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: May 23, 2002 (Volume 67, Number 100)]
[Rules and Regulations]
[Page 36367-36408]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23my02-17]

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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, Department of
Energy.
ACTION: Final rule.

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SUMMARY: The Department of Energy (DOE) today amends the existing
energy conservation standards for central air conditioners and heat
pumps by raising the minimum energy efficiency levels by 20 percent for
most central air conditioners and heat pumps, with somewhat lower
levels for certain space-constrained products. DOE also today withdraws
a final rule, published on January 22, 2001, that would have
established even higher standards. DOE has determined that the
standards in the January 22 final rule, which never became effective,
are not economically justified under the Energy Policy and Conservation
Act (EPCA). Finally, DOE adopts provisions that clarify the point in
time at which DOE's discretion to amend standards becomes limited under
EPCA.

DATES: The final rule amending 10 CFR part 430 published January 22,
2001 (66 FR 7170) is withdrawn as of May 23, 2002. The effective date
of the amendments to the Code of Federal Regulations in this rule is
August 6, 2002.

ADDRESSES: You may read copies of the public comments, the Technical
Support Document for Energy Efficiency Standards for Consumer Products:
Central Air Conditioners and Heat Pumps (TSD), the transcript of the
public hearing, workshop transcripts in this proceeding, the petition
for reconsideration submitted by the Air-Conditioning and Refrigeration
Institute, and other post-promulgation submissions at the DOE Freedom
of Information (FOI) Reading Room, U.S. Department of Energy, Forrestal
Building, Room 1E-190, 1000 Independence Avenue, SW., Washington, DC
20585, (202-586-3142), between the hours of 9 a.m. and 4 p.m., Monday
through Friday, except Federal holidays. You may obtain copies of the
TSD and analysis spreadsheets from the Office of Energy Efficiency and
Renewable Energy's (EERE) Web site at: http://www.eren.doe.gov/
buildings/codes_standards/applbrf/central_air_conditioner.html.

FOR FURTHER INFORMATION CONTACT: Michael Raymond, U.S. Department of
Energy, Office of Energy Efficiency and Renewable Energy, Forrestal
Building, EE-41, 1000 Independence Avenue, SW., Washington, DC 20585-
0121, (202) 586-0854, e-mail: michael.raymond@ee.doe.gov, or
Michael Bowers, Esq., U.S. Department of Energy, Office of General
Counsel, Forrestal Building, GC-72, 1000 Independence Avenue, SW.,
Washington, DC 20585, (202) 586-9507, e-mail:
mike.bowers@hq.doe.gov.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Rulemaking History
III. Authority of DOE to Reconsider and Withdraw the January 22,
2001 Final Rule and Adopt a 12 SEER Standard for Central Air
Conditioners
A. DOE's Analysis of EPCA's Anti-Backsliding Provision
B. Discussion of Public Comments on the Anti-Backsliding
Provision
1. Environmental Advocates' Views
2. ARI's Views
IV. Basis for DOE's Decision to Withdraw the January 22, 2001 Final
Rule
A. Legal Issues
B. Policy Issues
V. Amended Energy Conservation Standards
A. Overview
1. Central Air Conditioner and Heat Pump Features
2. Consumer Benefits
3. National Benefits
B. Statutory Framework
C. Methodology Used in DOE Analyses
D. General Discussion of DOE's Consideration of Statutory
Criteria
1. Technological Feasibility
2. Economic Justification Factors
a. Economic Impact on Manufacturers and Consumers
b. Life-cycle Costs and Rebuttable Presumption
c. Energy Savings
d. Lessening of Utility or Performance of Products
e. Impact of Lessening of Competition
f. Need of the Nation to Conserve Energy
g. Other Factors
VI. Discussion of Comments
A. Impact on Consumers
1. Low-Income Consumers
2. Electricity Prices
3. Installation Costs
4. Manufactured Housing Owners
B. Life-Cycle Cost and Payback Period
1. Product Lifetime
2. Warranty, Maintenance, and Service Costs
3. Markups
4. Energy Use
a. Residential Energy Consumption Survey
b. Rebound Effect
5. Rebuttable Payback Period
C. Shipments/National Energy Savings
1. Shipments Forecasts
2. Heat Rates
3. Fuel Switching
D. Impact on Manufacturers
1. Cumulative Regulatory Burden
2. Financial Burdens Associated with New Efficiency Standards
3. Small Manufacturers
4. Manufacturer Cost Estimates
E. Effect on Competition
F. Effect on Utility or Performance
1. Dehumidification
G. Electric System Reliability/Peak Power
1. Peak Power
2. Reliability
H. Other Issues
1. Minimum EER Requirement
2. TXV Requirement
3. State Exemption From DOE Standards
4. Effective Date
5. Environmental Impacts
6. Employment Impacts
7. Space-Constrained Products
a. Through-the-Wall Products
b. Small Duct, High Velocity Systems
8. Basis for HSPF Level
9. Non-Regulatory Approaches
10. Energy Policy
VII. Analytical Results and Conclusions
A. Overview of Analytical Results
1. General
2. Through-the-Wall Products
3. Small Duct, High Velocity Systems
B. Conclusions Regarding Conventional Products
C. Conclusions Regarding Space-Constrained Products
1. Through-the-Wall Products
2. Small Duct, High Velocity Systems
VIII. Procedural Issues and Regulatory Review
A. Review Under the National Environmental Policy Act
B. Review Under Executive Order 12866
C. Review Under the Regulatory Flexibility Act
D. Review Under the Paperwork Reduction Act
E. Review Under Executive Order 12988
F. Review Under Executive Order 12630
G. Review Under Executive Order 13132
H. Review Under the Unfunded Mandates Reform Act of 1995
I. Review Under the Treasury and General Government
Appropriations Act, 1999
J. Review Under Executive Order 13211
K. Congressional Notification

I. Introduction

DOE today publishes three final rulemaking determinations with
respect to amended central air conditioner and heat pump energy
conservation standards under section 325 of the Energy Policy and
Conservation Act (42 U.S. Code (U.S.C.) Section 6295). First, for
reasons described in detail in Section IV of this Supplementary
Information, DOE hereby withdraws the January 22, 2001 final rule that
would have established 13 as the mandatory Seasonal Energy Efficiency
Rating

[[Page 36369]]

(SEER) \1\ for most central air conditioners and central air
conditioning heat pumps (heat pumps). DOE withdraws the final rule
because it: (1) Was promulgated without consulting with the Attorney
General on potential anti-competitive effects, (2) contained a material
defect in the statement of basis and purpose required by the
Administrative Procedure Act (APA), (3) contained an effective date in
conflict with the Congressional Review Act's lie-before-the-Congress
requirement for major rules, and (4) was based on an assessment of
benefits and burdens that resulted in an erroneous conclusion that a 13
SEER standard for both central air conditioners and central air
conditioning heat pumps would be economically justified under title
III, part B of the Energy Policy and Conservation Act (EPCA) (42 U.S.C.
6291 et seq.). Second, DOE adopts regulatory provisions that implement
section 325(o)(1) of EPCA, including definitions of the statutory terms
"maximum allowable energy use" and "minimum required
energy efficiency," and thereby pinpoints the point in time at
which DOE's discretion to alter an amended standard becomes limited.
The basis for this determination is discussed in Section III of this
Supplementary Information. Third, DOE finalizes 12 SEER and 7.4 Heating
System Performance Factor (HSPF) \2\ as the amended energy conservation
standard for most central air conditioners and central air conditioning
heat pumps and adopts lower standards for certain space-constrained
products. The basis for these determinations is discussed in Sections V
through VII of this Supplementary Information
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\1\ The Seasonal Energy Efficiency Ratio or SEER is DOE's
measure of energy efficiency for the seasonal cooling performance of
central air conditioners and central air conditioning heat pumps.
\2\ The Heating Seasonal Performance Factor is DOE's measure of
energy efficiency for the seasonal heating performance of heat
pumps.
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II. Rulemaking History

The existing standards for residential central air conditioners and
heat pumps were prescribed by the National Appliance Energy
Conservation Act of 1987 (NAECA) (Pub. L. 100-12) and have been in
effect since 1992. 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 DOE's intention to revise the existing
central air conditioner and heat pump efficiency standard pursuant to
section 325(d) of EPCA, as amended by NAECA. 58 FR 47326. The fiscal
year (FY) 1996 appropriations legislation for DOE imposed a moratorium
on proposed and final energy conservation standards. Public Law 104-
134. During the moratorium, DOE responded to congressional concern
about how the appliance standards program was working by consulting
with a broad spectrum of interested persons on possible improvements.
As a result, on July 15, 1996, DOE published a new policy on how it
would conduct appliance standards rulemaking (61 FR 36974). The new
policy, "Procedures for Consideration of New or Revised Energy
Conservation Standards for Consumer Products," is commonly
referred to as the Process Improvement Rule and is codified at 10 CFR
part 430, subpart C, Appendix A. Under this new policy, DOE presented
for comment an analytical framework for the central air conditioner and
heat pump standards rulemaking during a workshop on June 30, 1998. The
analytical framework described the different analyses that DOE would
conduct, the methods for conducting them, the use of new spreadsheets,
and the relationship of the various analyses. On November 24, 1999, DOE
published a Supplemental ANOPR for central air conditioners and heat
pumps and invited additional comment on issues raised following
publication of the original ANOPR. 64 FR 66306.
DOE published a notice of proposed rulemaking on October 5, 2000
(October 5, 2000 NOPR). 65 FR 59590. The energy efficiency standards
that DOE proposed for residential central air conditioners and 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, DOE
requested comments on a proposal to adopt a standard for steady-state
cooling efficiency, denominated EER (or Energy Efficiency Ratio). The
proposal of an EER was designed to ensure more efficient operation at
high outdoor temperatures, during periods when electricity use by air
conditioners is at its peak. A public hearing was held in Washington,
D.C. on November 16, 2000, to hear oral views, data and arguments on
the proposed rule.
On January 22, 2001, at the close of the Clinton Administration,
DOE published a final rule that would have required a SEER of 13 for
all classes of central air conditioners, except for "niche"
products which were omitted from the rule, and a corresponding HSPF of
7.7 for central air conditioning heat pumps (Final Rule, "Energy
Conservation Program for Consumer Products; Central Air Conditioners
and Heat Pump Energy Conservation Standards," 61 FR 7170).
Pursuant to President Bush's Regulatory Review Plan,\3\ DOE
conducted an internal review of the final, not-yet-effective rules
issued under section 325 of EPCA that DOE published at the end of the
Clinton Administration, including final rules concerning energy
conservation standards for clothes washers, water heaters, and central
air conditioners and central air conditioning heat pumps. Consistent
with the EPCA criteria for determining whether a standard level is
economically justified under section 325 (42 U.S.C. 6295(o)(2)(B)), DOE
examined each of these three rules to determine, among other things,
whether the rulemaking record was complete and whether the affirmative
determination of economic justification was based on adequate findings
with regard to the statutorily required considerations that make up the
test of economic justification.
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\3\ This Plan was set forth in a memorandum from Assistant to
the President and Chief of Staff Andrew H. Card, dated January 20,
2001, and published in the Federal Register on January 24, 2001 (66
FR 7702).
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While DOE examined the three appliance energy conservation
standards rulemakings under the President's Regulatory Review Plan, DOE
received petitions for reconsideration for each final rule. In
addition, DOE received notice that the Gas Appliance Manufacturers
Association (with regard to the water heater rule) and the Air-
Conditioning and Refrigeration Institute (ARI) and certain
manufacturers (with regard to the central air conditioner rule) had
filed petitions for review in the United States Court of Appeals for
the Fourth Circuit.
Ultimately, DOE decided that neither the clothes washer rule nor
the water heater rule warranted further rulemaking action and denied
the related petitions for reconsideration. See 66 FR 19714 (April 17,
2001). With regard to central air conditioners and central air
conditioning heat pumps, DOE concluded that ARI had raised

[[Page 36370]]

substantial questions as to the legal sufficiency of and basis for the
January 22, 2001 final rule and that the interests of justice therefore
dictated that DOE further postpone the rule's effective date in light
of the pendency of ARI's petition for judicial review in the Fourth
Circuit and its related petition for reconsideration. 66 FR 20191
(April 20, 2001). At that time DOE indicated that it would likely
resolve these issues through supplemental rulemaking that would be
forthcoming shortly.
On June 19, 2001, the State of New York, several other states, the
Natural Resources Defense Council, Consumer Federation of America, and
the Public Utility Law Project sued DOE in Federal court challenging
its actions delaying the effective date of the January 22 final rule.
The cases were consolidated, with the states of California,
Connecticut, Vermont, Maine, New Jersey and Nevada joining the lawsuit
(State of New York et al. v. Abraham, 01 Civ. 5499 (LTS) and 01 Civ.
5500(LTS)(SDNY); \4\ a petition for review was also filed with the
Court of Appeals for the Second Circuit (Docket No. 01-4103).
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\4\ On April 25, 2002, the district court dismissed the
consolidated actions on the ground that the court lacked subject
matter jurisdiction to consider the matters raised by the
plaintiffs.
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On July 25, 2001, DOE granted ARI's petition and published a three
part supplemental proposal with regard to energy conservation standards
for central air conditioners and central air conditioning heat pumps.
66 FR 38822. First, DOE proposed regulatory provisions to clarify that
section 325(o)(1), which qualifies DOE's rulemaking authority to
prescribe amended energy conservation standards, applies as of an
effective date for modifying the Code of Federal Regulations (CFR) set
forth in the notice of final rulemaking and established consistent with
the Congressional Review Act (5 U.S.C. 801-804). Second, in order to
correct arguable legal errors and policy shortcomings, DOE proposed to
withdraw the January 22 final rule. Third, based on a re-assessment of
factual information and analyses already in the record, DOE proposed to
determine that elevation of the currently enforceable central air
conditioner and central air conditioning heat pump energy conservation
standards by 20 percent is the maximum increase that is economically
justified. For product classes other than through-the-wall products,
DOE proposed a SEER of 12 with a corresponding HSPF of 7.4 which would
apply to products manufactured in 2006. With respect to through-the-
wall product classes, DOE proposed somewhat lower standards. DOE
conducted a public hearing in Washington, D.C. on October 2, 2001, to
hear oral views, data and arguments on the proposed rule.

III. Authority of DOE To Reconsider and Withdraw the January 22, 2001
Final Rule and Adopt a 12 SEER Standard for Central Air Conditioners

The issue of DOE's authority to withdraw the January 22 final rule
and propose a 12 SEER standard was first raised in ARI's March 23, 2001
petition for reconsideration (ARI, No. 138) and in a responding letter
submitted to Secretary Abraham by various environmental organizations
on April 6, 2001 (Alliance to Save Energy (ASE), et al., ASE, No. 183).
ARI contended that section 325(o)(1) of EPCA, which prohibits DOE from
decreasing the maximum allowable energy use or minimum required energy
efficiency of covered products, did not apply to reconsideration of the
January 22 final rule because DOE had suspended the effective date of
the rule (ARI, No. 138 at p. 3, n. 2). This provision has been referred
to in the rulemaking as EPCA's "anti-backsliding
provision." The environmental advocates took a contrary position,
arguing that the anti-backsliding provision did apply and, thus, that
DOE was precluded from reconsidering the rule and proposing a less
stringent standard (ASE et al., No. 183 at p. 5). In the April 20,
2001, notice postponing the effective date of the January 22 final
rule, DOE stated its intention to issue a further notice of proposed
rulemaking that would propose a 12 SEER/7.4 HSPF standard for central
air conditioners and heat pumps, and stated that it would invite public
comment on its explanation of the statutory authority to make such a
proposal upon reconsideration of the January 22 final rule (66 FR
20101). Subsequently in the notice of supplemental proposed rulemaking
published on July 25, 2001 (July 25 SNOPR), DOE included a detailed
explanation of its interpretation of section 325(o)(1) of EPCA. We
repeat much of the July 25 SNOPR explanation here as a preface to a
discussion of public comments received on this issue. (Repeating DOE's
analysis of section 325(o)(1) here also will assist readers who
otherwise would have to look back at a copy of the July 25 SNOPR.)

A. DOE's Analysis of EPCA's Anti-Backsliding Provision

The starting point for the analysis of DOE's authority to
reconsider the January 22 final rule and propose 12 SEER standards is
the text of the statute. Section 325(o)(1) of EPCA provides as follows:

The Secretary may not prescribe any amended standard which
increases the maximum allowable energy use, or, in the case of
showerheads, faucets, water closets, or urinals, water use, or
decreases the minimum required energy efficiency, of a covered
product.

42 U.S.C. 6295(o)(1).

The critical term in section 325(o)(1), as it relates to the
rulemaking on central air conditioners and heat pumps, is
"minimum required energy efficiency." EPCA does not define
this term. However, in context, it is clear that a SEER and an HSPF are
benchmarks of "minimum required energy efficiency" for
central air conditioners and heat pumps. See 42 U.S.C. 6295(d)(1) and
(d)(2). The key question, however, is which SEER and HSPF represent the
"minimum required energy efficiency" for central air
conditioners and heat pumps that may not be decreased by an amended
standard.
Had the new SEER and HSPF set out in the January 22, 2001, final
rule been allowed to take effect, but (as the rule set forth) been made
applicable only to appliances manufactured on or after January 23,
2006, we think this would be a close question. A reasonable argument
could be made that the new SEER and HSPF became "required"
immediately as to such appliances provided they were manufactured on or
after January 23, 2006. A reasonable argument could also be made that
the new SEER and HSPF would not be "required" until January
23, 2006, when appliances manufactured after that date would have had
to comply with them. We address this question, and other considerations
bearing on the answer to it, at greater length below.
In fact, however, the January 22, 2001 final rule expressly stated
that the amendments it set out to existing standards in the Code of
Federal Regulations would not take effect until 30 days after
publication in the Federal Register. Well before that date arrived, on
February 2, 2001, DOE postponed that effective date for an additional
60 days. Before that 60-day period had passed, on April 18, 2001, DOE
further postponed the amendments' effective date pending the outcome of
petitions by ARI for reconsideration and for judicial review.
As a result, the new SEER and HSPF, though set out in a final rule,
never in any sense achieved the status of being the
"required" "minimum energy efficiency"
benchmarks. There has never been a single moment under any

[[Page 36371]]

understanding of the word "required" at which any central
air conditioner or heat pump, including one manufactured after January
23, 2006, could even arguably have been legally required to be
manufactured in conformity with them. Hence, whatever might have been
the case had the January 22 final rule been allowed to take effect, we
do not see how the publication of a final rule that would have changed
those standards, but was prevented by later agency action from doing
so, could possibly establish "minimum required energy
efficiency" benchmarks.
This interpretation of "minimum required energy
efficiency" is reinforced by the rest of the sentence in section
325(o)(1) of which the phrase is a part. That sentence establishes a
limitation on the "amended standards" the Secretary may
prescribe. That wording strongly suggests that the "minimum
required energy efficiency" levels below which the Secretary may
not go are the ones established by the standards being amended. Because
of the various actions postponing the effective date of the amendments
to the standards it proposed, the January 22, 2001 rule never actually
effectuated any amendment to the prior standards. Therefore, the
standards that DOE proposed to amend are not the ones that would have
been in place had the amendments set out in the January 22 rule
actually been made. Rather, they are the standards prescribed by NAECA
(SEER of 10.0 and HSPF of 6.8 for split systems manufactured after
January 1, 1992, SEER of 9.7 and HSPF of 6.6 for single package systems
manufactured after January 1, 1993), unamended until now by anything,
including the never-made-effective amendments set out in the January
22, 2001 rule.
Notwithstanding public comments (discussed below), DOE continues to
believe the foregoing analysis establishes that EPCA is unambiguous on
the question of whether standards that are published in the Federal
Register, but not yet effective, represent the "minimum required
energy efficiency" benchmarks for central air conditioners and
heat pumps for purposes of section 325(o)(1). We think it is clear from
the statutory text that such standards do not represent the benchmarks
for "minimum required energy efficiency." We also believe
that even if the statute were found to be ambiguous, for the reasons
set out in the discussion that follows, that would not be the
interpretation that we should select as a matter of policy.
If published but not yet effective standards are not the benchmarks
for "minimum required energy efficiency" in section
325(o)(1), the question remains whether DOE should construe the term
"minimum required energy efficiency" to mean (A) energy
efficiency standards that are not yet enforceable against the
manufacturers, but that have been prescribed in a final rule amending
prior standards, which amendments have been made to the CFR pursuant to
an effective date that has passed; or (B) energy efficiency standards
that are currently enforceable against the manufacturers if they
manufacture and sell a non-compliant product.
DOE believes that alternative (A) is the preferable construction of
the term, but only if the effective date selected for the final rule is
consistent with other applicable laws and regulations and allows the
Secretary an opportunity promptly to correct legal and policy errors
that may have been contained in the final rule. If that precondition is
satisfied, DOE believes alternative (A) will better advance the
relevant statutory and policy considerations underlying section
325(o)(1): To promote greater energy efficiency while providing greater
certainty to manufacturers who must plan and make the expenditures
necessary to comply with an amended energy conservation
standard?which is often a multi-year endeavor with substantial
costs. We note that the relative certainty the interpretation set out
in alternative (A) produces for manufacturers, which is a key
comparative advantage of this interpretation over the competing one, is
intimately tied to a proper effective date choice that facilitates
prompt error correction, thereby potentially avoiding litigation that
would seriously undermine the certainty sought to be achieved.
DOE believes that this resolution of the ambiguities in the statute
is consistent with the statute's text, structure, legislative history,
and the fundamental policy choices it makes. We believe that on balance
this approach better accomplishes the statute's objectives than either
adopting alternative (A) without the qualification set out above,
thereby establishing a set of procedures that could have the effect of
preventing the Secretary, within a short period after publication of a
final rule that would modify such standards, from correcting defects in
them that come to his attention; or adopting alternative (B), thereby
reading the phrase "minimum required energy efficiency" to
encompass only energy efficiency standards as of the date upon which
manufacturers have to comply with those standards. Although at least
the latter approach may well be a permissible interpretation of section
325(o)(1), DOE believes that the view set out in our proposed rule is
the better one.
The latter view?that a standard is only covered by section
325(o)(1) after manufacturers are required to comply with it?does
at first blush appear to be the most natural reading of the phrase.
This view, however, is in tension with the rest of the sentence, which,
as explained above, suggests that the relevant point of comparison is
the standard being amended, regardless of whether manufacturers
actually have to comply with it. Moreover, if adopted, this view would
allow the Secretary to change the energy efficiency standards right up
to the minute before the compliance date. This seems to slight
important reliance interests given significant weight in other respects
by EPCA's provisions on central air conditioner standards. For example,
section 325(d) provides that with respect to central air conditioners,
any amended standard contained in a final rule published on January 1,
1994, can apply only to products manufactured on or after January 1,
1999. It similarly provides that any amended standard contained in a
final rule published between January 1, 1994, and January 1, 2001, can
apply only to products manufactured on or after January 1, 2006. The
purpose of these delays is plainly to give manufacturers a significant
amount of time to develop and manufacture new products after a new
standard is adopted but before it becomes enforceable. These delays
also suggest that a change of standard on the eve of the manufacture of
a product would be quite disruptive?which stands to reason given
the lead-time necessary to be in a position to manufacture a compliant
product. Thus, to allow a standard to be blocked at the last minute
before the compliance deadline would potentially leave a rather large
residual uncertainty difficult to reconcile with the central purpose of
establishing a climate of regulatory stability served by these closely
related portions of EPCA.
The legislative history of section 325(o)(1), although sparse, also
suggests that this interpretation may not be the one best suited to
accomplish the statute's objectives. In discussing this provision in
the House bill, the House report states:

DOE may not prescribe an amended standard that increases the
maximum allowable energy use or decreases the minimum required
energy efficiency of a covered product. The purpose of this
requirement is to prevent the Secretary from weakening any energy
conservation standard

[[Page 36372]]

for a covered product, whether established in this Act or
subsequently adopted. This serves to maintain a climate of relative
stability with respect to future planning by all interested parties
* * *

House Report No. 100-11 at p. 22 (emphasis added).

This language suggest that section 325(o)(1) was specifically
expected, at least in the view of the House Committee, to act
harmoniously with the other provisions of EPCA discussed above in
facilitating regulatory certainty. The latter purpose is better
accomplished by construing the provision to become applicable at a
point well before the compliance date.
On the other hand, the reliance interests at stake also are not
best served in the long run by taking the opposite course and adopting
the view that section 325(o)(1) becomes applicable at the earliest
possible moment. Let us imagine, for example, that DOE were routinely
to make final rules containing standards potentially subject to section
325(o)(1) effective as soon as possible under the Administrative
Procedure Act (APA). This would likely result in its making such rules
effective 30 days after publication. DOE also could refuse to
reconsider any aspect of such a rule relevant to the standard (unless
it could complete its consideration and correct any errors within that
30-day time period), no matter how serious or legitimate a question
might be raised, since to do so effectively, it would have to prevent
the standard from going into effect.
This approach, however, would not be the best way for DOE to
promote regulatory certainty either. It is common for agencies to
entertain petitions for reconsideration at least for a short period
after issuance of a final rule as well as to correct errors on their
own motion during that time. Moreover, there is good reason why
agencies follow this course, since otherwise such errors would have to
await the completion of judicial review before they could be corrected,
thereby creating substantial delay and uncertainty. Accordingly, this
approach too, in addition to running counter to ordinary administrative
practices that there is no reason to believe section 325(o)(1) was
intended to abrogate, is not the best way to advance the regulatory
stability sought by section 325(o)(1) and the other related EPCA
provisions discussed above.
With respect to major rules, this approach also would create
unnecessary conflict between section 325(o)(1) and the Congressional
Review Act (CRA) (5 U.S.C. 801-804) enacted in 1996. Under the CRA,
before a final rule can become "effective," DOE must send a
report to Congress (5 U.S.C. 801(a)(1)(A) and (B)). With respect to a
"major rule" within the meaning of 5 U.S.C. 804(2), the CRA
provides for the passing of a 60-calendar-day-lie-before-the-Congress
period, after submission of the agency report, at the end of which a
final rule could become effective in the absence of a Congressional
resolution of disapproval (5 U.S.C. 801(a)(3)). CRA allows for an
exception to the 60-day-lie-before requirement only if the President
determines that a major rule should take effect before the end of that
period because of an imminent health or safety threat or other
emergency; because it is necessary to the enforcement of criminal laws
or national security; or if it is issued pursuant to a statute
implementing an international trade agreement (5 U.S.C. 801(c)).
In DOE's view, this last set of considerations also points the way
to the answer to the question of at what time amendments to an energy-
efficiency-setting-standard should best be viewed as having set
"minimum required energy efficiency" benchmarks. For the
reasons explained at the beginning of this section, that time must be
after the final rulemaking the amendments to the standard is in effect.
But, consistent with the objective of section 325(o)(1) and the other
closely related EPCA provisions of promoting regulatory certainty, and
to harmonize section 325(o)(1) with common administrative practice and
the CRA, such final rules should ordinarily be made effective only
after a reasonable hiatus after the date of publication has elapsed,
allowing for prompt use of ordinary administrative error correction
procedures and completion of congressional review under CRA. This is
the earliest that manufacturer planning in reliance on a final major
rule to amend appliance energy conservation standards can realistically
be expected to begin. The certainty of the regulatory regime sought to
be achieved therefore cannot occur until that time.
Accordingly, DOE believes it should construe section 325(o)(1) as
applying to standards designed to set "minimum required energy
efficiency" benchmarks at the point in time a final rule
containing such a standard becomes effective. It also believes,
however, that it should take care to select effective dates for final
rules containing such standards that are consistent with the CRA and
any other applicable law. This approach will best promote the
regulatory certainty sought by section 325(o)(1) and its companion
provisions and also comports well with the ordinary understanding of
when a rule containing such standards has established
"require[ments]."
DOE's decision to exercise its discretion to adopt this
interpretation of section 325(o)(1) is not meant to intimate a view
with respect to or suggest how anti-backsliding provisions in other
statutes should be interpreted. Decisions of that type would of course
turn on the specific language and policy of those provisions, just as
today's decision did here.
Based on this consideration of the meaning of section 325(o)(1),
DOE proposed to adopt a series of amendments to the EPCA rules intended
to address these general issues. First, it proposed definitions of the
terms "maximum allowable energy use" and "minimum
required energy efficiency" as energy conservation standards
established by a final rule that has become effective in the sense that
it has modified the Code of Federal Regulations. It further proposed to
include in its definition that to qualify, the final rule has to have
made that modification on a date selected consistent with the CRA and
other applicable law. Finally, in order to avoid confusion, it proposed
a technical amendment adding a definition of the EPCA term
"effective date," which EPCA, inconsistently with the
Office of Federal Register guidance, treats as synonymous with
"compliance date."

B. Discussion of Public Comments on the Anti-Backsliding Provision

DOE's analysis of section 325(o)(1) and related proposals were the
subject of comment by the environmental advocates and by ARI. Their
comments elaborated upon the basic positions each had taken in
connection with ARI's petition for reconsideration. The environmental
advocates prefaced their comments with the observation that ultimately
the question whether the anti-backsliding provision prevents DOE from
withdrawing the January 22 final rule and proposing a 12 SEER standard
would likely be resolved in the Federal litigation previously mentioned
(see "Rulemaking History.").
1. Environmental Advocates" Views
The environmental advocates, led by the Natural Resources Defense
Council (NRDC) and several states, argue that EPCA's anti-backsliding
provision applies upon publication of final standards in the Federal
Register, and that DOE is powerless thereafter to entertain and grant a
petition for reconsideration that requests lower

[[Page 36373]]

amended standards. (NRDC, No. 250; Attorneys General of New York and
Massachusetts, No. 277; State of Vermont, No. 268; Attorney General of
California, No. 249).
The NRDC commented that the APA contains no provision for
"withdrawing" a final rule, and that if DOE wishes to
change the rule, it may propose to "amend, revise or
revoke" the rule consistent with the APA. NRDC also states there
is no statutory or regulatory provision allowing interested persons to
"petition for reconsideration" of a final rule. DOE does
not believe these arguments have merit. DOE chose to use the word
"withdraw" at the suggestion of staff in the Office of the
Federal Register. "Withdraw" is the term that Office uses
to describe the action of an agency in pulling back a rule document
before it is officially filed and published in the Federal Register.
(Document Drafting Handbook, Chapter 4, p. 4-2 (Oct. 1998)). The Office
of the Federal Register decided that the word "withdraw"
also is apt when an agency proposes to rescind a published final rule
before it becomes effective, thus pulling it back before it modifies
the Code of Federal Regulations. (Document Drafting Handbook, Chapter
2, p. 2-33 (Oct. 1998)). By proposing to withdraw the January 22 final
rule and proposing a 12 SEER standard, DOE was proposing actions that,
if adopted and implemented in a future final rule, would rescind or
repeal the January 22 final rule. This course of action is entirely
consistent with the APA. While an agency generally has inherent
authority to reconsider its decisions, as the comments of ARI state
(ARI, No. 259, at p. 6), the APA specifically gives interested persons
the right to petition for rulemaking (5 U.S.C. 553(e)).
NRDC further believes DOE has misconstrued section 325(o)(1) by
placing undue weight on the word "required" in the term
"minimum required energy efficiency." (Several state
officials submitted comments similar in most respects to the NRDC views
summarized here and in the discussion that follows.) NRDC faults DOE
for ignoring the terms "maximum allowable energy use" and
"maximum water use" in the same provision. All of these
terms, NRDC argues, are simply measurements of energy conservation and
do not refer in any way to compliance dates or requirements for
manufacturers. NRDC, therefore, concludes that the word
"require" is ambiguous and that one needs to look to the
entire statutory scheme to determine when the anti-backsliding
provision applies.
NRDC argues that the key word in section 325(o)(1) is
"prescribe," which it states occurs when a final rule is
published in the Federal Register, and that it is the act of
"prescribing" a final rule that triggers application of the
anti-backsliding provision. NRDC finds supports for this interpretation
of "prescribe" in section 325(p), which includes
publication of a final rule as the last step in the procedure for
prescribing a new or amended standard, and in the deadlines for various
amendments of product standards that are determined by reference to the
date of publication of the previous standard. NRDC also points to House
Report language stating that section 325(o)(1) prevents DOE from
weakening any energy conservation standard for a product "whether
established in this Act or subsequently adopted," and states that
use of the word "adopted" confirms its view that the anti-
backsliding provision applies when a rule is published in the Federal
Register. Thus, under NRDC's interpretation, once DOE published the
January 22 final rule, it was powerless to reconsider it and propose a
lower energy conservation standard.
DOE agrees that the term "minimum required energy
efficiency" is not the only descriptor of energy or water
efficiency used in section 325(o)(1), but it is the only descriptor
that applies to standards for central air conditioners and heat pumps.
That is why DOE's analysis focuses on the word "required."
It is true that for other covered products, the applicable descriptor
would be "maximum allowable energy use" or "maximum
allowable water use." For those products, the key word would be
"allowable." But for the same reasons why, as explained in
DOE's analysis above, the SEER and HSPF levels set out in the January
22 final rule never in any sense achieved the status of being the
"required" "minimum energy efficiency"
benchmarks, it is not much easier to see how a rule that never became
effective could set "maximum allowable" amounts of water or
energy use. At least until a new rule establishing maximum allowable
energy or water use became effective, the "maximum allowable
energy" or "maximum allowable water use" for a
product subject to one of these standards would remain the preexisting
standard. Accordingly, today's rule contains definitions of
"maximum allowable energy use" and "maximum allowable
water use" that parallel the definition of "maximum
required energy efficiency" that DOE adopts.
DOE also thinks NRDC's view of the importance of the word
"prescribe" in section 325(o)(1) is wrong. The word
"prescribe" is nowhere defined in EPCA, but it does not
necessarily mean "publication." For example, section
325(p), concerning the procedure for prescribing any new or amended
standard, provides that "[a]
final rule prescribing an amended or
new energy conservation standard or prescribing no amended or new
standard for a type (or class) of covered products shall be published
as soon as practicable * * *" 42 U.S.C. 6295(p)(4). The
use of the word "prescribe" in the same provision in which
the word "publish" is used is a clear indication that
Congress may have considered the two words to have different meanings.
It is not necessary to resolve the question of the meaning to the word
"prescribe" because it begs the critical question of what
DOE may not prescribe under section 325(o)(1). With respect to central
air conditioners and heat pumps, the what that DOE may not prescribe
under section 325(o)(1) is any amended standard "which increases
the * * * minimum required energy efficiency" of a
central air conditioner or heat pump. We continue to believe that
standards in a published rule that have never become effective are in
no sense "required" energy efficiency levels, and therefore
cannot be the baseline for determining whether the amended standards
increase the minimum required energy efficiency.
Finally, DOE disagrees with NRDC's conclusion that the structure
and language of EPCA point to the date of publication of amended
standards as the time at which section 325(o)(1) applies. More
specifically, DOE does not think the statutory intervals for issuance
of amended standards, which reference to the date the previous
amendment is published, are relevant to the question of when the anti-
backsliding provision applies. The fact that Congress required DOE to
periodically review and publish amendments to standards does not seem
to have any bearing on the question of what point in time standards are
required for purposes of section 325(o)(1).
The Attorneys General of the States of New York and Massachusetts
attacked the legality of DOE's February 2, 2001, and April 20, 2001,
notices delaying the effective date of the January 22 final rule
(Attorneys General of New York and Massachusetts, No. 277). In their
view, DOE lacked good cause for not proposing the delays for public
comment. They dismiss DOE's analysis of, and provisions for,
implementing the anti-backsliding provision as a post hoc attempt to
justify its allegedly illegal

[[Page 36374]]

delays of the January 22 final rule. Implicit in their comment is the
view that the January 22 final rule actually became effective and,
thus, became the required standards for purposes of section 325(o)(1).
Based on this understanding of the anti-backsliding provision, the
States of New York and Massachusetts consider DOE's action to withdraw
the January 22 final rule and adopt 12 SEER standards to be a
"rollback" of established standards.
As explained in the February 2, 2001, notice, DOE temporarily
delayed the effective date of the January 22 final rule in conjunction
with Executive branch wide direction from the Assistant to the
President and Chief of Staff. DOE explained that seeking public comment
would be impracticable and contrary to the public interest, and further
that the imminence of the effective date in the rule constituted good
cause for making the temporary delay effective upon publication. 66 FR
8745-46. The further postponement of the effective date on April 20,
2001, was based in part on several reasons why seeking public comment
and delaying the effective date of the action were impracticable,
unnecessary, and contrary to the public interest. 66 FR 20191. These
reasons are not repeated in full here, but DOE explained why in light
of ARI's petition for reconsideration and its lawsuit in the Court of
Appeals for the Fourth Circuit, DOE concluded there was good cause for
further delaying the January 22 final rule's effective date pending
consideration of ARI's petition and judicial review. Thus, DOE thinks
the short-term delays of the January 22 final rule's effective date to
deal with substantial legal questions were lawful, and it rejects the
characterization of DOE's proposals as a "rollback" of the
energy conservation standards.
The Attorneys General of the States of New York and Massachusetts
and the American Council for an Energy-Efficient Economy (ACEEE) argued
that choosing an effective date for purposes of section 325(o)(1) other
than the date of publication of amended standards would lead to delay
and cause uncertainty with respect to when manufacturers must make
investments needed to comply with amended standards. (Attorneys General
of New York and Massachusetts, No. 277 at p. 9; ACEEE, No. 284 at p.
3). The Northeast Energy Efficiency Partnerships, Inc. (NEEP) argued
DOE's proposed approach would give stakeholders another opportunity to
try to influence decision makers and would "politicize" the
standard setting process. (NEEP, No. 273 at p. 3). As explained above,
DOE does not believe section 325(o)(1) can be reasonably interpreted to
apply upon the publication of final standards in the Federal Register.
However, assuming DOE had the discretion to adopt such an
interpretation, DOE would not choose the date of publication as the
date for purposes of section 325(o)(1). As explained previously, a
practice of routinely making published standards effective in the
shortest time after publication (normally 30 days after publication
under the APA) is not likely to provide greater certainty about the
point in time when standards would take effect. If DOE were unable to
respond to legitimate requests for reconsideration and correction of
errors, then the only avenues available to aggrieved stakeholders would
be lawsuits in Federal courts or efforts to obtain a legislative
reversal under the CRA. This would not lead to expeditious correction
of errors or resolution of issues and would not advance the goal of
regulatory certainty. Such a practice also would create needless
conflict with the CRA's 60-day lie-before-the-Congress provision for
major rules.
2. ARI's Views
ARI agrees with DOE that the existing "minimum required
energy efficiency" levels for central air conditioners and heat
pumps, which DOE may not lower, are the standards established by NAECA,
effective on January 1, 1992 (i.e., 10 SEER/6.8 HSPF for split systems
and 9.7 SEER/6.6 HSPF for single package systems). However, ARI
believes the term "minimum required energy efficiency"
should be understood to mean the existing efficiency standard as of the
effective date under EPCA, i.e., the date on which the standard is
required to be complied with (ARI, No. 259 at p. 19). ARI believes its
interpretation would avoid the risk of having the anti-backsliding
provision apply unreasonably early, which could prevent DOE from taking
appropriate administrative action to correct a promulgated standard or
to respond to extraordinarily changed circumstances.
DOE acknowledged in its analysis of section 325(o)(1) that the view
that a standard is only covered by the anti-backsliding provision after
manufacturers are required to comply with it is an arguable one. This
view, however, is in tension with the rest of the sentence, which
suggests that the relevant point of comparison is the standard being
amended, regardless of whether manufacturers actually have to comply
with it. Moreover, by allowing the Secretary to change the energy
efficiency standards at any point in time before the compliance date,
this view would slight important reliance interests that, as DOE
explained in its analysis, are given significant weight by other
provisions and the legislative history of EPCA. For these reasons, DOE
continues to believe that section 325(o)(1) should be construed as
applying to standards designed to set "minimum required energy
efficiency" benchmarks at the point in time a final rule
containing such a standard becomes effective for purposes of revising
the Code of Federal Regulations, as long as the effective date that is
selected is consistent with the CRA and any other applicable law. In
today's rule, DOE adopts provisions that implement this approach.
ARI stated that if DOE adopted the approach it proposed in the July
25 SNOPR, then it would like the definitions of "minimum required
energy efficiency" and "maximum allowable energy use"
revised to ensure that DOE has sufficient time to complete any
administrative action it takes in response to a petition for
reconsideration. ARI recommended adding to each definition the words
"or the date on which DOE completes action on any timely-
initiated administrative reconsideration, whichever is later."
(ARI, No. 259 at pp. 20-21). We think ARI's suggested language is a
useful addition to the definitions. Therefore, we have revised the
proposed definitions of "maximum allowable energy use" and
"minimum required energy efficiency," to be added to
section 430.2, accordingly. In addition, DOE adds a similar definition
of "maximum allowable water use," which was inadvertently
omitted in the July 25 SNOPR.
Under the provisions adopted in today's final rule, DOE will select
a date for the "Effective Date" line of the notice of final
rulemaking that in most instances will be 60 to 80 days after the date
of publication. (DOE has chosen 75 days after the date of publication
for the effective date of today's rule.) DOE would expect that any
petition for reconsideration, to be considered timely, ordinarily would
be submitted to DOE before the effective date specified in the notice
of final rulemaking.
DOE did not receive any public comments on the proposed definition
of the term "effective date" as used in EPCA and 10 CFR
430.32. This definition clarifies that for purposes of construing the
term under EPCA (but not for purposes of determining the point at which
amendments to a standard qualify for protection under section
325(o)(1)), the "effective date" is

[[Page 36375]]

the date on which an amended energy conservation standard becomes
enforceable. DOE also did not receive comments on proposed section
430.34, which tracks the language of section 325(o)(1). Therefore, DOE
today adopts these provisions without substantive change.

IV. Basis for DOE's Decision To Withdraw the January 22, 2001, Final
Rule

In the July 25 SNOPR, DOE discussed possible legal errors in the
promulgation of the January 22 final rule and economic issues that DOE
believed had not been adequately considered in determining the energy
efficiency levels that are the maximum technologically feasible and
economically justified (66 FR 38827-29). On the basis of these possible
legal and policy errors, DOE proposed to withdraw the January 22 final
rule and proposed to adopt a 12 SEER standard for most central air
conditioners and heat pumps, rather than the 13 SEER standard in the
January 22 final rule (66 FR 38842). DOE today finally withdraws the
January 22 final rule and amends the energy conservation standards for
central air conditioners and heat pumps at the 12 SEER level except for
two types of space-constrained products (through-the-wall products and
small duct, high velocity systems) that are subject to lower standards.
In taking this action, DOE corrects the legal and policy errors that
were the basis for DOE's decision to withdraw the January 22 final
rule.

A. Legal Issues

In the July 25 SNOPR, DOE acknowledged that to comply with section
325(o)(2)(B)(i) of EPCA, DOE arguably should have invited the
Department of Justice to submit a supplemental statement of its views
on the potential anti-competitive impact of a 13 SEER standard for both
central air conditioners and heat pumps which was included in the
January 22 final rule (66 FR 38827-28).
Section 325(o)(2)(B)(i) requires DOE to determine whether the
benefits of a new or amended energy conservation standard exceed its
burdens by considering "to the greatest extent practicable"
seven factors, including: "(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" (42 U.S.C.
6295(o)(2)(B)(i)). Section 325(o) also provides that:

For purposes of clause (i)(V), the Attorney General shall make a
determination of the impact, if any, of any lessening of competition
likely to result from such standard and shall transmit such
determination, not later than 60 days after the publication of a
proposed rule prescribing or amending an energy conservation
standard, in writing to the Secretary, together with an analysis of
the nature and extent of such impact. Any such determination and
analysis shall be published by the Secretary in the Federal
Register.

42 U.S.C. 6295(o)(2)(B)(ii).

In context, it is clear that the term "the standard" in
section 325(o)(2)(B)(i) refers to any new or amended energy
conservation standard finally prescribed by DOE under section 325(o) of
EPCA. Because the Department of Justice must transmit its determination
to DOE within 60 days after the publication of a proposed rule, EPCA
contemplates that the Department of Justice's determination on the
anti-competitive effects of a proposed rule usually will enable DOE to
fulfill its substantive obligation to consider the Department's expert
opinion on the anti-competitive impact of a final standard. However, as
the following discussion shows, this will not always be the case.
DOE submitted the October 5, 2000, NOPR to the Attorney General for
review pursuant to the foregoing provisions. The NOPR described the
range of potential trial standards considered by DOE, and proposed
adoption of Trial Standard Level 3, i.e., a minimum SEER of 12 for
central air conditioner product classes and a SEER of 13, with a
corresponding HSPF of 7.7, for central air conditioning heat pumps. The
Department of Justice, consistent with its past practice, confined its
response to the proposed standards, corresponding to Trial Standard
Level 3.
The Department of Justice had several concerns about the proposed
rule's potential impact on competition (see December 4, 2000, letter in
the Appendix to this notice). First, the Department of Justice was
concerned the proposed rule would have a disproportionate impact on
small manufacturers. Second, it was concerned that the proposed
standard for heat pumps, and in some instances the standard for air
conditioners, would have an adverse impact on some manufacturers of
equipment to be used to retrofit existing housing and used in
manufactured housing. Third, it was concerned that the proposed 13 SEER
for central air conditioning heat pumps could cause consumers to shift
from heat pumps to other systems that include resistance heat systems,
reducing the competition that presently exists between manufacturers of
heat pumps and manufacturers of those other heating systems. The
Department of Justice urged DOE to take these concerns into account and
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 and for manufactured housing." 66 FR 7200.
DOE published a final rule on January 22, 2001, that adopted
standards that corresponded to Trial Standard Level 4 (the next higher
level) and prescribed a minimum SEER of 13 for all the product classes,
except for niche products, with a corresponding 7.7 HSPF. While the
preamble to the final rule addressed the Department of Justice's
specific concerns about the proposed 12 SEER standards for central air
conditioners/13 SEER/7.7 HSPF standard for central air conditioning
heat pump systems (66 FR 7192-93), DOE did not have the benefit of the
Department of Justice's views on the potential anti-competitive impact
of the final 13 SEER standards for both air conditioners and heat
pumps. This is particularly of concern in light of information in the
TSD indicating that standards at Trial Standard Level 4 (uniform 13
SEER standards) could cause several major manufacturers to consider
selling their production assets rather than make the investment
required to meet the new standard or face the loss of profits caused by
the absence of premium products in the marketplace (see July 25 SNOPR
at 38827). Therefore, DOE believes the Department of Justice's views on
the potential of the standards in the January 22 final rule to
accelerate consolidation in the industry should have been obtained.
As part of its review of the January 22 final rule pursuant to the
President's Regulatory Review Plan, DOE on March 20, 2001, requested
the views of the Department of Justice on the 13 standards for central
air conditioners and heat pumps. The Department of Justice's letter
responding to our request is published in the Appendix to this notice.
While some commenters were critical of the substance of the Department
of Justice's determinations about the anti-competitive impact of 13
SEER standards (see Section VI below), none of the comments disputed
DOE's view that it should have obtained the Department of Justice's
views on 13 SEER standards for both central air conditioners and heat
pumps.
A second legal error that DOE considered in deciding to propose
withdrawal of the January 22 final rule was the absence of any
discussion of cumulative regulatory burden in the

[[Page 36376]]

statement of basis and purpose for the January 22 final rule. One
aspect of the assessment of manufacturer burden required by EPCA (42
U.S.C. 6295(o)(2)(B)(i)(I)) is the cumulative impact of multiple DOE
standards and the regulatory actions of other Federal agencies and
States that affect the manufacture of a covered product. The preamble
to the January 22 final rule contained an assertion that DOE considered
cumulative burdens, but it did not discuss the magnitude of the burden
or how DOE took it into account in evaluating manufacturer impact (see
66 FR 7174). In light of the evidence of cumulative regulatory burdens
on manufacturers documented in the TSD, DOE thinks the mere assertion
that DOE considered the cumulative burdens on manufacturers was not an
adequate statement of basis and purpose for DOE's determination on
manufacturer impact resulting from a 13 SEER standard. See July 25
SNOPR at 38828.
Finally, as explained in DOE's analysis of EPCA's anti-backsliding
provision, the effective date included in the January 22 final rule
(i.e., the date 30 days after the date of publication of the notice)
was in direct conflict with the CRA requirement that a major rule may
not take effect until the later of the date occurring 60 days after the
date Congress receives the agency's report under 5 U.S.C. 801 or the
date the rule is published in the Federal Register. 5 U.S.C.
801(a)(3)(A)).

B. Policy Issues

DOE also based its decision to propose withdrawal of the January 22
final rule and to propose 12 SEER standards on its review of the
analysis of benefits and burdens that underpinned the January 22
determination that 13 SEER is the maximum efficiency level that is
technologically feasible and economically justified. As a result of its
review of the January 22 rule, DOE tentatively concluded that a 13 SEER
standard was not economically justified, and therefore DOE proposed to
withdraw the January 22 final rule and proposed to adopt a 12 SEER
standard (66 FR 38828-29).
As explained in the July 25 SNOPR (66 FR 38828) DOE believed that
in issuing the January 22 final rule, the previous Administration had
given inadequate consideration to the fraction of consumers, and
especially low income consumers, who would incur significant increases
in life-cycle cost as a result of the 13 SEER standard. DOE decided to
propose a 12 SEER standard, instead of 13 SEER, because the analysis
showed it would result in a lower fraction of consumers who would incur
significant life-cycle cost increases (25 percent and 34 percent of
average and low income consumers, respectively, at 12 SEER versus 39
percent and 50 percent, respectively, at 13 SEER).
DOE also based its decision to propose the withdrawal of the
January 22 final rule on its conclusion that DOE, in determining
whether 13 SEER was economically justified, had not adequately assessed
the potential regulatory burden and financial impacts on manufacturers
of central air conditioners and heat pumps. See July 25 SNOPR at 38828-
29. First, DOE concluded that the cumulative regulatory burden on
manufacturers was not given sufficient weight in the determination of
economic justification. As discussed previously, the statement of basis
and purpose for the final rule did not explain how DOE considered the
cumulative impact on manufacturers of the costs of complying with
various new regulatory actions. DOE also concluded that inadequate
consideration was given in the January 22 determination to the effect
of 13 SEER standards on industry net cash flow and the maldistribution
of regulatory burden on the two major types of manufacturers (66 FR
38829).
DOE's tentative conclusions in the July 25 SNOPR about the
appropriate weight to give to the benefits and burdens of 13 SEER
versus 12 SEER standards, and the resulting conclusion about which
level is economically justified, were the subject of extensive public
comment. These comments are discussed in Section VI of this
Supplementary Information, and the analysis that supports DOE's
determination that 12 SEER is the maximum efficiency level that is
technologically feasible and economically justified is set forth in
Section VII.

V. Amended Energy Conservation Standards

A. Overview

The amended standards in today's rule 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 they go into effect, the
amended standards will raise the energy efficiency standards to 12 SEER
for new central air conditioners and to 12 SEER/7.4 HSPF for new
central air conditioning heat pumps. The standards will apply to
products manufactured for sale in the United States, as of January 23,
2006. The standard for split-system air conditioners, the most common
type of residential air conditioning equipment, represents a 20 percent
improvement in energy efficiency. For split-system heat pumps, the new
standard represents a 20 percent improvement in cooling efficiency and
a 9 percent improvement in heating efficiency. The standard will
increase the cooling efficiency of single-package air conditioners and
single-package heat pumps by 24 percent and the heating efficiency of
single-package heat pumps by 12 percent. DOE has determined that the
new standards are the highest efficiency levels that are
technologically feasible and economically justified as required by law.
DOE adopts somewhat lower amended standards for through-the-wall
central air conditioner and heat pump products to ensure that more
efficient versions remain available for this application. DOE
establishes 10.9 SEER and 7.1 HSPF as the standard for through-the-wall
split systems, and 10.6 SEER and 7.0 HSPF for through-the-wall single
package systems.
Finally, DOE creates a new class for small duct, high velocity
central air conditioners and heat pumps. These products are designed
for retrofit applications and have special requirements that make it
unlikely they can meet the efficiency standards that DOE today
establishes for conventional equipment. As discussed in Section VI, DOE
received public comments that supported creation of a separate class
for these products. While DOE includes a definition of "small
duct, high velocity system" in the final rule and creates a
separate class for them, DOE retains the NAECA prescribed standard
levels for small duct, high velocity products in today's final rule
because DOE has not yet conducted the analysis required to determine
whether higher levels are technologically feasible and economically
justified. DOE in the near future intends to begin a rulemaking to
determine if a higher standard is warranted.
Several aspects of today's standards warrant highlighting, as
follows.
1. Central Air Conditioner and Heat Pump Features
The efficiency levels in today's final rule can be met by central
air conditioner and heat pump designs that are already available in the
market. DOE fully expects variations of these models to exist under the
new standards, offering all the features and utility that are found in
currently available products.

[[Page 36377]]

2. Consumer Benefits
Table 1 summarizes the "characteristics" of today's
typical central air conditioners and heat pumps. Table 2 presents the
implications for the average consumer of the standards becoming
effective in 2006.

Table 1.?Characteristics of Today's Typical Central Air Conditioners and Heat Pumps \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Single package air
Split system air conditioner Split system heat pump conditioner Single package heat pump
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average Installed Price............ $2,236...................... $3,668..................... $2,607..................... $3,599
Annual Utility Bill \2\............ 189......................... 453........................ 189........................ 453
Life Expectancy.................... 18.4 years.................. 18.4 years................. 18.4 years................. 18.4 years
Energy Consumption per year........ 2,305 kWh................... 6,549 kWh.................. 2,305 kWh.................. 6,549 kWh
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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 2.?Implications of New Standards for the Average Consumer
--------------------------------------------------------------------------------------------------------------------------------------------------------
Single package air
Split system air conditioner Split system heat pump conditioner Single package heat pump
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year Standard Comes into Effect.... 2006........................ 2006....................... 2006....................... 2006
New Average Installed Price........ $2,449...................... $3,812..................... $2,765..................... $3,748
Estimated Price Increase........... 213......................... 144........................ 158........................ 149
Annual Utility Bill Savings........ 31.......................... 50......................... 31......................... 50
Average Net Saving over Equipment 113......................... 365........................ 163........................ 421
Life.
Energy Savings per Year............ 384 kWh..................... 768 kWh.................... 384 kWh.................... 768 kWh
--------------------------------------------------------------------------------------------------------------------------------------------------------

The most typical air conditioner (i.e., split system air
conditioner which comprises approximately 65 percent of today's central
air conditioning and heat pump market) has an installed price of $2,236
and an annual utility costs of $189. In order to meet the 2006
standard, DOE estimates that the installed price of a typical air
conditioner would be $2,449, an increase of $213.\5\ This price
increase would be offset by an annual energy savings of about $31 on
the utility bills. The most typical heat pump (i.e., split system heat
pump) currently has an installed price of $3,668 and annual utility
costs of $453. In order to meet the 2006 standard, DOE estimates that
the installed price of a typical heat pump would be $3,812, an increase
of $144.\6\ This price increase would be offset by an annual energy
savings of about $50 on the utility bills.
---------------------------------------------------------------------------

\5\ Based on estimates supplied by the industry trade
association, the Air-Conditioning and Refrigeration Institute (ARI),
the installed price is estimated to be $2,510, an increase of $274.
\6\ Based on estimates supplied by ARI, the installed price is
estimated to be $3,933, an increase of $265.
---------------------------------------------------------------------------

DOE 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, DOE has investigated
the effects of the different energy prices across the nation and
different air-conditioning usage patterns. DOE estimates that 75
percent of all consumers purchasing a new typical air conditioner would
either save money or would be negligibly impacted as a result of the
2006 standard.\7\ In the case of a new typical heat pump, all consumers
either would save money or be negligibly impacted.\8\
---------------------------------------------------------------------------

\7\ Based on estimates supplied by ARI, 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.
\8\ Based on estimates supplied by ARI, 97 percent of all
consumers purchasing a new typical heat pump will either save money
or will be negligibly impacted as a result of the 2006 standard.
---------------------------------------------------------------------------

DOE also investigated how these standards might affect low income
consumers. On average, DOE estimates that it is likely that low income
air conditioner and heat pump consumers would also save money over the
life of the equipment as a result of the standard.
3. National Benefits
The standards in today's rule will provide benefits to the nation.
DOE estimates the standards will save approximately 3 quads of energy
over 25 years (2006 through 2030). This is equivalent to all the energy
consumed by nearly 17 million American households in a single year. In
2020, the standards will avoid the construction of three 400 megawatt
coal-fired plants and nineteen 400 megawatt gas-fired plants. These
energy savings would result in cumulative greenhouse gas emission
reductions of approximately 24 million metric tons (Mt) of carbon, or
an amount equal to that produced by approximately 2 million cars every
year. Additionally, air pollution would be reduced by the elimination
of approximately 80 thousand metric tons (kt) of nitrous oxides
(NO_X) from 2006 through 2020. In total, DOE estimates this
standard will have a net benefit to the nation's consumers of $2
billion over the period 2006 through 2030.\9\
---------------------------------------------------------------------------

\9\ Net benefit assumes NAECA efficiency scenario. Net benefit
would be $3 billion for Roll-up efficiency scenario.
---------------------------------------------------------------------------

B. Statutory Framework

Part B of Title III of EPCA provides for the Energy Conservation
Program for Consumer Products other than Automobiles (42 U.S.C. 6291 et
seq.). The consumer products subject to this program include central
air conditioners and heat pumps. Under the Act, the program consists
essentially of three parts: testing, labeling, and Federal energy
conservation standards.
As previously stated, NAECA prescribed initial Federal energy
conservation standards for central air conditioners and heat pumps (42
U.S.C. 6295(d)). NAECA further specified that DOE is to review and
publish amended standards by January 1, 1994 (42 U.S.C. 6295(d)(3)(A)).
Under EPCA, 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 (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

[[Page 36378]]

proposed standard (42 U.S.C. 6295(o)(2)(B)(i)). That section further
provides that, after reviewing the comments, DOE must 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 * * * ." (42 U.S.C. 6295(o)(2)(B)(iii)).
The rebuttable presumption test is an alternative path to establishing
economic justification.

C. Methodology Used in DOE Analyses

For this final rule, the methodologies used to evaluate the seven
factors described above are unchanged from those used in the analyses
that DOE relied on for the October 5 proposed rule and the January 22
final rule. DOE's methodology is discussed in the October 5, 2000 NOPR
(65 FR 59594-97) and the January 22 final rule (66 FR 7173-74).
Additionally, the TSD that accompanies this rulemaking provides a
detailed description of every aspect of the various analytical
methodologies used.

D. General Discussion of DOE's Consideration of Statutory Criteria

1. Technological Feasibility
Pursuant to section 325(p)(2) of EPCA, and as discussed in the
October 5, 2000 NOPR (65 FR 59593, 59612) and January 22 final rule (66
FR 7172), DOE determined that 18 SEER is the maximum technologically
feasible level (Max Tech Level) for cooling efficiency for all product
classes and capacities covered by this rulemaking. The Max Tech Level
for heating efficiency is 9.4 HSPF, which is the highest HSPF rating
currently available in residential heat pumps. DOE's determinations of
technological feasibility for central air conditioners and heat pumps
have not been disputed in the written and oral comments of interested
persons in the rulemaking.
2. Economic Justification Factors
DOE has considered the seven statutory factors for determining
whether a conservation standard is economically justified. This section
briefly summarizes DOE's consideration of these factors. More detailed
consideration of these factors is provided in the discussion of
comments in Section VI and the discussion of analytical results in
Section VII of this Supplementary Information.
a. Economic Impact on Manufacturers and Consumers
The record for this rulemaking contains several discussions of the
economic impact on manufacturers and consumers See 66 FR 7174-78, 7185-
7191, and 66 FR 38828-29, 38834-35. In the July 25 SNOPR, DOE
identified deficiencies in the assessment of manufacturer and consumer
impacts that was the basis for adoption of the January 22 final rule.
Later sections of this Supplementary Information address the public
comments received and DOE's conclusions on these subjects.
b. Life-Cycle Costs and Rebuttable Presumption
DOE considered life-cycle costs, as discussed in the January 22
final rule. 66 FR 7173, 7175, 7187-90. DOE calculated the installed
price and operation and maintenance costs for a range of consumers
around the nation to estimate the range in life-cycle cost benefits
that consumers would expect to receive due to new standards. DOE has
made no change in its assumptions and analysis of life-cycle costs in
making the determinations in today's notice of final rulemaking.
Section 325(o)(2)(B)(iii) of EPCA provides that if, according to
the applicable 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 DOE is to
presume that such standard is economically justified. This presumption
of economic justification can be rebutted upon a proper showing.
Using the reverse engineering manufacturing costs, the standards
DOE adopts today for split heat pumps and packaged heat pumps can be
shown to have satisfied the rebuttable presumption requirements in
section 325(o)(2)(B)(iii).\10\ Therefore, DOE presumes that the
standards adopted for split system and single package heat pumps are
economically justified. The analysis, however, shows that split system
air conditioners and single package air conditioners do not meet the
standard for use of the rebuttable presumption of economic
justification. Therefore, DOE does not presume them to be economically
justified. If the rebuttable presumption does not apply, DOE must
perform additional analysis to determine economic justification. As
discussed in Section VII, DOE has performed an analysis for all classes
of central air conditioner and heat pump products that shows the
standards in today's rule are indeed economically justified.
---------------------------------------------------------------------------

\10\ To avoid confusion, DOE points out that the statute
requires DOE to use "the applicable test procedure" to
calculate the payback periods for purposes of the rebuttable
presumption. As explained in the October 5, 2000 NOPR (65 FR 59596),
the annual cooling and heating energy consumption calculations based
on DOE's test procedure are significantly greater than the weighted-
average values from DOE's life-cycle cost analyses based on the 1997
Residential Energy Consumption Survey, used in other DOE analyses.
For this reason, the payback periods presented in Section VII of
this portion of the preamble, entitled "Analytical Results and
Conclusions," are significantly longer than those calculated
to determine whether the rebuttable presumption applies to these
products.
---------------------------------------------------------------------------

c. Energy Savings
EPCA 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. DOE forecasted
energy savings through the use of a national energy savings (NES)
spreadsheet, as discussed in the October 5, 2000 NOPR (65 FR 59590,
59593). DOE relies on the same spreadsheets and assumptions for its
estimate of the NES that would result from implementation of today's
standards.
As discussed in the October 5, 2000 NOPR, section 325(o)(3)(B) of
EPCA prohibits DOE from adopting a standard for a product if that
standard would not result in "significant" energy savings.
The energy savings for the standard levels DOE is adopting today are
non-trivial?indeed they are substantial?and therefore we
consider them "significant" within the meaning of

[[Page 36379]]

section 325 of the Act as construed by the court in Natural Resources
Defense Council v. Herrington, 768 F.2d 1355 (D.C. Cir. 1985).
d. Lessening of Utility or Performance of Products
This factor cannot be quantified. In establishing classes of
products, DOE has attempted to eliminate any degradation of utility or
performance in the products covered by today's 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.
The separate treatment of through-the-wall products and small duct,
high velocity systems in today's rule is based in part on utility and
performance considerations.
e. Impact of Lessening of Competition
This economic justification factor has two aspects: On the one
hand, it assumes that there could be some lessening of competition as a
result of standards; on the other hand, it directs the Attorney General
to gauge the impact, if any, of that effect and DOE must consider the
Attorney General's views in determining whether an efficiency level is
economically justified.
In order to assist the Attorney General in making such a
determination, DOE provided the Attorney General with copies of the
October 5, 2000, NOPR and the TSD for review. The Attorney General's
determination, in a letter dated December 4, 2000, was discussed in the
preamble to the January 22 final rule. 66 FR 7176, 7199-200. The
Attorney General's December 4, 2000, determination is included in the
Appendix to this notice of final rulemaking.
During the review conducted pursuant to the President's Regulatory
Review Plan, DOE invited the Attorney General to submit supplemental
views on the January 22 final rule. The Department of Justice, in a
letter dated April 5, 2001, provided comments on whether the final rule
effectively removed its concerns regarding possible lessening of
competition that could result from the October 5 proposed standards.
The Department of Justice's April 5, 2001, letter is also included in
the Appendix to this notice. The Department of Justice concluded that
the 13 SEER standards for heat pumps and air conditioners in the
January 22 final rule still presented anti-competitive concerns. More
specifically, the Department of Justice concluded that while the final
rule's exclusion of niche products might alleviate competitive problems
for manufacturers of those products, the Department of Justice remained
concerned about the impact of the final rule on manufacturers of
standard equipment who could not make 13 SEER equipment that would fit
into space-constrained sites. The Department of Justice also concluded
the January 22 final rule would have a disproportionate impact on
smaller manufacturers of heat pumps. Finally, the Department of Justice
was of the view that the 13 SEER standard for air conditioners presents
the same kinds of anti-competitive problems as the 13 SEER standard for
heat pumps, and urged DOE to adopt a 12 SEER standard for all products
covered by the rule.
DOE submitted the July 25, 2001, supplemental proposed rule to the
Department of Justice for comment. The Assistant Attorney General,
Antitrust Division, responded in a letter dated October 19, 2001, (see
Appendix to this notice) that the Department of Justice had concluded
that the proposed 12 SEER standards would not adversely affect
competition. This factor is discussed further in Section VI.E of this
Supplementary Information.
f. Need of the Nation To Conserve Energy
DOE 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. As part of the analysis
supporting today's rule, DOE estimated energy savings and the national
consumer benefits and estimated reduction in emissions of pollutants
and greenhouse gases resulting from those energy savings. See the
October 5, 2000 NOPR for a qualitative discussion of how these
standards affect energy savings and those benefits. 65 FR 59622-3. The
amount of energy savings ultimately associated with a particular
standard level is also affected by the effect of a given standard on
competition and consumer cost. Selecting a standard level should take
into account manufacturer?and therefore inevitably
consumer?costs, in order to encourage robust competition and
heightened introduction of newer, more efficient units into the
inventory of units available for purchase and use by consumers.
g. Other Factors
Section 325(o) of EPCA 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 (42 U.S.C.
6295(o)(2)(B)(i)(VI)). Under this provision, DOE considered the
potential improvement to the reliability of the electrical system and
health effects caused by foregone air conditioner purchases. These
issues are discussed in the October 5, 2000 NOPR (65 FR 59605); the
January 22 final rule (66 FR 7195); and in the Discussion of Comments
that follows. The Utility Impacts Analysis in Chapter 11 of the TSD
describes the technical analysis used in estimating the effects of
adopting new efficiency standards on installed generation capacity. As
will be described in the Discussion of Comments, the Utility Impacts
Analysis has been revised. Updated results are provided in Appendix M
of the TSD.

VI. Discussion of Comments

A. Impact on Consumers

The record for this rulemaking includes numerous discussions of the
distributions, extent, and type of burdens on the typical consumer as
well as on low-income consumers. See 65 FR 59623-59624, 66 FR 7189-
7190, and 66 FR 38834. In the January 22 notice of final rulemaking,
DOE determined that most consumers, including low-income consumers,
would likely benefit financially over the life of the equipment, but
that all consumers would bear higher initial costs, and many consumers,
though not the majority, would never recover the higher first costs in
the form of savings in their utility bills. However, the previous
Administration concluded that the national energy savings and the
slight financial benefit to the typical consumer overrode any negative
and maldistributed consumer impacts. Upon review undertaken in
conjunction with President Bush's Regulatory Review Plan, DOE focused
on analytical results showing that the benefits of the standards
adopted in the January 22 final rule would accrue to a much smaller
fraction of consumers, particularly low-income consumers, than is the
case for recent standards for other products. Therefore, DOE sought to
mitigate those burdens by proposing on July 25 a 12 SEER standard,
which would reduce the increase in equipment cost compared to the 13
SEER requirements issued on January 22. See July 25 SNOPR, 66 FR 38828,
38834. DOE received extensive public

[[Page 36380]]

comments on this subject in response to the July 25 SNOPR.
1. Low-Income Consumers
As stated in the July 25 SNOPR, DOE is particularly concerned that
new standards be designed to distribute their burdens and benefits as
fairly as practical. Although some disparity is expected in any
national standard, the disparity in impacts between low-income and
typical consumers is of greater concern at more stringent efficiency
standards because increases in first cost and increases in life cycle
costs are felt more sharply by lower income consumers.
Many advocates of a 13 SEER standard argued that because a majority
of low-income central air conditioner and heat pump consumers are
renters, most would not bear the first cost increases associated with
more efficient equipment. These comments asserted that landlords would
have to absorb any first cost increase because rental prices are
dictated by housing availability, real estate prices, and a number of
other market forces as opposed to first cost increases in any single
appliance. The comments also asserted that because landlords typically
purchase the least expensive, and in turn, the least efficient
equipment, stringent efficiency standards are one of the few options
provided to renters to protect them from unduly high energy bills.
(ACEEE, No. 284 at p. 3; Appliance Standards Awareness Project (ASAP),
No. 244 at pp. 1-2; Austin Energy, No. 243 at p. 2; Consumer Federation
of America (CFA), No. 246 at p. 2; NEEP, No. 273 at p. 3; State of
Vermont, No. 268 at p. 3; Goodman Global Holdings (Goodman), No. 269 at
p. 4; ASE, No. 282 at p. 4; California Energy Commission (CEC), No. 263
at p. 2; NRDC, No. 250 at pp. 17-18; Environmental Ministries of
Southern California, No. 263 at p. 4; Texas Ratepayers' Organization to
Save Energy (Texas ROSE), No. 241-SS at pp. 15-16; National Consumer
Law Center (NCLC), No. 241-NN at p. 1; Texas Natural Resource
Conservation Commission (TNRCC), No. 286 at pp. 1-2; American
Geothermal DX, No. 241-HH at p. 1; EPA, No. 276 at p. 5). Goodman,
Oregon Office of Energy (OOE), National Grid, and Texas ROSE stated
that low-income consumers in general would benefit from stringent
efficiency standards. Goodman argued that any first cost increase would
be made up through lower energy bills, while Texas ROSE asserted that
the stringency of the efficiency standard is immaterial as most low-
income households would find buying a new central air conditioning unit
a prohibitive expense at any efficiency level. (OOE, No. 275 at pp. 4-
5; Goodman, No. 269 at p. 4; National Grid, No. 241-OO at p. 2; Texas
ROSE, No. 241-SS at pp. 12-16).
Countering the above comments, York International (York), Trane
Company and American Standard Heating and Air Conditioning (Trane),
Southern Company, ARI, Edison Electric Institute (EEI), Rheem
Manufacturing (Rheem), Carrier Corporation (Carrier), and George Mason
University Mercatus Center (Mercatus Center) all argued that the
increased cost of more efficient air-conditioning equipment cannot be
afforded by those consumers living on fixed or low incomes. For those
low-income consumers that are elderly or of ill-health, Carrier and
Mercatus Center stated that the increased first cost associated with
more efficient equipment could cause these consumers to forego the
purchase of new equipment leading to potential adverse health effects
for this sub-population. With regard to low-income renters, both Trane
and Southern Company maintained that landlords will pass on the higher
first costs associated with more efficient equipment to renters.
Southern Company elaborated by stating the "renters get it
free" argument only has validity in the very short-term. In the
long term, higher costs experienced by landlords will inevitably result
in higher costs to their tenants. Southern Company asserts that DOE
would be better served looking at cost-effectiveness from a direct-
cost, societal viewpoint, and avoid speculating on changes in landlord
profit margins decades from now. (York, No. 270 at pp. 2-3; Trane, No.
262 at pp. 4-5; Southern Company, No. 257 at p. 2; ARI, No. 259 at p.
2; EEI, No. 253 at p. 4; Rheem, No. 248 at p. 2; Carrier, No. 280 at p.
2; Mercatus Center, No. 242 at p. 11).
DOE believes roughly half of low income households are renters. The
1997 Residential Energy Consumption Survey (RECS) that was used as the
basis for determining the impacts of increased efficiency standards on
households estimates that 49.8 percent of low-income households with
central air-conditioners or heat pumps are renters. What is at issue is
the extent to which increased equipment costs will be borne by
occupants of these households or by the building owners.
DOE examined existing literature on the economics of rental markets
to determine whether any previous analyses might help resolve the
disagreements on this issue.\11\ The literature provides expressions
for determining the renter and landlord pass-through-fractions as a
function of elasticities for long-run housing supply and demand. The
renter pass-through-fraction defines that portion of a landlord's
investment cost (such as the cost associated with more efficient air-
conditioning equipment) that gets passed through to the renter in the
form of an increased rental price. The renter pass-through-fraction is
defined by the following expression:
---------------------------------------------------------------------------

\11\ Pindykck, R. and D. Rubinfeld, Microeconomic Theory, 2001,
provides equations for renter and landlord pass-through fractions as
a function of elasticities for long-run housing supply and demand.
Typical supply elasticities can be found in Pindykck, R. and D.
Rubinfeld, Microeconomics, 2001, Prentice Hall (citing de Leeuw, F.
and N. Ekanen, "The Supply of Rental Housing", AER, Vol.
61, 1971, pp. 806-817). Typical demand elasticities can be found in
Hanushek, E.A. and J.M. Quigley, "The Determinants of Housing
Demand", Research in Urban Economics, Vol. 2, 1982, pp. 221-
242.
---------------------------------------------------------------------------

Where,

[GRAPHIC]
[TIFF OMITTED]
TR23MY02.000

e_s = elasticity of long-run housing supply and
e_d = elasticity of long-run housing demand.

The landlord pass-through-fraction defines that portion of a renter's
benefit due to a landlord's investment (such as utility bill savings
associated with more efficient air-conditioning equipment) that get
passed back through to the landlord in the form of an increased rental
price. The landlord pass-through-fraction is defined by the following
expression:
[GRAPHIC]
[TIFF OMITTED]
TR23MY02.001

The existing literature provides a range of elasticities for long-run
housing supply (0.3 to 0.7) and demand (-0.1 to -1.0). The
literature suggests that there will always be some form of renter pass-
though but not necessarily some form of landlord pass-through. As a
result, the minimum and maximum pass-through-fractions are 23 percent
and 121 percent, respectively, of a landlord's investment cost. As
shown above, the literature suggests that it is possible that some
landlords will not be able to pass on all investment costs, while other
landlords may actually pass on more than 100 percent of these costs.
Those landlords who are unable to pass on all of these added costs
will, of course, be adversely affected by this rulemaking (unless they
are directly responsible for the utility bills associated with air
conditioning use), although their renters are much more likely to
benefit. Landlords that would be adversely

[[Page 36381]]

affected may be more likely to seek alternatives, such as small
capacity units or even delayed replacement of failed units. Those
landlords that pass on more than 100 percent of the costs of new
equipment could benefit from efficiency standards, but their renters
are much more likely to be adversely affected. Since no study could be
found that addressed the specific population of renters likely to be
affected by this rulemaking, DOE believes there is insufficient basis
to change its analytical methods or conclusions regarding the likely
effects of central air conditioner and heat pump standards on low-
income renters.

2. Electricity Prices

In proposing a 12 SEER standard in the July 25 SNOPR, DOE stated
that a lower fraction of consumers would be negatively impacted in
terms of life-cycle cost than under a 13 SEER standard. See 66 FR
28828.
Several comments disagreed with DOE's life-cycle cost conclusions,
claiming that DOE's analysis significantly underestimates the benefits
of the 13 SEER rule due to its failure to account for recent increases
in electricity prices. The comments note that DOE based its seasonal
price forecasts on electricity price data from 1996-97 that were
adjusted downward using Energy Information Administration (EIA)
projections of future annual electricity prices. Citing recent
residential rate data from areas of the country that have undergone
some form of electricity deregulation (e.g., Massachusetts, California,
and the Northwest), the comments assert that DOE's electricity cost
projections fail to recognize the significant summertime consumer price
increases that are accompanying restructuring of the electric utility
industry. For additional support, some comments refer to an analysis
conducted by Synapse Energy Economics that demonstrated that summer
daytime wholesale electric prices across the country averaged
approximately 2\1/2\ ¢/kWh (kilowatt-hour) more than annual
average wholesale prices. These comments conclude that if DOE's
analysis were revised to include more recent electricity prices, the
results would indicate that a 13 SEER standard represents a better
choice for consumers and the Nation. (ACEEE, No. 284 at pp. 8-11; CFA,
No. 246 at p. 2; Attorneys General of New York and Massachusetts, No.
277 at pp. 15-16; OOE, No. 275 at p. 3; Pacific Gas & Electric Company
(PG&E), No. 274 at pp. 1-2; ASE, No. 282 at p. 4; Goodman, No. 269 at
p. 2; National Rural Electric Cooperative Association (NRECA), No. 278
at pp. 1-2; Environmental Ministries of Southern California, No. 236 at
pp. 2-3; Texas ROSE, No. 241-SS at pp. 7-8; NCLC, No. 255 at pp. 2-4;
Northwest Power Planning Council (NWPPC), No. 287 at pp. 1-3;
Environmental Protection Agency (EPA), No. 276 at p. 4). Some comments
further argue that the costs of electricity price increases due to air-
conditioning are passed, in the form of higher rates, onto all
consumers for all end uses, regardless of the importance of their role
in creating the price increase. Thus, DOE's analysis should account for
how lower air-conditioning consumption lowers electricity bills for all
consumers and not only those that utilize air conditioners. (NEEP, No.
273 at pp. 2-3; NRDC, No. 250 at pp. 14-17).
Trane, ARI, and EEI all disagree that recent price increases due to
electricity deregulation will lead to higher electricity rates in the
long-term. For example, Trane asserts that competition will cause
energy prices to consumers to remain stable. EEI adds that price
collapses have recently occurred in some of the same regional markets
which experienced rate increases. EEI also states that retail price
caps have been instituted in many areas of the country that have been
deregulated in order to shield residential consumers from the price
fluctuations in the wholesale market. (Trane, No. 262 at pp. 14-16;
ARI, No. 259 at pp. 33-34; EEI, No. 253 at p. 3).
Rather than speculate on how current volatility in energy markets
will impact future electricity prices, DOE has consistently relied on
EIA energy price forecasts and has used other forecasts, including the
various EIA scenarios, to bound the energy prices used in the standards
analysis. EIA's most recent Annual Energy Outlook (AEO) for the year
2002 recognizes that over the past year energy markets have been
extremely volatile.\12\ Recent energy market volatility as well as the
economic slowdown and lower prices following the September 2001
terrorists' attacks in the United States have been incorporated in the
short-term projections of the AEO2002. To be more specific regarding
the AEO2002 assumptions, its projections assume a transition to full
competitive pricing of electricity in States with specific deregulation
plans. Other States are assumed to continue cost-of-service pricing.
Price projections include the contracts entered into by California to
guarantee electricity supplies in the State. Increased competition in
electricity markets is also represented through changes in the
financial structure of the industry and efficiency and operating
improvement. The impact of EIA's assumptions are evidenced from the
average residential electricity price estimated by AEO2002 for the year
2001. The average rate estimated by AEO2002 for 2001 is 4.2 percent
greater (or 0.3 ¢/kWh) than that estimated by the AEO2000.
Although the AEO2002 short-term projections have taken into account
recent events, EIA estimates that long-term volatility in energy
markets will not occur from recent events or from the impacts of such
future events as supply disruptions or severe weather. Again, this is
evidenced from the average residential electricity price forecasts from
the AEO2002. Starting in the year 2003 average rates are projected to
drop below those forecasted by the AEO2000 and remain that way until
2010. After 2010 the rates forecasted by both the AEO2002 and AEO2000
are essentially the same. In terms of the consumer analysis, this means
that the life-cycle results based on the AEO2000 price projections
would remain virtually unchanged if the AEO2002 projections were to be
substituted in their place.
---------------------------------------------------------------------------

\12\ U.S. Department of Energy-Energy Information Administration
(EIA), Early Release of the Annual Energy Outlook 2002. EIA website:
http:www.eia.doe.gov/oiaf/aeo/.
---------------------------------------------------------------------------

With regard to Synapse Energy Economics' wholesale electricity
price analysis, DOE does recognize that wholesale summertime
electricity prices are on average 2\1/2\ ¢/kWh greater than
average wholesale rates. But as was stated in the January 22 final
rule, DOE cannot speculate as to how wholesale prices will be
translated into retail prices to residential consumers. It is possible
that this difference in wholesale rates will ultimately result in
higher marginal energy prices for the operation of central air
conditioners. However, several other assumptions about future
electricity prices are equally reasonable. It is possible that
increased competition will result in higher fixed charges for utility
service and higher fixed charges would lower marginal rates. That is,
under competition, utilities may recover more of their costs of
supplying electricity to consumers from fixed charges on utility bills,
thereby reducing the cost consumers have to pay for electricity being
supplied at the margin. It is also possible that higher peak load
prices for electricity would cause consumers to significantly alter the
times at which they use air conditioning, thus reducing projected
electricity costs (and cost savings). Finally, it is possible that the

[[Page 36382]]

recent trend toward increased retail level competition will slow or
even stop. DOE recognizes that the Nation's electric utility systems
are in the midst of major regulatory, structural and technological
changes which are likely to have important effects on the marginal
prices for electricity use that are charged to residential customers
and that these effects may be particularly pronounced during periods of
especially high (or low) electricity demand. However, given the many
possible scenarios affecting the costs of operating central air
conditioners, DOE has decided to retain for this rulemaking the
existing method for estimating future marginal electricity prices. This
analysis method utilizes the most current, comprehensive data available
on the actual marginal rates paid by consumers and uses price forecasts
that closely parallel the most current assessment published by DOE.
During the coming years, DOE intends to monitor carefully the
actual changes in the marginal electricity rates being paid by
consumers and other electricity users, and to look for any trends in
these changes that could help improve DOE's analysis. For future
efficiency standards rulemakings, DOE intends to use the most recent
data available on marginal rates, considering emerging trends in such
rates that result from significant changes in electricity rate design
(such as fixed and variable charges, or time-of-use rates), metering
and demand management technologies, equipment use load shapes, or in
the allocations of costs among sectors.
Within approximately five years of the current rulemaking, DOE
expects to complete another review of the efficiency standards for
central air conditioners and heat pumps. During this period DOE hopes
that sufficient data will become available to enable it to forecast
with greater confidence the marginal rates for residential electricity
users. If available, DOE expects to use such rates to support modified
standards.
3. Installation Costs
The potential increase in installation costs associated with 13
SEER equipment was cited by DOE as one of the reasons for not proposing
a 13 SEER standard in its July 25 SNOPR. See 66 FR 38836. Several
comments disagreed with DOE's conclusion that installation costs could
be significantly different between 12 and 13 SEER equipment. Goodman
claims that because their 12 and 13 SEER equipment are similar in size,
there is almost no difference in the installation costs associated with
their 12 and 13 SEER systems. (Goodman, No. 269 at p. 3). American
Geothermal DX, an HVAC contractor, asserts that, based on its
experience, any cost difference between installing a 13 SEER unit over
a 12 SEER unit would be minimal. (American Geothermal DX, No. 241-HH at
pp. 1-2). Several other comments, in particular those from ACEEE,
assert that DOE's treatment of the "footprint" issue is
speculative, i.e., DOE provides no evidence that installation costs
will actually increase for 13 SEER equipment. With regard to space-
constrained equipment, ACEEE adds that because DOE has already moved to
isolate this type of equipment as separate product classes, it
effectively dismisses any arguments asserting that the impact of space
constraints would result in higher installation costs for
"mainstream" 13 SEER equipment. (ACEEE, No. 284 at pp. 13-
14; ASE, No. 282 at p. 5; NRDC, No. 250 at p. 23; National Grid, No.
241-OO at p. 2).
Trane, ARI, and Rheem all argue that 13 SEER equipment is
significantly larger than 12 SEER systems. As a result, installation
costs are significantly greater for 13 SEER units than for 12 SEER
units. In particular, they state there will be many instances where it
will be very difficult to physically fit larger indoor coils, needed to
match outdoor 13 SEER condensing units, without retrofitting the air
handler originally designed for a smaller, lower SEER indoor coil.
(ARI, No. 259 at pp. 25-26; Trane, No. 262 at pp. 5-9; Rheem, No. 248
at p. 3).
Throughout the analysis DOE has assumed that installation costs
would remain constant as efficiency increased. As stated in the January
22 final rule, DOE believes that 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, 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. See January 22 final rule, 66 FR 7180. Although
DOE still maintains that installation costs generally are unlikely to
increase due to the above reason, as stated in the July 25 SNOPR, there
is the possibility that substantial increases in installation costs due
to larger and heavier 13 SEER systems may materialize for some
consumers, especially for those replacing 10 SEER systems. See July 25
SNOPR, 66 FR 38836. As a result, DOE continues to believe the
possibility of increased installation costs is a factor that supports
adopting the less costly 12 SEER standard.
4. Manufactured Housing Owners
York, ARI, and Nordyne Inc. (Nordyne) stated that consumers living
in manufactured homes are especially vulnerable to the increased first
costs associated with more efficient equipment. They asserted that
manufactured homes are typically "starter" homes for low-
to-middle income families where any increases in household expenses,
including those associated with more efficient space-conditioning
equipment, are difficult to afford. Because the life-cycle cost
analysis made no explicit mention of this sub-population, they are
concerned that DOE did not consider manufactured-home owners in its
analysis. (York, No. 270 at pp. 2-3; ARI, No. 259 at p. 9; Nordyne, No.
264 at pp. 1-2).
DOE considered all household types utilizing central air
conditioners or heat pumps in its consumer life-cycle cost analysis,
including manufactured homes. Of the households with central air
conditioners analyzed in the consumer life-cycle analysis, 4.5 percent
were manufactured homes. For households with heat pumps, 6.1 percent
were manufactured homes.
In its decision to propose 12 SEER standards for conventional
products, DOE took into consideration the first cost impacts of higher
efficiency standards to manufactured home owners. In particular, DOE
was concerned that the 13 SEER standards issued in the January 22 final
rule could cause manufactured home consumers to shift from heat pumps
to other systems that include resistance heat systems. See July 25
SNOPR, 66 FR 38836.

B. Life-Cycle Cost and Payback Period

Although a majority of the comments concerning consumer impacts
addressed either low-income impacts or the effect that electricity
prices have on the number of consumers either benefitting or being
burdened by increased standards, several comments expressed concerns
over other elements of the consumer life-cycle cost analysis.
1. Product Lifetime
Energy Market & Policy Analysis, Inc. (EMPA) stated that DOE
incorrectly used estimates of the full lifetime of the equipment rather
than the time that the equipment may remain in the ownership and use of
the initial owner. (EMPA, No. 241-LL at pp. 5-6).
In analyzing increases in efficiency standards, DOE is required by
section

[[Page 36383]]

325(o)(2)(B)(i) of EPCA to use the full lifetime of the equipment for
establishing the operating cost savings resulting from higher
efficiency standards. The second factor in section 325 to be considered
for determining whether the benefits of the standard exceed its burdens
is "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." 42 U.S.C,
6295(o)(2)(B)(i)(II).
A retirement function with an average 18.4-year equipment lifetime
was used in the life-cycle cost analysis for central air conditioners
and heat pumps. As stated in the January 22 final rule, the basis of
the 18.4-year equipment lifetime was a survey conducted on more than
2,100 heat pumps in a seven state region of the U.S.\13\ See 66 FR
7179-7180.
---------------------------------------------------------------------------

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

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, DOE has not been provided with more substantive data to
support discontinuing its use of the above mentioned survey data. DOE
believes that the survey data provides an accurate representation of
central air conditioner and heat pump life. Although the survey was
conducted only on heat pumps, the retirement function was also used as
the basis for estimating central air conditioner product lifetime.
Because heat pumps are used during both the cooling and heating
seasons, they generally incur more operating hours and more wear during
the course of a year than air conditioners. Thus, the use of a heat
pump retirement function for air conditioners likely underestimates
their lifetime. Although heat pump and air conditioner lifetimes likely
differ, DOE was unable to obtain any well substantiated data to
determine whether air conditioner lifetimes are longer than those for
heat pumps. Without such data, the heat pump retirement function was
assumed valid for air conditioners.
2. Warranty, Maintenance, and Service Costs
EMPA stated that DOE made no attempt to collect or include
warranty, maintenance, and service costs in the consumer analysis.
(EMPA, No. 241-LL at pp. 5-6). On the issue of warranty costs, Mercatus
Center adds that the reliability patterns of new components that are
part of high efficiency products are less known, so warranty accruals
may be significantly higher for these products (i.e., 12 to 13 SEER
equipment). (Mercatus Center, No. 242 at p. 8).
With regard to maintenance and service (or repair) costs, DOE did
collect data or make reasonable assumptions to establish both types of
costs.
Maintenance costs are costs to the consumer of maintaining
equipment operation such as checking and maintaining refrigerant charge
levels and cleaning heat exchanger coils. For the life-cycle cost
analysis, maintenance costs were based on data from Service Experts, an
HVAC service company. See TSD, Chapter 5. Maintenance costs were
assumed not to change with increased efficiency, the rationale being
that the general maintenance of more efficient products would not be
impacted by the more sophisticated components that they contain.
Service or repair costs are costs to the consumer for replacing or
repairing components which have failed. For baseline equipment (i.e.,
10 SEER) and equipment with efficiencies greater than 13 SEER,
annualized repair costs were assumed to equal one-half the equipment
price divided by the average lifetime (18.4 years). Equipment with
efficiencies of 11 through 13 SEER were assumed to incur a one percent
increase in repair cost over the baseline level. Because systems with
efficiencies up to and including 13 SEER generally do not include
sophisticated electronic components, repair costs were assumed to
remain essentially flat from 10 to 13 SEER. As noted above in the
discussion of equipment lifetime, compressor replacement costs were
also included in the analysis.
With regard to warranty costs, these costs were essentially
considered by incorporating repair costs into the analysis. As noted
above, a product that is less reliable or contains more expensive
components was assumed to have a higher cost of repair over its
lifetime. As stated in the October 5, 2000 NOPR, either the consumer or
the warranty provider will bear that added cost directly through more
frequent service calls or higher repair costs. See 65 FR 59599-59600.
If the cost is covered by warranty, however, the warranty provider
passes it back to future warranty holders in the form of slightly
higher warranty prices. DOE believes the incremental increase in the
price of the warranty is equal to, or just slightly higher, than the
discounted present value of the incremental repair costs over the life
of the warranty. Over the long term then, the average consumer always
incurs higher repair costs, either directly or through higher warranty
prices. Since the life-cycle cost analysis considers the present value
of consumer life cycle costs on the average consumer, incremental
repair costs and incremental warranty costs are the same, and
interchangeable.
3. Markups
ARI, Trane, and York all believe that DOE greatly underestimated
the manufacturer, distributor, and contractor markups used to derive
consumer purchase prices. ARI maintains that the manufacturer markup
should be approximately 1.35, as verified by a survey ARI conducted in
the fall of 2000. Furthermore, ARI continues to believe that the
distributor and contractor markups should be approximately 1.37, as
determined by DOE in the 1999 Supplemental Advance Notice of Proposed
Rulemaking (SANOPR). (ARI, No. 259 at pp. 23-25; Trane, No. 262 at pp.
10-11; York, No. 270 at p. 3).
As stated in the January 22 final rule, DOE did assume for the
Manufacturer Impact Analysis that markups increase with increasing
efficiency under a given standard level. However, for the consumer
economic analyses, as the minimum standard level increases, DOE
determined that the distributor and contractor markups on more
efficient products do decrease. See January 22 final rule, 66 FR 7180.
DOE's analysis of distributor cost data revealed a measurable
difference between the average aggregate markup on the entire set of
direct business costs and the incremental markup on only

[[Page 36384]]

direct equipment costs. In other words, for an incremental increase in
the cost of the equipment, the markup required to cover the incremental
cost increase is distinctly different than the average markup required
to cover all business costs. The average aggregate distributor markup
was determined to be 1.36 and is assumed to cover the direct business
costs that are present at the current baseline (i.e., 10 SEER) level.
Note that the average aggregate distributor markup of 1.36 is
approximately equal to the value used in DOE's analysis for the SANOPR.
The incremental distributor markup was determined to be 1.11 and is
assumed to cover incremental equipment cost increases, such as those
associated with increases in equipment efficiency.
DOE's analysis of contractor cost data revealed a significant
difference between the markup required for covering labor and equipment
expenses and the markup required for covering only equipment expenses.
The markup covering all business expenses was determined to be 1.53
while the markup for only equipment expenses was determined to have a
mean value of 1.27. The 1.53 markup value covering all business
expenses is approximately equal to the value used in DOE's analysis for
the SANOPR. Because the life-cycle cost analysis breaks out the
contractor's installation cost (i.e., the cost to install the
equipment) from the cost which is charged for the equipment, only the
markup value of 1.27 is applicable for marking up the equipment. As
with the distributor markup, a contractor markup associated only with
an incremental increase in equipment cost was also determined. Since
the incremental markup was shown to be close to the average value of
1.27, only the average markup value was used in the analysis.
As a result of determining lower distributor and contractor markups
on incremental equipment cost increases, such as those associated with
more efficient equipment, the overall markups decrease as efficiency
increases. Although comments argued that overall distributor and
contractor markups should not decrease, no data was offered to counter
DOE's approach. Thus, DOE has retained its methodology for estimating
both distributor and contractor markups. Appendix D of the TSD provides
more detailed information on this issue.
4. Energy Use
a. Residential Energy Consumption Survey
EMPA asserted that DOE violated well-established statistical
principles by basing the proposed standards on small subsets of data
from EIA's Residential Energy Consumption Survey (RECS). As a result,
EMPA concludes that DOE simply has no reasonable claim of validity for
either the calculations or its analytical conclusions. (EMPA, No. 241-
LL at pp. 2-4).
As stated in the January 22 final rule, as part of the process to
improve the energy efficiency standards analysis, DOE is committed to
use of sensitivity analysis tools to evaluate the potential
distribution of impacts among different subgroups of consumers. DOE
believes that RECS provides a nationally representative household data
set which is suited for conducting the type of sensitivity analyses
suggested by the Process Improvement Rule. Limiting the RECS households
to those equipped with either central air conditioners or heat pumps,
the life-cycle cost 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. See
January 22 final rule, 66 FR 7178-7179.
b. Rebound Effect
Mercatus Center alludes to what it termed the "rebound
effect" when stating that more efficient air-conditioning due to
higher SEER standards would cause consumers to use their equipment more
often, thereby negating some of the energy savings realized from the
more efficient equipment. (Mercatus Center, No. 242 at pp. 9-10).
Assumed under the rebound effect is that consumers will use more
efficient equipment more often because of the greater utility bill
savings they will realize relative to less efficient equipment.
Although DOE recognizes that consumers may utilize more efficient
equipment more often, the LCC analysis did not attempt to account for
the possible reduction in energy savings due to a rebound effect. As a
result, the LCC impacts detailed in today's final rule may overestimate
actual consumer cost and energy savings that result from an increase in
the minimum energy efficiency standards for central air conditioners
and heat pumps.
5. Rebuttable Payback Period
NWPPC asserts that 13 SEER, at least for split system heat pumps,
is economically justified. NWPPC states the DOE has not justified why
it should not adopt the HSPF 7.7 and SEER 13 standards for split system
heat pumps since this level of efficiency satisfies the
"rebuttable presumption" requirements of the law. (NWPPC,
No. 287 at p. 3).
As noted in the July 25 SNOPR, DOE recognizes some standard levels
for some product classes satisfy the rebuttable presumption
requirements in section 325(o)(2)(B)(iii). But DOE points out that the
statute requires DOE to use "the applicable test procedure"
to calculate the payback periods for purposes of the rebuttable
presumption. As explained in the October 5, 2000 NOPR, the annual
cooling and heating energy consumption calculations based on DOE's test
procedure are significantly greater than the weighted-average values
from DOE's life-cycle cost analyses based on the 1997 Residential
Energy Consumption Survey, used in other DOE analyses, including
evaluation of consumer impacts. 65 FR 59596. For this reason, the
payback periods presented in Section VII of this portion of the
preamble, entitled "Analytical Results and Conclusions,"
are significantly longer than those calculated to determine whether the
rebuttable presumption applies to these products. More importantly,
DOE's economic justification analysis for a particular class of covered
product involves consideration of factors other than the payback
period. For example, as discussed in the July 25 SNOPR (66 FR 38837),
one reason DOE did not propose Trial Standard Level 3 (12 SEER for air
conditioners and 13 SEER for heat pumps) was the potential of those
standards to cause heat pump owners to switch to resistance heating,
and possibly adversely affect competition.

C. Shipments/National Energy Savings

1. Shipments Forecasts
Mercatus Center asserts that DOE's shipment model does not account
for the reduced equipment sales that occur when consumers forego
purchases due to the increased equipment prices resulting from higher
efficiency standards. As a result of delayed consumer purchases, the
energy savings to the nation would build up more slowly than forecasted
by DOE. (Mercatus Center, No. 245 at p. 5). This is effectively an
argument that the price elasticity for the air conditioner and heat
pump market should be higher than what was assumed.
DOE has used historical saturation trends to establish price
elasticities for the overall air conditioner and heat pump market.
Higher saturation levels

[[Page 36385]]

are assumed to decrease price elasticity, which makes sales volume less
sensitive to price increases. Over the past twenty years household
saturation levels of central air-conditioning have increased, primarily
due to the steady increase in real household incomes. In order to
capture the effect that increased equipment price and household income
have on equipment sales, the shipments model breaks the air conditioner
market into the following segments: New construction, early
(discretionary) replacements, regular replacements, extra repairs, and
remodels. In the new construction market, the price of air conditioning
has dropped over time relative to household income resulting in a
corresponding increase in saturation to its current value of
approximately 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 early 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. 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 is much more elastic. With regard to the other market
segments, the regular replacement and extra repair market price
elasticities are dependent on the age of the equipment in addition to
price. Thus, the price elasticity for a relatively new air conditioner
is much more elastic than that for a relatively old air conditioner.
With regard to the remodel market (otherwise known as the market of
stock homes without air-conditioning), historical data reveals that a
relatively low number of non-air conditioned households purchase new
air-conditioning equipment. Thus, like the early replacement market,
the remodel market's price elasticity is relatively sensitive to first
cost increases.
Because the price elasticities in the shipments model are based on
actual historical data, DOE has retained the price elasticities
developed for the central air conditioner and heat pump standards
analysis.
2. Heat Rates
ACEEE asserts that DOE has severely underestimated the national
energy savings resulting from more efficient standards due to the
marginal heat rates which were used to convert electrical energy
savings at the site (i.e., at the household or commercial building)
into fuel savings at the source (i.e., at the power plant). ACEEE
contends that the value assumed by DOE in 2018 and beyond (5519 Btu/
kWh) is well below the heat rate estimates provided by EIA (e.g., 9617
Btu/kWh in 2020). Using the EIA heat rate estimate would lead to about
a 2-fold increase in energy savings and reduction in pollution for
2020, with progressively smaller differences earlier. (ACEEE, No. 284
at pp. 9-10).
The standards analysis has used marginal heat rates calculated by
using a version of EIA's National Energy Modeling System (NEMS-BRS)
\14\ to translate end use electricity savings to primary energy
savings. The marginal heat rate is calculated by imposing a load
reduction to the appliance end-use being analyzed in NEMS-BRS and
observing the change in primary energy use. As noted by ACEEE, the
marginal heat rates used in the central air-conditioning analysis are
lower than expected. One would expect the central air-conditioning
marginal heat rate to be higher than those of more base load appliances
(like clothes washers or electric water heaters) because this peak-use
appliance displaces more expensive, less efficient generation. Further,
this marginal displaced plant should be not unlike the inefficient
plant in place today because most rapid technological change occurs in
the base load. The key to understanding this apparent paradox is that
this conversion rate does not represent a specific marginal generator
or combination of generators, but is actually a conversion factor that
incorporates several simulated effects resulting from the standard.
---------------------------------------------------------------------------

\14\ 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.
---------------------------------------------------------------------------

The primary reason as to why the marginal heat rate is lower than
expected is that the overall rate of efficiency improvement of the
power system with the standard in place is slower than estimated by EIA
in the AEO Reference Case. While there are many effects of the
standard, DOE's analysis shows the two major components of the
standard's impact on the power sector are: (1) The direct reduction in
fuel burned in power plants and (2) the indirect effect whereby the
slowing of electricity demand growth slows new investment, thereby
impeding the rate of overall improvement in power sector efficiency.
While this latter effect would seem to be trivial relative to the
first, it grows significantly over time because fewer and fewer of more
efficient generating plants are added to the power system. By the end
of the forecast period, this effect becomes a significant drag on the
primary energy savings of the standard, which explains why the marginal
heat rate is less than that attributed to new technology. Further, it
is a bigger drag on the benefits of peaking end-use efficiency
improvements. These reduce peak demand more and slow investment more
because the rate of new construction is heavily dependent on growth in
peak demand. A more detailed discussion of this effect can be found in
Appendix M of the TSD.
3. Fuel Switching
As discussed in the July 25 SNOPR, potential equipment switching
from heat pumps to electric resistance heating due to high heat pump
prices was cited as one of the reasons for not proposing a 13 SEER
standard. The energy savings resulting from 13 SEER heat pumps would be
eliminated if only a small fraction of heat pump owners (4 percent)
switched to electric resistance heating. See July 25 SNOPR, 66 FR
38836.
ACEEE, NRDC, and NWPPC all disagreed that more efficient heat pump
standards would cause consumers to switch to electric resistance
heating. Both ACEEE and NRDC stated that if equipment switching was
truly a concern, DOE should prevent such action not by lowering heat
pump efficiency standards, but by promoting revisions to building
energy codes to minimize the use of resistive heat. (ACEEE, No. 284 at
p. 14; NRDC, No. 250 at pp. 18-20). ACEEE adds that DOE failed to
account for the impact that electric resistance heating has on consumer
energy bills (nearly doubling average annual heating bills) in their
assessment of the potential of equipment switching. NWPPC claims that
DOE overstated the potential of equipment switching if split system
heat pump SEER standards were set higher than those for split system
air conditioners. NWPPC states that the price difference between a heat
pump and an air conditioner at the same SEER level is already very high
(approximately $1400). The extra price associated with a more efficient
heat pump (approximately $150 between 13

[[Page 36386]]

and 12 SEER) is not enough to alter consumer purchase decisions.
(NWPPC, No. 287 at p. 3).
York agrees with DOE that there is potential for equipment
switching if the standards for heat pumps are set too high. York states
that the higher price associated with more efficient heat pumps would
force consumers to choose either resistance heat and the resulting
higher utility bills, or fossil fuel furnaces that may have to operate
on higher cost fuels with more volatile prices such as oil or propane.
(York, No. 270 at pp. 3-4).
As stated in the January 22 final rule, a significant number of
households use electric resistance heat, indicating the potential for
equipment switching from heat pumps to resistance heat. See 66 FR 7180.
Based on data from the 1997 RECS, a little over 14 percent of
households with room or central air conditioning have either baseboard
or forced air electric resistance heating compared to almost 10 percent
of households which have heat pumps. The fact that such a large
percentage of households currently use a combination of central or room
air-conditioning with resistance heat to meet their space-conditioning
needs supports DOE's view that there is a real possibility that some
purchasers would choose to switch to resistance heat from heat pumps
rather than pay the consumer prices associated with 13 SEER heat pumps.
DOE has not attempted to estimate the number of consumers that might
actually switch from heat pumps to resistance heating. Rather, DOE has
determined that 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. Because such a
small fraction of heat pump owners would need to switch to electric
resistance heating to negate the energy savings realized from 13 SEER
heat pumps, DOE believes the possibility of equipment switching is real
enough to warrant its inclusion as a factor supporting a 12 SEER/7.4
HSPF standard.

D. Impact on Manufacturers

1. Cumulative Regulatory Burden
DOE considers that a standard level is not economically justified
if it contributes to an unacceptable cumulative regulatory burden. The
TSD contains information on cumulative regulatory burden (section 8.6
of the TSD), although as previously discussed, DOE did not explain how
it considered this information in promulgating the 13 SEER standard on
January 22, 2001. The TSD shows that the burden on manufacturers due to
all other recent or imminent Federal regulations exceeds $479 million.
DOE estimates the 13 SEER amendments to the standards for central air
conditioners and heat pumps would contribute up to an additional $303
million in manufacturer costs, bringing the total cumulative regulatory
burden to as high as $782 million. In light of that heavy burden, the
July 25 SNOPR proposed 12 SEER standards that DOE estimates will reduce
the expected financial burden on manufacturers from all new Federal and
State regulations by $144 million compared to the 13 SEER final rule of
January 22.
ACEEE, NRDC, and EPA all argued that DOE overestimated the impacts
to the industry due to cumulative regulatory burden. EPA focused on the
impacts due to the phase out of HCFC-22 (the hydrochlorofluorocarbon
used as a refrigerant) and cited its own analysis as well as an
estimate from Goodman Manufacturing to claim that DOE's estimate of $50
million per company is at least twice as high as warranted based on
prior industry transitions and more recent trends. Referring to the
costs incurred by the refrigerator industry in the mid-1980's to
convert from CFCs to HCFCs, EPA suggests that a more reasonable
estimate to phase out HCFC-22 is $20 to $30 million per company. EPA
also cites Goodman's estimate that the combined cost of meeting a 13
SEER standard and transitioning from HCFC-22 is approximately $25
million per company, half of DOE's $50 million estimate for just
converting to a new refrigerant. (EPA, No. 276 at pp. 2-4).
Because the industry has known for well over a decade of the
impending phase out of HCFC-22, both ACEEE and NRDC claim that the
costs for converting to a new refrigerant should be lower than DOE's
estimate. ACEEE states that DOE seems to treat the costs of redesign
for efficiency and redesign for refrigerants as additive, as though
manufacturers would first redesign for efficiency (2006) and then for
replacement refrigerants (2010). ACEEE believes this assumption would
be demonstrably false as there is every reason to accomplish the two
goals with a single re-engineering effort, both saving capital and
improving time-to-market. ACEEE adds that since there is already fairly
widespread use of an alternative refrigerant, R-410A, this strongly
suggests that component manufacturers of compressors, coils, valves,
lubricants, and all other critical components are already geared up and
supplying the manufacturers with the necessary pieces to assemble non-
HCFC-based heat pumps and air conditioners. With regard to the costs to
be incurred by the industry to comply with Clean Air Act amendments for
coating large appliances, ACEEE asserts that much more data are needed
before any definitive estimates can be made. (ACEEE, No. 284 at pp. 11-
13; NRDC, No. 250 at pp. 13-14).
Counter to the above arguments, ARI states that DOE is correct to
give greater weight to cumulative burden. ARI asserts that the cost
impacts due to cumulative regulatory burdens will exceed DOE's estimate
of $479 million. ARI notes that various additional burdens to the
industry were not quantified by DOE including: (1) Recently revised DOE
efficiency standards for room air conditioners; (2) on-going DOE review
of possible new minimum efficiency standards for residential furnaces;
(3) DOE's adoption of standard levels related to ASHRAE 90.1-1999
(American Society of Heating, Refrigerating and Air-Conditioning
Engineers, Inc., Standard 90.1 as revised in October 1999); (4) EPA's
Metal Products and Machinery (MP&M) effluent guidelines and standards;
and (5) EPA's allowance system for controlling production, import, and
export of HCFCs. ARI states that DOE's own estimate that a 12 SEER
standard would have $144 million less cumulative burden than a 13 SEER
standard warrants adoption of a 12 SEER standard. (ARI, No. 259 at pp.
10-13).
In reaching its conclusion on manufacturer impacts, DOE considered
the cumulative regulatory cost imposed on air conditioner manufacturers
under the various standards scenarios, including manufacturers'
investment to meet the new standard. As noted above, DOE estimated the
cumulative regulatory impacts on manufacturers to likely exceed $782
million if a 13 SEER standard were adopted. This includes the $303
million reduction in industry value due to a 13 SEER standard and $479
million in other regulatory burdens, including costs associated with
the HCFC phase out. It does not include other major Federal and State
regulations that we listed but did not quantify.
The comments submitted by ACEEE, NRDC, and, in particular, EPA do
not address the cumulative manufacturer impacts. Rather, the comments
were limited to manufacturer's investment required to transition away
from HCFC refrigerant. DOE's estimated $50 million per company
investment to comply with the HCFC phase out was based on

[[Page 36387]]

interviews with all seven major air conditioner manufacturers during
1998 and 1999 when the firms were asked specific questions regarding
the costs of replacing HCFCs in their equipment. In contrast, ICF
Consulting, in its analysis for the EPA, refers to mid-1980's estimated
costs associated with phasing CFCs out of the refrigerator industry,
without explaining the link between those costs estimates and ICF's
estimated $20 to $30 million per company to phase HCFCs out of the air
conditioner industry.
DOE believes that the cost to convert from CFC refrigerants used in
residential refrigerators is substantially less than the cost to
convert from HCFC-22 refrigerant used in central air conditioners and
heat pumps. For example, compressor capacity and power input for
central air conditioners and heat pumps is an order of magnitude larger
than compressor capacity and power input needed for home refrigerators
(2 to 5 horsepower for central air conditioners versus one-quarter
horsepower for home refrigerators). For this reason alone,
significantly higher conversion costs would be expected. Further,
central air conditioner or heat pump components (compressors, coils and
air handlers) comprise almost the entire product cost. In contrast,
over 50 percent of the cost of a home refrigerator is embodied in such
non-refrigerant components as the insulated cabinet, shelves and other
storage components, and other accessories such as icemakers and through
the door ice and drink dispensers.
DOE also believes refrigerant related design changes will result in
greater impact on the overall product cost and competitive position for
air conditioner manufacturers than will be the case for refrigerator
manufacturers. Since HFC-410A refrigerant operates at substantially
higher operating pressures than HCFC-22 refrigerant, a major system
redesign is necessary with HFC-410A refrigerant to take advantage of
the beneficial aspects of the 40 to 50 percent higher pressure and to
minimize any deleterious effects. With the alternative replacement
refrigerant HFC-407C, system efficiency is reduced by 5 to 10 percent
compared to use of HCFC-22 refrigerant in the same system. Significant
resizing and reconfiguring of components is required to restore
efficiency levels.
Replacing CFC-12 refrigerant in refrigerators with HFC-134a
refrigerant reduces system efficiency by only 1 to 2 percent, which is
easily offset by higher the higher efficiency compressors available at
the time of CFC to HFC conversion. In contrast, replacing air
conditioner compressors, whose efficiencies are already close to
thermodynamic limits, with higher efficiency units to offset the impact
of refrigerant related efficiency loss is not a viable option. Finally,
there are fewer models in a typical appliance manufacturer's
refrigerator product line than the number of residential central air
conditioner and heat pump models (multiple efficiency level products)
produced by a typical unitary air conditioner manufacturer. As a
result, significantly more redesign and product validation is necessary
for the unitary air conditioner manufacturers to convert their product
lines and production from R-22 to either of the HFC blends.
ACEEE states that the rational approach to meeting the two
regulatory requirements?new efficiency levels in 2006 and the
phase out of HCFCs in 2010?is to do so simultaneously, rather
than sequentially, 3 to 4 years apart. If both changes could be
accomplished simultaneously, the investment would indeed be less than
the cost of making the two changes separately. Although the
characteristics of the new refrigerant, with significantly higher
operating pressures, will add to the scope and cost of the development
effort for the increased efficiency product families, in principle,
product validation testing and retooling would occur only once, saving
substantial resources.
The difficulty with this scenario is the competitive reality of the
industry. Competition in the U.S. air conditioning industry is
especially vigorous, with seven major manufacturers competing for
business. Consumers have benefitted significantly from this, with real
(inflation adjusted) prices having fallen steadily over the past 20
years, even during periods of rapid market growth. In addition, this
level of competition in the domestic industry has provided no
opportunity for foreign competition to displace main line HVAC
products, preserving traditional manufacturing jobs in the U.S.
In 2006, in this environment of vigorous competition, each
manufacturer will be faced with the choice of producing a cost
optimized product line using HCFC-22 refrigerant or of also making the
additional investment to convert to an HFC refrigerant, combined with
meeting the increased efficiency standard level. It is clear that
either HFC blend (R-407C or R-410A) will result in increased product
cost (at comparable efficiency and performance level). If HFC
refrigerant use would result in lower cost compared to HCFC-22, it is
likely that manufacturers would already have voluntarily converted. In
fact, hardware cost increases are readily identifiable and the higher
cost HFC refrigerant alone will add $20 to $30 to the direct
manufacturing cost of each unit. Therefore, it is highly likely that
one or more manufacturers will opt to use HCFC-22 in the majority of
their product line between 2006 and 2009. In that situation, the
resulting cost advantage will force the other manufacturers to follow
suit to remain competitive and avoid market share loss. While most
manufacturers produce 12 and 13 SEER HFC air conditioners, they are
typically low volume products and the tooling for full scale mass
production does not exist. To increase production of 12 SEER or 13 SEER
units, manufacturers will need expanded tooling to produce those
models. To obtain the least cost, manufacturers will need to use
designs that are better optimized for mass production. Consequently,
DOE believes that much of the redesign, validation, and retooling
effort faced by the industry is likely to happen once for efficiency
standards in 2006 and a second time for the HCFC phase out in 2010.
2. Financial Burdens Associated With New Efficiency Standards
As explained in the July 25 SNOPR (66 FR 38829), the 13 SEER
standards in the January 22 final rule were projected by the TSD to
result in a negative cash flow for the industry in the year preceding
the new standards' enforcement. Moreover, DOE's analysis shows that 13
SEER standards would impose far greater financial burdens on
manufacturers whose operating costs exceed the industry average. Those
manufacturers typically engage in more research and development or
provide additional sales or service support than do their lower
operating cost competitors. Consequently, DOE proposed the 12 SEER
standard to reduce the maldistribution of financial impacts on
manufacturers and allow manufacturers to maintain a positive cash flow.
Trane concurred with DOE's action to reduce the maldistribution of
financial impacts on manufacturers. Trane asserted that as efficiency
is increased, a larger commodity market is created. This in turn
reduces the market opportunities for companies that focus on value-
added systems and services. Thus, the "volume"
manufacturers (i.e., lower operating cost manufacturers) benefit
disproportionately. Trane also noted that under a 13 SEER standard,
manufacturers who invest heavily in

[[Page 36388]]

research and development (R&D) would dedicate less funding to
innovative programs, resulting in the entire industry focusing on the
development of designs that address the absolute lowest commodity
product. Trane's opinion was shared by Equipment Distributors. (Trane,
No. 262 at pp. 2-4, 13-14; Equipment Distributors, Inc., No. 266 at p.
1).
NRDC disputed DOE's interpretation of the financial impacts to
manufacturers by pointing out that DOE's own analysis undercuts the
contention that the industry is impacted more severely under a 13 SEER
standard. Referring to the TSD, NRDC notes that under two different
scenarios (NAECA and Roll-up) lowering the standard from 13 to 12 SEER
actually increases the burden to the industry (as measured by the
industry net present value). (NRDC, No. 250 at pp. 20-22).
DOE disagrees with this comment. In its interpretation of
manufacturer impacts, NRDC overlooks the important role that the
efficiency mix assumptions play in the financial projections. In
Section 8.4.8 of the TSD, we described the dynamics by which the
profits of manufacturers with higher operating costs depend on the sale
of premium products, and how those products are differentiable only at
efficiency levels higher than the baseline. The closer the baseline
unit is to the technological limit, the fewer consumers will "buy
up" to a higher efficiency. For more and more consumers, the
baseline will be the cost-effective option, and those consumers who
wish to "buy up" will have fewer options and less financial
incentive to do so. For these reasons, DOE assumed the Roll-up
efficiency scenario to be the most probable for 13 SEER standard levels
and the NAECA efficiency scenario most probable at 12 SEER standard
levels. The resulting cumulative change in industry net present value
(NPV) is negative $300 million at 13 SEER levels compared to negative
$199 million at 12 SEER levels.
NRDC's interpretation of manufacturer impacts also overlooks short-
run cash flow impacts of the standards. While NPV is useful for
evaluating the long-term effects of new standards, short-term changes
in cash flow are also important indicators of the industry's financial
situation. The annual cash flow impacts at 13 SEER are $31 million more
than at 12 SEER and turn the absolute cash flow negative. Depressed
cash flow can strain the industry's access to capital or cause
investors to flee.
OOE, Goodman, and ACEEE all claim that the industry impacts due to
13 SEER standards cannot be too severe as the technologies required to
comply with the standard are conventional and well known. (OOE, No. 275
at p. 3; Goodman, No. 269 at p. 3; ACEEE, No. 284 at p. 7). Goodman
specifically states that the only difference between a 10 SEER, 12
SEER, and 13 SEER units is a little more copper and aluminum used in
manufacturing different sized coils.
DOE believes it is erroneous to conclude from the fact that
technologies required to comply with standards are conventional and
well known that it is a trivial exercise to increase production volumes
to a level capable of satisfying the entire U.S. demand for air
conditioners. Sales of 13 SEER equipment and higher are only 3 percent
of all equipment sold and large investments would be required to
convert all production to these levels. Furthermore, as previously
described, much of the industry's financial health today depends on
sales of 12 SEER equipment.
3. Small Manufacturers
The issue of how higher efficiency standards impact small
manufacturers also drew several comments. The Department of Justice's
April 5, 2001, letter to DOE regarding the potential effect on
competition of new central air conditioner and heat pump efficiency
standards stated that some small manufacturers would be
disproportionately impacted under a 13 SEER standard, and noted that
100 percent of their current product line would fail to comply with the
new efficiency requirement. The Department of Justice also stated that
manufacturers of equipment for space-constrained installation sites
(such as manufactured housing) would also be disproportionately
impacted by a 13 SEER standard (DOJ, No. 285 printed in Appendix of
this notice).
Goodman asserted that moving to a 13 SEER would not be a hardship
to small manufacturers. Goodman claims that 13 SEER technology has been
available to both large and small manufacturers for approximately 15
years. Goodman also points to the fact that Goettl Air Conditioning, a
small manufacturer based in Arizona, supports the 13 SEER standard.
(Goodman, No. 269 at p. 3). PG&E concurs with Goodman's statements.
(PG&E, No. 274 at p. 4). NRDC asserts that higher efficiency standards
encourage competition by shaking up the cozy arrangements that the
bigger companies have drifted into, requiring manufacturers either to
invest in building new components or to purchase new components from
other suppliers. They claim that this provides smaller, nimble
manufacturers an opportunity to unseat large but slow-adapting
competitors. (NRDC, No. 250 at p. 31).
Both ARI and Rheem agree with the Department of Justice's
statements regarding small manufacturers. Rheem states that small
manufacturers will most likely not be able to afford the redesign and
retooling of their equipment and manufacturing facilities to meet the
13 SEER standard. ARI quotes DOE's TSD in stating that "small
manufacturers engaged in the production of conventional equipment would
find it difficult to overcome the financial and technical burdens
associated with the transition, and could decide to exit the
market." (ARI, No. 259 at pp. 10-11; Rheem, No. 248 at p. 3).
With regard to the manufacturers of equipment for the manufactured
housing industry, both ARI and Goodman agree that products for markets
like manufactured housing, where space constraints limit efficiency
gains achieved with conventional technology, should be granted an
exemption from higher efficiency standards. (ARI, No. 259 at p. 8;
Goodman, No. 269 at p. 3).
The Department of Justice's concerns relate to disproportionate
impacts on small manufacturers. Most small manufacturers produce only
indoor coils or niche product lines. For small manufacturers who
produce coils only, there are no intensive incremental technological or
capital requirements for them to increase the efficiency of their
products and DOE does not expect them to face any incremental burden as
a result of the new standards. However, DOE has documented that
manufacturers of niche air conditioning products, such as through-the-
wall equipment and small duct, high velocity systems, face special
technological and financial considerations compared to those faced by
the major air conditioner producers. Consequently, new efficiency
standards could be more detrimental to the financial situation of niche
product manufacturers than of major manufacturers. Technical
considerations are typically more important for certain niche
manufacturers than for major manufacturers and have more severe
consequences related to increased production costs or loss of sales
volume due to increased price. Overall, if provisions were not made in
the standard for niche products that face severe technological
constraints, we would expect their impacts to be disproportionate to
those on the industry as a whole. In today's rule, DOE is establishing
separate product

[[Page 36389]]

classes for through-the-wall equipment and small duct, high velocity
systems, which will be required to meet a lower SEER. DOE believes this
meets the Department of Justice's concern regarding the impact of more
stringent standards on small manufacturers.
DOE recognizes that products used for manufactured housing and
modular housing also face space constraints. In its decision to propose
12 SEER standards for conventional products, DOE took into
consideration the impacts of higher efficiency standards on the
manufacturers of manufactured housing and modular housing products. For
these applications, products at the 12 SEER level are currently on the
market. DOE has concluded that, at the 12 SEER level, there is no need
for a separate class for products used mainly in manufactured or
modular housing.
4. Manufacturer Cost Estimates
Several comments asserted that DOE's manufacturing cost estimates
derived from the reverse engineering analysis were too high. The
comments stated that economies of scale in production and competitive
forces will result in lower costs for the more efficient equipment as
compared to pre-implementation estimates. (ACEEE, No. 284 at p. 2; CFA,
No. 246 at p. 1; NCLC, No. 241-NN at p. 1). OOE specifically states
that the cost of the commodity product at a minimum standard level
cannot be appropriately characterized by looking at the mean or median
manufacturer cost estimates from the reverse engineering analysis.
(OOE, No. 275 at p. 3). Goodman states that their incremental cost for
producing a 13 SEER unit is $100 and is comparable to DOE's estimate.
(Goodman, No. 269 at pp. 3-4).
The reverse engineering analysis does in fact take into account
economies of scale by considering larger production volumes for more
efficient products after implementation of the new standards. In its
production modeling, DOE also considered that manufacturers would cost-
optimize their production at the new level because of more intense
competition at that level. We expect this competitive pressure to drive
manufacturing costs and this is illustrated by the results of the
reverse engineering analysis which fall within the ARI range and nearer
to the ARI minimum.
ARI, Trane, York, and EEI disagree with the above comments and
assert that DOE's manufacturing cost estimates are too low. Trane
states that the reverse engineering analysis was based on too small of
a sample of units and eliminated units which fell out of the range of
costs bounded by the manufacturers' submission. Trane nevertheless
thinks that, despite its shortcomings, the reverse engineering analysis
essentially confirmed cost levels submitted by ARI. However, Trane
recommends that DOE utilize the cost data submitted by ARI. EEI concurs
with this conclusion. (Trane, No. 262 at 9-10; EEI, No. 253 at p. 2).
ARI states that it surveyed its manufacturer members after DOE issued
its January 22 final rule. The results of the survey indicate that: (1)
DOE has underestimated the baseline manufacturer costs by approximately
30 percent and (2) the additional cost of a 13 SEER split air
conditioner over a 12 SEER is not $122 as estimated by DOE, but is at
least approximately $305. ARI also refutes Goodman's claim that the
amount of copper and aluminum needed for a 13 SEER unit is
insignificant. In reviewing Goodman's current technical literature, ARI
states that on average a Goodman 13 SEER split air conditioner weighs
44 pounds (18 percent) more than a 12 SEER system. More specifically,
Goodman's 13 SEER condenser and evaporator coils are on average 20.2
percent and 11.5 percent heavier than the condenser and evaporator
coils from their 12 SEER unit, respectively. (ARI, No. 259 at pp. 23-
25). York states that the reverse engineering analysis is flawed
because it focused on one size of equipment, a 3-ton unit and they
believe that the whole range of equipment should have been analyzed, as
size becomes much more problematic and costly at higher capacities.
(York, No. 270 at p. 3).
DOE believes that the reverse engineering analysis is based on a
sufficient equipment sample size to capture variability in design,
manufacturing practices and costs across the range of products that
would be subject to new standards. The equipment models were selected
to be representative of the costs to manufacture existing baseline
models and to capture the costs to manufacture products at potential
new standards levels. To select representative equipment samples for
the reverse engineering analysis, DOE requested that manufacturers
identify equipment in their product lines most appropriate for this
purpose. Four major manufacturers submitted design data for split
cooling-only equipment, and three of those submitted design data for
the other classes as well. This submission process yielded information
on 62 models. DOE selected an additional nine models from catalogs of
those and other manufacturers and also used the ARI Product Attribute
Database and technical literature to describe the efficiency-related
attributes of those products. Additionally, from the group of
manufacturer submittals, three units were purchased for extensive
disassembly and inspection. In their comment ARI does not explain how
it derived baseline costs (estimation method, models included, product
features, etc.), making an assessment or comparison to DOE's costs
impossible. In contrast, the reverse engineering derivation method and
resulting disaggregated baseline data are transparent and have been
reviewed extensively by stakeholders.
Several comments also focused on the issue of productivity gains
and asserted that these gains would lower manufacturing costs below the
levels estimated by DOE. ACEEE, ASE, and OOE all refer to historic
changes as shown by the U.S. Census Bureau's Current Industrial Reports
series and state that air conditioner costs to the manufacturer have
declined at a rate of 1.7 percent annually over the 1994-1998 period.
They assert that DOE should include this rate of cost reductions in its
analysis. They add that the Census figures are probably conservative as
they ignore the fact that manufacturers tend to find ways to
substantially increase productivity when standards take effect in order
to reduce the impact of standards-induced cost increases. In making
this claim, the comments cite DOE's cost estimates from the 1980's for
meeting the 10 SEER standards that took effect in 1992. Rather than
having any cost impacts, they assert that the 1992 standards resulted
in essentially no change in product costs. (ACEEE, No. 284 at pp. 4-8;
OOE, No. 275 at p. 3; ASE, No. 282 at pp. 3-4).
Although NRDC recognizes that the reverse engineering model
accounts for economies of scale, it states that it does not account for
any "learning-curve" effect. Thus, as cumulative production
of high efficiency units increases, the reverse engineering model
merely scales up the costs rather than factoring the downward effect
that "learning" has on production costs. (NRDC, No. 250 at
pp. 31-32). Goodman also alludes to the "learning-curve"
when it states that when a unit meeting a new standard is produced in
volume, it allows the manufacturer to run its plant more efficiently
and pass the resulting cost savings on to the consumer. (Goodman, No.
269 at pp. 4-5). Trane, Rheem, and Lennox International, Inc. (Lennox))
all refute the contention that productivity gains will materialize.
Trane asserts that earlier hard won productivity gains

[[Page 36390]]

were produced by the industry through untold millions spent on R&D.
These expenditures reduced the cost to produce the entire product line,
but did little to reduce the material-driven incremental costs of
efficiency upgrades. Likewise, any cost reductions likely to occur in
the next decade will have significantly greater impact on the overall
consumer cost structure than on the cost and price increment between
successively higher efficiency levels. Rheem states that under a 13
SEER standard only industry profits will be reduced, lessening the
money available for research and design of new products to meet other
upcoming standards, i.e., HCFC phase-out, new commercial standards, new
gas and oil furnace standards. (Trane, No. 262 at pp. 10-11; Rheem, No.
248 at p. 3; Lennox, No. 272 at p. 2).
DOE has not included unspecified productivity improvements or
"learning-curve" cost reductions in its analysis. DOE does
not believe historical price trends for unitary air conditioners, or
other products, can be applied to forecast equipment costs where there
are no data to indicate what factors resulted in the observed trends or
that the trends will continue. Furthermore, without specific cost
information, it is impossible to tell if productivity improvements
would apply equally to baseline costs and standards induced incremental
costs. Therefore, without specific data on the nature and magnitude of
cost impacts, DOE will not apply a productivity improvement factor in
this rulemaking or other rulemakings.

E. Effect on Competition

Several comments argued that DOE was unduly concerned that 13 SEER
standards would lead to industry consolidation. NRDC claimed that the
13 SEER standards would actually enhance competition relative to the
existing 10 SEER standards because economic losses imposed on higher-
cost producers would force them to be more competitive. (NRDC, No. 250
at pp. 20-22). OOE adds that industry consolidation occurs regularly in
all sectors of the economy. In the context of the various factors that
influence industry consolidation, OOE asserts that it is unreasonable
for DOE to claim that the incremental effects of efficiency standards
can have any measurable effect on the industry. (OOE, No. 275 at pp. 3-
4). PG&E cites third party coil manufacturers' response to PG&E's high
efficiency rebate programs as support for the view that these small
coil manufacturers can supply the efficiency combinations needed to
meet new standards. By extension, PG&E asserts that 13 SEER standards
would foster manufacturing diversity by providing the coil
manufacturers more business. (PG&E, No. 274 at p. 3).
Countering the above claims, ARI, Trane, and the U.S. Small
Business Administration (U.S. SBA) asserted that a 12 SEER standard
would have less of an anti-competitive impact than the 13 SEER
standard. (ARI, No. 259 at pp. 3-4, 25; Trane, No. 262 at pp. 2-4, 13-
14; U.S. SBA, No. 234 at p. 1). Both ARI and Trane cited the Department
of Justice's April 5, 2001 letter to DOE regarding the anti-competitive
impacts of 13 SEER standards in claiming that the industry impacts due
to 13 SEER standards are too severe. ARI additionally stated that DOE's
failure to obtain a determination by the Attorney General of the anti-
competitive impact of the 13 SEER standard prior to issuing the January
22 final rule is an appropriate basis to withdraw the 13 SEER decision.
The Department of Justice (DOJ) submitted comments on DOE's July 25,
2001 SNOPR which concluded that the 12 SEER proposal would not
adversely affect competition. (DOJ, No. 285 printed in the Appendix to
this notice).
In establishing the new standards, DOE considered several factors
which have a potential bearing on industry competition and
consolidation. For each trial standard level DOE considered: Changes in
manufacturer net present value; cumulative regulatory burden; and
changes in annual cash flow. To further capture competitive effects,
DOE considered differential impacts on three sub-groups of
manufacturers, since higher efficiency standards will affect each group
of manufacturers differently. "Low Operating Cost
Manufacturers" observe a low cost, commodity-product strategy and
achieve a higher operating profit margin on their baseline equipment.
DOE's analysis indicates that this group of manufacturers will likely
benefit from higher standards. "High Operating Cost"
manufacturers typically place more of an emphasis on product
differentiation than cost leadership. For this group of manufacturers,
higher standards reduce opportunities for product differentiation and
lower profitability. Finally "Small Manufacturers" fall
into two groups; manufacturers of equipment for niche markets and
manufactures of indoor coils and fancoil units. As previously stated in
Section VI (D) (3), we do not expect coil manufacturers to face any
incremental burden as a result of new standards. Also we stated that
impacts on niche manufacturers have been largely addressed through the
creation of separate product classes for products used in space
contained applications.
In arriving at today's decision to adopt a 12 SEER standard, DOE
relied on the Department of Justice's expert opinion that a 13 SEER air
conditioner and heat pump standard raises competitive concerns (April
5, 2001 letter), and that a 12 SEER standard would not adversely affect
competition (October 19, 2001 letter). DOE also factored into
consideration the serious concerns regarding potential anti-competitive
effects at higher trial standard levels presented in the TSD. DOE's
analysis demonstrates that both High and Low Operating Cost
Manufacturer groups would experience negative cash flows in the years
leading up to the new standard under TSL3 and TSL4, but only the higher
operating cost group is expected to suffer a long term decline in
value, cash flow, and return on invested capital. Since Low Operating
Cost Manufacturers would likely benefit from 13 SEER standards, most of
the total financial burden due to the standards would need to be borne
by High Operating Cost Manufacturers. The differential impact between
the subgroups is $238 million at 12 SEER and rises to $429 million at
13 SEER. Due to this probable maldistribution of industry impacts at 13
SEER, DOE was particularly concerned that either accelerated industry
consolidation (i.e., less competitive market) or the stifling of
innovation could occur.

F. Effect on Utility or Performance

1. Dehumidification
The only comments regarding product utility pertained to the
impacts that more stringent standards may have on the ability of air-
conditioning equipment to properly dehumidify. Both Southern Company
and Mercatus Center claim that the lower latent cooling capacity
inherent in larger, more efficient single speed equipment would result
in dehumidification problems in humid climates. (Southern Company, No.
257 at pp. 3-4; Mercatus Center, No. 242 at p. 8).
As stated in the October 5, 2000 NOPR, ARI research has
demonstrated for hundreds of systems that latent heat removal is not
obviously impacted by increases in equipment efficiency at rated
conditions (i.e., 95&deg;F outdoor temperature).\15\ See 65 FR 59611-
59612. Nonetheless, DOE recognizes the humidity control problems that
exist in the southern region of the U.S. For the excessive humidity
conditions commonly experienced in the South,

[[Page 36391]]

the equipment may very likely not provide adequate dehumidification.
Equipment efficiency should not be viewed as the sole source of the
problem, however. Proper installation and maintenance practices also
likely play a large role in the equipment's performance, as well as
other factors, such as the duct system and the building shell
characteristics. All these factors play a role in how a system
dehumidifies. For these reasons, DOE does not believe the 12 SEER
standard adopted today will have an appreciable effect on the
performance of central air conditioners, and any problem with
dehumidification can be dealt with in a variety of ways other than
lowering the energy efficiency standard.
---------------------------------------------------------------------------

\15\ D. Godwin. 1998. "Latent Capacity of Unitary
Equipment." ASHRAE Transactions 98(2).
---------------------------------------------------------------------------

G. Electric System Reliability/Peak Power

1. Peak Power
As part of its analysis to determine the impacts of amended
efficiency standards, DOE quantified how increased standards affected
installed generation capacity, i.e., reduction in electrical power
demand. In response to DOE's proposal to withdraw the January 22 final
rule, several comments expressed concern that the 12 SEER standard
would have less of an impact on peak power demand than the 13 SEER
standard. (Austin Energy, No. 243 at p. 1; State of Connecticut, No.
279 at p. 1; Attorneys General of New York and Massachusetts, No. 277
at pp. 15-16; New York State Energy Research and Development Authority
(NYSERDA), No. 252 at p. 1; State of Vermont, No. 268 at p. 3; PG&E,
No. 274 at p. 3; State of Nevada, No. 271 at p. 2; National Grid, No.
241-OO at p. 3).
Regardless of SEER level, ACEEE asserted that DOE significantly
underestimated the peak demand impacts of more efficient air
conditioners. Specifically, ACEEE states that DOE's model to estimate
peak power impacts, NEMS-BRS, uses load shapes that underestimate the
effect that residential central air conditioners have on peak power by
a factor of more than two. To correct this problem, ACEEE recommends
correcting NEMS-BRS with load shape data that is more nationally
representative of central air conditioner power consumption. ACEEE
specifically recommends load shape data that has a Conservation Load
Factor (CLF) of 0.104. (ACEEE, No. 284 at pp. 8-11).
Both EEI and Southern Company assert that a 13 SEER standard could
actually increase peak power demand. EEI states that for units rated at
13 SEER and higher, there is no correlation between SEER and EER.\16\
So if the standard was raised to 13 SEER, EEI believes it is likely
that the manufacturers would use technologies to raise SEER values and
lower EER values, assuming it would lower their production costs. Thus,
the higher SEER values could very easily lead to lower EER values,
resulting in reduced energy savings in warmer climates, increased peak
demands associated with residential systems in all climates, and
increased need for peaking power plants. (EEI, No. 253 at pp. 2-3).
Southern Company adds that the reduction in peak demand from higher
efficiency standards is so long-term as to have no bearing on current
problems. Thus, it is entirely possible that the higher efficiency
levels could exacerbate a supply glut in the regions now experiencing
shortages ten to fifteen years from now. (Southern Company, No. 257 at
p. 3). Mercatus Center believes that higher SEER standards would cause
more people to use their air conditioners more due to their lower
operating costs. The result during a heat wave could increase overall
air conditioning usage, increasing peak demand and the risk of a
blackout, and leaving everyone without air conditioning. (Mercatus
Center, No. 242 at pp. 9-10).
---------------------------------------------------------------------------

\16\ EER, Energy Efficiency Ratio, is a steady-state measure of
energy efficiency which determines efficiency at a prescribed
outdoor temperature (95&deg;F), and is one of the test conditions in
the DOE test procedure used to develop the SEER. EER is generally
thought of as an efficiency descriptor that indicates the level of
performance during periods when electricity use by air conditioners
is at its peak.
---------------------------------------------------------------------------

First, in response to the comments submitted by EEI and Southern
Company, DOE has demonstrated in its technical analysis (See TSD,
Chapter 4) that in the efficiency range of 10 to 13 SEER, the EER, on
average, increases proportionally to the SEER. Thus, DOE maintains that
higher standards of up through 13 SEER will yield progressively greater
peak demand reductions. Mercatus Center's claims regarding increased
equipment sales leading to higher overall air conditioner use are not
substantiated. As presented earlier in the shipments forecasts
discussion, due to higher consumer purchase prices, DOE's shipments
model forecasts declining rather than increasing sales due to more
efficient standards. Thus, DOE concludes that there is a very low
probability that increased standards could actually lead to an increase
in peak demand.
As stated in the January 22 final rule regarding peak demand
impacts, DOE recognized that more research was needed to resolve the
issue of whether NEMS-BRS accurately estimates the peak demand
reductions resulting from air conditioner efficiency standards. See 66
FR 7182. To resolve this outstanding issue as well as address those
comments submitted by ACEEE in response to the July 25 SNOPR, DOE
conducted a comprehensive review of the end-use load shapes used by
NEMS-BRS, not only for the residential sector, but for the commercial,
industrial, and transportation sectors as well.\17\ DOE discovered a
number of problems associated with the specific load shapes. In the
case of the residential air-conditioning end-use, DOE determined that a
non-representative load shape was assigned to it. This non-
representative load shape peaks in October and has a correspondingly
high CLF. As discussed in the January 22 final rule, 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.\18\ The CLF is defined as:
---------------------------------------------------------------------------

\17\ Alternative Sectoral Load Shapes for NEMS, Department of
Energy-Energy Information Administration, Washington, D.C., August
2001.
\18\ 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]
TR23MY02.002

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

[[Page 36392]]

for a given amount of annual energy savings. See 66 FR 7181.
As a result of discovering several problems with the load shapes
within NEMS-BRS, an alternative set of sectoral end-use load shapes
were assigned to the 2002 version of NEMS-BRS that were distinctly
different than the load shapes used in prior versions of the model
(including the 2000 and 2001 versions). For example, in the case of the
residential air-conditioning end-use, the alternative version consists
of thirteen regional load shapes based on regions defined by the North
American Electric Reliability Council (NERC) as compared to the single
national load shape used in prior versions. Depending on the region of
the country, the thirteen air-conditioning load shapes have CLFs
ranging from 0.063 to 0.183 and generally peak in either July or
August. Although the alternative load shapes specific to the
residential air-conditioning end-use are more representative (e.g., the
loads peak during the summer months), switching to the entire set of
alternative sectoral end-use load shapes results in smaller peak-to-
average system loads. As a consequence, the overall built-up system
load shapes using the alternative sectoral end-use load shapes have
less pronounced peaks than those that are used in prior versions of
NEMS-BRS. Because the built-up system loads within the 2002 version of
NEMS-BRS have less pronounced peaks, the impact of reducing the energy
use on a relatively peaky end-use like residential air-conditioning
(such as through increased efficiency standards) will have less of an
affect on overall system capacity.
New NEMS-BRS standard case runs were conducted with the entire set
of alternative sectoral end-use load shapes, including the updated
residential air-conditioning load shapes, to determine their impact on
system capacity. These new runs were conducted with the 2000 version of
NEMS-BRS by replacing the existing set of sectoral load shapes with the
alternative versions. As expected, the installed generation capacity
reductions based on the new NEMS-BRS runs are lower than those produced
for the January 22 final rule. In the case of today's final rule, the
installed generation capacity reduction is now estimated to be 8.7 GW
as opposed to the 10.6 GW provided in the January 22 final rule. A
complete set of updated installed generation capacity reduction impacts
can be found in Appendix M of the TSD.
2. Reliability
As stated in the July 25 SNOPR, DOE has considered as a benefit the
potential of the proposed standards to improve the reliability of the
electric generation and distribution system by reducing the need for
installed generation capacity. See July 25 SNOPR, 66 FR 38841.
Several comments, while not disputing DOE's conclusion that air
conditioner standards would improve electric system reliability, argued
that the potential for improving reliability would be reduced by going
forward with the proposed standards (12 SEER) instead of those
standards issued in the January 22 final rule (13 SEER). (ACEEE, No.
284 at p. 2; NRDC, No. 250 at p. 23; NEEP, No. 273 at p. 1; ASE, No.
282 at p. 2; CEC, No. 263 at p. 1; National Association of Regulatory
Utility Commissioners (NARUC), No. 260 at p. 2).
Southern Company, which states that raising the standard from 12 to
13 SEER will have minimal effect on peak demand growth, believes this
efficiency increase will have even less effect on reliability, because
there is not a direct relationship between peak demand growth and
reduced electric system reliability. The Southern Company claims that
the reduction in peak demand from higher efficiency standards is so
long-term as to have no bearing on current problems. It is entirely
possible that the higher efficiency levels could exacerbate a supply
glut in the regions now experiencing shortages ten to fifteen years
from now. (Southern Company, No. 257 at p. 3). For different reasons,
Mercatus Center also argues that higher efficiency standards would not
improve and could possibly reduce electric system reliability. As
stated in their arguments pertaining to peak demand impacts, they
believe higher standards could lead to increased use of air-
conditioning products due their lower operating costs. During periods
of peak demand this could lead to an overall increase in air-
conditioning. The resulting increase in peak demand heightens the risk
of blackouts. (Mercatus Center, No. 242 at pp. 9-10).
DOE agrees with the assertion of the Southern Company that the
primary effects of the proposed efficiency standards are so long term
(more than 10 years in the future) that they are very unlikely to have
any significant effect on electric system reliability. While DOE still
believes that near term improvements in energy efficiency can help
improve the reliability of systems that now have inadequate generating
or transmission capacity (e.g., California), the primary effect of
energy efficiency standards is likely beyond the long-term planning
horizon of most electric systems. This means that long term electric
system reliability is determined primarily by how well system planners
(generators, utilities, regulators) anticipate future loads, not by how
large those loads will be. In other words, planners in most areas of
the country generally do not attempt to provide enough generating
capacity to satisfy peak loads as the marginal cost for satisfying peak
loads is generally cheaper using means other than the construction of
large generating facilities (e.g., the use of relatively small
"peaker" plants or the purchase of supply from outside the
planning region). DOE knows of no analysis which has found a
correlation between system load factor and system reliability over the
long term. Nor is DOE aware of any analysis that found a correlation
between the long term rate of growth of electricity demand and system
reliability.
Higher efficiency standards for central air conditioners and heat
pumps are expected to reduce significantly the peak loads of electric
systems in the future, thus enabling a reduction in the number of new
power plants and transmission lines required to meet future demand.
Electric system planners will take these efficiency improvements and
other factors affecting future electricity demand into account when
estimating how many new plants and transmission lines will be required
to meet future demand, while maintaining or improving system
reliability. Long term system reliability will be determined by how
accurately system planners anticipate electricity demand and whether
they take steps to ensure the addition of sufficient electricity
generating, transmission and distribution capacity to meet this
expected demand, while maintaining adequate reserve margins. For
example, EIA's Annual Energy Outlook 2001 forecast that the cumulative
requirements for additional electricity generating capacity by 2020
might range from roughly 350 gigawatts, assuming a low rate of economic
growth, to nearly 500 gigawatts, assuming a comparatively high rate of
economic growth. This compares to a difference of approximately 4
gigawatts between the estimated effects on capacity requirements of a
SEER 12 standard and those of a SEER 13 standard. The range of
estimated requirements for additional electricity generating capacity
that result from varying assumptions about the rate of change in end-
use technology

[[Page 36393]]

(in all sectors) and the rate of economic growth is even greater.

H. Other Issues

1. Minimum EER Requirement
Several comments were in support of a minimum EER requirement to
ensure more efficient operation at high outdoor temperatures during
periods when electricity use by air conditioners is at its peak.
(ACEEE, No. 284 at p. 3; Austin Energy, No. 243 at p. 1; PG&E, No. 274
at p. 1). NARUC passed a resolution in July, 2000, urging DOE to raise
the standard by 30 percent (i.e., to 13 SEER) with a minimum peak
efficiency performance requirement. (NARUC, No. 260 at p. 2). NEEP also
supports a standard of at least 13 SEER with a corresponding minimum
EER of 11.6. (NEEP, No. 273 at p. 2). NRDC believes that DOE cannot set
a standard at the highest level that is technologically feasible and
economically justified if it does not include in that standard a
minimum EER requirement. NRDC adds that this recommendation does not
mean that EER would drop as SEER increases; it simply reflects NRDC's
concern that EER might not rise as quickly without a separate
regulation than it would with one. (NRDC, No. 250 at p. 32).
York and Southern Company are both opposed to a minimum EER
requirement. York asserts that an EER standard could be counter-
productive by discouraging variable speed and modulating equipment,
which could save consumers substantial amounts of money over the
cooling season. (York, No. 270 at p. 4). Southern Company believes
that, regardless of cost-effectiveness, DOE does not possess regulatory
authority to specify performance measures necessary to insure cost
savings to consumers (SEER) and peak demand benefits to electricity
suppliers (EER). (Southern Company, No. 257 at p. 4).
As stated in the January 22 final rule, DOE is still convinced that
the stringent physical relationship between EER and SEER in equipment
rated through the adopted standard of 12 SEER, which is comprised
exclusively of non-modulating equipment, will remain intact for the
foreseeable future. Thus, there is no strong need for a minimum EER
requirement in addition to a minimum SEER standard. See January 22
final rule, 66 FR 7183.
With regard to the use of variable speed or modulating
technologies, even if these 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 oversizing, 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.
Although DOE 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.
Finally, although DOE 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
ACEEE and PG&E were both in support of a prescriptive requirement
for adaptive expansion devices such as thermostatic expansion valves
(TXV). (ACEEE, No. 284 at p. 3; PG&E, No. 274 at p. 1). NEEP was more
expansive on the topic by stating that the evidence in the record
supports a TXV requirement. NEEP claims that TXVs provide additional
efficiency benefits, over and above the benefits captured in the SEER
rating procedure. They assert that central air conditioners with TXVs
suffer lower efficiency degradation when a unit is improperly
installed. The result is that TXVs can provide 12 percent energy
savings over and above the energy savings associated with increasing
SEERs. (NEEP, No. 273 at pp. 2, 4).
York agrees with DOE's decision in the both the January 22 final
rule and the July 25 SNOPR not to impose a TXV requirement. York claims
that imposing a TXV requirement in this rule would circumvent the test
procedure. Also, it asserts that key data for evaluating the impacts of
TXVs on system performance have not been thoroughly reviewed by all
interested parties. (York, No. 270 at p. 4).
As stated in the January 22 final rule, a performance-based
approach is also our preference and is certainly in the spirit of EPCA.
See 66 FR 7183-7184. 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. DOE is 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 parties. That said, DOE favors a SEER test procedure that
fairly evaluates equipment performance under conditions that represent
those encountered in the field. DOE prefers to encourage correct
charging or proper airflow but recognizes that practical barriers
exist. Although no immediate action will be taken to address field
equipment performance in the test procedure currently under revision,
attempts may be made in future test procedure revisions to evaluate
whether the SEER test procedure can and should be amended to better
reflect equipment performance under improper charge or airflow.
In sum, this rulemaking does not adopt a TXV requirement. Any
alterations in the SEER test procedure further to encourage the use of
TXVs may be undertaken in a separate rulemaking process after proposed
revisions to the test procedure have been finalized. We also 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. State Exemption From DOE Standards
The Council of State Governments, Eastern Regional Conference (ERC)
states that if DOE fails to implement a 13 SEER standard, then ERC
member States will seek a waiver from the Federal standard and
implement the

[[Page 36394]]

higher standard at the State level, as the States of California and
Oregon are currently doing. ERC goes on to quote 42 U.S.C. 6297(d)
"Waiver of Federal Preemption" where it states that
"Any state * * * which provides for any energy
conservation standard for any type of covered product for which there
is a Federal energy conservation standard * * * may file a
petition with the Secretary (of Energy) requesting that such State
regulation become effective with respect to such covered
product." (ERC, No. 241-JJ at p. 1).
DOE will promptly act upon any petition for waiver that may be
submitted by a State pursuant to section 327(d) of EPCA (42 U.S.C.
6297(d)). Section 327(d) provides that DOE must prescribe a rule
granting a waiver from Federal preemption if the State establishes by a
preponderance of the evidence that a State regulation is needed to meet
"unusual and compelling State or local energy or water
interests," as that phrase is defined by the statute (42 U.S.C.
6297(d)(1)(B)). Section 327(d) further provides that DOE may not grant
a waiver if interested persons establish by a preponderance of the
evidence that the State regulation would significantly burden
manufacturing, marketing, distribution, sale, or servicing of the
covered product on a national basis (42 U.S.C. 6297(d)(3)). Finally,
section 327(d) establishes the timetable and procedure that must be
followed for acting upon petitions for waiver from Federal preemption.
4. Effective Date
DOE received written and oral comments with regard to DOE's
proposed effective date (i.e., the date when the covered products must
comply with the new standards for the proposed amended standards
contained in the July 25 SNOPR). In written comments, NRDC notes that
the proposed effective date in the July 25 SNOPR is approximately six
months later than that in the January 22 final rule, and claims that
any delay in the effective date of new standards would reduce their
benefits. NRDC adds that section 325(d) of EPCA (42 U.S.C. 6295(d))
does not require DOE to provide a five-year lead time for compliance by
manufacturers after publication of a final rule. (NRDC, No. 250 at p.
34). TNRCC recommends that rather than making the proposed standards
effective in 2006, DOE should accelerate the effective date of the
standards from the year 2006 to 2004, thereby providing improved energy
efficiency and resultant air quality benefits as soon as reasonably
practicable. (TNRCC, No. 286 at p. 2). At the public hearing on the
July 25 SNOPR, representatives of the California Energy Commission,
PG&E, and Goodman also urged DOE to establish an earlier effective date
if a 12 SEER standard was adopted. (Hearing Transcript, at pp. 142-144
and 164-165). In initial written comments, ARI stated a willingness to
consent to the proposed 5-years-from-date-of-publication effective date
for the proposed 12 SEER standard. (ARI, No. 259 at p. 36). In
supplemental comments submitted after the close of the comment period,
ARI responded to the comments that requested an earlier effective date
by stating that ARI would accept a compliance date of January 23, 2006,
the same effective date as provided in the January 22 final rule (ARI,
No. 289). ARI stated that any agreement on its part to an earlier
effective date should not be deemed as a precedent by DOE or concession
by ARI with respect to future rulemaking proceedings.
Although section 325(d) of EPCA does not specifically state that
initial amended standards become applicable to the manufacture of
covered products after a certain number of years elapse following
publication of a notice of final rulemaking, it provides a schedule of
specific dates for the promulgation of a final rule and of specific
dates on which an initial amended SEER and an initial amended HSPF
established by a final rule would apply to the manufacture of new
central air conditioners and new central air conditioning heat pumps.
In the past, in circumstances where DOE was unable to publish a final
rule by a deadline date established by a statute with scheduled
compliance dates, DOE has had a practice of adjusting the statutorily
scheduled date such a rule becomes enforceable to allow for the same
amount of lead time as provided in the original statutory schedule.
However, the application of this practice in any particular rulemaking
is subject to public comment and to exceptions in special
circumstances. See, e.g., 61 FR 10622, 10625 (March 14, 1996) (final
rule establishing the Alternative Fuel Vehicle Acquisition Program with
a compliance schedule that varied from the statutory schedule
established by the Energy Policy Act of 1992 and that was subject to
case-by-case exceptions). In this rulemaking, all interested persons
who have an interest in the date that the final rule becomes
enforceable?including representatives of all of the manufacturers
who would have to comply with that rule?agree that the full
amount of time between date of publication and the dates on which the
rule applies in the statutory schedule is not needed for central air
conditioner and central air conditioning heat pump manufacturers to
come into compliance with a 12 SEER standard. Moreover, if, as a result
of unforeseen circumstances, a particular manufacturer can show
hardship, inequity, or unfair distributions of burdens, the standard
would be subject to case-by-case exception pursuant to the authority of
the DOE Office of Hearing and Appeals under section 504 of the DOE
Organization Act (42 U.S.C. 7194), as implemented at subpart B of 10
CFR part 1003. On the basis of the foregoing, DOE has decided to fix
January 23, 2006, as the date on which the amended standards set forth
in today's final rule apply to the manufacture of central air
conditioners and central air conditioning heat pumps.
5. Environmental Impacts
Several comments stated that there would be greater environmental
benefits under a 13 SEER standard. (Goodman, No. 269 at p. 2; Austin
Energy, No. 243 at p. 1; State of Connecticut, No. 279 at p. 2; State
of Maine, No. 254 at pp. 1-2). The Attorneys General from the States of
New York and Massachusetts asserted that DOE's assessment of
environmental impact used the wrong "no action" scenario;
in their view, the correct "no action" scenario or baseline
for measuring impacts is the SEER 13 standard in the January 22 rule
(Attorneys General of New York and Massachusetts, No. 277 at p. 11). In
addition to the carbon and NO_X emissions, the Attorneys
General state that coal-fired power plants are dominant sources of
mercury and particulate pollution nationwide and that by ignoring these
impacts of its SNOPR, DOE violated the National Environmental Policy
Act (NEPA). (Attorneys General of New York and Massachusetts, No. 277
at pp. 14-15).
DOE disagrees with the comment that DOE failed to comply with NEPA
in proposing 12 SEER standards in the July 25 SNOPR. As previously
discussed, DOE does not believe the standards in the January 22 final
rule constitute the baseline for assessing the impact of today's final
rule because those standards never became effective. The correct
baseline, and the one used for the "no action" alternative
in the EA, are the currently effective NAECA standards.
DOE's environmental assessment (EA) examined the environmental
impacts of all trial standard levels being considered. See Section
VIII.A. of this

[[Page 36395]]

Supplementary Information. All of the alternatives considered in DOE's
analysis were found to have beneficial environmental impacts compared
to the "no action" alternative. Under the "no-
action" or base case alternative, the minimum efficiency
requirements would remain at their current levels: a cooling efficiency
of 10 SEER for split system air conditioners and heat pumps, a cooling
efficiency of 9.7 SEER for single package system air conditioners and
heat pumps, a heating efficiency of 6.8 HSPF for split system heat
pumps, and a heating efficiency of 6.6 HSPF for single package system
heat pumps. The primary focus of the EA is the effect of alternative
efficiency standards on air resources resulting from decreased
emissions from fossil-fueled electricity generation. For each of the
trial standard levels, DOE used the NEMS-BRS model to calculate total
power sector emissions of nitrogen oxide, sulfur dioxide, and carbon.
As explained in Section VIII.A. of this Supplementary Information, on
the basis of the EA, DOE determined that the environmental effects
associated with the standard levels in today's final rule are not
significant.
DOE has corrected an error that DOE discovered in the NEMS-BRS, the
model used by DOE to estimate both peak power and power plant emission
impacts due to appliance standards. As discussed earlier (see Peak
Power), DOE conducted a comprehensive review of the end-use load shapes
used by NEMS-BRS, not only for the residential sector and,
specifically, the air-conditioning end-use, but for the commercial,
industrial, and transportation sectors as well. Several problems were
discovered with the load shapes and, as a result, an alternative set of
sectoral end-use load shapes were assigned to NEMS-BRS. By implementing
a new set of sectoral load shapes, NEMS-BRS estimates greater power
plant emission impacts (in the form of reduced CO₂ and
NO_X emissions) from increased central air conditioner and
heat pump standards. With regard to NO_X emissions, the
actual reductions that result from more stringent efficiency standards
are likely to be less than the original DOE estimates because some
provisions of the Clean Air Act (CAA) were not explicitly modeled in
the version of NEMS-BRS used for this analysis (AEO2000). Some of these
provisions have been incorporated in subsequent AEOs. In addition, EPA
is expected to promulgate regulations during the analytic period in
question that are likely to further constrain NO_X emissions
and reduce the impact that efficiency standards would have on
NO_X and other environmental emissions. Appendix M of the TSD
includes an updated set of power plant emission impacts. The changes
resulting from this NEMS-BRS error correction do not affect DOE's
finding of no significant impact.
6. Employment Impacts
With regard to the impact that amended central air conditioner and
heat pump standards have on national employment, both ARI and Rheem are
concerned that high efficiency standards can lead to job losses in the
air-conditioning industry's manufacturing sector. Rheem states that
fewer units will be sold due to the higher purchase prices associated
with more efficient equipment. Fewer equipment sales will in turn
reduce the need for personnel in manufacturing facilities and design
groups. (Rheem, No. 248 at p. 3). ARI states that DOE's decision to
issue 13 SEER standards in its January 22 final rule was in part based
on the fact that unemployment was then at the lowest rate in 30 years.
Because the current state of the national economy is certainly worse
than when DOE issued its January 22 final rule, ARI claims that 13 SEER
standards would have a much worse impact on the air-conditioning
industry than initially forecasted by DOE. In any case, ARI points out
that DOE's analysis demonstrates that 12 SEER standards would have
approximately 50 percent fewer job losses compared to 13 SEER
standards. ARI asserts that this difference in job losses is
significant and demonstrates that the proposed 12 SEER standards are a
much better choice. (ARI, No. 259 at pp. 11-12, 31-32).
OOE has a much different perspective on DOE's employment impact
analysis. OOE states that it is purely speculative to claim that there
is a distinguishable difference between the impacts that 12 SEER and 13
SEER standards have on the national economy. The accuracy of the
macroeconomic model used by DOE to estimate employment impacts does not
allow for such a distinction. (OOE, No. 275 at pp. 3-4).
As stated in the January 22 final rule, DOE estimated the impacts
of the new standards on national labor demand using an input/output
model of the U.S. economy. See 66 FR 7192. The model characterizes the
interconnections between 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,\19\ producing a gain of
jobs in the manufacturing sector that is less than the loss of jobs in
other sectors of the economy. 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.
---------------------------------------------------------------------------

\19\ 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. The following reasons were given in the January 22
final rule for the conclusion that any modest changes in employment
were in doubt (66 FR 7192):
*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 identify and consider separately any
employment impacts beyond the calculation of net present value.
Although, as noted by ARI, unemployment is no longer as low as it
was at the time the January 22 final rule was issued, the annual
unemployment rate in 2001, (4.8 percent) is only slightly higher than
the annual rates for 1998, 1999, and 2000 and still less than the
annual rates for all other years in the 1990's.\20\ Thus, after
discounting the first factor cited above, and considering the other two
legitimate concerns regarding the interpretation and use of the
employment impacts analysis, DOE cannot conclude that the central air
conditioner and heat pump standards issued in today's final rule are
likely to

[[Page 36396]]

result in appreciable job losses to the nation.
---------------------------------------------------------------------------

\20\ U.S. Department of Labor?Bureau of Labor Statistics
(BLS), Labor Force Statistics from the Current Population Survey.
BLS Web site http://stats.bls.gov:80/cps/home.htm.
---------------------------------------------------------------------------

7. Space-Constrained Products
a. Through-the-Wall Products
All parties commenting on DOE's proposed standards for through-the-
wall products supported the proposed standards?10.9 SEER and 7.1
HSPF for split system air conditioners and heat pumps and 10.6 SEER and
7.0 HSPF for single package air conditioners and heat pumps. (Austin
Energy, No. 243 at p. 3; OOE, No. 275 at p. 4; Lennox, No. 272 at p. 3;
ASE, No. 282 at p. 4; ACEEE, No. 284 at pp. 13-14).
Thus, DOE is adopting as minimum efficiency standards for the
through-the-wall products the standards proposed in the July 25 SNOPR.
b. Small Duct, High Velocity Systems
DOE received information in the rulemaking that indicated that the
special characteristics of small duct, high velocity (SDHV) air
conditioner and heat pump systems make it unlikely such systems could
meet the 12 SEER/7.4 HSPF standard established for conventional
products. Spacepak, Unico, and ARI all support the creation of a
separate product class for SDHV systems and the development of
technologically feasible and economically justified standards for this
product. Although all three comments are in agreement with regard to
the establishment of a new product class for SDHV systems, Unico and
ARI are in disagreement over how these systems should be tested. While
ARI recommends that no special consideration be given for SDHV systems
and, therefore, no changes be made to the test procedures for central
air conditioners and heat pumps, Unico proposes three options for
amending the test procedure to rate SDHV systems. The three options
include: (1) A coil-only test with a higher allowable coil pressure
drop and use of a default fan power; (2) coil and blower tested with a
1.2 inch minimum external static pressure; and (3) coil-only testing
with existing coil pressure drop allowance and default fan power
without mention of the blower. (Spacepak, No. 267 at p. 1; Unico, No.
251 at pp. 3-4; ARI, No. 259 at p. 35).
While DOE agrees with public comments stating that these systems
should not be subject to the standards set for conventional products,
DOE does not currently have an analytical basis for setting a new
standard for SDHV systems. DOE is currently in the process of amending
the test procedure for rating the performance of central air
conditioners and heat pumps and will take the above comments into
consideration when determining the appropriate testing requirements for
SDHV systems. DOE has started the research needed to propose amended
standards for SDHV systems and it intends to initiate a rulemaking
shortly for this product class.
8. Basis for HSPF Level
ARI stated in its comments that if a 12 SEER standard is adopted
for central air conditioning heat pumps, the HSPF should be no higher
than 7.3. ARI believes the HSPF should be based on an analysis of the
SEER-HSPF relationships across equipment of varying capacity ratings.
It faults DOE's analysis for relying on an analysis of only 3-ton
equipment to determine the HSPF. (ARI, No. 259 at p. 4).
As DOE explained in the preamble to the January 22 final rule, DOE
established the SEER-HSPF pairings in order to maintain the offset
between the minimum SEER and the minimum HSPF in the current standards.
Because heating energy is a large fraction of total heat pump energy
consumption, DOE stated it would not relax the HSPF level in the
absence of sound evidence regarding the burdens that would be mitigated
(66 FR 7184). DOE continues to think an HSPF of 7.4 is the appropriate
level for 12 SEER, and today adopts that level. DOE's decision is
supported by data discussed in the TSD (Section 4.6.2.1) which shows
that most models of equipment below 3-tons meet or exceed an HSPF of
7.4, and almost a third of models available below 20,000 BTU/hr meet or
exceed an HSPF of 7.4.
9. Non-Regulatory Approaches
ARI, Carrier, and Mercatus Center contended that DOE did not
adequately evaluate the national impacts of non-regulatory programs for
improving the efficiency of central air conditioners and heat pumps.
ARI claimed that by combining several non-regulatory alternatives, such
as consumer tax credits, consumer rebates and low-income subsidies, the
amount of energy saved could increase to 3.5 quads while the net
present value would remain relatively unchanged. (ARI, No. 259 at pp.
15-16). Carrier points out that DOE overlooked the energy saving
benefits due to the proper installation and maintenance of air-
conditioning equipment. Carrier claims that the total energy savings
from these actions far exceed those limited to increasing the SEER of
the equipment. In stating the proposed 12 SEER standards represent an
appropriate level for the entire nation, Carrier recognizes that there
are some regions of the country that could benefit from higher
efficiency for unique climate or electrical supply reasons. In these
instances, government agencies and utilities should provide incentives
to encourage the use of higher efficiency equipment. (Carrier, No. 280
at p. 3). Mercatus Center states that DOE does not evaluate non-
regulatory programs adequately because it assumes their effects rather
than estimating them based on any credible data or evidence. (Mercatus
Center, No. 242 at p. 13).
DOE disagrees with this comment. In determining the base case for
the analysis of the highest efficiency standards that are
technologically feasible and economically justified (i.e., the energy
consumption likely to occur in the absence of amended standards), DOE
gave adequate consideration to all non-regulatory market forces likely
to occur in the absence of amended standards. Additionally, the
Regulatory Impact Analysis estimated the national energy savings and
net present value that would result from non-regulatory approaches
including: (1) Consumer product labeling, (2) public education, (3)
prescriptive standards, (4) consumer tax credits, (5) manufacturer tax
credits, (6) consumer rebates, (7) low income subsidies, (8) voluntary
efficiency targets, and (9) mass government purchases. The analysis
found that none of them would save an equivalent amount of energy as
energy conservation standards.
10. Energy Policy
On the issue of energy policy, several comments claimed that DOE's
action of withdrawing the 13 SEER standards issued in the January 22
final rule is not consistent with the current Administration's own
National Energy Policy. ASAP, ASE, CEC, and NRDC all note that the
Administration calls for appliance standards as way to moderate growth
in electricity demand and limit consumer energy bills. (ASAP, No. 244
at p. 1; ASE, No. 282 at p. 2; CEC, No. 263 at p. 2; NRDC, No. 250 at
p. 28). NRDC also states that the relaxation of the 13 SEER standard is
inconsistent with the obligations of the United States under the United
Nations Framework Convention on Climate Change (UNFCCC), to which our
country became a Party with the advice and consent of the Senate in
1992. (NRDC, No. 250 at pp. 29-30).
DOE disagrees that its action to finalize 12 SEER standards for
central air conditioners and heat pumps is inconsistent with either the
Administration's National Energy Policy or with the United States'
obligations under the UNFCCC. The 12 SEER

[[Page 36397]]

standards being finalized today significantly increase the minimum
efficiency requirements for central air conditioners and heat pumps.
Thus, the policy to amend the standards is consistent with the
Administration's call to use appliance standards as a method to
moderate growth in electricity demand and limit consumer energy bills.

VII. Analytical Results and Conclusions

A. Overview of Analytical Results

1. General
Although DOE reassessed the benefits and burdens of the trial
standard levels in arriving at the determinations in today's rule, the
underlying analyses are unchanged from those presented in the January
22 final rule except for additional analysis of through-the-wall
product classes included as Appendix L to the TSD. Briefly, DOE
examined five standard levels. Table 3 presents the trial standards
levels analyzed and the corresponding efficiency level for each class
of product. Trial Standard Level 5 is the Max Tech Level for each class
of product. Trial Standard Level 4 was the one DOE adopted for the
standards set forth in the January 22 final rule. Trial Standard Level
2 is the one DOE today determines to be the maximum efficiency that is
technologically feasible and economically justified.

Table 3.?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 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 forecasts from the
Energy Information Agency's 2000 Annual Energy Outlook (AEO): (1)
Reference Case, (2) High Growth Case, and (3) Low Growth Case. DOE
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. See
October 5, 2000 NOPR for an explanation of the three scenarios (65 FR
59596, notes 10 through 12 and accompanying text). Under the standard
levels in today's rule, DOE believes that the NAECA scenario most
closely represents the likeliest impact of the new standards, as
explained in Chapter 8 of the TSD. DOE analyzed two manufacturer cost
scenarios: (1) Based on reverse engineering estimates, and (2) based on
ARI-provided mean cost estimates. For the reasons given in the preamble
to the January 22 final rule (66 FR 7177-78), DOE expects manufacturer
costs under the amended standards will lie closer to the estimates
produced through DOE's reverse engineering analysis, which lie between
ARI's minimum and ARI's mean cost values. DOE 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.
2. Through-the-Wall Products
In response to comments on the October 5, 2000 NOPR, DOE conducted
additional analysis on the cost and technical issues related to
through-the-wall air conditioner and heat pump products. The analysis
is described in detail in Appendix L of the TSD and is summarized here.
DOE performed a design assessment on two split through-the-wall
systems and one packaged through-the-wall system. All systems are
designed primarily for the replacement market and fit the physical
definition of through-the-wall equipment proposed in the October 5,
2000 NOPR and July 25 SNOPR. The design assessment sought to identify
the cost and efficiency impacts of employing commonly applied
techniques to improve efficiency including reduction of air leakage and
improvement in airflow, utilizing more efficient compression and fan
motors, and increasing heat exchanger surface area. Emerging
technologies and modulating technologies were not considered since they
are not likely to be applied in conventional baseline equipment.
The cost estimation for the analysis was based on a modified
version of the reverse engineering cost models developed as part of
this rulemaking for conventional products. The performance impacts of
employing various design options were estimated utilizing a spreadsheet
model populated with actual performance data and engineering
guidelines.
The analysis concluded that utilizing commonly applied technologies
and designs, the most constrained through-the-wall split-system
analysis could increase its SEER rating from 10.0 SEER to as high as
11.4 SEER, and the packaged system analysis could increase its SEER
rating from 9.7 SEER to 10.6 SEER. Employing all improvements would add
$106 and $129 to the retail price of the equipment, respectively,
comparable to the increases expected in conventional equipment moving
to a 12 SEER standard.
To explore the effects that more stringent standards for through-
the-wall products would have on consumers, DOE performed a life-cycle
cost analysis. The life-cycle cost analysis for through-the-wall
consumers used a subset of consumers identified as living in multi-
family dwellings, which are the predominate application for through-
the-wall products.
In the July 25 SNOPR, DOE proposed, based on its analysis, a 10.9
SEER/7.1 HSPF standard for through-the-wall split systems and a 10.6
SEER/7.0 HSPF standard for through-the-wall single package system
products. After considering public comments, all of which supported the
proposed levels, DOE today adopts those levels as final standards for
through-the-wall products.
3. Small Duct, High Velocity Systems
In response to comments on the July 25, 2001 SNOPR, DOE has
determined that additional analysis on the cost and technical issues
related to SDHV air conditioner and heat pump products are

[[Page 36398]]

needed to determine appropriate minimum efficiency standards for this
class of product. The analysis plan for establishing the manufacturing
cost and efficiency relationship for SDHV systems has yet to be
developed, but DOE intends to involve the manufacturers that produce
these products (Spacepak and Unico) in the planning process.
To explore the effects that more stringent standards for SDHV
systems have on consumers, DOE intends to perform a life-cycle cost
analysis. The life-cycle cost analysis for SDHV consumers will use a
subset of consumers identified as probable candidates for the
application of SDHV products.
Although DOE has concluded that SDHV systems warrant their own
product class, it has yet to determine an appropriate minimum
efficiency standard for them. Therefore, this final rule provides that
the NAECA-prescribed minimum efficiency standards covering all product
types (e.g., 10 SEER/6.8 HSPF for split system air conditioners) will
remain applicable to SDHV systems. DOE intends to conduct a separate
rulemaking for SDHV systems to establish appropriate minimum efficiency
standards for this class of product.

B. Conclusions Regarding Conventional Products

EPCA specifies that any new or amended energy conservation standard
for any type (or class) of covered product shall be designed to achieve
the maximum improvement in energy efficiency which the Secretary
determines is technologically feasible and economically justified (42
U.S.C. 6295(o)(2)(A)). In determining whether a standard is
economically justified, the Secretary must determine whether the
benefits of the standard exceed its burdens (42 U.S.C.
6295(o)(2)(B)(i)). The amended standard must "result in
significant conservation of energy" (42 U.S.C. 6295(o)(3)(B)).
In conducting its analysis, DOE considers the impacts of standards
beginning with the Max Tech Level, i.e., Trial Standard Level 5 in this
rulemaking. DOE then considers less efficient levels until it reaches
the level which is both technologically feasible and economically
justified.
To aid the reader in the discussion of the benefits and burdens of
the trial standard levels, DOE includes a summary of the analysis
results for all of the levels in Table 4.\21\ Table 4 presents a
summary of quantitative analysis results for each trial standard level
based on the assumptions DOE considers 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 effectgs are discounted to 1998 dollars.

Table 4.?Summary of Quantitative Results \1\
----------------------------------------------------------------------------------------------------------------
Trial Std 1 Trial Std 2 Trial Std 3 Trial Std 4 Trial Std 5
----------------------------------------------------------------------------------------------------------------
SEER levels for most products..... 11............ 12............ 12 for CAC/13 13........... 18
for HP.
Primary Energy Saved (quads)...... 1.7........... 3.0........... 3.5........... 4.2.......... 8.8
Generation Capacity Offset (GW)... 4.4........... 8.7........... 10.1.......... 12.6......... 21.9
-----------------------------------
NPV ($billion)
----------------------------------------------------------------------------------------------------------------
7% Discount Rate............ 2............. 2............. 1............. 1............ (10)
-----------------------------------
Industry Impacts (million $) \2\
----------------------------------------------------------------------------------------------------------------
Cumulative Change in (30).......... (159)......... (171)......... (303)........ ?
Industry NPV.
Differential impact between 75............ 238........... 261........... 429.......... ?
Industry Sub-groups \3\.
Cumulative Regulatory Burden on (>509)..... (>638)..... (>650)..... (>782).... ?
Industry.
Minimum net cash flow............. 62............ 31............ 18............ (3).......... ?
-----------------------------------
Life-Cycle Cost Savings ($) \4\
----------------------------------------------------------------------------------------------------------------
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
-----------------------------------
Equipment Price Increase ($)
----------------------------------------------------------------------------------------------------------------
Split AC.................... 91............ 213........... 213........... 335.......... 754
Packaged AC....................... 89............ 158........... 158........... 425.......... 859
Split HP.......................... 55............ 144........... 332........... 332.......... 1039
Packaged Heat Pump................ 92............ 149........... 435........... 435.......... 985
-----------------------------------
Fraction of all Consumers with Net LCC Losses >2% (%)
----------------------------------------------------------------------------------------------------------------
Split AC.................... 2............. 25............ 25............ 39........... 68
Packaged AC....................... 1............. 9............. 9............. 52........... 73
Split HP.......................... 0............. 0............. 6............. 6............ 57

[[Page 36399]]

Packaged Heat Pump................ 0............. 0............. 12............ 12........... 48
-----------------------------------
Fraction of Low Income Consumers with Net LCC Losses >2% (%)
----------------------------------------------------------------------------------------------------------------
Split AC.................... 5............. 34............ 34............ 50........... 77
Packaged AC....................... 2............. 14............ 14............ 61........... 80
Split HP.......................... 0............. 0............. 12............ 12........... 75
Packaged Heat Pump................ 0............. 0............. 20............ 20........... 66
----------------------------------------------------------------------------------------------------------------
\1\ Parentheses indicate negative (-) values. Unless otherwise noted, Trial Standard Levels 1-3 refer to
the NAECA efficiency scenario, and Trial Standard Levels 4 and 5 refer to the Roll-up efficiency scenario.
\2\ Not calculated at Trial Standard Level 5.
\3\ The benefit accruing to the Higher Operating Cost subgroup compared to the Lower Operating Cost subgroup.
\4\ Negative values indicate LCC increases.

In addition to the quantitative results, DOE also considers other
burdens and benefits that might affect the economic justification.
The potential to improve the reliability of the electricity system
is considered by some to be the major benefit that DOE had 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 DOE's analysis as savings in consumer
utility bills. However, in areas that are unable to maintain adequate
capacity reserves, the value of avoided blackouts associated with
reductions in peak demand often far exceed the normal costs of capacity
expansion.\22\ DOE has reexamined claims that the energy efficiency
standards under consideration could improve significantly electric
system reliability over the long term (see discussion at Section
VI.G.2).
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

DOE also recognizes that the adopted standards could result in
additional unquantifiable benefits and burdens. These include the
avoidance of environmental impacts associated with the siting of some
powerplants, a possible increase in health problems caused by consumers
foregoing 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.
First DOE considered Trial Standard Level 5, the Max Tech Level for
each of four classes of products, representing uniform 18 SEER
requirements. The manufacturing cost DOE assumes for Trial Standard
Level 5 is equal to the cost of 15 SEER equipment, rather than the cost
of 18 SEER equipment, since manufacturer cost data were not available
for the 18 SEER efficiency levels. Because of that assumption, DOE
expects that its estimate of the cost and price of the product at Trial
Standard Level 5 are understated. Trial Standard Level 5 would likely
save 8.8 quads of energy between 2006 and 2030 which DOE considers
significant. The energy savings through 2020 would result in the
avoidance of approximately 22 gigawatts (GW) of installed generation
capacity in 2020. For comparison, the generating capacity is equivalent
to roughly 55 large, 400 megawatt, power plants, and reduced emissions
would range up to 73 Mt of carbon equivalent and up to 279 kt of
NO_X.\23\ Furthermore, for the nation as a whole, Trial
Standard Level 5 is estimated to result in a net cost in excess of $10
billion. DOE did not calculate manufacturer impacts at this trial
standard level, determining based on preliminary evaluation that they
would be severe and unacceptable.
---------------------------------------------------------------------------

\23\ Generating capacity, carbon, and NO_X reductions
are based on Roll-up efficiency scenario.
---------------------------------------------------------------------------

At Trial Standard Level 5, the average consumer would experience an
increase in life-cycle cost. Compared to today's standards, purchasers
of split central air-conditioners, the predominate class of central air
conditioner with 65 percent of the sales of central air conditioners
and heat pumps, would most likely lose in excess of $137 over the life
of the appliance. Purchasers of split heat pumps, the predominant class
of heat pump, would most likely lose in excess of $41. These life-cycle
cost estimates represent lower bounds to the actual costs because they
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.
DOE concludes that at Trial Standard Level 5, the benefits of
energy and energy cost savings, and emission reductions would be
outweighed by the negative economic impacts to the nation, to the vast
majority of consumers and to the manufacturers. Consequently, DOE has
determined that Trial Standard Level 5, the Max Tech Level, is not
economically justified.
Next, DOE considered Trial Standard Level 4, the level that the
previous Administration determined to be economically justified in the
January 22 final rule. This level specifies 13 SEER equipment for all
product classes. In considering Trial Standard Level 4, DOE assumed the
Roll-up efficiency scenario and reverse engineering cost estimates to
be the most probable. Under the Roll-up scenario, equipment that in the
base case was forecast to be less efficient than the trial standard
level is assumed to move up to the standard level, and equipment
forecasted to be at or above the trial standard level is assumed not to
increase in efficiency. (See Section 8.4.8 of the TSD for the reasons
DOE considers the Roll-up efficiency scenario most probable above Trial
Standard Level 3 and the NAECA efficiency scenario most probable at
Trial Standard Levels 1, 2, and 3; see Section 7.2.2.5 of the TSD for
the current efficiency distribution for each product class and for the
assumed efficiency distributions after new standards.)
Primary energy savings between 2006 and 2030 is estimated to be 4.2
quads, which DOE considers significant. The estimated energy savings
through 2020 would result in avoidance of approximately 12.6 GW in
installed

[[Page 36400]]

generating capacity in 2020. For comparison, the generating capacity is
equivalent to avoiding the need for 32 large 400 megawatt power plants,
and reduced emissions would range up to 33 Mt of carbon equivalent and
up to 111 kt of NO_X.\24\ Trial Standard Level 4 would lower
peak electricity demand compared to the base case. That would allow
utility service areas to build less new capacity, with attendant
environmental benefits.
---------------------------------------------------------------------------

\24\ Generating capacity, carbon, and NO_X reductions
are based on Roll-up efficiency scenario.
---------------------------------------------------------------------------

A measure of an efficiency standard's economic benefit to the
nation is the increase in net present value, which is the difference in
total cost, both initial cost and discounted operating cost, between
the base case (without a new standard) and the case with a new
standard. For Trial Standard Level 4, the increase in national net
present value is estimated to be $1 billion.\25\
---------------------------------------------------------------------------

\25\ Under the NAECA efficiency scenario, the increase in
national net present value would be zero.
---------------------------------------------------------------------------

Since DOE expects the Roll-up efficiency scenario to result from
standards adopted at Trial Standard Level 4, the burdens of Trial
Standard Level 4 on manufacturers are likely to be severe. Not only
does DOE expect the average loss in industry NPV to be around 20
percent, but impacts on most manufacturers would reach almost 30
percent. Their long term drop in return on investment and short term
drop in cash flow suggest that standards adopted at Trial Standard
Level 4 could accelerate the consolidation trend, possibly resulting in
fewer choices for consumers and in a slowing of the pace of innovation
well into the future. Furthermore, the cumulative impact on the
industry of all new Federal and State regulations is estimated to
exceed $782 million.
For Trial Standard level 4, the average purchaser of a split system
air conditioner, the predominant class with 65 percent of all
shipments, would see the installed price of $2236 rise to $2571, an
increase of $335. Lower utility bills from the energy savings would
repay this increase in 11.3 years and produce a total saving with a net
present value of $113 over the 18.4 year life of the product. The
average purchaser of a single package air conditioner, which represents
10 percent of all shipments, would see the average installed price of
$2607 rise to $3032, an increase of $425. Lower utility bills from the
energy savings would repay this increase in 14.5 years and produce a
total saving with a net present value of $29 over the 18.4 year life of
the product.
The average purchaser of a split system heat pump, which represents
22 percent of all shipments, would see the average installed price of
$3668 rise to $4000, an increase of $332. Lower utility bills from the
energy savings would repay this increase in 6.4 years and produce a
total saving with a net present value of $372 over the 18.4 year life
of the product. The average purchaser of a single package heat pump,
which represents 4 percent of all shipments, would see the average
installed price of $3599 rise to $4034, an increase of $435. Lower
utility bills from the energy savings would repay this increase in 8.4
years and produce a total saving with a net present value of $353 over
the 18.4 year life of the product. While the average consumer
purchasing a 13 SEER air conditioner or heat pump would experience a
net saving over the lifetime of the product, a substantial fraction of
all households would experience net costs exceeding 2 percent of the
total life-cycle cost of today's baseline units. Thirty-nine percent of
the households with split system air conditioners, 52 percent with
single package air conditioners, 6 percent with split system heat pumps
and 12 percent with single package heat pumps would experience a net
cost. The percentage of low-income consumers who would experience net
costs exceeding 2 percent of the total life-cycle cost of today's
baseline units is greater than that of the average household; 50
percent of low-income households with split system air conditioners, 61
percent with single package air conditioners, 12 percent with split
system heat pumps and 20 percent with single package heat pumps. Also,
the possibility that many consumers would incur substantial
installation costs is great because 13 SEER equipment often will not
fit in the same space as current 10 SEER equipment. In light of the
higher purchase cost increase experienced by all consumers and the
percentage of households that experience life-cycle cost increases, in
particular low-income households, which experience life-cycle cost
increases, consumer burdens are particularly acute under Trial Standard
Level 4.
DOE concludes that at Trial Standard Level 4, the benefits of
energy savings, generating capacity and emission avoidance, and net
benefit to the nation's consumers would be outweighed by the
maldistribution of consumer benefits, the potential increase in
installation costs for some consumers related to installing potentially
larger equipment, and the cost to manufacturers taking into account the
cumulative regulatory burden. Trial Standard Level 4 introduces the
serious concern that prospective owners of air conditioning heat pump
systems would instead purchase less costly air conditioner resistance
heater combinations because of the substantial purchase price
differential between heat pumps and air conditioners. As discussed in
the January 22 notice of final rulemaking (66 FR 7196), 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. Those households residing in manufactured housing, which is
often shipped from the factory without an air conditioning system but
with a resistance furnace, might be inclined to simply add a lower cost
air conditioner and retain the resistance furnace instead of replacing
the resistance furnace with a heat pump. In short, the large financial
burdens of Trial Standard Level 4 are not outweighed by the expected
financial benefits. Other potential burdens include possible health
effects caused indirectly by foregone air conditioning purchases and
possible lessening of competition, as determined by DOJ in its letter
of April 5, 2001 to DOE regarding the January 2001 final rule.
Consequently, DOE determines that Trial Standard Level 4 is not
economically justified.
Next, DOE considered Trial Standard Level 3. This level specifies
12 SEER equipment for air conditioners and 13 SEER equipment for heat
pumps. In considering Trial Standard Level 3, DOE assumed the NAECA
efficiency scenario and reverse engineering cost estimates to be the
most probable. (See Section 8.4.8 of the TSD for the reasons DOE
considers the Roll-up efficiency scenario most probable at Trial
Standard Levels 4 and 5 and the NAECA efficiency scenario most probable
at Trial Standard Levels 1, 2 and 3.)
For Trial Standard Level 3, primary energy savings between 2006 and
2030 are estimated to be 3.5 quads, which DOE considers significant.
The energy savings through 2020 would result in avoidance of
approximately 10.1 GW in installed generating capacity in 2020. For
comparison, the generating capacity is equivalent to avoiding the need
for 25 large 400 megawatt power plants, and reduced emissions would
range up to 28 Mt of carbon equivalent and up to 97 kt of
NO_X.\26\ Trial Standard Level 3 would

[[Page 36401]]

lower peak electricity demand compared to the base case. That would
allow utility service areas to build less new capacity, with attendant
environmental benefits.
---------------------------------------------------------------------------

\26\ Generating capacity, carbon, and NO_X reductions
are based on NAECA efficiency scenario.
---------------------------------------------------------------------------

For Trial Standard Level 3, the increase in national net present
value is estimated to be $1 billion.\27\ Since DOE expects the NAECA
efficiency scenario to result from standards adopted at Trial Standard
Level 3, the burdens of Trial Standard Level 3 on manufacturers are
likely to be less severe than at Trial Standard Level 4. DOE expects
the average loss in industry NPV to be around 11 percent, but impacts
on most manufacturers would be around 17 percent. Their long term drop
in return on investment and short term drop in cash flow suggest that
standards adopted at Trial Standard Level 3 could accelerate the
consolidation trend, possibly resulting in fewer choices for consumers
and in a slowing of the pace of innovation well into the future.
Furthermore, the cumulative impact of all new Federal and State
regulations would exceed $650 million.
---------------------------------------------------------------------------

\27\ Under the Roll-up efficiency scenario, the increase in
national net present value would be $2 billion.
---------------------------------------------------------------------------

At Trial Standard Level 3, the average purchaser of a split system
air conditioner, the predominant class with 65 percent of all
shipments, would see the installed price of $2236 rise to $2449, an
increase of $213. Lower utility bills from the energy savings would
repay this increase in 9.8 years and produce a total saving with a net
present value of $113 over the 18.4 year life of the product. The
average purchaser of a single package air conditioner, which represents
10 percent of all shipments, would see the average installed price of
$2607 rise to $2765, an increase of $158. Lower utility bills from the
energy savings would repay this increase in 7.5 years and produce a
total saving with a net present value of $163 over the 18.4 year life
of the product.
The average purchaser of a split system heat pump, which represents
22 percent of all shipments, would see the average installed price of
$3668 rise to $4000, an increase of $332. Lower utility bills from the
energy savings would repay this increase in 6.4 years and produce a
total saving with a net present value of $372 over the 18.4 year life
of the product. The average purchaser of a single package heat pump,
which represents 4 percent of all shipments, would see the average
installed price of $3599 rise to $4034, an increase of $435. Lower
utility bills from the energy savings would repay this increase in 8.4
years and produce a total saving with a net present value of $353 over
the 18.4 year life of the product.
Like Trial Standard Level 4, Trial Standard Level 3 raises the
serious concern that prospective owners of air conditioning heat pump
systems would purchase less costly air conditioner resistance heater
combinations. In this case there is a potential loss of energy savings
because of the lower standards for air conditioners compared to heat
pumps, which could eliminate all energy savings from the more efficient
heat pumps if only a small fraction of heat pump owners (4 percent)
switched to resistance heating. Trial Standard Level 3 poses a serious
concern regarding potential anti-competitive effects because the size
and cost of the higher efficiency heat pumps could reduce competition
between manufacturers of heat pumps and manufacturers of resistance
heating and other lower cost heating systems.
DOE concludes that, at Trial Standard Level 3, the benefits of
energy savings, generating capacity and emission avoidance, and net
benefit to the nation's consumers would be outweighed by the
maldistribution of consumer benefits and manufacturer costs, the
likelihood of higher installation costs resulting from potentially
larger equipment, and the net impact on the industry in light of the
cumulative regulatory burden. The most serious concern is the
possibility of equipment switching that would likely substantially
reduce the calculated energy savings, drastically reducing the
potential benefits. Other possible burdens include lessening of
competition, as determined by DOJ in its April 5, 2001 letter to DOE
regarding the January 2001 final rule, and adverse health effects
caused by forgone air conditioner purchases. Consequently, DOE
determines that Trial Standard Level 3 is not economically justified.
Next, DOE considered Trial Standard Level 2. This level specifies
12 SEER equipment for all product classes, and this is the level that
DOE has determined is the maximum efficiency level that is economically
justified. In considering Trial Standard Level 2, DOE assumed the NAECA
efficiency scenario and reverse engineering cost estimates to be the
most probable. Primary energy savings between 2006 and 2030 is
estimated to be 3 quads, which DOE considers significant. The energy
savings through 2020 would result in avoidance of approximately 8.7 GW
in installed generating capacity in 2020. For comparison, the
generating capacity is equivalent to avoiding the need for 22 large 400
megawatt power plants, and reduced emissions would range up to 24 Mt of
carbon equivalent and up to 83 kt of NO_X.\28\ Trial Standard
Level 2 would lower peak electricity demand compared to the base case.
That would allow utility service areas to either avoid build less new
capacity, with attendant environmental benefits. For Trial Standard
level 2, the increase in national net present value is estimated to be
$2 billion, which represents the highest level for all the standard
levels considered.\29\
---------------------------------------------------------------------------

\28\ Generating capacity, carbon, and NO_X reductions
are based on NAECA efficiency scenario.
\29\ Under the Roll-up efficiency scenario, the increase in
national net present value would be $3 billion.
---------------------------------------------------------------------------

Since DOE expects the NAECA efficiency scenario to result from
standards adopted at Trial Standard Level 2, the burdens of Trial
Standard Level 2 on manufacturers are likely to be moderate. DOE
expects the average loss in industry NPV to be around 10 percent, with
impacts on most manufacturers around 16 percent. Their long term drop
in return on investment and short term drop in cash flow are moderate,
suggesting that standards adopted at Trial Standard Level 2 would not
accelerate the consolidation trend, and could result in more choices
for consumers and raise the pace of innovation. Furthermore, the
cumulative impact of all new Federal and State regulations is estimated
to exceed $638 million.
For Trial Standard Level 2, the average purchaser of a split system
air conditioner, the predominant class with 65 percent of all
shipments, would see the installed price of $2236 rise to $2449, an
increase of $213. Lower utility bills from the energy savings would
repay this increase in 9.8 years and produce a total saving with a net
present value of $113 over the 18.4 year life of the product. The
average purchaser of a single package air conditioner, which represents
10 percent of all shipments, would see the average installed price of
$2607 rise to $2765, an increase of $158. Lower utility bills from the
energy savings would repay this increase in 7.5 years and produce a
total saving with a net present value of $163 over the 18.4 year life
of the product.
The average purchaser of a split system heat pump, which represents
22 percent of all shipments, would see the average installed price of
$3668 rise to $3812, an increase of $144. Lower utility bills from the
energy savings would repay this increase in 3.9 years and produce a
total saving with a net

[[Page 36402]]

present value of $365 over the 18.4 year life of the product. The
average purchaser of a single package heat pump, which represents 4
percent of all shipments, would see the average installed price of
$3599 rise to $3748, an increase of $149. Lower utility bills from the
energy savings would repay this increase in 4 years and produce a total
saving with a net present value of $421 over the 18.4 year life of the
product.
While the average consumer purchasing a 12 SEER air conditioner or
heat pump would experience a net saving over the lifetime of the
product, some households would experience net costs exceeding 2 percent
of the total life-cycle cost of today's baseline units. Thus, 25
percent of the households with split system air conditioners and 9
percent with single package air conditioners would experience a net
cost. No households with heat pumps would experience a net cost. The
percentage of low-income consumers who would experience net costs
exceeding 2 percent of the total life-cycle cost of today's baseline
units is greater than that for an average household. Thus, 34 percent
of low-income households with split system air conditioners and 14
percent with single package air conditioners would experience a net
cost. No low-income households with heat pumps would experience a net
cost. Also, the possibility that consumers would incur substantial
installation costs is less than that with a 13 SEER standard because 12
SEER equipment is more likely to fit in the same space as current 10
SEER equipment. In light of the moderate purchase cost increase
experienced by all consumers, the percentage of households, in
particular low-income households, which experience life-cycle cost
increases, consumer burdens are substantially less severe under Trial
Standard Level 2 than Trial Standard Level 4.
After carefully reconsidering the analyses and comments, and giving
appropriate weight to consumer impacts and cumulative regulatory burden
in the assessment of the benefits and burdens, DOE today amends the
energy conservation standards for central air conditioners and central
air conditioning heat pumps at Trial Standard Level 2. DOE concludes
this standard saves a significant amount of energy and is
technologically feasible and economically justified. In determining
economic justification, DOE concludes that the benefits of energy
savings, the projected amount of avoided power plant capacity, 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, taking
into account the cumulative regulatory burden and annual cash flow,
increases in life-cycle cost for some users of products covered by
today's rule, any possible increase in health problems caused by
consumers foregoing air conditioner purchases, any possible reduction
in the ability of the product to dehumidify, any possible effect on
competition (addressed by DOJ in its October 19, 2001 letter to DOE),
and any possible difficulty in installing the new baseline products
into replacement applications.

C. Conclusions Regarding Space-Constrained Products

If a 12 SEER minimum requirement for air conditioners and heat
pumps is implemented, DOE's analysis shows that of all potential space-
constrained products, only those with through-the-wall condensers and
small duct, high velocity systems need special consideration.
1. Through-the-Wall Products
The TSD contains a new Appendix L describing the results of our
recent re-evaluation of those products. They demonstrate that split
through-the-wall equipment can attain 10.9 SEER using designs and
technologies that are commonly applied or available, with price impacts
similar to those that conventional equipment would experience in
meeting the proposed 12 SEER standard. The packaged equipment analyzed
was demonstrated to be capable of attaining only a 10.6 SEER rating,
although comments received indicate that one manufacturer of packaged
through-the-wall equipment, Armstrong, expects their equipment to be
capable of attaining 11 SEER.
Based on this evaluation, DOE adopts new product classes for
products that have through-the-wall condensers and are intended for
replacement applications. The new classes are required to meet minimum
efficiencies lower than those of the other classes: 10.9 SEER and 7.1
HSPF for through-the-wall air conditioner and heat pump split-systems,
and 10.6 SEER and 7.0 HSPF for through-the-wall air conditioner single-
package systems. DOE's analysis suggests those products can attain
these levels without substantial redesign or price increases that would
result in a loss of market share to conventional products. Also, the
life-cycle cost analysis confirms that, on average, consumers of split
through-the-wall equipment would not incur an increase in life-cycle
cost, and that consumers of packaged through-the-wall equipment would
incur an increase of $52 over the life of the equipment. In no case
would any consumer of split through-the-wall products be expected to
incur life-cycle costs greater than 2 percent of the total life-cycle
cost, and only 17 percent of consumers of packaged through-the-wall
equipment would be expected to incur cost increases greater than 2
percent of the total life-cycle cost.
DOE concludes that standard levels higher than 10.9 SEER (split
through-the-wall) and 10.6 SEER (packaged through-the-wall) are
technologically feasible, but are not economically justified. DOE's
analysis on three through-the-wall models suggests that those products
could attain efficiencies as high as 11.4 SEER, but the results are not
conclusive and cannot be confidently applied to all through-the-wall
products. DOE's analysis does not provide enough evidence to convince
us that levels higher than 10.9 SEER (10.6 SEER for packaged through-
the-wall) will be technologically feasible during the five year period
during which manufacturers would prepare to meet the new requirements.
DOE's analysis does indicate that opportunities for efficiency
improvement do exist, and that manufacturers of those products should
continue to investigate those opportunities.
A serious concern that DOE has considered is that the lower
through-the-wall standards might encourage purchasers of conventional
equipment to shift to through-the-wall products, undermining the
benefits of the 12 SEER standard for conventional products. DOE is
therefore limiting the new through-the-wall classes to products
manufactured before January 23, 2010. See definition of "through-
the-wall air conditioner and heat pump." Thus, these classes will
exist only for a period of four years following the compliance date
established for the new standards for conventional products. During
that time, the availability of suitable high-efficiency components will
likely increase and the manufacturers of through-the-wall products will
be able to investigate options for meeting the more stringent 12 SEER
level. Both will make it easier for through-the-wall products to attain
the 12 SEER minimum efficiency required of other products, thereby
making 12 SEER a technologically feasible and economically justified
level. The sunset provision will help to ensure that other
manufacturers will not make the investment required to market through-

[[Page 36403]]

the-wall products heavily for conventional applications during the four
year period. It will also limit the time during which lower efficiency
through-the-wall equipment is installed, ensuring that additional
energy savings associated with the 12 SEER level are realized in a
certain time period.
To further limit the application of the through-the-wall class,
products in these classes may not exceed 30,000 BTU/hr in cooling
capacity, may not contain special weatherization features that would
allow them to be installed totally outdoors, and must be marked for
installation only through an exterior wall. DOE also limits the size of
the area used for condenser air exchange in order to limit these
classes to those products intended primarily for replacement
applications.
2. Small Duct, High Velocity Systems
In today's final rule, DOE establishes a separate product class for
SDHV systems and retains the NAECA standards for these products pending
further study to establish appropriate higher standard levels. DOE
intends to publish a final rule for the test procedure in the near
future. Any future work to establish appropriate minimum efficiency
standards for SDHV systems will be based on the testing requirements
developed for SDHV systems in the test procedure revision currently
being finalized, or in a future revision specifically aimed at SDHV
products.

VIII. Procedural Issues and Regulatory Review

A. Review Under the National Environmental Policy Act

DOE 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. DOE
found the environmental effects associated with various standard
efficiency levels for central air conditioners and heat pumps,
including 12 SEER, to be not significant. Therefore DOE is 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 on Environmental Quality (40 CFR Parts 1500-1508), and
DOE's regulations for compliance with NEPA (10 CFR Part 1021).
As previously discussed (Section VI.G.1, "Peak Power"),
the model used by DOE to estimate both peak power and power plant
emission impacts due to appliance standards was updated to include a
more representative set of end-use load shapes for the residential,
commercial, industrial, and transportation sectors. As a result of this
update, NEMS-BRS estimates somewhat greater power plant emission
impacts (in the form of reduced CO₂ and NO_X
emissions) from increased central air conditioner and heat pump
standards. Appendix M of the TSD includes an updated set of power plant
emission impacts. These changes, which are discussed in the FONSI, do
not affect DOE's finding of no significant impact.
The comments of some environmental advocates argue that DOE is
required to prepare an environmental impact statement for today's final
rule because, in their view, DOE is "rolling back" 13 SEER
standards, and that constitutes a major agency action significantly
affecting the quality of the environment. As explained in Section
VI.H.5 of this Supplementary Information, DOE believes these comments
are based on an erroneous premise, namely, that the January 22 final
rule attained permanent status even though the rule never became
effective. Instead, the correct baseline for assessing the impacts of
today's rule, in DOE's view, are the existing energy conservation
standards established by NAECA (i.e, SEER of 10.0 and HSPF of 6.8 for
split systems manufactured after January 1, 1992, SEER of 9.7 and HSPF
of 6.6 for single package systems manufactured after January 1, 1993).
The 12 SEER standard in today's rule will increase the energy
efficiency of the most common type of central air conditioners by
approximately 20 percent.

B. Review Under Executive Order 12866

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 DOE's Freedom of Information Reading
Room, 1000 Independence Avenue, SW., Washington, DC 20585, between the
hours of 9 a.m. and 4 p.m., Monday through Friday, telephone (202) 586-
3142.
The October 5, 2000 NOPR 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. 65 FR 59627-29. The alternatives considered in DOE's analysis
are consumer product labeling, consumer education, prescriptive
standards, consumer tax credits, consumer rebates, manufacturer tax
credits, voluntary efficiency targets, low income subsidy, mass
government purchases, and performance standards. The reader is referred
to the complete "Regulatory Impact Analysis," which is
contained in the TSD, available as indicated at the beginning of this
notice or from the contact person named at the beginning of this
notice. The TSD provides: (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 that
a Federal agency prepare a regulatory flexibility analysis for any rule
for which the agency is required to publish a general notice of
proposed rulemaking. Such an assessment of the impact of regulations on
small businesses is not required if the agency certifies that the rule
would not, if promulgated, have a significant economic impact on a
substantial number of small entities (5 U.S.C. 605(b)). To be
categorized as a "small" air conditioning and warm air
heating equipment manufacturer, a firm must employ no more than 750
employees.
In the October 5, 2000 NOPR, DOE discussed the potential impacts on
small businesses of the October 5 proposed rule (corresponding to Trial
Standard Level 3), and certified that the proposed standard levels
would not have a significant economic impact on a substantial number of
small entities. 65 FR 59629-30. DOE reported that nearly all small
businesses engaged in the manufacture of central air conditioners and
heat pumps produce products that DOE has called "niche"
products. To avoid adversely impacting manufacturers of niche products,
DOE proposed a separate product class for through-the-wall equipment,
much of which is manufactured by small

[[Page 36404]]

manufacturers. See 65 FR 59609-11. In the preamble to the January 22
final rule, DOE addressed comments regarding the impacts more stringent
standards might have on the availability of niche products, and
although the final rule adopted the higher Trial Standard Level 4
standards, DOE deferred setting an amended standard for niche products.
66 FR 7175, 7196-97. The omission of niche products from the January 22
final rule also addressed the concern expressed by the Department of
Justice about the impact of the October 5, 2000, proposed rule on small
manufacturers (see preamble to January 22 final rule at 66 FR 7192).
Because the final rule excluded most products made by small
manufacturers, DOE affirmed its certification.
Today DOE publishes energy conservation standards for central air
conditioners and heat pumps that correspond to Trial Standard Level 2.
Primarily because of severe size constraints, DOE is establishing
separate product classes for through-the-wall equipment and small duct,
high velocity systems, which will be required to meet a lower SEER and
HSPF. In light of these product class exceptions and after considering
the information in the TSD and public comments, including the views of
the Department of Justice (see October 19, 2001, letter in the Appendix
to this notice), DOE has concluded that the 12 SEER standards in
today's final rule will not have a disproportionate adverse impact on a
substantial number of small entities. In its comments, the Office of
Advocacy of the U.S. Small Business Administration stated that the
proposed 12 SEER standard would substantially improve energy efficiency
while preserving competition, innovation and jobs, and, therefore, it
strongly supports the 12 SEER standard. On this basis, DOE certifies
that today's rule will not have a significant impact on a substantial
number of small entities. Accordingly, DOE has not prepared a
regulatory flexibility analysis.
DOE's certification is based on an assessment of the impact the
standards will have on small entities that would be directly affected
by their implementation, which is all the Regulatory Flexibility Act
requires. The assertion by ARI, in its petition for consideration (ARI,
No. 138, at section m), that DOE is required to assess the indirect
effects of proposed standards is contrary to established case law
interpreting the Act.

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

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 rule
under the standards of section 3 of the Executive Order and determined
that, to the extent permitted by law, this rule meets the relevant
standards.

F. Review Under Executive Order 12630

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 rule will 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, "Federalism," 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 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 rule were preempted by the Federal standards established in
NAECA. As discussed in Section VI.H.3, States can petition DOE for
exemption from such preemption to the extent, and based on criteria,
set forth in section 327 of EPCA (42 U.S.C. 6297).

H. Review Under the Unfunded Mandates Reform Act of 1995

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, 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. DOE's consultation process is described in a
notice published in the Federal Register on March 18, 1997. 62 FR
12820. Today's rule will 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
"Regulatory

[[Page 36405]]

Impact Analysis" section of the TSD for this rule responds to
those requirements.
Under section 205 of UMRA, DOE 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 rule would establish
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 rule.

I. Review Under the Treasury and General Government Appropriations Act,
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 rule would not have any impact on the
autonomy or integrity of the family as an institution. Accordingly, DOE
did not prepare a Family Policymaking Assessment.

J. Review Under Executive Order 13211

Executive Order 13211, "Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use," (66 FR
28355, May 22, 2001) requires Federal agencies to prepare and submit to
the Office of Information and Regulatory Affairs (OIRA), Office of
Management and Budget, a Statement of Energy Effects for any
significant energy action. A "significant energy action" is
defined as any action by an agency that promulgates or is expected to
lead to the promulgation of a final rule, and that: (1) Is a
significant regulatory action under Executive Order 12866, or any
successor order; and (2) is likely to have a significant adverse effect
on the supply, distribution, or use of energy; or (3) is designated by
the Administrator of OIRA as a significant energy action. For any
proposed significant energy action, the agency must give a detailed
statement of any adverse effects on energy supply, distribution, or use
should the proposed action be implemented, and of reasonable
alternatives to the action and their expected benefits on energy
supply, distribution, and use.
Today's rule would not have any adverse effects on the supply,
distribution, or use of energy in the near term because it would not
have any effect on the manufacture of central air conditioners and heat
pumps until 2006. In the longer term, beginning in 2006, the standards
in this rule would have a small positive impact on the electricity
supply in the United States. The standards that DOE is adopting would
represent a 20 percent improvement in the energy efficiency of split-
system central air conditioners, and a 9 percent improvement in heating
efficiency for heat pumps. The standards would improve the cooling
efficiency of single-package heat pumps by 24 percent and the heating
efficiency of single-package heat pumps by 12 percent.
As explained in Section VII of this Supplementary Information, DOE
estimates the standards would save approximately 3 quads of energy over
25 years (2006 through 2030). Also, in determining whether these
standards are economically justified, DOE considered as a benefit the
potential of the standards to improve the reliability of the electric
generation and distribution system or to reduce the environmental
impacts associated with new power plants and transmission lines. See
Section VI.G. of this Supplementary Information. DOE's analysis
predicts today's standards would result in an estimated reduction in
installed generation capacity in the year 2020 of approximately 8.7
gigawatts. This would be the equivalent of three 400 megawatt coal-
fired plants and nineteen 400 megawatt gas-fired plants.
DOE disagrees with the NRDC's view that the levels in the January
22 final rule are the appropriate baseline for determining whether
today's rule is likely to have a significant adverse effect on the
supply, distribution, or use of energy and, thus, subject to the
Executive Order's analysis requirement. (NRDC, No. 250 at p. 9). For
reasons stated in Section III, we think the proper baseline is the
currently effective standards (i.e., the standards prescribed by
NAECA). In any case, section 325 of EPCA requires DOE to weigh all of
the significant costs and benefits associated with standard levels that
are being considered and not just avoided electricity costs. DOE has
set forth its evaluation of costs and benefits elsewhere in this notice
(see Section VII). DOE has also considered various regulatory and non-
regulatory alternatives to today's proposed standard (see Section
VIII.B., "Review Under Executive Order 12866," and the
Regulatory Impact Analysis portion of the TSD). DOE has concluded that
the costs associated with elevating the current standard to the
standard level set forth in the January 22, 2001, final rule exceed the
associated benefits, including the benefit of avoided electricity
consumption.

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, D.C., on May 14, 2002.
David K. Garman,
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. The final rule amending 10 CFR part 430 published January 22,
2001 (66 FR 7170) is withdrawn.

3. Section 430.2 is amended by adding definitions for
"effective date," "maximum allowable energy
use," "maximum allowable water use," "minimum
required energy efficiency," "small duct, high velocity
system," and "through-the-wall air conditioner and heat
pump" in alphabetical order to read as follows:

[[Page 36406]]

Sec. 430.2 Definitions.

* * * * *
Effective date means the date on and after which a manufacturer
must comply with an energy conservation standard in the manufacture of
a covered product.
* * * * *
Maximum allowable energy use means an energy conservation standard
for a covered product, expressed in terms of a maximum amount of energy
that may be consumed, which is established by statute or by a final
rule that has modified this part pursuant to a date DOE has selected
consistent with the Congressional Review Act (5 U.S.C. 801-804) and any
other applicable law, or the date on which DOE completes action on any
timely-initiated administrative reconsideration, whichever is later.
* * * * *
Maximum allowable water use means an energy conservation standard
for a covered product, expressed in terms of a maximum amount of water
that may be consumed, which is established by statute or by a final
rule that has modified this part pursuant to a date DOE has selected
consistent with the Congressional Review Act (5 U.S.C. 801-804) and any
other applicable law, or the date on which DOE completes action on any
timely-initiated administrative reconsideration, whichever is later.
* * * * *
Minimum required energy efficiency means an energy conservation
standard for a covered product, expressed in terms of a minimum
efficiency quotient, which is established by statute or by a final rule
that has modified this part pursuant to a date DOE has selected
consistent with the Congressional Review Act (5 U.S.C. 801-804) and any
other applicable law, or the date on which DOE completes action on any
timely-initiated administrative reconsideration, whichever is later.
* * * * *
Small duct, high velocity system means a heating and cooling
product that contains a blower and indoor coil combination that:
(1) Is designed for, and produces, at least 1.2 inches of external
static pressure when operated at the certified air volume rate of 220-
350 CFM per rated ton of cooling; and
(2) When applied in the field, uses high velocity room outlets
generally greater than 1000 fpm which have less than 6.0 square inches
of free area.
* * * * *
Through-the-wall air conditioner and heat pump means a central air
conditioner or heat pump that is designed to be installed totally or
partially within a fixed-size opening in an exterior wall, and:
(1) Is manufactured prior to January 23, 2010;
(2) Is not weatherized;
(3) Is clearly and permanently marked for installation only through
an exterior wall;
(4) Has a rated cooling capacity no greater than 30,000 Btu/hr;
(5) Exchanges all of its outdoor air across a single surface of the
equipment cabinet; and
(6) Has a combined outdoor air exchange area of less than 800
square inches (split systems) or less than 1,210 square inches (single
packaged systems) as measured on the surface described in paragraph (5)
of this definition.
* * * * *

6. 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.............. 12 ?
(ii) Split system heat pumps................... 12 7.4
(iii) Single package air conditioners.......... 12 ?
(iv) Single package heat pumps................. 12 7.4
(v)(A) Through-the-wall air conditioners and 10.9 7.1
heat pumps?split system.................
(v)(B) Through-the-wall air conditioners and 10.6 7.0
heat pumps?single package...............
(vi) Small duct, high velocity systems......... 10.0 \1\ 6.8
------------------------------------------------------------------------
\1\ NAECA-prescribed value subject to amendment.

* * * * *
5. Section 430.34 is added to Subpart C to read as follows:

Sec. 430.34 Energy and water conservation standards amendments

The Department of Energy may not prescribe any amended standard
which increases the maximum allowable energy use or, in the case of
showerheads, faucets, water closets or urinals, the maximum allowable
water use, or which decreases the minimum required energy efficiency of
a covered product.

Appendix

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

Department of Justice

Antitrust Division
A. Douglas Melamed
Acting Assistant Attorney General, 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, D.C. 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. 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

[[Page 36407]]

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 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 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, DOE
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 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, 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.
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

Department of Justice

Antitrust Division
John M. Nannes
Acting Assistant Attorney General,
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)
April 5, 2001.
Eric J. Fygi,
Acting General Counsel, Department of Energy, Washington, DC 20585
Dear Acting General Counsel Fygi: I am responding to your letter
dated March 20, 2001, seeking the views of the Attorney General
about the potential effect on competition of the final rule
published on January 22, 2001, setting forth new energy efficiency
standards for central air conditioners and heat pumps. You
specifically asked for our views about the impact on competition of
the rule's prescription of a 13 SEER (Seasonal Energy Efficiency
Rating) standard for all product classes, except for niche products,
and the desirability of reducing the standard to a 12 SEER level for
all subcategories. Your letter requested our views by March 30, but
your staff agreed to extend the response date to Apri1 6.
As you noted in your letter to the Attorney General, the
Antitrust Division had earlier expressed its views on the proposed
rule, which provided for a 12 SEER standard for air conditioners and
a 13 SEER standard for heat pumps. The Division had concluded that
the 13 SEER standard for heat pumps could have an adverse effect on
competition and urged the Department of Energy to adopt a 12 SEER
standard for heat pumps. We noted only minor concerns about the
proposed 12 SEER standard for air conditioners.
We have reviewed the final rule and determined that the 13 SEER
heat pump standard still raises competitive problems. We have
further determined that the 13 SEER standard for air conditioners
also raises competitive concerns.
In our earlier letter, we identified and described three
competitive problems resulting from the proposed 13 SEER standard
for heat pumps, including a disproportionate impact on smaller
manufacturers \2\ and an adverse effect on manufacturers of
specialized equipment (the niche product manufacturers) and
manufacturers of equipment for space-constrained installation sites
(such as manufactured housing, which accounts for a significant
percentage of the country's housing starts). The exception made in
the final rule for niche product manufacturers may alleviate
competitive problems for their products, but the exception does not
eliminate the difficulties for manufacturers of standard equipment
who could not make equipment that complied with the 13 SEER standard
and still fit into space-constrained sites. The final rule also
continues to have a disproportionate impact on smaller manufacturers
of heat pumps. The 13 SEER standard for air conditioners raises the
same kinds of competitive problems as the 13 SEER standard does for
heat pumps.
---------------------------------------------------------------------------

\2\ We noted in our previous letter that less than 20 percent of
the total current heat pump product lines meet the new standard, but
for some small manufacturers, 100 percent of their product lines
failed to satisfy the standard. The same is true for air conditioner
manufacturers when the standard is 13 SEER.
---------------------------------------------------------------------------

We urge the Department of Energy to consider the impact on
competition and to adopt a 12 SEER standard for all products covered
by the rule.
Sincerely,
John M. Nannes

Department of Justice

Antitrust Division
Charles A. James
Assistant Attorney General,
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)
October 19, 2001
Lee Liberman Otis,
General Counsel, Department of Energy, Washington, DC 20585
Dear General Counsel Otis: I am responding to your August 15,
2001 letter seeking the views of the Attorney General about the
potential impact on competition of proposed energy efficiency
standards for residential central air conditioners and central air
conditioning 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. 6291, 6295 ("EPCA"), which requires the
Attorney General to make a determination of the impact of any
lessening of competition that

[[Page 36408]]

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 0.40(g).
The proposal provides for 12 SEER standards for all types of
residential central air conditioners and central air conditioning
heat pumps, except those that are installed through an exterior
wall. We have reviewed the materials that accompanied your August 15
letter, the materials that you previously provided, and the comments
submitted to DOE, as well as the results of our industry interviews.
Based on that review, we have concluded that the proposal would not
adversely affect competition.
Sincerely,
Charles A. James

[FR Doc. 02-12680 Filed 5-22-02; 8:45 am]
BILLING CODE 6450-01-P

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