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

Heading: DOE's Analysis of Burdens

Text: 292 Petitioners challenge DOE's use of the Financial Impacts Computer Model (FIM) to calculate certain effects of standards on manufacturers and separately attack the data used in the FIM for central air conditioner standards. They also challenge two other asserted burdens of standards as unreasonably conjectural: the investment that manufacturers would be required to forgo in order to comply with standards, and possible future reductions in the performance or utility of products regulated by standards.
293 DOE used the FIM to predict changes that two different levels of standards might cause in business risk, profitability, debt/equity ratio, and quick ratio 59 for small, medium, and large manufacturers of covered products 60 over the period 1980-1981. The FIM results were then used to gauge the economic impact of standards on manufacturers, which is one of the statutory criteria bearing on economic justification. 294 One of the analysts working on the FIM described that model as follows: 295 Our analysis clearly presupposes an absolutely worst case. We have assumed that there will be no price increase, no abandonment of low efficiency models, and no capital investment outside of the scenario specifications. Under these conditions, the impacts appear to be minimal. 296 Memorandum from David P. Ross to Steven Lee at 4 (Sept. 14, 1981), J.A. at 2314. DOE describes the model-builders as having made every attempt to use conservative assumptions, 1982 Economic Analysis at 209, J.A. at 1146, [t]he most conservative of [which was] that the appliance industry has, as of this point in time, made no major investment in products with efficiencies approaching those of the final standard, id. 61 This assumption supposed that nearly all of the investment needed to achieve standard-mandated efficiencies resulted from standards, and thus tended to increase the burdens predicted for standards. 297 Petitioners suggest that the FIM produced unstable results. For example, the FIM predicted that the debt/equity ratio for freezer manufacturers under level 2 standards would deteriorate 6 percent for small firms, would improve for large firms, but would plummet by 183 percent for medium firms. For water-heater manufacturers, the debt/equity ratio of large firms declined 280 percent, as against reductions of 32 percent and 26 percent for medium and small firms. We agree with petitioners that these and other FIM results 62 are surprisingly counterintuitive; and DOE's mild reply that [t]he predictions of the FIM ... were well within a reasonable range, DOE Br. at 68, is not completely reassuring, because we do not know what DOE considers a reasonable range. 298 We rest our decision, however, not on these surprising results, but on a specific assumption in the model. The FIM assumes that all appliance manufacturers will finance the increased investment required by standards with debt. This assumption molds at least one important projected consequence of standards, changes in a firm's debt/equity ratio, in a way that could substantially affect the dollar cost of that burden. Petitioners assert that the assumption rests on no evidence that appliance manufacturers in fact always employ debt rather than equity financing, and was thus arbitrary. 63 More specifically, petitioners charge that the all-debt assumption made it virtually inevitable that the model would overestimate deteriorations in debt/equity ratios under standards. Here is DOE's account of the assumption: 299 As developed for this program, the FIM does not allow for equity financing. The only kind of financing allowed is debt financing. This assumption was made because the analysis was performed at the manufacturing division level. No manufacturing division, if it is not itself a corporate entity, can issue equity. The meaning of debt as used herein includes debt issued to the parent company in return for an intrafirm transfer of cash in the form of a loan. 300 The effect of this assumption is to overstate the indebtedness of the prototypical firm if it could obtain equity financing either directly or through a parent. Normally, equity financing of a division is not done, however. Conversations with industry experts indicate that normal practice requires the division to forward its budget requests to higher corporate authority where they are reviewed, revised and budgeted. These loans are then repaid out of funds from operations over some term of years. 301 On the basis of industry practice, while indebtedness is to a certain extent overstated, the assumption captures industry practice more fully than would be the case if equity financing were allowed. Thus, it was felt that this assumption was neutral with respect to analysis of impacts on manufacturers. 302 1982 Economic Analysis Document Sec. A.2.5.1 at 251, J.A. at 1188. 303 DOE has not explained how this analysis at the manufacturing division level could produce a meaningful prediction about the effect of standards on debt/equity ratio, which is necessarily a characteristic of an entire firm. We assume arguendo that, as DOE asserts, parent corporations normally finance capital improvements in manufacturing divisions through loans, which the division eventually repays. As DOE states, this conclusion breaks down for manufacturing divisions that are themselves corporations, and DOE does not tell us whether such corporations exist in significant numbers. In addition, DOE's argument relies entirely an accounting procedures within a corporation. The only loan necessarily involved is one from the parent to the division, and DOE offers no opinion at all about how the parent raised the money to make the loan. It is, in fact, perfectly consistent with everything DOE says--though not very likely--to suppose that parent corporations always raise the funds for capital improvements in appliance manufacturing divisions through equity financing, and then lend the money thus raised to the divisions. Thus, the debt of a division to a parent might correspond to equity financing or debt financing by the parent corporation, depending on how the parent obtained the money lent. 304 One of the FIM's four outputs is the effect of standards on the debt/equity ratio of a firm. As DOE comments, a manufacturing division that is not a corporation has no stock. It consequently has no real debt/equity ratio, which is a characteristic of the entire firm. Of course, DOE will want to isolate changes in the debt/equity ratio of manufacturers resulting from efficiency standards. But we do not understand how DOE can do that without making some assumption about the way the parent raises the money that it then lends to the manufacturing division. It is not enough, so far as we can see, to call the money owed by the division to the parent debt and therefore exclude from the model's assumptions any possibility of equity financing. This is so because such debt may not represent any money owed by the corporation at all, which is the sense of debt relevant to a firm's debt/equity ratio. Petitioners argue that by defining debt in such a way that all capital investments required by standards are debt-financed, DOE virtually guaranteed that standards would worsen the debt/equity ratios of manufacturers. Our review of DOE's explanation does not enable us to say that petitioners are wrong. 305 Nor can we tell what effect the all-debt assumption may have had on the model's other outputs. While the debt/equity ratio is the output that on its face is most likely to have been affected by that assumption, all four outputs measure the financial impact of standards on manufacturers, and all four may have been affected by the costs of the debt financing DOE assumed. In any event, DOE's discussion of the FIM results does not enable us to decide how much any particular output influenced DOE's generally negative view of the financial impact standards would have on appliance manufacturers. 64 For these reasons, we cannot assume that the challenged assumption did not affect DOE's overall view of the FIM results; and we cannot assume that the FIM results, which DOE interpreted as weighing against standards, did not affect the final rules. 306 We wish to emphasize that we do not invalidate DOE's use of the FIM. We conclude only that this record does not contain an adequate explanation of the all-debt assumption, and the model is therefore not supported by substantial evidence. There may be a straightforward answer to the objection we have sketched. 65 But the agency did not explain how the assumption we have questioned corresponds to the real world, and we cannot gauge with any confidence what effect that assumption had on the final rules. DOE must provide such an explanation if it is to use this assumption in the FIM to measure the burdens of standards. 307
308 As we noted in Part V.A.3.c, the NRDC criticized two points on one of the cost-efficiency curves for central air conditioners as substantially overstating the cost of achieving certain high efficiency levels. DOE adjusted one point to take account of the NRDC's comment, left the other unchanged, and used the resulting revised curve in the ORNL model. DOE did not, however, incorporate the lower cost data in the information used by the FIM for the following reasons: 309 DOE does not have sufficient data to create a full cost book for a new design option at this efficiency level. DOE does not believe, however, that the change in cost would be substantial enough to affect the conclusions of the FIM. It should be noted that even a lower cost per se does not even necessarily mean that the negative impacts in the FIM would be reduced at all. 310 48 Fed.Reg. 39,376, 39,401 n. 86 (1983). DOE's brief adds that because the impact on manufacturers of standards for that product was minimal to nonexistent even using the uncorrected data, a change in costs would not have substantially affected the conclusions of the FIM. DOE Br. at 68. 311 The disputed points on the cost-efficiency curve were points 5 and 6. Point 6 on the curve described the cost of achieving the degree of appliance efficiency analyzed as standard level 4, which was the highest level considered as a basis for standards. In weighing the factors relevant to economic justification, DOE commented that for a CAC standard [a]t level 4 there are very significant burdens. The impacts on manufacturers, while not overwhelming, are negative for small and medium-size manufacturers. 48 Fed.Reg. at 39,406. Thus, although DOE's brief stated that the financial impact of standards on CAC manufacturers as measured by the FIM was minimal to nonexistent, see DOE Br. at 68, DOE's Federal Register notice described that same impact for level 4 standards as substantial, id. at 39,403, although not overwhelming. 66 We cannot read into DOE's characterization of the financial impact on manufacturers as not overwhelming a finding that the impact was minimal to nonexistent, as DOE's brief would have it, and therefore did not influence DOE's rejection of level 4 standards. The most natural reading of DOE's phrase runs the other way: a burden that is substantial was apparently thought to be worthy of some weight. For us to conclude that the FIM results for level 4 standards did not influence DOE's rejection of those standards would be the merest guesswork about the agency's decisionmaking, and improbable guesswork at that. 312 We therefore cannot accept DOE's suggestion that the FIM impacts of level 4 standards could not have influenced the final rules, and pass to its belief that the changed costs were not substantial enough to affect the conclusions of the FIM. However, we cannot tell on the present record how serious an effect DOE's acknowledged error had on the cost-efficiency curve used in the FIM. The proposition that lower costs do not per se reduce negative impacts in the FIM is not enough: we need some idea whether the lower costs cited by NRDC and accepted in part by DOE for this appliance would noticeably reduce the specific negative impacts predicted for these proposed standards, and DOE hazards nothing more than unsupported conjecture on that central question. 313 Finally, we also have difficulty understanding DOE's explanation that it could not prepare a cost book for the commercially available CACs which furnished the basis for NRDC's criticism of point 6. As we have said, point 6 corresponded to standard level 4. DOE described level 4 as incorporating the use of some technologies not on the market in 1980, but DOE was nonetheless originally able to prepare sufficient manufacturing costs for FIM analysis of level 4 air conditioner standards. Commenters then cited to DOE commercially available models with efficiencies comparable to or higher than standard 4 levels, and DOE agreed that the price of these models was significantly lower than the prices DOE had predicted for models at that level of efficiency. In short, it appears that DOE could analyze hypothetical CACs at level 4 efficiencies under the FIM; but when commenters identified commercially available models at those efficiencies, DOE asserted that it needed unavailable information about manufacturing costs. We do not understand why these costs could be estimated for models that were not available, but could not be determined for appliances on the market. DOE's one-sentence disclaimer relating to cost books in its Federal Register notice does not explain this anomaly or otherwise elaborate on the missing information DOE needed; and its brief drops this line of argument entirely. We must therefore conclude that DOE has not adequately supported its use in the FIM information it knew to be incorrect. As the FIM results were partly based on incorrect information, and as DOE's rejection of CAC standards at level 4 was partly based on the FIM results, we must hold that rejection to have been insufficiently supported in the record. 314
315 Petitioners claim that DOE incorrectly gave weight to two unquantifiable burdens of standards. First, DOE believed that standards might force manufacturers to spend money on energy efficiency improvements and thereby deprive manufacturers of capital needed for more appropriate investments. See 48 Fed.Reg. 37,376, 39,386 (1983). DOE noted that the forgone investments could include investments in increased productivity, increased energy efficiency in the manufacturing sector, or new utility or performance features. Id.; see also 47 Fed.Reg. 14,424, 14,431-32 (1982). Manufacturers also indicated concern over this possible burden of standards. See Comment No. 2075 at 7-1 (June 16, 1982) (General Electric Co.), J.A. at 4661; Comment No. 2178 at 18-19 (August 2, 1982) (Whirlpool Corp.), J.A. at 5551-52. 316 We do not think that DOE erred in giving this burden some weight. While an agency may not rely on unsupported conjecture to explain its decisions, cf. Pillai v. Civil Aeronautics Bd., 485 F.2d 1018, 1023 (D.C.Cir.1973), neither is an agency forced to document copiously every collateral inference it draws from its experience with a regulated industry and its general economic views. Cf. Center for Auto Safety v. Peck, 751 F.2d 1336, 1367 (D.C.Cir.1985) (agency may rely on general view that reduced governmental regulation would produce innovation to achieve [other] values). Manufacturers obviously have limited funds, and money a manufacturer must spend on one project is money that the manufacturer cannot spend on other projects. DOE properly recognized that this burden was one that any scheme of mandatory standards would impose, and therefore declined to give it great weight. See 48 Fed.Reg. 39,376, 39,386 (1983). But we cannot fault DOE's decision to consider the burden at all. 317 Similarly, petitioners criticize DOE's determination that mandatory standards might in the future diminish product utility or performance. DOE first noted that it had attempted to design product classes so that the standards analyzed, if adopted, would not compromise product utility or performance. 67 See 47 Fed.Reg. 14,424, 14,433 (1982). For example, automatic defrost refrigerators-freezers consume more energy than manual defrost refrigerators-freezers. See 45 Fed.Reg. 43,976, 43,987 (1980). If all refrigerator-freezers had been grouped in a single class and an efficiency standard has been based on the most efficient model in that class, the standard might have prevented the sale of any automatic defrost products at all. DOE avoided that result by placing automatic defrost refrigerators-freezers in a separate class, and considering standards based only on the most efficient model within that class. Id. Through its general practice of creating distinct classes for appliance models with energy-consuming features of value to consumers, DOE tried to avoid forcing appliances with such features out of the market. 318 DOE concluded that it had successfully defined classes that would avoid any loss of product utility or performance from mandatory standards. See 48 Fed.Reg. 39,376, 39,393, 39,395, 39,397, 39,405 (1983). However, DOE was concerned that after standards were prescribed, manufacturers might develop new performance-improving appliance features that increased energy consumption. If an appliance with a new feature could not meet the relevant standard, the standard would ban appliances including that feature from the market. DOE might eventually amend its rules to create a new class for appliance models with the feature and prescribe a new standard, if appropriate, for that class. However, at best the availability of improved appliances might be delayed; and at worst, DOE feared, the uncertainty surrounding efforts to amend rules might create a disincentive to the development of improved appliances. See 47 Fed.Reg. 14,424, 14,433 (1982). 319 DOE concluded that these possibilities were a burden entitled to some weight. This burden, like that imposed by forgone investment, would be created to some extent by standards at any level. It therefore could not be given dispositive weight without rendering superfluous all other statutory factors bearing on economic justification. However, DOE could reasonably predict that the appliance industry will continue to develop new performance-improving features, some of which may increase energy consumption. It could also reasonably judge that standards might interfere with these developments. Petitioners jump from DOE's finding that standards would not immediately degrade appliance performance to the conclusion that standards would not have this effect in the future. But that argument assumes that the industry will not eventually develop any currently unforeseen appliance features, and DOE was clearly not required to act on that assumption. 320 We must also reject the claim that DOE's reliance on an unprovable forecast about future improvements in appliance design violates the substantial evidence requirement. Any prediction about the future impact of standards, and particularly about the possible tendency of standards to inhibit innovation, necessarily involves an informed attempt to resolve uncertainties. DOE acknowledged the uncertainties, made a rational prediction in light of the very limited evidence available, and from all that appears did not give more weight to its prediction than was reasonably warranted. We therefore uphold DOE's decision to consider the potential loss of performance and utility as a burden of standards. 321