Energy Conservation Program for Consumer Products: Central Air
Conditioners and Heat Pumps Energy Conservation Standards
[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]
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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.
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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 ![[logo] US EPA](http://www.epa.gov/epafiles/images/logo_epaseal.gif){kind=logo}