAMEWORK 

TABLE OF CONTENTS 

2.1 INTRODUCTION ..................................................... 2-1 

2.2 BACKGROUND ...................................................... 2-4 

2.3 MARKET AND TECHNOLOGY ASSESSMENT ........................... 2-4 

2.3.1 Market Assessment .............................................. 2-4 

2.3.2 Technology Assessment ........................................... 2-4 

2.3.3 Product Classes ................................................. 2-5 

2.4 SCREENING ANALYSIS .............................................. 2-5 

2.5 ENGINEERING ANALYSIS ............................................ 2-6 

2.5.1 Baseline Models ................................................. 2-6 

2.5.2 Manufacturing Cost Analysis ...................................... 2-6 

2.5.3 Markup Analysis ................................................ 2-7 

2.5.4 Installation Cost Analysis ......................................... 2-7 

2.6 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS .................. 2-8 

2.7 NATIONAL IMPACT ANALySIS ....................................... 2-9 

2.7.1 Shipments Analysis .............................................. 2-9 

2.7.2 National Energy Savings Analysis .................................. 2-9 

2.7.3 Net Present Value Analysis ....................................... 2-10 

2.8 CONSUMER SUBGROUP ANALySIS .................................. 2-10 

2.9 MANUFACTURER IMPACT ANALySIS ................................ 2-11 

2.9.1 Industry Characterization ......................................... 2-11 

2.9.2 Industry Cash Flow ............................................. 2-11 

2.9.3 Manufacturer Subgroup Analysis .................................. 2-12 

2.9.4 Interview Process ............................................... 2-12 

2.9.5 Competitive Impact Assessment ................................... 2-13 

2.10 UTILITY IMPACT ANALySIS ......................................... 2-13 

2.11 EMPLOYMENT IMPACT ANALySIS ................................... 2-14 

2.12 ENVIRONMENTAL ASSESSMENT .................................... 2-15 

2.13 REGULATORY IMPACT ANALYSIS ................................... 2-16 

LIST OF FIGURES 

Figure 2.1.1 Analytic Framework for Residential Furnaces and Boilers Rulemaking ....... 2-3 

2-i 
CHAPTER 2. ANALYTIC FRAMEWORK

2.1 INTRODUCTION

Section 342(a)(6)(A) of the Energy Policy and Conservation Act (EPCA) requires the

Department of Energy (DOE) to set forth energy conservation standards that are technologically

feasible and economically justified and would result in significant energy conservation. This

chapter provides a description of the general analytical framework that DOE uses in developing

such standards, with particular focus on residential furnaces and boilers. Essentially, the

analytical framework is a description of the methodology , the analytical tools, and relationships

among the various analyses that are part of this rulemaking . For example, the methodology that

addresses the statutory requirement for economic justification includes analyses of life-cycle cost

(LCC), economic impact on manufacturers and users, national benefits, impacts on utilities, and

any impacts from lessening of competition.

Figure 2.1.1 summarizes the analytical components of the rulemaking process. The focus

of this figure is the center column, identified as "Analysis." The columns labeled "Key inputs"

and "Key Outputs" indicate how the analyses fit into the rulemaking process, and how the

analyses relate to each other. Key inputs are the types of data and information that the analyses

require. Some key inputs exist in public databases; DOE collects other inputs from stakeholders

or persons with special knowledge. Key outputs are analytical results that feed directly into the

standards-setting process. Dotted lines connecting analyses indicate types of information that

feed from one analysis to another.

The analyses DOE performs in the advance notice of proposed rulemaking (ANOPR)

stage include:

® A market and technology assessment to characterize the relevant equipment markets and

existing technology options.

® A screening analysis to review each technology option and determine if it is practicable

to manufacture, install, and service; if it would adversely affect equipment utility or

equipment availability; or if it would have adverse impacts on health and safety.

® A markup analysis to describe how manufacturing costs are marked up to obtain retail

prices.

® An engineering analysis to develop cost/efficiency relationships that show the cost of

achieving increased efficiency.

® An LCC and payback period (PBP) analysis to calculate, at the customer level, the

discounted savings in operating costs (less maintenance and repair costs) throughout the

estimated average life of the covered equipment, compared to any increase in the

installed cost for the equipment likely to result directly from the imposition of the

standard.

® A shipments analysis to forecast shipments by product class, in the absence or presence

of new standards.

2-1

 EE-RM/STD-01-350 COMMENT 164

CHAPTER 2. ANALYTIC FRAMEWORK 

2.1 INTRODUCTION 

Section 342(a)(6)(A) of the Energy Policy and Conservation Act (EPCA) requires the 

Department of Energy (DOE) to set forth energy conservation standards that are technologically 

feasible and economically justified and would result in significant energy conservation. This 

chapter provides a description of the general analytical framework that DOE uses in developing 

such standards, with particular focus on residential furnaces and boilers. Essentially, the 

analytical framework is a description of the methodology, the analytical tools, and relationships 

among the various analyses that are part of this rulemaking. For example, the methodology that 

addresses the statutory requirement for economic justification includes analyses of life-cycle cost 

(LCC), economic impact on manufacturers and users, national benefits, impacts on utilities, and 

any impacts from lessening of competition. 

Figure 2.1.1 summarizes the analytical components of the rulemaking process. The focus 

of this figure is the center column, identified as "Analysis." The columns labeled "Key inputs" 

and "Key Outputs" indicate how the analyses fit into the rulemaking process, and how the 

analyses relate to each other. Key inputs are the types of data and information that the analyses 

require. Some key inputs exist in public databases; DOE collects other inputs from stakeholders 

or persons with special knowledge. Key outputs are analytical results that feed directly into the 

standards-setting process. Dotted lines connecting analyses indicate types of information that 

feed from one analysis to another. 

The analyses DOE performs in the advance notice of proposed rulemaking (ANOPR) 

stage include: 

• A market and technology assessment to characterize the relevant equipment markets and 

existing technology options. 

• A screening analysis to review each technology option and determine if it is practicable 

to manufacture, install, and service; if it would adversely affect equipment utility or 

equipment availability; or if it would have adverse impacts on health and safety. 

" A markup analysis to describe how manufacturing costs are marked up to obtain retail 

prices. 

• An engineering analysis to develop cost/efficiency relationships that show the cost of 

achieving increased efficiency. 

• An LCC and payback period (PBP) analysis to calculate, at the customer level, the 

discounted savings in operating costs (less maintenance and repair costs) throughout the 

estimated average life of the covered equipment, compared to any increase in the 

installed cost for the equipment likely to result directly from the imposition of the 

standard. 

" A shipments analysis to forecast shipments by product class, in the absence or presence 

of new standards. 

2-1 
® A national impacts analysis to estimate the national net present value (NPV) of total

consumer LCC savings and the national energy savings (NES).

The analyses DOE performs in the subsequent notice of proposed rulemaking (NOPR)

stage include those listed below. In addition, DOE re-analyzes the work done in the ANOPR

stage.

® An LCC subgroup analysis to evaluate variations in key factors (e.g., energy prices,

equipment use behavior, installation costs) that might cause a standard to impact

particular customer subgroups differently than the overall population.

® A manufacturer impact analysis (MIA) to estimate the financial impact of standards on

manufacturers and to calculate impacts on competition, employment, and manufacturing

capacity.

• A utility impact analysis to estimate the effects of proposed standards on electric and gas

utilities.

® A net national employment impact analysis to assess the aggregate impacts on national

employment.

• An environmental assessment to provide estimates of impacts on power plant and site

emissions of carbon dioxide (CO2), nitrogen oxides (NOX), and sulfur dioxide (SO2).

® A regulatory impact analysis to evaluate major alternatives to proposed standards that

could achieve substantially the same regulatory goal.

After the publication of the NOPR, DOE reviews stakeholder comments and revises its

analyses as appropriate before issuing the final rule.

 EE-RM/STD-01-350 COMMENT 164

.. A national impacts analysis to estimate the national net present value (NPV) of total 

consumer LCC savings and the national energy savings (NES). 

The analyses DOE performs in the subsequent notice of proposed rulemaking (NOPR) 

stage include those listed below. In addition, DOE re-analyzes the work done in the ANOPR 

stage. 

.. An LCC subgroup analysis to evaluate variations in key factors (e.g., energy prices, 

equipment use behavior, installation costs) that might cause a standard to impact 

particular customer subgroups differently than the overall population. 

• A manufacturer impact analysis (MIA) to estimate the financial impact of standards on 

manufacturers and to calculate impacts on competition, employment, and manufacturing 

capacity. 

.. A utility impact analysis to estimate the effects of proposed standards on electric and gas 

utilities. 

.. A net national employment impact analysis to assess the aggregate impacts on national 

employment. 

.. An environmental assessment to provide estimates of impacts on power plant and site 

emissions of carbon dioxide (COz), nitrogen oxides (NOx), and sulfur dioxide (SOz). 

.. A regulatory impact analysis to evaluate major alternatives to proposed standards that 

could achieve substantially the same regulatory goal. 

After the publication of the NOPR, DOE reviews stakeholder comments and revises its 

analyses as appropriate before issuing the final rule. 

2-2 
Approaches I Key Inputs* I Analyses* I Key Outputs

• Indust Review • Identify Firms/Products

• Quantitative Analysis • Historical Shipments • Product Classes

Market and Technology • Market Structure

• Qualitative Analysis -

Manufacturer lnte[yiew5

• Market/Firm Segmentation

• Non-Regulatory Programs

Assessment

• Technology Options

S i A l

• Design Options • Prototype Designs creen ng na ysis

Design

O lions • Installation Model • Installation Costs

• Efficiency/Performance

• E P i

• Price-Efficiency Relationship

• Equipment Simulation Models

nergy r ces

• Maintenance Costs

Engineering Analysis

• Tear-Down Analysis • Manufacturin Costs

Baseline Selected

Energy

Consumption of

Furnaces

and Boilers

Units Design

options

• Industry Financial Data

Markups for

Equipment Price Life-C cle Cost and

Determination

y

Payback Period cos

• ds Pabiayacck k Period s

Analyses

Unit Energy

Usage and

Installed Price

• Stock Accounting Model • Ener Savin s

• Market Share Estimation Shipments National Impact

gy g

• Net Present Values

Analysis Analysis

Notice of Proposed Rulemaking (NOPR)

• Stakeholder Comments

Revised NOPR

Analyses

• Demographics Life-Cycle Cost

• Payback Distribution

• Life-Cycle Cost Distribution

Sub-Group Analysis

• Efficiency Distributions

• Manufacturer Prices

• Average Costs Manufacturer Impact

• Industry Cash Flow

• Sub-Group Cash-Flow

• Direct Employment Impacts

• Manufacturer Interviews Analysis • Competitive Impacts

• Cumulative Regulatory Burden

• GRIM Anal sis • Financial

•EIA NEMS-BT • Utility Load Factors Utility Impact

Analysis

• IM Build Employment Impact • National Employment Impacts

Analysis

• EIA NEMS-BT • Emission Rates Environmental • Emissions

Assessment

Regulatory Impact • Regulatory Impacts

• Non-Regulatory Alternatives ^-E Anal i ys s

Notice of Proposed Rulemakiing (NOPR)

• Stakeholder Comments

R i d A l ev • Revised Results se na yses

* Dark boxes indicate TSD chapters and reports.

Framework Document

Final Rule

Figure 2.1.1 Analytic Framework for Residential Furnaces and Boilers Rulemaking

2-3

 EE-RM/STD-01-350 COMMENT 164

Approaches Key Inputs* Analyses* Key Outputs 

Framework Document 

• Industrv Review • Identifv Firms/Products 

• Quantitative Anal sis • Historical Shioments • Product Classes 

Market and Technology • Market Structure 

• Qualitative Analysis ~ • Market/Firm Segmentation Assessment 

·In'e",;ew< • Non-Regulatory Programs In 

• Technology Options • Prototype Designs Screening AnalYSiS g • Design Options 

Design 

Options ! • Installation Model • Installation Costs 

• Efficiency/Performance • Price-Efficiency Relationship • Energy Prices - Engineering Analysis 

• Equipment Simulation Models • Maintenance Costs 

• Tear-Down Analvsis • Manufacturina Costs II Baseline Selected 

Units Design 

Energy Options 

Consumption of 

Furnaces ~ 

and Boilers ~ 

• Industrv Financial Data Markups for 

Equipment Price ~ Life-Cycle Cost and • Life-Cycle Costs 

Determination 1m ~ Payback Period • Payback Periods 

Analyses III Unit Energy :131 Usage and 

Installed Price 

• Stock Accounting Model I J • Energy Savings 

• Market Share Estimation J Shipments National Impact • Net Present Values 

rl Analysis m Analysis m] 

. , .... > .' . , ... :. ': : 

" .····.··:1 . N()tice. 6fPrOIlO§E!d ~ulllrriaki(1g(Ni:l:PR).· ':. .• . . 

• Stakeholder Comments '" Revised NOPR 

Analyses 

l • Payback Distribution 

• Demographics Life-Cycle Cost • Life-Cvcle Cost Distribution 

Sub-Group Analysism 

• Efficiency Distributions • Industry Cash Flow 

• Manufacturer Prices Manufacturer Impact • Sub-Group Cash-Flow 

• Average Costs ~ • Direct Employment Impacts 

• Manufacturer Interviews Analysis • Competitive Impacts 

JE • Cumulative Regulatory Burden 

• GRI M Anal sis • Financial 

• EIA NEMS-BT • Utility Load Factors Utility Impact 

rl Analysis or 

'IM Build I Employment Impact ~ • National Employment Impacts 

Analysis III 

• EIA NEMS-BT • Emission Rates 4J Environmental • Emissions 

Assessment !iII 

Regulatory Impact I • Regulatory Impacts • Non-Regulatorv Alternatives Analysis 1m . ' :. ..... ... ....• .. ... •. ·</>1 : .: Notice8fProposeci RllI~makirig(N6PR) 

• Stakeholder Comments I Revised Analyses • Revised Results 

.'. . . Fh,alRule . Dark boxes Indicate TSD chapters and reports. 

Figure 2.1.1 Analytic Framework for Residential Furnaces and Boilers Rulemaking 

2-3 
2.2 BACKGROUND

As described in Chapter 1, the Process Rule outlined procedural improvements to the

standards rulemaking process which included a review of the following elements used in the

rulemaking process: ( 1) economic models; (2) analytical tools; (3) methodologies; (4)

non-regulatory approaches ; and (5) prioritization of future rules. See appendix A to subpart C of

Title 10 Code of Federal Regulations Part 430 (10 CFR Part 430). The Process Rule also

required DOE to take into account uncertainty and variability by doing scenario or probability

analyses.

DOE developed the analytical framework for the furnace and boiler rulemaking pursuant

to the Process Rule. DOE presented this analytical framework to stakeholders during a public

meeting on July 17, 2001. The following sections provide a general description of the different

analytical components of the rulemaking framework.

2.3 MARKET AND TECHNOLOGY ASSESSMENT

The market and technology assessment characterizes the relevant product markets and

existing technology options, including prototype designs.

2.3.1 Market Assessment

When initiating a standards rulemaking , DOE develops information on the present and

past industry structure and market characteristics for the equipment concerned. This activity

assesses the industry and equipment both quantitatively and qualitatively , based on publicly

available information.

DOE reviewed existing marketing materials and literature , and interviewed

manufacturers to get an overall picture of the market for furnaces and boilers in the United

States. Industry publications and trade journals, government agencies, and trade organizations

provided most of the information, including: (1) manufacturer market share, (2) equipment

efficiency, and (3 ) shipments by capacity and efficiency level.

DOE used the most reliable and accurate data available at the time of each analysis in this

rulemaking. All data are available for public review.

2.3.2 Technology Assessment

DOE typically uses information relating to existing and past technology options and

prototype designs as inputs to determine what technologies manufacturers use to attain higher

energy efficiency levels. In consultation with interested parties, DOE develops a list of

technologies that it can and should consider in its rulemaking. Initially, these technologies

encompass all those considered to be technologically feasible.

2-4

 EE-RM/STD-01-350 COMMENT 164

2.2 BACKGROUND 

As described in Chapter 1, the Process Rule outlined procedural improvements to the 

standards rulemaking process which included a review of the following elements used in the 

rulemaking process: (1) economic models; (2) analytical tools; (3) methodologies; (4) 

non-regulatory approaches; and (5) prioritization of future rules. See appendix A to subpart C of 

Title 10 Code of Federal Regulations Part 430 (10 CFR Part 430). The Process Rule also 

required DOE to take into account uncertainty and variability by doing scenario or probability 

analyses. 

DOE developed the analytical framework for the furnace and boiler rulemaking pursuant 

to the Process Rule. DOE presented this analytical framework to stakeholders during a public 

meeting on July 17, 2001. The following sections provide a general description of the different 

analytical components of the rulemaking framework. 

2.3 MARKET AND TECHNOLOGY ASSESSMENT 

The market and technology assessment characterizes the relevant product markets and 

existing technology options, including prototype designs. 

2.3.1 Market Assessment 

When initiating a standards rulemaking, DOE develops information on the present and 

past industry structure and market characteristics for the equipment concerned. This activity 

assesses the industry and equipment both quantitatively and qualitatively, based on publicly 

available information. 

DOE reviewed existing marketing materials and literature, and interviewed 

manufacturers to get an overall picture of the market for furnaces and boilers in the United 

States. Industry publications and trade journals, government agencies, and trade organizations 

provided most of the information, including: (1) manufacturer market share, (2) equipment 

efficiency, and (3) shipments by capacity and efficiency level. 

DOE used the most reliable and accurate data available at the time of each analysis in this 

rulemaking. All data are available for public review. 

2.3.2 Technology Assessment 

DOE typically uses information relating to existing and past technology options and 

prototype designs as inputs to determine what technologies manufacturers use to attain higher 

energy efficiency levels. In consultation with interested parties, DOE develops a list of 

technologies that it can and should consider in its rulemaking. Initially, these technologies 

encompass all those considered to be technologically feasible. 

2-4 
DOE developed its list of technologically feasible design options for this rulemaking in

consultation with manufacturers of components and systems, and using trade publications and

technical papers. Since many options for improving product efficiency are available in existing

equipment, product literature and direct examination provided additional information.

2.3.3 Product Classes

EPCA Section 321 (23) states that the term "furnace" includes forced -air and gravity

central furnaces and low-pressure steam and hot-water boilers with a heat input of less than

300,000 Btu/hr for boilers and less than 225,000 Btu/hr for furnaces. For this rulemaking,

however, DOE adopted the terminology used in the heating, ventilation , and air-conditioning

(HVAC) industry, which considers furnaces and boilers as separate categories, within the above

size ranges.

Based on the market and technology assessment and stakeholder comments, DOE

developed a number of well-defined product classes. (See the ANOPR for residential furnaces

and boilers. 58 FR 47326)

• Gas furnaces

- Non-weatherized

- Weatherized

• Oil-fired furnaces

- Non-weatherized

Weatherized

• Mobile home furnaces

- Gas

- Oil

• Electric resistance furnaces

• Hot water boilers

- Gas

- Oil

• Steam boilers

- Gas

- Oil

• Combination space/water heating appliances

- Water-heater/fancoil combination units

- Boiler/tankless coil combination units

Of the above product classes, DOE included six product classes in the analysis for

today's Final Rule, as presented in Chapter 6.

2.4 SCREENING ANALYSIS

The screening analysis examines various technologies as to whether they: (a) are

technologically feasible; (b) are practicable to manufacture, install, and service; (c) have an

adverse impact on equipment utility or availability; and (d) have adverse impacts on health and

2-5

 EE-RM/STD-01-350 COMMENT 164

DOE developed its list of technologically feasible design options for this ru1emaking in 

consultation with manufacturers of components and systems, and using trade publications and 

technical papers. Since many options for improving product efficiency are available in existing 

equipment, product literature and direct examination provided additional information. 

2.3.3 Product Classes 

EPCA Section 321 (23) states that the term "furnace" includes forced-air and gravity 

central furnaces and low-pressure steam and hot-water boilers with a heat input of less than 

300,000 Btu/hr for boilers and less than 225,000 Btu/hr for furnaces. For this ru1emaking, 

however, DOE adopted the terminology used in the heating, ventilation, and air-conditioning 

(HVAC) industry, which considers furnaces and boilers as separate categories, within the above 

SIze ranges. 

Based on the market and technology assessment and stakeholder comments, DOE 

developed a number of well-defined product classes. (See the ANOPR for residential furnaces 

and boilers. 58 FR 47326) 

" Gas furnaces 

Non-weatherized 

Weatherized 

" Oil-fired furnaces 

Non-weatherized 

Weatherized 

.. Mobile home furnaces 

Gas 

Oil 

" Electric resistance furnaces 

" Hot water boilers 

Gas 

Oil 

" Steam boilers 

Gas 

Oil 

• Combination space/water heating appliances 

Water-heater/fancoi1 combination units 

Boi1er/tank1ess coil combination units 

Of the above product classes, DOE included six product classes in the analysis for 

today's Final Rule, as presented in Chapter 6. 

2.4 SCREENING ANALYSIS 

The screening analysis examines various technologies as to whether they: (a) are 

technologically feasible; (b) are practicable to manufacture, install, and service; (c) have an 

adverse impact on equipment utility or availability; and (d) have adverse impacts on health and 

2-5 
safety. As described in section 2.3.2, DOE developed an initial list of efficiency enhancement

options from the technologies identified in the technology assessment. Then DOE, in

consultation with interested parties, reviewed the list to determine if these options are practicable

to manufacture, install, and service, would adversely affect equipment utility or availability, or

would have adverse impacts on health and safety. In the engineering analysis, DOE further

scrutinized efficiency enhancement options not eliminated in the screening process.

2.5 ENGINEERING ANALYSIS

The engineering analysis establishes the relationship between the cost and efficiency of

the equipment concerned. To estimate the cost to consumers of furnaces and boilers, DOE

estimated manufacturing costs, markups in the distribution chain, installation costs, and

maintenance costs. DOE then calculated payback periods for higher-efficiency equipment,

calculating furnace or boiler energy use according to the DOE test procedure , 10 CFR Part 430,

subpart B, Appendix N, Uniform Test Method for Measuring the Energy Consumption of

Furnaces and Boilers.

2.5.1 Baseline Models

To analyze design options for energy efficiency improvements, DOE defined a baseline

model unit for each product class . DOE defined baseline models as appliances with the most

popular and cost-effective features that just meet the current minimum efficiency standard. In its

selection process, DOE considered technical descriptions of the covered equipment, definitions

of the product classes as described in the Framework Document, results of the market

assessment, and suggestions from stakeholders.

2.5.2 Manufacturing Cost Analysis

There are several ways to develop the relationship between cost and performance. DOE

chose to use a component-based engineering analysis, or teardown analysis. This approach

identifies potential technological paths manufacturers could use to achieve increased equipment

energy efficiency. DOE purchased "off-the-shelf' units commercially available on the market

and physically analyzed them, i.e., dismantled them component-by-component to determine

what technologies and designs manufacturers currently employ to increase energy efficiency.

DOE then used independent costing methods, along with manufacturer and component-supplier

data, to estimate the costs of the components.

DOE determined the efficiency levels corresponding to various design options from

commercially available information on products, data submitted by manufacturers, and/or

engineering calculations. It obtained cost estimates from detailed incremental manufacturer cost

data, which include the cost of the equipment components, labor, purchased parts and materials,

shipping/packaging, and investment. DOE estimated manufacturing costs using a combination

of teardown analysis, manufacturer-supplied estimates, and its own estimates. It used a single

set of cost-efficiency estimates in its analysis, and accounted for variability and uncertainty by

using ranges.

2-6

 EE-RM/STD-01-350 COMMENT 164

safety. As described in section 2.3.2, DOE developed an initial list of efficiency enhancement 

options from the technologies identified in the technology assessment. Then DOE, in 

consultation with interested parties, reviewed the list to determine if these options are practicable 

to manufacture, install, and service, would adversely affect equipment utility or availability, or 

would have adverse impacts on health and safety. In the engineering analysis, DOE further 

scrutinized efficiency enhancement options not eliminated in the screening process. 

2.5 ENGINEERING ANALYSIS 

The engineering analysis establishes the relationship between the cost and efficiency of 

the equipment concerned. To estimate the cost to consumers of furnaces and boilers, DOE 

estimated manufacturing costs, markups in the distribution chain, installation costs, and 

maintenance costs. DOE then calculated payback periods for higher-efficiency equipment, 

calculating furnace or boiler energy use according to the DOE test procedure, 10 CFR Part 430, 

subpart B, Appendix N, Uniform Test Methodfor Measuring the Energy Consumption of 

Furnaces and Boilers. 

2.5.1 Baseline Models 

To analyze design options for energy efficiency improvements, DOE defined a baseline 

model unit for each product class. DOE defined baseline models as appliances with the most 

popular and cost-effective features that just meet the current minimum efficiency standard. In its 

selection process, DOE considered technical descriptions of the covered equipment, definitions 

of the product classes as described in the Framework Document, results of the market 

assessment, and suggestions from stakeholders. 

2.5.2 Manufacturing Cost Analysis 

There are several ways to develop the relationship between cost and performance. DOE 

chose to use a component-based engineering analysis, or teardown analysis. This approach 

identifies potential technological paths manufacturers could use to achieve increased equipment 

energy efficiency. DOE purchased "off-the-shelf' units commercially available on the market 

and physically analyzed them, i.e., dismantled them component-by-component to determine 

what technologies and designs manufacturers currently employ to increase energy efficiency. 

DOE then used independent costing methods, along with manufacturer and component-supplier 

data, to estimate the costs of the components. 

DOE determined the efficiency levels corresponding to various design options from 

commercially available information on products, data submitted by manufacturers, and/or 

engineering calculations. It obtained cost estimates from detailed incremental manufacturer cost 

data, which include the cost of the equipment components, labor, purchased parts and materials, 

shipping/packaging, and investment. DOE estimated manufacturing costs using a combination 

ofteardown analysis, manufacturer-supplied estimates, and its own estimates. It used a single 

set of cost-efficiency estimates in its analysis, and accounted for variability and uncertainty by 

usmg ranges. 

2-6 
The teardown analysis relied on inputs provided by individual manufacturers through a

process approved by the Gas Appliance Manufacturers Association (GAMA). Since DOE

analyzed only the "off-the-shelf 'equipment at hand, the analysis could not capture new

combinations of existing technologies or prototypical designs.

2.5.3 Markup Analysis

To carry out the engineering and LCC analyses, DOE needed to determine the cost to the

customer of a baseline model furnace or boiler and the cost of more-efficient units. The

customer price of such units is not generally known. By applying a multiplier called a "markup"

to the manufacturers' costs estimated in the engineering analysis, DOE estimated the customers'

prices for baseline model and more-efficient equipment. In addition to estimating average

markups, DOE characterized the markups with probability distributions. DOE used these

distributions in the LCC analysis.

DOE defined two types of distribution channels that describe how most equipment passes

from the manufacturer to the customer. The first distribution channel applies to furnaces and

boilers installed in retrofit applications. In this distribution channel, the manufacturer sells the

equipment to a wholesaler, who sells it to a contractor, who in turn sells it to the customer. The

second distribution channel applies to furnaces and boilers installed in new construction, and

thus includes an additional link in the chain-the home builder. In this distribution channel, the

manufacturer sells the equipment to a wholesaler, who sells it to a contractor, who in turn sells it

to a builder, who in turn sells it to the customer as part of the house.

For each of the markups, DOE further differentiated between a baseline markup and an

incremental markup. DOE defines baseline markups as coefficients that relate the manufacturer

price of a baseline model to the wholesale or contractor sales price of such equipment.

Incremental markups are coefficients that relate changes in the manufacturer price of a baseline

model to changes in the wholesale or contractor sales price.

2.5.4 Installation Cost Analysis

To determine installation costs, DOE developed a cost model, called the Installation

Model, for the following product classes: non-weatherized gas furnaces, hot water gas boilers,

oil-fired furnaces, and oil-fired boilers. DOE used RS Means, a well-known and respected

construction cost estimation method, to develop labor costs, and obtained quotes from national

distributors to develop material costs. The Installation Model weight-averaged detailed costs for

a large variety of typical installations in the field, including both new construction and retrofit

installations; single and multifamily housing; plastic, metal, and masonry chimney vents; single

and double-wall vent connectors; and common venting with other appliances.

Weatherized gas furnaces and mobile home furnaces have no vent or a very short vent;

therefore a venting cost model was not required for these product classes. DOE applied simpler

RS Means estimates, and estimates of factory installation costs, to estimate the installation costs

for these product classes.

2-7

 EE-RM/STD-01-350 COMMENT 164

The teardown analysis relied on inputs provided by individual manufacturers through a 

process approved by the Gas Appliance Manufacturers Association (GAMA). Since DOE 

analyzed only the "off-the-shelf' equipment at hand, the analysis could not capture new 

combinations of existing technologies or prototypical designs. 

2.5.3 Markup Analysis 

To carry out the engineering and Lee analyses, DOE needed to determine the cost to the 

customer of a baseline model furnace or boiler and the cost of more-efficient units. The 

customer price of such units is not generally known. By applying a multiplier called a "markup" 

to the manufacturers' costs estimated in the engineering analysis, DOE estimated the customers' 

prices for baseline model and more-efficient equipment. In addition to estimating average 

markups, DOE characterized the markups with probability distributions. DOE used these 

distributions in the Lee analysis. 

DOE defined two types of distribution channels that describe how most equipment passes 

from the manufacturer to the customer. The first distribution channel applies to furnaces and 

boilers installed in retrofit applications. In this distribution channel, the manufacturer sells the 

equipment to a wholesaler, who sells it to a contractor, who in tum sells it to the customer. The 

second distribution channel applies to furnaces and boilers installed in new construction, and 

thus includes an additional link in the chain-the home builder. In this distribution channel, the 

manufacturer sells the equipment to a wholesaler, who sells it to a contractor, who in tum sells it 

to a builder, who in tum sells it to the customer as part of the house. 

For each of the markups, DOE further differentiated between a baseline markup and an 

incremental markup. DOE defines baseline markups as coefficients that relate the manufacturer 

price of a baseline model to the wholesale or contractor sales price of such equipment. 

Incremental markups are coefficients that relate changes in the manufacturer price of a baseline 

model to changes in the wholesale or contractor sales price. 

2.5.4 Installation Cost Analysis 

To determine installation costs, DOE developed a cost model, called the Installation 

Model, for the following product classes: non-weatherized gas furnaces, hot water gas boilers, 

oil-fired furnaces, and oil-fired boilers. DOE used RS Means, a well-known and respected 

construction cost estimation method, to develop labor costs, and obtained quotes from national 

distributors to develop material costs. The Installation Model weight-averaged detailed costs for 

a large variety of typical installations in the field, including both new construction and retrofit 

installations; single and multifamily housing; plastic, metal, and masonry chimney vents; single 

and double-wall vent connectors; and common venting with other appliances. 

Weatherized gas furnaces and mobile home furnaces have no vent or a very short vent; 

therefore a venting cost model was not required for these product classes. DOE applied simpler 

RS Means estimates, and estimates of factory installation costs, to estimate the installation costs 

for these product classes. 

2-7 
2.6 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS

In determining whether an energy efficiency standard is economically justified, EPCA

directs DOE to consider the economic impact of potential standards on consumers. To address

that impact, DOE calculated changes in equipment LCC for consumers that are likely to result

from a candidate standard, as well as PBPs. The effects of standards on individual consumers

include changes in operating expenses (usually lower) and changes in total installed cost (usually

higher). DOE analyzed the net effect of these changes by calculating the changes in LCC

compared to a base case forecast. The LCC calculation considers total installed cost (equipment

purchase price plus installation cost), operating expenses (energy and maintenance costs),

equipment lifetime, and a discount rate. The analysis compares the LCC of equipment with

efficiency improvements designed to meet possible energy-efficiency standards with the LCC of

the equipment chosen in the absence of standards.

The PBP represents the number of years of operation required to achieve savings

sufficient to pay for the increased efficiency features. It is the change in total installed cost due

to an increased efficiency standard divided by the change in annual operating cost from

increased efficiency.

DOE conducted the LCC and PBP analysis using a range of typical values to reflect

conditions in the field for appliance price and lifetime, fuel costs, energy usage, and discount

rates. Much of the input for this analysis came from the engineering analysis. Other major

inputs were a database of furnace and boiler specifications, and distributions of manufacturing

costs from GAMA.

In previous analyses, DOE estimated the life-cycle costs of consumer energy savings

possible from appliance energy efficiency standards based on average energy prices. However,

using marginal energy prices (the cost of the last unit of energy purchased or saved) in energy

conservation standards analyses is more theoretically sound. In April 1998, the Advisory

Committee on Appliance Energy Efficiency Standards recommended that DOE replace the use

of national average energy prices with the full range of consumer marginal energy rates in its

LCC analyses. In this analysis, DOE used data from DOS's Energy Information Administration

(EIA)'s Residential Energy Consumption Survey (RECS) to calculate marginal energy prices for

residential consumers.'

Using data from RECS, DOE developed a representative sample of households for each

of the analyzed product classes. To account for uncertainty and variability among consumers,

DOE used a weighted sampling of households with furnaces and boilers from the RECS

database. The LCC model uses Monte Carlo simulations to perform the analysis. The model

specifies uncertainty and variability in the inputs with probability distributions.

Based on results of the LCC and PBP analysis, DOE selected candidate standard levels

for analysis. The national impacts analysis used the outputs of the LCC analysis.

 EE-RM/STD-01-350 COMMENT 164

2.6 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS 

In determining whether an energy efficiency standard is economically justified, EPCA 

directs DOE to consider the economic impact of potential standards on consumers. To address 

that impact, DOE calculated changes in equipment LCC for consumers that are likely to result 

from a candidate standard, as well as PBPs. The effects of standards on individual consumers 

include changes in operating expenses (usually lower) and changes in total installed cost (usually 

higher). DOE analyzed the net effect of these changes by calculating the changes in LCC 

compared to a base case forecast. The LCC calculation considers total installed cost (equipment 

purchase price plus installation cost), operating expenses (energy and maintenance costs), 

equipment lifetime, and a discount rate. The analysis compares the LCC of equipment with 

efficiency improvements designed to meet possible energy-efficiency standards with the LCC of 

the equipment chosen in the absence of standards. 

The PBP represents the number of years of operation required to achieve savings 

sufficient to pay for the increased efficiency features. It is the change in total installed cost due 

to an increased efficiency standard divided by the change in annual operating cost from 

increased efficiency. 

DOE conducted the LCC and PBP analysis using a range of typical values to reflect 

conditions in the field for appliance price and lifetime, fuel costs, energy usage, and discount 

rates. Much of the input for this analysis came from the engineering analysis. Other major 

inputs were a database of furnace and boiler specifications, and distributions of manufacturing 

costs from GAMA. 

In previous analyses, DOE estimated the life-cycle costs of consumer energy savings 

possible from appliance energy efficiency standards based on average energy prices. However, 

using marginal energy prices (the cost of the last unit of energy purchased or saved) in energy 

conservation standards analyses is more theoretically sound. In April 1998, the Advisory 

Committee on Appliance Energy Efficiency Standards recommended that DOE replace the use 

of national average energy prices with the full range of consumer marginal energy rates in its 

LCC analyses. In this analysis, DOE used data from DOE's Energy Information Administration 

(EIA)'s Residential Energy Consumption Survey (RECS) to calculate marginal energy prices for 

residential consumers.' 

Using data from RECS, DOE developed a representative sample of households for each 

of the analyzed product classes. To account for uncertainty and variability among consumers, 

DOE used a weighted sampling of households with furnaces and boilers from the RECS 

database. The LCC model uses Monte Carlo simulations to perform the analysis. The model 

specifies uncertainty and variability in the inputs with probability distributions. 

Based on results of the LCC and PBP analysis, DOE selected candidate standard levels 

for analysis. The national impacts analysis used the outputs of the LCC analysis. 

2-8 
2.7 NATIONAL. IMPACT ANALYSIS

The assessment of the aggregate impacts of new standards at the national level reports

national energy savings and the NPV of standards for consumers. Analyzing impacts of

standards requires a comparison of projected energy consumption with and without new

standards. DOE refers to the cases without new standards as base case forecast projections. The

forecasts contain projections of annual equipment shipments, unit energy consumption of new

equipment, and the total price of purchased equipment.

2.7.1 Shipments Analysis

The shipments forecast estimates the total number of furnaces and boilers of all fuel types

purchased in a year and the market shares by product class for furnace and boiler shipments.

DOE first developed a base case forecast of equipment shipments in the absence of new

standards. This forecast included a distribution of shipments by efficiency level. DOE used an

accounting model to track units installed in new construction and existing buildings. It based the

retirement of units on the range of lifetimes of the equipment. For non-weatherized gas furnaces,

DOE expressed market shares as a function of installed cost and operating cost to capture the

impact of standards on fuel choice.

2.7.2 National Energy Savings Analysis

DOE calculated national energy consumption in each year by multiplying the number of

units, or stock, of furnaces and boilers (by vintage) by the unit energy consumption (also by

vintage). Vintage represents the age of the equipment. DOE calculated national annual energy

savings from the difference between national energy consumption in the base case forecast

(without new standards) and in each standards case forecast. The analysis includes estimated

energy savings by fuel type used for generating electricity. DOE estimated energy consumption

and savings based on site energy, and then converted the site energy consumption and savings to

source energy. Cumulative energy savings are the sum of the annual NES, which DOE

determined over specified time periods.

The stock of equipment is dependent on annual shipments and the lifetime of the

equipment. DOE developed shipments projections under the base case forecast and standards

case forecasts. Shipments projections under the standards cases are lower than shipments in the

base case projection, because of the higher installed cost of the more-efficient equipment. As a

result, DOE used the standards case shipments projection and, in turn, the resulting stock of

equipment under the standards case, to determine the NES. Calculating the NES in this manner

avoids the inclusion of savings resulting from displaced shipments.

The inputs for the determination of NES are: (1) annual energy consumption per unit; (2)

shipments; (3) equipment stock; (4) national energy consumption; and (5) site-to-source

conversion factors.

 EE-RM/STD-01-350 COMMENT 164

2.7 NATIONAL IMPACT ANALYSIS 

The assessment of the aggregate impacts of new standards at the national level reports 

national energy savings and the NPV of standards for consumers. Analyzing impacts of 

standards requires a comparison of projected energy consumption with and without new 

standards. DOE refers to the cases without new standards as base case forecast projections. The 

forecasts contain projections of annual equipment shipments, unit energy consumption of new 

equipment, and the total price of purchased equipment. 

2.7.1 Shipments Analysis 

The shipments forecast estimates the total number of furnaces and boilers of all fuel types 

purchased in a year and the market shares by product class for furnace and boiler shipments. 

DOE first developed a base case forecast of equipment shipments in the absence of new 

standards. This forecast included a distribution of shipments by efficiency level. DOE used an 

accounting model to track units installed in new construction and existing buildings. It based the 

retirement of units on the range oflifetimes of the equipment. For non-weatherized gas furnaces, 

DOE expressed market shares as a function of installed cost and operating cost to capture the 

impact of standards on fuel choice. 

2.7.2 National Energy Savings Analysis 

DOE calculated national energy consumption in each year by multiplying the number of 

units, or stock, of furnaces and boilers (by vintage) by the unit energy consumption (also by 

vintage). Vintage represents the age of the equipment. DOE calculated national annual energy 

savings from the difference between national energy consumption in the base case forecast 

(without new standards) and in each standards case forecast. The analysis includes estimated 

energy savings by fuel type used for generating electricity. DOE estimated energy consumption 

and savings based on site energy, and then converted the site energy consumption and savings to 

source energy. Cumulative energy savings are the sum of the annual NES, which DOE 

determined over specified time periods. 

The stock of equipment is dependent on annual shipments and the lifetime of the 

equipment. DOE developed shipments projections under the base case forecast and standards 

case forecasts. Shipments projections under the standards cases are lower than shipments in the 

base case projection, because of the higher installed cost of the more-efficient equipment. As a 

result, DOE used the standards case shipments projection and, in turn, the resulting stock of 

equipment under the standards case, to determine the NES. Calculating the NES in this manner 

avoids the inclusion of savings resulting from displaced shipments. 

The inputs for the determination ofNES are: (1) annual energy consumption per unit; (2) 

shipments; (3) equipment stock; (4) national energy consumption; and (5) site-to-source 

conversion factors. 

2-9 
2.7.3 Net Present Value Analysis

DOE calculated net savings each year as the difference between total operating cost

savings (including energy, repair, and maintenance cost savings) and increases in total installed

costs (including equipment price and installation cost). DOE calculated NPV as the difference

between the present value of operating cost savings and the present value of increased total

installed costs. It discounted future costs and savings to the present with a discount factor.

DOE calculated increases in total installed costs as the product of 1) the difference in the

total installed cost between the base case forecast and standards case forecast and 2) the annual

sales volume or shipments in the standards case. Because costs of the more-efficient equipment

purchased in the standards case are higher than those of equipment purchased in the base case

forecast, price increases appear as negative values in the NPV.

DOE expressed operating cost savings as decreases in operating costs associated with the

higher energy efficiency of equipment purchased in the standards case compared to the base case

forecast. Total operating cost savings are the product of savings per unit and the number of units

of each vintage surviving in a particular year.

The inputs for the determination of NPV are: (1) total annual installed cost; (2) total

annual operating cost savings; (3) discount factor; (4) present value of costs; and (5) present

value of savings.

2.8 CONSUMER SUBGROUP ANALYSIS

The consumer subgroup analysis evaluates economic impacts on subgroups of

consumers, particularly those who might be adversely affected by any change in the national

energy efficiency standards levels for the equipment concerned. DOE evaluated the impacts of

new standards on particular subgroups of consumers by analyzing the LCC and PBP for these

particular customers. The consumer subgroup analysis evaluated households with senior-only

occupants or low income levels using non-weatherized gas furnaces. DOE also analyzed the

impact of standards for non-weatherized gas furnaces on households located in northern (coldclimate) and southern (warm-climate) regions.

DOE evaluated variations in regional energy prices and energy use that might affect the

NPV of an energy efficiency standard to consumers subgroups. To the extent possible, DOE

obtained estimates of the variability of each input parameter and considered this variability in its

calculation of consumers impacts. Variations in energy use for a particular equipment type

depend on factors such as climate and building type. DOE performed sensitivity analyses to

consider how differences in energy use affect various subgroups of consumers. It was

particularly sensitive to increases in the purchase price of furnaces and boilers to avoid a

negative economic impact on any identified customer subgroup.

 EE-RM/STD-01-350 COMMENT 164

2.7.3 Net Present Value Analysis 

DOE calculated net savings each year as the difference between total operating cost 

savings (including energy, repair, and maintenance cost savings) and increases in total installed 

costs (including equipment price and installation cost). DOE calculated NPV as the difference 

between the present value of operating cost savings and the present value of increased total 

installed costs. It discounted future costs and savings to the present with a discount factor. 

DOE calculated increases in total installed costs as the product of 1) the difference in the 

total installed cost between the base case forecast and standards case forecast and 2) the annual 

sales volume or shipments in the standards case. Because costs of the more-efficient equipment 

purchased in the standards case are higher than those of equipment purchased in the base case 

forecast, price increases appear as negative values in the NPV. 

DOE expressed operating cost savings as decreases in operating costs associated with the 

higher energy efficiency of equipment purchased in the standards case compared to the base case 

forecast. Total operating cost savings are the product of savings per unit and the number of units 

of each vintage surviving in a particular year. 

The inputs for the determination ofNPV are: (1) total annual installed cost; (2) total 

annual operating cost savings; (3) discount factor; (4) present value of costs; and (5) present 

value of savings. 

2.8 CONSUMER SUBGROUP ANALYSIS 

The consumer subgroup analysis evaluates economic impacts on subgroups of 

consumers, particularly those who might be adversely affected by any change in the national 

energy efficiency standards levels for the equipment concerned. DOE evaluated the impacts of 

new standards on particular subgroups of consumers by analyzing the LCC and PBP for these 

particular customers. The consumer subgroup analysis evaluated households with senior-only 

occupants or low income levels using non-weatherized gas furnaces. DOE also analyzed the 

impact of standards for non-weatherized gas furnaces on households located in northern (coldclimate) and southern (warm-climate) regions. 

DOE evaluated variations in regional energy prices and energy use that might affect the 

NPV of an energy efficiency standard to consumers subgroups. To the extent possible, DOE 

obtained estimates of the variability of each input parameter and considered this variability in its 

calculation of consumers impacts. Variations in energy use for a particular equipment type 

depend on factors such as climate and building type. DOE performed sensitivity analyses to 

consider how differences in energy use affect various subgroups of consumers. It was 

particularly sensitive to increases in the purchase price of furnaces and boilers to avoid a 

negative economic impact on any identified customer subgroup. 

2-10 
2.9 MANUFACTURER IMPACT ANALYSIS

DOE conducted the MIA after the ANOPR and reported the results in the NOPR. This

analysis estimates the financial impact of standards on manufacturers and also calculates the

impact of standards on competition, direct employment, and manufacturing capacity within the

industry. Three important elements of the MIA approach are the analysis of industry cash flow,

the development of a process to consider subgroup cash flow, and the design of a guide to

interview manufacturers and others in gathering information.

The policies outlined in the Process Rule resulted in substantial revisions to the analytical

framework DOE uses in performing the MIA for each rulemaking . In its Framework Document

for this rulemaking, DOE described and obtained comments on the methodology it uses to

perform the MIA. It conducts the MIA in three phases . Phase 1 consists of two activities:

preparation of an industry characterization and identification of issues. Phase 2 evaluates the

industry from a macro perspective . In this phase, DOE uses the Government Regulatory Impact

Model (GRIM) to perform an industry cash flow analysis . Phase 3 involves repeating the

process described in Phase 2 (the industry cash-flow analysis) but on different subgroups of

manufacturers. Phase 3 also entails calculating additional impacts on competition , direct

employment, and manufacturing capacity.

2.9.1 Industry Characterization

Phase 1 of the MIA consists of collecting pertinent financial and market information.

This activity involves both quantitative and qualitative efforts. Data gathered include market

share, corporate operating ratios, wages, employment, and production cost ratios. DOE

incorporated these data into the engineering analysis in the estimation of equipment production

costs and distribution markups. The sources of information used for Phase 1 include experts

from industry as well as reports published by the Gas Appliance Manufacturers Association and

the Gas Research Institute , trade journals, the U.S. Census Bureau, and U.S. Securities and

Exchange Commission (SEC) 10-K filings.

2.9.2 Industry Cash Flow

Increased efficiency standards affect manufacturers in three ways: 1) by requiring

additional investment, 2) by raising production costs, and 3) by affecting revenue because of

higher prices, and possibly, lower quantities sold. To quantify these manufacturer impacts, DOE

performed an industry cash flow analysis using the GRIM. This analysis used manufacturing

costs, shipments forecasts, and price forecasts developed for the LCC and NES analyses. DOE

developed financial information, also required as an input to the GRIM, based on publicly

available data and manufacturer information confidentially submitted to DOE's contractor.

The GRIM analysis uses a number of factors -annual expected revenues; manufacturer

costs such as cost of sales; selling, general and administrative (SG&A) costs; property taxes; and

capital expenditures related to depreciation, new standards, and maintenance-to arrive at a

series of annual cash flows beginning from before implementation of standards and continuing

explicitly for several years after implementation. The analysis calculated industry net present

values by discounting the annual cash flows from the period before implementation of standards

to some future point in time.

2-11

 EE-RM/STD-01-350 COMMENT 164

2.9 MANUFACTURER IMPACT ANALYSIS 

DOE conducted the MIA after the ANOPR and reported the results in the NOPR. This 

analysis estimates the financial impact of standards on manufacturers and also calculates the 

impact of standards on competition, direct employment, and manufacturing capacity within the 

industry. Three important elements of the MIA approach are the analysis of industry cash flow, 

the development of a process to consider subgroup cash flow, and the design of a guide to 

interview manufacturers and others in gathering information. 

The policies outlined in the Process Rule resulted in substantial revisions to the analytical 

framework DOE uses in performing the MIA for each rulemaking. In its Framework Document 

for this rulemaking, DOE described and obtained comments on the methodology it uses to 

perform the MIA. It conducts the MIA in three phases. Phase 1 consists of two activities: 

preparation of an industry characterization and identification of issues. Phase 2 evaluates the 

industry from a macro perspective. In this phase, DOE uses the Government Regulatory Impact 

Model (GRIM) to perform an industry cash flow analysis. Phase 3 involves repeating the 

process described in Phase 2 (the industry cash-flow analysis) but on different subgroups of 

manufacturers. Phase 3 also entails calculating additional impacts on competition, direct 

employment, and manufacturing capacity. 

2.9.1 Industry Characterization 

Phase 1 of the MIA consists of collecting pertinent financial and market information. 

This activity involves both quantitative and qualitative efforts. Data gathered include market 

share, corporate operating ratios, wages, employment, and production cost ratios. DOE 

incorporated these data into the engineering analysis in the estimation of equipment production 

costs and distribution markups. The sources of information used for Phase 1 include experts 

from industry as well as reports published by the Gas Appliance Manufacturers Association and 

the Gas Research Institute, trade journals, the U.S. Census Bureau, and U.S. Securities and 

Exchange Commission (SEC) 10-K filings. 

2.9.2 Industry Cash Flow 

Increased efficiency standards affect manufacturers in three ways: 1) by requiring 

additional investment, 2) by raising production costs, and 3) by affecting revenue because of 

higher prices, and possibly, lower quantities sold. To quantify these manufacturer impacts, DOE 

performed an industry cash flow analysis using the GRIM. This analysis used manufacturing 

costs, shipments forecasts, and price forecasts developed for the LCC and NES analyses. DOE 

developed financial information, also required as an input to the GRIM, based on publicly 

available data and manufacturer information confidentially submitted to DOE's contractor. 

The GRIM analysis uses a number of factors-annual expected revenues; manufacturer 

costs such as cost of sales; selling, general and administrative (SG&A) costs; property taxes; and 

capital expenditures related to depreciation, new standards, and maintenance-to arrive at a 

series of annual cash flows beginning from before implementation of standards and continuing 

explicitly for several years after implementation. The analysis calculated industry net present 

values by discounting the annual cash flows from the period before implementation of standards 

to some future point in time. 

2-11 
2.9.3 Manufacturer Subgroup Analysis

Assessment of impacts on subgroups of manufacturers is Phase 3 of the MIA. Using

industry "average" cost values is not adequate for assessing the variation in impacts among

subgroups of manufacturers. Smaller manufacturers, niche manufacturers, or manufacturers

exhibiting a cost structure largely different from industry averages could be affected differently.

Ideally, DOE would consider the impact on every firm individually. In highly concentrated

industries this may be possible. In industries having numerous participants, DOE uses the results

of the industry characterization to group manufacturers exhibiting similar characteristics. The

financial analysis of the "prototypical" firm performed in the Phase 2 industry analysis can serve

as a benchmark against which DOE can analyze manufacturer subgroups.

DOE used the manufacturing cost data collected for the engineering analysis, to the

extent practical, in the subgroup impact analysis. To be useful, however, these data were disaggregated to reflect the variability in costs between relevant subgroups of firms.

DOE conducted detailed interviews with manufacturers to gain insight into the potential

impacts of furnace and boiler standards. During these interviews, DOE solicited the information

necessary to evaluate cash flows and to assess impacts on competition, direct employment, and

manufacturing capacity. DOE considered company-specific cumulative burden.

2.9.4 Interview Process

The revised rulemaking process under the Process Rule provides for greater public input

and for improved analytical approaches, with particular emphasis on earlier and more extensive

information gathering from interested parties. The three-phase MIA process drew on multiple

information sources, including structured interviews with manufacturers and a broad

cross-section of interested parties. DOE conducted interviews during all phases of the analyses,

as determined in Phase 1 of the MIA.

The interview process has a key role in the MIA, since it provides an opportunity for

manufacturers to privately express their views on important issues. A key characteristic of the

interview process is that it is designed to allow DOE to consider confidential information in the

rulemaking process.

The initial industry characterization collected information from relevant industry and

market publications, industry trade organizations, company financial reports, and product

literature. This information aided in the development of detailed and focused questionnaires to

perform all phases of the MIA. DOE took steps to ensure that the contents of questionnaires and

the list of interview participants were publicly vetted before initiating the interview process.

The Phase 3 (subgroup analysis) questionnaire solicited information on the possible

impacts of potential efficiency levels on manufacturing costs, product prices, and sales.

Evaluation of the possible impacts on direct employment, capital assets, and industry

competitiveness drew heavily on the information gathered during the interviews. The

questionnaires solicited both qualitative and quantitative information. DOE requested

supporting information whenever applicable.

2-12

 EE-RM/STD-01-350 COMMENT 164

2.9.3 Manufacturer Subgroup Analysis 

Assessment of impacts on subgroups of manufacturers is Phase 3 of the MIA. Using 

industry "average" cost values is not adequate for assessing the variation in impacts among 

subgroups of manufacturers. Smaller manufacturers, niche manufacturers, or manufacturers 

exhibiting a cost structure largely different from industry averages could be affected differently. 

Ideally, DOE would consider the impact on every firm individually. In highly concentrated 

industries this may be possible. In industries having numerous participants, DOE uses the results 

of the industry characterization to group manufacturers exhibiting similar characteristics. The 

financial analysis of the "prototypical" firm performed in the Phase 2 industry analysis can serve 

as a benchmark against which DOE can analyze manufacturer subgroups. 

DOE used the manufacturing cost data collected for the engineering analysis, to the 

extent practical, in the subgroup impact analysis. To be useful, however, these data were disaggregated to reflect the variability in costs between relevant subgroups of firms. 

DOE conducted detailed interviews with manufacturers to gain insight into the potential 

impacts of furnace and boiler standards. During these interviews, DOE solicited the information 

necessary to evaluate cash flows and to assess impacts on competition, direct employment, and 

manufacturing capacity. DOE considered company-specific cumulative burden. 

2.9.4 Interview Process 

The revised rulemaking process under the Process Rule provides for greater public input 

and for improved analytical approaches, with particular emphasis on earlier and more extensive 

information gathering from interested parties. The three-phase MIA process drew on multiple 

information sources, including structured interviews with manufacturers and a broad 

cross-section of interested parties. DOE conducted interviews during all phases of the analyses, 

as determined in Phase 1 of the MIA. 

The interview process has a key role in the MIA, since it provides an opportunity for 

manufacturers to privately express their views on important issues. A key characteristic of the 

interview process is that it is designed to allow DOE to consider confidential information in the 

rulemaking process. 

The initial industry characterization collected information from relevant industry and 

market publications, industry trade organizations, company financial reports, and product 

literature. This information aided in the development of detailed and focused questionnaires to 

perform all phases of the MIA. DOE took steps to ensure that the contents of questionnaires and 

the list of interview participants were publicly vetted before initiating the interview process. 

The Phase 3 (subgroup analysis) questionnaire solicited information on the possible 

impacts of potential efficiency levels on manufacturing costs, product prices, and sales. 

Evaluation of the possible impacts on direct employment, capital assets, and industry 

competitiveness drew heavily on the information gathered during the interviews. The 

questionnaires solicited both qualitative and quantitative information. DOE requested 

supporting information whenever applicable. 

2-12 
DOE scheduled interviews well in advance to provide every opportunity for key

individuals to be available for comment. Although a written response to the questionnaire was

acceptable, DOE preferred an interactive interview process because it helped clarify responses

and provided the opportunity for additional issues to be identified.

DOE requested that interview participants identify all confidential information provided

in writing or orally. Approximately two weeks following each interview, DOE provided

participants with an interview summary to give them the opportunity to confirm the accuracy and

protect the confidentiality of all collected information. DOE considered all the information

transmitted, when appropriate, in its decision-making process. However, confidential

information is not available in the public record.

DOE's contractor collated the completed interview questionnaires and prepared a

summary of the major issues and outcomes . DOE sought public comment on the outcome of the

interview process.

2.9.5 Competitive Impact Assessment

Executive Order 12866 directs DOE to consider any lessening of competition that is

likely to result from standards. It further directs the Attorney General to gauge the impacts, if

any, of any lessening of competition. DOE made an effort to gather and report firm-specific

financial information and impacts. The competitive analysis focused on assessing the impacts to

smaller, yet significant, manufacturers. DOE based the assessment on manufacturing cost data

and on information collected from interviews with manufacturers , consistent with Phase 3 of the

MIA. The interview questions pertained to assessing the likelihood of increases in market

concentration levels and other market conditions that could lead to anti-competitive pricing

behavior. The manufacturer interviews focused on gathering information that would help in

assessing asymmetrical cost increases to some manufacturers , increased proportion of fixed costs

potentially increasing business risks, and potential barriers to market entry (e.g., proprietary

technologies).

2.10 UTILITY IMPACT ANALYSIS

To estimate the effects of any proposed energy-efficiency standards for furnaces and

boilers on the electric and gas utility industry , DOE used a variant of DOE/EIA's National

Energy Modeling System (NEMS)a. DOE/EIA uses NEMS to produce the Annual Energy

Outlook (AEO). DOE used a variant, known as NEMS-BT, to provide key inputs to the analysis

and estimate the impacts on the utility industry from energy efficiency standards. Thus, the

utility impact analysis is a comparison between NEMS-BT results for the base case forecast and

a For more information on NEMS, refer to the U.S. Department of Energy , Energy Information Administration

documentation. A useful summary is the National Energy Modeling System: An Overview 2000, DOE/EIA-0581(2000),

March, 2000 . 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 this analysis entails some minor code modifications and the model is vin under

various policy scenarios that are variations on DOE/EIA assumptions, DOE refers to it by the name NEMS-BT (BT is

DOE's Building Technologies Program, under whose aegis this work has been performed). NEMS-BT was previously

called NEMS-BRS.

2-13

 EE-RM/STD-01-350 COMMENT 164

DOE scheduled interviews well in advance to provide every opportunity for key 

individuals to be available for comment. Although a written response to the questionnaire was 

acceptable, DOE preferred an interactive interview process because it helped clarify responses 

and provided the opportunity for additional issues to be identified. 

DOE requested that interview participants identify all confidential information provided 

in writing or orally. Approximately two weeks following each interview, DOE provided 

participants with an interview summary to give them the opportunity to confirm the accuracy and 

protect the confidentiality of all collected information. DOE considered all the information 

transmitted, when appropriate, in its decision-making process. However, confidential 

information is not available in the public record. 

DOE's contractor collated the completed interview questionnaires and prepared a 

summary of the major issues and outcomes. DOE sought public comment on the outcome of the 

interview process. 

2.9.5 Competitive Impact Assessment 

Executive Order 12866 directs DOE to consider any lessening of competition that is 

likely to result from standards. It further directs the Attorney General to gauge the impacts, if 

any, of any lessening of competition. DOE made an effort to gather and report firm-specific 

financial information and impacts. The competitive analysis focused on assessing the impacts to 

smaller, yet significant, manufacturers. DOE based the assessment on manufacturing cost data 

and on information collected from interviews with manufacturers, consistent with Phase 3 of the 

MIA. The interview questions pertained to assessing the likelihood of increases in market 

concentration levels and other market conditions that could lead to anti-competitive pricing 

behavior. The manufacturer interviews focused on gathering information that would help in 

assessing asymmetrical cost increases to some manufacturers, increased proportion of fixed costs 

potentially increasing business risks, and potential barriers to market entry (e.g., proprietary 

technologies). 

2.10 UTILITY IMPACT ANALYSIS 

To estimate the effects of any proposed energy-efficiency standards for furnaces and 

boilers on the electric and gas utility industry, DOE used a variant of DOE/EIA's National 

Energy Modeling System (NEMS)". DOE/EIA uses NEMS to produce the Annual Energy 

Outlook (AEO). DOE used a variant, known as NEMS-BT, to provide key inputs to the analysis 

and estimate the impacts on the utility industry from energy efficiency standards. Thus, the 

utility impact analysis is a comparison between NEMS-BT results for the base case forecast and 

a For more information on NEMS, refer to the U.S. Department of Energy, Energy Information Administration 

documentation. A useful summary is the National Energy Modeling System: An Overview 2000, DOE/EIA-OSSl (2000), 

March,2000. DOE/EIA approves use ofthe name NEMS to describe only an official version of the model without any 

modification to code or data. Because this analysis entails some minor code modifications and the model is nm under 

various policy scenarios that are variations on DOE/EIA assumptions, DOE refers to it by the name NEMS-BT (BT is 

DOE's Building Technologies Program, under whose aegis this work has been perfonned). NEMS-BT was previously 

called NEMS-BRS. 

2-13 
for policy cases in which proposed standards are in place. The results of the analysis consist of

differences between the base case forecast and standards case forecasts for electricity generation,

installed capacity, sales, and prices. DOE conducted the utility impact analysis during the

NOPR stage of this rulemaking.

In general, the use of NEMS-BT for the utility impact analysis offers several advantages.

As the official DOE energy forecasting model, it relies on a set of assumptions that are

transparent and have received wide exposure and commentary. NEMS-BT also allows DOE to

estimate the interactions between the various energy supply and demand sectors and the

economy as a whole. The utility impact analysis reports any changes in installed capacity and

generation of electricity by fuel type that resulted from each trial energy efficiency standard

level, as well as changes in electricity sales.

DOE conducted the utility impact analysis as a policy deviation from the AEO, applying

the same basic set of assumptions . For example, the operating characteristics (e.g., energy

conversion efficiency and emissions rates) of future electricity generating plants were as

specified in the AEO reference case, as were the prospects for natural gas supply.

To represent alternative futures, DOE explored deviations from some of the reference

case assumptions corresponding to medium growth. Two such alternative scenarios use the high

and low economic growth cases of the AEO. The high economic growth case assumes higher

projected growth rates for population, labor force, and labor productivity, resulting in lower

predicted inflation and interest rates, and higher overall aggregate economic growth relative to

the reference case. The opposite is true for the low-growth case.

2.11 EMPLOYMENT IMPACT ANALYSIS

DOE estimated the impacts of energy efficiency standards for furnaces and boilers on

employment for equipment manufacturers, relevant service industries, energy suppliers, and the

economy in general. DOE separated employment impacts into indirect and direct impacts.

Direct employment impacts would result if standards led to a change in the number of employees

at manufacturing plants and related supply and service firms . Indirect impacts are impacts on the

national economy other than in the manufacturing sector being regulated. Indirect impacts might

result both from expenditures shifting among goods (substitution effect), and changes in income,

which could lead to a change in overall expenditure levels (income effect). DOE defines indirect

employment impacts from energy efficiency standards as net jobs eliminated or created in the

general economy, as a consequence of increased spending on the purchase price of equipment

and reduced customer spending on energy.

DOE found that new furnace and boiler standards increase the total installed cost of

equipment but decrease energy consumption , and therefore reduce customer expenditures for

energy. Over time, the increased total installed cost would be paid back through energy savings.

The savings in energy expenditures could then be spent on new investment and other items.

Using an input/output model of the U.S. economy , this analysis sought to estimate the effects on

different sectors and the net impact on jobs. It used public and commercially available data

sources and software to estimate employment impacts.

2-14

 EE-RM/STD-01-350 COMMENT 164

for policy cases in which proposed standards are in place. The results of the analysis consist of 

differences between the base case forecast and standards case forecasts for electricity generation, 

installed capacity, sales, and prices. DOE conducted the utility impact analysis during the 

NOPR stage of this rulemaking. 

In general, the use ofNEMS-BT for the utility impact analysis offers several advantages. 

As the official DOE energy forecasting model, it relies on a set of assumptions that are 

transparent and have received wide exposure and commentary. NEMS-BT also allows DOE to 

estimate the interactions between the various energy supply and demand sectors and the 

economy as a whole. The utility impact analysis reports any changes in installed capacity and 

generation of electricity by fuel type that resulted from each trial energy efficiency standard 

level, as well as changes in electricity sales. 

DOE conducted the utility impact analysis as a policy deviation from the AEO, applying 

the same basic set of assumptions. For example, the operating characteristics (e.g., energy 

conversion efficiency and emissions rates) of future electricity generating plants were as 

specified in the AEO reference case, as were the prospects for natural gas supply. 

To represent alternative futures, DOE explored deviations from some of the reference 

case assumptions corresponding to medium growth. Two such alternative scenarios use the high 

and low economic growth cases of the AEO. The high economic growth case assumes higher 

projected growth rates for population, labor force, and labor productivity, resulting in lower 

predicted inflation and interest rates, and higher overall aggregate economic growth relative to 

the reference case. The opposite is true for the low-growth case. 

2.11 EMPLOYMENT IMPACT ANALYSIS 

DOE estimated the impacts of energy efficiency standards for furnaces and boilers on 

employment for equipment manufacturers, relevant service industries, energy suppliers, and the 

economy in general. DOE separated employment impacts into indirect and direct impacts. 

Direct employment impacts would result if standards led to a change in the number of employees 

at manufacturing plants and related supply and service firms. Indirect impacts are impacts on the 

national economy other than in the manufacturing sector being regulated. Indirect impacts might 

result both from expenditures shifting among goods (substitution effect), and changes in income, 

which could lead to a change in overall expenditure levels (income effect). DOE defines indirect 

employment impacts from energy efficiency standards as net jobs eliminated or created in the 

general economy, as a consequence of increased spending on the purchase price of equipment 

and reduced customer spending on energy. 

DOE found that new furnace and boiler standards increase the total installed cost of 

equipment but decrease energy consumption, and therefore reduce customer expenditures for 

energy. Over time, the increased total installed cost would be paid back through energy savings. 

The savings in energy expenditures could then be spent on new investment and other items. 

Using an input/output model of the U.S. economy, this analysis sought to estimate the effects on 

different sectors and the net impact on jobs. It used public and commercially available data 

sources and software to estimate employment impacts. 

2-14 
DOE uses a spreadsheet model (IMBUILD) to analyze indirect employment impacts.

IMBUILD is a special purpose version of the Impact Analysis for Planning (IMPLAN) national

input-output model that specifically estimates the employment and income effects of building

energy technologies. IMPLAN was developed originally by the U.S. Forest Service in

cooperation with the Federal Emergency Management Agency (FEMA) and the Bureau of Land

Management (BLM), to assist the Forest Service in land and resource management planning.

IMBUILD is an economic analysis system that focuses on those sectors most relevant to

buildings, and characterizes the interconnections among 35 sectors as national input-output

matrices. The IMBUILD output includes employment, industry output, and wage income.

Changes in expenditures due to appliance standards can be introduced to IMBUILD as

perturbations to existing economic flows, allowing the estimation of the resulting net national

impact on jobs by sector.

2.12 ENVIRONMENTAL ASSESSMENT

DOE conducted an assessment of the impacts of furnace and boiler standards levels on

certain environmental indicators. The environmental assessment considered two pollutants, SO2

and NOx, and one emission, carbon (tracked in the NEMS-BT as CO2). For each of the energy

efficiency standards levels, DOE calculated total emissions using NEMS-BT and external

analyses as needed.

DOE conducted the environmental assessment as a policy deviation from the AEO,

applying the same basic set of assumptions. DOE's assessment took into account any factors

affecting the type of electricity generation and, in turn, the type and amount of airborne

emissions being generated by the utility industry.

The results of the environmental assessment are similar to a complete NEMS run as

published in the AEO. These include power sector emissions for SO2, NOR, and carbon, and SO2

prices, in five-year forecasted increments. DOE reports the outcome of the assessment for each

trial standard level as a deviation from the AEO reference cases.

2.13 REGULATORY IMPACT ANALYSIS

Under Executive Order 12866, "Regulatory Planning and Review," DOE prepared a draft

regulatory impact analysis which would be subject to review under the Executive Order by the

Office of Information and Regulatory Affairs (OIRA). 58 FR 51735 (October 4, 1993).

The RIA includes a quantitative analysis of alternatives to energy conservation standards.

DOE used the NES Spreadsheet Model (discussed earlier in section 2.7) to calculate the NES and

the NPV corresponding to specified alternatives to standards.

As part of the regulatory impact analysis, DOE identified and sought to mitigate the

overlapping effects on manufacturers of new or revised DOE energy efficiency standards and

other regulatory actions affecting the same equipment. Through manufacturer interviews and

literature searches, DOE compiled information on burdens from existing and impending

2-15

 EE-RM/STD-01-350 COMMENT 164

DOE uses a spreadsheet model (IMBUILD) to analyze indirect employment impacts. 

IMBUILD is a special purpose version of the Impact Analysis for Planning (IMP LAN) national 

input-output model that specifically estimates the employment and income effects of building 

energy technologies. IMPLAN was developed originally by the u.s. Forest Service in 

cooperation with the Federal Emergency Management Agency (FEMA) and the Bureau of Land 

Management (BLM), to assist the Forest Service in land and resource management planning. 

IMBUILD is an economic analysis system that focuses on those sectors most relevant to 

buildings, and characterizes the interconnections among 35 sectors as national input-output 

matrices. The IMBUILD output includes employment, industry output, and wage income. 

Changes in expenditures due to appliance standards can be introduced to IMBUILD as 

perturbations to existing economic flows, allowing the estimation of the resulting net national 

impact on jobs by sector. 

2.12 ENVIRONMENTAL ASSESSMENT 

DOE conducted an assessment of the impacts of furnace and boiler standards levels on 

certain environmental indicators. The environmental assessment considered two pollutants, S02 

and NOx, and one emission, carbon (tracked in the NEMS-BT as CO2). For each of the energy 

efficiency standards levels, DOE calculated total emissions using NEMS-BT and external 

analyses as needed. 

DOE conducted the environmental assessment as a policy deviation from the AEO, 

applying the same basic set of assumptions. DOE's assessment took into account any factors 

affecting the type of electricity generation and, in tum, the type and amount of airborne 

emissions being generated by the utility industry. 

The results of the environmental assessment are similar to a complete NEMS run as 

published in the AEO. These include power sector emissions for S02' NOx, and carbon, and S02 

prices, in five-year forecasted increments. DOE reports the outcome of the assessment for each 

trial standard level as a deviation from the AEO reference cases. 

2.13 REGULATORY IMPACT ANALYSIS 

Under Executive Order 12866, "Regulatory Planning and Review," DOE prepared a draft 

regulatory impact analysis which would be subject to review under the Executive Order by the 

Office ofInformation and Regulatory Affairs (OIRA). 58 FR 51735 (October 4, 1993). 

The RIA includes a quantitative analysis of alternatives to energy conservation standards. 

DOE used the NES Spreadsheet Model (discussed earlier in section 2.7) to calculate the NES and 

the NPV corresponding to specified alternatives to standards. 

As part of the regulatory impact analysis, DOE identified and sought to mitigate the 

overlapping effects on manufacturers of new or revised DOE energy efficiency standards and 

other regulatory actions affecting the same equipment. Through manufacturer interviews and 

literature searches, DOE compiled information on burdens from existing and impending 

2-15 
regulations affecting residential furnaces and boilers.

 EE-RM/STD-01-350 COMMENT 164

regulations affecting residential furnaces and boilers. 

2-16 
REFERENCES

U.S. Department of Energy - Energy Information Administration. Residential Energy

Consumption Survey: Household Energy Consumption and Expenditures 2001. 2001.

(Last accessed May 18, 2005.)

<http://www.eia.doe . gov/emeu/recs/recs200l /publicuse2OOl.html>

 EE-RM/STD-01-350 COMMENT 164

REFERENCES 

1. U.S. Department of Energy - Energy Information Administration. Residential Energy 

Consumption Survey: Household Energy Consumption and Expenditures 2001.2001. 

(Last accessed May 18,2005.) 

<http://www.eia.doe.gov/emeu/recs/recs200 I/puhlicuse200 I.html> 

2-17