Opinion ID: 456159
Heading Depth: 3
Heading Rank: 2

Heading: DOE's Use of a 10 Percent Real Discount Rate

Text: 257 In determining life cycle costs and the net present value of savings from standards, DOE used a real annual discount rate of 10 percent. The discount rate does not adjust for inflation, since DOE's calculations were expressed in real base-year dollars; instead, the discount rate reduces the value of future benefits and costs because the right to receive a dollar in the future is not as valuable as a dollar today. DOE's 1980 proposal had used a real discount rate of 5 percent, but DOE increased the rate to 10 percent in the April 1982 proposal because an OMB Circular prescribed that figure as a government-wide discount rate. The Staff of the Conservation Division of the California Energy Commission commented that: 258 The OMB discount rate was intended to be used in evaluating the future economic benefits of government investments. The 10 percent discount rate was intended to represent the future economic benefits of government investments. OMB Circular # A-94 was not intended to be used in the economic analysis of consumer decisions. 259 The appropriate discount rate for consumers should be the interest rate for borrowing or investing individual savings. The real, after-tax rates available to consumers are considerably less than 10 percent used by DOE. That is, to purchase an appliance a consumer can obtain a consumer loan or take the funds out of savings. In either case the real after-tax interest rate that would be paid, or would have been earned, can be calculated. 260 For example, in the current credit market, consumer loans may cost 18 percent per year. Since interest paid is tax deductible at a 40 percent marginal tax rate the after-tax interest rate would be 10.8 percent (18% X .06). If inflation is 6 percent, then the real interest rate is 4.8 percent. The discount rate used to compare an investment in higher efficiency to future utility should therefore be 4.8 percent. Similarly, if the funds were obtained from an investment yielding 18 percent, the after-tax earnings would be 10.8 percent, and if inflation were 6 percent the real return would be 4.8 percent. 261 The same logic can be used to examine different combination of interest rates, tax rates, and inflation rates. No plausible combination of price variables would yield a consumer discount rate of 10 percent. A discount rate of 3 to 5 percent is more reasonable. 262 Comment No. 2097 at 1-2 (June 16, 1982), J.A. at 2591-92. DOE replied that: 263 Nothing in [OMB] Circular A-94 limits its application to consideration of Government investments or excludes regulatory programs. Even if there were [sic], if a 10 percent discount rate is an appropriate basis for measuring the present value to the Government of future savings the commenters have not sufficiently established why the present value to consumers from the same future savings should be different. Moreover, DOE believes a 3-6 percent discount rate, suggested by the commenters, is inappropriately low. See CEC [comment quoted above] (assuming 40 percent marginal tax rate for consumer). 264 48 Fed.Reg. 39,376, 39,389 (1983). 265 We do not believe DOE's response is satisfactory. The disputed OMB circular is essentially a general instruction to government agencies and does not explain the reasoning behind the discount rate it recommends. 52 It is no criticism of the circular to say that in a rulemaking which must be supported by substantial evidence, DOE may not rely without further explanation on an unelaborated order from another agency. Neither we as a reviewing court nor participants in the rulemaking can possibly discover the substantive basis of OMB's edict. Similarly, DOE's rejection of the comments critical of a 10 percent rate is simply too conclusory to qualify as reasoned decisionmaking. DOE's parenthetical description of the critical comment suggests that DOE may have thought that an assumed 40 percent marginal rate of taxation was too high. But a glance at the comment shows that considerably lower marginal rates would also have produced real discount rates substantially below 10 percent. We cannot, however, tell if DOE accepted the basic approach of the comment to formulating a discount rate but disputed the figures; or if DOE thought that an entirely different approach was better suited to the purposes of this rulemaking; or if DOE even bothered to form a conviction on the subject. DOE has passed from the tolerably terse to the intolerably mute. Greater Boston Television Corp. v. FCC, 444 F.2d 841, 852 (D.C.Cir.1970), cert. denied, 403 U.S. 923, 91 S.Ct. 2229, 29 L.Ed.2d 701 (1971). 266 DOE's doubling of the 5 percent rate it originally proposed tended to reduce the value of ultimate energy savings as compared to higher purchase prices in DOE's life cycle and net present value analyses. As DOE's curves show, use of a 5 or even 7 percent real discount rate would have substantially increased life cycle benefits from standards for many appliances. 53 The major consequences of the discount rate made it particularly important that DOE fix the rate carefully and explain its decision intelligibly. It did not do these things, and we are accordingly constrained to reject its choice as fatally unexplained. 267