Mr. JohnCymbalsky U.S. Department ofEnergy PHILADELPHIA GAS WORKS Steven P
. Hershey Vice President, Regulatory & External Aff airs 800 W
. MontgomeryAvenue, Philadel phia, PA 19122

September23, 2014

OfficeofEnergy Efficiency and Renewable Energy BuildingTechnologies Office, EE-SB 1000 Independence Avenue SW Washington, DC 20585-0121
DearMr. Cymbalsky: Philadelphia Gas Works (POW), the largest municipally-owned gas utility in the United States, is concerned about the impact that a new furnace efficiencyrule could have on POW, its customers, the City of Philadelphia and the airquality ofthis region. Theconcern is that the new rule, ifit adopts a condensing standard without recognition that non-condensing furnaces are a separate product class underthe statute, instead ofpromoting greater efficiency, would make continued use ofgas-fired heating so expensivebecause ofpurchase and installation costs that it would, for a significant numberofconsumers, cause fuel switching and hence the diminished use ofnatural gas for heating (and hot water). The same concern was expressed in a face-to-face meeting with DOE officials that was hosted by Senator Robert Casey's staffon April 11, 2012, as well as inPGW's comments on the DFR in 2011 and in a May 1, 2012 POW affidavit filed in the United States Court ofAppeals for the District ofColumbia Circuit, a copy ofwhich is attached It is ourunderstanding that DOE has cited PGW's demand side management program ("DSM") as somehow being supportive ofDOE's past position that adopting a condensing standard would not cause fuel switching. To the contrary, PGW's program demonstrates that intervention to override the normal operation ofthe marketplace is required for high efficiency furnaces to achieve significant penetration in Philadelphia and elsewhere. Unfortunately, without the kind ofsubstantial financial intervention provided by a DSM program like PGW's, such equipment will not bebroadly installed in places like Philadelphia wherethe old housing stock and customer socio-economic status create barriers. While PGW's voluntary DSM does assist customers in selecting high-efficiency gas-fired furnaces, this program should notbe viewed as a standard

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component ofthe marketplace as it is voluntary, approved onlythrough August 31, 2015, and limited in nature, as further discussed below. PGW previously provided information supporting these statements during the meeting in Senator Casey's office and in the above-referenced comments and affidavit. DOE has apparently misunderstood the reason for providing this information as well as what it reveals. It was not provided to demonstrate that high efficiency furnaces will likely be installed should the condensing standard beadopted. The information provided byPGW demonstrates that that will not likely betrue. PGW, a municipally-owned utility, described the DSM work that we do to demonstrate that PGW strongly supports energy efficiency and reduction ofgreenhouse gases. We did not want any misunderstanding that ouropposition to the DFR was a reflection ofa broader opposition to energy efficiency. We support energy efficiency and have invested considerable dollars to that end. PGW's DSM program is really seven different programs for different customer segments. The largest program is open only to low income customers who participate in PGW's low income payment program, the Customer Responsibility Program. Customers in the CustomerResponsibility Programpayonly a percentage ofincome each month regardless ofactual gas consumption. These customers typically live in homes that are the worst housing stock in the City and are energy inefficient. All other residential customers bear the burden ofthe subsidy provided to these low income customers. This low income energy efficiency program was designed to reduce the burden ofthe subsidy by targeting opportunities for substantial energy savings through comprehensive residential weatherization measures. Customers in this low income program do not pay for anyofthe work performed, and PGW's program is not strictly limited by short-term project cost comparisons. For these reasons, the comprehensive projects can include measures, such as HVAC replacements, which are expensive and may not necessarily be cost-effective even over full lifetime paybackperiods on their own. Six market rate programs with drastically smaller budgets serve other customers, providing incentives covering a portion ofincremental costs ofhigh efficiency equipment purchase and installation. Even given the PGW rebates, customers are still responsible for a portion ofthe high-efficiency equipment's incremental costs. Program survey results indicate that the incremental costs are the greatest barrier to participation: many customers are still likely to elect not to purchasehigh-efficiency equipment despite access to PGW rebates. The fact that Philadelphia's climate is warmer than many areas in the southern region and not nearly as cold as those included in the northern region provides further disincentive to buy and install the high efficiency furnace. Cost recovery and payback take much longer in Philadelphia's climate. Thus, up-front costs are critical to the decisions made by homeowners that must replace anexisting furnace. High-efficiency furnaces present barriers to installation, such as the high price ofthe equipment and the high cost ofventing the condensing furnace, particularly in row homes and twins that have at least one common wall with anotherhome. Eliminating the option for affordable natural gas equipment would force many residents, who either could not access PGW's incentives orwould still be unable to afford the higher

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costs even given PGW rebates, towards making decisions contrary to DOE's (and PGW's) intended goal of fuel efficiency. The short-term concerns ofaffordability would likely outweigh other considerations, even given the potential long-term benefits. This situation is especially troubling in Philadelphia, given the City's demographics and housing stock: InPhiladelphia, 26.3% ofthe population is at orbelow l 00% ofthe federal poverty level, 38.6% are at orbelow l 50% ofthe poverty level and 49.3% are at orbelow 200% ofthe poverty level. All have very low income and struggle. They do not have the resources to pay the higherprices for purchase and installation ofcondensing equipment even though, over the lifetime ofthe equipment, the cost ofheating will be substantially lower than otheralternatives. As described in the attached affidavit, Philadelphia is a city ofrow homes and twin homes which share at least onecommon wall with neighbors. These common walls make side venting ofa high efficiency furnace difficult and expensive. Venting through a chimney would require major modification ofthe flue in the chimney, particularly when the water heater currently shares a flue with the furnace. Such modifications make the venting costly. 45% ofPhiladelphians rent their homes and pay the utility bills. The landlord would be indifferent to the cost ofthe monthly utility service, but would be sensitive to the price of purchase and installation, making purchase ofhigh efficiency equipment much less likely. Forthose people, ifthe condensing standard were to become law, the only alternative available would be electric heating, easy and cheap to install, but inefficient and much more expensive to the customer in an area that relies heavily on coal-fired generation ofelectricity,1much more damaging to the environment than natural gas. IfDOE proposes a new furnace efficiency rule that adopts a condensing standard, it must, in our view, also provide that non-condensing furnaces are a separate product class ifit wishes to avoid wholesale fuel switching and to promote fuel efficiency. PG W's EnergySense Program changes the normal operation ofthe market through bulk installation of high efficiency equipment without charge (the low income program) and by offering direct incentives for installation ofenergy efficiency measures such as high efficiency furnaces, which skews installation decisions from what would otherwise naturally occur. Furthermore, these market interventions should not be relied

1 Coal was used to generate 44.3% ofelectricity in PJM during 2013
.

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upon for assisting all customers who would be impacted by a furnace rule that adopts the condensing standard. Thevoluntary PGWprograms are only approved through August 31, 2015, and during this time period are limited in budget. We would appreciate anopportunity to meet with you to discuss these matters and to clear up any misunderstandings as to the PGW DSM program and its implications for the adoption ofa new furnace rule. Inthe meantime, ifyou have any questions, please contact us. 

# 7fi_ ?
. Steven P. Hershey Attachment

cc: SenatorRobert P. Casey, Jr. Bert Kalisch, President and CEO, American Public Gas Association Dave McCurdy, President and CEO, American Gas Association

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