Energy Conservation Program for Consumer Products: Supplemental Advance Notice of Proposed Rulemaking Regarding Energy Conservation Standards for Three Types of Consumer Products

SUMMARY: On September 8, 1993, the Department of Energy published an

Advance Notice of Proposed Rulemaking (58 FR 47326) regarding energy

conservation standards for three types of consumer products. In that

Advance Notice, the Department stated that it intended to consider more

explicitly environmental and energy security externalities associated

with alternative energy efficiency standards. Specifically, the

Department expressed the intention to monetize the values of any

externalized benefits (or costs) if a sound analytic basis could be

found.

The purpose of this notice is to solicit public comments on whether

and how the Department should evaluate and consider environmental and

energy security externalities that may be associated with alternative,

candidate energy efficiency standards. It has three specific aims:

First, it requests focused public input on specific questions related

to the development and use of environmental and energy security

externality values. Second, it outlines the Department's preliminary

thinking in several of these issue areas in order to provide

stakeholders with maximum available information. Finally, it solicits

public identification of other issues relevant to the application of

externality values in the context of appliance standards, so that these

may be considered in appliance standards rulemakings.

DATES: Written comments in response to this Supplemental Advance Notice

of Proposed Rulemaking must be received by DOE by December 6, 1994.

Oral views, data, and arguments may be presented at the public

hearing on the issues raised herein to be held in Washington, DC, on

November 17, 1994. Requests to speak at the hearing must be received by

the Department no later than 4 p.m., November 4, 1994. Copies of

statements to be given at the public hearing must be received by the

Department no later than 4 p.m., November 10, 1994.

The length of each presentation is limited to 20 minutes.

ADDRESSES: Written comments, oral statements, requests to speak at the

hearing, and requests for speaker lists are to be submitted to: U.S.

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

EE-431, Energy Conservation Program for Consumer Products, Docket No.

CE-RM-93-801, Room 5E-066, Forrestal Building, 1000 Independence

Avenue, SW., Washington, DC 20585, (202) 586-9127.

The hearing will begin at 9:30 a.m., on November 17, 1994, and will

be held at the U.S. Department of Energy, Forrestal Building, Room 1E-

245, 1000 Independence Avenue SW., Washington, DC.

Copies of the transcript of the public hearing and public comments

received may be read at the DOE Freedom of Information Reading Room,

U.S. Department of Energy, Forrestal Building, Room 1E-190, 1000

Independence Avenue SW., Washington, DC 20585, (202) 586-6020 between

the hours of 8 a.m. and 4 p.m., Monday through Friday, except Federal

holidays.

For more information concerning public participation in this

rulemaking proceeding, see section VI, ``Public Comment Procedures,''

of this notice.

FOR FURTHER INFORMATION CONTACT:

Dr. Barry P. Berlin, U.S. Department of Energy, Office of Energy

Efficiency and Renewable Energy, Forrestal Building, Mail Station EE-

43, 1000 Independence Avenue SW., Washington, DC 20585, (202) 586-9127

Eugene Margolis, Esq., U.S. Department of Energy, Office of General

Counsel, Forrestal Building, Mail Station GC-72, 1000 Independence

Avenue SW., Washington, DC 20585, (202) 586-9507

SUPPLEMENTARY INFORMATION:

I. Introduction

a. Authority

b. Background

c. The potential impact of externalities on the determination of

appliance efficiency standard levels.

d. The structuring of the Department's analysis of

externalities.

II. Crosscutting Issues

a. Relationship to existing environmental regulation and

existing uses of externality values in the resource planning

process.

b. The role of damage-based and cost-based measures in the

development of externality values.

c. Utility pricing and incremental externality values.

III. Environmental Externalities

a. Sulfur dioxide

b. Nitrogen dioxide

c. Carbon dioxide

IV. Energy Security Externalities

V. Review under Executive Order 12866

VI. Public Comment Procedures

a. Participation in rulemaking

b. Written comment procedures

c. Public hearing

I. Introduction

a. Authority

Part B of Title III of the Energy Policy and Conservation Act, Pub.

L. 94-163, as amended by the National Energy Conservation Policy Act,

Pub. L. 95-619, the National Appliance Energy Conservation Act, Pub. L.

100-12, and the National Appliance Energy Conservation Amendments of

1988, Pub. L. 100-357,1 created the Energy Conservation Program

for Consumer Products other than Automobiles (Program). The consumer

products subject to the Program (often referred to hereafter as

``covered products'') are: Refrigerators, refrigerator-freezers, and

freezers; dishwashers; clothes washers; clothes dryers; water heaters;

central air conditioners and central air-conditioning heat pumps;

furnaces; direct heating equipment; television sets; kitchen ranges and

ovens; room air conditioners; fluorescent lamp ballasts; and pool

heaters; as well as any other consumer products classified by the

Secretary of Energy (Secretary) (section 322). To date, the Secretary

has not so classified any additional products.

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\1\Part B of Title III of the Energy Policy and Conservation

Act, as amended by the National Energy Conservation Policy Act, the

National Appliance Energy Conservation Act, and the National

Appliance Energy Conservation Amendments of 1988, is referred to in

this Supplemental Advance Notice of Proposed Rulemaking as the

``Act.'' Part B of Title III is codified at 42 U.S.C. 6291 et seq.

Part B of Title III of the Energy Policy and Conservation Act, as

amended by the National Energy Conservation Policy Act only, is

referred to as the National Energy Conservation Policy Act.

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Under the Act, the Program consists essentially of three parts:

testing, labeling, and mandatory energy conservation standards. DOE, in

consultation with the National Institute of Standards and Technology,

is required to amend or establish new test procedures as appropriate

for each of the covered products (section 323). The purpose of the test

procedures is to provide for test results that reflect the energy

efficiency, energy use, or estimated annual operating costs of each of

the covered products (section 323(b)(3)).

The Federal Trade Commission is required by the Act to prescribe

rules governing the labeling of covered products for which test

procedures have been prescribed by DOE (section 324(a)). These rules

require that each particular model of a covered product bear a label

that indicates its annual operating cost and the range of estimated

annual operating costs for other models of that product class (section

324(c)(1)). At the present time, there are Federal Trade Commission

rules requiring labels for the following products: room air

conditioners, furnaces, clothes washers, dishwashers, water heaters,

freezers, refrigerators and refrigerator-freezers, central air

conditioners and central air-conditioning heat pumps, and fluorescent

lamp ballasts. 44 FR 66475, November 19, 1979; 52 FR 46888, December

10, 1987; and 54 FR 28031, July 5, 1989.

For each of 12 of the covered products, the Act prescribes an

initial Federal energy conservation standard (section 325(b)-(h)). The

Act establishes effective dates for the standards in 1988, 1990, 1992

or 1993, depending on the product, and specifies that the standards are

to be reviewed by DOE within three to ten years, also depending on the

product (Ibid.). After the specified three- to ten-year period, DOE may

promulgate new standards for each product; however, the Secretary may

not prescribe any amended standard that increases the maximum allowable

energy use or decreases the minimum required energy efficiency of a

covered product (section 325(l)(1)).

With regard to television sets, the Act allows DOE to prescribe an

applicable standard. (section 325(i)(3)).

Three products (central air conditioners and central air-

conditioning heat pumps; furnaces; and refrigerators, refrigerator-

freezers and freezers) are the subject of this rulemaking proceeding.

For central air conditioners and central air-conditioning heat pumps,

the Act directs DOE to review each legislated standard for possible

amendment and to issue final rules as follows: for the seasonal energy

efficiency ratio, no later than January 1, 1994, for units manufactured

after January 1, 1999; and for the heating seasonal performance factor,

no later than January 1, 1994, for units manufactured after January 1,

2002. For furnaces, the Act directs DOE to review the previously

established standard for small gas furnaces (54 FR 47916, November 17,

1989), the pending standard for mobile home furnaces, and the

legislated standards for all other covered furnaces for possible

amendment and to issue final rules no later than January 1, 1994, for

units manufactured after January 1, 2002. For refrigerators,

refrigerator-freezers, and freezers, the Act directs DOE to review the

previous final rule, published November 17, 1989, for possible

amendment and to issue final rules no later than November 17, 1994, for

units manufactured after January 1, 1998.

Any new or amended standard is required to be designed so as to

achieve the maximum improvement in energy efficiency that is

technologically feasible and economically justified (section

325(l)(2)(A)).

Section 325(l)(2)(B)(i) provides that before DOE determines whether

an energy conservation standard is economically justified, it must

first solicit comments on the proposed standard. After reviewing

comments on the proposal, DOE must then determine that the benefits of

the standard exceed its burdens based, to the greatest extent

practicable, on a weighing of the following seven factors:

(1) The economic impact of the standard on the manufacturers and on

the consumers of the products subject to such standard;

(2) The savings in operating costs throughout the estimated average

life of the covered product in the type (or class) compared to any

increase in the price, initial charges, or maintenance expenses for the

covered products that are likely to result directly from the imposition

of the standard;

(3) The total projected amount of energy savings likely to result

directly from the imposition of the standard;

(4) Any lessening of the utility or the performance of the covered

products likely to result from the imposition of the standard;

(5) The impact of any lessening of competition, as determined in

writing by the Attorney General, that is likely to result from the

imposition of the standard;

(6) The need for national energy conservation; and

(7) Other factors the Secretary considers relevant.

Section 327 of the Act addresses the effect of Federal rules

concerning testing, labeling, and standards on State laws or

regulations concerning such matters. Generally, all such State laws or

regulations are superseded by the Act (section 327(a)-(c)). Exceptions

to this general rule include the following: (1) State standards

prescribed or enacted before January 8, 1987, and applicable to

appliances produced before January 3, 1988, may remain in effect until

the applicable energy conservation standard begins (section 327(b)(1));

(2) State procurement standards which are more stringent than the

applicable Federal standard (section 327(b)(2) and (e)) and certain

building code requirements for new construction, if certain criteria

are met, are exempt from Federal preemption (sections 327(b)(3) and

(f)(1)-f(4)); (3) State regulations banning constant burning pilot

lights in pool heaters; and (4) State standards for television sets

effective on or after January 1, 1992, may remain in effect in the

absence of a Federal standard for such products (sections 327(b)(6) and

(c)).

The Act directs DOE to publish an Advance Notice of Proposed

Rulemaking in advance of DOE consideration of prescribing a new or

amended standard.

b. Background

In the Advance Notice to which this is a supplement, the Department

indicated its intention more explicitly to consider environmental and

energy security externalities associated with alternative energy

efficiency standards. The Department also noted that it would attempt

to establish monetary values for externalities if a sound analytical

basis could be found for doing so.\2\ If the Department finds that a

sound analytical basis exists, externalities may be incorporated in its

analysis of the net national benefits of alternative levels for the

appliance efficiency standards covered by this rulemaking.

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\2\Energy Conservation Program for Consumer Products, Advance

Notice of Proposed Rulemaking Regarding Energy Conservation

Standards for Three Types of Consumer Products, 58 FR 47326, 47333,

September 8, 1993.

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Externalities arise when the production or consumption of goods and

services imposes costs or confers benefits on members of society

external to the transaction that are not reflected in market prices.

Environmental externalities reflect the net national reductions in the

adverse health effects or other damages associated with a reduction in

emissions of pollutants due to reductions in energy use as appliance

efficiency is increased. Energy security externalities reflect the net

national reductions in energy security vulnerability associated with

reduced reliance on external energy sources.

Many comments received in response to an earlier ANOPR in the

appliance standards program3 indicated a high level of public

interest in this issue.

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\3\Energy Conservation Program for Consumer Products; Advance

Notice of Proposed Rulemaking Regarding Energy Conservation

Standards for Nine Types of Consumer Products, 55 FR 39624,

September 28, 1990.

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The American Council for an Energy Efficient Economy

(ACEEE) suggested that DOE account explicitly for environmental costs

in its economic analysis. (ACEEE, No. 6 at 6).\4\ In addition, Public

Citizen stated that the Department should include in its analyses all

external costs and benefits, e.g., environmental quality, national

security, and reduced energy imports. (Public Citizen, No. 7 at 4).

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\4\In the Appliance Standards rulemaking record, comments are

assigned docket numbers; the second number represents the page

number from the submittal where the issue discussed may be found.

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The Sierra Club stated that the difference between

``Consumer Analysis'' and ``Life Cycle Cost Analysis'' is difficult to

ascertain. They urged DOE to evaluate, as part of the Consumer

Analysis: (a) Environmental external costs; and (b) national security

and balance of payments costs of increased/decreased oil consumption.

(Sierra Club, No. 43 at 2).

The Ohio Office of the Consumers Council (OOCC) said that

the consumer and utility analyses should include monetization of

externalities (environmental and security). Environmental externalities

include sulfur oxides, carbon monoxide, carbon dioxide, nitrogen

oxides, particulate, and other air, water, and land use impacts of

energy production and use. Such considerations should be consistent

with current trends in state utility regulations. (OOCC, No. 60 at 2).

Recognizing that the specification of monetary values for such

environmental and energy security externalities is a complex analytical

effort, the Department is now supplementing its original Advance Notice

for the three-product rulemaking. This supplement provides an

indication of the Department's intent in this area, identifies a range

of specific issues for public comment, and solicits identification of

additional relevant issues.

As indicated in the 1993 Advance Notice, the Department will

attempt to develop analytically sound estimates of the values of energy

and environmental externalities. Provided that such values can be

calculated, the Department intends to use them in the analyses

supporting the proposed and final rules establishing the standards for

the products covered by this notice. Estimates of such externalities

would be considered in conjunction with the estimates of the total net

national benefits (or costs) of the standard, rather than in the

analysis of consumer life-cycle costs. The life-cycle cost analysis is

intended to estimate the actual cost impacts on consumers. So long as

externalities are not internalized, individual consumers would not

incur these benefits (or costs) directly.

The Department believes that the relationship between price and

marginal cost, including the marginal cost of emission controls, bears

significantly on the size of the incremental adjustments to be made in

the analysis in order to incorporate environmental and energy security

externalities into the assessment of net national benefits. The

Department will consider this relationship in determining the monetary

values (if any) that should be placed on the external or marginal

environmental and energy benefits likely to result from appliance

efficiency standards. The consideration of marginal costs in this

context also raises the question of whether the Department should use

marginal electricity prices, rather than estimates of average retail

prices, for the calculation of net national benefits. The Department

invites comments on these issues.

c. The potential impact of externalities on the determination of

appliance efficiency standard levels.

As noted above, the net national benefits estimated by the

Department to result from appliance efficiency standards have, in the

past, excluded environmental and energy security externalities. The

Department recognizes that the approach taken for including these

benefits in economic analyses of alternative appliance standards may

vary, depending on issues and variables that are specific to each

standard under consideration.

Any estimates of environmental externalities would reflect ranges

of uncertainties and be considered with other national benefits

associated with appliance efficiency standards. The consideration of

externality values may or may not influence the appliance efficiency

standards selected for one or more appliances, depending on the

quantitative externality estimates and their relationship to the costs

of higher efficiency and other elements of the analysis.

d. The structure of the Department's analysis.

The Department intends to adopt a consistent approach in the

treatment of externalities and the development of externality values

throughout these rulemakings. Therefore, this analysis starts with

consideration of crosscutting issues that are likely to bear on all

standards and all types of externalities. This analysis of crosscutting

questions provides a framework for an analysis specific to each type of

externality.

The following discussion is framed around a series of focused

issues for public comment. For convenience, the main issues addressed

are numbered consecutively throughout the entire notice. The numbered

set provides a convenient summary of the Department's current view

regarding the issues that bear on the development and use of

externality values in the appliance standards analysis.

Issues related to toxins, solid waste, and discharges affecting

waste quality are not discussed in detail in this notice. However, the

Department invites comment on the potential importance of these

emissions pathways to the determination of externality values. Comments

that are structured so as to address the same generic and externality-

specific issues raised in this notice, while also identifying other

issues unique to particular pollutants or media, would be particularly

helpful.

Finally, it is worth emphasizing that the Department's current

positions on many issues outlined below is not yet firm. Responses to

issues in this supplemental Advanced Notice of Proposed Rulemaking

could substantially alter the Department's approach as the rulemaking

progresses. Parties are also encouraged to raise, and comment on,

additional issues related to evaluating externalities and the use of

such estimates in determining appliance standard levels.

II. Crosscutting Issues

a. Relationship to Existing Environmental Regulation and Existing Uses

of Externality Values in the Resource Planning Process

Issue I: The relationship between existing environmental

regulations or the use of externality values in the resource planning

process and the use of externality values in setting appliance

standards.

Based on its current information, the Department does not believe

that existing programs of environmental regulation or existing uses of

externality adders in the resource planning process preclude the use of

externality values in analyses considered in setting appliance

standards.

The relationship between externality adders and environmental

regulation has been extensively studied. One key finding is that proper

use of externality adders does not turn on whether there is

``overcontrol'' or ``undercontrol'' in existing environmental

regulation. Rather, taking the environmental control regime as given,

the use of externality adders can improve net national welfare by

moving ``private'' decisionmaking within the existing regulatory regime

closer to ``social'' decisionmaking. For example, even if there is

``overcontrol'', it is still desirable that the external impacts of

differences in residual damage resulting from differing emissions

levels associated with alternative energy supply and end-use efficiency

options be reflected in private decision-making.

Based on its current understanding, the Department also believes

that existing uses of externality values in the resource planning

process do not present a barrier to the use of externality values in

setting appliance standards. The former are largely focused on bringing

social costing considerations into capacity planning decisions, while

the latter is focused on reducing marginal electricity demand. The

Department also notes that the use of externality values in the

capacity planning process is far from universal. According to a recent

report of the Consumer Energy Council of America Research Foundation

(July 1993) only seven States and the Bonneville Power Administration

use quantitative externality values.

Issue 2: The impact if any, of existing environmental regulations

on the determination of externality values for use in the appliance

standards analysis.

Based on its current understanding, the Department believes that

the emission-reducing effects of existing programs will affect

externality values in two distinct ways.

First, the form of current environmental regulations can influence

the net emissions impact of changes in energy use associated with

alternative appliance standards. This net emissions impact reflects

both the direct impact of changes in energy use--emissions associated

with changes in primary energy either directly or to generate

additional electricity--and indirect impacts that may arise due to

emission caps, offset requirements, non-attainment rules, or other

features of existing regulations.

For example, if regulation takes a form that fully ``internalizes''

environmental externalities on all of the relevant margins, including,

in the case of electricity, not only utility decisions related to

capacity, but those related to dispatch and additions to capacity, as

well as consumer demand decisions, the role for a supplemental

externality value is difficult to identify. An emission tax equal to

marginal damage that was reflected in the market price is one example

of a policy instrument (albeit not one in widespread use) that would

align private and social decision-making on all three margins.

Second, current regulatory programs, whatever their form, have a

significant influence on ambient concentrations of pollutants. In

general, the marginal damage associated with changes in net emissions

due to alternative appliance standards is sensitive to base level of

pollutant loading.

The Department notes that existing programs, notably implementation

of the Clean Air Act Amendments of 1990, could result in significant

changes in emissions loadings, and therefore change marginal damages,

before the standards promulgated pursuant to this rulemaking take

effect. Economic growth over time would, in itself, tend to have the

opposite effect. The Department is currently considering how best to

assess the marginal damages that should be associated with any

variation in emissions due to alternative appliance standards under

these changing circumstances.

Issue 3: The geographic scope of environmental externalities that

will be considered within the analysis.

Environmental externalities associated with energy-related

emissions arise on all geographic scales. For example, attainment of

ambient air quality standards for criteria pollutants is assessed at

the level of an air quality control region, generally a county or

regional metropolitan area airshed. Concentrations of the criteria

pollutants Nitrous Oxide (NOX), Sulfur Oxide (SOX), and

ozone, the latter for which non-attainment remains a widespread

problem, may be influenced by emissions of Volatile Organic Compounds

(VOCs), NOX and SOX from the energy sector.

Acid precipitation, for which NOX and SOX emissions from

the utility sector are important precursors, is a pollution issue in

which regional transport plays a major role. In some parts of the

country, the same is also true for smog.

Some issues involving energy-related emissions can even transcend

national boundaries. Increasing attention has turned to the possibility

of climate change due to increasing atmospheric concentrations of

greenhouse gas (GHG) emissions. Carbon dioxide, primarily from the

combustion of fossil fuels, is the single most important greenhouse

gas. Because atmospheric concentrations are driven by global emissions

trends, concern with greenhouse gas emissions is truly global in

nature.

The Department believes that emissions impacts on all geographic

scales are relevant to the development of externality values for use in

the context of this rulemaking. However, because appliance efficiency

standards are implemented at the national level, environmental

externalities should be evaluated from a net national perspective.

Thus, for example, based on our current understanding, if variation in

a standard increases environmental damage in some areas while reducing

it in others, only the change in net damage to the nation would be

relevant to the comparison of alternative standards.

b. The Role of Damage-based and Cost-based Measures

Issue 4: The role of damage-based and cost-based measures in the

development of externality values.

The Department believes that both types of measures may play a role

in estimating the net national benefits of selecting alternative energy

efficiency standards. The Department does not view itself as facing a

choice between damage-based and cost-based measures; rather, different

measures are applicable in different cases. Three different cases are

described below.

Regardless of which case applies, in all cases the Department's aim

is to use economic analyses to quantify the change in net national

benefits attributable to different appliance efficiency standards.

Case 1: Changes in the efficiency standard selected will change

national emission levels.

In this case, selecting a more energy-efficient standard will

reduce emissions into the environment. The Department believes that

damage-based measures are the preferred means of valuing the external

effects of these reductions. Damaged-based estimates are a direct

measure of the external effect of variations in emissions levels.

Reductions in damage due to reduced emissions could encompass reduced

human morbidity or illness, reduced property damage, and/or improved

environmental resources.

The Department recognizes that, for many pollutants, the literature

on the damages caused by additional emissions is not well developed.

When information on damages is lacking, the Department may consider the

use of information related to the costs of emissions reduction in its

effort to values externalities. The rationale for this approach is that

control costs convey information about social willingness-to-pay for

emissions reduction. If legislative and regulatory actions to limit

emissions were economically rational (i.e., control measures were

adopted in strictly increasing order of marginal cost, stopping at the

point where marginal control cost and marginal benefits were equated),

marginal control costs would provide an indirect measure of marginal

damages. It is generally recognized, however, that actual regulatory

practice often diverges significantly from these conditions. Therefore,

the Department proposes to consider the use of control cost information

to estimate externality values in situations where changes in

efficiency standards affect emission levels only in those cases where

direct damage information is unavailable.

Case 2: The pollutant is subject to a binding emissions cap and

changes in the efficiency standard selected will not change national

emission levels.

With a binding, national emissions cap in place, the aggregate

level of emissions will not be affected by the appliance efficiency

standard selected. Because of the cap, there is no net change in

emissions and, therefore, there are usually no environmental

externalities.

Although in the case of an emissions cap there is usually no net

environmental change on a national level, and therefore no external

environmental effect, the level of appliance efficiency standard

selected may affect the net national cost of meeting the emissions cap.

For example, such a situation could arise from the need to meet

progress requirements under the Clean Air Act Amendments of 1990. In

such a case, adoption of a less stringent efficiency standard could

trigger adjustments in the State Implementation Plan to impose

additional controls on other sources to compensate for higher emissions

from electricity generation or fuel combustion. If a more stringent

appliance standard were adopted, States might avoid the imposition of

additional controls on other parties.

The Department seeks comments on whether and how the net change in

environmental control costs attributable to variation across

alternative appliance standards should be included as an external

effect. In this regard, DOE notes that the effect on control costs of

lower energy demand resulting from a more stringent appliance standard

will vary according to the structure of pre-existing regulatory

programs. In the case of sulfur dioxide, for example, control

obligations of each emission source will remain fixed, but total

compliance costs will fall. In the case of NOX and of VOCs,

however, lower energy demand could reduce the extent to which State

Implementation Plans must ratchet down control requirements or expand

the set of sources subject to emissions controls. The Department

solicits comment as to whether it is appropriate to differentiate these

two situations, and how to calculate appropriate values of net external

cost savings.

It is worth noting that a binding national emissions cap may become

non-binding over time, for example, through technology improvements.

Case 3: The pollutant is subject to regional emission caps and

changes in the efficiency standard selected will change emission levels

in some areas of the country, but not others.

For situations that fall into this category, DOE would propose to

use a combination of the previous two cases for computing external

effects. Comments on how to combine these two approaches would be

particularly helpful.

Issue 5: The use of cost information to provide a basis for

determining society's willingness-to-pay for emissions reduction.

As noted above, the preferred method for computing damages from a

change in emissions is to rely on direct information from damage-based

studies. When damage-based studies are not available, however, the

Department will consider using control cost information to develop

indirect estimates of externality values.

The Department notes that existing environmental programs may

embody an extremely wide range of marginal costs for emission

reductions for the same pollutant. Costs within existing programs may

vary by an order of magnitude or more across regions, and even across

sources in a given region. For example, some areas have failed to

implement advanced inspection and maintenance programs costing $100 per

ton, while choosing to implement other standards to reduce the same

pollutants costing $3,000 to $10,000 per ton. One issue is whether the

cost of the most expensive option adopted, the least expensive option

rejected, or some other value between the two should be considered as

most representative of revealed societal willingness-to-pay for an

emissions reduction.

Externality values used in state resource planning processes may

provide another expression of revealed willingness-to-pay for emissions

reductions. The Department recognizes that the values used in resource

planning processes are not actually ``paid'' by either consumers or

utilities. However, the use of these values appears to be directly

analogous to that contemplated by the Department in the setting of

appliance standards. As noted above, only seven states applied monetary

externality values as of July 1993. Other jurisdictions applied

qualitative externality values or no such values at all. If externality

values used by state regulators were to be considered as an expression

of willingness-to-pay, the Department would need to develop a national

average measure that fairly characterizes a widely disparate set of

policies across the fifty states. The Department now believes that any

such average should reflect differences in the size of residential

electricity markets across states. We solicit comment and suggestions

regarding how averaging across different policy types could be

implemented.

Another issue related to the possible use of externality values

from the resource planning process is that some states have applied

them in a manner that allows for the application of offsets for some or

all pollutants. With offsets, sources can reduce the quantity of

emissions to which externality values are applied by securing cost-

effective emissions reductions (or emissions sequestration), often at a

cost that is far below the official externality value. In such cases,

the product of actual emissions and the official externality value

would significantly overstate the ``effective'' externality adjustment

actually used in the planning process. The Department is considering

how, if at all, offset policies in the application of ``official''

externality values in the resource planning process bear on the

relevance of these values to the setting of appliance standards, where

offset opportunities would not be available.

Issue 6: The role of damage assessments implicit in official

decisions, such as the setting of ambient air quality standards on

damage estimates used in the appliance standards analysis.

The Department notes that the Environmental Protection Agency (EPA)

and other Federal agencies have the statutory responsibility to

establish standards that reflect their assessment of damages from

environmental externalities. For example, EPA is required to set

primary ambient air quality standards at levels that protect the public

health, including the health of sensitive populations, with an adequate

margin of safety.

On the one hand, the Department could rely on existing standards in

determining that emissions that do not contribute to a standards

violation do not impact human health in any way. Such reliance would

not, of course, preclude the finding of other types of environmental

externalities, such as ecosystem or crop damages, for emissions that do

not contribute to standards violations.

Alternatively, the Department, recognizing that appliance standards

promulgated today will have their primary effect five to ten years into

the future, and that processes for setting environmental standards

often engender significant lags, might wish to consider studies

pointing to adverse health effects at concentrations below currently

applicable standards in assessing health damages. How the Department

could decide which evidence is credible and relevant without

duplicating the review process for setting environmental standards,

which is clearly infeasible in terms of resource requirements, is an

open issue.

C. Utility Pricing and Incremental Externality Values

Issue 7: The impact of the utility sector pricing practices on the

use of externality adders in the appliance standards analysis.

State utility regulatory commissions, motivated by the historical

natural monopoly features of electric and natural gas production,

transportation, and distribution systems (although production systems

are now increasingly seen as allowing for competition), generally set

regulated prices for electricity based on embedded rather than marginal

cost. Based on its present understanding, the Department believes that

the relationship between price and marginal cost can have a major

bearing on the application of externality values in setting appliance

standards.

Some background is helpful. In the absence of externalities, the

theoretical economic conditions for social welfare maximization are met

when price equals marginal cost (a pricing condition enforced by

competition in perfectly competitive industries) and each consumer sets

demand to equate this marginal cost with his/her own marginal private

benefit (or marginal utility). With externalities, this private market

solution diverges from the necessary conditions for a social optimum

because external costs imposed on others are not reflected in decision-

making. An appropriate externality tax or adder can move private

decision-making towards the social optimum.

Within this context, consideration of the effects of a gap between

price and marginal cost on the size of incremental externality values

is straightforward. Suppose, for example, that the price charged to

end-users exceeds the marginal private cost of producing and delivering

electricity (or natural gas) to them. Then, in terms of private

decision-making, the positive gap by which price exceeds marginal cost

would have the same effect as a tax in reducing electricity consumption

(and, implicitly, the emissions and the environmental externalities

associated with production to meet incremental demand).

Because a positive difference between price and marginal cost

functions as if it were a tax, it bears significantly on the size of

the additional externality adder the Department could justifiably

employ when calculating the net national benefit of alternative

standards. For example, if the price of a marginal kilowatt were to

exceed its marginal cost by an amount equal to the value of the

marginal externality damage, the pricing distortion in utility markets

and the externality would together create a situation where utility-

customer decision-making would satisfy the marginal conditions for

social optimality without any further adjustments. An additional

externality adder in this situation would move away from the alignment

of the private and social decision-making problems that motivates

concern with externalities in the first place. Based on this reasoning,

DOE believes that application of an additional externality adder in any

situation where the price of a marginal kilowatt exceeds marginal cost

by more than the value of the marginal externality damage would be

inconsistent with the objective of maximizing net national benefits. In

fact, for this latter case, one can envision arguments in favor of

applying ``subtractors'' to utility rates used in a calculation of net

national benefits.

The Department recognizes that real-world utility pricing systems

are quite complex. Many systems employ a fixed connection or service

charge, together with prices to meet incremental demand that may vary

with the class of service, time of day, or level of demand within a

billing period. The analysis that supports the appliance standards

rulemakings does not reflect this complexity. Rather, a national

average is used to represent current and forecasted consumer prices.

Based on its present information, the Department believes that the

difference between this ``analysis price'' and marginal cost, rather

than the difference between some true marginal price and marginal cost,

is relevant to establishing the gap between price and cost that bears

on the incorporation of incremental externality values in the

Department's analysis. The Department seeks comment on alternatives to

national averages that would better reflect local and regional

differences in consumer prices, as well as the other sources of price

variation mentioned above.

Finally, in some circumstances, the price facing end-users may be

less than marginal cost. The same principles would apply. Even ignoring

externalities, prices below marginal cost encourage demand whose value

to users is less than the cost of production to meet it. To correct

this situation and at the same time reflect externalities that may also

be present, it would be necessary to apply adders larger than the

marginal damage from emissions associated with increased energy demand.

Given the above, the relationship between price and marginal cost

is clearly central to the determination of externality values for use

in setting appliance standards.

Issue 8: Evidence bearing on the relationship between the end-user

price of energy and marginal cost.

First, the Department recognizes that the price/marginal cost

relationship can vary significantly across utilities. Given the

national applicability of appliance standards, we will seek to estimate

a price/marginal cost relationship that characterizes national average

conditions. The rationale here is identical to that for focusing on

national average emission impacts.

Second, the relationship between price and marginal cost may vary

across appliances because of the differences in load shapes. For

example, refrigerators that run continuously might be considered as

contributing to ``base load'', while air conditioners, which are used

most intensively on hot afternoons, contribute primarily to ``peak

load.'' The Department solicits comment on the need to develop

information on the relationship between price and marginal cost,

relevant to each individual appliance.

Finally, there are several different marginal cost concepts. Short

run marginal cost may, in systems with excess capacity, include only

fuel and incremental fuel and operation and maintenance costs. A long-

run marginal cost concept would also include the capital costs of

generating facilities. To the extent that transmission and distribution

infrastructure costs also vary with marginal demand, these too can be

included in marginal cost.

The Department has not yet developed quantitative estimates of the

relationship between price and marginal cost, or determined which

marginal cost concept is relevant to the question of externality

adders. Evidence that would be relevant to such a quantification

includes:

(1) The gap between prices to industrial and residential consumers.

Assuming that PUC's do not permit sales to industrial users at prices

below marginal cost (to do so would force residential and commercial

customers to pick up 100 percent of system fixed costs plus a portion

of variable costs incurred for utility customers), the price of power

to industrial customers with an adjustment for any difference in

marginal transmission and distribution costs between the residential

and industrial classes, could be taken as an upper bound on marginal

supply costs to residential customers.

The Energy Information Administration (EIA) reported national

average electricity rates in 1992 for residential and industrial

consumers of $0.082 per kilowatt hour (kWh) and $0.048 per kilowatt

hour (kWh), respectively. For natural gas, EIA reports average rates in

1992 of $5.87 per thousand cubic feet and $2.82 per thousand cubic feet

for residential and industrial consumers, respectively.\5\

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\5\U.S. Department of Energy, Energy Information Administration,

Monthly Energy Review, March 1993, Tables 9.9 and 9.11.

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(2) The capital and operating cost of incremental capacity. If

meeting marginal demand requires new capacity, the relevant marginal

cost should include capacity cost. Current estimates of fully-loaded

marginal costs for natural gas combined cycle plants or pulverized coal

plants are $0.035/kwh to $0.045/kwh. Again, marginal transmission and

distribution costs, if any, would also need to be considered.

(3) The marginal cost of dispatching the least efficient capacity

in systems with excess capacity. One insight into these costs can be

gained by examining the operation and maintenance costs, on a per

kilowatt basis, of combustion turbines used for peaking purposes on

some systems. Another perspective may be provided by the cost per

kilowatt hour of peak-shaving, demand-side management programs approved

by various public utility regulatory commissions. Public comments

providing information related to these measurement approaches and their

qualification would be especially helpful.

The Department solicits comment on the relevance of the categories

of evidence cited above, as well as other types of evidence, in

establishing a reasoned estimate of the relationship between price and

marginal cost.

III. Environmental Externalities

Issue 9: The types of environmental emissions from the energy

sector to be included in the Department's consideration of the use of

externality values in the context of appliance standards.

In this section, the Department builds on the crosscutting analysis

presented above to outline an approach for analysis of three types of

energy-related emissions--sulfur oxides (SOX), nitrous oxides

(NOX), and carbon dioxide (CO2). The focus on these three

emission categories reflects a similar focus in recent U.S. legislation

and international agreements, most notably the Clean Air Act Amendments

of 1990 and the Framework Convention on Climate Change.

The Department recognizes that there are other types of emissions,

such as particulates, carbon monoxide, air toxins, volatile organic

compounds, solid wastes, and water discharges associated with energy

use. Moreover, consideration of the entire fuel cycle may reveal

additional environmental externalities at the extraction or

transportation stages of the cycle. The Department welcomes comment and

evidence regarding the importance of other types of externalities that

may arise through these and other emissions pathways that are not

discussed below. Comments that are structured so as to address the same

generic- and externality- specific issues raised in this notice, while

also identifying other issues unique to particular pollutants or media,

would be particularly helpful. Each of the discussions of the

individual pollutants addresses a common set of issues as well as

points specific to that emissions category. The common issues are:

Issue 10: The local, regional, national, and global externalities

associated with each type of emission.

Issue 11: The impact of a change in appliance efficiency standards

on emissions, taking account of both direct impacts and the indirect

effects arising from existing regulatory structures.

Issue 12: Evidence regarding the impact of change in emissions on

the level of environmental damage to external parties. Alternatively,

if damage cannot be estimated directly, evidence regarding cost-based

measures available as surrogates.

Issue 13: The impact and relevance of a change in appliance

efficiency standards on the emission control obligations of external

parties.

Finally, it is important to note that the relationship between

price and marginal cost discussed as a crosscutting issue will be

relevant to the determination of whether an application of an

incremental externality value is appropriate in those cases where an

environmental or energy security externality is identified.

a. Sulfur Dioxide

Sulfur dioxide emissions are implicated in environmental effects at

the local, regional, and global level. At the local level, sulfur

dioxide is one of the criteria pollutants for which ambient air quality

standards are established under the Clean Air Act. At the regional

level, sulfur dioxide is a precursor of acid rain, an issue addressed

in Title IV of the 1990 Clean Air Act Amendments. At the global level,

the 1992 Supplementary Scientific Assessment of Intergovernmental Panel

on Climate Change identifies sulfate aerosols as a potentially

significant offset to greenhouse warming that may be caused by

increasing atmospheric concentrations of greenhouse gases.

Based on its present information, the Department believes that

attention in this rulemaking should focus on externalities related to

the acid precipitation pathway, and therefore on the regional effects.

On the local level, there is already widespread attainment with ambient

air quality standards for sulfur dioxide. On the global level, the

effect of sulfur dioxide emissions as an offset to greenhouse warming

remains speculative, and its value may be undercut by its extremely

short duration relative to warming from greenhouse gases.

The acid precipitation issue is addressed in Title IV of the Clean

Air Act Amendments of 1990. Beginning in the year 2000, its provisions

implement a national cap on utility sulfur dioxide emissions of 8.9

million tons together with a system of tradable allowances for

allocating the burden of emissions reduction in a cost-effective

manner. The cap reflects a reduction of roughly 50 percent from 1980

emission levels.

The Department expects that the national emissions cap will be

binding and, concomitantly, that allowance prices will be positive. The

Department notes that allowance transactions at positive prices are

being recorded in increasing number, and there are no known projections

that suggest a non-binding cap.

Under a binding cap, reductions in SO2 emissions at one

location due to reductions in electricity demand would free up

emissions allowances, the use of which could increase allowable

emissions at other locations, unless allowances were ``banked''. With

no change in overall emissions, the Department has no basis for

assuming that alternative appliance standards would cause any change in

environmental damage levels. However, a net national environmental

externality benefit could occur if the pattern of emissions changes

across alternative standards is one that systematically reallocates

emissions from locations where they inflict low marginal damage to

locations where they inflict high marginal damage. Based on its current

information, the Department would assume that emissions reallocation

from reduced electricity demand is environmentally neutral.

If the Department were to determine that emissions reallocation was

not environmentally neutral, the development of damage estimates would

become an issue. In this case, the Department would rely heavily on the

current criteria document for sulfur dioxide, and on the report of the

recent National Acid Precipitation Assessment Program (NAPAP), a 10-

year, $500 Million assessment effort. The Department welcomes comment

on these and other potential sources of damage information.

The Department also solicits comment on the possibility that the

current binding national cap on SO2 emissions will become non-

binding during the time period affected by appliance standards as a

result of technology improvements or cost reduction.

With regard to economic externalities, the Department notes that

changes in electricity demand could affect the market price of

allowances. A change in allowance prices might affect the manner in

which external parties elect to meet their control obligations, but

would not affect the obligations themselves.

b. Nitrogen Dioxides

Nitrogen oxide (NOX) emissions are implicated in environmental

effects at both the local and regional levels. NOX is a precursor

of tropospheric (ground-level) ozone, one of the Clean Air Act criteria

pollutants. NOX is also an acid rain precursor. Finally, changes

in tropospheric ozone levels, by changing total column ozone, may

affect the amount of ultraviolet-B (UVB) radiation reaching the earth's

surface.

Based on its present information, the Department believes that

attention in this rulemaking should address all three of these

externality pathways. According to EPA (1993), the primary ambient air

quality standard for tropospheric ozone is violated more than one time

per year in areas where 66 million Americans live. As noted in the

discussion of sulfur dioxide, acid precipitation is another issue of

significant national and international concern. The potential

importance of the UVB issue is underlined by the fact that concern

surrounding the potential damages from a projected increase in UVB at

the earth's surface was the major reason motivating the phaseout of

chlorofluorocarbons (CFC's), required by the Montreal Protocol to the

Vienna Convention and the CAAA of 1990.

With respect to acid precipitation, the Department would consider

the same factors and information sources as outlined above for sulfur

dioxide. However, the regulatory structure for NOX emissions

outlined in Title IV of the Clean Air Act Amendments of 1990 is built

around low NOX burner technology requirements rather than an

emissions cap. Therefore, the Department would not presume that

national NOX emissions were insensitive to changes in electricity

demand.

With respect to the ambient air quality standards, the Department

believes that three main issues must be considered.

The regulatory structure and damages from emissions

changes in attainment areas (those areas not violating the ambient air

quality standards)

The regulatory structure and damages from emissions

changes in non-attainment areas.

The impact of NOX transport from outside of an area

on ambient air quality conditions in non-attainment areas.

With respect to the first and second points, the Department notes

that roughly one-third of the nation's coal-fired power plants and one-

half of its gas- and oil-fired power plants are located in non-

attainment areas. These are the types of generating plants that,

together with non-utility stationary sources and vehicles, are the

sources of NOX emissions.

Attainment areas: Abstracting from the issue of transport into non-

attainment areas, the Department would rely heavily on the information

underlying the existing ambient standards for tropospheric ozone. These

standards were issued in early 1993. However, at the time the standards

were issued, EPA noted that new studies, done after finalization of the

criteria document on which the standards were based, might suggest

health effects at lower concentration levels. The Department welcomes

comment on whether and how these newer studies, which have yet to be

formally evaluated by the EPA, should be reflected in a damage

assessment. The Department's damage assessment will also consider non-

health impacts drawing on studies included in the criteria document

underlying the latest standards.

Non-attainment areas: In non-attainment areas, reductions in

electricity demand affect the level of NOX emissions in several

ways. Any new generating plants in ozone non-attainment areas that are

needed to meet growing electricity demand would, under the regulatory

structure of Title I of the Clean Air Act, be required to fully offset

their NOX emissions before they could begin operation.

Alternatively, changes in electricity demand could simply affect the

operation rate of existing plants, without triggering offset

requirements for the operating company. In this latter case, the

initial effect would be an increase in emissions. However, Title I also

specifies milestones, or progress requirements, for emissions reduction

in non-attainment areas. These requirements are applicable to NOX

in serious and severe non-attainment areas. If these progress

requirements were binding, a change in the level of emissions from the

operation of existing power plants could affect the level of reductions

that State Implementation Plans would require from other types of

sources in order to meet these requirements. From this perspective, a

change in appliance efficiency standards could change the control

obligations of parties unrelated to appliance purchase decisions.

To develop its analysis on a national scale, DOE will try to

develop information regarding the extent to which each of the cases

described above characterizes prevailing conditions. In order to

develop an acceptable basis for estimating the external benefits

associated with NOX emission reductions in both attainment and

non-attainment areas, DOE will be seeking more information on the

likely marginal effects of appliance standards on net emissions and the

marginal control costs required to meet non-attainment area progress

requirements. DOE will also be seeking better data on how damages and

control costs might vary seasonally, which may increase or decrease the

estimated benefits of particular types of appliance efficiency

standards.

In addition, DOE recognizes the concern that transport of NOX

emissions from attainment areas may affect ozone concentrations in non-

attainment areas, even though they do not trigger offsets either

through the new source program or via progress requirements. DOE

welcomes information and analysis regarding the importance of this

issue for a national evaluation of externality damage, and recommended

approaches for incorporating it into the quantitative analysis.

Finally, the effect of increased tropospheric ozone concentrations

on the level of UVB at the surface, represents a potentially favorable

externality. The Department welcomes comment on the inclusion of this

pathway in the externality analysis, and on the use of information

developed in the context of various rulemakings and assessments related

to the impacts of stratospheric ozone depletion to estimate marginal

damages from reduced ozone.

c. Carbon Dioxide

The Department believes that the potential for climate change due

to an enhanced greenhouse effect, a global scale issue, is the only

relevant externality pathway for carbon dioxide emissions. Clearly,

this is a high priority issue. In 1992, the world community completed

negotiations for a Framework Convention on Climate Change. This

convention has already been signed by 152 nations and should achieve a

sufficient number of ramifications to enter into force by the spring of

1994.

Within the United States, President Clinton and Vice-President Gore

have both identified the threat of climate change as the environmental

issue having the highest priority for the nation and the world. The

President, on Earth Day 1993, announced our nation's commitment to

return its emissions of greenhouse gases to their 1990 levels by the

year 2000. On October 19, 1993, the Administration released a Climate

Change Action Plan outlining a set of specific programs to achieve that

objective. However, unlike SOX and NOX emissions, energy-

related emissions of carbon dioxide are not presently subject to formal

regulatory requirements that go beyond emissions monitoring and

reporting. The Administration's action plan does not include proposals

for any such requirements.

Carbon dioxide emissions in the energy sector are proportionally

related to the level of use and type of fossil fuel. For electricity,

the Department intends to estimate the effect of a change in

electricity use on carbon dioxide by evaluating the ``average'' fuel

mix used to supply marginal changes in electricity demand throughout

the country. The Department welcomes comments and suggestions regarding

these calculations. While the absence of existing regulatory programs

and the simple relationships between primary energy use and emissions

simplify the externality analysis compared to that applicable to

SOX and NOX, the evaluation of marginal damages is far more

challenging for CO2. The effect of domestic emissions levels on

changes in the global emissions trends that determine atmospheric

concentrations of CO2, the effect of these concentrations on the

both the global climate and the U.S. climate, and the timing of any

such effects are all highly uncertain. The effects of changes in

climate on human activities and unmanaged ecosystems are even more

uncertain.

Given the difficulties in estimating the impacts of global climate

change, which is a necessary preliminary step in estimating marginal

damages from emissions changes, only the most rudimentary calculations

have been made. Studies made by the EPA (1989), Nordhaus (1991 and

1992) and Cline (1992) are particularly noteworthy. These authors

candidly admit the preliminary and often speculative nature of their

calculations, and their inability to estimate impacts for important

categories of damages, such as impacts on unmanaged ecosystems.

Based on its present evaluation, the Department believes that the

existing literature does not provide a sufficient basis for developing

estimates of marginal damage. Therefore, the Department is considering

using revealed willingness-to-pay for emissions reductions as a proxy

to represent the social value of emissions reduction.

The October 1993 Climate Change Action Plan represents the most

aggressive national policy statement on emissions reductions to date.

The major portion of energy-related actions in the plan aim to increase

end-use efficiency. These programs are generally voluntary in nature,

and rely on the attractive economics of the targeted energy-efficiency

improvements to attract public participation. It is projected that

reprogramming federal expenditures of $1.9 billion into these areas

will encourage private investments of approximately $61 billion

(undiscounted 1991 dollars) through the end of the decade. These

investments are projected to reduce energy costs (undiscounted 1991

dollars) by $60 billion through the end of the decade, and by an

additional $207 billion though 2010.

Because the plan calls only for investments in efficiency projects

that have a high rate of return, and generally does not mandate these

investments in the event that private parties judge them to be

unattractive, it should not impose any net costs on the private sector.

The exclusion of measures that would impose net costs on the private

sector could itself suggest that, at present, the willingness to pay

for emission reductions is at or near zero. The Department notes,

however, that the plan reflects only those actions taken to achieve a

near-term objective. The President and Vice-President have noted that

the plan is only a first step. Moreover, it is not clear what

amendments or protocols may be made to the Climate Convention, and on

what timescale. For these reasons, an evaluation of willingness-to-pay

implicit in the action plan may not provide an adequate basis for

evaluating the longer term willingness-to-pay for sustained emissions

reduction. The Department notes that estimates of the long-run cost of

emissions reduction varies widely, with bottom-up engineering models

generally providing much lower cost estimates than top-down economic

models.

The Department also notes that utility regulators in several states

employ quantitative externality values for carbon dioxide in the

resource planning process. The Department invites comments on the

relevance of these values to the present rulemaking. Comments that

provide a basis for determining how a national average ``effective''

value might be calculated, taking account of states with and without

CO2 externality values and varying offset provisions, would be

especially helpful.

The Department invites public comment on the most appropriate

methods for estimating the monetary value of reducing CO2

emissions, recognizing the many uncertainties involved.

IV. Energy Security Externalities

Issue 14: The major components of energy security externalities

associated with oil consumption that DOE should consider in this

rulemaking.

Issue 15: The relative importance of the level of oil imports and

the overall level of oil usage within the economy as determinants of

energy security.

The literature on this subject identifies five main avenues through

which energy security externalities can be generated. Authors generally

reach widely varying conclusions about their significance. DOE intends

to study each of these five areas and invites comments on their

significance.

The importance of several of the pathways listed below depends

partially or wholly on the amount oil prices rise in response to an oil

supply disruption. Thus, as a part of its study of energy security

externality values, DOE will consider the likelihood of a disruption,

its size, excess production capacity in other regions of the world, and

how the price shock associated with the disruption might be mitigated

by drawing down strategic petroleum stockpiles. DOE invites comments on

the best approach to study these issues.

With the exception of externalities #3 and perhaps #5 listed below,

the external effects of oil consumption are more closely associated

with the total amount of oil consumed in the U.S. economy, and not oil

imports.

(1) Gross Domestic Product losses resulting from oil price shocks:

Increased world oil prices caused by supply disruptions may cause

macroeconomic shocks to the economy that result in unemployment and

Gross Domestic Product losses. Different studies reach different

conclusions regarding the significance of oil price shocks on

macroeconomic performance. For example, a DOE study (1987) cites

macroeconomic stabilization as one justification for energy security

policy. In contrast, a study by Bohi (1991) finds little, if any, link

between oil price shocks and macroeconomic performance.

(2) Inflationary losses that accompany oil price rises: If oil

prices rise, then the rate of inflation in the economy increases.

Policies to fight inflation can cause increased unemployment and

heighten Gross Domestic Product losses. Further, because many

government payments are indexed to inflation, oil price shocks can

increase the size of the budget deficit. DOE intends to treat these

inflationary losses as part of the Gross Domestic Product loss

component cited previously.

(3) Monopsony price effects: Some economists argue that decreased

domestic oil consumption will lower world oil prices and reduce

payments for imported oil. The reduced U.S. payments for imported oil

benefit U.S. and foreign consumers, but they hurt domestic and foreign

producers. From a U.S.-centric accounting stance, this outcome would be

beneficial because the U.S. consumes more oil than it produces.

Adopting a U.S.-centric stance might be problematic in light of

continuing U.S. policies to encourage free trade. For example, U.S.

exports of products other than oil to both oil exporting countries and

other countries could be reduced as the effects of a reduction in the

value of oil imports work through the trading system.

Recognizing that monopsony-like arguments could be raised to

justify externality values for many types of imported goods, DOE

intends to consider whether there is anything special about oil that

justifies an externality for it, while excluding one for other

products.

(4) Terms of trade effect: Decreased oil imports would improve the

balance of trade and strengthen the U.S. dollar. This would leave U.S.

consumers unambiguously better off. This balance-of-trade effect is not

considered in private decision-making. However, like the monopsony

effect, counting this as an externality raises broader issues regarding

free trade. DOE intends to consider whether there is anything special

about oil that justifies an externality value for it, while excluding

one for other products.

(5) Financing of government strategic stockpiles and military

operations associated with oil: Some analysts have suggested that the

costs of stocking the strategic petroleum reserve and, more

importantly, maintaining the military power needed to minimize oil

supply disruptions are an additional source of externalities. DOE

intends to study this source of externality in more detail, with

particular emphasis on whether the size of the change in import

dependence that might be attributed to alternative appliance efficiency

standards would have any effect on government expenses.

In addition to these quantifiable aspects of energy security

externalities, some analysts contend that reduced oil consumption will

increase U.S. flexibility in conducting foreign policy. DOE intends to

consider this issue, recognizing that any benefit here would again

relate to the size of the impact of the efficiency standards.

Issue 19: The impact of incremental appliance efficiency standards

on oil consumption.

A central issue in trying to estimate the energy security value to

reduced oil imports is the quantitative effect of incremental

efficiency standards on domestic oil consumption. The appliances being

considered in this rule affect oil consumption either directly, as is

the case with oil-fired furnaces, or indirectly by reducing the use of

oil to generate electricity.

In 1990, according to the Annual Energy Outlook for 1993 (AEO93),

about 2 percent of total U.S. oil consumption was used for residential

space heating. By 2010, the same source projects that oil used for

residential space heating will decrease significantly, and account for

only about 1 percent of a higher total oil consumption.

The current efficiency standard for residential oil-fired furnaces

is 78 percent. Moving from the current standard to 95 percent, for

example would after complete stock replacement, reduce oil consumption

in this category by less than 20 percent, and by less if there is a

``rebound'' effect. Marginal changes in this standard could have only

an extremely small effect on total oil consumption.

In the case of appliance standards that affect electricity

consumption, the amount by which oil consumption is reduced depends

upon the fuels used to generate electricity. According to the AEO93,

about 4 percent of the primary energy consumption used for electricity

generation in 1990 was oil-based. That percentage is projected to

remain approximately constant through 2010. Because oil's share of

electricity generation is so small, changes in appliance efficiency

standards for electric appliances will not significantly alter total

oil consumption in the nation.

Based on the national fuel mix used in 1990, each kilowatt hour of

electricity saved will reduce oil consumption by 0.000072 barrels.

Given this ratio, each dollar of externality value attached to a barrel

of oil translates into only 0.007 cents per kilowatt hour on a national

average basis.

Oil-based electricity might be significant in some regions of the

country. Additionally, oil tends to be used for peaking power. DOE

intends to study whether regional and peak-load considerations might

cause significant divergences from the national ratio of barrels of oil

per kilowatt hour. However, because the national ratio is so low, it

seems unlikely that even taking into account regional and peak-load

considerations could result in large energy security externality values

for electric appliances even if a high per-barrel externality value

were deemed appropriate.

Issue 17: The impact of efficiency standards on domestic oil

production and oil imports.

DOE believes that the preponderant share of reduced oil consumption

caused by incremental appliance efficiency standards, will come from

imports. The price of oil is set in a world market and domestic energy

producers supply as much oil as is profitable given that world price.

Unless appliance efficiency standards significantly affect the world

oil price, domestic production will remain largely unchanged and

imports will fall.

The Department has considered, in several recent policy exercises,

the impact of changes in domestic oil consumption on world market

prices. The change in price determines how reduced consumption is split

between reduced imports and reduced domestic production. Current

modeling generally shows that domestic production falls by only about

ten percent of the decrease in domestic consumption. The Department of

Interior's Minerals Management Service also studied this issue in

detail as a part of their 1992 5-Year Leasing Program, and reached

similar conclusions.

Issue 18: The possibility of energy security externalities

associated with non-oil fuels.

The Department does not believe that there are comparable energy

security externalities associated with fuels other than oil. That is

because non-oil fuels consumed in the U.S. are obtained primarily from

domestic sources. The prices of these fuels are primarily determined in

national markets, and are not particularly susceptible to price spikes

caused by supply disruptions in other areas of the world. Because of

these factors, DOE does not intend to consider energy security

externalities for fuels other than oil.

Finally, it is important to note that the generic issue of the

relationship between price and marginal cost outlined in the

Crosscutting Issues section must be considered in the determination of

whether an application of an incremental externality value is

appropriate in those cases where an energy security externality related

to the use of oil in electricity generation is identified. However,

given the competitive market structure of the fuel oil industry, the

Department, based on its current information, presumes that oil sold

directly to residential end-users is competitively priced.

V. Review under Executive Order 12866

The rulemaking on energy efficiency standards for central air

conditioners, heat pumps, furnaces, refrigerators, refrigerator-

freezers and freezers has been determined to be an ``economically

significant regulatory action'' under Executive Order 12866,

``Regulatory Planning and Review,'' (58 FR 51735, October 4, 1993).

Accordingly, today's action was subject to review under the Executive

Order by the Office of Information and Regulatory Affairs (OIRA).

There was no substantive changes between the draft submitted to

OIRA and today's action.

The draft of today's action and any other documents submitted to

OIRA for review have been made part of the rulemaking record and are

available for public review in the Department's Freedom of Information

Reading Room, 1000 Independence Avenue SW., Washington, DC 20585

between the hours of 9 and 4, Monday through Friday, telephone (202)

586-6020.

VI. Public Comment Procedures

a. Participation in Rulemaking

The Department encourages the maximum level of public participation

possible in this rulemaking. Individual consumers, representatives of

consumer groups, manufacturers, associations, States or other

governmental entities, utilities, retailers, distributors,

manufacturers, and others are urged to submit written statements on the

proposal. The Department also encourages interested persons to

participate in the public hearing to be held in Washington, DC at the

time and place indicated at the beginning of this notice.

The DOE has established a period of 60 days following publication

of this notice for persons to comment on this proposal. All public

comments received and the transcript of the public hearing will be

available for review in the DOE Freedom of Information Reading Room.

b. Written Comment Procedures

Interested persons are invited to participate in this proceeding by

submitting written data, views, or arguments with respect to the

subjects set forth in this notice. Instructions for submitting written

comments are set forth at the beginning of this notice and below.

Comments should be labeled both on the envelope and on the

documents, ``Three Products Rulemaking (Docket No. CE-RM-93-801)'', and

must be received by the date specified at the beginning of this notice.

Ten copies are requested to be submitted. Additionally, the Department

would appreciate an electronic copy of the comments to the extent

possible. The Department is currently using WordPerfectTM 5.1. All

comments received by the date specified at the beginning of this notice

and other relevant information will be considered by DOE in the

proposed rule.

All written comments received on the Advance Notice of Proposed

Rulemaking will be available for public inspection at the Freedom of

Information Reading Room, as provided at the beginning of this notice.

Pursuant to the provisions of 10 CFR 1004.11, any person submitting

information or data that is believed to be confidential and exempt by

law from public disclosure should submit one complete copy of the

document and ten (10) copies, if possible, from which the information

believed to be confidential has been deleted. The Department will make

its own determination with regard to the confidential status of the

information or data and treat it according to its determination.

Factors of interest to DOE, when evaluating requests to treat

information as confidential, include: (1) A description of the item;

(2) an indication as to whether and why such items of information have

been treated by the submitting party as confidential, and whether and

why such items are customarily treated as confidential within the

industry; (3) whether the information is generally known or available

to others; (4) whether the information has previously been available to

others without obligation concerning its confidentiality; (5) an

explanation of the competitive injury to the submitting person that

would result from public disclosure; (6) an indication as to when such

information might lose its confidential character due to the passage of

time; and (7) whether disclosure of the information would be in the

public interest.

c. Public Hearing

1. Procedure for Submitting Requests to Speak

The time and place of the public hearing are indicated at the

beginning of this notice. The Department invites any person who has an

interest in these proceedings, or who is a representative of a group or

class of persons having an interest, to make a written request for an

opportunity to make an oral presentation at the public hearing. Such

requests should be labeled both on the letter and the envelope, ``Three

Products Rulemaking (Docket No. CE-RM-93-801),'' and should be sent to

the address and must be received by the time specified at the beginning

of this notice. Requests may be hand-delivered or telephoned to such

address between the hours of 8:30 a.m. and 4:30 p.m., Monday through

Friday, except Federal holidays.

The person making the request should briefly describe the interest

concerned and, if appropriate, state why he or she is a proper

representative of the group or class of persons that has such an

interest, and give a telephone number where he or she may be contacted.

Persons selected to be heard will be notified by DOE as to the time

they will be speaking.

Each person selected to be heard is requested to submit ten (10)

copies of the statement at the beginning of the hearing. In the event

any person wishing to testify cannot meet this requirement, that person

may make alternative arrangements with the Office of Codes and

Standards in advance by so indicating in the letter requesting to make

an oral presentation.

2. Conduct of Hearing

The Department reserves the right to select the persons to be heard

at the hearing, to schedule the respective presentations, and to

establish the procedures governing the conduct of the hearing. The

length of each presentation is limited to 20 minutes.

A DOE official will be designated to preside at the hearing. The

hearing will not be a judicial or an evidentiary-type hearing, but will

be conducted in accordance with 5 U.S.C. 533 and section 336 of the

Act. At the conclusion of all initial oral statements at each day of

the hearing, each person who has made an oral statement will be given

the opportunity to make a rebuttal statement, subject to time

limitations. The rebuttal statement will be given in the order in which

the initial statements were made. The official conducting the hearing

will accept additional comments or questions from those attending, as

time permits. Any interested person may submit to the presiding

official written questions to be asked of any person making a statement

at the hearing. The presiding official will determine whether the

question is relevant and whether time limitations permit it to be

presented for answer.

Further questioning of speakers will be permitted by DOE. The

presiding official will afford any interested person an opportunity to

question, with respect to disputed issues of material fact, other

interested persons who made oral presentations as well as employees of

the United States Government who have made written or oral

presentations relating to the proposed rule. This opportunity will be

afforded after any rebuttal statements to the extent that the presiding

official determines that such questioning is likely to result in a more

timely and effective resolution of disputed issues of material fact. If

the time provided is insufficient or inconvenient, DOE will consider

affording an additional opportunity for questioning at a mutually

convenient time. Persons interested in making use of this opportunity

must submit their request to the presiding official no later than

shortly after the completion of any rebuttal statements and be prepared

to state specific justification, including why the issue is one of

disputed fact and how the proposed questions would expedite their

resolution.

Any further procedural rules regarding proper conduct of the

hearing will be announced by the presiding official.

A transcript of the hearing will be made and the entire record of

this rulemaking, including the transcript, will be retained by DOE and

made available for inspection at the DOE Freedom of Information Reading

Room as provided at the beginning of this notice. Any person may

purchase a copy of the transcript from the transcribing reporter.

Issued in Washington, DC September 21, 1994.

Christine A. Ervin,

Assistant Secretary, Energy Efficiency and Renewable Energy.

[FR Doc. 94-24924 Filed 10-6-94; 8:45 am]

BILLING CODE 6450-01-P