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

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

[Federal Register: January 22, 2001 (Volume 66, Number 14)]
[Rules and Regulations]
[Page 7169-7200]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22ja01-32]

[[Page 7169]]

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Part XII

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; Final Rule

Finding of No Significant Impact Energy Conservation Program for
Consumer Products; Notice

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DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 430

[Docket Number EE-RM-98-440]
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, Energy.

ACTION: Final rule.

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SUMMARY: The Department of Energy (DOE or Department) has determined
that revised energy conservation standards for central air conditioners
and heat pumps will result in significant conservation of energy, are
technologically feasible, and are economically justified. On this
basis, the Department is today amending the existing energy
conservation standards for central air conditioners and heat pumps.

EFFECTIVE DATE: The effective date of this rule is February 21, 2001.

ADDRESSES: A copy of the Technical Support Document (TSD) may be read
at the DOE Freedom of Information Reading Room, U.S. Department of
Energy, Forrestal Building, Room 1E-190, 1000 Independence Avenue, SW.,
Washington, DC 20585, (202) 586-3142, between the hours of 9:00 a.m.
and 4:00 p.m., Monday through Friday, except Federal holidays. Copies
of the TSD may be obtained from: the Codes and Standards Internet site
at: http://www.eren.doe.gov/buildings/codes_standards/applbrf/
central_air_conditioner.html or from the U.S. Department of Energy,
Office of Energy Efficiency and Renewable Energy, Forrestal Building,
Mail Station EE-41, 1000 Independence Avenue, SW., Washington, DC
20585-0121. (202) 586-9127.

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

SUPPLEMENTARY INFORMATION:

I. Introduction
A. Consumer Overview
1. Background
2. Central Air Conditioner and Heat Pump Features
3. Consumer Benefits
4. National Benefits
B. Authority
C. Background
II. General Discussion
A. Technological Feasibility
1. General
2. Maximum Technologically Feasible Levels
B. Energy Savings
1. Determination of Savings
2. Significance of Savings
C. Rebuttable Presumption
D. Economic Justification
1. Economic Impact on Manufacturers and Consumers
2. Life-cycle-costs
3. Energy Savings
4. Lessening of Utility or Performance of Products
5. Impact of Lessening of Competition
6. Need of The Nation to Conserve Energy
7. Other Factors
III. Methodology
IV. Discussion of Comments
A. Burdens and Benefits
1. Economic Impacts
a. Economic Impacts on Manufacturers
b. Economic Impacts on Consumers
2. Life-Cycle Costs
3. Energy Savings
4. Lessening of Utility or Performance of Products
5. Impact of Lessening of Competition
6. Need of the Nation to Conserve Energy
7. Other Factors
B. Analysis and Assumptions
1. Engineering Analysis
a. Reliance on ARI and Reverse Engineering Cost Estimates
b. Consideration of Emerging Technologies
2. Life Cycle Cost (LCC) analysis
a. Probability-based analysis
b. Energy Use
c. Electricity Prices
d. Product Life
e. Installation Cost
f. Mark-ups
3. Shipments/National Energy Savings
a. Adjustments to NAECA Shipment Scenario
b. Fuel Switching
c. Drop in Shipments in New Construction Market
4. Manufacturer Impact Analysis
5. Utility Impacts
a. Peak Demand Impacts
6. Projection of Trends
C. Other Comments
1. HCFC Phaseout
2. Ozone Reduction Catalyst Requirement
D. Additional Standard Requirements
1. EER Standard
2. TXV Requirement
3. HSPF Levels
V. Analytical Results and Conclusions
A. Trial Standard Levels
B. Significance of Energy Savings
C. Payback Period
D. Economic Justification
1. Economic Impact on Manufacturers and Consumers
2. Life-cycle-cost (LCC)
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
VI. 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
K. Congressional Notification

I. Introduction

A. Consumer Overview

1. Background
The Department of Energy (DOE or the Department) is directed by the
Energy Policy and Conservation Act to consider establishing minimum
efficiency standards for various consumer products, including central
air conditioners and heat pumps. Today's final rule adopts standards
that are consistent with these requirements of the law. The Department
is amending the almost ten year old minimum efficiency standards for
new central air conditioners and heat pumps. These amended standards
take into account a decade of technological advancements and will save
consumers and the nation money, significant amounts of energy, and have
substantial environmental and economic benefits.
When today's adopted standards go into effect, they will
essentially raise the energy efficiency standards to 13 SEER for new
central air conditioners and to 13 SEER/7.7 HSPF for new central air
conditioning heat pumps (heat pumps). 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. HSPF, Heating Seasonal Performance Factor, is the Department's
measure of energy efficiency for the seasonal heating performance of
heat pumps. The standards will apply to products manufactured for sale
in the United

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States, as of January 23, 2006. The standard for split-system air
conditioners, the most common type of residential air conditioning
equipment, represents a 30 percent improvement in energy efficiency.
For split-system heat pumps, the new standard would represent a 30
percent improvement in cooling efficiency and a 13 percent improvement
in heating efficiency. The standard will also increase the cooling
efficiency of single-package air conditioners and single-package heat
pumps by 34 percent and the heating efficiency of single-package heat
pumps by 17 percent. Finally, the Department is not yet adopting new
standards for some products to ensure that more efficient versions
remain available for niche applications. The Department has determined
that the new standards are the highest efficiency levels that are
technically feasible and economically justified as required by law.
Therefore, the Department is amending the energy conservation standards
for residential central air conditioners and heat pumps.
2. Central Air Conditioner and Heat Pump Features
The amended efficiency levels can be met by central air conditioner
and heat pump designs that are already available in the market. We
fully expect variations of these models to exist under the new
standards, offering all the features and utility that are found in
currently available products.
3. Consumer Benefits
Table I.1 summarizes the ``characteristics'' of today's typical
central air conditioners and heat pumps. Table I.2 presents the
implications for the average consumer of the standards becoming
effective in 2006.

Table I.1.--Characteristics of Today's Typical Central Air Conditioners and Heat Pumps \1\
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Split system Single Single
air Split system package air package heat
conditioner heat pump conditioner pump
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Average Installed Price......................... $2,236 $3,668 $2,607 $3,599
Annual Utility Bill \2\......................... $189 $453 $189 $453
Life Expectancy (years)......................... 18.4 18.4 18.4 18.4
Energy Consumption per year (kWh)............... 2,305 6,549 2,305 6,549
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\1\ ``Typical'' equipment have cooling and heating efficiencies of 10 SEER and 6.8 HSPF, respectively.
\2\ Utility bill pertains to the energy cost of operating the air conditioner or heat pump.

Table I.2.--Implications of New Standards for the Average Consumer
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Split system Single Single
air Split system package air package heat
conditioner heat pump conditioner pump
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Year Standard Comes into Effect................. 2006 2006 2006 2006
New Average Installed Price..................... $2,571 $4,000 $3,032 $4,034
Estimated Price Increase........................ $335 $332 $425 $435
Annual Utility Bill Savings..................... $42 $70 $42 $70
Average Net Saving over Equipment Life.......... $113 $372 $29 $353
Energy Savings per Year (kWh)................... 532 1081 532 1081
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The most typical air conditioner (i.e., split system air
conditioners which comprise approximately 65 percent of today's central
air conditioning and heat pump market) has an installed price of $2,236
and an annual utility cost of $189. In order to meet the 2006 standard,
the Department estimates that the installed price of a typical air
conditioner will be $2,571, an increase of $335. This price increase
will be offset by an annual energy savings of about $42 on the utility
bills. The most typical heat pump (i.e., split system heat pump)
currently has an installed price of $3,668 and an annual utility cost
of $453. In order to meet the 2006 standard, the Department estimates
that the installed price of a typical heat pump will be $4,000, an
increase of $332. This price increase will be offset by an annual
energy savings of about $70 on the utility bills.
The Department recognizes that most consumers pay energy prices
that are higher or lower than the ``typical'' consumer and operate
their equipment more or less often. Consequently, the Department has
investigated the effects of the different energy prices across the
nation and different air-conditioning usage patterns. The Department
estimates that 61 percent of all consumers purchasing a new typical air
conditioner will either save money or will be negligibly impacted as a
result of the 2006 standard. In the case of a new typical heat pump, 94
percent of all consumers either save money or will be negligibly
impacted.
The Department also investigated how these standards might affect
low income consumers. On average, the Department estimates that it is
likely that low income air conditioner and heat pump consumers will
also save money as a result of the standard.
4. National Benefits
The standards will provide benefits to the nation. DOE estimates
the standards will save approximately 4.2 quads of energy over 25 years
(2006 through 2030). This is equivalent to all the energy consumed by
nearly 26 million American households in a single year. We also
estimate this standard will have a net benefit to the nation's
consumers of $1 billion over the same period. In 2020, the standards
will avoid the construction of five 400 megawatt coal-fired plants and
thirty-four 400 megawatt gas-fired plants. These energy savings will
result in cumulative greenhouse gas emission reductions of
approximately 33 million metric tons (Mt) of carbon, or an amount equal
to that produced by approximately 3 million cars every year.
Additionally, air pollution will be reduced by the elimination of
approximately 94 thousand metric tons of nitrous oxides (
NOX) from 2006 through 2020.

B. Authority

Part B of Title III of the Energy Policy and Conservation Act
(EPCA), Pub. L. 94-163, as amended by the National

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Energy Conservation Policy Act, Pub. L. 95-619, by the National
Appliance Energy Conservation Act, Pub. L. 100-12, by the National
Appliance Energy Conservation Amendments of 1988, Pub. L. 100-357, and
by the Energy Policy Act of 1992, Pub. L. 102-486 \1\ created the
Energy Conservation Program for Consumer Products other than
Automobiles. The consumer products subject to this program (often
referred to hereafter as ``covered products'') include central air
conditioners and heat pumps.
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\1\ Part B of Title III of the Energy Policy and Conservation
Act, as amended by the National Energy Conservation Policy Act, the
National Appliance Energy Conservation Act, the National Appliance
Energy Conservation Amendments of 1988, and the Energy Policy Act of
1992, is referred to in this notice as EPCA, or the ``Act.'' Part B
of Title III is codified at 42 U.S.C. 6291 et seq. Part B of Title
III of the Energy Policy and Conservation Act, as amended by the
National Energy Conservation Policy Act only, is referred to in this
notice as the National Energy Conservation Policy Act.
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Under the Act, the program consists essentially of three parts:
testing, labeling, and Federal energy conservation standards.
The National Appliance Energy Conservation Act of 1987 (NAECA)
prescribed initial Federal energy conservation standards for central
air conditioners and heat pumps. EPCA Section 325(d), 42 U.S.C.
6295(d). The Act specifies that the Department is to review the
standards January 1, 1994. EPCA Section 325(d)(3)(A), 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).
Section 325(o)(2)(B)(i) provides that before DOE determines whether
a standard is economically justified, it must first solicit comments on
a proposed standard. After reviewing comments on the proposal, and
before it adopts a standard, DOE must then determine whether the
benefits of the standard exceed its burdens, based, to the greatest
extent practicable, on a weighing of the following seven factors:

``(i) The economic impact of the standard on the manufacturers
and on the consumers of the products subject to such standard;
(ii) 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;
(iii) The total projected amount of energy savings likely to
result directly from the imposition of the standard;
(iv) Any lessening of the utility or the performance of the
covered products likely to result from the imposition of the
standard;
(v) 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;
(vi) The need for national energy conservation; and
(vii) Other factors the Secretary considers relevant.''

In addition, section 325(o)(2)(B)(iii) establishes a rebuttable
presumption of economic justification in instances where the Secretary
determines that ``the additional cost to the consumer of purchasing a
product complying with an energy conservation standard level will be
less than three times the value of the energy * * * savings during the
first year that the consumer will receive as a result of the standard,
as calculated under the applicable test procedure * * *.'' The
rebuttable presumption test is an alternative path to establishing
economic justification.

C. Background

The existing standards for residential central air conditioners and
heat pumps have been in effect since 1992. As described above, the
descriptor for air conditioner and heat pump cooling efficiency is SEER
and the descriptor for heat pump heating efficiency is HSPF. The
current central air conditioner and heat pump 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

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. During a workshop on June 30, 1998, we presented for comment
an analytical framework for the central air conditioner and heat pump
standards rulemaking. The analytical framework described the different
analyses to be conducted, the method for conducting them, the use of
new spreadsheets, and the relationship of the various analyses. On
November 24, 1999, DOE published a Supplemental ANOPR. 64 FR 66306. On
October 5, 2000, DOE published a Notice of Proposed Rulemaking (NOPR or
proposed rule). 65 FR 59590. The energy efficiency standards proposed
for residential central air conditioners and central air conditioning
heat pumps (heat pumps) were as follows:

--Split system and single-package air conditioners--12 SEER
--Split system and single package heat pumps--13 SEER/7.7 HSPF
--Through-the-Wall air conditioners and heat pumps--11 SEER/7.1 HSPF.

In addition to the increase proposed in SEER and HSPF, the
Department requested comments on a proposal to adopt a standard for
steady-state cooling efficiency, EER.\2\ The proposal on EER was
designed to ensure more efficient operation at high outdoor
temperature, during periods when electricity use by air conditioners is
at its peak.
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\2\ 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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The proposed rule provided additional background information on the
current standards, the history of previous rulemakings and the
procedures, interpretations and policies which guide the Department in
developing new efficiency standards, which are set forth as the Process
Improvement Rule. 61 FR 36974. A public hearing was held in Washington,
DC on November 16, 2000, to hear oral views, data and arguments on the
proposed rule.

II. General Discussion

A. Technological Feasibility

1. General
There are central air conditioners and heat pumps in the market at
all of the efficiency levels prescribed in today's final rule. The
Department, therefore, believes all of the efficiency levels adopted by
today's final rule are technologically feasible.
2. Maximum Technologically Feasible Levels
Pursuant to section 325(p)(2) of the Act, and as discussed in the
proposed rule, the Department determined that 18 SEER is the maximum
technologically feasible (Max Tech) level for cooling efficiency for
all product classes and capacities covered by this rulemaking. 65 FR
59593. The Max Tech level for heating efficiency, is 9.4 HSPF which is
the highest HSPF rating currently available in residential heat pumps.

B. Energy Savings

1. Determination of Savings
The Department forecasted energy savings through the use of a
national energy savings (NES) spreadsheet as discussed in the proposed
rule. 65 FR 59590, 59593 (October 5, 2000). The

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spreadsheets and assumptions upon which the results of today's final
rule is based are unchanged.
2. Significance of Savings
As discussed in the proposed rule, section 325(o)(3)(B) of the Act
prohibits the Department from adopting a standard for a product if that
standard would not result in ``significant'' energy savings. The energy
savings for the standard levels we are adopting today are non-trivial--
indeed they are substantial--and therefore we consider them
``significant'' within the meaning of section 325 of the Act.

C. Rebuttable Presumption

The National Appliance Energy Conservation Act established new
criteria for determining whether a standard level is economically
justified. Section 325(o)(2)(B)(iii) of the Act 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, according to the test procedure, 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. This presumption
of economic justification can be rebutted upon a proper showing.
The standard levels we are adopting today do not satisfy the
criteria set forth above. Therefore, we cannot presume them to be
economically justified and have performed additional analysis to
support the Secretary's determination that they are indeed economically
justified.

D. 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
We considered the economic impact on manufacturers and consumers as
discussed in the proposed rule. 65 FR 59590, 59593 (October 5, 2000).
2. Life-cycle-costs
We considered life-cycle-costs as discussed in the proposed rule.
65 FR 59590, 59594 (October 5, 2000). The installed price and operation
and maintenance costs were calculated for a range of consumers around
the nation to estimate the range in life cycle cost benefits that
consumers would expect to achieve due to new standards.
3. Energy Savings
While significant conservation of energy is a separate statutory
requirement for establishing 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.
4. Lessening of Utility or Performance of Products
This factor cannot be quantified. In establishing classes of
products, the Department has attempted to eliminate any degradation of
utility or performance in the products covered by today's final rule.
Attributes that affect utility include the product's ability to cool
and dehumidify. In some applications, noise levels may also be an
aspect of utility. Product size or configuration can also be considered
utility if a change in size would cause the consumer to install the
product in a location or in a manner inconsistent with the consumer's
preferences.
5. Impact of Lessening of Competition
It is important to note that this factor has two parts; on the one
hand, it assumes that there could be some lessening of competition as a
result of standards; and on the other hand, it directs the Attorney
General to gauge the impact, if any, of that effect.
In order to assist the Attorney General in making such a
determination, the Department provided the Attorney General with copies
of the proposed rule and the Technical Support Document for review. The
Attorney General's response is discussed in section V.D.5 below, and is
reprinted at the end of the rule.
6. Need of the Nation To Conserve Energy
The Secretary recognizes that energy conservation benefits the
Nation in several important ways. Enhanced energy efficiency improves
the Nation's energy security, strengthens the economy, and reduces the
environmental impacts of energy production.
7. Other Factors
This provision allows the Secretary of Energy, in determining
whether a standard is economically justified, to consider any other
factors that the Secretary deems to be relevant. EPCA Section
325(o)(2)(B)(i)(VI), 42 U.S.C. 6295(o)(2)(B)(i)(VI).
Under this factor, we considered the potential improvement to the
reliability of the electrical system. Recent summertime electric power
outages in various regions of our country resulted in disruption of
many peoples' lives and businesses. The schedule contained in the Act
called for the Department to revise the standards for central air
conditioners and heat pumps by 1994, to be effective in 1999. For
reasons explained in the proposed rule and ANOPR, promulgation of many
standards including those for central air conditioners and heat pumps
was delayed.
While central air conditioning accounts for about 10 percent of
residential electricity consumption, it can account for several times
this amount during peak hours on hot summer days, when electricity
reliability is most strained. A 30 percent improvement in air
conditioner efficiency would reduce the nation's total annual
electricity use by approximately 2 percent after it was fully phased
in. However, the same efficiency improvement would provide a greater
percentage reduction in peak loads, reducing the prospect of brownouts
and price spikes. These peak load reductions are critical given that
the conditions leading to grid instability can occur well before peak
demand even equals supply.
The Final Report \3\ by the team of experts convened by the
Secretary to investigate the electric power problem included the
recommendation to increase the energy efficiency of central air
conditioners as one means for enhancing reliability. This
recommendation led the Secretary to put this rulemaking on the fast
track and to advance the publication of today's final rule for central
air conditioners and heat pumps. Thus, the Department has considered
effects of the rule on electric power system reliability.
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\3\ ``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.
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III. Methodology

As discussed in the proposed rule, the Department developed new
analytical tools for this and other recent rulemakings. The first tool
was a

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spreadsheet that calculates life-cycle-cost (LCC) and payback period.
The second calculates national energy savings and national net present
value (NPV). The Department also completely revised the methodology
used in assessing manufacturer impacts including the adoption of the
Government Regulatory Impact Model (GRIM). Additionally, DOE developed
a new approach using the National Energy Modeling System (NEMS) to
estimate impacts of air conditioner energy efficiency standards on
electric utilities and the environment.
In order to estimate production costs for this rulemaking, we used
an efficiency level approach, with cost data provided by the Air
Conditioning and Refrigeration Institute (ARI) and through our own
reverse engineering methods. The ARI cost data presented the minimum,
mean, and maximum cost estimates for the sample of ARI members who
participated. The data covered each product class at each efficiency
level through 15 SEER, and was expressed relative to the base cost for
each manufacturer. The reverse engineering methodology, conceived as a
way to validate the ARI data, analyzed seventy-one samples, mostly
selected by manufacturers, using design data provided by manufacturers.
We physically examined three of these models. In refining our results,
we reviewed our detailed cost estimates for split air conditioners with
a major manufacturer.
The benefits of reverse engineering include the transparency of the
methods, data, and assumptions used to produce the estimates, and the
insights gained into the design options used to achieve the different
efficiency levels. The ARI data provides none of these benefits, but
does draw on the considerable expertise of the manufacturers involved
in producing the underlying estimates describing all of the products on
the market. One benefit of the reverse engineering analysis is that
results are expressed in absolute costs instead of relative costs.
Absolute costs are needed to represent production costs at the minimum
efficiency level and are helpful in representing the production costs
at higher efficiency levels.
Regarding the analytical methodology, the Department continues to
use the spreadsheets and approaches explained in the proposed rule. 65
FR at 59594-59597. We have applied them to develop the analysis further
in this final rule. We added new analysis based on the manufacturing
cost estimates that we had derived through reverse engineering
techniques. Also, because its results were similar to those derived
using our 18.4-year equipment life assumption, we are no longer
considering the 14-year equipment lifetime scenarios in the economic
analysis. Finally, the emissions reductions analysis now also estimates
the discounted value of cumulative emission reductions.

IV. Discussion of Comments

Since we opened the docket for this rulemaking, we have received
over 800 comments from a diverse set of interested parties, including
manufacturers and their representatives, states, energy conservation
advocates, heating and air-conditioning contractors, consumers,
electric utilities and others. The comments addressed the burdens and
benefits associated with more stringent standards, aspects of our
analysis, the merits of the different trial standard levels and
standard options we considered, and the DOE rulemaking process. Many
comments raised issues that we substantially addressed in the proposed
rule and Supplementary ANOPR. Comments received during the most recent
comment period are addressed below, and some previous comments are
revisited.

A. Burdens and Benefits

This section discusses comments we received on the burdens and
benefits associated with more stringent minimum efficiency standards,
organized into the seven factors that the Secretary considers as a
basis for deciding whether a standard level is economically justified.
1. Economic Impacts
a. Economic Impacts on Manufacturers. According to our manufacturer
impact analysis, more stringent efficiency standards burden most
manufacturers by causing them to make new investments in capacity,
research and development, and testing. We also expect most
manufacturers to experience lower profitability and sales volumes for
several years after the adopted standards become effective. Some
manufacturers in our analysis benefit under more stringent standards.
ARI characterizes the financial burdens on the industry overall as
severe. They also assert that the hydrochloroflourocarbons (HCFC)
phaseout results in cumulative burdens. (ARI, No. 100 at pp. 6 and 13).
Some manufacturers noted that EER and thermal expansion valve (TXV)
requirements would add to the burden. (York, No. 90, at pp. 4-5). The
Natural Resources Defense Council (NRDC) questions whether we
considered that reverse engineering-based prices reduce impacts through
price elasticity effects, but noted that industry impacts did not seem
to change across trial standard levels, and the Oregon Office of Energy
(OOE) believes that we have overstated manufacturer impacts since they
are already making investments in new technologies to help them improve
product efficiency. (NRDC, No. 88 at p. 15; and OOE, No. 84 at p.5).
The reduction in industry net present value does increase with
increasing standard levels, particularly since we consider it more
likely that the Roll-up \4\ scenario will occur under higher standard
levels. Individual manufacturers themselves discussed their situations
with us at length, and we have incorporated the information they
presented to us into our manufacturer impact analysis. In adopting this
rule, we have assumed that the Roll-up scenario is the most likely
outcome resulting from a new 13 SEER standard for all product classes.
We did consider the change in sales volumes driven by changes in the
underlying cost assumptions.
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\4\ The Roll-up scenario assumes that the proportion of
equipment with efficiency ratings above the new standard level will
not increase compared to their proportion today.
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Many comments described what they consider disproportionate impacts
on manufacturers of niche products. Those comments are discussed in
Section IV.4 below.
The Department has considered the manufacturer burdens as described
in the manufacturer impact analysis of the TSD in adopting the new
standard. These include cumulative burdens. It also considers the
extent to which the differences among efficiency scenarios change the
implications of more stringent standards.
b. Economic Impacts on Consumers. Many comments mention the
economic burdens that more stringent efficiency standards can place on
consumers who are sensitive to increases in first cost. Many noted that
our decision should consider burdens on consumers caused by long median
payback periods. Some comments emphasized that disproportionate impacts
on low income consumers due to an expected increase in installed price
would reduce the number of consumers who would be able to afford new
air conditioners. Some comments suggested that this effect could
increase health problems and deaths. The Mercatus Center stated that
the Department believed consumers pass up energy efficient equipment
because they are misinformed about

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operating costs, therefore the Department should construct a program to
correct this deficiency. (ARI, No. 100 at pp. 2 and 5; American Public
Power Association (APPA), No. 113 at p. 2; Manufactured Home Institute
(MHI), No. 99 at p. 1; Lennox, No. 91 at p. 3; Consumer Federation of
America (CFA), No. 110 at p. 1; Nebraska Public Power District (NPPD),
No. 109 at p. 2; National Association of Home Builders (NAHB), No. 94
at p. 1; Nordyne, No. 101 at p. 2; Trane, No. 93 at p. 4; York, No. 90
at pp. 4-5; and Mercatus Center, No. 115 at pp. 18-19).
CFA considers lower energy bills a benefit and would support
regional standards and public assistance programs to mitigate long
payback periods and disproportionate impacts on consumers. (CFA, No.
110 at p. 2).
Many comments express the belief that, for various reasons, we
either underestimated or overestimated economic impacts on consumers.
Those comments are addressed in Section IV.B. below.
We recognize that increases in first cost and long payback periods
are generally considered burdens on consumers. Based on the reverse
engineering derived manufacturing cost estimates, however, our analysis
shows that, at the adopted standard levels, the payback period is
shorter than the life of the equipment. This means that over the life
of the product, any increase in price will be paid back to the average
consumer. Thus, the new efficiency standards should provide the average
consumer with a long term economic benefit. Also, we have examined
impacts on low income consumers, and found them to benefit overall.
Consumers concerned about potential health effects should note that
assistance programs are already available to assist them with their air
conditioning purchases, and that room air conditioners will continue to
be available when cooling in individual rooms could mitigate their
health concerns.
2. Life-Cycle Costs
ARI, The Trane Company (Trane), American Electric Power (AEP),
Mercatus Center, Southern Company, Dominion Virginia Power (Dominion),
and Edison Electric Institute (EEI) asserted that the percent of
consumers realizing life-cycle-cost savings at the standard levels
issued in the proposed rule were too low and did not warrant an
increase in the minimum efficiency standard. (ARI, No. 100 at p. 2;
Trane, No. 93 at p. 4; AEP, No. 83 at p. 1; Mercatus Center, No. 115;
Southern Company, No. 96 at p. 2; Dominion, No. 103 at p. 3 and
Transcript No. 73 at pp. 50-51; and EEI, Transcript No. 73 at pp. 176-
178). Carrier Corp. asserted that there were too many consumers
incurring life-cycle-cost increases at 12 SEER. (Carrier, No. 92 at p.
5). In contrast, the American Council for an Energy-Efficient Economy
(ACEEE), the Alliance to Save Energy (ASE), the Pacific Gas and
Electric Company (PG&E), and NRDC argued that the percent of consumers
realizing life-cycle-cost savings from a particular standard level is
not the appropriate measure for establishing an updated efficiency
standard. Because air-conditioning use is highly dependent on climatic
conditions and because these are national standards, it is to be
expected that some consumers in the Northern part of the U.S. will
realize net costs from an increased standard but will be offset by
consumers in the Southern part of the U.S. who will realize life-cycle
cost savings from more efficient air-conditioning equipment. Due to
this disparity, they argue it is better to base the standard on
national average life-cycle-cost results. (ACEEE, No. 104 at p. 13;
ASE, No. 81 at p.9; PG&E, No. 104 at p. 5; and NRDC, No. 88 at pp. 19-
21).
EPCA requires the Department to consider life-cycle-cost as one of
the seven factors in determining economic justification. In determining
economic justification, the Secretary must determine whether the
benefits of a standard exceed the burdens. Life-cycle-cost is just one
of the factors to be considered and there is no mathematical formula
for weighing the benefits and burdens of the various factors. There are
also no mathematical thresholds for life-cycle-cost as implied by EEI
and ACEEE. (EEI, Transcript No. 73 at p. 177; and ACEEE, Transcript No.
73 at p. 182). The Department notes that under the standards in today's
rule, consumers on average will have lower life-cycle costs.
Furthermore, it appears that EPCA, in requiring DOE to set national
standards that maximize energy savings for appliances where there will
obviously be regional differences in usage and energy costs,
contemplated that the level of life cycle cost savings would vary among
consumers.
We have quantified the distribution of life cycle costs among
consumers and have considered it, along with other information, in the
weighing of the benefits and burdens of each standard level we
assessed.
3. Energy Savings
ARI states that the Department overestimated the energy savings
realized from efficiency standards by basing the savings on source
energy consumption at the power plant, rather than site energy
consumption at the household or commercial building. (ARI, No. 100 at
p. 11). While neither stating that the energy savings estimated by the
Department were too great or too low, ASE claims that 70 billion kWh
would be saved from a 13 SEER standard coupled with a minimum EER
requirement of 11.6 and mandatory use of TXVs. (ASE, No. 81 at p. 12).
ACEEE also claims that significant national energy savings will be
realized from a 13 SEER standard, an 11.6 minimum EER requirement,
mandatory use of TXVs, and an HSPF standard of 7.9.
NAECA prescribes that consumer energy savings be evaluated based on
site rather than source energy consumption. However, the Department
believes national energy savings evaluated at the source reflects a
more accurate representation of the energy consumption being avoided
from a standard. Evaluating energy at the source takes into account the
efficiency of the generation source as well as the transmission and
distribution of the electricity. The Department accounts for site
energy consumption in its analysis of consumer life-cycle-cost impacts.
With regard to the magnitude of the energy being saved from a standard,
the Department is confident in its National Energy Savings (NES)
spreadsheet model to forecast the source energy savings realized from
all standard levels, including a 13 SEER standard. Discussions with
regard to minimum EER standards and TXV requirements are presented
later in this Chapter.
4. Lessening of Utility or Performance of Products
Comments regarding lessening of utility related mainly to the
impacts that more stringent standards may have on the availability of
niche products and some products that are not typically considered
``niche''. Most comments stated that those products face size
constraints that they will find difficult, if not impossible, to
conform to under more stringent standards. That result could lead to
the removal of the products from the market, or to equipment prices
that are higher than the market would be able to sustain. (Friedrich,
No. 116 at p. 1; Unico, No. 117 at pp. 1-2; Carrier, No. 92 at p. 8;
Lennox, No. 91 at p. 7; Trane, No. 93 at p. 18; Mitsubishi, No. 87 at
p. 1; Armstrong, No. 86 at pp. 1-3; and Fujitsu, No. 85 at p. 1).
We recognize that contractors and consumers do take product size
into account when making a purchase, and that size constraints can make
it more

[[Page 7176]]

difficult for manufacturers to offer equipment meeting performance
needs. This is true for niche products, which we discuss elsewhere, as
well as for conventional products. The same was the case when the 10
SEER minimum standards were agreed upon and established in 1987.
Manufacturers can attempt to prevent size constraints from degrading
performance or utility by offering smaller 13 SEER equipment than they
typically offer today. The technical options for achieving that
objective include existing and emerging technologies. Therefore, we do
not consider it likely that products will be unavailable that meet the
new 13 SEER standard, and have substantially the same capacities,
performance and range of sizes as today's products.
If the size of 13 SEER equipment does not generally decrease under
new standards, some consumers may be required to incur additional
installation expense to accommodate the larger equipment. We discuss
this in more depth in Section IV.B.2.e. The Department did consider
that possibility when adopting today's standards.
Along a separate line, Southern Company is concerned that higher
efficiency equipment will reduce dehumidification, which is an
important attribute in moderate, humid, climates. (Southern Company,
No. 96 at pp. 4-5). The equipment's ability to dehumidify is a function
of its design and not necessarily its efficiency. As we stated in the
proposed rule, evidence indicates that sensible heat ratios in high
efficiency equipment are similar to those at the baseline. We trust
that under a more stringent standard, manufacturers will seek to serve
the needs of the market with products that dehumidify properly.
5. Impact of Lessening of Competition
The Department of Justice (DOJ) and others commented that the more
stringent standards contained in the proposed rule could lessen
competition. (DOJ, No. 112; Trane, No. 93 at p. 12; and EEI, No. 80 at
p. 8). Aspects of our manufacturer impact analysis support that
conclusion. We discuss the DOJ concerns in more depth in Section V.D.5.
The letter from the Department of Justice is attached in the Appendix
of this rulemaking. We recognize that the standard levels we are
adopting could accelerate the consolidation trend among major
manufacturers. However, as discussed in the manufacturer impact
analysis, we do not expect that any manufacturer or group of
manufacturers will be able to use the standards as an opportunity to
consolidate their market power. (See TSD, Chapter 8). Therefore, we
believe that competition will remain vigorous under the adopted
standard, and any lessening of competition that does occur will not
result in price increases or loss of choice and utility for consumers.
Other comments note that a large fraction of today's models would
not be able to meet more stringent standards. (AEP, No. 83 at p. 1;
Dominion, No. 68 at p. 2; ARI, No. 100 at p. 11; and EEI, No. 80 at p.
8). In the manufacturer impact analysis, we considered that
manufacturers will have to design new products to meet any increased
standard level. Furthermore, products are technologically feasible
through 18 SEER. So, while many of today's models may not be available
under more stringent standards, we fully expect variations of those
models to be available, offering all the features and utility of
currently available products.
6. Need of the Nation To Conserve Energy
Of the approximately 800 comments we have received, the vast
majority were from individuals and organizations who made similar
claims regarding the benefits that would be associated with a 13 SEER
standard and an EER standard for air conditioners and heat pumps. These
benefits included savings for consumers, avoided emissions and
electrical capacity, and the reduced occurrence of brownouts and
blackouts. Although our analysis is not able to substantiate many of
these claims, all of these issues relate to the need of our nation to
conserve energy. We recognize that a broad cross-section of citizens
and organizations are concerned about these issues and in the potential
for more stringent standards to address them.
We discuss more specific comments related to economic benefits and
electric system capacity in other sections of this chapter. In this
section, we discuss the comments we received regarding environmental
benefits.
ASE claims that a 13 SEER standard coupled with an 11.6 EER minimum
standard and a mandatory TXV requirement would yield environmental
benefits in the form of the following air-borne emission reductions: 15
million metric tons of carbon, 40,000 tons of nitrous oxides, and
200,000 tons of sulfur dioxide in 2020. Northeast Energy Efficiency
Partnership (NEEP) also states that significant carbon dioxide emission
reductions could be achieved with a 13 SEER standard relative to a 12
SEER standard. (ASE, No. 81 at p. 12; and NEEP, No. 118 at p. 2). The
Northwest Power Planning Council (NWPPC) states that the Department
used the average heat rate of avoided plants rather than the heat rate
of operating plants displaced by the efficiency standards when
determining emission reductions. As a result, NWPPC claims that the
emissions mitigated by the standards were underestimated (NWPPC, No. 76
at p. 6).
National energy savings realized from central air conditioner and
heat pump efficiency standards are directly translated into reduced
air-borne emissions at electric power plants. The magnitude of the
emission reductions are determined through the use of NEMS-BRS \5\, a
version of NEMS used for appliance standards analyses. NEMS-BRS 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. Thus, although the
Department agrees with ASE that emissions will be avoided from new air
conditioner and heat pump efficiency standards, the Department believes
that the magnitude of those emission reductions are best estimated with
NEMS-BRS. 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. We do not believe there
is a potential benefit in reductions in SO2 emissions from
electricity savings as long as emissions of SO2 are at or
near the emission ceilings. With regard to the issue of heat rates,
contrary to NWPPC's assertion, the Department did use the heat rates of
displaced power plants in determining the emission reductions resulting
from efficiency standards.
---------------------------------------------------------------------------

\5\ 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
Modelling System: An Overview 1998. DOE/EIA-0581 (98), February,
1998. BRS is DOE's Office of Building Research and Standards.
---------------------------------------------------------------------------

7. Other Factors
With regard to other factors, the issue of electric system
reliability attracted numerous comments. EEI, AEP, and

[[Page 7177]]

Dominion Virginia Power stated many changes are occurring in the
electric utility industry at the same time electric load is continuing
to grow. As a result, the overall effect of any end-use efficiency
measure, such as an air conditioner and heat pump standard, is likely
small. (EEI, Transcript, No. 73 at p. 224; AEP, No. 83 at p. 4; and
Dominion, No. 103 at p. 4). Southern Company argued that once a
standard is established, new load growth forecasts incorporating its
effects will likely be made and investment decisions will be
accordingly adjusted. In other words, since the effects of this rule do
not become noticeable until five or more years after its 2006 effective
date, utilities will have ample time to plan and construct capacity in
response to expectations of load growth, reserve margin, and, where
competition has become normal practice, to prices. (Southern Company,
Transcript No. 73 at p. 241). Synapse Energy Economics (Synapse), along
with ACEEE, NWPPC, NRDC, ASE, and PG&E noted that there is a real issue
in meeting increased demand, due in large part to increased air
conditioner usage. Synapse also notes that conventional assumptions
about the ability of the power system to meet growing load are
increasingly coming into question as the barriers to system expansion
are not inadequate price incentives or unwillingness to invest, but
rather siting (of generation, transmission, and distribution
capability), environmental, and other constraints. (Synapse, Transcript
No. 73 at p. 243; ACEEE, No. 104 at pp. 13-15; NWPPC, Transcript No. 73
at p. 253; NRDC, No. 88 at pp. 4 and 6; ASE, No. 81 at pp. 7 and, 10;
and PG&E, Transcript No. 73 at p. 251).
In a March 2000 final report, the DOE Power Outage Study Team
described several power outages that occurred in the summer of 1999.
During early July, a heat storm affected much of the East from New
England down past the Mid-Atlantic causing many problems. From July 3
through 8, service was interrupted to a total of 110,000 Long Island
Power Authority (LIPA) customers for varying periods. During that
period, two new system peak loads were set and LIPA activated its
Commercial Peak Reduction Program, appealed to its other large
customers to voluntarily curtail their use of electricity and reduced
system-wide voltage by five percent. Many organizations and government
offices responded by closing early or cutting back on their electricity
use. On July 6, the eastern half of the Pennsylvania, New Jersey,
Maryland Interconnection grid experienced sudden and steep voltage
declines as an all-time-high peak load was recorded. The integrity of
the system was maintained by reducing voltage, curtailing contractually
interruptible customers and appealing for voluntary load reductions. On
that same day, Delmarva Power and Light had a capacity shortfall that
resulted in rotating outages from 10:30 a.m. until 7:30 p.m. affecting
138,000 customers. In the Chicago area on July 30, Commonwealth Edison
set all-time-peak demand during a period of intense heat and humidity.
Resulting system failures caused more than 100,000 customers temporary
losses of power for up to several hours. The summer of 2000 has seen
similar types of problems in the state of California.
Outages such as these can cost millions of dollars per hour
depending on which and how many customers are affected. Although we
recognize that system adequacy may only play a small part in ensuring
system reliability, the Department is convinced, especially due to
recent expansion shortfalls in the Western part of the U.S., that
system reliability is an important issue which can be addressed, to
some degree, by increased air conditioner and heat pump standards. The
impacts of standards could be potentially beneficial in lowering
overall system stress and postponing necessary investment. This is
especially important since annual investment in transmission has
roughly halved since the levels of the 1970's \6\. The potential
benefit of air conditioner and heat pump efficiency improvements is a
factor in establishing the standards being issued today. In addition,
the Department is continuing to establish national equipment standards
in the form of the current efficiency descriptors (i.e., SEER and
HSPF), as discussed below, it will examine ways to provide additional
credit in the test procedure for EER rather than using such additional
measures as minimum EER standards and mandatory TXV requirements.
---------------------------------------------------------------------------

\6\ ``Hirst, E., ``Expanding U.S. Transmission Capacity.'' Paper
prepared for Edison Electric Institute, Washington D.C., July 2000:
p. 8-9.
---------------------------------------------------------------------------

B. Analysis and Assumptions

1. Engineering Analysis
a. Reliance on ARI and Reverse Engineering Cost Estimates. The
Department considered primarily two sets of data for relating the
manufacturing costs of current baseline (minimum SEER) equipment to the
manufacturing costs of higher efficiency equipment which would become
baseline equipment under new standards: one source provided by the
industry through ARI and the other source determined from the
Department's reverse engineering analysis. In the proposed rule, our
analyses and conclusions relied heavily on the ARI manufacturing cost
estimates, and less on the reverse engineering cost estimates.
However, several comments questioned the validity of the ARI
results and recommended we rely more heavily, if not exclusively, on
the reverse engineering estimates. They cited various reasons,
including retail price information that matched the ARI Mean, the
greater transparency of the reverse engineering process and results,
and the natural tendencies of manufacturers to overestimate the costs
of complying with more stringent standards. The same comments even
suggest that the reverse engineering cost estimates may themselves be
overestimates. (OOE, No. 84 at p. 3; NRDC, No. 88 at pp. 3-15; ASE, No.
81 at p. 11; and NEEP, No. 188 at p. 3).
Other comments supported the use of the ARI data, citing the
experience of the manufacturers and apparent flaws in the assumptions
and methodology used in the reverse engineering analysis, which was
designed as a validation tool. These perceived flaws included the small
number of tear-downs performed. However, ARI and some of its members
recognize that the reverse engineering results fall within their range
and seem to validate their data to some extent. (ARI, Transcript No. 14
at p. 42, No. 48 at p. 2 and No. 100 at p. 9; Carrier, No. 92; Trane,
No. 93; and Lennox, No. 91 at p. 4).
While we recognize the expertise of ARI's members related to
projecting the cost of producing central air conditioning equipment, we
have several concerns with the ARI data. First, ARI has not
satisfactorily explained why their cost data at 12 SEER and higher
levels display such a large range between the minimum and maximum
values. We are convinced that, in order to remain competitive,
manufacturers will have to adopt relatively similar paths to increase
the efficiency of their baseline products to meet the new minimum
standards. This will tend to result in actual costs that are closer to
the ARI Minimum values than to the ARI Mean values.
We are also concerned with how closely the data on recent Wisconsin
retail prices, submitted by ACEEE, agrees with the ARI Mean cost
estimates. Once we adopt a higher minimum efficiency level, we believe
that the retail prices of baseline equipment that must meet that level

[[Page 7178]]

will decline below the price of equipment currently at that level. York
International Corporation (York) and ARI confirmed, for example, that
their markups generally increase on higher efficiency equipment, and
Star Supply Company seemed to imply that distributor markups increase
with increasing efficiency. (Star Supply Co., No. 95 at p. 2; York,
Transcript No. 73 at p. 117; and ARI, No. 100 at p. 3). Those markups
are reflected in the current retail prices of those products. Due to
competitive pressures at the baseline level, today's markups would not
be sustainable for baseline equipment that meets, but does not exceed,
a new standard. In addition, as noted by John Compton of Home
Excellence, Inc. (HEI), a heating and air-conditioning contractor, the
new, more efficient, baseline equipment would likely possess fewer of
the premium features found in today's high efficiency equipment. (HEI,
Transcript No. 73 at p. 123). For those reasons, current retail price
data would overestimate the relative cost of high efficiency products
under new standards. The agreement between ARI's mean cost data and the
Wisconsin retail price data suggests that the ARI cost data correspond
to today's costs of producing high efficiency equipment rather than to
the lower production costs we would expect under new standards.
The reverse engineering analysis, on the other hand, is transparent
and the results fall within the ARI range and nearer to the ARI Minimum
where we expect competitive pressure to drive manufacturing costs.
Seventy-one samples were analyzed using bills-of-materials provided
manufacturers, supplemented with three physical teardowns, and detailed
estimates for split air conditioners were reviewed with a major
manufacturer. Our reverse engineering methodology, though originally
conceived as a validation exercise, is itself a valid method of
estimating equipment production costs, and is well suited for use in
this rulemaking as an indicator of the most likely production costs
under new standards.
Based on a consideration of the above, we conclude that the reverse
engineering cost estimates are more representative of what actual
production costs will be under new standards and that the ARI Mean cost
data very likely overestimate those costs. For that reason, we are
weighing the reverse engineering cost estimates heavily in our
decision-making. We continue to provide the results based on the ARI
Mean data cost to illustrate an upper bound, which we believe will be
quite an unlikely outcome.
b. Consideration of Emerging Technologies. ACEEE and others
commented we should have included the savings that could result from
the use of emerging technologies rather than presenting them
separately. The Oregon Energy Office and Thermalex, Inc. also expressed
more optimism regarding the applicability and probability of adoption
for microchannel heat exchangers than we had expressed in the TSD.
(ACEEE, Transcript No. 73 at p. 88; ASE, No. 81 at pp. 8, 9 and 12;
OOE, No. 84 at p. 5; and Thermalex, No. 89 at pp. 1-2).
Trane and York dispute some of the claims regarding the potential
of emerging technologies. (Trane, No. 93 at p. 7; and York, No. 90 at
p.4).
According to our engineering analysis described in Section 4.5 of
the TSD, on a system basis, emerging technologies cannot make a
significant cost impact below 14 SEER. That explains why they are not
in widespread use today. At 14 SEER and above, some emerging
technologies could compete quite favorably with the technologies that
currently dominate in some applications. We did not analyze standard
levels at 14 SEER, instead we examined 13 SEER and 18 SEER, the Max
Tech level. ACEEE contends that, had we evaluated life-cycle-costs
using reverse engineering analysis combined with emerging technology
impacts, a standard level as high as 14 SEER may have been justified
after all, and should have been considered. (ACEEE, Transcript No. 73
at p. 171, and No. 101 at p. 7).
From our ANOPR analysis based on ARI mean costs, we concluded that
standard levels between 13 SEER and 18 SEER did not warrant further
consideration. York had stated that ARI's cost data already included
the benefits of emerging technologies although we could not verify the
methods they used to incorporate them. (York, Transcript No. 14 at p.
116; and ARI, Transcript No. 14 at p. 115). Economic impact results
based on reverse engineering were more favorable, but still were far
from compelling. For example, the impact on national net present value
was negative $8.4 billion for 14 SEER split air conditioners. We
believe that incorporating the modest reduction in cost due to the most
likely impact of emerging technologies (about 10 percent for split air
conditioners) would not have resulted in a 14 SEER level being
economically justified.
Overall, we considered the potential of emerging technologies to
penetrate the market in 13 SEER products under a 13 SEER standard to be
higher than under lower standard levels. Partially for that reason, we
believe that the burdens that could accrue from increases in the size
of baseline equipment under a 13 SEER standard can be somewhat
mitigated by the use of emerging technologies.
2. Life Cycle Cost (LCC) Analysis
a. Probability-based analysis. Trane questioned the use of a Monte
Carlo probability-based analysis because they claim that several of the
distributions used to characterize the inputs to the analysis are
erroneous. (Trane, No. 93 at pp. 4-5).
As part of the process to improve the energy efficiency standards
analysis, the Department uses a probability-based analysis to determine
a distribution of life-cycle cost impacts for consumers utilizing
central air conditioners and heat pumps. Most of the inputs to the
analysis are characterized with distributions. While some of the input
distributions are based on limited data, no other data have been
offered to recharacterize the distributions. Therefore, the Department
sees no compelling reason to alter its assumptions regarding the input
distributions.
b. Energy Use. Trane claimed that the 1997 Residential Energy
Consumption Survey (RECS) sample is too small and may not accurately
represent the population of central air conditioner and heat pump
consumers. In addition, they claimed that the Department is not
accurately representing the saturation of air-conditioned households.
Trane stated that the saturation reported by the Department (37.6
percent) is inconsistent with the saturation reported by RECS (47
percent). (Trane, No. 93 at pp. 4-5).
As part of the process to improve the energy efficiency standards
analysis, the Department is 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. With regard to apparent discrepancies
between air-conditioned household saturations, the 37.6 percent

[[Page 7179]]

saturation value cited by Trane represents only those households with
central air conditioners. When including homes with central air-
conditioning heat pumps, the household saturation used by the
Department in its LCC analysis matches the 47 percent saturation level
reported by RECS.
c. Electricity Prices. Wholesale electricity cost data for the
period of 1998 through October, 2000, presented by experts on behalf of
the Appliance Standards Awareness Project (ASAP), demonstrated dramatic
variations in seasonal wholesale electricity costs for regions of the
country (i.e., California, New England, New York, and the Pennsylvania-
New Jersey-Maryland region) that have recently deregulated their
electric utility industry. In particular, wholesale costs during summer
months and especially certain summer day hours were significantly
greater than annual average wholesale costs. Wholesale electricity cost
data for the period spanning 1998 through 1999 for six regulated North
American Electric Reliability Council (NERC) regions were also
presented showing that summer costs were also significantly greater
than average annual costs. (Synapse, Transcript, No. 73 at pp.127-137
and No. 108 at p. 5). Asserting that DOE's marginal prices based on
1996 and 1997 data are regulated and do not reflect the marginal cost
of electricity under a deregulated market, ASAP, ACEEE, NWPPC, and
Synapse argued that based on recent wholesale electricity cost data,
marginal costs will significantly exceed average costs during periods
when air conditioners are operating.\7\ Future marginal electricity
prices are also likely to increase as electricity markets through out
the U.S. are deregulated. (ASAP, No. 108 at p. 1; ACEEE, Transcript No.
73 at pp. 154-158; NWPPC, No. 76 at pp. 3-4; and Synapse, Transcript
No. 73 at pp. 152-153).
---------------------------------------------------------------------------

\7\ Marginal prices exclude fixed charges, average prices
include fixed charges.
---------------------------------------------------------------------------

Dominion Virginia Power (Dominion), The Southern Company
(Southern), and EEI all disagree with the assertion that higher
marginal costs will result from higher wholesale electricity costs.
Dominion stated that recent deregulation pilot programs in Virginia
revealed that residential consumers are not being offered rates that
reflect the costs of generation (e.g., time of use rates). Southern
warned that it is premature to draw conclusions from wholesale
electricity costs this early into the deregulation process. Extremely
high wholesale prices now may not be an indicator as what will happen
to retail prices in the future. Southern also warned that the specific
problems facing California with regard to wholesale electricity costs
are not representative of the current situation in the Southeast where
peak prices were considerably lower in the summer of 2000 on pooled
prices than they were the previous summer because of greater supply
availability. EEI argued that flat rate retail pricing will likely
continue into the future even under a deregulated market. Electricity
suppliers will hedge against any probable summer price spikes by
offering high enough flat rates so that financial losses incurred
during times of high summer wholesale costs will be more than offset by
the profits earned during times when wholesale costs are low (e.g., off
peak summer hours or the winter season). (EEI, Transcript No. 73 at pp.
148-150; Dominion, Transcript No. 73 at pp. 158-160; and Southern
Company, No. 96 at pp. 6-7).
As was stated in the proposed rule, the 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 \8\)
was taken from the years 1996 and 1997. For commercial buildings,
utility tariffs used to establish marginal prices were collected in the
year 1997. On average, residential marginal prices for households with
central air conditioners are 3 percent lower than average rates while
for households with heat pumps marginal prices are 7 percent lower.
Space-cooling marginal prices in commercial buildings are on average 2
percent greater than average commercial rates. Our method for
determining marginal prices provides a snapshot of recent retail rates
and may or may not accurately reflect what marginal prices will be like
in the future. Although wholesale electricity costs for four
deregulated electricity markets demonstrate higher wholesale
electricity costs during times when air conditioners are likely to be
used, we cannot speculate as to how wholesale electricity prices will
be translated into retail prices to residential consumers. Thus, rather
than speculating as to how electricity deregulation may impact marginal
electricity prices, we are retaining our existing method for
establishing marginal prices.
---------------------------------------------------------------------------

\8\ Residential Energy Consumption Survey.
---------------------------------------------------------------------------

With the above said, the Department investigated the sensitivity of
consumer life-cycle costs (aggregated to a national level in the form
of a net present value (NPV)) to increases in the marginal electricity
price. As will be reported in Chapter V, Analytical Results, the NPV of
a 13 SEER standard based on Reverse Engineering manufacturing costs is
a savings to the nation of $1 billion. An increase in the marginal
electricity price of 3 cents/kWh yields a further increase in the
operating cost savings so that the NPV equals $5 billion. Although the
Department will continue to rely on its existing method for
establishing marginal electricity prices, we recognize that future
changes in the electric utility industry due to deregulation could
significantly change future electricity prices and, as a result,
improve the economic benefits of the standards being issued today.
d. Product Life. ARI, Carrier Corp., and The Trane Company all
asserted that the 18.4-year average equipment lifetime assumed by the
Department is not representative of actual central air conditioner and
heat pump life. Both Carrier and Trane believed the lifetime is 15
years while ARI stated that the lifetime is even lower at 13 years.
(ARI, No. 100 at p. 4; Carrier, No. 92 at p. 5; and Trane, No. 93 at p.
8).
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.\9\. 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. Since the
heat pump survey clearly indicates that the original compressor is
replaced once in a system's life, DOE's analysis was based on the
inclusion of a repair cost for the 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. Although a shorter equipment lifetime is possible, the
Department has not been provided with more substantive data to support
discontinuing its use of the above mentioned survey data. The
Department believes that the survey

[[Page 7180]]

data provides an accurate representation of central air conditioner and
heat pump life. In addition, an average lifetime of 14 years was run as
a scenario for the analyses conducted for the proposed rulemaking
showing that the resulting consumer economics were very close to the
results generated with the 18.4-year average life coupled with
compressor replacement costs.
---------------------------------------------------------------------------

\9\ ``Bucher, M.E., Grastataro, C.M., and Coleman, W.R., ``Heat
Pump Life and Compressor Longevity in 'Diverse Climates.'' ASHRAE
Transacitons, 1990, 96(1): p. 1567-1571.
---------------------------------------------------------------------------

e. Installation Cost. International Comfort Products (ICP) and HEI
stated that the consumer's installation costs, e.g, labor and materials
costs, exclusive of equipment cost, for installing a central air
conditioner or heat pump will increase with product efficiency. (ICP,
Transcript No. 73 at pp. 126-127; and HEI, Transcript No. 73 at pp. 92-
93). ICP specifically voiced concerns over the installation cost
differences between baseline (10 SEER) and 14 SEER equipment stating
that the more efficient equipment, due its increased physical size,
would incur higher labor expenses as a result of needing extra
personnel to install the equipment. Other comments claimed that
installation costs would be impacted by larger and more efficient units
for those installations with size constraints such as equipment closets
in manufactured homes and certain replacement installations in single-
family homes. (MHI, No. 99 at p. 4; York, No. 90 at p. 5; and Lennox,
No. 91 at p. 7).
Throughout the analysis we have assumed that installation costs
would remain constant as efficiency increased. We remain unconvinced
based on the comments we have received that our assumption is
necessarily incorrect. Even if installation costs do generally rise as
the size and weight of equipment increases, manufacturers will have the
incentive under new standards to reduce the size of 13 SEER equipment
using various approaches at their disposal. These include existing
design options that we have mentioned, such as adopting variable speed
and modulating capacity technologies, converting to microchannel heat
exchangers, increasing the size of the unconstrained outdoor unit or
indoor unit only, or changing the footprint or elevation of the unit.
These possible solutions are applicable to manufactured homes as well
as site-built homes.
For those reasons, we are retaining our assumption that
installation costs remain constant as efficiency levels rise.
f. Markups. ARI, York, Carrier and Trane commented that we had
apparently assumed that markups decreased as efficiency levels
increased, and provided evidence to the contrary. (ARI, No. 100 at p.
3; York, No. 90 at p. 4; Carrier, No. 92 at p. 5; and Trane, No. 93 at
p. 12).
In fact, we did assume for the Manufacturer Impact Analysis that
markups increase with increasing efficiency under a given standard
level. This agrees with the comments. However, for the consumer
economic analyses, as the minimum standard level increases, we assumed
that some of the markups on the baseline product do decrease. Comments
did not address that issue, and we believe our assumption is correct.
Appendix D of the TSD provides more information on this issue.
3. Shipments/National Energy Savings
a. Adjustments to NAECA Shipment Scenario. ACEEE and the NEEP
assert that the NAECA efficiency scenario we developed is not at all
representative of the effect of the NAECA standard as we claim. (ACEEE;
Transcript No. 73 at p. 213 and No. 118 at p. 4). They point out that
the distribution of equipment higher than 10 SEER in 1993 was 18
percent, and that our NAECA scenarios apply much smaller fractions of
shipments than 18 percent.
As we mentioned in the TSD for the proposed rule (section 8.3.5),
the NAECA scenario represents the effect that NAECA had on equipment
efficiency in the market. A further explanation is warranted. While
sales of equipment rated higher than 10 SEER was indeed 18 percent in
1993, it was 10 percent in 1992, 7 percent in 1991, 5 percent in 1990
and 3 percent in 1989. A trend of improving efficiency had already been
in place since the late 1970's. NAECA, which became effective in 1992,
clearly did not cause all the high efficiency shipments that existed in
1993. However, NAECA did seem to stimulate more high efficiency
shipments than could have been explained by the ongoing trend. It is
that enhancement to the status quo that our NAECA scenario attempts to
reproduce. Thus, under our NAECA scenario, shipments above the 13 SEER
level increase from 1 percent under the base case to 7 percent with a
13 SEER standard. Expecting them to increase from 1 percent to 18
percent as ACEEE and NEEP seem to assert is not at all representative
of the NAECA experience and is more in line with the Shift scenario
that we developed.
b. Fuel Switching. Several comments noted the potential for fuel-
or equipment-switching from heat pumps to either gas-fired or electric
resistance heating equipment due to the disparity in the standards
proposed for central air conditioners (12 SEER) and heat pumps (13
SEER). The comments stated that the incremental purchase price of a 13
SEER heat pump relative to a 12 SEER air conditioner with either a gas-
fired or electric resistance heating system is great enough to drive
heat pump consumers to an alternative space-conditioning system. (ARI,
No. 100 at p. 10; Southern Company, No. 96 at p. 3; AEP, No. 83 at p.
2; Carrier, No. 92 at p. 4; EEI, No. 80 at p. 8; York, No. 90 at p. 7;
and Lennox, No. 91 at pp. 4-6).
Acknowledging the potential for fuel-or equipment-switching, both
ASE and ACEEE recommended setting both air conditioner and heat pump
standards to 13 SEER. (ASE, Transcript No. 73 at p. 197; and ACEEE,
Transcript No. 73 at pp. 202-203).
From the perspective of saving the maximum amount of energy that is
economically justifiable, the biggest ``fuel'' switching concern is
from heat pumps to a combination of central air conditioners and
electric resistance heating. This may occur in households that have
only electric service and where the incremental purchase price of heat
pumps is too great. Such a price increase might occur if the standard
on heat pumps is significantly higher than the standard for central air
conditioners.
Based on data from the 1997 RECS, a little over 14 percent of
households have either baseboard or forced air electric resistance
heating with room or central air conditioning compared to almost 10
percent of households which have heat pumps. Because there are already
such a large percentage of households that utilize a combination of
central or room air-conditioning with resistance heat to meet their
space-conditioning needs, this supports the possibility that some
purchasers would choose to switch to resistance heat from heat pumps.
Compared to heat pumps meeting the standards issued in the proposed
rule (i.e., 13 SEER and 7.7 HSPF), electric resistance heating uses
over 225 percent of the energy for the same amount of heating.
Therefore, if a standard of 13 SEER and 7.7 HSPF is issued for heat
pumps while a 12 SEER standard is set for central air conditioners, a
mere 4 percent of heat pump households would need to switch to central
air conditioners and electric resistance heating to negate the energy
savings achieved from increasing the heat pump standard from 12 SEER/
7.4 HSPF to 13 SEER/7.7 HSPF.
If heat pump and air conditioner standards were set at different
levels, the price differential between the two would increase on the
order of $200. Under those conditions, we consider it likely that at
least 4 percent of prospective heat pump owners would

[[Page 7181]]

switch to lower-priced resistance heat. Therefore, we have weighed this
concern in adopting today's standard levels, which require air
conditioners and heat pumps to meet the same minimum efficiency
standard so as to reduce the likelihood of switching to resistance
heating.
A larger price differential between heat pumps and air conditioners
will also tend to encourage switching to gas or oil fired furnaces. It
is not our objective to encourage or discourage that type of fuel
switching. Therefore, we also considered this potential effect in our
decision to establish air conditioner and heat pump efficiency
standards at the same SEER level.
c. Drop in Shipments in New Construction Market. ACEEE argued that
DOE's forecasts for more efficient air-conditioning equipment estimated
too large of a drop in shipments to the new construction market. They
state that because the new construction market already has an 80
percent saturation rate it is unlikely that this market will forego the
installation of more efficient air-conditioning equipment due to its
associated increased purchase price. (ACEEE, Transcript No. 73 at pp.
219-221). This is effectively an argument that the price elasticity of
air conditioners and heat pumps in the new construction market should
be much lower than we have assumed.
Historical saturation data, however, seems to confirm that the
price elasticity in the new construction market is closer to what was
derived for the Shipments Analysis, which is already much lower than
the elasticity we assumed in the replacement market, for example. As
the price of air conditioners and heat pumps has dropped over time
relative to household income, the saturation of air-conditioning and
heat pump equipment has increased in the new housing market to its
current value of 80 percent. Because of the high saturation in the new
construction market, the purchase price elasticity for the new housing
market is small relative to the replacement market. But although the
price elasticity is small, a decrease in shipments to the new
construction market will still be likely when equipment prices increase
(as we expect to occur under a new efficiency standard). As a result,
for the case of a 13 SEER standard for split system air conditioners
for example, shipments to the new construction market drop by
approximately 3 percent based on reverse engineering manufacturing cost
data. For comparison purposes, shipments to the early replacement
market drop much more significantly (approximately 15 percent) as this
market is far less saturated and the resulting purchase price
elasticity is much more elastic. For those reasons, we retained our
assumed price elasticity in the analysis.
4. Manufacturer Impact Analysis
A few comments addressed the manufacturer impact analysis. Trane
disputes our assumed manufacturer markups. ARI commented that a survey
of their members revealed that our markup assumptions are grossly
underestimated, but the TSD (Table 8.7) reveals that, in fact, their
survey data agrees with the markups we used in the GRIM analysis to
estimate manufacturer impacts. (Trane, No. 93 at pp. 12 and 22; and
ARI, No. 100 at p. 3).
Trane also pointed out several oversights and simplifications
relating to our characterization of manufacturers and our apparent
failure to present cash flow results and other important indicators of
financial strength. (Trane, No. 93 at pp. 6, 11-13 and 23). We believe
that Chapter 8 of the TSD addresses most of Trane's concerns. No
evidence cited in the comments suggest that our assumptions contain
errors that would warrant significant change in our conclusions
regarding manufacturing impacts.
5. Utility Impacts
a. Peak Demand Impacts. ACEEE asserts that the peak power impacts
presented in the proposed rule underestimate the true peak generation
impacts due to central air conditioner and heat pump standards. ACEEE's
assertion is based on what they consider as more accurate and
significantly greater peak impacts as estimated by the Appliance
Standards Awareness Project (ASAP).\10\ (ACEEE, No. 104 at pp. 5-6).
APPA warned that excessively high SEER standards could increase peak
demand. (APPA, No. 113 at p. 1).
---------------------------------------------------------------------------

\10\ Staying cool: How Energy-Efficient Air Conditioners Can
Prevent Blackouts, Cut Pollution and Save Money, Appliance Standards
Awareness Project, July 2000, Authors: J. Thone, T. Kubo, and S.
Nadel.
---------------------------------------------------------------------------

For purposes of comparing the estimated peak impacts from the
Department's analysis based on the use of NEMS-BRS and those from ASAP,
it is helpful to consider the concept of a conservation load factor
(CLF). The CLF was first introduced by researchers at Lawrence Berkeley
National Laboratory to allow for the straightforward calculation of the
peak demand avoided from a given amount of energy savings.\11\ The CLF
is defined as:
---------------------------------------------------------------------------

\11\ Conservation Screening Curves to Compare Efficiency
Investments to Power Plants: Applications to Commercial Sector
Conservation Programs, Lawrence Berkeley National Laboratory,
Berkeley, CA, August 1990, published in the Proceedings of the 1990
ACEEE Summer Study on Energy Efficiency in Buildings, Authors: J.
Koomey, A. Rosenfeld, and A. Gadgil.
[GRAPHIC] [TIFF OMITTED] TR22JA01.169

Thus, a conservation technology that saves a constant amount of
power on a continuous basis has a CLF of 1.0. Because air conditioning
use occurs most often during times of peak demand, the CLF is
significantly lower. The lower the CLF, the greater the amount of peak
load savings achieved for a given amount of annual energy savings.
For a 13 SEER central air conditioner and heat pump standard, NEMS-
BRS forecasts peak demand savings which result in a nationally
representative CLF of 0.22. In contrast, for the same 13 SEER standard,
ASAP forecasts energy and peak demand savings which result in CLFs
ranging from 0.08 to 0.14. Based on the above discrepancy in the CLF,
ACEEE asserts that the peak demand savings forecasted by NEMS-BRS are
too low. The Department disagrees with ACEEE's position for two
reasons: (1) ASAP's peak savings estimates rely on suspect air
conditioner demand data, and (2) metered end-use data from air-
conditioned households in California and Florida indicate that the
NEMS-BRS-based CLF value of 0.22 is reasonable.
With regard to ASAP's peak demand estimates, regional calculations
are based on peak demand data from a single 1988 study by the
Narragansett Electric Co. (an electric utility in the Northeast).\12\
Although ASAP increased

[[Page 7182]]

the Northeast peak demand data by 25 percent for the two Southern
divisions and decreased it by 25 percent for the Pacific division, no
basis for these adjustments are provided. Because of ASAP's reliance on
peak demand data from only one region of the country, we do not place
much confidence in the peak generation savings provided by ASAP.
---------------------------------------------------------------------------

\12\ Personal communication with Steve Nadel, ACEEE, October,
2000.
---------------------------------------------------------------------------

As opposed to the ASAP results, metered end-use data from Southern
California and Florida indicate that climate has a much larger affect
on the CLF than reported by ASAP. In Southern California, a metered
end-use study conducted on 132 air-conditioned households in Southern
California Edison's service area revealed that the CLF for this region
is likely 0.08.\13\ In Homestead, Florida, a metered end-use study
conducted on ten air-conditioned homes indicated that the CLF is likely
0.42.\14\ Although strong conclusions cannot be drawn from only two
studies, the metered end-use results do provide the Department with
some confidence that the NEMS-BRS CLF estimate of 0.22 is reasonable
since it falls between the CLF range provided by the two metered end-
use studies. Therefore, we have reason to believe that our assumption
is more valid than ASAP's.
---------------------------------------------------------------------------

\13\ Residential Appliance End-Use Survey; Collection of
Residential Appliance Time-of-Use Energy Load Profiles; 1991
Results, prepared by Quantum Consulting Inc., Berkeley, CA for
Southern California Edison Co., San Dimas, CA, November, 1992.
\14\ Monitored Energy Use Patterns in Low-Income Housing (FSEC-
PF-300), Florida Solar Energy Center, Cocoa, FL, 1996, Authors: D.
S. Parker, M. D. Mazzara, and J. R. Sherwin.
---------------------------------------------------------------------------

Obviously more research needs to be conducted in the area of peak
demand impacts due to increased air conditioner efficiency. But until
such extensive research is conducted, the Department sees no reason to
discontinue its use of NEMS-BRS to estimate peak demand savings.
6. Projection of Trends
Several comments suggested or asserted that we should project
historical trends that they believe exist. These include price
reductions or productivity improvements in manufacturing. (ACEEE,
Transcript No. 73 at pp. 64 and 88-90; and NRDC, Transcript No. 73 at
pp. 105 and 115), post-standard product efficiencies (ACEEE, Transcript
No. 73 at p. 210), and electricity prices. (ASAP, No. 108 at p. 1;
ACEEE, Transcript No. 73 at pp. 154-158; NWPPC, No. 76 at pp. 3-4; and
Synapse, Transcript No. 73 at pp. 152-153).
Other comments responded to some of these suggestions. With regard
to the issue of price reductions or productivity improvements, some
contend that reductions are due to declining commodity metals prices
rather than any increases in production efficiency. (Lennox, No. 91 at
pp. 4-5). On the issue of efficiency trends, EEI claims that rather
than post-standard efficiency increases, the Department neglected to
account for pre-standard efficiency increases. (EEI, Transcript No. 73
at pp. 206-208). Counter to claims that electricity prices will
increase in the future due to the deregulation of the electric utility
industry, others state that the future path of deregulation is so
uncertain that it is unknown as to whether prices will decline or
increase. (EEI, Transcript No. 73 at pp. 148-150; Dominion, Transcript
No. 73 at pp. 158-160; and Southern Company, No. 96 at pp. 6-7).
In these instances where we have conflicting opinions about what is
responsible for creating a trend, we have no basis for changing our
initial assumption. Usually, we rely on the most recent set of data we
have available to us to make projections into the future. In the case
of efficiency trends, we rely on existing trends that seem to indicate
that efficiency will remain static after a new standard becomes
effective. In the case of electricity prices, we rely on the
projections provided in the Annual Energy Outlook, which is publicly
and readily available, and which we assume is unbiased with respect to
parties interested in the outcome of this rulemaking. Since this is the
case for all the supposed trends listed above, we have not changed any
of our projections.

C. Other Comments

1. HCFC Phaseout
Comments noted that as efficiency increases, refrigerant charge may
increase also. This could cause the United States to reach its cap on
HCFC-22 use earlier, resulting in higher prices for HCFC-22 than we
have considered. (Carrier, No. 92 at p. 4). We would point out that
occurrence would likely accelerate the transition to HCFC-free
refrigerants. There are also other options available for manufacturers
to improve equipment efficiency without increasing equipment size or
charge. Both of these factors will have the effect of suppressing
increases in refrigerant prices over the long term.
2. Ozone Reduction Catalyst Requirement
ARI and its members remind us to consider the potential impact on
the industry of Texas' proposed requirement to mandate the application
of ozone reduction technology in its most severe non-attainment areas.
(ARI, No. 100 at p. 13; and Carrier, No. 92 at p. 4).
We understand that Texas has since withdrawn its proposal. However,
the TSD does include a preliminary estimate of the burden of this
requirement on the industry and, to the extent that other states may
pursue the same course of action, included that in our consideration of
cumulative burden. We consider that widespread requirements for this
technology will not be likely, due to its apparently high cost,
questionable efficacy, and possible reduction in energy efficiency.

D. Additional Standard Requirements

1. EER Standard
In the proposed rule, we discussed including a requirement for a
new standard based on a system's energy efficiency ratio (EER) in
addition to its seasonal energy efficiency ratio (SEER). That new
standard was to be established at the median of available EER ratings
at a particular SEER level. Our objective was to ensure that any
increase in the SEER standard also resulted in an increase in equipment
efficiency under the warmer conditions best measured by EER. That
resulting drop in peak power demand would then help avoid the need for
new power plants and, in the view of many stakeholders, improve power
system reliability. We asked whether an EER standard would impose a
significant burden on manufacturers, would significantly affect the
cost of equipment considered in our analysis, would negatively impact
the sale of modulating equipment, or would significantly improve power
system reliability.
Several comments, including those of environmental advocacy groups
and some utilities, supported adding an EER standard and urged us to
adopt the median EER standards we proposed. They cited potential
benefits that would accrue from avoidance of new power plant capacity
and a reduction in the occurrence of blackouts. NRDC believes that the
Act requires us to adopt an EER-based standard. Underlying these
comments is a belief that SEER standards alone cannot guarantee those
benefits. Carrier supports an EER-based standard only in lieu of a
SEER-based standard because it would harmonize with International
Standards Organization testing requirements. (ACEEE, Transcript No. 73
at p. 62; NWPPC, Transcript No. 73 at p. 161; ASE, No. 81 at p. 1;
NPPD, No. 109 at p. 1; OOE, No. 84 at p. 2; NRDC, No. 88

[[Page 7183]]

at p. 3; Omaha Public Power District (OPPD), No. 111 at p. 2; and
Carrier, No. 92 at p. 8).
Other comments took an opposing position on the grounds that
including an EER standard would impede the application of modulating
components; that we are not permitted to adopt a standard other than
SEER and have not sufficiently analyzed the validity of an EER-based
standard; that an EER standard would eliminate products from the
market; that an EER standard will not improve electric system
reliability, particularly nationwide; and that there are burdens
associated with testing and certifying EER. (National Comfort Products
(NCP), No. 77 at p. 3; EEI, Transcript No. 73 at p. 327 and No. 80 at
pp. 3 and 9; Dominion, Transcript No. 73 at p. 264 and No. 68 at p. 2;
Trane, No. 93 at p. 14; York, No. 90 at pp. 1-4; ARI, Transcript No. 73
at p. 320 and No. 100 at p. 16; Goodman, Transcript No. 73 at p. 302;
and Southern, Transcript No. 73 at p. 243).
It is true that under the efficiency level approach, we assume that
all equipment at the same SEER level costs the same to produce
regardless of the combination of design options chosen to achieve that
SEER level. These options include those that raise EER, including
compressor and heat exchanger upgrades, as well as those that do not
raise EER, such as thermostatic expansion valves. For any given SEER
and HSPF levels, the efficiency level approach cannot differentiate
equipment cost based on different EER choices.
Underlying the efficiency level approach, however, is the
assumption that manufacturers make cost-optimal choices based on their
own unique situations. Therefore, a manufacturer who was required to
raise the EER of its equipment from the 10th percentile to the 50th
percentile (median) would indeed incur added costs since its design
choices would no longer be cost-optimal for its own circumstances.
Since efficiency levels are expressed in terms of SEER and HSPF only,
we would have to depart from the efficiency level approach in order to
quantify those costs.
We are still convinced that the stringent physical relationship
between EER and SEER in equipment rated through 12 SEER, which is
comprised exclusively of non-modulating equipment, would remain intact
under new standards and for the foreseeable future. Under the adopted
13 SEER standard, we have less certainty since there are counteracting
incentives. On the one hand, to reduce warranty claims, manufacturers
have a strong incentive to simplify the design of baseline equipment.
This suggests they will favor heat exchanger or compressor improvements
that improve EER.
On the other hand, manufacturers will have a strong incentive to
reduce the size of 13 SEER baseline equipment. Although microchannel
heat exchangers could reduce size and improve EER, manufacturers could
also choose to introduce variable speed or capacity modulation
technologies that can induce them to lower EER at a given SEER level.
As the cost of power electronics and control technologies come down,
this possibility becomes more likely.
However, even if variable speed or modulating technologies
eventually predominate, and thereby reduce EERs in typical equipment,
they would still reduce peak demand compared to today's 10 SEER
baseline equipment. Furthermore, because variable speed and modulating
equipment mitigate the cyclic losses that are due to widespread over
sizing, the aggregated peak demand of a group of modulating air
conditioners with lower EERs will likely be lower than that of a
similar group of non-modulating air conditioners with higher EERs at
the same SEER level. Also, utilities have the opportunity with
modulating equipment to offer customers the option to allow the utility
to ``lock'' the equipment into low-capacity operation in return for a
lower electricity price.
Finally, although the Department is interested in reducing peak
demand, the primary purpose of appliance efficiency standards is to
save energy. An EER standard could be counterproductive by discouraging
variable speed and modulation, which can save substantial amounts of
energy over the cooling season while providing consumers with
additional benefits not found in single speed and non-modulating
equipment.
Although the Department believes that EPCA permits adoption of an
EER standard, for the foregoing reasons, we do not believe that the Act
requires or suggests that we establish such a standard under the
circumstances here. Given the adopted standard levels, a national EER
standard is both unnecessary and undesirable. Most benefits accruing
from an EER standard will likely accrue from the SEER standards alone,
without the associated burdens on manufacturers and the disincentives
to apply energy-saving modulating technologies. Therefore, we have not
adopted an EER standard in this rule.
2. TXV Requirement
In the proposed rule, we discussed the issues associated with
mandating thermostatic expansion valves, or TXVs. We did not propose
such a requirement, but we recognized that such a requirement may be
capable of saving a great deal of energy. We discussed our options for
encouraging their use.
Many comments continue to express strong support for a TXV
requirement. Many cite a report submitted by Proctor Engineering
(Proctor) that describes the results of a field study covering 4,000
units in California. The study concluded that 62 percent of equipment
is mischarged by more than 5 percent, and that TXVs, which perform
better than fixed orifices in undercharged conditions, could save 11
percent of the energy used by that equipment. (Proctor No. 105; OOE,
No. 84 at p. 2; NRDC, No. 88; California Energy Commission (CEC), No.
98 at p. 1; ACEEE, No. 101 at p. 8; PG&E No. 104 at p. 1; and ASAP,
Transcript No. 73 at p. 4).
Other comments expressed some resistance to a TXV requirement,
particularly regarding our authority to establish one. Some also
express concerns about problems associated with TXVs. (NCP, No. 77 at
p. 4; Trane, No. 93 at p. 19; York, No. 90 at pp. 4-5; Lennox, No. 91
at p. 3; EEI No. 80 at p. 3; and Carrier, No. 92 at p. 10).
In response to our concern that mandating TXVs would stifle the
development of other, perhaps preferable, technologies, Proctor and
ACEEE suggested performance tests that could be applied in lieu of a
TXV requirement. They would reward equipment that possessed a TXV or
performed as well while undercharged or when airflow is restricted.
This approach is at least partially endorsed by others. (NRDC No. 88 at
p. 17; CEC No. 199 at p. 1; and OOE, No. 84 at p. 8). Some of the
commenters preferred that we initially specify TXVs but then phase out
that requirement in favor of a performance-based approach.
As we alluded to in the proposed rule, a performance-based approach
is also our preference and is certainly in the spirit of EPCA. As such,
the SEER test procedure, not a TXV requirement, appears to be the most
appropriate vehicle for assuring that an equipment's efficiency rating
is based on its performance characteristics. In fact, TXVs already
receive credit in the test procedure because of their superior cyclic
performance. We are not eager to circumvent the test procedure,
particularly when the key data either are not available or have not
been thoroughly reviewed by all interested

[[Page 7184]]

parties. That said, we favor a SEER test procedure that fairly
evaluates equipment performance under conditions that represent those
encountered in the field. We would prefer to encourage correct charging
or proper airflow, but we recognize that practical barriers exist, and
we will take steps to evaluate whether the SEER test procedure can and
should be amended to better reflect equipment performance under
improper charge or airflow.
In sum, we are not adopting a TXV requirement in this rulemaking.
Any alterations in the SEER test procedure to further encourage the use
of TXVs will be undertaken in a separate process. In addition to
pursuing modifications to the test procedure, we encourage parties
interested in encouraging the broader application of TXVs to pursue
other avenues. These include voluntary programs like Energy Star, tax
incentives, and other state and local initiatives, which can all be
tied to the presence of a device like a TXV. States also have the
opportunity to apply to us for an exemption from preemption that would
allow them to implement their own requirements based on their own
unique circumstances.
3. HSPF Levels
Some comments urged us to reconsider our proposed HSPF levels,
particularly to reflect differences among the HSPF-SEER relationships
across capacity ratings. Trane commented that HSPF-SEER factors for
heat pumps are lower with 410A refrigerant than with HCFC-22, and that
the current proposal for HSPF is too high for 410A by as much as 3 to 5
percent. (ARI, No. 100 at p. 11; Carrier, No. 92 at p. 7; and Trane,
No. 93 at p. 8). Others urged us to adopt HSPF levels at the median for
each SEER level we considered. (OOE, No. 84 at p. 11; and ACEEE, No.
104 at p. 12).
As we explained in the proposed rule, we established the HSPF
levels corresponding to SEER levels in an attempt to maintain the
existing offset between the minimum HSPF and the minimum SEER. Heating
energy is a large fraction of total heat pump energy consumption, so we
prefer not to relax that relationship without sound evidence regarding
the burdens that would be mitigated. We are reluctant to adopt a more
stringent level since we are aware that heat pump design is difficult
and costly, and that improvements in HSPF typically are associated with
a reduction in SEER. Too stringent a standard would impose considerable
design and testing burdens on manufacturers, could result in the
permanent loss of heat pump market share to electric resistance heat,
and could encourage fuel switching.
For those reasons, we are retaining our proposed minimum HSPF
levels in the standards adopted today.

V. Analytical Results and Conclusions

A. Trial Standard Levels

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

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

For each trial standard level examined, several different scenarios
were analyzed consisting of variations on: (1) Electricity price and
housing projections; (2) equipment efficiency distributions; (3)
manufacturer cost estimates; and (4) societal discount rate.
Electricity price and housing projections were based on three different
AEO 2000 forecasts: (1) Reference Case, (2) High Growth Case, and (3)
Low Growth Case. We analyzed three efficiency scenarios, each of which
assumed a different efficiency distribution after new standards would
take effect: (1) NAECA scenario, (2) Roll-up scenario, and (3) Shift
scenario. Under the standard levels we are adopting, we believe that
the Roll-up scenario most closely represents the most likely impact of
the new standards, as explained in Chapter 8 of the TSD. We analyzed
two manufacturer cost scenarios: (1) Based on reverse engineering data,
and (2) based on ARI-provided mean cost data. For the reasons expressed
in Parts III and IV of this document, we believe that the reverse
engineering data most closely represents the costs as they will
actually be under the new standards. We assumed a societal discount
rate of 7 percent for calculating net present value (NPV). However, a 3
percent value was investigated as an alternative scenario in accordance
with the Office of Management and Budget's (OMB) Guidelines to
Standardize Measures of Costs and Benefits and the Format of Accounting
Statements.
Our decision on today's final rule was arrived at by placing more
emphasis on some scenarios rather than others. Our estimates of
electricity price and housing projections relied primarily on the
AEO2000 reference case. We considered primarily the NAECA and Roll-up
efficiency scenarios with an increasing expectation of the Roll-up
scenario occurring for more stringent trial standard levels. Finally,
we expect manufacturer costs to lie closer to the reverse engineering
estimates (which lie between the ARI minimum and ARI mean values).
The results presented in this chapter include only those that are
needed to supplement or replace the results we presented in the
proposed rule, which still form a basis for our decision with the
exception that we are no longer considering the 14-year life scenarios.
We believe that the 18.4-year life with a compressor replacement in the
14th year addresses the concerns of those who believe that actual
equipment life is closer to 14 years and achieves substantially the
same analytical results. Therefore, all analyses below assume an 18.4-
year average equipment lifetime with a compressor replacement in the
14th year.

B. Significance of Energy Savings

To estimate the energy savings through 2030 due to revised
standards, we compared the energy consumption of central air
conditioners and heat pumps under the base case to energy consumption
of central air conditioners and heat pumps under the revised standard.

[[Page 7185]]

Table V.2 shows the range of cumulative energy savings based on the
AEO 2000 Reference, High Growth, and Low Growth cases for each trial
standard level. The parameters shown are the two manufacturing costs
and the three equipment shipment efficiency scenarios.

Table V.2.--Range of National Energy Savings With AEO Price Forecast
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Range of national energy savings for units sold from 2006 to 2030 (quads)
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Reverse engineering costs ARI mean costs
Trial standard level --------------------------------------------------------------------------------------------------------------------------------------------------------------
NAECA Roll-up Shift NAECA Roll-up Shift
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1................................ 1.7 to 1.8............... 1.5 to 1.6............... 1.9 to 2.0............... 1.7 to 1.8.............. 1.5 to 1.6.............. 1.9 to 20
2................................ 2.9 to 3.2............... 2.8 to 3.0............... 3.4 to 3.6............... 2.9 to 3.2.............. 2.8 to 3.0.............. 3.4 to 3.6
3................................ 3.4 to 3.7............... 3.3 to 3.5............... 3.8 to 4.1............... 3.4 to 3.6.............. 3.3 to 3.5.............. 3.8 to 4.1
4................................ 4.3 to 4.6............... 4.1 to 4.4............... 4.7 to 5.0............... 4.2 to 4.5.............. 4.1 to 4.4.............. 4.6 to 4.9
5................................ 8.4 to 9.0............... 8.4 to 9.0............... 8.4 to 9.0............... 8.1 to 8.7.............. 8.1 to 8.7.............. 8.1 to 8.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C. Payback Period

As discussed above, the Act requires the Department to examine
payback periods to determine if the three-year rebuttable presumption
of economic justification applies. As prescribed by the Act, the
rebuttable payback period is ``calculated under the applicable test
procedure * * *''.
The annual space-cooling and space-heating energy consumption
calculated based on the hours of use in the test procedure are on the
order of 50 percent greater than the weighted-average energy
consumption data used in the life-cycle-cost (LCC) analysis. The LCC
data are based on the 1997 RECS for residential buildings and hourly
simulations for commercial buildings. Since the test procedure assumes
higher annual operating hours than the RECS data implied, the use of
test procedure energy consumption results in rebuttable payback periods
which are shorter than median payback periods calculated from the LCC
analysis.
In Table V.3, we list the rebuttable payback periods versus SEER
efficiency level for the four product classes, using the 1997 RECS
energy consumption data. This information shows that both classes of
heat pumps are presumed to be economically justified up to a 12 SEER
efficiency level, using the reverse engineering cost estimates.

Table V.3.--Summary of Rebuttable Payback Period (Years)
------------------------------------------------------------------------
Reverse
Product class/efficiency level engineering ARI mean costs
costs
------------------------------------------------------------------------
Split System Central Air Conditioner:
11.................................. 3.5 4.7
12.................................. 4.5 5.8
13.................................. 5.2 7.6
18.................................. 7.3 11.3
Split System Heat Pump:
11.................................. 1.3 2.5
12.................................. 1.8 3.3
13.................................. 3.2 4.5
18.................................. 5.8 6.8
Single Package Air Conditioner:
11.................................. 3.5 7.3
12.................................. 3.3 6.2
13.................................. 6.8 9.8
18.................................. 8.6 13.3
Single Package Heat Pump:
11.................................. 2.1 3.7
12.................................. 1.8 4.0
13.................................. 4.3 6.5
18.................................. 5.4 7.2
------------------------------------------------------------------------

D. Economic Justification

1. Economic Impact on Manufacturers and Consumers
Estimated economic impacts of standards on manufacturers are based
on the methodology described in the proposed rule; however, in today's
final rule the manufacturer impact analysis has been expanded to
include impacts based on reverse engineering cost estimates as well as
ARI manufacturing cost data. The economic impacts on manufacturers are
presented in terms of industry net present value (INPV) as well as
change in INPV. INPV is calculated by summing the stream of annual
discounted cash flows beginning from the base year of the analysis
(2000) and continuing explicitly for ten years after the implementation
of the standard and adding the discounted value of the industry at the
end of the ten-year period (see TSD Section 8.4.4 and Appendix G). The
discount rate is based on the industry's weighted average cost of
capital. This method of calculating INPV provides one measure of the
fair value of the industry in today's dollars. The impact of new
standards on INPV is then the difference between the INPV in the base
case (no new standards) and the INPV is the standards case (with new
standards).
Data are presented for the base case and for trial standard levels
1 through 4, in Tables V.4 through V.9. As can be observed,
manufacturer impacts are relatively insensitive between the

[[Page 7186]]

manufacturing cost estimates, but sensitive to the shipment scenarios.
The proposed rule provides additional information on the methodology,
assumptions and results.

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

Table V.5.--Changes in Industry Net Present Value--Reverse Engineering Relative Cost, Roll-up Efficiency Mix
----------------------------------------------------------------------------------------------------------------
Industry net Change in INPV from base case
Standard level present value -------------------------------
($ million) $ million Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................ 1,539 .............. ..............
1............................................................... 1,379 (160) -10
2............................................................... 1,226 (313) -20
3............................................................... 1,220 (319) -21
4............................................................... 1,236 (303) -20
----------------------------------------------------------------------------------------------------------------

Table V.6.--Changes in Industry Net Present Value--Reverse Engineering Relative Cost, Shift Efficiency Mix
----------------------------------------------------------------------------------------------------------------
Industry net Change in INPV from base case
Standard level present value -------------------------------
($ million) $ million Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................ 1,539 .............. ..............
1............................................................... 1,658 119 8
2............................................................... 1,772 233 15
3............................................................... 1,776 237 15
4............................................................... 1,824 285 19
----------------------------------------------------------------------------------------------------------------

Table V.7.--Changes in Industry Net Present Value--ARI Mean Manufacturing Cost, NAECA Efficiency Mix
----------------------------------------------------------------------------------------------------------------
Industry net Change in INPV from base case
Standard level present value -------------------------------
($ million) $ million Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................ 1,603 .............. ..............
1............................................................... 1,566 (37) -2
2............................................................... 1,417 (186) -12
3............................................................... 1,406 (197) -12
4............................................................... 1,420 (183) -11
----------------------------------------------------------------------------------------------------------------

Table V.8.--Changes in Industry Net Present Value--ARI Mean Manufacturing Cost, Roll-up Efficiency Mix
----------------------------------------------------------------------------------------------------------------
Industry net Change in INPV from base case
Standard level present value -------------------------------
($ million) $ million Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................ 1,603 .............. ..............
1............................................................... 1,422 (181) -11
2............................................................... 1,241 (362) -23
3............................................................... 1,236 (367) -23
4............................................................... 1,268 (335) -21
----------------------------------------------------------------------------------------------------------------

[[Page 7187]]

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

Table V.10 provides the change in INPV relative to the base case
(with no change in standards) for trial standard levels 1 through 4.
Data are presented for two industry segments (lower cost manufacturers
and higher cost manufacturers), and for the three shipment efficiency
scenarios.

Table V.10.--Change in Industry Net Present Value (percent) Relative to Base--Comparison Between Lower (L) and Higher (H) Cost Manufacturers
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reverse engineering relative cost (in percent) ARI mean manufacturing cost (in percent)
-----------------------------------------------------------------------------------------------------------------------
Standard level NAECA Roll-up Shift NAECA Roll-up Shift
-----------------------------------------------------------------------------------------------------------------------
L H L H L H L H L H L H
--------------------------------------------------------------------------------------------------------------------------------------------------------
1............................... 5 -4 3 -15 6 8 5 -5 3 -16 7 9
2............................... 7 -16 5 -28 13 16 7 -17 5 -31 12 14
3............................... 8 -17 6 -29 14 16 9 -19 6 -32 14 16
4............................... 12 -18 10 -29 19 18 15 -19 13 -31 21 19
--------------------------------------------------------------------------------------------------------------------------------------------------------

For the group most negatively impacted, i.e., the higher cost
group, Table V.11 presents the Return on Invested Capital (ROIC) in
year 2011 associated with the base case, and with each new standard
level for the NAECA and Roll-up shipment efficiency scenarios.

Table V.11.--Return on Invested Capital (ROIC) in 2011 for Higher Cost Manufacturers
----------------------------------------------------------------------------------------------------------------
Reverse engineering (in ARI manufacturing costs (in
percent) percent)
Standard level ---------------------------------------------------------------
NAECA Roll-up NAECA Roll-up
----------------------------------------------------------------------------------------------------------------
Base............................................ 13.0 13.0 13.3 13.3
1............................................... 12.2 10.7 12.3 10.7
2............................................... 10.2 8.5 0.2 8.4
3............................................... 10.0 8.4 10.0 8.3
4............................................... 9.7 8.4 9.6 8.3
----------------------------------------------------------------------------------------------------------------

Consumers will also be affected by increased efficiency standards
in that they will experience higher purchase prices and lower operating
costs. These impacts are best captured by changes in life cycle costs
which are discussed below.
2. Life-Cycle-Cost (LCC)
We analyzed the net effect by calculating the LCC. Inputs required
for calculating LCC include total installed costs (i.e., equipment
price plus installation costs), annual energy savings, average and
marginal electricity prices, electricity price trends, repair costs,
maintenance costs, equipment lifetime, and discount rates.
The output of the LCC model is the mean LCC savings for each
product class as well as a probability distribution or likelihood of
LCC reduction or increase. The LCC analysis for today's final rule
employs a concept described in the proposed rule with regard to the
percentage of consumers (both residential and commercial) that are
impacted to a substantial degree by an increase in the minimum
efficiency standard.
Table V.12 summarizes the LCCs for baseline split systems and
single package central air conditioners and heat pumps and also shows a
2 percent threshold which helped us identify those consumers who are
impacted to a more substantial degree.

Table V.12.--Baseline Life-Cycle-Costs
------------------------------------------------------------------------
2% of Baseline
Product Class Baseline LCC LCC
------------------------------------------------------------------------
Split Air Conditioners............ $5,170 $103
Split Heat Pumps.................. 9,679 194
Single Package Air Conditioners... 5,629 113
Single Package Heat Pumps......... 9,626 193
------------------------------------------------------------------------

[[Page 7188]]

Tables V.13 and V.14 depict the LCC results for split system and
single package central air conditioners and heat pumps. The tables show
the average LCC values for the baseline and each trial standard level.
Since manufacturer cost data were not available for the 18 SEER
efficiency levels, 15 SEER cost data were used for all 18 SEER
calculations resulting in 18 SEER LCC results which underestimate their
true cost level. The data in Tables V.13 and V.14 also present the
difference in LCC at each efficiency level relative to the baseline.
The differences represent either an LCC savings or an LCC cost
increase. In addition, the tables show the subset of consumers (both
residential and commercial) at each efficiency level who are impacted
in one of three ways: consumers who achieve net LCC savings in excess
of 2 percent of the baseline LCC, consumers whose change in LCC is
within 2 percent of the baseline LCC, and consumers who
achieve a net LCC increase exceeding 2 percent of the baseline LCC.

Table V.13.--Summary of LCC Results based on Reverse Engineering Manufacturing Costs
----------------------------------------------------------------------------------------------------------------
Percent of consumers with
Average LCC -------------------------------------------------
Product Class/Efficiency Level Average LCC Savings Net Savings or
(Costs) Net Savings Costs (2
(>2 %) minus>2%) %)
----------------------------------------------------------------------------------------------------------------
Split System Central Air
Conditioner:
10........................ $5,170 .............. .............. ................ ..............
11........................ 5,095 $75 28 70 2%
12........................ 5,057 113 35 40 25%
13........................ 5,057 113 34 27 39%
18........................ 5,307 (137) 25 7 68%
Split System Heat Pump:
10........................ 9,679 .............. .............. ................ ..............
11........................ 9,470 209 40 60 0%
12........................ 9,314 365 58 42 0%
13........................ 9,307 372 52 42 6%
18........................ 9,720 (41) 28 15 57%
Single Package Air
Conditioner:
10........................ 5,629 .............. .............. ................ ..............
11........................ 5,551 78 27 72 1%
12........................ 5,466 163 40 51 9%
13........................ 5,600 29 28 20 52%
18........................ 5,905 (276) 21 6 73%
Single Package Heat Pump:
10........................ 9,626 .............. .............. ................ ..............
11........................ 9,419 207 39 61 0
12........................ 9,205 421 66 34 0
13........................ 9,273 353 50 38 12
18........................ 9,460 166 37 15 48
----------------------------------------------------------------------------------------------------------------

Table V.14.--Summary of LCC Results Based on ARI Mean Manufacturing Costs
----------------------------------------------------------------------------------------------------------------
Percent of consumers with
-----------------------------------------------
Average LCC Net savings or
Product class/efficiency level Average LCC savings Net savings (costs) Net costs (>
(costs) (> 2%) ( 2%)
2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air
Conditioner:
10.......................... $5,170 .............. .............. .............. ..............
11.......................... 5,126 $44 23 68 9
12.......................... 5,125 45 27 34 39
13.......................... 5,199 (29) 25 17 58
18.......................... 5,725 (555) 15 4 81
Split System Heat Pump:
10.......................... 9,679 .............. .............. .............. ..............
11.......................... 9,529 150 30 70 0
12.......................... 9,437 242 42 55 3
13.......................... 9,464 215 39 39 22
18.......................... 9,955 (276) 23 11 66
Single Package Air Conditioner:
10.......................... 5,629 .............. .............. .............. ..............
11.......................... 5,649 (20) 16 47 37
12.......................... 5,600 29 26 30 44
13.......................... 5,804 (175) 18 11 71
18.......................... 6,370 (741) 12 4 84
Single Package Heat Pump:
10.......................... 9,626 .............. .............. .............. ..............
11.......................... 9,492 134 28 72 0
12.......................... 9,372 254 44 49 7
13.......................... 9,514 112 33 31 36

[[Page 7189]]

18.......................... 9,922 (296) 24 10 66
----------------------------------------------------------------------------------------------------------------

Consumer subgroup impacts have been estimated by determining the
LCC impacts of the trial standard levels on those consumers who are
below the poverty line (e.g., for a family of four, this constitutes a
household income of less than $16,036). To perform this calculation, we
used the subset of RECS 97 data for households that are considered low-
income.\15\ Table V.15 and V.16 summarize the impacts on low-income
consumers who utilize central air conditioners and heat pumps.
---------------------------------------------------------------------------

\15\ Approximately 7 percent of the RECS 97 households with
central air conditioners and 9 percent of the households with heat
pumps met this criteria.

Table V.15.--Summary of LCC Results on Low-Income Consumers Based on Reverse Engineering Manufacturing Costs
----------------------------------------------------------------------------------------------------------------
Percent of consumers with
-----------------------------------------------
Average LCC Net Savings or
Product class/efficiency level Average LCC savings Net savings (costs) Net costs (>
(costs) (> 2%) ( 2%)
2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air
Conditioner:
10.......................... $4,906 .............. .............. .............. ..............
11.......................... 4,855 $51 21 74 5
12.......................... 4,841 65 28 38 34
13.......................... 4,863 43 26 24 50
18.......................... 5,176 (270) 17 6 77
Split System Heat Pump:
10.......................... 8,965 .............. .............. .............. ..............
11.......................... 8,836 129 26 74 0
12.......................... 8,742 223 44 56 0
13.......................... 8,780 185 39 49 12
18.......................... 9,389 (424) 15 10 75
Single Package Air Conditioner:
10.......................... 5,327 .............. .............. .............. ..............
11.......................... 5,272 55 21 77 2
12.......................... 5,202 125 34 52 14
13.......................... 5,364 (37) 21 18 61
18.......................... 5,704 (377) 15 5 80
Single Package Heat Pump:
10.......................... 9,149 .............. .............. .............. ..............
11.......................... 9,057 118 24 76 0
12.......................... 8,973 265 53 47 0
13.......................... 9,145 148 36 44 20
18.......................... 9,619 (284) 20 14 66
----------------------------------------------------------------------------------------------------------------

Table V.16.--Summary of LCC Results on Low-Income Consumers Based on ARI Mean Manufacturing Costs
----------------------------------------------------------------------------------------------------------------
Percent of consumers with
Average LCC -----------------------------------------------
Product class/efficiency level Average LCC savings Savings/costs
(costs) Net savings ( Net costs (>
(> 2%) 2%) 2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air
Conditioner:
10.......................... $4,906 .............. .............. .............. ..............
11.......................... 4,887 $19 17 66 17
12.......................... 4,903 3 20 29 51
13.......................... 5,007 (101) 17 14 69
18.......................... 5,598 (692) 10 2 88
Split System Heat Pump:
10.......................... 8,965 .............. .............. .............. ..............
11.......................... 8,890 75 16 84 0
12.......................... 8,862 103 27 64 9
13.......................... 8,948 17 25 40 35
18.......................... 9,610 (645) 11 8 81
Single Package Air Conditioner:
10.......................... 5,327 .............. .............. .............. ..............

[[Page 7190]]

11.......................... 5,283 44 11 42 47
12.......................... 5,313 14 20 27 53
13.......................... 5,568 (241) 12 9 79
18.......................... 6,158 (831) 10 2 88
Single Package Heat Pump:
10.......................... 9,149 .............. .............. .............. ..............
11.......................... 9,057 92 21 78 1
12.......................... 8,973 176 35 53 12
13.......................... 9,145 4 25 27 48
18.......................... 9,619 (470) 18 8 74
----------------------------------------------------------------------------------------------------------------

In comparing the LCC results on the subgroup of consumers who are
low-income (Tables V.15 and V.16) versus all central air conditioner
and heat pump consumers (Tables V.13 and V.14), it appears that low-
income consumers have lower savings at the different trial standard
levels than the general population of central air conditioner and heat
pump consumers. Table V.17 directly compares the LCC impacts of the
final rule on both the low-income subgroup and all consumers.

Table V.17.--Comparison of LCC Impacts of the Final Rule on All Consumers vs. Low-Income Consumers
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reverse engineering costs ARI mean costs
---------------------------------------------------------------------------------------
Average LCC savings Percent of consumers Average LCC savings Percent of consumers
(costs) with net costs (>2% (costs) with net costs (>2%
Product class SEER ---------------------- of baseline LCC) ---------------------- of baseline LCC)
---------------------- ---------------------
All Low- All Low- All Low- All Low-
consumers income consumers income consumers income consumers income
--------------------------------------------------------------------------------------------------------------------------------------------------------
Split System A/C........................................ 13 $113 $43 39 50 ($29) ($101) 58 69
Split System HP......................................... 13 372 185 6 12 215 17 22 35
Single Package A/C...................................... 13 29 (37) 52 61 (175) (241) 71 79
Single Package HP....................................... 13 353 148 12 20 112 4 36 48
--------------------------------------------------------------------------------------------------------------------------------------------------------

3. Net Present Value and Net National Employment
The net present value analysis is a measure of the cumulative
benefit or cost to the Nation that would result from more stringent
standards. As with the determination of national energy savings, four
different scenarios were analyzed for each trial standard level
consisting of variations on: (1) Electricity price and housing
projections; (2) shipment efficiency distributions; (3) manufacturer
cost estimates; and (4) societal discount rate. Electricity price and
housing projections were based on three different AEO 2000 forecasts:
(1) Reference Case, (2) High Growth Case, and (3) Low Growth Case.
Three efficiency scenarios were analyzed which forecast the shipment
efficiency distribution after new standards: (1) NAECA scenario, (2)
Roll-up scenario, and (3) Shift scenario. For these results the
equipment lifetime was assumed to be 18.4 years, coupled with the
inclusion of compressor replacement costs and an assumed societal
discount rate of 7 percent. The range of NPVs are reported in Table
V.18.

Table V.18: Range of Net Present Value With Electricity Price and Housing Projections
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net present value for unites sold from 2006 to 2030 (billion 98$)
------------------------------------------------------------------------------------------------------------------------
Trial standard level Reverse engineering costs ARI mean costs
------------------------------------------------------------------------------------------------------------------------
NAECA Rool-up Shift NAECA Roll-up Shift
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.............................. 1 to 2............. 2................. 1 to 2............ 0................. 1................. 0 to -1
2.............................. 2.................. 2 to 3............ 0 to -1........... -1................ 0 to 1............ -3 to -4
3.............................. 1 to 2............. 2 to 3............ -1 to -2.......... -1 to -2.......... 0 to -1........... -5
4.............................. 0 to 1............. 1 to 2............ -3 to -4.......... -5 to -6.......... -4................ -10
5.............................. -10 to -11......... -10 to -11........ -10 to -11........ -22............... -22............... -22
--------------------------------------------------------------------------------------------------------------------------------------------------------

In order to show the sensitivity of the NPVs in Table V.18 to the
various input assumptions, Tables V.19 through V.22 report the range of
NPV results for a range of assumptions and scenarios relative to the
base case national equipment and operating costs for all central air-
conditioning and heat pump equipment. By the ``base case'' we mean the
case of no new efficiency standards. The results in Table V.19 and V.20
are the AEO 2000 Reference Case forecast of

[[Page 7191]]

electricity prices and housing. The total costs are presented for the
base case and each trial standard level. The discount rate is 7
percent. In addition, the NPV (the difference in total costs between
the base case and trial standard level), as well as the NPV as a
percentage of the ``Base Case Total Costs,'' are calculated for each
trial standard level.

Table V.19.--Net Present Values Results Relative to Base Case Total Equipment and Operating Costs Based on Reverse Engineering Manufacturing Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Efficiency scenario
--------------------------------------------------------------------------------------------------
NAECA Roll-up Shift
Base case --------------------------------------------------------------------------------------------------
total NPV NPV NPV
TSL costs ---------------------- ---------------------- ---------------------
billion Total As Total As Total As
98$ costs percent costs percent costs percent
billion Billion of base billion Billion of base billion Billion of base
98$ 98$ case 98$ 98$ case 98$ 98$ case
total total total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1......................................... 379 378 2 0.4 377 2 0.5 378 1 0.4
2......................................... 379 377 2 0.5 377 3 0.7 380 (1) 0.2
3......................................... 379 378 1 0.4 377 2 0.6 381 (2) 0.5
4......................................... 379 379 0 0.0 378 1 0.3 383 (4) 0.9
5......................................... 379 390 (10) -2.7 390 (10) -2.7 390 (10) -2.7
--------------------------------------------------------------------------------------------------------------------------------------------------------

Table V.20.--Net Present Values Relative to Base Case Total Equipment and Operating Costs Based on ARI Mean Manufacturing Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Efficiency scenario
--------------------------------------------------------------------------------------------------
NAECA Roll-up Shift
Base case --------------------------------------------------------------------------------------------------
total NPV NPV NPV
TSL costs ---------------------- ---------------------- ---------------------
billion Total As Total As Total as
98$ costs percent costs percent costs percent
billion Billion of base billion Billion of base billion billion of base
98$ 98$ case 98$ 98$ case 98$ 98$ case
total total total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1......................................... 381 381 0 0.0 381 1 0.2 385 0 -0.1
2......................................... 381 382 (1) -0.3 381 0 0.0 388 (3) -0.9
3......................................... 381 383 (2) -0.5 382 (1) -0.2 390 (5) -1.4
4......................................... 381 387 (5) -1.4 386 (4) -1.1 395 (10) -2.5
5......................................... 381 403 (22) -5.8 403 (22) -5.8 407 (22) -5.8
--------------------------------------------------------------------------------------------------------------------------------------------------------

Table V.21 shows how a 3 percent discount rate\16\ impacts the net
present value. Only the Roll-up efficiency scenario and the AEO
Reference Case electricity price and housing projection were considered
in analyzing the impacts from a 3 percent discount rate.
---------------------------------------------------------------------------

\16\ A societal discount rate of 3 percent value was
investigated as a scenario in accordance with the Office of
Management and Budget's (OMB) Guidelines to Standardize Measures of
Costs and Benefits and the Format of Accounting Statements.

Table V.21: Net Present Values Results Based on 3-Percent Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reverse engineering costs ARI mean costs
-----------------------------------------------------------------------------------------------
Trial standard level Trial standard level
Base case ------------------------------------ Base case -----------------------------------
TSL total total Net
costs Total cost Net As percent costs Total cost present As percent
billion billion present of base billion billion value of base
98$ 98$ value 98$ case total 98$ 98$ billion cast total
costs 98$ costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
1....................................................... 708 701 7 0.9 712 707 4 0.6
2....................................................... 708 697 11 1.6 712 705 6 0.9
3....................................................... 708 697 11 1.6 712 706 6 0.8
4....................................................... 708 697 11 1.5 712 711 0 0.0
5....................................................... 708 716 (8) -1.2 712 746 (35) -4.9
--------------------------------------------------------------------------------------------------------------------------------------------------------

The proposed rule also estimated the national employment impacts
due to each of the five trial standard levels. As discussed in the
proposed rule, the energy efficiency standards for central air
conditioners and heat pumps are expected to reduce electricity bills
for residential and commercial consumers and the resulting net savings
are expected to be redirected to other forms of economic activity.
These shifts in

[[Page 7192]]

spending and economic activity are expected to affect the demand for
labor.
As we did for the proposed rule, the Department estimated the
impacts of the new standards on national labor demand using an input/
output model of the U.S. economy. The model characterizes the
interconnections among 35 economic sectors using data from the Bureau
of Labor Statistics. For some years after the new standards go into
effect, new consumer expenditure on air conditioners and heat pumps
each year outpaces their annual energy savings. This activity redirects
expenditures into the manufacturing sector, which is less labor
intensive than other sectors of the economy,\17\ producing a loss of
jobs in those sectors that is larger than the gain of jobs in
manufacturing. Also, a loss of jobs results in the utility sector due
to its loss of revenues. As annual consumer energy savings begin to
exceed annual new expenditures on air conditioners, eventually the new
standards will produce a net gain in national employment.
---------------------------------------------------------------------------

\17\ Bureau of Economic Analysis, Regional Multipliers: A User
Handbook for the Regional Input-Output Modeling System (RIMS II)
---------------------------------------------------------------------------

The increases or decreases in the net demand for labor in the
economy estimated by the input/output model due to air conditioner and
heat pumps standards are likely to be very small relative to total
national employment. For the following reasons any modest changes in
employment are in doubt:
Unemployment is now at the lowest rate in 30 years. If
unemployment remains very low during the period when the standards are
put into effect, it is unlikely that the standards alone could result
in any change in national employment levels;
Neither the BLS data nor the input-output model used by
DOE include the quality or wage level of the jobs. The losses or gains
from any potential employment change may be offset if job quality and
pay also change; and
The net benefits or losses from potential employment
changes are a result of the estimated net present value of benefits or
losses likely to result from air conditioner and heat pump standards.
It may not be appropriate to separately identify and consider any
employment impacts beyond the calculation of net present value.
Taking into consideration these legitimate concerns regarding the
interpretation and use of the employment impacts analysis, the
Department concludes only that the proposed central air conditioner and
heat pump standards are likely to result in no appreciable job losses
to the nation.
4. Impact on Utility or Performance of Products
As detailed in Section V of the proposed rule, in establishing
classes of products we believe the adopted standards will not result in
any degradation of utility or performance in the covered products.
5. Impact of Any Lessening of Competition
The Act directs the Department to consider any lessening of
competition that is likely to result from standards. It further directs
the Attorney General to determine the impact, if any, of any lessening
of competition likely to result from a proposed standard and transmit
such determination to the Secretary, not later than 60 days after the
publication of a proposed rule, together with an analysis of the nature
and extent of such impact. EPCA Section 325(o)(2)(B)(i)(V) and (B)(ii),
42 U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii).
In order to assist the Attorney General in making such a
determination, the Department provided the Department of Justice (DOJ)
with copies of the proposed rule and the TSD for review. At DOE's
request, the DOJ reviewed the manufacturer impact analysis interview
questionnaire to ensure that it would provide insight concerning any
lessening of competition due to any proposed trial standard levels.
As previously discussed in section II.D.4 above, the Department of
Justice concluded that the residential central air conditioner and heat
pump standards contained in the proposed rule could have an adverse
impact on competition. The proposed standards would have changed the
current central air conditioner and heat pump efficiency standards of
10 SEER/6.8 HSPF for split system air conditioners and heat pumps and
9.7 SEER/6.6 HSPF for single package air conditioners and heat pumps to
12 SEER for air conditioners and 13 SEER/7.7 HSPF for heat pumps.
Through-the-wall equipment was the only exception. We proposed an 11
SEER standard for that class.
DOJ identified three possible competitive problems presented by the
proposed standards. First, DOJ stated that the proposed 13 SEER heat
pump standard would have a disproportionate impact on smaller
manufacturers. They stated that currently less than 20 percent of the
total current product lines meet the proposed standards, but for some
small manufacturers, 100 percent of their product lines fail to satisfy
the proposed standard.
Second, DOJ stated that the proposed standard for heat pumps, and
in some instances for air conditioners, would have an adverse impact on
some manufacturers of products (including those products referred to in
the proposed rule as ``niche products'') used to retrofit existing
housing and used in manufactured housing. These manufacturers could
not, according to DOJ, make units that comply with the rule and fit
into the available space.
Third, DOJ expressed concern that the proposed heat pump standard
of 13 SEER could make heat pumps less competitive with alternative
heating and cooling systems. Because the standard would result in
increases in the size and cost of heat pumps, it is possible that
purchasers would shift away from heat pumps to other systems that
inc1ude electric resistance heat, reducing the competition that
presently exists between heat pumps and those other systems.\18\
---------------------------------------------------------------------------

\18\ DOJ also wrote about our request for comments on a proposal
to adopt a standard for steady-state cooling efficiency (EER). The
regulation language in the proposed rule did not include a provision
regarding an EER standard, and DOJ limited its views to the
standards set forth in the proposed regulation language, indicating
that if the Department proposes rule language in the future
incorporating an EER standard, DOJ would address the competitive
impact of that standard.
---------------------------------------------------------------------------

The Department of Justice urged the Department of Energy to take
into account these possible impacts on competition in determining its
final energy efficiency standard for air conditioners and heat pumps.
DOJ wrote that the Department of Energy should consider setting a lower
SEER standard for heat pumps, such as the standard included in Trial
Standard Level 2, and a lower SEER standard for air conditioners for
retrofit markets where there are space constraints (such as markets
served by niche products) and for manufactured housing.
As we noted in the Supplementary ANOPR and proposed rule, nearly
all small manufacturers produce only niche products. DOJ's first
concern relates to disproportionate impacts on small manufacturers,
which are substantially the same group as the niche product
manufacturers. Furthermore, niche products almost exclusively serve
applications with severe space constraints. Today's final rule
prescribes standards only for those products that are not severely
space-constrained, and therefore substantially eliminates their first
concern regarding the impact of more stringent standards on small
manufacturers.

[[Page 7193]]

DOJ's second concern about products intended for space constrained
markets are more difficult to address since the standards apply to
products at the point of manufacture and not the point of installation.
We have removed one element of this concern by not specifying new
standards for niche products, primarily due to our concern over their
continued viability in replacement applications. However, we recognize
that larger conventional equipment also poses problems in replacement
applications and that these problems may be more complex in
manufactured homes. Nevertheless, air conditioner and heat pump
manufacturers do have options for increasing the efficiency of
equipment without increasing the size of both the indoor and outdoor
units, and we expect products utilizing those options to be available
to consumers during the time when the standards we are adopting today
are in effect.
As to DOJ's third concern regarding possible shifting in the market
from heat pumps to resistance heaters, we have adopted the same minimum
SEER requirement for heat pumps as we have for air conditioners. That
action substantially reduces the incentive for consumers to switch,
thereby addressing that concern.
In summary, the standards we are adopting should effectively
eliminate most of DOJ's concerns regarding the lessening of
competition, even under TSL 4. To the extent that we have not fully
eliminated all their concerns, however, we have considered the
remaining possibility for lessening of competition as we weighed the
burdens of today's adopted standards.
6. Need of the Nation To Save Energy
The Secretary recognizes the need of the Nation to save energy.
Enhanced energy efficiency improves the nation's energy security, and
reduces the environmental impacts of energy production. Improved
efficiency of central air conditioners and heat pumps is also likely to
improve the reliability of the nation's electric system. The energy
savings from central air conditioner and heat pump standards result in
reduced emissions of carbon and NOX. Cumulative emissions
savings over the 15-year period modeled are shown in Table V.22. The
results presented in Table V.22 are based only on the AEO 2000
Reference Case for electricity price and housing projections and the
NAECA efficiency scenario.

Table V.22.--Cumulative Emissions Reductions Based on AEO 2000 Reference Case and NAECA Efficiency Scenario
(2006-2020)
----------------------------------------------------------------------------------------------------------------
Reverse engineering costs ARI mean costs
Trial standard level ---------------------------------------------------------------
Carbon (Mt) NOX (kt) Carbon (Mt) NOX (kt)
----------------------------------------------------------------------------------------------------------------
1............................................... 13.2 36.7 13.4 37.2
2............................................... 23.8 72.7 23.7 67.9
3............................................... 27.7 84.4 27.4 78.8
4............................................... 32.6 85.8 33.6 102.5
5............................................... 63.0 184.2 63.7 193.7
----------------------------------------------------------------------------------------------------------------

The impact of varying electricity price and housing projections
(i.e., different AEO cases) as well as different efficiency scenarios
were considered for the Trial Standard Level 4. Table V.23 shows how
carbon and NOX emissions are impacted by the different
projections and scenarios.

Table V.23.--Cumulative Emissions Reductions for Final Standard (2006-2020) and the Impact of Different
Electricity Price/Housing Projections and Efficiency Scenarios
----------------------------------------------------------------------------------------------------------------
Reverse engineering costs ARI mean costs
Electricity price and housing Efficiency ---------------------------------------------------------------
projection scenario Carbon (Mt) NOX (kt) Carbon (Mt) NOX (kt)
----------------------------------------------------------------------------------------------------------------
AEO reference case............ NAECA........... 32.6 85.8 33.6 102.5
AEO reference case............ Roll-up......... 32.7 93.8 31.3 87.5
AEO reference case............ Shift........... 36.0 107.1 34.9 97.9
AEO low growth case........... NAECA........... 28.5 97.2 27.5 95.8
AEO high growth case.......... NAECA........... 42.2 92.4 42.8 103.1
----------------------------------------------------------------------------------------------------------------

The annual carbon emission reductions range up to 6.8 Mt in 2020
and the NOX emissions reductions up to 27.0 kt in
2015.19 20 Total carbon and NOX emissions for
each trial standard level are reported in the Environmental Assessment,
in the TSD.
---------------------------------------------------------------------------

\19\ Million metric tons (Mt).
\20\ Thousand metric tons (kt).
---------------------------------------------------------------------------

The Department makes no effort to monetize the benefits of the
actual emission reductions, but there may be time related differences
in the perceived value of the emissions depending on when they occur,
as with monetized benefits that accumulate over time. Emission
reductions that occur sooner are often more desirable than equivalent
reductions that occur later. Like monetary benefits, the health,
recreational and ecosystem benefits that result from emission
reductions are often perceived to have a greater value if they occur
sooner, rather than later. To the extent that the different trial
standard levels have slightly different shipment distributions over
time, some trial standard levels might have a slightly higher
proportion of earlier emission reductions than another trial standard
level. To show the possible effect of the different timing patterns of
the emissions, the Department is also presenting discounted emissions.
These calculations were done using the same seven percent discount rate
as was used for discounting monetized benefits. We show discounted
cumulative emission savings from 2006 through 2030 in Table V.24.

[[Page 7194]]

Table V.24.--Cumulative Discounted Emissions Reductions Based on AEO 2000 Reference Case and NAECA Efficiency
Scenario (2006-2020)
----------------------------------------------------------------------------------------------------------------
Reverse engineering costs ARI mean costs
Trial standard level ---------------------------------------------------------------
Carbon (Mt) NOX (kt) Carbon (Mt) NOX (kt)
----------------------------------------------------------------------------------------------------------------
1............................................... 4.7 15.7 4.8 15.7
2............................................... 8.5 30.3 8.5 29.2
3............................................... 9.8 35.2 9.8 33.8
4............................................... 11.6 36.7 12.0 43.3
5............................................... 22.3 77.1 22.7 81.1
----------------------------------------------------------------------------------------------------------------

7. Other Factors
This provision allows the Secretary of Energy, in determining
whether a standard is economically justified, to consider any other
factors that the Secretary deems to be relevant. EPCA Section
325(o)(2)(B)(i)(VI), 42 U.S.C. 6295(o)(2)(B)(i)(VI). The Secretary has
decided to consider the impact on peak power requirements and electric
utility system reliability.
Peak power impacts on electric utilities from increases in the
central air conditioner and heat pump standard are calculated using the
NEMS-BRS model. NEMS-BRS is used to estimate peak power impacts by
calculating the reduction in planned generation capacity due to an
increase in the minimum efficiency standard. Table V.25 shows the
estimated reductions in installed generation capacity, in giga-watts
(GW), in the year 2020, due to each of the trial standard levels. Of
the installed generating capacity avoided, 13 percent would have been
provided by coal power plants. The remaining percentage (87 percent)
would have been supplied by either gas-fired, oil-fired, or dual-fired
power plants. The results presented in Table V.25 are based only on the
AEO 2000 Reference Case for electricity price and housing projections
and the NAECA efficiency scenario.

Table V.25.--Installed Generation Capacity Reductions in the Year 2020
Based on AEO 2000 Reference Case and NAECA Efficiency Scenario
------------------------------------------------------------------------
Reverse ARI mean costs
engineering ---------------
costs
---------------- Installed
Trial standard level Installed generating
generating capacity
capacity reduction (GW)
reduction (GW)
------------------------------------------------------------------------
1....................................... 6.5 6.4
2....................................... 10.6 10.6
3....................................... 12.4 12.3
4....................................... 15.5 15.4
5....................................... 28.8 28.6
------------------------------------------------------------------------

The impact of varying electricity price and housing projections
(i.e., different AEO cases) as well as different efficiency scenarios
were considered only for the final standard (trial standard level 4).
Table V.26 shows how installed generation capacity is impacted by the
different projections and scenarios.

Table V.26.--Installed Generation Capacity Reductions in the Year 2020 for Final Standard and the Impact of
Different Electricity Price/Housing Projections and Efficiency Scenarios
----------------------------------------------------------------------------------------------------------------
Reverse ARI mean costs
engineering ---------------
costs
Electricity price and housing ---------------- Installed
projection Efficiency scenario Installed generating
generating capacity
capacity reduction (GW)
reduction (GW)
----------------------------------------------------------------------------------------------------------------
AEO reference case................... NAECA.................................... 15.5 15.4
AEO reference case................... Roll-up.................................. 15.5 15.0
AEO reference case................... Shift.................................... 16.6 16.4
AEO low growth case.................. NAECA.................................... 14.5 13.9
AEO high growth case................. NAECA.................................... 16.0 15.6
----------------------------------------------------------------------------------------------------------------

E. Conclusion

Section 325(o)(2)(A) of the Act, 42 U.S.C. 6295(o)(2)(A), specifies
that any new or amended energy conservation standard for any type (or
class) of covered product shall be designed to achieve the maximum
improvement in energy efficiency which the Secretary determines is
technologically feasible

[[Page 7195]]

and economically justified. In determining whether a standard is
economically justified, the Secretary must determine whether the
benefits of the standard exceed its burdens. EPCA Section
325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i). The amended standard must
``result in significant conservation of energy.'' EPCA Section
325(o)(3)(B), 42 U.S.C. 6295(o)(3)(B).
We consider the impacts of standards beginning with the max tech
level, i.e., Trial Standard Level 5. We then consider less efficient
levels until we reach the level which is technologically feasible and
economically justified.
To aid the reader as we discuss the benefits or burdens of the
trial levels, we have included a summary of the analysis results in
Table V.27.\21\ Table V.27 presents a summary of quantitative analysis
results for each Trial Standard Level based on the assumptions we
consider most plausible. These include manufacturing cost estimates
from the reverse engineering, an 18.4-year equipment lifetime with one
compressor replacement at 14 years, and electricity prices based on the
AEO2000 Reference Case.
---------------------------------------------------------------------------

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

Table V.27.--Summary of Quantitative Results \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Trial std 1 Trial std 2 Trial std 3 Trial std 4 Trial std 5
------------------------------------------------------------------------------------------------------------------------------------------
Primary energy saved (quads)\2\........................... 1.5 2.9 3.4 4.2 8.6
Generation capacity offset (GW)\3\........................ 6.5 10.6 12.4 15.5 28.8
NPV ($billion):...........................................
7% Discount rate, roll-up............................. 2 3 2 1 (10)
7% Discount rate, NAECA............................... 2 2 1 0 (10)
3% Discount rate, roll-up............................. 7 11 11 11 (8)
Cumulative emissions reductions through 2020:
Carbon equivalent (Mt)\3\............................. 13.2 23.8 27.7 32.7 63.0
NOX (kt)\3\.......................................... 36.7 72.7 84.4 93.8 184.2
Cumulative change in INPV ($ million)\4\:
Roll-up............................................... (160) (313) (319) (303) ..............
NAECA................................................. (30) (159) (171) (169) ..............
Life cycle cost savings ($)\5\:
Split AC.............................................. 75 113 113 113 (137)
Packaged AC........................................... 78 163 163 29 (276)
Split HP.............................................. 209 365 372 372 (41)
Packaged HP........................................... 207 421 353 353 166
Payback (years)\6\:
Split AC.............................................. 7.8 9.8 9.8 11.3 19.6
Packaged AC........................................... 7.7 7.5 7.5 14.5 25.1
Split HP.............................................. 2.7 3.9 6.4 6.4 14.0
Packaged heat pump.................................... 4.6 4.0 8.4 8.4 12.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Parentheses indicate negative (-) values.
\2\ Energy savings based on Roll-up efficiency scenario.
\3\ Values based on NAECA efficiency scenario with the exception of TSL 4 which is based on the Roll-up scenario.
\4\ Not calculated at Trial Standard Level 5.
\5\ Negative values indicate LCC increases.
\6\ Payback periods are median values.

In addition to the quantitative results, we also consider other
burdens and benefits that affect economic justification. The potential
to improve the reliability of the electricity system is the major
benefit we have not quantified explicitly. In areas where the
occurrence of blackouts (and brownouts) can be reduced through
expansion of system capacity, the economic value of avoided blackouts
associated with reductions in peak load cannot exceed the value of the
avoided capacity expansion. That value is already captured in our
analysis as savings in consumer utility bills. However, in areas that
do not expect to be able to maintain adequate capacity reserves, the
value of avoided blackouts associated with reductions in peak demand
can far exceed the normal costs of capacity expansion.\22\
---------------------------------------------------------------------------

\22\ For instance, if capacity-related blackouts cost a region
$1 billion, society would be willing to pay up to $1 billion to
prevent them. If those blackouts can be prevented through either a
capacity expansion or a reduction in peak demand, and the new
capacity would cost $100 million, the value of the reduction in peak
demand can be no more than $100 million, If the region is short on
capacity and cannot add new capacity quickly, however, the same
reduction in peak demand then can equal the value of the avoided
blackout ($1 billion) since there is no feasible alternative.
---------------------------------------------------------------------------

We also recognize that the adopted standards could result in
additional burdens. These include a possible increase in health
problems caused by consumers forgoing air conditioner purchases, a
possible reduction in the ability of the product to dehumidify, a
possible lessening of competition, and possible difficulty in
installing the new baseline products into replacement applications.
However, we generally believe that these burdens are capable of being
mitigated at any standard level, except possibly Trial Standard Level
5. Section IV discusses our response to comments regarding benefits and
burdens and explains our viewpoints on those issues.
First we considered Trial Standard Level 5, the maximum
technologically achievable efficiency level for each of four classes,
representing uniform 18 SEER requirements. The manufacturing cost we
assume for Trial Standard Level 5 is equal to 15 SEER equipment,
although we would expect that assumption to understate the cost and
price of the product. Trial Standard Level 5 will likely save 8.6 quads
of energy which the Department considers significant. These savings
will result in the avoidance of approximately 29 GW of installed
generation capacity. For comparison, the generating capacity is
equivalent to roughly 75 large, 400 megawatt, power plants,\23\
approximately 3.7 percent of current installed generating capacity
nationwide

[[Page 7196]]

and more than 13 percent of the anticipated growth in capacity needed
by 2020. The emissions reductions are 63.0 Mt of carbon equivalent and
184.2 kt of NOX.
---------------------------------------------------------------------------

\23\ DOE estimates 9 coal-fired power plants and 66 gas-fired
power plants can be avoided. See TSD, Chapter 11 and Appendix H.
---------------------------------------------------------------------------

At Trial Standard Level 5, the average consumer would experience an
increase in LCC. Purchasers of split central air-conditioners, the
predominant class of central air conditioner with 65 percent of the
sales of central air conditioners and heat pumps, would lose on average
$137 over the life of the appliance. Purchasers of split heat pumps,
the predominant class of heat pump, would lose on average $41. Again,
these results do not include the additional price the consumer would
pay over the price of a 15 SEER product, which would increase the life
cycle cost considerably. Furthermore, for the nation as a whole, Trial
Standard Level 5 would result in a net cost of $10 billion in NPV. We
did not calculate manufacturer impacts at this trial standard level,
determining based on preliminary evaluation that they would be severe
and unacceptable.
The Secretary concludes that at Trial Standard Level 5, the
benefits of energy savings, generating capacity reductions and emission
reductions would be outweighed by the burdens of negative economic
impacts to the nation, to the vast majority of consumers and to the
manufacturers. Consequently, the Secretary has concluded that Trial
Standard Level 5, the Max Tech Level, is not economically justified.
Next, we considered Trial Standard Level 4. This level specifies 13
SEER equipment for all product classes. In considering Trial Standard
Level 4 the Roll-up efficiency scenario and reverse engineering cost
data are the assumptions we consider to be the most probable as
discussed in Part V.A, Trial Standard Levels. Primary energy savings
would likely be 4.2 quads which the Department considers significant.
The estimated reduction in installed generating capacity is
approximately 15 GW, and reduced emissions would range up to 32.7 Mt of
carbon equivalent and up to 93.8 kt of NOX.
The average air conditioner owner would save $113 over the life of
a split air conditioner and $29 over the life of a packaged air
conditioner. These equate to median payback periods of 11.3 years and
14.5 years, respectively. Low income consumers of split air
conditioners and split heat pumps also incur LCC savings ($43 for split
air conditioner owners and $185 savings for split heat pump owners). In
addition, the average heat pump owner would benefit, saving $372 over
the life of a split heat pump and $353 over the life of a packaged heat
pump. These equate to median payback periods between 6.4 and 8.4 years,
respectively. Trial Standard Level 4 will lower peak electricity demand
compared to the base case. That will allow utility service areas to
either avoid new capacity or, to the extent that peak loads contribute
to reliability problems, improve system reliability. The increase in
national net present value is expected to be $1 billion. The decrease
in the net present value of the air conditioning and heat pump
manufacturing industry is expected to be $300 million.
After carefully considering the analysis, comments, and benefits
versus burdens, the Department is amending the energy conservation
standards for central air conditioners and central air conditioning
heat pumps at Trial Standard Level 4. The Department concludes this
standard saves a significant amount of energy and is technologically
feasible and economically justified. In determining economic
justification, the Department finds that the benefits of energy
savings, the projected amount of avoided power plant capacity or
improvement in system reliability that accompanies expected reduction
in peak demand, consumer life cycle cost savings, national net present
value increase and emission reductions resulting from the standards
outweigh the burdens. The burdens include the loss of manufacturer net
present value, increases in consumer life cycle cost for some users of
products covered by today's final rule, any possible increase in health
problems caused by consumers forgoing air conditioner purchases, any
possible reduction in the ability of the product to dehumidify, any
possible lessening of competition, and any possible difficulty in
installing the new baseline products into replacement applications.
In the proposed rule, we proposed to adopt Trial Standard Level 3.
The Department's decision to instead adopt the more stringent standards
represented by Trial Standard Level 4 was influenced by comments we
received during the intervening comment period. First, comments we
received regarding the prices and markups applied to today's equipment
persuaded us that the reverse engineering cost data are much more
likely than the ARI Mean cost data to represent the actual costs of
producing equipment under more stringent standards. Placing more weight
on the costs represented by the reverse engineering data substantially
improved the economic benefits to air conditioner owners, demonstrating
that the benefits of Trial Standard Level 4 outweigh the burdens.
Second, many comments expressed concern that adopting heat pump
standards that were more stringent than air conditioner standards would
encourage more consumers to purchase electric resistance furnaces and
air conditioners instead of heat pumps. In response to those comments,
we verified that the energy savings from the more efficient heat pumps
would be eliminated if only a small fraction of heat pump owners (4
percent) switched to resistance heating. That possibility provided
added justification for adopting the same minimum standards for heat
pumps as for air conditioners.
Given our decision to adopt a 13 SEER standard for both central air
conditioners and central air conditioning heat pumps, we believe
further evaluation is needed before we can issue final standards for
air conditioners or heat pumps that currently are intended to serve
applications with severe space constraints, exemplified by what we have
referred to as ``niche'' products. Based on our preliminary assessment
of ``highest viable efficiency levels'' we identified for these
products in the TSD (Table 4.23), the comments stating that these
products would have difficulty in meeting the standards proposed in the
proposed rule, and the concerns expressed by the Department of Justice,
we have serious concerns about whether 13 SEER is an appropriate
standard for most such products. On the other hand, we are uncertain
whether it would be prudent for us to apply the standards contained in
the proposed rule to niche products in light of the 13 SEER standard we
are adopting today for other products. Doing so may create a strong
tendency for niche products, with lower minimum efficiency standards
than conventional products, to be applied in conventional applications.
Therefore, today's final rule provides efficiency standards for all
residential central air conditioners and heat pumps, except the niche
products. We are referring to these products more generally as ``space-
constrained products'', since they are specifically intended for
severely space-constrained applications. We define them as having the
following characteristics:
(1) Rated cooling capacities no greater than 30,000 BTU/hr
(2) An outdoor or indoor unit having at least two overall exterior
dimensions or an overall displacement that:
(a) are (is) substantially smaller than those of other units that
are (i) currently usually installed in site-built single family homes,
and (ii) of a similar cooling, and, if a heat pump, heating, capacity,
and

[[Page 7197]]

(b) if increased, would certainly result in a considerable increase
in the cost of installation or would certainly result in a significant
loss in the utility of the product to the consumer.
(3) Of a product type that was available for purchase in the United
States as of December 1, 2000.
Based on the information we have gathered thus far in this
rulemaking, we believe space-constrained products would include
equipment described as:
through-the-wall packaged and split
ductless split
single package and non-weatherized
Small duct, high velocity equipment is covered by today's
standards. As discussed in the proposed rule (65 FR at 59609-10), DOE
addressed the concerns for that equipment by modifying the test
procedure to allow those products to be tested as coil-only equipment.
Also, the standards in today's rule will clearly apply to the types of
central air conditioners and heat pumps normally installed in site-
built single family homes.
The Department will re-open the comment period in this rulemaking
to address standards for space-constrained products, and plans to
publish a final rule in the Federal Register no later than eighteen
(18) months from the date of publication of today's rule. The rule
covering space-constrained products will establish new product classes,
to the extent necessary, and minimum efficiency standards for these
products. It will also contain an assessment of technical feasibility
and economic justification in accordance with the requirements of the
Act. The Department intends to make the rule for space-constrained
products effective on January 23, 2006.
Before reopening the comment period, we will initially identify
those product types we believe should be treated as space-constrained
products, and will begin to assess the impact of a rulemaking for these
products on small businesses. To aid in this process, we will seek
shortly the following information from each manufacturer of those
products that we believe may meet the definition of space-constrained
products:
(1) the number of employees employed by the company as of December
31, 2000 (to assist us in determining whether we should consider the
company to be a small business entity);
(2) a list of proposed space-constrained products, providing for
each type of product:
(a) a description of its intended applications
(b) a description based on physical characteristics, manufacturing
characteristics, capacity, and performance attributes that would
distinguish it from other types of products, and which would be
enforceable at the point of manufacture
(c) a list of models produced of that product type by the
manufacturer, containing for each model: Physical dimensions, rated
capacities, and range of efficiency ratings available;
(3) a statement of whether the number of units produced by the
manufacturer was less than or greater than 100,000 units in the year
2000; and
(4) an estimate of the percentage of units produced by the
manufacturer that the manufacturer estimates are installed as
replacements for similar units.
The Department encourages companies that believe they manufacture
space-constrained products to immediately submit this information,
without awaiting a request from DOE, to Ms. Geraldine Paige at the
address indicated at the beginning of this notice.
We will make the information we obtain publicly available
(excluding confidential information) through a Federal Register notice.
A comment period will follow during which time the public will have an
opportunity to review the published information and respond to the
Department. Following the close of the comment period, we will issue in
the Federal Register our determination of which of the published
products we believe are space-constrained products and which we believe
are not. We expect these steps to proceed simultaneously with the other
activities to set standards for such products.

VI. Procedural Issues and Regulatory Review

A. Review Under the National Environmental Policy Act

The Department prepared an Environmental Assessment (EA) (DOE/EA-
1352) available from: U.S. Department of Energy, Office of Energy
Efficiency and Renewable Energy, Forrestal Building, Mail Station EE-
41, 1000 Independence Avenue, SW, Washington, DC 20585-0121, (202) 586-
0854. We found the environmental effects associated with various
standard efficiency levels for central air conditioners and heat pumps
to be not significant, and therefore we are publishing, elsewhere in
this issue of the Federal Register, a Finding of No Significant Impact
(FONSI) pursuant to the National Environmental Policy Act of 1969
(NEPA), 42 U.S.C. 4321 et seq., the regulations of the Council of
Environmental Quality (40 CFR Parts 1500-1508), and the Department's
regulations for compliance with NEPA (10 CFR Part 1021).

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

Today's regulatory action has been determined to be an
``economically significant regulatory action'' under Executive Order
12866, ``Regulatory Planning and Review.'' 58 FR 51735 (October 4,
1993). Accordingly, today's action was subject to review under the
Executive Order by the Office of Information and Regulatory Affairs
(OIRA) of the Office of Management and Budget.
The draft submitted to OIRA and other documents submitted to OIRA
for review have been made a part of the rulemaking record and are
available for public review in the Department's Freedom of Information
Reading Room, 1000 Independence Avenue, SW, Washington, DC 20585,
between the hours of 9:00 a.m. and 4:00 p.m., Monday through Friday,
telephone (202) 586-3142.
The proposed rule contained a summary of the Regulatory Analysis
which focused on the major alternatives considered in arriving at the
approach to improving the energy efficiency of consumer products. The
reader is referred to the complete draft ``Regulatory Impact
Analysis,'' which is contained in the TSD, available as indicated at
the beginning of this notice. It consists of: (1) A statement of the
problem addressed by this regulation, and the mandate for government
action; (2) a description and analysis of the feasible policy
alternatives to this regulation; (3) a quantitative comparison of the
impacts of the alternatives; and (4) the national economic impacts of
the proposed standard.

C. Review Under the Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., requires an
assessment of the impact of regulations on small businesses. To be
categorized as a ``small'' air conditioning and warm air heating
equipment manufacturer, a firm must employ no more than 750 employees.
The Department prepared a manufacturing impact analysis which was
made public and available to all residential central air conditioner
and heat pump manufacturers. Other impacts on small businesses were
previously discussed in the proposed rule. 65 FR 59590, 59629-30
(October 5, 2000). The Department reaffirms its certification in the
proposed rule.

[[Page 7198]]

Today's rule will not have a significant impact on a substantial number
of small entities, and preparation of a regulatory flexibility analysis
is unnecessary.
Most small businesses engaged in the manufacture of central air
conditioners and heat pumps produce products that we have called
``niche'' products. To address the concerns of the Department of
Justice and many commenters regarding the impacts of more stringent
standards on small manufacturers, we are continuing our evaluation of
standards for those products and have not issued new standards for them
as part of this rule.

D. Review Under the Paperwork Reduction Act

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

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

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

F. ``Takings'' Assessment Review

DOE has determined pursuant to Executive Order 12630,
``Governmental Actions and Interference with Constitutionally Protected
Property Rights,'' 52 FR 8859 (March 18, 1988), that this regulation
would not result in any takings that might require compensation under
the Fifth Amendment to the United States Constitution.

G. Review Under Executive Order 13132

Executive Order 13132 (64 FR 43255, August 4, 1999) imposes certain
requirements on agencies formulating and implementing policies or
regulations that preempt State law or that have federalism
implications. Agencies are required to examine the constitutional and
statutory authority supporting any action that would limit the
policymaking discretion of the States and carefully assess the
necessity for such actions. Agencies also must have an accountable
process to ensure meaningful and timely input by State and local
officials in the development of regulatory policies that have
federalism implications. DOE published its intergovernmental
consultation policy on March 14, 2000. 65 FR 13735. DOE has examined
today's final rule and has determined that it would not have a
substantial direct effect on the States, on the relationship between
the national government and the States, or on the distribution of power
and responsibilities among the various levels of government. State
regulations that may have existed on the products that are the subject
of today's final rule were preempted by the Federal standards
established in NAECA. States can petition the Department for exemption
from such preemption to the extent, and based on criteria, set forth in
EPCA.

H. Review Under the Unfunded Mandates Reform Act

With respect to a proposed regulatory action that may result in the
expenditure by State, local and tribal governments, in the aggregate,
or by the private sector of $100 million or more (adjusted annually for
inflation), section 202 of the Unfunded Mandates Reform Act of 1995
(UMRA) requires a Federal agency to publish estimates of the resulting
costs, benefits and other effects on the national economy. 2 U.S.C.
1532(a), (b). UMRA also requires each Federal agency to develop an
effective process to permit timely input by state, local, and tribal
governments on a proposed significant intergovernmental mandate. The
Department's consultation process is described in a notice published in
the Federal Register on March 18, 1997 (62 FR 12820). Today's final
rule may impose expenditures of $100 million or more on the private
sector. It does not contain a Federal intergovernmental mandate.
Section 202 of UMRA authorizes an agency to respond to the content
requirements of UMRA in any other statement or analysis that
accompanies the proposed rule. 2 U.S.C. 1532(c). The content
requirements of section 202(b) of UMRA relevant to a private sector
mandate substantially overlap the economic analysis requirements that
apply under section 325(o) of EPCA and Executive Order 12866. The
Supplementary Information section of the Notice of Final Rulemaking and
``Regulatory Impact Analysis'' section of the TSD for this Final Rule
responds to those requirements.
Under section 205 of UMRA, the Department is obligated to identify
and consider a reasonable number of regulatory alternatives before
promulgating a rule for which a written statement under section 202 is
required. DOE is required to select from those alternatives the most
cost-effective and least burdensome alternative that achieves the
objectives of the rule unless DOE publishes an explanation for doing
otherwise or the selection of such an alternative is inconsistent with
law. As required by section 325(o) of the Energy Policy and
Conservation Act (42 U.S.C. 6295(o)), today's final rule establishes
energy conservation standards for central air conditioners and heat
pumps that are designed to achieve the maximum improvement in energy
efficiency that DOE has determined to be both technologically feasible
and economically justified. A full discussion of the alternatives
considered by DOE is presented in the ``Regulatory Impact Analysis''
section of the TSD for today's final rule.

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

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

[[Page 7199]]

J. Review Under the Plain Language Directives

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

K. Congressional Notification

As required by 5 U.S.C. 801, DOE will submit to Congress a report
regarding the issuance of today's final rule prior to the effective
date set forth at the outset of this notice. DOE also will submit the
supporting analyses to the Comptroller General (GAO) and make them
available to each House of Congress. The report will state that it has
been determined that the rule is a ``major rule'' as defined by 5
U.S.C. 804(2).

List of Subjects in 10 CFR Part 430

Administrative practice and procedure, Energy conservation,
Household appliances.

Issued in Washington, DC, on January 16, 2001.
Dan W. Reicher,
Assistant Secretary, Energy Efficiency and Renewable Energy.

For the reasons set forth in the preamble, Part 430 of Chapter II
of Title 10, Code of Federal Regulations is amended, as set forth
below.

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

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

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

2. Section 430.2 is amended by adding a definition for ``space-
constrained products'' in alphabetical order to read as follows:

Sec. 430.2 Definitions.

* * * * *
Space constrained product means a central air conditioner or heat
pump:
(1) That has rated cooling capacities no greater than 30,000 BTU/
hr;
(2) That has an outdoor or indoor unit having at least two overall
exterior dimensions or an overall displacement that:
(i) Are (is) substantially smaller than those of other units that
are (i) currently usually installed in site-built single family homes,
and (ii) of a similar cooling, and, if a heat pump, heating, capacity,
and
(ii) If increased, would certainly result in a considerable
increase in the usual cost of installation or would certainly result in
a significant loss in the utility of the product to the consumer; and
(3) Of a product type that was available for purchase in the United
States as of December 1, 2000.
* * * * *

3. Section 430.32 of Subpart C is amended by revising paragraph (c)
to read as follows:

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

* * * * *
(c) Central air conditioners and central air conditioning heat
pumps. (1) Split system central air conditioners and central air
conditioning heat pumps manufactured after January 1, 1992, and before
January 23, 2006, and single package central air conditioners and
central air conditioning heat pumps manufactured after January 1, 1993,
and before January 23, 2006, shall have Seasonal Energy Efficiency
Ratio and Heating Seasonal Performance Factor no less than:

------------------------------------------------------------------------
Seasonal Heating
energy seasonal
Product class efficiency performance
ratio factor
------------------------------------------------------------------------
(i) Split systems.............................. 10.0 6.8
(ii) Single package systems.................... 9.7 6.6
------------------------------------------------------------------------

(2) Central air conditioners and central air conditioning heat
pumps manufactured on or after January 23, 2006, shall have Seasonal
Energy Efficiency Ratio and Heating Seasonal Performance Factor no less
than:

------------------------------------------------------------------------
Seasonal Heating
energy seasonal
Product class efficiency performance
ratio factor
(SEER) (HSPF)
------------------------------------------------------------------------
(i) Split system air conditioners.............. 13 ...........
(ii) Split system heat pumps................... 13 7.7
(iii) Single package air conditioners.......... 13 ...........
(iv) Single package heat pumps................. 13 7.7
(v) Space constrained products................. [reserved] [reserved]
------------------------------------------------------------------------

* * * * *

Appendix

[The following letter from the Department of Justice will not
appear in the Code of Federal Regulations.]

DEPARTMENT OF JUSTICE,

Antitrust Division, Main Justice Building, 950 Pennsylvania Avenue
NW., Washington, DC 20530-0001, (202) 514-2401/(202) 616-2645 (f),
antitrust@justice.usdoj.gov (internet),
http://www.usdoj.gov (World Wide Web).
December 4, 2000.
Mary Anne Sullivan, General Counsel, Department of Energy,
Washington, DC 20585.
Dear General Counsel Sullivan:
I am responding to your October 16, 2000 letter seeking the
views of the Attorney General about the potential impact on
competition of two proposed energy efficiency standards: one for
clothes washers and the other for residential central air
conditioners and heat pumps. Your request was submitted pursuant to
Section 325(o)(2)(B)(i) of the Energy Policy and Conservation Act,
42 U.S.C. Sec. 6291, 6295 (``EPCA''), which requires the Attorney
General to make a determination of the impact of any lessening of
competition that is likely to result from the imposition of proposed
energy efficiency standards. The Attorney General's responsibility
for responding to requests from other departments about the effect
of a program on competition has been delegated to the Assistant
Attorney General for the Antitrust Division in 28 CFR Sec. 0.40(g).
We have reviewed the proposed standards and the supplementary
information published in the Federal Register notices and submitted
to the Attorney General, which include information provided to the
Department of Energy by manufacturers. We have additionally
conducted interviews with members of the industries.
We have concluded that the proposed clothes washer standard
would not adversely affect competition. In reaching this conclusion,
we note that the proposed standard is based on a joint
recommendation submitted to the Department of Energy by
manufacturers and energy conservation advocates. That recommendation
states that virtually all manufacturers of clothes washers who sell
in the United States participated in arriving at the recommendation
through their trade association, that the recommendation

[[Page 7200]]

was developed in consultation with small manufacturers, and that the
manufacturers believe the new standard would not likely reduce
competition. We note further that, as the industry recommended, the
proposed standard will be phased in over six years, which will allow
companies that do not already have products that meet the proposed
standard sufficient time to redesign their product lines.
With respect to the proposed residential central air conditioner
and heat pump standard, we have concluded that there could be an
adverse impact on competition. The proposed standard, Trial Standard
Level 3, is expressed in terms of two industry measurements: SEER
(Seasonal Energy Efficiency Ratio) and HSPF (Heating Seasonal
Performance Factor).\1\ These standards would change from the
current central air conditioner and heat pump efficiency standards
of 10 SEER/6.8 HSPF for split system air conditioners and heat pumps
and 9.7 SEER/6.6 HPSF for single package air conditioners and heat
pumps to 12 SEER for air conditioners and 13 SEER/7.7 HPSF for heat
pumps.
---------------------------------------------------------------------------

\1\ The Federal Register notice also requested comments on a
proposal to adopt a standard for steady-state cooling efficiency
(EER) and discussed several options the Department of Energy is
considering. The proposed rule set forth in the notice does not,
however, include a provision regarding an EER standard, and the
views of the Department of Justice expressed in this letter are
limited to the impact of any lessening of competition * * * that is
likely to result from the imposition of the [proposed] standard,''
as required by EPCA. If the Department of Energy proposes a rule in
the future incorporating an EER standard, the Department will then
evaluate that proposed rule and express its views about the
competitive impact of that standard.
---------------------------------------------------------------------------

We have identified three possible competitive problems presented
by the proposed standards. First, the proposed 13 SEER heat pump
standard would have a disproportionate impact on smaller
manufacturers. Currently less than 20% of the total current product
lines meet the proposed standards, but for some small manufacturers,
100% of their product lines fail to satisfy the proposed standard.
Second, the proposed standard for heat pumps, and in some
instances for air conditioners, would have an adverse impact on some
manufacturers of these products (including those products referred
to in the Federal Register notice as ``niche products'') used to
retrofit existing housing and used in manufactured housing. These
manufacturers could not make units that comply with the rule and fit
into the available space.
Third, the proposed heat pump standard of 13 SEER could make
heat pumps less competitive with alternative heating and cooling
systems. Because the standard will result in increases in the size
and cost of heat pumps, it is possible that purchasers will shift
away from heat pumps to other systems that include electric
resistance heat, reducing the competition that presently exists
between heat pumps and those other systems.
The Department of Justice urges the Department of Energy to take
into account these possible impacts on competition in determining
its final energy efficiency standard for air conditioners and heat
pumps. The Department of Energy should consider setting a lower SEER
standard for heat pumps, such as the standard included in Trial
Standard Level 2, and a lower SEER standard for air conditioners for
retrofit markets where there are space constraints (such as markets
served by niche products) and for manufactured housing.

Sincerely,
A. Douglas Melamed,
Acting Assistant Attorney General.

[FR Doc. 01-1790 Filed 1-18-01; 11:30 am]
BILLING CODE 6450-01-P

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