Energy Conservation Program for Consumer Products: Central Air Conditioners and Heat Pumps Energy Conservation Standards

Note: EPA no longer updates this information, but it may be useful as a reference or resource.

[Federal Register: October 5, 2000 (Volume 65, Number 194)]
[Proposed Rules]
[Page 59589-59632]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05oc00-20]

[[Page 59589]]

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Part IV

Department of Energy

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Office of Energy Efficiency and Renewable Energy

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10 CFR Part 430

Energy Conservation Program for Consumer Products: Central Air
Conditioners and Heat Pumps Energy Conservation Standards; Proposed
Rule

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DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 430

[Docket Number EE-RM-97-500]
RIN: 1904-AA77

Energy Conservation Program for Consumer Products: Central Air
Conditioners and Heat Pumps Energy Conservation Standards

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

ACTION: Notice of proposed rulemaking and public hearing.

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SUMMARY: Pursuant to the Energy Policy and Conservation Act, as
amended, the Department of Energy (DOE, Department, or we) is proposing
to amend the energy conservation standards for residential central air
conditioners and heat pumps to require them to be more energy
efficient, and is announcing a public hearing on the proposal.

DATES: Comments must be received on or before December 4, 2000. DOE is
requesting a signed original, a computer diskette (WordPerfect 8) and
10 copies of the written comments. The Department will also accept e-
mailed comments, but you must send a signed original. Oral views, data,
and arguments may be presented at the public hearing (workshop) in
Washington, DC beginning at 9 a.m. on November 16, 2000.
The Department must receive requests to speak at the public hearing
and a copy of your statements no later than 4 p.m., November 1, 2000,
and we request that you provide a computer diskette (WordPerfect 8) of
each statement at that time.

ADDRESSES: Please submit written comments, oral statements, and
requests to speak at the public hearing to: Brenda Edwards-Jones, U.S.
Department of Energy, Office of Energy Efficiency and Renewable Energy,
Energy Conservation Program for Consumer Products: Central Air
Conditioners and Heat Pumps, Docket No. EE-RM/STD-97-500, 1000
Independence Avenue, SW., Washington, DC 20585-0121. You may send
emails to: brenda.edwards-jones@ee.doe.gov.
The hearing will begin at 9 a.m., in Room 1E-245 at the U.S.
Department of Energy, Forrestal Building, 1000 Independence Avenue,
SW., Washington DC. You can find more information concerning public
participation in this rulemaking proceeding in Section VIII, ``Public
Comment Procedures,'' of this notice of proposed rulemaking.
You may read copies of the public comments, the Technical Support
Document for Energy Efficiency Standards for Consumer Products: Central
Air Conditioners and Heat Pumps (TSD), the transcript of the public
hearing, and previous workshop transcripts in this proceeding at the
DOE Freedom of Information (FOI) Reading Room, U.S. Department of
Energy, Forrestal Building, Room 1E-190, 1000 Independence Avenue, SW.,
Washington, DC 20585, (202-586-3142, between the hours of 9 a.m. and 4
p.m., Monday through Friday, except Federal holidays. You may obtain
copies of the TSD and analysis spreadsheets from the Office of Energy
Efficiency and Renewable Energy's (EERE) web site at: http://
www.eren.doe.gov/buildings/codes_standards/applbrf/
central_air_conditioner.html.

FOR FURTHER INFORMATION CONTACT: Dr. Michael E. McCabe, U.S. Department
of Energy, Office of Energy Efficiency and Renewable Energy, Forrestal
Building, EE-41, 1000 Independence Avenue, SW., Washington, DC 20585-
0121, (202) 586-0854, e-mail: michael.e.mccabe@ee.doe.gov, or Edward
Levy, Esq., U.S. Department of Energy, Office of General Counsel,
Forrestal Building, GC-72, 1000 Independence Avenue, SW., Washington,
DC 20585, (202) 586-9507, e-mail: edward.levy@hq.doe.gov.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of Proposed Rule
II. Introduction
A. Authority
B. Background
1. Current Standards
2. History of Previous Rulemakings
3. Process Improvement
III. General Discussion
A. Test Procedures
B. Technological Feasibility
1. General
2. Maximum Technologically Feasible Levels
C. Energy Savings
1. Determination of Savings
2. Significance of Savings
D. Rebuttable Presumption
E. Economic Justification
1. Economic Impact on Manufacturers and Consumers
2. Life-Cycle Costs
3. Energy Savings
4. Lessening, If Any, of Utility or Performance of Products
5. Impact of Any Lessening of Competition
6. Need of The Nation to Conserve Energy
7. Other Factors
IV. Methodology
A. Life-Cycle-Cost and Payback Period Analysis
B. National Energy Savings and Net Present Value Analysis
C. Manufacturer Impact Analysis
1. Phase 1, Industry Profile
2. Phase 2, Industry Cash Flow Analysis
3. Phase 3, Sub-Group Impact Analysis
4. GRIM Analysis
D. NEMS Environmental Analysis
V. Discussion of Comments
A. Engineering Cost Data
1. Reverse Engineering Cost Estimates
2. Productivity Efficiency Improvements
3. Emerging Technologies
4. HFC-Based Engineering Analysis
B. Life-Cycle-Cost Parameters
1. Extended Warranty and Service Costs
2. Residential Energy Consumption Survey (RECS)
3. Equipment Lifetime
4. Commercial Applications
5. Marginal Electricity Prices
6. Forecast of Future Electricity Prices
7. Discount Rates
8. Percentage of Households with LCC Savings
9. Regional Analysis
10. Rebuttable Payback
11. Sensitivity Analyses
C. Shipments Analysis
1. Forecasted Housing Shifts
2. Elasticities
3. Equipment Efficiency
4. Fuel Switching
D. National Energy Savings Analysis
1. Uncertainty in NES Results
2. Site-to-Source Conversion
E. Consumer Sub-Group Analysis, Low Income Renters
F. Utility and Environmental Analysis
1. Peak Power Impacts, Reliability
2. Quantitative Assessment of Impacts on Peak Demand
3. Qualitative Assessment of Air Conditioning Standards Impact
on Power System Reliability
4. Competitive Residential Market
G. Manufacturer Impact Analysis--Low Volume Manufacturers
H. Markups
I. EER-Based Efficiency Standard
1. Current Relationship between SEER and EER
2. Options for Possible EER Standards
J. Niche Products
1. Ductless Split Air Conditioners and Heat Pumps
2. Small Duct High Velocity Air Conditioners
3. Vertical Packaged, Wall Mounted
4. Through-the-Wall Condensers
5. Non-Weatherized Single-Package Unit, Mounted Entirely within
the Structure
6. Request for Comments Regarding Niche Product Standards
K. Thermostatic Expansion Valves
L. Other Comments
1. Latent Heat Removal
2. 3-Phase Equipment
3. SEER-HSPF Relationship
4. Max Tech
VI. Analytical Results
A. Trial Standard Levels
B. Significance of Energy Savings
C. Payback Period

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D. Economic Justification
1. Economic Impact on Manufacturers
2. Life-Cycle Cost
3. Net Present Value and Net National Employment
4. Impact on Utility or Performance of Products
5. Impact of Any Lessening of Competition
6. Need of the Nation to Save Energy
7. Other Factors
E. Conclusion
VII. Procedural Issues and Regulatory Review
A. Review Under the National Environmental Policy Act
B. Review Under Executive Order 12866, ``Regulatory Planning and
Review'
C. Review Under the Regulatory Flexibility Act
D. Review Under the Paperwork Reduction Act
E. Review Under Executive Order 12988, ``Civil Justice Reform''
F. ``Takings'' Assessment Review
G. Review Under Executive Order 13132
H. Review Under the Unfunded Mandates Reform Act
I. Review Under the Treasury and General Government
Appropriations Act of 1999
J. Review Under the Plain Language Directives
VIII. Public Comment
A. Written Comment Procedures
B. Public Workshop/Hearing
1. Procedure for Submitting Requests to Speak
2. Conduct of Hearing
C. Issues for Which DOE Seeks Comment

I. Summary of Proposed Rule

The Department is proposing to raise the energy efficiency
standards for residential air conditioners and central air conditioning
heat pumps (heat pumps) to 12 SEER \1\ for air conditioners and to 13
SEER/7.7 HSPF \2\ for heat pumps. The proposed standards would apply to
all covered products offered for sale in the United States, effective
on January 1, 2006. The proposed standard for split system air
conditioners, the most common type of residential air conditioning
equipment represents a 20% improvement in energy efficiency. For split
system heat pumps, the new standards would represent a 30% improvement
in cooling efficiency and a 13% improvement in heating efficiency. The
proposed standards would also increase the efficiency of packaged air
conditioners and packaged heat pumps by 24% and 17%, respectively.
Finally, the Department is proposing provisions for some special
products to ensure that more efficient versions remain available for
niche applications.
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\1\ SEER, Seasonal Energy Efficiency Ratio, is the Department's
measure of energy efficiency for the seasonal cooling performance of
central air conditioners and heat pumps.
\2\ HSPF, Heating Seasonal Performance Factor, is the
Department's measure of energy efficiency for the seasonal heating
performance of heat pumps.
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The proposed standards would save a significant amount of energy
and, as a result of less electricity being produced, result in a
cleaner environment. In the 25-year period after the new standards
become effective, the nation would save over 3.4 Quads \3\ of primary
energy, equivalent to all the energy consumed by nearly 18 million
American households in a single year. These energy savings would also
significantly reduce the emissions of air pollutants and greenhouse
gases associated with electricity production, by avoiding the emission
of 56 million tons (Mt) of Carbon and 52 thousand tons (kt) nitrogen
oxides (NOX). Also, the standards are expected to eliminate
the need for the construction of approximately 31 (4 coal-fired and 27
natural gas-fired) new large, 400 megaWatt (MW), power plants in 2020.
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\3\ Quad, means quadrillion (10\15\ Btus).
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In addition to the increase proposed in SEER and HSPF, we are
proposing and requesting public comments on a proposal to adopt a
standard for steady-state cooling efficiency, EER.\4\ A requirement on
EER would ensure more efficient operation at high outdoor temperature,
during periods when electricity use by air conditioners is at its peak.
This would help to further alleviate the need for new electric power
plants and reduce the demands placed on the electric transmission and
distribution systems during periods of high usage, thereby, improving
system reliability.
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\4\ EER, Energy Efficiency Ratio, is a steady-state measure of
energy efficiency which measures efficiency at a prescribed outdoor
temperature (95 deg.F), and is one of the test conditions in the
Department's test procedure used to develop the SEER.
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Finally, consumers would see benefits from the proposed standards.
For example, while the initial cost of a typical central air
conditioner would increase by $122 to $153 or about 10-12%, the higher
efficiency equipment would save enough over its life to pay for the
increase in the price of the equipment plus an extra $45. Many
consumers, especially air conditioner owners in warmer parts of the
country and heat pump owners, would save even more.
While the higher efficiency units are widely available today and
promoted through the Department of Energy and the Environmental
Protection Agency (EPA) Energy Star program, as well as
utility rebate programs, manufacturers would be redesigning their
product line to meet the efficiency standards. At the same time they
would be redesigning their products to respond to the phase-out
hydrochloroflourocarbons (HCFC's) refrigerants required by EPA. By
making both changes at once, i.e., efficiency and HCFC refrigerants,
manufacturers will be able to plan and apply their resources in a cost-
effective manner, resulting in lower burdens and costs.

II. Introduction

A. Authority

Part B of Title III of the Energy Policy and Conservation Act
(EPCA), Pub. L. 94-163, as amended by the National Energy Conservation
Policy Act of 1978, Pub. L. 95-619, the National Appliance Energy
Conservation Act, 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 \5\ created the Energy Conservation
Program for Consumer Products other than Automobiles. The consumer
products subject to this program (often referred to hereafter as
``covered products'') include central air conditioners and heat pumps.
EPCA section 322(a)(4), 42 U.S.C. 6292(a)(4).
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\5\ Part B of Title III of the Energy Policy and Conservation
Act, as amended by the National Energy Conservation Policy Act, the
National Appliance Energy Conservation Act, the National Appliance
Energy Conservation Amendments of 1988, and the Energy Policy Act of
1992, is referred to in this notice as the ``Act,'' or ``EPCA.''
Part B of Title III is codified at 42 U.S.C. 6291 et seq. Part B of
Title III of the Energy Policy and Conservation Act, as amended by
the National Energy Conservation Policy Act only, is referred to in
this notice as the National Energy Conservation Policy Act.
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Under the Act, the program consists essentially of four parts:
testing, labeling, Federal energy conservation standards, and
certification and enforcement procedures. The Federal Trade Commission
is responsible for labeling, and DOE implements the remainder of the
program. Section 323 of the Act authorizes the Department, with
assistance from the National Institute of Standards and Technology
(NIST) and subject to certain criteria and conditions, to develop test
procedures to measure the energy efficiency, energy use, or estimated
annual operating cost of each covered product. 42 U.S.C. 6293. The
central air conditioners and heat pump test procedures appear at title
10 Code of Federal Regulations (CFR) part 430, subpart B, Appendix M.
The Act prescribes initial Federal energy conservation standards
for each of the listed covered products, except television sets. EPCA
section 325 (b)-(k), 42 U.S.C. 6295 (b)-(k). For central air
conditioners and heat pumps, EPCA section 325(d)(3)(A) specifies that
the

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standards are to be reviewed by the Department no later than January 1,
1994. 42 U.S.C. 6295(d)(3)(A).
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). Moreover, the Department may not prescribe a
standard for: (1) Certain products, including central air conditioners
and heat pumps, if no test procedure has been established for the
product, or (2) any product, if DOE determines by rule that a standard
for the product either would not result in significant conservation of
energy, or is not technologically feasible or economically justified.
EPCA section 325(o)(3), 42 U.S.C. 6295(o)(3).
Section 325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i) provides that
DOE must determine whether a standard is economically justified, after
receiving comments on the proposed standard, and whether the benefits
of the standard exceed its burdens, based, to the greatest extent
practicable, on a weighing of the following seven factors:

``(1) The economic impact of the standard on the manufacturers
and the consumers of the products subject to such standard;
(2) The savings in operating costs throughout the estimated
average life of the covered product in the type (or class) compared
to any increase in the price of, or in the initial charges for, or
maintenance expenses of, the covered products which are likely to
result from the imposition of the standard;
(3) The total projected amount of energy * * * savings likely to
result directly from the imposition of the standard;
(4) Any lessening of the utility or the performance of the
covered products likely to result from the imposition of the
standard;
(5) The impact of any lessening of competition, as determined in
writing by the Attorney General, that is likely to result from the
imposition of the standard;
(6) The need for national energy conservation; and
(7) Other factors the Secretary considers relevant.''

In addition, Section 325(o)(2)(B)(iii) of the Act, 42 U.S.C.
6295(o)(2)(B)(iii), establishes a rebuttable presumption that a
standard is economically justified if the Secretary finds that ``the
additional cost to the consumer of purchasing a product complying with
an energy conservation standard level will be less than three times the
value of the energy * * * savings during the first year that the
consumer will receive as a result of the standard, as calculated under
the applicable test procedure * * * '' The rebuttable presumption test
is an alternative path to establishing economic justification.
Section 327 of the Act, 42 U.S.C. 6297, provides that generally the
Federal energy efficiency requirements supersede State laws or
regulations concerning energy conservation testing, labeling, and
standards, and specifies limited exceptions to this general rule. EPCA
Section 327(a) through (c), 42 U.S.C. 6297 (a) through (c). The
Department can grant a waiver of preemption in accordance with the
procedures and other provisions of Section 327(d) of the Act. 42 U.S.C.
6297(d).

B. Background

1. Current Standards
The existing standards for residential central air conditioners and
heat pumps have been in effect since 1992. Energy efficiency for air
conditioner and heat pump cooling has been defined by the descriptor
SEER. Energy efficiency for heat pumps has been defined by the
descriptor, Heating Seasonal Performance Factor (HSPF) while operating
during the heating season and by SEER while operating during the
cooling season. The current central air conditioners and heat pumps
efficiency standards are as follows:

--Split system air conditioners and heat pumps--10 SEER/6.8 HSPF
--Single package air conditioners and heat pumps--9.7 SEER/6.6 HSPF
2. History of Previous Rulemakings
On September 8, 1993, DOE published an Advance Notice of Proposed
Rulemaking (ANOPR) announcing the Department's intention to revise the
existing central air conditioner and heat pump efficiency standard. (58
FR 47326). On November 24, 1999, DOE published a Supplemental ANOPR
(hereinafter referred to as the Supplemental ANOPR). 64 FR 66306. In
the Supplemental ANOPR and during the December 9, 1999, public
workshop, we provided interested persons an opportunity to comment on
several issues, including:
(1) The product classes that the Department planned to analyze;
(2) The analytical framework, models (e.g., the Government
Regulatory Impact Model (GRIM)), and tools (e.g., a Monte Carlo
sampling methodology, and the life-cycle cost (LCC) and national energy
savings (NES) spreadsheets) that the Department was using in performing
analyses of the impacts of energy conservation standards;
(3) The results of preliminary analyses for the engineering, LCC,
payback and NES; and
(4) The candidate energy conservation standard levels that the
Department had developed from these analyses.
3. Process Improvement
The fiscal year (FY) 1996 appropriations legislation imposed a
moratorium on proposed or final rules for appliance efficiency
standards for FY 1996. Pub. L. 104-134. During the moratorium, the
Department examined the appliance standards program and how it was
working. Congress advised DOE to correct the standards-setting process
and to bring together stakeholders (such as manufacturers and
environmentalists) for assistance. Therefore, we consulted with energy
efficiency groups, manufacturers, trade associations, state agencies,
utilities and other interested parties to provide input to the process
used to develop appliance efficiency standards. As a result, on July
15, 1996, the Department published a final rule: Procedures for
Consideration of New or Revised Energy Conservation Standards for
Consumer Products (referred to as the Process Rule) (61 FR 36974),
codified at 10 CFR part 430, subpart C, Appendix A.
The Process Rule states that for products, such as central air
conditioners and heat pumps, for which DOE issued a proposed rule prior
to August 14, 1996, DOE would conduct a review to decide whether any of
the analytical or procedural steps already completed should be
repeated. (61 FR 36982). DOE completed this review and decided to use
the Process Rule, to the extent possible, in the development of the
revised central air conditioners and heat pumps standards.
We developed an analytical framework for the central air
conditioners and heat pumps standards rulemaking for our stakeholders,
which we presented during a workshop on June 30, 1998. The analytical
framework described the different analyses (e.g., LCC, payback and
manufacturing impact analyses (MIA)) to be conducted, the method for
conducting them, the use of new LCC and NES spreadsheets, and the
relationship of the various analyses.

III. General Discussion

A. Test Procedures

Section 7(b) of the Process Rule states that necessary
modifications to test procedures concerning efficiency standards will
be proposed before issuance of a proposed rule. Section 7(c) of the
Process Rule states that a final modified test procedure will be issued

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prior to issuing a proposed rule regarding energy conservation
standards. The residential central air conditioner and heat pump test
procedure is being revised to improve its organization and ease of use,
with a proposed rule to be published. 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 finalized before
issuance of the proposed rule for these standards.

B. Technological Feasibility

1. General
There are central air conditioners and heat pumps in the market at
all of the efficiency levels analyzed in today's notice. The
Department, therefore, believes all of the efficiency levels discussed
in today's notice are technologically feasible.
2. Maximum Technologically Feasible Levels
The Act requires the Department, in a proposed rule that sets forth
new or amended standards, to ``determine the maximum improvement in
energy efficiency * * * that is technologically feasible for each type
(or class) of covered products.'' EPCA section 325 (p)(2), 42 U.S.C.
6295(p)(2). Accordingly, for each class of product under consideration
in this rulemaking, a maximum technologically feasible (Max Tech) level
was identified.
As previously stated in Section II.B, residential central air
conditioner and heat pump cooling efficiency is expressed as a SEER.
Heating efficiency is expressed as a HSPF. The most efficient
technology presently available is a 3-ton 18 SEER central air
conditioner. The Department has determined that at this time 18 SEER is
the Max Tech level for cooling efficiency for all product classes and
capacities in this analysis. The Max Tech level for heating efficiency,
corresponding to the 18 SEER level, is 9.4 HSPF which is the highest
HSPF rating currently available in residential heat pumps.

C. Energy Savings

1. Determination of Savings
The Department estimated energy savings through the use of the NES
spreadsheet, which forecasted energy savings over the period of
analysis for candidate standards relative to the base case. The
Department quantified the energy savings that would be attributable to
a standard as the difference in energy consumption between the
candidate standards case and the base case. The base case represents
the forecast of energy consumption in the absence of amended mandatory
efficiency standards.
The NES spreadsheet model is described in Section IV.B of this
notice, Appendix of the Technical Support Document and also in the
Supplemental ANOPR. (64 FR 66306). The NES spreadsheet model calculates
the energy savings in site energy or kilowatt-hours (kWh). Site energy
is the energy directly consumed at building sites by the central air
conditioner or heat pump. National energy savings are expressed in
terms of the source energy savings which is the savings in energy used
to generate and transmit the electricity consumed at the site. Chapter
7 of the TSD contains a table of factors used to convert kWh to Btu.
These conversion factors, which change with time, are derived from
DOE's Energy Information Administration's (EIA) Annual Energy Outlook
2000 (AEO2000).
2. Significance of Savings
The Act prohibits the Department from adopting a standard for a
product if that standard would not result in ``significant'' energy
savings. EPCA section 325(o)(3)(B), 42 U.S.C. 6295(o)(3)(B). While the
term ``significant'' is not defined in the Act, the U.S. Court of
Appeals, in Natural Resources Defense Council v. Herrington, 768 F.2d
1355, 1373 (D.C. Cir. 1985), indicated that Congress intended
``significant'' energy savings in this context to be savings that were
not ``genuinely trivial.'' The energy savings for all of the trial
standard levels considered in this rulemaking are non-trivial and
therefore we consider them ``significant'' within the meaning of
section 325 of the Act.

D. Rebuttable Presumption

The National Appliance Energy Conservation Act established new
criteria for determining whether a standard level is economically
justified. EPCA section 325(o)(2)(B)(iii) states:

``If the Secretary finds that the additional cost to the
consumer of purchasing a product complying with an energy
conservation standard level will be less than three times the value
of the energy * * * savings during the first year that the consumer
will receive as a result of the standard, as calculated under the
applicable test procedure, there shall be a rebuttable presumption
that such standard level is economically justified. A determination
by the Secretary that such criterion is not met shall not be taken
into consideration in the Secretary's determination of whether a
standard is economically justified.''

If the increase in initial price of an appliance due to a
conservation standard would repay itself to the consumer in energy
savings in less than three years, then we presume that such standard is
economically justified.\6\ This presumption of economic justification
can be rebutted upon a proper showing.
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\6\ For this calculation, the Department calculated cost-of-
operation based on the DOE test procedure, with the test procedure
assumed annual hours of operation. Consumers that use the central
air conditioner or heat pump fewer hours will experience a longer
payback while those that use them more will have a shorter payback.
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E. Economic Justification

As noted earlier, section 325(o)(2)(B)(i) of the Act provides seven
factors to be evaluated in determining whether a conservation standard
is economically justified.
1. Economic Impact on Manufacturers and Consumers
The Process Rule established procedures, interpretations and
policies to guide the Department in the consideration of new or revised
appliance efficiency standards. The provisions of the rule have direct
bearing on the implementation of manufacturer impact analyses. First,
the Department will use an annual cash flow approach in determining the
quantitative impacts on manufacturers. This includes a short-term
assessment based on the cost and capital requirements during the period
between the announcement of a regulation and the time when the
regulation comes into effect, and a long-term assessment. Impacts
analyzed include industry net present value, cash flows by year,
changes in revenue and income, and other measures of impact, as
appropriate. Second, the Department will analyze and report the impacts
on different types of manufacturers, with particular attention to
impacts on small manufacturers. Third, the Department will consider the
impact of standards on domestic manufacturer employment, manufacturing
capacity, plant closures and loss of capital investment. Finally, the
Department will take into account cumulative impacts of different DOE
regulations on manufacturers.
For consumers, measures of economic impact are the changes in
installed cost and annual operating costs, i.e., LCC. The life-cycle
cost of the product at each standard level are presented in Chapter

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5 of the TSD. Under section 325 of the Act, the life-cycle cost
analysis is a separate factor to be considered in determining economic
justification.
2. Life-Cycle Costs
The life-cycle cost is the sum of the purchase price, including the
installation, and the operating expense, including operating energy,
maintenance, and repair expenditures, discounted over the lifetime of
the appliance.
For each central air conditioner and heat pump product class, we
calculated both life-cycle costs and life cycle cost savings for the
following space-cooling efficiency levels: 11, 12, 13, and 18 SEER. For
heat pumps, the following space-heating efficiency levels correspond to
the above SEER values: 7.1, 7.4, 7.7, and 8.8 HSPF, respectively. The
calculated life-cycle cost savings is given as a distribution, with a
mean value and a range. We used a distribution of real discount rates
ranging from 0.1 to 18% for the calculations. The assumption is that
the consumer purchases the central air conditioner and/or heat pump in
2006. For the probability-based LCC analysis, a building-by-building
analysis is performed for purposes of generating a distribution of
life-cycle costs for each efficiency level analyzed. The building stock
is composed of both residential and commercial buildings under the
assumption that 90% of single-phase central air conditioners and heat
pumps are utilized in residential buildings with the remaining 10% in
commercial buildings. The 1997 Residential Energy Consumption Survey
(RECS) is used to represent the residential building stock while 77
commercial buildings are used to represent the commercial building
stock based on assumptions consistent with those used in the process to
update ASHRAE Standard 90.1-1999. Annual energy costs are based on
marginal electricity prices which are developed for each residential
and commercial building. Electricity price forecasts are taken from the
AEO2000 (DOE/EIA-0383). The LCC calculations include markup structures
developed for both the new construction and replacement/retrofit
markets. Chapter 5 of the TSD contains the details of the LCC
calculations including those considered under factor seven below.
3. Energy Savings
While significant conservation of energy is a separate statutory
requirement for imposing an energy conservation standard, the Act
requires DOE, in determining the economic justification of a standard,
to consider the total projected energy savings that are expected to
result directly from revised standards. The Department used the NES
spreadsheet results, discussed earlier, in its consideration of total
projected savings. The savings are provided in section V of this
notice.
4. Lessening, if Any, of Utility or Performance of Products
This factor cannot be quantified. In establishing classes of
products, and in evaluating design options and the impact of potential
standard levels, the Department tried to eliminate any degradation of
utility or performance in the products under consideration in this
rulemaking. None of the proposed trial standard levels reduces the
performance of central air conditioners and heat pumps.
5. Impact of Any Lessening of Competition
The Act directs the Department to consider any lessening of
competition that is likely to result from standards. It further directs
the Attorney General to determine the impact, if any, of any lessening
of competition likely to result from a proposed standard and transmit
such determination to the Secretary, not later than 60 days after the
publication of a proposed rule, together with an analysis of the nature
and extent of such impact. Section 325(o)(2)(B)(i)(V) and (B)(ii), 42
U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii).
In order to assist the Attorney General in making such a
determination, the Department has provided the Attorney General with
copies of this notice and the Technical Support Document for review.
6. Need of the Nation To Conserve Energy
We report the environmental effects from each standard level for
each product under this factor in Section VI of this notice.
7. Other Factors
During the extreme periods of heat and humidity that took place in
the summer of 1999, electric power outages and other system
disturbances disrupted the lives of millions of people and thousands of
businesses in various regions of our country. In response to public
concerns about this problem, the Secretary of Energy formed a team of
experts to investigate the problem and to recommend actions that the
Federal government can take to help avoid future power outages by
improving the reliability of the U.S. electric power system. One of the
actions proposed by the Secretary at that time was to accelerate the
rulemaking process and advance the publication of a final rule for
central air conditioners by six months.
The Final Report \7\ by the team of experts, issued in March, 2000,
included the recommendation to increase the energy efficiency of
central air conditioners as one means for enhancing reliability. The
report stated, ``Technologies and practices that reduce loads during
times of peak demand, such as high-efficiency air conditioning and
lighting equipment, are especially valuable.'' This was based on the
finding that in several of the affected regions ``Retail customers have
limited mechanisms and incentives to conserve energy or resort to
alternatives during electricity shortages.'' Included in the federal
activities that promote energy efficiency recommended to the Secretary
was to promulgate standards for more efficient technologies.
---------------------------------------------------------------------------

\7\ ``Report of the U.S. Department of Energy's Power Outage
Study Team: Findings and Recommendations to Enhance Reliability from
the Summer of 1999'', March 2000.
---------------------------------------------------------------------------

As an additional element to consider under this factor, the
Secretary has decided to evaluate the life-cycle cost impacts on those
subgroups of consumers who are at or below the poverty line (e.g., for
a family of four, this constitutes a household income of less than
$16,036).

IV. Methodology

The Process Rule outlines the procedural improvements identified by
the interested parties. 61 FR 36974. The process improvement effort
also included a review of the: (1) Economic models; (2) analytical
tools; (3) methodologies; (4) non-regulatory approaches; and (5)
prioritization of future rules.
The Department continues to use two spreadsheet tools to meet the
objectives of the Process Rule. The first spreadsheet calculates life-
cycle-costs and payback periods of potential new energy conservation
standards. The second conducts shipments forecasts and then calculates
national energy savings and net present value impacts of potential new
energy conservation standards. The Department also completely revised
the methodology used in assessing manufacturer impacts including the
adoption of the GRIM.
Additionally, DOE has estimated the impacts of central air
conditioner and heat pump energy efficiency standards on electric
utilities and the environment. The Department used a version of EIA's
National Energy Modeling System (NEMS) for the utility

[[Page 59595]]

and environmental analyses. NEMS simulates the energy economy of the
U.S. and has been developed over several years by the EIA primarily for
the purpose of preparing the AEO. NEMS produces a widely-known baseline
forecast for the U.S. through 2020 that is available in the public
domain. The version of NEMS used for appliance standards analysis is
called NEMS-BRS,\8\ and is based on the AEO2000 version with minor
modifications. NEMS offers a sophisticated picture of the effect of
standards since its scope allows it to measure the interactions between
the various energy supply and demand sectors and the economy as a
whole.
---------------------------------------------------------------------------

\8\ EIA approves use of the name NEMS to describe only an AEO
version of the model without any modification to code or data.
Because our analysis entails some minor code modifications and the
model is run under various policy scenarios that deviate from AEO
assumptions, the name NEMS-BRS refers to the model as used here. For
more information on NEMS, please refer to the National Energy
Modeling System: An Overview 1998. DOE/EIA-0581 (98), February,
1998. BRS is DOE's Office of Building Research and Standards.
---------------------------------------------------------------------------

A. Life-Cycle Cost and Payback Period Analysis

This section describes the LCC and payback period analysis and the
spreadsheet model used for analyzing the economic impacts of possible
standards on individual residential and commercial consumers. Details
of the spreadsheet model can be found in Chapters 5 in the TSD. We
conduct the LCC and payback period analysis with a spreadsheet model
developed in Microsoft Excel for Windows 95 or above. When combined
with Crystal Ball (a commercially available software program), the LCC
and payback period generates a Monte Carlo simulation to perform the
analysis by incorporating uncertainty and variability considerations.
The LCC is the total consumer expense over the life of the
appliance, including purchase expense and operating costs (including
energy expenditures). Future operating costs are discounted to the time
of purchase and summed over the lifetime of the appliance. The payback
period is the change in purchase expense due to an increased efficiency
standard divided by the change in annual operating cost that results
from the standard. For today's proposed rule, both the LCC and payback
period are based on a building-by-building analysis of a nationally
representative set of residential and commercial buildings.
The set of residential buildings are taken from those households in
the 1997 RECS equipped with either a central air conditioner or heat
pump. Of the 5,900 households surveyed in the 1997 RECS, 2,003
households representing 37.6% of the housing population have a central
air conditioner while 579 households representing 11.1% of the housing
population have heat pumps.\9\ RECS specifies the annual space-cooling
energy consumption and, in the case of heat pumps, the annual space-
heating energy consumption associated with the space-conditioning
equipment. Also provided is the age of the space-conditioning equipment
which, when coupled with historical equipment efficiency data provided
by the Air-Conditioning and Refrigeration Institute (ARI), allows for
the imputation of the household's space-conditioning equipment
efficiency (i.e., the SEER and, in the case of heat pumps, the HSPF).
With both the annual energy use and the efficiency of the central air
conditioner or heat pump specified, the annual energy use associated
with equipment at higher efficiency levels is simply determined by
multiplying the household's existing annual energy use by the ratio of
the existing equipment efficiency divided by the efficiency of the more
efficient equipment. Household utility billing data in RECS allows for
the determination of average and marginal electricity prices. The
electricity price data along with the annual energy use data allows for
the determination of annual electricity cost savings for any efficiency
level.
---------------------------------------------------------------------------

\9\ The number of households actually used in the central air
conditioner and heat pump LCC and Payback period analyses were 1218
and 308, respectively. Some central air-conditioned households were
dropped from the analysis for one or more of the following reasons:
(1) The central air conditioner was not used, (2) a room air
conditioner was present and used, or (3) marginal energy prices
could not be determined for the household. With regard to households
with heat pumps, they were dropped from the analysis for one or more
of the following reasons: (1) The heat pump was not used or (2)
marginal energy prices could not be determined for the household.
---------------------------------------------------------------------------

The set of commercial buildings are based on assumptions consistent
with those used to develop the American Society of Heating,
Refrigerating, and Air-Conditioning Engineers' (ASHRAE) Standard 90.1-
1999. The commercial building data set consists of seven building types
located in eleven different geographic regions yielding a total of 77
buildings. An hourly simulation program is used to calculate the annual
full-load equivalent operating hours (FLEOH) of the space-cooling and
space-heating equipment in each building. The FLEOHs are used with the
Department of Energy's test procedure equations for central air
conditioners and heat pumps to obtain each building's annual space-
cooling and space-heating energy consumption. Similar to the analysis
for residential buildings, the energy use associated with equipment at
higher efficiency levels is simply determined by multiplying the
building's simulated annual energy use by the ratio of the building's
assumed equipment efficiency (i.e., 10 SEER) divided by the efficiency
of the more efficient equipment. Average and marginal electricity
prices for each commercial building are determined by applying a
national sample of electric utility tariffs to the simulated load and
demand. The electricity price data along with the annual energy use
data allows for the determination of annual electricity cost savings
for any efficiency level for each commercial building.
The probability-based LCC and payback period analysis samples
buildings from the residential and commercial building data set in
order to produce a distribution of LCC results for a given standard
level. The LCC and payback period analysis takes 10,000 samples to
create a distribution of results based on the assumption that 90% of
the single-phase central air conditioning and heat pump equipment stock
are in residential buildings with the remaining 10% in commercial
buildings.
The spreadsheet model is organized so that ranges or distributions
can be entered for each input variable needed to perform the
calculations. The LCC and payback period output can be either a point
value when we use the average value of the inputs or a distribution
when we use distributions for some or all of the inputs. Inputs for
determining the total installed cost include: Baseline manufacturer
costs, manufacturer cost multipliers for each efficiency level,
manufacturer markups, distributor or wholesaler markups, dealer or
contractor markups, builder markups, sales taxes, and installation
costs. Of the above total installed cost inputs, the manufacturer,
dealer, distributor, and builder markups, as well as the sales tax and
installation price are described with distributions. Inputs for
determining operating expenses include: Annual energy consumption,
average electricity prices, marginal electricity prices, electricity
price projections, repair costs, maintenance costs, equipment lifetime,
discount rates, and the year standards take effect. Of the above
operating expense inputs, the discount rate and equipment lifetime are
described with distributions (note that neither the discount rate nor
lifetime are needed to determine the payback period). Operating
expense, annual

[[Page 59596]]

energy use and electricity prices, although represented by point-values
for each residential and commercial building, are highly variable when
looking at the entire building data set. Chapter 5 of the TSD contains
the details of all the inputs to the LCC and payback period analysis.
In addition to determining payback periods with the spreadsheet
model, the Act requires us to determine a rebuttable payback period.
The Act requires the Department to examine payback periods to determine
if the three year rebuttable presumption of economic justification
applies. As prescribed by the Act, the rebuttable payback period is
``calculated under the applicable test procedure, * * * .''
The annual space-cooling and space-heating energy consumption
calculated based on the Department's test procedure are on the order of
50% greater than the weighted-average values from the LCC analysis
(i.e., analyses based on the 1997 RECS for residential buildings and
hourly simulations for commercial buildings). As will be shown in
Section VI (Analytical Results), the payback value calculated from the
Department's test procedure equations will be significantly lower than
the average payback value calculated from the LCC analysis, for any
standard level.

B. National Energy Savings and Net Present Value Analysis

In order to make the analysis more accessible and transparent to
all stakeholders, we continue to use an Excel spreadsheet model to
calculate the energy savings and the national economic costs and
savings from new standards. Various input quantities within the
spreadsheet can be changed. Unlike the LCC analysis, the NES
spreadsheet does not use distributions for inputs or outputs. We
conduct sensitivities by running different scenarios.
DOE uses the NES spreadsheet to perform calculations of energy
savings and net present value (NPV) based on user inputs similar to
those for the LCC spreadsheet. The energy savings, energy cost savings,
equipment costs, and NPV of benefits for several product classes are
forecast from the chosen start year through 2030. The forecasts provide
annual and cumulative values for all four output parameters.
The Department calculates the national energy savings by
subtracting energy use under a standards scenario from energy use in a
base case (no new standards scenario). Energy use is reduced when the
baseline central air conditioner or heat pump (i.e, 10 SEER) is
replaced by a more efficient piece of equipment. Unit energy savings
for each product class are the same weighted-average values as
calculated in the LCC and Payback period spreadsheet. Additional
information about the NES spreadsheet can be found in Chapter 7 of the
TSD.
User inputs include: (1) A choice from among several electricity
price projections: (2) effective date of the central air conditioners
and heat pumps standard; (3) discount rate and discount year; (4) a
standards case efficiency level; (5) an equipment price; (6) an
equipment price and housing projection; and (7) an efficiency scenario.
Additionally, we use a time series of conversion factors to change from
site to source energy.
The efficiency scenario specifies the equipment efficiency
distribution after new standards would take effect. Three efficiency
scenarios were used to forecast the impact new standards would have
after they take effect: (1) National Appliance Energy Conservation Act
(NAECA) scenario,\10\ (2) Roll-up scenario,\11\ and (3) Shift
scenario.\12\ As opposed to the Supplemental ANOPR where weighted-
average equipment efficiencies were forecasted, an actual distribution
of efficiencies (i.e., the percentage of shipments which occur in
incremental SEER bins over the range from the minimum standard to 18
SEER) were used in the analysis for the proposed rule.
---------------------------------------------------------------------------

\10\ Under the NAECA scenario, equipment efficiencies after the
adoption of new standards are forecasted to change in the same
pattern as the efficiency changes that occurred in 1992 when minimum
efficiency standards first took effect. This results in weighted
average equipment efficiencies, based on minimum efficiency
standards of 11, 12, and 13 SEER, of 11.6 SEER, 12.4 SEER, and 13.4
SEER, respectively.
\11\ Under the Roll-up scenario, equipment that in the base case
were forecast to be less efficient than the trial standard level are
assumed to move up to the standard level, and equipment forecasted
in the base case to be at or above the trial standard level are
assumed not to increase in efficiency. This results in weighted-
average equipment efficiencies, based on minimum efficiency
standards of 11, 12, and 13 SEER, of 11.5 SEER, 12.3 SEER, and 13.3
SEER, respectively.
\12\ Under the Shift scenario, equipment efficiencies after the
adoption of new standards are forecast to have the same pattern, at
and above the standard levels, as the current distribution of
efficiencies. This results in weighted-average equipment
efficiencies, based on minimum efficiency standards of 11, 12, and
13 SEER, of 11.7 SEER, 12.7 SEER, and 13.7 SEER, respectively.
---------------------------------------------------------------------------

One of the more important components of any estimate of future
impact is shipments. Forecasts of shipments for the base case and
standards case are determined within the NES spreadsheet. The shipments
portion of the spreadsheet forecasts central air conditioner and heat
pump shipments from 2000 to 2030. Shipments forecasts are developed by
accounting for: (1) The combined effects of equipment price, operating
cost, and household income; (2) different market segments (e.g., new
housing, replacement decisions, and non-owners adding a central air
conditioner or heat pump); (3) decisions to repair rather than replace;
and (4) different equipment age categories. Additional details on the
various shipments forecasts are provided in Chapter 6 of the TSD.

C. Manufacturer Impact Analysis

The MIA estimates the financial impact of standards on
manufacturers and calculates impacts on employment and manufacturing
capacity.
The Department published the proposed MIA approach as part of the
Federal Register publication of the Supplemental ANOPR, and received no
comments suggesting substantive changes in the methodology. As
proposed, the MIA was conducted in three phases. Phase 1, ``Industry
Profile,'' consisted of the preparation of an industry
characterization. Phase 2, ``Industry Cash Flow,'' focused on the
industry as a whole, including both major and niche-product
manufacturers. The GRIM was used to prepare an industry cash flow
analysis. The Department used publicly available information developed
in Phase 1 to adapt the GRIM structure to facilitate the analysis of
new central air conditioner and central air conditioning heat pump
standards.
In Phase 3, ``Sub-Group Impact Analysis,'' the Department conducted
interviews with several niche-product manufacturers to determine the
financial impacts of revised standards. Phase 3 also entailed
documenting additional impacts on employment and manufacturing capacity
through a structured interview process.
1. Phase 1, Industry Profile
Phase 1 of the MIA consisted of preparing an Industry Profile.
Prior to initiating the detailed impact studies, DOE collected
information on the present and past structure and market
characteristics of the central air conditioning industry. This activity
involved both quantitative and qualitative efforts to assess the
industry and products to be analyzed. The information collected
included manufacturer market shares and characteristics and financial
information, market trends, and product characteristics.

[[Page 59597]]

The industry profile included a top-down cost analysis of the
central air conditioner manufacturing industry that was used to derive
cost and financial inputs for the GRIM, e.g., revenues, and material,
labor, overhead, depreciation, Sales General & Administration (SG&A),
and Research & Development (R&D) expenses. The Department also utilized
additional sources of information to further characterize the industry.
These included company Securities and Exchange Commission (SEC) 10-K
reports, Moody's company data reports, Standard & Poor's (S&P) stock
reports, Value Line industry composites, and Dow Jones Financial
Services.
2. Phase 2, Industry Cash Flow Analysis
Phase 2 of the MIA focused on the financial impacts of new
standards on the industry as a whole. The analytical tool used for
calculating the financial impacts of standards on manufacturers is the
GRIM. As part of the analysis, DOE interviewed several of the major
manufacturers. For the Industry Cash Flow Analysis, DOE used the
financial values determined during Phase 1 and the shipment scenarios
used in the LCC and NES analyses.
3. Phase 3, Sub-Group Impact Analysis
The Department has received many comments during workshops and
interviews, and in writing, suggesting that manufacturers of niche
products, representing less than 3% of industry shipments, could be
more negatively impacted by new standards than major manufacturers. To
assess the differential impacts, the Department interviewed two
manufacturers of niche products, in addition to those conducted during
the Engineering Analysis. The focus of the interviews was to determine
which GRIM parameters differed for niche manufacturers by virtue of
their smaller revenue base and more limited markets.
From a financial standpoint, the common distinguishing
characteristic of niche product manufacturers was their need to spread
the costs of converting to new standards over smaller production
volumes, as well as the product size constraints identified during the
Engineering Analysis which make their shipments more sensitive to
increases in product size. During the interviews, small manufacturers
demonstrated that several of the costs necessary to meet any new
regulation are largely independent of the product volume produced. The
most apparent are the costs necessary to design a new product meeting
the proposed energy standards. Other costs, such as plant engineering,
some tooling, and other capital costs, have significant portions that
are independent of final production volumes.
4. GRIM Analysis
An increase in standards affects a manufacturer's cash flow in
three distinct ways: (1) Increased investment; (2) higher production
costs per unit; and (3) altered revenue by virtue of higher per unit
prices and changes in sales volumes. As mentioned, the Department uses
the GRIM to quantify the changes in cash flow that result in a higher
or lower industry value.
The GRIM analysis uses a number of inputs--annual shipments;
prices; manufacturer costs such as materials and labor, selling and
general administration costs, taxes, and capital expenditures--to
arrive at a series of annual net cash flows beginning today and
continuing ten years past the implementation of new standards. This
information was collected from a number of sources, including
publically available data, as well as interviews with of the major
manufacturers and two specialty manufacturers. Industry net present
values are calculated by discounting and summing the annual net cash
flows. Additional information about the GRIM spreadsheet can be found
in Chapter 8 of the TSD.

D. NEMS Environmental Analysis

The environmental analysis provides estimates of changes in
emissions of nitrogen oxides (NOX) and carbon from carbon
dioxide (CO2). The Department used NEMS-BRS for central air
conditioner and heat pump analyses (as well as the utility analyses).
NEMS-BRS is run similar to the AEO2000 NEMS except that central air
conditioner and heat pump energy usages are reduced by the amount of
energy (electricity) saved due to the proposed trial standard levels.
The input of energy savings are obtained from the NES spreadsheet. For
the environmental analysis, the output is the forecasted physical
emissions. The net benefits of the standard is the difference between
emissions estimated by NEM-BRS and the AEO2000 Reference Case.
The environmental analysis is relatively straightforward from NEMS-
BRS. Carbon emissions are tracked in NEMS-BRS using a detailed carbon
module that provides robust results because of its broad coverage of
all sectors and inclusion of interactive effects. The only form of
carbon tracked by NEMS-BRS is CO2. However, in this report
the carbon savings are reported as elemental carbon.
The two airborne pollutant emissions that have been reported in
past analyses, sulfur dioxide (SO2) and NOX, are
reported by NEMS-BRS. NOX results are based on forecasts of
compliance with existing legislation. In the case of SO2,
the Clean Air Act Amendments of 1990 set an emissions cap on all power
generation. The attainment of this target, however, is flexible among
generators and is enforced by applying market forces, through the use
of emissions allowances and tradable permits. As a result, accurate
simulation of SO2 trading tends to imply that physical
emissions effects will be zero because emissions will always be at, or
near, the ceiling. This fact has caused considerable confusion in the
past. There is virtually no real possible SO2 environmental
benefit from electricity savings as long as there is enforcement of the
emission ceilings. See the TSD, Environmental Assessment, for a
discussion of this issue.
Alternative price forecasts corresponding to the high and low
economic growth side cases found in AEO 2000 have also been generated
for use by NEMS-BRS, and were used as alternative scenarios, and are
presented in the TSD. (See TSD, Environmental Assessment.)

V. Discussion of Comments

As noted above, DOE published the Supplemental ANOPR regarding
central air conditioners and heat pumps on November 24, 1999, and
conducted a public workshop to present the analyses and to solicit
comments on December 9, 1999. The Department requested comments on the
following twelve issues:
1. Differences between the industry and the reverse engineering
cost data:
2. The incorporation of emerging technologies into the Engineering
Analysis;
3. The assessment of the impacts on steady-state efficiency, i.e.
EER, due to increases in the SEER;
4. For heat pump systems, the relationship between SEER and HSPF;
5. Additional product classes based on system capacity;
6. Niche product classes
(a) Ductless split
(b) High-velocity, small-duct
(c) Vertical-package, wall-mounted
(d) Split, through-the-wall-condenser;
7. The impact of alternative refrigerants for HCFC-22;
8. Data on retail mark-up assumptions;
9. Information relating to the determination of price and operating
cost elasticities in conducting shipment forecasts;
10. Data on the possible adverse affects of standards on
identifiable groups of consumers that experience below-average utility
or usage rates;

[[Page 59598]]

11. Information on what non-regulatory alternatives to standards
need to be reviewed; and
12. Comments on the candidate standard levels and the alternative
standard scenarios.
Based on responses and comments received since that workshop, we
provide the following discussion.

A. Engineering Cost Data

1. Reverse Engineering Cost Estimates
The Department's reverse engineering analysis prepared as a basis
for the Supplemental ANOPR received a broad range of comments, both
supportive and critical. ARI and the Natural Resources Defense Council
(NRDC) commented on the apparent accuracy of the split air conditioner
cost estimates and the ease with which the results are able to be
scrutinized by outside parties. (Wethje, ARI, Transcript, p. 42; ARI,
No. 11 at 1; Goldstein, NRDC, Transcript, p. 94).
The Department also received comments criticizing the reverse
engineering results for split heat pumps and for packaged air
conditioners and heat pumps, noting the lack of design detail and the
aggregation of the results into an efficiency level-based analysis.
(Hodges, ARI, Transcript, p. 85; Madera, York International (York),
Transcript, pp. 90, 91, 93; Goldstein, NRDC, Transcript p. 96 and
California Energy Commission (CEC) No. 47 at 7). The comments observed
that the relative cost results for split heat pumps and packaged
equipment differed significantly from those of split air conditioners,
and that those analyses were less rigorous than the split air
conditioner analysis. They also noted that the split heat pump and
packaged equipment analysis was based on fewer equipment samples; did
not include a detailed tear-down of a 10 SEER split heat pump or
packaged air conditioner; and was based on questionable production
volume assumptions.
The Department agreed that those deficiencies were likely to cause
some of the differences between the ARI cost and the reverse
engineering cost estimates, and revised its analysis of split heat
pumps and packaged equipment.
In responding to the comment on sample size for split heat pumps
and packaged equipment, the Department took guidance from a review of
the engineering analysis performed by DOE consultant, Joseph Pietsch.
Mr. Pietsch presented five guidelines for comparing the production cost
of equipment for different product classes. (Pietsch, No 36 at 2-5).
At each cooling capacity and SEER level, the same outside
unit will likely be used for split air conditioners (fancoil) and split
air conditioners (cased coil);
At each cooling capacity and SEER level, the same fancoil
will likely be used for split air conditioners (fancoil) and split heat
pumps;
At each cooling capacity and SEER level, the same cabinet
will likely be used for packaged air conditioners and packaged heat
pumps;
There should be some degree of consistency in the cost to
``convert'' an air conditioner into a heat pump; and
Split systems with fan coils and single package units at
the same cooling capacity and SEER level should have nearly identical
costs for the major functional components.
Based on the above guidelines, DOE revised the analysis of split
heat pumps and packaged equipment. Table V.1 provides the original and
the revised production dollar cost estimates resulting from this new
approach. Table V.2 provides the same information, but in terms of
relative costs. Revised production costs are generally lower than the
original costs, particularly at the baseline 10 SEER level. The most
significant change is that the new analysis includes nine additional
estimates that were not presented originally.

Table V.1.--Engineering Production Cost Estimates for 3-Ton Unitary Equipment
--------------------------------------------------------------------------------------------------------------------------------------------------------
Split air Split air Split heat pump Packaged air Packaged heat pump
conditioner (cased conditioner ---------------------- conditioner ---------------------
Efficiency level (SEER) coil) (fancoil) ----------------------
-------------------------------------------- Original Revised Original Revised
Original Revised Original Revised Original Revised
--------------------------------------------------------------------------------------------------------------------------------------------------------
10........................................ $367 $367 $456 $449 $622 $572 $552 $511 $643 $593
11........................................ 412 412 550 519 ......... 602 ......... 555 ......... 638
12........................................ 468 468 ......... 563 690 648 627 595 708 668
13........................................ 529 529 756 637 840 743 809 730 ......... 820
14........................................ 588 588 802 815 1,011 1,023 ......... 889 ......... 1,029
15........................................ ......... ......... 893 893 1,147 1,107 ......... 955 ......... 1,100
--------------------------------------------------------------------------------------------------------------------------------------------------------

The only significant departures are found in split air conditioners
with fancoils, where the new estimates are lower, and in 14 SEER and 15
SEER equipment where the new results are higher.

Table V.2.--Revised Reverse Engineering Production
--------------------------------------------------------------------------------------------------------------------------------------------------------
Split air Split air Split heat pump Packaged air Packaged heat pump
conditioner (cased conditioner ---------------------- conditioner ---------------------
Efficiency leval (SEER) coil) (fancoil) ----------------------
-------------------------------------------- Original Revised Original Revised
Original Revised Original Revised Original Revised
--------------------------------------------------------------------------------------------------------------------------------------------------------
10........................................ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
11........................................ 1.12 1.12 1.21 1.16 ......... 1.05 ......... 1.09 ......... 1.08
12........................................ 1.28 1.28 ......... 1.25 1.11 1.13 1.14 1.16 1.10 1.13
13........................................ 1.44 1.44 1.66 1.42 1.35 1.30 1.47 1.43 ......... 1.38
14........................................ 1.60 1.60 1.76 1.82 1.63 1.79 ......... 1.74 ......... 1.74
15........................................ ......... ......... 1.96 1.99 1.84 1.94 ......... 1.87 ......... 1.86
--------------------------------------------------------------------------------------------------------------------------------------------------------

In response to comments on its production volume assumptions prior
to the publication of the Supplemental ANOPR, the Department had
reduced its heat pump production volume from 125,000 units per year to
25,000 units per year. However, since heat pumps and air conditioners
are typically produced with the same plant

[[Page 59599]]

equipment, reducing the production volume significantly increases the
overhead allocated to each heat pump produced. The higher overhead
allocation raises the cost of the baseline heat pump, lowering the
relative cost of producing equipment at higher efficiency levels. To
compensate for this overestimate of overhead allocation, we set the
split heat pump overhead allocation equal to that of the split air
conditioner at each efficiency level.
The Department believes that the revisions to the split heat pump
and packaged equipment production costs have improved the cost
estimates for those product classes and that no additional equipment
samples need to be subjected to tear-down or reverse engineering
analysis. The revised reverse engineering cost estimates were used in
the analysis for today's proposed rule.
2. Productivity Efficiency Improvements
According to the American Council for an Energy Efficient Economy
(ACEEE), Census Bureau Current Industrial Report (CIR) data suggest
that the unit price of equipment shipments below 65,000 Btu/hr fell in
real terms between 1992 and 1997. (ACEEE, No. 43 at 4). ACEEE suggested
that the Department apply an annual deflator of 1.7% to projected
prices to account for this apparent productivity improvement.
For other rulemakings, the Department has used production input
costs and production technologies based on the best information
available at the time. DOE has not made any assumptions about
productivity improvements and material cost changes over time. The
Department does not believe historical price trends for unitary air
conditioners, or other products, can be applied to forecast equipment
costs where there are no data to indicate the trends will continue.
Therefore, without specific data on the likely costs to manufacture a
product, the Department will not apply a productivity improvement
factor in this rulemaking or other rulemakings.
3. Emerging Technologies
Emerging technologies that are not established in the residential
central air conditioning market have the potential to lower the cost of
achieving higher efficiency. In the Supplemental ANOPR, we considered
advances in variable speed and variable capacity compressors, and
reductions in the cost of variable speed fan motors and parallel-flow,
microchannel heat exchangers to be potentially viable methods for
increasing the efficiency of equipment at a lower cost than currently
established methods.
Bard Manufacturing (Bard), Unico, Inc. (Unico) and NRDC disagreed
with this approach, questioning whether some of the technologies
considered were commercially and technically viable, but proposed no
other technologies for consideration. (Bard Manufacturing, No. 28 at 4;
Unico, No. 34 at 1; NRDC No. 35 at 11-12). ARI stated that they
considered some compressor and motor advances but not microchannel heat
exchangers in their relative production cost data. (ARI No. 48 at 3).
The Trane Company (Trane) and Edison Electric Institute (EEI) also
expressed concern over some apparent inconsistencies in the emerging
technologies analysis presented in Table 4.16 and the use and
calculation of the Carnot efficiency on page 4-27 of the Supplemental
ANOPR TSD. (Trane, No. 23 at 2; and EEI No. 20 at 3).
Pacific Gas and Electric (PG&E) voiced concern that new
technologies, such as the Bristol modulating compressor, could reduce
costs to the point that manufacturers may use them at lower SEER levels
resulting in a negative impact on peak loads and electrical system
reliability. (PG&E, No. 31 at 3).
The emerging technology analysis based on reverse engineering
information seems to confirm that, of the technologies considered, only
variable capacity compressors and variable speed fan motors have the
potential to be cost options for providing additional efficiency
compared to today's established technologies. This provides evidence
that ARI is justified in not considering the potential benefits of
microchannel heat exchangers as part of its relative cost data
submission. Therefore, we will apply emerging technologies only to the
reverse engineering results and consider the ARI relative cost
multipliers to already include the effects of emerging technologies.
We do not believe our original emerging technology analysis was
inconsistent, as expressed by Trane and EEI above, although we do
recognize that combining the effects of component efficiency
improvements does not necessarily lead to a cumulative improvement in
the system. The intent of the analysis is not to provide a definitive
estimate of the impact of any or all emerging technologies on system
cost. It is to provide evidence as to the extent to which reverse
engineering overestimates the cost of higher efficiency equipment by
neglecting emerging technologies. Therefore, the method used previously
for portraying and combining the potential effects of emerging
technologies on system costs is carried forward into today's rule.
Chapter 2 of the TSD provides the details of the revised emerging
technologies analysis.
4. HFC-Based Engineering Analysis
ARI and Trane supported the Department's decision not to explicitly
examine the effects of the HCFC phaseout on equipment cost and
efficiency. (Wethje, ARI, Transcript p. 145; Crawford, Trane,
Transcript p. 143). The Oregon Energy Office (OEO) and NRDC urged the
Department to reconsider, given that a large fraction of the equipment
sold under the new efficiency standard will likely use a refrigerant
other than HCFC-22, even prior to the 2010 phaseout date. (Stevens,
OEO, Transcript, p. 144; NRDC, No. 35 at 11-12).
To date, no data presented to the Department indicate that the
incremental cost for increasing the efficiency of equipment using
either HFC-407c or HFC-410a refrigerants will differ significantly from
the incremental cost of increasing efficiency using HCFC-22 equipment.
Although the base cost may differ somewhat, the incremental cost
determines the life-cycle-cost savings. Furthermore, the Department
continues to receive information that much of the market is changing to
HFC-410a and that HFC-410a offers little, if any, efficiency benefit
over HCFC-22 at the same equipment cost.
For these reasons, the Department will not perform additional
engineering analysis related to alternate refrigerants. The costs to
manufacturers related to their conversion to the new refrigerant will
be considered in the Manufacturer Impact Analysis.

B. Life-Cycle-Cost Parameters

1. Extended Warranty and Service Costs
Energy Market and Policy Analysis, Inc. (EMPA) noted that the Life
Cycle Cost analysis did not explicitly address extended warranty and
service costs and asserted that they should be taken into account.
(Schleede, EMPA, Transcript, p. 221). The Alliance to Save Energy (ASE)
stated that the inclusion of extended warranty and service costs would
have the impact of reducing repair and maintenance costs. (Prindle,
ASE, Transcript, p. 222). Industry consultant Joseph Pietsch stated
that manufacturers may provide longer-term warranties for high
efficiency systems that cover a wider range of components, to alleviate
customer concerns regarding possible future repair cost of the more

[[Page 59600]]

complex systems. (Pietsch, No. 36 at 22).
Air conditioner manufacturers warranty their equipment against
defects, and contractors typically guarantee performance and
installation. Manufacturer warranties typically cover parts and labor
for one year, with longer warranties applying to the compressor. Mr.
Pietsch noted that compared to low-SEER products, high-SEER products
have more components, many of which have a relatively short history.
Reliability patterns of these new components are less known, so
warranty accruals may be significantly higher for these products.
(Pietsch, No. 36 at 22). Dealers also may offer extended warranties
which are usually underwritten by the manufacturer or a third party.
A product that is less reliable or contains more expensive
components will have a higher cost of repair over its lifetime. Either
the consumer or the warranty provider will bear that added cost
directly through more frequent service calls or higher repair costs. If
the cost is covered by warranty, however, the warranty provider passes
it back to future warranty holders in the form of slightly higher
warranty prices. DOE believes the incremental increase in the price of
the warranty is equal to, or just slightly higher, than the discounted
present value of the incremental repair costs over the life of the
warranty. Over the long term then, the average consumer always incurs
the cost of higher repair costs, either directly or through higher
warranty prices. Since our analysis considers the present value of
consumer life cycle costs on the average consumer, incremental repair
costs and incremental warranty costs are the same, and interchangeable.
Since consideration of repair costs is satisfied by considering
either repair costs or extended warranties, we limited our
consideration to repair costs, which are slightly easier to estimate,
communicate, and incorporate into the analysis. Considering them both
would require a much more rigorous analysis of service costs since we
would have to estimate the service cost incurred on a year-by-year
basis. That additional analysis would likely not produce significantly
different results. Comments are welcome as to whether explicit
consideration of extended warranties would produce significantly
different results from those based on service costs alone which we have
assumed rise in proportion to the price of the equipment. Since more
efficient equipment is also more expensive, we have included the higher
cost of repair, or equivalently, the higher warranty cost associated
with more efficient equipment, as part of the lifecycle cost analysis.
2. Residential Energy Consumption Survey (RECS)
Both NRDC and EMPA asserted that RECS'' method for estimating end-
use energy consumption (i.e., conditional demand analysis) yields
unreliable and flawed results. NRDC added that conditional demand
analysis methods inherently underestimate central air conditioner
energy use due to its treatment of internal loads. EMPA stated that the
RECS household sample size is too small to be used in the manner in
which it is being treated in the life-cycle cost analysis. (NRDC, No.
35 at 6-7; EMPA, No. 33 at 4-6; Schleede, EMPA, Transcript, pp. 160-
161). Virginia Power, EEI, and EMPA all requested that the analysis be
updated to use RECS 1997 data rather than RECS 1993 data. EEI added
that actual submetered end-use data should be used if possible rather
than the end-use data in RECS. (Virgina Power, No. 27 at 2; EEI, No. 20
at 5, Schleede, EMPA, Transcript, pp. 160-161).
As part of the process to improve the new energy efficiency
standards analysis, we are committed to use sensitivity analysis tools
to evaluate the potential distribution of impacts among different
subgroups of consumers. The Department believes that RECS provides a
nationally representative household data set which is suited for
conducting the type of sensitivity analyses suggested by the Process
Rule. Limiting the RECS households to those equipped with either
central air conditioners or heat pumps, the LCC analysis performs a
household-by-household analysis that predicts the percentage of
households that will incur net life-cycle cost savings or costs from an
increased efficiency standard.
End-use energy consumption data from past RECS surveys have been
compared to submetered end-use data for purposes of validating their
conditional demand analysis estimates. Central air conditioning and
space-heating energy data from the 1990 RECS were shown to differ by 5%
to 22% compared to submetered end-use data from five utility service
areas. The Department believes that this range of difference is
acceptable considering that the conditional demand analysis utilized by
RECS is fully capable of estimating the energy consumption of equipment
throughout the nation. Because RECS is a very well suited source of
data for performing the analyses suggested by the Process Rule and RECS
has been shown to provide reasonable estimates of end-use energy
consumption, we will continue to rely on RECS for providing the annual
energy consumption data necessary for conducting the life-cycle cost
analysis.
The analysis conducted in support of this proposed rule has been
revised based on data from the 1997 RECS rather than the 1993 RECS.
3. Equipment Lifetime
Virginia Power, EEI, ARI, Unico, Rheem Co., and Trane commented
that the average equipment lifetime of 18.4 years assumed in the
Supplemental ANOPR was incorrect, and suggested an actual lifetime
between 12 and 15 years. (Virginia Power, No. 27 at 2; EEI, No. 20 at
10; ARI, No. 48 at 3; Unico, No. 34 at 3; Lux, Rheem Co., Transcript,
p. 165; Foster, EEI, Transcript, p. 170; Crawford, Trane, Transcript,
p. 191; Wethje, ARI, Transcript, p. 193). EMPA asserted that the length
of first ownership should be used as the basis for equipment lifetime.
(EMPA, No. 33 at 3, Schleede, EMPA, Transcript, p. 162).
NRDC, ACEEE, and the Vermont Energy Investment Corporation (VEIC)
all believed that the 18.4 year equipment lifetime was reasonable. They
reasoned that a shorter or longer average equipment lifetime would
result in less accurate estimates of historical shipments. ACEEE added
that unless manufacturers can provide new data, the 18.4 year average
lifetime should be retained. (NRDC, No. 35 at 7-8; ACEEE, No. 43 at 6-
7; VEIC, No. 32 at 7).
The Department notes that the basis of the 18.4 year equipment
lifetime was a survey conducted on more than 2,100 heat pumps in a
seven state region of the U.S.\13\ The survey determined not only the
lifetime of a complete heat pump system, but the life of the original
compressor as well. Although the system lifetime is on average over 18
years, the survey also showed that the original compressor lifetime
was, on average, 14 years. Thus, the survey indicated that essentially
all heat pump owners replaced their original compressor once in the
lifetime of system.
---------------------------------------------------------------------------

\13\ ``Bucher, M.E., Grastataro, C.M., and Coleman, W.R., ``Heat
Pump Life and Compressor Longevity in Diverse Climates.'' ASHRAE
Transactions, 1990. 96(1): p. 1567-1571.
---------------------------------------------------------------------------

In the LCC analysis conducted for the Supplemental ANOPR, we did
not include any repair costs associated with replacing the compressor.
But since the heat pump survey clearly indicates that the original
compressor is replaced once in a system's life, the analysis was
revised to include a repair cost for the

[[Page 59601]]

compressor. Conducting the analysis in this manner retains the average
system lifetime of 18.4 years but explicitly addresses the replacement
cost of the compressor, which is the most expensive component of a
system. As indicated by the survey data, the compressor was assumed to
be replaced in the 14th year of the system's life. In addition, because
more efficient systems tend to use more efficient and, thus, more
expensive compressors, the compressor replacement cost was assumed to
vary with system efficiency.
Although the revised LCC analysis assumed an 18.4 year average
equipment life and one compressor replacement, a shorter equipment
lifetime was investigated as an alternative scenario. In this
alternative scenario, a retirement function yielding an average
lifetime of 14 years was used and compressor replacement costs were not
considered. The shorter equipment lifetime is plausible assuming that
most, if not all, consumers when faced with replacing a failed
compressor would choose to replace the entire system rather than
replace the compressor in a relatively old system. LCC results based on
both the 18.4 year and 14 year average equipment lifetimes are provided
in Section VI as well as Chapter 5 of the TSD.
4. Commercial Applications
NRDC, ACEEE, VEIC, CEC, and the Northwest Power Planning Council
(NPPC) commented that DOE should analyze the application of residential
central air conditioners and heat pumps (i.e., single-phase equipment)
in commercial buildings. All stated that there is a significant portion
of this type equipment being used in small commercial buildings. They
argued that since the energy use patterns in commercial buildings are
distinctly different than those in households, the analysis should
include residential equipment use in commercial applications. (NRDC,
No. 35 at 12-13; ACEEE, No. 43 at 2; VEIC, No. 32 at 6-7; CEC, No. 47
at 8; Tom Eckman, NPPC, Transcript, p. 166).
EEI requested clarification as to how the commercial application
analysis was conducted for the Department's January 14, 2000, LCC
Sensitivity Analysis. (EEI, No. 20 at 10).
For today's proposed rule, the use of residential equipment in
commercial buildings was analyzed assuming that 10% of all central air
conditioners and heat pumps are used in commercial applications. This
figure is based on ARI's estimate that approximately 10% of single-
phase air conditioning and heat pump shipments are used in commercial
buildings. The annual energy consumption of commercially applied air-
conditioning and heat pump equipment was based on the simulation of 77
nationally representative commercial buildings consistent with the
approach and assumptions utilized to develop the American Society of
Heating, Refrigerating and Air-Conditioning Engineers' (ASHRAE)
Standard 90.1-1999. Both average and marginal electricity rates were
developed by matching a set of commercial electric utility tariffs to
the above simulated building loads and demands.
The LCC spreadsheet models were modified so that commercial
buildings with their corresponding annual energy consumption and
marginal and average electricity costs represent 10% of the entire
residential and commercial building population. Complete details on the
procedure to incorporate commercial applications are included in
Chapter 5 of the TSD.
5. Marginal Electricity Prices
NRDC, ACEEE, CEC, PG&E, NPCC, and ASE commented that the
Supplemental ANOPR analysis underestimated future marginal electricity
prices. Several of the comments stated the belief that deregulation of
the electric utility industry would result in greater volatility of
electricity pricing that eventually would translate into higher
electricity prices during peak power periods. (Goldstein, NRDC,
Transcript, p. 175; ACEEE, No. 43 at 6; CEC, No. 47 at 8; PG&E, No. 31
at 6-7; Eckman, NPPC, Transcript, pp. 167-168; Prindle, ASE,
Transcript, p. 168).
ARI and EEI were not convinced that a deregulated electric utility
industry would result in higher electricity prices in the future. ARI
noted that under a peak pricing scenario consumers may decline to
operate their air-conditioning equipment to avoid incurring high
electricity bills. EEI added that currently, there is no mechanism to
capture utility capital costs for providing peak power in residential
pricing. (Wethje, ARI, Transcript, pp. 168-169; Foster, EEI,
Transcript, pp. 169, 175-176).
The current method for establishing marginal electricity prices
only allows for defining marginal prices for those years in which data
are available. In the case of residential pricing, the data for
establishing marginal prices (the 1997 RECS) was taken from the year
1997. The same can be said for commercial buildings. The utility
tariffs used to establish marginal prices (as described earlier) were
collected in the year 1997. On average, residential marginal prices for
households with central air conditioners are 3% lower than average
rates while for households with heat pumps marginal prices are 7%
lower. Space-cooling marginal prices in commercial buildings are on
average 2% greater than average commercial rates. Future marginal
prices were in turn based upon the Reference Case electricity price
forecast from the AEO2000. The Reference Case forecasts declining
electricity rates through the year 2020. Although it is certainly
possible that future electricity rates may increase in a deregulated
climate, the evidence to date (i.e., residential marginal prices are
actually lower than average rates and AEO 2000 forecasts project
declining electricity rates) convinces us that our current methods for
establishing marginal prices are reasonable. To state that future
prices may decrease or increase is speculative. Even in the case of
commercial buildings where demand pricing already exists, marginal
prices are only 2% greater than average electricity rates. This
reenforces our conviction to keep our current methodology for
establishing marginal prices. However, the Department seeks comments on
its methodology and data for determining the appropriate marginal
energy costs to use in future analysis.
6. Forecast of Future Electricity Prices
EMPA asserted that the EIA's forecast of electricity prices as
found in the Annual Energy Outlook underestimates the future drop in
electricity rates. (EMPA, No. 33 at 2-3; Schleede, EMPA, Transcript, p.
185). Don Dasher stated that any forecast of electricity prices should
capture the future use of renewable energy and emerging technologies
for generating power. (Dasher, Transcript, pp. 192-193).
Future marginal prices are based upon the Reference Case
electricity price forecast from the AEO 2000. The Reference Case
forecasts declining electricity rates through the year 2020. Although
it is certainly possible that future electricity rates may increase in
a deregulated climate, the evidence to date (i.e., residential marginal
prices are actually lower than average rates and current AEO forecasts
project declining electricity rates) leads us to believe that our
current methods for establishing future marginal prices are reasonable.
In addition to the Reference Case, DOE analyzed the effects of two
other energy price forecasts, the AEO 2000 High Growth and Low Growth
cases. (See TSD, Chapter 5.)

[[Page 59602]]

7. Discount Rates
NRDC, ACEEE, VEIC, PG&E, and CEC believe that the discount rate
used in the Supplemental ANOPR analysis was too high. Their primary
criticism pertained to the breakdown of finance methods which were
assumed for establishing the discount rate. The Supplemental ANOPR
analysis assumed that 35% of consumers purchasing a central air
conditioner or heat pump used a credit card to finance their purchase.
The comments argued for a much lower percentage and cited a recent PG&E
survey that demonstrated that only 5% of consumers used credit cards.
VEIC also cited a survey by Potomac Electric Power Company (PEPCO) that
reported lower purchases with credit cards. (NRDC, No. 35 at 10-11;
ACEEE, No. 43 at 3; VEIC, No. 32 at 3-4; Neme, VEIC, Transcript, pp.
186-187; PG&E, No. 31 at 7; CEC, No. 47 at 7). Counter to the above
assertion, Trane maintained that the Supplemental ANOPR's assumption
regarding the percentage of consumers using credit cards to purchase
equipment was correct, based on the number of consumers in the U.S.
that carry credit card debt. (Crawford, Trane, Transcript, p. 191-192).
EEI commented that the interest rates associated with credit card and
cash purchases needed to be revisited. (EEI, No. 20 at 6). EMPA
asserted that with higher cost air conditioners, consumers' after tax
income would be reduced, requiring them to forego the purchase of
various household necessities such as food, clothing, and shelter.
(EMPA, No. 33 at 3).
The Department performed an extensive review and revision to the
methodology that determines consumer discount rate. The Supplemental
ANOPR established the share of various finance methods used for
purchasing air-conditioning equipment and determined the associated
interest rates for each of the finance methods. For equipment obtained
through the purchase of a new home, second mortgage, or home equity
lines of credit, this approach is reasonable. But for purchases made to
replace old or failed equipment where cash or some form of credit is
used to finance the acquisition, we determined it more appropriate to
establish how the purchase affects a consumer's overall household
financial situation. For example, even though the purchase might be
financed through a dealer loan or some other low interest financing
vehicle, the more probable effect of the purchase is to either cause
the consumer to incur additional credit card debt or forego their
investment in some type of savings-related asset. Cash that was once
available to either pay for household necessities or to invest in an
asset like the stock market or a simple savings account now must be
earmarked to pay off the equipment purchase loan, thus, either causing
the consumer to incur additional credit card debt or to lose the
opportunity to earn income from their assets. For today's proposed
rule, we have decided to use the above methodology for defining the
discount rate for central air conditioner and heat pump purchases. The
1998 Survey of Consumer Finances (SCF) was used to estimate the
percentage of households that used second mortgages to finance their
equipment purchase as well as those households that either would incur
more credit card debt or be forced to forgo their normal course of
investing. Data from the Air Conditioning, Heating, and Refrigeration
News (December 12, 1998) established the percentage of shipment going
to new homes.
After establishing the share captured by each finance method, the
range of interest rates due to each method were developed. The 1998 SCF
established the range of interest rates for new home mortgages, second
mortgages, and credit cards. Rates of return on certificates of
deposit, savings bonds, and bonds were based on historical interest
rates. A weighted-average discount rate of 5.6% is calculated from the
mean interest rates for each finance method. A more detailed discussion
of the data sources and how the interest rates were derived is found in
Chapter 5 of the TSD.
8. Percentage of Households With LCC Savings
For the Supplemental ANOPR, all consumers having an LCC increase
resulting from the standard were considered to be adversely impacted.
Several comments expressed concern on how we would use this information
on adverse consumer impacts in selecting minimum efficiency standards.
ARI, Unico and EMPA asserted that a majority of households would need
to benefit from the standard in order to justify its selection. (ARI,
No. 48 at 5; Unico, No. 34 at 3; EMPA, No. 33 at 2). NRDC stated that
the percentage of households with LCC savings or costs relative to the
baseline level should not be a criterion in basing a standard's
economic justification. NRDC stated that variations in electricity
pricing make it nearly impossible to determine consumer costs on a
disaggregated level. (NRDC, No. 35 at 12-15). PG&E commented that the
percentage of households at any particular standard level with net LCC
costs actually overstates the significance of the negative LCC impacts.
Most consumers experience LCC increases of only a few dollars over the
life of the equipment. (PG&E, No. 31 at 8).
The Department agrees with PG&E's comment and in formulating
today's proposed rule, DOE has redefined the criteria for determining
negative impacts. Noting that the baseline LCC is approximately $5,000
for central air conditioners and $10,000 for heat pumps, previously all
consumers incurring an LCC increase as small as $10 were considered to
be adversely impacted by an increase in the standard. In the revised
LCC analysis, the Department defines consumers impacts as follows:
consumers who achieve significant net LCC savings (i.e., LCC savings
greater than 2% of the baseline LCC), consumers who are impacted in an
insignificant manner by having either a small reduction or small
increase in LCC (i.e., within 2% of the baseline LCC), or
consumers who achieve a significant net LCC increase (i.e., an LCC
increase exceeding 2% of the baseline LCC). Consequently, only
consumers (both residential and commercial) having an LCC increase
greater than 2% of the baseline are considered to be negatively
impacted.
9. Regional Analysis
At the December 9, 1999, public workshop, NRDC and CEC requested
further information on regional distributions of households with net
LCC savings or costs relative to the regional baseline level.
(Goldstein, NRDC, Transcript, pp. 188-189; Martin, CEC, Transcript, p.
274). The Department responded by conducting additional analysis, which
was posted to our web site on January 14, 2000, and included LCC
analysis disaggregated by region into census divisions. From this
regional analysis it could be determined how different parts of the
country would be impacted by an increase in the minimum efficiency
standard.
10. Rebuttable Payback
EEI asked why the rebuttable payback period is not determined with
annual energy use data from RECS. They also requested clarification as
to how rebuttable payback periods will factor into the decision to
select a new minimum efficiency standard. (EEI, No. 20 at 7-8).
As prescribed by section 325(o)(2)(B)(iii) of EPCA, the rebuttable
payback period is calculated under the applicable test procedure. Thus,
all rebuttable payback periods are based on an annual energy
consumption that is determined through the current

[[Page 59603]]

Department of Energy test procedure for central air conditioners and
heat pumps. The resulting annual energy use as determined by the test
procedure is significantly greater than what is indicated by RECS.
Thus, the rebuttable payback periods are significantly shorter than
those based on the RECS annual energy consumption data.
The rebuttable presumption test does not consider the full range of
impacts of standards, including manufacturer impacts and energy
savings. Therefore, the Department bases its decision primarily on the
seven factors specified in section 325(o) of the Act.
11. Sensitivity Analyses
ACEEE recommended that several sensitivity analyses be conducted to
determine how the LCC varies with changes in certain input variables.
(Nadel, ACEEE, Transcript, pp. 233-236; ACEEE, No. 43 at 10). NRDC also
requested some of the sensitivity analyses described by ACEEE. (NRDC,
No. 35 at 12-13). Trane went on the record as not endorsing all of
ACEEE's requested sensitivities. (Crawford, Trane, Transcript, p. 237).
We conducted several of the requested LCC sensitivity analyses, as
well as the previously described regional analyses, and posted the
results to our web site on January 14, 2000. The sensitivities examined
how the LCCs for central air conditioners and heat pumps were impacted
by changes in the following: dealer markups, builder markups, repair
costs, lifetime, emerging technologies, and the use of single-phase
central air conditioning and heat pump equipment in commercial
applications. Of the sensitivities examined, the assumption of fixed
margins (i.e., no variation in the difference between the equipment
price to the consumer and the cost to manufacture with increased
efficiency) had the largest impact on the LCC results. Changes in the
lifetime had a noticeable affect but not the same order of magnitude as
the fixed margin assumption. All other sensitivities had only minor
impacts on the LCC results.
In preparing the sensitivity analyses, we found reason to revise
our assumptions regarding markups, compressor replacement, and
commercial applications. Those revisions are incorporated into the
analysis that supports today's proposed rule and are discussed
elsewhere in this Section.

C. Shipments Analysis

1. Forecasted Housing Shifts
Both the OEO and NPPC stated that there will likely be significant
shifts in regional housing populations. For example, future housing
shifts may result in more housing in warmer weather climates where
central air conditioning is more prevalent and used more often, thus,
impacting the nation's future space-conditioning energy use. Since the
Shipment Analysis does not account for regional housing shifts, OEO and
NPPC request that it be accounted for in the analysis. (Stephens, OEO,
Transcript, pp. 171-172; and Eckman, NPPC, Transcript, pp. 216-217).
Preliminary analysis of regional housing shifts has been examined
and determined to have a relatively small effect (i.e., a maximum
change of 2% in the cumulative amount of monetary energy savings). This
is primarily due to the large size of the housing stock and the fact
that changes in the housing stock occur over a long time scale
resulting in slow changes in regional housing shifts. A preliminary
analysis of historical housing data coupled with worst case forecasts
of regional housing and air-conditioning market share shifts
demonstrated the small impact on national NPV due to changes in
regional housing.
New housing starts are only about 2% of existing housing stock and
this is forecast to decrease to about 1% of housing stock by 2030.
Historical data over the period from 1980 to 1990 showed the shift in
regional shares of housing stock changed by less than 2% (decreased by
1.2% and 1.7% in the Northeast and Midwest, respectively, and increased
by 1.7% and 1.2% in the South and West, respectively). If these changes
continue at a steady rate, the housing share of the Northeast will
decrease another 3.6% over three decades. This translates to a relative
decrease of 17% in the Northeast's air-conditioning market share. If
the entire loss in the Northeast's market share goes to that portion of
the South with the highest annual energy use (Census Region 7), the
absolute market share of this region would increase from 15.7% to
17.7%. The result of this change is that the dollar value of energy
savings at a 12 SEER standard level would increase from $5.73 billion
to $5.85 billion, or about a 2% increase in the dollar energy savings.
The actual impact on dollar savings would likely be less than half of
this because the above housing shift was assumed to be immediate and to
the highest energy use area of the South. As a result, the actual
impact would likely be less than 1% on the dollar value of the energy
savings. For these reasons, the Department has not revised its
Shipments Analysis to account for shifts in regional housing
populations.
2. Elasticities
Both ACEEE and NRDC note that the purchase price elasticities are
based on data from the 1970s and are likely no longer applicable to
current market conditions. Both stated that price elasticities should
be developed from more recent data. (ACEEE, No. 43 at 10; Nadel, ACEEE,
Transcript, p. 211; Goldstein, NRDC, Transcript, pp.211-212).
This has been corrected for in the analysis underlying today's
proposed rule. We have calibrated elasticity for price relative to
household income, with historical data from 1970 to 1996. It is worth
noting that for forecasting future shipments, consumer purchase
decisions are based upon sensitivities to changes in product life-cycle
cost relative to income. Life-cycle cost changes are dependent on the
purchase price and the present worth of operating cost savings.
Operating cost savings are in turn dependent on electricity prices. As
electricity prices are forecasted to decrease over time (based on the
Annual Energy Outlook 2000), operating cost savings due to a particular
increase in equipment efficiency will in turn decrease over time and
have less of an impact on consumer purchase decisions.
Usage elasticity expresses how changes in equipment efficiency
resulting from higher standards changes consumer behavior regarding air
conditioners and heat pumps usage. Because of lower operating costs,
consumers may change thermostat settings and/or operate the systems for
longer hours to achieve greater comfort. Direct evidence of the
magnitude of this effect is limited and the Department is interested in
receiving comments. One study \14\ indicated that in summer months
consumers may take 1-2% of the cooling energy savings back in increased
usage, and 9-13% in winter months. Usage elasticity has not been
considered in the current analysis but will be considered in the Final
Rule.
---------------------------------------------------------------------------

\14\ Jeffrey A. Dubin, Allen K. Miedema, and Ram V. Chandran,
1986. ``Price effects of energy-efficient technologies: a study of
residential demand for heating and cooling,'' Rand Journal of
Economics, Vol 17, No. 3, Autumn, pp 310-324.
---------------------------------------------------------------------------

3. Equipment Efficiency
Several comments received questioned the use of a weighted-average
equipment efficiency equaling the SEER of the standard level for

[[Page 59604]]

forecasting shipments and national energy savings. All asserted that in
the event of an increase in the minimum efficiency standard, the actual
weighted-average efficiency of equipment in the marketplace would be
greater than the minimum efficiency standard. For example, if a 12 SEER
standard was set as the new minimum, the weighted-average efficiency
would be equal to a value which was greater than 12 SEER. (Neme, VEIC,
Transcript, pp. 214, 226-227; Nadel, ACEEE, Transcript, p. 228; NRDC,
No. 35 at 8-9; PG&E, No. 31 at 6-7).
The Department has modified several assumptions with regard to
future equipment efficiencies. The Shipments Model no longer simply
forecasts a weighted-average equipment efficiency, but rather, an
actual distribution of efficiencies i.e., the percentage of shipments
which occur in incremental SEER bins over the range of the minimum
standard 10 to 18 SEER). Also, as discussed in Section IV, three
efficiency scenarios are provided to model future equipment
efficiencies. The impact of the three different scenarios on national
energy savings and national net present values are discussed in Section
VI.
EEI asked the reason for assuming the weighted-average efficiency
remains fixed at the same SEER level from the year 1997 to the assumed
effective date of standard (2006). (EEI, No. 20 at 7-8). Historical
data from the years 1994 through 1997 indicate that shipment-weighted
efficiencies have remained essentially flat. As a result, weighted-
average efficiencies were assumed to remain constant from 1997 through
2006.
4. Fuel Switching
EEI, York, Virginia Power and Southern Company stated that shipment
forecasts must account for any fuel switching that might occur as a
result of increased heat pump prices to the consumer. The concern is
that an increase in the total installed price of a heat pump would
cause some consumers to choose a gas-space heating appliance rather
than an electric heat pump. (Foster, EEI, Transcript, p.263; Madera,
York, Transcript, p.264; Virginia Power, No.27 at 2-3; Southern
Company, No. 29 at 1-2). ACEEE stated that any incorporation of fuel
switching into the Shipments Model must account for future changes in
gas-fired space-heating minimum efficiency standards. (Nadel, ACEEE,
Transcript, p.266).
Our examination of the historical data tends to indicate that the
relative installed price of heat pumps is not the primary driver in
heat pump vs. gas furnace purchase decisions. The more important factor
in these decisions seems to be the availability of gas service. In the
middle 1980's, there was a large peak in gas prices relative to
electricity, but only a small, delayed increase in the relative market
share of heat pumps. Besides this one historical event, the relative
market share of heat pumps has been relatively constant from 1977 to
the present.

D. National Energy Savings Analysis

Changes to the LCC assumptions impact the NES and the National Net
Present Value (NPV) analyses directly as the NES analysis uses the same
basic data as the LCC analysis for the energy use and cost of the
central air-conditioning and heat pump equipment.
As previously mentioned, estimates of NES and NPV also depend on
the distribution of product efficiencies among units sold after a
standard takes effect in the marketplace. For the Supplemental ANOPR,
the assumed product efficiency distribution was based on a weighted-
average equipment efficiency equal to the SEER of the new standard
level.
1. Uncertainty in NES Results
EEI believes that due to the uncertainty in the electric utility
industry and its impact on future electricity prices it is more
appropriate to represent the NES results with some degree of
uncertainty. (EEI, No. 20 at 8).
Although NES results presented in the Supplemental ANOPR were based
only on electricity price estimates from the Reference Case forecast
from the 1999 Annual Energy Outlook, our NES spreadsheets have provided
users with five different options for estimating future electricity
prices; 1999 AEO Reference Case forecast, 1999 AEO High Growth Case
forecast, 1999 AEO Low Growth Case forecast, 1998 Gas Research
Institute (GRI) forecasts, and constant electricity prices. Providing a
number of options for forecasting future prices recognizes the
uncertainty in the electric utility industry and how that uncertainty
can impact the NES results. The NES uses single point values rather
than ranges as used in LCC; consequently, NES provided single point
results rather than a range. However, in order to account for the
uncertainty in electricity price forecasts, DOE evaluated three energy
price scenarios in the NES. The NES Spreadsheets have been made
available to all interested parties via our web site to facilitate
analysis of sensitivities for assumptions different than those for the
Supplemental ANOPR. For today's proposed rule, we continue to provide
the same options for forecasting future electricity prices with the
exception that AEO 1999 forecasts have been replaced with those from
the AEO 2000 as well as the five options for energy prices as described
above.
2. Site-to-Source Conversion
Both the Southern Company and EEI questioned the validity of the
site-to-source conversions used in the NES spreadsheet model. The
Southern Company and EEI asserted that hydroelectric power and
renewable forms of electric energy are assigned fossil fuel-fired power
plant heat rates. (Southern Company, No. 29 at 4-5; EEI, No. 20 at 7).
We estimated the effects of proposed central air conditioner and
heat pump standard levels on both the gas and electric utility
industries using a variant of DOE/EIA's NEMS-BRS, together with some
exogenous calculations.\15\ NEMS-BRS is used to determine site-to-
source conversion factors and does not assign fossil-fuel-fired power
plant heat rates to hydroelectric or renewable power plants. The site-
to-source conversion factors used in the Supplemental ANOPR are average
annual values for the residential sector. The average conversion
factors are based on all forms of electricity generation with their
corresponding heat rates (e.g., heat rates are assigned to fossil-fuel
fired power plants which are much different than those assigned to
other types of power plants). As a result, the site-to-source
conversion factors are significantly lower than if all power plants
were assigned the heat rates associated with fossil fuel-fired power
plants. For today's proposed rule, site-to-source conversion factors
are based on recommendations of the Advisory Committee on Appliance
Energy Efficiency Standards. In this analysis, heat rates are based on
determining how a deviation in national energy consumption due to
standards impacts the type of electricity generation. In other words,
heat rates are based on those power plants which are avoided as a
result of the standard.
---------------------------------------------------------------------------

\15\ For more information on NEMS, please refer to the U.S.
Department of Energy, Energy Information Administration
documentation. A useful summary is National Energy Modeling System:
An Overview 1998, DOE/EIA-0581(98), February, 1998. DOE/EIA approves
use of the name NEMS to describe only an official version of the
model without any modification to code or data. Because our analysis
entails some minor code modifications and the model is run under
various policy scenarios that are variations on DOE/EIA assumptions,
the name NEMS-BRS refers to the model as used here (BRS is DOE's
Building Research and Standards office, under whose aegis this work
has been performed).

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

[[Page 59605]]

E. Consumer Sub-Group Analysis-Low Income Renters

NRDC stated that impacts on low-income renters should be
investigated, because such renters do not purchase their space-
conditioning equipment and they have no choice as to the efficiency of
the equipment which is used to space-condition their home. (NRDC, No.
35 at 9).
We have investigated the economic impact of standards on low-income
households, and have included such impacts in section VI.D.7 of today's
proposed rule and in Chapter 10 of the TSD. But we have not
investigated the impacts on low-income renters separately. Renters at
each income level are considered to have the same choice in efficiency
as new home purchasers at the same level. Regardless of whether a
household is occupied by an owner or a renter, we implicitly assume
that the occupant incurs all costs of ownership, either directly or
through rent payments. Therefore, we believe that our consideration of
low income households generally applies to renters as well as owners.

F. Utility and Environmental Analysis

1. Peak Power Impacts--Reliability
The CEC raised concerns over peak power by stating that the western
region of the U.S. will soon face a capacity shortfall which will
necessitate reductions in peak demand (CEC, No. 47 at 2-4). Leon Neal,
Advanced Energy Corporation (AEC), stated that because of a
relationship between SEER, EER, and equipment capacity which is not
captured by using only the ``nominal 3 ton'' unit and SEER analyses,
there were important factors not addressed in the DOE analysis. They
argued that with larger capacity units at higher SEER, it is economic
for manufacturers to use multi-compressor units and multi-speed
compressor units, which results in a penalty in EER. They noted major
national trends, i.e., increasing average size of residential
dwellings, the tendency to sell bigger systems to increase profits and
compensate for poor installations, and the distrust of contractors for
higher efficiency equipment. (AEC, No. 17 at 1). EEI stated that the
consideration of peak power impacts in setting new efficiency standards
departs from the Department's statutory mandate. (Foster, EEI,
Transcript, p. 176).
With regard to AEC's concern that an increase in the efficiency
standard would be accompanied by an increased air-conditioning power
demand, we are not convinced that this situation would occur. Over the
last 20 years, while shipment-weighted efficiency has continually
increased, usage has remained relatively constant. Therefore, we see no
reason that a significant jump in system usage would occur in
conjunction with higher efficiency standards.
Regarding EEI's claim that the consideration of peak power impacts
departs from the Department's statutory mandate, section
325(o)(2)(B)(i)(VII) of the Act, 42 U.S.C. 6295(o)(2)(B)(i)(VII),
allows the Secretary to consider other factors deemed relevant for
updating minimum efficiency standards, including peak power impacts.
2. Quantitative Assessment of Impacts on Peak Demand
For purposes of estimating peak demand impacts from an increase in
the central air conditioner and heat pump energy efficiency standard,
we are using a version of the NEMS, called NEMS-BRS. NEMS-BRS is run
similar to the AEO2000 NEMS except that central air conditioner and
heat pump energy usages are reduced by the amount of energy
(electricity) saved due to the proposed trial standard levels. The
input of energy savings are obtained from the NES spreadsheet.
NEMS estimates peak power impacts by determining the reduction in
installed generation capacity due to an increase in the minimum
efficiency standard. For central air conditioners and heat pumps, NEMS
uses a single nationally representative end-use load shape to estimate
peak power impacts. The overall end-use load shape is reduced in
proportion to the amount of energy savings achieved through an increase
in the standard. The reduction in power demand achieved by shaving the
end-use load shape is extrapolated to a national scale to come up with
nationally representative peak power impacts. Thus, NEMS does not use
the equipment's EER performance, per se, to estimate peak power
impacts. Rather, because the load shape is shaved in proportion to the
energy savings, the EER is implicitly assumed to increase in proportion
to the SEER.
The forecasted peak impacts using NEMS-BRS are presented in Section
VI of today's proposed rule.
3. Qualitative Assessment of Air Conditioning Standards Impact on Power
System Reliability
We also recognize that reducing growth in electricity demand during
peak periods may improve the reliability of the U.S. electric power
system. But there are number of factors with the electric power system
itself that may overwhelm any effect that an improvement in residential
air conditioning efficiency might offer. First, investment in system
expansion has fallen behind demand growth, and future development may
be limited by siting constraints. Second, industry restructuring
requires the development of new technologies, operating procedures, and
regulatory structures to meet peak demands. And third, the strong
demand expansion of recent years may well continue into the future.
Within this environment, the potential benefits of a central air
conditioner and heat pump standard that could lower growth in peak
demand could be desirable. But, due to the existing problems with the
electric power system described above, it is difficult to assess, in
quantitative terms, the impact of an air conditioner standard on system
reliability. Thus, in addition to the planned activities to improve
NEMS to forecast more credible peak demand impacts, we plan to assess
the reliability of the U.S. electric system to determine what
connection exists between end-use peak demand reductions and system
reliability. The assessment will focus on three areas: (1) Defining
reliability, (2) historic performance of the utility system, and (3)
analyzing near- and long-term utility changes and how they might impact
reliability. In defining reliability, we will use typical threats
(e.g., weather, tree falls, excess load, and inaccurate demand
forecasts) to put system reliability into context. In addition,
industry indices for the frequency of failures and the number of
customers affected will be used. With regard to historic performance,
we will attempt to analyze the history of system disturbances and
estimate their economic consequences. Finally, we will look at the
changes occurring in the utility industry such as restructuring and
increasing demand growth to determine to try and assess how these
future changes might impact reliability.
4. Competitive Residential Market
EEI asked whether NEMS, the model which is used for forecasting
utility and environmental impacts, will be adapted to model more
accurately the deregulated electric utility industry. As part of the
deregulated industry, EEI stated that consumers will have choice of
electricity providers. In addition, the industry will likely build more
merchant power plants. (EEI, No. 20 at 9).
Although we recognize that NEMS may not be entirely accurate in its
modeling of the changing electric utility industry, we believe it is
still the best tool for forecasting the impacts due to increased
central air conditioner and

[[Page 59606]]

heat pump standards. We also recognize the difficulty for any model or
tool to forecast changes in the utility industry. Thus, the results
from NEMS are used to provide a gross picture of the impacts that can
be expected from the imposition of new efficiency standards for central
air conditioners and heat pumps. Sensitivities are conducted with the
AEO High Growth and Low Growth cases to capture the variability that
could arise from changes in the electric utility industry.

G. Manufacturer Impact Analysis--Low Volume Manufacturers

First Company (First Co.) and National Comfort Products commented
that the assumptions used in the engineering analysis were not
applicable for low volume manufacturers and urged the Department to
consider the situations of all firms in the industry. (First Co., No.
40 at 10; National Comfort Products, No. 30 at 1).
Since the engineering analysis is used to assess the impacts on
consumers and the nation, it is more appropriate to rely on assumptions
reflective of larger manufacturers who control more than 95% of the
market. However, we did consider the special circumstances of lower
volume manufacturers as part of the manufacturer impact analysis. We
interviewed the major manufacturers as well as two smaller
manufacturers, and based on this information, estimated the impact of
standards on both large and small manufacturers separately.

H. Markups

The Supplemental ANOPR's engineering analysis estimated the cost of
producing baseline air conditioners and heat pumps and also estimated
the series of markups on that product cost that yield the price of the
equipment to the consumer. Four markups were applied: Manufacturer
markup (1.18), distributor/wholesaler markup (1.37), dealer/contractor
markup (1.54), and sales tax (1.07). In general, these were based on
financial reports for each group on a national basis.
NRDC, ACEEE and VEIC commented that instead of applying average
markups to the incremental increase in costs resulting from new
standards, it was more reasonable to apply a lower markup to those
incremental costs. Otherwise, companies would receive a windfall from
the new standard, which would surely not be the case in a competitive
industry such as heating, ventilation, and air conditioning. (NRDC, No.
35 at 6, ACEEE, No. 43 at 2, VEIC, No. 32 at 2). NRDC also advocated
the use of a fixed gross margin in dollars rather than a fixed
percentage (NRDC, No. 35 at 6), while EEI stated that the fixed
percentage assumption is unreasonable. (EEI, No. 20 at 10). ARI
supported the markups the Department used. (ARI, No. 48 at 4).
Department consultant Joseph Pietsch stated that at the distributor
level, since no labor is involved to modify the product, the markup is
applied to a well-documented material cost. However, the distributor's
markup percentage may vary by product type. If the distributor's mark-
up prices to the installing trade are not competitive in the market
served, the distributor might have to seek price adjustments from the
manufacturer. Further, installing contractors typically use a markup
procedure for labor that is most likely be at a different percentage
than a markup for materials. (Pietsch, No. 36 at 23). Finally, prompted
by comments we received, we now distinguish markups based on whether
products are sold into new homes or as replacements or retrofits.
(Nadel, ACEEE, Transcript pp. 122-123; and Eckman, NPPC, Transcript p.
152-153; CEC, No. 47 at 7).
After reviewing the comments and publishing an interim analysis
with fixed dollar margin, the Department undertook a thorough review of
its markup assumptions and made one minor and one major revision.
First, at the manufacturer level, the markups were raised slightly
(from 1.18 to 1.24) partially to reflect new financial data for a
manufacturer who recently completed an initial public offering, and
partially to incorporate results from the MIA. The MIA suggests that
firms accrue a higher profit margin on baseline equipment than the
conservative 1% assumed for the Supplemental ANOPR's Engineering
Analysis.
Second, at the distributor and dealer levels, analysis of U.S.
Census Bureau data and recent industry financial reports suggest that
markups on changes in the unit price of equipment are less than the
average markups for those industries. In light of these new findings,
the markups for the distributors and dealers on the incremental
increase in equipment cost were lowered from 1.37 to 1.09 and 1.54 to
1.27, respectively. For the distributor, the markup on the portion of
equipment cost equal to the cost of the baseline equipment remains at
1.37. For the dealer, the 1.27 markup is applied to the total cost. The
original 1.54 assumption included the markup on the labor portion of
installation, which is not appropriately applied to equipment. We
increased our estimate of the markup on installation labor slightly to
compensate for the lower markup on equipment price, keeping the overall
installed price the same. The Department's pricing information
indicates that the total installed price of baseline equipment is
accurate as published in the Supplemental ANOPR. The overall effect of
these changes is to slightly decrease distributor and dealer equipment
markups as the standard level rises.
We introduced a new builder markup of 1.27 for new construction
markets only and applied the sales tax rate of 1.07 in only
replacement/retrofit markets.
Table V.3 summarizes the changes in markups. The Technical Support
Document (Chapter 5) provides more details on the derivation of these
new estimates.

Table V.3.--Comparison of Revised Markups and Supplemental ANOPR Markups
------------------------------------------------------------------------
Revised analysis Supplemental
Type markup ANOPR markup
------------------------------------------------------------------------
Manufacturer Markup............. 1.23............... 1.18
Wholesaler/Distributor Markups:
10 SEER..................... 1.37............... 1.37
11 SEER..................... 1.33............... .................
12 SEER..................... 1.30............... .................
13 SEER..................... 1.26............... .................
Dealer/Contractor:
Equipment Markup............ 1.27............... 1.55
Installation Labor: \a\
Air Conditioner......... $1,279/$1,367...... $1,190
Heat Pump............... $2,280/$2,160...... $2,035

[[Page 59607]]

Builder Markup.................. b 1.09............. c 1.00
Sales Tax....................... b 1.04............. d 1.07
Overall Markup:
10 SEER..................... 2.42............... 2.68
11 SEER..................... 2.35............... 2.68
12 SEER..................... 2.30............... 2.68
13 SEER..................... 2.23............... 2.68
------------------------------------------------------------------------
a For revised analysis, first value pertains to split systems and second
value pertains to single package systems.
b Weighted-average markups representing both the new construction and
replacement markets.
c For the SANOPR, builder markups were not considered.
d For the Supplemental ANOPR, sales taxes representing only the
replacement market were used.

I. EER-Based Efficiency Standard

The Department received numerous comments on the relationship of
steady state efficiency (EER) to increases in SEER. NRDC, ACEEE, VEIC,
PG&E, CEC, OEO, Unico and Southern Company support the establishment of
minimum efficiency standards based on EER at an outdoor temperature of
95 deg.F, (EER(95 deg.F)) in lieu of, or in addition to, SEER, which is
based largely on an outdoor temperature of 82 deg.F. (NRDC, No. 35 at
15-16; ACEEE, No. 43 at 8-9; VEIC, No. 32 at 5; PG&E, No. 31 at 1-4;
CEC, No. 47 at 5; OEO, No. 46 at 10-12; Unico, No. 34 at 2; Southern
Company, No. 29 at 3).
Their concern is that an increase in SEER does not necessarily
correspond to an increase in EER, and that a 95 deg.F rating condition
better represents the performance of an air conditioner on hot days
when electricity demand is at its highest. They believe that
residential air conditioners contribute significantly to this peak
demand, particularly in warmer regions of the country. Since
electricity generation, transmission, and distribution capacity is
determined by the electrical load served during these peak demand
times, products that demonstrate improved efficiency under peak
conditions can reduce the need for added electrical system capacity.
They also believe that reducing peak demand is an important component
of any integrated plan to improve the reliability of the nation's
electrical system. Recently there have been several well-publicized
blackouts and brownouts following, or in the midst of, hot periods.
Advocates of an EER-based standard believe that a SEER-only standard
does not guarantee the desired improvement in peak-period performance.
1. Current Relationship Between SEER and EER
It is certainly true that SEER is not an ideal indicator of system
efficiency in very hot weather, and SEER may not be the best indicator
of the seasonal efficiency for equipment operating in the warmest
regions of the country. However, the relationship between efficiency at
82 deg.F and at 95 deg.F is fairly close for single-speed, single-
capacity equipment, which represents the vast majority of unitary
equipment in the marketplace. For other equipment, including variable
or multi-speed equipment or equipment with modulating capacity, the
82 deg.F test point is given a great deal of weight in determining the
SEER rating. In these cases, the relationship between SEER and
EER(95 deg.F) is less certain, and manufacturers have some flexibility
and incentive to improve SEER without improving EER(95 deg.F).
The SEER test, representing equipment performance over the entire
cooling season, encourages manufacturers to design equipment that
consumes less energy throughout the cooling season for the average
user. The EER(95 deg.F) test, which is a measure of steady-state
performance under only one set of climatic conditions, cannot provide
insight into cyclical performance or cooling efficiency at cooler
temperatures which represent the bulk of the cooling season nationwide.
The Department, therefore, maintains that a SEER-based standard is
essential to its effort to reduce national energy consumption. Further,
we assume that peak demand savings would accompany any seasonal energy
savings resulting from an increase in the required SEER level, because
of the relationship between SEER and EER(95 deg.F), and the costs of
increasing EER(95 deg.F) are already incorporated into the analysis.
However, the Department is particularly interested in ensuring that
the current relationship between EER(95 deg.F) and SEER will remain
intact under new efficiency standards, resulting in reduction in growth
of peak demand. This additional reduction in peak demand growth would
benefit utilities through an eventual and incremental reduction in the
need for new capacity. Maintaining higher EER(95 deg.F) would also
benefit consumers. Since the cost of electricity is highest during
periods of peak demand, any decrease in electricity consumption during
peak-periods, could reduce the user's annual electricity bill,
particularly if the user pays time-of-day or seasonal rates.
2. Options for Possible EER Standards
The Department has at least four options for ensuring that
EER(95 deg.F) performance is maintained under new SEER standards.
First, the Department could rely on the physical relationship between
EER(95 deg.F) and SEER to ensure that an increase in SEER would result
in a corresponding increase in EER. The Department is not aware of any
modulating, multi-speed, or variable speed air conditioners (hereafter
referred to collectively as modulating equipment) being offered below
13 SEER, and very few of the available 13 SEER products are modulating
equipment. Therefore, SEER and EER are closely related in equipment
currently available at the efficiency levels that, as discussed below,
the Department is proposing today to adopt as minimum levels--12 SEER
for air conditioners and 13 SEER for heat pumps. Assuming that
relationship holds under such new standards, EER would increase as SEER
increases.
The second option would be to establish an EER(95 deg.F) floor that
must be met by modulating equipment only or, alternately, all
equipment.
The third option would be to establish a minimum EER requirement at
each SEER level, even for products exceeding the minimum SEER level.
Again, this could be established for modulating equipment only or for
all equipment.
The fourth option would be to alter the SEER test procedure to rely
more on 95 deg.F performance and less on performance at cooler
temperatures. This would provide incentive for

[[Page 59608]]

manufacturers to optimize their designs to favor the warmer part of the
cooling season and warmer regions of the country.
We consider the second and third options to be the most attractive.
While we believe that the first option, relying on the current
relationship between EER and SEER, would satisfy our concerns in the
foreseeable future, this option provides no assurance that
manufacturers would not develop and promote equipment in the long term
that would seriously reduce EER ratings. The fourth option, altering
the SEER test procedure to favor higher temperatures, would require us
to embark on a new rulemaking to establish those new procedures and
then to redo this rule to incorporate the new SEER values. We would
prefer to avoid those delays and the design uncertainty associated with
altering the procedures.
Both the second and third options, mandating minimum EER ratings,
would guarantee that products under new standards would achieve the
same EER ratings as they do today without altering the test procedures.
The third option is more aggressive since it would require that
products of higher SEER ratings must also meet increasingly stringent
EER ratings.
Within the second and third options, we could establish EER
requirements of varying degrees of stringency. For example, we could
select EER levels equivalent to the ratings of the minimum EER rating
of available equipment today at the proposed standard level, the median
EER rating, anywhere in between, or even higher.
We prefer the second option, establishing an EER floor equal to the
median EER ratings of equipment currently available at each standard
level. That would result in a substantial improvement in the EER
ratings of the typical product sold while still providing manufacturers
with the flexibility to raise SEER ratings through modulation rather
than EER improvements in higher efficiency products.
The concern that prevents us from fully endorsing the third option
is that it would discourage the development and sale of modulating
capacity and variable speed equipment. Modulating equipment realizes a
benefit in the SEER test, allowing manufacturers to reduce the cost of
the core components compared to non-modulating equipment. This cost
reduction partially offsets the cost of the modulation, making
modulating equipment more affordable for consumers. Being required to
meet the same EER standards as non-modulating equipment would negate
this cost benefit.
The Department wishes to encourage, not discourage, the development
and sale of modulating equipment. Consumers value the added benefits of
modulation, and manufacturers realize this value in the form of higher
revenues. For consumers and the nation, modulation mitigates the
inefficiencies caused by oversizing the system during installation.
Oversizing is a widespread problem that causes frequent equipment
cycling, increasing energy consumption. Furthermore, oversizing
arguably contributes more to peak power demand than does any reduction
in EER associated with modulating equipment.
For DOE to require products to meet median EER values rather than
less stringent EER values would also raise some concerns. First, the
cost-efficiency relationships used in our analysis may underestimate
costs of manufacturing such products, since we did not include the
costs of a minimum EER. Second, if an EER standard increases product
cost, it would discourage the development and sale of modulating
equipment at the baseline levels. We expect any cost increases required
to meet median EER levels, however, would be slight and would not
significantly alter our analysis.
To determine what the appropriate EER(95 deg.F) requirement might
be, the Department assessed ARI performance data on residential unitary
equipment certified as of February 1998. The median EERs available for
each product class at the minimum SEER levels DOE proposes today, are
identified in Table V.4 as the ``Median Available EER at Proposed
Minimum SEER.'' In addition to the minimum SEER proposal contained in
this notice, the Department is inclined to adopt in the Final Rule
minimum EER(95 deg.F) requirements equal to these values. However,
since there are very few packaged heat pumps available from which to
draw a conclusion concerning EER, DOE believes the minimum EER
requirement for packaged heat pumps should be the same as split heat
pumps less the 0.3 EER offset seen between packaged and split air
conditioners.

Table V.4.--Median Available Energy Efficiency Ratings (EER) and Proposed Minimum EERs in Residential Unitary
Equipment (1998)
----------------------------------------------------------------------------------------------------------------
10th
Lowest percentile Median
Proposed available available available
Product class minimum EER at EER at EER at Proposed
SEER proposed proposed proposed minimum EER
minimum minimum minimum
SEER SEER SEER
----------------------------------------------------------------------------------------------------------------
Split Air Conditioners......................... 12.0 10.1 10.5 10.8 10.8
Packaged Air Conditioners...................... 12.0 10.1 10.3 10.5 10.5
Split Heat Pumps............................... 13.0 10.8 11.1 11.9 11.9
Packaged Heat Pumps............................ 13.0 11.0 11.0 11.0 11.6
----------------------------------------------------------------------------------------------------------------

We encourage comments regarding the burdens and benefits that would
result from including an EER requirement in the final rule. Of
particular interest are comments regarding burdens on manufacturers and
benefits regarding reduction in peak electricity demand, including the
effect of an EER minimum on costs, on availability and sales of
modulating equipment, and on electrical system reliability. In
addition, comments are welcome to discuss the pros and cons of any of
the other options described above.

J. Niche Products

Several types of central air conditioners and heat pumps are used
in particular or unusual applications and have features that differ
from those of the vast majority of products available in the
marketplace. We refer to these as ``niche products.'' Included are
single package units that are designed to be mounted within or
immediately adjacent to a fixed-size opening in an outside wall of the
structure and split systems where the outdoor unit is designed to be
mounted in the same

[[Page 59609]]

manner. This would be comparable to the classes that have been
established for room air conditioners that are defined as ``without
louvered sides.'' Also included are non-ducted mini-split air
conditioners and heat pumps, and high-velocity, small-duct systems.
Typical applications for of niche products may include: existing single
family buildings without air ducts and multi-family buildings with
fixed-area wall openings and both new and existing manufactured homes.
Several manufacturers have claimed that certain niche products
would not be viable if required to meet higher efficiency standards,
and have asked the Department to establish new classes for these
products, with efficiency standards maintained at current levels. All
these products serve relatively small niche markets and as such, the
efficiency standards established for these products will have little
effect on national energy savings. Further, each is a product with some
unique utility. Earlier in this rulemaking the Department sought
information on whether higher standards would eliminate these products
from the marketplace because of the severity of their constraints.
1. Ductless Split Air Conditioners and Heat Pumps
Ductless split systems, or mini-splits as they are commonly known,
consist of a single outdoor unit and one or more indoor fan coil units,
each located in the conditioned space. Since consumers may consider the
interior units to be more intrusive than a ducted system, manufacturers
strive to make them as compact as possible. This cabinet size
constraint combined with efficiency losses due to heat transfer between
refrigerant lines puts pressure on equipment efficiency.
Mitsubishi and EnviroMaster International (EMI), manufacturers of
ductless split systems, commented that ductless products should be
assigned a separate product class with a lower standard. (Mitsubishi,
No. 18 at 1 and EMI, No. 26 at 1). Their arguments for a separate class
are:
Ductless units are operated like room air conditioners,
because the ``compressor delivering air conditioning to a particular
room operates only when necessary rather than when a central thermostat
calls for cooling in another area;'
Ductless units do not have the duct losses of a central
air conditioning system, and so have greater installed system
efficiency. Mitsubishi claims that: ``a 10 SEER ductless unit may be
virtually equivalent or even higher in efficiency than a 12 SEER ducted
unit';
The overwhelming portion of the market of ductless mini-
splits is in capacities of 18,000 Btu/hr and less. Making significant
increases in the efficiency of motors and compressors used in these
small units is difficult;
Ductless air conditioners frequently employ variable speed
control of the compressor motors. Mitsubishi claims: ``Controlling the
speed of the compressor by inverter will not benefit the 100% capacity
rating but it has a tremendous benefit when the compressor begins
slowing down. During 50% capacity operation the SEER level would be
several points above the 100% capacity SEER. This results in more
energy savings, quieter operation, less peak load demands.'' Mitsubishi
also argued that an EER rating, like a room air conditioner, would be
more appropriate because of the inverter driven system's low cyclic
losses; and
Per ton, (of cooling capacity) a ductless air conditioning
system is one of the most expensive HVAC systems in the U.S. today.
Some of the reasons for high production costs are: low volumes in the
United States, the indoor unit is a ``finished'' product fully visible
to the customer so it requires additional cosmetic expenses, and the
unit must be small, so complex design of coils is necessary.
After review of the available information, the Department does not
believe a separate class is warranted for these products. The evidence
presented in the comments does not convince us that these products
would not be able to meet the proposed standard level. The constraints
on increasing the size of the indoor fan coil units are primarily
esthetic, and the Department is unaware of technological limitations to
increasing minimum efficiency standards for these products. The
esthetic disadvantage of larger cabinet size would be compensated by
higher efficiency and lower cost of operation. While the claim that the
small capacities make increased efficiencies difficult is a reasonable
one, the Department is aware that systems with capacities of up to
44,000 Btu/h are available and believes that providing an exemption for
all systems because of difficulty with smaller systems is not
justified.
2. Small Duct High Velocity Air Conditioners
Small-duct, high-velocity (SDHV) systems target primarily the
retrofit market, where they are installed in attic or closet spaces and
distribute conditioned pressurized air through round ducts small enough
to fit inside stud walls. Compared with conventional air conditioners
and heat pumps that use large ducts, the indoor coil section of an SDHV
system is compactly designed to facilitate retrofit installation in
tight spaces, resulting in smaller face area and more rows of tubing
than conventional systems. The compact fan coil design and small ducts
contribute to high static pressure loss that must be overcome by the
blower, requiring greater fan power. Manufacturers claim the greater
energy consumption of these blower motors and the limited space for
installing the fan coils makes it more difficult for SDHV systems to
increase energy efficiency. To mitigate the burden on the blowers,
designers reduce the required air volume by cooling it more than a
conventional air conditioner, which offers an associated benefit of
enhanced humidity removal but increases cost. In order to meet the
current 10 SEER standard, manufacturers of SDHV systems typically pair
the fan coil with high efficiency condensing units (typically 13--14
SEER).
Unico described a number of alternatives to increase system
efficiency for their product, including a larger heat exchanger, an
improved blower design and a more efficient blower motor, and concluded
that the burden of increased initial cost would outweigh the benefits
of increased system efficiency. (Unico, No.60 at 5). Unico asked the
Department to either: (1) Exempt them from any increase in standards;
(2) allow a 15% SEER credit for reduced duct losses associated with
their type of system; or (3) allow their system to be tested as a coil
only (without a blower) at a conventional airflow, using the test
procedure's default fan power to establish a SEER rating but allow them
to install systems with a high pressure blower. (Unico, No. 61 at 3).
SpacePak, another major manufacturer of this type of product,
commented that they have made the investment to produce more efficient
systems. (SpacePak, No. 39 at 1). SpacePak also provided ARI directory
data indicating the higher efficiency of their designs. SpacePak
claimed to offer many equipment combinations in the 11 to 12 SEER
range, with only 17% of their ARI listings at the 10 SEER minimum.
(Space Pak, No. 52 at 1).
After review of the available information, the Department does not
believe a separate class with an efficiency standard below 12 SEER or a
15% SEER credit, is warranted for these products. Regarding Unico's
third

[[Page 59610]]

alternative, i.e., revise the DOE test procedure to allow SDHV systems
to be tested as coil-only products, the Department believes that such a
change would recognize the improvements in delivered efficiency of the
SDHV system because of reduced duct losses. We are therefore proposing
to modify the DOE test procedure to allow small-duct high velocity
system manufacturers to test their products as coil only products. We
estimate that the impact of this allowance will be 1 to 2.5 SEER
points; i.e., a 10 SEER system would become an 11 to 12.5 SEER system.
The Department seeks comments on whether the test procedure revision or
other proposed changes are needed to maintain the viability of the
small-duct, high-velocity systems in the market place.
3. Vertical Packaged, Wall Mounted
These products are factory-assembled single packaged vertical air-
conditioners and heat pumps using single phase power but intended for
use in commercial and industrial heating and cooling applications. The
difficult air flow configuration (each of the condenser and evaporator
compartments takes air in and exhausts it through the same face)
combined with the attempt to minimize size constrains the ability of
these units to attain higher SEERs.
The Department understands that single-package vertical air-
conditioners and heat pumps are not distributed for personal use or
consumption by individuals, and therefore believes that at present they
are commercial products covered by EPACT and not by residential energy
efficiency standards. Accordingly, vertical packaged, wall mounted
equipment would not be covered by today's proposed rule for residential
products.
4. Through-the-Wall Condensers
Through-the-wall (TTW) condensers were popular in new multistory
residential construction in the 1960s and 1970s. Major manufacturers
have since abandoned the replacement market, providing an opportunity
for lower volume manufacturers. Most equipment is in the 1\1/2\ to 2\1/
2\ ton capacity range. These systems take in air through only one face
and exhaust air through the same face resulting in reduced efficiency
because of increased fan power consumption. Some short-circuiting of
exhaust air into the intake may also occur.
Replacements for through-the-wall condensers must fit within the
same wall opening as the original units, even though original units may
be half as efficient as the new units. Residents or building owners are
particularly sensitive to any increase in price or to the cost of
enlarging the wall opening to accommodate a larger condenser. Since
repair is the only other cost effective alternative to replacement, a
new standard that increases cabinet size or results in a significant
price increase could be counterproductive, preventing the turnover of
old, inefficient equipment.
According to submitted data, 10 SEER TTW split condensing air-
conditioners with fan coils (when scaled up to 3-tons) are $206 more
expensive (manufacturer price) than 10 SEER pad-mounted split systems.
Under a 12 SEER standard for pad-mounted split air conditioners, the
$206 differential would be maintained if TTW Condenser systems had to
meet an 11 SEER rating (also based on submitted data). This
differential increases when wall modifications are necessary. DOE
believes 11 SEER is technologically feasible at this time for most
configurations of TTW split equipment. TTW condensers come in three
sizes (height x weight exterior to the building): 32" x 24" (768
sq. in.); 28" x 26" (721 sq. in.); and 23" x 30" (679 sq. in.).
First Co. commented that imposing higher efficiency standards would
eliminate through-the-wall products from the marketplace because of the
significant increase in the price with a correspondingly small
operating cost savings. (First Co., No. 40 at 1).
TTW packaged systems are intended for both new construction and
retrofit. First Co's dimensions (new construction) are 43" x 28"
(1,204 sq. in.). Skymark's retrofit unit is 15" x 55" (825 sq. in.).
TTW packaged equipment for new construction, which is not severely
size-constrained, should be able to reach 12 SEER in its current
configuration with component upgrades. The current manufacturer price
differential (First Co.) between TTW packaged and conventional packaged
equipment (scaled to 3-tons) is $430. According to First Co. data, that
differential would be maintained under an 11 SEER standard for TTW
packaged with a 12 SEER for conventional packaged.
The Department proposes to establish a separate class for TTW
equipment (including packaged and split, cooling only and heat pump)
based on a maximum combined surface area of the air inlet and outlet of
the condenser of 830 square inches, and a maximum capacity of 30,000
Btu/hr. The purpose of the maximum capacity requirement is to ensure
that if new technology reduces the size of the condenser, manufacturers
will not offer 3-ton equipment that fits the definition but is intended
for use in conventional applications. To maintain the price
differential between this new class and conventional equipment, we
propose a standard of 11 SEER. Because electric strip heat is popular
in TTW equipment, the 11 SEER standard would also apply to TTW heat
pumps.
5. Non-Weatherized Single-Package Unit, Mounted Entirely Within the
Structure
Another niche product, which was not discussed in the Supplemental
ANOPR, is a non-weatherized single-package unit, mounted entirely
within the structure (in an attic, basement, or closet), with outdoor
air ducted to and from the unit. This unit is used in high-rise and
garden apartments, manufactured homes, and other residential
applications where locations for placement of outdoor units may be
unavailable or too remote, where architectural aesthetics may be
compromised by visible outdoor units, where vandalism or theft of
outdoor units is a potential problem, or where compliance with local
sound ordinances restricts the placement of outdoor air conditioning
equipment.
Consolidated Technologies, Inc., manufacturer of the INSIDER,
commented, ``For the INSIDER to be used in Manufactured Housing and
Modular housing it is important to have the smallest footprint
possible.'' (Consolidated Technologies, Inc., No. 42 at 2).
The Department recognizes that this product has space constraints,
albeit not as severe as products that must fit a wall opening. Products
at the 12 SEER level (the proposed air conditioning standard level) are
currently on the market. A very difficult obstacle to establishing a
separate class for this product is a definition that could not be used
as a loophole to use its lower standard for conventional products. Its
salient feature is its indoor location; product class definitions
should be based on physical characteristics, and it is nearly
impossible to define physical characteristics that would ensure
products be installed in a particular location. No separate class is
proposed for this product.
6. Request for Comments Regarding Niche Product Standards
The Department encourages comments regarding whether the proposed
standards concerning high-velocity, vertically-packaged wall-mounted
equipment, and through-the-wall equipment provide a significant
advantage to those products versus

[[Page 59611]]

competing products, whether they are sufficient to preserve the unique
features of those products, and whether improvements in the definitions
are needed to prevent loopholes. For ductless split equipment and non-
weatherized vertical packaged equipment, additional comment is welcome
on the impacts that meeting the new standards would have on the
availability of those products.

K. Thermostatic Expansion Valves

VEIC, NRDC, ACEEE, and CEC requested that a design standard
requiring the use of thermostatic expansion valves (TXVs) be adopted to
ensure that energy savings expected from an increase in the minimum
efficiency standard are realized in the field. Several of the comments
cited studies which demonstrate that TXVs can mitigate adverse effects
on efficiency due to field installation problems such as inadequate
evaporator airflow and improper refrigerant charge. CEC suggested that
separate classes be established for systems with and without TXVs and
that more stringent minimum efficiency standards be established for
classes not utilizing TXVs, and VEIC suggested mandating the use of
TXVs in all new equipment. (VEIC, No. 32 at 4-5; Neme, VEIC,
Transcript, pp. 187-189; NRDC, No. 35 at 11-12; ACEEE, No. 43 at 5-6;
CEC, No. 47 at 5-6).
At least two regulatory options exist for encouraging the use of
TXVs. The first is to require that all equipment contain TXVs,
hereafter called TXV requirement. The second is to establish a separate
product class for TXV-bearing equipment and to reduce the minimum SEER
requirements for those classes from the levels in today's proposed
rule.
The EPCA allows the Department to issue a requirement such as
mandating the use of TXVs if the Secretary determines that such a
requirement is necessary to ensure that the product meets its
performance-based standard. In the case of TXVs, the Department's
current opinion is that products can meet the proposed SEER
requirements without TXVs. This is certainly true in the laboratory. In
the field, although many installations could undoubtedly benefit from
TXVs, it is unclear whether we could find that TXVs are needed for
those systems to perform at their rated efficiencies.
Regarding the second option, EPCA requires the Department to
establish separate product classes for products based on a performance
related feature (such as a TXV) if the Secretary determines that a
higher or lower efficiency standard is justified for those products.
Evidence indicates that TXVs maintain system efficiency better than do
fixed orifices or capillary tube expansion devices in cases where split
system equipment is over- or under-charged with refrigerant. This
apparently includes most installations. To encourage the use of TXVs we
could consider establishing lower SEER standards for products
containing TXVs.
While the evidence of the potential energy-saving benefits of TXVs
is certainly persuasive, the current SEER test procedures already
encourage their use. For rating a manufacturer's condenser with the
evaporator of a different manufacturer, the SEER determination
procedures provide a credit for systems that incorporate TXVs. For
matched systems, the use of TXVs typically lowers the degradation
coefficient, resulting in higher SEER results.
We hesitate to provide stronger support for TXV-bearing equipment
than that which is already granted through the test procedures. Unlike
fixed orifices, TXVs are mechanical components. Some manufacturers
avoid their usage because of reliability concerns, and the additional
repair costs incurred by consumers could outweigh their energy-saving
benefits. Furthermore, contractors are able to adjust the factory-set
TXV in the field, and it is possible that alleviating problems due to
over- or under-charging by encouraging the use of TXVs could create
another problem--improperly set TXVs. Also, it is not clear that TXVs
are the only, or even the best, option for maintaining equipment
efficiency in the field. For example, technologies that could mitigate
dirty coils or prevent improper charging and airflow may be more
attractive options, and we would not want to discourage their
development or use by mandating the use of TXVs.
In any case, manufacturers may well find that the SEER benefits
offered by TXVs are compelling enough under the new efficiency
standards that they would offer TXVs in a substantial amount of
baseline equipment without further encouragement by the Department. The
Engineering Analysis suggests that manufacturers are currently more
likely to incorporate TXVs into their 12 SEER and 13 SEER products than
in their 10 SEER products. We would expect, therefore, that TXV use
would be much more prevalent under higher efficiency standards.
For these reasons, the Department feels that the current test
procedure provides the proper encouragement for manufacturers to
incorporate TXVs into their products, and that neither a TXV
requirement nor a lower standard for TXV-bearing products are justified
at this time. We welcome additional comments on this issue,
particularly regarding whether our concerns regarding the perceived
reliability problems and potential misuses associated with widespread
use of TXVs are valid.

L. Other Comments

1. Latent Heat Removal
The Southern Company, Virginia Power, and R.B. Stotz insisted that
increased equipment efficiency impacts the equipment's ability to
properly dehumidify (i.e., remove latent heat). Virginia Power
specifically wants assurances that any increase in the standard will
maintain current humidity control capabilities. In addition, it asserts
that the costs of maintaining humidity control should be included in
the analysis. (Virginia Power, No. 27 at 2). The Southern Company
claims that higher SEER values will lead to larger indoor coils which
in turn will result in higher air temperatures leaving the indoor coil.
The higher the air temperature, the less dehumidification occurs. They
also claim that while more efficient systems may dehumidify properly at
rated test conditions, their ability to dehumidify under high indoor
humidity conditions are worse than less efficient equipment. (Southern
Company, No. 29 at 3-4; R.B. Stotz, No. 24 at 1). Trane counters the
claims made by the Southern Company and Virginia Power by stating that
there is absolutely no evidence to support the claim that more
efficient equipment has less latent heat removal capability. (Crawford,
Trane, Transcript, pp. 272-273).
Trane's claim that there is no relationship between equipment
efficiency and its ability to dehumidify is substantiated by research
conducted by ARI. From this research, ARI demonstrated for hundreds of
systems that latent heat removal is not obviously impacted by increases
in equipment efficiency at rated conditions (i.e., 95 deg.F outdoor
temperature). \16\ Not to dismiss the concerns of Virginia Power and
the Southern Company, we recognize the humidity control problems that
exist in the southern region of the U.S. For the excessive humidity
conditions commonly experienced in the South, the equipment may very
likely not provide adequate dehumidification. But rather than focusing
on the equipment efficiency as the source of the problem,

[[Page 59612]]

proper installation and maintenance practices also likely play a large
role in the equipment's performance. Other factors to consider are the
duct system as well as the building shell characteristics. All these
factors play a role in how a system dehumidifies. To lay blame only on
the efficiency of the equipment ignores how other factors contribute to
the system's ability to properly dehumidify.
---------------------------------------------------------------------------

\16\ D. Godwin. 1998. ``Latent Capacity of Unitary Equipment.''
ASHRAE Transactions 98(2).
---------------------------------------------------------------------------

2. 3-Phase Equipment
ACEEE asserted that if an identical standard is to be set for both
single-phase and 3-phase central air conditioners and heat pumps under
65,000 Btu/hr, then 3-phase equipment should be incorporated into the
rulemaking analysis. Alternatively, if 3-phase equipment is excluded
from the analysis, it should be made clear that a new standard on 3-
phase equipment will be set based on a new analysis covering 3-phase
equipment.
EPACT provides for DOE to amend the standards for these products
when ASHRAE amends the standards found in ASHRAE Standard 90.1. When
ASHRAE has completed its consideration of standards for these products,
DOE will analyze 3-phase equipment under a separate rulemaking
pertaining to commercial air-conditioning and heat pump equipment.
3. SEER-HSPF Relationship
ARI supported the Department's HSPF-SEER standard pairings proposed
in the Supplemental ANOPR. (ARI No. 48 at 4). Pietsch proposed
maintaining the current minimum requirements for HSPF at 6.8 for future
levels of minimum SEER, which would allow manufacturers to continue to
place more emphasis on improving SEER. He based this recommendation on
the strong competition that heat pumps face in the market place with
electric resistance heat, noting that the increased first-cost of heat
pumps that have higher minimum HSPFs makes it more difficult for heat
pumps to compete against the much lower first-cost of electric
resistance heating systems. (Pietsch No. 36 at 41). ACEEE, VEIC, and
PG&E noted that the Department's definition of HSPF-SEER pairing for
the standard levels it analyzed seemed arbitrary or too lenient and
preferred that the Department establish higher HSPF levels. (ACEEE, No.
43 at 5; VEIC, No. 32 at 6; PG&E, No. 31 at 4).
The Department plotted the relationship between HSPF and SEER for
all 3-ton split heat pumps listed in the Spring 1998 ARI Directory of
Certified Unitary Equipment. At 10 SEER, the difference between the
minimum HSPF (6.8) and the median (7.1) was 0.3 HSPF. The Department
then determined the equation of the line that ran generally parallel
with the median HSPF at each SEER level, while passing through the 10
SEER, 6.8 HSPF point. Table V.5 reviews the derivation of the SEER-HSPF
pairings.

Table V.5.--Comparison of Proposed HSPF Standard Levels With Median HSPFs of Equipment Listed in the ARI Unitary Directory
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cooling efficiency (SEER) 10 11 12 13 14 15 16 17
--------------------------------------------------------------------------------------------------------------------------------------------------------
Median Heating Efficiency (HSPF)................ 7.1 7.4 7.9 7.9 7.9 8.9 8.2 8.4
Recommended Heating Efficiency Standard (HSPF).. 6.8 7.1 7.4 7.7 8.0 8.2 8.4 8.6
Offset from Median (HSPF)....................... -0.3 -0.3 -0.5 -0.2 +0.1 -0.7 +0.2 +0.2
--------------------------------------------------------------------------------------------------------------------------------------------------------

Even though the Department does not have information on the
distribution of heat pump sales by HSPF at each SEER level, it is
apparent that the market currently favors products that exceed the
minimum allowable HSPF level. This is due both to the natural
relationship between HSPF and SEER and the preference in the market for
high HSPF heat pumps in cooler climates. The Department believes that
establishing an HSPF standard equal to the current median at a given
SEER level would impose an undue design constraint on manufacturers,
adding to the cost and burden of designing, producing, testing, and
qualifying the product without resulting in a significant increase in
the average HSPF of equipment sold. Also, the Department does not want
to encourage substitution of electric resistance heating systems for
heat pumps. Without further information on the cost of attaining higher
HSPFs or the shipments of heat pumps by HSPF level, the Department has
no basis for modifying its current HSPF-SEER standard combinations.
4. Max Tech
The Supplemental ANOPR analysis proposed a Max Tech level of 20
SEER. ARI, Trane, and York commented that a prototype hasn't been built
that has exceeded 18 SEER. (Wethje, ARI, Transcript p. 66; Crawford,
Trane, Transcript p. 69; and Madera, York, Transcript p. 71). The
Department also understands that 18 SEER is the highest efficiency
level currently available for sale.
While the Department believes improvements to the 18 SEER design
are certainly possible, it agrees with the industry that any analysis
based on a design higher than 18 SEER would be pure speculation.
Therefore, the Department considers 18 SEER to be the Max Tech at this
time for cooling performance. The Max Tech level for heating efficiency
is 9.4 HSPF, which is the highest HSPF rating currently available in
residential heat pumps. Any parties possessing knowledge of prototype
central air conditioners or heat pumps that exceed 18 SEER or 9.4 HSPF
levels are encourage to provide such information in comment on today's
proposed rule.
DOE does not have relative cost data for 18 SEER units as ARI did
not provide the Department data for equipment exceeding 15 SEER. In
lieu of performing a reverse engineering analysis on an 18 SEER design,
the Department is proceeding as if the 18 SEER equipment cost and price
were equal to those of the 15 SEER equipment. DOE believes the 18 SEER
cost would be higher because the product is more complex.

VI. Analytical Results

A. Trial Standard Levels

Table VI.1 presents the trial standards levels analyzed for today's
proposed rule and the corresponding efficiency level for each class of
product. Trial standard level 5 is the max tech level for each class of
product.

[[Page 59613]]

Table VI.1.--Trial Standards Levels for Central Air Conditioners and Heat Pumps (SEER)
----------------------------------------------------------------------------------------------------------------
Packaged air
Trial standard level Split air Split heat Packaged
conditioners conditioners pumps heat pumps
----------------------------------------------------------------------------------------------------------------
1......................................................... 11 11 11 11
2......................................................... 12 12 12 12
3......................................................... 12 12 13 13
4......................................................... 13 13 13 13
5......................................................... 18 18 18 18
----------------------------------------------------------------------------------------------------------------

B. Significance of Energy Savings

To estimate the energy savings through 2030 due to revised
standards, we compared the energy consumption of central air
conditioners and heat pumps under the base case to energy consumption
of central air conditioners and heat pumps under the revised standard.
We examined five standard levels. For each trial standard examined,
several different scenarios were analyzed consisting of variations on:
(1) Electricity price and housing projections; (2) equipment efficiency
distributions; (3) manufacturer cost estimates; (4) equipment lifetime;
and (5) societal discount rate. Electricity price and housing
projections were based on three different AEO 2000 forecasts: (1)
Reference Case, (2) High Growth Case, and (3) Low Growth Case. We
analyzed three efficiency scenarios, each of which assumed a different
efficiency distribution after new standards would take effect: (1)
NAECA scenario, (2) Roll-up scenario, and (3) Shift scenario.
Manufacturer costs were based on ARI-provided mean cost data. Since
several comments suggested that the industry-provided cost estimates
were overstated, cost data from the reverse engineering analysis were
analyzed as an alternative scenario. Equipment lifetime was based on a
retirement function with an 18.4 year average lifetime coupled with the
inclusion of compressor replacement costs. However, since several
comments suggested that the equipment life is actually shorter, a
retirement function yielding an average lifetime of 14 years without
the inclusion of compressor replacement costs was analyzed as an
alternative scenario.
For calculating NPV, a societal discount rate of 7% was assumed.
However, a 3% value was investigated as an alternative scenario in
accordance with the Office of Management and Budget's (OMB) Guidelines
to Standardize Measures of Costs and Benefits and the Format of
Accounting Statements.
Table VI.2 shows the range of energy savings for each of the three
shipments scenarios for each trial standard level based on varying
electricity and housing projections. The energy savings assume the ARI
mean manufacturer cost estimate, an 18.4-year average lifetime with
compressor replacement and a 7% societal discount rate. The electricity
scenarios are the AEO 2000 Reference, High Growth, and Low Growth
cases.

Table VI.2.--Energy Savings Based on ARI Mean Manufacturer Costs, 18.4 year Retirement Function with Compressor
Replacement, and a 7% Discount Rate
[Energy savings for units sold from 2006 to 2030]
----------------------------------------------------------------------------------------------------------------
Energy savings (quads)
Trial standard level --------------------------------------------------------------------------
NAECA Roll-up Shift
----------------------------------------------------------------------------------------------------------------
1.................................... 1.7 to 1.8.............. 1.5 to 1.6............. 1.9 to 2.0
2.................................... 2.9 to 3.2.............. 2.8 to 3.0............. 3.4 to 3.6
3.................................... 3.4 to 3.6.............. 3.3 to 3.5............. 3.8 to 4.1
4.................................... 4.2 to 4.5.............. 4.1 to 4.4............. 4.6 to 4.9
5.................................... 8.1 to 8.7.............. 8.1 to 8.7............. 8.1 to 8.7
----------------------------------------------------------------------------------------------------------------

Table VI.3 shows how each of the three scenarios described above
(reverse engineering costs, 14 year average life, and 3% discount rate)
impact the energy savings. The three scenarios were investigated only
for the NAECA efficiency scenario and the AEO 2000 Reference Case
electricity price and housing projection.

Table VI.3.--Energy Savings based on the NAECA Efficiency Scenario and
AEO Reference Case
[Energy savings for units sold from 2006 to 2030]
------------------------------------------------------------------------
Energy savings (quads)
----------------------------------------
Reverse
Trial standard level engineering 14 year 3% discount
manufacturing lifetime rate
cost
------------------------------------------------------------------------
1.............................. 1.7 1.7 1.7
2.............................. 3.0 2.9 3.0
3.............................. 3.5 3.4 3.5
4.............................. 4.3 4.2 4.3
5.............................. 8.7 8.2 8.3
------------------------------------------------------------------------

[[Page 59614]]

C. Payback Period

As discussed above, the Act requires the Department to examine
payback periods to determine if the three year rebuttable presumption
of economic justification applies. As prescribed by the Act, the
rebuttable payback period is ``calculated under the applicable test
procedure, * * *''.
The annual space-cooling and space-heating energy consumption
calculated based on the hours of use in the test procedure are on the
order of 50% greater than the weighted-average values from the LCC
analysis (i.e., analyses based on the 1997 RECS for residential
buildings and hourly simulations for commercial buildings). This means
that, for any given standard level, the payback period calculated from
the test procedure will be significantly shorter than the average
payback value calculated from the LCC analysis which was based on the
1997 RECS data.
In Table VI.4a, we list the median payback periods for product
classes and efficiency levels according to the methods employed by the
LCC analysis. Table VI.4b is the rebuttable presumption payback period
based on the Department of Energy's test procedure.

Table VI.4a.--Summary of LCC Payback Median Period
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reverse engineering 14-year lifetime
Product class Efficiency level ARI mean manufacturing cost scenario/ARI mean
manufacturing cost 1 scenario 1 manufacturing cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Split System Central Air Conditioner 11 10.6 7.8 10.5
12 12.6 9.8 12.8
13 16.0 11.3 16.2
18 36.0 19.6 50.4
Split System Heat Pump 11 5.5 2.7 5.5
12 7.2 3.9 7.3
13 9.3 6.4 9.5
18 17.3 14.0 19.9
Single Package Air Conditioner 11 6.1 7.7 16.6
12 14.0 7.5 14.2
13 21.8 14.5 21.8
18 48.8 25.1 88.1
Single Package Heat Pump 11 8.1 4.6 8.1
12 8.7 4.0 8.7
13 13.2 8.4 13.4
18 19.4 12.8 23.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 Assumes a 18.4-year lifetime with a compressor replacement at 14 years.

Table VI.4b.--Summary of Rebuttable Payback Period
------------------------------------------------------------------------
ARI mean
Product class Efficiency manufacturing
level cost 1
------------------------------------------------------------------------
Split System Central Air Conditioner.... 11 4.7
12 5.8
13 7.6
18 11.3
Split System Heat Pump.................. 11 2.5
12 3.3
13 4.5
18 6.8
Single Package Air Conditioner.......... 11 7.3
12 6.2
13 9.8
18 13.3
Single Package Heat Pump................ 11 3.7
12 4.0
13 6.5
18 7.2
------------------------------------------------------------------------
1 Assumes a 18.4-year lifetime with a compressor replacement at 14
years.

D. Economic Justification

1. Economic Impact on Manufacturers
a. Background. We performed a Manufacturer Impact Analysis (MIA) to
estimate the impact of higher efficiency standards on air conditioner
manufacturers. The TSD explains the analysis in further detail. As part
of the MIA, we discussed potential impacts with six major manufacturers
responsible for approximately 90% of the residential air conditioner
and heat pump sales. We also interviewed two niche manufacturers to
understand how their financial situation differs from that of their
larger counterparts. These interviews are in addition to those we
conducted as part of the Supplemental ANOPR. The interviews provided
valuable information used to evaluate the impacts of a new standard on
manufacturers' cash flows, manufacturing capacities and employment
levels.
The MIA has both quantitative and qualitative aspects. Quantitative
analysis primarily relies on the GRIM, an industry cash flow model
customized for this rulemaking. The GRIM inputs

[[Page 59615]]

are assumptions regarding the industry cost structure, shipments, and
revenues. The key output is the industry net present value (INPV).
Different sets of assumptions (scenarios) produce different results as
described below.
In the GRIM we evaluated each of the shipment scenarios, i.e.,
``NAECA'', ``Rollup'', and ``Shift''. Changes in efficiency mix by
efficiency standard level are a key driver of manufacturer finances
since costs and revenues are both tied to shipments.
Two cost scenarios, ``Industry Relative Cost'' and ``Reverse-
Engineering Relative Cost'', were also examined. These relative costs
are also used as the basis for deriving the production costs of
equipment above the minimum efficiency level. The ``Reverse-Engineering
Relative Cost'' scenario was applied only to the ``NAECA'' product mix
scenario in order to determine the effects of lower production costs on
the MIA results.
The equipment lifetime scenarios assumptions, ``18-year life'' and
``14-year life'', were considered. The ``14-year life'' assumption
applied only to the ``NAECA'' and ``Industry Relative Cost'' scenarios
to isolate the effects of a shorter product life on the results.
The interviews revealed that manufacturers use different pricing
strategies and place different levels of emphasis on the sale of higher
efficiency products. Manufacturers fall into two basic groups in this
regard. The first group has lower operating and production costs than
its competitors and targets such price-sensitive consumers as new home
builders. This focus on low price limits the ability and desire of
these manufacturers to sell premium equipment. Because they have a cost
advantage over their competitors, the lower cost manufacturers can
achieve a higher operating profit margin on their baseline equipment
and still maintain a price advantage. They then apply a fairly
consistent markup across efficiency levels.
The higher cost manufacturers typically place more of an emphasis
on marketing, service, and research than do their lower cost
competitors. Faced with stiff price competition from the lower cost
manufacturers in price-sensitive markets, the higher cost manufacturers
are forced to reduce their price (and markup) on their baseline
equipment to the minimum level sustainable. They then target less price
sensitive customers by offering products with premium features and
higher efficiency. These products carry higher markups.
Since higher efficiency standards will affect each group of
manufacturers differently, we set up two versions of the GRIM to model
each group independently. To represent the lower cost manufacturers, we
reduced the operating expense ratio and research and development
expense ratio to below the industry averages. We also assumed that a
single markup applies to products across all efficiency levels. To
model higher cost manufacturers, we raised the operating expense ratio
and research and development ratios to above the industry average. We
then assumed that markups increase roughly linearly as the efficiency
level increases. This represents two effects: selling a greater
fraction of higher margin premium product as efficiency level rises,
and being able to secure a higher profit margin on products by virtue
of the higher efficiency.
To represent the industry in aggregate, we combined the results of
the two GRIM versions, giving 25% weight to the results of the lower-
operating-cost group and 75% weight to the results of the higher-
operating-cost group. This ratio reflects the prevalence of each
strategy in the marketplace. Many companies may pursue both strategies
simultaneously through different brands and divisions.
b. Industry Cash Flow Analysis Results. Tables VI.5 through VI.7
present the GRIM results for the unitary air conditioning industry for
the three shipment scenarios based on the industry provided mean cost
multipliers and an 18-year product life. The corporate discount rate
used in the analysis is 6.2% based on an estimate of the weighted
average cost of capital for the industry over a five-year period.
Results assume that manufacturers with lower operating costs control
25% of the market and those with higher operating costs control 75%.
Since we did not collect information regarding the cost or investments
involved in manufacturing product at 18 SEER, we did not assess impacts
under Max Tech.

Table VI.5.--Changes in Industry Net Present Value--Industry Relative Cost, 18 Year Life, NAECA Efficiency Mix
----------------------------------------------------------------------------------------------------------------
Industry net Change in INPV from base case
Standard level present value -------------------------------
($ million) $ million Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................ 1,603 .............. ..............
1............................................................... 1,566 (37) -2
2............................................................... 1,417 (186) -12
3............................................................... 1,406 (197) -12
4............................................................... 1,420 (183) -11
----------------------------------------------------------------------------------------------------------------

Table VI.6.--Changes in Industry Net Present Value--Industry Relative Cost, 18 Year Life, Roll-up Efficiency Mix
----------------------------------------------------------------------------------------------------------------
Industry net Change in INPV from base case
Standard level present value -------------------------------
($ million) $ million Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................ 1,603 .............. ..............
1............................................................... 1,422 (181) -11
2............................................................... 1,241 (362) -23
3............................................................... 1,236 (367) -23
4............................................................... 1,268 (335) -21
----------------------------------------------------------------------------------------------------------------

[[Page 59616]]

Table VI.7.--Changes in Industry Net Present Value--Industry Relative Cost, 18 Year Life, Shift Efficiency Mix
----------------------------------------------------------------------------------------------------------------
Industry net Change in INPV from base case
Standard level present value -------------------------------
($ million) $ million Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................ $1,603 .............. ..............
1............................................................... 1,740 $137 9
2............................................................... 1,825 222 14
3............................................................... 1,854 251 16
4............................................................... 1,914 311 19
----------------------------------------------------------------------------------------------------------------

The NAECA and Roll-up scenarios reduce INPV while the Shift
scenario increases INPV. This result occurs because we assume the
higher-operating cost manufacturers accrue much of their profits from
the sale of higher efficiency equipment. As the standard level
increases, they earn lower profit margins on that equipment. The loss
in profits can be offset by the combination of more sales and more
expensive equipment. The Shift scenario provides a much more favorable
projection of high-efficiency equipment sales than do the NAECA and
Rollup scenarios.
Tables VI.8 and VI.9 present the results for the 14-year life
assumption and the Reverse Engineering Relative Cost scenario with the
NAECA Efficiency Mix scenario.

Table VI.8.--Changes in Industry Net Present Value--Industry Relative Cost, 14 Year Life, NAECA Efficiency Mix
----------------------------------------------------------------------------------------------------------------
Industry net Change in INPV from base case
Standard level present value -------------------------------
($ million) $ million Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................ $1,726 .............. ..............
1............................................................... 1,701 $ (25) -1
2............................................................... 1,558 (168) -10
3............................................................... 1,555 (171) -10
4............................................................... 1,598 (128) -7
----------------------------------------------------------------------------------------------------------------

Table VI.9.--Changes in Industry Net Present Value--Reverse Engineering Relative Cost, 18 Year Life, NAECA
Efficiency Mix
----------------------------------------------------------------------------------------------------------------
Industry net Change in INPV from base case
Standard level present value -------------------------------
($ million) $ million Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................ $1,539 .............. ..............
1............................................................... 1,509 $ (30) -2
2............................................................... 1,380 (159) -10
3............................................................... 1,368 (171) -11
4............................................................... 1,370 (169) -11
----------------------------------------------------------------------------------------------------------------

Table VI.10 presents the differential impacts between the groups of
manufacturers with lower and higher operating costs. The lower
operating cost manufacturers benefit under all scenarios and trial
standard levels, and the higher operating cost manufacturers benefit
only under the Shift scenario. The reason, again, is that we assume
that lower operating cost manufacturers accrue the same profit margin
regardless of the efficiency level, so as the cost of the product
increases, profits also increase. The higher operating cost
manufacturers, on the other hand, lose profits as the standard level
rises and the products face pricing pressure from the lower cost
manufacturers.

Table VI.10.--Change in Industry Net Present Value (%) Relative to Base--Comparison Between Lower and Higher Cost Manufacturers
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry relative cost 1 Reverse
-------------------------------------------------------------------------------- engineering
NAECA NAECA--14 year Roll-up Shift relative cost
-------------------- life -----------------------------------------------------------
Standard level -------------------- NAECA
Lower Higher Lower Higher Lower Higher -------------------
cost cost Lower Higher cost cost cost cost Lower Higher
cost cost cost cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
1................................................... 5 -5 6 -4 3 -16 7 9 5 -4
2................................................... 7 -17 9 -16 5 -31 12 14 7 -16

[[Page 59617]]

3................................................... 9 -19 11 -16 6 -32 14 16 8 -17
4................................................... 15 -19 19 -16 13 -31 21 19 12 -18
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 18-year lifetime unless otherwise noted.

For the group most negatively impacted, i.e., the higher cost
group, Table VI.11 presents the Return on Invested Capital (ROIC)
associated with the base case, and with each new standard level for the
NAECA and Roll-up efficiency mix scenarios, for industry relative costs
and an 18-year lifetime. A reduction in ROIC increases the likelihood
that the company will choose to exit the market or sell its assets
rather than to make the investments required to move to the new
efficiency level.

Table VI.11.--Return on Invested Capital (ROIC) in 2011 for Higher Cost
Manufacturers
------------------------------------------------------------------------
NAECA (in Roll-up (in
Standard level percent) percent)
------------------------------------------------------------------------
Base.................................... 13.3 13.3
1....................................... 12.3 10.7
2....................................... 10.2 8.4
3....................................... 10.0 8.3
4....................................... 9.6 8.3
------------------------------------------------------------------------

Table VI.12 provides a summary of the total investment required for
each trial standard level. Product conversion expenses include mostly
product development and testing costs. Capital investments include new
equipment, tooling, and floor space. Since these investments occur in
the years leading up to the effective date of the new standard, larger
investments equate to a more serious strain on cash flows in the near-
term.

Table VI.12.--Manufacturer Expenditures Related to New Efficiency Standards (million 1999 $)
----------------------------------------------------------------------------------------------------------------
Product
Trial standard level conversion Capital Total
expenses investments investment
----------------------------------------------------------------------------------------------------------------
Base............................................................ .............. .............. ..............
1............................................................... $ 31 $ 54 $ 85
2............................................................... 93 109 202
3............................................................... 110 138 248
4............................................................... 157 167 324
----------------------------------------------------------------------------------------------------------------

The TSD which accompanies today's proposed rule provides more
details on the MIA assumptions, methodology, results, and conclusions,
including the assessments of impacts on lower volume equipment
manufacturers and compressor manufacturers, which we estimate to be
similar in proportion to the impacts described above.
c. Impacts on Employment. Manufacturers stated uniformly that labor
requirements track materials costs. Since a new standard will increase
the amount and cost of material in each product, labor requirements are
expected to rise proportionally. However, the industry has recently
been experiencing rapid growth in sales volume and is now faced with
production capacity constraints. Since new efficiency standards will
increase the product's size and complexity, many manufacturers will
need to add additional capacity to accommodate the new products and
retain their sales volumes. It is possible that those companies will
choose to add the new capacity outside of the United States. This
effect could keep domestic employment levels flat or result in
employment loss if companies choose to shift current production to new
facilities in other countries.
d. Impacts on Manufacturing Capacity. It is likely that a central
air conditioner and heat pump standard would increase central air
conditioner and heat pump production capacity in the United States.
Since more efficient conventional heat exchangers are also larger,
plants that now face capacity constraints will be unable to produce as
many heat exchangers as they can under existing standards. Five of the
six manufacturers we interviewed identified capacity constraints during
peak production periods.
e. Impact on Lower Volume Manufacturers. Converting from a
company's current basic product line involves creating, testing, and
moving a new design into production. These tasks have associated
capital investments. Manufacturers of niche products and those who
produce only coils and fancoils, because of their need to spread these
investments over smaller

[[Page 59618]]

production volumes, may be affected more negatively than major
manufacturers by an increase in efficiency standards. This is
particularly true for those manufacturers that compete head-to-head
with major manufacturers in some product lines, and less true for coil-
only manufacturers. These results occur separately from any technical
considerations related to the manufacturer's ability to modify its
products to bring them into compliance with a new standard. Technical
considerations are typically more important for niche manufacturers
than for major manufacturers and have more severe consequences related
to increased production costs or loss of sales volume due to increased
price. Overall, if provisions are made in the standard for niche
products that face severe technological constraints, we would not
expect the impacts on lower-volume manufacturers as a group to be
disproportionate with those of the industry as a whole.
2. Life-Cycle Cost
More efficient central air conditioners and heat pumps would affect
consumers in two ways: Annual operating expense would decrease and
purchase price would increase. We analyzed the net effect by
calculating the LCC. Inputs required for calculating LCC include total
installed costs (i.e., equipment price plus installation costs), annual
energy savings, average and marginal electricity rates, electricity
price trends, repair costs, maintenance costs, equipment lifetime, and
discount rates.
The output of the LCC model is a mean LCC savings for each product
class as well as a probability distribution or likelihood of LCC
reduction or increase. The LCC analysis for today's proposed rule
introduces a new concept with regard to the percentage of consumers
(both residential and commercial) that are negatively impacted by an
increase in the minimum efficiency standard. (For the Supplemental
ANOPR, all consumers that would incur an LCC increase were considered
to be adversely impacted by an increase in the standard. This included
even consumers that would incur a relatively small LCC increase e.g.,
as small as $10, as compared to a relatively large baseline level total
LCC. Note that the baseline LCC is approximately $5,000 for central air
conditioners and $10,000 for heat pumps.)
The revised analysis defines negative impacts by including in this
category only those consumers which incur LCC increases greater than 2%
of the baseline LCC. For central air conditioners, this translates to
an LCC increase of approximately $100 or an annual expense of
approximately $5 over the lifetime of the system. Table VI.13
summarizes the baseline LCCs for split system and single package
central air conditioners and heat pumps and also provides the 2%
threshold at which consumers are considered to be adversely impacted.

Table VI.13.--Baseline Life-Cycle Costs and Threshold for Adverse
Impacts
------------------------------------------------------------------------
Threshold for
Baseline life- adverse
Product class cycle cost impacts: 2% of
Baseline LCC
------------------------------------------------------------------------
Split Air Conditioners.................. $5,170 $103
Split Heat Pumps........................ 9,679 194
Single Package Air Conditioners......... 5,629 113
Single Package Heat Pumps............... 9,626 193
------------------------------------------------------------------------

Table VI.14 depicts the LCC results for split system and single
package central air conditioners and heat pumps. The table shows the
average LCC values for the baseline and each Trial Standard Level.
Since manufacturer cost data were not available for the 18 SEER
efficiency levels, 15 SEER cost data were used for all 18 SEER
calculations resulting in 18 SEER LCC results which underestimate their
true cost level. Table VI.14 also provides for each product class the
difference in LCC at each efficiency level relative to the baseline.
The differences represent either an LCC savings or an LCC cost
increase. In addition, the table shows the subset of consumers (both
residential and commercial) at each efficiency level who are impacted
in one of three ways: Consumers who achieve significant net LCC savings
(i.e., LCC savings greater than 2% of the baseline LCC), consumers who
are impacted in an insignificant manner by having either a small
reduction or small increase in LCC (i.e., within 2% of the
baseline LCC), or consumers who achieve a significant net LCC increase
(i.e., an LCC increase exceeding 2% of the baseline LCC).

Table VI.14.--Summary of LCC Results Based on ARI Mean Manufacturer Costs and a 18.4 Year Average Lifetime
----------------------------------------------------------------------------------------------------------------
Percent of consumers with
Average LCC --------------------------------------
Product class Efficiency Average LCC (savings) No
level costs Net savings significant Net costs
(>2%) impact (>2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air 10 $5,170 ............ ........... ........... ...........
Conditioner.....................
11 5,126 ($44) 23 68 9
12 5,125 (45) 27 34 39
13 5,199 29 25 17 58
18 5,725 555 15 4 81
Split System Heat Pump........... 10 9,679 ............ ........... ........... ...........
11 9,529 (150) 30 70 0
12 9,437 (242) 42 55 3
13 9,464 (215) 39 39 22
18 9,955 276 23 11 66

[[Page 59619]]

Single Package Air Conditioner... 10 5,629 ............ ........... ........... ...........
11 5,649 20 16 47 37
12 5,600 (29) 26 30 44
13 5,804 175 18 11 71
18 6,370 741 12 4 84
Single Package Heat Pump......... 10 9,626 ............ ........... ........... ...........
11 9,492 (134) 28 72 0
12 9,372 (254) 44 49 7
13 9,514 (112) 33 31 36
18 9,922 296 24 10 66
----------------------------------------------------------------------------------------------------------------

As discussed previously for the presentation of energy savings and
payback period results, we have investigated two scenarios where lower
estimates of the manufacturer costs (reverse engineering) and system
lifetime (retirement function with 14 year average lifetime without
compressor replacement costs) were analyzed. Table VI.15 presents the
results for the manufacturer cost scenario while Table VI.16 presents
the results for the lifetime scenario.

Table VI.15.--Summary of LCC Results Based on Reverse Engineering Manufacturer Costs
----------------------------------------------------------------------------------------------------------------
Percent of consumers with
Average LCC --------------------------------------
Product class Efficiency Average LCC (savings) No
level costs Net savings significant Net costs
(>2%) impact (>2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air 10 $5,170 ............ ........... ........... ...........
Conditioner.....................
11 5,095 ($75) 28 70 2
12 5,057 (113) 35 40 25
13 5,057 (113) 34 27 39
18 5,307 137 25 7 68
Split System Heat Pump........... 10 9,679 ............ ........... ........... ...........
11 9,470 (209) 40 60 0
12 9,314 (365) 58 42 0
13 9,307 (372) 52 42 6
18 9,720 41 28 15 57
Single Package Air Conditioner... 10 5,629 ............ ........... ........... ...........
11 5,551 (78) 27 72 1
12 5,466 (163) 40 51 9
13 5,600 (29) 28 20 52
18 5,905 276 21 6 73
Single Package Heat Pump......... 10 9,626 ............ ........... ........... ...........
11 9,419 (207) 39 61 0
12 9,205 (421) 66 34 0
13 9,273 (353) 50 38 12
18 9,460 (166) 37 15 48
----------------------------------------------------------------------------------------------------------------

Table VI.16.--Summary of LCC Results Based on ARI Mean Manufacturer Cost and 14-Year Average Lifetime
----------------------------------------------------------------------------------------------------------------
Percent of consumers with
Average LCC --------------------------------------
Product class Efficiency Average LCC (savings) No
level costs (in Net savings significant Net costs
dollars) (>2%) impact (>2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air 10 $4,682 ........... ........... ........... ...........
Conditioner......................
11 4,650 $(32) 22 69 9
12 4,672 (10) 24 31 45
13 4,769 87 21 15 64
18 5,336 654 12 3 85
Split System Heat Pump............ 10 8,747 ........... ........... ........... ...........
11 8,623 (124) 27 73 0
12 8,587 (160) 35 58 7
13 8,630 (117) 33 37 30
18 9,184 437 18 9 73
Single Package Air Conditioner.... 10 5,150 ........... ........... ........... ...........
11 5,182 32 14 46 40

[[Page 59620]]

12 5,157 7 22 29 49
13 5,378 228 14 10 76
18 6,011 861 9 3 88
Single Package Heat Pump.......... 10 8,747 ........... ........... ........... ...........
11 8,623 (124) 27 73 0
12 8,587 (160) 35 58 7
13 8,630 (117) 33 37 30
18 9,184 437 18 9 73
----------------------------------------------------------------------------------------------------------------

3. Net Present Value and Net National Employment
The net present value analysis is a measure of the cumulative
benefit or cost to the Nation of standards. As with the determination
of national energy savings, five different scenarios were analyzed for
each trial standard level consisting of variations on: (1) Electricity
price and housing projections; (2) equipment efficiency distributions;
(3) manufacturer cost estimates; (4) equipment lifetime; and (5)
societal discount rate. Electricity price and housing projections were
based on three different AEO 2000 forecasts: (1) Reference Case, (2)
High Growth Case, and (3) Low Growth Case. Three efficiency scenarios
were analyzed which forecast the equipment efficiency distribution
after new standards were assumed to take effect: (1) NAECA scenario,
(2) Roll-up scenario, and (3) Shift scenario. Manufacturer costs were
based on ARI mean cost estimates. Equipment lifetime was assumed to be
18.4 years, coupled with the inclusion of compressor replacement costs.
A societal discount rate of 7 was assumed. The range of NPVs are
reported in Table VI.17.

Table VI.17.--Net Present Value Variation With Electricity Price and Housing Projections
----------------------------------------------------------------------------------------------------------------
Net present value for units sold from 2006 to 2030 (billion 98$) 1
Trial standard level --------------------------------------------------------------------------
NAECA Roll-up Shift
----------------------------------------------------------------------------------------------------------------
1.................................... 0...................... 1...................... 0 to -1.
2.................................... -1..................... 0 to 1................. -3 to -4.
3.................................... -1 to -2............... 0 to -1................ -5.
4.................................... -5 to -6............... -4..................... -10.
5.................................... -22.................... -22.................... -22.
----------------------------------------------------------------------------------------------------------------
1 Based on ARI mean manufacturer costs, 18.4-year retirement function with compressor replacement, and a 7%
discount rate.

In order to show the significance of the NPVs in Table V.17 to the
various input assumptions, Tables VI.18 through VI.21 report the range
of NPV results for a range of assumptions and scenarios relative to the
total national equipment and operating costs for all central air-
conditioning and heat pump equipment under the base case (i.e., in the
absence of new efficiency standards). The results in Table VI.18 are
based on the AEO 2000 Reference Case forecast of electricity prices and
housing. The total costs are presented for the base case and each Trial
Standard Level. In addition, the NPV (the difference in total costs
between the base case and trial standard level), as well as the NPV as
a percentage of the ``Base Case Total Costs,'' are calculated for each
trial standard level.

Table VI.18.--Net Present Values Relative to Base Case Total Equipment and Operating Costs 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Efficiency scenario
-----------------------------------------------------------------------------------------------------------
Base case NAECA Roll-up Shift
total -----------------------------------------------------------------------------------------------------------
TSL costs NPV NPV NPV
(billion Total ------------------------ Total ------------------------ Total -----------------------
98$) costs as percent costs as percent costs as percent
(billion (billion of base (billion (billion of base (billion (billion of base
98$) 98$) case total 98$) 98$) case total 98$) 98$) case total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1............................... 381 381 0 0.0 381 1 0.2 385 0 -0.1
2............................... 381 382 -1 -0.3 381 0 0.0 388 -3 -0.9
3............................... 381 383 -2 -0.5 382 -1 -0.2 390 -5 -1.4
4............................... 381 387 -5 -1.4 386 -4 -1.1 395 -10 -2.5
5............................... 381 403 -22 -5.8 403 -22 -5.8 407 -22 -5.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 Based on AEO 2000 Reference Case, ARI mean manufacturer costs, 18.4-year retirement function with compressor replacement, and a 7% discount rate.
Values rounded to the nearest $1 billion.

[[Page 59621]]

Tables VI.19 through VI.21 show how the three scenarios, i.e.,
reverse engineering costs, 14-year average life, and 3% discount
rate,\17\ impact the net present value. The three scenarios were
investigated only for the NAECA efficiency scenario and the AEO
Reference Case electricity price and housing projection.
---------------------------------------------------------------------------

\17\ A societal discount rate of 3% value was investigated as a
scenario in accordance with the Office of Management and Budget's
(OMB) Guidelines to Standardize Measures of Costs and Benefits and
the Format of Accounting Statements.

Table V.19.--Net Present Values Results Based on Reverse Engineering Manufacturer Costs 1
----------------------------------------------------------------------------------------------------------------
Trial standard level
Base case -----------------------------------------------
Trial standard level total costs Net present As percent of
(billion 98$) Total cost value (billion base case
(billion 98$) 98$) total costs
----------------------------------------------------------------------------------------------------------------
1............................................... 379 378 2 0.4
2............................................... 379 377 2 0.5
3............................................... 379 378 1 0.4
4............................................... 379 379 0 0.0
5............................................... 379 390 -10 -2.7
----------------------------------------------------------------------------------------------------------------
1 Based on AEO 2000 Reference Case, NAECA efficiency scenario, 18.4-year retirement function with compressor
replacement, and a 7% discount rate. Values rounded to the nearest $1 billion.

Table V1.20.--Net Present Values Results Based on 14-Year Average Lifetime 1
----------------------------------------------------------------------------------------------------------------
Trial standard level
Base case -----------------------------------------------
Trial standard level total costs Net present As percent of
(billion 98$) Total cost value base case
(billion 98$) (billion 98$) total costs
----------------------------------------------------------------------------------------------------------------
1............................................... 363 364 0 0.0
2............................................... 363 365 -2 -0.5
3............................................... 363 366 -3 -0.8
4............................................... 363 370 -7 -1.9
5............................................... 363 389 -25 -6.9
----------------------------------------------------------------------------------------------------------------
1 Based on AEO 2000 Reference Case, NAECA efficiency scenrio, ARI mean manufacturer costs, and a 7% discount
rate. Values rounded to the nearest $1 billion.

Table VI.21.--Net Present Values Results Based on 3% Discount Rate 1
----------------------------------------------------------------------------------------------------------------
Trial standard level
Base case -----------------------------------------------
Trial standard level total costs Net present As percent of
(billion 98$) Total cost value base case
(billion 98$) (billion 98$) total costs
----------------------------------------------------------------------------------------------------------------
1............................................... 712 708 3 0.5
2............................................... 712 708 4 0.5
3............................................... 712 708 3 0.4
4............................................... 712 714 -3 -0.4
5............................................... 712 746 -35 -4.9
----------------------------------------------------------------------------------------------------------------
1 Based on AEO 2000 Reference Case, NAECA efficiency scenario, ARI mean manufacturer costs, and 18.4-year
retirement function with compressor replacement. Values rounded to the nearest $1 billion.

The Department committed in its 1996 Process Improvement Rule to
develop estimates of the employment impacts of proposed standards in
the economy in general. 61 FR 36983.
As discussed above, energy efficiency standards for central air
conditioners and heat pumps are expected to reduce electricity bills
for residential and commercial consumers. The resulting net savings are
expected to be redirected to other forms of economic activity. These
shifts in spending and economic activity are expected to affect the
demand for labor, but there is no generally accepted method for
estimating these effects.
One method to assess the possible effects on the demand for labor
of such shifts in economic activity is to compare sectoral employment
statistics developed by the Labor Department's Bureau of Labor
Statistics (BLS). The BLS regularly publishes its estimates of the
number of jobs per million dollars of economic activity in different
sectors of the economy, as well as the jobs created elsewhere in the
economy by this same economic activity. BLS data indicate that
expenditures in the electric sector generally are associated with fewer
jobs (both directly and indirectly) than expenditures in other sectors
of the economy. There are many reasons for these differences, including
the capital-intensity of the utility sector and wage differences.
In developing this proposed rule, the Department attempted a more
precise analysis of the impacts on national labor demand using an
input/output model of the U.S. economy. The model characterizes the
interconnections among 35 economic sectors using the data from the
Bureau of Labor Statistics. Since the electric utility sector is more
capital-intensive and less labor-intensive than other sectors (see
Bureau of Economic Analysis, Regional Multipliers: A User Handbook for
the

[[Page 59622]]

Regional Input-Output Modeling System (RIMS II), Washington, D.C., U.S.
Department of Commerce, 1992), a shift in spending away from energy
bills into other sectors would be expected to increase overall
employment. But for this analysis, since the increased manufacturing
costs to the nation of meeting a new efficiency standard are relatively
large, there is an overall decrease in national employment. The results
of the Department's analysis are shown in Chapter 12 of the TSD.
While this input/output model suggests the proposed central air
conditioner and heat pump standards are likely to decrease the net
demand for labor in the economy, the losses would most likely be very
small relative to total national employment. For several reasons,
however, even these modest losses are in doubt:
Unemployment is now at the lowest rate in 30 years. If
unemployment remains very low during the period when the proposed
standards are put into effect, it is unlikely that the standards alone
could result in any net decrease in national employment levels.
Neither the BLS data nor the input-output model used by
DOE include the quality or wage level of the jobs. One reason that the
demand for labor decreases in the model may be that the jobs expected
to be created pay more than the jobs being lost. The losses from any
potential employment reduction would be offset if job quality and pay
are increased.
The net benefits from potential employment changes are a
result of the estimated net present value of benefits or losses likely
to result from the proposed standards. It may not be appropriate to
separately identify and consider any employment impacts beyond the
calculation of net present value.
Taking into consideration these concerns regarding the
interpretation and use of the employment impacts analysis, the
Department concludes only that the proposed central air conditioner and
heat pump standards are likely to result in no appreciable job losses
to the nation.
Public comments are solicited on the validity of the analytical
methods used and the appropriate interpretation and use of the results
of this analysis.
4. Impact on Utility or Performance of Products
As detailed in Section V, in establishing classes of products we
have tried to eliminate any degradation of utility or performance in
the products under consideration in this rulemaking.
5. Impact of Any Lessening of Competition
The Act directs the Department to consider any lessening of
competition that is likely to result from standards. It further directs
the Attorney General to determine the impact, if any, of any lessening
of competition likely to result from a proposed standard and transmit
such determination to the Secretary, not later than 60 days after the
publication of a proposed rule, together with an analysis of the nature
and extent of such impact. EPCA section 325(o)(2)(B)(i)(V) and (B)(ii),
42 U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii).
In order to assist the Attorney General in making such a
determination, the Department has provided the Department of Justice
(DOJ) with copies of this notice and the TSD for review. At DOE's
request, the DOJ reviewed the manufacturer impact analysis interview
questionnaire to ensure that it would provide insight concerning any
lessening of competition due to any proposed trial standard levels.
6. Need of the Nation to Save Energy
Enhanced energy efficiency improves the nation's energy security,
and reduces the environmental impacts of energy production. Improved
efficiency of central air conditioners and heat pumps is also likely to
improve the reliability of the nation's electric system. The energy
savings from central air conditioner and heat pump standards result in
reduced emissions of carbon and NOX. Cumulative emissions
savings over the 16-year period modeled are shown in Table VI.22.
Emission savings are based on the use of: (1) The ARI mean manufacturer
cost data and (2) an 18.4-year average lifetime. The results presented
in Table VI.22 are based only on the AEO 2000 Reference Case for
electricity price and housing projections and the NAECA efficiency
scenario.

Table VI.22.--Cumulative Emissions Reductions Based on AEO 2000
Reference Case and NAECA Efficiency Scenario (2006-2020)
------------------------------------------------------------------------
Emissions reductions
Trial standard level -------------------------------
Carbon (Mt) NOX (kt)
------------------------------------------------------------------------
1....................................... 13.4 37.2
2....................................... 23.7 67.9
3....................................... 27.4 78.8
4....................................... 33.6 102.5
5....................................... 63.7 193.7
------------------------------------------------------------------------

The impact of varying electricity price and housing projections
(i.e., different AEO cases) as well as different efficiency scenarios
were considered only for the Trial Standard Level 3. Table VI.23 shows
how carbon and NOX emissions are impacted by the different
projections and scenarios.

Table VI.23.--Cumulative Emissions Reductions for Proposed Standard (2006-2020) and the impact of Different Electricity Price/Housing Projections and
Efficiency Scenarios
--------------------------------------------------------------------------------------------------------------------------------------------------------
Emission
Electricity price and housing projection Efficiency scenario -------------------------------
Carbon (Mt) NOX (kt)
--------------------------------------------------------------------------------------------------------------------------------------------------------
AEO Reference Case............................................ NAECA 27.4 78.8
AEO Reference Case............................................ Roll-up 26.2 77.8
AEO Reference Case............................................ Shift 30.2 89.3
AEO Low Growth Case........................................... NAECA 23.4 80.8
AEO High Growth Case.......................................... NAECA 34.1 75.8
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 59623]]

The annual carbon emission reductions range up to 6.6 Mt in 2020
and the NOX emissions reductions up to 24.5 kt in 2015.;
\18\ \19\ Total carbon and NOX emissions for each trial
standard level are reported in the Environmental Assessment, in the
TSD.
---------------------------------------------------------------------------

\18\ Million metric tons (Mt).
\19\ Thousand metric tons (kt).
---------------------------------------------------------------------------

7. Other Factors
This provision allows the Secretary of Energy, in determining
whether a standard is economically justified, to consider any other
factors that the Secretary deems to be relevant. EPCA Section
325(o)(2)(B)(i)(VI), 42 U.S.C. 6295(o)(2)(B)(i)(VI). The Secretary has
decided that the impacts of the proposed standards on peak power
requirements and electric utility system reliability, the impacts of
proposed standards on those subgroups of consumers who are at or below
the poverty line, and the impacts of proposed standards on consumers
and manufacturers which might be required by proposed environmental
regulations to incorporate ozone reduction technologies in air
conditioning and heat pump equipment, are relevant to the economic
justification of the standards, and has decided to consider such
impacts in this rulemaking.
Peak power impacts are determined as part of the analysis to
estimate impacts on electric utilities from increases in the central
air conditioner and heat pump standard. NEMS-BRS is used to estimate
peak power impacts by calculating the reduction in installed generation
capacity due to an increase in the minimum efficiency standard. Table
VI.24 shows the estimated reductions in installed generation capacity,
in giga-watts (GW), in the year 2020 due to each of the trial standard
levels. Of the installed generating capacity avoided, 13% would have
been provided by coal power plants. The remaining percentage (87%)
would have been supplied by either gas-fired, oil-fired, or dual-fired
power plants. The results presented in Table VI.24 are based only on
the AEO 2000 Reference Case for electricity price and housing
projections and the NAECA efficiency scenario.

Table VI.24.--Installed Generation Capacity Reductions in the Year 2020
Based on AEO 2000 Reference Case and NAECA Efficiency Scenario
------------------------------------------------------------------------
Installed
generating
Trial standard level capacity
reduction (GW)
------------------------------------------------------------------------
1....................................................... 6.4
2....................................................... 10.6
3....................................................... 12.3
4....................................................... 15.4
5....................................................... 28.6
------------------------------------------------------------------------

The impact of varying electricity price and housing projections
(i.e., different AEO cases) as well as different efficiency scenarios
were considered only for the proposed standard (trial standard level
3). Table VI.25 shows how installed generation capacity is impacted by
the different projections and scenarios.

Table VI.25.--Installed Generation Capacity Reductions in the Year 2020 for Trial Standard Level 3 and the
Impact of Different Electricity Price/Housing Projections and Efficiency Scenarios
----------------------------------------------------------------------------------------------------------------
Installed generating
Electricity price and housing projection Efficiency scenario capacity reduction (GW)
----------------------------------------------------------------------------------------------------------------
AEO Reference Case.............................. NAECA................................ 12.3
AEO Reference Case.............................. Roll-up.............................. 11.9
AEO Reference Case.............................. Shift................................ 13.6
AEO Low Growth Case............................. NAECA................................ 11.4
AEO High Growth Case............................ NAECA................................ 12.5
----------------------------------------------------------------------------------------------------------------

As discussed above, the impact of the peak power requirements of
any single end-use on electric utility system reliability is highly
uncertain. Thus, we plan on conducting further research to determine
what connection, if any, exists between end-use peak demand reductions
and system reliability. If such research is completed and applicable to
this rulemaking, we will make it available for public review during the
comment period on today's proposed rule.
Consumer subgroup impacts have been estimated by determining the
LCC impacts of the trial standard levels on those consumers who are at
or below the poverty line (e.g., for a family of four, this constitutes
a household income of less than $16,036). To perform this calculation,
we used the subset of RECS 97 data for households that are considered
low-income.\20\ Table VI.26 summarizes the LCC impacts on those low-
income consumers who utilize central air conditioners and heat pumps.
The results in Table VI.26 are based on ARI mean manufacturer costs and
an 18.4-year average lifetime.
---------------------------------------------------------------------------

\20\ Approximately 7% of the RECS 97 households with central air
conditioners and 9% of the households with heat pumps met this
criteria.

Table VI.26.--Summary of LCC Results on Low-Income Consumers Based on ARI Mean Manufacturer Costs and an 18.4-
Year Average Lifetime
----------------------------------------------------------------------------------------------------------------
Percent of consumers with
Average LCC --------------------------------------
Product class Efficiency Average LCC (savings) No
level costs Net savings significant Net costs
(>2 %) impact (>2 %)
----------------------------------------------------------------------------------------------------------------
Split System Central Air 10 $4,906
Conditioner......................
11 4,887 (19) 17 66 17
12 4,903 (3) 20 29 51
13 5,007 101 17 14 69
18 5,598 692 10 2 88
Split System Heat Pump............ 10 8,965

[[Page 59624]]

11 8,890 (75) 16 84 0
12 8,862 (103) 27 64 9
13 8,948 (17) 25 40 35
18 9,610 645 11 8 81
Single Package Air Conditioner.... 10 5,327
11 5,283 (44) 11 42 47
12 5,313 (14) 20 27 53
13 5,568 241 12 9 79
18 6,158 831 10 2 88
Single Package Heat Pump.......... 10 9,149
11 9,057 (92) 21 78 1
12 8,973 (176) 35 53 12
13 9,145 (4) 25 27 48
18 9,619 470 18 8 74
----------------------------------------------------------------------------------------------------------------

In comparing the LCC results on the subgroup of consumers who are
low-income (Table V.26) versus all central air conditioner and heat
pump consumers (Table V.14), it appears that low-income consumers have
lower savings at the different trial standard levels than the general
population of central air conditioner and heat pump consumers. Table
V.27 directly compares the LCC impacts of the proposed standard on low-
income and all consumers.

Table VI.27.--Comparison of LCC Impacts of the Proposed Standard on All Consumers vs. Low-Income Consumers
----------------------------------------------------------------------------------------------------------------
Average LCC (savings) costs Percent of consumers with net
Efficiency -------------------------------- costs (>2 % of baseline LCC)
Product class level -------------------------------
All consumers Low-income All consumers Low-income
----------------------------------------------------------------------------------------------------------------
Split System Central Air 12 ($45) ($3) 39 51
Conditioner....................
Split System Heat Pump.......... 13 (215) (17) 22 35
Single Package Air Conditioner.. 12 (29) (14) 44 53
Single Package Heat Pump........ 13 (112) (4) 36 48
----------------------------------------------------------------------------------------------------------------

The U.S. Environmental Protection Agency (EPA) requires states to
develop a state implementation plan (SIP) for most areas that are not
in compliance with the National Ambient Air Quality Standards (NAAQS),
or classified as nonattainment. In Texas, four areas are in
nonattainment of the EPA's one-hour NAAQS for ozone: Beaumont-Port
Arthur, El Paso, Dallas-Fort Worth, and Houston-Galveston. On August 9,
2000, The Texas Natural Resource Conservation Commission (TNRCC), the
lead environmental agency for the state of Texas, approved for
publication and public hearing proposed revisions to the state
implementation plan (SIP), in order to reduce ground-level ozone in the
Houston/Galveston (HGA), Dallas/Fort Worth (DFW), and Beaumont/Port
Arthur (BPA) ozone nonattainment areas, as well as in the 95-county
central and eastern Texas. The proposed rules consist of 23 separate
requirements applying to various regions of the state. One of the
proposals mandates the use of a technology in the affected areas that
will reduce ozone from ambient air that is drawn across the external
heat exchanger units of air-cooled air conditioning units, including
heat pumps. The proposed rule would require, after January 1, 2002,
that all central air conditioners sold in the specified areas of Texas
have ozone reduction technology installed.
The ozone reduction technology is a proprietary catalyst called
PremAir, manufactured by the Engelhard Corporation. The catalyst is
incorporated in air conditioners in two ways: by coating the condenser
coils, or by installing an insert next to the condenser coil. The
Department is required, by the Process Rule, to understand the costs
and benefits of standards, and the distribution of those costs among
consumers, manufacturers and others, and the uncertainty associated
with these costs and benefits. Any adverse impacts on significant
subgroups and uncertainty concerning adverse impacts must be fully
considered in selecting a standard. If the introduction of this
technology in Texas, and possibly other jurisdictions, would create new
consumer subgroups or would significantly change the ability of
equipment manufacturers to meet the new efficiency standard or the cost
required to do so, the Department would factor that information into
its decision making for this rule.
This technology has the potential for affecting the price and
efficiency of central air conditioners. For example, DOE is aware of a
range of estimates of what this technology would add to the cost of
central air conditioners. The costs of this technology are estimated to
range between $42 and $446 per 12,000 Btu/hr of air conditioner
capacity. As to possible effects of the technology on the efficiency of
central air conditioners, DOE understands several designs of catalyst-
treated air conditioners have been tested by Intertek Testing Services
(ITS). DOE understands the test results show no impact on efficiency
for coated condenser coils, and a roughly 2%

[[Page 59625]]

reduction in efficiency for the catalyst insert.
Manufacturers could also be affected by the ozone reduction
requirement. The higher purchase costs of new air conditioners could
alter consumers' decisions on repairing or replacing equipment, which
would affect air conditioner sales and impact manufacturers. If the
effect applies to a significant fraction of units sold each year, the
Department's current manufacturer impact analysis may underestimate the
impact on manufacturers.
After reviewing the available information, DOE is not certain as to
the impacts of any ozone reduction requirements that the TNRCC may
adopt. The proposal is one of 23 requirements TNRCC may adopt and it is
uncertain whether this requirement will be included in their final
rule. Even if the requirement is adopted, it is unclear what, if any,
effect the requirement would have on efficiency. Finally, DOE believes
such a requirement may have an impact on manufacturers. DOE estimates a
potential impact on 800,000 central air conditioner shipments per year
covered by the TNRCC proposal, or approximately 13% of total shipments.
This potential requirement was not included in today's proposed rule
because of uncertainty about whether the TNRCC will include the
catalyst requirement in their SIP. DOE invites comments on the status
of the TNRCC deliberations and whether this potential requirement
should be considered.

E. Conclusion

Section 325(o)(2)(A) of the Act, 42 U.S.C. 6295(o)(2)(A), specifies
that any new or amended energy conservation standard for any type (or
class) of covered product shall be designed to achieve the maximum
improvement in energy efficiency which the Secretary determines is
technologically feasible and economically justified. In determining
whether a standard is economically justified, the Secretary must
determine whether the benefits of the standard exceed its burdens. EPCA
section 325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i). The amended
standard must ``result in significant conservation of energy.'' EPCA
section 325(o)(3)(B), 42 U.S.C. 6295(o)(3)(B).
We consider the impacts of standards at each of five trial
standards levels, beginning with the Max Tech Level, i.e., Trial
Standard Level 5. We then consider less efficient levels. Trial
Standard Level 3 is a combination of different efficiency levels for
the different classes. It combines the SEER values for air conditioners
from Trial Standard Level 2 (12 SEER) with the SEER values for heat
pumps from Trial Standard Level 4 (13 SEER). By combining efficiency
levels in this way, the Department is able to evaluate the impacts of
different combinations of standard levels to make an informed decision
on the merits of different efficiency combinations.
To aid the reader as we discuss the benefits or burdens of the
trial levels, we have included a summary of the analysis results in
Tables VI.28 and VI.29.\21\ Table VI.28 presents a summary of analysis
results based on ARI mean manufacturing costs, NAECA and Roll-up
efficiency scenarios and 7% and 3% societal discount rate scenarios.
Table VI.29 presents a summary of analysis results based on
manufacturing costs obtained from the reverse engineering analysis for
the NAECA efficiency scenario and 7% and 3% societal discount rate
scenario. Both tables assume an 18.4-year equipment lifetime, including
one compressor replacement. The reverse engineering scenario results in
Table VI.29 are limited to single scenarios which highlight the impact
of manufacturing costs on the consumer, manufacturers, national energy
savings, and NPV.
---------------------------------------------------------------------------

\21\ All cumulative effects that are not monetary are not
discounted. Monetary effects are discounted to 1998 dollars.

Table VI.28.--Summary of Analysis Results Based on ARI Mean Manufacturer Costs \1\
----------------------------------------------------------------------------------------------------------------
Trial std 1 Trial std 2 Trial std 3 Trial std 4 Trial std 5
----------------------------------------------------------------------------------------------------------------
Total Quads Saved \2\........... 1.7-1.8 2.9-3.2 3.4-3.6 4.2-4.5 8.1-8.7
Generation Capacity Offset 6.4 10.6 12.3 15.4 28.6
(GW)\3\........................
NPV ($billion): \4\
7% Discount Rate............ 0 -1 -1 to -2 -5 to -6 -22
3% Discount Rate............ 3 4 3 -3 -35
Emissions: \5\
Carbon Equivalent (Mt)...... 13.4 23.7 27.4 33.6 63.7
NOX (kt).................... 37.2 67.9 78.8 102.5 193.7
Cumulative Change in INPV ($
million): \6\
NAECA....................... (37) (186) (197) (183)
Roll-up..................... (181) (362) (367) (335)
Life Cycle Cost ($):
Split AC.................... ($44) ($45) ($45) $29 $555
Packaged AC................. $20 ($29) ($29) $175 $741
Split HP.................... ($150) ($242) ($215) ($215) $276
Packaged HP................. ($134) ($254) ($112) ($112) $296
Payback (years):
Split AC.................... 10.6 12.6 12.6 16 36
Packaged AC................. 16.1 14 14 21.8 48.8
Split HP.................... 5.5 7.2 9.3 9.3 17.3
Packaged Heat Pump.......... 8.1 8.7 13.2 13.2 19.4
----------------------------------------------------------------------------------------------------------------
\1\ Estimates are based on 18.4-year lifetime.
\2\ Based on AEO 2000 reference, high and low growth cases, and NAECA efficiency distributions.
\3\ Reductions in installed generation capacity in the year 2020, based on AEO 2000 reference case, NAECA
efficiency scenario.
\4\ Based on NAECA efficiency distribution and 7 % discount rate. Range reflects AEO 2000 reference, high and
low growth cases.
\5\ Based on AEO 2000 reference case, NAECA efficiency scenario, and ARI mean manufacturing costs.
\6\ Not calculated at Trial Standard Level 5.

[[Page 59626]]

Table VI.29.--Summary of Analysis Results Based on Reverse Engineering Manufacturing Costs) \1\
----------------------------------------------------------------------------------------------------------------
Trial std 1 Trial std 2 Trial std 3 Trial std 4 Trial std 5
----------------------------------------------------------------------------------------------------------------
Total Quads Saved \2\........... 1.7-1.8 2.9-3.2 3.4-3.7 4.3-4.6 8.4-9.0
Generation Capacity Offset (GW) 6.4 10.6 12.3 15.4 28.6
\3\............................
NPV ($billion):
7% Discount Rate \2\........ 1 to 2 2 1 to 2 0 to 1 -10 to -11
3% Discount Rate............ 6 10 10 9 -8
Emissions: \3\
Carbon Equivalent (Mt)...... 13.4 23.7 27.4 33.6 63.7
NOX (kt).................... 37.2 67.9 78.8 102.5 193.7
Cumulative Change in INPV ($
million):
NAECA....................... (30) (159) (171) (169)
Roll-up \3\................. (181) (362) (367) (335)
Life Cycle Cost ($):
Split AC.................... ($75) ($113) ($113) ($113) $137
Packaged AC................. ($78) ($163) ($163) ($29) $276
Split HP.................... ($209) ($365) ($372) ($372) $41
Packaged HP................. ($207) ($421) ($353) ($353) ($166)
Payback (years):
Split AC.................... 7.8 9.8 11.3 11.3 19.6
Packaged AC................. 7.7 7.5 7.5 14.5 25.1
Split HP.................... 2.7 3.9 6.4 6.4 14.0
Packaged Heat Pump.......... 4.6 4.0 8.4 8.4 12.81
----------------------------------------------------------------------------------------------------------------
\1\ Based on 18 year lifetime, NAECA efficiency scenario and AEO 2000 reference case.
\2\ Variation based on AEO 2000 reference, low and high growth case.
\3\ Based on ARI mean manufacturer costs as reported in Table VI.28.

First we considered Trial Standard Level 5, the most efficient
level for each of four classes, representing uniform 18 SEER
requirements. Trial Standard Level 5 saves between 8.1 and 8.7 Quads of
energy, a significant amount. The estimated reduction in installed
generating capacity is 28.6 GW, or roughly 73 large, 400 megawatt,
power plants.\22\ The forecasted reduction in generating capacity is
approximately 3.7% of current installed generating capacity and more
than 13% of the anticipated growth in capacity needed by 2020. The
emissions reductions of 63.7 Mt of carbon equivalent and 193.7 kt of
NOX are also significant. However, at this level, the vast
majority of consumers would experience an increase in LCC costs.
Purchasers of split central air-conditioners, the predominate class of
central air conditioner with 65% of the sales of central air
conditioners and heat pumps, would lose $555 over the life of their
appliance.\23\ Purchasers of split heat pumps, the predominate class of
heat pump, would lose $276.\24\ Moreover, the Department believes these
LCC results overstate the benefits of this trial standard level.
Because we did not have equipment cost estimates at this level, we used
instead the costs of 15 SEER equipment. DOE believes the costs of 18
SEER equipment would be higher than the 15 SEER costs and that, as a
result, the increase in life-cycle-costs would actually be greater than
our LCC analysis indicates. For the nation as a whole Trial Standard
Level 5 would have a net cost 22 billion dollars in NPV.\25\ The
Department did not calculate manufacturer impacts at this trial
standard level. The Department concludes that at this trial standard
level, the benefits of energy savings, generating capacity reductions
and emission reductions would be outweighed by the negative economic
impacts to the nation, to the vast majority of consumers and to the
manufacturers. Consequently, the Department concludes Trial Standard
Level 5, the Max Tech Level, is not economically justified.
---------------------------------------------------------------------------

\22\ DOE estimates 9 coal-fired power plants and 64 gas-fired
power plants can be avoided. See TSD, Chapter 11 and Appendix H.
\23\ Consumers would experience a $137 increase in life-cycle-
costs based on the Department's reverse engineering manufacturing
costs.
\24\ Consumers would experience a $41 increase in life-cycle-
costs based on the Department's reverse engineering manufacturing
costs.
\25\ At the 3% societal discount rate scenario, the nation would
have a net cost of 35 billion dollars. With the reverse engineering
equipment cost, the NPV is a net cost of 10 to 11 billion dollars at
the 7% discount rate and 8 billion dollars at 3%.
---------------------------------------------------------------------------

Next, we considered Trial Standard Level 4. This level specifies 13
SEER equipment for all product classes and would save between 4.2 and
4.5 Quads of energy, a significant amount. The estimated reduction in
installed generating capacity is 15.4 GW, or roughly 39 large, 400
megawatt, power plants.\26\ The forecasted reduction in generating
capacity is approximately 2% of current installed generating capacity
and more than 7% of the anticipated growth in capacity needed in 2020.
The emissions reductions would also be significant: 33.6 Mt of carbon
equivalent and 102.5 kt of NOX. The NPV of Trial Standard
Level 4 would have a net cost of between 5 and 6 billion dollars.\27\
The average LCC savings for consumers with split heat pumps would be
$215, based on ARI equipment costs.\28\ Owners of split air
conditioners could see their LCC increase by $29, based on ARI
costs.\29\
---------------------------------------------------------------------------

\26\ DOE estimates 5 coal-fired power plants and 34 gas-fired
power plants can be avoided. See TSD, Chapter 11 and Appendix H.
\27\ At the 3% societal discount rate scenario, the nation would
have a net cost of 3 billion dollars. With the reverse engineering
equipment cost, the NPV has a no net cost at the 7% discount rate
and a savings of 9 billion dollars at 3%.
\28\ Consumers would experience a $372 savings in life-cycle-
costs based on the Department's reverse engineering costs.
\29\ Consumers would experience a $133 savings in life-cycle-
costs based on the Department's reverse engineering manufacturing
costs.
---------------------------------------------------------------------------

Under Trial Standard Level 4, the air conditioning industry would
experience a NPV loss of between 169 and 335 million dollars. The range
of impacts is driven primarily by the assumption regarding the
distribution of air conditioner and heat pump efficiencies in the
market after implementation of the standard (NAECA or Roll-up). The
Department recognizes that the ability to maintain a full product line
is more difficult at higher standard levels and therefore places more
weight on the Roll-up scenario at Trial Standard Level 4. The
Department concludes that at Trial Standard Level 4 the benefits of
energy savings, generating capacity

[[Page 59627]]

reductions and emission reductions and the reduction in LCC for some
consumers are outweighed by the negative economic impacts on the
nation, increase in LCC for most consumers and manufacturer loss in
NPV. Consequently, the Department concludes Trial Standard Level 4 is
not economically justified.
Next, we considered Trial Standard Level 3. This level specifies 12
SEER for air conditioners and 13 SEER for heat pumps. The energy
savings are estimated to be between 3.4 and 3.6 quads, a significant
amount. The estimated reduction in installed generating capacity is
12.3 GW, or roughly 31 large, 400 megawatt, power plants.\30\ The
forecasted reduction in generating capacity is approximately 1.6% of
current installed generating capacity and more than 5% of the
anticipated growth in capacity needed in 2020. The emissions reductions
would also be significant: 27.4 Mt of carbon equivalent and 78.8 kt of
NOX. The national NPV of this trial standard level has a
range of net costs from 1 to 2 billion dollars, using ARI costs.\31\
\32\ All classes of product would have mean LCC savings. The average
LCC savings for consumers with split air conditioners would be $45,
using ARI costs.\33\ The average LCC savings for consumers with split
heat pumps would be $215, using ARI costs.\34\ As an additional LCC
analysis, DOE considered the effect of standards on low-income
consumers. DOE expects low-income consumers will experience less
savings than the population as a whole. (See TSD, Chapter 10). Under
this trial standard level, the air conditioning industry would
experience a NPV loss of between 171 and 367 million dollars depending
on whether the Roll-up or NAECA efficiency distribution scenario is
considered.
---------------------------------------------------------------------------

\30\ DOE estimates 4 coal-fired power plants and 27 gas-fired
power plants can be avoided. See TSD, Chapter 11 and Appendix H.
\31\ At the 3% societal discount rate scenario, the nation would
have a net savings of 3 billion dollars. With the reverse
engineering equipment cost, the NPV has a net savings of 1 billion
dollars at the 7% discount rate and 10 billion dollars at 3%.
\32\ DOE observes that the average LCC savings for all classes
at this trial standard level are positive and at the same time the
NPV is negative. This is a counterintuitive result since the NPV can
be described as a sum of individual consumer LCCs. The negative NPV
is caused by a number of factors, including the assumption in the
NES that some consumers will purchase more efficient products than
is required by the standard, e.g., 14 SEER. Since the NES uses
average usage rates and average marginal energy prices for these
consumers, it may overstate the life-cycle-costs for consumers that
voluntarily purchase products which, based on average values, would
seem not to be cost-effective. Furthermore, the NES does not
consider factors such as utility rebate programs which would have a
effect on total discounted costs.
\33\ Consumers would experience a $113 savings in life-cycle-
costs based on the Department's reverse engineering costs.
\34\ Consumers would experience a $372 increase in life-cycle-
costs based on the Department's reverse engineering costs.
---------------------------------------------------------------------------

Given the benefits and burdens of Trial Standard Level 3 as
discussed above, and observing the reduction in NPV compared to Trial
Standard Level 2, the Department compared the benefits and burdens of
the two trial standard levels. Adopting Trial Standard Level 3, instead
of Trial Level 2, would save the nation an additional 0.5 Quads of
energy, and further reduce installed generating capacity by 1.7 GW, or
roughly 5 large, 400 megawatt, power plants.\35\ The incremental
emission reductions of carbon equivalent and NOX are 3.7 Mt
and 10.9 kt, respectively. Trial Standard Level 3 would, however,
reduce the national NPV by up to 1 billion dollars, depending on the
cost estimates used.\36\ \37\ The consumer LCC savings are not changed
for central air conditioners, but are reduced by $27 for split heat
pumps using ARI costs.\38\
---------------------------------------------------------------------------

\35\ DOE estimates one coal-fired power plants and four gas-
fired power plants can be avoided.
\36\ At the 3% societal discount rate, the national NPV is
reduced by 1 billion dollars. With the reverse engineering equipment
cost, the NPV is not changed.
\37\ The total national discounted cost of owning and operating
central air conditioners and heat pumps at this Trial Standard Level
3 is 382 billion dollars.
\38\ Using the reverse engineering costs the savings are
increased by $7.
---------------------------------------------------------------------------

In determining the economic justification of Trial Standard Level
3, the Department has weighed the benefits of energy savings,
generating capacity reductions, reduced average consumer LCC, and
emissions reductions against the burdens of a loss in manufacturer net
present value, consumer LCC increases for some households and the
potential loss in national NPV. We find the benefits to be substantial.
Although the loss in manufacturer net present value is also
substantial, the projected LCC increases and loss in national NPV are
relatively small, and these burdens of Trial Standard Level 3 would be
outweighed by its benefits. Moreover, in light of the reverse
engineering analysis, we believe the equipment costs will be lower than
the ARI estimates on which we have relied and that the loss in national
NPV would be less than estimated.
Comparing Trial Standard Level 3 to Trial Standard Level 2, DOE
found the potential decrease in national NPV is outweighed by other
factors not included in the national NPV calculations. For example, the
national NPV calculation does not include quantitative estimates for
the value of emission reductions.\39\ Furthermore, as an added benefit,
the standard may improve the reliability of the electric distribution
system. The Department finds that, compared with Trial Standard Level
2, the incremental benefits of generating capacity reductions and
emission reductions of Trial Standard Level 3 to be greater than the
potential loss in national NPV and increase in life-cycle-costs to some
consumers, including a relatively small number of low-income consumers.
---------------------------------------------------------------------------

\39\ It is possible the NPV does not include the value of
avoided power plants. It should be captured in the price of
electricity, however, DOE used the same AEO 2000 prices forecasts in
the base case projection as well as each trial standard level. It is
entirely possible the average and marginal electricity prices do not
change, however, DOE did not undertake an analysis to determine the
effect, if any, of standards on electricity prices.
---------------------------------------------------------------------------

After considering the benefits and burdens of Trial Standard Level
3 and comparing the impacts of Trial Standard Levels 2 and 3, the
Department finds Trial Standard Level 3 to be maximum improvement in
efficiency that is technologically feasible and economically justified.
Therefore, the Department today proposes to adopt the energy
conservation standards for air conditioners and heat pumps at Trial
Standard Level 3.

VII. Procedural Issues and Regulatory Review

A. Review Under the National Environmental Policy Act

The Department is preparing an Environmental Assessment of the
impacts of the proposed rule and DOE anticipates completing a Finding
of No Significant Impact (FONSI) before publishing the final rule on
Energy Conservation Standards for central air conditioners and heat
pumps, pursuant to the National Environmental Policy Act of 1969 (NEPA)
(42 U.S.C. 4321 et seq.), the regulations of the Council on
Environmental Quality (40 CFR Parts 1500-1508), and the Department's
regulations for compliance with NEPA (10 CFR Part 1021).

B. Review under Executive Order 12866, ``Regulatory Planning and
Review''

The Department has determined today's regulatory action is a
significant regulatory action within the scope of section 3(f)(1) of
Executive Order 12866, ``Regulatory Planning and Review.'' (58 FR
51735, October 4, 1993). Therefore, this proposal requires a regulatory
analysis. Such an analysis presents major alternatives to the proposed
regulation that could achieve substantially the same goal, as well as a
description of the cost and benefits

[[Page 59628]]

(including potential net benefits) of the proposed rule. Accordingly,
the Office of Information and Regulatory Affairs (OIRA) reviewed
today's action under the Executive Order.
There were no substantive changes between the draft we submitted to
OIRA and today's action. The draft and other documents we submitted to
OIRA for review are a part of the rulemaking record and are available
for public review in the Department's Freedom of Information Reading
Room, 1000 Independence Avenue, SW., Washington, DC 20585, between the
hours of 9:00 a.m. and 4:00 p.m., Monday through Friday, except Federal
holidays, telephone (202) 586-3142.
The following summary of the Regulatory Impact Analysis (RIA)
focuses on the major alternatives considered in arriving at the
proposed approach to improving the energy efficiency of consumer
products. The reader is referred to the complete RIA, which is
contained in the TSD, available as indicated at the beginning of
today's proposed rule. The RIA consists of: (1) A statement of the
problem addressed by this regulation, and the mandate for government
action; (2) a description and analysis of the feasible policy
alternatives to this regulation; (3) a quantitative comparison of the
impacts of the alternatives; and (4) the economic impact of the
proposed standard.
The RIA calculates the effects of feasible policy alternatives to
central air conditioner and heat pump energy efficiency standards, and
provides a quantitative comparison of the impacts of the alternatives.
We evaluate each alternative in terms of its ability to achieve
significant energy savings at reasonable costs, and we compare it to
the effectiveness of the proposed rule.
We created the RIA using a series of regulatory scenarios (with
various assumptions), which we used as input to the shipments model for
central air conditioners and heat pumps. We used the results from the
shipments model as inputs to the NES spreadsheet calculations.
DOE identified the following seven major policy alternatives for
achieving consumer product energy efficiency. These alternatives
include:

No New Regulatory Action
Informational Action
--Product Labeling
--Consumer Education
Prescriptive Standards
Financial Incentives
--Tax credits
--Rebates
--Low income and seniors subsidy
Voluntary Energy Efficiency Targets (5 Years, 10 Years)
Mass Government Purchases
The Proposed Approach (Performance Standards)

We have evaluated each alternative in terms of its ability to
achieve significant energy savings at reasonable costs (Table VII.1),
and have compared it to the effectiveness of the proposed rule. All of
the results below have been determined with the AEO Reference Case and
the NAECA efficiency scenario.

Table VII.1.--Alternatives Considered
------------------------------------------------------------------------
Energy
Policy alternatives NPV (billions Savings
98$) (Quads)
------------------------------------------------------------------------
Consumer Product Labeling............... 0 0.1
Consumer Education...................... 0 0.1
Prescriptive Standards.................. 0 1.1
Consumer Tax Credits.................... 0 0.1
Consumer Rebates........................ 0 0.2
Manufacturer Tax Credits................ 0 0.0
Voluntary Efficiency Target (5 year -1 3.1
delay).................................
Voluntary Efficiency Target (10 year -1 1.9
delay).................................
Low Income Subsidy...................... 0 0.1
Mass Government Purchases............... 0 0
Performance Standards................... -2 4.4
------------------------------------------------------------------------
NPV = Net Present Value (2006-2030, in billion 1998$) (does not include
government expenses).
Savings = Energy Savings (Source Quads).

If we imposed no new regulatory action, then we would implement no
new standards for this product. This is essentially the ``base case''
for central air conditioners and heat pumps. In this case, between the
years 2006 and 2030, there would be an expected energy use of 39 Quads
of primary energy, with no energy savings and a zero NPV.
We grouped several alternatives to the base case under the heading
of informational action. They include consumer product labeling and DOE
public education and information programs. Both of these alternatives
are already mandated by, and are being implemented under EPCA sections
324 and 337, 42 U.S.C. 6294, 6297. One base case alternative would be
to estimate the energy conservation potential of enhancing consumer
product labeling. To model this possibility, the Department estimated
that 5% of the consumers purchasing 10 SEER equipment and 5% of the
consumers purchasing 12 SEER equipment would change their decisions and
purchase 12 SEER and 13 SEER systems, respectively. It is assumed that
the program would last six years and upon its expiration consumers
would revert back to their prior purchase decisions. The consumer
product labeling alternative resulted in 0.1 Quad of energy savings
with no impact on the NPV.
Another approach, called consumer education, is to consider an
Energy Star program for 12 SEER and 13 SEER central air
conditioners and heat pumps. We assume, under this program, there would
be a 20% increase in the sales of both 12 SEER and 13 SEER systems. As
with the consumer product labeling program, it is assumed that the
education program would last six years and upon its expiration sales
would drop back to their market share levels prior to the program's
implementation. This consumer education program results in energy
savings equal to 0.1 Quad with no impact on the NPV.
Another method of setting standards would entail requiring that
certain design options be used on each product, i.e., for DOE to impose
prescriptive standards. For this approach, we assume that a
prescriptive standard is implemented to ensure that all central air
conditioners and heat pumps are equipped with thermostatic expansion
valves (TXVs). The resulting efficiency increase is 0.5 SEER. That is,
the

[[Page 59629]]

baseline efficiency of 10 SEER is assumed to increase to 10.5 SEER as a
result of the prescriptive standard. Manufacturer costs associated with
this standard were arrived by linearly interpolating between those
costs associated with the baseline (i.e., 10 SEER) and 11 SEER
efficiency levels. This resulted in energy savings of 1.1 Quad and no
impact on the NPV.
We tested various financial incentive alternatives. These included
tax credits and rebates to consumers, as well as tax credits to
manufacturers. We assumed the tax credits to consumers were 50% of the
incremental purchase price for higher energy-efficiency equipment. The
incremental price is based on the difference between the 2006 baseline
price and the price of 12 SEER equipment. We estimate the impact of
this policy would be to move 5% of the market share from the 2006
baseline to 12 SEER models. These tax credits would start in 2006 and
run for six years. We assume people stop buying these more efficient
and more expensive central air conditioners and heat pumps when the tax
credits stop. The tax credits to consumers showed a change from the
base case, saving 0.1 Quad with no impact to the NPV.
To estimate the impact of consumer rebates, we assumed rebates of
35% of the incremental retail prices for higher energy-efficiency
equipment. The incremental cost is based on the difference between the
2006 baseline cost and the cost of 12 SEER equipment. We estimate the
impact of this policy would be to move 10% of market share from the
2006 baseline to the 12 SEER models. These rebates would start in 2006
and run for six years. We assume people stop buying these more
efficient and more expensive central air conditioners and heat pumps
when the rebates stop. The rebates to consumers showed a change from
the base case, would save 0.2 Quad with no impact to the NPV.
Another financial incentive we considered was a tax credit to
manufacturers for the production of energy-efficient models of central
air conditioners and heat pumps. We assumed an investment tax credit of
20%, applicable to the tooling and machinery costs of the
manufacturers. These are tooling costs as they relate to producing 12
SEER central air conditioners and heat pumps. We estimate the impact of
this policy would be to move 1% of the market share from the 2006
baseline to the 12 SEER models. These tax credits would start in 2006
and run for six years. We assume no persistence in the market once they
stop. Tax credits to manufacturers would save no energy and have no
impact on the NPV. The impact of this scenario would be negligible
because the investment tax credit was applicable only to the tooling
and machinery costs of the firms. The firms' fixed costs and some of
the design improvements that would likely be adopted to manufacture
more efficient versions of this product would involve purchased parts.
Expenses for purchased parts would not be eligible for an investment
tax credit.
We examined two scenarios of voluntary energy efficiency targets.
In the first one, we assumed all the relevant manufacturers voluntarily
adopted the proposed energy conservation standards in five years. In
the second scenario, we assumed the proposed standards were adopted in
10 years. In these scenarios, voluntary improvements having a five-year
delay, compared to implementation of mandatory standards, would result
in energy savings of 3.1 Quads and -$1 billion NPV; voluntary
improvements having a 10-year delay would result in 1.9 Quads being
saved and -$1 billion NPV. These scenarios assume that there would be
universal voluntary adoption of the energy conservation standards by
these appliance manufacturers, an assumption for which there is no
assurance.
One of the market barriers to higher efficiency central air
conditioners and heat pumps is the expense to upgrading to a more
efficient system. Since these expenses can be a particular burden on
low income households, we considered a low income subsidy of $500 to
make higher efficiency central air-conditioning and heat pump equipment
available and cost effective for these households. We determined the
number of low income households with central air-conditioning from the
RECS public use data. We assumed that half of these households would
take advantage of the program. The program would start in 2006 and run
for six years. This subsidy would save 0.1 Quad with no impact to the
NPV.
Another policy alternative we reviewed was that of large purchases
of high efficiency central air conditioners and heat pumps by Federal,
State, and local governments. We modeled this policy by assuming these
governmental entities (e.g., U.S. Department of Housing and Urban
Development at the Federal level) purchased 12 SEER equipment for 5% of
the low income, rented housing stock utilizing central air-conditioning
and heat pump equipment. This policy alternative resulted in no energy
savings with no impact to the NPV.
Lastly, all of these alternatives must be gauged against the
performance standards we are proposing in today's proposed rule. Such
performance standards would result in energy savings under the AEO
Reference Case and NAECA efficiency scenario of 3.5 Quads, and the NPV
estimates range from an increase of $3 billion to a cost of $2 billion.
As indicated in the paragraphs above, none of the alternatives we
examined for these products would save as much energy as today's
proposed rule. Also, several of the alternatives would require new
enabling legislation, since authority to carry out those alternatives
does not presently exist.

C. Review Under the Regulatory Flexibility Act

The Regulatory Flexibility Act of 1980 (Pub. L. 96-354) requires an
assessment of the impact of regulations on small businesses. For air
conditioning and warm air heating equipment manufacturing, a ``firm''
is defined by the Small Business Administration as a small business if
it (including affliates) has 750 or fewer employees.
The residential air-conditioner industry is characterized by seven
firms accounting for nearly 95% of sales. DOE understands that each of
these firms, including its affiliates, has more than 750 employees.
Smaller businesses and firms, which make specialty air-conditioning
products and supply niche markets, share 5% of the market.
In this industry, average production cost is inversely related to
firm size. The industry displays economies of scale, and large firms
(to the extent that their facilities are modernized) have lower average
production costs than small firms. This fact, coupled with increasing
competitiveness of the national market, probably accounts for the
consolidation that has occurred for several decades. The fact that the
consolidation has been producing larger firms strongly corroborates the
finding that large firms have a cost advantage.
A principal implication of consolidation is that the smaller of the
firms will be, on average, more vulnerable to the financial impacts of
higher efficiency standards. Any decrease in average profitability is
more likely to mean the difference between success and failure for a
smaller firm.
The impact of higher efficiency standards on small firms is likely
to be mixed. Those firms that face a large technological challenge in
meeting the new standards may face a disproportionate burden, because
smaller firms have more limited research and development capabilities

[[Page 59630]]

than their larger competitors. Some smaller manufacturers indicated the
potential for a negative economic impact of any higher standard level
on their firms. However, since these concerns apply primarily to small
manufacturers of niche products, they benefit from the provisions
proposed by the Department to somewhat protect those products from the
new standards. For example, a separate product class is being proposed
for through-the-wall equipment, many of which are manufactured by small
manufacturers. Also, the Department has acknowledged that small
manufacturers of high velocity distribution systems may potentially be
adversely affected by the proposed standard level. The Department is
considering modifications to the SEER test procedure, which would grant
these manufacturers some relief. Vertical-packaged, wall-mounted
equipment is another product manufactured by small firms, and, as
stated in Section V.J.3 of this notice, the Department intends to
consider those to be commercial products under EPACT. These provisions
should eliminate any potential for significant economic impact on small
manufacturers related to the proposed standard level.
Many small manufacturers produce coils only. Since there are no
intensive incremental technological or capital requirements for these
companies to increase the efficiency of their products, we do not
expect them to face any incremental burden as a result of the new
standards.
In view of these conclusions, the Department has determined and
hereby certifies pursuant to section 605(b) of the Regulatory
Flexibility Act that, for this particular industry, the proposed
standard levels in today's proposed rule will not ``have a significant
economic impact on a substantial number of small entities,'' and it is
not necessary to prepare a regulatory flexibility analysis.

D. Review Under the Paperwork Reduction Act

No new information or record keeping requirements are proposed in
this rulemaking. Accordingly, no Office of Management and Budget
clearance is required under the Paperwork Reduction Act. 44 U.S.C. 3501
et seq.

E. Review Under Executive Order 12988, ``Civil Justice Reform''

With respect to the review of existing regulations and the
promulgation of new regulations, Section 3(a) of Executive Order 12988,
``Civil Justice Reform,'' 61 FR 4729 (February 7, 1996), imposes on
Executive agencies the general duty to adhere to the following
requirements: (1) Eliminate drafting errors and ambiguity; (2) write
regulations to minimize litigation; and (3) provide a clear legal
standard for affected conduct rather than a general standard and
promote simplification and burden reduction. With regard to the review
required by Section 3(a), Section 3(b) of Executive Order 12988
specifically requires that Executive agencies make every reasonable
effort to ensure that the regulation: (1) Clearly specifies the
preemptive effect, if any; (2) clearly specifies any effect on existing
Federal law or regulation; (3) provides a clear legal standard for
affected conduct while promoting simplification and burden reduction;
(4) specifies the retroactive effect, if any; (5) adequately defines
key terms; and (6) addresses other important issues affecting clarity
and general draftsmanship under any guidelines issued by the Attorney
General. Section 3(c) of Executive Order 12988 requires Executive
agencies to review regulations in light of applicable standards in
Section 3(a) and Section 3(b) to determine whether they are met or it
is unreasonable to meet one or more of them. DOE reviewed today's
proposed rule under the standards of Section 3 of the Executive Order
and determined that, to the extent permitted by law, the regulations
meet the relevant standards.

F. ``Takings'' Assessment Review

The Department has determined pursuant to Executive Order 12630,
``Governmental Actions and Interference with Constitutionally Protected
Property Rights,'' 53 FR 8859 (March 18, 1988), that this regulation
would not result in any takings that might require compensation under
the Fifth Amendment to the United States Constitution.

G. Review Under Executive Order 13132

Executive Order 13132 (64 FR 43255, August 4, 1999) requires
agencies to develop an accountable process to ensure meaningful and
timely input by State and local officials in the development of
regulatory policies that have ``federalism implications.'' Agencies are
required to examine the constitutional and statutory authority
supporting any action that would limit the policymaking discretion of
the States and carefully assess the necessity for such actions. DOE has
examined today's proposed rule and has determined that it would not
have a substantial direct effect on the States, on the relationship
between the national government and the States, or on the distribution
of power and responsibilities among the various levels of government.
State regulations that may have existed on the products that are the
subject of today's proposed rule were preempted by the Federal
standards established in NAECA 1987. States can petition the Department
for exemption from such preemption based on criteria set forth in EPCA.
No further action is required by Executive Order 13132.

H. Review Under the Unfunded Mandates Reform Act

With respect to a proposed regulatory action that may result in the
expenditure by State, local, and tribal governments, in the aggregate,
or by the private sector, of $100 million or more (adjusted annually
for inflation) in any one year, section 202(a) of the Unfunded Mandates
Reform Action of 1995 (UMRA), 2 U.S.C. 1531 et seq. requires a Federal
agency to publish a written statement concerning estimates of the
resulting costs, benefits and other effects on the national economy. 2
U.S.C. 1532(a),(b). DOE estimates that the proposed standards, if
adopted, would not result in the expenditure by the private sector of
$100 million or more in a year, with the possible exception of one year
in which industry expenditures could total approximately $110 million.
Section 202 of UMRA authorizes an agency to respond to the content
requirements of UMRA in any other statement or analysis that
accompanies the proposed rule. 2 U.S.C. 1532(c). The content
requirements of section 202(b) of UMRA relevant to a private sector
mandate substantially overlap the economic analysis requirements that
apply under section 325(o) of EPCA and Executive Order 12866. The
Supplementary Information section of the Notice of Proposed Rulemaking
and ``Regulatory Impact Analysis'' section of the TSD for today's
proposed rule responds to those requirements.
DOE is obligated by Section 205 of UMRA, 2 U.S.C. 1535, to identify
and consider a reasonable number of regulatory alternatives before
promulgating a rule for which a written statement under section 202 is
required. From those alternatives, DOE must select the least costly,
more cost-effective or least burdensome alternative that achieves the
objectives of the rule, unless DOE publishes an explanation of why a
different alternative is selected. As required by section 325(o) of the
Energy Policy and Conservation Act (42 U.S.C. 6295(o)), this proposed
rule would establish energy conservation standards for central air
conditioners and heat pumps that are designed to

[[Page 59631]]

achieve the maximum improvement in energy efficiency that DOE has
determined to be both technologically feasible and economically
justified. A full discussion of the alternatives considered by DOE is
presented in the ``Regulatory Impact Analysis'' section of the TSD for
this notice.

I. Review Under the Treasury and General Government Appropriations Act
of 1999

Section 654 of the Treasury and General Government Appropriations
Act, 1999 (Pub. L. No. 105-277) requires Federal agencies to issue a
Family Policymaking Assessment for any proposed rule or policy that may
affect family well-being. Today's proposal would not have any impact on
the autonomy or integrity of the family as an institution. Accordingly,
DOE has concluded that it is not necessary to prepare a Family
Policymaking Assessment.

J. Review Under the Plain Language Directives

Section 1(b)(12) of Executive Order 12866 requires that each agency
draft its regulations to be simple and easy to understand, with the
goal of minimizing the potential for uncertainty and litigation arising
from such uncertainty. Similarly, the Presidential memorandum of June
1, 1998 (63 FR 31883) directs the heads of executive departments and
agencies to use, by January 1, 1999, plain language in all proposed and
final rulemaking documents published in the Federal Register, unless
the rule was proposed before that date.
Today's proposed rule uses the following general techniques to
abide by section 1(b)(12) of Executive Order 12866 and the Presidential
memorandum of June 1, 1998 (63 FR 31883):
Organization of the material to serve the needs of the
readers (stakeholders).
Use of common, everyday words in short sentences.
Shorter sentences and sections.

We invite your comments on how to make this proposed rule easier to
understand.

VIII. Public Comment

A. Written Comment Procedures

The Department invites interested persons to participate in the
proposed rulemaking by submitting data, comments, or information with
respect to the proposed issues set forth in today's proposed rule to
Ms. Brenda Edwards-Jones, at the address indicated at the beginning of
this notice. We will consider all submittals received by the date
specified at the beginning of this notice in developing the final rule.
According to 10 CFR 1004.11, any person submitting information that
he or she believes to be confidential and exempt by law from public
disclosure should submit one complete copy of the document and ten (10)
copies, if possible, from which the information believed to be
confidential has been deleted. The Department of Energy will make its
own determination with regard to the confidential status of the
information and treat it according to its determination.
Factors of interest to the Department when evaluating requests to
treat as confidential information that has been submitted include: (1)
A description of the items; (2) an indication as to whether and why
such items are customarily treated as confidential within the industry;
(3) whether the information is generally known by or available from
other sources; (4) whether the information has previously been made
available to others without obligation concerning its confidentiality;
(5) an explanation of the competitive injury to the submitting person
which would result from public disclosure; (6) an indication as to when
such information might lose its confidential character due to the
passage of time; and (7) whether disclosure of the information would be
contrary to the public interest.

B. Public Workshop/Hearing

1. Procedure for Submitting Requests To Speak
You will find the time and place of the public hearing listed at
the beginning of this notice. We invite any person who has an interest
in today's notice, or who is a representative of a group or class of
persons that has an interest in these issues, to request an opportunity
to make an oral presentation. If you would like to attend the public
hearing, please notify Ms. Brenda Edwards-Jones at (202) 586-2945. You
may hand deliver requests to speak to the address indicated at the
beginning of this notice between the hours of 8 a.m. and 4 p.m., Monday
through Friday, except Federal holidays. You may also send them by mail
or E-mail to brenda.edwards-jones@ee.doe.gov.
The person making the request should state why he or she, either
individually or as a representative of a group or class of persons, is
an appropriate spokesperson, briefly describe the nature of the
interest in the rulemaking, and provide a telephone number for contact.
We request each person selected to be heard to submit an advance copy
of his or her statement at least two weeks prior to the date of this
hearing as indicated at the beginning of this notice. At our
discretion, we may permit any person who cannot do this to participate
if that person has made alternative arrangements with the Office of
Building Research and Standards in advance. The request to give an oral
presentation should ask for such alternative arrangements.
2. Conduct of Hearing
The Department will designate a Department official to preside at
the workshop and we may also use a professional facilitator to
facilitate discussion. The workshop will not be a judicial or
evidentiary-type hearing, but the Department will conduct it in
accordance with 5 U.S.C. 553 and Section 336 of the Act and a court
reporter will be present to record the transcript of the workshop. We
reserve the right to schedule the presentations by workshop
participants, and to establish the procedures governing the conduct of
the workshop.
The Department will permit each participant to make a prepared
general statement, limited to five (5) minutes, prior to the discussion
of specific topics. The general statement should not address these
specific topics, but may cover any other issues pertinent to this
rulemaking. The Department will permit other participants to briefly
comment on any general statements. We will divide the remainder of the
hearing into segments, with each segment consisting of one or more of
the following specific topics covered by this notice:
Engineering analysis, including mark-up;
Life-Cycle-Cost and payback analysis;
National Energy Savings and Net Present Value;
Manufacturer impacts;
Utility impacts;
Proposed standards, including an EER-based standard and
TXV considerations; and
Other issues.
The Department will introduce each topic with a brief summary of
the relevant parts of our analysis and of the proposed rule, and the
significant issues involved. We will then permit participants in the
hearing to make a prepared statement limited to five (5) minutes on
that topic. At the end of all prepared statements on a topic, the
Department will permit each participant to briefly clarify his or her
statement and comment on statements made by

[[Page 59632]]

others. Participants should be prepared to answer questions by us and
by other participants concerning these issues. Our representatives may
also ask questions of participants concerning other matters relevant to
the hearing. The total cumulative amount of time allowed for each
participant to make prepared statements will be 20 minutes.
The official conducting the hearing will accept additional comments
or questions from those attending, as time permits. The presiding
official will announce any further procedural rules, or modification of
the above procedures, needed for the proper conduct of the hearing.
We will make the entire record of this rulemaking, including the
transcript, available for inspection in the Department's Freedom of
Information Reading Room. Any person may purchase a copy of the
transcript from the transcribing reporter.

C. Issues for Which DOE Seeks Comment

The Department is particularly interested in receiving comments and
views of interested parties concerning:
(1) Whether explicit consideration of extended warranties would
produce significantly different results from those based on service
costs alone;
(2) The Department's methodology and data for determining the
appropriate marginal energy costs;
(3) The burdens and benefits that would result from including an
EER requirement in the final rule. Of particular interest are comments
regarding burdens on manufacturers, benefits regarding reduction in
peak electricity demand, the effect of more stringent standards on the
cost and availability of modulating equipment, and the effect that an
EER floor would have on electrical system reliability. In addition,
comments are welcome to discuss the pros and cons of any of the options
described in Section V.I.2 above, as well as other approaches;
(4) Whether the proposed standards concerning high-velocity,
vertically-packaged wall-mounted equipment, and through-the-wall
equipment provide a significant advantage to those products versus
competing products and are sufficient to preserve the unique features
of those products, and whether improvements in the definitions are
needed to prevent loopholes. For ductless split equipment and non-
weatherized vertical packaged equipment, additional comment is welcome
on the impacts that meeting the new standards would have on the
availability of those products;
(5) The issue of thermal expansion valves (TXV), particularly
whether our concerns regarding the perceived reliability problems and
potential misuses associated with widespread use of TXVs are valid;
(6) The validity of the analytical methods used and the appropriate
interpretation and use of the results of this analysis;
(7) The Draft Environmental Assessment, which is printed within the
TSD prepared for today's proposed rule; and
(8) The impacts on manufacturers and consumers if the levels in
today's proposed rule were applied to commercial three-phase unitary
air conditioners less than 65K Btu/hr as well.

List of Subjects in 10 CFR Part 430

Administrative practice and procedure, Energy conservation,
Household appliances.

Issued in Washington, DC, on September 27, 2000.
Dan W. Reicher,
Assistant Secretary, Energy Efficiency and Renewable Energy.
For the reasons set forth in the preamble Part 430 of Chapter II of
Title 10, Code of Federal Regulations, is proposed to be amended as set
forth below.

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

1. The authority citation for Part 430 continues to read as
follows:

Authority: 42 U.S.C. 6291-6309; 28 U.S.C. 2461 note.

2. Section 430.2 is amended by adding a definition for ``through-
the-wall air conditioner and heat pump'' in alphabetical order to read
as follows:

Sec. 430.2 Definitions.

* * * * *
Through-the-wall air conditioner and heat pump means a central air
conditioner or heat pump, having a rated capacity between 18,000 Btu/hr
and 30,000 Btu/hr that is:
(1) Designed to be installed partially within, or mounted against,
a fixed-size opening in an exterior wall; and
(2) Designed so that air for the outdoor coil is taken in and
discharged at the same surface.
* * * * *
3. Section 430.32 of Subpart C is amended by revising paragraph (c)
to read as follows:

Sec. 430.32 Energy and water conservation standards and effective
dates.

* * * * *
(c) Central air conditioners and central air conditioning heat
pumps. (1) Split system central air conditioners and central air
conditioning heat pumps manufactured after January 1, 1992, and before
January 1, 2006, and single package central air conditioners and
central air conditioning heat pumps manufactured after January 1, 1993,
and before January 1, 2006, shall have Seasonal Energy Efficiency Ratio
and Heating Seasonal Performance Factor no less than:

------------------------------------------------------------------------
Seasonal Heating
energy seasonal
Product class efficiency performance
ratio factor
------------------------------------------------------------------------
1. Split systems............................. 10.0 6.8
2. Single package systems.................... 9.7 6.6
------------------------------------------------------------------------

(2) Central air conditioners and central air conditioning heat
pumps manufactured on or after January 1, 2006, shall have Seasonal
Energy Efficiency Ratio and Heating Seasonal Performance Factor no less
than:

------------------------------------------------------------------------
Seasonal Heating
energy seasonal
Product class efficiency performance
ratio factor
(SEER) (HSPF)
------------------------------------------------------------------------
1. Split system air conditioners............. 12 ...........
2. Split system heat pumps................... 13 7.7
3. Single package air conditioners........... 12 ...........
4. Single package heat pumps................. 13 7.7
5. Through the wall air conditioners and heat 11 7.1
pumps........................................
------------------------------------------------------------------------

* * * * *
[FR Doc. 00-25336 Filed 9-29-00; 9:42 am]
BILLING CODE 6450-01-P

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