[Federal Register Volume 61, Number 123 (Tuesday, June 25, 1996)]
[Rules and Regulations]
[Pages 32647-32651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16120]
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DEPARTMENT OF ENERGY
Office of Energy Efficiency and Renewable Energy
10 CFR Part 436
[Docket No. EE-RM-95-501]
Federal Energy Management and Planning Programs; Methodology and
Procedures for Life Cycle Cost Analyses
AGENCY: Office of Energy Efficiency and Renewable Energy, DOE.
ACTION: Final rule.
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SUMMARY: The Department of Energy (DOE) is publishing a final rule to
implement its Federal Energy Management Program to include application
of the life cycle costing methodology when evaluating and comparing the
cost effectiveness of water conservation measures in Federal buildings.
The amendments are directed principally toward updating the life cycle
cost methodology and procedures in subpart A in light of changes in law
requiring the use of life cycle costing methodology when installing
water conservation measures.
EFFECTIVE DATE: This regulation is effective July 25, 1996.
FOR FURTHER INFORMATION CONTACT: Theodore C. Collins, Federal Energy
Management Program, Office of Energy Efficiency and Renewable Energy,
Mail Station EE-92, U.S. Department of Energy, 1000 Independence
Avenue, SW., Washington, DC 20585, (202) 586-8017.
SUPPLEMENTARY INFORMATION:
I. Introduction
On August 25, 1995, DOE published a Notice of Proposed Rulemaking
to amend some of the provisions in 10 CFR part 436 which are applicable
to programs for the management of energy consumption by Federal
agencies (60 FR 44286). The amendments are directed principally toward
updating the life cycle cost methodology and procedures in subpart A in
light of changes in law requiring the use of life cycle costing
methodology when installing water conservation measures.
Section 152 of the Energy Policy Act of 1992 (Pub.L. 102-486)
amended the legislatively mandated policies with regard to federal
energy management originally set forth in section 542 of the National
Energy Conservation Policy Act (Act or NECPA). 42 U.S.C. 8252. This
amendment to section 542 expands the purpose of the Federal Energy
Management Program to include the conservation and the efficient use of
water, in addition to non-renewable energy, by the Federal government.
Section 543 of the Act (42 U.S.C. 8253(a)) ``Energy Management
Goals'' was also amended by section 152 of the Energy Policy Act by
adding an energy management requirement for Federal agencies that ``Not
later than January 1, 2005, each agency shall, to the maximum extent
practicable, install in Federal buildings owned by the United States
all energy and water conservation measures with payback periods of less
than 10 years, as determined by using the methods and procedures
developed pursuant to section 544.'' To implement this statutory
provision, it is necessary to amend the life cycle cost regulations as
set forth in part 436 of the Code of Federal Regulations, pursuant to
section 544 of the Act, so that the life cycle cost methodology and
procedures can be applied to the installation of water conservation
measures which are implemented by Federal agencies to meet the
requirements of the Act.
In response to the Notice of Proposed Rulemaking, DOE received no
written comments and there were no commenters at a public hearing held
on October 12, 1995 in Washington, DC. In view of the above, no changes
have been
[[Page 32648]]
made to the rule proposed on August 25, 1995.
II. Background of the Life Cycle Cost Methodology
On January 23, 1980, DOE published a final Life Cycle Cost rule
(LCC) (45 FR 5620) which established the methodology and procedures for
calculating and comparing the life cycle cost of proposed investments
to upgrade the economic efficiency of Federal buildings through energy
conservation or substitution of renewable energy sources. The LCC rule
was published pursuant to section 381(a)(2) of the Energy Policy and
Conservation Act, as amended, 42 U.S.C 6361(a)(2), section 10 of
Executive Order 11912, and Title V, part 3, of the National Energy
Conservation Policy Act (NECPA).
On November 30, 1990, DOE published final amendments to 10 CFR part
436 (55 FR 48217) to update the guidelines applicable to Federal agency
in-house energy management programs. That rulemaking was directed
principally toward updating the life cycle cost methodology and
procedures in subpart A of 10 CFR part 436 in light of provisions in
the Federal Energy Management Improvement Act of 1988 granting DOE more
discretion in setting discount and energy cost escalation rates (Pub.
L. 100-615).
The principle uses of the LCC rule are determining the cost
effectiveness of proposed investments and assigning priorities among
proposed cost-effective investments. The methodology and procedures of
the LCC rule are amplified in a manual published for DOE by the
National Institute of Standards and Technology (NIST) HB135, revised as
necessary to reflect amendments. It is referred to as the ``Life Cycle
Costing Manual for the Federal Energy Management Program.'' The
methodology required by the LCC rule involves a systematic analysis of
all significant costs associated with proposed investments, the
principal purpose of which is to increase energy efficiency on a life-
cycle cost effectiveness basis. This analysis relates investment costs
to future costs associated with a proposed investment. The LCC rule
provides for standardized assumptions for establishing and comparing
relevant cost. See 10 CFR 436.14.
The Energy Policy Act of 1992 (Pub. L. 102-486) amended NECPA by
adding water and the use of renewable energy sources to the purpose of
NECPA (42 U.S.C. 8252) and requiring the use of the life cycle cost
methodology when installing in Federal buildings energy and water
conservation measures with payback periods of less than 10 years (42
U.S.C. 8253(b)). The amendments published today relating to water
conservation measures are pursuant to this authority.
III. General Discussion of Amendments
These amendments for the most part insert the term ``water'' in the
various provisions of the rule to reflect the fact that the
conservation and efficient use of water are now included within the
purpose and scope of the Federal Energy Management Program. The
methodology and procedures for applying life cycle cost analyses to
water conservation measures have been determined to be generally
consistent with the treatment of energy. In those instances where the
nature of water conservation measures require different treatment, a
separate provision is added. Overall, only minor changes to the rule
have been made to comply with the mandates imposed by the Energy Policy
Act of 1992.
The basic requirements of the life cycle cost methodology and
procedures are not changed by the amendments. Their coverage is
expanded so that they apply to water conservation measures which are
the primary subject of the amendments. To accommodate the differences
found when examining factors which may be unique only to water or
energy, the Department of Energy is adding new and revised definitions
in Sec. 436.11 to allow for the computation of factors unique to water
conservation measures for the purpose of performing the life cycle
costing calculations. It is the intent of the amendatory language to
make clear that the application of the life cycle cost methodology and
procedures to water conservation measures are treated parallel, where
practicable, to energy conservation measures when determining life
cycle cost effectiveness. For example, the new definition of ``building
water system'' parallels that of ``building energy system.'' The
difference is the type of system which is the subject of the analysis.
In many instances, the Department of Energy has amended the rule with
addition of the terms ``and water'' or ``or water,'' as determined
appropriate, to meet the requirement of the Act to apply life cycle
cost methodology and procedures to water conservation measures.
There are a few minor changes which serve to clarify and facilitate
agency implementation. Section 436.13 presumes that investment in a
retrofit to an existing Federal building is not life cycle cost-
effective if it is occupied under a lease which includes the cost of
utilities in the rent and does not provide a pass-through of energy or
water savings to the government. Language was added to be explicit that
this presumption applies only to Federal investment and should not
necessarily be used to determine the cost effectiveness of building
owners' investments in their Federally-leased buildings. Such
investments are, in fact, cost-effective and are encouraged. The
assumption in section 436.14 that ``water prices will not escalate'' is
based upon the fact that there are no escalation rates established for
water at the national level. However, agencies are permitted to use
escalation rates when they are available from suppliers. Section 436.23
was modified to allow agencies to include future price changes when
they estimate simple payback time in order to be consistent with
national consensus standards developed by the American Society of
Testing and Materials.
IV. Review Under Executive Order 12866
This rule was reviewed under the provisions of this Executive Order
governing Regulatory Planning and Review. DOE has determined that this
rule does not constitute a ``significant regulatory action'' and is
therefore not subject to the provisions of section 6 of the Executive
Order requiring review by the Office of Management and Budget (OMB).
V. Review Under the Regulatory Flexibility Act
This rule was reviewed under the Regulatory Flexibility Act of
1980, Public Law 96-354 (5 U.S.C. 601-612). DOE has determined that
this rule will not have a significant economic impact on a substantial
number of small entities, therefore, no regulatory flexibility analysis
has been performed.
VI. Review Under the Paperwork Reduction Act
The Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520) requires
that Federal agencies obtain approval from the OMB before collecting
information from 10 or more persons. There are no information
collection requirements in these amendments.
VII. Review Under the National Environmental Policy Act
DOE has determined that promulgation of this rule falls within the
interpreting/amending rulemaking class, Category A5 of appendix A to
subpart D, ``Categorical Exclusions Applicable to General Agency
Actions,'' of the DOE National Environmental Policy Act (NEPA)
regulations. 10 CFR part 1021. It is therefore categorically
[[Page 32649]]
excluded from preparation of either an Environmental Assessment or an
Environmental Impact Statement under NEPA (42 U.S.C. 4321, et. seq).
VIII. Review Under Executive Order 12612
Executive Order 12612, 52 FR 41685 (October 30, 1987), requires
that regulations, rules, legislation, and any other policy actions be
reviewed for any substantial direct effects on States, on the
relationship between the National government and the States, or in the
distribution of power and responsibilities among various levels of
government. If there are sufficient substantial direct effects, then
the Executive Order requires preparation of a federalism assessment to
be used in all decisions involved in promulgating and implementing a
policy action. The rule revises certain policy and procedural
requirements applicable only to Federal energy management programs.
Therefore, the Department of Energy has determined that the rule will
not have a substantial direct effect on the institutional interests or
traditional functions of States.
IX. 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 simplificaiton 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 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 has completed the required review and
determined that, to the extent permitted by law, the final regulations
meet the relevant standards of Executive Order 12988.
List of Subjects in 10 CFR Part 436
Energy Conservation, Federal buildings and facilities.
Issued in Washington, DC, on June 4, 1996.
Christine A. Ervin,
Assistant Secretary, Energy Efficiency and Renewable Energy.
For the reasons set out in the preamble, 10 CFR part 436 is amended
as follows:
PART 436--FEDERAL ENERGY MANAGEMENT AND PLANNING PROGRAMS
1. The authority citation for part 436 continues to read as
follows:
Authority: 42 U.S.C. 6361; 42 U.S.C. 8251-8263; and 42 U.S.C.
8287-8287c.
2. Section 436.1 is revised as follows:
Sec. 436.1 Scope.
This part sets forth the rules for Federal energy management and
planning programs to reduce Federal energy consumption and to promote
life cycle cost effective investments in building energy systems,
building water systems and energy and water conservation measures for
Federal buildings.
3. Section 436.2 is amended by revising paragraph (b) to read as
follows:
Sec. 436.2 General objectives.
* * * * *
(b) To promote the methodology and procedures for conducting life
cycle cost analyses of proposed investments in building energy systems,
building water systems and energy and water conservation measures;
* * * * *
4. Section 436.10 is revised to read as follows:
Sec. 436.10 Purpose.
This subpart establishes a methodology and procedures for
estimating and comparing the life cycle costs of Federal buildings, for
determining the life cycle cost effectiveness of energy conservation
measures and water conservation measures, and for rank ordering life
cycle cost effective measures in order to design a new Federal building
or to retrofit an existing Federal building. It also establishes the
method by which efficiency shall be considered when entering into or
renewing leases of Federal building space.
5. Section 436.11 is amended by:
(a) Revising the definitions of component price, Federal building,
life cycle cost, replacement cost, retrofit, and salvage value, and (b)
adding definitions for building water system, non-water operation and
maintenance costs, and water conservation measures in alphabetical
order to read as follows:
Sec. 436.11 Definitions.
* * * * *
Building water system means a water conservation measure or any
portion of the structure of a building or any mechanical, electrical,
or other functional system supporting the building, the nature or
selection of which for a new building influences significantly the cost
of water consumed.
Component price means any variable sub-element of the total charge
for a fuel or energy or water, including but not limited to such
charges as ``demand charges,'' ``off-peak charges'' and ``seasonal
charges.''
* * * * *
Federal building means an energy or water conservation measure or
any building, structure, or facility, or part thereof, including the
associated energy and water consuming support systems, which is
constructed, renovated, leased, or purchased in whole or in part for
use by the Federal government. This term also means a collection of
such buildings, structures, or facilities and the energy and water
consuming support systems for such collection.
* * * * *
Life cycle cost means the total cost of owning, operating and
maintaining a building over its useful life (including its fuel and
water, energy, labor, and replacement components), determined on the
basis of a systematic evaluation and comparison of alternative building
systems, except that in the case of leased buildings, the life cycle
cost shall be calculated over the effective remaining term of the
lease.
* * * * *
Non-water operation and maintenance costs mean material and labor
cost for routine upkeep, repair and operation exclusive of water cost.
* * * * *
Replacement costs mean future cost to replace a building energy
system or building water system, an energy or water conservation
measure, or any component thereof.
Retrofit means installation of a building energy system or building
water system alternative in an existing Federal building.
[[Page 32650]]
Salvage value means the value of any building energy system or
building water system removed or replaced during the study period, or
recovered through resale or remaining at the end of the study period.
* * * * *
Water conservation measures mean measures that are applied to an
existing Federal building that improve the efficiency of water use,
reduce the amount of water for sewage disposal and are life cycle cost
effective and that involve water conservation, improvements in
operation and maintenance efficiencies, or retrofit activities.
6. Section 436.13 is amended by revising paragraph (a), the
introductory text of paragraph (b) and paragraph (b)(2) to read as
follows:
Sec. 436.13 Presuming cost-effectiveness results.
(a) If the investment and other costs for an energy or water
conservation measure considered for retrofit to an existing Federal
building or a building energy system or building water system
considered for incorporation into a new building design are
insignificant, a Federal agency may presume that such a system is life
cycle cost-effective without further analysis.
(b) A Federal agency may presume that an investment in an energy or
water conservation measure retrofit to an existing Federal building is
not life cycle cost-effective for Federal investment if the Federal
building is--
* * * * *
(2) Occupied under a lease which includes the cost of utilities in
the rent and does not provide a pass-through of energy or water savings
to the government; or
* * * * *
8. Section 436.14, is amended by revising paragraphs (b)(1), (c),
introductory text to paragraph (d)(2), (e) and (g) as follows:
Sec. 436.14 Methodological assumptions.
* * * * *
(b) * * *
(1) If the Federal agency is using component prices under
Sec. 436.14(c), that agency may use corresponding component escalation
rates provided by the energy or water supplier.
* * * * *
(c) Each Federal agency shall assume that the price of energy or
water in the base year is the actual price charged for energy or water
delivered to the Federal building and may use actual component prices
as provided by the energy or water supplier.
(d) * * *
(2) For determining the life cycle costs or net savings of mutually
exclusive alternatives for a given building energy system or building
water system (e.g., alternative designs for a particular system or size
of a new or retrofit building energy system or building water system),
a uniform study period for all alternatives shall be assumed which is
equal to--
* * * * *
(e) Each Federal agency shall assume that the expected life of any
building energy system or building water system is the period of
service without major renewal or overhaul, as estimated by a qualified
engineer or architect, as appropriate, or any other reliable source
except that the period of service of a building energy or water system
shall not be deemed to exceed the expected life of the owned building,
or the effective remaining term of the leased building (taking into
account renewal options likely to be exercised).
* * * * *
(g) Each Federal agency may assume that energy or water costs and
non-fuel or non-water operation and maintenance costs begin to accrue
at the beginning of the base year or when actually projected to occur.
* * * * *
8. Section 436.16 is amended by revising the section heading,
redesignating paragraphs (b) and (c) as paragraphs (c) and (d), and by
adding a new paragraph (b) as follows:
Sec. 436.16 Establishing non-fuel and non-water cost categories.
* * * * *
(b) The relevant non-water cost categories are--
(1) Investment costs;
(2) Non-water operation and maintenance cost;
(3) Replacement cost; and
(4) Salvage value.
* * * * *
9. Section 436.17 is amended by revising the section heading and by
adding paragraphs (c) and (d) to read as follows:
Sec. 436.17 Establishing energy or water cost data.
* * * * *
(c) Each Federal agency shall establish water costs in the base
year by multiplying the total units of water used in the base year by
the price per unit of water in the base year as determined in
accordance with Sec. 436.14(c).
(d) When water costs begin to accrue in the base year, the present
value of water costs over the study period is the product of water
costs in the base year as established under Sec. 436.17(a), or as
calculated by computer software provided or approved by DOE and used
with the official discount rate and assumptions under Sec. 436.14. When
water costs begin to accrue at a later time, subtract the present value
of water costs over the delay, calculated using the uniform present
worth factor for the period of delay, from the present value of water
costs over the study period or, if using computer software, indicate a
delayed beneficial occupancy date.
10. Section 436.18 is amended by revising the introductory text to
paragraph (c), paragraph (d), the first sentence of paragraph (e) and
paragraph (f) to read as follows:
Sec. 436.18 Measuring cost-effectiveness.
* * * * *
(c) Replacement of a building energy or water system with an energy
or water conservation measure by retrofit to an existing Federal
building or by substitution in the design for a new Federal building
shall be deemed cost-effective if--
* * * * *
(d) As a rough measure, each Federal agency may determine estimated
simple payback time under Sec. 436.23, which indicates whether a
retrofit is likely to be cost effective under one of the four
calculation methods referenced in Sec. 436.18(c). An energy or water
conservation measure alternative is likely to be cost-effective if
estimated payback time is significantly less than the useful life of
that system, and of the Federal building in which it is to be
installed.
(e) Mutually exclusive alternatives for a given building energy or
water system, considered in determining such matters as the optimal
size of a solar energy system, the optimal thickness of insulation, or
the best choice of double-glazing or triple-glazing for windows, shall
be compared and evaluated on the basis of life cycle costs or net
savings over equivalent study periods. * * *
(f) When available appropriations will not permit all cost-
effective energy or water conservation measures to be undertaken, they
shall be ranked in descending order of their savings-to-investment
ratios, or their adjusted internal rate of return, to establish
priority. If available appropriations cannot be fully exhausted for a
fiscal year by taking all budgeted energy or water conservation
measures according to their rank, the set of energy or water
conservation measures that will maximize net savings for available
appropriations should be selected.
* * * * *
[[Page 32651]]
11. Section 436.19 is amended by revising paragraph (d) to read as
follows:
Sec. 436.19 Life cycle costs.
* * * * *
(d) Energy and/or water costs.
12. Section 436.21 is revised to read as follows:
Sec. 436.21 Savings-to-investment ratio.
The savings-to-investment ratio is the ratio of the present value
savings to the present value costs of an energy or water conservation
measure. The numerator of the ratio is the present value of net savings
in energy or water and non-fuel or non-water operation and maintenance
costs attributable to the proposed energy or water conservation
measure. The denominator of the ratio is the present value of the net
increase in investment and replacement costs less salvage value
attributable to the proposed energy or water conservation measure.
13. Section 436.22 is revised to read as follows:
Sec. 436.22 Adjusted internal rate of return.
The adjusted internal rate of return is the overall rate of return
on an energy or water conservation measure. It is calculated by
subtracting 1 from the nth root of the ratio of the terminal value of
savings to the present value of costs, where n is the number of years
in the study period. The numerator of the ratio is calculated by using
the discount rate to compound forward to the end of the study period
the yearly net savings in energy or water and non-fuel or non-water
operation and maintenance costs attributable to the proposed energy or
water conservation measure. The denominator of the ratio is the present
value of the net increase in investment and replacement costs less
salvage value attributable to the proposed energy or water conservation
measure.
14. Section 436.23 is revised to read as follows:
Sec. 436.23 Estimated simple payback time.
The estimated simple payback time is the number of years required
for the cumulative value of energy or water cost savings less future
non-fuel or non-water costs to equal the investment costs of the
building energy or water system, without consideration of discount
rates.
15. Section 436.24 is amended by revising the last sentence in the
section as follows:
Sec. 436.24 Uncertainty analyses.
* * * If additional analysis casts substantial doubt on the life
cycle cost analysis results, a Federal agency should consider obtaining
more reliable data or eliminating the building energy or water system
alternative.
[FR Doc. 96-16120 Filed 6-24-96;8:45am]
BILLING CODE 6450-01-P