# Energy Conservation Program for Consumer Products: Central Air Conditioners and Heat Pumps Energy Conservation Standards > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A00-25336 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** October 5, 2000 - **Citation:** 65 FR 59590 ## Text DEPARTMENT OF ENERGY Office of Energy Efficiency and Renewable Energy 10 CFR Part 430 [Docket Number EE-RM-97-500] RIN: 1904-AA77 Energy Conservation Program for Consumer Products: Central Air Conditioners and Heat Pumps Energy Conservation Standards AGENCY: Office of Energy Efficiency and Renewable Energy, Department of Energy. ACTION: Notice of proposed rulemaking and public hearing. SUMMARY: Pursuant to the Energy Policy and Conservation Act, as amended, the Department of Energy (DOE, Department, or we) is proposing to amend the energy conservation standards for residential central air conditioners and heat pumps to require them to be more energy efficient, and is announcing a public hearing on the proposal. DATES: Comments must be received on or before December 4, 2000. DOE is requesting a signed original, a computer diskette (WordPerfect 8) and 10 copies of the written comments. The Department will also accept e-mailed comments, but you must send a signed original. Oral views, data, and arguments may be presented at the public hearing (workshop) in Washington, DC beginning at 9 a.m. on November 16, 2000. The Department must receive requests to speak at the public hearing and a copy of your statements no later than 4 p.m., November 1, 2000, and we request that you provide a computer diskette (WordPerfect 8) of each statement at that time. ADDRESSES: Please submit written comments, oral statements, and requests to speak at the public hearing to: Brenda Edwards-Jones, U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, Energy Conservation Program for Consumer Products: Central Air Conditioners and Heat Pumps, Docket No. EE-RM/STD-97-500, 1000 Independence Avenue, SW., Washington, DC 20585-0121. You may send emails to: brenda.edwards-jones@ee.doe.gov. The hearing will begin at 9 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 VIII, “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: Central Air Conditioners and Heat Pumps (TSD), the transcript of the public hearing, and previous workshop transcripts in this proceeding 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 a.m. and 4 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/central_air_conditioner.html. FOR FURTHER INFORMATION CONTACT: Dr. Michael E. McCabe, U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, Forrestal Building, EE-41, 1000 Independence Avenue, SW., Washington, DC 20585-0121, (202) 586-0854, e-mail: michael.e.mccabe@ee.doe.gov, or Edward Levy, Esq., U.S. Department of Energy, Office of General Counsel, Forrestal Building, GC-72, 1000 Independence Avenue, SW., Washington, DC 20585, (202) 586-9507, e-mail: edward.levy@hq.doe.gov. 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 III. General Discussion A. Test Procedures B. Technological Feasibility 1. General 2. Maximum Technologically Feasible Levels C. Energy Savings 1. Determination of Savings 2. Significance of Savings D. Rebuttable Presumption E. Economic Justification 1. Economic Impact on Manufacturers and Consumers 2. Life-Cycle Costs 3. Energy Savings 4. Lessening, If Any, of Utility or Performance of Products 5. Impact of Any Lessening of Competition 6. Need of The Nation to Conserve Energy 7. Other Factors IV. Methodology A. Life-Cycle-Cost and Payback Period Analysis B. National Energy Savings and Net Present Value Analysis C. Manufacturer Impact Analysis 1. Phase 1, Industry Profile 2. Phase 2, Industry Cash Flow Analysis 3. Phase 3, Sub-Group Impact Analysis 4. GRIM Analysis D. NEMS Environmental Analysis V. Discussion of Comments A. Engineering Cost Data 1. Reverse Engineering Cost Estimates 2. Productivity Efficiency Improvements 3. Emerging Technologies 4. HFC-Based Engineering Analysis B. Life-Cycle-Cost Parameters 1. Extended Warranty and Service Costs 2. Residential Energy Consumption Survey (RECS) 3. Equipment Lifetime 4. Commercial Applications 5. Marginal Electricity Prices 6. Forecast of Future Electricity Prices 7. Discount Rates 8. Percentage of Households with LCC Savings 9. Regional Analysis 10. Rebuttable Payback 11. Sensitivity Analyses C. Shipments Analysis 1. Forecasted Housing Shifts 2. Elasticities 3. Equipment Efficiency 4. Fuel Switching D. National Energy Savings Analysis 1. Uncertainty in NES Results 2. Site-to-Source Conversion E. Consumer Sub-Group Analysis, Low Income Renters F. Utility and Environmental Analysis 1. Peak Power Impacts, Reliability 2. Quantitative Assessment of Impacts on Peak Demand 3. Qualitative Assessment of Air Conditioning Standards Impact on Power System Reliability 4. Competitive Residential Market G. Manufacturer Impact Analysis—Low Volume Manufacturers H. Markups I. EER-Based Efficiency Standard 1. Current Relationship between SEER and EER 2. Options for Possible EER Standards J. Niche Products 1. Ductless Split Air Conditioners and Heat Pumps 2. Small Duct High Velocity Air Conditioners 3. Vertical Packaged, Wall Mounted 4. Through-the-Wall Condensers 5. Non-Weatherized Single-Package Unit, Mounted Entirely within the Structure 6. Request for Comments Regarding Niche Product Standards K. Thermostatic Expansion Valves L. Other Comments 1. Latent Heat Removal 2. 3-Phase Equipment 3. SEER-HSPF Relationship 4. Max Tech VI. Analytical Results A. Trial Standard Levels B. Significance of Energy Savings C. Payback Period D. Economic Justification 1. Economic Impact on Manufacturers 2. Life-Cycle Cost 3. Net Present Value and Net National Employment 4. Impact on Utility or Performance of Products 5. Impact of Any Lessening of Competition 6. Need of the Nation to Save Energy 7. Other Factors E. Conclusion VII. Procedural Issues and Regulatory Review A. Review Under the National Environmental Policy Act B. Review Under Executive Order 12866, “Regulatory Planning and Review' 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. Review Under Executive Order 13132 H. Review Under the Unfunded Mandates Reform Act I. Review Under the Treasury and General Government Appropriations Act of 1999 J. Review Under the Plain Language Directives VIII. Public Comment A. Written Comment Procedures B. Public Workshop/Hearing 1. Procedure for Submitting Requests to Speak 2. Conduct of Hearing C. Issues for Which DOE Seeks Comment I. Summary of Proposed Rule The Department is proposing to raise the energy efficiency standards for residential air conditioners and central air conditioning heat pumps (heat pumps) to 12 SEER 1 for air conditioners and to 13 SEER/7.7 HSPF 2 for heat pumps. The proposed standards would apply to all covered products offered for sale in the United States, effective on January 1, 2006. The proposed standard for split system air conditioners, the most common type of residential air conditioning equipment represents a 20% improvement in energy efficiency. For split system heat pumps, the new standards would represent a 30% improvement in cooling efficiency and a 13% improvement in heating efficiency. The proposed standards would also increase the efficiency of packaged air conditioners and packaged heat pumps by 24% and 17%, respectively. Finally, the Department is proposing provisions for some special products to ensure that more efficient versions remain available for niche applications. 1 SEER, Seasonal Energy Efficiency Ratio, is the Department's measure of energy efficiency for the seasonal cooling performance of central air conditioners and heat pumps. 2 HSPF, Heating Seasonal Performance Factor, is the Department's measure of energy efficiency for the seasonal heating performance of heat pumps. The proposed standards would save a significant amount of energy and, as a result of less electricity being produced, result in a cleaner environment. In the 25-year period after the new standards become effective, the nation would save over 3.4 Quads 3 of primary energy, equivalent to all the energy consumed by nearly 18 million American households in a single year. These energy savings would also significantly reduce the emissions of air pollutants and greenhouse gases associated with electricity production, by avoiding the emission of 56 million tons (Mt) of Carbon and 52 thousand tons (kt) nitrogen oxides (NO X ). Also, the standards are expected to eliminate the need for the construction of approximately 31 (4 coal-fired and 27 natural gas-fired) new large, 400 megaWatt (MW), power plants in 2020. 3 Quad, means quadrillion (10 15 Btus). In addition to the increase proposed in SEER and HSPF, we are proposing and requesting public comments on a proposal to adopt a standard for steady-state cooling efficiency, EER. 4 A requirement on EER would ensure more efficient operation at high outdoor temperature, during periods when electricity use by air conditioners is at its peak. This would help to further alleviate the need for new electric power plants and reduce the demands placed on the electric transmission and distribution systems during periods of high usage, thereby, improving system reliability. 4 EER, Energy Efficiency Ratio, is a steady-state measure of energy efficiency which measures efficiency at a prescribed outdoor temperature (95°F), and is one of the test conditions in the Department's test procedure used to develop the SEER. Finally, consumers would see benefits from the proposed standards. For example, while the initial cost of a typical central air conditioner would increase by $122 to $153 or about 10-12%, the higher efficiency equipment would save enough over its life to pay for the increase in the price of the equipment plus an extra $45. Many consumers, especially air conditioner owners in warmer parts of the country and heat pump owners, would save even more. While the higher efficiency units are widely available today and promoted through the Department of Energy and the Environmental Protection Agency (EPA) Energy Star ® program, as well as utility rebate programs, manufacturers would be redesigning their product line to meet the efficiency standards. At the same time they would be redesigning their products to respond to the phase-out hydrochloroflourocarbons (HCFC's) refrigerants required by EPA. By making both changes at once, i.e., efficiency and HCFC refrigerants, manufacturers will be able to plan and apply their resources in a cost-effective manner, resulting in lower burdens and costs. II. Introduction A. Authority Part B of Title III of the Energy Policy and Conservation Act (EPCA), Pub. L. 94-163, as amended by the National Energy Conservation Policy Act of 1978, 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 5 created the Energy Conservation Program for Consumer Products other than Automobiles. The consumer products subject to this program (often referred to hereafter as “covered products”) include central air conditioners and heat pumps. EPCA section 322(a)(4), 42 U.S.C. 6292(a)(4). 5 Part B of Title III of the Energy Policy and Conservation Act, as amended by the National Energy Conservation Policy Act, the National Appliance Energy Conservation Act, the National Appliance Energy Conservation Amendments of 1988, and the Energy Policy Act of 1992, is referred to in this notice as the “Act,” or “EPCA.” Part B of Title III is codified at 42 U.S.C. 6291 et seq. Part B of Title III of the Energy Policy and Conservation Act, as amended by the National Energy Conservation Policy Act only, is referred to in this notice as the National Energy Conservation Policy Act. Under the Act, the program consists essentially of four parts: testing, labeling, Federal energy conservation standards, and certification and enforcement procedures. The Federal Trade Commission is responsible for labeling, and DOE implements the remainder of the program. Section 323 of the Act authorizes the Department, with assistance from the National Institute of Standards and Technology (NIST) and subject to certain criteria and conditions, to develop test procedures to measure the energy efficiency, energy use, or estimated annual operating cost of each covered product. 42 U.S.C. 6293. The central air conditioners and heat pump test procedures appear at title 10 Code of Federal Regulations (CFR) part 430, subpart B, Appendix M. The Act prescribes initial Federal energy conservation standards for each of the listed covered products, except television sets. EPCA section 325 (b)-(k), 42 U.S.C. 6295 (b)-(k). For central air conditioners and heat pumps, EPCA section 325(d)(3)(A) specifies that the standards are to be reviewed by the Department no later than January 1, 1994. 42 U.S.C. 6295(d)(3)(A). Any new or amended standard must be designed so as to achieve the maximum improvement in energy efficiency that is technologically feasible and economically justified. EPCA section 325(o)(2)(A), 42 U.S.C. 6295(o)(2)(A). Moreover, the Department may not prescribe a standard for: (1) Certain products, including central air conditioners and heat pumps, if no test procedure has been established for the product, or (2) any product, if DOE determines by rule that a standard for the product either would not result in significant conservation of energy, or is not technologically feasible or economically justified. EPCA section 325(o)(3), 42 U.S.C. 6295(o)(3). Section 325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i) provides that DOE must determine whether a standard is economically justified, after receiving comments on the proposed standard, and whether 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 such 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 * * * 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 conservation; and (7) Other factors the Secretary considers relevant.” In addition, Section 325(o)(2)(B)(iii) of the Act, 42 U.S.C. 6295(o)(2)(B)(iii), establishes a rebuttable presumption that a standard is economically justified if the Secretary finds 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 * * * 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, provides that generally the Federal energy efficiency requirements supersede State laws or regulations concerning energy conservation testing, labeling, and standards, and specifies limited exceptions to this general rule. EPCA Section 327(a) through (c), 42 U.S.C. 6297 (a) through (c). 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 standards for residential central air conditioners and heat pumps have been in effect since 1992. Energy efficiency for air conditioner and heat pump cooling has been defined by the descriptor SEER. Energy efficiency for heat pumps has been defined by the descriptor, Heating Seasonal Performance Factor (HSPF) while operating during the heating season and by SEER while operating during the cooling season. The current central air conditioners and heat pumps efficiency standards are as follows: —Split system air conditioners and heat pumps—10 SEER/6.8 HSPF —Single package air conditioners and heat pumps—9.7 SEER/6.6 HSPF 2. History of Previous Rulemakings On September 8, 1993, DOE published an Advance Notice of Proposed Rulemaking (ANOPR) announcing the Department's intention to revise the existing central air conditioner and heat pump efficiency standard. (58 FR 47326). On November 24, 1999, DOE published a Supplemental ANOPR (hereinafter referred to as the Supplemental ANOPR). 64 FR 66306. In the Supplemental ANOPR and during the December 9, 1999, public workshop, we provided interested persons an opportunity to comment on several issues, including: (1) The product classes that the Department planned to analyze; (2) The analytical framework, models ( e.g., the Government Regulatory Impact Model (GRIM)), and tools ( e.g., a Monte Carlo sampling methodology, and the life-cycle cost (LCC) and national energy savings (NES) spreadsheets) that the Department was using in performing analyses of the impacts of energy conservation standards; (3) The results of preliminary analyses for the engineering, LCC, payback and NES; and (4) The candidate energy conservation standard levels that the Department had developed from these analyses. 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 central air conditioners and heat pumps, for which DOE issued a proposed rule prior to August 14, 1996, DOE would 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 central air conditioners and heat pumps standards. We developed an analytical framework for the central air conditioners and heat pumps standards rulemaking for our stakeholders, which we presented during a workshop on June 30, 1998. 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 NES spreadsheets, and the relationship of the various analyses. III. General Discussion A. Test Procedures Section 7(b) of the Process Rule states that necessary modifications to test procedures concerning efficiency standards will be proposed before issuance of a proposed rule. Section 7(c) of the Process Rule states that a final modified test procedure will be issued prior to issuing a proposed rule regarding energy conservation standards. The residential central air conditioner and heat pump test procedure is being revised to improve its organization and ease of use, with a proposed rule to be published. This revision of the test procedure is not expected to alter the measured efficiencies as determined under the existing test procedure. Therefore, the revised test procedure would not affect development of revised efficiency standards. For these reasons, revisions to the test procedure are not a “necessary modification” as that term is used in the Process Rule, but rather a routine update, and hence need not be finalized before issuance of the proposed rule for these standards. B. Technological Feasibility 1. General There are central air conditioners and heat pumps in the market at all of the efficiency levels analyzed in today's notice. The Department, therefore, believes all of the efficiency levels discussed in today's notice are technologically feasible. 2. Maximum Technologically Feasible Levels The Act requires the Department, in a proposed rule that sets forth new or amended standards, to “determine the maximum improvement in energy efficiency * * * that is technologically feasible for each type (or class) of covered products.” EPCA section 325 (p)(2), 42 U.S.C. 6295(p)(2). Accordingly, for each class of product under consideration in this rulemaking, a maximum technologically feasible (Max Tech) level was identified. As previously stated in Section II.B, residential central air conditioner and heat pump cooling efficiency is expressed as a SEER. Heating efficiency is expressed as a HSPF. The most efficient technology presently available is a 3-ton 18 SEER central air conditioner. The Department has determined that at this time 18 SEER is the Max Tech level for cooling efficiency for all product classes and capacities in this analysis. The Max Tech level for heating efficiency, corresponding to the 18 SEER level, is 9.4 HSPF which is the highest HSPF rating currently available in residential heat pumps. C. Energy Savings 1. Determination of Savings The Department estimated energy savings through the use of the NES spreadsheet, which forecasted energy savings over the period of analysis for candidate standards relative to the base case. The Department quantified the energy savings that would be attributable to a standard as the difference in energy consumption between the candidate standards case and the base case. The base case represents the forecast of energy consumption in the absence of amended mandatory efficiency standards. The NES spreadsheet model is described in Section IV.B of this notice, Appendix of the Technical Support Document and also in the Supplemental ANOPR. (64 FR 66306). The NES spreadsheet model calculates the energy savings in site energy or kilowatt-hours (kWh). Site energy is the energy directly consumed at building sites by the central air conditioner or heat pump. National energy savings are expressed in terms of the source energy savings which is the savings in energy used to generate and transmit the electricity consumed at the site. Chapter 7 of the TSD contains a table of factors used to convert kWh to Btu. These conversion factors, which change with time, are derived from DOE's Energy Information Administration's (EIA) Annual Energy Outlook 2000 (AEO2000). 2. Significance of Savings The Act prohibits the Department from adopting a standard for a product if that standard would not result in “significant” energy savings. EPCA 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), indicated that Congress intended “significant” energy savings in this context 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. D. Rebuttable Presumption The National Appliance Energy Conservation Act established new criteria for determining whether a standard level is economically justified. EPCA section 325(o)(2)(B)(iii) states: “If the Secretary finds 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 * * * savings during the first year that the consumer will receive as a result of the standard, as calculated under the applicable test procedure, there shall be a rebuttable presumption that such standard level is economically justified. A determination by the Secretary that such criterion is not met shall not be taken into consideration in the Secretary's determination of whether a standard is economically justified.” If the increase in initial price of an appliance due to a conservation standard would repay itself to the consumer in energy savings in less than three years, then we presume that such standard is economically justified. 6 This presumption of economic justification can be rebutted upon a proper showing. 6 For this calculation, the Department calculated cost-of-operation based on the DOE test procedure, with the test procedure assumed annual hours of operation. Consumers that use the central air conditioner or heat pump fewer hours will experience a longer payback while those that use them more will have a shorter payback. E. Economic Justification As noted earlier, section 325(o)(2)(B)(i) of the Act provides seven factors to be evaluated in determining whether a conservation standard is economically justified. 1. Economic Impact on Manufacturers and Consumers The Process Rule established procedures, interpretations and policies to guide the Department in the consideration of new or revised appliance efficiency standards. The provisions of the rule have direct bearing on the implementation of manufacturer impact analyses. First, the Department will use 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, and a long-term assessment. Impacts analyzed include industry net present value, cash flows by year, changes in revenue and income, and other measures of impact, 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 take into account cumulative impacts of different DOE regulations on manufacturers. For consumers, measures of economic impact are the changes in installed cost and annual operating costs, i.e. , LCC. The life-cycle cost of the product at each standard level are presented in Chapter 5 of the TSD. Under section 325 of the Act, the life-cycle cost analysis is a separate factor to be considered in determining economic justification. 2. Life-Cycle Costs The life-cycle cost is the sum of the purchase price, including the installation, and the operating expense, including operating energy, maintenance, and repair expenditures, discounted over the lifetime of the appliance. For each central air conditioner and heat pump product class, we calculated both life-cycle costs and life cycle cost savings for the following space-cooling efficiency levels: 11, 12, 13, and 18 SEER. For heat pumps, the following space-heating efficiency levels correspond to the above SEER values: 7.1, 7.4, 7.7, and 8.8 HSPF, respectively. The calculated life-cycle cost savings is given as a distribution, with a mean value and a range. We used a distribution of real discount rates ranging from 0.1 to 18% for the calculations. The assumption is that the consumer purchases the central air conditioner and/or heat pump in 2006. For the probability-based LCC analysis, a building-by-building analysis is performed for purposes of generating a distribution of life-cycle costs for each efficiency level analyzed. The building stock is composed of both residential and commercial buildings under the assumption that 90% of single-phase central air conditioners and heat pumps are utilized in residential buildings with the remaining 10% in commercial buildings. The 1997 Residential Energy Consumption Survey (RECS) is used to represent the residential building stock while 77 commercial buildings are used to represent the commercial building stock based on assumptions consistent with those used in the process to update ASHRAE Standard 90.1-1999. Annual energy costs are based on marginal electricity prices which are developed for each residential and commercial building. Electricity price forecasts are taken from the AEO2000 (DOE/EIA-0383). The LCC calculations include markup structures developed for both the new construction and replacement/retrofit markets. Chapter 5 of the TSD contains the details of the LCC calculations including those considered under factor seven below. 3. Energy Savings While significant conservation of energy is a separate statutory requirement for imposing an energy conservation standard, the Act requires DOE, in determining the economic justification of a standard, to consider the total projected energy savings that are expected to result directly from revised standards. The Department used the NES spreadsheet results, discussed earlier, in its consideration of total projected savings. The savings are provided in section V of this notice. 4. Lessening, if Any, of Utility or Performance of Products This factor cannot be quantified. In establishing classes of products, and in evaluating design options and the impact of potential standard levels, the Department tried to eliminate any degradation of utility or performance in the products under consideration in this rulemaking. None of the proposed trial standard levels reduces the performance of central air conditioners and heat pumps. 5. Impact of Any 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 any lessening of competition likely to result from a proposed standard and transmit such determination to the Secretary, not later than 60 days after the publication of a proposed rule, together with an analysis of the nature and extent of such impact. Section 325(o)(2)(B)(i)(V) and (B)(ii), 42 U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii). In order to assist the Attorney General in making such a determination, the Department has provided the Attorney General with copies of this notice and the Technical Support Document for review. 6. Need of the Nation To Conserve Energy We report the environmental effects from each standard level for each product under this factor in Section VI of this notice. 7. Other Factors During the extreme periods of heat and humidity that took place in the summer of 1999, electric power outages and other system disturbances disrupted the lives of millions of people and thousands of businesses in various regions of our country. In response to public concerns about this problem, the Secretary of Energy formed a team of experts to investigate the problem and to recommend actions that the Federal government can take to help avoid future power outages by improving the reliability of the U.S. electric power system. One of the actions proposed by the Secretary at that time was to accelerate the rulemaking process and advance the publication of a final rule for central air conditioners by six months. The Final Report 7 by the team of experts, issued in March, 2000, included the recommendation to increase the energy efficiency of central air conditioners as one means for enhancing reliability. The report stated, “Technologies and practices that reduce loads during times of peak demand, such as high-efficiency air conditioning and lighting equipment, are especially valuable.” This was based on the finding that in several of the affected regions “Retail customers have limited mechanisms and incentives to conserve energy or resort to alternatives during electricity shortages.” Included in the federal activities that promote energy efficiency recommended to the Secretary was to promulgate standards for more efficient technologies. 7 “Report of the U.S. Department of Energy's Power Outage Study Team: Findings and Recommendations to Enhance Reliability from the Summer of 1999”, March 2000. As an additional element to consider under this factor, the Secretary has decided to evaluate the life-cycle cost impacts on those subgroups of consumers who are at or below the poverty line ( e.g. , for a family of four, this constitutes a household income of less than $16,036). IV. Methodology The Process Rule outlines the procedural improvements identified by the interested parties. 61 FR 36974. The process improvement effort also included a review of the: (1) Economic models; (2) analytical tools; (3) methodologies; (4) non-regulatory approaches; and (5) prioritization of future rules. The Department continues to use two spreadsheet tools to meet the objectives of the Process Rule. The first spreadsheet calculates life-cycle-costs and payback periods of potential new energy conservation standards. The second conducts shipments forecasts and then calculates national energy savings and net present value impacts of potential new energy conservation standards. The Department also completely revised the methodology used in assessing manufacturer impacts including the adoption of the GRIM. Additionally, DOE has estimated the impacts of central air conditioner and heat pump energy efficiency standards on electric utilities and the environment. The Department used a version of EIA's National Energy Modeling System (NEMS) for the utility and environmental analyses. NEMS simulates the energy economy of the U.S. and has been developed over several years by the EIA primarily for the purpose of preparing the AEO. NEMS produces a widely-known baseline forecast for the U.S. through 2020 that is available in the public domain. The version of NEMS used for appliance standards analysis is called NEMS-BRS, 8 and is based on the AEO2000 version with minor modifications. NEMS offers a sophisticated picture of the effect of standards since its scope allows it to measure the interactions between the various energy supply and demand sectors and the economy as a whole. 8 EIA approves use of the name NEMS to describe only an AEO 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 deviate from AEO assumptions, the name NEMS-BRS refers to the model as used here. For more information on NEMS, please refer to the National Energy Modeling System: An Overview 1998. DOE/EIA-0581 (98), February, 1998. BRS is DOE's Office of Building Research and Standards. A. Life-Cycle Cost and Payback Period Analysis This section describes the LCC and payback period analysis and the spreadsheet model used for analyzing the economic impacts of possible standards on individual residential and commercial consumers. Details of the spreadsheet model can be found in Chapters 5 in the TSD. We conduct the LCC and payback period analysis with a spreadsheet model developed in Microsoft Excel for Windows 95 or above. When combined with Crystal Ball (a commercially available software program), the LCC and payback period generates a Monte Carlo simulation to perform the analysis by incorporating uncertainty and variability considerations. The LCC is the total consumer expense over the life of the appliance, including purchase expense and operating costs (including energy expenditures). Future operating costs are discounted to the time of purchase and summed over the lifetime of the appliance. The payback period is the change in purchase expense due to an increased efficiency standard divided by the change in annual operating cost that results from the standard. For today's proposed rule, both the LCC and payback period are based on a building-by-building analysis of a nationally representative set of residential and commercial buildings. The set of residential buildings are taken from those households in the 1997 RECS equipped with either a central air conditioner or heat pump. Of the 5,900 households surveyed in the 1997 RECS, 2,003 households representing 37.6% of the housing population have a central air conditioner while 579 households representing 11.1% of the housing population have heat pumps. 9 RECS specifies the annual space-cooling energy consumption and, in the case of heat pumps, the annual space-heating energy consumption associated with the space-conditioning equipment. Also provided is the age of the space-conditioning equipment which, when coupled with historical equipment efficiency data provided by the Air-Conditioning and Refrigeration Institute (ARI), allows for the imputation of the household's space-conditioning equipment efficiency ( i.e. , the SEER and, in the case of heat pumps, the HSPF). With both the annual energy use and the efficiency of the central air conditioner or heat pump specified, the annual energy use associated with equipment at higher efficiency levels is simply determined by multiplying the household's existing annual energy use by the ratio of the existing equipment efficiency divided by the efficiency of the more efficient equipment. Household utility billing data in RECS allows for the determination of average and marginal electricity prices. The electricity price data along with the annual energy use data allows for the determination of annual electricity cost savings for any efficiency level. 9 The number of households actually used in the central air conditioner and heat pump LCC and Payback period analyses were 1218 and 308, respectively. Some central air-conditioned households were dropped from the analysis for one or more of the following reasons: (1) The central air conditioner was not used, (2) a room air conditioner was present and used, or (3) marginal energy prices could not be determined for the household. With regard to households with heat pumps, they were dropped from the analysis for one or more of the following reasons: (1) The heat pump was not used or (2) marginal energy prices could not be determined for the household. The set of commercial buildings are based on assumptions consistent with those used to develop the American Society of Heating, Refrigerating, and Air-Conditioning Engineers' (ASHRAE) Standard 90.1-1999. The commercial building data set consists of seven building types located in eleven different geographic regions yielding a total of 77 buildings. An hourly simulation program is used to calculate the annual full-load equivalent operating hours (FLEOH) of the space-cooling and space-heating equipment in each building. The FLEOHs are used with the Department of Energy's test procedure equations for central air conditioners and heat pumps to obtain each building's annual space-cooling and space-heating energy consumption. Similar to the analysis for residential buildings, the energy use associated with equipment at higher efficiency levels is simply determined by multiplying the building's simulated annual energy use by the ratio of the building's assumed equipment efficiency ( i.e. , 10 SEER) divided by the efficiency of the more efficient equipment. Average and marginal electricity prices for each commercial building are determined by applying a national sample of electric utility tariffs to the simulated load and demand. The electricity price data along with the annual energy use data allows for the determination of annual electricity cost savings for any efficiency level for each commercial building. The probability-based LCC and payback period analysis samples buildings from the residential and commercial building data set in order to produce a distribution of LCC results for a given standard level. The LCC and payback period analysis takes 10,000 samples to create a distribution of results based on the assumption that 90% of the single-phase central air conditioning and heat pump equipment stock are in residential buildings with the remaining 10% in commercial buildings. The spreadsheet model is organized so that ranges or distributions can be entered for each input variable needed to perform the calculations. The LCC and payback period output can be either a point value when we use the average value of the inputs or a distribution when we use distributions for some or all of the inputs. Inputs for determining the total installed cost include: Baseline manufacturer costs, manufacturer cost multipliers for each efficiency level, manufacturer markups, distributor or wholesaler markups, dealer or contractor markups, builder markups, sales taxes, and installation costs. Of the above total installed cost inputs, the manufacturer, dealer, distributor, and builder markups, as well as the sales tax and installation price are described with distributions. Inputs for determining operating expenses include: Annual energy consumption, average electricity prices, marginal electricity prices, electricity price projections, repair costs, maintenance costs, equipment lifetime, discount rates, and the year standards take effect. Of the above operating expense inputs, the discount rate and equipment lifetime are described with distributions (note that neither the discount rate nor lifetime are needed to determine the payback period). Operating expense, annual energy use and electricity prices, although represented by point-values for each residential and commercial building, are highly variable when looking at the entire building data set. Chapter 5 of the TSD contains the details of all the inputs to the LCC and payback period analysis. In addition to determining payback periods with the spreadsheet model, the Act requires us to determine a rebuttable payback period. The Act requires the Department to examine payback periods to determine if the three year rebuttable presumption of economic justification applies. As prescribed by the Act, the rebuttable payback period is “calculated under the applicable test procedure, * * * .” The annual space-cooling and space-heating energy consumption calculated based on the Department's test procedure are on the order of 50% greater than the weighted-average values from the LCC analysis ( i.e. , analyses based on the 1997 RECS for residential buildings and hourly simulations for commercial buildings). As will be shown in Section VI (Analytical Results), the payback value calculated from the Department's test procedure equations will be significantly lower than the average payback value calculated from the LCC analysis, for any standard level. B. National Energy Savings and Net Present Value Analysis In order to make the analysis more accessible and transparent to all stakeholders, we continue to use an Excel spreadsheet model to calculate the energy savings and the national economic costs and savings from new standards. Various input quantities within the spreadsheet can be changed. Unlike the LCC analysis, the NES spreadsheet does not use distributions for inputs or outputs. We conduct sensitivities by running different scenarios. DOE uses the NES spreadsheet to perform calculations of energy savings and net present value (NPV) based on user inputs similar to those for the LCC spreadsheet. The energy savings, energy cost savings, equipment costs, and NPV of benefits for several product classes are forecast from the chosen start year through 2030. The forecasts provide annual and cumulative values for all four output parameters. The Department calculates the national energy savings by subtracting energy use under a standards scenario from energy use in a base case (no new standards scenario). Energy use is reduced when the baseline central air conditioner or heat pump ( i.e , 10 SEER) is replaced by a more efficient piece of equipment. Unit energy savings for each product class are the same weighted-average values as calculated in the LCC and Payback period spreadsheet. Additional information about the NES spreadsheet can be found in Chapter 7 of the TSD. User inputs include: (1) A choice from among several electricity price projections: (2) effective date of the central air conditioners and heat pumps standard; (3) discount rate and discount year; (4) a standards case efficiency level; (5) an equipment price; (6) an equipment price and housing projection; and (7) an efficiency scenario. Additionally, we use a time series of conversion factors to change from site to source energy. The efficiency scenario specifies the equipment efficiency distribution after new standards would take effect. Three efficiency scenarios were used to forecast the impact new standards would have after they take effect: (1) National Appliance Energy Conservation Act (NAECA) scenario, 10 (2) Roll-up scenario, 11 and (3) Shift scenario. 12 As opposed to the Supplemental ANOPR where weighted-average equipment efficiencies were forecasted, an actual distribution of efficiencies ( i.e. , the percentage of shipments which occur in incremental SEER bins over the range from the minimum standard to 18 SEER) were used in the analysis for the proposed rule. 10 Under the NAECA scenario, equipment efficiencies after the adoption of new standards are forecasted to change in the same pattern as the efficiency changes that occurred in 1992 when minimum efficiency standards first took effect. This results in weighted average equipment efficiencies, based on minimum efficiency standards of 11, 12, and 13 SEER, of 11.6 SEER, 12.4 SEER, and 13.4 SEER, respectively. 11 Under the Roll-up scenario, equipment that in the base case were forecast to be less efficient than the trial standard level are assumed to move up to the standard level, and equipment forecasted in the base case to be at or above the trial standard level are assumed not to increase in efficiency. This results in weighted-average equipment efficiencies, based on minimum efficiency standards of 11, 12, and 13 SEER, of 11.5 SEER, 12.3 SEER, and 13.3 SEER, respectively. 12 Under the Shift scenario, equipment efficiencies after the adoption of new standards are forecast to have the same pattern, at and above the standard levels, as the current distribution of efficiencies. This results in weighted-average equipment efficiencies, based on minimum efficiency standards of 11, 12, and 13 SEER, of 11.7 SEER, 12.7 SEER, and 13.7 SEER, respectively. One of the more important components of any estimate of future impact is shipments. Forecasts of shipments for the base case and standards case are determined within the NES spreadsheet. The shipments portion of the spreadsheet forecasts central air conditioner and heat pump shipments from 2000 to 2030. Shipments forecasts are developed by accounting for: (1) The combined effects of equipment price, operating cost, and household income; (2) different market segments ( e.g. , new housing, replacement decisions, and non-owners adding a central air conditioner or heat pump); (3) decisions to repair rather than replace; and (4) different equipment age categories. Additional details on the various shipments forecasts are provided in Chapter 6 of the TSD. C. Manufacturer Impact Analysis The MIA estimates the financial impact of standards on manufacturers and calculates impacts on employment and manufacturing capacity. The Department published the proposed MIA approach as part of the Federal Register publication of the Supplemental ANOPR, and received no comments suggesting substantive changes in the methodology. As proposed, the MIA was conducted in three phases. Phase 1, “Industry Profile,” consisted of the preparation of an industry characterization. Phase 2, “Industry Cash Flow,” focused on the industry as a whole, including both major and niche-product manufacturers. The GRIM was used to prepare an industry cash flow analysis. The Department used publicly available information developed in Phase 1 to adapt the GRIM structure to facilitate the analysis of new central air conditioner and central air conditioning heat pump standards. In Phase 3, “Sub-Group Impact Analysis,” the Department conducted interviews with several niche-product manufacturers to determine the financial impacts of revised standards. Phase 3 also entailed documenting additional impacts on employment and manufacturing capacity through a structured interview process. 1. Phase 1, Industry Profile Phase 1 of the MIA consisted of preparing an Industry Profile. Prior to initiating the detailed impact studies, DOE collected information on the present and past structure and market characteristics of the central air conditioning industry. This activity involved both quantitative and qualitative efforts to assess the industry and products to be analyzed. The information collected included manufacturer market shares and characteristics and financial information, market trends, and product characteristics. The industry profile included a top-down cost analysis of the central air conditioner manufacturing industry that was used to derive cost and financial inputs for the GRIM, e.g., revenues, and material, labor, overhead, depreciation, Sales General & Administration (SG&A), and Research & Development (R&D) expenses. The Department also utilized additional sources of information to further characterize the industry. These included company Securities and Exchange Commission (SEC) 10-K reports, Moody's company data reports, Standard & Poor's (S&P) stock reports, Value Line industry composites, and Dow Jones Financial Services. 2. Phase 2, Industry Cash Flow Analysis Phase 2 of the MIA focused on the financial impacts of new standards on the industry as a whole. The analytical tool used for calculating the financial impacts of standards on manufacturers is the GRIM. As part of the analysis, DOE interviewed several of the major manufacturers. For the Industry Cash Flow Analysis, DOE used the financial values determined during Phase 1 and the shipment scenarios used in the LCC and NES analyses. 3. Phase 3, Sub-Group Impact Analysis The Department has received many comments during workshops and interviews, and in writing, suggesting that manufacturers of niche products, representing less than 3% of industry shipments, could be more negatively impacted by new standards than major manufacturers. To assess the differential impacts, the Department interviewed two manufacturers of niche products, in addition to those conducted during the Engineering Analysis. The focus of the interviews was to determine which GRIM parameters differed for niche manufacturers by virtue of their smaller revenue base and more limited markets. From a financial standpoint, the common distinguishing characteristic of niche product manufacturers was their need to spread the costs of converting to new standards over smaller production volumes, as well as the product size constraints identified during the Engineering Analysis which make their shipments more sensitive to increases in product size. During the interviews, small manufacturers demonstrated that several of the costs necessary to meet any new regulation are largely independent of the product volume produced. The most apparent are the costs necessary to design a new product meeting the proposed energy standards. Other costs, such as plant engineering, some tooling, and other capital costs, have significant portions that are independent of final production volumes. 4. GRIM Analysis An increase in standards affects a manufacturer's cash flow in three distinct ways: (1) Increased investment; (2) higher production costs per unit; and (3) altered revenue by virtue of higher per unit prices and changes in sales volumes. As mentioned, the Department uses the GRIM to quantify the changes in cash flow that result in a higher or lower industry value. The GRIM analysis uses a number of inputs—annual shipments; prices; manufacturer costs such as materials and labor, selling and general administration costs, taxes, and capital expenditures—to arrive at a series of annual net cash flows beginning today and continuing ten years past the implementation of new standards. This information was collected from a number of sources, including publically available data, as well as interviews with of the major manufacturers and two specialty manufacturers. Industry net present values are calculated by discounting and summing the annual net cash flows. Additional information about the GRIM spreadsheet can be found in Chapter 8 of the TSD. D. NEMS Environmental Analysis The environmental analysis provides estimates of changes in emissions of nitrogen oxides (NO X ) and carbon from carbon dioxide (CO 2 ). The Department used NEMS-BRS for central air conditioner and heat pump analyses (as well as the utility analyses). NEMS-BRS is run similar to the AEO2000 NEMS except that central air conditioner and heat pump energy usages are reduced by the amount of energy (electricity) saved due to the proposed trial standard levels. The input of energy savings are obtained from the NES spreadsheet. For the environmental analysis, the output is the forecasted physical emissions. The net benefits of the standard is the difference between emissions estimated by NEM-BRS and the AEO2000 Reference Case. The environmental analysis is relatively straightforward from NEMS-BRS. Carbon emissions are tracked in NEMS-BRS using a detailed carbon module that provides robust results because of its broad coverage of all sectors and inclusion of interactive effects. The only form of carbon tracked by NEMS-BRS is CO 2 . However, in this report the carbon savings are reported as elemental carbon. The two airborne pollutant emissions that have been reported in past analyses, sulfur dioxide (SO 2 ) and NO X , are reported by NEMS-BRS. NO X results are based on forecasts of compliance with existing legislation. In the case of SO 2 , the Clean Air Act Amendments of 1990 set an emissions cap on all power generation. The attainment of this target, however, is flexible among generators and is enforced by applying market forces, through the use of emissions allowances and tradable permits. As a result, accurate simulation of SO 2 trading tends to imply that physical emissions effects will be zero because emissions will always be at, or near, the ceiling. This fact has caused considerable confusion in the past. There is virtually no real possible SO 2 environmental benefit from electricity savings as long as there is enforcement of the emission ceilings. See the TSD, Environmental Assessment, for a discussion of this issue. Alternative price forecasts corresponding to the high and low economic growth side cases found in AEO 2000 have also been generated for use by NEMS-BRS, and were used as alternative scenarios, and are presented in the TSD. (See TSD, Environmental Assessment.) V. Discussion of Comments As noted above, DOE published the Supplemental ANOPR regarding central air conditioners and heat pumps on November 24, 1999, and conducted a public workshop to present the analyses and to solicit comments on December 9, 1999. The Department requested comments on the following twelve issues: 1. Differences between the industry and the reverse engineering cost data: 2. The incorporation of emerging technologies into the Engineering Analysis; 3. The assessment of the impacts on steady-state efficiency, i.e. EER, due to increases in the SEER; 4. For heat pump systems, the relationship between SEER and HSPF; 5. Additional product classes based on system capacity; 6. Niche product classes (a) Ductless split (b) High-velocity, small-duct (c) Vertical-package, wall-mounted (d) Split, through-the-wall-condenser; 7. The impact of alternative refrigerants for HCFC-22; 8. Data on retail mark-up assumptions; 9. Information relating to the determination of price and operating cost elasticities in conducting shipment forecasts; 10. Data on the possible adverse affects of standards on identifiable groups of consumers that experience below-average utility or usage rates; 11. Information on what non-regulatory alternatives to standards need to be reviewed; and 12. Comments on the candidate standard levels and the alternative standard scenarios. Based on responses and comments received since that workshop, we provide the following discussion. A. Engineering Cost Data 1. Reverse Engineering Cost Estimates The Department's reverse engineering analysis prepared as a basis for the Supplemental ANOPR received a broad range of comments, both supportive and critical. ARI and the Natural Resources Defense Council (NRDC) commented on the apparent accuracy of the split air conditioner cost estimates and the ease with which the results are able to be scrutinized by outside parties. (Wethje, ARI, Transcript, p. 42; ARI, No. 11 at 1; Goldstein, NRDC, Transcript, p. 94). The Department also received comments criticizing the reverse engineering results for split heat pumps and for packaged air conditioners and heat pumps, noting the lack of design detail and the aggregation of the results into an efficiency level-based analysis. (Hodges, ARI, Transcript, p. 85; Madera, York International (York), Transcript, pp. 90, 91, 93; Goldstein, NRDC, Transcript p. 96 and California Energy Commission (CEC) No. 47 at 7). The comments observed that the relative cost results for split heat pumps and packaged equipment differed significantly from those of split air conditioners, and that those analyses were less rigorous than the split air conditioner analysis. They also noted that the split heat pump and packaged equipment analysis was based on fewer equipment samples; did not include a detailed tear-down of a 10 SEER split heat pump or packaged air conditioner; and was based on questionable production volume assumptions. The Department agreed that those deficiencies were likely to cause some of the differences between the ARI cost and the reverse engineering cost estimates, and revised its analysis of split heat pumps and packaged equipment. In responding to the comment on sample size for split heat pumps and packaged equipment, the Department took guidance from a review of the engineering analysis performed by DOE consultant, Joseph Pietsch. Mr. Pietsch presented five guidelines for comparing the production cost of equipment for different product classes. (Pietsch, No 36 at 2-5). • At each cooling capacity and SEER level, the same outside unit will likely be used for split air conditioners (fancoil) and split air conditioners (cased coil); • At each cooling capacity and SEER level, the same fancoil will likely be used for split air conditioners (fancoil) and split heat pumps; • At each cooling capacity and SEER level, the same cabinet will likely be used for packaged air conditioners and packaged heat pumps; • There should be some degree of consistency in the cost to “convert” an air conditioner into a heat pump; and • Split systems with fan coils and single package units at the same cooling capacity and SEER level should have nearly identical costs for the major functional components. Based on the above guidelines, DOE revised the analysis of split heat pumps and packaged equipment. Table V.1 provides the original and the revised production dollar cost estimates resulting from this new approach. Table V.2 provides the same information, but in terms of relative costs. Revised production costs are generally lower than the original costs, particularly at the baseline 10 SEER level. The most significant change is that the new analysis includes nine additional estimates that were not presented originally. Table V.1.—Engineering Production Cost Estimates for 3-Ton Unitary Equipment Efficiency level (SEER) Split air conditioner (cased coil) Original Revised Split air conditioner (fancoil) Original Revised Split heat pump Original Revised Packaged air conditioner Original Revised Packaged heat pump Original Revised 10 $367 $367 $456 $449 $622 $572 $552 $511 $643 $593 11 412 412 550 519 602 555 638 12 468 468 563 690 648 627 595 708 668 13 529 529 756 637 840 743 809 730 820 14 588 588 802 815 1,011 1,023 889 1,029 15 893 893 1,147 1,107 955 1,100 The only significant departures are found in split air conditioners with fancoils, where the new estimates are lower, and in 14 SEER and 15 SEER equipment where the new results are higher. Table V.2.—Revised Reverse Engineering Production Efficiency leval (SEER) Split air conditioner (cased coil) Original Revised Split air conditioner (fancoil) Original Revised Split heat pump Original Revised Packaged air conditioner Original Revised Packaged heat pump Original Revised 10 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 11 1.12 1.12 1.21 1.16 1.05 1.09 1.08 12 1.28 1.28 1.25 1.11 1.13 1.14 1.16 1.10 1.13 13 1.44 1.44 1.66 1.42 1.35 1.30 1.47 1.43 1.38 14 1.60 1.60 1.76 1.82 1.63 1.79 1.74 1.74 15 1.96 1.99 1.84 1.94 1.87 1.86 In response to comments on its production volume assumptions prior to the publication of the Supplemental ANOPR, the Department had reduced its heat pump production volume from 125,000 units per year to 25,000 units per year. However, since heat pumps and air conditioners are typically produced with the same plant equipment, reducing the production volume significantly increases the overhead allocated to each heat pump produced. The higher overhead allocation raises the cost of the baseline heat pump, lowering the relative cost of producing equipment at higher efficiency levels. To compensate for this overestimate of overhead allocation, we set the split heat pump overhead allocation equal to that of the split air conditioner at each efficiency level. The Department believes that the revisions to the split heat pump and packaged equipment production costs have improved the cost estimates for those product classes and that no additional equipment samples need to be subjected to tear-down or reverse engineering analysis. The revised reverse engineering cost estimates were used in the analysis for today's proposed rule. 2. Productivity Efficiency Improvements According to the American Council for an Energy Efficient Economy (ACEEE), Census Bureau Current Industrial Report (CIR) data suggest that the unit price of equipment shipments below 65,000 Btu/hr fell in real terms between 1992 and 1997. (ACEEE, No. 43 at 4). ACEEE suggested that the Department apply an annual deflator of 1.7% to projected prices to account for this apparent productivity improvement. For other rulemakings, the Department has used production input costs and production technologies based on the best information available at the time. DOE has not made any assumptions about productivity improvements and material cost changes over time. The Department does not believe historical price trends for unitary air conditioners, or other products, can be applied to forecast equipment costs where there are no data to indicate the trends will continue. Therefore, without specific data on the likely costs to manufacture a product, the Department will not apply a productivity improvement factor in this rulemaking or other rulemakings. 3. Emerging Technologies Emerging technologies that are not established in the residential central air conditioning market have the potential to lower the cost of achieving higher efficiency. In the Supplemental ANOPR, we considered advances in variable speed and variable capacity compressors, and reductions in the cost of variable speed fan motors and parallel-flow, microchannel heat exchangers to be potentially viable methods for increasing the efficiency of equipment at a lower cost than currently established methods. Bard Manufacturing (Bard), Unico, Inc. (Unico) and NRDC disagreed with this approach, questioning whether some of the technologies considered were commercially and technically viable, but proposed no other technologies for consideration. (Bard Manufacturing, No. 28 at 4; Unico, No. 34 at 1; NRDC No. 35 at 11-12). ARI stated that they considered some compressor and motor advances but not microchannel heat exchangers in their relative production cost data. (ARI No. 48 at 3). The Trane Company (Trane) and Edison Electric Institute (EEI) also expressed concern over some apparent inconsistencies in the emerging technologies analysis presented in Table 4.16 and the use and calculation of the Carnot efficiency on page 4-27 of the Supplemental ANOPR TSD. (Trane, No. 23 at 2; and EEI No. 20 at 3). Pacific Gas and Electric (PG&E) voiced concern that new technologies, such as the Bristol modulating compressor, could reduce costs to the point that manufacturers may use them at lower SEER levels resulting in a negative impact on peak loads and electrical system reliability. (PG&E, No. 31 at 3). The emerging technology analysis based on reverse engineering information seems to confirm that, of the technologies considered, only variable capacity compressors and variable speed fan motors have the potential to be cost options for providing additional efficiency compared to today's established technologies. This provides evidence that ARI is justified in not considering the potential benefits of microchannel heat exchangers as part of its relative cost data submission. Therefore, we will apply emerging technologies only to the reverse engineering results and consider the ARI relative cost multipliers to already include the effects of emerging technologies. We do not believe our original emerging technology analysis was inconsistent, as expressed by Trane and EEI above, although we do recognize that combining the effects of component efficiency improvements does not necessarily lead to a cumulative improvement in the system. The intent of the analysis is not to provide a definitive estimate of the impact of any or all emerging technologies on system cost. It is to provide evidence as to the extent to which reverse engineering overestimates the cost of higher efficiency equipment by neglecting emerging technologies. Therefore, the method used previously for portraying and combining the potential effects of emerging technologies on system costs is carried forward into today's rule. Chapter 2 of the TSD provides the details of the revised emerging technologies analysis. 4. HFC-Based Engineering Analysis ARI and Trane supported the Department's decision not to explicitly examine the effects of the HCFC phaseout on equipment cost and efficiency. (Wethje, ARI, Transcript p. 145; Crawford, Trane, Transcript p. 143). The Oregon Energy Office (OEO) and NRDC urged the Department to reconsider, given that a large fraction of the equipment sold under the new efficiency standard will likely use a refrigerant other than HCFC-22, even prior to the 2010 phaseout date. (Stevens, OEO, Transcript, p. 144; NRDC, No. 35 at 11-12). To date, no data presented to the Department indicate that the incremental cost for increasing the efficiency of equipment using either HFC-407c or HFC-410a refrigerants will differ significantly from the incremental cost of increasing efficiency using HCFC-22 equipment. Although the base cost may differ somewhat, the incremental cost determines the life-cycle-cost savings. Furthermore, the Department continues to receive information that much of the market is changing to HFC-410a and that HFC-410a offers little, if any, efficiency benefit over HCFC-22 at the same equipment cost. For these reasons, the Department will not perform additional engineering analysis related to alternate refrigerants. The costs to manufacturers related to their conversion to the new refrigerant will be considered in the Manufacturer Impact Analysis. B. Life-Cycle-Cost Parameters 1. Extended Warranty and Service Costs Energy Market and Policy Analysis, Inc. (EMPA) noted that the Life Cycle Cost analysis did not explicitly address extended warranty and service costs and asserted that they should be taken into account. (Schleede, EMPA, Transcript, p. 221). The Alliance to Save Energy (ASE) stated that the inclusion of extended warranty and service costs would have the impact of reducing repair and maintenance costs. (Prindle, ASE, Transcript, p. 222). Industry consultant Joseph Pietsch stated that manufacturers may provide longer-term warranties for high efficiency systems that cover a wider range of components, to alleviate customer concerns regarding possible future repair cost of the more complex systems. (Pietsch, No. 36 at 22). Air conditioner manufacturers warranty their equipment against defects, and contractors typically guarantee performance and installation. Manufacturer warranties typically cover parts and labor for one year, with longer warranties applying to the compressor. Mr. Pietsch noted that compared to low-SEER products, high-SEER products have more components, many of which have a relatively short history. Reliability patterns of these new components are less known, so warranty accruals may be significantly higher for these products. (Pietsch, No. 36 at 22). Dealers also may offer extended warranties which are usually underwritten by the manufacturer or a third party. A product that is less reliable or contains more expensive components will have a higher cost of repair over its lifetime. Either the consumer or the warranty provider will bear that added cost directly through more frequent service calls or higher repair costs. If the cost is covered by warranty, however, the warranty provider passes it back to future warranty holders in the form of slightly higher warranty prices. DOE believes the incremental increase in the price of the warranty is equal to, or just slightly higher, than the discounted present value of the incremental repair costs over the life of the warranty. Over the long term then, the average consumer always incurs the cost of higher repair costs, either directly or through higher warranty prices. Since our analysis considers the present value of consumer life cycle costs on the average consumer, incremental repair costs and incremental warranty costs are the same, and interchangeable. Since consideration of repair costs is satisfied by considering either repair costs or extended warranties, we limited our consideration to repair costs, which are slightly easier to estimate, communicate, and incorporate into the analysis. Considering them both would require a much more rigorous analysis of service costs since we would have to estimate the service cost incurred on a year-by-year basis. That additional analysis would likely not produce significantly different results. Comments are welcome as to whether explicit consideration of extended warranties would produce significantly different results from those based on service costs alone which we have assumed rise in proportion to the price of the equipment. Since more efficient equipment is also more expensive, we have included the higher cost of repair, or equivalently, the higher warranty cost associated with more efficient equipment, as part of the lifecycle cost analysis. 2. Residential Energy Consumption Survey (RECS) Both NRDC and EMPA asserted that RECS” method for estimating end-use energy consumption ( i.e., conditional demand analysis) yields unreliable and flawed results. NRDC added that conditional demand analysis methods inherently underestimate central air conditioner energy use due to its treatment of internal loads. EMPA stated that the RECS household sample size is too small to be used in the manner in which it is being treated in the life-cycle cost analysis. (NRDC, No. 35 at 6-7; EMPA, No. 33 at 4-6; Schleede, EMPA, Transcript, pp. 160-161). Virginia Power, EEI, and EMPA all requested that the analysis be updated to use RECS 1997 data rather than RECS 1993 data. EEI added that actual submetered end-use data should be used if possible rather than the end-use data in RECS. (Virgina Power, No. 27 at 2; EEI, No. 20 at 5, Schleede, EMPA, Transcript, pp. 160-161). As part of the process to improve the new energy efficiency standards analysis, we are committed to use sensitivity analysis tools to evaluate the potential distribution of impacts among different subgroups of consumers. The Department believes that RECS provides a nationally representative household data set which is suited for conducting the type of sensitivity analyses suggested by the Process Rule. Limiting the RECS households to those equipped with either central air conditioners or heat pumps, the LCC analysis performs a household-by-household analysis that predicts the percentage of households that will incur net life-cycle cost savings or costs from an increased efficiency standard. End-use energy consumption data from past RECS surveys have been compared to submetered end-use data for purposes of validating their conditional demand analysis estimates. Central air conditioning and space-heating energy data from the 1990 RECS were shown to differ by 5% to 22% compared to submetered end-use data from five utility service areas. The Department believes that this range of difference is acceptable considering that the conditional demand analysis utilized by RECS is fully capable of estimating the energy consumption of equipment throughout the nation. Because RECS is a very well suited source of data for performing the analyses suggested by the Process Rule and RECS has been shown to provide reasonable estimates of end-use energy consumption, we will continue to rely on RECS for providing the annual energy consumption data necessary for conducting the life-cycle cost analysis. The analysis conducted in support of this proposed rule has been revised based on data from the 1997 RECS rather than the 1993 RECS. 3. Equipment Lifetime Virginia Power, EEI, ARI, Unico, Rheem Co., and Trane commented that the average equipment lifetime of 18.4 years assumed in the Supplemental ANOPR was incorrect, and suggested an actual lifetime between 12 and 15 years. (Virginia Power, No. 27 at 2; EEI, No. 20 at 10; ARI, No. 48 at 3; Unico, No. 34 at 3; Lux, Rheem Co., Transcript, p. 165; Foster, EEI, Transcript, p. 170; Crawford, Trane, Transcript, p. 191; Wethje, ARI, Transcript, p. 193). EMPA asserted that the length of first ownership should be used as the basis for equipment lifetime. (EMPA, No. 33 at 3, Schleede, EMPA, Transcript, p. 162). NRDC, ACEEE, and the Vermont Energy Investment Corporation (VEIC) all believed that the 18.4 year equipment lifetime was reasonable. They reasoned that a shorter or longer average equipment lifetime would result in less accurate estimates of historical shipments. ACEEE added that unless manufacturers can provide new data, the 18.4 year average lifetime should be retained. (NRDC, No. 35 at 7-8; ACEEE, No. 43 at 6-7; VEIC, No. 32 at 7). The Department notes that the basis of the 18.4 year equipment lifetime was a survey conducted on more than 2,100 heat pumps in a seven state region of the U.S. 13 The survey determined not only the lifetime of a complete heat pump system, but the life of the original compressor as well. Although the system lifetime is on average over 18 years, the survey also showed that the original compressor lifetime was, on average, 14 years. Thus, the survey indicated that essentially all heat pump owners replaced their original compressor once in the lifetime of system. 13 “Bucher, M.E., Grastataro, C.M., and Coleman, W.R., “Heat Pump Life and Compressor Longevity in Diverse Climates.” ASHRAE Transactions, 1990. 96(1): p. 1567-1571. In the LCC analysis conducted for the Supplemental ANOPR, we did not include any repair costs associated with replacing the compressor. But since the heat pump survey clearly indicates that the original compressor is replaced once in a system's life, the analysis was revised to include a repair cost for the compressor. Conducting the analysis in this manner retains the average system lifetime of 18.4 years but explicitly addresses the replacement cost of the compressor, which is the most expensive component of a system. As indicated by the survey data, the compressor was assumed to be replaced in the 14th year of the system's life. In addition, because more efficient systems tend to use more efficient and, thus, more expensive compressors, the compressor replacement cost was assumed to vary with system efficiency. Although the revised LCC analysis assumed an 18.4 year average equipment life and one compressor replacement, a shorter equipment lifetime was investigated as an alternative scenario. In this alternative scenario, a retirement function yielding an average lifetime of 14 years was used and compressor replacement costs were not considered. The shorter equipment lifetime is plausible assuming that most, if not all, consumers when faced with replacing a failed compressor would choose to replace the entire system rather than replace the compressor in a relatively old system. LCC results based on both the 18.4 year and 14 year average equipment lifetimes are provided in Section VI as well as Chapter 5 of the TSD. 4. Commercial Applications NRDC, ACEEE, VEIC, CEC, and the Northwest Power Planning Council (NPPC) commented that DOE should analyze the application of residential central air conditioners and heat pumps ( i.e., single-phase equipment) in commercial buildings. All stated that there is a significant portion of this type equipment being used in small commercial buildings. They argued that since the energy use patterns in commercial buildings are distinctly different than those in households, the analysis should include residential equipment use in commercial applications. (NRDC, No. 35 at 12-13; ACEEE, No. 43 at 2; VEIC, No. 32 at 6-7; CEC, No. 47 at 8; Tom Eckman, NPPC, Transcript, p. 166). EEI requested clarification as to how the commercial application analysis was conducted for the Department's January 14, 2000, LCC Sensitivity Analysis. (EEI, No. 20 at 10). For today's proposed rule, the use of residential equipment in commercial buildings was analyzed assuming that 10% of all central air conditioners and heat pumps are used in commercial applications. This figure is based on ARI's estimate that approximately 10% of single-phase air conditioning and heat pump shipments are used in commercial buildings. The annual energy consumption of commercially applied air-conditioning and heat pump equipment was based on the simulation of 77 nationally representative commercial buildings consistent with the approach and assumptions utilized to develop the American Society of Heating, Refrigerating and Air-Conditioning Engineers' (ASHRAE) Standard 90.1-1999. Both average and marginal electricity rates were developed by matching a set of commercial electric utility tariffs to the above simulated building loads and demands. The LCC spreadsheet models were modified so that commercial buildings with their corresponding annual energy consumption and marginal and average electricity costs represent 10% of the entire residential and commercial building population. Complete details on the procedure to incorporate commercial applications are included in Chapter 5 of the TSD. 5. Marginal Electricity Prices NRDC, ACEEE, CEC, PG&E, NPCC, and ASE commented that the Supplemental ANOPR analysis underestimated future marginal electricity prices. Several of the comments stated the belief that deregulation of the electric utility industry would result in greater volatility of electricity pricing that eventually would translate into higher electricity prices during peak power periods. (Goldstein, NRDC, Transcript, p. 175; ACEEE, No. 43 at 6; CEC, No. 47 at 8; PG&E, No. 31 at 6-7; Eckman, NPPC, Transcript, pp. 167-168; Prindle, ASE, Transcript, p. 168). ARI and EEI were not convinced that a deregulated electric utility industry would result in higher electricity prices in the future. ARI noted that under a peak pricing scenario consumers may decline to operate their air-conditioning equipment to avoid incurring high electricity bills. EEI added that currently, there is no mechanism to capture utility capital costs for providing peak power in residential pricing. (Wethje, ARI, Transcript, pp. 168-169; Foster, EEI, Transcript, pp. 169, 175-176). The current method for establishing marginal electricity prices only allows for defining marginal prices for those years in which data are available. In the case of residential pricing, the data for establishing marginal prices (the 1997 RECS) was taken from the year 1997. The same can be said for commercial buildings. The utility tariffs used to establish marginal prices (as described earlier) were collected in the year 1997. On average, residential marginal prices for households with central air conditioners are 3% lower than average rates while for households with heat pumps marginal prices are 7% lower. Space-cooling marginal prices in commercial buildings are on average 2% greater than average commercial rates. Future marginal prices were in turn based upon the Reference Case electricity price forecast from the AEO2000. The Reference Case forecasts declining electricity rates through the year 2020. Although it is certainly possible that future electricity rates may increase in a deregulated climate, the evidence to date (i.e., residential marginal prices are actually lower than average rates and AEO 2000 forecasts project declining electricity rates) convinces us that our current methods for establishing marginal prices are reasonable. To state that future prices may decrease or increase is speculative. Even in the case of commercial buildings where demand pricing already exists, marginal prices are only 2% greater than average electricity rates. This reenforces our conviction to keep our current methodology for establishing marginal prices. However, the Department seeks comments on its methodology and data for determining the appropriate marginal energy costs to use in future analysis. 6. Forecast of Future Electricity Prices EMPA asserted that the EIA's forecast of electricity prices as found in the Annual Energy Outlook underestimates the future drop in electricity rates. (EMPA, No. 33 at 2-3; Schleede, EMPA, Transcript, p. 185). Don Dasher stated that any forecast of electricity prices should capture the future use of renewable energy and emerging technologies for generating power. (Dasher, Transcript, pp. 192-193). Future marginal prices are based upon the Reference Case electricity price forecast from the AEO 2000. The Reference Case forecasts declining electricity rates through the year 2020. Although it is certainly possible that future electricity rates may increase in a deregulated climate, the evidence to date ( i.e., residential marginal prices are actually lower than average rates and current AEO forecasts project declining electricity rates) leads us to believe that our current methods for establishing future marginal prices are reasonable. In addition to the Reference Case, DOE analyzed the effects of two other energy price forecasts, the AEO 2000 High Growth and Low Growth cases. (See TSD, Chapter 5.) 7. Discount Rates NRDC, ACEEE, VEIC, PG&E, and CEC believe that the discount rate used in the Supplemental ANOPR analysis was too high. Their primary criticism pertained to the breakdown of finance methods which were assumed for establishing the discount rate. The Supplemental ANOPR analysis assumed that 35% of consumers purchasing a central air conditioner or heat pump used a credit card to finance their purchase. The comments argued for a much lower percentage and cited a recent PG&E survey that demonstrated that only 5% of consumers used credit cards. VEIC also cited a survey by Potomac Electric Power Company (PEPCO) that reported lower purchases with credit cards. (NRDC, No. 35 at 10-11; ACEEE, No. 43 at 3; VEIC, No. 32 at 3-4; Neme, VEIC, Transcript, pp. 186-187; PG&E, No. 31 at 7; CEC, No. 47 at 7). Counter to the above assertion, Trane maintained that the Supplemental ANOPR's assumption regarding the percentage of consumers using credit cards to purchase equipment was correct, based on the number of consumers in the U.S. that carry credit card debt. (Crawford, Trane, Transcript, p. 191-192). EEI commented that the interest rates associated with credit card and cash purchases needed to be revisited. (EEI, No. 20 at 6). EMPA asserted that with higher cost air conditioners, consumers' after tax income would be reduced, requiring them to forego the purchase of various household necessities such as food, clothing, and shelter. (EMPA, No. 33 at 3). The Department performed an extensive review and revision to the methodology that determines consumer discount rate. The Supplemental ANOPR established the share of various finance methods used for purchasing air-conditioning equipment and determined the associated interest rates for each of the finance methods. For equipment obtained through the purchase of a new home, second mortgage, or home equity lines of credit, this approach is reasonable. But for purchases made to replace old or failed equipment where cash or some form of credit is used to finance the acquisition, we determined it more appropriate to establish how the purchase affects a consumer's overall household financial situation. For example, even though the purchase might be financed through a dealer loan or some other low interest financing vehicle, the more probable effect of the purchase is to either cause the consumer to incur additional credit card debt or forego their investment in some type of savings-related asset. Cash that was once available to either pay for household necessities or to invest in an asset like the stock market or a simple savings account now must be earmarked to pay off the equipment purchase loan, thus, either causing the consumer to incur additional credit card debt or to lose the opportunity to earn income from their assets. For today's proposed rule, we have decided to use the above methodology for defining the discount rate for central air conditioner and heat pump purchases. The 1998 Survey of Consumer Finances (SCF) was used to estimate the percentage of households that used second mortgages to finance their equipment purchase as well as those households that either would incur more credit card debt or be forced to forgo their normal course of investing. Data from the Air Conditioning, Heating, and Refrigeration News (December 12, 1998) established the percentage of shipment going to new homes. After establishing the share captured by each finance method, the range of interest rates due to each method were developed. The 1998 SCF established the range of interest rates for new home mortgages, second mortgages, and credit cards. Rates of return on certificates of deposit, savings bonds, and bonds were based on historical interest rates. A weighted-average discount rate of 5.6% is calculated from the mean interest rates for each finance method. A more detailed discussion of the data sources and how the interest rates were derived is found in Chapter 5 of the TSD. 8. Percentage of Households With LCC Savings For the Supplemental ANOPR, all consumers having an LCC increase resulting from the standard were considered to be adversely impacted. Several comments expressed concern on how we would use this information on adverse consumer impacts in selecting minimum efficiency standards. ARI, Unico and EMPA asserted that a majority of households would need to benefit from the standard in order to justify its selection. (ARI, No. 48 at 5; Unico, No. 34 at 3; EMPA, No. 33 at 2). NRDC stated that the percentage of households with LCC savings or costs relative to the baseline level should not be a criterion in basing a standard's economic justification. NRDC stated that variations in electricity pricing make it nearly impossible to determine consumer costs on a disaggregated level. (NRDC, No. 35 at 12-15). PG&E commented that the percentage of households at any particular standard level with net LCC costs actually overstates the significance of the negative LCC impacts. Most consumers experience LCC increases of only a few dollars over the life of the equipment. (PG&E, No. 31 at 8). The Department agrees with PG&E's comment and in formulating today's proposed rule, DOE has redefined the criteria for determining negative impacts. Noting that the baseline LCC is approximately $5,000 for central air conditioners and $10,000 for heat pumps, previously all consumers incurring an LCC increase as small as $10 were considered to be adversely impacted by an increase in the standard. In the revised LCC analysis, the Department defines consumers impacts as follows: consumers who achieve significant net LCC savings ( i.e., LCC savings greater than 2% of the baseline LCC), consumers who are impacted in an insignificant manner by having either a small reduction or small increase in LCC ( i.e., within ±2% of the baseline LCC), or consumers who achieve a significant net LCC increase ( i.e., an LCC increase exceeding 2% of the baseline LCC). Consequently, only consumers (both residential and commercial) having an LCC increase greater than 2% of the baseline are considered to be negatively impacted. 9. Regional Analysis At the December 9, 1999, public workshop, NRDC and CEC requested further information on regional distributions of households with net LCC savings or costs relative to the regional baseline level. (Goldstein, NRDC, Transcript, pp. 188-189; Martin, CEC, Transcript, p. 274). The Department responded by conducting additional analysis, which was posted to our web site on January 14, 2000, and included LCC analysis disaggregated by region into census divisions. From this regional analysis it could be determined how different parts of the country would be impacted by an increase in the minimum efficiency standard. 10. Rebuttable Payback EEI asked why the rebuttable payback period is not determined with annual energy use data from RECS. They also requested clarification as to how rebuttable payback periods will factor into the decision to select a new minimum efficiency standard. (EEI, No. 20 at 7-8). As prescribed by section 325(o)(2)(B)(iii) of EPCA, the rebuttable payback period is calculated under the applicable test procedure. Thus, all rebuttable payback periods are based on an annual energy consumption that is determined through the current Department of Energy test procedure for central air conditioners and heat pumps. The resulting annual energy use as determined by the test procedure is significantly greater than what is indicated by RECS. Thus, the rebuttable payback periods are significantly shorter than those based on the RECS annual energy consumption data. The rebuttable presumption test does not consider the full range of impacts of standards, including manufacturer impacts and energy savings. Therefore, the Department bases its decision primarily on the seven factors specified in section 325(o) of the Act. 11. Sensitivity Analyses ACEEE recommended that several sensitivity analyses be conducted to determine how the LCC varies with changes in certain input variables. (Nadel, ACEEE, Transcript, pp. 233-236; ACEEE, No. 43 at 10). NRDC also requested some of the sensitivity analyses described by ACEEE. (NRDC, No. 35 at 12-13). Trane went on the record as not endorsing all of ACEEE's requested sensitivities. (Crawford, Trane, Transcript, p. 237). We conducted several of the requested LCC sensitivity analyses, as well as the previously described regional analyses, and posted the results to our web site on January 14, 2000. The sensitivities examined how the LCCs for central air conditioners and heat pumps were impacted by changes in the following: dealer markups, builder markups, repair costs, lifetime, emerging technologies, and the use of single-phase central air conditioning and heat pump equipment in commercial applications. Of the sensitivities examined, the assumption of fixed margins ( i.e., no variation in the difference between the equipment price to the consumer and the cost to manufacture with increased efficiency) had the largest impact on the LCC results. Changes in the lifetime had a noticeable affect but not the same order of magnitude as the fixed margin assumption. All other sensitivities had only minor impacts on the LCC results. In preparing the sensitivity analyses, we found reason to revise our assumptions regarding markups, compressor replacement, and commercial applications. Those revisions are incorporated into the analysis that supports today's proposed rule and are discussed elsewhere in this Section. C. Shipments Analysis 1. Forecasted Housing Shifts Both the OEO and NPPC stated that there will likely be significant shifts in regional housing populations. For example, future housing shifts may result in more housing in warmer weather climates where central air conditioning is more prevalent and used more often, thus, impacting the nation's future space-conditioning energy use. Since the Shipment Analysis does not account for regional housing shifts, OEO and NPPC request that it be accounted for in the analysis. (Stephens, OEO, Transcript, pp. 171-172; and Eckman, NPPC, Transcript, pp. 216-217). Preliminary analysis of regional housing shifts has been examined and determined to have a relatively small effect ( i.e. , a maximum change of 2% in the cumulative amount of monetary energy savings). This is primarily due to the large size of the housing stock and the fact that changes in the housing stock occur over a long time scale resulting in slow changes in regional housing shifts. A preliminary analysis of historical housing data coupled with worst case forecasts of regional housing and air-conditioning market share shifts demonstrated the small impact on national NPV due to changes in regional housing. New housing starts are only about 2% of existing housing stock and this is forecast to decrease to about 1% of housing stock by 2030. Historical data over the period from 1980 to 1990 showed the shift in regional shares of housing stock changed by less than 2% (decreased by 1.2% and 1.7% in the Northeast and Midwest, respectively, and increased by 1.7% and 1.2% in the South and West, respectively). If these changes continue at a steady rate, the housing share of the Northeast will decrease another 3.6% over three decades. This translates to a relative decrease of 17% in the Northeast's air-conditioning market share. If the entire loss in the Northeast's market share goes to that portion of the South with the highest annual energy use (Census Region 7), the absolute market share of this region would increase from 15.7% to 17.7%. The result of this change is that the dollar value of energy savings at a 12 SEER standard level would increase from $5.73 billion to $5.85 billion, or about a 2% increase in the dollar energy savings. The actual impact on dollar savings would likely be less than half of this because the above housing shift was assumed to be immediate and to the highest energy use area of the South. As a result, the actual impact would likely be less than 1% on the dollar value of the energy savings. For these reasons, the Department has not revised its Shipments Analysis to account for shifts in regional housing populations. 2. Elasticities Both ACEEE and NRDC note that the purchase price elasticities are based on data from the 1970s and are likely no longer applicable to current market conditions. Both stated that price elasticities should be developed from more recent data. (ACEEE, No. 43 at 10; Nadel, ACEEE, Transcript, p. 211; Goldstein, NRDC, Transcript, pp.211-212). This has been corrected for in the analysis underlying today's proposed rule. We have calibrated elasticity for price relative to household income, with historical data from 1970 to 1996. It is worth noting that for forecasting future shipments, consumer purchase decisions are based upon sensitivities to changes in product life-cycle cost relative to income. Life-cycle cost changes are dependent on the purchase price and the present worth of operating cost savings. Operating cost savings are in turn dependent on electricity prices. As electricity prices are forecasted to decrease over time (based on the Annual Energy Outlook 2000), operating cost savings due to a particular increase in equipment efficiency will in turn decrease over time and have less of an impact on consumer purchase decisions. Usage elasticity expresses how changes in equipment efficiency resulting from higher standards changes consumer behavior regarding air conditioners and heat pumps usage. Because of lower operating costs, consumers may change thermostat settings and/or operate the systems for longer hours to achieve greater comfort. Direct evidence of the magnitude of this effect is limited and the Department is interested in receiving comments. One study 14 indicated that in summer months consumers may take 1-2% of the cooling energy savings back in increased usage, and 9-13% in winter months. Usage elasticity has not been considered in the current analysis but will be considered in the Final Rule. 14 Jeffrey A. Dubin, Allen K. Miedema, and Ram V. Chandran, 1986. “Price effects of energy-efficient technologies: a study of residential demand for heating and cooling,” Rand Journal of Economics, Vol 17, No. 3, Autumn, pp 310-324. 3. Equipment Efficiency Several comments received questioned the use of a weighted-average equipment efficiency equaling the SEER of the standard level for forecasting shipments and national energy savings. All asserted that in the event of an increase in the minimum efficiency standard, the actual weighted-average efficiency of equipment in the marketplace would be greater than the minimum efficiency standard. For example, if a 12 SEER standard was set as the new minimum, the weighted-average efficiency would be equal to a value which was greater than 12 SEER. (Neme, VEIC, Transcript, pp. 214, 226-227; Nadel, ACEEE, Transcript, p. 228; NRDC, No. 35 at 8-9; PG&E, No. 31 at 6-7). The Department has modified several assumptions with regard to future equipment efficiencies. The Shipments Model no longer simply forecasts a weighted-average equipment efficiency, but rather, an actual distribution of efficiencies i.e., the percentage of shipments which occur in incremental SEER bins over the range of the minimum standard 10 to 18 SEER). Also, as discussed in Section IV, three efficiency scenarios are provided to model future equipment efficiencies. The impact of the three different scenarios on national energy savings and national net present values are discussed in Section VI. EEI asked the reason for assuming the weighted-average efficiency remains fixed at the same SEER level from the year 1997 to the assumed effective date of standard (2006). (EEI, No. 20 at 7-8). Historical data from the years 1994 through 1997 indicate that shipment-weighted efficiencies have remained essentially flat. As a result, weighted-average efficiencies were assumed to remain constant from 1997 through 2006. 4. Fuel Switching EEI, York, Virginia Power and Southern Company stated that shipment forecasts must account for any fuel switching that might occur as a result of increased heat pump prices to the consumer. The concern is that an increase in the total installed price of a heat pump would cause some consumers to choose a gas-space heating appliance rather than an electric heat pump. (Foster, EEI, Transcript, p.263; Madera, York, Transcript, p.264; Virginia Power, No.27 at 2-3; Southern Company, No. 29 at 1-2). ACEEE stated that any incorporation of fuel switching into the Shipments Model must account for future changes in gas-fired space-heating minimum efficiency standards. (Nadel, ACEEE, Transcript, p.266). Our examination of the historical data tends to indicate that the relative installed price of heat pumps is not the primary driver in heat pump vs. gas furnace purchase decisions. The more important factor in these decisions seems to be the availability of gas service. In the middle 1980's, there was a large peak in gas prices relative to electricity, but only a small, delayed increase in the relative market share of heat pumps. Besides this one historical event, the relative market share of heat pumps has been relatively constant from 1977 to the present. D. National Energy Savings Analysis Changes to the LCC assumptions impact the NES and the National Net Present Value (NPV) analyses directly as the NES analysis uses the same basic data as the LCC analysis for the energy use and cost of the central air-conditioning and heat pump equipment. As previously mentioned, estimates of NES and NPV also depend on the distribution of product efficiencies among units sold after a standard takes effect in the marketplace. For the Supplemental ANOPR, the assumed product efficiency distribution was based on a weighted-average equipment efficiency equal to the SEER of the new standard level. 1. Uncertainty in NES Results EEI believes that due to the uncertainty in the electric utility industry and its impact on future electricity prices it is more appropriate to represent the NES results with some degree of uncertainty. (EEI, No. 20 at 8). Although NES results presented in the Supplemental ANOPR were based only on electricity price estimates from the Reference Case forecast from the 1999 Annual Energy Outlook, our NES spreadsheets have provided users with five different options for estimating future electricity prices; 1999 AEO Reference Case forecast, 1999 AEO High Growth Case forecast, 1999 AEO Low Growth Case forecast, 1998 Gas Research Institute (GRI) forecasts, and constant electricity prices. Providing a number of options for forecasting future prices recognizes the uncertainty in the electric utility industry and how that uncertainty can impact the NES results. The NES uses single point values rather than ranges as used in LCC; consequently, NES provided single point results rather than a range. However, in order to account for the uncertainty in electricity price forecasts, DOE evaluated three energy price scenarios in the NES. The NES Spreadsheets have been made available to all interested parties via our web site to facilitate analysis of sensitivities for assumptions different than those for the Supplemental ANOPR. For today's proposed rule, we continue to provide the same options for forecasting future electricity prices with the exception that AEO 1999 forecasts have been replaced with those from the AEO 2000 as well as the five options for energy prices as described above. 2. Site-to-Source Conversion Both the Southern Company and EEI questioned the validity of the site-to-source conversions used in the NES spreadsheet model. The Southern Company and EEI asserted that hydroelectric power and renewable forms of electric energy are assigned fossil fuel-fired power plant heat rates. (Southern Company, No. 29 at 4-5; EEI, No. 20 at 7). We estimated the effects of proposed central air conditioner and heat pump standard levels on both the gas and electric utility industries using a variant of DOE/EIA's NEMS-BRS, together with some exogenous calculations. 15 NEMS-BRS is used to determine site-to-source conversion factors and does not assign fossil-fuel-fired power plant heat rates to hydroelectric or renewable power plants. The site-to-source conversion factors used in the Supplemental ANOPR are average annual values for the residential sector. The average conversion factors are based on all forms of electricity generation with their corresponding heat rates ( e.g. , heat rates are assigned to fossil-fuel fired power plants which are much different than those assigned to other types of power plants). As a result, the site-to-source conversion factors are significantly lower than if all power plants were assigned the heat rates associated with fossil fuel-fired power plants. For today's proposed rule, site-to-source conversion factors are based on recommendations of the Advisory Committee on Appliance Energy Efficiency Standards. In this analysis, heat rates are based on determining how a deviation in national energy consumption due to standards impacts the type of electricity generation. In other words, heat rates are based on those power plants which are avoided as a result of the standard. 15 For more information on NEMS, please refer to the U.S. Department of Energy, Energy Information Administration documentation. A useful summary is 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, under whose aegis this work has been performed). E. Consumer Sub-Group Analysis-Low Income Renters NRDC stated that impacts on low-income renters should be investigated, because such renters do not purchase their space-conditioning equipment and they have no choice as to the efficiency of the equipment which is used to space-condition their home. (NRDC, No. 35 at 9). We have investigated the economic impact of standards on low-income households, and have included such impacts in section VI.D.7 of today's proposed rule and in Chapter 10 of the TSD. But we have not investigated the impacts on low-income renters separately. Renters at each income level are considered to have the same choice in efficiency as new home purchasers at the same level. Regardless of whether a household is occupied by an owner or a renter, we implicitly assume that the occupant incurs all costs of ownership, either directly or through rent payments. Therefore, we believe that our consideration of low income households generally applies to renters as well as owners. F. Utility and Environmental Analysis 1. Peak Power Impacts—Reliability The CEC raised concerns over peak power by stating that the western region of the U.S. will soon face a capacity shortfall which will necessitate reductions in peak demand (CEC, No. 47 at 2-4). Leon Neal, Advanced Energy Corporation (AEC), stated that because of a relationship between SEER, EER, and equipment capacity which is not captured by using only the “nominal 3 ton” unit and SEER analyses, there were important factors not addressed in the DOE analysis. They argued that with larger capacity units at higher SEER, it is economic for manufacturers to use multi-compressor units and multi-speed compressor units, which results in a penalty in EER. They noted major national trends, i.e. , increasing average size of residential dwellings, the tendency to sell bigger systems to increase profits and compensate for poor installations, and the distrust of contractors for higher efficiency equipment. (AEC, No. 17 at 1). EEI stated that the consideration of peak power impacts in setting new efficiency standards departs from the Department's statutory mandate. (Foster, EEI, Transcript, p. 176). With regard to AEC's concern that an increase in the efficiency standard would be accompanied by an increased air-conditioning power demand, we are not convinced that this situation would occur. Over the last 20 years, while shipment-weighted efficiency has continually increased, usage has remained relatively constant. Therefore, we see no reason that a significant jump in system usage would occur in conjunction with higher efficiency standards. Regarding EEI's claim that the consideration of peak power impacts departs from the Department's statutory mandate, section 325(o)(2)(B)(i)(VII) of the Act, 42 U.S.C. 6295(o)(2)(B)(i)(VII), allows the Secretary to consider other factors deemed relevant for updating minimum efficiency standards, including peak power impacts. 2. Quantitative Assessment of Impacts on Peak Demand For purposes of estimating peak demand impacts from an increase in the central air conditioner and heat pump energy efficiency standard, we are using a version of the NEMS, called NEMS-BRS. NEMS-BRS is run similar to the AEO2000 NEMS except that central air conditioner and heat pump energy usages are reduced by the amount of energy (electricity) saved due to the proposed trial standard levels. The input of energy savings are obtained from the NES spreadsheet. NEMS estimates peak power impacts by determining the reduction in installed generation capacity due to an increase in the minimum efficiency standard. For central air conditioners and heat pumps, NEMS uses a single nationally representative end-use load shape to estimate peak power impacts. The overall end-use load shape is reduced in proportion to the amount of energy savings achieved through an increase in the standard. The reduction in power demand achieved by shaving the end-use load shape is extrapolated to a national scale to come up with nationally representative peak power impacts. Thus, NEMS does not use the equipment's EER performance, per se, to estimate peak power impacts. Rather, because the load shape is shaved in proportion to the energy savings, the EER is implicitly assumed to increase in proportion to the SEER. The forecasted peak impacts using NEMS-BRS are presented in Section VI of today's proposed rule. 3. Qualitative Assessment of Air Conditioning Standards Impact on Power System Reliability We also recognize that reducing growth in electricity demand during peak periods may improve the reliability of the U.S. electric power system. But there are number of factors with the electric power system itself that may overwhelm any effect that an improvement in residential air conditioning efficiency might offer. First, investment in system expansion has fallen behind demand growth, and future development may be limited by siting constraints. Second, industry restructuring requires the development of new technologies, operating procedures, and regulatory structures to meet peak demands. And third, the strong demand expansion of recent years may well continue into the future. Within this environment, the potential benefits of a central air conditioner and heat pump standard that could lower growth in peak demand could be desirable. But, due to the existing problems with the electric power system described above, it is difficult to assess, in quantitative terms, the impact of an air conditioner standard on system reliability. Thus, in addition to the planned activities to improve NEMS to forecast more credible peak demand impacts, we plan to assess the reliability of the U.S. electric system to determine what connection exists between end-use peak demand reductions and system reliability. The assessment will focus on three areas: (1) Defining reliability, (2) historic performance of the utility system, and (3) analyzing near- and long-term utility changes and how they might impact reliability. In defining reliability, we will use typical threats ( e.g. , weather, tree falls, excess load, and inaccurate demand forecasts) to put system reliability into context. In addition, industry indices for the frequency of failures and the number of customers affected will be used. With regard to historic performance, we will attempt to analyze the history of system disturbances and estimate their economic consequences. Finally, we will look at the changes occurring in the utility industry such as restructuring and increasing demand growth to determine to try and assess how these future changes might impact reliability. 4. Competitive Residential Market EEI asked whether NEMS, the model which is used for forecasting utility and environmental impacts, will be adapted to model more accurately the deregulated electric utility industry. As part of the deregulated industry, EEI stated that consumers will have choice of electricity providers. In addition, the industry will likely build more merchant power plants. (EEI, No. 20 at 9). Although we recognize that NEMS may not be entirely accurate in its modeling of the changing electric utility industry, we believe it is still the best tool for forecasting the impacts due to increased central air conditioner and heat pump standards. We also recognize the difficulty for any model or tool to forecast changes in the utility industry. Thus, the results from NEMS are used to provide a gross picture of the impacts that can be expected from the imposition of new efficiency standards for central air conditioners and heat pumps. Sensitivities are conducted with the AEO High Growth and Low Growth cases to capture the variability that could arise from changes in the electric utility industry. G. Manufacturer Impact Analysis—Low Volume Manufacturers First Company (First Co.) and National Comfort Products commented that the assumptions used in the engineering analysis were not applicable for low volume manufacturers and urged the Department to consider the situations of all firms in the industry. (First Co., No. 40 at 10; National Comfort Products, No. 30 at 1). Since the engineering analysis is used to assess the impacts on consumers and the nation, it is more appropriate to rely on assumptions reflective of larger manufacturers who control more than 95% of the market. However, we did consider the special circumstances of lower volume manufacturers as part of the manufacturer impact analysis. We interviewed the major manufacturers as well as two smaller manufacturers, and based on this information, estimated the impact of standards on both large and small manufacturers separately. H. Markups The Supplemental ANOPR's engineering analysis estimated the cost of producing baseline air conditioners and heat pumps and also estimated the series of markups on that product cost that yield the price of the equipment to the consumer. Four markups were applied: Manufacturer markup (1.18), distributor/wholesaler markup (1.37), dealer/contractor markup (1.54), and sales tax (1.07). In general, these were based on financial reports for each group on a national basis. NRDC, ACEEE and VEIC commented that instead of applying average markups to the incremental increase in costs resulting from new standards, it was more reasonable to apply a lower markup to those incremental costs. Otherwise, companies would receive a windfall from the new standard, which would surely not be the case in a competitive industry such as heating, ventilation, and air conditioning. (NRDC, No. 35 at 6, ACEEE, No. 43 at 2, VEIC, No. 32 at 2). NRDC also advocated the use of a fixed gross margin in dollars rather than a fixed percentage (NRDC, No. 35 at 6), while EEI stated that the fixed percentage assumption is unreasonable. (EEI, No. 20 at 10). ARI supported the markups the Department used. (ARI, No. 48 at 4). Department consultant Joseph Pietsch stated that at the distributor level, since no labor is involved to modify the product, the markup is applied to a well-documented material cost. However, the distributor's markup percentage may vary by product type. If the distributor's mark-up prices to the installing trade are not competitive in the market served, the distributor might have to seek price adjustments from the manufacturer. Further, installing contractors typically use a markup procedure for labor that is most likely be at a different percentage than a markup for materials. (Pietsch, No. 36 at 23). Finally, prompted by comments we received, we now distinguish markups based on whether products are sold into new homes or as replacements or retrofits. (Nadel, ACEEE, Transcript pp. 122-123; and Eckman, NPPC, Transcript p. 152-153; CEC, No. 47 at 7). After reviewing the comments and publishing an interim analysis with fixed dollar margin, the Department undertook a thorough review of its markup assumptions and made one minor and one major revision. First, at the manufacturer level, the markups were raised slightly (from 1.18 to 1.24) partially to reflect new financial data for a manufacturer who recently completed an initial public offering, and partially to incorporate results from the MIA. The MIA suggests that firms accrue a higher profit margin on baseline equipment than the conservative 1% assumed for the Supplemental ANOPR's Engineering Analysis. Second, at the distributor and dealer levels, analysis of U.S. Census Bureau data and recent industry financial reports suggest that markups on changes in the unit price of equipment are less than the average markups for those industries. In light of these new findings, the markups for the distributors and dealers on the incremental increase in equipment cost were lowered from 1.37 to 1.09 and 1.54 to 1.27, respectively. For the distributor, the markup on the portion of equipment cost equal to the cost of the baseline equipment remains at 1.37. For the dealer, the 1.27 markup is applied to the total cost. The original 1.54 assumption included the markup on the labor portion of installation, which is not appropriately applied to equipment. We increased our estimate of the markup on installation labor slightly to compensate for the lower markup on equipment price, keeping the overall installed price the same. The Department's pricing information indicates that the total installed price of baseline equipment is accurate as published in the Supplemental ANOPR. The overall effect of these changes is to slightly decrease distributor and dealer equipment markups as the standard level rises. We introduced a new builder markup of 1.27 for new construction markets only and applied the sales tax rate of 1.07 in only replacement/retrofit markets. Table V.3 summarizes the changes in markups. The Technical Support Document (Chapter 5) provides more details on the derivation of these new estimates. Table V.3.—Comparison of Revised Markups and Supplemental ANOPR Markups Type Revised analysis markup Supplemental ANOPR markup Manufacturer Markup 1.23 1.18 Wholesaler/Distributor Markups: 10 SEER 1.37 1.37 11 SEER 1.33 12 SEER [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A00-25336. Public record. Not legal advice.