[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