Energy Conservation Program for Commercial and Industrial Equipment: Energy Conservation Standards for Commercial Unitary Air Conditioners and Heat Pumps

Federal RegisterJul 29, 2004

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DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 431

[Docket No. EE-RM/STD-01-375]

RIN 1904-AB09

Energy Conservation Program for Commercial and Industrial Equipment: Energy Conservation Standards for Commercial Unitary Air Conditioners and Heat Pumps

AGENCY:

Office of Energy Efficiency and Renewable Energy, Department of Energy.

ACTION:

Advance notice of proposed rulemaking and notice of public meeting.

SUMMARY:

The Energy Policy and Conservation Act (EPCA) directs the Department of Energy (DOE or the Department) to consider whether to adopt the amended energy efficiency levels in the American Society of Heating, Refrigerating and Air-Conditioning Engineers, Inc. (ASHRAE)/Illuminating Engineering Society of North America (IESNA) Standard 90.1-1999, or more stringent levels, for certain commercial unitary air conditioners and heat pumps with rated cooling capacities of 65,000 British thermal units per hour (Btu/h) and greater, but less than 240,000 Btu/h. The Department publishes this Advance Notice of Proposed Rulemaking (ANOPR) to solicit public comments on its preliminary analyses for this equipment.

DATES:

The Department will hold a webcast on Thursday, August 12, 2004, from 1 p.m. to 4 p.m. If you are interested in participating in this event, please inform James Raba at (202) 586-8654.

The Department will hold a public meeting on Thursday, September 30, 2004, from 9 a.m. to 5 p.m., in Washington, DC. The Department must receive requests to speak at the meeting before 4 p.m., Thursday, September 16, 2004. The Department must receive a signed original and an electronic copy of statements to be given at the public meeting before 4 p.m., Thursday, September 23, 2004.

The Department will accept comments, data, and information regarding the ANOPR before or after the public meeting, but no later than Friday, November 12, 2004. See section IV, “Public Participation,” of this ANOPR for details.

ADDRESSES:

You may submit comments, identified by docket number EE-RM/STD-01-375 and/or RIN number 1904-AB09, by any of the following methods:

• Federal eRulemaking Portal:

http://www.regulations.gov

. Follow the instructions for submitting comments.

• E-mail:

commercial airconditioner.anopr@ee.doe.gov

. Include EE-RM/STD-01-375 and/or RIN 1904-AB09 in the subject line of the message.

• Mail: Ms. Brenda Edwards-Jones, U.S. Department of Energy, Building Technologies Program, Mailstop EE-2J, ANOPR for Commercial Unitary Air Conditioners and Heat Pumps, EE-RM/STD-01-375 and/or RIN 1904-AB09, 1000 Independence Avenue, SW., Washington, DC, 20585-0121. Telephone: (202) 586-2945. Please submit one signed paper original.

• Hand Delivery/Courier: Ms. Brenda Edwards-Jones, U.S. Department of Energy, Building Technologies Program, Room 1J-018, 1000 Independence Avenue, SW., Washington, DC, 20585.

Instructions: All submissions received must include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. For detailed instructions on submitting comments and additional information on the rulemaking process, see section IV of this document (Public Participation).

Docket: For access to the docket to read background documents or comments received, go to the U.S. Department of Energy, Forrestal Building, Room 1J-018 (Resource Room of the Building Technologies Program), 1000 Independence Avenue, SW., Washington, DC, (202) 586-9127, between 9 a.m. and 4 p.m., Monday through Friday, except Federal holidays. Please call Ms. Brenda Edwards-Jones at the above telephone number for additional information regarding visiting the Resource Room. Please note: The Department's Freedom of Information Reading Room (formerly Room 1E-190 at the Forrestal Building) is no longer housing rulemaking materials.

FOR FURTHER INFORMATION CONTACT:

James Raba, U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, Building Technologies, EE-2J, 1000 Independence Avenue, SW., Washington, D.C. 20585-0121, (202) 586-8654. E-mail:

jim.raba@ee.doe.gov.

Francine Pinto, U.S. Department of Energy, Office of General Counsel, GC-72, 1000 Independence Avenue, SW., Washington, DC 20585, (202) 586-9507. E-mail:

Francine.Pinto@hq.doe.gov.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Summary of the Analysis

1. Engineering Analysis

2. Building Energy Use and End-Use Load Characterization

3. Markups to Determine Equipment Prices

4. Life-Cycle Cost (LCC) and Payback Period (PBP) Analysis

5. National Impact Analysis

B. Authority

C. Background

1. History

2. Rulemaking Process

3. Equipment Definitions

4. Efficiency Levels

5. Test Procedure

II. Commercial Unitary Air Conditioner and Heat Pump Analyses

A. Market and Technology Assessment

1. Manufacturers

2. Equipment Efficiency

3. Equipment Shipments

B. Screening Analysis

C. Engineering Analysis

1. Baseline Equipment

a. Efficiency Level

b. Maximum Technologically Feasible Design

c. Representative Capacities

2. Methodology

3. Cost Assessment Approach

a. Teardown Analysis

b. Cost Model

c. Cost/Efficiency Curves

4. Supplemental Design Option Analysis

5. Alternative Refrigerant Analysis

D. Building Energy Use and End-Use Load Characterization

1. Approach

2. Preliminary Results

E. Markups to Determine Equipment Price

1. Approach

2. Estimated Markups

F. Life-Cycle Cost and Payback Period Analysis

1. Inputs to LCC Analysis

a. Total Installed Cost Inputs

b. Operating Cost Inputs

(1) Use of Whole-Building Simulations

(2) Electricity Price Analysis

(a) Tariff-Based Approach

(b) Hourly Based Approach

(3) Electricity Price Trend

(4) Repair Cost

(5) Maintenance Cost

(6) Lifetime

(7) Discount Rate

(8) Effective Date

2. Inputs to the Payback Period Analysis

3. Preliminary Results

a. Life-Cycle Cost Results

b. Payback Period Results

G. National Impact Analysis

1. National Energy Savings (NES)

a. National Energy Savings Inputs

(1) Annual Energy Consumption Per Unit

(2) Shipments

(3) Equipment Stock

(4) National Annual Energy Consumption

(5) Electricity Site-to-Source Conversion Factor

2. National Net Present Value

a. National Net Present Value Calculations

b. Net Present Value Inputs

(1) Total Annual Installed Cost

(2) Total Annual Operating Cost Savings

(3) Discount Factor

(4) Present Value of Costs

(5) Present Value of Savings

3. Shipments Model

a. Ownership Categories

b. Market Segments

c. Logit Probability Model

4. Preliminary Results

H. LCC Sub-Group Analysis

I. Manufacturer Impact Analysis

1. Sources of Information for the Manufacturer Impact Analysis

2. Industry Cash Flow Analysis

3. Manufacturer Sub-Group Analysis

4. Competitive Impacts Assessment

5. Cumulative Regulatory Burden

J. Utility Impact Analysis

K. Environmental Assessment

L. Employment Impact Analysis

M. Regulatory Impact Analysis

III. Candidate Energy Conservation Standards Levels

IV. Public Participation

A. Attendance at Public Meeting

B. Procedure for Submitting Requests to Speak

C. Conduct of Public Meeting

D. Submission of Comments

E. Issues on Which DOE Seeks Comment

1. Approaches to Analyses for Split Systems, Heat Pumps, and Niche Equipment

2. Alternative Refrigerant Analysis

3. Candidate Standards Levels

4. Design-Option Analysis and Maximum Energy Efficiency Levels

5. Industrial Buildings

6. Economizer Performance

7. Fan Energy Consumption

8. Equipment Markups

9. Hourly Based Electricity Prices

10. Forecasts of Electricity Prices

11. Equipment Lifetime

12. Maximum Market Share of Commercial Unitary Air Conditioning Equipment

13. Future Building Types Using Commercial Unitary Equipment

14. Customer Sub-Groups

15. Effective Date of New Standards and Phaseout Date of R-22 Refrigerant

16. Independent Expert Third-Party Reviews

a. Sample of Buildings

b. Building Loads and System Thermodynamics Simulation and Commercial Buildings Energy Consumption Survey Estimates of Energy Use

c. Supply Fan Energy Use While Ventilating

d. Incremental Markups

17. Effect of Income Taxes on Life-Cycle Cost

18. Technologies that Affect Full-or Part-Load Performance

19. Environmental Assessment

20. Rebound Effect

V. Regulatory Review and Procedural Requirements

VI. Approval of the Office of the Secretary

I. Introduction

A. Summary of the Analysis

The Energy Policy and Conservation Act (42 U.S.C. 6311

et seq.

) establishes minimum energy conservation standards for certain industrial and commercial equipment, including the commercial unitary air conditioners and heat pumps under consideration in this rulemaking. The EPCA further requires that, if certain industry standards are amended after the date of enactment of the Energy Policy Act of 1992, DOE must establish a new energy efficiency standard at that amended level, or at a more stringent level if DOE determines, “by rule published in the

Federal Register

and supported by clear and convincing evidence, that adoption of a uniform national standard more stringent than such amended ASHRAE/IESNA Standard 90.1 for such product would result in significant additional conservation of energy and is technologically feasible and economically justified.” (42 U.S.C. 6313(a)(6)(A))

The Department conducted in-depth technical analyses for this ANOPR in the following areas: (1) Engineering, (2) building energy use and end-use load characterization, (3) markups to determine equipment prices, (4) life-cycle cost (LCC) and payback periods (PBP), and (5) national impacts.

1. Engineering Analysis

The engineering analysis establishes the relationship between the cost and efficiency of commercial unitary air conditioners and heat pumps. This relationship serves as the basis for cost/benefit calculations in terms of individual consumers, manufacturers, and the Nation. The engineering analysis identifies the representative baseline equipment (using R-22 as the refrigerant), develops the bill of materials and determines the costs, constructs the industry cost/efficiency curves, and evaluates the impact of using an alternative to R-22 refrigerant on the cost/efficiency relationship of certain commercial unitary air conditioners and heat pumps. (See section II.C. of this ANOPR for further details.)

2. Building Energy Use and End-Use Load Characterization

The building energy use and end-use load characterization analysis uses building simulations to estimate the energy consumption of commercial unitary air conditioning equipment at specified candidate standards levels. The 1995 Commercial Buildings Energy Consumption Survey (CBECS 95) data set was the primary source of the data used to develop the building set and its associated characteristics. The Department modeled each building in the set using the Building Loads and System Thermodynamics (BLAST) software. (See section II.D of this ANOPR for further details.)

3. Markups To Determine Equipment Prices

The equipment price analysis derives end-user or customer prices for more energy efficient commercial unitary air-conditioning equipment. To derive those prices, the Department differentiates between a baseline (manufacturer's) markup and an incremental (wholesaler's, general contractor's, and mechanical contractor's) markup, based on the distribution channel that the customer uses to purchase such equipment. (See section II.E of this ANOPR for further details.)

4. Life-Cycle Cost (LCC) and Payback Period (PBP) Analysis

When the Department is determining whether an energy efficiency standard for commercial unitary air-conditioning equipment is economically justified, EPCA directs DOE to consider, in part, the economic impact of potential standards on consumers. (42 U.S.C. 6313(a)(6)(B)(i)(I)) To assess that impact, the Department calculated the changes in LCCs which are likely to result from a candidate standard, as well as a distribution of PBPs. The foundation of the LCC and PBP analyses is the building set defined by the building energy use and end-use load characterization analysis. The Department created a representative sample from the building set, and determined the LCC and PBP for a given energy efficiency standard level for each building in the sample. Probability distributions characterize most other inputs to the LCC and PBP analysis. The input probability distributions combined with the building sample enabled the Department to generate LCC and PBP results as probability distributions using a simulation based on Monte Carlo statistical analysis methods. One of the most critical inputs to the LCC and PBP analysis is electricity price. The Department derived two sets of electricity prices to estimate annual energy expenses: A tariff-based estimate and an hourly based estimate. Although the Department used these two sets of electricity prices, it designated the tariff-based prices as the primary approach. In combination with the hourly electrical loads from the building simulations, the

tariff-based approach estimates the annual energy expense using electricity prices determined from electric utility tariffs collected in the year 2002. (See section II.F of this ANOPR for further details.)

5. National Impact Analysis

The national impact analysis assesses the national energy savings (NES) and the net present value (NPV) of total customer LCC and NES. The Department calculated both NES and NPV for a given energy efficiency standard level as the difference between a base case (without new standards,

i.e.

, EPCA levels) and the standards case (with new standards). The Department determined national annual energy consumption by multiplying the number of units or stock of commercial unitary air conditioners (by vintage) by the unit energy consumption (also by vintage). Cumulative energy cost savings is the sum of the annual NES determined over specified time periods. The national NPV is the sum over time of discounted net cost savings due to the energy savings. The Department calculated net savings each year as the difference between total operating cost savings (including electricity, repair, and maintenance cost savings) and increases in total installed costs (including equipment price and installation cost). As with the NES, cumulative cost savings is the sum of the annual NPV determined over specified time periods. One of the most critical inputs to this analysis is shipments data. The Department developed shipments projections under a base case and certain candidate standards cases. It determined that shipment projections under the standards cases were lower than those from the base case projection, due to the higher installed cost of the more energy-efficient unitary air conditioning equipment. Higher installed costs caused some customers to forego equipment purchases. As a result, the Department used the standards case shipments projection and, in turn, the standards case stock of commercial unitary air conditioners to determine the NES and NPV to avoid the inclusion of savings due to displaced shipments.

Table I.1 summarizes the key inputs, assumptions, and methodologies for each analysis area, and provides general references for finding the corresponding analyses in the Technical Support Document (TSD), a “stand-alone” report that provides the technical analyses and results in support of the information presented in this ANOPR. The ANOPR and TSD are available to interested parties on the Department's website at

http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html

. Also, Table I.1 provides references for finding the results of each analysis in this ANOPR.

Table I.1.—In-Depth Technical Analyses Conducted for the ANOPR

Analysis area

Methodology

Key inputs

Key assumptions

ANOPR section for results

Engineering (TSD Chapter 5)

Tear Down Analysis supplemented with Design Option Analysis

Component cost data

Maximum Technologically Feasible efficiency equals 12 EER

Section II.C.3.c.

Building Energy Use and End-Use Load Characterization (TSD Chapter 6)

Whole-Building simulations using Building Loads and System Thermodynamics (BLAST) software

1997 Commercial Building Energy Consumption Survey (CBECS) to identify and characterize the type of building using unitary air conditioners

(1) BLAST characterization of part-load equipment performance;

(2) Ventilation rates set equal to ASHRAE 62 requirements; and

(3) Fan power consumption included during times of ventilation and heating

Section II.D.2.

Markups to Determine Equipment Price (TSD chapter 7)

Assessment of financial reports to develop markups to transform manufacturer prices into customer prices

(1) Characterization of distribution channels and markets; and (2) Financial reports characterizing firm costs, expenses, and profits

Differentiation between a baseline markup and an incremental markup to relate manufacturer price to customer price

Section II.E.2.

LCC and Payback Period (TSD Chapter 8)

Building-by-building analysis of a representative sample of commercial building customers (customers are appropriately weighted)

(1) Output from the Engineering, Building Simulation, and Equipment Price analyses; and

(2) Electricity prices based on current electric utility tariffs

Sample of commercial buildings representative of all unitary air conditioner users (industrial users have been excluded)

Section II.F.3.

National Impact (TSD Chapter 10)

Forecasts of unitary air conditioner costs and energy consumption to the year 2035

(1) Average values from the LCC analysis;

(2) Historical shipment data; and

(3) Commercial building stock and forecasts of commercial building starts

Responsiveness of shipments forecasts to total installed cost, operating costs, and business income

Section II.G.4.

The Department consulted with interested parties while developing the above analyses to make clear the sources of data and analytical processes it used. The Department continues to seek input from all interested parties on the methodologies, inputs, and assumptions used to develop the analyses. In addition, certain analyses were very complex and questions raised by stakeholders led the Department to engage independent, third-party experts to review the Department's assumptions, approaches, data, and analytical methods used in particular for: (1) The sample of buildings used to represent commercial unitary air conditioning equipment; (2) the BLAST and CBECS estimates of energy use in these buildings; (3) supply fan energy use while ventilating; and (4)

incremental markup of commercial unitary air conditioning equipment prices. The third-party reviews are available to interested parties on the Department's website at

http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html

. The Department is requesting stakeholder comments about the third-party reviews concerning the subjects described in Issue 16, found in section IV.E., “Issues on Which DOE Seeks Comment,” of this ANOPR.

B. Authority

Title III of EPCA sets forth a variety of provisions designed to improve energy efficiency. Part C of title III (42 U.S.C. 6311-6317) establishes an energy conservation program for “Certain Industrial Equipment” and includes commercial air conditioning equipment, the subject of this proceeding. Part C provides definitions, test procedures, labeling provisions, energy efficiency standards, and authority to require information and reports from manufacturers.

EPCA established efficiency requirements that correspond to the levels in ASHRAE/IESNA Standard 90.1-1989, that went into effect on October 24, 1992. EPCA further provides that if the efficiency levels in ASHRAE/IESNA Standard 90.1 are amended after that date for certain covered commercial equipment, including commercial unitary air conditioners and heat pumps, the Department must establish an amended uniform national standard for such equipment at the new minimum level for each effective date specified in the amended ASHRAE/IESNA Standard 90.1, unless the Department determines, through a rulemaking supported by clear and convincing evidence, that a more stringent standard is technologically feasible and economically justified and would result in significant additional energy conservation. (42 U.S.C. 6313(a)(6)(A))

Under EPCA, if DOE adopts a more stringent standard, DOE must determine whether the benefits of the standard exceed its burdens to the greatest extent practicable, by considering the following seven factors (42 U.S.C. 6313(a)(6)(B)(i)):

(1) The economic impact of the standard on the manufacturers and consumers of the affected products;

(2) The savings in operating costs throughout the estimated average life of the product compared to any increases in the initial cost, or maintenance expense;

(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 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.

Other statutory requirements are set forth in 42 U.S.C. 6313(a)(6)(B)(ii).

C. Background

1. History

On October 29, 1999, ASHRAE/IESNA adopted the energy efficiency standards for certain commercial heating and air conditioning equipment, including commercial unitary air conditioners and heat pumps, in ASHRAE/IESNA Standard 90.1-1999. On March 1, 2000, the Department published a notice of preliminary screening analysis to decide which of the ASHRAE/IESNA Standard 90.1-1999 standards to adopt immediately and which to analyze further. 65 FR 10984 (March 1, 2000). On January 12, 2001, the Department published a final rule adopting the energy efficiency levels in ASHRAE/IESNA Standard 90.1-1999 for 18 product categories and made a decision to further evaluate other products. 66 FR 3336 (January 12, 2001). In the final rule, DOE determined that further analysis was warranted for commercial unitary air conditioners and heat pumps with rated cooling capacities of 65,000 Btu/h and greater, but less than 240,000 Btu/h. This conclusion was based on DOE's screening analysis. As a result, the Department has conducted further analysis and is considering more stringent standards than those in ASHRAE/IESNA Standard 90.1-1999 for this equipment.

2. Rulemaking Process

The

Procedures, Interpretations and Policies for Consideration of New or Revised Energy Conservation Standards for Consumer Products

(the “Process Rule”), 10 CFR Part 430, Subpart C, Appendix A, applies to the development of energy efficiency standards for consumer products. DOE has decided, however, to apply its procedures to the development of energy conservation standards for industrial equipment as well, including commercial unitary air conditioners and heat pumps standards, as appropriate. 62 FR 54817.

On June 13, 2001, the Department published a

Framework Document for Commercial Air Conditioner and Heat Pump Standards Rulemaking

(Framework Document) that describes the procedural and analytical approaches available to evaluate energy conservation standards for commercial unitary air conditioners and heat pumps. This document is available at

http://www.eere.energy.gov/buildings/appliance_standards/commercial/ac_hp.html

. The Department held a Framework Workshop on October 1, 2001, to discuss the procedural and analytical approaches for use in the rulemaking, and to inform and facilitate stakeholders' involvement in the rulemaking process. The analytical framework presented at the workshop described different analyses, such as LCC and PBP, the methods proposed for conducting them, and the relationships among the various analyses (see Table I.2). The ANOPR TSD describes the analytical framework in detail.

Statements received after publication of the Framework Document and at the October 1, 2001, Framework Workshop helped identify issues involved in this rulemaking, and provided information that has contributed to DOE's proposed resolution of these issues. Many of the statements are quoted and summarized in this ANOPR. A parenthetical reference at the end of a quotation or passage provides the location index in the public record.

Table I.2.—Commercial Unitary Air Conditioners and Heat Pumps Rulemaking Analyses Pursuant to the Process Rule

ANOPR

NOPR

Final rule

Market and technology assessment

Revised ANOPR analyses

Revised analyses.

Screening analysis

Life-cycle cost sub-group analysis

Engineering analysis

Manufacturer impact analysis

Building energy use and end-use load characterization

Utility impact analysis

Markups to determine equipment price

Environmental assessment

Life-cycle cost and payback period analyses

Employment impact analysis

Shipments analysis

Regulatory impact analysis

National impact analysis.

On one hand, many stakeholders commented that DOE should immediately adopt the minimum efficiency requirements in ASHRAE/IESNA Standard 90.1-1999 for commercial unitary air conditioners and heat pumps, rather than pursue a formal rulemaking, on grounds that ASHRAE's “continuous maintenance” process for Standard 90.1-1999 allows for faster adoption of any necessary revisions to the commercial unitary equipment standards than does a formal DOE rulemaking process. “Continuous maintenance” is an industry term for ASHRAE's current process for maintaining standards. Under this process, ASHRAE accepts a continual flow of proposals from the public for changes to its standards, which in turn can result in multiple proposed addenda to an ASHRAE standard on a regular basis. The ASHRAE continuous maintenance process contrasts with the previous periodic maintenance process that updated a standard at fixed, predetermined intervals. These same stakeholders commented that DOE's preliminary screening analysis did not demonstrate that more-cost-effective efficiency standards were feasible for commercial unitary equipment. In addition, by not immediately adopting the efficiency requirements in ASHRAE/IESNA Standard 90.1-1999, the Department would forego the national energy savings that would otherwise be realized in the next six to ten years before a DOE final rule becomes effective. Finally, many of these stakeholders commented that market confusion would ensue over which standards requirements are applicable if DOE adopts ASHRAE/IESNA Standard 90.1-1999 for some equipment and not for other equipment. (Air-Conditioning and Refrigeration Institute (ARI), No. 11 at pp. 2-4; Edison Electric Institute (EEI), No. 4 at pp. 1-2; Lennox International Inc. (Lennox), No. 7 at pp. 1 and 4; Public Workshop Tr., No. 2EE at p. 46; National Rural Electric Cooperative Association (NRECA), No. 3 at pp. 1-2; Southern Company Services (Southern Company), No. 5 at p. 1).

Example: “(ARI, No. 11 at pp. 2-4)” refers to a written statement that was submitted by the Air-Conditioning & Refrigeration Institute and is recorded in the Resource Room of the Building Technologies Program in the Docket under “Commercial Central Air Conditioners and Heat Pumps” as comment number 11, and the passage appears on pages 2 through 4 of that statement. Likewise, “(Public Workshop Tr., No. 2EE at p. 46)” refers to the page number of the transcript of the “Framework Workshop” held in Washington, DC, October 1, 2001.

In contrast to the above comments, many other stakeholders commented that DOE should abandon the ASHRAE/IESNA Standard 90.1-1999 continuous maintenance process and pursue a formal rulemaking. Many of them participated in the ASHRAE/IESNA Standard 90.1-1999 process and asserted that it was fundamentally flawed. These stakeholders also challenged the technical merits of the analysis used to update ASHRAE/IESNA Standard 90.1-1999, stating that: (1) Manufacturing cost estimates for more efficient equipment were not representative,

i.e.

, too high; (2) electricity prices did not capture the variability associated with an industry moving toward economic deregulation; and (3) the ASHRAE process used high discount rates and short payback periods to evaluate energy efficiency measures instead of a carefully constructed life-cycle cost analysis. (Alliance to Save Energy (ASE), No. 9 at pp. 1-2; American Council for an Energy-Efficient Economy (ACEEE), No. 10 at pp. 3, 6-7, and 10; Natural Resources Defense Council (NRDC), No. 6 at pp. 2-6; Public Workshop Tr., No. 2EE at p. 77).

The Department intends to make its findings available to the ASHRAE/IESNA Standard 90.1-1999 committee and other stakeholders to inform ASHRAE's “continuous maintenance” process. Furthermore, consistent with the approach outlined in the Department's January 12, 2001, final rule (66 FR 3348), DOE may engage in the ASHRAE continuous maintenance process by proposing an addendum to the commercial unitary air conditioner efficiency levels in ASHRAE/IESNA Standard 90.1-1999 based on its analysis as part of this rulemaking.

Also, if during the rulemaking process the Department concludes that the EPCA criteria for a more stringent energy conservation standard are not likely to be satisfied, then the Department may either adopt the energy efficiency levels in ASHRAE/IESNA Standard 90.1-1999 or any new addendum to ASHRAE/IESNA Standard 90.1 that establishes higher levels.

3. Equipment Definitions

Unitary package air conditioning units represent the heating, ventilating, and air conditioning (HVAC) equipment class with the greatest energy use in the commercial building sector in the United States. Equipment covered under this rulemaking—air-cooled package air conditioning and heating equipment with rated cooling capacities of 65,000 British thermal units per hour (Btu/h) and greater, but less than 240,000 Btu/h—accounts for the majority of the total shipped tonnage of unitary HVAC equipment for commercial building applications.

Under EPCA, the term “small commercial package air conditioning and heating equipment” means “air-cooled, water-cooled, evaporatively-cooled, or water source (not including ground water source) electrically operated, unitary central air conditioners and central air conditioning heat pumps for commercial application which are rated below 135,000 Btu per hour (cooling capacity).” (42 U.S.C. 6311(8)) The term “large commercial package air conditioning and heating equipment” means “air-cooled, water-cooled, evaporatively-cooled, or water source (not including ground water source) electrically operated, unitary central air conditioners and central air conditioning heat pumps for commercial application which are rated at or above 135,000 Btu per hour and below 240,000 Btu per hour (cooling capacity).” (42 U.S.C. 6311(9)) These definitions parallel the categories of equipment outlined in ASHRAE/IESNA Standard 90.1-1999. The standards for the product subcategories of water-cooled unitary central air conditioners rated ≤240,000 Btu/h, evaporatively cooled unitary central air conditioners, and water-source unitary central heat pumps rated ≤240,000 Btu/h were covered under a separate standards

rulemaking (66 FR 3336 (January 12, 2001)) and currently appear under 10 CFR Part 431 Subpart Q. In this rulemaking, the Department will limit its analysis to air-cooled equipment, which is the largest subset of the small and large unitary air conditioners and heat pumps covered by EPCA.

Based on data from EIA's 1995 Commercial Buildings Energy Consumption Survey (CBECS 95), the Department estimates that a significant part of the unitary package air conditioning market has gas heating rather than either air conditioning only or electric resistance heating. Hence, the Department has elected to base the engineering analysis on equipment with a gas heating section.

Several comments questioned whether the Department planned to consider engine-driven units, units operating with 100 percent outside air, and split systems as unique categories. (Public Workshop Tr., No. 2EE at p. 82; Public Workshop Tr., No. 2EE at p. 148) The Department has decided not to analyze engine-driven units or units operating with 100 percent outside air because they represent very specialized or niche applications, but may analyze them if necessary for the Notice of Proposed Rulemaking (NOPR) in this rulemaking proceeding. The Department did not analyze split systems explicitly because they are similar in technology and application to packaged units, which represent 77 percent of the combined sales of the commercial unitary air-conditioning market. (See Market Assessment section (Chapter 3) of the ANOPR TSD.) While the size constraints (

i.e.

, cabinet requirements) may be different for the two types of systems, the technologies and design choices required to increase the efficiency are similar. The Department intends to apply the results of the single package air-conditioning equipment analysis, and the resulting efficiency levels, to both single package and split system equipment. This method is consistent with the residential central air-conditioner rulemaking where DOE applied the analysis results from split system air conditioners (the most common residential central air conditioner configuration) to packaged air conditioners. This method is also consistent with the current efficiency levels in EPCA and ASHRAE/IESNA Standard 90.1-1999, which are the same for single package and split system equipment. This is identified as Issue 1 under “Issues on Which DOE Seeks Comment” in section IV.E of this ANOPR.

4. Efficiency Levels

The language of 42 U.S.C. 6313(a)(6)(A) requires DOE to establish an amended uniform national standard for commercial unitary air conditioners and heat pumps at the minimum levels for each date specified in the amended ASHRAE/IESNA Standard 90.1-1999, unless DOE determines, by rule and supported by clear and convincing evidence, that a more stringent standard is technologically feasible and economically justified and would result in significant additional energy conservation. Because the Department cannot consider levels lower than that of the most recent ASHRAE/IESNA Standard 90.1, the Department will consider the baseline efficiency to be the minimum level specified in ASHRAE/IESNA Standard 90.1-1999, which is the most recent amendment to ASHRAE/IESNA 90.1 that changed efficiency levels. Table I.3 presents the ASHRAE/IESNA Standard 90.1-1999 minimum efficiency levels.

Table I.3.—ASHRAE/IESNA Standard 90.1-1999 Minimum EER Requirements* for Unitary Equipment

Equipment type

Size category

Heating section type

Sub-category

Minimum efficiency

Air Conditioners, Air Cooled

≥65,000 Btu/h and <135,000 Btu/h

Electric Resistance (or None)

All Other

Split System and Single Package

10.3 EER

10.1 EER

≥135,000 Btu/h and <240,000 Btu/h

Electric Resistance (or None)

All Other

Split System and Single Package

9.7 EER

9.5 EER

Heat Pumps, Air Cooled (Cooling Mode)

≥65,000 Btu/h and <135,000 Btu/h

Electric Resistance (or None)

All Other

Split System and Single Package

10.1 EER

9.9 EER

≥135,000 Btu/h and <240,000 Btu/h

Electric Resistance (or None)

All Other

Split System and Single Package

9.3 EER

9.1 EER

Heat Pumps, Air Cooled (Cooling Mode)

≥65,000 Btu/h and <135,000 Btu/h

(Cooling Capacity)

47°F db/43°F wb Outdoor Air

17°F db/15°F wb Outdoor Air

3.2 COP

2.2 COP

≥135,000 Btu/h

(Cooling Capacity)

47°F db/43°F wb Outdoor Air

17°F db/15°F wb Outdoor Air

3.1 COP

2.0 COP

* The current version of ASHRAE/IESNA Standard 90.1 is the 2001 version, which contains identical minimum efficiency levels to the 1999 version of the standard.

The ASHRAE/IESNA Standard 90.1-1999 rates the cooling performance of commercial unitary air conditioners and heat pumps using the energy efficiency ratio (EER) and heating coefficient of performance (COP). (These are the same energy efficiency descriptors used in EPCA for this type of equipment.) The Department received comments that it should consider part-load performance as part of the screening process and a part-load descriptor in addition to EER in the present rulemaking. (ACEEE, No. 10 at p. 3; Lennox, No. 7 at p. 3; NRDC, No. 6 at p. 7) The ACEEE provided several comments about the efficiency level used in the performance standards. Specifically, it advocates that the performance standard include efficiency ratings for both full-load and part-load conditions, reflecting that equipment operates for many more hours at part-load conditions than at full-load conditions. Further, ACEEE suggests

that the performance standard incorporate integrated part-load value (IPLV) levels for commercial unitary air conditioning equipment. (ACEEE, No. 10 at pp. 3-4, and 7)

The Department understands that there are potential energy savings associated with technologies and techniques that operate under full- or part-load conditions and that can improve the net annual energy performance of a system, but which generally reduce the EER of commercial unitary air-conditioning equipment, or have no effect on EER. However, because the EPCA energy descriptor for commercial unitary air conditioners and air source heat pumps is an EER, and the test procedure does not account for part-load operation, DOE will not include a part-load performance descriptor.

Although this rulemaking covers both commercial unitary air conditioners and heat pumps, this ANOPR and the detailed analyses in the accompanying TSD cover only unitary air conditioners. The Department did not collect the necessary data for conducting the detailed technical analyses for unitary heat pumps for this ANOPR because unitary heat pumps represent only 9 percent of the total market for commercial unitary air conditioning and heat pump equipment above 65,000 Btu/h. Instead, the Department proposes to streamline the analysis for commercial unitary heat pumps and use a method similar to the ASHRAE committee's method to establish the minimum EER and COP levels for heat pumps. The Department understands that ASHRAE determined the minimum efficiency level for air conditioners and then agreed to a minimum heat pump EER after reviewing ARI's industry data. The minimum heat efficiency of the heat pump, defined by the heat pump COP, was set to correspond to the minimum EER using ARI data that correlated the heat pump COP to the heat pump EER. In section IV.E, “Issues on Which DOE Seeks Comment,” the Department requests input from interested parties on the need for conducting analyses specific to commercial unitary heat pumps.

5. Test Procedure

The Department began development of test procedures for commercial unitary air conditioners and heat pumps on April 14 and 15, 1998, when it held a public workshop to solicit views and information from interested parties. The Department held a second public workshop on October 18, 1998. The Department published a NOPR on August 9, 2000, and held a public workshop on September 21, 2000. 65 FR 48828. The Department intends to publish the test procedure final rule as soon as possible.

On June 12, 2001, the Department published a Framework Document that described procedural and analytical approaches to evaluate energy conservation standards for commercial unitary air conditioners and heat pumps, and presented this analytical framework to stakeholders during the workshop held on October 1, 2001. In response to DOE's Framework Document and within the context of this standards rulemaking proceeding, ACEEE filed comments on the test procedure used to assess equipment EER levels. The ACEEE believes that the temperature used for testing current EER levels represents the lowest outside temperature possible for properly evaluating peak performance, and that a higher temperature would more accurately represent peak conditions encountered in many parts of the United States. It also commented that the test procedure should include a maximum sensible heat ratio (SHR) to ensure that all equipment provides sufficient dehumidification capacity and prevents manufacturers from sacrificing dehumidification performance to satisfy minimum EER levels. (ACEEE, No. 10 at pp. 3-4, and 7)

The Department acknowledges that the test procedure for EER reflects equipment performance under a single condition and that this condition does not represent actual equipment performance under part-load conditions nor necessarily at the peak design condition, nor does it specify a maximum SHR. Furthermore, the Department understands that there are potential energy savings associated with technologies and techniques that improve the part-load performance of the equipment. However, because the Department believes that the test procedure referenced by the ASHRAE/IESNA Standard 90.1-1999 is widely accepted and well established, the Department has elected to follow the conventions of the ASHRAE/IESNA Standard 90.1-1999 and use the EER as the only descriptor for efficiency.

II. Commercial Unitary Air Conditioner and Heat Pump Analyses

This section includes a general introduction to each analysis section and a discussion of relevant issues addressed in comments received from interested parties.

A. Market and Technology Assessment

The Department reviewed existing marketing materials and literature, and interviewed manufacturers to get an overall picture of the market in the United States for commercial unitary air conditioners and heat pumps. Industry publications and trade journals, government agencies, and trade organizations provided most of the information, including: (1) Manufacturer market share, (2) equipment efficiency, and (3) shipments by capacity and efficiency level. This ANOPR discusses the information in the appropriate sections.

The Department has used the most reliable and accurate data available at the time of the analysis. All data are available for public review in the TSD that accompanies this ANOPR. The TSD is available to interested parties on the Department's Web site at

http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html.

The Department welcomes and will consider any recommendations of additional data.

1. Manufacturers

There are six major domestic manufacturers of the equipment covered under this rulemaking. Four companies, Carrier Corporation (Carrier), The Trane Company (Trane), Lennox International, Inc. (Lennox), and York International Corporation (York) each hold a major share of the market for commercial unitary air conditioners and heat pumps. Two other manufacturers, AAON, Inc. (AAON) and Rheem Manufacturing Company (Rheem), hold significant niche market shares. The AAON corporation manufactures and sells high efficiency, air-cooled equipment almost exclusively to large corporate accounts. Rheem produces mostly smaller-capacity models in all the categories. Among the six major manufacturers, Carrier and Trane command a majority of the market for commercial unitary air conditioning equipment, followed by Lennox, York, AAON, and Rheem. For more detail on major manufacturers and market share, refer to the market assessment section (Chapter 3) of the ANOPR TSD.

2. Equipment Efficiency

In its analysis of the equipment efficiency data from ARI's Unitary Large Equipment Directory, January 2002, the Department found that most models of equipment manufactured by the six major domestic manufacturers met or exceeded the ASHRAE/IESNA Standard 90.1-1999 energy efficiency levels.

Also, in its analysis of the ARI Unitary Large Equipment Directory, January 2002, the Department found it could be easy to misinterpret the number of base models for each parent

company because each parent company manufactures similar models under different “brands” or manufactures base models with relatively superficial design changes around a base model. Consequently, the Department estimated the number of actual base models listed for each parent company in the ARI Directory. (See Market and Technology Assessment (Chapter 3, section 3.7.3) of the ANOPR TSD.)

3. Equipment Shipments

The Department extracted and documented information related to equipment shipments by domestic manufacturers from U.S. Census Bureau Current Industrial Reports. The United States (U.S.) Census Bureau data expresses cooling capacity ranges in a slightly different way from the DOE rulemaking equipment classifications. The major classifications presented in the U.S. Census Bureau data for single and split system air conditioners are for cooling capacity ratings 65,000 Btu/h to 134,999 Btu/h and 135,000 Btu/h to 249,999 Btu/h. (See U.S. Census Bureau Current Industrial Report for “Refrigeration, Air Conditioning, and Warm Air Heating Equipment: 2001,” (MA333M(01)-1), at

http://www.census.gov/industry/1/ma333m01.pdf.

) For heat pumps, the U.S. Census Bureau data list shipments for capacities rated greater than 65,000 Btu/h. In section II.G below, “National Impact Analysis,” the Department used the shipments data in its development of a Shipments Model for forecasting future equipment shipments.

B. Screening Analysis

This section describes the technology/design options and a process for screening these options as part of the DOE rulemaking. Screening eliminates certain design options from further consideration in the engineering analysis phase of the rule development. The Process Rule established four factors DOE uses for screening design options: (1) Technological feasibility; (2) practicability to manufacture, install, and service; (3) adverse impacts on equipment utility or equipment availability; and (4) adverse impacts on health and/or safety. 10 CFR Part 430, subpart C, Appendix A, under paragraph 5(b). In view of these factors, the technology/design options DOE considered as part of this rulemaking fall into two categories based on their development status and on their impacts on EER: emerging technologies that can enhance EER and commercial technologies that can enhance EER. For more detail on how the Department developed the technology options and the process for screening these options, refer to the technology and screening section (Chapter 4) of the ANOPR TSD.

First, the Department considered emerging technologies that encompass design options currently not available on the commercial market but that are being examined in the laboratory as possible means to enhance efficiency. These are:

• Electro-hydrodynamic enhanced heat transfer;

• Copper rotor motor with improved efficiency; and

• Non-hydrofluorocarbon/hydrochlorofluorocarbon (HFC/HCFC) refrigerants (

e.g.

, ammonia, hydrocarbons, carbon dioxide).

Second, the Department considered commercial technologies that are currently available for unitary air conditioners or similar equipment, and which have an impact on the EER (nominal full-load) rating under DOE's test conditions. These are:

• Evaporator coil area (keeping the number of coil rows the same);

• Condenser coil area (keeping the number of coil rows the same);

• Coil rows (keeping face area the same);

• Condenser fan diameters;

• Evaporator fan diameters;

• Air leakage paths within unit;

• Coil rows (keeping coil heat transfer performance the same);

• Microchannel heat exchangers;

• Deep coil heat exchangers;

• Low-pressure-loss filters;

• High efficiency fan motors;

• High efficiency compressors;

• Air foil centrifugal fans;

• Backward-curved centrifugal fans;

• Synchronous (toothed) belts;

• Direct-drive fans; and

• High efficiency propeller condenser fans.

Several of these technologies have penetrated the commercial equipment market and raised the available EER range. Because the EPCA energy descriptor for commercial unitary air conditioners and air source heat pumps is an EER, only those design options that improve the EER (nominal full-load) rating under DOE's test procedures were viable for consideration in the engineering analysis. DOE addresses matters with respect to other technologies that can improve the net annual energy performance of a system, but which generally reduce or have no effect on EER, as Issue 18 under “Issues on Which DOE Seeks Comment” in section IV.E of this ANOPR.

C. Engineering Analysis

The engineering analysis establishes the relationship between the cost and efficiency of commercial unitary air conditioners and heat pumps. This relationship serves as the basis for cost/benefit calculations in terms of individual consumers, manufacturers, and the Nation. The engineering analysis identifies the representative baseline equipment (using R-22 as the refrigerant), develops the bill of materials and determines the costs, constructs the industry cost/efficiency curves, and evaluates the impact of using an alternative to R-22 refrigerant on the cost/efficiency relationship of certain commercial air conditioners and heat pumps. The R-22 refrigerant is in current use and will phase out of new equipment in 2010 in compliance with the Environmental Protection Agency's (EPA's) requirements under the Clean Air Act of 1990, as amended (42 U.S.C. 7401

et seq.

1. Baseline Equipment

As discussed above, the engineering analysis considered only single package commercial unitary air conditioning equipment with gas heat in the estimate of the cost/efficiency relationship for the equipment classes under consideration. The Department analyzed single package commercial unitary air conditioning equipment with gas heat rather than single package units with electric heat or no heating section, because the gas heat units represent about 77 percent of the air conditioners covered in this rulemaking. (See the Market and Technology Assessment, section 3.6.1 of the ANOPR TSD, that provides information on historical shipments and efficiencies.) Although the Department did not explicitly analyze split air conditioning systems in the engineering analysis, the Department believes that the results of the unitary air conditioning equipment analysis apply to the split systems and that both unitary and split systems have equivalent cost/efficiency relationships. (See the engineering analysis, section 5.2 of the ANOPR TSD.) The Department discussed this approach during the initial interviews with manufacturers, and it is consistent with the ASHRAE methodology used to set the ASHRAE/IESNA Standard 90.1-1999.

The Department proposes to address the energy efficiency of commercial unitary heat pump equipment in a way that is consistent with the ASHRAE methodology used to set the ASHRAE/IESNA Standard 90.1-1999 levels for unitary air conditioning systems with heat pump heating, rather than conduct an explicit analysis of the unitary and split heat pump systems. According to Census Bureau data, commercial unitary

heat pumps with a capacity greater than 65,000 Btu/h represent about 10 percent of products covered under this rulemaking. Although the census data do not specify the quantity, the Department believes that most of these units have less cooling capacity and are within the 65,000 Btu/h to 135,000 Btu/h size range. (See the Market and Technology Assessment, section 3.6.1 of the ANOPR TSD, that provides information on historical shipments and efficiencies.) Under the ASHRAE process, the ASHRAE 90.1 committee worked with ARI to develop new efficiency levels for inclusion in ASHRAE/IESNA Standard 90.1-1999. For heat pumps in these capacity ranges, ARI supplied the ASHRAE 90.1 committee with curves relating the COP as a function of EER. The committee then set the minimum COP levels based on EER. The Department used a similar process in the residential central air conditioner and heat pump rulemaking, where it established minimum Heating Seasonal Performance Factors (HSPF) for heat pumps using functions relating the HSPF to the Seasonal Energy Efficiency Ratio (SEER). The Department intends to do the same for the NOPR analysis for commercial unitary air conditioning and heat pump equipment.

For more detail on baseline equipment, refer to the engineering analysis, section 5.3 of the ANOPR TSD. The Department requests comments from interested parties about this proposed approach to the engineering analysis, and has identified it as Issue 1 under “Issues on Which DOE Seeks Comment” in section IV.E. of this ANOPR.

Identification of the baseline for commercial unitary air conditioning equipment requires both establishing a baseline efficiency level and selecting a size typical of that equipment to represent the different capacity ranges of commercial, unitary, air conditioning equipment classes: ≥65,000 Btu/h to <135,000 Btu/h; and ≥135,000 Btu/h to <240,000 Btu/h.

a. Efficiency Level

As described above, the Department selected ASHRAE/IESNA Standard 90.1-1999 for the baseline efficiency levels both for ≥65,000 Btu/h to <135,000 Btu/h and ≥135,000 Btu/h to <240,000 Btu/h classes of commercial unitary air conditioning equipment. To aid in analyzing the economic impact of increasing standard levels, DOE examined the costs associated with moving from EPCA levels to the ASHRAE Standard 90.1-1999 levels. Additionally, to provide a reasonable span of efficiency levels to evaluate, DOE limited the efficiency levels under consideration to those that are commercially available.

In some cases, manufacturers' product lines span efficiency ranges from levels below the baseline to levels above the baseline. To properly assess the incremental cost of increasing the efficiency level beyond the baseline level, DOE evaluated the manufacturing costs of the equipment with efficiency levels below the baseline and included these data in the industry cost/efficiency curves. The Department determined the manufacturing costs of this lower efficiency equipment in the same way as it did for the equipment above the baseline efficiency level. For more detail on efficiency levels, refer to the discussion of efficiency levels in section 5.3.1 of the ANOPR TSD.

b. Maximum Technologically Feasible Design

In previous rulemakings, the Department relied on the maximum technologically feasible design to define the highest level of energy efficiency it would evaluate. The maximum energy efficiency level that is technologically feasible is often referred to as “max tech.” Technological feasibility requires that a system be not only theoretically possible, but also capable of being designed, constructed, and operated. At the time the engineering analysis was conducted, the highest efficiency level for commercial unitary air conditioners in the ≥65,000 Btu/h to <240,000 Btu/h range available on the market was 11.5 EER. The engineering analysis used reverse engineering on this existing equipment to develop a cost-efficiency curve up to 11.5 EER. Extending the curve beyond 11.5 EER required extrapolation and then verification using design-option analysis modeling. The Department's modeling indicated that with some additional conventional-type design modifications, such as increases to the size of heat exchangers and modification of the airflow paths (both of which may need new and larger cabinets), the highest practical efficiency level was about 12.0 EER. To limit uncertainty associated with the extrapolated curve beyond 11.5 EER, the maximum efficiency level that DOE evaluated in the engineering analysis was 12.0 EER. The Department verified the extrapolated cost-efficiency curve using design-option modeling between 11.5 and 12.0 EER. Beyond the 12.0 EER level, the Department would need to consider technologies that are not currently available or non-conventional technologies that are not typically in use by the industry.

The Department seeks comments on commercial unitary air-conditioning equipment designs that are currently used in the engineering analysis. The Department will review public comments after the ANOPR meeting and during the NOPR phase of the rulemaking to further evaluate design options, including the following, which could achieve higher technologically feasible efficiency levels.

• Larger heat transfer surface area for the tube and fin condensers accomplished by increasing the number of rows or by increasing the face area of the condenser (or some combination of both), while limiting the minimum condensing temperature to 110 °F with 10 °F of subcooling capability.

• Larger heat transfer surface area for the tube and fin evaporators accomplished by increasing the number of rows or by increasing the face area of the evaporator (or some combination of both), but limiting the maximum evaporating temperature to 52 °F and the sensible heat ratio to 0.75.

• Use of premium efficiency motors with compressors, condenser fans, and evaporator blowers.

• Use of larger diameter airfoil or backward-curved blade blowers for evaporators.

• Use of larger diameter airfoil fans for condensers.

Since the time the engineering analysis was completed in late 2002, several new commercial unitary air conditioners, with rated efficiency levels greater that 12.0 EER, have become available on the market. The Department requests comments from stakeholders on any commercial unitary air conditioners with rated efficiency levels above 12.0 EER. This is identified as Issue 4 under “Issues on Which DOE Seeks Comment” in section IV.E of this ANOPR.

c. Representative Capacities

After reviewing the available single package equipment and interviewing four major commercial air-conditioning equipment manufacturers and two niche manufacturers, the Department set the representative capacity (

i.e.

, the equipment capacity to be analyzed in detail for this capacity range) for the ≥65,000 to <135,000 Btu/h capacity range at 7.5 tons and the representative capacity of the ≥135,000 to <240,000 Btu/h capacity range at 15 tons. An air conditioning ton is equivalent to 12,000 Btu/h of cooling capacity. Also, for consistency with the ASHRAE standards development process, DOE chose the same equipment capacities of 7.5 tons and 15 tons to represent these commercial unitary air conditioning

equipment classes. These nominal capacities represent units which, according to the industry, are volume shipment points in the capacity range. Because manufacturers do not necessarily manufacture commercial unitary air conditioning equipment with the exact capacity of these units (90,000 Btu/h and 180,000 Btu/h), the Department uses the industry standard terminology of nominal “tons” for consistency with the current equipment catalogs.

Similarly, during the development of the ASHRAE 90.1-1999 standard, ASHRAE chose the 7.5- and 15-ton capacities as representative capacities for its analysis. In addition, these capacities fall close to the middle of the capacity range. For some manufacturers, these sizes represent their optimum design,

i.e.

, where they have optimized the ratio of cooling capacity to manufacturing cost. Increasing the efficiency of these models would generally be very difficult and expensive because the manufacturers have packed as much component equipment as possible into the smallest possible cabinet size. On the other hand, some manufacturers may have optimized their equipment at a higher capacity and, therefore, may initially use a larger cabinet for the evaluated equipment. Increasing the efficiency of this equipment would be less expensive because there intrinsically is more room in the cabinet to increase coil size and add other types of energy-saving devices without moving to the next larger cabinet.

After DOE reviewed available products in each equipment class and interviewed several manufacturers, it found that a majority of the manufacturers who were interviewed agreed that the 7.5-ton and 15-ton capacities adequately represent the ≥65,000 to <135,000 Btu/h and ≥135,000 to <240,000 Btu/h equipment classes, respectively, and the wide array of design constraints. Lennox, however, suggested that 10-ton and 20-ton units would provide a better representation of the baseline, because larger capacity units are generally the hardest to upgrade and are, therefore, the units that would force design changes in a specific line of commercial unitary air-conditioning equipment. Also, Lennox stated that 7.5-ton units are generally built off of 10-ton cabinets and 15-ton units are generally built off of 20-ton cabinets. (Public Workshop Tr., No. 2EE at pp. 87 and 88)

The Department believes that the 7.5-ton and 15-ton capacities are appropriate for the following reasons: (1) They are near the middle of the capacity range; (2) a majority of the manufacturers interviewed agreed that these capacities adequately represented the equipment classes; (3) they are consistent with the capacities chosen for the ASHRAE standards development process; and (4) these capacities represent both equipment that was cost-optimized (cabinet-size constrained), as well as equipment that was not constrained within the cabinet, to account for variations among manufacturers. In addition, data regarding commercial unitary air-conditioning system shipments by capacity, while not precise, suggest that shipments of 7.5-ton and 15-ton units are significantly higher than those of 10- and 20-ton systems, respectively. Therefore, it is more appropriate to select 7.5- and 15-ton units as representative capacities for their respective capacity ranges. Finally, the Department reviewed cabinet sizes and capacities for commercial unitary air conditioners and found a wide variation of cabinet sizes, and an equally wide variation of corresponding capacities within each cabinet size. Many 7.5-ton units are built off of 7.5-, 8.5-, 10-, 12-, and 12.5-ton cabinet sizes; and many 15-ton units are built off of 15-, 20-, and 25-ton cabinet sizes. Therefore, using 7.5- and 15-ton capacity sizes for several different manufacturers and aggregating the results will capture the diversity of cabinet sizes and space constraints for the industry. The Department will consider manufacturer-specific cabinet sizes and conversion costs when it conducts the MIA. For more detail on representative capacities, refer to the Engineering Analysis, section 5.3.2 of the ANOPR TSD.

2. Methodology

At the October 1, 2001, Framework Workshop, the Department solicited stakeholder comments on the most appropriate approach for the engineering analysis. However, there was no clear consensus among the respondents for a particular approach. The Northwest Power Planning Council (NWPPC) expressed the view that transparency should be the primary criterion for selecting one approach or another. (Public Workshop Tr., No. 2EE at p. 132) The Natural Resources Defense Council also commented on the need for a transparent approach. (NRDC, No. 6 at p. 6)

The ACEEE and NRDC commented that DOE should not use the efficiency-level approach because of concerns about the lack of transparency of data and the accuracy of cost estimates that could result from this approach. (ACEEE, No. 10 at p. 4; NRDC, No. 6 at p. 4) The ACEEE commented that developing estimates of uncertainty,

i.e.

, confidence intervals, for manufacturing cost estimates is irrelevant in the case of an efficiency-level analysis, due to the inability to validate the accuracy of those costs. It also noted that the incremental values ARI provided in the past were much greater than those the Northeast Energy Efficiency Partnerships (NEEP) and the Consortium for Energy Efficiency (CEE) found empirically. (ACEEE, No. 10 at pp. 8-10)

On a related issue, ACEEE, ASE, and NRDC argued that the Department should not use cost data that represent the 90th percentile of equipment cost used during the development of the ASHRAE/IESNA Standard 90.1-1999, because these costs are not representative of most equipment and would bias any life-cycle cost analysis away from higher standards. (ACEEE, No. 10 at p. 6; ASE, No. 9 at p. 2; NRDC, No. 6 at pp. 4-7) The NRDC further criticized the 90th percentile approach because it used the costs of the most expensive manufacturer, those costs could not be verified independently, and one erroneous data point could skew the cost data. Instead, NRDC recommended using third-party cost estimates and presenting them to the public for evaluation, even though NRDC believed that third-party estimates tended to be high because of the difficulty associated with anticipating innovation. (NRDC, No. 6 at p. 7) The ACEEE also noted that “revealed costs,”

i.e.

, the cost differential between high and low efficiency equipment in regions where high efficiency units have appreciable sales volumes, can provide insight into cost differentials. (Public Workshop Tr., No. 2EE at p. 65) Along these lines, NEEP submitted equipment incremental cost data related to the CEE efficiency levels. (NEEP, No. 8 at p. 3) The Alliance to Save Energy recommended applying reverse engineering analysis, particularly teardowns, to estimate future costs of different efficiency levels and supplementing this information with cost data obtained from market surveys performed in regions where products at higher efficiency levels have higher market shares. (ASE, No. 9 at p. 3)

As a result of the above comments from stakeholders, the Department used a cost assessment approach and supplemented the data with a design option analysis to develop incremental cost/efficiency curves for the two representative capacities described above. The reverse engineering analysis relied on creating bills of materials

(BOMs) for a sample of existing equipment that uses R-22 refrigerant. The Department developed the BOMs through the reverse engineering of either physical teardowns or catalog teardowns. The Department then entered the BOMs into a cost model and used that model to estimate the manufactured cost for each piece of equipment. The Department then aggregated the costs of the equipment and their associated efficiencies and fit them to a curve to represent the cost/efficiency behavior of the industry. In addition, the Department derived confidence intervals that described the accuracy of the curve, based on the variability of the estimated manufacturer costs. The Department then used the design option analysis to validate the accuracy of the curve between 11.5 and 12.0 EER, where there are no existing equipment data points, by using the cost model and a performance model to simulate equipment at higher efficiency levels. The last step in the process—the alternative refrigerant analysis—compared the cost/efficiency behavior of R-410a products to the R-22 cost/efficiency curve by using the cost model and the performance model to simulate R-410a products. For more detail on the Department's methodology, refer to the Engineering Analysis, section 5.4 of the ANOPR TSD.

3. Cost Assessment Approach

The use of the cost assessment (reverse engineering) approach provides useful information, including the identification of potential technology paths manufacturers use to increase efficiency. Under this type of analysis, the Department physically analyzes actual equipment on the market (

i.e.

, dismantles them component-by-component) or generates BOMs from publicly available manufacturer catalogs and specifications. This enables the Department to determine what technologies and designs manufacturers employ to increase efficiency. The Department then uses independent costing methods or manufacturer and component supplier data to estimate the costs of the components. This approach has the distinct advantage of using “real” market equipment to ascertain the technologies that manufacturers use as the bases for estimating the costs of reaching higher efficiencies.

The primary disadvantage of reverse engineering is the time and effort required to analyze the existing equipment. The Department needs several models of commercial unitary air conditioning equipment from various manufacturers to ensure that it identifies a broad representation of technological paths for increasing efficiency. In addition, because the Department only analyzes equipment in the market, the analysis might not capture prototypical designs, thus making it difficult to establish the maximum technologically feasible designs. Therefore, the Department has supplemented the reverse engineering process with a design option analysis that considers the technologies required to increase efficiency beyond what is currently available.

a. Teardown Analysis

The Department used a teardown analysis (or physical teardown) to determine the production cost of a piece of equipment by disassembling the equipment “piece-by-piece” and estimating the material and labor cost of each component. A supplementary method called a catalog teardown uses published manufacturer catalogs and supplementary component data to estimate the major physical differences between a piece of equipment that has been physically disassembled and another piece of similar equipment. The teardown analysis that DOE performed for the engineering analysis includes four physical teardowns and 14 catalog teardowns, for a total of 18 equipment teardowns. Tables II.1 and II.2 show the distribution of equipment teardown analyses that DOE performed for the 7.5-ton and 15-ton commercial unitary air conditioning equipment. The Department selected the equipment to provide a full range of efficiency levels and included equipment from similar product lines that had both higher and lower energy efficiency ratings. For more detail on the teardown analysis, refer to the Engineering Analysis, section 5.5 of the ANOPR TSD.

Table II.1.—Number of Commercial Unitary Air Conditioners Selected for Teardown Analysis in the ≥65,000 Btu/h to <135,000 Btu/h Equipment Class

EER Range

8.6-9.0

9.1-9.5

9.6-10.0

10.1-10.5

10.6-11.0

11.1-11.5

Equipment, Physical Teardown

Equipment, Catalog Teardown

Table II.2.—Number of Commercial Unitary Air Conditioners Selected for Teardown Analysis in the ≥135,000 Btu/h to <240,000 Btu/h Equipment Class

EER Range

8.6-9.0

9.1-9.5

9.6-10.0

10.1-10.5

10.6-11.0

11.1-11.5

Equipment, Physical Teardown

Equipment, Catalog Teardown

b. Cost Model

The cost model analysis created cost estimates for each of the 18 commercial unitary air conditioners, including all direct manufacturing costs and a manufacturer's markup, which covers corporate overhead expenses. This is the price at which DOE estimates a manufacturer sells the equipment to distributors, resellers, and similar parties; it is not the final cost to the end-user because it does not include the distribution markups and contractor installation costs.

In converting physical information about the equipment into cost information, the Department reconstructed manufacturing processes for each component, using internal expertise and knowledge of the methods used by the industry. The Department used assumptions regarding the manufacturing process parameters,

e.g.

, equipment use, labor rates, tooling depreciation, and cost of purchased raw materials, to determine the value of each component. It then summed the values of the components into assembly costs and, finally, the total equipment cost. The equipment cost includes the

material, labor, and overhead costs associated with the manufacturing facility. The material costs include both direct and indirect materials. The labor rates include fabrication, assembly, and indirect and overhead (burdened) labor rates. The overhead costs include equipment depreciation, tooling depreciation, building depreciation, utilities, equipment maintenance, and rework. The Department also applied a manufacturer markup of 1.23 to the equipment cost to arrive at a final manufacturer cost. The markup accounts for the corporate overhead that DOE believes to include sales and general administration, research and development, and profit.

Both ACEEE and NRDC commented that the actual, retrospective cost of compliance with appliance energy efficiency standards has been substantially less than forecast by industry, and suggested analyzing earlier cost-impact data to derive an appropriate discount for current cost projections. (ACEEE, No. 10 at p. 9; Public Workshop Tr., No. 2EE at p. 65; NRDC, No. 6 at p. 7) In response, Trane commented that although actual future equipment costs may or may not have approached predicted future equipment costs, these changes in costs reflect improvements in manufacturing efficiency and, because they apply to all equipment, do not necessarily result in a change in the marginal cost between equipment. ( Public Workshop Tr., No. 2EE at pp. 65-66) Lennox commented on the importance of understanding costs for both standard equipment and custom-built equipment because they have different cost structures. (Lennox, No. 7 at p. 7) Lastly, NWPPC commented that the cost basis for equipment meeting the ASHRAE Standard 90.1-1999 levels should not include retooling costs because manufacturers already have had to retool to manufacture equipment satisfying this level. (Public Workshop Tr., No. 2EE at p. 132)

The Department acknowledges that manufacturing efficiency evolves over time, but notes that earlier trends do not necessarily reflect future trends and that the incremental cost impact is the cost metric for evaluating appliance energy efficiency standards via LCC analysis. Thus, the Department believes that thorough and rigorous manufacturing cost analysis based on actual equipment at all efficiency levels represents the most effective and appropriate way to estimate current and near term incremental manufacturing costs.

After deriving production cost estimates from the reverse engineering analysis, the Department solicited detailed feedback on the cost estimates from specific manufacturers of individual products. The industry feedback resulted in revisions to the reverse engineering production costs of specific components including: Controls equipment, materials (sheet metal, refrigerant), labor, and buildings/capital. For more detail on how the Department developed the manufacturing costs, refer to the engineering analysis section (Chapter 5) of the ANOPR TSD.

Regarding the manufacturer markup, ARI believes that a value of 1.23 is not representative of what industry uses. Specifically, a value of 1.23 does not produce an acceptable financial return on investment,

i.e.

, it underestimates manufacturers' operating expenses and profitability. (ARI, No. 14 at p. 1)

The Department included the following expenses in the determination of the manufacturer markup: Research and development, net profit, general and administrative expenses, warranty expenses, taxes, and sales and marketing. The Department based the value of 1.23 on its analysis of industry corporate financial records and excluded shipping expenses (out-bound) because these expenses were included in the equipment cost. The Department determined research and development expenses by assuming reallocation of engineering budgets from value-engineering and new-feature development to product development and redesign. The incremental cost of the equipment captures additional capital outlays and re-tooling investments. For more detail on how the Department developed the cost model, refer to the Engineering Analysis, section 5.6 of the ANOPR TSD.

c. Cost/Efficiency Curves

Creating the cost/efficiency curves involved a three-step process: Plotting raw data points as cost versus efficiency, normalizing the cost data to go from absolute costs to incremental costs, and using a linear regression analysis using the least-squares fitting technique to determine the empirical equation and corresponding 95 percent confidence interval that best defines the normalized data. This process gives industry average cost/efficiency curves with a predicted range of accuracy.

The Department refers to the manufacturer cost—what the cost model directly provides as output—as the “absolute cost” in this section. The Department correlated the absolute costs from the model as a function of each commercial unitary air conditioner's rated EER. Each manufacturer publishes the rated EER of its air conditioners according to ARI specifications. The resulting two curves of absolute cost versus efficiency—one for the ≥65,000 Btu/h to <135,000 Btu/h equipment class and one for the ≥135,000 Btu/h to <240,000 Btu/h equipment class—each has nine data points.

The absolute costs, represented as output by the cost model, are not central to the rulemaking process and DOE does not present them in this document (nor in the TSD) to avoid the possibility of exposing sensitive information about individual manufacturers' equipment. Different manufacturers might have substantially different costs for their equipment at the same efficiency level, but this fact on its own does not provide the required insight. To determine the relationship of incremental cost versus EER for each of the 18 teardown commercial unitary air conditioners, DOE normalized the absolute cost data for every manufacturer. That is, DOE adjusted the costs of every manufacturer's equipment so that the cost of its equipment was zero at the baseline ASHRAE/IESNA Standard 90.1-1999 EER levels (10.1 EER for the ≥65,000 Btu/h to <135,000 Btu/h equipment class and 9.5 EER for the ≥135,000 Btu/h to <240,000 Btu/h equipment class). To do this, DOE first fit an exponential curve to each manufacturer's data points separately. Then, DOE shifted each curve until the incremental cost equaled zero at the baseline efficiency. The Department shifted all data points for a given manufacturer by the same amount as the entire curve, so that the resulting data points represent incremental cost versus EER. The Department then discarded individual manufacturer curve-fits and continued the analysis with the normalized cost data points. The engineering analysis section (Chapter 5) of the ANOPR TSD provides more explanation and details of the normalization process.

After establishing the normalized data points, the Department used a least-squares regression analysis to fit curves to the data and established two cost/efficiency curves—one for each equipment class—that represent the average incremental cost of increasing efficiency above the ASHRAE/IESNA Standard 90.1-1999 levels. The curves do not represent any single manufacturer, nor do they describe any variance among manufacturers. The curves simply represent the industry's cost to increase the efficiency of the equipment.

The Department also produced confidence intervals from the regression analysis which describe the accuracy of the cost/efficiency curves representing the mean value of the industry. The

Department selected a confidence interval of 95 percent to define the probability that the actual industry average is within these bounds. The LCC analysis (

see

section II.F of this ANOPR) uses the cost/efficiency curves and confidence intervals to compute the mean, minimum, and maximum cost cases.

At the time the engineering analysis was conducted, the highest efficiency level available in the equipment's representative capacities was 11.5 EER. Because the engineering analysis relies on reverse engineering of existing equipment, extending the curve beyond 11.5 EER required extrapolation and then verification using design/option analysis. To limit the uncertainty associated with the part of the curve that was extrapolated, the maximum efficiency level that DOE evaluated was 12.0 EER.

Tables II.3 and II.4 show the incremental manufacturer costs and confidence intervals for the systems with cooling capacities of about 7.5 and 15 tons.

Table II.3.—The ≥65,000 Btu/h to <135,000 Btu/h (7.5-ton) Equipment Class Incremental Cost/Efficiency Relationship and 95 Percent Confidence Interval

EER

Incremental cost

95%

Confidence interval [±]

10.1

10.5

11.0

139

11.5

292

12.0

543

159

Table II.4—The ≥135,000 Btu/h to <240,000 Btu/h (15-ton) Equipment Class Incremental Cost/Efficiency Relationship and 95 Percent Confidence Interval

EER

Incremental cost

95%

Confidence interval [±]

9.5

10.0

10.5

165

11.0

334

191

11.5

613

351

12.0

1,072

615

For more detail on how the Department developed the industry cost efficiency curves, refer to the engineering analysis, section 5.7 of the ANOPR TSD.

4. Supplemental Design Option Analysis

The Department used the design option approach to validate the accuracy of the cost efficiency curves at efficiency levels between 11.5 and 12.0 EER. As noted earlier, DOE did not evaluate any existing equipment in that EER range during the teardown analysis, so there were no data points available for the curve-fit. Therefore, DOE did not know the level of accuracy of the cost/efficiency curves in this range. The design option analysis simulates equipment with efficiency levels above 11.5 EER to compare their costs with the costs that the extrapolated curve predicts.

The Department received comments from ACEEE and Trane about using the design option approach. The ACEEE recommended using the design option approach because it can consider technologies with limited market share and take into account their cost impact at higher production volumes. (ACEEE, No. 10 at p. 4; Public Workshop Tr., No. 2EE at p. 136) At the Framework Workshop, Trane commented that all design options the Department considered were mature technologies'at least 20 years old'and that the pricing for the options also is mature. Consequently, development of costs for mature technologies should be straightforward. (Public Workshop Tr., No. 2EE at pp. 133-34)

For the equipment simulation, DOE used a combination of modeling tools and techniques. For more detail on the Department's approach to the design option analysis and equipment simulation, refer to the engineering analysis, section 5.8 of the ANOPR TSD. The Department performed the refrigerant-side heat-transfer and balance calculations with a simulation model called the Oak Ridge National Laboratory (ORNL) Heat Pump Design Model using compressor map data from commercially available compressors. A custom heat-exchanger software program provided estimates of the air-side heat transfer and pressure-drops associated with the equipment variations. The Department used a combination of manufacturer data, test data, fan curves, and motor curves to determine fan power and airflow.

To validate the accuracy of the simulations, the Department simulated the performance of the four existing, physically torn down, unitary air conditioners. In addition, DOE had a third-party testing laboratory test and measure the specific performance limits of one of the air conditioners. The Department then used the test data generated from the tests to calibrate the performance model.

After constructing and calibrating the performance model, DOE analyzed various combinations of design options to simulate equipment with increased efficiencies. Then, through discussions with manufacturers and reliance on sound engineering judgment, the Department established guidelines to limit the design option simulations.

The Department requests stakeholder comments regarding its design option analysis. This concern is identified as Issue 4 under “Issues on Which DOE Seeks Comment” in section IV.E. of this ANOPR.

5. Alternative Refrigerant Analysis

The ACEEE, ARI, and Lennox noted that the engineering analysis should consider alternative refrigerants because R-22 refrigerant will phaseout in 2010 in compliance with EPA requirements and this will affect equipment component costs. (ACEEE, No. 10 at pp. 9-10; ARI, No. 11 at p. 4; Lennox, No. 7 at p. 1) Both ARI and Lennox stated that significant uncertainty exists concerning what refrigerant will be the likely replacement for R-22 in commercial unitary air conditioner and heat pump equipment, thereby complicating analyses. (ARI, No. 11 at p. 4; Lennox, No. 7 at p. 1) During the October 1, 2001, Framework Workshop, Trane commented that alternative refrigerants can behave differently than R-22 at higher temperatures. (Public Workshop Tr., No. 2EE at p. 160) The ACEEE commented that DOE should base the cost impact of alternative refrigerants on a least-cost strategy incorporating efficiency and refrigerant re-designs in a single design cycle, along with changes in assembly processes. (ACEEE, No. 10 at p. 9)

The Department acknowledges that the phaseout of R-22 will occur shortly after the effective date of any new standards and therefore it is important to consider the impact of new refrigerants on incremental cost/efficiency relationships. In addition, the Department recognizes that it is not certain that R-410a will be the ultimate replacement for R-22 in future unitary air conditioner and heat pump equipment. Two refrigerants, R-410a and R-407c, are currently under serious consideration as substitutes for R-22. While R-407c has similar pressure/temperature characteristics as R-22 and thus easily adapts to existing R-22 designs, it is less efficient. By contrast, R-410a operates at higher pressures than R-22, thus requiring redesign of R-22 equipment. However, R-410a offers efficiency benefits relative to R-407c.

During the rulemaking process, the Department contacted manufacturers and the consensus was that R-410a would be the most likely replacement for R-22 in new commercial unitary equipment as the phaseout of R-22 approaches.

Although some unitary air conditioners using R-410a are commercially available, none were available in the ≥65,000 Btu/h to <240,000 Btu/h range when the engineering analysis was conducted. However, since the analysis was conducted, the Department has learned that there is one R-410a commercial unitary air conditioner now available on the market in the 15-ton representative capacity. Most air conditioners that use R-410a are sold primarily for residential applications. Consequently, the Department's analysis compared the design differences between R-22 and R-410a equipment in smaller packaged units (

i.e.

, <65,000 Btu/h units) to gain general engineering insight. In addition, the Department used performance information from manufacturers of R-410a compressors to develop engineering models of the larger R-410a systems.

The Department carried out preliminary performance analyses to simulate R-410a equipment using the same performance models applied to the R-22 equipment, and calculated the R-410a equipment costs using the same cost model applied to the R-22 equipment. The engineering analysis section (Chapter 5) of the ANOPR TSD presents additional details of the R-410a analyses. The Department generated cost/efficiency curves that represented the R-410a equipment using the performance analysis and estimated equipment costs.

The Department realizes that the absolute costs of R-410a equipment differ from those of the R-22 equipment. However, the analysis focuses on the difference in the incremental costs between the two curves. The Department intends to consider the absolute costs of the R-22 phaseout in the manufacturer impact analysis. The alternative refrigerant analysis provided no evidence to suggest that the incremental cost/efficiency behavior of R-410a equipment in the ≥65,000 Btu/h to <135,000 Btu/h and ≥135,000 Btu/h to <240,000 Btu/h equipment classes differs substantially from the R-22 cost/efficiency behavior. For more detail on the alternative refrigerant analysis, refer to the engineering analysis, section 5.9 of the ANOPR TSD.

The Department requests comments from interested parties about its proposed approach to the alternative refrigerant analysis, and has identified it as Issue 2 under “Issues on Which DOE Seeks Comment” in section IV.E. of this ANOPR.

D. Building Energy Use and End-Use Load Characterization

Energy savings from commercial unitary air conditioning equipment vary according to the rated efficiency level of the equipment and a number of other factors, including: Climate, building-type, and building occupation schedule and use. Operating cost savings are a result of reduced electricity consumption and a decrease in the peak electric demand charge. The Department conducted building simulations to estimate the energy use of the commercial unitary air conditioning equipment at candidate standard levels for various combinations of the above-mentioned factors. The simulations yielded hourly estimates of the buildings' electric loads that included lighting, plug, and air conditioning equipment. The Department uses these estimates in the life-cycle cost analysis to assess the cost savings that the air conditioning equipment provides at each of the efficiency levels analyzed. For more detail on the building energy use and end-use load characterization analysis, refer to Chapter 6 of the ANOPR TSD.

1. Approach

The 1995 CBECS (CBECS 95) data set was the primary source of the data used to develop the building characteristics. The Department considered the use of the 1999 CBECS (CBECS 99), but the entire microdata set was not available in time for this analysis. In addition, the sampling procedure for CBECS 99 specifically excluded new buildings of less than 10,000 square feet, which is the type of building that uses commercial unitary air conditioners. Using the CBECS 99 data would have resulted in a biased data set. The Department used a subset of the CBECS 95 representative building types to characterize the energy use and loads for this analysis. It selected six building types that included most of the top eight, energy-using building types in the commercial sector based on CBECS data.

The Department did not explicitly include health care buildings. Instead, because of similarities in modeling the outpatient segment of a health care building and an office building, the Department added the outpatient segment of a health care building into the office-building category. However, the Department did not include the inpatient segment of the health care building type, because there are insufficient data to characterize the buildings for the purpose of energy simulations. The Department did not consider the lodging building type because the number of observations nationwide in the CBECS data set was small and because these buildings do not typically use unitary packaged air conditioning equipment for most of their conditioned spaces. For more details on the engineering approach to building energy use, representative building types, modeling methodology, climate and building locations, and annual building energy use, refer to Chapter 6 of the ANOPR TSD.

Lennox provided comments indicating that industrial and light manufacturing applications use a large fraction of unitary equipment, which the DOE omitted from the building sample. (Lennox, No. 15 at p. 1) The CBECS data set excludes manufacturing facilities from its sample. The Manufacturing Energy Consumption Survey (MECS) includes manufacturing facilities, but the detailed data on building characteristics and operation are not available in the MECS data set. The lack of such data, including the square footage cooled by commercial unitary air conditioning equipment, makes it difficult to establish how significant this building category would be in the analysis. The Department believes that, in the case of office space attached to industrial or light manufacturing buildings, its analytical approach provides a reasonable representation of the cooling loads experienced by these building spaces. This issue is also discussed later with regard to the development of electricity prices from utility tariffs for the LCC analysis (

see

section II.F.1.b.(2)(a) of this ANOPR). This concern is identified as Issue 5 under “Issues on Which DOE Seeks Comment” in section IV.E of this ANOPR.

The Department further screened the individual CBECS buildings within the six building types to include only buildings with at least 70 percent of their total floor space cooled by unitary packaged equipment. The Department based the 70 percent value on the need to keep the sample size reasonable, yet still representative of the building stock that uses packaged cooling equipment. Using an 80 percent value would be too restrictive and using a 60 percent value would be too extensive and make the sample size too large. The total number of observations in the six building types meeting the 70 percent threshold was 1033. These buildings accounted for over 73 percent of the annual cooling energy use and 67 percent of the square

footage of commercial buildings with at least part of their floor space being cooled with packaged equipment.

The Department modeled each CBECS sample building using the BLAST software. The Department computed the building loads by simulating a prototypical three-story, 48,000-square-foot building with five thermal zones per floor with schedule and envelope characteristics chosen to represent each building sampled. The Department used the ventilation requirements of ASHRAE Standard 62.1-1999 as the basis for the ventilation rates in the building simulations. The Department scaled the results of that prototype's simulation to match the specific geometry of the CBECS building being represented, e.g., conditioned floor area, aspect ratio (defined as the ratio of the length to the width of a building), number of floors, and number of thermal zones per floor. The Department simulated the buildings with equipment at ten different EER levels to determine the annual energy impacts of changes in EER.

Lennox commented that the default part-load performance curve in the BLAST simulation tool appears to be representative of equipment that uses cylinder unloading at part-load, instead of multi-compressor staging that is common in commercial unitary air conditioners. The impact of using the BLAST default part-load performance curve is some overestimation of the energy use of the compressors when lightly loaded. (Lennox, No. 15 at p. 1) Due to the lack of available published data on part-load performance of commercial unitary air conditioners, the Department requests data on the part-load operating characteristics to adjust the BLAST part-load performance curve.

Also, in view of the complexity of the BLAST analysis, and Lennox's comments concerning the selection, characterization, and simulation of the building set used for the building energy use and end-use load characterization analysis (Lennox, No. 15 at p. 1), the Department had an independent third-party expert review its analysis. The results of the third-party review are available to interested parties on the Department's website at

http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html.

This third-party review is addressed as issue 16 under “Issues on Which DOE Seeks Comment” in section IV.E, of this ANOPR.

Also, Lennox provided comments on the ventilation rates used in the DOE building simulation analysis. (Lennox, No. 15 at p. 1) Lennox and ARI asserted that the DOE analysis overstates the ventilation load for most buildings by assuming all commercial buildings typically operate at ASHRAE Standard 62-1989 ventilation levels (15 cfm/person typical). Lennox wrote that most existing building applications as well as half of the new building applications of unitary air conditioning equipment operate at pre-ASHRAE Standard 62-1989 ventilation levels (5 to 7.5 cfm/person typical), which accounts for nearly 85 percent of the total shipments of commercial unitary air conditioning equipment. (Lennox, No. 15 at p. 1; ARI, No. 18 at pp. 1-8) Consultation between the Department and designers suggests that designers use ASHRAE Standard 62.1-1999 for establishing design ventilation rates, particularly since many designers wish to avoid potential litigation arising from adverse health effects attributable to low ventilation rates. (See the discussion of building energy use and end-use load characterization that addresses ventilation rates in section 6.2.5.5, “Ventilation and Infiltration,” of the ANOPR TSD.) For commercial unitary air-conditioning equipment, the ventilation rate is typically established by an outside air damper setting on the installed equipment. It is not a function of the age of the building, but rather is set at the time of installation. Concern over the health effects of low ventilation rates are the same regardless of the age of the building or the minimum ventilation rates in effect at the time the building was constructed.

Consequently, the Department believes that the use of ASHRAE Standard 62.1-1999 for setting ventilation requirements is the approach most representative of that used in the construction industry today. The Department is unaware of any field studies that would support use of a different ventilation rate than that required by ASHRAE Standard 62.1-1999, and thus is inclined to use this as the basis for the analysis for the ANOPR. However, in view of the complexity of the analysis and issues concerning ventilation rates that Lennox addresses, the Department had an independent third-party expert review its analysis. The results of the third party review are available to interested parties on the Department's website at

http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html.

This concern is addressed as Issue 16 under “Issues on Which DOE Seeks Comment” in section IV.E. of this ANOPR.

The Department received several comments that expressed concern about whether the higher efficiency equipment provided adequate humidity control while meeting ASHRAE Standard 62.1-1999 ventilation requirements. (ACEEE, No. 10 at p. 5; Public Workshop Tr., No. 2EE at p. 72; Lennox, No. 7 at p. 3; Public Workshop Tr., No. 2EE at p. 71) The Department established maximum sensible heat ratios for equipment analyzed via the design option process in the engineering analysis, indicating that there could be high EER equipment designs that provide acceptable humidity control (or adequate sensible heat ratio performance) under ARI Standard Rating Conditions for cooling.

In addition, DOE received several comments concerning the simulation of economizers. Lennox and the Oregon Office of Energy (OOE) commented that economizer operation or failure to operate is difficult to capture in a building simulation analysis. (Lennox, No. 7 at p. 4; Public Workshop Tr., No. 2EE at p. 163) The Department agrees with Lennox and OOE. However, for this ANOPR analysis, DOE assumed that if CBECS data indicated the use of an economizer then it was a fully functioning economizer. This might result in some underestimation of the actual cooling loads in the buildings.

The Department requests comments from interested parties regarding its proposed approach to economizers. This matter is identified as Issue 6 under “Issues on Which DOE Seeks Comment” in section IV.E. of this ANOPR.

Fan power in the energy analysis was raised as one of the issues in the Framework Workshop. A written comment from ACEEE proposed (in addition to the EER requirement) establishing a second requirement for fan power as a function of flow rate in Watts per cubic feet per minute (Watts/cfm) using the existing fan static pressures. (ACEEE, No. 10 at p. 9) The Department notes that the current EER performance metric includes fan power and has incorporated annual fan energy use in its estimate of total system energy use for the simulations. Because DOE is not planning to amend the test procedure at this time to extract the fan power measurement, it does not anticipate adding a requirement for fan efficiency (Watts/cfm).

In a related comment on the fan power issue, Lennox raised the issue of the inclusion of supply fan energy during all operational modes of the air conditioner (cooling, heating, and ventilating) in the energy analysis. (Lennox, No. 15 at p. 1) The Department understands that the supply fan is an integral part of a unitary air conditioner and its operation contributes to the energy use of the equipment. Including supply fan energy during hours when a commercial unitary air conditioner is

operating in the heating or ventilating mode will increase the energy use of that equipment, in comparison to including supply fan energy only when the equipment is providing cooling. For the purposes of the ANOPR analysis, the Department has included all energy from the supply fan and welcomes public comments on this approach. This concern is addressed in Issue 7 under “Issues on Which DOE Seeks Comment” in section IV.E of this ANOPR.

Furthermore, in view of the complexity of the analysis concerning fan energy and the issues addressed by Lennox, the Department had an independent third party review its analysis. The results of the third-party review are available to interested parties on the Department's Web site at

http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html.

Also, this concern is addressed as Issue 16 under “Issues on Which DOE Seeks Comment” in section IV.E of this ANOPR.

The end result of the simulation analysis was an hourly end-use energy stream of data for the following end-use categories:

• Cooling package equipment;

• Heating (gas);

• Lights;

• Plug and miscellaneous loads;

• Package-equipment fan;

• Nnon-package cooling; and

• Non-package fan.

2. Preliminary Results

The distribution of cooling energy use intensity (EUI) for all buildings simulated at the 8.9 EER efficiency level shows that EUI varies widely, from 0.33 kBtu/square-foot/year to a maximum of 63.3 kBtu/square-foot/year. However, the vast majority of the buildings fall into the 5 to 20 kBtu/square-foot/year range. Chapter 6 of the ANOPR TSD provides a comparison of the simulated cooling EUI for each building with the calculated cooling EUI using the CBECS estimated cooling energy use. On a square-footage-weighted basis, the BLAST simulation cooling EUIs agree reasonably well with the CBECS estimated EUIs. The CBECS estimated EUIs are higher for two of the building types (Office and Food Service), while the BLAST simulation cooling EUIs are higher for the four remaining building types (Retail, Education, Assembly, Warehouse). The square-footage-weighted cooling EUI for this set of buildings was 10.5 kBtu/square-foot/year for the BLAST simulations compared to 9.6 kBtu/square-foot/year for the CBECS estimates.

The hourly cooling energy use is only one of the energy inputs to the LCC analysis. All the electric energy end-uses play some part in determining which rate structure applies and where end-users are in the rate structure for any given hour. The electric energy use of the cooling equipment relative to the other electric energy use within a building is a strong function of the building type, climate, and time of use (seasonal as well as hourly). The peak hourly energy use becomes particularly important when analyzing the marginal cost of energy saved by higher EER levels.

In the progression to higher EER levels, the simulation runs indicated reduced cooling and fan energy consumption. The Department made a comparison of the change in cooling EUI (not including the fan energy) for two buildings from the representative building set as the equipment efficiency progressed from an EER of 8.5 to 12.0. As expected, the cooling EUI decreases with each incremental EER increase, but with a declining EUI benefit at higher EERs. This trend is the same for all buildings, even though the base EUI is different for each of them. The change in total fan energy use from the simulation as a function of EER is less pronounced. This is because, while the simulation model assumes that fan energy during the EER rating test is reduced, a substantial fraction of the fan energy consumption is a function of the external fan static pressure, which is assumed not to change between efficiency levels. The Department used the hourly simulated building electric-energy loads directly as inputs to the detailed LCC analysis discussed in the next section of this ANOPR. See Chapter 6 of the TSD for more details on this building load simulation analysis.

In determining the reduction in cooling and fan energy consumption due to higher EER levels, the Department did not take into account a rebound effect. The rebound effect occurs when a piece of equipment that is made more efficient is used more intensively, so that the expected energy savings from the efficiency improvement do not fully materialize. Because unitary air conditioners are a commercial appliance, the person owning the equipment (

i.e.

, the building owner) is often not the person operating the equipment (

i.e.

, the renter). Because the operator does not own the equipment, they will not have the information necessary to influence their operation of the equipment. In other words, a rebound effect would appear to be unlikely. The Department seeks comments on whether a rebound effect should be included in the determination of annual energy savings. If a rebound effect should be included, the Department seeks data for basing the calculation of the rebound effect. This matter is identified as Issue 20 under “Issues on Which DOE Seeks Comment” in section IV.E. of this ANOPR.

E. Markups To Determine Equipment Price

The Department understands that the price of a commercial unitary air conditioner depends on how the customer purchases such equipment. Because the customer price of such equipment is not generally known, the Department used the manufacturers' costs developed from the engineering analysis and applied multipliers called “markups” to arrive at the final equipment price. The derivation of the equipment price depends on the distribution channel the customer uses to purchase the equipment. Typical distribution channels consist of wholesalers, mechanical contractors, and general contractors. The Department based the wholesale and contractor markups on a combination of firm balance sheet data and U.S. Census Bureau data. For each of the markups, DOE further differentiated between a baseline markup and an incremental markup. The Department defines baseline markups as coefficients that relate the manufacturer's price of baseline equipment to the wholesaler's or contractor's sales price of such equipment. Incremental markups are coefficients that relate changes in the manufacturer's price of baseline equipment to changes in the wholesaler's or contractor's sales price. For more detail on equipment prices and markups, refer to Chapter 7 of the ANOPR TSD.

1. Approach

To carry out the LCC calculations, DOE needed to determine the cost to the customer of a baseline commercial unitary air conditioning unit and the cost of more efficient units. The customer price of such units is not generally known. However, by applying a multiplier called a “markup” to the manufacturer's prices that DOE derived, DOE could estimate customer prices both for baseline and more-efficient equipment.

Both Lennox and Trane noted the importance of the methodology used to determine markups and equipment prices. Lennox stated that markups are dependent on how commercial equipment is sold and involve complex distribution channels that include distributors (also known as wholesalers), installing contractors, and business or building owners. (Lennox,

No. 2 at p. 3; Public Workshop Tr., No. 2EE at p. 142) Trane also noted that any publicly available price lists are not useful for estimating equipment prices. (Public Workshop Tr., No. 2EE at p. 125) In response to Trane, OOE commented that invoices are available for estimating the installed cost of commercial unitary air conditioners. (Public Workshop Tr., No. 2EE at p. 126)

The Department understands that the equipment price to the customer depends on how the customer purchases the equipment. Based on manufacturer input, DOE defined two types of distribution channels to describe how the equipment passes from manufacturer to customer. In the first distribution channel, the manufacturer sells the equipment to a wholesaler, who in turn sells it to a mechanical contractor, who in turn sells it (and its installation) to a general contractor, who in turn sells it to the customer. In the second distribution channel, the manufacturer sells the equipment directly to the customer through a national account. The Department further subdivided the first distribution channel by mechanical contractor size (as measured in annual revenues). In its methodology for estimating equipment prices, the Department relied solely on the above approach,

i.e.

, defining distribution channels and determining markups at each point in the distribution channel. The Department could not collect any price lists or invoices to assist in its determination of equipment prices. For more detail on the distribution channels for commercial air conditioners, refer to the introduction to Chapter 7, figure 7.1.1, and section 7.7 of the ANOPR TSD.

Based on information provided by equipment manufacturers through informal interviews, as well as the judgment of individuals familiar with how commercial unitary air conditioning equipment is distributed to commercial customers, the Department assumes that end use customers purchase 50 percent of equipment through small mechanical contractors, 32.5 percent through large mechanical contractors, and the remaining 17.5 percent through national accounts. In addition, the Department understands that 30 percent of commercial unitary air conditioning equipment is purchased for the new construction market, while the remaining 70 percent serves the replacement market. In the case of the replacement market, where equipment is purchased through a mechanical contractor, the mechanical contractor generally purchases equipment directly from the wholesaler (

i.e.

, a general contractor is not involved in the distribution of equipment). The mechanical contractor markup is a function of contractor size and whether the contractor serves primarily the new construction or the replacement market. For more detail on the new construction and replacement markets and their effects on the mechanical contractor markups, refer to section 7.4.1 of the ANOPR TSD.

For each of the markups, DOE further differentiated between a baseline markup and an incremental markup. The Department defines baseline markups as coefficients that relate the manufacturer price of baseline equipment to the wholesale or contractor sales price of such equipment. Incremental markups are coefficients that relate changes in the manufacturer price of baseline equipment to changes in the wholesale or contractor sales price. For more detail on the methodology the Department used to determine baseline, incremental, and overall markups, refer to sections 7.1.1 through 7.1.3 of the ANOPR TSD.

The Department based the wholesale and mechanical contractor markups on firm balance sheet data, while it based the general contractor markups on U.S. Census Bureau data for the commercial and institutional building construction industry. The Department obtained balance sheets from the trade associations representing wholesalers and mechanical contractors. The Department put the building construction industry data into the same format as the balance sheet data for wholesalers and mechanical contractors to derive the markups for general contractors. The key assumptions used to estimate markups using this financial data are:

• The firm balance sheets faithfully represent the various average costs incurred by firms distributing and installing commercial air conditioning.

• There are two categories of costs: (1) Costs that vary in proportion to the manufacturer price of commercial air conditioners (variable costs); and (2) costs that do not vary with the manufacturer price of commercial air conditioners (fixed costs).

• Commercial air conditioner wholesale and contractor prices across different efficiency levels vary in proportion to commercial air conditioner wholesaler and contractor costs included in the balance sheets.

For more detail on the basic assumptions the Department used to estimate markups, wholesale markups, and mechanical contractor markups, refer to sections 7.2 through 7.5 of the ANOPR TSD.

Commercial unitary air conditioning equipment purchased through national accounts is an exception to the usual distribution of HVAC equipment to end users. Large customers of HVAC equipment, such as national retail chains, use national accounts to circumvent the typical chain of distribution. Due to the large volume of equipment purchased, large customers can purchase equipment directly from the manufacturer at significantly lower prices than could be obtained through the typical distribution chain.

To derive a national account markup, the Department considered costs that are added to the manufacturer price as additional markups and costs that are subtracted from the customer price as markups that are avoided in a more typical manufacturer-to-wholesaler-to-mechanical-contractor-to-general-contractor-to-customer distribution system. Costs that are added include:

• Freight charges (less-than-a-truck-load rates are higher than trailer-load rates);

• Account management and administration expenses (billing, collections and warranty issues); and

• Cost-of-sale increases (technical support and personalized service).

Costs that are deducted include:

• Wholesaler account management and administration expenses;

• Wholesaler warehousing and handling expenses;

• Mechanical contractor markup on equipment sale (profit, labor warranty, and service reserve);

• Mechanical contractor account management and administration expenses;

• Mechanical contractor warehousing and handling expenses;

• General contractor account management and administration expenses; and

• General contractor project oversight markup.

In view of these additions and deductions, the Department derived a national account markup assuming that the resulting equipment price increase was one-half of that realized from a typical chain of distribution. In other words, if the price increase resulting from the multiplicative product of the wholesale, mechanical contractor, and general contractor markups is $100, the national account markup is such that the price increase is one-half of that, or $50. The Department assumed that the resulting national account markup must fall somewhere between the manufacturer price (

i.e.

, a markup of 1.0) and the customer price under a typical chain of distribution. Because

DOE did not know precise values (between zero and one for the markups) for the actual national account equipment price, DOE used 0.5 to represent a mid-point value between manufacturer price and customer price. For more detail on national account markups, refer to section 7.7 of the ANOPR TSD.

As a final step, DOE applied a sales tax, which represents state and local sales taxes that are applied to the customer price of the equipment. The Department derived sales taxes representative of both state and local sales taxes from 1997 state sales tax data and 1997 local sales tax data. Using state unitary air conditioner shipment data from 1994, DOE weighted the state and local sales tax data by the percentage of unitary air conditioners shipped to each state. The sales tax has a mean value of 6.7 percent. The Department updated its calculation of sales taxes based on 2003 state and local sales tax data from the Sales Tax Clearinghouse (

http://thestc.com/STrates.stm

). Although the updated mean sales tax value is 6.6 percent, virtually unchanged from the value based on 1997 data, the Department intends to update the sales tax data in its analysis for the NOPR. The Department applied sales taxes to the customer equipment price irrespective of the distribution channel and the market in which the customer is located. The Department assumes the state and local sales tax rate is the same for residential products and commercial/industrial equipment.

For more detail on the Department's approach to state and local sales taxes, refer to section 7.6 of the ANOPR TSD. The Department invites comments and data from interested parties on its assumption. Also, the Department was not able to gather more recent state-by-state shipments of >65,000 Btu/h to <240,000 Btu/h commercial unitary air conditioners. The Department requests more recent data from interested parties.

2. Estimated Markups

The Department multiplied the wholesale and contractor markups described above by the sales tax to get the overall baseline and incremental markups shown in Tables II.5 and II.6, respectively. Overall markups are based on one of three assumed distribution channels as well as whether the commercial unitary air conditioning equipment is purchased for the new construction or the replacement market. The Department based the distribution channel on whether such equipment is purchased through small mechanical contractors, large mechanical contractors, or national accounts. The tables show a weighted-average overall markup, assuming that: (1) The new construction and replacement markets represent 30 percent and 70 percent of the market, respectively; and (2) end-use customers purchase 50 percent of equipment through small mechanical contractors, 32.5 percent through large mechanical contractors, and the remaining 17.5 percent through national accounts. The weighted-average overall baseline markup equals 2.31, while the weighted-average overall incremental markup equals 1.56. For more details on how the Department derived overall markups, refer to section 7.8 of the ANOPR TSD.

The Department used the overall markup to estimate the customer price of baseline equipment, using the manufacturer price of baseline equipment. For example, if the manufacturer price of a baseline commercial air conditioner is $100, DOE multiplied this by the weighted-average overall baseline markup to estimate the baseline customer price of the equipment as $231. Similarly, DOE used the overall incremental markup to estimate changes in the customer price, in view of changes in the manufacturer price above the baseline price resulting from a standard to raise equipment efficiency. For example, if a standard increases the commercial air conditioner manufacturer price by $25, DOE multiplied this by the weighted-average overall incremental markup to estimate that the customer price will increase by $39.

Table II.5.—Overall Baseline Markups

Market sector

New construction

Small

mech.

Large

mech.

National

account

Replacement

Small

mech.

Large

mech.

National

account

Weighted-

average

Wholesale

1.36

Mechanical Contractor

1.48

1.35

1.69

1.70

1.55

1.60

General Contractor

1.24

Sales Tax

1.07

Overall

2.66

2.42

1.80

2.47

2.24

1.71

2.31

Table II.6.—Overall Incremental Markups

Market sector

New construction

Small

mech.

Large

mech.

National

account

Replacement

Small

mech.

Large

mech.

National

account

Weighted-

average

Wholesale

1.11

Mechanical Contractor

1.26

1.18

1.27

1.37

1.29

1.24

General Contractor

1.13

Sales Tax

1.07

Overall

1.68

1.59

1.35

1.63

1.53

1.32

1.56

Referring specifically to the above wholesaler baseline and incremental markups of 1.36 and 1.11, respectively, ARI's comments reject the assumption that incremental markups should be less than baseline markups. ARI states that these correspond to margins of 27 percent and 9 percent respectively, and that the underlying assumption is that “the wholesaler will accept one-third the margin on the incremental cost that he receives on the baseline.” (ARI, No. 14 at pp. 1 and 2) According to ARI, this is saying that the wholesaler is expected to sell premium goods for a lower

markup than commodity goods, which is counter to the trends in all industries. Also, ARI states that “premium goods demand premium markups.” By using incremental markups, the effect of any increase in the standard would be to decrease the profit margins of the wholesalers and all others in the distribution chain. Further, ARI states that, over a period of time, “this is a sure formula for bankruptcy and collapse of an industry.” (ARI, No. 14 at p. 1)

As ARI notes, the wholesale incremental markups are one-third of the wholesale baseline markups. (ARI, No. 14 at p. 1) However, the Department does not agree with ARI's characterization of these estimates as counter to industry trends and “a formula for bankruptcy.” Rather, the Department believes that the above incremental markups are consistent with industry trends and sufficient to maintain industry profits. There appears to be some fundamental disagreement between ARI and the Department on whether growth in cost of goods sold (CGS) must always be matched by a proportionate growth in sales revenue. While this may be true within the context of a general business expansion, the Department believes that it is not an appropriate assumption within the context of an increase in equipment price due to an increase in the minimum efficiency standard. To develop markups, energy efficiency standards involve little or no change in the number of units sold or in the labor needed to handle those units. This situation is quite different from a market trend where both the number of units sold and CGS increase. The following example illustrates this case.

The Department uses a simple hypothetical example of a firm setting prices before and after implementation of an efficiency standard (see Table II.7). For illustration, the hypothetical standard is assumed to raise equipment cost by 25 percent, from $5 million CGS in the Baseline to $6.25 million CGS with the New Standard. For simplicity, the number of units sold in this example is assumed to remain constant. The DOE analyses of national energy savings and manufacturer impact takes into account changes in sales as a result of energy efficiency standards. Consequently, with the New Standards, labor and occupancy costs remain constant and other overhead costs and profit are assumed to rise in proportion to changes in CGS.

Table II.7.—Example Illustrating Impact of Profit on Markup

Baseline

New standard (proportional profit)

New standard (fixed markup)

Total CGS ($thousand)

$5,000

Total CGS ($thousand)

$6,250

Total CGS ($thousand)

$6,250

Labor and Occupancy ($thousand)

$659

Labor and Occupancy ($thousand)

$659

Labor and Occupancy ($thousand)

$659

Other Overhead ($thousand)

$659

Other Overhead ($thousand)

$824

Other Overhead ($thousand)

$824

Profit ($thousand)

$333

Profit ($thousand)

$416

Profit ($thousand)

$580

Total Revenue ($thousand)

$6,650

Total Revenue ($thousand)

$8,150

Total Revenue ($thousand)

$8,313

Markup

1.33

Markup

1.30

Markup

1.33

The New Standard (proportional profit) shown in the middle column of Table II.7 illustrates what would happen if the Department assumes profits are proportional to CGS. Even though baseline profit rises from $333,000 to $416,000, the apparent markup declines, compared to Baseline. The apparent decline is the result of an arithmetic change in the ratio of Total Revenue to Total CGS. In other words, if profitability increases proportionally with CGS from $333,000 to $416,000, then the markup declines from 1.33 to 1.30.

The New Standards (fixed markup) case illustrates the implications if instead the Department were to assume a fixed markup. The results (right column in Table II.7) show that if the markup is fixed at the pre-standard level of 1.33, then firm profits will rise after the standard becomes effective. In other words, with a fixed markup, revenue after the standard becomes effective would be 1.33 multiplied by the CGS, or $8,313,000. The profit that is consistent with this amount is the revenue minus the sum of CGS, labor and occupancy, and other overhead. This provides a profit of $580,000 after the standard, or a 74 percent increase in profit.

The Department does not believe that it is possible for firms to increase profits in this manner simply as a result of an increase in equipment efficiency. In a competitive market, DOE believes increases in profits do not persist because high profits attract competing firms which results in an increase in equipment supply and lower prices. The Department believes that a firm that used an efficiency standard as an opportunity to increase profits would eventually lose market share to firms that maintain profitability nearer to the pre-standard levels.

All this indicates that markups on goods sold after an energy efficiency standard becomes effective would be lower than the baseline markups. Thus, the Department believes that, due to implementation of an energy efficiency standard, CGS would increase but the number of units sold and associated labor costs would not increase.

Two sources of industry data support the Department's finding concerning incremental markups. First, the incremental markup the Department calculated is consistent with incremental markups calculated from a statistical analysis of U.S. Census Bureau data covering the HVAC sector. (See Wholesalers: U.S. Census Bureau, Gross Profit, Employment and Gross Margin for Merchant Wholesalers for NAICS 42173. By State: 1997. Refer to section 7.3 of the ANOPR TSD for details on the derivation of incremental markups based on the use of U.S. Census Bureau data.) Second, there are empirical observations of instances where industry growth in revenue exceeds growth in profits. For example, net sales of firms in the refrigeration and service industry grew at 18.6 percent over a period of five years while operating income grew by 12.6 percent. (See Ibbotson: 2001 Cost of Capital Yearbook. Statistics for SIC Code 358. Medium firm growth rates.) The Department concludes that many factors influence the relationship between CGS and operating profits.

The Department believes that the use of incremental markups is the most appropriate methodology for developing equipment prices for more energy efficient equipment. Because fewer

expenses need to be covered by an incremental markup, it has a lower value than its corresponding baseline markup. Nevertheless, the Department understands that identifying expenses that need to be covered by the incremental markup is essential to deriving its value. Therefore, the Department seeks comments on whether the wholesale, general contractor, and mechanical contractor incremental markups should cover more or fewer expenses. This is addressed as Issue 8 under “Issues on Which DOE Seeks Comment” in section IV.E of this ANOPR.

In addition, in view of the complexity of the analysis and issues addressed by ARI concerning markups (ARI, No. 14 at pp. 1 and 2), the Department had an independent third-party expert review and comment on its analysis. The results of the third-party review are available to interested parties on the Department's Web site at

http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html.

This subject is addressed as Issue 16 under “Issues on Which DOE Seeks Comment” in section IV.E of this ANOPR.

Concerning the Department's characterization of distribution channels, ARI states that replacement installations often need a general contractor. (ARI, No. 14 at pp. 1 and 2) Specifically, ARI states that replacements are divided between those due to equipment failures and those required as part of a major building renovation. In the latter case, ARI states that a general contractor is almost always involved and estimates that 50 percent of the replacement market includes a general contractor markup. (ARI, No. 14 at pp. 1 and 2)

As noted earlier, the Department developed the distribution channels based on data collected from manufacturers as well as the judgment of individuals familiar with how air conditioning equipment is distributed to commercial customers. Based on ARI's input, and any future comments from other interested parties in response to this ANOPR, the Department may change the distribution channels for the NOPR to be more reflective of how equipment is actually distributed.

For equipment purchased through national accounts, ARI states that general and mechanical contractors remain involved in the distribution and installation of the equipment. However, it adds that the contractors may use a slightly lower effective markup if they do not have to cover expenses associated with the cost of the equipment. Thus, national accounts are more similar to a typical distribution channel than not. ARI comments that the principal advantage of a national account to a manufacturer is volume reduction of incremental selling cost. The result is that some savings are shared with the customer in the form of reduced cost for the installed equipment. Although there are customer savings, ARI states that the large difference between baseline and incremental markups is not representative of actual market dynamics, and that national account markups should be 0.2 to 0.25 greater than the values shown in chart 13. (ARI, No. 14 at pp. 1 and 2) The Department understands that ARI is referring to chart 13 (Image 14) in the “Life Cycle Cost Analysis Presentation: Inputs and Results,” on the DOE Web site at

http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html.

In this case, chart 13 (Image 14) presents the same information as Tables II.5 and II.6 in this ANOPR.

As noted earlier, the Department derived a national account markup under the assumption that the resulting equipment price increase was one-half of that realized from a typical chain of distribution. In view of ARI's comments, and any future comments received from other interested parties in response to this ANOPR, the Department may change the national account markups for the NOPR to better reflect the actual distribution of commercial unitary air conditioning equipment.

The ACEEE and ASE commented that DOE should extrapolate future equipment prices from historical producer price trends for commercial unitary air conditioners published by the U.S. Census Bureau. (ACEEE, No. 10 at pp. 9 and 10; ASE, No. 9 at p. 4)

For other rulemakings, the Department used production input costs and production technologies based on the best information available at the time. The Department has not made any assumptions about productivity improvements and material cost changes over time. The Department believes historical price trends for commercial unitary air conditioners (or other related equipment) do not apply to forecast equipment prices where there are no data to show that the trends will continue. Therefore, without specific data on the likely costs to manufacture a piece of equipment, the Department does not plan to apply a productivity improvement factor in this rulemaking.

F. Life-Cycle Cost and Payback Period Analysis

The LCC and PBP analysis determines the impact of potential standards on consumers. The effects of standards on individual commercial consumers include changes in operating expenses (usually lower) and changes in total installed cost (usually higher). The Department analyzed the net effect of these changes by calculating the changes in LCCs compared to a base case. The LCC calculation considers total installed cost (equipment purchase price plus installation cost), operating expenses (energy, repair, and maintenance costs), equipment lifetime, and discount rate. The Department performed the LCC analysis from the perspective of the user of commercial unitary air conditioning equipment.

The Department also determined the economic impact of potential standards on consumers by calculating the PBP of potential standards relative to a base case. The PBP measures the amount of time it takes the commercial consumer to recover the assumed higher purchase expense of more-energy-efficient equipment through lowering operating costs. Similar to the LCC, the PBP is based on the total installed cost and the operating expenses. But unlike the LCC, only the first year's operating expenses are considered in the calculation of the PBP. Because the PBP does not take into account changes in operating expense over time or the time value of money, it is also referred to as a “simple” payback period. For more detail on the life-cycle cost and payback period analysis, refer to Chapter 8 of the ANOPR TSD.

The Department generated LCC and PBP results as probability distributions using a simulation based on Monte Carlo statistical analysis methods, in which inputs to the analysis consist of probability distributions rather than single-point values. As a result, the Monte Carlo analysis produces a range of LCC and PBP results. A distinct advantage of this type of approach is that the Department can identify the percentage of users achieving LCC savings or attaining certain PBP values due to an increased efficiency standard, in addition to the average LCC savings or average PBP for that standard. Because DOE conducted the analysis in this way, it can express the uncertainties associated with the various input variables as probability distributions. During the post-ANOPR consumer analysis, the Department may evaluate additional parameters and prepare a comprehensive assessment of the impacts on sub-groups of users.

Lennox and NRDC had some general concerns regarding the LCC analysis. Lennox commented that the technical analysis of the commercial air conditioner market, building loads, and equipment operation are much more

complex than past analyses conducted for residential central air conditioners. (Lennox, No. 7 at p. 1) The NRDC stated that the analysis must be credible and transparent. (NRDC, No. 6 at p. 3)

To make the analysis transparent, the Department developed a spreadsheet model in Microsoft Excel. An add-on to Microsoft Excel called Crystal Ball (a commercially available software program) allows a user to characterize input variables with probability distributions. Past LCC analyses conducted for residential central air conditioners also used Microsoft Excel spreadsheets with Crystal Ball. Although the residential and commercial air conditioner analyses are similar in this respect, the commercial analysis is more complicated in that it requires conducting whole-building simulations to derive equipment energy use and demand.

In addition, the Department derived two sets of electricity prices to estimate annual energy expenses: A tariff-based estimate and an hourly based estimate. The tariff-based approach estimates an annual energy expense using electricity prices determined from electric utility tariffs collected in the year 2002. The hourly based approach estimates annual energy expense using electricity prices that may exist, assuming all electricity markets are deregulated. Under this approach, the Department collected electricity production prices that vary on an hourly basis and used them to model a scenario in which customers are directly charged for the costs incurred by an electricity provider to supply energy for air conditioning. For electricity markets that are already deregulated, the Department collected actual wholesale hourly electricity prices. For markets that are still regulated, it collected hourly system load and generation cost data and used them as a proxy for wholesale prices that might exist if those markets were deregulated.

1. Inputs to LCC Analysis

For each efficiency level analyzed, the LCC analysis requires input data for the total installed cost of the equipment and the operating cost. Table II.8 summarizes the inputs used to calculate the customer economic impacts of various energy efficiency levels. A more detailed discussion of the inputs follows.

Table II.8. Summary of Inputs Used in the LCC Analysis

Input

Description

Equipment Price

Derived by multiplying manufacturer cost by manufacturer, distributor, mechanical contractor, and general contractor markups and sales tax. Manufacturer costs and markup discussed in section II.C. and summarized in Tables II.3 and II.4. Other markups and sales tax discussed in section II.E and summarized in Tables II.5 and II.6.

Installation Cost

≥65,000 Btu/h to <135,000 Btu/h—$1585; ≥135,000 Btu/h to <240,000 Btu/h—$2142. Installation costs vary as a function of equipment weight.

Annual Energy Use and Demand

Derived through whole-building energy use simulations. Discussed in section II.D.

Annual Energy Expenses

Derived from tariff-based and hourly based electricity prices. Average marginal tariff-based electricity price—10.0¢ per kilowatt/hour (kWh). Average marginal hourly based electricity price—9.9¢/kWh.

Repair Costs

≥65,000 Btu/h to <135,000 Btu/h annual repair cost—$151; ≥135,000 Btu/h and <240,000 Btu/h annual repair cost—$279. Annual repair costs vary as a function of manufacturer price.

Maintenance Costs

Annual maintenance cost equals $200; does not vary as a function of cooling capacity or efficiency.

Lifetime

Mean lifetime equals 15.4 years.

Discount Rate

Mean discount rate equals 6.1 percent.

Effective Date*

2008.

* Refer to section II.F.1.b.(8).

As noted by its absence in Table II.8, the Department chose not to include the impact of income taxes in the LCC analysis for this ANOPR. The Department understands that there are two ways in which taxes affect the net impacts attributed to purchasing more energy efficient equipment compared to baseline equipment: (1) Energy efficient equipment typically costs more to purchase than baseline equipment, which in turn lowers net income and may lower company taxes; and (2) efficient equipment typically costs less to operate than baseline equipment, which in turn increases net income and may increase company taxes. In general, the Department believes that the net impact of taxes on the LCC analysis depends on firm profitability and expense practices (how firms expense the purchase cost of equipment). For more detail on the inputs to the life-cycle cost analysis, refer to section 8.2 of the ANOPR TSD. The Department seeks input on whether income tax effects are significant enough to warrant inclusion in the LCC analysis for the NOPR. The Department specifically requests information on how many firms that purchase commercial unitary air conditioners actually pay taxes and, if they do, what expense-accounting practices they use to depreciate the purchase costs. This is addressed as Issue 17 under “Issues on Which DOE Seeks Comment” in section IV.E of this ANOPR.

a. Total Installed Cost Inputs

The total installed cost is the sum of the equipment price and the installation cost. The equipment price includes the distribution markups (as determined in section II.E) that are applied to the manufacturer costs estimated in the engineering analysis (section II.C).

The Department derived installation costs for commercial air conditioners from data in

RS Means Mechanical Cost Data, 2002.

The Department decided that data for 7.5-ton and 15-ton rooftop air conditioners are representative of installation costs for the ≥65,000 Btu/h to <135,000 Btu/h and ≥135,000 Btu/h to <240,000 Btu/h air conditioning equipment classes, respectively. The Department derived nationally representative installation costs of $1,585 and $2,142 for 7.5-ton and 15-ton commercial unitary air conditioners, respectively. Because labor rates vary significantly in each region of the country, DOE used data from

RS Means Mechanical Cost Data, 2002

to identify how installation costs vary from state to state and incorporated these costs into the analysis.

Lennox, Trane, and ARI stated that installation costs will increase with efficiency because of the increased

weight and size of more efficient equipment. (Lennox, No. 7 at p. 3; Public Workshop Tr., No. 2EE at p. 146-148; ARI, No. 14 at p. 2 and No. 17 at p. 2) Lennox added that installation costs for the replacement market would increase substantially if larger and heavier equipment requires new roof mounting frames or structural modifications. (Lennox, No. 7 at p. 3) Regarding replacements, ARI stated that most of the equipment being replaced is likely to be older and rated 8.0 EER or lower. The ARI stated that the more efficient equipment will be larger and heavier, and is likely to need an adapter curb or rebooting and perhaps structural modifications to carry the weight. Retrofit installations use adapter curbs. An adapter curb consists of structural members that provide a transition or alignment between existing roof curbs and new equipment with a different size or configuration. Also, ARI stated that the cost of adaptation may be significantly greater if parapets must be increased (to meet building codes) to hide a unit sitting on a tall adapter. The ARI provided rough estimates of $2500 for a 7.5-ton adapter curb and $3500 for a 15-ton adapter curb (parts and labor included). (ARI, No. 14 at p. 2)

The Department could not find data that explicitly showed how installation costs vary with equipment efficiency. As a result, the Department considered varying installation costs in direct proportion to the weight of the equipment. The Department developed linear relationships of operating weight as a function of equipment efficiency for 7.5-ton and 15-ton commercial unitary air conditioners and assumed the installation cost increased in the same proportion. The Department does not believe the weight increases are great enough to warrant structural modifications and so it has excluded the cost of adaptor curbs and increased parapets. Therefore, DOE did not develop a separate set of installation costs for the replacement market. Spreadsheets used in evaluating the LCC and PBP can also be used to evaluate LCC and PBP based on a constant installation cost.

The Department will review the engineering analysis data for the NOPR to determine when manufacturers increase box size and in what direction (height, footprint, or both). Based on that review, the Department will determine whether the current installation cost analysis captures all the associated costs of installing more efficient equipment. The Department did not include in the analysis the incremental cost of replacing older equipment (

i.e.

, equipment rated 8.0 EER or lower). This is because the analysis establishes the incremental cost of installations exceeding the baseline efficiency levels (

i.e.

, the ASHRAE/IESNA 90.1-1999 efficiency levels of 10.1 EER for the ≥65,000 Btu/h to <135,000 Btu/h equipment class, and 9.5 EER for the ≥135,000 Btu/h to <240,000 Btu/h class), not the cost of upgrading older equipment to baseline EER levels. Therefore, if baseline equipment requires adaptor curbs or increased parapets to replace older equipment, but upgrading baseline equipment to more efficient equipment does not need further curb adaption or parapet increases, then the analysis would not include the costs of adaptor curbs or increased parapets. For more detail on the total installed cost inputs, refer to section 8.2.2 of the ANOPR TSD.

b. Operating Cost Inputs

The operating costs consist of a series of discounted cash flows that capture the cost of the electricity needed to operate the equipment, the repair costs, and the maintenance costs over the lifetime of the equipment beginning at the effective date of the standard. The Department calculated the annual electricity expense from the energy use data supplied by the whole-building simulations and electricity prices. As discussed above, the Department used two approaches to estimate electricity prices: A tariff-based approach and an hourly based approach. Because data were not available to indicate how repair costs (

i.e.

, those costs associated with the repair or replacement of failed components) vary with equipment efficiency, the Department assumed that repair costs vary directly with the cost of the equipment. Because equipment costs increase with efficiency and, to a large extent, equipment replacement costs drive repair costs, the Department reasonably assumes that repair costs will vary directly with the cost of the equipment. On the other hand, the Department assumed that maintenance costs remain constant regardless of equipment cost. Because maintenance costs correspond to the upkeep of equipment operation (

e.g.

, cleaning heat-exchanger coils and recharging refrigerant) and are not associated with repair or replacement of system components, the Department reasonably assumed that maintenance costs are not part of the cost of the equipment and, therefore, will not vary with the equipment cost. Also, the Department used a survival function to define the probable lifetime of the equipment with the mean being 15.4 years. For the analyses conducted for this ANOPR, the Department assumed that an energy efficiency standard for commercial unitary air conditioning equipment would become effective in 2008. (42 U.S.C. 6313(a)(6)(C)) For more detail on operating cost inputs to the life-cycle cost analysis, refer to section 8.2.3 of the ANOPR TSD.

(1) Use of Whole-Building Simulations

As discussed in the building energy use and end-use load characterization analysis (section II.C of this ANOPR), the whole-building simulation analysis generates building energy consumption data for each hour of a typical meteorological year. For each of the 1,033 records in the building sample, DOE disaggregated the hourly whole-building energy consumption into the air conditioning energy consumption (

i.e.

, the consumption due to the compressor and condenser fan), the supply or ventilation fan energy consumption, and the energy consumption due to all other electric end-uses in the building. Since the supply fan is integral to commercial unitary air conditioning equipment, DOE included energy consumption for ventilation even during periods where mechanical cooling is not required for space-conditioning (

i.e.

, when the compressor is not operating).

(2) Electricity Price Analysis

The electric power industry is currently in a state of transition between two different business models, from regulated monopoly utilities providing bundled service to all customers in their service area, to a system of deregulated independent suppliers who compete for customers. While it is unclear when this transition will be finished, it is possible that in the future customers will see a very different pricing structure for electricity. To account for the impacts of this change on the LCC, DOE used two different electricity price models in this analysis. The first analysis uses information on utility tariffs for commercial customers collected in 2002. The Department based the second analysis on electricity production prices that vary on an hourly basis and used them to model a scenario in which customers are directly charged for the costs incurred by an electricity provider to supply energy for air conditioning. The Department refers to the two analyses as tariff-based and hourly based, respectively.

To account for the wide regional variation in electricity usage patterns, wholesale costs, and retail rates across the country, the Department divided the continental U.S. into 17 subdivisions. The breakdown started with the nine census divisions, which were further

subdivided to take into account significant climate variation and the existence of different electricity market or grid structures. The Department based climate divisions on the nine climate regions defined for the continental U.S. by the National Climatic Data Center. It separated out Texas, Florida, New York, and California because their electric grids operate independently. Finally, it assigned each record from the 1,033 building sample to one of the 17 subdivisions. Both the tariff-based and hourly based approaches used the complete set of 1033 buildings to develop electricity prices.

(a) Tariff-Based Approach

The tariff-based analysis uses tariffs for commercial customers collected for a sample of 90 utilities across the country. The Department used three main criteria in developing the utility sample: (1) The sample of utilities should reflect the distribution of population across the country, with more utilities drawn from more populated areas; (2) the sample should reflect the proportion of customers served by privately owned utilities (investor-owned utilities (IOUs) and power marketers) versus publicly owned utilities (municipals, cooperatives, State, and Federal); and (3) the sample should cover as many customers as possible. The Department used data from DOE's Energy Information Administration (EIA) Form 861 filings for the year 2000 to determine the number of customers served by utilities of different types. The Department determined the representativeness of the sample by the percentage of the total number of commercial and industrial (C&I) customers who were covered. The sampled utilities serve 60 percent of the C&I customers of private utilities, and 14.4 percent of C&I customers for public utilities. The combined total for the U.S. is 48.5 percent of all C&I customers. For more detail on the tariff-based approach, refer to subsection 8.2.3.1 of the ANOPR TSD.

Pacific Gas and Electric (PG&E), ACEEE, NRDC, OOE, and NWPPC stated that electricity prices should reflect actual rates faced by customers. (Public Workshop Tr., No. 2EE at p. 202; ACEEE, No. 10 at p. 4; NRDC, No. 6 at pp. 4-5; Public Workshop Tr., No. 2EE at pp. 197 and 210; Public Workshop Tr., No. 2EE at p. 195) All but PG&E commented that electricity rates used in the LCC analysis must reflect demand or peak load pricing as well as time-of-use (TOU) or time-of-day (TOD) pricing. (ACEEE, No. 10 at p. 4; NRDC, No. 6 at pp. 4-5; Public Workshop Tr., No. 2EE at pp. 197 and 210; Public Workshop Tr., No. 2EE at p. 195) The OOE also stated that electricity prices should be based on marginal rates. (Public Workshop Tr., No. 2EE at pp. 194 and 195) Counter to the above comments, Southern Company stated that pricing strategies will be much more simple in a deregulated electricity market, so [DOE] should not consider real-time or TOU pricing in the analysis. (Public Workshop Tr., No. 2EE at p. 194)

The Department collected tariff documents for the 90 utilities in the sample to establish the actual electricity prices paid by commercial air conditioner customers. The tariff documents encompassed a variety of pricing strategies, including TOU rates. Because the Department did not want to speculate whether TOU rates would exist in a partially or fully deregulated market, DOE kept TOU rates in the tariff-based analysis. As will be described below, based on the electricity prices described in the tariffs, marginal pricing is the basis for establishing electricity expenses in the LCC analysis. For most of the utilities in the sample, the Department collected tariff documents directly from their web sites. When web documents were not available, the Department contacted the utilities directly. An archive of the tariff documents is available at:

http://eetd.lbl.gov/ea/ees/tariffs/index.php

. The tariff documents reflect actual rates that customers pay for electricity.

Utility companies have many tariffs separated into residential, non-residential, and special-use, such as public street-lighting or agricultural uses. Typically, a specific tariff is assigned to a particular customer based on that customer's annual peak demand. Following common utility practice, in the tariff analysis the Department combined commercial and industrial customers into one category. The Department's sampling strategy was to take the default tariff for each customer type, including TOU tariffs where appropriate. The Department assigned every building in the 1033 building simulation sample to one of the 17 subdivisions, and treated each building as a single customer. To increase the sample size and avoid bias in the electricity bill calculations, the Department assigned each customer to each utility in its subdivision. In other words, if the Department assigns six utilities to a particular subdivision, it then assigns the default tariff from each of the six utilities to each customer residing in that subdivision. Then the Department calculates an electric utility bill from each tariff assigned to the customer (the calculation of customer bills is explained below). Because the Department assigned, on average, almost six utilities to each of the 17 subdivisions, the above customer assignment method enabled the Department to effectively expand its building sample from 1033 to 6178 buildings. The particular tariff assigned to each customer was based on the annual peak demand for the base case EER level. The Department kept the customer on the same tariff for all standard levels.

For each of the 1033 buildings simulated, the Department processed the hourly simulation data for each standard level to compute the peak demand and total energy consumption for the 12 calendar months. For buildings assigned to TOU tariffs, DOE re-processed the hourly data to compute the peak demand and total energy consumption for the 12 calendar months during the peak, off-peak, and shoulder hours as defined by the utility. The Department entered into a bill-calculating spreadsheet tool that estimated the total customer bill in each month. The Department repeated the calculation for each standard level and then totaled the monthly bills to arrive at an annual electricity bill. The difference between the annual bills for each standard level gave the associated operating cost savings. To compute the base case air conditioning expense, DOE took the annual bill and multiplied it by the ratio of the total air conditioning energy use to the total building electricity use. It calculated customer marginal prices as the net change in the total bill divided by the net change in energy consumption between two standard levels. The Department implemented a version of the “Bill Calculator” in a spreadsheet that includes customer data for a set of representative buildings. Interested parties can get the Bill Calculator spreadsheet at

http://eetd.lbl.gov/ea/ees/tariffs/index.php

Lennox commented that the energy analysis does not include the effect of units operating on industrial tariffs. In particular, Lennox stated that: (1) The building set analyzed is a subset of the CBECS data set for commercial buildings; (2) the exclusion of manufacturing sites excludes 30 percent of the electricity used for cooling; and (3) the average rate for electricity in buildings specified in the MECS is 40 percent less than in CBECS buildings. As a result, Lennox commented that the energy analysis overstates the cost of energy consumption by 10 to 15 percent and has the effect of biasing the life-cycle cost and payback period analyses

so that higher efficiency levels would look more favorable to customers. (Lennox, No. 15 at p. 1)

Overall, while the Department agrees that the analysis would be improved by explicitly considering industrial buildings, it does not believe that this will result in a meaningful change to the LCC results.

First, the tariff data collection and analysis do, in fact, include the effect of units operating on industrial tariffs. Through its research, DOE found that utilities typically do not distinguish between commercial and industrial customers in their tariffs. Instead, utilities assign customers General Service tariffs where customer classes are based on annual peak load. The Department's analysis for this ANOPR included only tariffs for customers taking electrical service at secondary voltage, which represents the largest non-residential customer sub-class. The Department understands that utilities could charge different rates to customers taking service at primary voltage and plans to expand its database to include them, although only about 10 percent of utility customers are on primary voltage tariffs.

Concerning the issue of industrial electricity rates, Lennox cited EIA data on estimates of U.S. electric utility average revenue per kWh as the basis for its statement that the average electricity rate for industrial/manufacturing buildings is 40 percent less than that for commercial buildings. (Lennox, No. 15 at p. 1) The Department's analysis for this ANOPR confirms the Lennox observations and shows that the average revenues per kWh for the commercial and industrial categories are 7.4 cents/kWh and 4.6 cents/kWh, respectively. However, because of ambiguities in the definition of customer type and the weighting of customer electricity bills, the Department believes that 4.6 cents/kWh cannot be a proxy for the marginal price charged to customers in industrial buildings. For example, EIA calculates average electricity rates by dividing total electricity revenues by total sales, which is equivalent to assigning equal weight to each kWh sold and giving much greater weight to large consumers. Since most consumers in the Department's analysis are relatively small, DOE believes that EIA's weighting greatly exaggerates the effect of any difference in the per-kWh average price paid by industrial and commercial customers. Also, the Department believes that the average electricity rate is not appropriate for an LCC analysis because energy savings are priced at marginal rates that are heavily dependent on both the building load and the marginal load for a particular end use. The Department's analysis, as detailed in the LCC section (Chapter 8) of the ANOPR TSD, found no clear dependence of the marginal price on the size of the customer. As a result, the Department sees no reason that customers with large peak loads will automatically see significantly lower marginal prices.

Lennox commented that excluding manufacturing sites from the DOE analysis excludes 30 percent of the energy used for cooling. (Lennox, No. 15 at p. 1) According to Manufacturing Energy Consumption Survey (MECS) of 1998, the industrial contribution to the total of commercial and industrial buildings facility heating, ventilating, and air conditioning energy use is about 30 percent. It is likely that manufacturers ship a much smaller percentage of the commercial unitary air conditioning equipment within the scope of this rulemaking to industrial buildings because, on average

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