CHAPTER 17. REGULATORY IMPACT ANALYSIS

TABLE OF CONTENTS

17.1 INTRODUCTION ............................................................................................................ 17-1 17.2 MAJOR POLICY ALTERNATIVES............................................................................... 17-2 17.2.1 No New Regulatory Action ............................................................................... 17-2 17.2.2 Tax Credits, Rebates, and Othe r Financial Incentives.......................................17-2 17.2.3 Revisions to Voluntary Ener gy Efficiency Targets ........................................... 17-4 17.2.4 Bulk Government Purchases and Early Replacement Incentive Programs .......17-4 17.2.5 Prescriptive Standards that would Mandate Design Requirements ...................17-4 17.2.6 Performance Standards ...................................................................................... 17-5

17-i17-iiCHAPTER 17. REGULATORY IMPACT ANALYSIS FOR REFRIGERATED BEVERAGE VENDING MACHINES

17.1 INTRODUCTION

Under the Process Rule, the U.S. Departm ent of Energy (DOE) is committed to exploring non-regulatory alternatives to ener gy conservation standards. This is a regulatory impact analysis prepared by DOE under Executive Order 12866, “Re gulatory Planning and Review,” which will be subject to review by the Office of Information and Regulatory Affairs.

Executive Order 12866, §1(b)(1), requires that each agency iden tify in writing the specific market failure or other problem that warrants new agency acti on, as well as assess the significance of that problem to determine whether any new regulation is necessary.

DOE has determined that today’s regulatory action is not an “ec onomically significant” action under §3(f)(1) of Executive Order 12866, “Regulatory Pla nning and Review”.

In the advanced notice of proposed rule making (ANOPR) for this rulemaking, DOE requested feedback and data on a number of issues related to Executive Order 12866 and the existence of a market failure in the BVM industry. In this request, DOE sought:

 data on the efficiency levels of existing beverage vending machines (BVM) in use by owner (i.e., site owner or machine operator), electricity price, equipment class (Class A or Class B machines) and installa tion type (i.e., indoors or outdoors);

 comment on the availability of energy efficiency information to end users and the extent to which the information leads to informed choices, specifically given how such equipment is purchased;

 detailed data on the distribution of energy efficiency levels for both the new site owner and equipment operator markets;

 data on, and suggestions for the existence a nd extent of potential market failures to complete an assessment of the significance of these failures and, thus, the net benefits of regulation; and

 comment on the weight that s hould be given to “external” benefits resulting from improved energy efficiency of BVMs that are not captured by the users of such equipment. These benefits include both environmental and en ergy security-related externalities that are not reflected in en ergy prices, such as reduced emissions of greenhouse gases and reduced use of natura l gas and oil for electricity generation.

DOE prepared a regulatory impact analysis (RIA) for this rulemaking. The RIA is subject to review by the Office of Information and Regulatory Affairs (OIRA) in the Office of Management and Budget (OMB). The RIA consists of:

 a statement of the problem addressed by this regulation and the mandate for Government action;

 a description and analysis of policy alternatives to this regulation;

17-1 a qualitative review of the potenti al impacts of the alternatives; and

 the national economic impacts of the proposed standard.

The RIA assesses the effects of feasible polic y alternatives to beverage vending machine standards and provides a comparison of the impacts of the alternatives. DOE evaluated the alternatives in terms of their ability to achieve significant energy savings at reasonable cost, and compared it to the effectiveness of the propos ed rule. DOE analyzed these alternatives qualitatively with reference to the particular market dynamics of the beverage vending industry.

17.2 MAJOR POLICY ALTERNATIVES

DOE identified the f ollowing major policy alternatives for achieving increased beverage vending machine energy efficiency:

 no new regulatory action;

 financial incentives, includi ng tax credits and rebates;

 revisions to voluntary ener gy efficiency targets ( e.g ., ENERGY STAR program criteria);

 early replacement;

 bulk government purchases; and

 prescriptive standards that woul d mandate design requirements ( e.g ., lighting and refrigeration controls).

DOE qualitatively evaluated each alternative’s ability to achieve significant energy savings at reasonable cost and compared it to th e effectiveness of the pr oposed rule. The policy alternatives are discussed in the following sections.

17.2.1 No New Regulatory Action

The case in which no regulato ry action is ta ken for BVMs constitutes the base case (or No Action) scenario. By defi nition, no new regulatory action yi elds zero energy savings and a net present value of zero dollars.

17.2.2 Tax Credits, Rebates, and Other Financial Incentives

DOE considered the impact of various fi nancial incentives at both the EN ERGY STAR Tier 2 level and higher efficiency levels, and examined the likeli hood of an increase in customers purchasing high-efficiency equipment b ecause of these financial incentives.

In considering the impact of financial incen tives, DOE reviewed exis ting rebate programs for BVMs. Most existing rebate programs are ut ility-sponsored programs that provide incentives for incorporating lighting and temperature controllers. Als o, similar rebates for other technologies ( e.g ., electronically commutated motors for evaporator fans) are provided in other industries, such as in the food sales industry for commercial refrigerated display cases, and could theoretically be adapted for BVMs. However, utili ty rebate programs are aimed at the site of

17-2installation and not at th e purchasers of the machines (as most of the controllers covered by the rebate are add-on devices), and utility rebates are onl y provided for reduction of electricity at sites served by the utility. Becau se BVMs purchased by large scale bottlers may not remain on a given site, tracking the location of rebated equi pment could be an issue for utilities. Also, because most utility rebate programs are not aimed at the purchasers of the machines, they do not provide an incentive for the larg e bottlers who purchase the machin es to choose high-efficiency equipment.

Besides utility-sponsored reba te programs, other programs possibilities include national manufacturer rebates, purcha ser rebates, or tax incentives . Typically, these programs are advocated as a means to encourage households or or ganizations that are sensitive to the first cost of equipment to purchase or manufacture more-costly efficient equipment that has an ultimate favorable life cycle cost payoff either to the pur chaser, to society, or both. The incentive can be given to the buyer of the equipment, the rate payer, or the manufacturer, depending on which method is considered to be most administratively effective. Ho wever, the nature of the BVM industry and market makes this approach largely ineffective.

At least 75 percent of BVMs are purchased by two companies (Coca-Cola and PepsiCo) and their affiliated bott lers and distributors. In the ANOPR public meeting, representatives of PepsiCo stated that all BVMs purchased by th e company are required to meet ENERGY STAR Tier 2 levels. Representatives of Coca-Cola stated that by 2010, the BVMs purchased by the company would use half as much energy as th ey do now, which would meet at least ENERGY STAR Tier 1 levels. These companies purchase ENERGY STAR equipment despite the first-cost increase, because it improves their public image, which results in higher sales in the long run. Direct compensation for the energy savings is not assured but comes only through a negotiation with the site. Because the driving economic fo rce for these companies is product sales, not equipment purchases, lowering the purchase pr ice of equipment woul d make no significant difference in market behavior, a nd the program would simply transf er the amount of tax credit or rebate to the rebated entity without having induc ed extra purchases of efficient BVMs. With regard to the use of rebates or other incentives be yond Tier 2 efficiency levels, it is not clear how the buying policy of Coca-Cola and PepsiCo would be influenced by tax credits or rebates. However, the companies are large enough to succ essfully finance the higher costs of BVMs more efficient than Tier 2 with or without tax credits or rebates.

While rebates or tax credits may affect small purchasers, thei r influence over the marketplace for BVMs is marginal. In addition, because of the existing market dynamics, any economic incentive paid for the purchase of Tier 2 efficiency equipment face s the possibility of a significant proportion of the rebates be ing free riders. This is particul arly true of rebates paid to manufacturers. Rebates to purchas ers would necessarily have to be limited to small volumes of purchases by individual rebatees to avoid this and target non-bo ttler, site-owned equipment. Tax credits to purchasers face similar issues. Curre ntly, no national manufacturer rebates, purchaser rebates, or tax incentives are available for enhancement of beverage vending machine efficiency.

DOE does see value in the continued use of rebates for lighting and temperature controller technologies even under the standards proposed in this notice of proposed rulemaking. Because the impact of these technologies is not captured in the DOE test procedure for BVMs, employing these technologies in the field will continue to pr o vide reductions in energy

17-3consumption above and beyond those that can be achieved by the standards proposed for BVMs. The reductions will continue to accrue at the site of installation; therefore, these rebates, primarily for the purchase of afte rmarket controller equipment, s hould continue to be provided to the installation site directly.

17.2.3 Revisions to Voluntary Energy Efficiency Targets

The voluntary ENERGY STAR program currently has two levels of efficiency targets: Tier 1 and T ier 2. The current ENERGY STAR pr ogram appears to have been effective at inducing large-scale adoption of ENERGY STAR Tier 1 equipment. Furthermore, it is expected by the beverage vending industr y that ENERGY STAR will be highly effective in securing purchases of Tier 2 equipment because of the fa vorable response of the two large purchasers, Coca-Cola and PepsiCo, who essentially define the market. While it is possible that voluntary programs for equipment more efficient than Ti er 2 would also be effective, DOE lacks a quantitative basis to determine how effective or ineffective such a beyond-Tier 2 program might be. As noted previously, broader economic and social considerati ons are in play than simple economic return to the equipment purchaser. DOE lacks the data necessa ry to quantitatively project the degree to which such voluntary prog rams for more expensive, higher efficiency equipment would modify the market.

17.2.4 Bulk Government Purchases and Ea rly Replacement Incentive Programs

DOE also considered, but did not analyze, the potential of bulk G overnme nt purchases and early replacement incentive programs as alternat ives to the proposed standards. In the case of bulk Government purchases, BVMs are a small pa rt of the total market and the volume of high-efficiency equipment purchases that the Fe deral Government might make directly (versus equipment installed by bottlers are Federal Government sites) would have very limited impact on improving the overall market efficiency of BVMs. In the case of replacement incentives, several policy options exist to promot e early replacement, including a direct national program of customer incentives, incentives paid to utilities to promote an early repl acement program, market promotions through equipment manufacturers, an d replacement of Federally owned equipment. Previous analysis by DOE of methods to promot e early replacement for other covered equipment have suggested that the energy sa vings realized through a one-time early replacement of existing stock equipment has not resulted in energy sa vings commensurate to the cost to run and administer the program. As a consequence, DOE did not analyze this option in detail.

17.2.5 Prescriptive Standards that woul d Mandate Design Requirements

EPCA provides that standards regulating th e energy use of certain equipment m ay be design standards, which require specific features that are required in the design of the equipment; or performance standards, which describe a required level of equipment performance ( e.g. , maximum kWh/year energy consumption) and provide a manufacturer with discretion in determining—among the many available options—how best to meet that performance level. However, BVMs are not one of the specified equipment for which the Energy Policy and Conservation Act (EPCA) allows a standard to consist of a de sign requirement. Furthermore, EPCA specifically requires DOE to base its te st procedure for this equipment on American National Standards Institute (ANSI)/American Society of Heating, Re frigerating and Air17-417-5 Conditioning Engineers (A SHRAE) Standard 32.1-2004, Methods of Testing for Rating Vending Machines for Bottled, Canned or Other Sealed Beverages . The test methods in ANSI/ASHRAE Standard 32.1-2004 consist of means to measure energy consumption.

For these reasons, DOE does not intend to develop design requirements for this equipment. Instead, DOE intends to develop stan dards such that each beverage vending machine would be subject to a maximum level of en ergy use, and manufacturers could meet these standards with their own choice of design methods.

17.2.6 Performance Standards

The difficulty in using these non-regulatory al ternatives mu st be gauged against the more direct benefits calculated for the performa nce standards DOE is proposing in this NOPR.

Based on the qualitative review, DOE is not c onfident that any of the alternatives DOE examined would save as much energy as today’ s proposed rule, and the fi nancial incentives in particular may engender significant free ridership issues. Also, seve ral of the alternatives would require new enabling legislation, si nce authority to carry out thos e alternatives does not exist.