Opinion ID: 456159
Heading Depth: 2
Heading Rank: 1

Heading: DOE's Analysis of Benefits

Text: 248 Petitioners first call attention to the fact that other alleged problems in the rulemaking, such as DOE's failure to consider standards set at higher efficiency levels and its use of the ORNL model to calculate savings, biased DOE's view of the benefits standards might confer. In Part IV, we concluded that DOE has not pointed to substantial evidence supporting its refusal to consider standards based on certain classes of design options. We also agree that this failure may have influenced the efficiency levels ultimately analyzed as candidates for standards, and thus the benefits and burdens attributed to standards. These views are enough to require us to overturn the final rules, but in order to guide the agency on remand we also review the independent challenges petitioners have brought to DOE's findings concerning economic justification. 249
250 Petitioners argue that DOE failed outright to discuss or evaluate the nation's need to save energy, see State Pet. Br. at 49, which is one of the statutory factors relevant to economic justification. See EPCA Sec. 325(d)(6). That blunt challenge can be readily discarded. Although DOE did not explicitly refer to this factor in the Weighing of Factors section that preceded determinations on economic justification for standards governing each product type, DOE did discuss the factor in a separate section preceding the Weighing of Factors statements. See, e.g., 48 Fed.Reg. 39,376, 39,392, 39,393-94, 39,395 (1983). Moreover, those statements all contained explicit references to the amount of energy standards would save, see, e.g., id. at 39,392, 39,394, 39,395, and those references can fairly be understood to incorporate the earlier discussions concerning the need to save the quantity and kind of energy that standards might conserve. We are quite sure that DOE did not ignore this statutory factor completely. 251 Whether DOE's treatment of this statutory factor and the closely related factor of energy savings can stand in light of DOE's misunderstanding of significant savings is a far more difficult question. As we discussed in Part II, DOE seriously overestimated the energy savings it could reasonably demand from standards, and consequently rejected standards that saved amounts of energy Congress regarded as significant. In its April 1982 notice, DOE offered the following passage as its entire discussion of how to evaluate energy savings in considering economic justification: 252 While the significant conservation of energy is a separate statutory requirement for imposing an energy efficiency standard, the total projected savings directly resulting from standards is also one factor to be considered in weighing the burdens and benefits under section 325(d). The ORNL results, discussed above, were utilized for this factor. In each product-specific analysis the savings are specified. 253 47 Fed.Reg. 14,424, 14,433 (1982). The product-specific discussions of energy savings, in turn, for each product type merely specified the highest number of Quads saved under DOE's various analyses of possible standards. DOE discussed the amount of energy saved only for central air conditioners--the product for which standards would have saved the largest amount of energy--where DOE termed a saving of .063 to .103 Quads annually as not very great. 48 Fed.Reg. 39,376, 39,405 (1983). As we noted in Part II, the total annual source consumption of an appliance eligible for optional standards is about .0483 Quads. That figure, which Congress evidently thought was a noticeable amount of energy, is less than the lower boundary and less than one-half of the upper boundary for the range of savings from CAC standards that DOE thought not very great. DOE did not comment on the amount of energy standards would save for any other product type. Thus, we do not know how DOE's appraisal of the energy savings under standards for other products figured in its evaluation of the overall benefits from those standards. But as no standard saved more than the standard for central air conditioners, and as DOE considered the total benefits of standards for each other product type considered in the August 1983 notice to be either relatively small or minimal, 49 we must assume that DOE was quite unimpressed with the energy savings from any of them. 254 DOE, in short, elaborated only once on its view of energy savings as a statutory factor bearing on economic justification. That passage, quoted above, refers directly to DOE's standards for significant savings, which we have found to be unlawful. The question, then, is whether the unlawful significance standards tainted DOE's view of economic justification. We think it did. The explanation DOE provided for its assessment of energy savings referred only to DOE's standards for significance. 50 In addition, DOE's disparagement of the savings predicted for central air conditioners, which was its only articulated evaluation of this factor in the product-specific discussions, is entirely in line with the unreasonably inflated demands the agency made of standards in evaluating significance. We think that DOE was right to link its interpretation of significance to its evaluation of energy savings, since related provisions of a statute should be understood as a unified scheme. In this case, however, the consequence of that principle is that DOE's incorrect view of significance infected its view of an important statutory criterion for economic justification. 255 Because DOE decided not to adopt any system for quantifying the factors to be weighed in determining economic justification, we have no way of knowing whether that error in turn affected the overall findings on the benefits of standards. But as the entire point of EPCA was to save energy, we can scarcely assume that DOE's opinion of how much energy was worth saving did not influence the final rules. Had DOE correctly understood the range of savings Congress regarded as significant, DOE would presumably have paused for reflection before weighing significant savings so lightly in assessing economic justification. As it is, however, we are in the awkard position of reviewing an agency which took a radically faulty view of congressional intent. We must decide whether, had DOE begun in a wholly different place, it would necessarily have ended where it did. The fact is that we do not know, and that for us to speculate on the question would impermissibly intrude on the agency's prerogative to make policy judgments for itself. In sum, we find that DOE explicitly carried over its unlawful standards for significance into its evaluation of one of the statutory criteria for economic justification, and that this mistake was at least potentially dispositive of whether standards should be imposed. 51 DOE must consequently reconsider its view of energy savings, and thus its conclusions on economic justification, in light of a new definition of significance authorized by EPCA. 256
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
268 Central air conditioners (CACs) were the single product type for which DOE concluded that standards would save significant energy, even under its extremely rigorous test for significance. DOE decided, however, that CAC standards would not be economically justified--a conclusion petitioners assail both on grounds generally applicable to DOE's interpretation of economic justification and on grounds particularly addressed to DOE's investigation of CACs. Petitioners offer four specific objections to the CAC findings: DOE allegedly failed to consider peak load savings, failed to consider certain high-efficiency models, used erroneous data in its CAC cost-efficiency curves, and offered no basis for the annual hours of operation figure DOE used in the ORNL model. 269 a. Possible Reduction of Peak Load Electrical Demand. A number of commenters stressed the particular importance of peak demand electrical consumption and the contribution that standards for room and central air conditioners might make towards its reduction. 54 In brief, reductions in peak demand--that is, in demand during the seasonal and daily periods of highest demand--are particularly valuable because they reduce the maximum output required of a utility, and so reduce the greatest generating capacity the utility must maintain. Because the marginal electricity produced to satisfy peak demand is more expensive per watt to generate than the average watt, reductions in peak demand also result in greater generating efficiency for utilities. See 1980 Economic Analysis at 5-43 to -46, J.A. at 526-29. 270 DOE considered adopting a test for significant savings based on reductions in peak demand electrical consumption. It ultimately decided not to do so for the following reasons. 271 A number of methodologies can be used to determine peak load savings attributable to a standard in a particular utility service area. Each of these methodologies requires data specific to the utility service area as to peak and average loads (which is generally available) and as to the contribution of the particular product in question to those peak and average loads (which is generally not available, although it is available for some utilities). The primary difficulty, however, is in making determinations on a national basis. First, it is simply not possible, for data and resource reasons, to determine the effect of a standard for a product on the peak load for each of the utilities in the United States and then simply add them. Second, it would be inaccurate in this instance simply to generalize to all utilities the impacts of a standard on the peak loads of a small number of particular utilities. Third, it is methodologically inaccurate to derive national peak load savings by backing out of aggregated national data regarding peak loads the demand reduction attributable to a standard for a product. The present inability to determine even order-of-magnitude national peak load savings attributable to a standard for any product, especially air conditioning equipment, makes impossible a specific test of the significance of energy savings based on peak load savings. 272 48 Fed.Reg. 39,376, 39,385 (1983) (footnotes and citation omitted) (emphasis in original). In footnotes to this passage, DOE noted that the reduction in peak demand attributable to a standard is not equal to the overall savings in demand from that standard, because not all units of any product, including central air conditioners, will be operating at times of peak demand. Id. at n. 41. DOE also commented that central air conditioner standards would not reduce peak load demand for winter-peaking utilities, although it did not suggest what effect this fact might have on overall reductions in peak demand from CAC standards. Similarly, DOE speculated that by reducing summer usage, CAC standards might turn summer-peaking utilities into winter-peaking utilities. For such a utility, the reduction of peak demand attributable to a standard would be the difference between the summer peak the utility would have experienced in the absence of standards and the winter peak it would experience with standards--not the difference between the summer peak without standards and the summer peak with standards. See id. However, DOE does not mention any utilities with this characteristic or estimate the effect that the existence of such utilities would have on peak-load reductions in energy consumption. 273 Nonetheless, we accept DOE's reasoning as sufficient to support its refusal to establish a test for significance that hinged on peak load reduction. Such a test necessarily designates a specific amount of electricity saved at peak loads, and requires a reasonably reliable method for quantifying the energy savings attributable to a standard as measured by the test. DOE's discussion does raise substantial questions whether such a method could be developed to measure peak load reductions. 274 DOE's reasoning does not, however, fully carry over to consideration of peak load reductions in weighing economic justification. Factors bearing on economic justification need not be precisely quantifiable, a fact that DOE itself repeatedly relied on in considering quite nebulous factors that assertedly weighed against standards. Petitioners' real claim, we believe, is that DOE should have investigated peak load reductions in electrical consumption much more thoroughly, or at least should have given greater weight to the likelihood of such reductions in its weighing. See Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 103 S.Ct. 2856, 2866-67, 77 L.Ed.2d 443 (1983). 275 In the 1980 Economic Analysis Document, DOE tentatively summarized the effect of standards at the levels proposed in 1980 on seven summer-peaking and three winter-peaking utilities. For all seven summer-peaking utilities, DOE noted that standards reduced peak demand more than they reduced baseload demand. See 1980 Economic Analysis Document Sec. 5.5.5 at 5-44 to -45, J.A. at 527-28. In DOE's high price case, the ratio of peak demand to baseload demand was reduced in 1995 by .5 to 15.5 percent; in the low price case, the corresponding figures were .7 to 13.5 percent. DOE concluded that additional research was warranted to gather more accurate data on the time of day usage of consumer products and the factors influencing peak and baseload electric demand growth in the representative electric utility service areas. Id. at 5-46, J.A. at 529. The results of this research, if any was ever conducted, never became part of the record. 55 276 Comments by utilities supported DOE's 1980 belief that peak load reductions could be an important benefit of CAC standards. For example, the Georgia Power Company submitted these comments in opposition to a no-standard standard for central air conditioners: 277 Our experience indicates that full load power requirements of central air conditioners occurs at the peak generation hour on the hottest day of the year. The use of central air conditioning in Georgia has increased to the point that it is considered a standard appliance in a majority of new home and new apartment construction. Each additional central air conditioner, therefore, constitutes an additional load on the power generation system. 278 The capital expenditures required by Georgia Power Company to meet these additional load requirements are reflected in the rate base and has the net effect of increasing utility rates for all customers. 279 Comment No. 2082 at 1 (June 15, 1982), J.A. at 2541; see also Comment No. 2141 at 5-6 & app. C (New York City Energy Office), J.A. at 2897-98, 2911-27; Comment No. 2173 (Aug. 2, 1982) (ACEE), J.A. at 2947; Oral Comments of Owen H. Davis, Pacific Gas & Electric Co. at 4 (May 18, 1982), J.A. at 3226. The Carrier Corporation, a major manufacturer of residential central air conditioners, believed that [t]he utility summer peak would be reduced 26.1 million kilowatts as opposed to the peak under a no-standard standard. At $1500 per kw of new generating capacity that translates to $39 billion of cost avoidance. Comment No. 2120 at 8 (May 18, 1982) (oral comments of Edward A. Bailey), J.A. at 2727. 280 We think that whether DOE adequately investigated peak load savings presents a close question. Early in the rulemaking, these savings were thought potentially so important as to justify a separate test for significance; by its close, however, DOE abandoned its announced intention to investigate whether CAC standards would reduce peak load electrical consumption, and then resisted serious consideration of such reductions because it did not have the detailed information that investigation might have disclosed. Utilities, who were certainly in a position to have informed opinions on the subject, offered cogent anecdotal evidence that DOE's early determination to investigate peak load savings was correct. We recognize that DOE's doubts about its ability to quantify peak load savings precisely are rational on their face, but they are worrisomely divorced from the record. It might be that these savings so elude measurement that DOE could consider them only as a vague, atmospheric factor of very slight weight. That, indeed, seems to be the kind of consideration DOE did give this factor. But we are unsure from the record what consideration DOE gave the possibility that even if peak load savings could not appropriately be used as a measure of significance, they might be given more robust and detailed consideration as a potential benefit of standards. Cf. Association of Pac. Fisheries v. EPA, 615 F.2d 794, 819-20 (9th Cir.1980). Our concern is fortified by the significantly more prominent attention DOE gave to factors with a highly speculative basis in the record, such as the chance that standards might force manufacturers to forgo more economically productive investments of their capital or that standards might diminish product performance or utility in the future. 281 Nonetheless, we acknowledge that agencies rightfully enjoy very broad discretion in determining what aspects of a problem warrant investigation. Moreover, peak load savings are not among the factors specifically enumerated in section 325(d) of EPCA, and DOE obviously has considerable latitude in deciding how far to inquire into further benefits and burdens the Secretary considers relevant. EPCA Sec. 325(d)(7). In light of the broad deference appropriately due an agency in allocating its limited resources for investigation of different aspects of a complex and highly technical regulatory problem, we refrain from holding that DOE was legally required to conduct a more thorough factual inquiry into the likelihood and amount of peak load savings achievable through standards. We are, however, uncomfortable with DOE's failure to explain more clearly why the considerations that led it to reject a significance criterion based on peak load savings also support its terse treatment of those savings as a benefit of standards. Without holding that DOE's explanation on this subject was legally inadequate, we do express the hope that closer scrutiny of this question will emerge from the new rulemaking. 282 b. Failure to Consider High-Efficiency Models. Petitioners claim that DOE failed to analyze commercially available CACs that were notably more efficient than the highest-efficiency model considered by DOE. For example, DOE cited a small split system CAC with a seasonal energy efficient ratio (SEER) of 14.0, although the highest efficiency model of that CAC class DOE analyzed had a SEER rating of 10.4. DOE offered three related responses: (1) DOE did not have enough data to create a full cost book for design options at the efficiency levels identified by NRDC, see 48 Fed.Reg. 39,376, 39,401 n. 86 (1983); (2) some currently marketed high efficiency units obtain their high efficiency at the expense of dehumidification and therefore compromise product performance, while others take advantage of quirks in DOE's testing procedure for CACs to generate misleadingly high SEER ratings, see id. at 39,400; and (3) DOE did not have time to create cost books for these models, which had become commercially available since 1980, see id. 283 We do not think that DOE's first suggestion, standing alone, would sustain its refusal to take account of commercially available design options. NECPA places upon DOE an affirmative obligation to gather the information required to discharge its duties, and DOE must at least attempt to obtain information it needs from manufacturers of high-efficiency appliances actually on the market. Similarly, while we recognize the force of the concerns raised by DOE's second explanation, DOE did not actually find that the models cited by DOE suffered from the problems identified. Where a commenter identifies particular appliance models alleged to be more efficient and cheaper than models analyzed by DOE, DOE may rest its rejection of the models on deficiencies in performance or anomalies in test results only if these problems actually affect the cited models. 284 DOE's third explanation rests on its decision not to consider data that became available after 1980. As we explained in Part IV.C.3, we do not pass on that stance. We note, however, that the CAC models discussed by NRDC vividly illustrate the problems that delay has occasioned in this rulemaking. It seems very likely that design options on the market by 1983 were technologically feasible within DOE's definition in 1980. 56 In any event, the effect of DOE's refusal to consider standards based on commercially unavailable technology, coupled with DOE's tardy issuance of final rules, resulted in the publication of rules that did not consider standards at efficiency levels even approaching those of CACs that had been available in the domestic market for some time. While we refrain from rejecting DOE's final rule because DOE relied on somewhat stale information, see supra at 1408, 1409 - 1410, we must observe that DOE's reliance on demonstrably obsolete information, particularly when combined with other restrictions DOE imposed on design options it considered as a basis for standards, is in some tension with Congress' direction that DOE analyze standards that would achieve the maximum technologically feasible improvement in efficiency. 285 c. Flaws in the Cost-Efficiency Curve. Among the crucial determinations in this rulemaking were the cost-efficiency curves, which plotted efficiency levels for a product type or class against the additional cost to large- and medium-sized manufacturers of achieving those efficiency levels. See 1982 Engineering Analysis at C-1 to C-5, J.A. at 1573-77. These curves in turn influenced DOE's assessment of several statutory factors bearing on economic justification. 57 DOE constructed cost-efficiency curves for the four classes of CACs by locating six data points that represented the cost of achieving various levels of efficiency, and then fitting a curve to those points. During the rulemaking, NRDC complained that some CACs actually on the market achieved efficiencies comparable to the two highest-efficiency data points at lower cost than the points reflected. See Comment No. 2121 at 32-36 (June 18, 1982) (NRDC), J.A. at 2766-70. DOE responded by deleting the highest efficiency point on the curve (point 6) and adding a new data point at the same efficiency but lower cost. DOE did not, however, delete the other point (point 5) to which NRDC objected; in fact, the passage in the Federal Register notice accepting DOE's criticism of point 6 did not even mention that NRDC had also criticized point 5. See 48 Fed.Reg. 39,376, 39,401 (1983). 286 We have carefully examined the arguments the parties have presented on this issue and have reviewed in detail the technical problems bearing on the issue. We are left uneasy with DOE's decision to retain point 5, and in fact to use that point as the basis for calculating other points on the curve at higher efficiencies, without confronting NRDC's criticism more directly. We recognize, of course, that DOE has published hundreds of pages about the many choices made in this rulemaking, and that sentence-by-sentence refutation of every objection raised by commenters is not required. Here, however, DOE accepted part of a comment and changed its information base accordingly, while leaving unaddressed closely related arguments raised in the same comment. 287 However, we would be reluctant to seize upon a single apparently erroneous datum in a very complex rulemaking and announce that the error undermines the entire rule governing CACs, particularly when the underlying technical issues have not, even with the benefit of supplemental briefing, been completely ventilated. More importantly, this dispute revolves around difficult questions of fact, and our resolution of those issues is unlikely to be of use in any new rulemaking. Accordingly, we do not rule on this question. 288 d. Hours of Operation. Between the April 1982 proposal and the August 1983 final rule, DOE reduced the figure for annual hours of operation for CACs used in the ORNL model from 1,000 to 750 hours annually. The ORNL model needed a figure for hours of operation to calculate national energy consumption by central air conditioners. DOE, however, stated that the product of average appliance capacity and average hours of use (previously estimated to be 1,000 hours) would under-estimate national energy consumption, because high-capacity appliances tend to be used for higher than average hours. See 48 Fed.Reg. 39,376, 39,401 (1983). DOE accordingly substituted for use in the ORNL model 289 the number of hours of use that when coupled with the national average capacity, yields an energy consumption estimate that is consistent with the national energy consumption attributable to CACs reported by the Edison Electric Institute. Given national average capacity, national average efficiency, total households having CACs, and total national CAC energy consumption and solving for the usage yields a value approximately equal to 750 hours/year. 290 Id.; see also 1983 Supplement at 468-2 (conclusory statement that 750 hours is better estimate), J.A. at 2170. Since lower hours of operation reduce energy savings in relation to purchase price, this change tilted against standards. 291 State petitioners protest that DOE never identified the Electric Institute statistics it relied upon or the exact value that was approximately equal to 750 hours/year. See State Pet. Br. at 58; State Pet. Reply Br. at 15. DOE's brief is simply unresponsive; it cites only DOE's own Federal Register notice in support of the 750-hour figure. See DOE Br. at 76-77. DOE has not directed us to any evidence supporting or explaining the calculation it describes in the passage quoted above, and our own canvass of the record does not enable us to contradict the State petitioners' assertion that no such evidence exists. See State Pet. Reply Br. at 15. Without reaching the other arguments challenging DOE's hourly figure as unreasonable, 58 we agree that DOE's figure cannot stand in light of DOE's entire failure to explain what statistics support its derivation.