Federal Energy Management and Planning Programs; Methodology and Procedures for Life Cycle Cost Analyses

DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 436

[Docket No. EE-RM-95-501]

Federal Energy Management and Planning Programs; Methodology and

Procedures for Life Cycle Cost Analyses

AGENCY: Office of Energy Efficiency and Renewable Energy, DOE.

ACTION: Notice of proposed rulemaking and public hearing and request

for public comment.

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SUMMARY: The Department of Energy (DOE) proposes to amend its Federal

Energy Management Program regulations to include provisions for

applying the life cycle costing methodology when evaluating and

comparing the cost effectiveness of water conservation measures in

Federal buildings.

DATES: Written comments (six copies) must be received on or before

October 24, 1995 in order to ensure their consideration. A public

hearing will be held on October 12, beginning at 9:30 a.m., e.d.t. at

the address indicated below. Requests to speak at the hearing must be

received by 4:30 p.m., e.d.t. on or before October 10. The length of

each oral presentation is limited to 10 minutes.

ADDRESSES: Written comments (six copies) and requests to speak at the

public hearing, are to be submitted to: U.S. Department of Energy,

Office of Energy Efficiency and Renewable Energy, Docket No. EE-RM-95-

501, EE-92, 1000 Independence Avenue, SW., Washington, DC 20585 (202)

586-3012. FAX comments will not be accepted. The public hearing will be

held at the U.S. Department of Energy, Forrestal Building, Room 1E-245,

1000 Independence Avenue, SW., Washington, DC 20585. Copies of the

transcript of the public hearing and public comments received may be

obtained from 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 9 a.m. and 4 p.m., Monday through Friday, except Federal

holidays.

FOR FURTHER INFORMATION CONTACT: K. Dean DeVine, P.E., Federal Energy

Management Program, Office of Energy Efficiency and Renewable Energy,

Mail Station EE-92, U.S. Department of Energy, 1000 Independence

Avenue, SW., Washington, DC 20585, (202) 586-6784.

SUPPLEMENTARY INFORMATION:

I. Introduction

The Department of Energy (DOE) today proposes amendments to some of

the provisions in 10 CFR part 436 which are applicable to programs for

the management of energy consumption by Federal agencies. The

amendments are directed principally toward updating the life cycle cost

methodology and procedures in subpart A in light of changes in law

requiring the use of life cycle costing methodology when installing

water conservation measures.

Section 152 of the Energy Policy Act of 1992 (Pub.L. 102-486)

amended the legislatively mandated policies with regard to federal

energy management originally set forth in section 542 of the National

Energy Conservation Policy Act (Act). 42 U.S.C. 8252. This amendment to

section 542 expands the purpose of the federal energy management

program to include the conservation and the efficient use of water, in

addition to non-renewable energy, by the Federal Government.

Section 543 of the Act (42 U.S.C. 8253(a)) ``Energy Management

Goals'' was also amended by Section 152 of the Energy Policy Act by

adding an energy management requirement for Federal agencies that ``Not

later than January 1, 2005, each agency shall, to the maximum extent

practicable, install in Federal buildings owned by the United States

all energy and water conservation measures with payback periods of less

than 10 years, as determined by using the methods and procedures

developed pursuant to section 544''. To implement this statutory

provision, it is necessary to amend the life cycle cost regulations as

set forth in part 436 of the Code of Federal Regulations, pursuant to

section

[[Page 44287]]

544 of the Act, so that the life cycle cost methodology and procedures

can be applied to the installation of water conservation measures which

are implemented by Federal agencies to meet the requirements of the

Act.

Interested persons are invited to participate in the making of this

proposed amendment by submitting such written data, views, or arguments

as they may desire. All communications received on or before the

closing date for comments, specified above, will be considered before

taking action on a final rule.

II. Background of the Life Cycle Cost Methodology

On January 23, 1980, DOE published a final Life Cycle Cost rule

(LCC) (45 FR 5620) which established the methodology and procedures for

calculating and comparing the life cycle cost of proposed investments

to upgrade the economic efficiency of Federal buildings through energy

conservation or substitution of renewable energy sources. The LCC rule

was published pursuant to section 381(a)(2) of the Energy Policy and

Conservation Act, as amended, 42 U.S.C 6361(a)(2), section 10 of

Executive Order 11912, and title V, part 3, of the National Energy

Conservation Policy Act (NECPA).

On November 30, 1990, DOE published final amendments to 10 CFR part

436 (55 FR 48217) to update the guidelines applicable to Federal agency

in-house energy management programs. That rulemaking was directed

principally toward updating the life cycle cost methodology and

procedures in subpart A of 10 CFR part 436 in light of provisions in

the Federal Energy Management Improvement Act of 1988 granting DOE more

discretion in setting discount and energy cost escalation rates (Pub.

L. 100-615).

The principal uses of the LCC rule are determining the cost

effectiveness of proposed investments and assigning priorities among

proposed cost-effective investments. The methodology and procedures of

the LCC rule are amplified in a manual published for DOE by the

National Institute of Standards and Technology (NIST) HB135, revised as

necessary to reflect amendments. It is referred to as the ``Life Cycle

Costing Manual for Federal Energy Management Program.'' The methodology

required by the LCC rule involves a systematic analysis of all

significant costs associated with proposed investments, the principal

purpose of which is to increase energy efficiency on a life-cycle cost

effectiveness basis. This analysis relates investment costs to future

costs associated with a proposed investment. The LCC rule provides for

standardized assumptions for establishing and comparing relevant cost.

See 10 CFR 436.14.

The Energy Policy Act of 1992 (Pub. L. 102-486) amended NECPA by

adding water and the use of renewable energy sources to the purpose of

NECPA (42 U.S.C. 8252) and requiring the use of the life cycle cost

methodology when installing in Federal buildings energy and water

conservation measures with payback periods of less than 10 years (42

U.S.C. 8253(b)). The amendments proposed today relating to water

conservation measures are pursuant to this authority.

III. General Discussion of Amendments

The proposed amendments for the most part insert the term ``water''

in the various provisions of the rule to reflect the fact that the

conservation and efficient use of water are now included within the

purpose and scope of the federal energy management program. The

methodology and procedures for applying life cycle cost analyses to

water conservation measures have been determined to be generally

consistent with the treatment of energy. In those instances where the

nature of water conservation measures require different treatment, a

separate provision is proposed. Overall, only minor changes to the rule

have been proposed to comply with the mandates imposed by the Energy

Policy Act of 1992.

The basic requirements of the life cycle cost methodology and

procedures are not changed by the proposed amendments. Their coverage

is expanded so that they apply to water conservation measures which are

the primary subject of the proposed amendments. To accommodate the

differences found when examining factors which may be unique only to

water or energy, the Department of Energy is proposing new and revised

definitions in Sec. 436.11 to allow for the computation of factors

unique to water conservation measures for the purpose of performing the

life cycle costing calculations. It is the intent of the amendatory

language to make clear that the application of the life cycle cost

methodology and procedures to water conservation measures are treated

parallel, where practicable, to energy conservation measures when

determining life cycle cost effectiveness. For example, the proposed

new definition of ``building water system'' parallels that of

``building energy system.'' The difference is the type of system which

is the subject of the analysis. In many instances, the Department of

Energy is proposing to amend the rule with addition of the terms ``and

water'' or ``or water'', as determined appropriate, to meet the

requirement of the Act to apply life cycle cost methodology and

procedures to water conservation measures.

There are a few minor changes which serve to clarify and facilitate

agency implementation. Section 436.13 presumes that investment in a

retrofit to an existing Federal building is not life cycle cost-

effective if it is occupied under a lease which includes the cost of

utilities in the rent and does not provide a pass through of energy or

water savings to the government. Language was added to be explicit that

this presumption applies only to Federal investment and should not

necessarily be used to determine the cost effectiveness of building

owners' investments in their Federally leased buildings. Such

investments are, in fact, cost-effective and are encouraged. The

assumption in Sec. 436.14 that ``water prices will not escalate'' is

based upon the fact that there are no escalation rates established for

water at the national level. However, agencies are permitted to use

escalation rates when they are available from suppliers. Public comment

is invited as to the availability and impact of such rates. Section

436.23 was modified to allow agencies to include future price changes

when they estimate simple payback time in order to be consistent with

national consensus standards developed by the American Society of

Testing and Materials.

IV. Review Under Executive Order 12866

The proposed rule was reviewed under the provisions of this

Executive Order governing Regulatory Planning and Review. DOE has

determined that the proposed rule does not constitute a ``significant

regulatory action'' and is therefore not subject to the provisions of

Sec. 6 of the Executive Order requiring review by the Office of

Management and Budget (OMB).

V. Review Under the Regulatory Flexibility Act

The proposed rules were reviewed under the Regulatory Flexibility

Act of 1980, Pub. L. 96-354 (5 U.S.C. 601-612). DOE has determined that

this rule will not have a significant economic impact on a substantial

number of small entities, therefore, no regulatory flexibility analysis

has been performed.

VI. Review Under the Paperwork Reduction Act

The Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520) requires

that

[[Page 44288]]

Federal agencies obtain approval from the OMB before collecting

information from 10 or more persons. There are no information

collection requirements in these proposed amendments.

VII. Review Under the National Environmental Policy Act

DOE has determined that promulgation of this proposed rule falls

within the interpreting/amending rulemaking class, Category A5 of

appendix A to subpart D, ``Categorical Exclusions Applicable to General

Agency Actions,'' of the DOE National Environmental Policy Act (NEPA)

regulations. 10 CFR part 1021. It is therefore categorically excluded

from preparation of either an Environmental Assessment or an

Environmental Impact Statement under NEPA (42 U.S.C. 4321, et. seq).

VIII. Review Under Executive Order 12612

Executive Order 12612, 52 FR 41685 (October 30, 1987), requires

that regulations, rules, legislation, and any other policy actions be

reviewed for any substantial direct effects on States, on the

relationship between the National Government and the States, or in the

distribution of power and responsibilities among various levels of

Government. If there are sufficient substantial direct effects, then

the Executive Order requires preparation of a federalism assessment to

be used in all decisions involved in promulgating and implementing a

policy action. The proposed rule will revise certain policy and

procedural requirements applicable only to Federal energy management

programs. Therefore, the Department of Energy has determined that the

proposed rule will not have a substantial direct effect on the

institutional interests or traditional functions of States.

IX. Opportunities for Public Comment

A. Written Comment Procedures

Interested persons are invited to participate in this rulemaking by

submitting data, views, or comments with respect to the proposed

rulemaking.

Six copies of written comments should be submitted to the address

indicated in the ADDRESSES section of this notice and must be received

by the date indicated in the DATES section of this notice. Comments

should be identified on the outside of the envelope and on the

documents themselves with the designation ``EE-RM-95-501''. In the

event any person cannot provide 6 copies, alternative arrangements can

be made in advance with DOE.

All written comments received will be available for public

inspection as part of the administrative record on file for this

rulemaking in the Department of Energy Freedom of Information Office

Reading Room at the address provided in the beginning of this notice.

If informal meetings or other contacts occur during this rulemaking,

DOE may add a memorandum to the record on file summarizing what

transpired.

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

information which that person believes to be confidential and which may

be exempt by law from public disclosure, should submit one complete

copy of the document, as well as two copies from which the information

claimed to be confidential has been deleted. DOE reserves the right to

determine the confidential status of the information and to treat it

according to its determination.

B. Public Hearing

1. Request to Speak Procedures

A public hearing on the proposed rule will be held at the time and

place indicated in the DATES and ADDRESSES Sections of this notice. Any

person who has an interest in the proposed rule or who is a

representative of a group or class of persons that has an interest in

the proposed rule may request an opportunity to make an oral

presentation. A request to speak at the public hearing should be

addressed to the address and phone number indicated at the beginning of

this notice. The person making the request should briefly describe his

or her interest in the proceedings and, if appropriate, state why the

person is a proper representative of the group. The person should also

provide a phone number where he or she may be reached during the day.

Each person selected to be heard will be notified by DOE as to the

approximate time they will be speaking. Six copies of the speaker's

statement should be submitted at the hearing. In the event any person

wishing to testify cannot meet this requirement, alternative

arrangements can be made in advance with DOE.

2. Conduct of the Hearing

DOE reserves the right to select persons to be heard at the

hearing, to schedule their respective presentations, and to establish

procedures governing the conduct of the hearing. The length of each

presentation will be limited to 10 minutes or based on the number of

persons requesting an opportunity to speak.

A DOE official will preside at the hearing. This will not be a

judicial or evidentiary-type hearing. It will be conducted in

accordance with 5 U.S.C. 553 and section 501 of the Department of

Energy Organization Act, 42 U.S.C. 7191.

Questions may be asked only by those conducting the hearing. At the

conclusion of all initial oral statements, each person who has made an

oral statement will be given the opportunity to make a rebuttal or

clarifying statement. The statements will be given in the order in

which the initial statements were made and will be subject to time

limitations.

Any further procedural rules needed for proper conduct of the

hearing will be announced by the presiding officer.

A transcript of the hearing will be made by DOE and made available

as part of the administrative record for this rulemaking. It will be on

file for inspection at the DOE Freedom of Information Reading Room at

the address indicated at the beginning of this notice.

If DOE must cancel the public hearing, DOE will make every effort

to publish an advance notice of such cancellation in the Federal

Register. Actual notice of cancellation will also be given to all

persons scheduled to speak. The hearing date may be canceled in the

event no member of the public requests the opportunity to make an oral

presentation.

List of Subjects in 10 CFR Part 436

Energy conservation, Federal buildings and facilities.

Issued in Washington, DC on August 3, 1995.

Christine A. Ervin,

Assistant Secretary, Energy Efficiency and Renewable Energy.

For the reasons set out in the preamble, 10 CFR part 436, is

proposed to be amended as follows:

PART 436--FEDERAL ENERGY MANAGEMENT AND PLANNING PROGRAMS

1. The authority citation for Part 436 continues to read as

follows:

Authority: 42 U.S.C. 6361; 42 U.S.C. 8251-8261; and E.O. 11912.

2. Section 436.1 is revised as follows:

Sec. 436.1 Scope.

This part sets forth the rules for Federal energy management and

planning programs to reduce Federal energy consumption and to promote

life

[[Page 44289]]

cycle cost effective investments in building energy systems, building

water systems and energy and water conservation measures for Federal

buildings.

3. Section 436.2 is amended by revising paragraph (b) to read as

follows:

Sec. 436.2 General objectives.

* * * * *

(b) To promote the methodology and procedures for conducting life

cycle cost analyses of proposed investments in building energy systems,

building water systems and energy and water conservation measures; and

* * * * *

4. Section 436.10 is revised to read as follows:

Sec. 436.10 Purpose.

This subpart establishes a methodology and procedures for

estimating and comparing the life cycle costs of Federal buildings, for

determining the life cycle cost effectiveness of energy conservation

measures and water conservation measures, and for rank ordering life

cycle cost effective measures in order to design a new Federal building

or to retrofit an existing Federal building. It also establishes the

method by which efficiency shall be considered when entering into or

renewing leases of Federal building space.

5. Section 436.11 is amended by:

(a) Revising the definitions of component price, Federal building,

life cycle cost, replacement cost, retrofit, and salvage value, and (b)

adding definitions for building water system, non-water operation and

maintenance costs, and water conservation measures.

Sec. 436.11 Definitions.

* * * * *

Building water system means a water conservation measure or any

portion of the structure of a building or any mechanical, electrical,

or other functional system supporting the building, the nature or

selection of which for a new building influences significantly the cost

of water consumed.

Component price means any variable sub-element of the total charge

for a fuel or energy or water, including but not limited to such

charges as ``demand charges,'' ``off-peak charges'' and ``seasonal

charges.''

* * * * *

Federal building means an energy or water conservation measure or

any building, structure, or facility, or part thereof, including the

associated energy and water consuming support systems, which is

constructed, renovated, leased, or purchased in whole or in part for

use by the Federal Government. Such term also means a collection of

such buildings, structures, or facilities and the energy and water

consuming support systems for such collection.

* * * * *

Life Cycle Cost means the total cost of owning, operating and

maintaining a building over its useful life (including its fuel and

water, energy, labor, and replacement components), determined on the

basis of a systematic evaluation and comparison of alternative building

systems, except that in the case of leased buildings, the life cycle

cost shall be calculated over the effective remaining term of the

lease.

* * * * *

Non-water operation and maintenance costs means material and labor

cost for routine upkeep, repair and operation exclusive of water cost.

* * * * *

Replacement costs means future cost to replace a building energy

system or building water system, an energy or water conservation

measure, or any component thereof.

Retrofit means installation of a building energy system or building

water system alternative in an existing Federal building.

Salvage value means the value of any building energy system or

building water system removed or replaced during the study period, or

recovered through resale or remaining at the end of the study period.

* * * * *

Water conservation measures means measures that are applied to an

existing Federal building that improve the efficiency of water use,

reduce the amount of water for sewage disposal and are life cycle cost

effective and that involve water conservation, improvements in

operation and maintenance efficiencies, or retrofit activities.

6. Section 436.13 is amended by revising paragraph (a), the

introductory text of paragraph (b) and paragraph (b)(2) to read as

follows:

Sec. 436.13 Presuming cost-effectiveness results.

(a) If the investment and other costs for an energy or water

conservation measure considered for retrofit to an existing Federal

building or a building energy system or building water system

considered for incorporation into a new building design are

insignificant, a Federal agency may presume that such a system is life

cycle cost-effective without further analysis.

(b) A Federal agency may presume that an investment in an energy or

water conservation measure retrofit to an existing Federal building is

not life cycle cost-effective for Federal investment if the Federal

building is--

* * * * *

(2) Occupied under a lease which includes the cost of utilities in

the rent and does not provide a pass through of energy or water savings

to the government; or

* * * * *

8. Section 436.14 is amended by revising paragraphs (b)(1), (c),

introductory text of (d)(2), (e) and (g) as follows:

Sec. 436.14 Methodological assumptions.

* * * * *

(b) * * *

(1) If the Federal agency is using component prices under

Sec. 436.14(c), that agency may use corresponding component escalation

rates provided by the energy or water supplier.

* * * * *

(c) Each Federal agency shall assume that the price of energy or

water in the base year is the actual price charged for energy or water

delivered to the Federal building and may use actual component prices

as provided by the energy or water supplier.

(d) * * *

(2) For determining the life cycle costs or net savings of mutually

exclusive alternatives for a given building energy system or building

water system (e.g., alternative designs for a particular system or size

of a new or retrofit building energy system or building water system),

a uniform study period for all alternatives shall be assumed which is

equal to--

* * * * *

(e) Each Federal agency shall assume that the expected life of any

building energy system or building water system is the period of

service without major renewal or overhaul, as estimated by a qualified

engineer or architect, as appropriate, or any other reliable source

except that the period of service of a building energy or water system

shall not be deemed to exceed the expected life of the owned building,

or the effective remaining term of the leased building (taking into

account renewal options likely to be exercised).

* * * * *

(g) Each Federal agency may assume that energy or water costs and

non-fuel or non-water operation and maintenance costs begin to accrue

at the beginning of the base year or when actually projected to occur.

* * * * *

8. Section 436.16 is amended by revising the section heading,

[[Page 44290]]

redesignating paragraphs (b) and (c) as paragraphs (c) and (d), and by

adding a new paragraph (b) as follows:

Sec. 436.16 Establishing non-fuel and non-water cost categories.

* * * * *

(b) The relevant non-water cost categories are--

(1) Investment costs;

(2) Non-water operation and maintenance cost;

(3) Replacement cost; and

(4) Salvage value.

* * * * *

9. Section 436.17 is amended by revising the section heading and by

adding paragraphs (c) and (d) to read as follows:

Sec. 436.17 Establishing energy or water cost data.

* * * * *

(c) Each Federal agency shall establish water costs in the base

year by multiplying the total units of water used in the base year by

the price per unit of water in the base year as determined in

accordance with Sec. 436.14(c).

(d) When water costs begin to accrue in the base year, the present

value of water costs over the study period is the product of water

costs in the base year as established under Sec. 436.17(a), or as

calculated by computer software provided or approved by DOE and used

with the official discount rate and assumptions under Sec. 436.14. When

water costs begin to accrue at a later time, subtract the present value

of water costs over the delay, calculated using the uniform present

worth factor for the period of delay, from the present value of water

costs over the study period or, if using computer software, indicate a

delayed beneficial occupancy date.

10. Section 436.18 is amended by revising the introductory text to

paragraph (c), paragraph (d), the first sentence of paragraph (e) and

paragraph (f) to read as follows:

Sec. 436.18 Measuring cost-effectiveness.

* * * * *

(c) Replacement of a building energy or water system with an energy

or water conservation measure by retrofit to an existing Federal

building or by substitution in the design for a new Federal building

shall be deemed cost-effective if--

* * * * *

(d) As a rough measure, each Federal agency may determine estimated

simple payback time under Sec. 436.23, which indicates whether a

retrofit is likely to be cost effective under one of the four

calculation methods referenced in Sec. 436.18(c). An energy or water

conservation measure alternative is likely to be cost-effective if

estimated payback time is significantly less than the useful life of

that system, and of the Federal building in which it is to be

installed.

(e) Mutually exclusive alternatives for a given building energy or

water system, considered in determining such matters as the optimal

size of a solar energy system, the optimal thickness of insulation, or

the best choice of double-glazing or triple-glazing for windows, shall

be compared and evaluated on the basis of life cycle costs or net

savings over equivalent study periods. * * *

(f) When available appropriations will not permit all cost-

effective energy or water conservation measures to be undertaken, they

shall be ranked in descending order of their savings-to-investment

ratios, or their adjusted internal rate of return, to establish

priority. If available appropriations cannot be fully exhausted for a

fiscal year by taking all budgeted energy or water conservation

measures according to their rank, the set of energy or water

conservation measures that will maximize net savings for available

appropriations should be selected.

* * * * *

11. Section 436.19 is amended by revising paragraph (d) to read as

follows:

Sec. 436.19 Life cycle costs.

* * * * *

(d) Energy and/or water costs.

12. Section 436.21 is revised to read as follows:

Sec. 436.21 Savings-to-investment ratio.

The savings-to-investment ratio is the ratio of the present value

savings to the present value costs of an energy or water conservation

measure. The numerator of the ratio is the present value of net savings

in energy or water and non-fuel or non-water operation and maintenance

costs attributable to the proposed energy or water conservation

measure. The denominator of the ratio is the present value of the net

increase in investment and replacement costs less salvage value

attributable to the proposed energy or water conservation measure.

13. Section 436.22 is revised to read as follows:

Sec. 436.22 Adjusted internal rate of return.

The adjusted internal rate of return is the overall rate of return

on an energy or water conservation measure. It is calculated by

subtracting 1 from the Nth root of the ratio of the terminal value of

savings to the present value of costs, where N is the number of years

in the study period. The numerator of the ratio is calculated by using

the discount rate to compound forward to the end of the study period

the yearly net savings in energy or water and non-fuel or non-water

operation and maintenance costs attributable to the proposed energy or

water conservation measure. The denominator of the ratio is the present

value of the net increase in investment and replacement costs less

salvage value attributable to the proposed energy or water conservation

measure.

14. Section 436.23 is revised to read as follows:

Sec. 436.23 Estimated simple payback time.

The estimated simple payback time is the number of years required

for the cumulative value of energy or water cost savings less future

non-fuel or non-water costs to equal the investment costs of the

building energy or water system, without consideration of discount

rates.

15. Section 436.24 is amended by revising the last sentence in the

Section as follows:

Sec. 436.24 Uncertainty analyses.

* * * If additional analysis casts substantial doubt on the life

cycle cost analysis results, a Federal agency should consider obtaining

more reliable data or eliminating the building energy or water system

alternative.

[FR Doc. 95-21156 Filed 8-24-95; 8:45 am]

BILLING CODE 6450-01-P