# Energy Conservation Program for Consumer Products: Energy Conservation Standards for Central Air Conditioners and Heat Pumps > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A99-30480 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** November 24, 1999 - **Citation:** 64 FR 66306 ## Text SUMMARY: The Department of Energy publishes this Supplemental Advance Notice of Proposed Rulemaking (ANOPR) to consider amending the energy conservation standards for central air conditioners and heat pumps. The purpose of this Supplemental ANOPR is to provide interested persons with an opportunity to comment on: First, the product classes that the Department is planning to analyze; Second, the analytical framework, models (e.g., the Government Regulatory Impact Model (GRIM)), and tools (e.g., a Monte Carlo sampling methodology, and life-cycle cost (LCC) and national energy savings (NES) spreadsheets) that the Department has been using in performing analyses of the impacts of energy conservation standards; Third, the results of preliminary analyses for the engineering, LCC, payback and NES contained in the Preliminary Technical Support Document (TSD): Energy Efficiency Standards for Consumer Products: Central Air Conditioners and Heat Pumps and summarized in this Supplemental ANOPR; and Fourth, the candidate energy conservation standard levels that the Department has developed from these analyses. DATES: Written comments must be received by February 7, 2000. The Department requests 10 copies of the written comments and, if possible, a computer disk. The Office of Building Research and Standards is currently using WordPerfect 8. A public hearing will be held on December 9, 1999, from 9 am-5 pm. See Section IV of the Supplementary Information for further details. ADDRESSES: Written comments should be submitted to: U.S. Department of Energy, Attn: Brenda Edwards-Jones, Office of Energy Efficiency and Renewable Energy, ``Energy Efficiency Standards for Consumer Products,'' (Docket No. EE-RM-94-403), EE-431, Forrestal Building, 1000 Independence Avenue, SW, Room 1J-018, Washington, DC 20585, (202) 586- 2945. The public hearing will be held at the U.S. Department of Energy, Forrestal Building, 1000 Independence Avenue SW, Room 1E-245, Washington, DC 20585. Copies of the Preliminary TSD: Energy Efficiency Standards for Consumer Products: Central Air Conditioners and Heat Pumps may also be obtained from: U.S. Department of Energy, Office of Building Research and Standards, 1000 Independence Avenue, SW, Rm 1J-018, Washington, D.C. 20585-0121, (202) 586-9127. The Preliminary TSD will also be available through DOE's web site. The Preliminary TSD provides the technical details of the analysis that was conducted in support of the Supplemental ANOPR being issued today. Public Information: The public may visit the Freedom of Information Reading Room, located at the US Department of Energy, Forrestal Building, 1000 Independence Avenue, SW, Room 1E-190, Washington, DC 20585 between the hours of 9 am and 4 pm, Monday through Friday, (except Federal holidays). Call (202) 586-3142 for information. For more information concerning public participation in this rulemaking proceeding, see section IV, ``Public Comment Procedures,'' of this document. FOR FURTHER INFORMATION CONTACT: Dr. Michael E. McCabe, U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, Forrestal Building, Mail Station EE-41, 1000 Independence Avenue, SW, Washington, DC 20585-0121, (202) 586-0854, E-mail: Michael.E.McC[email protected]. Edward Levy, 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, E-mail: Edward.L[email protected]. SUPPLEMENTARY INFORMATION: I. Introduction A. Authority B. Background 1. History 2. Process Improvement 3. Test Procedure II. Central Air Conditioners and Heat Pumps Analyses A. Preliminary Market and Technology Assessment 1. Market Assessment a. General b. Product Specific 2. Technology Assessment a. General b. Product Specific 3. Preliminary Baseline Shipments Forecast a. General b. Product Specific B. Screening Analysis 1. Product Classes a. General b. Product Specific 2. Baseline Equipment a. General b. Product Specific 3. Technology Screening a. General b. Product Specific C. Engineering Analysis 1. Energy Savings Potential and Production Costs a. General b. Product Specific i. Efficiency-Level Approach ii. Reverse Engineering Approach iii. Design Option Approach iv. Outside Regulatory Changes Affecting the Engineering Analysis 2. Manufacturing Costs a. General b. Product Specific i. Characterizing Uncertainty ii. Variability in Costs Among Manufacturers iii. Proprietary Design D. Life-Cycle Cost (LCC) and Payback Analysis 1. LCC Spreadsheet Model a. General b. Product Specific i. LCC Analysis ii. Equipment Prices iii. Payback Analysis (Distribution of Paybacks) iv. Rebuttable Payback 2. Preliminary Results a. General b. Product Specific E. Preliminary National Impact Analyses 1. National Energy Savings (NES) Spreadsheet Model a. General b. Product Specific i. Inputs to NES Analysis ii. Shipments Model iii. National Net Present Value 2. Preliminary Results a. General b. Product Specific 3. Indirect Employment Impacts a. General b. Product Specific F. Consumer Analyses 1. Consumer Sub-group Analysis a. General b. Product Specific 2. Consumer Participation a. General b. Product Specific G. Manufacturer Impact Analysis 1. Industry Characterization (Phase 1) a. General b. Product Specific 2. Industry Cash Flow (Phase 2) a. General b. Product Specific [[Page 66307]] 3. Manufacturer Sub-Group Analysis (Phase 3) a. General b. Product Specific 4. Interview Process a. General b. Product Specific H. Competitive Impact Assessment a. General b. Product Specific I. Utility Analysis 1. Proposed Methodology a. General b. Product Specific J. Environmental Analysis 1. Proposed Methodology a. General b. Product Specific K. Regulatory Impact Analysis III. Proposed Standards Scenarios IV. Public Comment Procedures A. Participation in Rulemaking B. Written Comment Procedures C. Issues for Public Comment V. Review Under Executive Order 12866 and other provisions I. Introduction A. Authority Part B of Title III of the Energy Policy and Conservation Act, Pub. L. 94-163, as amended by the National Energy Conservation Policy Act, Pub. L. Law 95-619, the National Appliance Energy Conservation Act of 1987, Pub. L. 100-12, the National Appliance Energy Conservation Amendments of 1988, Pub. L. 100-357, and the Energy Policy Act of 1992, Pub. L. 102-486, (EPCA or the Act), created the Energy Conservation Program for Various Consumer Products other than Automobiles. 42 U.S.C. 6291-6309. The National Appliance Energy Conservation Act of 1987 amended EPCA to impose performance standards for central air conditioners and heat pumps as part of the energy conservation program for consumer products. EPCA, section 325(d), 42 U.S.C. 6295 (d). EPCA also requires the Department to publish final rules thereafter, to determine if these standards should be amended. Before the Department determines whether to adopt a proposed energy conservation standard it must first solicit comments on the proposed standard. EPCA, section 325 (p), 42 U.S.C. 6295 (p). Any new or amended standard must be designed so as to achieve the maximum improvement in energy efficiency that is technologically feasible and economically justified. EPCA, section 325(o)(2)(A), 42 U.S.C. 6295 (o)(2)(A). To determine whether economic justification exists the Department must review comments on the proposal and determine that the benefits of the proposed standard exceed its burdens based to the greatest extent practicable, weighing the following seven factors: (1) The economic impact of the standard on the manufacturers and on the consumers of the products subject to such standard; (2) The savings in operating costs throughout the estimated average life of the covered product in the type (or class) compared to any increase in the price, initial charges, or maintenance expenses for the covered products that are likely to result directly from the imposition of the standard; (3) The total projected amount of energy savings likely to result directly from the imposition of the standard; (4) Any lessening of the utility or the performance of the covered products likely to result from the imposition of the standard; (5) The impact of any lessening of competition, as determined in writing by the Attorney General, that is likely to result from the imposition of the standard; (6) The need for national energy conservation; and (7) Other factors the Secretary considers relevant. EPCA, Section 325(2)(B), 42 U.S.C. 6295(2)(B) B. Background 1. History The Energy Policy and Conservation Act, as amended (EPCA or Act), requires the Department of Energy (DOE or Department) to consider amending the energy conservation standards for certain major household appliances. In 1992, the Department initiated engineering and LCC studies for central air conditioners and heat pumps based on use of computer simulation models. An ad hoc working group was formed to advise the Department and to provide engineering and test data to use with the computer models. The working group, which included representatives from central air conditioner and heat pump manufacturers, the Air Conditioning & Refrigeration Institute (ARI), Lawrence Berkeley National Laboratory (LBNL), and Oak Ridge National Laboratory (ORNL), also provided production cost data for establishing the cost-effectiveness of the various design options selected for study. On September 8, 1993, the Department published an ANOPR (58 FR 47326 ) which discussed the number of product classes and design options, the computer simulation models, and the methodologies which the Department intended to use in its analysis of increased energy efficiency standards for central air conditioners and heat pumps. After the ANOPR was issued, the Department continued its analysis of LCCs, payback periods, and preliminary NES which were shared with representatives from the air-conditioning industry. In 1995, the Department abandoned the approach of using computer simulation models as a result of concerns expressed by the industry. The concerns included: the cost/performance relations derived from the computer simulations were not consistent with the experience of the industry; the assumptions and procedures were flawed; and the industry expressed doubts over the Department's experience with selection of appropriate design options. In October, 1995, a moratorium on proposing, issuing, or prescribing energy conservation standards took effect pertaining to standards for central air conditioners and heat pumps, and the dialogue between the air-conditioning industry and the Department, on the analysis performed, was suspended. 2. Process Improvement During consideration of the fiscal year 1996 appropriations, there was considerable debate about the efficacy of the standards program. The Department of the Interior and Related Agencies Appropriations Act for Fiscal Year 1996 included the aforementioned moratorium on proposing or issuing energy conservation appliance standards for the remainder of Fiscal Year 1996. See Pub. L. 104-134. Congress advised DOE to correct the standards-setting process and to bring together stakeholders (such as manufacturers and environmentalists) for assistance. In September 1995, the Department announced a formal effort to consider further improvements to the process used to develop appliance efficiency standards, calling on manufacturers, energy efficiency groups, trade association, state agencies, utilities and other interested parties to provide input to guide the Department. On July 15, 1996, the Department published a Final Rule: Procedures for Consideration of New or Revised Energy Conservation Standards for Consumer Products (hereinafter referred to as the Process Rule). 61 FR 36974. The Process Rule outlines the procedural improvements identified by the interested parties. The process improvement effort included a review of the: (1) Economic models, such as the Manufacturer Analysis Model and Residential Energy Model; (2) analytical tools, such as the use of a Monte Carlo sampling methodology; and (3) [[Page 66308]] prioritization of future rules. The Process Rule requires the evaluation of uncertainty and variability by doing scenario or probability analysis (as detailed in the Process Rule, 10 CFR part 430, subpart C, appendix A sections 1(f), 4(d)(2), and 10(f)(1)). In addition, an Advisory Committee on Appliance Energy Efficiency Standards, consisting of a representative group of these interested parties, was established to make recommendations to the Secretary regarding the implementation of the Process Rule. The Process Rule is applicable in this rulemaking to develop new central air conditioner and heat pump standards. In this Supplemental ANOPR, the Department is presenting the framework by which it will develop the standards. The framework reflects improvements and steps detailed in the Process Rule. The rulemaking process is dynamic. If timely new data, models or tools that enhance the development of standards become available, they will be incorporated into the rulemaking. For example the Advisory Committee has made several recommendations and the Department has developed new models which are discussed in this Supplemental ANOPR. The Department held a workshop on June 30, 1998 to discuss the analytical framework that was being proposed for conducting the central air conditioner and heat pump rulemaking. The analytical framework presented at the workshop described the different analyses (e.g., the LCC, payback and national impact analyses) to be conducted (See Table 1), the methods proposed for conducting them, and the relationship among the various analyses. Table 1.--Central Air Conditioner and Heat Pump Analyses Under Process Rule ---------------------------------------------------------------------------------------------------------------- ANOPR NOPR Final Rule ---------------------------------------------------------------------------------------------------------------- Screening Analysis................... Revised Pre-ANOPR Analyses Revise Analyses (LCC and National Impacts (LCC and National Impacts Analyses). Analyses). Engineering Analysis................. Consumer Sub-group Analysis. LCC Analysis......................... Industry Cash Flow Analysis (GRIM). Preliminary National Impacts Analysis Manufacturer Impact Analysis. Utility Impact Analysis. Environmental Analysis. ---------------------------------------------------------------------------------------------------------------- A number of concerns were raised at the framework workshop relating to the application of the Process Rule to the central air conditioner and heat pump rulemaking, with particular emphasis on (1) the appropriate approaches for conducting the Engineering Analysis, (2) how to validate manufacturer cost figures submitted by ARI, (3) methods for developing consumer equipment price data, and (4) how non-regulatory issues, e.g., the phase-out of hydro-fluoro-chloro-carbon (HCFC) refrigerants might affect the effective date of any new standards. In response to the concerns and comments of interested parties at the Framework Workshop, the Department decided to perform the Engineering Analysis based on the efficiency-level approach rather than the design option approach, using cost data submitted by manufacturers in aggregate via their trade association, ARI. The Department also decided to utilize a reverse engineering approach as a ``stand alone'' analysis for developing manufacturer costs and validating the ARI- provided manufacturer's cost data. Both approaches are discussed in detail in the discussion of the Engineering Analysis (II C.). As part of the information gathering and sharing process, the Department and its contractors met several times with members of the ARI Unitary Equipment Regulatory Committee, presenting the preliminary manufacturer costs developed through the reverse engineering approach and demonstrating the LCC spreadsheet model. During this time period, ARI submitted relative production cost data for the four different product classes of central air conditioners and heat pumps (split system and single package for both air conditioners and heat pumps) for 3-ton capacity systems at various efficiency levels. Efficiency levels are defined differently for air conditioners and for heat pumps. Air conditioner efficiency is defined by the descriptor, Seasonal Energy Efficiency Rating (SEER). Heat pump efficiency is defined by the descriptor, Heating Season Performance Factor (HSPF) while operating during the heating season and by SEER while operating during the cooling season. The cooling season efficiencies provided by ARI ranged from 11 to 14 SEER. The individual manufacturers provided their costs, which were normalized to 10 SEER equipment costs, to ARI. ARI aggregated the individual manufacturers' costs and provided the Department with minimum, maximum and shipment-weighted mean values. As will be discussed in the Engineering Analysis, the ARI-provided and reverse engineering manufacturer costs overlap considerably, especially at the lower efficiency levels in the split air conditioning class and in the middle efficiency levels of the split heat pump class. For the most part, the range between ARI's minimum and mean manufacturer costs completely encompasses the reverse engineering costs. This agreement is encouraging given the levels of uncertainty and variability involved in estimating representative manufacturer costs under different efficiency baselines across a diverse industry. These areas of convergence provide an excellent indication of the most likely costs of producing equipment utilizing today's technology under new standard levels. Although the two sets of manufacturer costs do overlap, they disagree in some respects. In particular, there are significant differences in the breadth of the manufacturer cost distributions at each efficiency level. The Department assumes that vigorous competition in the market for minimum-efficiency equipment will compel manufacturers to meet new standards at similar incremental manufacturer costs, and that the market cannot sustain as broad a range of costs as ARI's results may imply. Furthermore, we cannot replicate ARI's maximum manufacturer costs without altering our underlying assumptions beyond what we currently consider justified. The Department and ARI have worked diligently to identify possible sources of those discrepancies. The Department sincerely appreciates ARI's and its members' dedicated participation in the Engineering Analysis. Their relative manufacturer costs provide a solid [[Page 66309]] foundation for further analysis, and their frequent review of and input to our validation effort is a valuable addition to our understanding of the production and design issues associated with meeting higher standards. The Department will work with ARI to understand the remaining differences between our two sets of manufacturer costs. With regard to the LCC, payback, and preliminary national impact analyses, three new spreadsheet tools were developed for this rulemaking in an effort to meet the objectives of the Process Rule. The first spreadsheet calculates LCC and payback. The second one calculates impacts of standards at various levels on shipments. The third calculates the NES and national net present values (NPV) at various standard levels. These spreadsheets and the results of the preliminary analysis were posted on the Department's web site on August 24, 1999. The preliminary results posted on the web consisted of two sets of data: one set based on the manufacturer costs submitted by ARI and the other set based on manufacturer costs developed through reverse engineering. The Department suggested that any errors in the web site materials be immediately brought to our attention for correction, and that any other comments be submitted during the 75 day period following publication of this Supplemental ANOPR. The Department has reviewed the recommendations made by the Advisory Committee on Appliance Energy Efficiency Standards on April 21, 1998. (Advisory Committee, No. 96) These recommendations relate to using the full range of consumer marginal energy rates (CMER) in the LCC Analysis (replacing the use of national average energy prices), defining a range of energy price futures for each fuel used in the economic analyses and defining a range of primary energy conversion factors and associated emission reductions, based on the generation displaced by energy efficiency standards for each rulemaking. The Department has incorporated the use of consumer marginal energy rates and a range of future energy prices for the analysis that was conducted for this Supplemental ANOPR. The Department plans to incorporate the recommendations on energy conversion factors in future analyses for the Notice of Proposed Rulemaking (NOPR). Today's Supplemental ANOPR pertains to central air conditioners and heat pumps and utilizes the framework described in Section II. Both written and verbal comments from the June 30, 1998 Framework Workshop are being addressed in this document. The commentor's name and organization are shown in parentheses after each comment. Written comments are further identified by a number assigned to each set of written comments received during the commentary period. Verbal comments are further identified by the page number in the workshop transcript. Written comments and the Workshop transcript are viewable at the Department's Freedom of Information Reading Room described previously. 3. Test Procedure Section 7(b) of the Process Rule states that necessary modifications to test procedures concerning efficiency standards will be identified and proposed before issuance of an ANOPR. The residential central air conditioner and heat pump test procedure is currently being revised to improve its organization and ease of use, with a proposed rule expected in November, 1999. This revision of the test procedure is not expected to alter the measured efficiencies as determined under the existing test procedure. Therefore, the revised test procedure would not affect development of revised efficiency standards. For these reasons, revisions to the test procedure are not a ``necessary modification'' as that term is used in the Process Rule, but rather a routine update, and hence need not be proposed before issuance of the proposed rule for these standards. II. Central Air Conditioner and Heat Pump Analyses This section includes a general introduction to each analysis section and provides a discussion of issues relevant to energy conservation standards for central air conditioners and heat pumps. The Department received a number of general comments from Energy Market & Policy Analysis (EMPA) regarding the analysis conducted for the rulemaking (EMPA, # 3). Some of these concern the rulemaking procedure, while others refer to the analytic methods, and are as follows: the methodology for evaluating standards is extremely complex and increasingly unrealistic; approaches, models, assumptions, data, and data sources need to be more detailed and should to be put out for public comment before issuance of the ANOPR; and inadequate consideration is given to the impact of standards on ``real consumers'' as EMPA believes that groups on the DOE Advisory Committee do not represent and protect the interests of ``real consumers.'' The Department appreciates the concerns expressed previously. The methods and approaches used for the analyses conducted for this Supplemental ANOPR are well described and have been released on the Department's web site prior to the issuance of this notice. Any questions or comments as to how to clarify the methodologies used in this rulemaking are always welcome and appreciated. A. Preliminary Market and Technology Assessment The preliminary market and technology assessment characterizes the relevant product markets and existing technology options including prototype designs. 1. Market Assessment a. General When initiating a standards rulemaking, the Department develops information on the present and past industry structure and market characteristics of the product(s) concerned. This activity consists of both quantitative and qualitative efforts to assess the industry and products based on publicly available information. Issues to be addressed include: (1) Manufacturer market share and characteristics; (2) trends in the number of firms; (3) the financial situation of manufacturers; (4) existing non-regulatory efficiency improvement initiatives; and (5) trends in product characteristics and retail markets. The information collected serves as resource material to be used throughout the rulemaking. For instance, historical product shipments and prices are used to help predict future prices and shipments. Market structure data are particularly useful in conducting the competitive impacts analysis. b. Product Specific The Department reviewed existing literature and interviewed manufacturers to get an overall picture of the residential central air- conditioning market in the United States. Industry publications and trade journals, government agencies, and trade organizations provided the bulk of the information, including: (1) Manufacturer market share; (2) shipments by capacity and efficiency level; (3) price distribution; (4) market saturation; and (5) distribution trends. The information described is discussed in the sections where it is used in the analysis. Edison Electric Institute (EEI) commented that contractors should be interviewed when market assessments are being developed (EEI, # 2) while the [[Page 66310]] Oregon Office of Energy (OOE) requested the Department to gather information on trends in product characteristics and non-regulatory efficiency improvement initiatives, and to interview manufacturers of components (compressors, motor/fan assemblies, heat exchangers) on initiatives to improve system efficiency. (OOE, # 7) The Department relied predominantly upon literature searches and input from equipment manufacturers while developing its market assessment, but also interviewed national contracting organizations, independent contractors and component suppliers. Of course, this market assessment is preliminary, and any additional comments will be taken into consideration when the assessment is revised. 2. Technology Assessment a. General Information relating to existing and past technology options and prototype designs are typically used as inputs to determine what technologies manufacturers utilize to attain higher energy efficiency levels. In consultation with interested parties, the Department develops a list of technologies that can and should be considered. Initially, the technologies encompass all those considered to be technologically feasible and serve to establish the maximum technologically feasible design. b. Product Specific The Department based its list of technically feasible design options on design options included in a previous ANOPR (58 FR 47326, September 8, 1993). The Department then updated the list through consultation with manufacturers of components and systems, trade publications, and technical papers. Since many options for improving product efficiency are available in existing equipment, product literature and direct examination provided additional information. Further descriptions of the most current technologies are provided in the engineering section of the Preliminary TSD. OOE asserted that all appropriate component and system technologies must be considered in the technology assessment, and that it should include microchannel heat exchangers and electrohydrodynamic enhancement technologies (OOE, # 7). Additional technologies were considered as set forth in the Technology Screening Analysis (section II.B.3) including such emerging technologies as microchannel heat exchangers, modulating compressors, and advanced variable speed motors and controls. Electrohydrodynamic enhancement technologies were not considered as they have yet to be publicly demonstrated in prototypical central air conditioner and heat pump designs. 3. Preliminary Baseline Shipments Forecast a. General The Department develops a preliminary baseline forecast of product shipments that assumes no new standards. This is an initial step in an iterative process. Subsequently, a more comprehensive baseline shipments forecast is prepared using a shipments model, superceding the preliminary forecast. The baseline shipments forecast is used as an input to the National Benefits Analysis. To perform the National Benefits Analysis, a forecast of shipment-weighted product efficiencies is prepared to the year 2030. To assess the average impact on the affected consumer, a forecast of product shipments by efficiency level was prepared for the year a new standard would come into effect. b. Product Specific The Department prepared a baseline shipments forecast for central air conditioners and heat pumps. Data on historical product shipments guided preparation of the preliminary baseline shipments forecast. The Oregon Office of Energy (OOE) pointed out that non-regulatory energy efficiency programs are on the wane, and that if these programs are to be considered in shipment forecasting, it must be quantifiably demonstrated how they will transform the market (OOE, #7). Information from parties involved in market-based initiatives for increasing the sales of high-efficiency models was reviewed, but provided no quantifiable measure of how these programs impact product efficiencies on a national basis. However, because the baseline forecast assumes an efficiency distribution of 10.7 SEER, based on current sales, the impact of market-based initiatives is implicit in the baseline forecast. OOE also noted that since central air conditioning is not an essential appliance for most areas of the country, central air conditioning purchase price elasticities will likely be different than those used for forecasting shipments in other product rulemakings (OOE, #7). Since the shipments model used in this rulemaking was prepared specifically for central air conditioners and heat pumps, the Department believes this concern is addressed. The shipments model is further described in the Preliminary National Impacts Analysis discussion in section E.1.b.ii. B. Screening Analysis The Screening Analysis reviews various technologies with regard to whether they: (a) Are technologically feasible; (b) are impracticable to manufacture, install and service; (c) have an adverse impact on product utility or product availability; and (d) have adverse impacts on health and safety. The subsequent Engineering Analysis does not consider or incorporate technologies that do not pass these tests, regardless of whether the Engineering Analysis takes a Design Option approach or an Efficiency-level approach. Technologies that pass the Screening Analysis tests may be considered further to determine their potential cost and efficiency impacts. The Screening Analysis also identifies possible product classes and baseline equipment to serve as a basis for further analysis. 1. Product Classes a. General Product types are divided into classes using the following criteria: (a) The type of energy used; (b) capacity; and (c) performance-related features that affect consumer utility or efficiency. Different energy efficiency standards are applied to different product classes. In general, classes are defined using information obtained in discussions with appliance manufacturers, trade associations, and other interested parties. b. Product Specific As prescribed by the National Appliance Energy Conservation Act (NAECA), central air conditioners and heat pumps are each categorized into split and single package systems, giving four product classes. The analysis performed to date includes only products in these four product classes at a nominal 3 ton capacity. However, there may be justification for establishing additional classes including product types such as: Through-the-wall condensing units, Ductless split systems, High-velocity space-conditioning systems, and Vertical packaged, wall mounted. The Department is also considering establishing new classes defined by the cooling or heating capacity of the equipment. OOE felt that the addition of more classes may be reasonable. For example, mini-splits and combined space/water [[Page 66311]] heating systems might be considered as separate classes based on their characteristics and configuration constraints (OOE, #7). EEI commented that the product classes be expanded to include gas- fired air-conditioning equipment. Gas-fired equipment would then not be included as a design option, but as an additional product class for which baseline models must be developed. (EEI, # 2) Although the Department appreciates EEI's comments, the NAECA definition of central air conditioners subsumes only certain types of electric driven systems. This rulemaking addresses only products covered by that definition, and thus, no consideration will be given here to developing standards for fuel driven technologies. With regard to the additional product classes listed in this section, the Department is seeking input on whether they need to be established. 2. Baseline Equipment a. General The Department defines baseline equipment for each product class as the starting point for analyzing energy efficiency improvements. Baseline equipment are models with the minimum allowable energy efficiency specified by the NAECA. Such baseline equipment are typically ``low-end'' units that contain no premium features, e.g., noise reduction or appearance features. b. Product Specific Efficiency is the most important statistic required to establish the baseline model. Current minimum efficiency standards for split and single package system central air conditioners and central air conditioning heat pumps are 10.0 and 9.7 SEER, respectively. The current minima for the heating performance of split and single package central air conditioning heat pump systems are 6.8 and 6.6 HSPF, respectively. The Department used the split system minimum efficiency standards as the baseline efficiency for each of the above classes. If additional classes are created, the Department will apply the appropriate existing standard as the baseline efficiency for that class. OOE agreed with the Department's intent to use the efficiency of products that just meet the current minimum NAECA requirements as the baseline efficiency. (OOE, #7) 3. Technology Screening a. General An initial list of efficiency enhancement options is developed from the technologies identified in the technology assessment. Then the Department, in consultation with interested parties, reviews the list to determine if they are practicable to manufacture, install and service, would adversely affect product utility or product availability, or would have adverse impacts on health and safety. Efficiency enhancement options not eliminated in the screening process are considered further in the Engineering Analysis. b. Product Specific Compiling a list of efficiency enhancement options provided an understanding of the technologies available to manufacturers to improve equipment efficiency. This understanding also helped the Department estimate maximum technologically feasible efficiency levels. For split air conditioners, the Department believes, based on a preliminary analysis, that 20 SEER is the highest efficiency level attainable by 2006 on a commercially practicable basis using design and technology options that pass the screening criteria. These include the following: enhanced and oversized heat transfer surfaces; variable or multispeed or variable capacity compressors; high efficiency compressors; electrically-commutated, variable-speed fan or blower motors, and thermostatic or electronic expansion valves. We assumed that the efficiency of compressors, motors, and heat transfer surfaces would improve slightly prior to the effective date of any new rule. The 20 SEER level does not depend on any emerging technologies, because the Department believes that, although those technologies could reduce the cost of the equipment in the SEER 13 to SEER 17 range compared to established technologies, the emerging technologies will not advance the maximum attainable efficiency level. The analysis of manufacturing costs and prices was based only on technologies and designs available in mass produced products as of 1998. The Department considered the potential cost impact of emerging technologies in a separate analysis described in the Preliminary TSD. The emerging technologies that pass the screening criteria include: Microchannel heat exchangers Advanced compressors Variable speed motor controls The American Council for an Energy Efficient Economy (ACEEE), OOE, Modine Manufacturing (Modine), and York International (York) all provided comments pertaining to emerging technologies. Both ACEEE and OOE suggested that all advanced or emerging technologies be considered (ACEEE, #5; Steve Nadel, ACEEE, Transcript, pp 80-81; OOE, #7) . ACEEE identified improved compressors and microchannel heat exchangers. ACEEE also stated that emerging technologies could be analyzed in the context of a reverse engineering analysis. Modine stated that PF (microchannel) heat exchangers are a viable technology for improving equipment efficiency, but their acceptance should be driven by market needs rather than through a desire to push the technology into the market (Modine, #1). Bristol Compressors (Bristol) is now bringing to market the Twin-Single (TS) compressor, a reciprocating compressor that reduces system capacity by de-activating one or more pistons under part-load operating conditions. Bristol states that this technology can increase central air conditioner and heat pump efficiency from either 10 to 12 SEER or from 12 to 14 SEER. With a variable-speed indoor blower, the TS can increase system efficiency from 10 to 14 SEER (York, #4). In contrast, an industry representative contended that emerging technologies would already be in the marketplace if they were feasible and that, in the context of conducting an Engineering Analysis based on the use of the efficiency-level approach, emerging technologies should not be considered until they are shown to radically change the shape of the industry cost curve. (Jim Crawford, The Trane Company (Trane), Transcript, pp 81,87) ARI stated that in developing an aggregate industry cost curve, emerging technologies may or may not be included depending on whether manufacturers submitting data include them in their cost estimates (Ted Leland, ARI, Transcript, pp 85). The Department has performed a preliminary assessment of the potential impact of these technologies on the manufacturing costs of air-conditioning equipment and is seeking comment on the following: Whether these emerging technologies do in fact pass the screening criteria; the potential impact of these technologies on manufacturing cost, operating cost, and price; whether additional emerging technologies should be considered; and whether the maximum technologically feasible level is commercially practical. The Department notes that it is not considering fuel-driven technologies, such as gas-fired engine driven heat pumps, absorption heat pumps, and Stirling refrigeration cycles, as design options for central air conditioners and heat pumps. NAECA defines a central air conditioner and heat pump, in part, [[Page 66312]] as being ``powered by single phase electric current.'' This rulemaking concerns only products that meet the NAECA definition. Thus, fuel- driven technologies are precluded from consideration here. C. Engineering Analysis The purpose of the Engineering Analysis is to estimate the energy savings potential from increased equipment efficiency levels and the costs of achieving those levels, compared to the baseline equipment. The increased efficiency levels are associated with increased production costs. The efficiency/cost relations developed in the Engineering Analysis are combined with end-user costs in the LCC Analysis. 1. Energy Savings Potential and Production Costs a. General The Engineering Analysis estimates the energy savings potential of the individual or combinations of design options not eliminated in the previous Screening Analysis. The Department, in consultation with stakeholders, uses the most appropriate means available to determine energy consumption, including an overall system approach or engineering modeling. Ranges and uncertainties in performance are established. The Engineering Analysis involves adding individual or combinations of design options to the baseline equipment. A cost-efficiency relationship is developed to show the manufacturer cost of achieving increased efficiency. The efficiency levels corresponding to various design option combinations are determined from manufacturer data submittals and from DOE engineering calculations. EPCA requires that, any new or amended standard, ``shall be designed to achieve the maximum improvement in energy efficiency that the Secretary determines is technologically feasible and economically justified.'' EPCA, section 325(l)(2)(A), 42 U.S.C. 6295(l)(2)(A). An essential role of the Engineering Analysis consists of identifying the maximum technologically feasible level. The maximum technologically feasible level is one that can be reached by the addition of efficiency improvements and/or design options, both commercially feasible or in working prototypes, to the baseline equipment. The Department believes that the design options must have been physically demonstrated in at least a prototype form to be considered technologically feasible. Three methodologies can be used to generate the manufacturing costs needed for the Engineering Analysis. These methods include: (1) The design-option approach, reporting the incremental costs of adding specific design options to a baseline model; (2) the efficiency-level approach, reporting relative costs of achieving energy efficiency improvements; and/or (3) the reverse engineering or cost-assessment approach which requires a ``bottoms-up'' manufacturing cost assessment based on a detailed bill of materials for models that operate at particular efficiency levels. The Department considers public comments in determining the best approach for a rulemaking. If the efficiency-level approach is used, the Department will select appropriate efficiency levels for data collection on the basis of: (1) Energy savings potential identified from engineering models; (2) observation of existing products on the market; and/or (3) information obtained for the technology assessment. Stakeholders will be consulted on the efficiency-level selection. The use of a design-option approach provides useful information such as the identification of potential technological paths manufacturers could use to achieve increased product energy efficiency. It also allows the use of engineering models to simulate the energy consumption of different design configurations under various user profiles and applications. However, the Department recognizes that the manufacturer cost information derived in the design-option approach does not reflect the variability in design strategies and cost structures that can exist among manufacturers. Therefore, the Department may derive additional manufacturing cost estimates from other approaches developed in consultation with interested parties. The reverse engineering or cost-assessment approach can be used to supplement the efficiency-level or design option approaches under special circumstances when data is not publically available for proprietary reasons, the product is a prototype and/or the data is not provided by the manufacturers. b. Product Specific The Department, in consultation with stakeholders, has used both overall efficiency level and reverse engineering approaches. The efficiency-level analysis relies upon manufacturer cost submittals from ARI while the reverse engineering analysis relies upon manufacturer costs developed by Arthur D. Little, Inc. (ADL) for the Department. The design options selected in the Screening Analysis helped to establish potential efficiency improvements. Manufacturing cost estimates under the efficiency-level approach were submitted by individual manufacturers to ARI. For purposes of ensuring manufacturer confidentiality, ARI submitted to the Department minimum, maximum, and shipment-weighted averages of incremental manufacturer cost increases associated with various efficiency levels. In the case of the reverse engineering approach, ADL derived manufacturing cost estimates from detailed incremental cost data enabling them to establish costs for labor, purchased parts and material, shipping/packaging, and investment. Both sets of manufacturer costs were input into the Engineering Analysis and cost-efficiency relationships were developed to show the manufacturing costs of achieving various levels of increased efficiency. As discussed earlier in the section on Process Improvement, attempts were made to reconcile differences between the ARI and the preliminary reverse engineering production cost data. Feedback from the industry resulted in revising the reverse engineering production costs of such components as outdoor cabinet (labor and materials), indoor coil (materials) and refrigerant materials. Packaging and shipping costs were also revised. The Department is continuing consultations with manufacturer representatives regarding other industry suggested issues, including manufacturing production volume, copper and aluminum raw material costs, compressor costs, indoor and outdoor coil costs, and freight costs. For more detail on how the ARI and the reverse engineering costs were developed, and our revisions to the reverse engineering costs, please refer to the Preliminary TSD. As noted earlier, these revisions helped to reconcile some of the differences between the ARI production costs and the reverse engineering production costs, but remaining differences between the two sets of manufacturer cost require further examination. i. Efficiency-Level Approach The efficiency-level approach establishes the relationship between manufacturer cost and increased efficiency at predetermined efficiency levels. It has the distinct advantage of being simple and straight forward. Manufacturers typically provide incremental manufacturer cost data for [[Page 66313]] incremental increases in efficiency. Cost-efficiency curves can be easily constructed to clearly identify at what point manufacturers are incurring significant costs to raise efficiency. Additionally, the efficiency-level approach allows manufacturers the ability to supply detailed cost data without revealing their unique design strategies for achieving increased efficiency levels. But the simplicity of the efficiency-level approach is also its primary drawback. Namely, since technological details are not provided, it is extremely difficult to verify whether the costs provided for each specific efficiency level are truly representative of the costs for that level. In addition, prototypical designs become difficult to evaluate and maximum technologically feasible designs are then difficult to ascertain. As a result, some other type of analysis is likely needed in order to verify the accuracy of the costs supplied through the efficiency-level approach. In reply to the Department's request to stakeholders at the 1998 Framework Workshop regarding the most appropriate approach which should be pursued for the Engineering Analysis, some industry members stated their support for the efficiency-level approach (Ted Leland, ARI; David Lewis, Lennox International Inc (Lennox), Transcript, pp 55-56, 61, 76). More specifically, these industry members stated their intention to provide costs under the efficiency-level approach as one cost- efficiency curve that would represent an aggregate of the entire industry, i.e., a smooth curve relating the relative manufacturer cost increases associated with increased efficiency. Industry indicated that the curve would represent the 90th percentile, i.e., the cost efficiency level at which 90% of manufacturers would be able to produce product. ACEEE and the OOE stated they would be willing to accept the efficiency-level approach only if certain conditions were met (ACEEE, #5, OOE, #7; Steven Nadel, ACEEE, Transcript, pp 65-67; Charlie Stephens, OOE, Transcript, pp 65-67). For example, in addition to providing costs at the 90th percentile, costs at multiple percentiles should be reported. Having the full distribution of costs allows for a more meaningful probability analysis to be conducted. With regard to heat pumps, costs should be collected for achieving different HSPF levels in addition to providing costs at different SEER levels. ACEEE and OOE stated that verification of the costs submitted is extremely important and they suggest that DOE staff members or consultants be permitted to inspect raw data in order to ascertain its reasonableness. OOE suggested that a reverse engineering or design option approach be used to verify the cost data, although they prefer the design option approach. ACEEE also contended that a design approach could be used to verify cost data. ACEEE stated that it is more important to verify costs submitted for high-efficiency equipment (14 to 15 SEER) as current market prices do not reflect mature market costs. Both the Consortium for Energy Efficiency and the Pacific Gas and Electric Company (PG&E) supported ACEEE's conditions for adopting the efficiency-level approach (CEE, #6; PG&E, #8). In addition, PG&E believed that the cost of efficiency upgrades for heat pumps will be similar to air conditioners since their components are nearly identical (PG&E, #8). On the issue of cost verification, one industry representative contended that if industry provided disaggregated cost data it would allow for the determination of the sources of the data and, thus, result in violation of anti-trust laws. (Jim Crawford, Trane, Transcript, pp 70-72) In any case, he stated that if the reverse engineering approach were used and it validated the aggregated industry cost-efficiency curve the issue of cost verification would be a moot point. The Department selected two approaches, one of which was the efficiency-level approach, for conducting the Engineering Analysis. Specific efficiency levels were selected by the Department based on consultations with stakeholders. In the case of central air conditioners, efficiency levels were based upon SEER. Efficiency levels for heat pumps were based upon both the cooling season SEER and the heating season HSPF efficiencies. ARI collected data from individual manufacturers and, rather than providing only costs at the 90th percentile, submitted minimum, maximum, and shipment-weighted mean incremental manufacturer costs for five distinct efficiency levels (11, 12, 13, 14, and 15 SEER). ARI also provided incremental manufacturer costs for heat pumps for the same five SEER levels. Since heat pumps are also rated for their heating performance using the HSPF efficiency descriptor, the Department developed a simple relationship between the two efficiency descriptors for purposes of setting an HSPF standard in addition to an SEER standard. The Department assumed the following set of heating seasonal performance factors corresponding to the above five SEER levels: 7.1, 7.4, 7.7, 8.0, and 8.2 HSPF). Tables 2 to 5 show the incremental manufacturer costs, also called manufacturer cost multipliers, which ARI submitted for the four primary product classes for systems with cooling capacities of approximately 3 tons (36,000 Btu/hr). The manufacturer cost multipliers are used together with the baseline manufacturer cost (which will be presented in Section II.C.2.b.) to determine the manufacturer costs for each efficiency level. For example, the mean manufacturer cost multiplier for an 11 SEER split system air conditioners from Table 2 is 1.16 and the baseline manufacturer cost for a split system air conditioner is $454. Thus, the mean manufacturer cost for an 11 SEER split system air conditioner is the product of the baseline manufacturing cost ($454) and the cost multiplier (1.16), or $527. While the manufacturer cost multipliers in Tables 2 to 5 included low and high values as well as mean values, because the probability distribution for the cost data at a given standard level are unknown, only the mean values were subsequently used in the LCC Analysis (section II.D). Table 2.--Split System Air Conditioners--ARI Manufacturer Cost Multipliers ------------------------------------------------------------------------ SEER Low Mean High ------------------------------------------------------------------------ 10........................................... ....... 1.00 ....... 11........................................... 1.03 1.16 1.30 12........................................... 1.09 1.36 1.55 13........................................... 1.30 1.63 1.90 14........................................... 1.60 2.03 3.00 15........................................... 1.81 2.40 3.50 ------------------------------------------------------------------------ Table 3.--Split System Heat Pumps--ARI Manufacturer Cost Multipliers ------------------------------------------------------------------------ SEER/HSPF Low Mean High ------------------------------------------------------------------------ 10/6.8.......................................... ...... 1.00 ...... 11/7.1.......................................... 1.05 1.10 1.15 12/7.4.......................................... 1.11 1.24 1.35 13/7.7.......................................... 1.17 1.44 1.66 14/8.0.......................................... 1.30 1.64 1.88 15/8.2.......................................... 1.75 2.09 2.52 ------------------------------------------------------------------------ Table 4.--Single Package Air Conditioners--ARI Manufacturer Cost Multipliers ------------------------------------------------------------------------ SEER Low Mean High ------------------------------------------------------------------------ 10........................................... ....... 1.00 ....... 11........................................... 1.03 1.19 1.27 12........................................... 1.15 1.30 1.40 13........................................... 1.40 1.63 1.75 14........................................... 1.59 1.87 2.00 [[Page 66314]] 15........................................... 1.89 2.23 2.92 ------------------------------------------------------------------------ Table 5.--Single Package Heat Pumps--ARI Manufacturer Cost Multipliers ------------------------------------------------------------------------ SEER/HSPF Low Mean High ------------------------------------------------------------------------ 10/6.8.......................................... ...... 1.00 ...... 11/7.1.......................................... 1.06 1.14 1.25 12/7.4.......................................... 1.06 1.28 1.50 13/7.7.......................................... 1.45 1.60 1.90 14/8.0.......................................... 1.65 1.75 2.30 15/8.2.......................................... 1.93 2.13 2.47 ------------------------------------------------------------------------ In response to EEI's comment that the Engineering Analysis should include the impact of any standard on the EER rating of the equipment (EEI, #2), the Department plans on conducting a Utility Impact Analysis for the Notice of Proposed Rulemaking (NOPR). The Utility Impact Analysis will capture the peak power impacts of an increased SEER standard, which EEI is alluding to in their comment regarding the EER. ii. Reverse Engineering Analysis As mentioned in the previous section, a reverse engineering approach was conducted in parallel with the efficiency-level approach to validate the ARI production cost data. The use of a component-based technology-costing (reverse engineering) approach provides useful information including the identification of potential technological paths manufacturers could use to achieve increased product energy efficiency. Under this type of analysis, actual equipment on the market is physically analyzed, i.e., dismantled, component-by-component to determine what technologies and designs manufacturers employ to increase efficiency. Independent costing methods or manufacturer and component supplier data are then used to estimate the costs of the components. This approach has the distinct advantage of using ``real'' market equipment to establish the technologies which manufacturers use as the basis for estimating the cost to reach higher efficiencies. The primary disadvantage of reverse engineering is the time and effort required to analyze ``real'' equipment. Several models from a diverse range of manufacturers may have to be assessed in order to ensure that an accurate representation of technological paths for increasing efficiency are identified. In addition, since only equipment in the market is analyzed, prototypical designs may not be captured by the analysis, thus making it difficult to establish maximum technologically feasible designs. The industry contends that a reverse engineering approach could be used to verify the cost data submitted through the efficiency-level approach but DOE must first define the acceptable level of variability between the costs that are developed through each approach. (Jim Crawford, Trane; David Lewis, Lennox, pp 110-113) Industry also maintained that there is wide variation in production costs between manufacturers due to the levels of services that are provided with the purchase of the equipment. OOE stated that reverse engineering could be used to validate the efficiency approach (OOE, #7) while ACEEE stated that reverse engineering has the benefit of analyzing advanced technologies. (Steven Nadel, ACEEE, pp 80-81) The Department carried out the reverse engineering approach to validate the cost estimates provided by ARI from the efficiency-level approach. The manufacturer costs of 71 equipment models at eight efficiency levels were estimated. Three 3-ton models were torn down: (1) A 10 SEER split system cooling-only condenser, (2) a 10 SEER packaged heat pump, and (3) a 12 SEER split system heat pump condenser. Manufacturer submissions, catalog data, and the ARI Product Attributes Database provided design information on the other 68 models. For split system air conditioners, cost estimates were developed for whole-number efficiency levels ranging from 10 to 17 SEER. For split system heat pumps, cost estimates were developed for whole-number efficiency levels ranging from 10 to 16 SEER. The heating efficiencies corresponding to each of the whole-number SEER levels were: 6.8 HSPF for 10 SEER, 7.1 HSPF for 11 SEER, 7.4 for 12, 7.7 for 13, 8.0 for 14, 8.2 for 15, and 8.4 for 16. A limited set of models were analyzed for single package systems. For single package air conditioners cost estimates were developed for 10, 12, and 13 SEER efficiency levels while for single package heat pumps cost estimates were developed for 10 SEER/6.8 HSPF and 12 SEER/7.4 HSPF efficiency levels. Tables 6 to 9 show the manufacturer cost multipliers developed by reverse engineering for the four primary product classes. Probability distributions rather than single point-values were used in the LCC analysis. The low and high values shown in the following represent the 10th and 90th percentiles, respectively, of the distributions. Table 6.--Split System Air Conditioners--Reverse Engineering Manufacturer Cost Multipliers ------------------------------------------------------------------------ SEER Low Average High ------------------------------------------------------------------------ 10........................................... 0.96 1.00 1.05 11........................................... 1.08 1.13 1.18 12........................................... 1.20 1.25 1.31 13........................................... 1.35 1.42 1.48 14........................................... 1.65 1.73 1.81 15........................................... 1.87 1.95 2.04 16........................................... 1.98 2.07 2.17 17........................................... 2.13 2.23 2.33 ------------------------------------------------------------------------ Table 7.--Split System Heat Pumps--Reverse Engineering Manufacturer Cost Multipliers ------------------------------------------------------------------------ SEER/HSPF Low Average High ------------------------------------------------------------------------ 10/6.8......................................... 0.96 1.00 1.05 11/7.1......................................... 0.97 1.01 1.06 12/7.4......................................... 1.05 1.10 1.15 13/7.7......................................... 1.29 1.35 1.41 14/8.0......................................... 1.57 1.65 1.72 15/8.2......................................... 1.79 1.87 1.96 16/8.4......................................... 1.92 2.01 2.10 ------------------------------------------------------------------------ Table 8.--Single Package Air Conditioners--Reverse Engineering Manufacturer Cost Multipliers ------------------------------------------------------------------------ SEER Low Average High ------------------------------------------------------------------------ 10........................................... 0.96 1.00 1.05 11........................................... ....... ....... ....... 12........................................... 1.08 1.14 1.19 13........................................... 1.33 1.40 1.46 ------------------------------------------------------------------------ Table 9.--Single Package Heat Pumps--Reverse Engineering Manufacturer Cost Multipliers ------------------------------------------------------------------------ SEER/HSPF Low Average High ------------------------------------------------------------------------ 10/6.8......................................... 0.96 1.00 1.05 11/7.1......................................... ...... ....... ...... 12/7.4......................................... 1.11 1.16 1.22 ------------------------------------------------------------------------ iii. Design Option Approach Industry representatives contended that the design option approach can only be conducted by industry personnel with years of experience, but the industry is not willing to provide this expertise because of the expense involved. (Jim Crawford, Trane; David Lewis, Lennox; Ted Leland, ARI, Transcript, pp105-106) The industry also stated that DOE should not provide funds for others to carry out this [[Page 66315]] approach because they lack the necessary expertise. In contrast, ACEEE and OOE believe that the design option approach has merits (Steven Nadel, ACEEE, Transcript, p 108; OOE, #7). ACEEE stated that it can be useful for evaluating new technologies, while OOE believes it is the approach of choice for conducting the Engineering Analysis, since the impact of any single technology on cost and efficiency is explicitly stated. The Department used only the efficiency level and reverse engineering approaches to establish the manufacturer costs of achieving increased efficiency levels for the following reasons: (1) Central air conditioners and heat pumps are complex products; (2) a wide variety of options exist to improve their efficiency; (3) these options interact in complex ways; and (4) the industry strongly opposed use of the design option approach and was willing to provide data for the efficiency-level approach. iv. Outside Regulatory Changes Affecting the Engineering Analysis There sometimes occur regulatory changes outside of the EPCA efficiency standards process that can affect the manufacture of a product. In some cases, such changes affect the energy efficiency of a product. The Department has attempted to identify all regulatory issues outside the efficiency standards process that would influence the Engineering Analysis. The central air conditioning and heat pump industry faces the impending phase-out of HCFC-22, the refrigerant used in almost all the equipment currently being installed in the U.S. The phase-out of HCFC- 22 begins in the year 2010, and the industry has responded by conducting in-depth analyses of various HCFC-22 alternatives. The most notable effort to date has been the ARI's Alternative Refrigeration Evaluation Program (AREP). Under AREP, several HCFC-22 alternatives were identified, and their effects on equipment capacity, efficiency, and longevity, and other variables were established. Two primary candidates have emerged from the field of alternatives: R-410A and R-407C. Although R-410A shows promise of being able to significantly raise equipment efficiencies, its high volumetric capacity requires systems to be redesigned to handle the significantly higher discharge pressures. R-407C is a virtual drop-in replacement, but results in an efficiency degradation of 5-10% relative to HCFC-22. In response to the issue of alternative refrigerants for HCFC-22, industry representatives stated that manufacturing costs that will be submitted will attempt to factor in the impact of switching to R-410A. (Ted Leland, ARI, Transcript, pp 287-288; Jim Crawford, Trane, p 288; David Lewis, Lennox, p 290, p 297) In response to a schedule presented at the 1998 Framework Workshop showing that a new minimum standard would become effective in the year 2005, the industry representatives stated that the effective date of any new efficiency standard should coincide with the phase-out date of HCFC-22 (the year 2010) or be in the 2006 to 2010 time frame. Additionally, they warned that efficiency gains through the use of R-410A are not as great as first believed. In response to industry's proposal to postpone the effective date of the standard, both ACEEE and OOE stated that DOE should make new standards effective in 2005. (ACEEE, #5; OOE, #7; Steven Nadel, ACEEE, Transcript, p 298; PG&E, #8) In their view, any delay will compromise U.S. commitments to reduce global warming gases. OOE offers two approaches for completing the rulemaking on-schedule: (1) Base the rulemaking analysis on replacement refrigerants or (2) base the analysis on HCFC-22 and use a correction factor to adjust equipment performance based on the use of alternative refrigerants. PG&E adds that an effective date of 2005 will allow any new building standards proposed by the California Energy Commission (CEC) to include the beneficial impact of higher-efficiency air conditioners. PG&E states that if standards are delayed to 2010, then over 500,000 new California dwellings would be significantly less efficient. The Department has determined that the phase-out date for HCFC-22 is far enough in the future that it will not affect a manufacturer's ability to meet any new efficiency standards, whether using HCFC-22 before the phase-out, or using alternative refrigerants before and after the phase-out. The Department does not plan to delay the effective date of any new standards to coincide with the phase-out date of HCFC-22. The Engineering Analysis has therefore been based on the assumption that equipment will use HCFC-22. However, the Department recognizes that equipment design changes to accommodate alternate refrigerants may alter the manufacturing cost-efficiency relationship developed for HCFC-22 equipment. The Department welcomes input regarding the analysis of equipment designed for alternate refrigerants. Other non-regulatory issues of concern to the industry include the need to make systems increasingly tighter to prevent refrigerant leaks due to the use of HCFC-based refrigerants (David Lewis, Lennox, Transcript, p 298), and international standardization of test procedures. (Jim Crawford, Trane, Transcript, pp 298-299). The Department has not explicitly addressed these concerns in its current analysis but welcomes any comments as to how to address these issues in the course of the rulemaking. 2. Manufacturing Costs a. General In addition to being inputs to the Engineering Analysis, manufacturing costs are used as the means of determining retail prices, and are needed for the manufacturer impact analysis. b. Product Specific Two sets of manufacturing costs were prepared. Using an efficiency- level approach, ARI collected data from individual manufacturers and submitted incremental manufacturing cost estimates. The Department also conducted a reverse engineering analysis to determine manufacturing costs. This analysis included an assessment of uncertainty and variability among manufacturers. Baseline manufacturer costs, i.e., the costs associated with producing equipment with efficiencies of 10 SEER, were also developed through the reverse engineering analysis. Table 10 shows the baseline manufacturer costs developed for the four primary product classes for systems with cooling capacities of approximately 3 tons (36,000 Btu/ hr). Note that for split system air conditioners, two costs were developed; one for systems sold without indoor blowers and the another for systems sold with indoor blowers. (A split system air conditioner is usually sold without an indoor blower when the air conditioner's indoor unit is installed in conjunction with a heating furnaces that is equipped with a blower). The uncertainty and variability of the baseline costs are noted in the manufacturer cost multipliers derived in the reverse engineering analysis (Tables 6 to 9) in the rows identified as 10 SEER/6.8 HSPF. Table 10.--Baseline Manufacturer Costs ------------------------------------------------------------------------ Without With Product Class blower blower ------------------------------------------------------------------------ Split System A/C.................................... $367 $454 [[Page 66316]] Split System Heat Pump.............................. ........ 615 Single Package A/C.................................. ........ 534 Single Package Heat Pump............................ ........ 589 ------------------------------------------------------------------------ i. Characterizing Uncertainty Consistent with the Process Rule, DOE places a range around the average manufacturing costs of achieving various efficiency levels. The OOE concurs with DOE's plan for dealing with uncertainty and variability in manufacturer cost estimates. (OOE, #7) The ranges of costs are used to generate retail prices for the consumer LCC Analysis, and are used in the Industry Cash Flow Analysis. ARI collected data from manufacturers and developed a shipment- weighted mean, along with minimum and maximum cost multipliers for each efficiency level to account for variability and uncertainty. Since the actual distribution of manufacturer costs were not provided to the Department, only the shipment-weighted means were used in the calculation of retail prices and, in turn, the LCCs. In conducting the reverse engineering approach, the Department developed a range of cost estimates for each efficiency level. For each efficiency level in each product class, the range of cost estimates were approximated by multiplying the mean value by a uniform distribution (from 95% of the mean to 105% of the mean) and a normal distribution (centered on the mean, with a standard deviation of 1.9%). The resulting cost distributions were then used in the calculation of retail prices and, in turn, the LCCs. ii. Variability in Cost Among Manufacturers The Department is committed to assessing the differential impacts of standards on different manufacturers. The results are used as inputs for the sub-group analysis of manufacturing impacts, which entails calculating cash flows separately for each class of manufacturer. In previous analyses for other appliances, manufacturing costs submitted to DOE have demonstrated large variability. In line with the Department's preference, ARI therefore collected cost data disaggregated by manufacturer, although, as discussed earlier, ARI provided to the Department only aggregated shipment-weighted manufacturer costs. Under the efficiency-level approach, this same disaggregated company-specific cost information developed for the Engineering Analysis can be used to perform Government Regulatory Impact Analysis for each manufacturer or manufacturer subgroup. These aggregated data, however, were insufficient to generate distributions of costs by manufacturer. Therefore, only mean values were used in the subsequent LCC Analysis. iii. Proprietary Design The Department considers in its analysis all design options that are commercially available or present in a working prototype, including proprietary designs. OOE stated that designs meeting the stated criteria of a proprietary design should be analyzed as a design option, providing the example of the microchannel heat exchanger (OOE, #7). Proprietary designs are considered in the Department's engineering and economic analyses. The Department looked at the potential impact of proprietary heat exchanger and compressor designs plus any proprietary designs that were part of equipment which were analyzed in the course of the reverse engineering analysis. The Department considered the potential impact of proprietary designs as part of its preliminary assessment of design options. Its initial conclusion is that the inclusion of proprietary designs will not materially affect the results of the Engineering Analysis because equipment can achieve the same efficiencies competitively using non- proprietary designs. The Department intends to continue examining this issue during the Manufacturing Impact Analysis and welcomes input on the appropriateness of considering proprietary designs. D. Life-Cycle Cost (LCC) and Payback Analysis In determining economic justification, EPCA directs the Department to consider a number of different factors, including the economic impact of potential standards on consumers. EPCA also establishes a rebuttable presumption that a standard is economically justified if the additional cost of purchasing a product, attributed to the standard, is less than three times the value of the first year energy cost savings. EPCA, section 325(o)(2)(B)(iii), 42 U.S.C. 6295 (o)(2)(B)(iii). To address these provisions the Department calculates changes in LCCs to the consumers that are likely to result from the proposed standard, as well as two different simple payback periods, i.e., distribution of payback periods, and a payback period calculated for purposes of the rebuttable presumption clause. The effects of standards on individual consumers include changes in operating expenses (usually lower) and changes in total installed cost (usually higher). The net effect is analyzed by calculating the change in LCC as compared to the base case. The base case manufacturing cost is determined in the reverse engineering analysis. The LCC calculation considers installed consumer cost (equipment purchase price plus installation cost), operating expenses (energy, repair, and maintenance costs), appliance lifetime, and discount rate. The LCC Analysis is performed from the perspective of the consumer. At the ANOPR stage, the Department generates LCC and payback period results as probability distributions using a simulation based on Monte- Carlo methods, in which inputs to the analysis consist of probability distributions rather than single-point values. As a result, the Monte Carlo analysis produces a range of LCC and payback period results rather than single-point values. A distinct advantage of this type of approach is that the percentage of consumers achieving LCC savings or attaining certain payback values due to an increased efficiency standard can be identified in addition to the average LCC savings or average payback for that standard. Because the analysis is being conducted in this manner, the uncertainties associated with the various input variables (as described in the next paragraph) can be expressed as probability distributions. During the post-ANOPR consumer analysis, the Department will evaluate additional parameters, and prepare a comprehensive assessment of the impacts on sub-groups of consumers. The LCC and one of the payback periods (distribution of payback periods) are calculated using the LCC spreadsheet model developed in Microsoft Excel for Windows 95, combined with Crystal Ball (a commercially available software program), based on probability distributions of input variables. The second payback, the Rebuttable payback based on DOE test procedure assumptions for estimating annual energy consumption, is not calculated using Crystal Ball and input probability distributions, but is instead based on the spreadsheet option allowing single-values for the input variables. [[Page 66317]] Based on the results of the Engineering and LCC Analyses, DOE selects candidate standard levels for a more detailed analysis. The range of candidate standard levels typically includes: (1) The most energy-efficient combination of design options or most energy-efficient level; (2) the efficiency level with the lowest LCC; and (3) an efficiency level with a payback period of not more than three years. Additionally, candidate standard levels that incorporate noteworthy technologies or fill in large gaps between efficiency levels of other candidate standards levels may be selected. The payback, for purposes of the rebuttable presumption test, attempts to capture the payback to consumers affected if a new standard is promulgated. It compares the purchase cost and energy use of central air conditioners and heat pumps consumers would buy in the year the standard becomes effective with what they would buy without a new efficiency standard. In some cases, this means comparing the baseline energy efficiency and cost with those associated with the standard level. In other cases, the standard level would also be compared to a higher-efficiency appliance purchased without new standards (but at a lower efficiency than the trial standard level). A weighted average of these payback periods, in the year a new standard level would take effect, is considered the payback for purposes of the rebuttable presumption clause. In addressing the usefulness of the LCC Analysis, an industry representative asserted that LCCs have no relationship to market dynamics, have no relationship to what the customer will buy, and have no relationship to the cost effectiveness of any efficiency standard. (Jim Crawford, Trane, Transcript, pp 135) But section 325(l)(2)(B)(I)(II) of EPCA requires the Department to consider the savings and costs of standards, and virtually mandates performance of an LCC Analysis. One commenter during the Framework Workshop stated that tax credits [incentives] for consumer purchases of high efficiency equipment should be included in the LCC Analysis. (Transcript, pp 243) The Department has not considered tax incentives in the LCC Analysis being presented here, because there are no such tax benefits available under Federal law. However, the Department seeks specific information from stakeholders regarding whether the Department should consider LCC analyses with alternative tax incentive scenarios. 1. LCC Spreadsheet Model a. General This section describes the LCC spreadsheet model used for analyzing the economic impacts of possible standards on individual consumers. The LCC spreadsheet model is available on the Department's web site for use by interested parties who wish to modify the assumptions in the models and view the results of those changes. The LCC Analysis is conducted using a spreadsheet model developed in Microsoft Excel for Windows 95, combined with Crystal Ball. The Model uses a Monte Carlo simulation to perform the analysis considering uncertainty and variability. The spreadsheet is organized so that ranges (distributions) can be entered for each input variable needed to perform the calculations. The Department wishes to consider the impacts of varying regional climate, energy prices, and consumer behavior on LCCs and payback periods. Calculations were therefore based on a Monte Carlo uncertainty analysis in which variables are represented by probability distributions of values. With this approach, the Department could express LCCs and payback periods as national means, with ranges that fully account for regional variations in climate, electricity cost, and behavior. The spreadsheet has the capability to sample subsets of households for the analysis of particular sub-populations, e.g., low income households, and will be used for Consumer Sub-Group Impact Analysis prior to issuance of the NOPR. An industry representative commented that an LCC Analysis based upon uncertain or distributional inputs is suspect and totally unverifiable if the uncertainty of the inputs cannot be clearly defined. (Jim Crawford, Trane, Transcript, pp 252-254) He suggested that a simpler approach be used. Others supported the use of a distributional LCC Analysis, commenting that this approach is better than what has been used in prior rulemakings. (Charles Stephens, OOE; Michael Martin, CEC, Transcript, pp 256) EEI stated that the use of ranges of values for appliance price and life, fuel costs, energy usage, and discount rates follows recommendations provided by the Appliance Standards Advisory Committee. (EEI, #2) OOE asserts that use of a distributional analysis creates potential pitfalls in accounting for regional climatic and energy price variations. Use of traditional methods for screening out design options based upon increased LCC or excessively long payback periods will be more difficult as results for one region may demonstrate that a design option is economically attractive while another region does not. DOE must establish some basis for rejecting or retaining design improvements. (OOE, #7) Although the use of distributional LCC Analysis may be more complex, the Department has decided it is the best approach to use to capture the uncertainty and variability inherent in input variables. In response to OOE's concerns for selecting appropriate standard levels, the Department will keep in mind their concerns when selecting appropriate standard levels for the NOPR. In order to generate the distributions required for the analysis, the Department used the Energy Information Administration's (EIA's) Residential Energy Consumption Survey (RECS). The 1993 RECS is based on a representative sample of 7,111 households from the population of all primary, occupied residential housing units in the United States. Each household is weighted so that the data properly represent the 96.6 million households in the 50 states and the District of Columbia reported in the 1993 RECS. RECS estimates end-use energy consumption and reports the age of equipment as well as household energy prices. Of the over 7,000 households surveyed in RECS, 2550 households representing 35.6% of the housing population have a central air conditioner while 651 households representing 8.3% of housing population have an electric heat pump. The distribution of LCC and payback results are generated by performing an LCC and payback calculation for each RECS household with a central air conditioner or heat pump. For example, in conducting the LCC Analysis for a 12 SEER standard level for central air conditioners, all RECS households with a central air conditioner have their existing equipment ``replaced'' first with a baseline (i.e.,10 SEER) system. The corresponding LCCs of the baseline systems are then calculated. Then all RECS households with a central air conditioner have their existing equipment ``replaced'' with a 12 SEER system and the LCC of these systems are established. On a household-by-household basis, the payback periods and the LCC differences of the 12 SEER system are determined relative to the economics of the baseline system. The result is a distribution of LCCs and payback periods. Since climatic conditions and consumer behavior affect the energy consumption of a given [[Page 66318]] piece of equipment, these data implicitly account for regional variations. Similarly, variations in the RECS energy price data represent the range faced by consumers in the U.S. Both EEI and EMPA warned of problems using the RECS data in a LCC and Payback Analysis. (EEI, #2; EMPA, #3) EEI asserts the following: (1) The age of the RECS data (1993) is too old to be used with efficiency and price data from 1998, (2) only total annualized average electricity and fuel rates rather than summer marginal rates are provided, (3) the stated age of the equipment may be inaccurate if the households surveyed are not original homeowners, and (4) there is no accounting of equipment used in small commercial facilities. EEI also claims that RECS may not reflect regional or national equipment saturations as the 1993 RECS shows that 42% of survey homes have a central air conditioner while an industry publication (ACHR News, June 22, 1998) shows saturations ranging from 55% in the western U.S. to 99% in the southern U.S. EMPA questioned whether the 7,000 to 8,000 households surveyed households in RECS can be representative of the 90 million households in the U.S. They also commented that RECS experts from EIA needed to provide a written statement in support of the way in which DOE plans to use the RECS data in its LCC analyses. In contrast to these comments, OOE states that they are very comfortable with the analysis methodology as it was applied to other products (clothes washers) where RECS data was used to determine annual energy use and equipment age. (OOE, #7) Although the Department understands the concerns of the EEI and EMPA, the 1993 RECS data is the most recent and appropriate database available for conducting the desired distributional LCC Analysis. DOE plans to conduct updates to the LCC and Payback Period Analysis with the 1997 RECS. Use of this data will address most of the concerns brought up by both EEI and EMPA. Estimates of the efficiency of equipment currently in use are based upon the age of the equipment as established by RECS and historical shipment-weighted efficiency values. The age of the equipment establishes the year of manufacture which in turn, using the shipment- weighted efficiency data, allows for the determination of the equipment's most probable efficiency. Replacing existing equipment with new equipment results in reductions in energy consumption. These reductions were approximated by multiplying current energy use by the ratio of the efficiencies of existing and new equipment. Using an energy price allowed for the calculation of the operating costs of existing and new replacement equipment, and, in turn, the LCCs and payback periods associated with different efficiency levels of new equipment. The Department developed LCCs and payback periods based on both sets of manufacturer cost estimates developed in the Engineering Analysis: (1) The ARI cost data developed through the efficiency-level approach, and (2) the cost data developed through the reverse engineering analysis. A more detailed description of the methodology and contents of the RECS database is contained in the Preliminary TSD. b. Product Specific This section discusses the approaches for analyzing the economic impacts on individual consumers from potential new central air conditioner and heat pump standards. An LCC spreadsheet model, described previously in Section II.D.1.a, is used to calculate two of the economic impacts, LCC and payback period, based on input variables that have uncertainty and variability expressed with probability distributions. A third economic impact, Rebuttable Payback Period, is determined without the use of the spreadsheet model. In future analyses, all three of these economic metrics will be compared to baseline efficiencies of appliances sold in the year the new standard would take effect. In this preliminary analysis, only the Rebuttable Payback Period is compared to a distribution of efficiencies forecasted to the year 2006. i. LCC Analysis The Department determined values of input variables for central air conditioners and heat pumps, including total installed cost (consisting of both the equipment purchase price and installation price), annual energy use, lifetime, repair costs, and maintenance costs of equipment, as well as average energy prices, marginal energy prices, and discount rate. Table 11 summarizes some of the major assumptions used to calculate the consumer economic impacts of various energy-efficiency levels. Table 11.--Assumptions Used in the LCC Analysis ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- Total Installed Cost: Equipment Purchase Price......... Manufacturer cost multiplied by manufacturer markup, distributor markup, dealer markup, and sales tax. Installation Price................................. Central air conditioners--$1190; heat pumps--$2035. Existing Equipment Efficiency.......................... Distribution imputed from RECS database based on equipment age and historical shipment-weighted efficiencies (central air conditioners--5.3 to 15.2 SEER, weighted average of 8.58 SEER; heat pumps--5.3 to 15.2 SEER, weighted average of 8.72 SEER; 4.88 to 9.67 HSPF, weighted average of 6.52 HSPF). Existing Annual Energy Use............................. Distribution from RECS database (central air conditioners--174 to 12,929 kWh/yr, weighted average of 2629 kWh/yr; heat pumps--space-cooling equals 0 to 14,771 kWh/yr, weighted average of 2987 kWh/yr; space- heating equals 162 to 29,839 kWh/yr, weighted average of 4658 kWh/yr). Average Energy Prices.................................. Historical--distribution from RECS database (central air conditioners--2.70 to 16.50 cents/kWh, weighted average 8.49 cents/kWh; heat pumps--2.60 to 13.00 cents/kWh, weighted average 7.86 cents/kWh); projections--AEO--1999. Marginal Energy Prices................................. Historical--estimated from RECS database (central air conditioners--0.58 to 19.42 cents/kWh, weighted average 8.74 cents/kWh; heat pumps--0.82 to 18.62 cents/kWh, weighted average 7.99 cents/kWh); projections--scaled to trends in average energy prices. Lifetime............................................... Distribution based on empirical data (mean life is 18.4 years). Discount Rate.......................................... Distribution (0% to 19%, weighted average 6.51%) Repair Costs........................................... For systems with efficiencies of 10 SEER or greater than 12 SEER, one-half equipment price divided by mean lifetime. For systems with efficiencies of 11 or 12 SEER, 1% greater than the 10 SEER repair cost. Maintenance Costs...................................... Distribution ($0 to $135/year, weighted average $36/ year). ---------------------------------------------------------------------------------------------------------------- [[Page 66319]] Total Installed Cost: The total installed cost consists of the equipment purchase price and the installation price. Markups are used to convert the manufacturer cost to the equipment purchase price. The determination of equipment purchase prices is described in the next section. Installation Price: The installation price represents all costs required to install the equipment other than the marked-up equipment cost. The installation price includes labor, overhead, and any miscellaneous materials and parts such as linesets. For central air conditioners the installation price used in the analysis used is $1190, and for heat pumps it is $2035. The installation price was determined by subtracting the derived equipment purchase price from the typical total installed cost. The typical total installed cost values were collected from public sources and phone calls to heating ventilating and air conditioning (HVAC) contractors. While the data collected were for split systems, the Department has assumed the installation prices apply to single package systems, although installation price for these systems might be somewhat lower than for the split systems, since only single packages are involved and no line sets are required. The Department is interested in obtaining information on the installation prices for all classes of products. Annual Energy Use: Currently, the DOE test procedure calculates annual cooling and heating energy consumption based on 1,000 and 2,080 hours of operation, respectively. Although this procedure seems to be widely accepted for comparing the seasonal performance of different units, the procedure overstates equipment energy use compared to RECS estimates. As described above, basing operating and LCC on RECS household data provides a more accurate measure of the savings possible from more-efficient equipment, and accounts for variability in LCCs due to climatic conditions and energy prices. Variations in energy use for a particular appliance can depend on factors such as climate, type of household, people in household, etc. For purposes of this analysis, annual energy use was based on the annual end-use energy consumption values in RECS. Climatic and consumer behavior are inherent to the RECS energy use data. The Department will perform sensitivity analyses prior to issuance of the NOPR to consider how differences in energy use will affect sub-groups of consumers. For the RECS households with central air conditioners, the range of annual space-cooling energy consumption is 174 to 12,929 kWh/year with a weighted-average value of 2629 kWh/year. For the RECS households with heat pumps, the range of annual space-cooling energy consumption is 0 to 14,771 kWh/year with a weighted-average value of 2987 kWh/year. The annual space-heating energy consumption for households with heat pumps ranges from 162 to 29,839 kWh/year with a weighted-average value of 4658 kWh/year. For each RECS household equipped with either a central air conditioner or heat pump, the annual energy use associated with a particular standard level is calculated by taking the annual energy use associated with the existing system and multiplying it by the ratio of the existing system's efficiency to the efficiency of the standard level of interest. To illustrate this approach, this calculation procedure is carried out here based on the weighted-average annual energy use and the weighted-average efficiency from all RECS households equipped with central air conditioners. As presented earlier, for all RECS households with a central air conditioner, the weighted-average annual energy use and the weighted-average efficiency are 2629 kWh/year and 8.58 SEER, respectively. Thus, for the case of a 12 SEER air conditioner, the weighted-average annual energy use is determined according to the following expression: Weighted-average annual energy use of 12 SEER A/C = 2629 kWh/yr 4 x (8.58 SEER 12 SEER) = 1880 kWh/yr Of course, as the efficiency of the standard level being analyzed increases, its corresponding annual energy use decreases proportionally. It should be noted that in the case of establishing the annual space-heating energy use of heat pumps, the ratio of HSPF values are used rather than the SEER values. It must also be emphasized that the above calculation is illustrative only. In order to generate the distribution of LCC and payback results for a particular standard level, each RECS household that is equipped with a central air conditioner or heat pump is analyzed. Concerning use of RECS data in the economic analysis, EEI stated that, although energy use is dependent on equipment design, weather, and consumer operation, it is also a strong function of house design, landscape, and thermostatic controls, and their impacts should be taken into consideration. (EEI, #2) They also stated that EER ratings, in addition to SEER ratings, ranges of cooling capacity, and the climatic impact on hours of operation, should also have an impact on energy use and should also be considered. With regard to the annual operating hours, EEI stated that a range of values based upon end-use metering studies, load management programs, and other utility or research organization studies should be used. They cited state utility commissions, Internet web sites, and software providers as possible sources for determining variations on energy use. As stated earlier, the Department believes that the 1993 RECS is the most recent and appropriate data available. In addition to the equipment design, weather, and consumer operation, the RECS annual end- use estimates also consider the household's shell characteristics including any prominent shading. Past RECS data sets have been validated against end-use metering studies in an attempt to better its procedures for estimating end-use energy consumption. Although the Department is comfortable with the use of RECS as its source for establishing annual energy consumption, interested parties are welcome to present any metered end-use data that could verify or substitute for the RECS estimates. Average Energy Prices: As discussed above, the Department is using RECS household data to establish energy prices. Projections of future energy prices for the LCC Analysis use high, low, and reference case projections of national average electricity prices to residential customers. The current edition of EIA's Annual Energy Outlook (AEO) is used as the source of projections for uncertainty in the LCC analysis. For the RECS households with central air conditioners, the range of average electricity prices in 1993$ is 2.70 to 16.50 cents/kWh with a weighted-average value of 8.49 cents/kWh. For the RECS households with heat pumps, the range of average electricity prices is 2.60 to 13.00 cents/kWh with a weighted-average value of 7.86 cents/kWh. While average energy prices establish the annual electricity cost of baseline equipment (i.e., split-system air conditioners with efficiencies of 10 SEER and heat pumps with efficiencies of 10 SEER and 6.8 HSPF), marginal energy prices establish savings in electricity costs associated with increased efficiency standards. Both EEI and EMPA stated that the average energy prices in RECS are outdated and that marginal energy prices should be used in their place in conducting the LCC and Payback Analysis. (EEE, #2; EMPA, #3) Both [[Page 66320]] pointed to subtracting out the fixed cost portion of the price as an interim step in developing marginal prices. EEI suggested several data sources for developing marginal prices including state utility commissions, Internet web sites such as the PowerRates site, and software providers such as such as EPS solutions and Energy Interactive. EMPA stated that any work to identify marginal energy costs should include a detailed description of the methodology and that any data collection efforts must comply with Paperwork Reduction Act. ACEEE noted how air conditioners are used during peak periods when the cost of supplying electricity is high and that price data should be collected during these periods for use in the economic analyses. (ACEEE, #5) Regarding future energy prices, several participants at the 1998 Framework Workshop stated that future residential electricity prices will be dependent on the how the electric utility industry is restructured. (Transcript, pp 220-230) EMPA was critical of EIA's forecasts of future energy prices, stating that the forecasts have consistently underestimated rates, and that EIA's forecasting models do not reflect the factors resulting from the deregulation of the electric utility industry. (EMPA, #3) The Department used the most recent forecasts from the 1999 AEO to predict the trend in both average and marginal electricity prices by multiplying the average and marginal price for the base year (1998) by the AEO's forecasted relative electricity price increases and/or decreases. In addition, LCC and payback spreadsheets can be run with price forecasts from the Gas Research Institute (GRI). The Department believes these forecasts are the most reliable available to predict future energy trends. Marginal Energy Prices: Marginal energy prices are those prices consumers pay for the last units of energy used. Marginal prices reflect a change in a consumer's bill associated with a change in energy consumed, consequently, marginal energy prices, rather than average energy prices, are appropriate for determining energy cost savings associated with increased efficiency standards. For LCC analyses, the Advisory Committee recommended that DOE use the full range of consumer marginal energy prices instead of national average energy prices. Absent consumer marginal energy price information, the Committee recommended DOE use a range of net energy prices, calculated by removing all fixed charges. The Department agrees the use of marginal energy prices improves the accuracy of the LCC Analysis and has estimated marginal prices for electricity and natural gas. The Department estimated consumer marginal electricity and natural gas prices directly from household data in the 1993 RECS survey by calculating the slopes of the regression lines of customers' bills vs. energy consumption for these two fuels. Those slopes are equal to the change in bill divided by the change in energy consumption, that is, the marginal prices paid by each household. Since this rulemaking concerns only energy efficiency standards that apply to electrically- driven central air conditioners and heat pumps, only marginal electricity prices are of concern here. For electricity, the Department calculated separately the slopes of the regression lines for four summer months (June-September) and for the remaining (``winter'') months. The annual marginal price was derived by taking the weighted average of the two seasonal prices, where the weighting was the relative energy consumption of the appliance in each season. For air conditioners/heat pumps, the weighting was based on the regional location and age of each of the households in the RECS sample. Given restructuring of parts of the energy supply sector, customers may have more than one bill (e.g., one from the distribution company, and one or more from generators or suppliers). To capture complete information, future surveys would best gather energy pricing information directly from customers, rather than from utilities or local distribution companies. Efficient collection of energy pricing information in the future will require changing the current processing of the billing information so as to gather consumption by month and pricing information for each customer from the bills. The pricing information would comprise the applicable rate schedule, including marginal prices, fixed charges, and demand charges for commercial and industrial customers, or time-of-use rates where applicable. The Office of Energy Efficiency and Renewable Energy has expressed the need for these data in discussions with EIA concerning the design of future surveys. Until a time series of marginal prices is available, the Department will use projected trends in energy prices to derive estimates of consumer marginal energy prices for the economic analysis of proposed standards. An index (scaling factor) was created relative to current prices from the trend in average prices (by fuel and sector) and was applied to the current range of marginal prices. For example, if the trend in average residential electricity prices was a decline by 20 percent over a given period of time, then we assume the marginal price for each household would decline from its initial observed value by 20 percent over that same period. The Department recognizes that a simple scaling of marginal energy prices may be incorrect in a restructured electric power market. Therefore, the Department may develop a different approach to forecast future marginal energy prices when restructuring becomes more widely implemented. Given the uncertainty of projections, the Department has made available to stakeholders the ability to conduct a scenario analysis to examine the robustness of different efficiency levels under different energy-price conditions. Each scenario provides a self-consistent projection, integrating energy supply and demand. The scenarios differ from each other in the energy prices that result. The Advisory Committee suggested the use of three scenarios. While many scenarios can be envisioned, the three scenarios specified are sufficient to bound the range of energy prices. The three scenarios suggested by the Advisory Committee are based on projections in the 1999 AEO. The Department's most recent reference case, published in the 1999 AEO, provides a well-defined middle scenario. In addition, DOE can use the scenarios with the highest and lowest energy prices in the sector from the range of scenarios in the 1999 AEO. The future trend in energy prices assumed in each of the three scenarios is clearly labeled and accessible in each spreadsheet. Also included as a scenario is the GRI energy price forecast for 1998. Stakeholders can easily substitute alternative assumptions in the Department's web site LCC spreadsheets to examine additional scenarios. For the RECS households with central air conditioners, the range of marginal electricity prices in 1993 dollars is 0.58 to 19.42 cents/kWh with a weighted-average value of 8.74 cents/kWh. For the RECS households with heat pumps, the range of marginal electricity prices is 0.82 to 18.62 cents/kWh with a weighted-average value of 7.99 cents/ kWh. As discussed previously under the section describing average energy prices, marginal energy prices are used to determine the annual electricity costs associated with energy savings resulting from an increased efficiency standard (i.e., any efficiency above baseline efficiencies). Lifetime: In choosing a value for lifetimes of central air conditioners and [[Page 66321]] heat pumps, a variety of sources were reviewed. These studies on lifetimes of central air conditioners and heat pumps indicates that there is a wide range of values for lifetimes. The references are provided in Table 12, with the mean lifetimes given in years. Table 12.--Central Air Conditioner and Heat Pump Mean Lifetimes ------------------------------------------------------------------------ In years-- Source --------------------------- Central AC Heat pump ------------------------------------------------------------------------ Appliance Magazine. The Life Expectancy/ 13.0 14 Replacement Picture, Sept. 1998 a.......... National Association of Home Builders. 15.0 15 Housing Facts, Figures, and Trends, 1998 b. 1995 ASHRAE Applications Handbook c......... 15.0 15 M.E. Bucher et al, American Electric Power ............ d 19 Service Corp. 1990. ``Heat Pump Life and Compressor Longevity in Diverse Climates'', ASHRAE Transactions 96(1):1567-1571........ K.A. Pientka, Commonwealth Edison Co. 1987. ............ d 15-16 ``Heat Pump Service Life and Compressor Longevity in a Northern Climate'', ASHRAE Transactions 93(1):1087-1101............... C.C. Hiller, EPRI and N.C. Lovvorn, Alabama ............ d 20 Power Co. 1987. ``Heat Pump Compressor Life in Alabama'', ASHRAE Transactions 93(1):1102-1110............................ J.E. Lewis, Easton Consultants. 1987. 12.1 10.9 ``Survey of Residential Air-to-Air Heat Pump Service Life and Maintenance Issues'', ASHRAE Transactions 93(1):1111-1127........ MTSC, Inc. Energy Capital in the U.S. 12.0 12 Economy, prepared for the Office of Policy, Planning, and Evaluation, U.S. Department of Energy, Nov. 1980 e..................... ------------------------------------------------------------------------ a Based on first-owner use. Central AC min life = 8, max life = 18. Heat Pump min life = 10, max life = 17. b Sources: Air Conditioning and Refrigeration Institute; Air Conditioning, Heating, and Refrigeration News; Air Movement and Control Association; American Gas Association; American Society of Gas Engineers; ASHRAE. c Source for Central A/C: Akalin, M.T. 1978. ``Equipment life and maintenance cost survey'', ASHRAE Transactions 84(2):94-106. Source for Heat Pump: ASHRAE Technical Committee 1.8, 1986. d Median lifetime. e Based on retirement function. The available sources report mean and median lifetimes ranging from 10.9 to 20 years. The Department's analysis assumed a mean lifetime of 18.4 years, based on a 1990 ASHRAE technical paper that has the most recent and most detailed information on heat pump life available, based on a survey of 2,184 heat pump installations in a seven-state region of the United States. The sources that report shorter average lifetimes are based on data of a lesser quality, and the Department considers those figures are less reliable. For example, in the case of Appliance Magazine, the reported lifetime values are based on expert opinion rather than empirical data. Appliances produced at some future date may have different lifetimes than those in the same class produced in the past. The projections of lifetimes and other parameters used in the analysis should be based on observed empirical trends, as well as expert knowledge of likely changes in the industry, since future changes are not always straight-line projections of past trends. While expert judgement is crucial, however, it must have a strong empirical basis. With this in mind, the Department believes that the probability distribution of equipment lifetime used in the analysis is the most sound, given available evidence of past performance and recent trends. Because none of the data on equipment lifetime indicates a relationship between efficiency and lifetime, the Department assumes that equipment lifetime is independent of efficiency. EMPA claimed that lifetime should be based on first ownership rather than actual equipment life. (Glenn Schleede, EMPA, Transcript, pp 232; EMPA, #3) They stated that homeowners usually change residences every 7 years. In response to this assertion, it was stated that although the statute requires that LCC be determined it does not specify the exact meaning of lifetime. (Mike Rivest, ADL, Transcript, p 236) Counter to EMPA's claims, OOE stated that energy efficiency benefits are essentially swapped when a homeowner changes residence. (Charlie Stephens, OOE, Transcript, pp 233; OOE, #7) That is, the new homeowner will realize the benefits of the first owner's more efficient equipment. They also add that an equipment lifetime of 15 years seems reasonable for split system air conditioners, but that field data indicates that heat pumps have a shorter life. The Department believes that equipment life rather than first ownership is the correct measure of lifetime. The Department continues to seek any additional information that may provide better data on actual air conditioner and heat pump life. Discount Rate: Interested parties submitted several comments recommending values or procedures for determining discount rates. An industry representative suggested that rates of 18 to 20% may be appropriate as consumers are paying off credit card debt at these rates. (Jim Crawford, Trane, Transcript, p 237) He also asserted that practical (i.e., implicit) discount rates (which are derived from analyzing actual consumer behavior) may be on the order of 30%. EEI also believes that credit card interest rates should be used as a basis for establishing discount rates. (EEI, #2) EMPA believes DOE's discount rates (as presented at the 1998 Framework Workshop) are too high and based on faulty assumptions. They stated that discount rates should reflect the true cost of money that consumers would have to spend to purchase more efficient appliances. (EMPA, #3) Industry representatives also stated that questions concerning consumer discount rates should be included on any market surveys for determining retail prices and that DOE needs to take into account any information supplied by the industry's trade association, ARI. (Jim Crawford, Trane, Transcript, p 243; David Lewis, Lennox, Transcript, pp 243-244) In contrast to these comments, OOE believes that prior discount rates developed by DOE seem reasonable, although there are differences in how consumers purchase air conditioner and heat pump equipment compared to how they purchase other appliances. (OOE, #7) They strongly disagreed that discount rates in excess of 15% might be appropriate. They claim such high rates are based on calculating an [[Page 66322]] implicit discount rate or market failure factor based on past shipments. The Department's Process Rule for establishing new or revised energy efficiency standards for consumer products describes how real discount rates are to be established for residential consumers, as follows: For residential and commercial consumers, ranges of three different real discount rates will be used. For residential consumers, the mid-range discount rate will represent DOE's approximation of the average financing cost (or opportunity costs of reduced savings) experienced by typical consumers. Sensitivity analyses will be performed using discount rates reflecting the costs more likely to be experienced by residential consumers with little or no savings and credit card financing and consumers with substantial savings. Based on the Department's guidelines provided in the Process Rule, a distribution of discount rates was derived to reflect the variability in financing methods consumers use in purchasing central air conditioners and heat pumps. The real interest rate associated with financing an appliance purchase is a good indicator of the additional costs incurred by consumers who pay a higher first cost, but enjoy future savings, although it is not the only indicator of such costs. While the method used to derive this distribution relies on a number of uncertain assumptions regarding the financing methods used by consumers, DOE believes that the resulting distribution of discount rates encompasses the full range of discount rates that are appropriate to consider in evaluating the impacts of DOE standards on consumers (i.e., values represented by the mid-range financing cost, consumers with no savings, and consumers with substantial savings), as well as all the discount rates which fall between the high and low extreme values. The method of purchase used by consumers is assumed to be indicative of the source of the funds and the type of financing used, although DOE is not aware of detailed research into this relationship. Consumers purchase appliances as parts of new homes (mortgages) and as separate retail purchases. Retail purchases are paid by cash, credit cards, or loans. In the case of space-conditioning equipment, the loans are assumed to take the form of second mortgages, as central air conditioner and heat pump purchases often occur when home upgrades are made. Based upon recommendations provided by the ARI, the shares of the different financing mechanisms used for purchasing central air conditioners and heat pumps were assumed to be 30% with a new home (first mortgages), 25% through loans (second mortgages), 10% paid by cash, and 35% by use of credit cards. In order to derive a full distribution of discount rates, DOE estimated a range of interest rates, based on historical data and judgments of future trends, for different types of consumer savings or financing. For new housing, the Department based its real mortgage rates on ARI's suggested mean value of 3.0% and assumed a range of 1.6 to 4.4%. Applying an assumed marginal tax rate of 28% (i.e., the maximum marginal rate paid by most U.S. taxpayers) and an assumed inflation rate of 2% results in a mean nominal mortgage rate of 6.94% with a range of 5.0 to 8.89%. For second mortgages or loans, ARI suggested a mean real interest rate of 8.0%. This rate is more representative of a nominal rate for second mortgages and was used as such. Assuming a tax rate of 28%, then subtracting an assumed inflation rate of 2% (the same rates used to derive the new home real interest rates) we arrive at a mean real interest rate of 3.76%. Nominal minimum and maximum interest rates of 6% and 10% were assumed to arrive at the real interest rate range of 2.32% to 5.20%. For cash, the minimum rate was assumed to equal 0%. This rate applies to purchasers making cash purchases without withdrawing from savings accounts. Based upon ARI's recommendation, the maximum is taken to be the opportunity cost represented by the interest that could have been earned in a typical mutual fund (assumed to be 6% real). A real mean rate of 3% results. For credit cards, the Department based its real interest rate on ARI's suggested mean value of 12.5%. Minimum and maximum real rates of 6% and 19% were assumed. It should be noted that the use of these credit card rates reflects an assumption that all consumers who use credit cards do so as a means of long term financing for product purchases, rather than as simply a convenient method of purchase or as a means of short term financing. Combining the assumed shares of each financing method, the above real interest rates result in a weighted-average (mean) value of 6.51% and a distribution that varies from 0 to 19%. Sensitivity studies show that while the LCC results are sensitive to the value chosen for mean discount rate, the LCC results are not sensitive to the distribution of discount rates. The Department believes that the above method is a valid basis for establishing a distribution of discount rates over the full range of discount rates relevant to most purchasers of the products covered by this rulemaking, but acknowledges that different assumptions might be made about likely interest, inflation and marginal tax rates, or about consumer financing methods, and that different approaches to identifying valid consumer discount rates might also be valid. For example, it is also possible to base consumer discount rates on the average real rates of return on consumer investment or other measures of the opportunity costs incurred by consumers that purchase the covered products. DOE does not believe, however, that such alternative assumptions or alternative approaches would significantly alter the range of discount rates used by the Department or the conclusions drawn from the life cycle cost analyses conducted using these discount rates. The Department is seeking any information that would support significant alterations in the range or distribution of the discount rates derived from DOE's analysis. Alternatively, DOE is soliciting comment on the possible use of a standardized distribution of discount rates ranging from approximately 4% to 12%, with a mean of 6%. The use of such a standardized distribution would explicitly recognize the many uncertainties associated with DOE's current analysis and, based on sensitivity analyses already performed by DOE, such a standardized distribution would not significantly alter the conclusions of DOE's life cycle cost analyses. Repair Costs: The annual repair cost covers the replacement or repair of components which have failed. The Department assumed repair costs for minimum efficiency equipment (10 SEER) and equipment with efficiencies greater than 12 SEER were equal one-half the equipment price divided by the mean equipment lifetime. The Department assumed equipment with efficiencies of 11 and 12 SEER incur a 1% increase in repair cost over [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A99-30480. Public record. Not legal advice.