Energy Conservation Program for Consumer Products; Proposed Rule DEPARTMENT OF ENERGY

SUMMARY: The Energy Policy and Conservation Act, as amended, prescribes

energy conservation standards for certain major household appliances,

and requires the Department of Energy (DOE or Department) to administer

an energy conservation program for these products. The National

Appliance Energy Conservation Act amendments require DOE to consider

amending the energy conservation standards for room air conditioners,

water heaters, direct heating equipment, mobile home furnaces, kitchen

ranges and ovens, pool heaters and fluorescent lamp ballasts; and to

consider establishing energy conservation standards for television

sets.

DATES: Written comments on the proposed rule must be received by the

Department by May 18, 1994. The Department requests 10 copies of the

written comments and, if possible, a computer disk.

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

hearing to be held in Washington, DC, beginning at 9:30 a.m. on April

5, 6 and 7, 1994.

Requests to speak at the hearing must be received by the Department

no later than 4 p.m., March 25, 1994. Copies of statements to be given

at the public hearing must be received by the Department no later than

4 p.m., March 29, 1994. The DOE panel will read the statements in

advance of the hearing and would appreciate the oral presentations to

be limited to a summary of the statement. The length of each oral

presentation is limited to 15 minutes.

ADDRESSES: The hearing will be held at the U.S. Department of Energy,

Forrestal Building, Room 1E-245, 1000 Independence Avenue, SW.,

Washington, DC. Written comments, oral statements, and requests to

speak at the hearing 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. EE-RM-90-201,

room 5E-066, Forrestal Building, 1000 Independence Avenue, SW.,

Washington, DC, 20585, (202) 586-7140.

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:

Michael J. McCabe, 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

II. General Discussion

a. Energy Descriptions

b. Test Procedures

c. Technological Feasibility

1. General

2. Maximum Technologically Feasible Levels

d. Energy Savings

1. Determination of Savings

2. Significance of Savings

e. Rebuttable Presumption

f. Economic Justification

1. Economic Impact on Manufacturers and Consumers

2. Life-cycle Costs

3. Energy Savings

4. Lessening of Utility or Performance of Products

5. Impact of Lessening of Competition

6. Need of The Nation to Conserve Energy

7. Other Factors

III. Discussion of Comments

a. General Analytical Comments

b. Product-Specific Comments

1. Room Air Conditioners

2. Water Heaters

3. Direct Heating Equipment

4. Mobile Home Furnaces

5. Kitchen Ranges and Ovens

6. Pool Heaters

7. Clothes Washers

8. Fluorescent Lamp Ballasts

9. Television Sets

IV. Product-Specific Discussion

a. Room Air Conditioners

1. Efficiency Levels Analyzed

2. Payback Period

3. Significance of Energy Savings

4. Economic Justification

A. Economic Impact on Manufacturers and Consumers

B. Life-cycle Cost and Net Present Value

C. Energy Savings

D. Lessening of Utility or Performance of Products

E. Impact of Lessening of Competition

F. Need of the Nation to Save Energy

5. Conclusion

b. Water Heaters

1. Efficiency Levels Analyzed

2. Payback Period

3. Significance of Energy Savings

4. Economic Justification

A. Economic Impact on Manufacturers and Consumers

B. Life-cycle Cost and Net Present Value

C. Energy Savings

D. Lessening of Utility or Performance of Products

E. Impact of Lessening of Competition

F. Need of the Nation to Save Energy

5. Conclusion

c. Direct Heating Equipment

1. Efficiency Levels Analyzed

2. Payback Period

3. Significance of Energy Savings

4. Economic Justification

A. Economic Impact on Manufacturers and Consumers

B. Life-cycle Cost and Net Present Value

C. Energy Savings

D. Lessening of Utility or Performance of Products

E. Impact of Lessening of Competition

F. Need of the Nation to Save Energy

5. Conclusion

d. Mobile Home Furnaces

1. Efficiency Levels Analyzed

2. Payback Period

3. Significance of Energy Savings

4. Economic Justification

A. Economic Impact on Manufacturers and Consumers

B. Life-cycle Cost and Net Present Value

C. Energy Savings

D. Lessening of Utility or Performance of Products

E. Impact of Lessening of Competition

F. Need of the Nation to Save Energy

5. Conclusion

e. Kitchen Ranges and Ovens

1. Efficiency Levels Analyzed

2. Payback Period

3. Significance of Energy Savings

4. Economic Justification

A. Economic Impact on Manufacturers and Consumers

B. Life-cycle Cost and Net Present Value

C. Energy Savings

D. Lessening of Utility or Performance of Products

E. Impact of Lessening of Competition

F. Need of the Nation to Save Energy

G. Other Factors

5. Conclusion

f. Pool Heaters

1. Efficiency Levels Analyzed

2. Payback Period

3. Significance of Energy Savings

4. Economic Justification

A. Economic Impact on Manufacturers and Consumers

B. Life-cycle Cost and Net Present Value

C. Energy Savings

D. Lessening of Utility or Performance of Products

E. Impact of Lessening of Competition

F. Need of the Nation to Save Energy

5. Conclusion

g. Fluorescent Lamp Ballasts

1. Efficiency Levels Analyzed

2. Payback Period

3. Significance of Energy Savings

4. Economic Justification

A. Economic Impact on Manufacturers and Consumers

B. Life-cycle Cost and Net Present Value

C. Energy Savings

D. Lessening of Utility or Performance of Products

E. Impact of Lessening of Competition

F. Need of the Nation to Save Energy

5. Conclusion

h. Television Sets

1. Efficiency Levels Analyzed

2. Payback Period

3. Significance of Energy Savings

4. Economic Justification

A. Economic Impact on Manufacturers and Consumers

B. Life-cycle Cost and Net Present Value

C. Energy Savings

D. Lessening of Utility or Performance of Products

E. Impact of Lessening of Competition

F. Need of the Nation to Save Energy

5. Conclusion

V. Environmental, Regulatory Impact, Takings Assessment, Federalism

and Regulatory Flexibility Reviews

a. Environmental Review

b. Regulatory Impact Review

c. ``Takings'' Assessment Review

d. Federalism Review

e. Regulatory Flexibility Review

VI. Public Comment Procedures

a. Participation in Rulemaking

b. Written Comment Procedures

c. Public Hearing

d. Issues Requested for Comment

I. Introduction

a. Authority

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

Public Law 94-163, as amended by the National Energy Conservation

Policy Act, Public Law 95-619, by the National Appliance Energy

Conservation Act, Public Law 100-12, by the National Appliance Energy

Conservation Amendments of 1988, Public Law 100-357, and the Energy

Policy Act of 1992, Public Law 102-486\1\ created the Energy

Conservation Program for Consumer Products other than Automobiles. The

consumer products subject to this program (often referred to hereafter

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

freezers; dishwashers; clothes dryers; water heaters; central air

conditioners and central air conditioning heat pumps; furnaces; direct

heating equipment; television sets; kitchen ranges and ovens; clothes

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

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

Secretary of Energy. 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, the National Appliance

Energy Conservation Amendments of 1988, and the Energy Policy Act of

1992, is referred to in this notice 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 in this notice

as the National Energy Conservation Policy Act.

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

testing, labeling, and Federal energy conservation standards. The

Department, 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 produce test results that measure

the energy efficiency, energy use, or estimated annual operating cost

of a covered product during a representative average use cycle or

period of use and shall not be unduly burdensome to conduct. Section

323 (b)(3). A test procedure is not required if DOE determines by rule

that one cannot be developed. Section 323 (d)(1). Test procedures

appear at 10 CFR part 430, subpart B.

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 are

to require that each particular model of a covered product bears a

label that indicates its annual operating cost and the range of

estimated annual operating costs for other models of that product.

Section 324(c)(1). Disclosure of estimated operating cost is not

required under section 324 if the Federal Trade Commission determines

that such disclosure is not likely to assist consumers in making

purchasing decisions, or is not economically feasible. In such a case,

the Federal Trade Commission must require a different useful measure of

energy consumption. Section 324(c). 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, refrigerators, refrigerator-freezers and

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 the 12 covered products, the Act prescribes an initial

Federal energy conservation standard. Section 325(b)-(h). The Act

establishes dates of applicability for the standards in 1988, 1990,

1992 or 1993, depending on the product, and specifies that the

standards are to be reviewed by the Department within 3 to 10 years,

also depending on the product. Section 325(b)-(h). After the specified

period, DOE may promulgate new standards for each product; however, the

Secretary may not prescribe any amended standard which increases the

maximum allowable energy use, or decreases the minimum required energy

efficiency of a covered product. Section 325(l)(1). The Department's

current review of standards is for room air conditioners, water

heaters, direct heating equipment, mobile home furnaces, kitchen ranges

and ovens, pool heaters and fluorescent lamp ballasts and is

considering establishing energy conservation standards for television

sets. Section 325(g)(4)(A).

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

a standard is economically justified, it must first solicit comments on

a 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 of, or in the initial charges for, or maintenance

expenses of, the covered products which are likely to result from the

imposition of the standard;

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

directly from the imposition of the standard;

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

products likely to result from the imposition of the standard;

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

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

imposition of the standard;

(6) The need for national energy conservation; and

(7) Other factors the Secretary considers relevant.

In addition, section 325(l)(2)(B)(iii) establishes a rebuttable

presumption of economic justification in instances where the Secretary

determines that ``the additional cost to the consumer of purchasing a

product complying with an energy conservation standard level will be

less than three times the value of the energy savings during the first

year that the consumer will receive as a result of the standard, as

calculated under the applicable test procedure* * *.''

Section 327 of the Act addresses the effect of Federal rules on

State laws or regulations concerning testing, labeling, and standards.

Generally, all such State laws or regulations are superseded by the

Act. Section 327(a)-(c). Exemptions to this general rule include: (1)

State standards prescribed or enacted before January 8, 1987, and

applicable to appliances produced before January 3, 1988 (section

327(b)(1)); (2) State procurement standards which are more stringent

than the applicable Federal standard (Section 327(b)(3) and (f)(1)-

(4)); (3) State regulations banning constant burning pilot lights in

pool heaters (Section 327(b)(4)); 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 product (Section

327(b)(6) and 327(c)).

b. Background

The National Energy Conservation Policy Act required DOE to

establish mandatory energy efficiency standards for each of the 13

covered products.\2\ These standards were to be designed to achieve the

maximum improvement in energy efficiency that was technologically

feasible and economically justified.

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\2\The consumer products covered by the National Energy

Conservation Policy Act included: Refrigerators and refrigerator-

freezers; freezers; dishwashers; clothes dryers; water heaters; room

air conditioners; home heating equipment not including furnaces;

television sets; kitchen ranges and ovens; clothes washers;

humidifiers and dehumidifiers; central air conditioners; and

furnaces.

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The National Energy Conservation Policy Act provided, however, that

no standard for a product be established if there were no test

procedure for the product, or if DOE determined by rule either that a

standard would not result in significant conservation of energy, or

that a standard was not technologically feasible or economically

justified. In determining whether a standard was economically

justified, the Department was directed to determine whether the

benefits of the standard exceeded its burdens by weighing the seven

factors discussed above.

The National Appliance Energy Conservation Act, which became law on

March 17, 1987, amended the Energy Policy and Conservation Act in part

by: redefining ``covered products'' (specifically, refrigerators,

refrigerator- freezers, and freezers were combined into one product

type from two; humidifiers and dehumidifiers were deleted; and pool

heaters were added); establishing Federal energy conservation standards

for 11 of the 12 covered products; and creating a schedule, according

to which each standard is to be reviewed to determine if an amended

standard is required.

The National Appliance Energy Conservation Amendments of 1988,

which became law on June 28, 1988, established Federal energy

conservation standards for fluorescent lamp ballasts. These amendments

also created a review schedule for DOE to determine if any amended

standard for fluorescent lamp ballasts is required.

The Energy Policy Act of 1992, which became law on October 24,

1992, addressed various commercial appliances and equipment.

As directed by the Act, DOE published an advance notice of proposed

rulemaking with a 75-day comment period that ended December 12, 1990,

for the eight products subject to today's rulemaking. 55 FR 39624,

September 28, 1990. (Hereafter referred to as the September 1990

advance notice). The September 1990 advance notice presented the

product classes that DOE planned to analyze, and provided a detailed

discussion of the analytical methodology and analytical models that the

Department expected to use in performing the analysis to support this

rulemaking. The Department invited comments and data on the accuracy

and feasibility of the planned methodology and encouraged interested

persons to recommend improvements or alternatives to the Department's

approach. The comments in response to the advance notice are addressed

in Sections II and III of this notice.

II. General Discussion

a. Energy Descriptors

As discussed above, the Act established initial energy conservation

standards for all of the covered products except television sets. Some

of these standards were of a prescriptive form, such as the requirement

of a no heat dry option for dishwashers, and others were performance

standards, stated in terms of an energy descriptor, such as seasonal

energy efficiency ratio for central air conditioners, annual fuel

utilization factor for furnaces, etc. The intent of these standards,

and the subsequent required DOE analyses and rulemaking regarding

amending the standards, is to save energy. In conducting rulemakings

and analyses required by the Act to determine if standards should be

amended, the Department previously determined that the form of a

standard may need to change in order to evaluate the efficiency

standards. For example, the final rule issued for dishwashers changed

the standard from the initial prescriptive standard to a performance

standard based on an energy descriptor. 56 FR 22250, May 14, 1991.

Additionally, the Department has determined in this rulemaking that

energy descriptors may need to be changed when it is found they do not

account for all of the energy or all types of energy consumed by an

appliance. Not to change these energy descriptors would result in an

incomplete analysis and could lead to standards being met by utilizing

unaccounted energy resulting in products that might satisfy the energy

descriptor but result in little or no total energy savings. Examples of

unaccounted energy are the pilot light energy of a pool heater which is

not accounted for by the current energy descriptor of Thermal

Efficiency or the electrical fan energy of a gas furnace which is not

accounted for by the current energy descriptor of the annual fuel

utilization factor. Accordingly, the Department is proposing in today's

notice to change the energy descriptors of the initial standards for

direct heating equipment, mobile home furnaces, and pool heaters.

b. Test Procedures

For each product discussed in today's proposed rulemaking there is

an applicable DOE test procedure to evaluate its energy efficiency.

A Notice of Proposed Rulemaking that would amend the test

procedures for mobile home furnaces, direct heating equipment, and pool

heaters was published in the Federal Register on August 23, 1993 (58 FR

44538); in addition, another Notice of Proposed Rulemaking which

includes amendments to the test procedures for clothes washers, water

heaters, ranges and ovens is being published.

c. Technological Feasibility

1. General

For those products and classes of products discussed in today's

notice, DOE believes that the efficiency levels analyzed, while not

necessarily being realized in production, are technologically possible.

The technological feasibility of the design options are addressed in

the product-specific discussion. The Department's criteria for

evaluating design options for technological feasibility are that the

design options are already in use by the respective industry, or that

research has progressed to the development of a prototype.

2. Maximum Technologically Feasible Levels

The Act requires the Department, in considering any new or amended

standards, to consider those that ``shall be designed to achieve the

maximum improvement in energy efficiency which the Secretary determines

is technologically feasible and economically justified.'' (Section 325

(l)(2)(A)). Accordingly, for each class of product under consideration

in this rulemaking, a maximum technologically feasible (max tech)

design option was identified. The max tech level is one that can be

carried out by the addition of design options, both commercially

feasible and prototypes, to the baseline units.\3\ The Department

believes that in identifying the max tech level a unit must be capable

of being assembled, but not necessarily mass produced, by the effective

date of the amended standards. Manufacturing ability is determined

under economic justification. For example, in the November 1989 Final

Rule, DOE concluded that evacuated panels for refrigerators was a

technically feasible design option since refrigerators had been

produced on a limited scale with this technology included. However, DOE

concluded that this technology was not economically justified because

the chemical industry would not be able to make sufficient quantities

of the raw materials commercially available by the effective date of

the standard.

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\3\The baseline unit is the most commonly used combination of

engineering design options which are found in appliances that meet

the existing National Appliance Energy Conservation Act standards

except for television sets where no National Appliance Energy

Conservation Act standard exists. In the case of television sets,

the baseline is represented by the typical 19/20'' television with

electronic tuning and remote control.

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The max tech levels were derived by adding energy-conserving

engineering design options to the respective classes in order of

decreasing consumer payback. For example, the max tech level for room

air conditioners includes higher efficiency fan motors, which were

added early, and variable speed compressors, which were added later

because of their slower payback. A complete discussion of each max tech

level, and the design options included in each, is found in the

Engineering Analysis. See Technical Support Document, Chapter 3.

Tables 2-1 through 2-8 present the Department's max tech

performance levels for all classes of the subject products:

Table 2-1.--Room Air Conditioner Maximum Technologically Feasible Levels

------------------------------------------------------------------------

Energy

Product class efficiency

ratio

------------------------------------------------------------------------

With louvered sides less than 6,000 Btu.................... 13.0

With louvered sides 6,000 to 7,999 Btu..................... 12.1

With louvered sides 8,000 to 13,999 Btu.................... 13.5

With louvered sides 14,000 to 19,999 Btu................... 13.6

With louvered sides 20,000 and more Btu.................... 11.4

Without louvered sides less than 6,000 Btu................. 12.6

Without louvered sides 6,000 to 7,999 Btu.................. 11.7

Without louvered sides 8,000 to 13,999 Btu................. 13.0

Without louvered sides 14,000 to 19,000 Btu................ 13.1

Without louvered sides 20,000 and more Btu................. 11.0

With reverse cycle, and with louvered sides................ 13.2

With reverse cycle, without louvered sides................. 12.7

------------------------------------------------------------------------

Table 2-2.--Water Heater Maximum Technologically Feasible Levels

------------------------------------------------------------------------

Product class Energy factor

------------------------------------------------------------------------

Gas................. .887 - (.001707 x Measured Storage Volume (in

gals.)).

Oil................. .835 - (.001707 x Measured Storage Volume (in

gals.)).

Electric............ 2.597 - (.001172 x Measured Storage Volume (in

gals.)).

Gas instantaneous... .897.

------------------------------------------------------------------------

Table 2-3.--Direct Heating Equipment Maximum Technologically Feasible

Levels

------------------------------------------------------------------------

Annual

Product class efficiency

------------------------------------------------------------------------

Gas wall fan type up to 42,000 Btu/hour.................... 89.2

Gas wall fan type over 42,000 Btu/hour..................... 89.9

Gas wall gravity type up to 10,000 Btu/hour................ 81.0

Gas wall gravity type over 10,000 Btu/hour up to 12,000 Btu/

hour...................................................... 81.7

Gas wall gravity type over 12,000 Btu/hour up to 15,000 Btu/

hour...................................................... 82.1

Gas wall gravity type over 15,000 Btu/hour up to 19,000 Btu/

hour...................................................... 82.9

Gas wall gravity type over 19,000 Btu/hour up to 27,000 Btu/

hour...................................................... 83.3

Gas wall gravity type over 27,000 Btu/hour up to 46,000 Btu/

hour...................................................... 83.8

Gas wall gravity type over 46,000 Btu/hour................. 84.4

Gas floor type up to 37,000 Btu/hour....................... 88.6

Gas floor type over 37,000 Btu/hour........................ 90.0

Gas room type up to 18,000 Btu/hour........................ 85.9

Gas room type over 18,000 Btu/hour up to 20,000 Btu/hour... 87.3

Gas room type over 20,000 Btu/hour up to 27,000 Btu/hour... 88.1

Gas room type over 27,000 Btu/hour up to 46,000 Btu/hour... 88.9

Gas room type over 46,000 Btu/hour......................... 89.7

------------------------------------------------------------------------

Table 2-4.--Mobile Home Furnace Maximum Technologically Feasible Levels

------------------------------------------------------------------------

Annual

Product class efficiency

------------------------------------------------------------------------

Gas-fired.................................................. 89.5

Oil-fired.................................................. 85.8

------------------------------------------------------------------------

Table 2-5.--Kitchen Range and Oven Maximum Technologically Feasible

Levels

------------------------------------------------------------------------

Annual energy

Product class use

------------------------------------------------------------------------

Electric oven, self-cleaning............................ 209.2 kWh.

Electric oven, non-self-cleaning........................ 157.3 kWh.

Gas oven, self-cleaning................................. 1.42 MMBtu.

Gas oven, non-self-cleaning............................. 1.07 MMBtu.

Microwave oven.......................................... 228.2 kWh.

Electric cooktop, coil element.......................... 257.7 kWh.

Electric cooktop, smooth element........................ 258.5 kWh.

Gas cooktop............................................. 1.6274 MMBtu.

------------------------------------------------------------------------

Table 2-6.--Pool Heater Maximum Technologically Feasible Level

------------------------------------------------------------------------

Annual

Product class efficiency

------------------------------------------------------------------------

Gas-fired.................................................. 95.7

------------------------------------------------------------------------

Table 2-7.--Fluorescent Lamp Ballast Maximum Technologically Feasible

Levels

------------------------------------------------------------------------

Efficacy

Product class factor

------------------------------------------------------------------------

One F40 lamp............................................... 2.50

Two F40 lamp............................................... 1.28

Two F96 lamp............................................... 0.72

Two F96HO lamps............................................ 0.50

Three F40 lamps............................................ 0.87

Four F40 lamps............................................. 0.67

One F32T8 lamp............................................. 3.17

Two F32T8 lamps............................................ 1.58

Three F32T8 lamps.......................................... 1.06

Four F32T8 lamps........................................... 0.76

------------------------------------------------------------------------

Table 2-8.--Television Set Maximum Technologically Feasible Level

------------------------------------------------------------------------

Annual

Product class energy use

(kWh/yr.)

------------------------------------------------------------------------

Color 19''-20'' electronically tuned....................... 138.5

------------------------------------------------------------------------

The Department believes that these are the max tech levels from an

engineering analysis standpoint. Each of the levels was evaluated in

accordance with the economic justification factors specified in the Act

to determine economic justification.

The Department evaluated each max tech level to determine if it

would be economically justified at the time the standards would become

effective. The Department rejected energy conservation standards that

had unacceptable impacts on consumers or manufacturers (e.g., unusually

long payback periods and substantially adverse impacts on

manufacturers' returns on equity).

d. Energy Savings

1. Determination of Savings

The Department forecasted energy consumption through the use of the

Lawrence Berkeley Laboratory Residential Energy Model, which forecasted

energy consumption over the period of analysis for candidate standards

and the base case. The Department quantified the energy savings that

would be attributable to a standard as the difference in energy

consumption between the candidate standard's case and the base case.

The base case represents the forecasts of outputs, e.g., prices,

operating expenses, energy consumption, shipments, and manufacturer

impacts in the absence of new or amended standards.

The Lawrence Berkeley Laboratory Residential Energy Model was used

by DOE in previous standards rulemakings. The Lawrence Berkeley

Laboratory Residential Energy Model is explained in the Technical

Support Document accompanying this notice. (See Appendix B to that

document for a detailed discussion of the Lawrence Berkeley Laboratory

Residential Energy Model.) The Lawrence Berkeley Laboratory Residential

Energy Model contains algorithms to project average efficiencies, usage

behavior, and market shares for each product.

COMMEND is the Commercial Energy End-Use Model. It was developed by

the Electric Power Research Institute, to characterize energy end-use

in the commercial sector. For this rulemaking, the Commercial Energy

End-Use Model is being used to evaluate more stringent standards on

fluorescent lamp ballasts, which are found principally in the

commercial sector of the economy.

The market share calculations contain the following steps:

potential purchasers may purchase any competing technology within an

end-use, or none. For room air conditioners, fluorescent lamp ballasts,

and television sets, the decision to purchase or not is modeled, and

the fraction of the total that chooses each class, e.g., F40T12 lamps,

F96T12 lamps, etc., is specified exogenously. For the other products,

along with the considerations above, the choice of fuel is modeled.

Long-term market share elasticities have been assumed with respect to

equipment price, operating expense, and income. The effects of

standards are expected to be lower operating expense and increased

equipment price. The percentage changes in these quantities are used,

together with the elasticities, to determine changes in sales volumes

resulting from standards. Higher equipment prices will decrease sales

volumes, while lower operating expenses will increase them. The net

result depends on the standard level selected, and associated equipment

prices and operating expenses.

The Lawrence Berkeley Laboratory Residential Energy Model and the

Commercial Energy End-Use Model (for ballasts only) are used to project

energy use over the relevant time periods for seven of these products

with and without amended standards, and, in the case of televisions,

with and without standards. By comparing the energy consumption

projection at alternative standard levels with the legislated

standards, the Department estimated the amount of energy projected to

be saved during the period 1996-2030.\4\ The energy saved is expressed

in quads, i.e., quadrillions of British thermal units (Btu). With

respect to electricity, the savings are quads of source or primary

energy, which is the energy necessary to generate and transmit

electricity. The Act defines ``energy use'' as the quantity of energy

directly consumed by a consumer product at point of use. This is

generally called ``site'' energy, as opposed to ``source'' energy.

There are major differences between these types of energy. From data

that remains rather constant over the years, the amount of electrical

energy consumed at the site is less than one-third of the amount of

source energy that is required to generate and transmit the site

electrical energy.\5\ Therefore, it is important to identify whether

the electricity involved is site or source energy.

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\4\Lawrence Berkeley-Laboratory Residential Energy Model and the

Commercial Energy End-Use Model were programmed to analyze a single

standard level or alternate standard levels over the entire period.

That is, the fact that a standard might be revised during subsequent

rulemakings was not considered by the model. The Department believes

that it is not possible to predict what result such reviews may

have, and therefore it would be speculative to model any particular

result. Therefore, for purposes of this rulemaking, each standard

level that was analyzed was projected to have been in place from the

time of implementation to the year 2030.

\5\Energy Information Administration, Electric Power Annual

1987, Tables 25 and 82, DOE/EIA-0348(87), 1987.

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The Lawrence Berkeley Laboratory Residential Energy Model

projections are dependent on many assumptions. Among the most important

are responsiveness of household appliance purchasers to changes in

residential energy prices and consumer income, future energy prices,

future levels of housing construction, and options that exist for

improving the energy efficiency of appliances. The Commercial Energy

End-Use Model projections are dependent upon changes in commercial

energy prices, future construction of commercial floorspace,

responsiveness of building owners to future energy and equipment prices

and to utility demand-side management programs, and options for

improving the energy efficiency of lighting. As is the case with any

complicated computer model simulation, the validity of the outputs is

critically dependent on the inputs.

2. Significance of Savings.

Under section 325(l)(3)(B) of the Act, the Department is prohibited

from adopting a standard for a product if that standard would not

result in ``significant'' energy savings. While the term

``significant'' has never been defined in the Act, the U.S. Court of

Appeals, in Natural Resources Defense Council v. Herrington, 768 F.2d

1355, 1406 (DC Cir. 1985), concluded that Congressional intent in using

the word ``significant'' was to mean ``non-trivial.'' Id. at 1373.

e. Rebuttable Presumption

The National Appliance Energy Conservation Act established new

criteria for determining whether a standard level is economically

justified. Section 325(l)(2)(B)(iii) states:

``If the Secretary finds that the additional cost to the

consumer of purchasing a product complying with an energy

conservation standard level will be less than three times the value

of the energy savings during the first year that the consumer will

receive as a result of the standard, as calculated under the

applicable test procedure, there shall be a rebuttable presumption

that such standard level is economically justified. A determination

by the Secretary that such criterion is not met shall not be taken

into consideration in the Secretary's determination of whether a

standard is economically justified.''

If the increase in initial price of an appliance due to a

conservation standard would repay itself to the consumer in energy

savings in less than three years, then it is presumed that such

standard is economically justified.\6\ This presumption of economic

justification can be rebutted upon a proper showing.

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\6\For this calculation, the Department calculated cost-of-

operation based on the DOE test procedures. Therefore, the consumer

is assumed to be an ``average'' consumer as defined by the DOE test

procedures. Consumers that use the products less than the test

procedure assumes will experience a longer payback while those that

use them more than the test procedure assumes will have a shorter

payback.

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f. Economic Justification

As noted earlier, Section 325(l)(2)(B)(i) of the Act provides seven

factors to be evaluated in determining whether a conservation standard

is economically justified.

1. Economic Impact on Manufacturers and Consumers

The engineering analysis identified improvements in efficiency

along with the associated costs to manufacturers for each class of

product. For each design option, these costs constitute the increased

per-unit cost to manufacturers to achieve the indicated energy

efficiency levels. Manufacturer, wholesaler, and retailer markups will

result in a consumer purchase price higher than the manufacturer cost.

To assess the likely impacts of standards on manufacturers, and to

determine the effects of standards on different-sized firms, the

Department used a computer model that simulated hypothetical firms in

the eight industries under consideration. This model, the Lawrence

Berkeley Laboratory Manufacturer Impact Model, is explained in the

Technical Support Document. See Technical Support Document, Appendix C.

The Lawrence Berkeley Laboratory Manufacturer Impact Model provides a

broad array of outputs, including shipments, price, revenue, net

income, and short- and long-run returns on equity. An ``Output Table''

lists values for all these outputs in the base case and in each of the

standards cases under consideration. It also gives a range for each of

these estimates. A ``Sensitivity Chart'' shows how returns on equity

would be affected by a change in any one of the model's nine control

variables.

For consumers, measures of economic impact are the changes in

purchase price and annual energy expense. The purchase price and annual

energy expense, i.e., life-cycle cost, of each standard level are

presented in Chapter 6 of the Technical Support Document. Under section

325 of the Act, the life-cycle cost analysis is a separate factor to be

considered in determining economic justification.

2. Life-cycle Costs.

One measure of the effect of proposed standards on consumers is the

change in operating expense as compared to the change in purchase

price, both resulting from standards. This is quantified by the

difference in the life-cycle costs between the base and standards cases

for the appliance classes analyzed. The life-cycle cost is the sum of

the purchase price and the operating expense, including installation

and maintenance expenditures, discounted over the lifetime of the

appliance.

The life-cycle cost was calculated for the range of efficiencies in

the Engineering Analysis for each class in the year standards are

imposed, using real consumer discount rates of 2, 6, and 10 percent.

The purchase price is based on the factory costs in the Engineering

Analysis and includes a factory markup plus a distributor and retailer

markup. Energy price forecasts are taken from the 1991 Annual Energy

Outlook of the Energy Information Administration. (DOE/Energy

Information Administration--0383(91)). Appliance usage inputs are taken

from the relevant test procedures.

3. Energy Savings

While the significant conservation of energy is a separate

statutory requirement for imposing an energy conservation standard, the

Act requires DOE, in determining the economic justification of a

standard, to consider the total projected savings that are expected to

result directly from revised standards. The Department used the

Lawrence Berkeley Laboratory Residential Energy Model results,

discussed earlier, in its consideration of total projected savings. The

savings for the eight products are provided in Section IV of this

notice.

4. Lessening of Utility or Performance of Products

This factor cannot be quantified. In establishing classes of

products and design options, the Department tried to eliminate any

degradation of utility or performance in the eight products under

consideration in this rulemaking. That is, to the extent that comments,

or the Department's own research, indicated that a product included a

utility or performance-related feature that affected energy efficiency,

a separate class with a different efficiency standard was created for

that product. In this way, the Department attempted to minimize the

impact of this factor as a result of the standards that were analyzed.

5. Impact of Lessening of Competition

It is important to note that this factor has two parts; on the one

hand, it assumes that there could be some lessening of competition as a

result of standards; and on the other hand, it directs the Attorney

General to gauge the impact, if any, of that effect.

In order to assist the Attorney General in making such a

determination, the Department studied the affected appliance industries

to determine their existing concentrations, levels of competitiveness,

and financial performances. This information will be sent to the

Attorney General. See Technical Support Document, Chapter 7. The

Department has also provided the Attorney General with copies of this

notice and the Technical Support Document for her review.

6. Need of The Nation to Conserve Energy

The results of the environmental effects from each standard level

for each product will be reported under this factor in the product

specific discussion (Section IV) of this notice.

7. Other Factors

This provision allows the Secretary of Energy, in determining

whether a standard is economically justified, to consider any other

factors that the Secretary deems to be relevant. The Secretary is

seeking comments on two issues which may be considered in this

rulemaking. The issues are (1) the incremental impact of appliance

conservation standards on energy use, consumers, manufacturers and

other factors (See the discussion regarding rebuttable presumption

under General Analytical Comments) and, (2) the extent to which any

proposed national efficiency standard is likely to disproportionally

affect identifiable groups of consumers and whether the analysis should

be modified to consider such impacts in the selection of efficiency

standard levels (See the discussion regarding other comments under

Product-Specific Comments for Direct Heating Equipment).

III. Discussion of Comments

The Department received 90 written comments in response to the

September 1990, advance notice. These comments addressed all aspects of

the analysis. In this section, the Department will present discussions

of the general analytical issues raised by the comments, followed by

discussions of the product-specific issues.

a. General Analytical Comments

Discount Rates

The Department's plans to use a 7 percent discount rate in the

standards' analyses drew more comments than any other issue. (American

Council for an Energy Efficient Economy, No. 6 at 6; Public Citizen,

No. 7 at 4; Wayne Goode, No. 8 at 1; Ohio Sierra Club, No. 11 at 1;

Natural Resources Defense Council, No. 13 at 5 and appendix; Rocky

Mountain Institute, No. 15 at 1; Citizens Environmental Coalition

Education Fund, Inc. No. 18 at 1; California Energy Commission, No. 24

at 2; Advance Transformer, No. 25 at 3; Whirlpool Corporation, No. 31

at 1; Northwest Power Planning Council, No. 32 at 2; Champaign County

(IL) Board, No. 36 at 1; Washington Gas Light, Inc., No. 37 at 2;

George Smith, No. 38 at 1; Lone Star Gas Co., No. 39 at 2; Florida

Energy Office, No. 42 at 2; Sierra Club, No. 43 at 2; Ohio Office of

the Consumers' Council, No. 60 at 7; Helen Satterthwaite, No. 67 at 1;

Warren Widener, No. 78 at 1; and Martin Frost, No. 80 at 1).\7\ Most of

the comments asserted that the 7 percent rate was unjustifiably high,

while several stated that a 7 percent or even higher rate was an

appropriate rate for the various analyses.

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\7\Comments on the advance notice of proposed rulemaking have

been assigned docket numbers and have been numbered consecutively.

---------------------------------------------------------------------------

Commentators seeking a higher rate focused on consumer impacts,

while those advocating a lower rate generally pointed to societal

benefits. These different perspectives are not easily captured in a

single discount rate. The Department has reconsidered the issue, and

has decided that multiple discount rates, with each pertaining to a

different perspective, are warranted. These different rates (i.e.,

consumer, commercial and societal) are used to capture the impacts of

the standards on different constituents. The consumer and commercial

rates are used to calculate life-cycle costs for purchasers of

residential and commercial products, respectively. The social discount

rate is used to calculate the net present value of standards for the

Nation as a whole. Separate rates, therefore, were used for the

consumer sector, the commercial sector (since fluorescent lamp ballasts

are purchased primarily by commercial firms), and for society as a

whole. This discussion will describe the derivations of the consumer,

commercial and social discount rates that were used in the different

analyses.

1. Consumer discount rate. On November 17, 1989, DOE published a

final rule for refrigerators, refrigerator-freezers, freezers, and

small gas furnaces (54 FR 47916, November 17, 1989), hereafter referred

to as the November 1989 final rule. In the November 1989 final rule,

DOE selected a 7 percent discount rate, based on a methodology derived

from the Court of Appeals decision, Natural Resources Defense Council

v. Herrington, 768 F.2d 1355, 1406 (D.C. Cir 1985). As discussed in the

November 1989 final rule, the applicability of the court decision

changed somewhat with the passage of the Tax Reform Act of 1986 (Pub.

L. 99-514). The Tax Reform Act phased out the deductibility of interest

paid on consumer loans. Based on the revised methodology, DOE

calculated a range of discount rates that consumers incur; this range

is from less than 1 percent to slightly more than 15 percent. As

explained in the November 1989 final rule, DOE selected 7 percent for

the analysis for purposes of that rulemaking proceeding because it was

near the mid-point of the potential consumer discount rates. In

addition, DOE believes that the approach is reasonable in that it was

related to the opportunity cost of money for purchasing consumer

durables. As such, it was justified in terms of alternate consumer

purchases that are foregone in order to finance the purchases of

appliances.

In a subsequent final rule on energy conservation standards for

dishwashers, clothes washers, and clothes dryers (56 FR 22250, May 14,

1991), hereafter referred to as the May 1991 final rule, the Department

restated that the 7 percent rate was near the mid-point of the range of

consumer finance rates for the purchase of appliances. It was further

stated that if the Department could obtain data on the methods that

consumers use to purchase appliances, it could develop a weighted-

average, real, after-tax finance rate to use as a consumer discount

rate in the analysis.

In its comments on the September 1990 advance notice, Whirlpool

Corporation offered estimates of consumer financing of purchases of its

equipment: 40 percent of retail sales are paid in cash; 35 percent use

credit cards; 25 percent use retailer loans. These figures excluded new

home construction, which accounts for approximately 25 percent of

Whirlpool Corporation's total sales. (Whirlpool Corporation, No. 31 at

1-2 and Appendix 1.)

While Whirlpool Corporation represents only one source of data, the

Department has no reason to believe that Whirlpool Corporation's

customers differ from those of other manufacturers, and, therefore,

accepted Whirlpool Corporation's estimates as representative.

These numbers were applied to the real, after-tax finance rates

that are incurred by consumers, as reported in the November 1989 final

rule. Those rates were estimated to be just over 3 percent for

appliances purchased as part of a new home (whose finance rate is a

tax-deductible mortgage interest rate), to slightly under 1 percent for

cash purchases, to more than 15 percent for credit card purchases.

When these rates were applied to Whirlpool Corporation's estimates,

the resulting weighted-average, real, after-tax rate incurred by

consumers in appliance purchases was approximately 6 percent. The

Department, then, used 6 percent for the consumer discount rate in the

analyses, with sensitivities at 4 and 10 percent. The Department

believes that this range of discount sensitivities will capture the

real, after-tax rates that consumers encounter in financing the

purchase of an appliance.

The Department recognizes however, that there remains considerable

uncertainty in this estimate of the average consumer discount rate.

There are numerous possible financial interactions that could be

involved in the purchase of an appliance. For example, a credit card

purchase could be paid in full within the customary billing grace

period, thereby being exempt from finance charges, and, in effect,

resembling a cash purchase. This would tend to put downward pressure on

the weighted-average range of purchase financing choices. On the other

hand, a cash purchase may actually be financed, indirectly, by an

increase in credit card debt. This would tend to put upward pressure on

the weighted-average range of purchase finance rates. Furthermore, this

analysis does not take into account varying consumer perceptions of the

value of reducing current consumption in favor of longer- term

financial gains. For these reasons, the Department continues to solicit

data that might provide a more complete basis for the derivation of a

consumer discount rate used in these analyses.

Furthermore, while financing rates may indicate the direct

financial impact to consumers of an investment in increased efficiency,

they do not reflect either other types of investments available to

them, or varying consumer perceptions of the value of reducing current

consumption in favor of longer-term financial gains. For example, what

value of energy savings does a consumer need to receive from an

investment in an energy efficient refrigerator in order to justify

reducing savings, increasing debt, or delaying the purchase of other

consumer goods?

The costs of consumer financing does not indicate whether there are

similar investment opportunities, available to most consumers, that

produce higher rates of return. For example, are there home

improvements or other investments that could be made by most consumers

that would have higher rates of return than an investment in an energy-

efficient appliance? Also, a consumer discount rate based on consumer

financing expenses does not fully account for the risks of individual

consumer investments in improved appliance efficiency. For example, the

actual rates of return experienced by individual consumers may vary

widely depending on energy prices, appliance usage and useful life.

Some have argued that implicit discount rates estimated through an

examination of actual consumer purchases of appliances and related

consumer equipment would be a better basis for the consumer discount

rate used under this program. Various studies have indicated that these

implicit discount rates range from 3 percent to as high as 100 percent

(or more) for certain appliances. However, because implicit discount

rates are based on actual consumer purchase behavior, they also reflect

the extent to which the numerous potential market failures in energy

efficiency investments occur, such as inadequate information,

conflicting owner/renter incentives, and second party (builder/

contractor) purchases. One of the major reasons why Federal appliance

efficiency standards were originally established was to overcome these

market failures regarding investment in energy efficiency.

Consequently, DOE does not believe unadjusted (i.e., not corrected for

potential biases) discount rates derived from actual consumer behavior

should be used in evaluating the economic impact of proposed standards

on consumers.

This conclusion appears to be supported by court rulings affecting

the program. In Natural Resources Defense Council v. Herrington, 768

F.2d 1355, 1406 (DC Cir. 1985), the court stated that ``the entire

point of a mandatory program was to change consumer behavior'' and

``the fact that consumers demand short payback periods was itself a

major cause of the market failure that Congress hoped to correct.'' The

Department believes that the intent of the legislation which

established the appliance standards program is to achieve energy

savings which are being foregone because of market failures which

distort consumer decision-making (and behavior) from investing in

energy efficiency.

However, if information were available on the implicit discount

rates revealed by consumer decision-making in the absence of any

significant market- failure biases, it might provide a better basis for

the discount rates to be used in assessing the impacts on consumers of

proposed appliance efficiency standards. Another approach might be to

examine the rate of return consumers would require from other fixed

investments of comparable risk and liquidity. The Department solicits

information on the results of any analyses that could support the

derivation of discount rates using either of these approaches.

On the other hand, the nature of the appliance standards program

may imply that a household average required rate of return, whether

based on actual appliance purchase decisions (in the absence of

potential market failure distortions) or on comparable investments, may

understate the appropriate rate. Because the Act requires minimum

standards, their effect is generally greater on the low-efficiency, low

purchase-price end of the market, sometimes eliminating the lowest-

priced models. To the extent that low-income households purchase a

disproportionate share of these low-efficiency/low-price appliances,

they will be disproportionately represented among the affected

consumers.

At the same time, limited empirical research\8\ suggests that these

households exhibit higher-than-average discount rates (i.e., required

rates of return) across all of their time-sensitive decisions,

including (but not limited to) their appliance purchases. If, indeed,

these households are disproportionately affected by standards, their

discount rates would need to be given greater weight in determining the

effects of alternative standard levels on consumers. The Department

seeks comment on this issue.

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\8\Train, Kenneth, Discount Rates in Consumers' Energy-Related

Decisions: A Review of the Literature; Energy, December 1985.

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Based on the information now available, it appears that the average

consumer discount rate lies in the range of 4 to 10 percent. As

discussed above, the Department has used a 6 percent consumer discount

rate for the analyses in this rulemaking. The Department has conducted

sensitivity analyses using the 4 to 10 percent range and will continue

to solicit data and comments that would provide a better basis for the

derivation of consumer discount rates.

2. Commercial discount rate. For a discount rate that would be

applicable in the fluorescent ballast analysis, the Department believes

that one based on consumer expenses is inappropriate; the rate should

be based on costs in the commercial sector, since fluorescent lamp

ballasts are purchased for use primarily in that sector. In developing

a rate for use in the commercial sector, the Department considered a

procedure similar to the procedure used to develop a consumer discount

rate, and examined possible methods of financing purchases of more

efficient lighting equipment. One such method would be to finance a

loan. For the most credit-worthy customers, the prime rate of interest

would be applicable. Tables 15 and 21 of the DRI/McGraw-Hill Review of

the U.S. Economy; Long-Range Focus; Winter 1990-91 presented forecasts

of prime interest rates and percentage changes in the consumer price

index (CPI) for each year between 1995 and 2015. During this period,

the prime rate is expected to be fairly stable, ranging from 8.37

percent to 8.50 percent. The changes in the consumer price index are

projected to range from 3.88 percent to 4.90 percent. The resulting

real rates of interest are projected to range from 3.55 percent in 2014

to 4.64 percent in 1995, with a 21-year average of 3.85 percent.

Most companies, of course, are not eligible for prime-rate loans.

For them, the terms of borrowing are generally less favorable. While

DRI/McGraw-Hill does not forecast long-term, non-prime loan rates, some

insight can be gained from how such loans rates differ from prime loan

rates.

Based on a telephone conversation with the Federal Reserve System,

DOE learned that most commercial loans were in the 6 percent to 15

percent range. Using the higher rate, 15 percent, and deducting the

applicable changes in the consumer price index, the Department

calculated real rates of interest ranging from 10.1 percent in 2014 to

11.2 percent in 1995, with a 21-year average of 10.46 percent.

Alternatively, the Department looked at the divergence of the 15

percent loans from the then current prime rate; such loans were 50

percent greater than the 10 percent prime rate prevailing in 1990. By

applying a 50 percent increase to the projected prime interest rates,

the Department obtained nominal rates of interest of 12.56 percent to

12.75 percent. After a deduction of the expected changes in the

consumer price index, real rates of interest ranged from 7.76 percent

to 9.87 percent, averaging 8.05 percent over the 21-year period.

Another possible financing mechanism would be for the corporation

to finance the purchase of the more efficient equipment by displacing

investment capital. In Table 8 of DRI/McGraw-Hill's forecasts, there

are annual projections of the after-tax costs of financial capital for

each year between 1995 and 2015. After converting the numbers to pre-

tax costs, and after deducting the expected changes in the consumer

price index, the Department obtained the respective real rates of

interest. The costs of financial capital are projected to range from

11.61 percent in 1995 to 12.86 percent in 2015. The consumer price

index rates forecasts are the same as before, and the resulting real

finance rates range from 7.67 percent in 2000 to 7.96 percent in 2015,

with the 21-year average being 7.86 percent.

Of the different possible means of companies paying for

conservation improvements in lighting equipment, the range of real

rates of interest is from 3.55 percent to 11.12 percent.

Economic theory suggests that in deriving a commercial discount

rate, the Department should consider the opportunity costs of

commercial investments that were foregone. Therefore, the Department

also investigated real rates of return from commercial investment

activities between 1961 and 1990. These data were compiled from Annual

Statistical Digests of the Board of Governors of the Federal Reserve

System. The variables that were examined were commercial trade credit,

i.e., bankers acceptances; time deposits, i.e. certificates of

deposits; U.S. Treasury securities; and commercial paper. During the

30-year period, the average real investment returns realized in the

commercial sector ranged from 2.02 percent for bankers' acceptances

(which constituted 70 percent of the investment dollars), to 2.29

percent for investments in Treasury securities (which constituted 9

percent of commercial investment dollars).

When more risky investments, such as tax-exempt (class B) and

corporate (AA) bonds were examined, their real rates were 1.27 percent

and 3.52 percent, respectively, over the 1970-to-1986 period. These

real rates, too, were substantially outside of the purchase finance

range. The real rates for such bonds in earlier years also fell below

the purchase financing range of rates.

After considering the above, the Department elected to use four

percent as the commercial discount rate. The Department believes that

this rate approximates the real costs likely to be incurred by private

businesses which are able to finance small additional investments in

energy efficiency by reducing relatively liquid corporate investments,

e.g., bankers' acceptances, or by obtaining loans at or near the prime

interest rate, without diminishing their normal business investment.

However, if increasing investments in more energy efficient

technology are assumed to displace other, more profitable business

investments, or would require loans available only at more typical

commercial interest rates, the approximate discount rate would be

higher. For example, between 1980 and 1991, the real rates of return to

nonfinancial corporations averaged between 7 and 8 percent based on

data contained in Table 1.16 of the National Income and Product

Accounts, as presented in the Department of Commerce's Survey of

Current Business and, as noted above, real commercial interest rates

often exceeded 7 percent.

The Department invites comment on the most appropriate methodology

upon which to base the commercial discount rate and the best types and

sources of data to use in the calculation of this rate.

3. Social discount rate. In identifying a discount rate that is

appropriate for use in calculating benefits to the Nation as a whole,

the Department must consider the opportunity costs of devoting more

economic resources to the production and purchase of more energy-

efficient appliances and fewer national resources to other alternative

types of investment. It is not necessary, however, to determine the

characteristics of specific classes of consumers or businesses directly

impacted by the proposed standard. For these reasons, a broad measure

of the average rates of return earned by economic investment throughout

the United States is the most useful basis for a social discount rate.

Using this approach, the Office of Management and Budget prepared a

Background on OMB's Discount Rate Guidance in November of 1992,

containing an analysis of the average annual real rate of return earned

on investments made since 1960 in nonfinancial corporations, non-

corporate farm and non-farm proprietorships, and owner-occupied housing

in the United States. The results of this analysis indicated that since

1980, the annual real rate of return for these categories of

investments averaged slightly more than 7 percent, ranging from a low

of about 4 percent for owner-occupied housing (which represented about

43 percent of total capital assets in 1991 of about $15 trillion) to a

high of about 9 percent on non-corporate farm and non-farm capital

(which represented about 23 percent of the total). Between 1960 and

1980, the average real rate of return on capital was higher, averaging

about 8.5 percent in the 1970's and about 11.2 percent in the 1960's.

As a result of this analysis, the Office of Management and Budget chose

to designate 7 percent as the social discount rate specified in

revisions to Office of Management and Budget Circular A-94 issued on

November 10, 1992 (57 FR 53519). In that revised circular, Office of

Management and Budget established, inter alia, discount rate guidance

for benefit-cost analyses of regulatory programs that provide benefits

and costs to the general public.

An alternative method for deriving such social discount rate might

be broad measures of the costs of financing capital investments in the

United States. One such measure is the Federal Government's cost of

borrowing or the interest rate that is payable on long-term Government

securities. Another might be the prime interest rate available to major

corporate borrowers. In order to derive a real discount rate from

either of these measures the relevant interest rate would be adjusted

for inflation.

With regard to long-term Government securities as an example, the

nominal rates during June 1991 on Government securities maturing

between the years 2000 and 2015 averaged 8.55 percent. Adjusted by long

term forecasts of inflation, the rate would be approximately 4 percent.

Because the Government borrowing rate most accurately reflects the

direct cost to the Government of added investment, the Office of

Management and Budget has used this approach as the basis for discount

rates used in evaluating Federal investments which directly affect

Federal costs (such as energy efficiency investments in Federal

facilities). Using the prime interest rate or some combination of rates

to reflect non-Federal financing costs would result in somewhat higher

rates.

As indicated above, because the cost of financing additional

capital investments does not reflect the full opportunity cost of

shifting private investment from one area to another, it is not

considered to be a good basis for deriving discount rates. For this

reason, DOE is now proposing the use of a 7 percent social discount

rate in National net present value calculations, although it will also

perform sensitivity analyses at 4 percent and 10 percent. The

Department seeks comment on appropriate discount rates for the

analysis.

Life-Cycle Cost Analysis

Another consumer issue that drew a considerable number of comments

was the suggestion that in its life-cycle cost analyses, the Department

include any additional installation and maintenance expenses that may

result from conservation standards. (Southern Gas Association, No. 4 at

10; Energen, No. 12 at 2; American Gas Association, No. 23 at 2;

Florida Energy Office, No. 42 at 1; Southern Natural Gas Company, No.

46 at 1; Montana-Dakota Utilities Company, No. 54 at 4; Laclede Gas

Company, No. 55 at 4; Oklahoma Natural Gas Company, No. 57 at 3; ENTEX,

No. 58 at 4-5; Gas Research Institute, No. 59 at 1; Arkansas Western

Gas Company, No. 64 at 7; Piedmont Natural Gas Company, No. 71c at 4;

Public Service Company of North Carolina, Inc., No. 74 at 4; Southern

California Gas Company, No. 79 at 1; and Louisiana Gas Service Company,

No. 81 at 2).

In each of the consumer analyses, such as payback and life-cycle

costs, the Department did include all incremental expenses caused by

standards. For those design options entailing additional maintenance

expenses (beyond the base case), the incremental maintenance expenses

were included in the consumer price of the design option. Installation

expenses that were specific to the design option and independent of the

application were also included in the consumer price of the design

option.

Regional and Other Variations in Impacts

Several comments recommended that the Department look at regional

variations in usages of some climate-sensitive products, e.g., direct

heating equipment. (Southern Gas Association, No. 4 at 10; United Texas

Transmission Company, No. 26 at 3; Florida Energy Office, No. 42 at 1;

Arkansas Western Gas Company, No. 64 at 3; and Minnegasco, No. 83 at

2.).

The standards analysis assumes that nationwide average appliance

usage rates, energy prices, and efficiency applied to all consumers in

all areas of the nation, although the Department recognizes that there

exist large variations in each of these factors. However, the

Department did conduct a sensitivity analysis on the life-cycle cost

for energy prices by substituting various high and low regional prices

for national prices. The results of these sensitivities are presented

in the Technical Support Document. See Technical Support Document,

Chapter 4. However, these sensitivity analyses were performed at the

national level, and no effort is made to link them with any specific

population groups.

The Department seeks information concerning the extent to which any

proposed national efficiency standard is likely to affect identifiable

groups of consumers disproportionally and how best to consider such

impacts in the selection of efficiency standard levels. The Department

is also seeking additional data to help it better assess the

disproportionate impacts on such groups.

Usage

On a related issue, numerous comments suggested that the usage

variables the Department should use are those that are calculated from

field usage data. In addition, many of the comments provided estimates

of annual operating expenses of several of the appliances, e.g. water

heaters, direct heating equipment, and ranges and ovens. (Southern Gas

Association No. 4 at 4; ---- American Council for an Energy Efficient

Economy, No. 6 at 2; Whirlpool Corporation, No. 31 at 17, 19;

Washington Gas Light, No. 37 at 5; Lone Star Gas Company, No. 39 at 3;

Gas Appliance Manufacturers Association, No. 40 at 8; Columbia Gas, No.

45 at 3; Southern Natural Gas Company, No. 46 at 1; Montana-Dakota

Utilities Company, No. 54 at 3; Laclede, No. 55 at 4; Oklahoma Natural

Gas Company, No. 57 at 3, 5; Association of Home Appliance

Manufacturers, No. 61A at 36; Arkansas Western Gas Company, No. 64 at

6; Peoples Natural Gas Company, No. 65 at 1; Northern Minnesota

Utilities, No. 68 at 1; Minnegasco, No. 83 at 2; and Flair, No. 85 at

2).

The Department appreciates the data it received. The Department

also obtained data on unit energy consumption by appliance type,

principally from utility companies. The Department reviewed the data

received from all sources and generated what it believes are the best

estimates of energy consumption which are contained in the proposed

test procedure amendments for mobile home furnaces, direct heating

equipment, pool heaters and kitchen ranges and ovens discussed above,

and were used in the analyses for today's notice.

As noted above, regional energy prices were used in sensitivity

analyses. Additionally, in the proposed test procedure amendments, the

usage for mobile home furnaces and direct heating equipment have been

modified from a national basis to a regional one to reflect the mostly

regional distribution of these products.

Rebound Effect

Two comments raised the issue of rebound effects, which occur when

an appliance that is made more efficient is used more intensively, so

that the expected energy savings from the efficiency improvement do not

fully materialize. (American Council for an Energy Efficient Economy,

No. 6 at 5; Washington Gas Light, No. 37 at 2). American Council for an

Energy Efficient Economy commented that the consumer sees and reacts to

his or her total utility bill, so any efficiency change in a particular

product that has a small impact on his or her total utility bill should

not affect usage behavior. Washington Gas Light suggested that usage

elasticities should be decided by rigorous analyses of regional

appliance usage characteristics.

In this rulemaking, the rebound effects assumed were: 30 percent

for direct heating equipment and mobile home furnaces, 20 percent for

room air conditioners, and 10 percent for ranges and ovens. These

percentages represent the amounts by which the potential energy savings

from standards are reduced.

There is, however, an argument that the usage elasticities/rebound

effects for at least some household uses of energy may be substantial.

Within a household, the price elasticity of demand will be an average

of the elasticities of demand for each end use, e.g. appliance. For

example, suppose the price elasticity of demand at the household level

is .3. If some levels of appliance usage (say refrigerators) are

insensitive to price changes, i.e., zero elasticity, then at least one

other use must have an elasticity in excess of .3.

If the usage elasticity for a product is identical to the price

elasticity of demand for the energy the product uses, then it follows

that the weighted average of the usage elasticities of all household

uses must equal the household price elasticity of demand. Since the

appliances subject to energy efficiency standards account for more than

80 percent of household consumption, it would be unlikely that all

appliances would have usage elasticities less that the overall

household price elasticity of demand.

According to the Energy Information Administration, the household

price elasticity of demand for electricity is about .15 in the short

run and upward of .7 in the long run. Thus usage elasticities, should,

on average approximate these estimates. The Department seeks comments

on this argument.

Marginal Electricity Rates

American Council for an Energy Efficient Economy, Natural Resources

Defense Council, and Washington Gas Light all urged the Department to

use marginal electricity rates rather than average ones. (American

Council for an Energy Efficient Economy, No. 6 at 6; Natural Resources

Defense Council, No. 13 at 18; and Washington Gas Light, No. 37 at 3).

American Council for an Energy Efficient Economy and Natural Resources

Defense Council both stated that since room air conditioners are run

disproportionately during periods of peak utility load (when rates are

the highest), the use of average electricity rates will undervalue the

electricity savings from improved efficiency.

The Department agrees that use of average electricity prices can

produce inaccuracies and does attempt to use energy prices specific to

each end use. In the past, electricity rates have been assumed higher

for air conditioning than for other end uses, based on survey data of

consumer expenditures, disaggregated according to equipment ownership.

The consumer analysis for this proposed rule continues to distinguish

energy prices by end use, based on such survey results.

Washington Gas Light added that in addition to using marginal

electricity prices, the Department should use the All-Ratepayers Test

when measuring the cost effectiveness of a standard level. This test

was developed by the California Public Utilities Commission, and it

measures the impact of an action on all ratepayers, including non-

participants in the conservation activity. (Washington Gas Light, No.

37 at 13).

In this program the Department examines the effect of energy

conserved by each purchaser of a more efficient appliance, but does not

examine the effects that the aggregate conservation effects would

impose on the rates charged within a given utility. The impacts on any

system's rates from increased energy standards would depend on the

participation rates of its customers in the conservation activity and

the particular financial position of the utility.

Several comments discussed the impact of energy conservation

standards on low-income people. (Rocky Mountain Institute, No. 15 at 2;

Southern Union Gas Company, No. 46 at 1; Laclede, No. 55 at 5; Oklahoma

Natural Gas Company, No. 57 at 5; and Public Service Company of North

Carolina, Inc., No. 74 at 5). While the Rocky Mountain Institute stated

that with improved energy efficiency, the prices of used appliances

could be expected to decline in the short run, the other comments all

stated that the higher prices that would be caused by improved

efficiency standards on new units would have price-increasing effects

on used appliances and, therefore, be harmful for lower-income and

elderly consumers on fixed incomes.

The Department conducted literature searches on purchasing and

usage decisions in low-income households, to determine whether the

inputs of the consumer analysis should be adjusted to account for

differences between low- and average-income households. There was no

information available on which to base any changes to the consumer

analysis.

Lighting Prices

Another consumer issue was raised by Valmont Electric, which stated

that new energy conservation standards on fluorescent ballasts would

raise the retail prices of such ballasts, thereby impeding the

conversion from incandescent lighting to fluorescent lighting. (Valmont

Electric, No. 16 at 2).

Conversions from incandescent lighting to fluorescent lighting

occurs principally through compact fluorescent bulbs, the ballasts of

which are not included as part of the review of the legislated

fluorescent ballast conservation standards. Any revised energy

conservation standards on fluorescent ballasts will not affect the

prices of compact fluorescent bulbs and thereby slow the conversion

from incandescent to fluorescent lighting.

Heat Pump Water Heaters

On the issue of consumer acceptance of heat pump water heaters,

Crispaire Corporation stated that studies show consumer satisfaction

with them. (Crispaire Corporation, No. 19 at 1). In addition, the

company provided attachments with estimates of unit energy consumption

and annual performance factors for heat pump and resistance water

heaters.

The Department appreciates the information provided and used the

cited studies in developing data for the consumer analysis and

forecasting efforts.

Appliance Lifetimes

Two comments discussed product lifetimes. Wisconsin Blue Flame

Council stated that pilot lights decrease condensate, thereby extending

the tank life of gas water heaters. (Wisconsin Blue Flame Council, No.

33 at 2).

The Department based product lifetimes on an analysis comparing

recent replacement sales to historical shipments, and researched the

effects of particular design options on product life.

Air Energy Heat Systems said that the lifetime of heat pumps for

pool heaters is approximately the same as for air conditioning, if the

water chemistry of the pool is maintained in proper balance. (Air

Energy Heat Systems, No. 44 at 1).

The Department did not analyze heat pump pool heaters because no

test procedure is available.

Modeling

There were several issues raised with regard to the forecasting

efforts in the analyses. For example, Natural Resources Defense Council

suggested that the Department model uncertainty, not point forecasts in

economic growth and consumer choice and further suggested that the

Department could model uncertainties in economic growth by modeling

high-, mid-, and low-growth scenarios. (Natural Resources Defense

Council, No. 13 at 35-36).

The Department recognizes that all forecasts contain uncertainties.

The principal method by which DOE has accounted for uncertainties has

been through sensitivity analyses, which, in the past, have been

performed on equipment prices, energy prices, projected equipment

efficiencies and market discount rates (the last of which models

uncertainties in consumer choices of efficiency).

The Department favors an explicit representation of the uncertainty

in the forecasts. Clearly, the best representation would be a

statistical treatment of the uncertainty in each of the important

variables, including the coefficients used in the Lawrence Berkeley

Laboratory Residential Energy Model. At this time, however, such a

specification of the distribution of each of the variables and

coefficients does not exist. As the Lawrence Berkeley Laboratory

Residential Energy Model is updated, such distributions will be

generated, which will allow the Department to work towards the

capability to perform an uncertainty analysis in the model. Until then,

the Department will model uncertainties with sensitivities.

On the other hand, Natural Resources Defense Council endorsed the

Department's different assumptions used when calculating energy savings

and net present value. (Natural Resources Defense Council, No. 13 at

36).

For this rulemaking, the Department maintained the current

methodologies for calculating energy savings and net present value.

Ballast Energy; Use Forecasting

Advance Transformer Company recommended that the Department exclude

fluorescent lamp ballasts from incorporation in the Lawrence Berkeley

Laboratory Residential Energy Model because of their small number of

sales in the residential sector. (Advance Transformer Company, No. 25

at 3).

The Department did exclude fluorescent lamp ballasts from

incorporation in the Lawrence Berkeley Laboratory Residential Energy

Model. Instead, the Department analyzed fluorescent lamp ballasts in

the commercial sector using the Electric Power Research Institute end-

use model and the Commercial Energy End-Use Model.

Television Sets

With regard to television power and usage forecasts, the

Electronics Industries Association stated that television sets of newer

vintage draw less power than those of older vintage. To support this,

Electronic Industries Association presented data for the period 1967-

1991. (Electronic Industries Association, No. 30 at 2).

Thomson Consumer Electronics, Inc. provided data on the energy

consumption of color televisions by size, and asserted that the most

important factor in energy usage is viewing habits, specifically, the

number of concurrently operating televisions in a household, the number

of daily operating hours for each receiver, and control settings, i.e.,

brightness and sound levels. (Thomson Consumer Electronics, Inc., No.

49 at 3-5).

The Department welcomes the additional data provided in the

comments. The Department agrees that the energy consumption of a

television set is a function of vintage. It was included in a previous

analysis\9\ and is included in the analysis for this proposed rule.

---------------------------------------------------------------------------

\9\U.S. DOE Technical Support Document: Energy Conservation

Standards for Consumer Products: Refrigerators, Furnaces, and

Television Sets, DOE/CE-0239, November 1988.

---------------------------------------------------------------------------

The Department also agrees that the number of television sets per

household and number of viewing hours are determinants of energy usage,

and included these factors in its forecasts. On the other hand, while

the Department recognizes that control settings are important, it does

not expect them to be different in the future than from today, and,

therefore, it did not forecast them.

Lawrence Berkeley Laboratory Residential Energy Model

Two comments addressed the Lawrence Berkeley Laboratory Residential

Energy Model methodology and documentation. Whirlpool Corporation

stated that it had no strong concerns with the Lawrence Berkeley

Laboratory Residential Energy Model at this time. (Whirlpool

Corporation, No. 31 at 1). The Florida Energy Office said that the

Department should document, well before the final rule, all model

assumptions. In addition, the Florida Energy Office offered to provide

Florida-specific data to the Department. (Florida Energy Office, No. 42

at 2, 6).

The Department will continue to use the basic Lawrence Berkeley

Laboratory Residential Energy Model methodology, but will incorporate

updates to data and coefficients for specific products as new analyses

proceed. The model assumptions and data for this rulemaking are

documented in the Technical Support Document accompanying this proposed

rule.

Lawrence Berkeley Laboratory-Manufacturer Impact Model

1. Modeling. There were numerous comments on the manufacturer

impact analysis. The Association of Home Appliance Manufacturers and

Whirlpool Corporation made several suggestions for improving the

modeling of manufacturer impacts.

The Association of Home Appliance Manufacturers suggested that the

Department devote more modeling efforts to developing demand curves

that are empirically verifiable. (Association of Home Appliance

Manufacturers, No. 61A at 66).

In response, the Department notes that many of the demand curves

used in the Lawrence Berkeley Laboratory-Manufacturer Impact Model were

derived from those that were empirically estimated by Oak Ridge

National Laboratory in 1976.\10\ The Department recognizes that a

project to update the demand curves could be useful, considering the

age of the data currently being used. The Department does not believe

that such data exist. However, the Department requests that if such

data does exist that it be submitted as comment on today's proposed

rule.

---------------------------------------------------------------------------

\10\Lin, Hirst, and Colon, Fuel Choices in the Household Sector,

ORNL Report Con-3 Oak Ridge National Laboratory, 1976.

---------------------------------------------------------------------------

2. Product mix. The Association of Home Appliance Manufacturers

stated that the Lawrence Berkeley Laboratory-Manufacturer Impact Model

should, but does not, take into account the effect that standards have

on the relative prices among product classes, which in turn will change

the product mix demanded by the market. (Association of Home Appliance

Manufacturers, No. 61A at 67).

The Department did take cross-elasticity effects into account in

the analysis of water heaters (between electric and gas fuels) where

they were particularly important, and will continue to look for

instances where such effects may arise in order to take those effects

into account as warranted. (See Technical Support Document, Volume F,

Appendix B).

3. Market power. The Association of Home Appliance Manufacturers

was critical of the way the Department models marketplace monopsony

power, i.e., the market power of purchasers. In its critique, the

Association of Home Appliance Manufacturers stated that the ability of

manufacturers to pass on increased costs to the consumer is limited

because their customers are primarily a group of large and

sophisticated retailers who have significant and increasing power in

the marketplace, and who exert downward pressure on the retail prices

of appliances. It further stated that the Lawrence Berkeley Laboratory-

Manufacturer Impact Model attempts to model the situation by modeling a

larger number of manufacturers than actually exist in the marketplace.

The Association of Home Appliance Manufacturers said that no

theoretical underpinnings were given for this assertion and that there

is no reason why the predictions of this ``false model'' should have

any resemblance to what actually transpires in the real world.

(Association of Home Appliance Manufacturers, No. 61A at 67-68).

The Department believes that oligopsony power itself could probably

be modeled analogously to oligopoly power. There is, however, no

accepted theory on the modeling of an industry characterized by both

oligopoly and oligopsony. Thus, DOE detailed the assumptions and

relevant mathematical derivations of the approach in the aforementioned

Technical Support Document for the final rule for dishwashers, clothes

washers, and clothes dryers. The approach is to increase the number of

firms input into the Lawrence Berkeley Laboratory- Manufacturer Impact

Model until the markups that are actually observed in the marketplace

are achieved; this is also an obvious implication of The Association of

Home Appliance Manufacturers's comments that manufacturers' ability to

pass on costs is limited. In fact, the most prominent comments from a

review panel on the Lawrence Berkeley Laboratory-Manufacturer Impact

Model indicated a concern that the modeling assumptions had gone too

far in the direction of reduced markups.\11\

---------------------------------------------------------------------------

\11\Lawrence Berkeley Laboratory, Manufacturers Impact Model

(MIM) External Review Panel Meeting, January 11, 1990.

---------------------------------------------------------------------------

4. Individual firm. There were also three comments critical of the

Department's modeling of an individual firm. It was argued that the use

of a ``typical firm'' does not address the differential impacts of

standards on companies, e.g., sizes, costs, niche markets. The

Association of Home Appliance Manufacturers insisted that the

Department could address the lack of data in performing this type of

analysis by researching the economic literature or by developing an

economic theory of how different classes of manufacturers would be

affected by standards. Whirlpool Corporation suggested addressing the

data problem by putting a range on the cost and margin data. (Advance

Transformer, No. 25 at 3; Whirlpool Corporation, No. 31 at 1;

Association of Home Appliance Manufacturers, No. 61A at 68-69).

The problem is essentially a lack of data. The Department's review

of the economic literature offered no solution to this problem. The

Department does analyze the cost and margin data (in addition to other

parameters) by performing a sensitivity analysis where the Department

changes those parameters (and others) in the model, and tests the

sensitivity of the model's results.

During interviews conducted with manufacturers, the Department

asked a series of questions covering the effects of firm size and

specialization. To date, DOE has not been given information by the

industry to draw conclusions about probable effects.

While it would be desirable to analyze the impact of standards on

the distribution of firms in an industry, fundamentally, this requires

detailed information on how individual firms differ from the norm.

Stating that the primary concern to manufacturers is the short-run

industry impact from standards, Whirlpool Corporation and the

Association of Home Appliance Manufacturers called for the Department

to present greater focus on, or explanation of, short-run impacts.

(Whirlpool Corporation, No. 31 at 1; Association of Home Appliance

Manufacturers, No. 61A at 69-70).

There are limitations to such an analysis. While general impacts

may be understood, the specific details of how each firm reacts at each

point of the short-run adjustment process are beyond the ability of

economic theory to elucidate. The Department believes that it has

treated the short run properly by modeling it on the short-run impact

of the downturn from a business cycle. In addition, in considering

standard levels to propose, the Department did take explicit account of

the short-run Lawrence Berkeley Laboratory-Manufacturer Impact Model

results.

The Association of Home Appliance Manufacturers suggested that more

detailed analysis of the impacts on individual firms and other areas

should be done. The Association of Home Appliance Manufacturers

commented that an analysis of how industry will fare, on average,

belies the very serious effects that adjustment can have, especially if

standards force a company in a small community to close. Therefore, it

is important, the Association of Home Appliance Manufacturers believes,

that DOE evaluate these potential short-term and individual company

impacts. (Association of Home Appliance Manufacturers, No 61A at 70).

In the analyses to date, the Department has used industry

profitability as the best single indicator of plant closures and other

significant disruptions on manufacturers. Further, the primary impact

variables of returns on equity, net income, revenue, price, and

shipments have been presented as the best summary statistics with which

to capture the significant impacts resulting from standards.

5. Multiple standards. In another comment, the Association of Home

Appliance Manufacturers stated that firms face constraints on the share

of their resources that can be devoted to meeting each new wave of

conservation standards from DOE. The cumulative impact of each new

rulemaking on manufacturers' resources must be considered in evaluating

manufacturer impacts. (Association of Home Appliance Manufacturers, No.

61A at 70-72).

The Lawrence Berkeley Laboratory-Manufacturer Impact Model is

designed to analyze the impact of standards on industry profitability

for an individual appliance. To date, this has involved treating each

manufacturer of a subject product as a separate company. Recognizing,

however, that many of the manufacturers produce more than one appliance

type subject to these rulemakings, and recognizing that those companies

may have limited resources to comply with the requirements of all of

the relevant regulations, the Department is presently seeking

approaches to account for the cumulative effects on a multi-product

company of the appliance conservation standards that it promulgates and

requests comments in this regard.

6. Variable costs. On another manufacturer issue, Whirlpool

Corporation criticized the Department's assumption that pricing relates

only to variable costs. Whirlpool Corporation suggested, instead, that

changes in fixed costs do have an impact on pricing in an industry.

(Whirlpool Corporation, No. 31 at 1).

The Department acknowledges that firms may try to pass on fixed

costs; however, standard economic theory concludes that even

monopolists will find this unprofitable, and will eventually decide not

to try it. The Department has seen no argument or evidence to the

contrary. It is interesting to note that if Whirlpool Corporation were

correct, the manufacturers who decided to do so would be impacted far

more favorably by standards than the Lawrence Berkeley Laboratory-

Manufacturer Impact Model predicted.

Consumer Demand

Whirlpool Corporation stated the Department assumes that consumers

will pay more for energy efficiency. Whirlpool Corporation claims

studies have shown this has not been true. In support, Whirlpool

Corporation supplied a list of 20 key buying factors from an August

1988 McKinsey study. Energy efficiency placed tenth in consideration

for kitchen products. (Whirlpool Corporation, No. 31, at Attachment 2).

The Department notes that energy efficiency placed ahead of other

factors such as ``lowest price available among similar makes and

models,'' ``has an extended service agreement at a fair price,'' and

``runs quietly.'' These results tend to support the Department's

position that consumers are willing to pay for energy efficiency.

Rebuttable Presumption

For consideration of rebuttable presumptions, the Association of

Home Appliance Manufacturers stated that incremental payback, not

cumulative payback, are the appropriate payback for standards.

(Association of Home Appliance Manufacturers, No. 61A at 64).

Since the legislation requires that payback be considered from a

standard level compared to the base case, DOE believes that only

cumulative payback may be used for the rebuttable presumption

determination. Additionally, the other impacts of appliance

conservation standards on energy use, consumers, manufacturers, and

other factors were determined by comparing projections under the base

case\12\ with the projections under the proposed standards.

---------------------------------------------------------------------------

\12\The base case assumes implementation of the conservation

standards that were set by the Act for central air conditioners and

central air conditioning heat pumps and furnaces and by Department

of Energy rulemaking in the case of refrigerators-freezers and

freezers and small gas furnaces.

---------------------------------------------------------------------------

Standards Decision Making

Natural Resources Defense Council and the Rocky Mountain Institute

addressed the Department's standards selection criteria. Both Natural

Resources Defense Council and the Rocky Mountain Institute stated that

in deciding the economic justification of standards, the Department

should not be attempting to maximize the economic benefits to

consumers, but should instead be maximizing energy savings. (Natural

Resources Defense Council, No. 13 at 16; Rocky Mountain Institute, No.

15 at 2).

In response, the Department recognizes that the basic statutory

direction to set standards is to achieve the ``maximum improvement in

energy efficiency that the Secretary determines is technologically

feasible and economically justified'' (section 325(l)(2)(A). DOE notes

that the economic impact of standards on consumers is only one of the

factors the Department considers in reaching its decision to set

conservation standards. Other factors include impacts on manufacturers

and on national benefits and costs. However, regarding consumer

benefits, while the minimum consumer life-cycle cost point is selected

as a trial standard level, and in many cases, the most stringent

standard level that the Secretary determined was economically justified

coincided with that level, several of the proposed standard levels have

life-cycle costs that exceed the minimum life-cycle cost. Thus,

maximizing consumer benefits does not take precedence over maximizing

energy savings.

Natural Resources Defense Council further stated that in deciding

on standard levels, the Department must first consider the most

stringent level of efficiency, i.e., the ``max tech'' level, and if it

is economically justified, DOE must set the standard at that level. If

it is not economically justified, DOE must then consider the next most

stringent level, and if economically justified, set the standard at

that level. (Natural Resources Defense Council, No. 13 at 17).

The Department does consider candidate standard levels in this

manner. However, in making its determination as to whether a standard

is economically justified, the Department considers both: The benefits

and costs of the standard level under consideration relative to the

base case; and how these benefits and costs compare to the benefits and

costs of other standards analyzed by the Department in the technical

support document for this rule.

Currently the costs and benefits of all candidate standard levels

are analyzed in comparison to the base case. However, it is possible

that more direct comparisons of the impacts of different standard

levels may be useful. In light of the above, the Department

specifically solicits comment on whether any incremental perspectives

would be useful and valid in the determination as to whether a

particular standard level is ``economically justified.''

The Florida Energy Office stated that after considering all

relevant costs and benefits over the life of the appliance, the

Department should set standards at the highest levels that are cost-

effective to the nation. (Florida Energy Office, No. 42 at 1).

As stated above, consideration of the national costs and benefits

of the impacts of candidate standard levels was one of the factors

considered in this rulemaking. (See Technical Support Document, Chapter

8.)

External Costs and Benefits

A number of comments on the Advance Notice of Proposed Rulemaking

urged the Department to consider the external costs and benefits in its

economic analyses of the efficiency standards proposed in this Notice

of Proposed Rulemaking. For example, the American Council for an Energy

Efficient Economy suggested that DOE account explicitly for

environmental costs in its economic analysis. (American Council for an

Energy Efficient Economy, No. 6 at 6.) 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.)

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 said that the consumer

and utility analyses should include monetization of externalities

(environmental and security) such as 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.

(Ohio Office of the Consumers' Council, No. 60 at 2.)

The Department recognizes that appliance standards may generate

external societal benefits arising from reductions in oil imports, and

emissions of SO2, NOx, and CO2 and perhaps other

pollutants. In this proposed rulemaking, as in previous rulemakings,

the Department derives the quantities of oil savings and emissions

reductions associated with the estimated energy demand reductions

expected to result from the proposed standards, but does not attach any

externality values to these benefits. In a separate Advance Notice of

Proposed Rulemaking for three products (58 FR 47326, September 8,

1993), the Department has indicated that it would be desirable to

establish monetary values for these external benefits, if sound

analytical bases can be found for doing so. The Department will attempt

to develop and use such monetary values in the analysis of the likely

impacts of updated standards for these three product categories.

However, because there is no consensus on how to undertake the analysis

underlying estimates of such environmental and energy security

externalities, the Department is not yet able to set monetary values

for such externalities accurately enough to be useful in the current

rulemaking.

Standards

1. Regional standards. On another standards determination issue,

the Association of Home Appliance Manufacturers stated opposition to

the setting of regional standards for room air conditioners.

(Association of Home Appliance Manufacturers, No. 61A at 22.)

The Department is not setting regional standards, but did conduct a

sensitivity analysis on life-cycle cost for room air conditioners

because their energy use is affected by climate. The sensitivity

analysis considered regional energy prices and usage.

2. Corporate average fuel economy. The Rocky Mountain Institute

stated that the Corporate Average Fuel Economy standards for

appliances, like the Corporate Average Fuel Economy for automobiles,

could allow for the gradual phase-in of technologies that are

substantially different from the present, less-efficient technologies,

e.g., horizontal-axis clothes washers and heat pump water heaters.

(Rocky Mountain Institute, No. 15 at 3.)

The Department acknowledges that some stringent standard levels

could involve radical industry manufacturing changes and recognizes

that a Corporate Average Fuel Economy-type approach to such standards

could help to ease industry's transition to producing these more

efficient appliances. The Department believes, however, that the Act

precludes that option since the statute requires any covered product to

meet the energy conservation standard.

3. Fuel switching. Several of the comments in this area dealt with

the standards selection criteria for specific products. For example,

Peoples Natural Gas Company stated a concern that standards could

unintentionally increase energy consumption by forcing a switch from

gas water heaters to electric. Peoples Natural Gas Company recommended

limiting standards-induced price increases to consumers for gas water

heaters to 120 percent of the standards-induced price increases for

electric resistance water heaters. Peoples Natural Gas Company

contended that this would avoid switching from gas to electric by

price-sensitive consumers, such as home builders and low-income

homeowners. (Peoples Natural Gas Company, No. 28 at 1).

In response, the Department analyzed standard levels by the

methodology proposed in the September 1990 advance notice, wherein fuel

switching was accounted for as part of the Lawrence Berkeley Laboratory

Residential Energy Model's forecasting of economic impacts. While some

fuel switching did occur (electric water heaters are projected to

increase their share of the market from 45.5 percent to 50.3 percent,

as shown by Table 3.4 of Volume F of the Technical Support Document),

the Department does not believe it occurred because of the relative

equipment price increases since the price of electric water heaters are

projected to increase much faster than that of gas, as presented in

Section IV below. The Department ascribes the fuel switching that is

projected to occur to the relative increase in the price of gas

compared to electricity as shown in Table 5.5 of Volume A of the

Technical Support Document.

Impacts on Manufacturers

The Association of Home Appliance Manufacturers contracted with

Arthur D. Little, Inc. to prepare a report on the Department's analysis

of top-loading, horizontal-axis clothes washers. In that report,

entitled ``Financial Impact of DOE Top-Loading Horizontal Axis

Standards on U.S. Washing Machine Manufacturers,'' Arthur D. Little

listed a number of criticisms of the Lawrence Berkeley Laboratory-

Manufacturer Impact Model and suggested that the Department use a

``Cash Flow Model,'' instead. (Association of Home Appliance

Manufacturers, Nos. 61D and 61E). Although clothes washers have been

dropped from this rulemaking, as discussed below, many of Arthur D.

Little's comments have general applicability to the other appliances.

One of Arthur D. Little's criticisms of Lawrence Berkeley

Laboratory- Manufacturer Impact Model involved that model's consumer

preference assumptions. Arthur D. Little stated, ``The combination of

price and energy savings account for under two-thirds of the basis of

selection. Thus, the Manufacturer Impact Model at best is taking into

account a little less than two-thirds of the consumer's decision to

purchase.'' Arthur D. Little concluded, ``neglected features seriously

distort the prediction of consumer's * * * well being.'' (Association

of Home Appliance Manufacturers, No. 61E at 25.)

The Department intends to set standards that do not reduce consumer

utility, a gauge of well being, by establishing product classes that

protect utility. While utility is sometimes a matter of degree, instead

of an open and shut case, the basic concept is the establishment of

classes that protect a less efficient, but desirable, feature such as

the through-the-door ice service for refrigerators. Since the

establishment of classes is performed before the manufacturer impact

analysis, it is appropriate for the Lawrence Berkeley Laboratory-

Manufacturer Impact Model to assume there is no difference in consumer

utility between an appliance meeting the different trial standard

levels. Furthermore, since standards are intended to affect only an

appliance's energy efficiency (which usually is positively related to

price), modeling consumer response only to changes in those variables

is reasonable.

The Arthur D. Little report was also critical of the Lawrence

Berkeley Laboratory-Manufacturer Impact Model's treatment of market

power issues. The report stated that the manufacturer analysis

concludes that manufacturers can set their own prices because the

manufacture of the product is concentrated in the hands of a small

number of producers. (Association of Home Appliance Manufacturers, No.

61E at 27.) Furthermore, the report asserted that within the Lawrence

Berkeley Laboratory-Manufacturer Impact Model, mark-up is countered

only by a very weak consumer reaction, as measured by the elasticity of

demand relative to the purchase price of the appliance and its

operating expense. (Association of Home Appliance Manufacturers, Id.)

A major difference that exists in the manufacturer impact analysis

performed for today's notice and typical manufacturer experience to

increasing prices is that the analysis assumes that all manufacturers

in the industry will have to increase prices to meet the standard. This

is a very different scenario from an individual firm raising its prices

independently from its competitors. To accomplish the analysis, the

Lawrence Berkeley Laboratory-Manufacturer Impact Model uses two

elasticities; an individual firm elasticity, which is used to establish

price, and an industry elasticity, which is used to establish sales.

The individual firm elasticity used by the Lawrence Berkeley

Laboratory-Manufacturer Impact Model is greater than the industry

elasticity, and is such that if a firm raises prices it loses sales. It

is this price elasticity faced by the individual firm that determines

how much the firm can mark up price. However, the initial effect of

this elasticity is tempered in the model by the fact that the firm's

competitors are also raising prices until equilibrium is reached

between increased costs to meet the standard and increased prices. The

consumer reaction to this higher price is then calculated by the

industry elasticity, which is the consumers' responsiveness to having

the appliance or not, as opposed to buying it from a competing seller

for less. Since the Department considers the whole industry to be

affected by standards, a resulting rise in the general level of prices

for an appliance would likely have a relatively weak aggregate consumer

reaction.

In addition, the Department notes that in Arthur D. Little's own

``cash flow'' model, long-run sales of appliances are seemingly

unaffected by price; Arthur D. Little has assumed there is no consumer

reaction to price, or in other words, a price elasticity of zero.\13\

---------------------------------------------------------------------------

\13\This result may be found by examining Appendix C of the ADL

report which contains the results of its cash flow model. In it, two

cases are discussed: a constant volume case and a variable volume

case. The distinction between the two is that in the former,

production volume is assumed to be constant for each year, while in

the latter, volume is constant for each year until 1997 (two years

before standards when, presumably, sales rise in anticipation of

higher prices) through 2003. The volume then goes back to the same

constant level in 2004. Thus, the results indicate that consumers

respond to the coming price increase, but after six years, their

demand falls back to the original level, despite the higher price.

Thus, aside from a short run effect over a six-year period, the

price elasticity of demand is zero.

---------------------------------------------------------------------------

This assumption would imply that manufacturers were completely free

to set price at any level they wanted.

Another area in which the Arthur D. Little report was critical of

the Lawrence Berkeley Laboratory-Manufacturer Impact Model was in the

treatment of dynamic adjustment issues. As Arthur D. Little's report

stated, ``To determine the impact on manufacturers, the Manufacturer

Impact Model only examines two static cases * * * and misses important

changes in the health of the industry [during the adjustment period].''

(Association of Home Appliance Manufacturers, Id.).

The ``two static cases'' to which Arthur D. Little is referring are

the base and standards cases. However, Arthur D. Little is incorrect in

stating that these two cases are static. As is documented in the

Technical Support Document, the Lawrence Berkeley Laboratory-

Manufacturer Impact Model also computes a short-run analysis, the sole

purpose of which is to assess the dynamic impact of standards, in

addition to computing the long-run analysis to determine the impacts

after those dynamic impacts have been absorbed. The dynamic effect that

is captured with the Lawrence Berkeley Laboratory-Manufacturer Impact

Model short-run analysis is the extra price competition that may occur

when the quantity demanded is suddenly reduced by the standards-induced

price increase. This dynamic effect generally results in lower

profitability over the short-run, as compared to over the long-run,

especially at the higher standard levels as reported in Section IV

below. This effect is completely ignored by the Arthur D. Little model

with its zero price elasticity. However, Arthur D. Little does address

a different dynamic effect which the Lawrence Berkeley Laboratory-

Manufacturer Impact Model does ignore.

The dynamic effect addressed by Arthur D. Little is the forward

time- shifting of appliance purchases in anticipation of a standards-

induced price increase. The Department has been aware of this for some

time, but has not incorporated it into the Lawrence Berkeley

Laboratory-Manufacturer Impact Model because of a lack of data on the

extent of purchase time-shifting.

Additionally, the Department believes that any effect of time-

shifting is initially positive and then negative. When appliances are

bought in advance of standards, the initial effect probably would be to

improve profits and cash flow. When the quantity demanded falls

temporarily after standards, the effect probably would be to hurt

profits and cash flow. These two effects very nearly should cancel over

time. The Department notes that this result is in sharp contrast to the

dynamic effect that the Lawrence Berkeley Laboratory- Manufacturer

Impact Model does consider, which has a non-recoverable impact on the

industry. Nonetheless, DOE agrees that time-shifting could bear further

investigation and will evaluate whether the estimates supplied by

Arthur D. Little on the magnitude of time-shifting can be of use.

Arthur D. Little also was critical of the Lawrence Berkeley

Laboratory- Manufacturer Impact Model's inability to take into account

(or try to predict) some of the consequences of the low profitability

that the model sometimes predicts. In particular, its report points out

that if the rate of profit did decline significantly in real terms, the

industry would have a very hard time raising additional equity. Arthur

D. Little points out that, in actuality, both owners and financial

backers of firms would limit capital until expected return matched

their required return. According to the comment, the Lawrence Berkeley

Laboratory-Manufacturer Impact Model, therefore, ``* * * sacrifices

realism in modeling the relationship between expected return and the

willingness of owners and financial backers to commit capital for

retooling.'' (Association of Home Appliance Manufacturers, No. 61E at

27-28.)

The Department agrees with Arthur D. Little's statement regarding

the difficulty that industry likely would have in raising capital as a

consequence of significantly reduced profitability. Furthermore, it is

true that the Lawrence Berkeley Laboratory-Manufacturer Impact Model is

limited to estimating the impact of potential standards on an industry,

whether positive or negative, as characterized by profitability. The

model does not attempt to predict the specific forms of the damage and

the complex reactions (inability to raise capital, failures of some

firms, foreign buy-outs, mergers, capacity reductions, etc.) that could

occur within a negatively affected industry. However, the Department

does not believe that it is necessary to attempt to predict that sort

of detail. Rather, DOE believes it is obligated not to set standards

that would cause serious damage.

The Department believes that the magnitude of the hypothetical

profit loss is a very good indicator of the magnitude of the impacts

that will be imposed on the industry. When the Lawrence Berkeley

Laboratory-Manufacturer Impact Model predicts a precipitous decline in

profit, this should be interpreted as damaging to the industry. Indeed,

in many cases, as discussed in Section IV below, the Lawrence Berkeley

Laboratory-Manufacturer Impact Model does predict a sharp drop in

profitability, and this prediction figures strongly in rejecting the

standard in question.

Because of all the ``deficiencies'' in the Lawrence Berkeley

Laboratory- Manufacturer Impact Model, Arthur D. Little's report

suggested that the Department abandon the model, and proposed, instead,

that the Department use a cash-flow model. The cash-flow model

determines the economic impact of energy conservation standards on

manufacturers by estimating the cash flows associated with meeting the

standards, and calculating a value for those cash flows. (Association

of Home Appliance Manufacturers, No. 61E at 19 and Appendix C.)

However, Arthur D. Little's cash-flow model submitted does not

predict whether a manufacturing industry will or will not be hurt by

standards. It allows one to make various assumptions about the market's

behavior, and then to predict the impact of those assumptions on cash

flow; but, it tells nothing about the market's behavior. As a result,

the Department notes that Arthur D. Little has run three scenarios with

radically different implications for the industry, with no way to

choose among them. The model is equally capable of processing the

optimistic and the pessimistic scenario, but it does not have an

expected scenario. The Department, therefore, does not believe that the

cash flow model, as presented in Association of Home Appliance

Manufacturers's comments, could serve to replace the Lawrence Berkeley

Laboratory-Manufacturer Impact Model for use in the analyses of the

impacts of appliance standards on manufacturers.

However, the Arthur D. Little report also stated that one of the

key assumptions in the Lawrence Berkeley Laboratory-Manufacturer Impact

Model is the proportion of costs that are fixed. The Arthur D. Little

report went on to state that, ``After interviewing all five domestic

manufacturers, Arthur D. Little was unable to verify that the washing

machine manufacturers have any sense as to the proportion of their

costs which are long-term fixed costs * * *. Basing a model upon an

assumption that is not empirically verifiable is a risky proposition.''

(Association of Home Appliance Manufacturers, Id.)

The Department agrees that one of the key assumptions in the

Lawrence Berkeley Laboratory-Manufacturer Impact Model is the

proportion of costs that are fixed and variable. The Department is

sensitive to the claim that this key input parameter to the Lawrence

Berkeley Laboratory-Manufacturer Impact Model is ``completely alien to

manufacturers.'' The Department would certainly consider alternate

manufacturer impact models that utilize more known and verifiable

inputs. However, to be an acceptable alternative model, the Department

believes that such model would have to have forecasting ability similar

in scope and sophistication as the Lawrence Berkeley Laboratory-

Manufacturer Impact Model. As discussed above, the cash-flow model

submitted by the Association of Home Appliance Manufacturers does not

meet this test. Additionally, the Department would be interested in any

analyses that indicate adverse manufacturer impacts at any of the

proposed standard levels, as opposed to arguments over the severity of

the adverse impact of rejected standard levels.

Impacts on Utilities

Several comments addressed the Department's proposed analysis of

the impacts of energy conservation standards on electric utilities.

Natural Resources Defense Council stated that the utility analysis

needs to consider that under the base cases, there will be less

forecasting certainty than would occur under new and revised standards,

and a greater probability that utilities would misforecast electricity

demand. (Natural Resources Defense Council, No. 13 at 32). The Ohio

Office of the Consumers' Council also suggested that the utility

analysis should consider the value of reduced uncertainty in utility

forecasts as a result of standards. In addition, the Ohio Office of the

Consumers' Council gave references to a methodology. (Ohio Office of

the Consumers' Council, No. 60 at 6).

Increased demand certainty after standards is an effect that was

not captured in the utility analysis. It results in substantial

benefits to electric utilities, particularly when demand growth is

rapid. These benefits accrue because demand growth is uncertain, and if

the utility misforecasts demand, it may build too few or too many power

plants. This risk of capital misallocation can be substantial in

certain cases.

With regard to the appropriate measure of dollars to use in the

utility impact analysis, Natural Resources Defense Council stated that

``DOE needs to do the utility impact analysis in nominal dollar terms,

using actual utility assumptions for depreciation and rate of return.

Utility rates and finances are computed in nominal dollars, not real

dollars, and this can have a dramatic impact on how new power plant

construction will affect rates.'' (Natural Resources Defense Council,

No. 13 at 32).

It is true that utilities calculate rates in nominal dollar terms.

The Department, therefore, calculated utility impacts in both real and

nominal dollars, in order to determine how adding an inflation factor

would affect the results.

With regard to the Clean Air Act Amendments of 1990 (Pub. L. 101-

549, November 15, 1990), Natural Resources Defense Council stated that

utility expansion plans will need to be consistent with the Act, which

will require more controls as the demand for electricity grows.

Appliance standards will, all other things being held equal, make

compliance with the Clean Air Amendments less expensive for utilities,

as it allows them to meet the cap on emissions more easily. (Natural

Resources Defense Council, No. 13 at 32, 35).

The utility analysis and the environmental analysis are consistent

with the 1990 Clean Air Act Amendments. The Department collected

forecasts of the value of marketable permits for sulfur, estimates of

the other effects of the Clean Air Act Amendments, and assessments of

future utility generation by fuel type. The Department assessed these

estimates and assimilated them into the analysis. (See Technical

Support Document, Environmental Assessment, Section 2).

The Florida Energy Office stated that capacity cost credit (for

avoided capacity) should not be limited to combustion turbines but

should match the load characteristics of the subject appliance,

categorized into peaking, intermediate, and baseload groups. Air

conditioners should be categorized according to their load duration

characteristics. (Florida Energy Office, No. 42, at 2).

The Department agrees that load shape characteristics should be

included in an assessment of air conditioner (and other appliances)

avoided peak demand. The current utility analysis accounted for these

effects. The Department investigated separating energy savings into

peaking, intermediate, and baseload categories, to determine if this

would have a significant effect on the results. The utility analysis

assumed a combustion turbine proxy, which values all peak demand

savings at the cost of a combustion turbine. This is the most widely

used approach by U.S. utilities.

The Ohio Office of the Consumers' Council stated that the utility

analysis should consider transmission and distribution capacity

savings. (Ohio Office of the Consumers' Council, No. 60 at 5).

The Department agrees that transmission and distribution capacity

savings should be included in the utility analysis, and did include

them. Avoided transmission and distribution costs were based on the

value assigned to this avoided transmission and distribution capacity

by many different U.S. utilities.

Two commentators stated that off-peak water heaters (those that

heat water only during off-peak hours) save energy, and that this

should be included in the utility analysis. (National Regional Electric

Cooperative Association, No. 17 at 1; Vaughn Manufacturing Company, No.

75 at 1).

In response, the Department notes that where utilities offer time-

of-day rates, the economics of off-peak water heating change

dramatically and may be very attractive. However, the Department does

not have the authority to require utilities to offer such rates, and

believes the lack of these rates offered nation-wide precludes

consideration of off-peak water heaters in a national standard.

Several comments discussed the impacts of appliance conservation

standards on natural gas utilities. The Washington Gas Light, Inc.

urged the Department to dedicate a similar level of analytical effort

to the utility cost consequences of standards on natural gas appliances

as it devotes to impacts on electric utilities from standards on

electric appliances. (Washington Gas Light, Inc., No. 37 at 12).

The Department initially studied the potential impacts of standards

on electric utilities and not natural gas utilities because there were

more abundant data on the former. Furthermore, significantly more

residential energy consumption is electricity rather than natural gas.

Nevertheless, the Department recognizes that for analytical

completeness, it should conduct studies on the potential impacts of

standards on natural gas utilities. Accordingly, DOE is now examining

methodologies and data sources that will enable it to conduct such

studies. The Department, therefore, welcomes submittals of relevant

information and data in this regard.

Columbia Gas and the Montana-Dakota Utilities Company stated that

conservation standards on gas appliances would result in a loss of

natural gas sales, which, in turn, would lead to higher rates to all

gas customers. (Columbia Gas, No. 45 at 5; Montana-Dakota Utilities

Company, No. 54 at 3).

The Department does not accept the inevitability of that

contention; a loss of gas sales may or may not increase rates. The

actual effect depends on the cost structure of the gas utility. If

avoided costs are larger than rates, then reducing sales would actually

decrease rates. Without study of individual gas utility cost

structures, no a priori conclusion in this regard can be drawn.

Lastly, four comments addressed the Department's planned analysis

of environmental effects. Both the Southern Union Gas Company and

Columbia Gas pointed out that the negative environmental effects from

electric resistance water heaters are more severe than are the effects

from natural gas water heaters. Columbia Gas stated that carbon dioxide

emissions from electric resistance water heaters are 3.8 times higher

than those from a minimum efficiency gas water heater. (Southern Union

Gas Company, No. 22 at 2; Columbia Gas, No. 45 at 5). Also, the

American Gas Association and Columbia Gas urged the Department to

consider the environmental impact of the total energy delivery cycle,

i.e., source energy, not just site consumption only. (American Gas

Association, No. 23 at 3; Columbia Gas, No. 45 at 2).

The statements regarding the relative environmental impacts of gas

and resistance electric water heating are generally correct.

Furthermore, the Department does account for source energy (not just

site energy) savings by including the fuel used by electric utilities

and the consequent emissions in the utility impact assessment and

environmental analysis. These effects are reported in Chapter 9 of the

Technical Support Document accompanying this Notice.

b. Product-Specific Comments

1. Room Air Conditioners

Classes. In the September 1990 advance notice, DOE proposed 12

classes of room air conditioners. The product classes consist of four

categories; units with side louvers, units without side louvers, units

with reversing valve with side louvers, and units with reversing valve

without side louvers. There are five class divisions by capacity within

each of the two categories without reversing valves.

The California Energy Commission proposed a reduction in product

classes from 12 to 4, eliminating the class divisions based on

capacity. (California Energy Commission, No. 24 at 2). Whirlpool

Corporation and Association of Home Appliance Manufacturers proposed

two additional classes, a casement slider and a casement only room air

conditioner. They stated that restricted geometry adversely impacts the

potential new designs that can be applied to those types of room air

conditioners. For example, rotary compressors could not be fitted into

the casement units. (Whirlpool Corporation, No. 31 at 7; Association of

Home Appliance Manufacturers No. 61A at 4). The American Council for an

Energy Efficient Economy in its comments cited room air conditioners as

an example where broad product classes have been properly selected.

(American Council for an Energy Efficient Economy, No. 6, at 1).

There are several constraints placed on the design of room air

conditioners. Because most room air conditioners are installed in

double-hung windows, the size of the most typical double-hung windows

becomes a significant factor in cabinet design and production. Every

room air conditioner unit could be designed to optimize performance and

efficiency as long as a specific cabinet could be built to best suit

the unit's particular capacity and efficiency. Manufacturers cannot

afford the luxury of optimizing every model they produce, so they limit

their production of cabinets to three or four sizes. Because of space

and configuration limitations, the larger capacity units for a given

cabinet size will tend to be less efficient. For this reason the

Department is rejecting the California Energy Commission proposal to

ignore capacity in establishing classes.

The Department decided to adopt additional classes for casement

slider and casement only room air conditioners. These units offer a

unique utility to the consumer in that they offer a performance-related

feature (fitting into casement windows) which other room air

conditioners cannot provide. The Department believes that the size

limitations imposed on casement units are more significant than those

faced by typical double-hung window units. Since its performance-

related feature justified a lower standard, separate product classes

were established for casement slider and casement only units. Because

of the small amount of empirical data on casement type units, the

Department was unable to analyze these classes. As a result, the

Department is not proposing any standards for them.

Design options. Both the Association of Home Appliance

Manufacturers and Whirlpool Corporation provided detailed comments on

each design option. (Association of Home Appliance Manufacturers, No.

61A at 5-22 and Whirlpool Corporation, No. 31 at 6-13). A number of the

comments concerned design changes to improve heat exchanger (evaporator

and condenser) performance. These improvements can be put into two

categories; designs for increasing the heat transfer surface area and

designs for increasing the heat transfer coefficients. The heat

transfer surface area can be increased by any of the following methods:

increasing the depth of the coil by adding vertical tube rows,

increasing the frontal area of the coil by increasing the height or

width, increasing the fin density, or adding a subcooler to the

condenser coil. The heat transfer coefficients can be increased by

using an enhanced fin design or grooved (rifled) refrigerant tubing. In

addition, spraying condensate on the condenser can improve its heat

transfer coefficient.

The Association of Home Appliance Manufacturers and Whirlpool

Corporation commented that cabinet size could prevent or at least limit

the number of tube rows that could be added to increase the depth of

the coil. In addition, they state that the effect of each successive

tube row on system performance diminishes rapidly. The Association of

Home Appliance Manufacturers also commented that compressor reliability

could be affected. The addition of tube rows increases the internal

volume of the system and, therefore, the amount of refrigerant

required. Compressor reliability could be reduced as the compressor

would be required to pump excess refrigerant. Whirlpool Corporation

added that a thicker coil will increase air flow restriction and may

actually reduce efficiency. (Association of Home Appliance

Manufacturers, No. 61A at 9-10; Whirlpool Corporation, No. 31 at 8).

In the analysis of additional tube rows, the Department used

engineering design data provided by room air conditioner manufacturers.

The data were based on measurements taken from actual room air

conditioner units and included information that specified the number of

tube rows that could be added to the existing coils. The computer

simulation model which was used in the analysis of room air

conditioners considered the effect that additional tube rows have on

the entire room air conditioner refrigerant system.

The Association of Home Appliance Manufacturers and Whirlpool

Corporation commented that increasing the frontal area of the coil

would require an increase in chassis size. Coils in existing room air

conditioners are already so large that any useful increase would

require an increase in the size of the cabinet. The incremental cost

for such a change would be significant. Whirlpool Corporation added

that an increase in frontal area reduces the water removal capability

of the evaporator coil. (Association of Home Appliance Manufacturers,

No. 61A at 10; Whirlpool Corporation, No. 31 at 7).

The Department agrees with the Association of Home Appliance

Manufacturers's and Whirlpool Corporation's comments regarding the

increase of the coil's frontal area. Any useful increase in performance

would require that the cabinet size be increased as well.

Manufacturers' cost data for this design were taken into consideration

in the analysis. The computer simulation model takes into account the

impact of increasing the coil frontal area on the evaporator's water

removal capability.

Both the Association of Home Appliance Manufacturers and Whirlpool

Corporation stated that there is a limit to how high the fin density

can be increased before air flow becomes too restricted and adversely

affects the efficiency of the unit. In addition, an increased fin

density might prevent the proper drainage of condensate from the

evaporator. The Association of Home Appliance Manufacturers added that

dirt build-up is a serious concern in coil design. With a higher fin

density, greater dirt build-up is likely to result in coil degradation

and lower unit efficiency. (Association of Home Appliance

Manufacturers, No. 61A at 11; Whirlpool Corporation, No. 31 at 8).

The Department solicited comments from room air conditioner

manufacturers regarding the maximum allowable fin densities for a

variety of evaporator and condenser coils. Their comments served as a

guideline to how high fin densities could be increased for prospective

coils. The computer simulation model is capable of calculating the

effect that increased fin density has on the air-side pressure drop

across the coil and, in turn, the power consumption of the fan motor.

In its comment concerning subcoolers, Association of Home Appliance

Manufacturers asserted that subcoolers are not used unless it is

impossible to achieve the needed subcooling without them. The

Association of Home Appliance Manufacturers also stated that when a

subcooler is needed, the available room in the chassis dictates the

allowable length of the subcooler. (Association of Home Appliance

Manufacturers, No. 61A at 12, 13). Whirlpool Corporation stated that a

subcooler type that transfers heat from the refrigerant in the liquid

line to the superheat exiting the evaporator is not practical in room

air conditioners due to limited space within the cabinet. (Whirlpool

Corporation, No. 31 at 10).

The Department understands the conventional practice used by

manufacturers for incorporating subcoolers into room air conditioners.

But the Department does not believe that this should prevent the design

option from being considered. As long as the chassis of the particular

unit is large enough to accommodate it, a subcooler will be considered

as a way to improve a unit's performance. Engineering data supplied by

manufacturers provided information on the maximum length of subcoolers

which could be incorporated into a particular unit. The data were used

to establish subcooler length for prospective room air conditioners.

Enhanced fin surfaces, such as wavy or slit patterns, improve the

heat transfer capability of a coil by increasing the air-side heat

transfer coefficient. In its comments regarding enhanced fin designs,

the Association of Home Appliance Manufacturers stated that most

manufacturers now use a wavy or ``waffle'' fin (Association of Home

Appliance Manufacturers, No. 61A at 12). Additional improvement can be

achieved through the use of ``lanced'' or ``louvered'' fins. The

Association of Home Appliance Manufacturers expressed a concern that

data based on work performed by manufacturers should be more heavily

relied upon than data based on published research papers available in

the public domain. The publicly available data seems to be either based

upon theoretical analysis or research-type testing of simulated coil

configurations. The Association of Home Appliance Manufacturers stated

that the correlation between the data and actual performance results in

room air conditioners is difficult to determine. (Association of Home

Appliance Manufacturers, No. 61A at 13, 14). Whirlpool Corporation

stated that air flow is reduced and air-side pressure drop across the

coil is increased due to incorporating enhanced fin surfaces into

coils. But Whirlpool Corporation added that enhanced fin designs

provide significant improvement without substantial additional cost.

(Whirlpool Corporation, No. 31 at 9).

The Department generally agrees with the comments made by

Association of Home Appliance Manufacturers concerning enhanced fin

design. Test data received from room air conditioner manufacturers and

heat exchanger manufacturers are given more weight than theoretical

analyses when deciding how much of an improvement should be given to

the air-side heat transfer coefficients due to enhanced fin surfaces.

The Department does not believe that the theoretical or research data

available in the public domain should be dismissed entirely, and is

using it as a check on the data received from manufacturers to

determine if their information is reasonable. Improvements to the air-

side heat transfer coefficients are input to the computer simulation

model. With this information on improvements, the model is able to

determine what effect enhanced fin surfaces have on the entire room air

conditioner system.

Augmenting the smooth inside surface of refrigerant tubing with

grooves increases the tube's refrigerant-side heat transfer

coefficient. Grooved (rifled) tubing can therefore improve the heat

transfer capability of a coil. The Association of Home Appliance

Manufacturers' comments concerning grooved tubing are similar to the

comments it gave regarding enhanced fin surfaces. The Association of

Home Appliance Manufacturers stated that data based on work performed

by manufacturers should be more heavily relied upon than data provided

by refrigerant tubing manufacturers. The Association of Home Appliance

Manufacturers asserted that the data made available by tubing

manufacturers are generally obtained under optimized conditions rather

than under conditions representing actual application in room air

conditioners. (Association of Home Appliance Manufacturers, No. 61A at

15). Whirlpool Corporation states that grooved tubing costs

significantly more than smooth tubing but has a beneficial effect on

system performance. (Whirlpool Corporation, No. 31 at 9).

As with enhanced fin surface data, the Department is giving more

weight to data received from room air conditioner manufacturers when

deciding how much improvement should be given to the refrigerant-side

heat coefficients due to grooved tubing. The Department is using data

made available by refrigerant tubing manufacturers as well as data

provided by research papers in the public domain to compliment the data

received from room air conditioner manufacturers. (See Technical

Support Document, Volume H). Improvements to the refrigerant-side heat

transfer coefficients are input as multipliers to the computer

simulation model. With the multipliers, the model is able to determine

what effect grooved tubing has on the entire room air conditioner

system.

Whirlpool Corporation stated that it is standard practice to spray

condensate produced by the evaporator onto the condenser coil.

(Whirlpool Corporation, No. 31 at 9).

Because most, if not all, manufacturers incorporate the spraying of

condensate into their room air conditioners, the Department did not

analyze condensate spray as a design option. Baseline models for each

of the product classes are assumed to include condensate spray in their

designs.

Improving the air system efficiency can be accomplished either by

increasing the fan or fan motor efficiency. In a room air conditioner,

both the evaporator and condenser fans are driven by one fan motor. The

Association of Home Appliance Manufacturers stated that increases in

air system efficiency are limited because of the following:

Configuration constraints due to the compact design of room air units;

standardization of air system components because the industry's supply

comes almost entirely from a single vendor; lower fan motor

efficiencies that occur because the room air unit design is optimized

at fan speeds other than the point of maximum motor efficiency; and air

system designs which must limit noise levels. In addition, the

Association of Home Appliance Manufacturers stated that fan motor

efficiency is not expected to increase significantly by the year 1995.

The Association of Home Appliance Manufacturers also stated that

reductions in restrictions to air flow can be made only by increasing

the space available for air flow. Major increases in cost would be

associated with such a change as it would necessitate an increase in

the chassis of the room air conditioner. (Association of Home Appliance

Manufacturers, No. 61A at 16-19). Whirlpool Corporation repeated much

of what the Association of Home Appliance Manufacturers stated and, in

addition, stated that the use of separate fan motors would require

significant redesign and increase the product cost. (Whirlpool

Corporation, No. 31 at 11). Natural Resources Defense Council said that

DOE should add improved air flow past coils as a design option.

(Natural Resources Defense Council, No. 13 at 27). The American Council

for an Energy Efficient Economy recommended that DOE treat fan and fan

motor efficiency separately. (American Council for an Energy Efficient

Economy, No. 6 at 3).

In its analysis of increasing the air system efficiency, the

Department analyzed only improvements that could be made to the fan

motor. The data from fan manufacturers did not provide information on

the effect of different fan types on air system efficiency in a room

air conditioner application. Therefore, the Department did not analyze

improvements due to changes in the fan efficiency. The Department

agrees with the Association of Home Appliance Manufacturers's comment

regarding restrictions to air flow. Increasing the space available for

air flow can be accomplished only by enlarging the chassis size. In the

analysis of increased coil face areas where the cabinet size had to be

increased, increases in system efficiency were assumed to be a result

not only of the enlarged coil, but also the improvement in air flow

resulting from the larger cabinet. Therefore, improvements in the air

flow past the coils are inherently considered in the analysis of

increased coil face areas. The Department utilized data obtained from

fan motor manufacturers to determine efficiency increases and the

associated incremental costs for improving the efficiency of fan

motors.

Both the Association of Home Appliance Manufacturers and Whirlpool

Corporation commented that most room air conditioner manufacturers use

rotary compressors. Improvements beyond the currently available

efficiency of 11.0 energy efficiency ratio are expected to be small.

They also stated that higher efficiency scroll compressors might be

suitable for larger capacity room air units. But use of scroll

compressors would significantly increase the cost of room air

conditioners. (Association of Home Appliance Manufacturers, No. 61A at

19, 20; Whirlpool Corporation, No. 31 at 11). Natural Resources Defense

Council said that DOE should disaggregate the design option of

improving the compressor efficiency into motor efficiency, volumetric

efficiency, reduced mechanical resistance in pumps, and alternate

compressor designs. (Natural Resources Defense Council, No. 13 at 27).

The Department took into account data from both room air

conditioner and compressor manufacturers when determining the available

efficiency increase in compressors. The data indicated that most room

air conditioners use rotary compressors and that the maximum energy

efficiency ratio for compressors of this type is 11.0. Other compressor

types were also analyzed. New technologies for reciprocating

compressors with capacities exceeding 17,000 Btu/h have pushed energy

efficiency ratios past 11.0. These reciprocating compressors were

considered for the two largest capacity classes of room air

conditioners. Scroll compressors were also considered, but for the

compressor capacities in the range used in room air conditioner units,

energy efficiency ratios did not exceed 11.0. Compressor manufacturers

indicated that there is a high probability that compressor energy

efficiency ratios ranging from 11.5 to 12.0 would be available by the

year 1995. Based on this information, compressor efficiencies of this

magnitude were analyzed by the Department. In response to Natural

Resources Defense Council's comment, compressor manufacturers increase

compressor efficiency by improving the performance of these individual

components. Data for the impact of component improvements are not

available but, component improvements are reflected in higher

compressor energy efficiency ratios. Therefore, the Department is

analyzing the compressor as a whole rather than attempting to analyze

individual components.

Other comments. The American Council for an Energy Efficient

Economy proposed that DOE revise the room air conditioner test

procedure to determine the energy savings on a cycling rather than a

steady state basis. If the test procedure cannot be revised during the

rulemaking, the American Council for an Energy Efficient Economy

recommended development of methods to estimate the benefits of design

options which tend to improve efficiency under cycling conditions.

(American Council for an Energy Efficient Economy, No. 6 at 2). On the

other hand, the Association of Home Appliance Manufacturers and

Whirlpool Corporation stated room air conditioners are not normally

turned on for extended periods of time, and when they are turned on the

(room and ambient) temperature is more likely to be high, reducing the

amount of cycling. The current one-temperature test procedure

adequately matches consumer usage patterns for room air conditioners.

The Association of Home Appliance Manufacturers said that any change in

the procedure will drive up the product cost and provide no benefit. It

was the contention of the Association of Home Appliance Manufacturers

and Whirlpool Corporation that design options such as variable speed

compressors, electronic expansion valves, thermostatic cycling

controls, and possibly use of alternative refrigerants that improve

efficiency under cycling conditions will not result in any measurable

efficiency improvements. The Association of Home Appliance

Manufacturers stated that the addition of a cycling test must be

justified by in-depth studies and field experiments to determine if the

efficiency improvements such a revision would predict are cost-

effective. (Association of Home Appliance Manufacturers, No. 61A at 6-

8; Whirlpool Corporation, No. 31 at 12-14).

In response, the Department believes that some design options may

improve efficiency under cycling conditions. The Department also agrees

that before such design options are translated into test procedure

credits, field tests would need to be conducted to provide evidence to

support such credits. Therefore, for purposes of this rulemaking,

cycling designs for room air conditioners will not be given test

procedure credit.

Though no test procedure credit will be given to cycling designs,

the Department believes that energy savings can be realized through the

use of variable speed compressors. Energy savings for variable speed

compressors have been estimated by extrapolating from results based on

tests performed on central air conditioners. The extrapolated estimate

is significantly lower than what test results indicate for central

systems. A low estimate is used because room air conditioners probably

cycle less than central systems. Cycling data for room air conditioners

are not available.

There are some design options listed in the Advance Notice of

Proposed Rulemaking which are theoretically possible, but for which

experimental data or prototypes are not available. The impact of

electronic expansion valves and thermostatic cycling controls on the

efficiency of room air conditioners has not been analyzed because the

Department was not able to obtain any data for these designs.

Both the Association of Home Appliance Manufacturers and Whirlpool

Corporation made comments regarding replacement refrigerants for R-22.

They commented that though research has identified refrigerant blends

(non-azeotropic mixtures) that could improve the efficiency of room air

conditioners, no prototypes have been developed that demonstrate this

potential. In addition, changes would be required in room air

conditioner systems, e.g., heat exchangers, in order for the unit to

operate efficiently with the replacement refrigerant. (Association of

Home Appliance Manufacturers, No. 61A at 8; Whirlpool Corporation, No.

31 at 15).

The Department agrees with the comments made by the Association of

Home Appliance Manufacturers and Whirlpool Corporation regarding

replacement refrigerants for R-22. Since no prototypes exist, the

Department did not analyze replacement refrigerants as a design option

for room air conditioners.

The Association of Home Appliance Manufacturers provided extensive

comments regarding the computer simulation model used by the Department

to analyze room air conditioners. The Association of Home Appliance

Manufacturers proposed the following changes to the computer simulation

model: (1) Modification of the compressor subroutine to model rotary

compressors and to simulate reciprocating compressors better; (2)

correction of the condensate spray subroutine to predict its effect on

system performance better; (3) addition of correction factors to

account for indoor/outdoor air leakage, short-circuiting of indoor air,

and heat leakage through the divider wall; (4) addition of

multiplication factors to modify coil heat transfer coefficients as a

result of using enhanced fin surfaces; (5) addition of correction

factors to modify such values as the compressor power and refrigerant

mass flow rate in order to assist in calibrating the model to test

data; and (6) addition of a psychometric heat balance routine to check

that the results from the simulation model are thermodynamically

consistent. In addition to making changes to the simulation model, the

Association of Home Appliance Manufacturers requested that DOE

calibrate the model to match industry test data for the baseline models

chosen to represent each of the room air conditioner product classes.

The Association of Home Appliance Manufacturers also requested that the

room air conditioner industry be given the opportunity to conduct

experiments to judge the models validity after the needed changes to

the model were completed. The Association of Home Appliance

Manufacturers also stated that manufacturers' data should be given

significant weight in predicting the increases to efficiency due to

design modifications. (Association of Home Appliance Manufacturers, No.

61A at 2,3). Whirlpool Corporation stated that it fully supports the

Association of Home Appliance Manufacturers's recommended changes to

the computer simulation model. (Whirlpool Corporation, No. 31 at 15).

The Department has made the changes to the simulation model that

were proposed by the Association of Home Appliance Manufacturers.

Simulation of baseline models were calibrated against test data

submitted by manufacturers. The Department encourages the room air

industry to test the validity of the simulation model and submit

results in response to the standard levels being proposed in this

rulemaking.

The Rocky Mountain Institute proposed that latent cooling be

considered in room air conditioner energy savings, and that DOE

investigate whether the spread between evaporator temperatures has been

reduced to a minimum. (Rocky Mountain Institute, No. 15 at 4).

The computer simulation model used in the analysis of room air

conditioners evaluated the thermodynamic performance of the refrigerant

system. In this evaluation, the removal of latent heat was calculated.

Minimization of the difference in evaporator inlet and outlet

temperatures is an inherent consideration in heat exchanger and system

design. This temperature difference was determined by the simulation

model.

The Florida State Energy Office (FSEO) suggested that the

Department consider classifying room air conditioners according to

their load characteristics. (FSEO, No. 42 at 5, 6). The Association of

Home Appliance Manufacturers stated that regional standards could

increase the product's cost by denying manufacturers the economy of

large production runs and augment distribution problems by isolating

inventories by region. (Association of Home Appliance Manufacturers,

No. 61A at 22-25).

The Department assumes that the Florida State Energy Office comment

concerns regional standards. The Department believes the program

requires the setting of a national standard and is proposing therefore

only a national standard for room air conditioners.

The Natural Resources Defense Council and the Florida State Energy

Office proposed that DOE establish procedures that take into account

the integration of room air conditioners and water heaters (heat

recovery units). (Natural Resources Defense Council No. 13 at 29; FSEO

No. 42 at 2,3).

Establishing standards and developing test procedures for

appliances which serve two types of loads simultaneously is a very

complex problem. The Department is in the process of developing

standards and test procedures for combined central air conditioners and

water heaters. However, because of the difficulty of running water

lines to a remote room air conditioner location and the inherent heat

losses from the hot water line, a room air conditioner/water heater

configuration does not seem particularly appropriate. At this time, DOE

will not establish a standard for room air conditioner/water heater

systems.

The Natural Resources Defense Council, the Florida State Energy

Office and the American Council for an Energy Efficient Economy stated

that DOE should consider the cost of peak power in evaluating the

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