[Federal Register Volume 65, Number 83 (Friday, April 28, 2000)]
[Proposed Rules]
[Pages 25042-25086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-9847]



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Part II





Department of Energy





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Office of Energy Efficiency and Renewable Energy



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10 CFR Part 430



Energy Conservation Program for Consumer Products: Energy Conservation 
Standards for Water Heaters; Proposed Rule

Federal Register / Vol. 65, No. 83 / Friday, April 28, 2000 / 
Proposed Rules

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DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 430

[Docket Number EE-RM-97-900]
RIN 1904-AA76


Energy Conservation Program for Consumer Products: Energy 
Conservation Standards for Water Heaters

AGENCY: Office of Energy Efficiency and Renewable Energy, Department of 
Energy (DOE).

ACTION: Notice of proposed rulemaking and public workshop.

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SUMMARY: The Energy Policy and Conservation Act, as amended, prescribes 
energy conservation standards for certain major household appliances, 
and requires the Department of Energy (DOE) to administer an energy 
conservation program for these products. In this notice we are 
proposing to amend the energy conservation standards for water heaters 
to make them more efficient and announce a public hearing.

DATES: Comments must be received on or before July 12, 2000. DOE is 
requesting a signed original, a computer disk (WordPerfect 8) and 10 
copies of the written comments. The Department will also accept e-
mailed comments, but you must also send a signed original. Oral views, 
data, and arguments may be presented at the public workshop (hearing) 
in Washington, DC, beginning at 9:00 a.m. on June 20, 2000.
    The Department must receive requests to speak at the workshop and a 
copy of your statements no later than 4:00 p.m., June 6, 2000, and we 
request that you provide a computer diskette (WordPerfect 8) of each 
statement at that time. The DOE panel will read the statements in 
advance of the workshop and requests that speakers limit their oral 
presentations to a summary. Attendees will have an opportunity to ask 
questions.

ADDRESSES: Please submit written comments, oral statements, and 
requests to speak at the workshop to Brenda Edwards-Jones, U.S. 
Department of Energy, Office of Energy Efficiency and Renewable Energy, 
Energy Conservation Program for Consumer Products: Water Heaters, 
Docket Number EE-RM-97-900, 1000 Independence Avenue, SW, Rm 1J018, 
Washington, DC 20585-0121. You may send email to: <a href="/cdn-cgi/l/email-protection#325040575c56531c575645534056411f585d5c57417257571c565d571c555d44"><span class="__cf_email__" data-cfemail="8ae8f8efe4eeeba4efeefdebf8eef9a7e0e5e4eff9caefefa4eee5efa4ede5fc">[email protected]</span></a>. The workshop will begin at 9:00 a.m., in Room 1E-245 
at the U.S. Department of Energy, Forrestal Building, 1000 Independence 
Avenue, SW, Washington, DC. You can find more information concerning 
public participation in this rulemaking proceeding in Section VI, 
``Public Comment Procedures,'' of this notice of proposed rulemaking.
    You may read copies of the public comments, the Technical Support 
Document for Energy Efficiency Standards for Consumer Products: Water 
Heaters (TSD) and the transcript of the public hearing and previous 
workshop transcripts at the DOE Freedom of Information (FOI) Reading 
Room, U.S. Department of Energy, Forrestal Building, Room 1E-190, 1000 
Independence Avenue, SW, Washington, DC 20585, (202) 586-3142, between 
the hours of 9:00 a.m. and 4:00 p.m., Monday through Friday, except 
Federal holidays. You may obtain copies of the TSD and analysis 
spreadsheets from the Office of Energy Efficiency and Renewable 
Energy's (EERE) web site at http://www.eren.doe.gov/buildings/codes_standards/applbrf/waterheater.htm.

FOR FURTHER INFORMATION CONTACT: Terry Logee, U.S. Department of 
Energy, EE-41, 1000 Independence Avenue, SW, Washington, DC 20585-0121, 
(202) 586-9127, email: <a href="/cdn-cgi/l/email-protection#295d4c5b5b500745464e4c4c694c4c074d464c074e465f"><span class="__cf_email__" data-cfemail="77031205050e591b181012123712125913181259101801">[email protected]</span></a> or Francine Pinto, Esq., 
U.S. Department of Energy, Office of General Counsel, GC-72, 1000 
Independence Avenue, SW, Washington, DC 20585, (202) 586-7432, email: 
<a href="/cdn-cgi/l/email-protection#9ff9edfef1fcf6f1fab1eff6f1ebf0dff7eeb1fbf0fab1f8f0e9"><span class="__cf_email__" data-cfemail="abcdd9cac5c8c2c5ce85dbc2c5dfc4ebc3da85cfc4ce85ccc4dd">[email protected]</span></a> or Eugene Margolis, Esq., GC-72, at the same 
address, (202) 586-9507, email: <a href="/cdn-cgi/l/email-protection#e0859587858e85ce8d8192878f8c8993a08891ce848f85ce878f96"><span class="__cf_email__" data-cfemail="3f5a4a585a515a11525e4d585053564c7f574e115b505a11585049">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of Proposed Rule

II. Introduction

A. Authority
B. Background
    1. Current Standards
    2. History of Previous Rulemakings
    3. Process Improvement
    4. Test Procedures

III. Analysis and Methodology

A. Market and Technology Assessment
    1. General
    2. Product Specific
B. Technological Feasibility
C. Screening Analysis
    1. Product Classes
    2. Baseline Units
    3. Screening of Design Options
    a. Design Options that Reduce Standby Losses
    b. Design Options that Improve Combustion Efficiency
    c. Design Options that Improve System Efficiency
    4. Results of Screening Analysis
    a. Heat Pump Water Heater
    b. Gas Condensing Water Heaters
    c. Other Water Heater Design Options
D. Engineering Analysis of Design Options
    1. Other Federal Agencies' Initiatives
    2. Maximum Technologically Feasible Levels
    3. Methodology
    a. Energy Savings Potential
    b. Comments on Design Options
    c. Manufacturing Costs
    d. Installation Costs
    e. Maintenance Costs
    f. Determination of Markups for Retail Prices
E. Economic Analysis
    1. Life-Cycle-Cost (LCC) and Payback Analysis
    a. Marginal Energy Price
    b. Future Energy Prices
    c. Discount Rates
    d. Household Characteristics
    e. Lifetime
    2. LCC Spreadsheet Model
    a. LCC and Payback Module
    b. Equipment Cost Module
    c. Operating Cost Module
    d. Energy Analysis Module
    e. Hot Water Draw Module
    3. Consumer Subgroup Analysis
    4. Payback Analysis for Rebuttable Presumption
F. National Impacts Analysis
    1. Net Present Value (NPV) and Energy Savings
    2. National Energy Savings Spreadsheet Model
    a. Shipments
    b. Energy Prices
    3. Comments
G. Manufacturer Impact Analysis
    1. Economic Impact on Manufacturers
    2. Product Specific
    3. GRIM: Industry Cash Flow
    4. Manufacturer Subgroup Analysis
    5. Interview Process
H. Other Factors
I. Utility Analysis
J. Environmental Analysis
K. Net National Employment

IV. Analytical Results

A. Trial Standard Levels
    1. Economic Impacts on Consumers
    a. Life-Cycle-Cost
    b. Median Payback
    c. Test Procedure Payback
    2. Economic Impact on Manufacturers
B. Significance of Energy Savings
C. Lessening of Utility or Performance of Products
D. Impact of Lessening of Competition
E. Need of the Nation to Save Energy and Net National Employment
    1. Environmental Impacts
    2. Net National Employment
F. Conclusion
    1. Comments on Standard Levels
    2. Proposed Standard

V. Procedural Reviews

A. Review under the National Environmental Policy Act
B. Review under Executive Order 12866, ``Regulatory Planning and 
Review''

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C. Review under the Regulatory Flexibility Act
D. Review Under the Paperwork Reduction Act
E. Review Under Executive Order 12988, ``Civil Justice Reform''
F. ``Takings'' Assessment Review
G. Federalism Review
H. Review Under the Unfunded Mandates Reform Act
I. Review Under the Plain Language Directives
J. Assessment of Federal Regulations and Policies on Families Review

VI. Public Comment Procedures

A. Written Comment Procedures
B. Public Workshop
C. Issues for Public Comment

Appendix A--Acronyms and Abbreviations

I. Summary of Proposed Rule

    The Energy Policy and Conservation Act, as amended (hereinafter 
referred to as EPCA or the Act), specifies that any new or amended 
energy conservation standard the Department of Energy (DOE) prescribes 
shall be designed to ``achieve the maximum improvement in energy 
efficiency . . . which the Secretary determines is technologically 
feasible and economically justified.'' Section 325(o)(2)(A), 42 U.S.C. 
6295(o)(2)(A). Furthermore, the amended standard must ``result in 
significant conservation of energy.'' Section 325(o)(2)(B)(3)(B), 42 
U.S.C. 6295(o)(2)(B)(3)(B).
    In accordance with the statutory criteria discussed in this notice, 
DOE is proposing to amend the water heater energy efficiency standards. 
The proposed standards represent performance consistent with:
    <bullet> electric water heaters with heat traps, 2.5 inches of 
insulation and an insulated tank bottom;
    <bullet> gas-fired water heaters with heat traps, flue baffles that 
achieve a 78% recovery efficiency (RE) and 2 inches of insulation;
    <bullet> no change from the current standard for oil-fired water 
heaters.
    The proposed standard, trial standard level three, is based on 
using HFC-245fa as a blowing agent in the insulation and saves an 
estimated 4.75 quads of energy over 27 years, a significant amount. 
This amount is more than the primary energy used for heating water in 
all U.S. buildings (residential, commercial and industrial) in 1997 
(3.82 quads). The economic impacts on consumers (i.e., the average 
life-cycle cost (LCC) savings) are positive. We identified and 
conducted analyses on two subgroups of the population, senior-only and 
low income consumers, because of concern that these groups might 
potentially be affected differently by the standards than the rest of 
the population. Our analyses showed no difference.
    The national net present value (NPV) of trial standard level three 
is $3.4 billion from 2003-2030. This is the estimated total value of 
future savings discounted to 1998 minus the estimated increased 
equipment costs also discounted to 1998. The water heater industry net 
present value (INPV) today is estimated to be $322 million. If we adopt 
trial standard level three, we expect manufacturers may lose 5 percent 
of the INPV, which is approximately $15 million. Other government 
actions that require the phase out of HCFC-141b and the prevention of 
ignition of flammable vapors by gas-fired water heaters will result in 
losses of an estimated $28 million in INPV. The cumulative effects of 
all government actions is an estimated loss of $43 million of INPV, or 
about 13 percent. However, the present value of future energy savings 
for the U.S. are projected to be $3.4 billion. These substantial energy 
savings exceed industry losses due to energy efficiency standards by 
227 times or, due to all Federal actions, by 79 times. Additionally, 
based on our interviews with four of the five major manufacturers, we 
do not expect any plant closings or loss of employment because the 
manufacturers stated that they would stay in business. During the 
interviews, the manufacturers all stated that only trial standard level 
four (incorporating plastic tanks and side-arm heaters) would severely 
impact employment levels and require new facilities.
    The proposed standard has significant environmental benefits, 
addressing global climate change and reducing air pollution. This 
proposed standard level would result in cumulative greenhouse gas 
emission reductions of 83 million metric tons (Mt) of carbon 
equivalent. Additionally, air pollution would be reduced by the 
elimination of 229 thousand metric tons of nitrous oxides 
(NO<INF>X</INF>) from 2003-2030.
    Trial standard level three has several other benefits. First, it 
maximizes the LCC savings to consumers, which means that total 
consumers' benefits are higher as a result of this standard level than 
any of the other standard levels analyzed. Second, this trial standard 
level causes similar cost increases between gas-fired and electric 
water heaters so the impacts in the market are fuel neutral.
    Therefore, DOE has determined that the benefits to the nation 
outweigh the burdens and we conclude that trial standard level three is 
economically justified. Furthermore, DOE has determined that trial 
standard level three is technologically feasible. The design options 
incorporated in trial standard level three are commercially available 
on some models of electric and gas-fired heaters sold in the U.S.

II. Introduction

A. Authority

    Part B of Title III of the Energy Policy and Conservation Act, 
Pub.L. 94-163, as amended by the National Energy Conservation Policy 
Act, Pub.L. 95-619, the National Appliance Energy Conservation Act, 
Pub.L. 100-12, the National Appliance Energy Conservation Amendments of 
1988, Pub.L. 100-357, and the Energy Policy Act of 1992, Pub.L. 102-
486, created the Energy Conservation Program for Consumer Products 
other than Automobiles. Water heaters are one of the consumer products 
subject to this program. Section 322(a)(4), 42 U.S.C. 6292(a)(4).
    Under the Act, the program consists essentially of three parts: 
testing, labeling, and Federal energy conservation standards. The 
Department, with assistance from the National Institute of Standards 
and Technology (NIST), may amend or establish test procedures for each 
of the covered products. Section 323(b)(1)(A)-(B), 42 U.S.C. 
6293(b)(1)(A)-(B). The test procedures measure the energy efficiency, 
energy use, or estimated annual operating cost of a covered product 
during a representative average use cycle or period of use. They must 
not be unduly burdensome to conduct. Section 323(b)(3), 42 U.S.C. 
6293(b)(3). A test procedure is not required if DOE determines by rule 
that one cannot be developed. Section 323(d)(1), 42 U.S.C. 6293(d)(1). 
The water heater test procedures appear at Title 10 Code of Federal 
Regulations (CFR) part 430, subpart B, appendix E.
    The Act prescribes an initial Federal energy conservation standard 
for each of the listed covered products, except television sets. The 
Department is authorized to amend these standards. Section 325, 42 
U.S.C. 6295. Any new or amended standard must be designed to achieve 
the maximum improvement in energy efficiency that is technologically 
feasible and economically justified. Section 325(o)(2)(A), 42 U.S.C. 
6295(o)(2)(A). The Department's current review of standards is for 
water heaters. Section 325(e), 42 U.S.C. 6295(e).
    Section 325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i) provides that 
before DOE determines whether a standard is economically justified, it 
must first ask

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for comments on a proposed standard. After reviewing comments on the 
proposal, DOE must determine that the benefits of the standard exceed 
its burdens, based, to the greatest extent practicable, on a weighing 
of the following seven factors:
    (1) The economic impact of the standard on the manufacturers and 
the consumers of the products subject to the standard;
    (2) The savings in operating costs throughout the estimated average 
life of the covered product in the type (or class) compared to any 
increase in the price of, or in the initial charges for, or maintenance 
expenses of, the covered products which are likely to result from the 
imposition of the standard;
    (3) The total projected amount of energy or water savings likely to 
result directly from the imposition of the standard;
    (4) Any lessening of the utility or the performance of the covered 
products likely to result from the imposition of the standard;
    (5) The impact of any lessening of competition, as determined in 
writing by the Attorney General, that is likely to result from the 
imposition of the standard;
    (6) The need for national energy and water conservation; and
    (7) Other factors the Secretary considers relevant.
    In addition, Section 325(o)(2)(B)(iii), 42 U.S.C. 
6295(o)(2)(b)(iii), establishes a rebuttable presumption of economic 
justification in instances where the Secretary determines that ``the 
additional cost to the consumer of purchasing a product complying with 
an energy conservation standard level will be less than three times the 
value of the energy, and as applicable, water, savings during the first 
year that the consumer will receive as a result of the standard, as 
calculated under the applicable test procedure . . .'' The rebuttable 
presumption test is an alternative path to establishing economic 
justification.
    Section 327 of the Act, 42 U.S.C. 6297, addresses the effect of 
Federal rules on State laws or regulations concerning testing, 
labeling, and standards. Generally, all such State laws or regulations 
are superseded by the Act, unless specifically exempted in Section 327. 
The Department can grant a waiver of preemption in accordance with the 
procedures and other provisions of Section 327(d) of the Act. 42 U.S.C. 
6297(d).

B. Background

1. Current Standards
    The existing water heater efficiency standards have been in effect 
since 1991. Energy efficiency is measured in terms of an energy factor 
(EF), which measures overall water heater efficiency and is determined 
by the DOE test procedure. 10 CFR part 430, subpart B, appendix E. The 
water heater efficiency standards are as follows:
    <bullet> electric, EF = 0.93--(0.00132 x rated volume)
    <bullet> gas-fired, EF = 0.62--(0.0019 x rated volume)
    <bullet> oil-fired, EF = 0.59--(0.0019 x rated volume)
where rated volume is the water storage capacity of a water heater in 
gallons, as specified by the manufacturer.
2. History of Previous Rulemakings
    On September 28, 1990, DOE published an Advance Notice of Proposed 
Rulemaking (ANOPR) announcing the Department's intention to revise the 
existing water heater efficiency standard. (55 FR 39624). On March 4, 
1994, DOE proposed a rule to revise the energy conservation standards 
for water heaters, as well as a variety of other consumer products. (59 
FR 10464). On January 31, 1995, we published a determination that we 
would issue a revised notice of proposed rulemaking (NOPR) for water 
heaters. (60 FR 5880). This is the revised proposal for amending the 
energy efficiency standards for water heaters.
3. Process Improvement
    The fiscal year (FY) 1996 appropriations legislation imposed a 
moratorium on proposed or final rules for appliance efficiency 
standards for FY 1996. Pub. L. 104-134. During the moratorium, the 
Department examined the appliance standards program and how it was 
working. Congress advised DOE to correct the standards-setting process 
and to bring together stakeholders (such as manufacturers and 
environmentalists) for assistance. Therefore, we consulted with energy 
efficiency groups, manufacturers, trade associations, state agencies, 
utilities and other interested parties to provide input to the process 
used to develop appliance efficiency standards. As a result, on July 
15, 1996, the Department published a Final Rule: Procedures for 
Consideration of New or Revised Energy Conservation Standards for 
Consumer Products (referred to as the Process Rule) (61 FR 36974), 
codified at 10 CFR part 430, subpart C, appendix A.
    The Process Rule states that for products, such as water heaters, 
for which DOE issued a NOPR prior to August 14, 1996, DOE will conduct 
a review to decide whether any of the analytical or procedural steps 
already completed should be repeated. (61 FR 36982). DOE completed this 
review and decided to use the Process Rule, to the extent possible, in 
the development of the revised water heater standards.
    We developed an analytical framework for the water heater standards 
rulemaking for our stakeholders, which we presented during a water 
heater workshop on June 24, 1997. The analytical framework described 
the different analyses (e.g., LCC, payback and manufacturing impact 
analyses (MIA)) to be conducted, the method for conducting them, the 
use of new LCC and national energy savings (NES) spreadsheets, and the 
relationship between the various analyses.
4. Test Procedures
    The DOE test procedure determines the water heater EF, which is a 
measure of overall water heater efficiency. Two other water heater 
performance characteristics determined by the DOE test procedures are 
the overall heat transfer coefficient (UA) and the recovery efficiency 
(RE) for gas and oil-fired water heaters. The UA is referred to as the 
standby heat loss coefficient of the storage tank. It is a measure of 
the amount of heat in British thermal units (Btus) lost from a water 
heater in one hour. The RE is defined as the ratio of energy delivered 
to the water to the energy content of the fuel consumed by the water 
heater.
    The Act does not allow DOE to set energy standards for a product 
unless there is a test procedure. The Department published a test 
procedure on May 11, 1998, that revised the first-hour rating of 
storage-type water heaters, added a new rating for electric and gas-
fired instantaneous water heaters and amended the definition of a heat 
pump water heater. (63 FR 25996). This revision did not change the test 
method for determining energy efficiency standards.

III. Analysis and Methodology

    This section describes the analyses and methodologies to be used in 
this rulemaking. It includes a general introduction to each analysis 
section and provides a discussion of issues relative to the water 
heater rule (see Chapter 2 of the TSD).

A. Market and Technology Assessment

    The market and technology assessment characterizes the relevant 
product markets and existing

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technology options including prototype designs.
1. General
    When initiating a standards rulemaking, the Department develops 
information on the present and past industry structure and market 
characteristics of the product(s) concerned. This activity consists of 
both quantitative and qualitative efforts to assess the industry and 
products based on publicly available information. Issues to be 
addressed include: (1) manufacturer market share and characteristics; 
(2) trends in the number of firms; (3) the financial situation of 
manufacturers; (4) existing non-regulatory efficiency improvement 
initiatives; and (5) trends in product characteristics and retail 
markets. The information collected serves as resource material to be 
used throughout the rulemaking.
2. Product Specific
    There are five major manufacturers in the residential water heater 
market. We estimate they have the following market shares as of 1997: 
Bradford White 10%, American and AO Smith 16% each, Rheem 28% and State 
Industries 29%; all others add up to 1%. Annual residential water 
heater shipments (i.e., the total number of water heaters delivered to 
and installed in consumers' homes) have gradually increased from 7.4 
million units in 1987 to 9.1 million units per year in 1997.
    Financial information for most water heater manufacturers is not 
publicly available, with only one publicly traded water heater 
manufacturer in the United States. Information from the U.S. Census 
Bureau Current Industrial Reports for 1997 and other public sources 
shows industry shipments with a value of $1.3 billion for 9.1 million 
water heaters. Typical industry profits are 6 percent of revenues.
    There is no current national non-regulatory water heater efficiency 
improvement program. However, DOE is considering an Energy 
Star<Register> water heater program and currently is supporting a 
program to demonstrate a 50 gallon, 6,000 Btu input heat pump water 
heater and to develop a residential condensing gas-fired water heater. 
If successful, the DOE heat pump water heater program will eliminate 
the installation, service and some of the product utility issues that 
formed most of our basis for screening out heat pump water heaters. 
This DOE heat pump water heater is designed to be a ``drop-in'' 
replacement for a standard electric water heater. Therefore it requires 
only standard plumbing and wiring connections and it will fit in most 
electric water heater closets. However, it still will not fit under 
counters or in spaces less than four feet tall.
    In addition, the Federal Energy Management Program's (FEMP) 
``Buying Energy Efficient Products Program'' identifies the upper 25% 
energy efficient residential gas and electric water heaters. These 
levels are recommended to Federal agencies with the ultimate goal of 
moving the entire U.S. market toward higher energy efficiency. We are 
aware of a few gas and electric utility programs that encourage the use 
of higher efficiency water heaters, including consumer rebates or 
dealer incentive programs, financing, consumer education, and rental/
guarantee programs that often include installation and maintenance 
costs. In the past decade, the number of these utility programs has 
diminished considerably due to restructuring of the electric and gas 
utility industries.
    The water heater market is largely a replacement market, accounting 
for 80-85% of sales. The remaining 15-20% of sales are for new 
installations. Of the 9.1 million water heaters sold annually, we 
estimate plumbing wholesalers sell approximately 4.3 million, while 
retail outlets such as Sears, Wards, Home Depot, and Lowes sell the 
majority of the remaining 4.8 million. Characteristics of the 
replacement market include: (1) consumers typically replace the 
existing water heater with one of similar fuel and capacity; (2) 
consumers consider the ease of installation--it has to fit in the 
existing space; (3) consumers usually replace water heaters under 
emergency conditions when they fail; and (4) consumers typically ask 
for and follow the installers' recommendations.
    Residential water heating uses about 2.6 quads per year of primary 
energy out of 19 quads (year 1997) for all residential buildings, at a 
cost of $26.4 billion. Where natural gas is available, 74% of 
households use gas to heat water and 24% heat with electric. Where gas 
is not available, 84% of households use electric water heaters and the 
remaining households use oil-fired water heaters or liquid petroleum 
gas (LPG).

B. Technological Feasibility

    Under the guidelines in the Process Rule, DOE will eliminate from 
consideration, early in the process, any design options that present 
unacceptable problems with respect to technological feasibility, 
practicability to manufacture, install, and service, product utility or 
unavailability, or safety. In order to conduct the screening analysis, 
the Department gathers information regarding all current technology 
options and prototype designs. In consultation with interested parties, 
the Department develops a list of design options for consideration in 
the rulemaking. All technologically feasible design options are 
candidates in this initial assessment. We identified heat pump water 
heaters and gas condensing water heaters as the maximum technologically 
feasible designs based on measured EF's greater than 2.0 and 0.9, 
respectively.
    The Department considers design options technologically feasible if 
they are already in use by the respective industry or research has 
progressed to the development of a working prototype. The Process Rule 
sets forth a definition of technological feasibility as follows: 
``Technologies incorporated in commercial products or in working 
prototypes will be considered technologically feasible.'' 10 CFR 430, 
subpart C, appendix A(4)(a)(4)(i).
    The Department has determined that all of the design options 
discussed in today's notice are technologically feasible as required by 
Section 325(o)(2)(A) of EPCA, as amended.

C. Screening Analysis

    Screening identifies those design options the Department will 
consider in the engineering analysis. This includes all technologically 
feasible design options not eliminated in the screening analysis. The 
screening analysis provides a basis for eliminating certain problematic 
design options from further consideration early in the process. 
Initially, the candidate design options encompass all those 
technologies considered to be commercially available or in working 
prototypes. The Process Rule establishes the factors DOE uses for 
screening design options. The factors are as follows:
    <bullet> Technological feasibility. DOE will only consider 
technologies that are incorporated in commercially available products 
or in working prototypes.
    <bullet> Practicability to manufacture, install, and service. A 
technology must be able to be mass produced, installed and serviced on 
a scale that will serve the relevant market at the time of the 
effective date of the standard.
    <bullet> Impacts on product utility to consumers. DOE must 
determine if any energy efficiency designs have significant adverse 
impacts on product utility, including impacts on significant subgroups 
of consumers, or if a product would become unavailable with performance 
characteristics that are substantially the same as products presently 
available in the U.S.

[[Page 25046]]

    <bullet> Adverse impacts on health and/or safety. DOE will not 
consider any designs that have significant adverse impacts on health or 
safety.

10 CFR part 430, subpart C, appendix A(4)(a)(4) and (5)(b).
1. Product Classes
    DOE divides water heaters into classes based on the type of fuel 
used to heat water: electricity, natural gas/LPG, and oil. Different 
energy efficiency standards will apply to different product classes. 
DOE defines residential storage water heaters in the following classes:
    <bullet> An electric water heater has a storage capacity of 20-120 
gallons and a heat input of 12 kilowatt (kW) or less.
    <bullet> A gas-fired water heater has a storage capacity of 20-100 
gallons and a heat input of 75,000 Btu per hour or less.
    <bullet> An oil-fired water heater has a storage capacity of 50 
gallons or less and a heat input of 105,000 Btu per hour or less.
2. Baseline Units
    In order to analyze design options for energy efficiency 
improvements, the Department defines a baseline unit. For each product 
class, the baseline unit is one that meets the existing standard. We 
determined the following baseline units for each fuel type:
    <bullet> The baseline electric water heater is a 50-gallon glass-
lined steel tank with 1.5 inch polyurethane foam insulation and two 
4,500 watt heater elements. The baseline EF is 0.86.
    <bullet> The baseline gas water heater is a 40-gallon glass-lined 
steel tank with a nominal 4 inch center flue. The heat input rate is 
40,000 Btu/hr with a 450 Btu/hr pilot light. The tank is insulated with 
1 inch of polyurethane foam. The energy factor is 0.54 and the recovery 
efficiency is 76%.
    <bullet> The baseline oil-fired water heater is a 32 gallon glass-
lined steel tank insulated with 1 inch of polyurethane foam. The heat 
input rate is 90,000 Btu/hr and it has a center flue. It has an EF of 
0.53 and the RE is 75%.
3. Screening of Design Options
    In the water heater rulemaking analysis, DOE considered three 
categories of design options: designs that reduce standby losses, 
designs that improve combustion efficiency, and designs that improve 
system efficiency. For a complete description of these design options, 
see Chapter 4.2 in the TSD.
a. Design Options That Reduce Standby Losses
    Some designs that reduce standby losses--heat traps and increased 
jacket insulation--are frequently applicable to all fuel types. A heat 
trap is a device that keeps hot water from circulating into a piping 
distribution system because of natural convection. Manufacturers 
insulate water heaters by filling the cavity between the jacket and the 
tank with polyurethane foam insulation. Most water heaters on the 
market today have at least 1 inch thick foam insulation, while some 
models have 2- or 3-inch thick insulation. An alternate way to reduce 
jacket heat losses is to use advanced insulation materials such as 
evacuated panels.
    The following design options reduce standby losses, but usually are 
restricted to one type of fuel:
    <bullet> Plastic water heater tanks reduce conducted heat. This 
design option is used with electric water heaters or with indirect 
water heating techniques.
    <bullet> A manufacturer can insulate the bottom of the tank, but 
this design option can be used only with electric water heaters or with 
gas or oil-fired burners mounted beside the water tank and using a heat 
exchanger to transfer heat to the water.
    <bullet> A damper installed either at the flue exit or in the vent 
pipe of gas water heaters minimizes off-cycle heat losses.
    <bullet> The side-arm heater design avoids flue losses by using a 
small, separate heat exchanger to heat water and a small circulation 
pump on gas-fired water heaters.
    <bullet> An electronic ignition device can replace a standing pilot 
ignition system in gas-fired water heaters.
b. Design Options That Improve Combustion Efficiency
    DOE considered six design options that improve combustion 
efficiency. Four design options are applicable for gas-fired and three 
for oil-fired water heaters:
    <bullet> First, increased heat exchange from a flue baffle, 
multiple flues, or submerged combustion improves heat transfer. The 
flue baffle is a twisted strip of metal inserted into the flue of a gas 
or oil-fired water heater that improves heat transfer to the flue. 
Increased heat exchanger surface area, usually from multiple flues, 
improves the heat transfer from the flue gas to the water. In submerged 
combustion or direct-fired combustion systems for gas-fired water 
heaters, water is heated by direct contact with the flue products.
    <bullet> Second, a condensing gas-fired water heater condenses some 
of the water vapor in the flue gas and extracts more heat.
    <bullet> Third, an inverted U-shaped flue increases recovery 
efficiency and reduces standby losses of oil-fired water heaters.
    <bullet> Fourth, a thermophotovoltaic or thermoelectronic generator 
uses silicon photovoltaic cells (energized by heat or light from the 
burning fuel) to generate power to run a fan and operate the electronic 
ignition and controls on a gas-fired water heater. This is more 
efficient because it eliminates the standing pilot and does not require 
any connection to an outside electric power source.
    <bullet> Fifth, the two-phase thermosiphon is a heat pipe that 
transfers heat from the gas burner to the storage tank.
    <bullet> Sixth, the air-atomized burner (oil-fired only) uses a 
stream of air to atomize the oil. This improves combustion efficiency 
and results in less unburned fuel in the flue.
    The heat pump is the only design option that improves the heating 
efficiency of an electric water heater. A heat pump water heater can 
double the EF of an electric water heater compared to a resistance type 
because it uses heat from the air within the house. This can cause 
beneficial dehumidification or unwanted overcooling. During those times 
when heat gains from normal household activities or from the 
environment are not large enough to keep the house comfortable, e.g., 
the winter, the house heating system must provide the makeup heat to 
the house.
c. Design Options That Improve System Efficiency
    There are several system improvement applications:
    <bullet> The timer design option limits the amount of time during 
the day when an electric water heater may be energized.
    <bullet> The solar pre-heat technique uses solar collectors as pre-
heaters for a standard electric or gas storage-type water heater.
    <bullet> The drain water heat recovery system uses a heat exchanger 
to recover waste heat from the drain water.
    <bullet> A tempering tank--an un-insulated storage tank installed 
in a conditioned space-- raises the inlet water temperature to the 
ambient temperature.
    <bullet> Dip-tubes that prevent the buildup of sediment on the 
bottom of the tank may reduce the degradation of efficiency and prolong 
the life of the water heater.
    While system improvement features may save energy, they are 
typically a part of the water heater system, not the water heater. For 
example, the tempering tank is a separate tank that is

[[Page 25047]]

plumbed to the water heater. Each of these designs was eliminated in 
the screening analysis because none is defined as a water heater in the 
Act. Section 321(27), 42 U.S.C. 6291(27).
4. Results of Screening Analysis
    In accordance with the Process Rule, the Department conducted a 
screening analysis and published the results in ``Technology Assessment 
and Screening Analysis,'' Appendix B: Supplement to the Water Heater 
Rulemaking Framework, January 1998. DOE notified stakeholders of the 
availability of this document in the Federal Register on January 14, 
1998. (63 FR 2186).
    We received many comments on the elimination of the heat pump water 
heater as a design option. Several stakeholders commented that DOE 
should consider all design options, including heat pump water heater 
designs. (American Gas Association (AGA), No. 28 at 4; Okaloosa, No. 29 
at 1; Clearwater, No. 30 at 1; Mesa, No. 34 at 1; Barley, No. 32 at 1; 
13 Letters from Various Gas Utilities, No. 31 at 1; and Laclede, No. 47 
at 2).
    DOE eliminated the heat pump water heater due to issues concerning 
the practicability to manufacture, install, and service on the scale 
necessary to serve the relevant market at the time of the effective 
date of the standard and product utility of these units. DOE eliminated 
heat pump water heaters after careful consideration of the current 
electric resistance and heat pump water heater markets and 
manufacturing technology, and after applying the factors to be 
considered in screening design options contained in the Process Rule. 
10 CFR 430, subpart C, appendix A(4)(a)(4) and (5)(b). See Chapter 
4.2.2.10 in the TSD for a discussion of the heat pump water heater 
screening analysis.
    Several other stakeholders, including Gas Appliance Manufacturers 
Association (GAMA), Edison Electric Institute (EEI), Southern Company 
(SC), and Virginia Power (VP) supported DOE's decision to screen out 
heat pump water heaters. (GAMA, No. 51 at 4; EEI, No. 36 at 2; SC, No. 
12 at 2 and No. 42 at 1; and VP, No. 45 at 3).
    Similarly, the screening criteria were applied to condensing gas-
fired water heaters. DOE eliminated gas condensing water heaters 
because we determined they are not technologically feasible. 10 CFR 
430, subpart C, appendix A(4)(a)(4) and (5)(b). See Chapter 4.2.2.10 in 
the TSD for a discussion of the condensing gas-fired water heater 
screening analysis.
a. Heat Pump Water Heaters
    Practicability to Manufacture. From meetings with the water heater 
industry, DOE has determined that water heater manufacturers would not 
have the lead time necessary to ramp up heat pump water heater 
production to present sales levels in the three-year time frame 
established by the NOPR. Since the late 1970s, sales of heat pump water 
heaters have not exceeded 10,000 per year (0.33% of electric water 
heater sales, 0.17% of all water heater sales) and presently sales of 
residential heat pump water heaters are less than 4,000 residential 
water heaters a year in categories covered by the present rulemaking. 
None of the five major manufacturers of residential water heaters 
currently have a heat pump design in their residential product line, 
and only two (State and Rheem) have had a heat pump water heater in 
their product lines in the last 10 years.
    LaClede Gas commented that DOE should not screen heat pump water 
heaters out as a design option because DOE is presently supporting the 
development of a residential heat pump water heater product. (LaClede, 
No. 25 at 3) The heat pump water heater design being researched by DOE 
is an integral heat pump water heater design which uses a small 
compressor with 40% less heating capacity than any used in existing 
heat pump water heater products (and has about 25% of the heating 
capacity of a typical electric resistance hot water heater). This 
should assist in installation in smaller spaces as it will physically 
use smaller components (particularly the compressor and evaporator/fan 
system), and will likely be quieter in operation. Present designs of 
the DOE heat pump re-inject condensate back into the air to be re-
condensed in the evaporator. DOE believes this may simplify 
installation, at some expense to system capacity, efficiency and 
dehumidification of the residence.
    The integral heat pump water heater design proposed by DOE uses a 
50-gallon tank, but even the small compressor and heat exchanger used 
in that design adds approximately a foot in height to that tank. The 
attached 50-gallon storage tank is sized to provide ample water for a 
typical day's use in most residences. Smaller tank sizes are not being 
proposed, as the cost effectiveness of the heat pump decreases rapidly 
with smaller tank sizes and characteristic lower water usage. 
Presently, the smallest integral heat pump water heater design 
available in the U.S. is an 80-gallon unit. The design proposed by DOE 
would still need access to the same amount of household heat any heat 
pump water heater would require to serve the residence load; however, 
the lower heat extraction rate of the DOE unit may allow for 
installation in locations with smaller surrounding air volume than is 
required for existing designs.
    The unit is being developed with input from DOE, Arthur D. Little, 
and Oak Ridge National Laboratory and has been designed from the outset 
to address many of the known market barriers facing the adoption of 
residential heat pump water heaters. The first barrier is the high cost 
of heat pump water heaters due to the heat pump motor, compressor and 
controls. A second barrier is the more complex (and more costly) 
installation for heat pump water heaters. There are size, air flow, 
filter replacement and condensate removal considerations. Third, poor 
reliability of many models has caused a lack of consumer confidence. 
Fourth, heat pump water heaters require more maintenance. Presently, no 
mass market service infrastructure exists.
    Preliminary field tests of the DOE design are likely to start in 
the spring of 2000. Larger scale utility testing is slated for late 
2000 to 2001. Accelerated reliability testing is also scheduled 
sometime after initial field testing has resulted in a more or less 
stable product. If field and reliability testing are positive, limited 
commercial production and sales are possible by 2003. Actual production 
and sales would be through an existing air-conditioning equipment 
manufacturer who would likely purchase storage tanks from an existing 
water heater manufacturer. Because of the issues that have plagued heat 
pump water heaters in the past, DOE is requiring its partners to 
introduce the product cautiously, correcting problems encountered 
during field testing and fully testing the corrections. A market study 
done by Arthur D. Little projected potential sales for the DOE design 
up to 300,000 units per year 10 years after commercial introduction, or 
7.5% of present electric water heater sales. (ADL Report #46230 to 
DOE).
    Although most manufacturers could develop, either alone or in 
partnership with others, a working heat pump water heater design in the 
next few years, there are significant difficulties in capitalizing and 
building heat pump water heater manufacturing facilities to provide for 
the present 4 million plus electric water heater sales annually.
    Manufacturers of heat pump water heaters would need to design a 
completely new product and build new production facilities to supply 
the current electric water heater market.

[[Page 25048]]

This market has a market volume greater than that of all room air-
conditioner shipments in the U.S. (1993 DOE Report, EE-0009). In a 1994 
A. D. Little report, the estimated investment cost to convert to heat 
pump water heaters was $750 million. Given the current levels of 
profitability of the water heater industry and the limited capital 
resources, some manufacturers will not be able to finance these costs. 
(Dieckmann, Topping and Shorey, August 31, 1994, ADL Report to GAMA, 
``Technical Analysis of the Proposed DOE Heat Pump Water Heater Energy 
Efficiency Standard'')
    In addition, given the high initial cost for heat pump water 
heaters, poor reliability with past heat pump water heater designs, and 
anticipated impact on consumer utility, initial sales of electric water 
heaters after a heat pump water heater standard may be low as consumers 
look for other alternatives. With a government imposed time frame for 
shifting all production to heat pump water heaters and a shifting 
market size, it is unclear how the electric water heater industry could 
plan and secure investments to satisfy an unknown final market volume.
    Considering these issues with regard to manufacturability and 
achieving sufficient production volume, DOE has concluded that the 
screening criterion of practicability to manufacture, on the scale 
necessary to serve the relevant market at the time of the effective 
date of the standard, will not be met.
    Practicability to Install. Based on our analysis of current heat 
pump water heater designs and the DOE drop-in heat pump water heater 
prototype, we do not believe heat pump water heaters can be used as 
direct replacements for electric water heaters in many applications. 
There are many replacement water heater applications where present 
electric resistance water heaters are installed in small spaces, in 
attics and under counters. An example of such small spaces are the 
approximately 27% (10 million) of all electric water heaters installed 
in residences smaller than 1,000 ft <SUP>2</SUP> (average size: 
approximately 760 ft <SUP>2</SUP>). In many of these installations, 
space restrictions would make it impossible to simply replace the 
existing electric resistance water heater with any of the existing heat 
pump water heater designs sold today. The DOE ``drop-in'' water heater 
is a candidate for some of these applications, but its current design 
does not address the problems of small spaces or small sizes.
    Even the small (4,000-6,000 Btu/h) heat pump unit for the DOE 
``drop-in'' water heater mounted on top of a tank will add 
approximately 8-12 inches on top of the tank for compressor, evaporator 
coils, and evaporator fan. Assuming no change in tank size from the 
electric resistance model, the extra height of the heat pump design 
will present installation problems where the existing water heater 
enclosure is height limited, such as many existing lowboy water heater 
installations.
    GAMA reported that electric lowboy shipments account for about 18 
percent of residential electric water heater shipments. (GAMA, No. 91 
at 1). DOE appreciates the electric lowboy shipment information from 
GAMA.
    About 18% of electric water heater sales are lowboy models. An 
integral heat pump water heater would not fit into these locations. 
Perhaps 50% of the lowboy sales would require an add-on heat pump unit. 
(The other 50% are for new construction.) Additionally, over one 
million standard sized electric water heaters per year are installed in 
residences of 1,000 ft <SUP>2</SUP> or less. Perhaps as many as half of 
these installations would also require an add-on heat pump unit. The 
lowboy and small residence replacements could equal 850,000 add-on heat 
pump water heaters per year. These add-on heat pump units require a 
space with at least 100 cubic feet per minute of warm air and wiring 
and plumbing connections (probably through one or more walls) for water 
pipes and a condensate drain. We would characterize this installation 
as ``difficult.'' Without an extensive survey, we are unable to 
determine how many of these difficult installations would be feasible, 
although costly, and how many would result in loss of product utility 
as discussed later in this section.
    We have determined that almost a million households could be 
affected each year. Therefore, DOE eliminated heat pump water heaters 
as a design option from further consideration because of problems 
concerning practicability to install on the scale necessary to serve 
the relevant market at the time of the effective date of the standard.
    Practicability to Service. We are also aware of the thousands of 
comments from interested consumers about heat pump water heaters in our 
1994 NOPR. These comments cited lack of a good service infrastructure, 
noise, and reliability, among other factors. We have more recent 
comments from Northeast Utilities (NU) that significant (10%) 
reliability problems are still evident in some heat pump water heater 
designs. (NU, No. 4 at 1).
    Two hundred sixteen comments to the 1994 rulemaking process (docket 
EE-RM-90-201) claimed that ``the infrastructure to service heat pump 
water heaters is not capable of handling a large quantity of heat pump 
water heater units.'' The issues faced in service and maintenance of 
heat pump water heaters have not changed since 1994. The present 
installation and service infrastructure for electric resistance water 
heaters consists, for the most part, of plumbers.
    Heat pump water heaters are more complex in design and based on 
fundamentally different technology from electric resistance water 
heater designs. Because of this, they require a broader range of skills 
to service the units. Plumbers generally do not have training or 
background in repair of appliances like a failing heat pump water 
heater. Generally, this type of repair work is done by small appliance 
repair personnel who repair refrigerators, freezers, room air 
conditioners, and other ``white'' goods (e.g., washing machines). 
According to the Bureau of Labor and Statistics, of the approximately 
71,000 home appliance repair workers in the U.S., two out of three work 
directly for department stores or household appliance stores. (1998-
1999 Occupational Outlook handbook, U.S. Dept. of Commerce, BLS) These 
stores represent a small fraction of water heater sales but might be 
potential sales and service outlets for heat pump water heaters.
    Presently, no mass-market servicing infrastructure for heat pump 
water heaters exists. While the air conditioning industry could provide 
servicing capabilities, only one company has any relationship with 
major water heater manufacturers or with plumbers who install water 
heaters. There is no precedent in the history of the U.S. major 
appliance industries to suggest that a new service and repair 
infrastructure could develop, on the scale of several million units per 
year, in a roughly three-year time frame.
    Therefore, DOE eliminated heat pump water heaters as a design 
option from further consideration because of problems concerning 
practicability to service on the scale necessary to serve the relevant 
market at the time of the effective date of the standard.
    Product Utility. Heat pumps need a certain amount of space for 
proper operation because a heat pump heats water by removing heat from 
the household air. Many heat pump water heaters currently available 
require a volume of at least 1,000 ft <SUP>3</SUP> of heated air to 
provide adequate heat exchange and minimize overcooling of the space, 
which can impact performance. Approximately 14% of all households

[[Page 25049]]

are smaller than 1000 ft <SUP>2</SUP> and presently use electric water 
heaters. The volume of heated air required for a heat pump is equal to 
12% of the floor space of a 1,000 ft <SUP>2</SUP> home. Therefore, in 
smaller residences, current or prototype heat pump units would have to 
be located in the living space, or have vigorous (100 cubic feet per 
minute) air exchange within the living space. Such a location can lead 
to significant homeowner dissatisfaction due to loss of space occupied 
by the unit and related piping, as well as the potential for noise of 
the fan and compressor. This is particularly a concern in small, slab-
on-grade housing, mobile/manufactured homes or apartments.
    If there is no space to incorporate both the water tank and the 
refrigeration subsystem in the same location, a reduced tank size may 
have to be installed. This could cause a 20% to 25 % loss of tank 
volume on a standard 50 gallon water heater. Any substantial reduction 
in the tank size to accommodate the heat pump would reduce the first 
hour rating, since first hour rating depends on tank size and reheat 
capacity. The first hour rating is, ``an estimate of the maximum volume 
of ``hot'' water that a storage-type water heater can supply within an 
hour that begins with the water heater fully heated.'' (10 CFR 430, 
subpart B, appendix E). We interpret losses of first hour rating as a 
loss of product utility.
    DOE believes heat pump water heaters should be eliminated from 
further consideration because there would be a loss of utility to a 
significant portion of the population (10 million households). 
Therefore, because of this significant adverse impact to significant 
subgroups of consumers, the Department has eliminated heat pump water 
heaters as a design option from further consideration.
    In summary, DOE has eliminated residential heat pump water heaters 
as a design option for this rulemaking because they fail to meet two of 
the three screening criteria listed earlier--namely, they are 
impracticable to manufacture, install, and service and have adverse 
impacts on product utility. There is no foreseeable means for the 
technology to advance enough in the short term to allow heat pump water 
heaters to fill market needs and to continue to provide a reasonable 
level of consumer utility.
    As a result of its screening analysis, DOE has determined that heat 
pump water heaters are not economically justified. This conclusion is 
based on the following factors: (1) a capital investment that is 2.3 
times the current industry net present value; (2) adverse utility 
impacts on about 10 million households living in homes with less than 
1,000 square feet; and (3) adverse impacts on low income and seniors-
only households due to a price increase about 3 times the expected 2003 
baseline price for electric water heaters.
b. Gas Condensing Water Heaters
    Although several manufacturers offer gas condensing water heaters, 
these are only in commercial sizes. Results from a GRI sponsored field 
test showed no serious reliability or durability problems and confirmed 
technical feasibility. (ASHRAE Transactions, 1987, 93(2) p. 1485-1500.) 
However, DOE is not aware of any prototypes or commercially available 
residential condensing gas-fired water heaters. Therefore, we have 
eliminated this design option based on a lack of technological 
feasibility. We discuss the details in Chapter 4.2.2 of the TSD.
c. Other Water Heater Design Options
    DOE has eliminated air-atomized oil burners, power vents, and 
increased heat exchanger surface areas. Based on comments, DOE 
eliminated air-atomized burners on the basis that they are not 
technologically feasible because the prototype has not been applied to 
water heaters. We eliminated power vents because they require special 
venting systems that cannot be installed in applications such as 
existing multifamily homes and some existing town homes and condos. 
However, the Department is aware of a new, low volume fan that may 
allow power venting of an oil-fired water heater unit with conventional 
negative draft vent systems. Test results of this technology are not 
available. We eliminated the increased heat exchanger surface areas 
(for gas-fired water heaters) because improved flue baffles can provide 
the same efficiency improvement and are preferred by manufacturers.
    After considering the above, the following are the design options 
considered for the rulemaking (see Table 1).

              Table 1.--Design Options Used in the Analysis
------------------------------------------------------------------------
  Design options--description        Gas        Electric         Oil
------------------------------------------------------------------------
Heat traps....................            X             X             X
Plastic tank..................      <SUP>(1)</SUP> X               X
Increased jacket insulation...            X             X             X
Insulating the tank bottom      ............            X
 (electric only)..............
Improved flue baffle/forced               X   ............            X
 draft........................
Increased heat exchanger                  X   ............            X
 surface area.................
Flue damper (electro-                     X   ............
 mechanical)..................
Side-arm heater...............            X   ............
Electronic (or interrupted)               X   ............           X
 ignition.....................
------------------------------------------------------------------------
<SUP>1</SUP> used only in conjunction with the side-arm heater option.

D. Engineering Analysis of Design Options

    The engineering analysis determines the maximum technologically 
feasible energy efficiency level, calculates unit energy savings and 
payback, and estimates the retail price for each design option and 
combination of design options. It analyzes the design options 
identified as a result of the screening analysis. This section 
discusses DOE's analytical tools and the critical assumptions DOE used 
in the water heater engineering analyses. We also discuss two 
initiatives by other Federal agencies that impact the rulemaking 
analyses.
1. Other Federal Agencies' Initiatives
    Two actions by other Federal agencies outside of the DOE efficiency 
standards process will affect our engineering analyses. First, the U.S. 
Environmental Protection Agency (EPA) is requiring a phase out of the 
blowing agent currently used by the water heater industry for foam 
insulation (HCFC-141b). Second, manufacturers have reached a voluntary 
agreement with the Consumer Product Safety Commission (CPSC), to 
produce gas-fired water heaters resistant to ignition of flammable 
vapors. The first will affect the efficiency of water

[[Page 25050]]

heaters, and the second will increase the price of gas-fired water 
heaters.
    Most residential water heaters are insulated with polyurethane foam 
in the cavity between the tank and the jacket. Currently, water heater 
manufacturers use a hydrochlorofluorocarbon, HCFC-141b, as a blowing 
agent for this insulation. HCFC-141b is an ozone-depleting blowing 
agent and, as a result of the Montreal Protocol, the EPA has scheduled 
the phase-out of this blowing agent by January 1, 2003. Water heater 
manufacturers must use another blowing agent after that time.
    A number of alternative blowing agents are available. The industry 
is considering HFC-245fa, HFC-356mfc, HFC-134b, cyclopentane and water 
blown foam. DOE decided to analyze two blowing agents--water-based and 
HFC-245fa. We based our decision on a number of criteria, including 
zero ozone depletion potential, low global warming potential, 
availability by 2003, and price. In our preliminary analysis, presented 
at the July 1999 Workshop, we only analyzed one of the alternatives--
water blown insulation. Some stakeholders raised concerns about our 
failure to include HFC-245fa blown insulation in our preliminary 
analysis. Therefore, we added HFC-245fa blown insulation to our 
analysis.
    We used HFC-245fa and water blown foam in our analysis. For cost 
information, Honeywell, the licensee to manufacture HFC-245fa in the 
U.S., provided estimates of HFC-245fa costs. For efficiency data, we 
used published laboratory measurements of physical parameters. In order 
to keep the baseline efficiency (those with HCFC-141b insulation) and 
the energy use characteristics of water heaters with HFC-245fa 
insulation the same, we modeled it with appropriately thicker 
insulation. We also increased the amount and cost of steel used for the 
water heater jacket in addition to the extra volume and cost of 
insulation. The analysis and test results using HFC-245fa and water 
blown foam to evaluate design options can be found in Chapter 3.4.1 of 
the TSD.
    Many comments addressed the potential of other alternatives. GRI 
claimed other types of insulation may be preferable to HFC-245fa blown 
insulation. (GRI, No. 48 at 2). The Oregon Office of Energy (OOE) 
requested that DOE provide a succinct and complete summary of the 
alternative insulations and why they were not considered in the 
analysis. (OOE, No. 96 at 5).
    In addition to the water/carbon dioxide (CO<INF>2</INF>) and HFC-
245fa blowing agents, there are cyclopentane, HFC-134a, and HFC-365mfc. 
All of these have zero ozone depletion potential and thus will meet the 
Montreal Protocol's requirements. Cyclopentane, widely used in Europe, 
is relatively inexpensive and highly flammable; U.S. manufacturers have 
been cautious about its use. HFC-134a is currently available, but its 
thermal resistance is lower than HFC-245fa. HFC-365mfc may be a good 
potential alternative blowing agent, but it also has a lower thermal 
resistance than HFC-245fa and its price is not available. Our decision 
to analyze both HFC-245fa and water/CO<INF>2</INF> blowing agents 
allowed us to cover the range of performance and costs of the suggested 
alternative blowing agents. We have more detailed information about 
alternative blowing agents in Chapter 3.4 of the TSD.
    Although we have analyzed HFC-245fa as a blowing agent, there is 
continuing concern about its availability. Representatives from 
Honeywell, the licensee to manufacture the material in the U.S., stated 
at the July 1999 workshop that it would have a commercial size plant 
ready to produce HFC-245fa by mid-2002. (July 22, 1999 Water Heater 
Workshop Transcript, pg. 105). We received comments from several 
manufacturers, GAMA, an individual, and an insulation supplier about 
the availability of HFC-245fa and Honeywell's capacity to supply the 
market. GAMA and manufacturers are concerned that Honeywell is the only 
source for HFC-245fa. They are also concerned that manufacturers need 
samples of HFC-245fa soon as it will take about six to nine months to 
replace existing low pressure foaming equipment with high pressure 
equipment and shrinkage tests will take 250 days. (Stepan, No. 86 at 1; 
Bradford White, No. 89 at 2; Vaughn, No. 56 at 1; Rheem, No. 95 at 1; 
GAMA, No. 91 at 2; and Energy Market and Policy Analysis, Inc. (EMPA), 
No. 88 at 9).
    Several comments suggested ways to deal with issues concerning the 
availability of HFC-245fa. The American Council for an Energy-Efficient 
Economy (ACEEE) suggested HCFC-141b could be stockpiled, the EPA could 
be petitioned to extend the phase out of HCFC-141b, or DOE could make 
the new standard conditional on the availability of HFC-245fa. (ACEEE, 
No. 93 at 7). SC and EEI suggested DOE delay implementation of the new 
water heater standard if HFC-245fa based insulation materials are not 
available. (SC, No. 42 at 2 and EEI, No. 39 at 2).
    DOE is concerned about the relatively short time the manufacturers 
have to incorporate a new blowing agent into production and to perform 
the necessary tests to measure results using the new blowing agent. 
Since the choice of insulation blowing agent has a significant impact 
on energy savings and water heater cost, we request stakeholder comment 
on the cost and availability of HFC-245fa and water blown foam, and 
other alternative blowing agents. We also invite comments on approaches 
that would enhance the transition to a new blowing agent for 
manufacturers, including, but not limited to, the timing needed for the 
transition of HFC-245fa, water blown foam, or any other alternative 
blowing agent manufacturers suggest would be appropriate to use in 
implementing a new standard. Manufacturers are requested to submit 
supporting data for alternative blowing agents.
    On September 13, 1999, we received updated information indicating 
that Honeywell had received EPA approval for production of HFC-245fa. 
Honeywell has since announced it would start building a commercial 
plant for producing HFC-245fa in Geismar, Louisiana. Based on 
Honeywell's announcement, we have decided to base our decision on 
insulation blown with HFC-245fa because such insulation is 42% more 
effective in reducing thermal losses than water blown insulation. 
Therefore, since our proposed standard uses HFC-245fa, this notice 
addresses the results based on HFC-245fa blown insulation. However, the 
Department has completed an identical analysis using water blown foam 
in order to anticipate the unlikely event that HFC-245fa does not 
become available.
    The other action affecting this rulemaking is a CPSC initiative to 
make gas-fired water heaters resistant to ignition of flammable vapors. 
Most current designs for gas-fired water heaters rely on a standing 
pilot to ignite the main burner. If flammable vapors are in the air 
near a water heater, there is the possibility of unintended ignition. 
This is a potential safety problem because water heaters are often 
installed in garages and basements, where flammable liquids such as 
gasoline or paint thinners may be used. The CPSC staff recommended 
publication of an advance notice of proposed rulemaking for the 
development of a test procedure that would determine whether a 
particular gas-fired water heater design would ignite flammable vapors. 
However, before the notice was published, the water heater 
manufacturers agreed to voluntarily develop a test procedure and new 
gas burner designs.
    The CPSC worked with GRI and the water heater industry to develop a 
test

[[Page 25051]]

procedure for gas-fired water heater designs that will resist ignition 
of flammable vapors. The American National Standards Institute (ANSI) 
Z21 Committee approved this test procedure in May 1999, but final 
approval by the full ANSI committee is still pending. Gas-fired water 
heaters designed to be resistant to the ignition of flammable vapors 
are now on the market. Manufacturers have agreed to begin marketing 
gas-fired water heaters resistant to ignition of flammable vapors by 
April 2001. DOE will consider those additional economic impacts on 
manufacturers of the transition to designs resistant to flammable 
vapors. The voluntary agreement between manufacturers and the CPSC will 
be implemented by April 1, 2001, which will be close to the effective 
date of this rule.
    The impact of this initiative on the water heater rulemaking 
analyses is an increase in manufacturing cost. Based on discussions 
with the Water Heater Industry Joint Research and Development 
Consortium, DOE decided to add an extra $35 per unit of manufacturer 
cost for designs resistant to ignition of flammable vapors. In this 
analysis, the $35 is applied to the manufacturing cost of all design 
options for gas-fired water heaters, including the baseline design. EEI 
stated that the cost of $35 may be very conservative. (EEI, No. 39 at 
5). We believe until flammable vapor ignition resistant designs are 
widely available in the market, and a market price is established, a 
manufacturer cost of $35 is reasonable. We discussed this during the 
manufacturing interviews, and several agreed with this cost estimate. 
Furthermore, the design does not require electricity for the water 
heater or modifications of the venting system. DOE also anticipates no 
changes in efficiency from flammable vapor ignition-resistant water 
heater designs. DOE will monitor this situation to verify these 
assumptions or to update the analysis, as designs meeting the ANSI 
standard become available.
2. Maximum Technologically Feasible Levels
    Amendments to a standard are required to achieve the maximum 
improvement in energy efficiency that is technologically feasible and 
economically justified. Section 325(o)(2)(A), 42 U.S.C. 6295(o)(2)(A). 
Furthermore, Section 325(p)(2) requires that the Secretary determine 
the maximum technologically feasible level (max tech) for each type (or 
class) of covered product and then, if the proposed standard is not 
designed to achieve the max tech levels, state the reasons that it will 
not meet those levels.
    The Secretary has determined heat pump water heaters for electric, 
and gas condensing water heaters, are the max tech design options. This 
means the max tech level for electric is 1.7 EF and for gas is 0.91 EF. 
The max tech level for oil is 0.61 EF. However, as a result of our 
screening analysis, the max tech levels for electric and gas-fired 
water heaters have been eliminated. Therefore, the proposed standard 
for both electric and gas-fired water heaters will not achieve the max 
tech levels. The reasons for this decision are described in our 
discussion on screening, and in Chapter 4.2.2 of the TSD. Accordingly, 
the Department has satisfied the requirements of Section 325(p)(2), 42 
U.S.C. 6295(p)(2).
    Therefore, we combined the design option technologies that were not 
screened out into successively more efficient design options until we 
reached the highest efficiency levels for each product class. We 
combined design options by using our payback analysis. We define 
payback as the time required to recover the cost of efficiency 
improvements through energy savings. We started with the design option 
with the shortest payback and continued to add design options with the 
next shortest payback at each higher efficiency level. See Table 3 for 
design option combinations. The highest efficiency levels for this 
rulemaking are approximately 0.91 EF for 50-gallon electric water 
heaters, 0.71 EF for 40-gallon gas-fired water heaters, and 0.61 EF for 
32-gallon oil-fired water heaters.
3. Methodology
    Table 2 summarizes the information we used in the engineering 
analysis and the assumptions we made. We briefly discuss many of the 
assumptions in this section. For complete details about the engineering 
analysis, please see Chapter 8 in the TSD.

         Table 2.--Key Elements Used in the Engineering Analysis
------------------------------------------------------------------------
         Description                            Elements
------------------------------------------------------------------------
Product classes..............  Electric, gas (includes LPG) & oil.
Analysis approach............  Design options.
Designs analyzed.............  Heat traps, thicker insulation, tank
                                bottom insulation on electric, 78% & 80%
                                RE on gas, 78% & 82% RE on oil, plastic
                                tank on electric, side-arm heater, & IID
                                on gas, interrupted ignition on oil.
Simulation models............  WATSIM for electric, TANK for gas, WHAM
                                for oil.
Basis for energy factor......  DOE water heater test procedure, 64.3
                                gpd.
Baseline energy factor.......  Electric, 50 gallon =.86, gas, 40 gallon
                                =.54, oil, 32 gallon =.53.
Cost data....................  Provided by GAMA and consultants and the
                                Water Heater Consortium ($35, resistance
                                to ignition of flammable vapors).
Price data...................  Water heater price database.
Insulation blowing agent.....  HFC-245fa (Water blown insulation
                                analyzed in TSD).
Insulation cost..............  Existing--HCFC-141b blown--$1/lb from
                                Honeywell.
                               New--HFC-245fa blown--$1.32/lb, from
                                Honeywell.
Insulation thicknesses.......  2 inch, 2.5 inch & 3 inch.
Warranty on baseline.........  6 years or less.
Markup.......................  Average baseline price divided by average
                                manufacturer baseline cost.
Installation costs...........  $160 for door jamb removal & replacement
                                on 27% of all designs with 3-inch
                                insulation.
                               $114 for Type-B vent connectors in 25% of
                                homes in northern states with 78% RE on
                                gas-fired.
                               $433 for chimney relining and Type-B vent
                                connectors in 25% of homes in northern
                                states with 80% RE on gas-fired.
Maintenance costs............  None on electric, $14.73/yr for the side-
                                arm heater for gas-fired and a $97.14
                                yearly maintenance contract for oil-
                                fired.
------------------------------------------------------------------------


[[Page 25052]]

a. Energy Savings Potential
    Having determined the highest energy efficiency levels for each 
product in this rulemaking, the Department then estimates the energy 
savings potential of individual design options or combinations of 
design options. Table 3 shows the design option combinations for each 
fuel type at incremental levels of efficiency. (These do not represent 
trial standard levels.) We use simulation model calculations and 
manufacturer data to determine the efficiency levels corresponding to 
various design option combinations.

                                      Table 3.--Design Option Combinations
----------------------------------------------------------------------------------------------------------------
                            Design option for       Design options for gas-fired    Design options for oil-fired
 Design  option level     electric water heaters           water  heaters                  water  heaters
----------------------------------------------------------------------------------------------------------------
1.....................  Heat traps...............  Heat traps....................  Heat traps.
2.....................  Heat traps + tank bottom   Heat traps + flue baffles (78%  Heat traps + 2 inch
                         insulation.                RE).                            insulation.
3.....................  Heat traps + tank bottom   Heat traps + flue baffles (78%  Heat traps + 2.5 inch
                         insulation + 2 inch        RE) + 2 inch Insulation.        insulation.
                         insulation.
4.....................  Heat traps + tank bottom   Heat traps + flue baffles (78%  Heat traps + 3 inch
                         insulation + 2.5 inch      RE) + 2.5 inch insulation.      insulation.
                         insulation.
5.....................  Heat traps + 2.5 inch      Heat traps + flue baffles (80%  Heat traps + 3 inch
                         insulation + plastic       RE) + 2 inch insulation.        insulation + flue baffles
                         tank.                                                      (78% RE).
6.....................  Heat traps + 3 inch        Heat traps + flue baffles (80%  Heat traps + 3 inch
                         insulation + plastic       RE) + 2.5 inch insulation.      insulation + flue baffles
                         tank.                                                      (78% RE) + interrupted
                                                                                    ignition.
7.....................                             Heat traps + flue baffles (80%  Heat traps + 3 inch
                                                    RE) + 3 inch insulation.        insulation + interrupted
                                                                                    ignition + increased heat
                                                                                    exchanger area (82% RE).
8.....................                             Heat traps + flue baffles (80%
                                                    RE) + 3 inch insulation +
                                                    side arm + electronic
                                                    ignition + plastic tank.
----------------------------------------------------------------------------------------------------------------

    2003 Baseline Model. As discussed earlier, the Department defines a 
baseline unit in order to analyze options which increase energy 
efficiency over the baseline. Because DOE expects new energy-efficiency 
standards to take effect near the phase-out date (2003) of HCFC-141b, 
we had to create a baseline model for this analysis which uses foam 
insulation blown with an acceptable alternative blowing agent. After 
considering all possible insulation choices, the Department determined 
that the most likely alternatives to replace HCFC-141b appears to be 
water and HFC-245fa. Consequently, we performed a complete analysis 
using these two different blowing agents. After weighing the 
comparative benefits and costs of HFC-245fa and water blown foam and 
then taking into account Honeywell's announcement on the availability 
of HFC-245fa, we ultimately selected HFC-245fa as the insulation for 
our proposed trial standard levels.
    To model the baseline electric water heater under existing 
efficiency standards with the alternative blowing agents, we increased 
the foam insulation thickness to 1.55 inches for HFC-245fa. To model 
the gas-fired water heater baseline for the alternative blowing agents, 
we increased the foam insulation thickness to 1.0 inch for HFC-245fa. 
To model the oil-fired water heater baseline for the alternative 
blowing agents, we assumed a foam insulation thickness of 1.01 inches 
for HFC-245fa. We made similar calculations for water blown foam so we 
could perform a comparative analysis throughout the TSD.
    Computer Simulation Models. To analyze the energy efficiency of 
water heaters with various combinations of design options, DOE used 
computer simulation models for electric (WATSIM) and gas-fired (TANK) 
water heaters, and a spreadsheet model (WHAM) for oil-fired water 
heaters. AGA commented that it preferred modeling results because 
modeling allows the use of consistent assumptions across design 
options. (AGA, No. 49 at 1).
    WATSIM Model for Electric Storage Water Heaters. WATSIM is a 
detailed electric water heater simulation program developed by Electric 
Power Research Institute (EPRI). (Report #TR-101702, 10/92). WATSIM 
contains two simulation algorithms: one for the detailed simulation of 
water heater tanks and the other for controlling water draw profiles. 
The output of WATSIM provides detailed temperature profiles of the 
water inside the water heater tank. We use these temperature profiles 
to determine the EF and other parameters of the water heater using the 
test DOE procedure calculations.
    Our analysis began with a simulation of a baseline model (i.e., one 
that is currently marketed that achieves a minimum allowable efficiency 
of 0.86 EF). When simulating the typical existing electric water 
heater, WATSIM was able to achieve the minimum allowable efficiency of 
0.86 EF by simulating a jacket thickness of 1.5 inches of HCFC-141b 
foam insulation. OOE, The Northwest Energy Efficiency Alliance (NEEA), 
The Northwest Power Planning Council (NWPPC), and ACEEE, did not 
support DOE's use of 1.5 inches of foam on electric water heaters to 
adjust the model results of EF 0.83 to reach the minimum EF of 0.86. 
(OOE, No. 44 at 3; NEEA, No. 53 at 2; NWPPC, No. 43 at 1; and ACEEE, 
No. 52 at 2). The commenters did not support this because the GAMA 
directory listed one model with 1 inch of insulation. Manufacturers 
indicated to DOE that 1.5 inches of foam insulation on electric water 
heaters is the norm to meet the minimum efficiency of 0.86 EF for a 50-
gallon electric water heater. Therefore DOE chose to use 1.5 inches in 
its simulation.
    Complete verification of the WATSIM program is not currently 
available to the public. The WATSIM user's manual states the model 
``has been vigorously verified for use in tank and system design, 
equipment sizing, and individual or diversified demand analyses, as 
well as for energy consumption analysis.'' (EPRI, TR-101702, 10/92). 
The Department validated the WATSIM simulations by comparing them to 
NIST measurements. NIST tested four mid-efficiency 50-gallon 
commercially available electric water heaters and reported an average 
0.89 EF. (Fanney, 1999 ASHRAE Summer Meeting). The Department compared 
the NIST EFs with WATSIM simulations of identical water heater models. 
The results agree within 0.01

[[Page 25053]]

EF. Subsequently, NIST tested five high efficiency electric water 
heaters and we validated the WATSIM model to the highest of the five 
test results, 0.91 EF. The WATSIM modeled results were within 0.002 EF 
of the NIST test results. These validations are in Chapter 8.2.4.1 of 
the TSD. Therefore, we believe WATSIM is accurate over the range of EFs 
considered in this rulemaking.
    Based on our selected design options, the WATSIM model predicts a 
maximum of 0.91 EF for electric water heaters. Stakeholders raised 
concerns at the November 1998 Workshop that the GAMA directory lists 
0.93 EF and higher EFs for electric water heaters. NEEA, NWPPC, VP, 
OOE, the National Resources Defense Council (NRDC), and ACEEE claim DOE 
should investigate and reconcile the differences between the EFs 
predicted by computer models and those listed in the GAMA directory. 
(NEEA, No. 53 at 1; NWPPC, No. 43 at 1; VP, No. 45 at 1; OOE, No. 44 at 
1; NRDC, No. 46 at 1; and ACEEE, No. 52 at 1). ACEEE stated the 
difference between computer simulation and directory listings is about 
0.03 efficiency points for electric water heaters. ACEEE stated DOE 
must explain what it intends to do to ensure that EF ratings are 
accurate. (ACEEE, No. 75 at 3). DOE is investigating the discrepancies 
in EF ratings between the GAMA directory and the WATSIM modeled 
results.
    NIST measured one high efficiency electric water heater from each 
manufacturer and found an average 0.036 EF lower on test results than 
in the GAMA directory listing. DOE also received data from GAMA on its 
certification testing program for 1994 through 1998. We reviewed this 
data and found that for the 26 high efficiency electric water heaters 
measured, results averaged 0.02 EF lower than published EFs in the GAMA 
directory. The NIST and GAMA certification program test results were 
consistent with the WATSIM simulation program results. Therefore, DOE 
will base its analysis of electric water heater performance on WATSIM 
results.
    Some stakeholders raised concerns about the test procedure. EEI and 
SC claimed there may be measurement problems when determining the 
electric water heater EF, since electric water heaters are close to 
their maximum potential thermodynamic efficiency levels. (EEI, No. 39 
at 2 and SC, No. 42 at 2). Vaughn claimed the error factor in the test 
equipment is greater than the obtainable increase in energy efficiency. 
(Vaughn, No. 56 at 1). VP recommended DOE determine and report the 
confidence level of EF results from the water heater test procedure to 
ensure that the difference between the existing efficiency standard and 
any proposed standard is within the accuracy of the test procedure. 
(VP, No. 45 at 2). EPRI claimed that routine EF testing performed at 
testing laboratories is only within 3 percent accuracy. (EPRI, No. 41 
at 1). DOE investigated this problem with Intertek Testing Services 
(ITS), NIST, and the manufacturers. ITS claimed that its test 
repeatability is within 0.5%. NIST has demonstrated accuracy better 
than 1 percent. NIST and ITS recently measured the EF on the same model 
of two electric water heaters. The results agreed within 0.008 EF. 
Based on these responses, DOE does not believe there is a problem in 
accurately measuring performance results that will adversely affect any 
manufacturers' ability to certify compliance with the proposed energy 
efficiency standard for electric, gas-fired, or oil-fired water 
heaters.
    TANK Model for Gas-Fired Storage Water Heaters. TANK is a detailed 
gas-fired storage water heater computer simulation program developed by 
Battelle for GRI, (GRI-93/0186). TANK calculates energy flows 
throughout a water heater including water draws, flue heat losses, 
jacket heat losses, fittings heat losses, and combustion chamber heat 
losses. Unlike WATSIM outputs, TANK outputs include the EF, RE, and UA 
from the DOE test procedure.
    To validate the analytical models comprising the TANK program, 
Battelle conducted actual water heater testing and monitoring. Battelle 
performed a set of tests to investigate the impacts of different flue 
baffle designs, increased insulation thickness, and different pilot 
light input rates on EFs. Battelle compared test results to the TANK 
model results. Battelle then tested gas water heaters under the 
assumptions of the DOE test procedure to validate the analytical 
predictions of TANK. Battelle reported the results in terms of EF, RE, 
UA, and total standby loss. Overall, the difference between the 
experimental values (measured) and the predicted values (simulated by 
TANK) is less than 0.01 EF for all of the above parameters.
    With the TANK simulation model for gas-fired water heaters, we 
consulted with Battelle to develop characteristics similar to the 
Battelle baseline model with a nominal insulation thickness of 1 inch. 
GAMA comments stated that the manufacturers use a 450 Btu/hr pilot 
light on gas water heaters. (GAMA, No. 51 at 1). DOE used this new heat 
input rate for pilot lights on gas-fired water heaters. See Chapter 8.2 
of the TSD for details about the simulation models and the baseline 
characteristics.
    WHAM Energy Calculation for Oil-Fired Storage Water Heaters. We 
used a simplified spread-sheet model (WHAM) for our engineering 
analysis of oil-fired water heaters. WHAM is based on the 24-hour 
simulated use test portion of the DOE test procedure. The model 
calculates energy consumption from a water heater's RE, UA, and rated 
input (P<INF>on</INF>). (Lutz, J., et al, 1998, ACEEE Summer Study on 
Energy Efficiency in Buildings, pp. 1.171-1.183). The model assumes the 
water temperature remains at the set point temperature throughout the 
tank. We also assume RE and UA are constant.
    To validate WHAM, we compared the results of the WHAM equation to 
results of the WATSIM and TANK simulation models of residential 
electric and gas-fired storage water heaters with excellent agreement. 
WHAM and WATSIM results are within 3% or less and WHAM and TANK results 
are within 5% for normal operating conditions, tank sizes and design 
options.
b. Comments on Design Options
    Tank Bottom Insulation. One design option considered for electric 
water heaters is insulation under the bottom of the tank, referred to 
as tank bottom insulation. EPRI and Bradford White commented that they 
do not observe the efficiency improvement from insulating the tank 
bottom that WATSIM predicts. (EPRI, No. 70 at 2 and Bradford White, No. 
89 at 3). Based on DOE's computer simulation results, and loss 
mechanisms NIST observed by infrared photography, DOE believes the 
improvement in efficiency is real. The infrared photography shows much 
warmer regions at the base of water heaters and around piping 
penetrations than any other tank surfaces. (Fanney, Zarr and Ketay-
Paprocki, 1999 American Society for Heating, Refrigerating and Air-
Conditioning Engineers (ASHRAE) Summer Meeting). We have also discussed 
this approach with a manufacturer who uses molded insulation under its 
tanks. This manufacturer believes water heater performance is improved 
but did not provide any test data to confirm the observation. 
Therefore, we will continue to use the WATSIM EF results in our 
analyses.
    Insulation Effectiveness. Due to water heater tank geometry and the 
method of pouring liquid insulation into the jacket which then forms in 
place, the insulation effectiveness may not be consistent between the 
sides and top of the tank. Bradford White recommended DOE limit the 
foam cavities to 2.5 inches in electric, 1.5 inches in gas-

[[Page 25054]]

fired, and 1 inch in oil-fired water heaters. Bradford White stated the 
insulation effectiveness of foam does not double for 2 inches or triple 
for 3 inches due to variations in cell structure as the foam rises 
vertically and spreads horizontally in the jacket cavity. (Bradford 
White, No. 89 at 3). To account for this, we derated the effectiveness 
of HFC-245fa blown insulation by about 10%. This allowed us to assume a 
uniform thickness and constant insulation effectiveness on the sides 
and top of the tank in the simulation models.
    Insulation Thickness. With water heaters, the thickness of the 
insulation cavity helps determine the diameter and height for a given 
tank volume. This is an important consideration in water heater product 
utility since some water heaters are installed in tight spaces and 
reduction of tank volume could reduce the first hour rating. SC and EEI 
claimed water heaters can become too wide to fit through residential 
interior doors if the insulation is too thick, and therefore the 
thickness of the insulation should be limited. (SC, No. 42 at 2 and 
EEI, No. 39 at 7). GAMA stated DOE should not consider insulation 
thicknesses beyond 3 inches because replacement units must be able to 
fit through doorways. (GAMA, No. 33 at 3). DOE agrees with the GAMA 
recommendation and has limited insulation thicknesses to 3.0 inches or 
less.
    We also have comments from GAMA, Connecticut Natural Gas (CNG) and 
New England Gas Association (NEGA) that thicker insulation will raise 
installation costs, cause installation of multiple smaller units, or 
inconvenience consumers with a smaller sized, lower capacity unit. 
(GAMA, No. 91 at 1; CNG, No. 85 at 2; and NEGA, No. 90 at 3). GAMA and 
Bradford White claimed a 2.5 inch insulation thickness will increase 
the diameter and height of electric water heaters and product utility 
will be impaired, particularly for 20-50 gallon lowboys and tabletop 
models. (GAMA, No. 71 at 4 and Bradford White, No. 74 at 2). We 
reviewed the application of these water heaters in households in multi-
family buildings, mobile homes and manufactured housing, and we 
estimate only a small percentage of households may be affected (see 
Chapter 3.4.4 in the TSD). Furthermore, we believe a 6 kW heating 
element should eliminate any lost first hour rating in those situations 
where a smaller capacity tank is required.
    Flue Baffles. The flue baffle, the twisted strip of metal inserted 
into the flue of a gas or oil-fired water heater, is the most commonly 
used method to improve heat transfer, thereby improving RE. RE is the 
percentage of energy transferred to the hot water compared to input 
energy. It takes into account the amount of energy lost through the 
flue and other parts of the water heater.
    There are many design options available to increase RE. Because of 
the low cost, the Department has assumed in its analysis the flue 
baffle alone would be the most cost effective method for increasing RE 
up to 80%. GAMA stated recovery efficiencies higher than 78% cannot be 
attained by modifying the flue baffle only. (GAMA, No 71 at 3). ACEEE 
claimed there are other technologies that can be combined with flue 
baffles to achieve 80% RE in gas-fired water heaters. (ACEEE, No. 93 at 
6). However, several manufacturers and consultants told DOE they could 
reach 80% RE by modifying flue baffles alone. For the July 1999 
workshop, DOE assumed flue baffles could be modified to increase RE to 
78% or 80% from the current baseline of 76%. We will analyze 78% and 
80% RE based on modifying flue baffles as design options.
    Bradford White claimed the flue baffle improvement to increase the 
recovery efficiency in oil products is possible, but only with a 
specific patented approach. (Bradford White, No. 74 at 3). DOE's 
analysis assumes several designs are possible, such as multi-flues, 
internally finned flues or a finned combustion chamber. We used the 
patented Bock Turboflue as a proxy to determine the performance of the 
increased heat exchanger area on oil-fired water heaters and reduced 
the performance to be conservative, since we were not confident a non-
proprietary design would achieve the same level of performance. To 
estimate the costs of the increased heat exchanger area design, we 
examined other approaches for providing increased heat exchanger area 
that are not proprietary, and we have estimated retooling and materials 
costs based on the use of these other approaches. We used this design 
to complete the list of energy factors and costs for oil-fired water 
heaters since this is the maximum technologically feasible level for 
oil-fired water heaters.
    Venting for Gas-fired Water Heaters. Most water heaters sold today 
are for the replacement market, where an existing vent system is in 
use. Improving the flue baffle can significantly increase the RE of a 
water heater, which in turn can reduce the temperature of the flue 
gases leaving the water heater. A reduction in temperature of the flue 
gases can increase the likelihood of condensation. Due to excessive 
moisture condensing from the flue gases, use of increased RE gas-fired 
water heaters with existing venting systems not designed for increased 
RE gas-fired water heaters can lead to excessive corrosion and failure 
of the vent system in certain climates. Studies conducted by GRI/
Battelle have shown corrosion can occur when a vent wall becomes wet. 
While it is not uncommon for a vent to be wet immediately after the 
appliance starts, the appliance must heat the vent system and dry the 
walls before turning off. If the vent does not dry, corrosion may occur 
during a long period of wetness.
    While we have discussed RE for water heaters, typically appliances 
are characterized for venting purposes by flue-loss efficiency. Flue-
loss efficiency measures how much of the input heat does not go up the 
flue. The DOE test procedure for rating residential water heaters does 
not measure flue-loss efficiency; it measures RE instead. Therefore, RE 
was used in this analysis for measuring the impact on the flue vent 
system, but in order to estimate the impact of increasing the RE of a 
water heater, a relationship between RE and flue loss efficiency was 
needed. Flue loss efficiency is not always directly proportional to RE, 
but flue loss efficiency is typically 2-4% higher than RE.
    RE of more than 80% is associated with flue-loss efficiencies 
exceeding 84%, resulting in excessive condensation within the vent 
system, which can lead to corrosion and a reduced vent system life. To 
ensure that condensation does not occur in the flue, only design 
options that increase RE to a maximum of 80% were selected for 
analysis. However, the Department recognizes that potential venting 
problems may occur in the 78-80% RE range and could require Type-B vent 
connectors and chimney relining. A Type-B vent connector is a double 
wall vent, with an aluminum inner wall and a galvanized steel outer 
wall. The special double wall construction keeps flue gases hot while 
inside the vent, providing a strong draft and minimizing condensation. 
Additionally, the aluminum inner wall is more corrosion resistant to 
condensation that may occur in the vent.
    A number of comments supported a maximum RE level of 80% for an 
improved flue baffle design option. (ACEEE, No. 52 at 4; OOE, No. 64 at 
1-4; ACEEE, No. 75 at 2; and OOE, No. 76 at 1). Additionally, ACEEE 
claimed, based on Table 3 in the GRI study (GRI-95/0198), the lowest 
flue-loss efficiency for homes with Type-B vent connectors and masonry 
chimneys is 84.5% and therefore no chimney relining should be needed 
for 80% RE. (ACEEE, No. 93 at

[[Page 25055]]

5). OOE claimed there are no inherent safety issues associated with REs 
of up to 80%. (OOE, No. 96 at 4).
    Other comments raised concerns with a maximum level of 80% RE. 
LaClede Gas and GAMA stated DOE should not exceed a 76% RE in order to 
maintain an adequate margin of safety. (LaClede, No. 69 at 6 and GAMA, 
No. 71 at 3). CNG and NEGA claimed setting a standard level at 78% RE 
could lead to condensation and chimney degradation. (CNG, No. 85 at 1 
and NEGA, No. 90 at 2). Bradford White said 78% is the maximum RE to 
avoid corrosion in the vent, but 77% is more realistic. (Bradford 
White, No. 74 at 2-3 and No. 89 at 2).
    The Department is very concerned about public safety for venting of 
gas-fired water heaters. We appreciate the analysis by OOE and GRI. We 
also discussed venting concerns with state experts and chimney 
installers. As a result of these discussions and comments, as well as 
the GRI study (GRI-94/0193), we believe there are no technological 
barriers to using either 78% or 80% RE gas-fired water heaters in a 
replacement installation. Furthermore, in most replacement 
applications, vent systems and chimney reliners are available on the 
market to meet the venting requirements for water heaters with 78% or 
80% RE. In new construction, installers can follow manufacturers 
recommendations so there are no problems with either a 78% or 80% RE.
    Heat Traps. In its analysis for the July 1999 workshop, DOE used 
WATSIM and TANK default values for heat trap performance. Manufacturers 
claimed they could not achieve performance for heat traps when 
installed on actual water heaters. In its comments on heat traps, GAMA 
claimed DOE should use a 0.01 EF increase. (GAMA, No. 71 at 5). 
Bradford White provided heat trap data for oil-fired, gas-fired, and 
electric water heaters. (Bradford White, No. 74 at 1). ACEEE stated DOE 
should only change the heat trap effectiveness based on independent 
test data. (ACEEE, No. 93 at 8). DOE has averaged the GAMA and Bradford 
White heat trap data. This has not affected gas-fired water heaters' 
heat trap results, but it has reduced heat trap performance on electric 
water heaters by 0.005 EF. Based on the above, heat traps are estimated 
to result in improvements of 0.012 EF for electric, 0.09 EF for gas-
fired, and 0.006 EF for oil-fired. These are the improvement values 
used in the analysis.
c. Manufacturing Costs
    After determining the design option combinations, the Department 
also had to determine the cost to manufacturers and consumers to 
achieve increased efficiency. In the 1997 Rulemaking Framework 
Workshop, DOE and stakeholders discussed three methods used to generate 
the manufacturing costs for the engineering analysis. These methods 
included: (1) The design-option approach, reporting the incremental 
costs of adding design options to a baseline model; (2) the efficiency-
level approach, reporting relative costs of achieving energy efficiency 
improvements; and (3) the cost-assessment approach, which requires a 
``bottom-up'' manufacturing cost assessment based on a detailed bill of 
materials.
    In written comments, GAMA recommended DOE use the design option 
approach in its economic analyses because ``there are only a few 
identifiable discrete efficiency improvement measures possible for 
residential water heaters.'' (GAMA, No. 5 at 4). There were no other 
comments. At the water heater standards rulemaking workshop in June 
1997, GAMA suggested it could collect and aggregate manufacturer costs 
on the design options of interest to DOE for this rulemaking. DOE 
accepted that offer and agreed to use the GAMA manufacturing cost data.
    The use of a design-option approach provides useful information, 
such as the identification of potential technological paths 
manufacturers could use to achieve increased energy efficiency. It also 
allows the use of engineering models to simulate the energy consumption 
of different design configurations under various user profiles and 
applications. However, the Department recognizes that the manufacturer 
cost information derived in the design-option approach may not reflect 
the variability in design strategies and cost structures that can exist 
among manufacturers. Therefore, the Department derived additional 
manufacturing cost estimates from other approaches based on 
consultant's estimates, component manufacturers' prices, and 
occasionally from other interested parties. DOE had two retired water 
heater manufacturing engineers as consultants provide cost estimates 
and peer review our analysis results. We describe these costs in the 
TSD in Chapter 8.3.3 for electric, Chapter 8.4.3 for gas-fired and 
Chapter 8.5.3 for oil-fired water heaters.
    GAMA provided most of the manufacturer costs with the exception of 
all oil-fired water heaters, the tank bottom insulation, and the 
plastic tank costs for electric and side-arm heater costs for gas-fired 
water heaters, which our consultants provided. GAMA based its cost 
estimates on the production of a 50-gallon electric or 40-gallon gas-
fired water heater. GAMA separated the costs into variable (material, 
labor, transportation, overhead) and fixed (capital, product design) 
costs on a per-unit basis and provided a distribution of fixed, 
variable, and total manufacturing costs for several design options. We 
used GAMA's cost data and consultant data to determine the water heater 
manufacturer costs for all combinations of design options. OOE claimed 
GAMA's manufacturing costs for gas water heaters are too high. (OOE, 
No. 44 at 7). DOE could not get independent cost data directly from 
individual manufacturers, so we are unable to determine if the 
manufacturing costs for gas-fired water heaters are too high. We 
believe the data best represents the costs of all water heater 
manufacturers, as well as the incremental costs between design options.
    GAMA based its existing baseline model cost estimates on an 
electric water heater with 1.5 inches of foamed jacket insulation using 
HCFC-141b as a blowing agent. The existing baseline is the starting 
point to construct the 2003 baseline cost, to determine markup, to 
develop incremental costs for heat traps and to build up incremental 
costs for a unit thickness of new insulation. For gas-fired water 
heaters, GAMA based its existing baseline model cost estimates on 1 
inch of foamed jacket insulation using HCFC-141b as a blowing agent. To 
develop costs for thicker insulation, we estimated the material costs 
for the additional foam and blowing agent as well as the cost for 
additional sheet metal. We used Honeywell's estimate of $4 per pound 
for the material costs of the HFC-245fa blowing agent and Honeywell's 
estimate of 15% blowing agent in a standard insulation mixture. Since 
the blowing agent is only 15% of the final foam insulation, total 
insulation cost is $1.32 per pound for HFC-245fa compared to $1 per 
pound for HCFC-141b. We also assumed a value of $35 additional 
incremental manufacturing cost ($15 variable costs and $20 fixed cost) 
for designs to resist flammable vapor ignition in gas-fired water 
heaters. We discuss the cost assumptions for each design option below.
    Heat Traps. GAMA provided manufacturer costs for electric and gas 
water heaters with heat traps. GAMA did not provide costs for the heat 
trap component. Vaughn stated the costs for heat traps should be the 
same for gas and electric water heaters. (Vaughn, No. 56 at 2). Vaughn 
is correct. Based on component costs from the heat trap

[[Page 25056]]

manufacturer, we know heat trap costs are the same for gas and 
electric. However, we did not use the component costs because we needed 
to include labor, overhead, and other costs. Therefore, we continue to 
use the combined water heater plus heat trap costs.
    Increased Jacket Insulation. GAMA provided variable and fixed cost 
data for jacket insulation increases based on HCFC-141b blown 
insulation from a baseline level of 1.5 inches on electric and 1 inch 
on gas-fired water heaters to a thickness of 2 inches only. Since HCFC-
141b will be phased out in 2003, we had to develop costs for 
alternative insulation. Our consultant developed the cost of the 2003 
baseline by adding incremental costs for HFC-245fa and sheet metal to 
the HCFC-141b baseline provided by GAMA. Our consultant used the same 
approach, adding the incremental costs for HFC-245fa and sheet metal to 
the GAMA data, for the 2 inch insulation thickness. Then, our 
consultant developed cost ratios from the incremental cost differences 
for 2.5 and 3 inch insulation thicknesses for the HFC-245fa blowing 
agent. We multiplied GAMA's incremental costs for 2 inches of 
insulation by these ratios to generate cost data in 2.5 inches and 3 
inches of insulation. For cost information see Chapter 6.4 in the TSD.
    Increased insulation creates a larger water heater than those 
typically installed today. Many replacement installations require the 
water heater to match the dimensions of the one it is replacing. One 
approach that addresses this issue was suggested in comments and 
discussed at the July 23, 1999 workshop, is to reduce the inner tank 
diameter slightly. Manufacturing a smaller inner tank diameter would 
require retooling for many manufacturers. Bradford White claimed 
retooling for different diameters of tanks cost $100,000 for each 
diameter. (Bradford White, No. 89 at 2). We agree with Bradford White 
on the retooling costs. From discussions with GAMA, we determined that 
the GAMA data accounts for any retooling cost associated with the trial 
standard levels, including any potential design changes to the inner 
tank diameter.
    Insulating the Tank Bottom. ACEEE claimed GAMA's $40 cost for 
bottom insulation on electric water heaters is excessive. (ACEEE, No. 
52 at 6). Based on discussions with manufacturers who use similar 
techniques, and our consultants' estimates, we determined the cost to 
be between $2 and $4. After the July 1999 workshop, GAMA and Bradford 
White claimed DOE should increase the $2-4 cost for tank bottom 
insulation because it has to be molded. (GAMA, No. 71 at 5 and Bradford 
White, No. 74 at 2). Based on our consultant's analysis and discussions 
with manufacturers who use tank bottom insulation, we believe the $2-4 
cost is reasonable, so we did not change these costs after the July 
1999 workshop. See Chapter 6.4 of the TSD for more details.
    Plastic Tank. Our consultant provided the manufacturer costs for a 
plastic tank electric water heater design. See Chapter 6.4 of the TSD. 
Although GAMA did not provide cost information, GAMA believed the cost 
of the plastic tank option has been significantly underestimated. 
(GAMA, No. 51 at 3). Since GAMA did not provide any data to 
substantiate its statement, DOE has not changed its cost estimate.
    Improved Flue Baffle. GAMA provided manufacturer costs for the 
improved flue baffle design. Originally, the costs were based on a flue 
baffle design that increased the RE to 78.5%. After the November 1998 
workshop, we decided to use flue baffles that achieve 78% and 80% RE 
because we believed 80% RE was feasible although it entailed more risk 
of venting system condensation. Our consultant estimated that the 
manufacturing costs for tooling a flue baffle to achieve a 78% or 80% 
RE are identical. There is no change in material cost for a flue baffle 
achieving 78% or 80% RE.
    OOE claimed as long as a conventional furnace shares the flue with 
a water heater, there should be no need for relining the flue 
regardless of the water heater efficiency. ACEEE estimated 1% of homes 
will need Type-B vent connectors and 17% will need flue relining. 
(ACEEE, No. 93 at 4-5). NEGA stated many New England consumers would 
have to install flue liners and Type-B vents at a cost of $800 if 
higher flue-loss efficiency gas-fired water heaters are mandated. 
(NEGA, No. 90 at 3). DOE estimates that at 78% RE, about 10% of the 
households with gas-fired water heaters in homes with over 5,000 
heating degree days need Type-B vent connectors; at 80% RE, about 25% 
of these homes need Type-B vent connectors and chimney relining. DOE 
based its estimates on GRI data (GRI 91/0298) modified for: gas-fired 
water heaters in new homes (since 1994) that use different venting 
systems; and the current National Fuel Gas Code (NFGC), which requires 
replacement furnaces with higher efficiencies to have better vents in 
existing installations. Since 1992, the DOE furnace energy efficiency 
standards placed gas furnaces in a new category of the NFGC and 
consequently requires better vent systems in new construction. DOE also 
determined that Type-B vent connectors and chimney relining, which 
might be needed in the New England states, cost an average of $508.
    OOE claimed the GRI report shows water heaters located in a 
conditioned space have no special venting requirements and no 
requirement or cost for a Type-B vent connector. OOE claimed Type-B 
connectors should be used when water heaters are installed in unheated 
spaces. Therefore, there is no additional vent connector or flue 
relining cost associated with higher water heater efficiencies. (OOE, 
No. 44 at 5). OOE claimed there is no need for Type-B venting or 
relining of chimneys for a water heater with an 80% RE that would not 
also be required for one with a 76% RE. (OOE, No. 96 at 2). In order to 
be conservative and provide a margin of safety, DOE assumed up to 25% 
of homes in cold climates with gas-fired water heaters may need vent 
connectors or relining of chimneys for 80% RE. We included this 
assumption in both the LCC and NPV analyses. It effectively increases 
consumer costs.
    Electro-Mechanical Flue Damper. GAMA provided manufacturer costs to 
include an electro-mechanical flue damper and electronic ignition with 
a gas-fired water heater. We used these costs in the analysis.
    Side-Arm Heater and Plastic Tank. Our consultant provided 
manufacturer costs for the side-arm heater for a gas-fired water heater 
design because GAMA received a response from only one manufacturer and 
could not provide this information for confidential reasons. We 
considered costs for six types of side-arm heater designs: 76%, 78%, 
and 80% RE designs using a metal tank and electronic ignition, and 76%, 
78%, and 80% RE designs using a plastic tank and electronic ignition. 
Based on our analysis, we determined the cost increase of the 78% or 
80% RE designs were the same and were equal to the cost of the improved 
flue baffle design option. This means heat exchanger costs for side-arm 
heaters with 78% or 80% RE are equal. GAMA disagreed with DOE's cost 
estimate for the side-arm heater design option; however it did not 
provide any specific information. (GAMA, No. 51 at 3). Therefore, we 
are using our cost estimate, absent any other information. Furthermore, 
GAMA did not comment on this issue at our July 1999 workshop.
    Oil-Fired Water Heaters. GAMA did not receive information from 
enough manufacturers to allow it to aggregate cost data for oil-fired 
water heaters. Therefore, DOE relied completely on its consultants' 
cost data for each design

[[Page 25057]]

option considered for the oil-fired water heater analysis. See Chapter 
6.4.3 of the TSD for details.
    Bradford White suggested DOE only increase the performance of oil-
fired water heaters by applying heat traps because the burner is 
usually not supplied with the tank and would therefore need a 
conversion kit. Bradford White also stated DOE's cost estimates for a 
conversion kit are too low. (Bradford White, No. 89 at 3). DOE 
considered two trial standard levels using only heat traps for oil-
fired water heaters. However, the oil burner manufacturer, who supplies 
most of the water heater oil burners, provided our cost estimates for 
the conversion kit.
d. Installation Costs
    The installation cost is the cost to the consumer of installing the 
water heater and is separate from the retail price. The cost of 
installation covers all labor and material costs associated with the 
simple replacement of an existing water heater. Delivery, removal, and 
permit fees are also included.
    We established the installation costs of baseline 50-gallon 
electric, 40-gallon gas-fired, and 32-gallon oil-fired water heaters 
from the same sources as the retail price data. DOE assumed only the 3-
inch insulation thickness would increase installation costs for gas-
fired and electric water heaters installed within a conditioned space 
based on stakeholder comments and discussions at the manufacturer 
interviews. Four design options increased the cost of installing a gas-
fired water heater. They are the improved flue baffle, electronic 
ignition, electro-mechanical flue damper, and side-arm heater.
    In comments, ACEEE and VP claimed installation costs differ in new 
construction and in existing homes. (ACEEE, No. 23 at 2 and No. 52 at 
6; and VP, No. 45 at 2). GAMA suggested DOE's analysis of revised water 
heater standards should be based on installed costs of replacement 
water heaters only. (GAMA, No. 51 at 3-4). DOE used the same 
installation costs for both markets. We based these costs on 
replacement costs because there are no cost installation data for new 
construction. New construction costs are combined with the plumbing and 
venting costs and we could not separate out the water heater 
installation costs.
    Installation Cost for 3 Inch Thick Insulation. Thicker insulation 
creates a larger water heater than the typical unit sold today. VP 
claimed we should account for the impact of increasing unit size on 
installation ease and cost in replacement applications. (VP, No. 45 at 
3). Rheem and SC claimed customers should not have to knock out walls 
and ceilings or relocate a water heater during replacement. (Rheem, No. 
95 at 1 and SC, No. 84 at 2).
    From the Residential Energy Consumption Survey (RECS) 1993 public 
use data, 54% of water heaters are located in a conditioned space. We 
assumed at least 50% of those homes would need the closet or an attic 
door removed to facilitate water heater replacement installation for 3 
inch thick insulation. We estimated this cost at $160 using responses 
from water heater installers and the 1996 Craftsman National 
Construction Estimator. This installation cost is for the removal and 
replacement of door jambs for 50% of all water heaters located in a 
conditioned space. We assumed oil-fired water heaters are not installed 
in conditioned spaces and therefore this cost is not applicable to oil-
fired water heaters.
    We also do not believe people should have to knock out ceilings or 
walls to replace a water heater. Therefore, we investigated the impact 
of reducing tank volume by 20% on the first hour rating. The first hour 
rating is a measure of how much usable hot water can be supplied by a 
water heater in one hour starting from a fully heated tank. It is 
determined by the DOE test procedure. We believe that increasing the 
heating element from 4.5-6 kW can adequately compensate for the 10 
gallons of storage volume lost by a 20% reduction in a 50-gallon 
electric water heater. We also believe that a similar increase in gas 
burner input rate can achieve the same effect with gas-fired water 
heaters.
    Venting Costs. If people replace their gas-fired water heater 
located in a conditioned space with one which has a higher RE, then 
there may be additional installation costs. In an attempt to account 
for these costs, DOE assumed a Type-B vent connector is installed when 
replacing an existing gas-fired water heater located in a conditioned 
space with a water heater with an RE of 78%, in 25% of homes in climate 
regions exceeding 5,000 heating degree days. Note that heating degree 
days are the number of degrees the average temperature is below 
65 deg.F. For water heaters with flue baffles that achieve 80% RE, we 
assumed a Type-B vent connector is installed and a masonry chimney is 
relined when replacing an existing gas-fired water heater located in a 
conditioned space in 25% of homes in climate regions exceeding 5,000 
heating degree days. In comments, Bradford White, LaClede and CNG 
stated we must add more installation cost to gas-fired and oil-fired 
water heaters for larger diameters and heights, pressure and 
temperature relief valves, relining masonry chimneys and for condensate 
removal. (Bradford White, No. 74 at 3; LaClede, No. 69 at 6; and CNG, 
No. 85 at 2).
    DOE believes we have accounted for the installation costs 
associated with higher RE gas-fired water heaters. We used installers' 
estimates to calculate the cost of installing Type-B vent connectors 
and to determine the cost to reline masonry chimneys. These estimates 
are slightly higher than the GRI estimates. We estimated the number of 
homes needing Type-B vent connectors for 78% RE gas-fired water heaters 
from comments, and from an AGA survey in a GRI report. (GRI-91/0298). 
We also used the AGA survey data to determine, by region, the number of 
water heaters connected to masonry chimneys. In the same manner, we 
estimated installers would reline 25% of the masonry chimneys in 
climate regions exceeding 5,000 heating degree days when replacing an 
existing gas-fired water heater with an 80% RE water heater. DOE 
developed its installation costs for Type-B vent connectors and masonry 
chimney relining based on the replacement market and installers' cost 
estimates for a typical installation, which would include the pressure 
and temperature relief valve. See Appendix D-3 in the TSD.
    We did not raise the RE enough to create condensation nor do we 
anticipate higher installation costs for 2 or 2.5 inch insulation 
thicknesses. Therefore, we added $160 for removal and replacement of 
door jambs for 50% of gas-fired water heaters with 3 inch thick 
insulation located in conditioned spaces. From the GRI data, we 
estimate that 25% of households with gas-fired water heaters in regions 
with over 5,000 heating degree days would need Type-B vent connectors 
at a cost of $114 for 78% RE. We estimated that 25% of households with 
gas-fired water heaters in regions with over 5,000 heating degree days 
would need chimney relining at a cost of $433 for 80% RE gas-fired 
water heaters. This is about one-half of the households with gas-fired 
water heaters common vented with gas furnaces.
    Cost to Install Electricity. The three remaining gas-fired water 
heater design options (electronic ignition, electro-mechanical flue 
damper, and side-arm heater) all require electricity to operate. We 
used data from GRI to estimate the number of households that would 
require electricity. We also used GRI data to estimate the cost of 
labor and wiring and adjusted these estimates for inflation to obtain 
1998 cost estimates,

[[Page 25058]]

see Chapter 8.4.5 in the TSD for more details.
e. Maintenance Costs
    The electro-mechanical flue damper and the side-arm heater are the 
only design options that increase a gas-fired water heater's 
maintenance cost. We used the TSD water heater analysis for the March 
4, 1994, NOPR to estimate the maintenance cost of the flue damper. (59 
FR 10464, March 4, 1994) In this analysis, we assumed the flue damper 
failed in the tenth year of operation. We discounted the maintenance 
cost of the flue damper at a 6 percent rate to get its present value in 
1998 dollars.
    In response to a comment from Battelle, we included the maintenance 
cost to replace the side-arm heater circulation pump. (Battelle, No. 66 
at 9 and No. 83 at 11). We assumed 10% of the installations would 
require a replacement of the circulation pump each year. We estimated 
the cost using contractor estimates and the 1998/99 Grainger Catalog.
    The intermittent ignition device (IID) of gas-fired water heaters 
may incur maintenance costs due to the failure of the control module or 
the sensor. We assumed the IID maintenance cost to be equivalent to the 
maintenance cost of replacing the standing pilot light and therefore 
did not assign any incremental cost to it.
    With the exception of the electro-mechanical flue damper, the IID 
and the side-arm circulation pump, information gathered to date 
suggests there is virtually no maintenance of residential electric or 
gas-fired water heaters. However, there were some suggestions from the 
manufacturer interviews that side-arm gas-fired water heater designs 
may incur increased maintenance costs due to clogging of the heat 
exchanger from scaling associated with hard water, but no data were 
identified or provided to confirm this.
    We included a typical annual maintenance charge for oil-fired water 
heaters. Since we anticipate that none of the oil-fired water heater 
design options will affect maintenance, this charge has no bearing on 
the final engineering analysis of the design options.
f. Determination of Markups for Retail Prices
    The retail price is the consumer cost of the water heating 
equipment. We determined the retail price for any design option simply 
by multiplying the manufacturer cost by the derived markup for the 
particular product class. We obtained a manufacturer cost-to-retail 
price markup by dividing the retail price by the manufacturer cost. We 
performed this calculation separately for electric, gas-fired, and oil-
fired water heaters. In the engineering analysis, we assumed that the 
baseline manufacturer cost-to-retail price markup was constant for all 
design options within a fuel class. Our approach results in different 
average markups for each fuel class in the engineering analysis.
    In order to obtain the retail price, DOE created the Water Heater 
Price Data Base. This Data Base contains extensive data on retail 
prices for electric and gas-fired water heaters and very limited 
information regarding retail prices of oil-fired water heaters. While 
the data in the Water Heater Price Database are based on information 
from water heater vendors in many regions of the U.S. (e.g., large 
retailers, plumbing wholesalers, small suppliers, web-sales and utility 
representatives), the majority of price information was gathered from 
large retailers and plumbing wholesalers. Although the database lacks 
information on the number of specific models sold, it contains actual 
prices representative of many models. We received the oil-fired water 
heater retail prices from approximately 25 oil equipment installers who 
buy water heaters from manufacturers and sell directly to consumers. In 
the case of oil-fired water heaters, the retail price does not include 
the cost of the burner, which is typically purchased separately.
    We determined an average price for an existing baseline 50-gallon 
electric, 40-gallon gas-fired, or 32-gallon oil-fired water heater with 
HCFC-141b foam insulation . Since the length of the manufacturer's 
warranty affects the price of the water heater, we originally 
considered only water heaters with a five year or less warranty as 
baseline models. However, at the November 1998 workshop, water heater 
manufacturers provided information that six-year warranties are typical 
of those models that are produced in large quantities (i.e., baseline 
models). A longer warranty period, in addition to raising the price, 
also may indicate the presence of some design features not normally 
found in baseline models. Based on this information, we have changed 
the analysis to include water heaters with warranties of six-years or 
less in our baseline models.
    The Water Heater Price Database includes installation costs that 
are part of the total cost to consumer. This price includes 
miscellaneous fees such as the delivery fee, removal fee, permit fee, 
and parts fee. We applied additional installation costs to some design 
options'for example, to account for replacing vent connectors, relining 
masonry chimneys, or installing larger water heaters in small spaces.
    In their comments, AGA and EMPA claimed the database is not 
representative of all manufacturers or states. (AGA, No. 49 at 5; EMPA, 
No. 50 at 3; and No. 88 at 4-6). NEEA, NWPPC, ACEEE, Pacific Gas and 
Electric (PG&E) and OOE claimed DOE's retail prices are too high or 
DOE's incremental costs are too large. They cited data from the Eugene, 
Oregon Water and Light Board or the California Residential Contractors 
Program. (NEEA, No. 53 at 2; NWPPC, No. 43 at 2; ACEEE, No. 52 at 6 and 
No. 93 at 4; PG&E, No. 94 at 4; and OOE, No. 44 at 6; and No. 76 at 
10). We received comments regarding the basis of the markups. For 
example, the analysis only included water heaters sold through stores 
(ACEEE, No. 52 at 6); the data may have been skewed by high sales 
volume models used as loss leaders (GAMA, No. 71 at 1); and the markup 
results should be reasonably consistent with prices found in the 
Northwest. (OOE, No. 44 at 7).
    In response to these comments DOE collected more data to make the 
database more representative. DOE added more retail price data from 
wholesalers and plumbing distributors. DOE added price data from the 
Eugene Water and Light Board's database but DOE added only a limited 
number of these prices so that its database would continue to be 
representative of regional populations in the entire U.S. Nevertheless, 
the addition of these data did not significantly change the average 
retail price of gas-fired or electric water heaters. DOE believes its 
price database, from more than 130 retail distributors and plumbing 
wholesalers (representing all 12 Census divisions and all five major 
manufacturers), provides an accurate representation of prices with good 
regional representation.
    OOE claimed a constant price should not be used for the entire 
analysis period because water heater prices should match today's prices 
in the mature market of the Pacific Northwest within 5-7 years after 
the imposition of a standard. (OOE, No. 96 at 6). We appreciate the 
price data provided by OOE and we have used a portion of the data in 
our national Water Heater Price Database. However, we kept the prices 
representative of each region in the U.S. by maintaining a fixed 
relationship between the number of water heater prices and the 
population of each region. See Chapter 5.2 in the TSD.
    We obtained a manufacturer cost-to-retail price markup by dividing 
the retail price by the manufacturer cost. Our approach results in 
different average markups for each product class

[[Page 25059]]

(i.e., 1.49 for electric, 1.22 for gas-fired, and 3.2 for oil-fired 
water heaters).
    Since oil-fired water heaters are essentially a niche product, the 
large markup was not surprising. However, several commenters believed 
that the gas-fired water heater markup should be nearly identical or 
identical to the electric water heater markup. ACEEE commented that 
DOE's retail costs showed inconsistent markups between electric, gas-
fired, and oil-fired water heaters. (ACEEE, No. 52 at 6). GAMA claimed 
the markup value for gas-fired water heaters was too low because DOE 
only sampled the retail market and some of the models are direct vent 
models. (GAMA, No. 51 at 4). GAMA, AGA, EPRI, SC, CNG, and Bradford 
White suggested DOE apply the same markup to electric and gas-fired 
water heaters. (GAMA, No. 51 at 4; AGA, No. 49 at 5; EPRI, No. 70 at 3; 
SC, No. 72 at 2; CNG, No. 85 at 3; and Bradford White, No. 74 at 3). VP 
claimed there is no justification for using one average markup. (VP, 
No. 45 at 2). Battelle claimed the gas-fired water heater markup is too 
low. (Battelle, No. 83 at 8). SC did not believe retail markups for 
electric water heaters are twice as high as those for gas-fired water 
heaters. (SC, No. 84 at 1). EPRI disagreed with DOE's markup approach 
because it raises the price of heat traps differently for each fuel and 
tank size. (EPRI, No. 41 at 4).
    We derived the markups by comparing retail prices to the baseline 
costs provided by GAMA. We believe these prices are representative of 
the national market for residential water heaters. Additionally, we 
applied our approach uniformly to all fuel types. Chapter 5 of the TSD 
provides a discussion on retail prices.

E. Economic Analysis

1. Life-Cycle-Cost (LCC) and Payback Analysis
    In determining economic justification, the Act directs the 
Department to consider a number of different factors, including the 
economic impact of potential standards on consumers. Section 
325(o)(2)(B)(i)(I), 42 U.S.C. 6295(o)(2)(B)(i)(I). The Act also 
establishes a rebuttable presumption that a standard is economically 
justified if the additional product costs attributed to the standard 
are less than three times the value of the first year energy cost 
savings. EPCA, Sec. 325(o)(2)(B)(iii), 42 U.S.C. 6295 (o)(2)(B)(iii).
    The payback, for purposes of the rebuttable presumption test, 
attempts to capture the payback to consumers affected if a new standard 
is promulgated. It compares the cost and energy use of water heaters 
consumers would buy in the year the standard becomes effective with 
what they would buy without a new efficiency standard. DOE calculates a 
simple payback which is the ratio of the increase in purchase price 
(including installation) to the decrease in annual operating expense 
(including maintenance).
    In considering this factor, the Department calculates changes in 
LCCs to the consumers that are likely to result from the proposed 
standard and two different simple payback periods: the median payback 
period and the test procedure payback period. The difference between 
these payback calculations is due to the way we calculate energy 
savings. The median payback is based on the LCC analysis using a 
derived amount of hot water dependent on characteristics of each 
household. The test procedure payback is based on hot water usage of 
64.3 gallons per day, the estimate of hot water usage used in the DOE 
test procedure.
    The effect of standards on individual consumers includes a change 
in the operating expense (usually decreased) and a change in the 
purchase price (usually increased). The net effect is analyzed by 
calculating the change in LCC as compared to the base case. Inputs to 
the LCC calculation include the installed consumer cost (purchase price 
plus installation cost), operating expenses (energy and maintenance 
costs), lifetime of the appliance, and a discount rate.
    In addition to analyzing price and energy cost effects on each 
household in a national database, DOE also determines which segments 
and what size of the population, if any, may be adversely affected. The 
Department has decided to consider the LCC impacts on low income and 
seniors-only consumer subgroups in this rulemaking. We chose the low-
income subgroup because higher water heater prices might affect that 
subgroup more than the general population. We chose the seniors-only 
subgroup because many of them may be in the low-income subgroup and 
because they tend to use less hot water than the general population. 
Lower water usage could increase the payback of some efficiency 
improvements.
    The LCC and one of the payback periods (median payback) are 
calculated using the LCC spreadsheet model developed in Microsoft Excel 
for Windows 95, combined with Crystal Ball (a commercially available 
software program) based on actual distributions of input variables. The 
LCC outputs from this program are a range of values that allow us to 
determine what fraction of the population will benefit from energy 
efficiency standards.
    Based on the results of the LCC analysis, DOE selects candidate 
standard levels for a more detailed analysis. The range of candidate 
standard levels typically includes: (1) the most energy-efficient 
combination of design options or most energy-efficient level; (2) the 
combination of design options or efficiency level with the lowest LCC; 
and (3) the combination of design options or efficiency levels with a 
payback period of not more than three years. Additionally, candidate 
standard levels that incorporate noteworthy technologies or fill in 
large gaps between efficiency levels of other candidate standards 
levels may be selected. 10 CFR Part 430, Subpart C, Appendix 
A(5)(c)(3).
    Table 4 lists the major input distributions DOE used in the water 
heater LCC analysis for the HFC-245fa blowing agent. We also completed 
an analysis for water blown insulation in the TSD. We discuss many of 
these assumptions briefly in this section. For more details on the LCC 
analysis for both blowing agents, please see Chapter 9 in the TSD.

          Table 4.--Input Distribution Used in the LCC Analysis
------------------------------------------------------------------------
                        LCC analysis assumptions
-------------------------------------------------------------------------
            Description                          Assumption
------------------------------------------------------------------------
Blowing agent.....................  HFC-245fa blowing agent.
Energy prices.....................  Marginal energy prices for
                                     incremental cost savings; average
                                     energy prices for base line costs.
Future energy prices..............  AEO99 reference case to the year
                                     2020 with extrapolations to the
                                     year 2030.
Discount rates....................  0-15% with an average about 6%.
Water heater prices...............  From the engineering analysis.
Installation costs & baseline       LBNL water heater price database.
 retail prices.
Design option combinations........  From the engineering analysis.

[[Page 25060]]

 
Markup............................  Retail prices divided by GAMA's
                                     manufacturing costs, calculated for
                                     each house in RECS `93.
Household characteristics.........  1993 RECS public use database, 5222
                                     households.
Lifetime..........................  Electric, 4-19 years, most likely 12
                                     years; gas and oil, 3-15 years,
                                     most likely 9 years.
Energy consumption................  Using RE, standby losses and input
                                     heating rates from the engineering
                                     analysis and calculated with WHAM.
Daily hot water use...............  Based on number of people, tank size
                                     and type of appliances from RECS,
                                     and thermostat settings and
                                     location imputed from the RECS
                                     data; climate data from NOAA 30
                                     year averages; inlet water
                                     temperature and air temperature
                                     based on climate data.
------------------------------------------------------------------------

    To get data representative of all U.S. residential households we 
used DOE's Energy Information Administration (EIA) Residential Energy 
Consumption Survey (RECS) for 1993. The RECS public use data survey 
weights each household so that the data properly represent the 96.1 
million households in the 50 states and the District of Columbia. The 
1993 RECS public use data survey provides information concerning energy 
consumption in the residential sector and contains a more complete set 
of data for water heater analysis than any other survey reviewed and 
available for this study. The survey contains basic data concerning 
household characteristics from an interview questionnaire and annual 
fuel consumption and expenditures (excluding transportation fuel) 
derived from the records of fuel suppliers. It also includes weather 
data (in the form of heating and cooling degree days) and a weighting 
variable. The households included in the analysis (75% of the RECS 
public use data) all have running hot water, and an individual water 
heater using one of four fuels: electricity, oil, natural gas, or LPG. 
Households without these features, which did not report their water 
heater size, or for which a marginal energy price could not be 
calculated, are not used in the analysis.
    The Department has received comments concerning the RECS data. EMPA 
claimed the 1993 RECS public use data is not valid, reliable, or 
representative because the useable data on electricity and gas 
consumption and costs is from only a portion of the households. (EMPA, 
No. 88 at 6). The RECS public use data is the most comprehensive 
national data set concerning residential water heating energy use. DOE 
used the entire data set that pertains to the types and sizes of water 
heaters in this rulemaking. We believe this subset is nationally 
representative and thus a valid data set.
a. Marginal Energy Price
    DOE formerly used average energy prices, but stakeholders objected 
because these prices did not represent a consumer's true savings. For 
the LCC analyses, the Advisory Committee on Appliance Energy Efficiency 
Standards recommended DOE use the full range of consumer marginal 
energy prices instead of national average energy prices. Marginal 
energy prices are those prices consumers pay (or save) for their last 
units of energy used (or saved). The Department agreed that marginal 
energy prices would improve the accuracy of the LCC analysis and 
estimated marginal rates for electricity and natural gas from the 1993 
RECS database.
    EIA gathered monthly energy bills and energy consumption data for 
the RECS public use data. It did not gather information on rate 
schedules, fixed charges, or marginal prices. DOE estimated consumer 
marginal electricity and natural gas prices directly from household 
data in the 1993 RECS public use data survey as the change in household 
monthly energy bills divided by the change in monthly energy 
consumption for each fuel, referred to as the change in monthly bill 
method. This provides a precise marginal energy rate based on actual 
household bills.
    For electricity, DOE calculated the slopes of the regression lines 
for four summer months (June-September) and, separately, for the winter 
(October-May) months. DOE derived the annual marginal price by taking 
the weighted average of the two seasonal prices, where the weighting 
used was the relative energy consumption of the appliance in each 
season. For water heaters, the weighting was 28% summer and 72% winter. 
For natural gas, DOE calculated the slopes of the regression lines at 
the annual level because there was no seasonal difference in marginal 
gas prices.
    In order to understand and characterize regional variations in 
pricing and distribution of fuel oil and LPG, we collected information 
relating to pricing and distribution of fuel oil and LPG. We learned 
that bills paid by residential consumers for both fuel oil and LPG are 
essentially volume-driven, with a single block rate. We interpreted the 
average prices inherent in those bills, as reported in the RECS public 
use data, as being equivalent to marginal prices for the purposes of 
the LCC price analysis.
    Several stakeholders commented on DOE's marginal energy prices. EEI 
and LaClede commented that marginal rates from the RECS public use data 
did not agree with EEI or AGA estimates. (EEI, No. 67 at 1-2; and 
LaClede, No. 82 at 2). EEI claimed DOE overstates actual electric costs 
by 12.8% due to the use of Inflator93. (Inflator93 is a scaling factor 
DOE used in an earlier analysis to adjust electricity prices from 1993-
1998.) (EEI, No. 67 at 1-2). EMPA claimed that DOE did not account for 
the sampling and non-sampling errors in the RECS public use data and 
that DOE included fixed costs. (EMPA, No. 88 at 6-7).
    We discovered that the Inflator93 coefficient in the July 1999 
Workshop Analysis was incorrect and we removed it. There is no direct 
comparison between DOE's change in monthly bill method and EEI's and 
AGA's method of subtracting fixed costs because of differences in the 
level of aggregation (rate class vs. individual households), sample 
set, and time period. Furthermore, DOE believes a marginal energy price 
based on subtraction of fixed costs is not correct due to variable rate 
schedules and seasonal rates. DOE's change in monthly bill method can 
and does account for variable rates and seasonal rates.
    VP stated that statistical probability analysis on many of the 
analysis inputs, use of marginal energy prices, and accurate conversion 
efficiencies provide greater assurance that the final rule will be 
appropriate and not overly burdensome. (VP, No. 45 at 3). DOE believes 
this is true. Our analysis methodology uses distributions on many 
analysis inputs, marginal energy prices and conversion efficiencies 
which change during the analysis based on EIA forecasts.
    We recognize there are sampling and non-sampling errors in the RECS 
public use data. However, these errors are

[[Page 25061]]

small and we expect they will have very little impact on marginal 
energy rates. For example, EIA compared the results from RECS with the 
American Housing Survey results and found the maximum difference 
between the two surveys was 3.2%. EIA also compared results to Consumer 
Expenditures (CE) estimates by the Bureau of Labor Statistics and found 
fuel expenditures for the CE were 2% higher for gas and 6% higher for 
electricity.
    DOE used projected future trends in average energy prices to derive 
estimates of future consumer marginal energy prices for the economic 
analysis of proposed standards. We created an index (scaling factor) 
from the trend in average prices (by fuel and sector) and applied it to 
the 1993 marginal prices calculated from the RECS public use database. 
The index accounts for both inflation and real energy price changes and 
it is different than Inflator93. For example, the average residential 
electricity price declined by 20% from 1993-1998, so we assume the 
marginal price for each household declines by 20% over the same period 
of time.
b. Future Energy Prices
    Given the uncertainty of projections of future energy prices, DOE 
used scenario analysis to examine the robustness of proposed energy 
efficiency standards under different energy price conditions. The LCC 
calculations used these scenarios. Each scenario integrates energy 
supply and demand into its energy price. The scenarios differ in the 
energy prices that result. The Advisory Committee on Appliance Energy 
Efficiency Standards suggested the use of three scenarios with high, 
low, and middle levels of energy prices because three scenarios should 
be sufficient to bound the range of energy prices. This is also the 
guidance provided in the Process Rule, 10 CFR 430 subpart C, appendix A 
13(b).
    The EIA's 1999 Annual Energy Outlook (AEO99) reference case 
provides a middle scenario. For the high and low energy price 
scenarios, DOE used the scenarios with the highest and lowest energy 
prices in the economic sector and the fuel of interest from AEO99. DOE 
also used the reference case from the GRI projection, 1998 GRI Baseline 
Projection: Residential Natural Gas, Electricity, and Distillate Fuel 
Oil Prices Tables. The future trend in energy prices assumed in each of 
the four scenarios is clearly labeled and accessible in each 
spreadsheet. Stakeholders can substitute alternative assumptions in the 
spreadsheets to examine additional scenarios as needed.
c. Discount Rates
    The Process Rule states that DOE will establish real (adjusted for 
federal taxes) discount rates for residential consumers by considering 
a range of three different real discount rates: credit card financing 
rate, a rate based on consumers having substantial savings, and a mid-
range rate. 10 CFR 430, subpart C, appendix A13(d). The mid-range 
discount rate will represent DOE's approximation of the average 
financing cost (or opportunity cost of reduced savings) experienced by 
typical consumers.
    Based on the guidelines from the Process Rule, we derived a 
distribution of discount rates to reflect the variability in financing 
methods consumers can use in purchasing water heaters. The real 
interest rate associated with financing an appliance purchase is a good 
indicator of the additional costs incurred by consumers who pay a 
higher first cost, but enjoy future savings, although it is not the 
only indicator of such costs. While the method used to derive this 
distribution relies on a number of uncertain assumptions regarding the 
financing methods used by consumers, DOE believes the resulting 
distribution of discount rates encompasses the full range of discount 
rates that are appropriate to consider in evaluating the impacts of 
standards on consumers (i.e., values represented by the mid-range 
financing cost, consumers with no savings, and consumers with 
substantial savings), as well as all the discount rates that fall 
between the high and low extreme values.
    DOE assumes the method of purchase used by consumers is indicative 
of the source of the funds and the type of financing used, although DOE 
is not aware of detailed research into this relationship. Whirlpool 
Corporation indicated that approximately 40% of white goods are 
purchased in cash, 35% with credit cards, and 25% with retailer loans. 
(1994 Eight Product Notice of Proposed Rulemaking, 59 FR 10464, March 
4, 1994.) The same manufacturer indicated that 25% of appliance 
purchases are for new homes. However, we know consumers purchase 20% of 
water heaters with new homes, i.e., in mortgages, and 80% as 
replacements for existing water heaters in separate retail purchases. 
Consumers pay for retail purchases by cash, credit cards, or loans. In 
the case of water heating equipment, we assumed consumers would usually 
use credit cards because most water heater purchases are emergency 
replacements. In order to derive a full distribution of discount rates, 
DOE estimated a range of interest rates, based on historical data and 
judgments of future trends, for different types of consumer savings or 
financing.
    For new housing, the estimated nominal mortgage rate ranges from 5-
8%, the derived after-tax rate is based on a tax of 28%, and a 2% 
inflation rate is subtracted from the total. The result is a range of 
real mortgage rates from 1.60%-3.76%. Example: 5%*(100%-28%)-2% =1.6%.
    For cash, the minimum interest rate is 0%. This rate applies to 
consumers making cash purchases without withdrawing from savings 
accounts or interest bearing checking accounts. For the maximum rate, 
the opportunity cost is the interest that could have been earned in a 
savings account or mutual fund. The historical nominal maximum savings 
rate ranged from 4.5-5.5% from 1970-1986 (real rates of -8.27 to 
+3.58%). We believe the current maximum is the opportunity cost 
represented by the interest earned in a typical mutual fund (assumed to 
be 6% real). DOE selected a real rate of 3% as the mean.
    DOE assumed the interest rates for retail loans and credit cards 
have the same range. The minimum credit card rate is 6% real. 
Introductory rates on some credit cards today are 5.9% nominal, but 
after the introductory period (often six months), the rate can increase 
sharply. Maximum rates are more than 20% nominal. However, if the 
consumer pays with a credit card and the balance is paid in less than 
the life of the water heater, then the effective interest rate is lower 
than the nominal credit card rate. The current assumption is a range of 
6-15% real.
    Combining the assumed shares of each financing method, the above 
real interest rates result in a weighted-average (mean) value of 6% and 
a distribution that varies from 0-15%. Sensitivity studies show that 
while the LCC results are sensitive to the value chosen for the mean 
discount rate, the LCC results are not sensitive to the distribution of 
discount rates.
    DOE believes the methods described above are valid for establishing 
a distribution of discount rates relevant to most purchasers of the 
products covered by this rulemaking. However, the Department 
acknowledges that different assumptions could be made about likely 
interest, inflation and marginal tax rates, or about consumer financing 
methods, and that different approaches to identifying consumer discount 
rates might also be valid. For example, it is possible to base consumer 
discount rates on the average real rates of return on consumer 
investment or other measures of the opportunity costs

[[Page 25062]]

incurred by consumers who purchase the covered products. DOE does not 
believe, however, such alternative assumptions or alternative 
approaches would significantly alter the range of discount rates used 
by the Department or the conclusions drawn from the LCC analyses 
conducted using these discount rates.
    The Department is seeking any information that would support 
significant alterations in the range or distribution of the discount 
rates derived from its analysis. Alternatively, DOE is soliciting 
comment on the possible use of a standardized distribution of discount 
rates ranging from approximately 4-12%, with a mean of 6%. The use of 
such a standardized distribution would explicitly recognize the many 
uncertainties associated with DOE's current analysis and, based on 
sensitivity analyses already performed by DOE, such a standardized 
distribution would not significantly alter the conclusions of DOE's 
life cycle cost analyses.
    Two stakeholders, EEI and EMPA, claimed the discount rates in the 
LCC appear to be very low for consumers. (EEI, No. 39 at 7 and EMPA, 
No. 50 at 2). They do not reflect the actual consumer purchasing 
behavior as measured by an implicit discount rate. Such discount rates 
are often higher. DOE policy is to base discount rates on average 
financing costs (or opportunity cost of reduced savings) experienced by 
typical consumers.
d. Household Characteristics
    The 1993 RECS public use data provide a sample of 7,111 households 
from the population of all primary, occupied residential housing units 
in the U.S. Of the 7,111 households, we use 5,222 household records in 
the analysis and we assume these households are representative of 
housing on a national scale. The households included in the analysis 
(see Table 5) have four defining features:

1. Water heater size
2. An individual water heater
3. One of four fuels: electricity, oil, natural gas, LP gas
4. Billing data for electric and gas-fired water heaters and gallons of 
fuel oil or LPG used

    Of the households not included, 11.8% shared water heaters or used 
other fuels; these water heaters are not subject to this rulemaking. Of 
the remaining households not included, 6.2% had no water heater size 
indicated and 8.2% had insufficient billing data for energy price 
analysis.
    EEI commented that the RECS public use data are more than five 
years old. (EEI, No. 39 at 3 and No. 67 at 1). The detailed 1997 RECS 
public use data were released in mid-January 2000. However, the 
Department has not had an opportunity to analyze the impact at this 
time. We will, however, determine the impacts of this updated 
information for the final rule. We have accounted for the age of the 
energy price data by adjusting the 1993 data to represent 1998 prices. 
We did this by multiplying the 1993 data by the ratio of the average 
annual energy prices from the EIA AEO between 1993 and 1998.
    Table 5 provides some information about households in the 1993 RECS 
public use data used in the LCC analysis. The weighted number of 
households are the total households represented by the RECS data. The 
average hot water use is not from RECS but is determined from the 
results of a California Energy Commission (CEC) study of hot water 
usage. We have included the average water heater set point and average 
inlet water temperature, which are not part of the RECS public use 
data. These are derived from the location of the household using the 
National Oceanic and Atmospheric Administration's (NOAA) 30-year (1961-
1990) database of average air temperatures to estimate average annual 
outdoor and inlet water temperatures (NOAA database: www.ncdc.noaa.gov/ol/climate/online/ccd). A more complete discussion of the data not from 
RECS is found in section III.E.2.d., Energy Analysis Module.

                                  Table 5.--1993 RECS Household Characteristics
----------------------------------------------------------------------------------------------------------------
                                                 Gas       Electricity       LPG        Fuel Oil      All Fuels
----------------------------------------------------------------------------------------------------------------
Number of Households (records)............          2475          2323           248           176          5222
Number of Households (weighted)...........    35,959,707    30,279,600     2,540,960     1,807,350    70,587,617
Household Size (average number of people).          2.79          2.58          2.70          2.87          2.70
Clothes Washer (percent saturation).......          89.2          82.0          89.1          96.6          86.3
Dishwasher (percent saturation)...........          52.4          49.1          32.5          56.8          50.4
Average Thermostat Set point (deg F)......         134.6         133.5         135.0         137.5         134.2
Average Inlet Water (deg F)...............          57.1          59.1          56.3          51.8          57.8
Average Hot Water Use (gallons per day)...          48.6          45.4          47.3          47.3          47.1
Low Income Households (percent of total)..          5.68          5.69          0.64          0.12         12.13
Senior-Only Households (percent of total).          8.13          7.66          0.72          0.39         16.90
Senior-Only and/or Low income (percent of          12.59         12.17          1.17         0.492          6.42
 total)...................................
----------------------------------------------------------------------------------------------------------------

    Stakeholders raised concerns about the RECS data. Battelle 
commented that some fraction of households in the RECS database 
incorrectly identifies fuel type of water heaters. (Battelle, No. 66 at 
5).
    Battelle and AGA claimed DOE ``fabricated data not in the 
database.'' They believe this has led to higher average set point 
temperatures for gas water heaters (134.5 deg.F for gas vs. 133.7 deg.F 
for electric), cooler air temperatures where the water heater is 
installed (55.1 deg.F for gas vs. 56.7 deg.F for electric), and colder 
entering water temperatures (57.3 deg.F for gas and 58.7 deg.F for 
electric). (Battelle, No. 83 at 2 and AGA, No. 92 at 3).
    Set point temperature, air temperatures and entering water 
temperatures are not in the RECS database. To obtain the set point, air 
and entering water temperatures, the Department used the following 
approach. DOE used heating degree days to determine an approximate 
location for each household. This is necessary because household 
locations are confidential. Based on the location, we used the 30-year 
NOAA data to determine the average air temperature. We derived cold 
water inlet temperatures based on the average annual air temperature. 
(NOAA database: www.ncdc.noaa.gov/ol/climate/online/ccd). From a study 
by the CEC (CEC, 1990, Report No. P400-90-009), DOE has inferred the 
set point temperature based on the cold water inlet temperature. This 
methodology is applied equally to all of the RECS public use data--gas, 
oil and electric. Any difference in the results among fuels is due to 
regional differences of

[[Page 25063]]

saturations of water heater fuel types and not to the data that DOE 
uses.
    Battelle disagreed with DOE's preliminary results showing average 
daily water use of 48.5 gallons per day for households with gas-fired 
water heaters versus 45.4 gallons per day for households with electric 
water heaters. Battelle claimed DOE's results will increase the energy 
used by 3.3% and will cause 3.2% more standby losses for gas water 
heaters. (Battelle, No. 83 at 3). DOE believes the differences in 
average energy use and standby losses between gas and electric water 
heaters are due to regional differences in numbers of water heaters by 
fuel type and household size, among other factors. These differences 
are not caused by inadequate data.
e. Lifetime
    Appliance Magazine was the source of information for water heater 
lifetimes. We created a triangular distribution using 4-19 years as the 
base for electric water heaters and the most likely value of 12 years 
as the peak. Similarly, for gas-fired water heaters the base is 3-15 
years with the most likely value at 9 years. We assumed that oil-fired 
water heaters have the same lifetime as gas-fired water heaters.
2. LCC Spreadsheet Model
    In order to simplify handling large amounts of input data, the 
water heater LCC analysis spreadsheet has five modules. The modules are 
LCC and Payback, Equipment Cost, Operating Cost, Energy Analysis, and 
Hot Water Draw. Chapter 9 in the TSD contains a detailed discussion of 
the spreadsheet and the individual modules.
a. LCC and Payback Module
    The LCC analysis uses a spreadsheet model developed in Microsoft 
Excel combined with Crystal Ball (a commercially available software 
program). The model uses a Monte Carlo simulation to perform the 
analysis while considering uncertainty and variability of many input 
values. Crystal Ball is a program that provides risk analysis 
capabilities to help analyze the variability and uncertainties 
associated with the data. We organized the spreadsheet so ranges 
(distributions) are entered for each input variable needed to perform 
the calculations.
    Recognizing that each household is unique, we accounted for 
variability in the model by performing the LCC calculation for a large 
number of individual households. The Monte Carlo simulation samples 
individual households from the RECS public use data. The results show 
the fraction of households having a particular LCC and payback.
    For the LCC calculations, we randomly sampled the set of households 
10,000 times. The analysis used separate LCC spreadsheets for each fuel 
type (electricity, natural gas, and fuel oil) and blowing agent (water 
and HFC-245fa). Chapter 9.1 of the TSD describes the sampling 
methodology and contents of the RECS public use data.
    In comments, EMPA claimed 10,000 Monte Carlo runs are not enough, 
and consumers' actual savings depend on their specific energy prices 
and amount of usage of the appliance. (EMPA, No. 88 at 2-7). AGA 
claimed manufacturers' costs and consumer prices are correlated so DOE 
should use a correlated Monte Carlo approach. (AGA, No. 92 at 5).
    We believe 10,000 Monte Carlo runs are sufficient because, when 
tested at 20,000 runs, there was less than 1% difference in the 
results. The manufacturers' cost data is not connected with a specific 
model but is only provided as a cost distribution. Therefore, 
manufacturers' costs and the prices in the Lawrence Berkeley National 
Laboratory (LBNL) price database cannot be correlated. There is no one-
to-one correlation between the cost of a specific model to the price 
for that same model because GAMA only provided cost distribution data.
    We analyzed all design options for water heaters as if they were at 
production levels equivalent to the typical existing baseline models, 
i.e., possessing similar economies of scale. We performed the LCC 
analysis separately for each energy source: electric, gas (including 
LPG) and oil. We calculated the analysis twice, once for water-blown 
insulation and again for HFC-245fa blown insulation. The LCC analysis 
does not address fuel choice; this is addressed in Section F, National 
Energy Savings and Shipments. See Section IV.A.1.a of this notice for 
the results of the LCC analysis.
    The Department calculates payback and LCC for each design option 
combination and compares it to the 2003 baseline model for every sample 
household.
b. Equipment Cost Module
    Equipment cost represents the sum of the retail price, sales tax, 
and installation costs. We calculated the retail price from the 
manufacturer's cost multiplied by an overall markup. GAMA provided 
estimates of water heater manufacturing costs for typical existing 
baseline models. The source of the retail price, the sales tax, and the 
installation cost of existing baseline models is the Water Heater Price 
Database, which is described in Section III.D.3.e. See Chapter 5.3 of 
the TSD.
    In its analysis for the November 1998 workshop, we estimated the 
manufacturing costs for all other standard size existing baseline water 
heaters based on the manufacturing cost for the typical water heater 
plus (or minus) incremental costs for extra foam insulation, sheet 
metal, and other components. We determined the retail price of each 
combination of design options by multiplying the manufacturing cost 
times the markup. See Chapter 7 on markups and Chapter 9.5 in the TSD 
for a complete discussion of this.
    AGA claimed DOE used average markups in the LCC. (AGA, No. 92 at 
5). DOE does not use average markups in the LCC. As described above, we 
calculate an overall markup for each RECS household by dividing a 
randomly chosen retail price from the Water Heater Price Database by a 
randomly chosen manufacturing cost from the cost distribution data for 
each standard-size existing baseline model. We apply this markup to all 
of the subsequent design options for that household. We limited the 
markup algorithm to ensure the retail price was never lower than the 
manufacturing cost.
c. Operating Cost Module
    Operating a water heater involves two costs: Fuel to operate the 
water heater and maintenance to keep the water heater running properly. 
Fuel costs depend on the water heater's energy usage and the per-unit 
cost of fuel. Maintenance costs depend on water heater design and were 
determined from consultants' discussions with manufacturers and 
installers.
    In the LCC analysis, we calculate the operating cost for the 
baseline product class (fuel type) for each household in the RECS 
database using average annual energy prices. For each design option or 
combination of design options, we multiply the energy savings by the 
marginal energy price. The operating cost is the baseline operating 
cost minus the operating cost savings for the particular design option 
or combination of design options. Therefore, we apply marginal energy 
prices to only the portion of total operating cost resulting from 
improved energy efficiency.
    To account for future uncertainties, we apply various scenarios of 
projected future energy prices (trends by national average) to each 
household's marginal energy price. After we adjusted for inflation and 
energy price changes, we adjusted energy prices for the RECS public use 
data from the starting year by

[[Page 25064]]

the projected average future energy prices. Thus, each sample house 
from the RECS public use data has four different future annual energy 
price series associated with it. We estimated future annual operating 
costs as annual energy use multiplied by the annual energy price series 
for each of the four scenarios: AEO99 High Growth, AEO99 Reference 
Case, AEO99 Low Growth, and the 1998 GRI Baseline Projection. The user 
can choose from among these four scenarios in the spreadsheets or can 
input his or her own price forecast.
d. Energy Analysis Module
    Since we can write WHAM as an equation, DOE used it in the LCC 
spreadsheets to quickly and reliably estimate residential water heater 
energy consumption. We validated WHAM with the TANK and WATSIM 
simulation programs for gas-fired and electric water heaters for many 
water heater characteristics. The WHAM results were within 3% of 
predicted energy consumption for electric, and within 5% of predicted 
energy consumption for gas-fired water heaters. Three parameters--RE, 
UA and rated input power--describe the efficiency characteristics of 
the water heater. The operating conditions of the water heater are the 
average daily hot water used, inlet water temperature, hot water outlet 
temperature, and air temperature around the water heater.
    We used the RE and standby heat loss coefficient values from 
computer simulations developed for the Engineering Analysis and rated 
input power from manufacturers' product literature to describe the 
energy performance of water heaters.
    WHAM uses the average daily hot water consumption for each 
household calculated by the Hot Water Draw Module, discussed below. We 
calculated temperatures for inlet water and the air surrounding the 
water heater from the outdoor air temperature and the location of the 
water heater in the house. The RECS public use database provides data 
on heating and cooling degree days, but not air or water temperatures, 
for each household in the sample. Each household was assigned to the 
climate zone within its reported Census division with the closest 
number of heating and cooling degree days for 1993. Once each household 
was associated with a climate zone, we made other temperature 
assignments from NOAA's 30-year average annual temperatures. (NOAA 
database: www.ncdc.noaa.gov/ol/climate/online/ccd).
    To assign hot water outlet temperatures for households, we derived 
an equation from a CEC study that measured delivered water temperature 
and cold water temperatures. (CEC, 1990, Report No. P400-90-009) The 
equation derived from the CEC data indicates that the water heater set 
point varies inversely with inlet water temperature. For every degree 
the average inlet water temperature increases, the hot water set point 
temperature decreases about half a degree. See Chapter 9.3.4 in the TSD 
for a discussion of the CEC data.
e. Hot Water Draw Module
    Hot water use varies widely among households because it is 
dependent on household and water heater characteristics, including the 
number and age of the people who live in the home, the presence of 
appliances using hot water, the tank size and thermostat setting of the 
water heater, and the climate in which the home is situated. By 
accounting for these five characteristics, the hot water draw model 
estimates average daily hot water used.
    There is a degree of uncertainty in estimating hot water use 
because of the limited data on measured actual hot water use. We 
estimate uncertainty attached to the weighting factors using normal 
distributions for parameters provided in the 1985 EPRI study. Based on 
the 1985 EPRI study, ``Electric Water Heating for Single-Family 
Residences: Group Load Research and Analysis,'' LBNL developed values 
for daily hot water used for the number and age of people living in the 
home and for the presence of appliances. (1996. LBNL-37805)
    RECS provides data on the number and age of household occupants, 
presence of a clothes washer or dishwasher, and three ranges of water 
heater tank size: small, medium, and large. For this analysis, however, 
we needed specific water heater sizes. By matching the three RECS 
ranges (small, medium, and large) with the standard water heater sizes, 
we assigned an exact water heater size to each RECS house. Generally, 
small is equivalent to 30 gallons, medium to 40 gallons, and large to 
50 gallons or larger.
3. Consumer Subgroup Analysis
    In the Process Rule, DOE committed to considering the LCC impacts 
on consumer subgroups who might be uniquely affected by a rulemaking. 
Process Rule, Appendix A (11)(d). DOE used LCC as the metric to 
determine consumer impacts. See Chapter 10 in the TSD for consumer 
subgroup analysis.
    The Consumer Subgroup Analysis for water heaters estimates the 
variation in energy consumption and LCC for different subgroups of 
consumers under different trial standard levels. Of particular interest 
is the potential effect of standards on households with low incomes and 
on seniors over 65. DOE identified these two subgroups from stakeholder 
input at the water heater workshop on November 11, 1998. The analysis 
answers questions such as: How many households of this type are better 
off with standards and by how much? How many households are worse off 
and by how much?
    By comparing the LCC of all consumers to the LCC of the specific 
consumer subgroups referenced above, we determine if the standards will 
affect those subgroups differently. DOE made these determinations for 
each trial standard level for low income and seniors-only households.
    AGA stated DOE must provide statistical support for the way the 
RECS data are used in the Consumer Subgroup Analysis. (AGA, No. 68 at 
6). There are a total of 484 records for low income households and 779 
records for senior-only households in the RECS database. Most of the 
low income or senior-only households have either a gas-fired or 
electric water heater. DOE used the RECS data because it is the most 
complete and largest database publicly available.
4. Payback Analysis for Rebuttable Presumption
    The Act establishes a rebuttable presumption that a standard is 
economically justified if the additional product costs attributed to 
the standard are less than three times the value of the first year 
energy savings. Section 325(o)(2)(B)(iii), 42 U.S.C. 6295 
(o)(2)(B)(iii).
    The payback period measures the amount of time needed to recover 
the additional money the consumer invests in increased efficiency 
through lower operating costs. Numerically, the payback period is the 
ratio of the increase in purchase (and installation) price to the 
decrease in annual operating expenditures (including maintenance) from 
replacing the 2003 baseline water heater with a water heater 
incorporating another more efficient design option.
    For purposes of the rebuttable presumption test, DOE identifies the 
design options with the highest efficiency that have a payback of no 
more than three years. Since the Act requires that the rebuttable 
presumption be based on the DOE test procedure, it is determined in the 
engineering

[[Page 25065]]

analysis. See section IV.A.1.c. of this notice for these results.

F. National Impacts Analysis

1. Net Present Value (NPV) and Energy Savings
    The national impacts analysis assesses the NPV of total consumer 
LCC and energy (and water, if appropriate) savings. A preliminary 
assessment of the aggregate impacts at the national level is conducted 
for the NOPR. Analyzing impacts of Federal energy-efficiency standards 
requires a comparison of projected U.S. residential energy consumption 
with and without standards. The base case, which is the projected U.S. 
residential energy consumption without standards, includes the mix of 
efficiencies being sold at the time the standard becomes effective. 
Sales projections together with efficiency levels of the water heaters 
sold, are important inputs to determine the total energy consumption 
due to water heaters under both base case and standards case scenarios. 
The differences between the base case and standards case provides the 
energy and cost savings. Depending on the analysis method used, the 
sales under a standards case projection may differ from those of a base 
case projection.
    The Department estimates national energy and water, if applicable, 
consumption for each year beginning with the expected effective date of 
the standards. National annual energy and water savings are calculated 
as the difference between two projections: a base case and a standards 
case.
    Analysis begins with estimated energy savings by fuel type for 
electricity, natural gas, LPG, and oil. DOE estimates energy 
consumption and savings based on ``site energy'' (kWh of electricity, 
million Btu of natural gas, LPG or oil used in the home). The Act 
defines ``energy use'' as the ``quantity of energy directly consumed by 
a consumer product at the point of use, determined in accordance with 
test procedures under Section 323.'' Section 321(4), 42 U.S.C. 6291(4). 
This is generally called ``site'' energy as opposed to ``source'' 
energy, which includes transportation and generation losses.
    The energy savings to the nation are expressed in quadrillions of 
Btu's of ``source'' energy. The National Energy Savings ( NES) 
spreadsheet model first calculates the energy savings in site energy, 
kWh or Btu, and then uses a time series of conversion factors to 
convert site energy to source energy. This was a recommendation by the 
Appliance Efficiency Advisory Committee that the Department implemented 
recently. The conversion factors are derived from the AEO99 (DOE/EIA-
0383).
    Measures of impact reported include the NPV of the energy savings 
in dollars and the energy savings at the source. Each of the above are 
determined for selected trial standard levels. These calculations are 
done by the use of a spreadsheet tool called the NES spreadsheet model, 
which has been developed for all the appliance standards rulemakings 
and tailored to each specific appliance rulemaking.
    In the water heater rulemaking, the NES spreadsheet model also 
forecasts fuel type market shares to new housing completions. Fuel 
switching may be caused by price increases of gas-fired and/or electric 
water heaters due to standards or other government agency actions. DOE 
examines several scenarios in order to include the range of 
possibilities for different market shares of electric and gas-fired 
water heaters (see Chapter 11.3 of the TSD).
2. National Energy Savings (NES) Spreadsheet Model
    Table 6 lists the major assumptions that DOE used in the water 
heater NES analysis. We discuss many of these assumptions briefly in 
this section. We discuss in more detail below our shipment analysis 
because shipments are an important input to the NES analysis. The 
shipment model predicts the number of water heaters expected to be sold 
each year between 2003 and 2030. For more details on the NES analysis, 
please see Chapter 12 in the TSD.

    Table 6.--Assumptions Used in the National Energy Saving Analysis
------------------------------------------------------------------------
                   National energy savings assumptions
-------------------------------------------------------------------------
              Description                           Assumption
------------------------------------------------------------------------
Real Discount Rate and Year of the NPV.  7% discounted to the year 1998.
Start Year of New Standards............  2003.
Energy Savings.........................  Source Consumption.
Average Marginal Energy Price..........  From the LCC analysis adjusted
                                          to 1998$.
Average Retail Prices and Installation   From the LCC analysis.
 Costs.
Energy Price Projections to 2020.......  AEO99.
Extrapolation of Energy Prices to 2030.  For petroleum, we use the
                                          average world oil price with
                                          markups from 2020; for gas, we
                                          use the average growth rates
                                          from 1997-2020 with margins
                                          from 2020; electricity prices
                                          are constant at 2020 levels.
Electric Source to Site Conversion       Time variant values from AEO99.
 Factors.
Gas Source to Site Conversion Factors..  0.9 from AGA.
Voluntary Programs.....................  Included in the base case via
                                          historical shipments data.
Annual Unit Energy Consumption.........  Values from the engineering
                                          analysis are market weighted
                                          by shipments forecasts.
Base Case..............................  Electric: 80% low efficiency,
                                          20% high efficiency.
                                         Gas-fired: 70% low efficiency,
                                          12% medium efficiency, 18%
                                          high efficiency.
                                         Oil-fired: 80% low efficiency,
                                          15% medium efficiency, 5% high
                                          efficiency.
------------------------------------------------------------------------

    The NES spreadsheet model determines the total source energy 
savings and the NPV of these savings. The model calculates net savings 
each year as the difference between total operating cost savings and 
total equipment cost increases. The NPV calculations also capture any 
differences in maintenance costs. NPV greater than zero indicates net 
savings (i.e., that the standard reduces consumer expenditures in the 
standards case

[[Page 25066]]

relative to the base case). NPV less than zero indicates that the 
standard incurs net costs. The elements of the NPV also can be 
expressed as a benefit/cost ratio. The benefit is the savings in 
decreased energy expense, while the cost is the increase in the 
purchase price due to standards relative to the base case. When the NPV 
is greater than zero, the benefit/cost ratio is greater than one and 
benefits exceed costs.
    We determine equipment costs from the increased purchase price 
associated with the higher energy efficiency of appliances purchased in 
the standards case compared to the base case. We calculate equipment 
costs as the difference in the purchase price between the base case and 
trial standard levels for new water heaters purchased each year, 
multiplied by water heater sales. We accounted for the number of water 
heaters sold each year by tracking shipments of new water heaters and 
the average lifetime of each market share by trial standard levels. We 
determine the retail prices of the baseline design and the higher 
efficiency design options from the LCC Analysis. Purchase price 
includes the water heater installation cost.
    Reductions in operating costs associated with the higher energy 
efficiency of water heaters purchased in the standards case--compared 
to the base case--create savings. Total operating cost savings are the 
product of savings per unit and the number of units of each age that 
continue to operate in a particular year. We accounted for the mix of 
different efficiencies each year using an average annual unit energy 
consumption weighted by the percentage of water heaters in the market.
    DOE calculates national energy consumption for the base case and 
each trial standard level by multiplying the average energy consumption 
by water heater age times the number of water heaters of that age still 
in the stock. This yields an estimate of the national total energy 
consumption for a year. We calculated annual NES as the difference 
between the total energy consumption for the trial standard level and 
the base case. We summed the annual NES to obtain cumulative energy 
savings over the period 2003-2030. Then using energy conversion rates 
from the EIA's AEO99 or from AGA, we can calculate the source energy 
consumption and savings. Energy conversion rates account for generation 
and distribution losses of electricity and transportation and pumping 
losses of natural gas. DOE's proposed standard is only based on the 
AEO99 reference energy price forecasts, although we consider the high 
and low economic forecast.

NPV in a Saturated Market

    NPV is the (discounted) difference in national water heater 
expenditures between the standard and base cases. Standards generally 
lower the average operating cost of appliances, but increase the 
average first (equipment) cost. Also, standards can cause consumers to 
make different purchase decisions, either choosing another product, 
e.g., room air conditioner instead of central air conditioners, or 
another fuel type, e.g., electric to gas. NPV accounts for these 
shifts.
    Water heaters constitute a saturated market (96% of households)--
standards are not expected to affect the percentage of households using 
a water heater. However, standards may affect the fuel type mixture of 
the water heater market. In calculating the NPV, the NES model accounts 
for two effects, the operating expenditures and increase in purchase 
price of the more efficient water heaters. The shipments model, an 
input to the NES, forecasts the change in market share of the various 
fuel types in response to the different standards. These shipment 
changes, due to purchase price, are reflected in the NES calculation of 
NPV.
    Since trial standard levels 1 and 3 are the same for gas water 
heaters, one would expect the NPV for these two levels to be the same. 
The individual, or unit, change in purchase price and operating 
expenditures are the same for the two trial standards levels, however, 
the shipment model forecasts are different for gas and electric water 
heaters. These different shipment forecasts cause the aggregate 
equipment expenditures and operating costs to differ for the two trial 
standards levels.
    Because of the higher cost of electric water heaters in trial 
standard level 3, the market share of electric water heaters is 
predicted to decrease. In the period between 2003 and 2030, the 
shipment model predicts about five million fewer electric water heater 
shipments in trial standard level 3 than in trial standard level 1. 
This loss in shipments of electric units is (roughly) compensated by an 
equivalent gain in gas unit shipments.
    NPV, combined across fuel types, includes the effect of market 
share changes caused by standards. For a saturated market, which is the 
case with water heaters, this accounts for the effects on the nation of 
standards. Considering NPV separately by fuel type can be misleading 
because changes in shipments among fuel types (market effects due to 
price increases) can obscure the expected national energy savings due 
to improved efficiency across all product classes. For a complete 
discussion of this topic, see sections 12.2 and 12.5 of Chapter 12 in 
the TSD.
a. Shipments
    One of the more important components of any estimate of future 
economic impact is shipments. Forecasts of shipments for the base case 
and the standard case need to be obtained as an input to the NES. Table 
7 lists the major assumptions that DOE used in the water heater 
shipments analysis. We discuss many of these assumptions briefly in 
this section. For more details on the shipments analysis, please see 
Chapter 11 in the TSD.

          Table 7.--Assumptions Used in the Shipments Analysis
------------------------------------------------------------------------
                     Shipments analysis assumptions
-------------------------------------------------------------------------
         Description                           Assumption
------------------------------------------------------------------------
Base Case....................  Based on historic data and new housing
                                starts, projected to 2030.
Existing Homes...............  Replace water heaters with units of the
                                same fuel type. 96% of housing units
                                have water heaters of the type analyzed
                                here.
New Construction.............  Have a fuel choice, 96% of homes have a
                                residential water heater of one of the
                                four major fuel types. Number of housing
                                units based on Census data and EIA
                                forecasts.
Market Saturation in New       Based on fuel price, equipment price and
 Construction.                  household income.
Implicit Discount Rates......  Electric 191%, Gas-fired 83%, Oil-fired
                                124%, LPG 83%.
Cost Elasticities............  From a 1979 Oak Ridge National Laboratory
                                study, see Table 11.3 in the TSD.
Fuel Prices..................  AEO99 and GRI98.
Lifetime.....................  Appliance Magazine 1998: Electric 4-19
                                yrs., most likely is 12 yrs; gas, oil
                                and LPG, 3-15 yr., most likely is 9 yrs.

[[Page 25067]]

 
Equipment Cost...............  From the LCC analysis.
Household Income.............  RECS93.
------------------------------------------------------------------------

    The Water Heater Shipments forecast spreadsheet is used primarily 
as an input into estimates of national impacts from standards 
implementation and into the manufacturer's impact analysis. The model 
predicts the total number of water heaters expected to be sold by 
manufacturers in each year between 2003 and 2030. In addition, it 
describes the change in fuel type market saturation due to implementing 
standards and other macroeconomic factors. The basic assumption of our 
analysis is that nearly all homes currently have a water heater with 
one of the four major fuel types, and that this trend will continue 
throughout the forecast period. Furthermore, we consider only water 
heaters serving a single housing unit. (We know from the RECS public 
use data that 4% of housing units built will either have no hot water, 
share a hot water heater with other units, or be fueled by a source 
other than the four fuel types, but we have excluded these from our 
analysis.)
    In its comments, AGA asked why the consumer implicit discount rates 
are different for gas, electric, and oil. (AGA, No. 68 at 6). We use an 
implicit discount rate to model a consumer's behavior and the tendency 
to purchase the least expensive water heater. We assume consumers are 
strongly influenced by first cost and future savings are much less 
important. The implicit discount rates are different for each fuel 
class because they depend on the increase in consumer price from the 
baseline to the first design option. In the shipment analysis, we use 
the implicit discount rate to determine the value of future operating 
cost savings for gas-fired, electric, oil-fired and LPG water heaters.
    ACEEE claimed DOE's analysis assumes purchasers are quite sensitive 
to operating costs and suggested DOE reduce the sensitivity to 
operating costs in the water heater shipment model similarly to the 
adjustments made to the clothes washer shipments model. (ACEEE, No. 93 
at 5). We could not make any adjustments to our shipments model similar 
to the adjustments made for clothes washers because we do not have any 
consumer preference surveys for water heaters.
    We use implicit discount rates to calculate equipment cost 
elasticities, which are about 2-5 times higher than operating cost 
elasticities. Based on the operating cost elasticities derived by the 
Oak Ridge National Laboratory (ORNL), we assume consumers are more 
sensitive to first cost than to operating cost. Using these 
calculations in the shipments model and the NES spreadsheet, we can 
assess the impact of fuel switching. The complete explanation and 
derivation of terms are in Chapter 11.3.2 of the TSD.
    As part of its analysis to determine energy savings, the Department 
develops a base case forecast. The base case shipments is a forecast of 
annual shipments in the absence of new standards and their weighted 
average energy efficiency to the year 2030. This forecast requires an 
assessment of the impacts of past and current non-regulatory efforts by 
manufacturers, utilities and other interested parties. DOE considers 
information on the actual impacts of such initiatives to date, and also 
considers information presented regarding the possible impacts that any 
current initiatives might have in the future. Such information could 
include the actions manufacturers, distribution channels, utilities, or 
others will take to realize such voluntary efficiency improvements.
    To develop a base case forecast of shipments, we used total water 
heater shipments from GAMA through 1993 and market share data from 
consultants to calibrate the model so it correctly estimates historical 
data. DOE calculated annual water heater shipments by fuel type as the 
sum of water heater installations in new housing and replacement units. 
We account for the energy saving impacts of non-regulatory efforts by 
manufacturers, utilities, and government (e.g., the FEMP), in the base 
case and we forecast their effects in the future. DOE considered 
information on the actual impacts of such initiatives to date, and also 
considered information regarding possible impacts that any existing 
initiatives might have in the future. See Chapter 11.3.1 in the TSD for 
our estimates of the relative market share efficiencies for the base 
case.
    Voluntary programs typically have a small but important effect in 
raising the future efficiency of the average appliance in the market. 
In the water heater market, utility programs and state building codes 
have created regional markets for high efficiency gas-fired and 
electric water heaters. See Section V.B of this notice for results of 
enhanced voluntary programs. FEMP also provides government purchasers 
with information about higher efficiency water heaters and their life-
cycle costs. We included the effects of these programs in the base case 
by modeling the current market for each fuel type by efficiency level. 
DOE also is researching electric heat pump water heaters and hopes to 
increase their market penetration in the future by reducing the first 
cost to consumers. We have not included any impact from these efforts 
to increase heat pump water heater market penetration in our forecast 
since we are still doing research.
    Since 1980, the U.S. has built about 1.3-2.1 million new housing 
units each year, including mobile home placements. From 1990-1993, 
about 96% of new housing units installed residential storage water 
heaters of the type and size considered under the standards. The 
remaining 4% of new housing units are not considered in the shipments 
forecast because the water heaters are shared among more than one 
housing unit or renewable energy sources are used for water heating. 
Thus, there are about 1.2-2.0 million residential storage water heaters 
installed in new housing each year. Since 1990, these installations 
have accounted for 15-20% of annual water heater shipments.
    After accounting for new housing construction, the remaining 80-85% 
of shipments are replacements. We determined the number of replacements 
by using the number shipped in the past and a distribution of water 
heater life expectancies, which varies by fuel type.
    The choice among competing fuels for water heating is highly 
correlated with the choice of fuel for space heating. Most homes use 
the same fuel for water heating as for space heating. In this analysis, 
we assume that when water heaters need to be replaced, they are 
replaced by water heaters of the same

[[Page 25068]]

fuel type as the original; changes in market share occur primarily as a 
result of installation trends in new housing. Natural gas and electric 
water heaters account for the major shares of shipments. As of 1997, 
electric water heaters account for about 47%, and natural gas 
(including LPG) water heaters account for almost 53%. Sales of oil-
fired water heaters account for less than 1% of water heater shipments.
    DOE estimates shipments based on two markets: new housing 
construction and water heater replacements in existing housing. We 
assume replacements in existing housing equal retirements; that is, 
everyone replaces his or her worn-out water heater. We further assume 
consumers replace their water heaters with the same fuel type; that is, 
we assume no fuel switching in the replacement market. For each fuel 
type, the number of retirements is equal to the total stock of each 
vintage, multiplied by a retirement probability for that vintage 
contained in the lifetime function for that fuel type. Electric water 
heaters have a life expectancy of 4-19 years and gas-fired water 
heaters last from 3-15 years, with average lifetimes of 12 and 9 years, 
respectively, as published in the September 1998 issue of Appliance 
Magazine. We expect water heater replacements to constitute 85 percent 
of total water heater shipments by 2003. Total retirements calculated 
in this way show rough agreement with historical shipment data provided 
by GAMA, during the period from 1967 to the present.
    The remainder of shipments comes from new housing construction. We 
took housing completions, including mobile home shipments, from census 
historic data and EIA forecasts. Currently, 96% of new homes generate a 
shipment of a water heater that is not shared and that is fired by one 
of the four major fuel types. We assume this percentage remains 
constant throughout the forecast period.
    The projected shipments for each fuel type consist of the water 
heaters retired and replaced, plus the number of new homes multiplied 
by the new-home market saturation of the fuel type. Total modeled 
shipments agree with actual shipment data from 1980-1997.
    In its comments, Battelle requested an explanation for the sudden 
shifts in shipments among fuel types in the analysis. (Battelle, No. 83 
at 7). Although there may be shifts in shipments among fuel types, we 
expect the total number of water heaters shipped to, and installed in, 
consumers' homes (shipments) to be nearly the same under different 
trial standard levels. When standards become effective, all the 
baseline water heaters immediately have improved efficiency and higher 
prices. The change in price among fuel types causes the sudden shift in 
shipments.
    EEI claimed the water heater shipment forecast seemed to be 
optimistic, with sales increasing for gas-fired and electric units 
every year from 2000-2030 (30 years). Past history has shown periods of 
flat or declining shipments. (EEI, No. 39 at 9). Our shipment forecast 
reflects the EIA's forecast of continued strong demand for new housing 
construction. Shipments of each fuel type may differ slightly, due to 
changes in market saturation occurring as a result of installation 
trends in new housing.
    Fuel Switching and Market Share. The Department decided to study 
the potential impacts of different trial standard levels on fuel type 
market share using the shipment model. A large shift from one fuel to 
another may affect consumer costs and national energy consumption and 
environmental impacts. We created an Ad Hoc Water Heater Fuel Switching 
Working Group to assist us in investigating fuel switching concerns. 
The Working Group was made up of representatives from GAMA, gas and 
electric utilities and energy advocates. The Working Group decided that 
since most water heater replacements are usually emergencies, water 
heaters are always replaced with the same fuel type. Therefore, in our 
analysis we assume no fuel switching in the replacement market; all 
shifts in fuel type market share are assumed to occur in new 
construction.
    The Department determined fuel type market share in new 
construction in response to economic conditions. The three components 
contributing to the type of water heater a consumer will buy are: 
equipment (initial) cost, operating (fuel) expense, and household 
income. The shipment model that we used takes income and fuel price 
projections through 2030 from EIA. Equipment costs and unit energy 
consumption are those calculated in the Engineering and LCC analyses. 
Each of these variables is related to consumer behavior by a set of 
cost elasticities from a 1978 study by the ORNL (ORNL/CON-24 1978). For 
more details on shipments and fuel switching, see Chapter 11.3 in the 
TSD.
    Water heater market shares in new construction by fuel type in 1992 
were: 47% electric; 44% natural gas; 1% oil; and 4% LPG. The shipments 
model shows a drop in gas market shares in the 1990s that may not be 
supported by data. Data from the American Housing Survey on space 
heating fuel market saturations shows no decline in gas heating fuel 
installations during the 1990s. Since space heating fuel and water 
heating fuels are highly correlated in households, we decided to 
conduct a sensitivity analysis to understand the impact of different 
shipment scenarios. We investigated several alternative scenarios based 
on constant market share. This scenario fits the results of the 
American Housing Survey. U.S. Census Bureau, Current Housing Reports, 
Series H150/97, September 1999.
    We conducted the NES analysis to determine energy savings and NPV 
using a constant market shipment scenario and two scenarios based on a 
10% change in the constant market shipments. Note that a constant 
market shipment fixes fuel shares so there is no fuel switching. For 
each of these scenarios, we forecast all four trial standard levels. In 
all cases, we held market shares of shipments constant throughout the 
forecast period. In the first scenario, we held market shares of 
shipments at 1992 values; that is, electric 47% and natural gas 44%. In 
the second scenario, we shift market shares of shipments 10%, to 
electric 57% and natural gas 34%. In the third scenario, we shift 
market shares of shipments to 37% electric and 54% natural gas.
    Results from the NES analysis show only slight differences in NES 
among the three scenarios 0.06-0.11 quads compared to the model result 
of 4.75 quads. Among the three scenarios, NPV is at its highest level 
at trial standard level three although it is about 15% lower than the 
model forecast. Since we only changed the shipment model in the three 
scenarios and our shipment forecast falls within the range of the 
scenarios, we conclude the energy savings and economic benefits to 
consumers are not sensitive to a 10% increase or decrease in new 
construction market share of electric or gas-fired water heaters. 
Therefore, we have continued to use the model results in our analysis. 
We present the results for the sensitivity analysis in Chapter 11.3.3 
of the TSD.
b. Energy Prices
    Because the AEO99 forecasts only to the year 2020 while other 
analyses related to appliance energy efficiency are forecast to 2030, 
we extrapolated energy price data to 2030 using a method similar to the 
one that EIA uses to forecast fuel prices for FEMP. To determine the 
regional price forecasts for petroleum products, we used the average 
growth rate for the world oil price in combination with refinery and 
distribution markups from 2020.

[[Page 25069]]

Similarly, we derived natural gas prices from the average growth rate 
over the years 1997-2020 in combination with regional price margins 
from the year 2020. We kept electricity prices constant at 2020 levels 
because we assume the transition to a restructured utility industry 
will be completed by then.
3. Comments
    LaClede stated the spreadsheet only allows the EIA price, heat 
rate, emissions, and economic forecasts. (LaClede, No. 69 at 4). EMPA 
stated DOE's analyses appear to be biased toward EIA's high economic 
scenario. (EMPA, No. 88 at 2). The EIA high and low economic forecasts 
bound the GRI and AGA forecasts, with one exception. From 2016-2020, 
the EIA low growth scenario forecasts fuel prices that are higher than 
the GRI forecast. See Appendix E-4 of the TSD for the results of 
alternate energy price forecasts. The spreadsheets can produce output 
based on any of the four economic scenarios. We based our decision on 
the reference case in the AEO99 energy price forecasts. This is the 
middle range of the energy price forecast and there is no bias toward 
the high economic scenario.
    AGA commented that the national energy analysis spreadsheet does 
not permit alternative inputs for electricity generation efficiency. 
(AGA, No. 68 at 4). The NES spreadsheet models include a clearly 
defined column of conversion factors, one for each year of the 
projection. DOE and stakeholders can examine the effects of alternative 
assumptions by substituting different values in this column.
    The model calculates national energy consumption at the site (i.e., 
electricity in kWh, natural gas, LPG, and oil in MMBtu, consumed in the 
household). Based on this site energy consumption, DOE applied site-to-
source conversion factors to calculate the primary energy consumed. The 
conversion factors are different for natural gas and electricity and 
account for losses, such as losses in generation, transmission, and 
distribution of electricity, or distribution losses for natural gas. 
This analysis assumes that the source conversion factor changes over 
time, and applies annual values. The model uses the U.S. annual 
electricity conversion factors from AEO99, Table A4 (DOE/EIA 1998). The 
source conversion factor applied to site natural gas consumption is the 
site energy divided by 0.9 (Natural Gas Council (NGC), 1998).
    In comments on the November 1998 analysis, AGA claimed the gas 
source-to-site conversion should be 90%, but the spreadsheet for the 
July workshop used 78% in 2003 and 81% in 2030. (AGA, No. 68 at 4). We 
have corrected this error in the baseline case of the NES spreadsheet 
and the conversion is now 90%. However, for the natural gas savings 
from the trial standard levels we use a marginal site to source gas 
conversion factor from NEMS-BRS model (see Section III.I of this 
notice) that is approximately 91%. See Chapter 12 of the TSD.
    NGC stated that in the case of natural gas, approximately 10% of 
the total energy is lost in the journey from the wellhead to the burner 
tip. NGC compared this loss to losses of 73% for electricity generation 
and distribution. It claims a total energy efficiency analysis will 
show gas-fired water heaters to be more efficient and cost effective 
than their electric counterparts. (NGC, No. 59 at 1).
    The Department has always believed that, in evaluating the impacts 
of appliance standards, one must consider the full range of impacts, 
including consumer and national impacts. In the analysis of consumer 
impacts, the Department considers the energy directly consumed by the 
product at the point of use. The measures of energy efficiency and 
energy use are, for example, all based on the energy consumed at the 
point of use and these are the measures of energy use that are used in 
the consumer analyses, e.g., LCC in Section III.E of this notice. See 
Section 321(4) of EPCA, as amended, 42 U.S.C. 6291(4), which defines 
energy use in this manner. This, DOE believes, provides useful measures 
to consumers since it can be directly related to information readily 
available, i.e., utility bills. In examining the impacts of standards 
on the nation, however, the Department considers the total energy 
consumed over the entire fuel cycle as well as emissions and energy 
costs. In this manner, the analysis captures the total impact of the 
standards.

G. Manufacturer Impact Analysis

1. Economic Impact on Manufacturers
    The economic impact of the standard on manufacturers is a criterion 
that must be considered under EPCA, as amended. Section 
325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i). The Process Rule provides 
guidance on how to assess these potential impacts on manufacturers. 10 
CFR 430, subpart C, appendix A 10. First, the Department will utilize 
an annual cash flow approach in determining the quantitative impacts on 
manufacturers. This includes a short-term assessment based on the cost 
and capital requirements during the period between the announcement of 
a regulation and the time when the regulation comes into effect. We 
will examine critical variables affecting manufacturers, such as 
industry NPV, cash flows by year, changes in revenue and income, 
changes in product price as it affects the fuel type of water heaters 
shipped, and other variables, as appropriate. Second, the Department 
will analyze and report the impacts on different types of 
manufacturers, with particular attention to impacts on small 
manufacturers. Third, the Department will consider the impact of 
standards on domestic manufacturer employment, manufacturing capacity, 
plant closures and loss of capital investment. Finally, the Department 
will consider the cumulative impacts of other DOE and other Federal 
agencies' regulations on manufacturers.
2. Product Specific
    The manufacturing impact analysis (MIA) estimates the financial 
impact of standards on manufacturers, as well as the impacts on 
competition, employment, and manufacturing capacity. Table 8 lists the 
major assumptions that DOE used in the water heater MIA. We discuss 
each of these assumptions briefly in this section. For more details on 
the MIA, please see Chapter 13 in the TSD.

  Table 8.--Assumptions Used in the Manufacturing Impact Analysis (MIA)
------------------------------------------------------------------------
             Assumptions in the manufacturer impact analysis
-------------------------------------------------------------------------
              Description                           Assumption
------------------------------------------------------------------------
Manufacturer Costs and Investments.....  GAMA & consultants' estimates.
Financial Information..................  SEC-10K Reports, Moody's
                                          Company Data Reports, Standard
                                          & Poor's Stock Reports, and
                                          Robert Morris Associates
                                          Reports.
Shipments..............................  From the shipments forecast.

[[Page 25070]]

 
Business Scenarios.....................  1. Full recovery of investment,
                                         2. Loss of all investment,
                                         3. Recovery of 75% of
                                          investment.
Other Federal Regulatory Actions.......  Phase out of HCFC-141b on
                                          January 1, 2003 and the CPSC
                                          initiative to prevent ignition
                                          of flammable vapors on gas-
                                          fired water heaters.
Qualitative Impacts....................  From interviews.
------------------------------------------------------------------------

    We conducted the MIA in three phases. Phase one consisted of the 
preparation of an industry characterization as well as individual 
meetings with manufacturers to identify issues facing the water heater 
industry. Phase two focused on the larger industry. In this phase, DOE 
used the Government Regulatory Impact Model (GRIM) to perform an 
industry cash flow analysis. Phase three entailed documenting 
additional impacts on competition, employment, and manufacturing 
capacity based on comments during the manufacturer's interviews. Below, 
we describe the three analytical tools used to accomplish these three 
phases: GRIM modeling, manufacturer subgroup analysis, and interviews.
    There are two other government regulatory actions that water heater 
manufacturers must incorporate into their manufacturing process by 
January 1, 2003, or sooner. First, the EPA phase out of HCFC's will 
require an alternative insulation blowing agent. Second, the CPSC 
initiative to prevent ignition of flammable vapors on gas-fired water 
heaters will require design, development, testing and production of a 
radically new gas burner. We account for these two actions in the MIA 
as cumulative effects along with energy efficiency standards.
3. GRIM: Industry Cash Flow
    A change in energy efficiency standards affects manufacturers in 
three distinct ways. More stringent standards require additional 
investment, raise production costs, and affect revenue through higher 
prices and, possibly, lower quantities sold. To quantify these changes, 
the Department performed an industry cash flow analysis using the GRIM. 
The GRIM analysis uses a number of factors--annual expected revenues, 
manufacturer cost of sales, selling and general administration costs, 
taxes, and capital expenditures related to depreciation, new standards, 
and maintenance--to arrive at a series of annual cash flows beginning 
before implementation of standards and continuing explicitly for 
several years after implementation. DOE obtained financial information, 
also required as an input to GRIM, from publicly available data and 
aggregated values of confidentially submitted manufacturer information. 
Discounted annual cash flows from the period before implementation of 
standards to some future point in time provide the measure of industry 
net present values.
    Given the relatively small number of firms in the industry, the 
Department created an industry cash flow analysis using a combination 
of top-down and bottom-up approaches. In order to facilitate individual 
manufacturer analyses, the Department prepared baseline scenarios for a 
``strawman'' manufacturer using publicly available financial 
information (top-down). Manufacturers were able to modify relevant 
parameters to meet their own situation (price, cost, financial, etc.) 
(bottom-up). DOE aggregated the modified inputs to the GRIM to develop 
an industry cash flow. DOE then used this industry cash flow to 
determine the economic burden on manufacturers for energy efficiency 
standards as well as other regulations currently facing the industry.
    The Department received manufacturing cost data for the various 
design options for typically-sized gas-fired and electric water heaters 
from manufacturers; GAMA had compiled and reported these data. DOE 
consultants provided manufacturer costs for the various design options 
for typically-sized oil-fired water heaters. DOE used the initial GAMA 
data, coupled with publicly available financial information, to develop 
a ``strawman'' industry cash flow.
    In preparing the industry cash flow analysis, the Department used 
the same shipment scenarios in the GRIM and the NES spreadsheets. The 
other GRIM inputs are firm-level financial information that indicates 
the extent to which individual firms may be adversely impacted by new 
standards. To obtain estimates for these inputs we analyzed publicly 
available, firm-specific financial information--SEC-10K Reports, 
Moody's Company Data Reports, Standard & Poor's Stock Reports, and 
Robert Morris Associates Reports--for major water heater manufacturers.
4. Manufacturer Subgroup Analysis
    Using industry ``average'' cost values is not adequate for 
assessing the variation in impacts among subgroups of manufacturers. 
Standards could more negatively affect smaller manufacturers, niche 
players, or manufacturers exhibiting a cost structure largely different 
from industry averages. The Department conducted detailed interviews 
with as many manufacturers as possible to gain insight into the 
potential impacts of standards. During these interviews, the Department 
solicited the information necessary to evaluate cash flows and to 
assess competitive, employment, and capacity impacts. The Department 
also considered firm-specific cumulative burden. We requested 
participation from both large and small manufacturers, but only four of 
the five large manufacturers responded. No small manufacturers 
responded to DOE's request for interviews, so examination of the small 
manufacturers was not possible at the quantitative level carried out 
for the large manufacturers.
5. Interview Process
    The interview process played a key role in the MIA, because it 
provided an opportunity for interested parties to privately express 
their views on important issues. A key characteristic of the interview 
process is that it allows DOE to consider confidential information in 
its decision making process.
    The Department developed a detailed and focused questionnaire, 
using information collected during the industry characterization 
process from industry and market publications, industry trade 
organizations, company financial reports, and product literature. The 
Department of Justice (DOJ) reviewed and commented on the

[[Page 25071]]

interview questionnaire. The interview questionnaire solicited 
information on the possible impacts of trial standard levels on 
manufacturing costs, product prices, and sales. The questionnaire 
solicited both qualitative and quantitative information. Evaluation of 
the possible impacts on direct employment, capital assets, and industry 
competitiveness drew heavily on the information gathered during the 
interviews.
    The questions on competitive impacts pertained to the assessment of 
the likelihood of increases in market concentration levels and other 
market conditions that could lead to anti-competitive pricing behavior. 
The manufacturer interviews also gathered information that helped in 
assessing whether there may be asymmetrical cost increases to some 
manufacturers, whether any increased proportion of fixed costs 
potentially increases business risks, and whether there are any 
potential barriers to market entry (e.g., proprietary technologies).
    DOE conducted face-to-face interviews with four of the five major 
water heater manufacturers in the winter and spring of 1999. During 
these interviews, the Department solicited the information necessary to 
evaluate cash flows and to assess competitive, employment, and capacity 
impacts. DOE also discussed firm-specific cumulative regulatory 
burdens. DOE has not placed any confidential information from the 
manufacturer interviews in the public record. However, DOE considered 
all of the information collected by interviews in its decision making 
process.
    DOE collated the completed interview questionnaires and prepared a 
summary. Chapter 13.3.2 of the TSD discusses the major issues 
identified by the manufacturers during the interview process. Also, 
Appendix H-1 of the TSD contains a copy of the manufacturer's interview 
guide.
    The manufacturer interviews allowed a free exchange of information 
between DOE representatives and manufacturer representatives, in a 
manner that does not occur in public meetings. From this exchange, the 
Department gained much more than quantitative data on the financial 
impacts of the trial standard levels for each particular company. 
During the interviews, DOE and manufacturers discussed rulemaking 
issues such as:

--The requirements for a new blowing agent,
--Design options that are particularly costly or difficult to 
manufacture or market,
--Marketing and distribution issues,
--Impacts of developing and manufacturing gas-fired water heaters that 
prevent ignition of flammable vapors, and
--Installation concerns due to thicker insulation.

H. Other Factors

    This provision allows the Secretary of Energy, in determining 
whether a standard is economically justified, to consider any other 
factors that the Secretary deems to be relevant. Section 
325(o)(2)(B)(i)(VI), 42 U.S.C. 6295(o)(2)(B)(i)(VI). The Secretary has 
decided that no other factors need to be considered in this rulemaking.

I. Utility Analysis

    The utility analysis estimates the effects of the reduced energy 
consumption due to improved appliance efficiency on the utility 
industry. Because electric utility restructuring is well underway, it 
is no longer valid to assume a cost recovery mechanism under public 
utility regulation, which was the basis of previous utility impact 
analyses. Therefore, this utility analysis consists of a comparison 
between forecast results for a case comparable to the AEO99 Reference 
Case and forecasts for policy cases incorporating each of the water 
heater trial standard levels.
    Table 9 lists the major assumptions DOE used in the water heater 
utility analysis. We discuss each of these assumptions briefly in this 
section. For more details on the utility analysis, please see Chapter 
14 in the TSD.

                            Table 9.--Assumptions Used in the Utility Impact Analysis
----------------------------------------------------------------------------------------------------------------
                                       Utility impact analysis assumptions
-----------------------------------------------------------------------------------------------------------------
             Description                                              Assumption
----------------------------------------------------------------------------------------------------------------
Energy Prices.......................  AEO99.
Energy Savings......................  From the NES spreadsheet as site energy savings.
Interpolation of Scaling Factors....  Linear.
----------------------------------------------------------------------------------------------------------------

    The Department uses a variant of EIA's widely recognized National 
Energy Modeling System-Building Research and Standards called NEMS-BRS 
for the utility analysis, together with some scaling and interpolation 
calculations.\1\ EIA uses NEMS primarily for the purpose of preparing 
the Annual Energy Outlook. Using NEMS, EIA produces a baseline forecast 
for the U.S. energy economy through 2020. The NEMS-BRS model used for 
this analysis is based on the AEO99 version of NEMS with minor 
modifications.
---------------------------------------------------------------------------

    \1\ For more information on NEMS, please refer to the National 
Energy Modeling System: An Overview 1998. DOE/EIA-0581 (98), 
February, 1998. DOE/EIA approves use of the name NEMS to describe 
only an official version of the model without any modification to 
code or data. Because our analysis entails some minor code 
modifications and the model is run under various policy scenarios 
that are variations on DOE/EIA assumptions, the name NEMS-BRS refers 
to the model as used here. BRS is DOE's Building Research and 
Standards office.
---------------------------------------------------------------------------

    NEMS-BRS has several advantages that have led to its adoption as 
the source for basic forecasting in the appliance energy efficiency 
analyses. NEMS-BRS relies on the AEO99 assumptions, which are well-
known and accepted due to the exposure and scrutiny each AEO receives. 
In addition, the comprehensiveness of NEMS-BRS permits the modeling of 
interactions among the various energy supply and demand sectors and the 
economy as a whole, so it produces a sophisticated picture of the 
effects of appliance standards. Perhaps most importantly, because it 
explicitly simulates the impact on the industry, NEMS-BRS provides an 
accurate estimate of marginal effects, which yield better indicators of 
actual effects than estimates based on industry-wide average values. 
Marginal rates show only the effects of standards. Average rates show 
the effects of standards as well as what is happening in the market.
    To analyze the effects of standards, we evaluate the trial standard 
levels by entering the changes in electricity, gas, LPG, and oil 
consumption values into the NEMS-BRS Residential Demand Module. We took 
the energy savings input from the NES spreadsheet, applied it to the 
water heater end use, and allocated it appropriately among census 
divisions. In the TSD, we report

[[Page 25072]]

results for several key industry parameters, notably residential energy 
sales, generation, and installed capacity, including the fuel mix that 
is used for generation. See Chapter 14 of the TSD for more details.

J. Environmental Analysis

    The Department determines the environmental impacts of each 
standard level as required in Section 325(o)(2)(B)(i)(VI), 42 U.S.C. 
6295(o)(2)(B)(i)(VI). Specifically, DOE calculates the reduction in 
carbon dioxide (CO<INF>2</INF>, nitrous oxide (NO<INF>x</INF>) and 
sulfur dioxide (SO<INF>2</INF>) emissions with the NEMS-BRS computer 
model, together with some external calculations. NEMS-BRS is a 
modification of the National Energy Modeling System used by DOE/EIA.
    Table 10 lists the major assumptions DOE used in the water heater 
environmental analysis. We discuss each of these assumptions briefly in 
this section. For more details on the environmental analysis, please 
see Chapter 14 in the TSD.

                            Table 10.--Assumptions Used in the Environmental Analysis
----------------------------------------------------------------------------------------------------------------
                                       Environmental analysis assumptions
-----------------------------------------------------------------------------------------------------------------
             Description                                              Assumption
----------------------------------------------------------------------------------------------------------------
Energy Prices.......................  AEO99.
Energy Savings......................  From the NES spreadsheet as site energy savings.
Interpolation of Scaling Factors....  Linear
Household Emissions.................  CO<INF>2</INF>, NO<INF>X</INF> & SO<INF>2</INF> estimated from general factors.
----------------------------------------------------------------------------------------------------------------

    We analyze the environmental effects of proposed water heater 
energy-efficiency standards using NEMS-BRS plus some scaling and 
interpolation calculations. Inputs to NEMS-BRS are similar to those 
used for the AEO99 reference case, except residential energy usage for 
water heaters is reduced by the amount of energy (gas, oil, LPG, and 
electricity) saved due to the water heater trial standard levels.
    The environmental analysis considers two pollutants, SO<INF>2</INF> 
and NO<INF>X</INF>, and one emission, CO<INF>2</INF>. NEMS-BRS has an 
algorithm for estimating NO<INF>X</INF> emissions from power 
generation. Since we use the AEO99 version of NEMS, the May 25, 1999 
EPA rule (64 FR 28249) on trading of NO<INF>X</INF> is fully 
incorporated in our analysis. However, NEMS-BRS estimates of 
NO<INF>X</INF> emissions are incomplete because NEMS-BRS does not 
estimate household emissions. Household emissions result from the 
combustion of fossil fuels, primarily natural gas, within individual 
homes. Because households that use natural gas, fuel oil, or LPG 
contribute to NO<INF>X</INF> emissions, DOE's analysis includes a 
separate household NOx emissions estimation, based on simple emissions 
factors derived from the general literature. NEMS-BRS tracks 
CO<INF>2</INF> emissions based on the total of fuels consumed. NEMS-BRS 
also produces comprehensive estimates of the benefits of the trial 
standard levels, so no additional analysis is necessary. Because 
SO<INF>2</INF> emissions from power plants are capped by clean air 
legislation, physical emissions of this pollutant from electricity 
generation will be only minimally affected by possible water heater 
standards. Therefore, we do not consider power plant SO<INF>2</INF> 
emissions here, although we report household emissions savings using a 
method similar to that described for NO<INF>X</INF>. See Appendix EA-1 
in the TSD for the methodology used to derive emission factors for 
residential combustion.
    The NES spreadsheet provides the input of energy savings for NEMS-
BRS, which then produces the emissions forecast. We calculate the net 
benefits of the standard as the difference between emissions estimated 
by the reference case version of NEMS-BRS and the emissions estimated 
with the trial water heater standard in place. See the Environmental 
Assessment (EA) bound into the TSD for details.
    We received several comments from stakeholders about the 
environmental analysis in NEMS-BRS. SC commented that the EIA treats 
electricity from renewable sources the same as fossil-fired generation. 
SC believes there is no benefit to ``saving'' hydroelectric, wind, 
geothermal generation, or biomass Btus. (SC, No. 42 at 3). However, DOE 
believes there are benefits from end-use electricity savings. Usually 
end-use savings result in differences in fossil fuel generation and not 
the fuels listed by SC because fossil fuels tend to be displaced first. 
The emissions reductions reported in this rulemaking are the net result 
of changes in the mix of electricity generating fuels used. Changes in 
equipment and any construction program adjustments that result from 
proposed standards are also accounted for. For example, DOE will only 
record CO<INF>2</INF> emissions savings to the extent that electricity 
generators burn less fuels emitting CO<INF>2</INF>.
    LaClede commented that DOE's emissions models appear to severely 
underestimate electric losses from extraction to generation, whereas 
natural gas losses are accounted for from the point of extraction to 
the point of end-use. (LaClede, No. 47 at 2). All losses from natural 
gas production are accounted for in NEMS-BRS. NES estimates are inputs 
to NEMS-BRS. They affect the natural gas supply system and are 
therefore completely accounted for in the model. As reductions in end-
use consumption result in less natural gas generation, less gas is 
extracted from wellheads resulting in less transportation losses from 
point of extraction through pipelines.
    NEMS-BRS accounts for total CO<INF>2</INF> emissions, so the full 
fuel cycle of carbon is incorporated from both coal and natural gas 
production. However, since NO<INF>X</INF> and SO<INF>2</INF> emissions 
are only treated in the power sector, emissions of these pollutants 
caused by mining and transporting fuel for power plants (``upstream 
emissions'') are ignored in NEMS-BRS. For electric end-uses, all energy 
losses associated with transmission and distribution from electric 
generators to residential appliances are included. Appendix EA-2 was 
included in the TSD to quantify the relative contribution of these 
upstream emissions to those reported in NEMS-BRS. DOE does not include 
the estimates of upstream coal mining emissions in its emissions 
reduction estimates.
    VP commented DOE should use marginal electric generating plant 
emission rates in the analysis to be more accurate and consistent with 
the energy costs. (VP, No. 45 at 3). Reported emissions are calculated 
from marginally displaced electric generation as simulated in NEMS-BRS.

K. Net National Employment

    The Process Rule includes national employment impacts among the 
factors

[[Page 25073]]

DOE considers in selecting a proposed standard; 10 CFR 430 subpart C, 
appendix A(4)(d)(7)(vi). The Department estimates the impacts of 
standards on employment for appliance manufacturers, relevant service 
industries, energy suppliers, and the economy in general. We estimate 
two employment impacts: total and direct impacts. Total impacts--or net 
national employment impacts--are impacts on the national economy, 
including the manufacturing sector being regulated. 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. 
The MIA only discusses the direct employment impacts.
    We define net national employment impacts from water heater 
standards as net jobs created or eliminated in the general economy. We 
expect the proposed energy efficiency standards for water heaters to 
save consumers money, although these savings will be partially offset 
by increased costs for water heaters. The resulting net savings are 
expected to be redirected to other forms of economic activity. We 
expect these shifts in spending and economic activity to affect the 
demand for labor, but there is no generally accepted method for 
estimating these effects.
    One method to assess the possible effects on the demand for labor 
of such shifts in economic activity is to compare sectoral employment 
statistics developed by the Labor Department's Bureau of Labor 
Statistics (BLS). The BLS regularly publishes its estimates of the 
number of jobs per million dollars of economic activity in different 
sectors of the economy, as well as the jobs created elsewhere in the 
economy by this same economic activity. BLS data indicates that 
expenditures in the electric sector generally create fewer jobs (both 
directly and indirectly) than expenditures in other sectors of the 
economy. There are many reasons for these differences, including the 
capital-intensity of the utility sector and wage differences. Based on 
the BLS data alone, we believe net national employment will increase 
due to shifts in economic activity resulting from the water heater 
standards.
    In developing this proposed rule, the Department attempted a more 
precise analysis of national employment impacts using an input/output 
model of the U.S. economy. The model characterizes the interconnections 
among 35 economic sectors using the data from the Bureau of Labor 
Statistics. Since the electric utility sector is more capital-intensive 
and less labor-intensive than other sectors (see Bureau of Economic 
Analysis, Regional Multipliers: A User Handbook for the Regional Input-
Output Modeling System (RIMS II), Washington, DC, U.S. Department of 
Commerce, 1992), a shift in spending away from energy bills into other 
sectors would be expected to increase overall employment. For more 
details on the net national employment analysis, please see Chapter 15 
in the TSD. This analysis also concluded that the shifts in sectoral 
expenditures likely to result from the proposed ballast standard would 
likely increase the net national demand for labor.
    Because this is a new analysis for an energy conservation standard 
rulemaking, we are requesting public comments on the validity of the 
analytical methods used and the appropriate interpretation and use of 
the results of this analysis.

IV. Analytical Results

A. Trial Standard Levels

    Based on the combination of design options that represent the most 
energy efficient level and the results of the LCC, MIA and NES 
analyses, we selected the following trial standard levels (see Table 
12). In selecting trial standard levels, we followed the guidance set 
forth in the Process Rule, 10 CFR 430, Subpart C, Appendix A, 5(c)(3), 
to identify and select candidate standard levels at the lowest LCC, a 
three year or less payback period, and the most energy efficient 
combination of design options.
    We have established four trial standard levels. Each level is made 
up of a combination of design options for each of the three fuel 
classes (electric, gas and oil). Several of the trial standard levels 
have the same efficiency within a particular fuel type (i.e., gas-fired 
trial standard level one and three have the same efficiency, but the 
electric and oil-fired efficiencies are different). This allows us to 
evaluate different design option combinations of fuel classes for 
subsequent analysis, permitting us to make an informed decision on the 
merits of different trial standard levels. We repeated some energy 
efficient, cost effective design options for electric and gas-fired 
water heaters in the selected trial standard levels to reduce the 
potential for fuel switching between these fuels. Table 11 presents the 
baseline and trial standard levels and associated design options for 
each fuel class of water heater.

    Table 11.--Trial Standard Levels for Water heaters With HFC-245fa
                              Blowing Agent
------------------------------------------------------------------------
 Trial standard level        Design options            Energy factor
------------------------------------------------------------------------
Basecase..............  Electric: Baseline......  .93--.00132V*
                        Gas: Baseline...........  .62--.0019V
                        Oil: Baseline...........  .59--.0019V
1.....................  Electric: Heat Traps +    .95--.00132V
                         Tank Bottom Insulation.  .67-.0019V
                        Gas: Heat Traps + Flue    .60--.0019V
                         Baffles (78% RE) + 2
                         Inch Insulation.
                        Oil: Heat Traps.........
2.....................  Electric: Heat Traps +    .96-.00132V
                         Tank Bottom Insulation   .68--.0019V
                         + 2 Inch Insulation.     .60-.0019V
                        Gas: Heat Traps + Flue
                         Baffles (78% RE) + 2.5
                         Inch Insulation.
                        Oil: Heat Traps.........
3.....................  Electric: Heat Traps +    .97--.00132V
                         Tank Bottom Insulation   .67--.0019V
                         + 2.5 Inch Insulation.   .59--.0019V
                        Gas: Heat Traps + Flue
                         Baffles (78% RE) + 2
                         Inch Insulation.
                        Oil: Baseline...........
4.....................  Electric: Heat Traps + 3  .98--.00132V
                         Inch Insulation +        .79--.0019V
                         Plastic Tank.            .67--.0019V
                        Gas: Heat Traps + Flue
                         Baffles (80% RE) + 3
                         Inch Insulation + Side
                         Arm Heater +Plastic
                         Tank + IID.
                        Oil: Heat Traps + 3 Inch
                         Insulation +
                         Interrupted Ignition +
                         Increased Heat
                         Exchanger Area (82% RE).
------------------------------------------------------------------------
* V is the Rated Storage Volume, which equals the water storage capacity
  of a water heater, in gallons, as specified by the manufacturer.


[[Page 25074]]

    Based on Honeywell's September 13, 1999, public announcement that 
it will produce HFC-245fa, the proposed standard levels are based on 
insulation blown with HFC-245fa. We considered insulation thicknesses 
of 2 inches, 2.5 inches, and 3 inches. Although we do not report the 
results of the water blown insulation analyses here, we completed a 
full analysis using water blown foam for each trial standard level. We 
chose HFC-245fa over water blown insulation because of 0.7 to 1.7 quads 
more energy savings for trial standard levels one to four. We request 
comments on the use of water blown insulation since DOE has analyzed 
both options. Results from the water blown insulation analyses are 
found in the TSD. Chapter 9.7 in the TSD has tables for HFC-245fa and 
water-blown insulation and the associated design options for each fuel 
class of water heater.
    Water heater energy conservation standards vary as a function of 
the water heater volume. Section 325(e) of EPCA as amended, 42 U.S.C. 
6295(e). DOE defines this volume as the rated volume based on 
manufacturers' labeling. See 10 CFR 430, subpart B, appendix E. For 
this rulemaking, DOE verified that these volumetric coefficients were 
consistent for the increased levels of efficiency under consideration 
in the analysis.
1. Economic Impacts on Consumers
a. Life-Cycle-Cost
    To evaluate the economic impact on consumers, we conducted a LCC 
analysis for each of the fuel types and trial standard levels including 
estimating the percent of the population that benefits at each trial 
standard level. Table 12 shows the average LCC savings and percent of 
households benefitting for each of the trial standard levels for each 
of the fuel classes. The average LCC savings for trial standard levels 
one, two and three are positive for gas-fired and electric water 
heaters with the HFC-245fa blowing agent. Only trial standard level 
three is not negative for oil-fired water heaters, and it is the 
baseline. None of the other trial standard levels has positive average 
LCC savings for oil-fired water heaters because energy savings are 
small compared to the increase in consumer price.
    Where LCC savings are positive for electric and gas-fired water 
heaters, the percent of households benefitting ranges from 74-91% for 
the trial standard levels analyzed. For oil-fired water heaters, the 
maximum of households benefitting is 25% at trial standard level two. 
However, even at trial standard level four, 20-31% of households with 
electric or gas-fired water heaters will benefit.

       Table 12.--Life-Cycle-Cost Savings and Percent Benefitting
                      [HFC-245fa Blown Insulation]
------------------------------------------------------------------------
 Trial  standard                              Percent       Life-cycle
      level            Design options       benefitting    cost savings
------------------------------------------------------------------------
1................  Electric: Heat Traps               91              32
                    + Tank Bottom
                    Insulation.
                   Gas Heat Traps + Flue              87              43
                    Baffles (78% RE) + 2
                    Inch Insulation.
                   Oil: Heat Traps......              25             -15
2................  Electric: Heat Traps               79              36
                    + Tank Bottom
                    Insulation + 2 Inch
                    Insulation.
                   Gas: Heat Traps +                  79              34
                    Flue Baffles (78%
                    RE) + 2.5 Inch
                    Insulation.
                   Oil: Heat Traps......              25             -15
3................  Electric: Heat Traps               74              40
                    + Tank Bottom
                    Insulation + 2.5
                    Inch Insulation.
                   Gas: Heat Traps +                  87              43
                    Flue Baffles (78%
                    RE) + 2 Inch
                    Insulation.
                   Oil: Baseline........              NA               0
4................  Electric: Heat Traps               31             -55
                    + 3 Inch Insulation
                    + Plastic Tank.
                   Gas: Heat Traps +                  20            -214
                    Flue Baffles (80%
                    RE) + 3 Inch
                    Insulation + Side
                    Arm Heater + Plastic
                    Tank + IID.
                   Oil: Heat Traps + 3                 0            -459
                    Inch Insulation +
                    Interrupted Ignition
                    + Increased Heat
                    Exchanger Area (82%
                    RE).
------------------------------------------------------------------------

    Another LCC analysis we conducted is the Consumer Subgroup 
analysis. This analysis examines the economic impacts on different 
groups of consumers by estimating the average change in LCC and by 
calculating the fraction of households that would benefit. We analyzed 
the potential effect of standards for households with low income levels 
and senior-only households, two consumer subgroups of interest 
identified by DOE and supported by stakeholders. We present the results 
of the analysis in Table 13.

                                     Table 13.--Consumer Subgroup LCC Savings and Percent of Households Benefitting
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Sample households benefitting (%)                    Average LCC Savings ($)
                    Trial std levels                     -----------------------------------------------------------------------------------------------
                                                               Total        Senior-only     Low income         Total        Senior-only     Low income
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Electric Water Heaters, HFC-245fa blown insulation
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................              91              94              92              32              34              29
2.......................................................              79              83              80              36              48              43
3.......................................................              74              77              76              40              53              48
4.......................................................              31              34              28             -55             -46             -66
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Gas-fired Water Heaters, HFC-245fa blown insulation
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................              87              90              91              43              42              46
2.......................................................              79              80              82              34              34              38
3.......................................................              87              90              91              43              42              46
4.......................................................              20              20              19            -214            -193            -206
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 25075]]

 
                                                   Oil-Fired Water Heaters, HFC-245fa blown insulation
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................              25              20              25             -15             -11              -6
2.......................................................              25              20              25             -15             -11              -6
3.......................................................               0               0               0               0               0               0
4.......................................................               0               0               0            -459            -512            -461
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The two consumer subgroups show the same trend in average LCC 
savings and percent of sample households benefitting as the total 
sample of households. In the case of electric water heaters, both 
senior-only and low income consumer groups appear to benefit more from 
trial standard levels two through four than the total sample of 
households. In households with gas-fired water heaters, low income 
households have greater savings of average LCC for trial standard 
levels one through three. None of the oil-fired water heater trial 
standard levels show positive LCC savings, but level three shows zero 
LCC savings because it is the same as the baseline. Low income 
households with oil-fired water heaters show 25% or less of households 
benefitting from any of the trial standard levels.
    We have noted the LCC savings for the senior-only subgroup are 
similar to those of the general population. Since the elderly use 30 
percent less hot water on average than the general population, one 
would expect their costs to be lower and as a result, the LCC effect to 
be different. However, the standby losses of water heaters, which are 
not affected by hot water usage, are the same for the elderly and the 
general population. Therefore, since most of the design options 
considered affect standby losses and not water heating efficiency, we 
would expect the distribution of LCC impacts for the elderly to be 
similar to the general population.
b. Median Payback
    A part of the LCC analysis is the payback analysis. The LCC payback 
analysis considers all of the design option combinations for each fuel 
type and calculates a payback for each RECS household. We report the 
median payback from the distribution of paybacks for each trial 
standard level in Table 14. The median payback is the median number of 
years required to recover, in energy savings, the increased costs of 
the efficiency improvements.

          Table 14.--Median and Test Procedure Payback (Years)
                      [HFC-245fa Blown Insulation]
------------------------------------------------------------------------
                                                               Test
 Trial  standard       Design options         Median         procedure
      level                                   payback       payback \1\
------------------------------------------------------------------------
1................  Electric: Heat Traps              2.5             1.9
                    + Tank Botton
                    Insulation.
                   Gas: Heat Traps +                 2.9             3.3
                    Flue Baffles (78%
                    RE) + 2 Inch
                    Insulation.
                   Oil: Heat Traps......             8.2             6.1
2................  Electric: Heat Traps              4.8             3.3
                    + Tank Bottom
                    Insulation + 2 Inch
                    Insulation.
                   Gas: Heat Traps +                 3.9             4.1
                    Flue Baffles (78%
                    RE) + 2.5 Inch
                    Insulation.
                   Oil: Heat Traps......             8.2             6.1
3................  Electric: Heat Traps              5.4             3.7
                    + Tank Bottom
                    Insulation + 2.5
                    Inch Insulation.
                   Gas: Heat Traps +                 2.9             3.3
                    Flue Baffles (78%
                    RE) + 2 Inch
                    Insulation.
                   Oil: Baseline........             0.0             0.0
4................  Electric: Heat Traps             11.7             8.2
                    + 3 Inch Insulation
                    + Plastic Tank.
                   Gas: Heat Traps +                11.3            10.3
                    Flue Baffles (80%
                    RE) + 3 Inch
                    Insulation + Side
                    Arm Heater + Plastic
                    Tank + IID.
                   Oil: Heat Traps + 3              24.6           15.5
                    Inch Insulation +
                    Interrupted Ignition
                    + Increased Heat
                    Exchanger Area (82%
                    RE).
------------------------------------------------------------------------
\1\ Electric--50 Gallon; Gas--40 Gallon; Oil--32 Gallon.

c. Test Procedure Payback
    The Act states that if the Department determines that the payback 
period is less than three years as calculated under the water heater 
procedure, there shall be a rebuttable presumption that such trial 
standard level is economically justified. In Table 14, we list the 
payback periods by fuel type (product class) and trial standard levels 
for HFC-245fa blown insulation. The Act further states that if this 
three year payback is not met, this determination shall not be taken 
into consideration in the deciding whether a standard is economically 
justified. Section 325(o)(2)(B)(iii), 42 U.S.C. 6295(o)(2)(B)(iii).
    Only electric water heaters at trial standard level one satisfy the 
rebuttable presumption. Electric water heaters with heat traps and 
insulated tank bottoms have a 1.9 year payback calculated under the 
test procedure. There are no trial standard levels for gas-fired or 
oil-fired water heaters that have a payback of three years or less.
2. Economic Impact on Manufacturers
    We performed a MIA to determine the impact of standards on 
manufacturers. The complete analysis is in Chapter 13 of the TSD. In 
general, manufacturers stated they would be able to manufacture any of 
the design options with heat traps, thicker insulation, tank bottom 
insulation on electric and improved flue baffles on gas-fired water 
heaters. None of the manufacturers indicated they would leave the 
industry or go out of business as a result of standard levels that 
would require

[[Page 25076]]

energy factors below plastic tanks or side-arm heaters (i.e., trial 
standard levels one through three).
    We conducted detailed interviews with four of the five major water 
heater manufacturers. The five together supply more than 99% of the 
U.S. residential water heater market. The interviews provided valuable 
information used to evaluate the impacts of an amended standard on 
manufacturers' cash flows, manufacturing capacities and employment 
levels.
    We analyzed the water heater industry using two business scenarios. 
The standards scenario represents the investments needed to meet the 
energy efficiency level of a trial standard level. The cumulative 
scenario includes the investments required for energy efficiency 
improvement, changes to a new blowing agent and the development and 
manufacture of a gas-fired water heater resistant to ignition of 
flammable vapors. Additionally, we examined the ability of 
manufacturers to recover the investments required for each of the 
scenarios and trial standard levels.
    The potential value of the water heater industry, represented by 
the INPV, ($322 million in 1998 dollars) is directly related to the 
manufacturers' price to the dealer/distributor. Since all five of the 
major manufacturers produce both gas-fired and electric water heaters, 
the industry is highly competitive in terms of manufacturer's pricing. 
Manufacturer prices are expected to increase from the current average 
cost to the dealer/distributor of $156 to a range of $188-299 for trial 
standard levels one through four. Based on comments from the 
interviews, we assume manufacturers will raise prices enough to recover 
the costs of materials, labor and transportation and 75% of their 
investment. If manufacturers increased water heater distributor prices 
slightly more, from $0.13 for trial standard level one to $2.00 for 
trial standard level four, they would recover all of their investment. 
Table 15 shows the results of the cash flow analysis with these 
assumptions.

                                     Table 15.--Manufacturer Impact Analysis
----------------------------------------------------------------------------------------------------------------
                                                                        Change in INPV              Investment
               Trial Std level                    INPV  ($    ----------------------------------   required  ($
                                                 millions)           (%)          ($ millions)      millions)
----------------------------------------------------------------------------------------------------------------
                                   Standard Scenario, HFC-5fa blown insulation
----------------------------------------------------------------------------------------------------------------
Base Case...................................              322                0                0                0
1...........................................              314               -3               -8               32
2...........................................              307               -5              -15               61
3...........................................              307               -5              -15               61
4...........................................              265              -18              -57              229
----------------------------------------------------------------------------------------------------------------
                                 Cumulative Scenario, HFC-245fa blown insulation
----------------------------------------------------------------------------------------------------------------
Base Case...................................              322                0                0                0
1...........................................              287              -11              -35              142
2...........................................              280              -13              -42              172
3...........................................              279              -13              -43              172
4...........................................              237              -27              -85              340
----------------------------------------------------------------------------------------------------------------

    From Table 15, we note energy efficiency standards could result in 
losses of industry net present value from about $8 million to 57 
million (3-18%), while requiring investments of $32 million to 229 
million. However, even if DOE did not revise energy efficiency 
standards, other Federal regulatory actions that will take effect on or 
before January 1, 2003, will result in a $27 million loss (8%) in 
industry NPV. This loss exceeds any of DOE's trial standard levels 
except level four. As requested by GRI and the SC and as required by 
the Process Rule, 10 CFR part 430, subpart C, appendix A 10(g)(1), DOE 
considered the cumulative impacts of other Federal regulatory actions 
on the trial standard levels, including the phase out of HCFC-141b and 
the CPSC initiative to prevent the ignition of flammable vapors on gas-
fired water heaters. (GRI, No. 11 at 1 and SC, No. 42 at 2). These 
cumulative losses range from $35 million to $85 million. The 
investments to prevent ignition of flammable vapors and for new blowing 
agents are $111 million. The investments for cumulative regulations are 
potentially large given the current after tax profitability of the 
water heater industry, estimated to be $41 million (1998) on revenues 
of $1.3 billion.
    Based on DOE's interviews, manufacturers expect little impact on 
manufacturing capacity and expect to meet future demand as long as 
standard levels based on side-arm gas-fired water heaters and plastic 
tank electric units are not mandated. Currently, the U.S. industry has 
far more manufacturing capacity than the domestic market can absorb. 
Manufacturers estimated the industry is operating at 60-80% of total 
capacity. Due to the phase-out of HCFC-141b insulation blowing agent 
and a requirement for a gas-fired water heater resistant to ignition of 
flammable vapors, it is likely that nearly every product line would 
have to be redesigned, retested and re-certified. Several manufacturers 
indicated a preference to retool for new blowing agents, energy-
efficiency standards and flammable vapor-resistant designs at the same 
time, to avoid redundant efforts and limit costs.
    We also used the manufacturers' interviews to assess employment 
impacts due to an amended energy efficiency standard. Manufacturers 
expected the impact of new blowing agents and flammable vapor resistant 
designs on labor to be minimal, neither increasing nor reducing 
employment levels by more than a few employees. Unless efficiency 
levels requiring the adoption of side arm heaters or plastic tanks are 
mandated, manufacturers do not anticipate significant changes in 
employment levels or training requirements. Additionally, we believe 
market growth of 2.5% per year for new homes and modest productivity 
gains ensure current employment levels for the foreseeable future. In 
our analysis, yearly water heater shipments range from 9.7 million in 
1999 to 19.5 in 2030. Furthermore, a replacement market that increases 
by about 1/10th of the new home market each year ensures future demand.

[[Page 25077]]

B. Significance of Energy Savings

    The Act prohibits the Department from adopting a standard for a 
product if that standard would not result in ``significant'' energy 
savings. Section 325(o)(3)(B), 42 U.S.C. 6295(o)(3)(B). While the term 
``significant'' is not defined in the Act, the U.S. Court of Appeals, 
in Natural Resources Defense Council v. Herrington, 768 F.2d 1355, 1373 
(D.C. Cir. 1985), ruled that Congress intended ``significant'' energy 
savings to be savings that were not ``genuinely trivial.'' The energy 
savings for all of the trial standard levels considered in this 
rulemaking are non-trivial and therefore we consider them 
``significant'' within the meaning of Section 325 of the Act.
    National Energy Savings. To estimate the energy savings through the 
year 2030 due to amended standards, we compared the energy consumption 
of water heaters in the 2003 baseline to the energy consumption of 
water heaters complying with the trial standard levels. DOE calculates 
these energy savings at the source using the NEMS-BRS distribution and 
generation losses. This addresses stakeholders' comments that a source-
based analysis is a more accurate measurement of the total energy being 
used. (Clearwater, No. 30 at 1 and NGC, No. 59 at 1). Table 16 shows 
these results for water heaters with HFC-245fa blown insulation.

                    Table 16.--Source Energy Savings With HFC-245fa Blown Insulation (Quads)
----------------------------------------------------------------------------------------------------------------
                                                    Trial Std 1     Trial Std 2     Trial Std 3     Trial Std 4
----------------------------------------------------------------------------------------------------------------
Total Quads Saved...............................             3.4             4.3             4.8            13.1
Total Exajoules Saved...........................             3.6             4.5             5.0            13.8
----------------------------------------------------------------------------------------------------------------

    All of the trial standard levels considered in this rulemaking have 
significant energy savings, ranging from 3.4 quads (3.6 Exajoules (EJ)) 
to 13.1 quads (13.8 EJ), depending on the trial standard level.
    National Net Present Value. Additionally, we analyzed the economic 
impact on the nation to year 2030. This is a NPV analysis using the 
AEO99 reference energy prices. Table 17 lists the NPV for HFC-245fa 
blown insulation. The NPV considers the combined discounted energy 
savings minus increased consumer costs of the four fuel types of 
equipment at a particular trial standard level. We base this 
calculation on all expenses and savings occurring between 2003 and 
2030.

                  Table 17.--National Net Present Value
------------------------------------------------------------------------
                                                         NPV--HFC-245fa
                 Trial standard level                     ($ billions)
------------------------------------------------------------------------
1.....................................................               2.3
2.....................................................               1.5
3.....................................................               3.3
4.....................................................             -17.4
------------------------------------------------------------------------

    The national NPV is positive for trial standard levels one through 
three. In this analysis, a positive NPV means that the estimated energy 
savings are greater than the increased costs due to standards. Among 
the trial standard levels analyzed, trial standard level three has the 
highest NPV.

C. Lessening of Utility or Performance of Products

    None of the trial standard levels reduces the performance of water 
heaters. Generally, the trial standard levels reduce heat losses and 
improve heat exchanger effectiveness. These changes improve energy and 
water heating performance and may increase the amount of water 
available in one hour, i.e., the first hour rating.
    However, to reduce heat losses, it is necessary to use thicker 
insulation. The trial standard levels contemplate thicker insulation of 
2.5-3 inches versus the 1-2 inches in common use today. This extra 
thickness of insulation will make water heaters larger and more 
difficult to squeeze into tight spaces when replacing a water heater. 
DOE does not believe any model of water heater will become unavailable 
as a result of thicker insulation. In those applications where thicker 
insulation could cause problems, we believe possible solutions include 
smaller tanks with larger heating elements, taller tanks, more 
effective insulation, e.g., space blanket, or perhaps instantaneous 
water heaters. Instantaneous water heaters generally have 
characteristics such as, initiating water heating based on sensing 
water flow, a higher heating rate and storage capacities less than two 
gallons.
    However, a number of manufacturers and other stakeholders believe 
that thicker insulation will reduce product utility or adversely impact 
consumers. (Bradford White, No. 74 at 2; GAMA, No. 71 at 4 and No. 91 
at 1; CNG, No. 85 at 2; NEGA, No. 90 at 3; Rheem, No. 95 at 1; SC, No. 
84 at 2; and AGA, No. 92 at 9). There may be replacement applications 
where manufacturers can only meet the demand for replacement water 
heaters with a slightly smaller tank. DOE has investigated this with 
water heater manufacturers and home builders and is aware that some 
replacement applications may be unable to accommodate the tank size 
currently used.
    ACEEE claimed manufacturers can make water heaters taller or wider 
to fit most of the installation situations encountered. (ACEEE, No. 93 
at 8). OOE stated the industry can find the additional space for 
insulation by reducing the storage tank diameter. This will only reduce 
tank volume by 2-3 gallons, according to OOE. (OOE, No. 96 at 5). In 
another approach, Battelle suggested manufacturers could increase the 
firing rate, set point, and heat transfer rate of gas-fired water 
heaters so they could reduce tank size without sacrificing any first-
hour rating. (Battelle, No. 66 at 8 and No. 83 at 11). We estimate 
external dimensions for electric water heaters could be maintained at 
approximately current sizes, if tank volume were reduced about 20%, 
coupled with a 1.35 kW increase in the heating rate, from 4.5-5.85 kW. 
This would restore the first hour rating and a 6 kW heating element as 
a common size, see Chapter 3.4.4 in the TSD. We recognize the increased 
heating element wattage may overload some existing electrical circuits. 
We request comments on these suggestions and the extent that product 
utility might be affected.
    Further, DOE requests engineering data or other information that 
will substantiate claims of reduced product utility and an explanation 
of the specific impact that would be anticipated. We are particularly 
interested in comments on the number of households that may be affected 
and whether these households are in a particular geographic region or 
income strata.

D. Impact of Lessening of Competition

    The Act directs the Department to consider any lessening of 
competition that is likely to result from standards. It further directs 
the Attorney General to determine the impact, if any, of competition 
likely to result from such

[[Page 25078]]

standard and transmit such determination, not later than 60 days after 
the publication of a proposed rule to the Secretary, together with an 
analysis of the nature and extent of such impact. Section 
325(o)(2)(B)(i)(V), 42 U.S.C. 6295(o)(2)(B)(i)(V).
    In order to assist the Attorney General in making such a 
determination, the Department has provided the Department of Justice 
(DOJ) with copies of this notice and the TSD for review. At DOE's 
request, the DOJ reviewed the manufacturer impact analysis interview 
questionnaire to ensure that it would provide insight concerning any 
lessening of competition due to any proposed trial standard levels.
    In response to a comment from the AGA, DOE requested the DOJ's view 
as to whether the ``lessening of competition'' language in Section 
325(o)(2)(B)(i)(V), 42 U.S.C. 6295(o)(2)(B)(i)(V) applies to energy 
suppliers. (AGA, No. 49 at 6). In its letter dated June 25, 1999, the 
DOJ replied that ``we would consider not only evidence of the effect on 
competition among water heater manufacturers, but also information 
relating to the likely effect on competition among energy suppliers.'' 
However, the DOJ added they would focus on the effect of standards ``on 
the overall level of market competition, not on individual fuel 
suppliers or on shifts in consumer usage among alternate fuels.''

E. Need of the Nation To Save Energy and Net National Employment

1. Environmental Impacts
    Enhanced energy efficiency improves the Nation's energy security, 
strengthens the economy and reduces the environmental impacts of energy 
production. The energy savings from water heater standards result in 
reduced emissions of CO<INF>2</INF>, SO<INF>2</INF> and NO<INF>X</INF> 
and aids in addressing global climate change and reducing air 
pollution. Depending on the standard level chosen, the cumulative 
emission reductions to 2030 range from 48-219 Mt for carbon equivalent, 
141-599 thousand metric tons (kt) for NO<INF>X</INF>, and -6 to 54 kt 
for SO<INF>2</INF>. The large reductions in CO<INF>2</INF> and 
NO<INF>X</INF> at all standard levels are a positive benefit to the 
nation. We show cumulative emissions savings from 2003-2030 in Table 
18.
    EEI, SC and VP claimed in-house combustion also will produce carbon 
monoxide (CO), particulates, and volatile organic compounds (VOCs), yet 
they are not included in the environmental analysis. (EEI, No. 39 at 4 
and No. 79 at 1; SC, No. 84 at 2; and VP, No. 45 at 3). Properly 
functioning appliances should not emit CO. Additionally, particulates 
and hydrocarbon emissions from appliances are very, very small. 
Therefore, we assumed CO and particulate emissions reductions resulting 
from proposed energy standards are negligible.

                             Table 18.--Cumulative Emissions Reductions Through 2030
----------------------------------------------------------------------------------------------------------------
                                                               Trial Std    Trial Std    Trial Std    Trial Std
                          Emission                              level 1      level 2      level 3      level 4
----------------------------------------------------------------------------------------------------------------
Carbon (Mt).................................................           48           74           83          219
NO<INF>X</INF> (kt)....................................................          141          208          229          599
SO<INF>2</INF> (kt)....................................................          **4          **1         **-6        **54
----------------------------------------------------------------------------------------------------------------
**Results only include household SO<INF>2</INF> emissions reductions because SO<INF>2</INF> emissions from power plants are capped by
  clean air legislation. Thus, SO<INF>2</INF> emissions will only be negligibly affected by possible water heater
  standards.

2. Net National Employment
    In the Process Rule, DOE committed to develop estimates of the 
employment impacts of proposed standards in the economy in general. The 
results of the Department's analysis are shown in Chapter 15 of the 
TSD.
    While both this input/output model and the direct use of BLS 
employment data suggest the proposed water heater standards could 
increase the net demand for labor in the economy, the gains would most 
likely be very small relative to total national employment. For several 
reasons, however, even these modest benefits for national employment 
are in doubt:
    <bullet> Unemployment is now at the lowest rate in 30 years. If 
unemployment remains very low during the period when the proposed 
standards are put into effect, it is unlikely that the standards could 
result in any net increase in national employment levels.
    <bullet> Neither the BLS data nor the input-output model used by 
DOE include the quality or wage level of the jobs. One reason that the 
demand for labor increases in the model may be that the jobs expected 
to be created pay less than the jobs being lost. The benefits from any 
potential employment gains would be reduced if job quality and pay are 
reduced.
    <bullet> The net benefits from potential employment changes are a 
result of the estimated net present value of benefits or losses likely 
to result from the proposed standards, it may not be appropriate to 
separately identify and consider any employment impacts beyond the 
calculation of net present value.
    Taking into consideration these legitimate concerns regarding the 
interpretation and use of the employment impacts analysis, the 
Department concludes only that the proposed water heater standards are 
likely to produce employment benefits that are sufficient to offset 
fully any adverse impacts on employment in the water heater or energy 
industries.

F. Conclusion

1. Comments on Standard Levels
    In order to inform interested stakeholders, we released our 
preliminary analysis results and convened a workshop to receive 
comments on what standard might be supported by the results. Below is a 
short summary of the type of comments we received on our preliminary 
analysis. We have considered these comments when selecting the proposed 
standard level. Many of the comments suggest actions that are already a 
part of the process we use to select a standard.
    SC stated minimum efficiency levels should be set so that the 
majority of consumers benefit from the new standards. SC suggested if 
at least 85% of the population benefitted, it would be unlikely that 
any particular subgroup of customers would suffer substantial loss from 
the proposed standard. (SC, No. 42 at 3). CNG and NEGA stated any 
standard above trial standard level one (use EFs from July Workshop) is 
too costly for consumers and may affect safety. (CNG, No. 85 at 1 and 
NEGA, No. 90 at 1). When we select a standard level, we weigh the 
overall benefits and burdens. We do not base our decision on any 
particular fraction of the population that benefits.
    Several comments claimed DOE should keep new standards fuel neutral 
(EEI, No. 79 at 2 and American Electric

[[Page 25079]]

Power, No. 87 at 1). The National Rural Electric Cooperative 
Association (NRECA) claimed gas-fired and electric water heaters should 
have the same 0.03 increase in energy factor using thicker insulation 
and heat traps. (NRECA, No. 2 at 2). EEI and American Electric Power 
wanted DOE to keep new standards fuel neutral by raising energy factors 
for all fuel types.
    Other comments made specific recommendations for gas-fired and 
electric water heaters. PG&E claimed DOE should set the new standards 
for electric and gas-fired water heaters at the highest levels that can 
be achieved with conventional technologies, e.g., 0.60 EF for gas-fired 
water heaters that are common in southern California. (PG&E, No. 94 at 
3). ACEEE claimed that according to DOE's July 1997 analysis, the 
minimum LCC point is 0.91 EF for a 50-gallon electric and 0.61 EF for a 
40-gallon gas-fired water heater when using HFC-245fa blown insulation. 
Furthermore, ACEEE believes this is what DOE should propose as the new 
standard in the NOPR. (ACEEE, No. 93 at 9). Bradford White recommended 
that electric and oil standards should remain the same and gas-fired 
water heater standards should be raised by 0.02 EF. (Bradford White, 
No. 89 at 5).
    ACEEE claimed DOE should consider a gas-fired water heater with an 
80% flue baffle, 2 inches of insulation and heat traps because it 
appears to be the minimum LCC. (ACEEE, No. 93 at 2). In our revised 
analysis, the lowest LCC for a gas-fired water heater is a 78% flue 
baffle with 2 inches of insulation and heat traps. To verify that we 
did not overlook any economically justified trial standard, we analyzed 
a gas-fired water heater with an 80% flue baffle and 2 inches of 
insulation. This standard level resulted in a negative LCC savings, 
negative manufacturers' impact and negative NPV so we concluded it is 
not economically justified.
2. Proposed Standard
    Section 325(o)(2)(A), 42 U.S.C. 6295(o)(2)(A), of the Act specifies 
that any new or amended energy conservation standard for any type (or 
class) of covered product shall be designed to achieve the maximum 
improvement in energy efficiency which the Secretary determines is 
technologically feasible and economically justified. In determining 
whether a standard is economically justified, the Secretary must 
determine whether the benefits of the standard exceed its burdens. 
Section 325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i). The amended 
standard must ``result in significant conservation of energy.'' Section 
325(o)(2)(B)(iii)(3)(B), 42 U.S.C. 6295(o)(B)(iii)(3)(B). The Secretary 
has eliminated the maximum technologically feasible levels for electric 
and gas-fired water heaters, but we are analyzing the maximum 
technologically feasible level for oil-fired water heaters. See Section 
III.D.2 of this notice. All of the design options included in our 
analysis are technologically feasible since they are commercially 
available.
    As discussed in section IV.A, we consider the impacts of standards 
at each of four standards levels, beginning with the most efficient 
level, i.e., standard level four. We then consider less efficient 
levels. Standard levels three and two are combinations of different 
efficiency levels for the different classes. For gas-fired water 
heaters, standard levels three and one are the same, though lower 
efficiency than that found in standard level two. For electric water 
heaters, no standard levels are repeated and the efficiency of each 
lower standard level is lower than that found in higher standard 
levels. Finally, for oil-fired water heaters, standard levels two and 
one are the same and level three is no change from the current 
standard. By combining efficiency levels in this way, the Department is 
able to evaluate the impacts of different combinations of standard 
levels to make an informed decision on the merits of different 
efficiency combinations.
    To aid the reader as we discuss the benefits or burdens of the 
trial levels we have included a summary of the analysis results in 
Table 19.

                     Table 19.--Summary Analysis Results Based on HFC-245fa Blown Insulation
----------------------------------------------------------------------------------------------------------------
                                                Trial Std 1      Trial Std 2      Trial Std 3      Trial Std 4
----------------------------------------------------------------------------------------------------------------
Total Quads Saved...........................              3.4              4.3              4.8             13.1
NPV ($Billion)..............................              2.2              1.5              3.4            -17.4
Emissions:
    Carbon Equivalent (Mt)..................             48               74               83              219
    NO<INF>X</INF> (kt)................................            141              208              229              599
    SO<INF>2</INF> (kt)................................            **4              **1             **-6             **54
    Cumulative Change in INPV ($ Million)...             -8              -15              -15              -57
Life Cycle Cost ($):
    Electric................................             32               36               40              -55
    Gas-Fired...............................             43               34               43             -215
    Oil-Fired...............................            -20              -20                0            -447
----------------------------------------------------------------------------------------------------------------
**Results only include household SO<INF>2</INF> emissions reductions because SO<INF>2</INF> emissions from power plants are capped by
  clean air legislation. Thus, SO<INF>2</INF> emissions will only be negligibly affected by possible water heater
  standards.

    We first considered trial standard level four, the most efficient 
level for each of the three classes. Trial standard level four saves 
about 13.1 quads of energy, a significant amount. The emissions 
reductions of 219 Mt of carbon equivalent, 599 kt of NO<INF>X</INF>, 
and 54 kt of SO<INF>2</INF> are significant. However, at this level, 
consumers experience negative LCC impacts. They would lose $55 (with 
electric water heaters), $193 (with gas-fired water heaters) and $459 
(with oil-fired water heaters). Furthermore, the water heater industry 
would lose 27% of its value and the nation would have a loss in NPV of 
more than $17 billion. The Department concludes the resulting energy 
savings and emission reductions at this level are outweighed by the 
negative economic impacts on the nation, consumers and manufacturers. 
Consequently, the Department concludes trial standard level four is not 
economically justified.
    Next, we considered trial standard level three. This trial standard 
level saves about 4.8 quads of energy, a significant amount. The 
emissions reductions are significant: 83 Mt of carbon equivalent and 
229 kt of NO<INF>X</INF>. There is a small increase in household 
emissions of SO<INF>2</INF> (6 kt) due to a slight increase in 
shipments of oil-fired water heaters. The national NPV of trial 
standard level three is $3.4 billion from 2003-2030.

[[Page 25080]]

    The economic benefits to consumers are significant. The average LCC 
savings for consumers with electric and gas-fired water heaters are $40 
and $43 respectively and there are no impacts on users of oil-fired 
water heaters. In trial standard level three, 87% of households with 
gas-fired water heaters have LCC savings, for an average savings of 
$57, while 13% experience LCC losses, for an average loss of $52. For 
households with electric water heaters, 74% of households have LCC 
savings, for an average savings of $64, while 26% experience LCC 
losses, for an average loss of $27.
    For electric water heaters, the analysis predicts that 26 percent 
of all consumers would experience no change or some net cost with more 
efficient electric water heaters. However, we believe that there are 
costs or savings near the point of zero change in LCC that consumers 
would be unable to distinguish in their yearly expenses. We have chosen 
<plus-minus>2 percent of average baseline LCC as the band of no 
consumer impact. We believe this small percentage, regardless of the 
actual total LCC, is insignificant to the consumer because these LCC 
costs or savings are spread over monthly utility bills for the life of 
the water heater. By applying a 2% band of average LCC, we can clearly 
show the significant net savings and net costs associated with a trial 
standard level. This permits a more informed decision based on weighing 
the significant benefits and burdens in terms of consumer impact. The 
resulting ranges are shown in Figure 9.6.2a in the TSD.
    We will use <plus-minus>2 percent of baseline LCC to indicate no 
impact, positively or negatively, on consumers. Therefore, only 4 
percent of consumers in the case of electric water heaters or 6 percent 
of consumers in the case of gas water heaters sustain any significant 
net costs under the proposed standard level for water heaters. 
Similarly, 35 percent of consumers in the case of electric water 
heaters or 62 percent of consumers in the case of gas water heaters 
have significant net savings.
    Two percent of average baseline LCC equals $51 for electric water 
heaters. Over the average life of 12 years for an electric water 
heater, this is less than $4.50 per year. For consumers with gas-fired 
water heaters, two percent of average baseline LCC is $30. Over the 
average life of 9 years for a gas water heater, this is less than $3.50 
per year. We believe this is a small amount in terms of yearly 
expenditures and will not adversely impact consumers' purchase 
decisions about water heaters, or their financial positions. 
Additionally, low-income and senior-only consumer subgroups exhibit 
similar distributions of costs and savings. A similar small percentage 
of low-income or senior only consumers are affected by higher costs.
    The industry will lose about 5% ($15 million) of its INPV due to 
energy efficiency standards. These losses are more than balanced by NPV 
gains to the nation of $3.3 billion, or 220 times the industry losses. 
Industry losses for trial standard level three due to all Federal 
actions (CPSC, EPA and DOE) are 13% of its INPV, or $43 million. Even 
this level of losses is offset by gains to the nation that are 77 times 
the industry losses.\2\ Based on the manufacturer interviews, DOE 
believes there will not be any plant closures or employee layoffs.
---------------------------------------------------------------------------

    \2\ As DOE has determined, the benefits of today's proposal 
outweigh the $15 million loss to the industry. To review the support 
for this determination, see the TSD at Chapters 12.5 and Table 
12.1a, 13.3.3.5 and Table 13.8a, 13.3.4, and 13.3.5.
---------------------------------------------------------------------------

    In determining the economic justification of trial standard level 
three, the Department has weighed the benefits of energy savings, 
reduced average consumer LCC, significant and positive NPV, and 
emissions reductions and the burdens of a loss in manufacturer net 
present value, and consumer LCC increases for some households. After 
carefully considering the results of the analysis, DOE has determined 
the benefits of trial standard level three outweigh its burdens and is 
economically justified. The Department also concludes trial standard 
level three saves a significant amount of energy and is technologically 
feasible.\3\ Therefore, the Department today proposes to adopt the 
energy conservation standards for water heaters at trial standard level 
three.
---------------------------------------------------------------------------

    \3\ The proposed standard is based on insulation blown with HFC-
245fa. We also analyzed the impact of using water-blown insulation. 
We found the benefits of LCC savings, emission reductions, and NPV 
are lower, and manufacturers' losses are higher using water blown 
insulation compared to using HFC-245fa blown insulation. The energy 
savings and water heater performance are also lower because water 
blown insulation is 42% less effective than HFC-245fa blown 
insulation.
    If, based on comments on today's proposed rule, DOE were to 
conclude that insulation with energy conservation characteristics 
similar to HFC-245fa blown insulation will not be available at the 
effective date of the standard, DOE would use the water blown 
insulation analysis as a basis for its final decision.
---------------------------------------------------------------------------

V. Procedural Reviews

A. Review Under the National Environmental Policy Act

    In issuing the March 4, 1994, Proposed Rule for energy efficiency 
standards for eight products, one of which was water heaters, the 
Department prepared an Environmental Assessment (DOE/EA-0819) that was 
published within the Technical Support Document for that Proposed Rule. 
(DOE/EE-0009, November 1993). The environmental effects associated with 
various standard levels for water heaters, as well as the other seven 
products, were found not to be significant, and a Finding of No 
Significant Impact (FONSI) was published. (59 FR 15868, April 5, 1994).
    In conducting the analysis for this Proposed Rule, the DOE 
evaluated several design options suggested in comments to the screening 
document. As a result, the energy savings estimates and resulting 
environmental effects from revised energy efficiency standards for 
water heaters in this Proposed Rule differ somewhat from those 
presented for water heaters in the 1994 Proposed Rule. Nevertheless, 
the environmental effects expected from the energy efficiency standards 
considered for this Proposed Rule fall within the ranges of 
environmental impacts from the revised energy efficiency standards for 
water heaters that DOE found in the 1994 FONSI not to be significant.

B. Review Under Executive Order 12866, ``Regulatory Planning and 
Review''

    The Department has determined today's regulatory action is a 
significant regulatory action within the scope of Section 3(f)(1) of 
Executive Order 12866, ``Regulatory Planning and Review.'' (58 FR 
51735, October 4, 1993). Therefore, this proposal requires a regulatory 
analysis. Such an analysis presents major alternatives to the proposed 
regulation that could achieve substantially the same goal, as well as a 
description of the cost and benefits (including potential net benefits) 
of the proposed rule. Accordingly, the Office of Information and 
Regulatory Affairs (OIRA) reviewed today's action under the Executive 
Order.
    There were no substantive changes between the draft we submitted to 
OIRA and today's action. The draft and other documents we submitted to 
OIRA for review are a part of the rulemaking record and are available 
for public review in the Department's Freedom of Information Reading 
Room, 1000 Independence Avenue, SW, Washington, DC 20585, between the 
hours of 9:00 a.m. and 4:00 p.m., Monday through Friday, except Federal 
holidays, telephone (202) 586-3142.
    The following summary of the Regulatory Impact Analysis (RIA) 
focuses on the major alternatives considered in arriving at the 
proposed approach to improving the energy

[[Page 25081]]

efficiency of consumer products. The reader is referred to the complete 
RIA, which is contained in the TSD, available as indicated at the 
beginning of this NOPR. It consists of: (1) A statement of the problem 
addressed by this regulation, and the mandate for government action; 
(2) a description and analysis of the feasible policy alternatives to 
this regulation; (3) a quantitative comparison of the impacts of the 
alternatives; and (4) the economic impact of the proposed standard.
    The RIA calculates the effects of feasible policy alternatives to 
water heater energy efficiency standards, and provides a quantitative 
comparison of the impacts of the alternatives. We evaluate each 
alternative in terms of its ability to achieve significant energy 
savings at reasonable costs, and we compare it to the effectiveness of 
the proposed rule.
    We created the RIA using a series of regulatory scenarios (with 
various assumptions), which we used as input to the shipments model for 
water heaters. We used the results from the shipments model as inputs 
to the NES spreadsheet calculations.
    DOE identified the following seven major policy alternatives for 
achieving consumer product energy efficiency. These alternatives 
include:

<bullet> No New Regulatory Action
<bullet> Informational Action
<bullet> Product Labeling
<bullet> Consumer Education
<bullet> Prescriptive Standards
<bullet> Financial Incentives
    --Tax credits
    --Rebates
    --Low income and seniors subsidy
<bullet> Voluntary Energy Efficiency Targets (5 Years, 10 Years)
<bullet> Mass Government Purchases
<bullet> The Proposed Approach (Performance Standards)

    We have evaluated each alternative in terms of its ability to 
achieve significant energy savings at reasonable costs (Table 20), and 
have compared it to the effectiveness of the proposed rule.

                   Table 20.--Alternatives Considered
------------------------------------------------------------------------
                                         NPV  ($ in      Energy Savings
         Policy Alternatives              billions)           Quads
------------------------------------------------------------------------
Consumer Product Labeling...........            -0.009             0.077
Consumer Education..................             0.439             0.539
Prescriptive Standards..............             1.149              0.78
Consumer Tax Credits................             0.333             0.163
Consumer Rebates High Efficiency....             0.349             0.174
Consumer Rebates Heat Pump..........             1.164             0.586
Low Income and Seniors Subsidy......             1.011             0.415
Manufacturer Tax Credits............             0.074             0.039
Voluntary Efficiency Target (5 year               1.47             2.887
 delay).............................
Voluntary Efficiency Target (10 year             0.882             2.211
 delay).............................
Mass Government Purchases...........             0.012             0.057
Performance Standards...............             3.433            4.746
------------------------------------------------------------------------
NPV = Net Present Value (2003-2030, in billion 1998 $) (does not include
  government expenses).
Savings = Energy Savings (Source Quads).

    If we imposed no new regulatory action, then we would implement no 
new standards for this product. This is essentially the ``base case'' 
for water heaters. In this case, between the years 2003 and 2030, there 
would be an expected energy use of 120.91 Quads (127.56 Exajoules (EJ)) 
of primary energy, with no energy savings and a zero NPV.
    We grouped several alternatives to the base case under the heading 
of informational action. They include consumer product labeling and DOE 
public education and information programs. Both of these alternatives 
are already mandated by, and are being implemented under EPCA, as 
amended, Sections 324 and 337, 42 U.S.C. 6294, 6297. One base case 
alternative would be to estimate the energy conservation potential of 
enhancing consumer product labeling. To model this possibility, the 
Department estimated that 5 percent of consumers change their decisions 
on which water heater to buy based on a consumer product labeling 
program. The consumer product labeling alternative resulted in 0.077 
quad (0.081 EJ) of energy savings with a negative $0.009 billion NPV.
    Another approach, called consumer education, is to consider an 
Energy Star<Register> program for heat pump water heaters. We assume, 
under this program, sales would jump to 150,000 units per year in 2008 
and continue to be constant after that. This estimate is based on an 
Arthur D. Little (ADL) report from October 20, 1997, ``Low Cost Heat 
Pump Water Heater Status Report.'' We calculated the fraction that this 
represents of the baseline electric water heater market share in 2008, 
and subtracted this fraction from the next lowest design option with 
any market share. This consumer education program would perform 
somewhat better than product labeling with energy savings equal to 
0.539 Quad (0.57 EJ) and $0.439 billion NPV.
    Another method of setting standards would entail requiring that 
certain design options be used on each product, i.e., for DOE to impose 
prescriptive standards. For this approach, we assume that a 
prescriptive standard is implemented as a standard at the next lower 
trial standard level than the performance standard level, i.e., we 
would implement a prescriptive standard at trial standard level two. 
The reduced flexibility afforded to manufacturers of a prescriptive 
standard would make it difficult for manufacturers to achieve the 
higher level. The lower standard level entails slightly smaller 
expenditures for retooling and purchasing parts. Consequently, the 
economic impacts we expect before the implementation date should be 
slightly smaller for prescriptive standards. This resulted in energy 
savings of 0.78 Quad (0.82 EJ) and $1.15 billion NPV.
    We tested various financial incentive alternatives. These included 
tax credits and rebates to consumers, as well as tax credits to 
manufacturers. We assumed the tax credits to consumers were 50% of the 
incremental purchase expense for higher energy-efficiency water 
heaters. The incremental cost is based on the difference between the 
2003 baseline cost and the cost of a 50-gallon 0.91 EF electric, a 40-
gallon 0.60 EF gas-fired, and a 32-gallon 0.61 EF oil-fired water 
heater. We estimate the impact of this policy is to move 5% of the 
market

[[Page 25082]]

share from the 2003 baseline to the more efficient models. These tax 
credits start in 2003 and run for six years. We assume people stop 
buying these more efficient and more expensive water heaters when the 
tax credits stop. The tax credits to consumers showed a change from the 
base case, saving 0.163 Quad (0.17 EJ) with $0.333 billion NPV.
    To estimate the impact of consumer rebates, DOE assumed rebates of 
35% of the incremental retail prices for more energy-efficient water 
heaters. The incremental cost is based on the difference between the 
2003 baseline cost and the cost of a 50-gallon 0.91 EF electric, a 40-
gallon 0.60 EF gas-fired, and a 32-gallon 0.61 EF oil-fired water 
heater. We estimate the impact of this policy is to move 5% of market 
share from the 2003 baseline to the more efficient models. These 
rebates start in 2003 and run for six years and we assume people stop 
buying these more efficient and more expensive water heaters when the 
rebates stop. Consumer rebates would save 0.174 Quad (0.18 EJ) with 
$0.349 billion NPV.
    We also considered a consumer rebate alternative that was equal to 
the difference between the retail cost of a heat pump water heater and 
a 0.91 EF electric resistance water heater. This rebate is only applied 
to new construction because heat pumps may require more closet space 
and more air space from which to remove heat. We estimated the 
installed costs of heat pump water heaters ($875) and market 
penetration levels (300,000 units per year) based on ADL data on drop-
in heat pump water heaters. We assumed these rebates run for six years 
and we assume people stop buying these more efficient and more 
expensive water heaters when the rebates stop. We estimated this rebate 
alternative would save 0.586 Quad (0.62 EJ) and produce $1.164 billion 
NPV.
    One of the market barriers to higher efficiency gas-fired water 
heaters is the expense to upgrade venting systems. Another market 
barrier for electric and gas-fired water heaters is the expense to 
enlarge small closets or to relocate water heaters with thicker 
insulation when they will not fit into an existing space. Since these 
expenses can be a particular burden on low income and seniors-only 
households, we considered a low income and seniors-only subsidy of $100 
to make higher efficiency water heaters available and cost effective 
for these households. We determined the number of low income and 
seniors only households from the RECS public use data. The program 
starts in 2003 and runs for six years. This subsidy saved 0.415 Quad 
(0.44 EJ) with $1.011 billion NPV.
    Another financial incentive we considered was a tax credit to 
manufacturers for the production of energy-efficient models of water 
heaters. We assumed an investment tax credit of 20%, applicable to the 
tooling and machinery costs of the manufacturers. These are tooling 
costs as they relate to producing a 0.91 EF on a 50-gallon electric, a 
0.60 EF on a 40-gallon gas-fired, and a 0.61 EF on a 32-gallon oil-
fired water heater. We estimate the impact of this policy is to move 1% 
of the market share from the 2003 baseline to the more efficient 
models. These tax credits start in 2003 and run for six years. We 
assume no persistence in the market once they stop. Tax credits to 
manufacturers would save 0.039 Quad (0.41 EJ) and produce $0.074 
billion NPV.
    The impact of this scenario produces small savings because the 
investment tax credit was applicable only to the tooling and machinery 
costs of the firms. The firms' fixed costs and some of the design 
improvements that would likely be adopted to manufacture more efficient 
versions of this product would involve purchased parts. Expenses for 
purchased parts would not be eligible for an investment tax credit.
    We examined two scenarios of voluntary energy efficiency targets. 
In the first one, we assumed all the relevant manufacturers voluntarily 
adopted the proposed energy conservation standards in five years. In 
the second scenario, we assumed the proposed standards were adopted in 
10 years. In these scenarios, voluntary improvements having a five-year 
delay, compared to implementation of mandatory standards, would result 
in energy savings of 2.887 Quads (3.05 EJ) and $1.469 billion NPV; 
voluntary improvements having a 10-year delay would result in 2.211 
Quads (2.33 EJ) being saved and $0.882 billion NPV. These scenarios 
assume that there would be universal voluntary adoption of the energy 
conservation standards by these appliance manufacturers, an assumption 
for which there is no assurance.
    Another policy alternative we reviewed was that of large purchases 
of high efficiency electric and gas-fired water heaters by Federal, 
State, and local governments. We modeled this policy by assuming these 
governmental entities (i.e., U.S. Department of Housing and Urban 
Development and DOE at the Federal level) purchased high efficiency 
water heaters for 5% of the low income, rented housing. This policy 
alternative resulted in energy savings of 0.057 Quad (0.06 EJ) and 
$0.012 billion NPV.
    Lastly, all of these alternatives must be gauged against the 
performance standards we are proposing in this NOPR. Such performance 
standards would result in energy savings of 4.746 Quads (5.00 EJ), and 
the NPV would be an expected $3.443 billion.
    As indicated in the paragraphs above, none of the alternatives we 
examined for these products would save as much energy as the Proposed 
Rule. Also, several of the alternatives would require new enabling 
legislation, since authority to carry out those alternatives does not 
presently exist.

C. Review Under the Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612 (Pub. L. 
96-354) requires an assessment of the impact of regulations on small 
businesses. The Small Business Administration's definition for small 
business in the water heater industry is one that employs 500 or fewer 
employees.
    The water heater industry is characterized by five firms accounting 
for nearly 99% of sales. Smaller businesses and firms, which make 
specialty water heaters and supply niche markets, share 1% of the 
market. We are aware of three small firms: Bock Water Heaters, Heat 
Transfer Products, and Vaughn.
    Of the three small firms, Bock manufactures oil-fired water heaters 
that have not been affected by this proposed rule. Therefore, we do not 
think that this firm will suffer any adverse impacts to the rule. The 
other two firms, Heat Transfer and Vaughn, both make electric water 
heaters that are considered in this rule. In the GAMA directory, these 
firms only list electric water heaters that meet or exceed the standard 
level contemplated in this rule. The proposed rule may raise the 
standard level enough to impact their niche market for high efficiency 
electric water heaters. However, these manufacturers also manufacture 
very long life products that incorporate other features which will help 
them preserve their niche market. The Department has taken this into 
consideration in this rulemaking.
    The Department prepared a manufacturing impact analysis that it 
shared with all the water heater manufacturers. The smaller 
manufacturers did not choose to discuss the impacts of the trial 
standard levels on their firms.
    In view of the information discussed above, the Department has 
determined and hereby certifies pursuant to Section 605(b) of the 
Regulatory Flexibility Act

[[Page 25083]]

that, for this particular industry, the proposed standard levels in 
today's Proposed Rule will not ``have a significant economic impact on 
a substantial number of small entities,'' and it is not necessary to 
prepare a regulatory flexibility analysis.

D. Review Under the Paperwork Reduction Act

    No new information or record keeping requirements are imposed by 
this rulemaking that would require Office of Management and Budget 
clearance under the Paperwork Reduction Act. 44 U.S.C. 3501 et seq.

E. Review Under Executive Order 12988, ``Civil Justice Reform''

    With respect to the review of existing regulations and the 
promulgation of new regulations, Section 3(a) of Executive Order 12988, 
``Civil Justice Reform,'' 61 FR 4729 (February 7, 1996), imposes on 
Executive agencies the general duty to adhere to the following 
requirements: (1) Eliminate drafting errors and ambiguity; (2) write 
regulations to minimize litigation; and (3) provide a clear legal 
standard for affected conduct rather than a general standard and (4) 
promote simplification and burden reduction.
    With regard to the review required by Section 3(a), Section 3(b) of 
Executive Order 12988 specifically requires that Executive agencies 
make every reasonable effort to ensure that the regulation: (1) Clearly 
specifies the preemptive effect, if any; (2) clearly specifies any 
effect on existing Federal law or regulation; (3) provides a clear 
legal standard for affected conduct while promoting simplification and 
burden reduction; (4) specifies the retroactive effect, if any; (5) 
adequately defines key terms; and (6) addresses other important issues 
affecting clarity and general draftsmanship under any guidelines issued 
by the Attorney General. Section 3(c) of Executive Order 12988 requires 
Executive agencies to review regulations in light of applicable 
standards in Section 3(a) and Section 3(b) to determine whether they 
are met or it is unreasonable to meet one or more of them. DOE reviewed 
today's proposed rule under the standards of Section 3 of the Executive 
Order and determined that, to the extent permitted by law, these 
proposed regulations meet the relevant standards.

F. ``Takings'' Assessment Review

    The Department has determined pursuant to Executive Order 12630, 
``Governmental Actions and Interference with Constitutionally Protected 
Property Rights,'' 53 FR 8859 (March 18, 1988) that this regulation 
would not result in any takings that might require compensation under 
the Fifth Amendment to the United States Constitution.

G. Review Under Executive Order 13132, ``Federalism''

    Executive Order 13132 (64 FR 43255, August 10, 1999) requires 
agencies to develop an accountable process to ensure meaningful and 
timely input by State and local officials in the development of 
regulatory policies that have ``federalism implications.'' Policies 
that have federalism implications are defined in the Executive Order to 
include regulations that have ``substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various level of government.'' Under Executive Order 13132, DOE may not 
issue a regulation that has federalism implications, that imposes 
substantial direct costs, and that is not required by statute, unless 
the Federal government provides the funds necessary to pay the direct 
compliance costs incurred by the State and local governments, or DOE 
consults with State and local officials early in the process of 
developing the proposed regulation. DOE also may not issue a regulation 
that has federalism implications and that preempts State law unless it 
consults with State and local officials early in the process of 
developing the proposed regulations.
    The statutory authority under which this proposed standard is being 
promulgated specifically addresses the effect of Federal rules on State 
laws or regulations concerning testing, labeling and standards. Section 
327 of EPCA, as amended, 42 U.S.C. 6297. Generally all such State laws 
or regulations are superseded by EPCA, unless specifically exempted in 
Section 327. The Department can grant a waiver of preemption in 
accordance with the procedures and other provisions of Section 327(d) 
of the Act, as amended. 42 U.S.C. 6297(d). States can file petitions 
for exemption from preemption with the Secretary and have their request 
reviewed on a case-by-case basis.
    DOE has examined today's rule and has determined that although 
final standards would preempt State laws in this area, they would not 
have a substantial direct effect on the States, on the relationship 
between the national government and the States, or on the distribution 
of power and responsibilities among the various levels of government. 
No further action is required by Executive Order 13132.

H. Review Under the Unfunded Mandates Reform Act of 1995

    With respect to a proposed regulatory action that may result in the 
expenditure by State, local, and tribal governments, in the aggregate, 
or by the private sector, of $100 million or more (adjusted annually 
for inflation) in any one year, Section 202(a) of the Unfunded Mandates 
Reform Act of 1995 (UMRA), 2 U.S.C. 1531 et seq. requires a Federal 
agency to publish a written statement concerning estimates of the 
resulting costs, benefits and other effects on the national economy. 2 
U.S.C. 1532(a), (b). DOE estimates that the proposed standards, if 
adopted, would result in the expenditure by the private sector of $100 
million or more in a year.
    Section 202 of UMRA authorizes an agency to respond to the content 
requirements of UMRA in any other statement or analysis that 
accompanies the proposed rule. 2 U.S.C. 1532(c). The content 
requirements of Section 202(a) of UMRA relevant to the private sector 
mandate substantially overlap the economic analysis requirements that 
apply under Section 325(o) of EPCA, as amended, and Executive Order 
12866. The Supplementary Information section in this NOPR and the 
analysis contained in the TSD for this proposed rule responds to those 
requirements.
    DOE is obligated by Section 205 of UMRA, 2 U.S.C. 1535, to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule for which a written statement under Section 202 is 
required. From those alternatives, DOE must select the least costly, 
most cost-effective or least burdensome alternative that achieves the 
objectives of the rule, unless DOE publishes an explanation of why a 
different alternative is selected. As required by Section 325(o) of the 
EPCA, as amended, 42 U.S.C. 6295(o), this proposed rule would establish 
energy conservation standards for water heaters that are designed to 
achieve the maximum improvement in energy efficiency which DOE has 
determined is technologically feasible and economically justified. A 
full discussion of the regulatory and non-regulatory alternatives 
considered by DOE is presented in the TSD for this proposed rule.

I. Review Under the Plain Language Directives

    Section 1(b)(12) of Executive Order 12866 requires that each agency 
draft its regulations so that they are simple and easy to understand, 
with the goal of

[[Page 25084]]

minimizing the potential for uncertainty and litigation arising from 
such uncertainty. Similarly, the Presidential memorandum of June 1, 
1998 (63 FR 31883) directs the heads of executive departments and 
agencies to use, by January 1, 1999, plain language in all proposed and 
final rulemaking documents published in the Federal Register, unless 
the rule was proposed before that date.
    Today's proposed rule uses the following general techniques to 
abide by Section 1(b)(12) of Executive Order 12866 and the Presidential 
memorandum of June 1, 1998 (63 FR 31883):
    <bullet> Organization of the material to serve the needs of the 
readers (stakeholders).
    <bullet> Use of common, everyday words.
    <bullet> Shorter sentences and sections.
    We invite your comments on how to make this proposed rule easier to 
understand.

J. Assessment of Federal Regulations and Policies on Families Review

    Section 654 of the Treasury and General Government Appropriations 
Act, 1999 (Pub. L. No. 105-277) requires Federal agencies to issue a 
Family Policymaking Assessment for any proposed rule or policy that may 
affect family well-being. Today's proposal would not have any impact on 
the autonomy or integrity of the family as an institution. Accordingly, 
DOE has concluded it is not necessary to prepare a Family Policymaking 
Assessment.

VI. Public Comment Procedures

A. Written Comment Procedures

    The Department invites interested persons to participate in the 
proposed rulemaking by submitting data, comments, or information with 
respect to the proposed issues set forth in today's proposed rule to 
Ms. Brenda Edwards-Jones, at the address indicated at the beginning of 
this notice. We will consider all submittals received by the date 
specified at the beginning of this notice in developing the final rule.
    According to 10 CFR 1004.11, any person submitting information that 
he or she believes to be confidential and exempt by law from public 
disclosure should submit one complete copy of the document and ten (10) 
copies, if possible, from which the information believed to be 
confidential has been deleted. The Department of Energy will make its 
own determination with regard to the confidential status of the 
information and treat it according to its determination.
    Factors of interest to the Department when evaluating requests to 
treat as confidential information that has been submitted include: (1) 
A description of the items; (2) an indication as to whether and why 
such items are customarily treated as confidential within the industry; 
(3) whether the information is generally known by or available from 
other sources; (4) whether the information has previously been made 
available to others without obligation concerning its confidentiality; 
(5) an explanation of the competitive injury to the submitting person 
which would result from public disclosure; (6) an indication as to when 
such information might lose its confidential character due to the 
passage of time; and (7) why disclosure of the information would be 
contrary to the public interest.

B. Public Workshop

1. Procedures for Submitting Requests To Speak
    You will find the time and place of the public workshop listed at 
the beginning of this notice of proposed rulemaking. The Department 
invites any person who has an interest in today's notice of proposed 
rulemaking, or who is a representative of a group or class of persons 
that has an interest in these proposed issues, to make a request for an 
opportunity to make an oral presentation. If you would like to attend 
the public workshop, please notify Ms. Brenda Edwards-Jones at (202) 
586-2945. You may hand deliver requests to speak to the address 
indicated at the beginning of this notice between the hours of 8:00 
a.m. and 4:00 p.m., Monday through Friday, except Federal holidays, or 
send them by mail.
    The person making the request should state why he or she, either 
individually or as a representative of a group or class of persons, is 
an appropriate spokesperson, briefly describe the nature of the 
interest in the rulemaking, and provide a telephone number for contact.
    The Department requests each person wishing to speak to submit an 
advance copy of his or her statement at least ten days prior to the 
date of this workshop as indicated at the beginning of this notice. The 
Department, at its discretion, may permit any person wishing to speak 
who cannot meet this requirement to participate if that person has made 
alternative arrangements with the Office of Building Research and 
Standards in advance. The letter making a request to give an oral 
presentation must ask for such alternative arrangements.
2. Conduct of Workshop
    The workshop (hearing) will be conducted in an informal, conference 
style. The Department may use a professional facilitator to facilitate 
discussion, and a court reporter will be present to record the 
transcript of the meeting. We will present summaries of comments 
received before the workshop, allow time for presentations by workshop 
participants, and encourage all interested parties to share their views 
on issues affecting this rulemaking. Following the workshop, we will 
provide an additional comment period, during which interested parties 
will have an opportunity to comment on the proceedings at the workshop, 
as well as on any aspect of the rulemaking proceeding.
    The Department will arrange for a transcript of the workshop and 
will make the entire record of this rulemaking, including the 
transcript, available for inspection in the Department's Freedom of 
Information Reading Room. Any person may purchase a copy of the 
transcript from the transcribing reporter. You can also download the 
TSD and other analyses from the Internet at: http://www.eren.doe.gov/buildings/codes_standards/applbrf/waterheater.htm

C. Issues for Public Comment

    We are interested in receiving comments and data to improve our 
analyses. In particular, we are interested in seeking responses to the 
following questions and/or concerns:
    1. Gas-fired water heater venting studies or data on venting 
problems. Data or studies on the use of 80% RE gas-fired water heaters 
in natural draft venting systems. Data on the number of 78% or 80% RE 
gas-fired water heaters installations, type of venting systems employed 
and the length of time installed.
    2. The number or type of ``size constrained'' replacement water 
heater installations. Data on the cost impact of installing a 3-4 inch 
larger diameter water heater in existing manufactured homes, mobile 
homes, attics, and applications where water heaters are located in the 
living space. Also, comments on the number of water heaters affected. 
Suggestions for alternative technologies such as, higher input gas 
burners or larger electric heating elements, that may reduce the impact 
of thicker insulation on ``size constrained'' replacement water heater 
applications.
    3. Additives or blowing agents with zero ozone depletion potential 
that will

[[Page 25085]]

provide lower conductivity or cost than HFC-245fa blown insulation at 
temperatures between 120 deg.F and 140 deg.F. We also request comment 
on our choice of insulation blowing agent, among the alternatives we 
analyzed. We welcome other suggestions of appropriate blowing agents.
    4. Approaches that will reduce the impact on manufacturers of the 
relatively short time between the availability of HFC-245fa in 
commercial quantities, the phase-out of HCFC-141b and a proposed 
effective date of September 2003 for DOE's amended water heater energy 
conservation standard.
    5. DOE is considering a consistent distribution of consumer 
discounts ranging from 4-12% with a mean of 6% for all the appliance 
products. We would like comments on this approach as it applies to 
water heaters.
    6. We request comments on the validity of the analytical methods 
used to develop the direct effects of water heater standards on 
national employment and the appropriate interpretation and use of the 
results of this analysis approach.

Appendix A--Acronyms and Abbreviations

ACEEE  American Council for an Energy Efficiency Economy
ADL  Arthur D. Little
AEO  EIA's Annual Energy Outlook
AEO99  EIA's 1999 Annual Energy Outlook
AGA  America Gas Association
ANOPR  Advance Notice of Proposed Rulemaking
ANSI  American National Standards Institute
ASHRAE  American Society for Heating, Refrigerating and Air-
Conditioning Engineers
BRS  DOE's Office of Building Research and Standards
Btu  British thermal unit
C  Elemental carbon
CE  Consumer Expenditures
CEC  California Energy Commission
CFR  Code of Federal Regulations
CNG  Connecticut Natural Gas
CO  Carbon monoxide
CO<INF>2</INF>  Carbon dioxide
CPSC  Consumer Product Safety Commission
DOE  U.S. Department of Energy (also the Department)
DOJ  U.S. Department of Justice
EA  Environmental Assessment
EEI  Edison Electric Institute
EIA  DOE's Energy Information Administration
EERE  DOE's Office of Energy Efficiency and Renewable Energy
EF  Energy factor
EJ  Exajoule
EMPA  Energy Market and Policy Analysis
EPA  Environmental Protection Agency
EPCA  Energy Policy and Conservation Act
EPRI  Electric Power Research Institute
FEMP  Federal Energy Management Program
FOI  Freedom of Information
FONSI  Finding of No Significant Impact
FR  Federal Register
GAMA  Gas Appliance Manufacturers Association
GRI  Gas Research Institute
GRIM  Government Regulatory Impact Model
HCFC  Hydrochlorofluorocarbon
HFC  Hydrofluorocarbon
IID  Intermittent ignition device
ImBuild  Impact of Building Energy Efficiency Programs model
INPV  Industry net present value
ITS  Intertek Testing Services
kt Thousand metric tons
kWh kilowatt hours
LBNL  Lawrence Berkeley National Laboratory
LCC  Life-cycle cost
LPG  Liquid petroleum gas
MIA  Manufacturer impact analysis
MMBtu  Million Btus
Mt  Million metric tons
NEEA  Northwest Energy Efficiency Alliance
NEGA  New England Gas Association
NEMS  National Energy Modeling System
NEMS-BRS  National Energy Modeling System--Building Research and 
Standards
NEPA  National Environmental Policy Act
NES  National energy savings
NFGC  National Fuel Gas Code
NGC  Natural Gas Council
NIST  National Institute of Standards and Technology
NO<INF>X</INF>  Oxides of nitrogen
NOAA  National Oceanic and Atmospheric Administration
NOPR  Notice of Proposed Rulemaking
NPV  Net present value
NRDC  Natural Resources Defense Council
NRECA  National Rural Electric Cooperative Association
NU  Northeast Utilities
NWPPC  Northwest Power Planning Council
OIRA  Office of Information and Regulatory Affairs
OOE  Oregon Office of Energy
ORNL  Oak Ridge National Laboratory
PG&E  Pacific Gas and Electric
PNNL  Pacific Northwest National Laboratory
Pon  Rated input power
RE  Recovery efficiency
RECS  Residential Energy Consumption Survey
RIA  Regulatory impact analysis
SC  Southern Company
SO<INF>2</INF>  Sulfur dioxide
TANK  Computer simulation model for gas-fired water heaters
TSD  Technical Support Document
UA  Heat transfer coefficient
UMRA Unfunded Mandates Reform Act of 1995
VOC  Volatile organic compound
VP  Virginia Power
WATSIM  Computer simulation model for electric storage water heaters
WHAM  Water Heater Analysis Model for oil-fired water heaters

List of Subjects in 10 CFR Part 430

    Administrative practice and procedure, Energy Conservation, 
Household appliances.

    Issued in Washington, DC, on March 8, 2000.
Dan W. Reicher,
Assistant Secretary, Energy Efficiency and Renewable Energy.

    For the reasons set forth in the preamble, Part 430 of Chapter II 
of Title 10, Code of Federal Regulations is proposed to be amended as 
set forth below.

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

    1.  The authority citation for Part 430 continues to read as 
follows:

    Authority: 42 U.S.C. 6291-6309.

    2.  Section 430.32(d) of Subpart C is revised to read as follows:


Sec. 430.32  Energy conservation standards and effective dates.

* * * * *
    (d) Water Heaters
    The energy factor of water heaters shall not be less than the 
following for products manufactured on or after the indicated dates.

[[Page 25086]]



----------------------------------------------------------------------------------------------------------------
                                                                                           Energy factor as of
                                         Energy factor as of      Energy factor as of       [date 3 years from
            Product class                  January 1, 1990           April 15, 1991        publication of final
                                                                                                  rule]
----------------------------------------------------------------------------------------------------------------
1. Gas-fired Water Heater............  0.62-(.0019  x  Rated    0.62-(.0019  x  Rated    0.67-(0.0019  x  Rated
                                        Storage Volume in        Storage Volume in        Storage Volume in
                                        gallons).                gallons).                gallons).
2. Oil-fired Water Heater............  0.59-(.0019  x  Rated    0.59-(.0019  x  Rated    0.59-(0.0019  x  Rated
                                        Storage Volume in        Storage Volume in        Storage Volume in
                                        gallons).                gallons).                gallons).
3. Electric Water Heater.............  0.95-(.00132  x  Rated   0.93-(.00132  x  Rated   0.97-(0.00132  x  Rated
                                        Storage Volume in        Storage Volume in        Storage Volume in
                                        gallons).                gallons).                gallons).
----------------------------------------------------------------------------------------------------------------
Note: The Rated Storage Volume equals the water storage capacity of a water heater, in gallons, as specified by
  the manufacturer.

* * * * *
[FR Doc. 00-9847 Filed 4-17-00; 11:57 am]
BILLING CODE 6450-01-P


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