Space heating is the largest energy-using activity in the residential sector, accounting for nearly 40% of total residential energy use. Natural gas furnaces account for about half of that total. About 40% of households use natural gas furnaces—the most common type of equipment and fuel—used for space heating. Furnaces are the most common type of residential central heating equipment in the nation. Residential furnaces come in a variety of designs, each of which employs a different fuel. Natural gas furnaces are, by far, the dominant type. A furnace produces hot air that is distributed throughout the home by a ventilation duct system. There are two main types of residential furnaces: weatherized (for outdoor installation, such as on rooftops) and non-weatherized (installed indoors, often in a basement or special closet). Non-weatherized furnaces are far more common and come in two forms: condensing and non-condensing. Furnaces with a 90% or greater AFUE (annual fuel utilization efficiency) are known as "condensing" furnaces because they condense water out of exiting (exhaust) flue gases to recover heat to further warm the home. Those exhaust gases would otherwise be vented up the chimney. A non-condensing furnace does not have the secondary system to recapture heat from byproduct moisture and gases. Thus, it requires a chimney or other exhaust venting to allow the larger amount of waste gases to escape. Appendix A provides an illustration of a non-condensing natural gas furnace. This section recounts the beginning stages of federal policymaking for energy efficiency standards for residential gas furnaces. Subsequent sections continue to trace the evolution of this vein of energy efficiency policymaking. Appendix B provides a chronology of key policy developments in the evolution of policy for regional energy efficiency standards for those furnaces. The Energy Policy and Conservation Act of 1975 (EPCA, P.L. 94-163 ) established voluntary national energy efficiency targets for various types of residential appliances and commercial equipment, including residential furnaces. Also, EPCA authorized the Federal Energy Administration (FEA) to administer the targets and directed the Federal Trade Commission (FTC) to provide energy labels for equipment covered by the targets. When FEA became part of the new Department of Energy (DOE) in 1978, the regulatory authority was transferred to the Secretary of Energy. The National Energy Conservation Policy Act of 1978 (NECPA, P.L. 95-619 ) further authorized DOE to set and enforce mandatory energy efficiency standards. EPCA, as amended, establishes criteria to guide the process of amending standards for "covered products." The law directs that any amended standard for a covered product must be designed to achieve the maximum improvement in energy efficiency that is technologically feasible and economically justified . Further, EPCA precludes DOE from adopting any standard that would not result in significant conservation of energy . EPCA also requires that, in deciding whether a standard is economically justified, DOE must determine whether the benefits of the standard exceed its burdens. DOE must do so only after receiving comments on the proposed standard and by considering, "to the greatest extent practicable," several factors: (1) the economic impact on manufacturers and consumers, (2) operating cost savings over the estimated average life of equipment compared with any increase in price, (3) total projected energy savings, (4) any lessening of usefulness or performance, (5) any lessening of market competition, (6) the need for energy conservation, and (7) any other factors DOE deems relevant. The National Appliance Energy Conservation Act of 1987 (NAECA, P.L. 100-12 ) amended EPCA to establish energy conservation standards by statute for residential furnaces and boilers. NAECA set a minimum national standard of 78% AFUE for residential oil and gas furnaces. The standard was scheduled to take effect on January 1, 1992. Also, NAECA amended EPCA to require DOE to consider amending the 78% AFUE standard in two subsequent rulemakings. First, the law required DOE to publish a final rule no later than January 1, 1994, to determine if the initial statutory efficiency standards for furnaces should be amended. Second, the law directed DOE to publish the second final rule by January 1, 2007, to determine whether efficiency standards for furnaces should be further amended. DOE missed EPCA's 1994 deadline for a new rulemaking. In August 2005, the Energy Policy Act of 2005 (EPAct 2005, P.L. 109-58 ) was enacted. Section 141 of EPAct 2005 directs DOE to develop a plan to issue expeditiously efficiency standards for those products for which DOE had not yet met the deadlines specified by the NAECA amendments to EPCA. Section 141 also required that DOE submit semi-annual reports on its standard-setting activities. The first of those reports was published in January 2006. In September 2005, a number of states and environmental groups brought a suit in the U.S. District Court for the Southern District of New York challenging DOE's failure to comply with EPCA's mandate to adopt certain efficiency standards by established deadlines for various categories of products, including residential furnaces. The parties eventually entered into a consent decree, pursuant to which DOE agreed to deadlines for taking various actions concerning efficiency standards for each product category. The consent decree required DOE to adopt a rule for furnace efficiency standards by September 30, 2007. The court eventually terminated the consent decree, finding that DOE had completed all of the required actions. Pursuant to the requirements of the consent decree described above, DOE published a final rule in November 2007 that would have raised the residential gas furnace efficiency standard from 78% to 80% AFUE. The rule established a final compliance date of November 19, 2015. DOE believed that publishing the rule fulfilled its obligation under the consent decree mentioned above. However, the rule was met with criticism from states and public interest groups who felt the rule should have demanded a greater increase in the efficiency standards. In January 2008, two parallel challenges to the DOE Final Rule were filed in the U.S. Court of Appeals for the Second Circuit. The challenges took issue with perceived flaws in DOE's economic analysis as well as the allegedly minimal energy saving associated with the 80% standard. One challenge noted that DOE had found that "a 90% standard would result in average life cycle costs (LCC) savings on a national level of $55 per consumer, while the 80% standard would result in only $2 of LCC savings per consumer" due to "DOE's assumption that by 2015, 99% of households will purchase furnaces that achieve the 80% efficiency level irrespective of any revision of standards." Some states also expressed a concern that the 80% AFUE national efficiency standard would preempt stricter state standards. For example, the state of California filed a motion to intervene in the State challenge to the DOE standards in which it contended that "[i]f DOE's weak standards for residential furnaces and boilers are permitted to stand, California will lose the opportunity to benefit from a more stringent rule." Other states also raised concerns about the new federal standards preempting stricter state standards. For example, in October 2009, the state of Massachusetts delivered a waiver petition to DOE seeking state exemption from DOE's 80% AFUE rule—which would preempt its state standard of 90% for non-weatherized residential gas furnaces. In October 2010, DOE issued a denial of the petition. In response to the legal challenges to the 80% rule and the state preemption concerns, DOE reasserted its position that it had previously determined that a 90% regional standard was beyond the scope of its statutory authority, but that it did have authority to grant state waivers. In response to these concerns regarding the energy savings impact of the proposed efficiency standard and the concerns regarding preemption, DOE sought and was granted a remand in the parallel proceedings at the U.S. Court of Appeals for the Second Circuit in order to reconsider the November 2007 Final Rule. The Energy Independence and Security Act of 2007 (EISA, P.L. 110-140 ) was enacted on December 19, 2007. As an answer to DOE's prior claim, noted above, that it lacked the authority to set regional standards, Section 306 of the law empowered DOE to set regional energy efficiency standards for residential furnaces as well as central air conditioners and heat pumps. This provision marked the first time that Congress authorized DOE to set regional efficiency standards—in order to account for geographic differences in heating or cooling needs . The law specified that any DOE rule which establishes a regional energy efficiency standard must be accompanied by a base national "minimum" standard. Further, it directed that any regional standard for the furnace product "shall apply to any such product installed on or after the effective date of the standard." (emphasis added) Thus, Section 306 authorized DOE to make a technical standard for manufacturers (the base national "minimum standard") and a higher regional "installation standard." All other previous DOE energy efficiency standards for consumer products—whether set by statute or by regulation—only created national technical standards for manufacturers. In another departure from past practice, Section 308 of the law specified that DOE could employ a "direct final rule" process to implement new regional standards. That process differed from the traditional notice-and-comment rulemaking process that had been used for all previous DOE rulemakings for efficiency standards.