[Federal Register Volume 65, Number 194 (Thursday, October 5, 2000)]
[Proposed Rules]
[Pages 59590-59632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25336]



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Part IV





Department of Energy





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Office of Energy Efficiency and Renewable Energy



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10 CFR Part 430



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

  Federal Register / Vol. 65 , No. 194 / Thursday, October 5, 2000 / 
Proposed Rules  

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DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 430

[Docket Number EE-RM-97-500]
RIN: 1904-AA77


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

AGENCY: Office of Energy Efficiency and Renewable Energy, Department of 
Energy.

ACTION: Notice of proposed rulemaking and public hearing.

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SUMMARY: Pursuant to the Energy Policy and Conservation Act, as 
amended, the Department of Energy (DOE, Department, or we) is proposing 
to amend the energy conservation standards for residential central air 
conditioners and heat pumps to require them to be more energy 
efficient, and is announcing a public hearing on the proposal.

DATES: Comments must be received on or before December 4, 2000. DOE is 
requesting a signed original, a computer diskette (WordPerfect 8) and 
10 copies of the written comments. The Department will also accept e-
mailed comments, but you must send a signed original. Oral views, data, 
and arguments may be presented at the public hearing (workshop) in 
Washington, DC beginning at 9 a.m. on November 16, 2000.
    The Department must receive requests to speak at the public hearing 
and a copy of your statements no later than 4 p.m., November 1, 2000, 
and we request that you provide a computer diskette (WordPerfect 8) of 
each statement at that time.

ADDRESSES: Please submit written comments, oral statements, and 
requests to speak at the public hearing to: Brenda Edwards-Jones, U.S. 
Department of Energy, Office of Energy Efficiency and Renewable Energy, 
Energy Conservation Program for Consumer Products: Central Air 
Conditioners and Heat Pumps, Docket No. EE-RM/STD-97-500, 1000 
Independence Avenue, SW., Washington, DC 20585-0121. You may send 
emails to: [email protected].
    The hearing will begin at 9 a.m., in Room 1E-245 at the U.S. 
Department of Energy, Forrestal Building, 1000 Independence Avenue, 
SW., Washington DC. You can find more information concerning public 
participation in this rulemaking proceeding in Section VIII, ``Public 
Comment Procedures,'' of this notice of proposed rulemaking.
    You may read copies of the public comments, the Technical Support 
Document for Energy Efficiency Standards for Consumer Products: Central 
Air Conditioners and Heat Pumps (TSD), the transcript of the public 
hearing, and previous workshop transcripts in this proceeding at the 
DOE Freedom of Information (FOI) Reading Room, U.S. Department of 
Energy, Forrestal Building, Room 1E-190, 1000 Independence Avenue, SW., 
Washington, DC 20585, (202-586-3142, between the hours of 9 a.m. and 4 
p.m., Monday through Friday, except Federal holidays. You may obtain 
copies of the TSD and analysis spreadsheets from the Office of Energy 
Efficiency and Renewable Energy's (EERE) web site at: http://www.eren.doe.gov/buildings/codes_standards/applbrf/central_air_conditioner.html.

FOR FURTHER INFORMATION CONTACT: Dr. Michael E. McCabe, U.S. Department 
of Energy, Office of Energy Efficiency and Renewable Energy, Forrestal 
Building, EE-41, 1000 Independence Avenue, SW., Washington, DC 20585-
0121, (202) 586-0854, e-mail: [email protected], or Edward 
Levy, Esq., U.S. Department of Energy, Office of General Counsel, 
Forrestal Building, GC-72, 1000 Independence Avenue, SW., Washington, 
DC 20585, (202) 586-9507, e-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of Proposed Rule
II. Introduction
    A. Authority
    B. Background
    1. Current Standards
    2. History of Previous Rulemakings
    3. Process Improvement
III. General Discussion
    A. Test Procedures
    B. Technological Feasibility
    1. General
    2. Maximum Technologically Feasible Levels
    C. Energy Savings
    1. Determination of Savings
    2. Significance of Savings
    D. Rebuttable Presumption
    E. Economic Justification
    1. Economic Impact on Manufacturers and Consumers
    2. Life-Cycle Costs
    3. Energy Savings
    4. Lessening, If Any, of Utility or Performance of Products
    5. Impact of Any Lessening of Competition
    6. Need of The Nation to Conserve Energy
    7. Other Factors
IV. Methodology
    A. Life-Cycle-Cost and Payback Period Analysis
    B. National Energy Savings and Net Present Value Analysis
    C. Manufacturer Impact Analysis
    1. Phase 1, Industry Profile
    2. Phase 2, Industry Cash Flow Analysis
    3. Phase 3, Sub-Group Impact Analysis
    4. GRIM Analysis
    D. NEMS Environmental Analysis
V. Discussion of Comments
    A. Engineering Cost Data
    1. Reverse Engineering Cost Estimates
    2. Productivity Efficiency Improvements
    3. Emerging Technologies
    4. HFC-Based Engineering Analysis
    B. Life-Cycle-Cost Parameters
    1. Extended Warranty and Service Costs
    2. Residential Energy Consumption Survey (RECS)
    3. Equipment Lifetime
    4. Commercial Applications
    5. Marginal Electricity Prices
    6. Forecast of Future Electricity Prices
    7. Discount Rates
    8. Percentage of Households with LCC Savings
    9. Regional Analysis
    10. Rebuttable Payback
    11. Sensitivity Analyses
    C. Shipments Analysis
    1. Forecasted Housing Shifts
    2. Elasticities
    3. Equipment Efficiency
    4. Fuel Switching
    D. National Energy Savings Analysis
    1. Uncertainty in NES Results
    2. Site-to-Source Conversion
    E. Consumer Sub-Group Analysis, Low Income Renters
    F. Utility and Environmental Analysis
    1. Peak Power Impacts, Reliability
    2. Quantitative Assessment of Impacts on Peak Demand
    3. Qualitative Assessment of Air Conditioning Standards Impact 
on Power System Reliability
    4. Competitive Residential Market
    G. Manufacturer Impact Analysis--Low Volume Manufacturers
    H. Markups
    I. EER-Based Efficiency Standard
    1. Current Relationship between SEER and EER
    2. Options for Possible EER Standards
    J. Niche Products
    1. Ductless Split Air Conditioners and Heat Pumps
    2. Small Duct High Velocity Air Conditioners
    3. Vertical Packaged, Wall Mounted
    4. Through-the-Wall Condensers
    5. Non-Weatherized Single-Package Unit, Mounted Entirely within 
the Structure
    6. Request for Comments Regarding Niche Product Standards
    K. Thermostatic Expansion Valves
    L. Other Comments
    1. Latent Heat Removal
    2. 3-Phase Equipment
    3. SEER-HSPF Relationship
    4. Max Tech
VI. Analytical Results
    A. Trial Standard Levels
    B. Significance of Energy Savings
    C. Payback Period

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    D. Economic Justification
    1. Economic Impact on Manufacturers
    2. Life-Cycle Cost
    3. Net Present Value and Net National Employment
    4. Impact on Utility or Performance of Products
    5. Impact of Any Lessening of Competition
    6. Need of the Nation to Save Energy
    7. Other Factors
    E. Conclusion
VII. Procedural Issues and Regulatory Review
    A. Review Under the National Environmental Policy Act
    B. Review Under Executive Order 12866, ``Regulatory Planning and 
Review'
    C. Review Under the Regulatory Flexibility Act
    D. Review Under the Paperwork Reduction Act
    E. Review Under Executive Order 12988, ``Civil Justice Reform''
    F. ``Takings'' Assessment Review
    G. Review Under Executive Order 13132
    H. Review Under the Unfunded Mandates Reform Act
    I. Review Under the Treasury and General Government 
Appropriations Act of 1999
    J. Review Under the Plain Language Directives
VIII. Public Comment
    A. Written Comment Procedures
    B. Public Workshop/Hearing
    1. Procedure for Submitting Requests to Speak
    2. Conduct of Hearing
    C. Issues for Which DOE Seeks Comment

I. Summary of Proposed Rule

    The Department is proposing to raise the energy efficiency 
standards for residential air conditioners and central air conditioning 
heat pumps (heat pumps) to 12 SEER \1\ for air conditioners and to 13 
SEER/7.7 HSPF \2\ for heat pumps. The proposed standards would apply to 
all covered products offered for sale in the United States, effective 
on January 1, 2006. The proposed standard for split system air 
conditioners, the most common type of residential air conditioning 
equipment represents a 20% improvement in energy efficiency. For split 
system heat pumps, the new standards would represent a 30% improvement 
in cooling efficiency and a 13% improvement in heating efficiency. The 
proposed standards would also increase the efficiency of packaged air 
conditioners and packaged heat pumps by 24% and 17%, respectively. 
Finally, the Department is proposing provisions for some special 
products to ensure that more efficient versions remain available for 
niche applications.
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    \1\ SEER, Seasonal Energy Efficiency Ratio, is the Department's 
measure of energy efficiency for the seasonal cooling performance of 
central air conditioners and heat pumps.
    \2\ HSPF, Heating Seasonal Performance Factor, is the 
Department's measure of energy efficiency for the seasonal heating 
performance of heat pumps.
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    The proposed standards would save a significant amount of energy 
and, as a result of less electricity being produced, result in a 
cleaner environment. In the 25-year period after the new standards 
become effective, the nation would save over 3.4 Quads \3\ of primary 
energy, equivalent to all the energy consumed by nearly 18 million 
American households in a single year. These energy savings would also 
significantly reduce the emissions of air pollutants and greenhouse 
gases associated with electricity production, by avoiding the emission 
of 56 million tons (Mt) of Carbon and 52 thousand tons (kt) nitrogen 
oxides (NOX). Also, the standards are expected to eliminate 
the need for the construction of approximately 31 (4 coal-fired and 27 
natural gas-fired) new large, 400 megaWatt (MW), power plants in 2020.
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    \3\ Quad, means quadrillion (10\15\ Btus).
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    In addition to the increase proposed in SEER and HSPF, we are 
proposing and requesting public comments on a proposal to adopt a 
standard for steady-state cooling efficiency, EER.\4\ A requirement on 
EER would ensure more efficient operation at high outdoor temperature, 
during periods when electricity use by air conditioners is at its peak. 
This would help to further alleviate the need for new electric power 
plants and reduce the demands placed on the electric transmission and 
distribution systems during periods of high usage, thereby, improving 
system reliability.
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    \4\ EER, Energy Efficiency Ratio, is a steady-state measure of 
energy efficiency which measures efficiency at a prescribed outdoor 
temperature (95 deg.F), and is one of the test conditions in the 
Department's test procedure used to develop the SEER.
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    Finally, consumers would see benefits from the proposed standards. 
For example, while the initial cost of a typical central air 
conditioner would increase by $122 to $153 or about 10-12%, the higher 
efficiency equipment would save enough over its life to pay for the 
increase in the price of the equipment plus an extra $45. Many 
consumers, especially air conditioner owners in warmer parts of the 
country and heat pump owners, would save even more.
    While the higher efficiency units are widely available today and 
promoted through the Department of Energy and the Environmental 
Protection Agency (EPA) Energy Star  program, as well as 
utility rebate programs, manufacturers would be redesigning their 
product line to meet the efficiency standards. At the same time they 
would be redesigning their products to respond to the phase-out 
hydrochloroflourocarbons (HCFC's) refrigerants required by EPA. By 
making both changes at once, i.e., efficiency and HCFC refrigerants, 
manufacturers will be able to plan and apply their resources in a cost-
effective manner, resulting in lower burdens and costs.

II. Introduction

A. Authority

    Part B of Title III of the Energy Policy and Conservation Act 
(EPCA), Pub. L. 94-163, as amended by the National Energy Conservation 
Policy Act of 1978, Pub. L. 95-619, the National Appliance Energy 
Conservation Act, Pub. L. 100-12, the National Appliance Energy 
Conservation Amendments of 1988, Pub. L. 100-357, and the Energy Policy 
Act of 1992, Pub. L. 102-486 \5\ created the Energy Conservation 
Program for Consumer Products other than Automobiles. The consumer 
products subject to this program (often referred to hereafter as 
``covered products'') include central air conditioners and heat pumps. 
EPCA section 322(a)(4), 42 U.S.C. 6292(a)(4).
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    \5\ Part B of Title III of the Energy Policy and Conservation 
Act, as amended by the National Energy Conservation Policy Act, the 
National Appliance Energy Conservation Act, the National Appliance 
Energy Conservation Amendments of 1988, and the Energy Policy Act of 
1992, is referred to in this notice as the ``Act,'' or ``EPCA.'' 
Part B of Title III is codified at 42 U.S.C. 6291 et seq. Part B of 
Title III of the Energy Policy and Conservation Act, as amended by 
the National Energy Conservation Policy Act only, is referred to in 
this notice as the National Energy Conservation Policy Act.
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    Under the Act, the program consists essentially of four parts: 
testing, labeling, Federal energy conservation standards, and 
certification and enforcement procedures. The Federal Trade Commission 
is responsible for labeling, and DOE implements the remainder of the 
program. Section 323 of the Act authorizes the Department, with 
assistance from the National Institute of Standards and Technology 
(NIST) and subject to certain criteria and conditions, to develop test 
procedures to measure the energy efficiency, energy use, or estimated 
annual operating cost of each covered product. 42 U.S.C. 6293. The 
central air conditioners and heat pump test procedures appear at title 
10 Code of Federal Regulations (CFR) part 430, subpart B, Appendix M.
    The Act prescribes initial Federal energy conservation standards 
for each of the listed covered products, except television sets. EPCA 
section 325 (b)-(k), 42 U.S.C. 6295 (b)-(k). For central air 
conditioners and heat pumps, EPCA section 325(d)(3)(A) specifies that 
the

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standards are to be reviewed by the Department no later than January 1, 
1994. 42 U.S.C. 6295(d)(3)(A).
    Any new or amended standard must be designed so as to achieve the 
maximum improvement in energy efficiency that is technologically 
feasible and economically justified. EPCA section 325(o)(2)(A), 42 
U.S.C. 6295(o)(2)(A). Moreover, the Department may not prescribe a 
standard for: (1) Certain products, including central air conditioners 
and heat pumps, if no test procedure has been established for the 
product, or (2) any product, if DOE determines by rule that a standard 
for the product either would not result in significant conservation of 
energy, or is not technologically feasible or economically justified. 
EPCA section 325(o)(3), 42 U.S.C. 6295(o)(3).
    Section 325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i) provides that 
DOE must determine whether a standard is economically justified, after 
receiving comments on the proposed standard, and whether the benefits 
of the standard exceed its burdens, based, to the greatest extent 
practicable, on a weighing of the following seven factors:

    ``(1) The economic impact of the standard on the manufacturers 
and the consumers of the products subject to such standard;
    (2) The savings in operating costs throughout the estimated 
average life of the covered product in the type (or class) compared 
to any increase in the price of, or in the initial charges for, or 
maintenance expenses of, the covered products which are likely to 
result from the imposition of the standard;
    (3) The total projected amount of energy * * * savings likely to 
result directly from the imposition of the standard;
    (4) Any lessening of the utility or the performance of the 
covered products likely to result from the imposition of the 
standard;
    (5) The impact of any lessening of competition, as determined in 
writing by the Attorney General, that is likely to result from the 
imposition of the standard;
    (6) The need for national energy conservation; and
    (7) Other factors the Secretary considers relevant.''

    In addition, Section 325(o)(2)(B)(iii) of the Act, 42 U.S.C. 
6295(o)(2)(B)(iii), establishes a rebuttable presumption that a 
standard is economically justified if the Secretary finds that ``the 
additional cost to the consumer of purchasing a product complying with 
an energy conservation standard level will be less than three times the 
value of the energy * * * savings during the first year that the 
consumer will receive as a result of the standard, as calculated under 
the applicable test procedure * * * '' The rebuttable presumption test 
is an alternative path to establishing economic justification.
    Section 327 of the Act, 42 U.S.C. 6297, provides that generally the 
Federal energy efficiency requirements supersede State laws or 
regulations concerning energy conservation testing, labeling, and 
standards, and specifies limited exceptions to this general rule. EPCA 
Section 327(a) through (c), 42 U.S.C. 6297 (a) through (c). The 
Department can grant a waiver of preemption in accordance with the 
procedures and other provisions of Section 327(d) of the Act. 42 U.S.C. 
6297(d).

B. Background

1. Current Standards
    The existing standards for residential central air conditioners and 
heat pumps have been in effect since 1992. Energy efficiency for air 
conditioner and heat pump cooling has been defined by the descriptor 
SEER. Energy efficiency for heat pumps has been defined by the 
descriptor, Heating Seasonal Performance Factor (HSPF) while operating 
during the heating season and by SEER while operating during the 
cooling season. The current central air conditioners and heat pumps 
efficiency standards are as follows:

--Split system air conditioners and heat pumps--10 SEER/6.8 HSPF
--Single package air conditioners and heat pumps--9.7 SEER/6.6 HSPF
2. History of Previous Rulemakings
    On September 8, 1993, DOE published an Advance Notice of Proposed 
Rulemaking (ANOPR) announcing the Department's intention to revise the 
existing central air conditioner and heat pump efficiency standard. (58 
FR 47326). On November 24, 1999, DOE published a Supplemental ANOPR 
(hereinafter referred to as the Supplemental ANOPR). 64 FR 66306. In 
the Supplemental ANOPR and during the December 9, 1999, public 
workshop, we provided interested persons an opportunity to comment on 
several issues, including:
    (1) The product classes that the Department planned to analyze;
    (2) The analytical framework, models (e.g., the Government 
Regulatory Impact Model (GRIM)), and tools (e.g., a Monte Carlo 
sampling methodology, and the life-cycle cost (LCC) and national energy 
savings (NES) spreadsheets) that the Department was using in performing 
analyses of the impacts of energy conservation standards;
    (3) The results of preliminary analyses for the engineering, LCC, 
payback and NES; and
    (4) The candidate energy conservation standard levels that the 
Department had developed from these analyses.
3. Process Improvement
    The fiscal year (FY) 1996 appropriations legislation imposed a 
moratorium on proposed or final rules for appliance efficiency 
standards for FY 1996. Pub. L. 104-134. During the moratorium, the 
Department examined the appliance standards program and how it was 
working. Congress advised DOE to correct the standards-setting process 
and to bring together stakeholders (such as manufacturers and 
environmentalists) for assistance. Therefore, we consulted with energy 
efficiency groups, manufacturers, trade associations, state agencies, 
utilities and other interested parties to provide input to the process 
used to develop appliance efficiency standards. As a result, on July 
15, 1996, the Department published a final rule: Procedures for 
Consideration of New or Revised Energy Conservation Standards for 
Consumer Products (referred to as the Process Rule) (61 FR 36974), 
codified at 10 CFR part 430, subpart C, Appendix A.
    The Process Rule states that for products, such as central air 
conditioners and heat pumps, for which DOE issued a proposed rule prior 
to August 14, 1996, DOE would conduct a review to decide whether any of 
the analytical or procedural steps already completed should be 
repeated. (61 FR 36982). DOE completed this review and decided to use 
the Process Rule, to the extent possible, in the development of the 
revised central air conditioners and heat pumps standards.
    We developed an analytical framework for the central air 
conditioners and heat pumps standards rulemaking for our stakeholders, 
which we presented during a workshop on June 30, 1998. The analytical 
framework described the different analyses (e.g., LCC, payback and 
manufacturing impact analyses (MIA)) to be conducted, the method for 
conducting them, the use of new LCC and NES spreadsheets, and the 
relationship of the various analyses.

III. General Discussion

A. Test Procedures

    Section 7(b) of the Process Rule states that necessary 
modifications to test procedures concerning efficiency standards will 
be proposed before issuance of a proposed rule. Section 7(c) of the 
Process Rule states that a final modified test procedure will be issued

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prior to issuing a proposed rule regarding energy conservation 
standards. The residential central air conditioner and heat pump test 
procedure is being revised to improve its organization and ease of use, 
with a proposed rule to be published. This revision of the test 
procedure is not expected to alter the measured efficiencies as 
determined under the existing test procedure. Therefore, the revised 
test procedure would not affect development of revised efficiency 
standards. For these reasons, revisions to the test procedure are not a 
``necessary modification'' as that term is used in the Process Rule, 
but rather a routine update, and hence need not be finalized before 
issuance of the proposed rule for these standards.

B. Technological Feasibility

1. General
    There are central air conditioners and heat pumps in the market at 
all of the efficiency levels analyzed in today's notice. The 
Department, therefore, believes all of the efficiency levels discussed 
in today's notice are technologically feasible.
2. Maximum Technologically Feasible Levels
    The Act requires the Department, in a proposed rule that sets forth 
new or amended standards, to ``determine the maximum improvement in 
energy efficiency * * * that is technologically feasible for each type 
(or class) of covered products.'' EPCA section 325 (p)(2), 42 U.S.C. 
6295(p)(2). Accordingly, for each class of product under consideration 
in this rulemaking, a maximum technologically feasible (Max Tech) level 
was identified.
    As previously stated in Section II.B, residential central air 
conditioner and heat pump cooling efficiency is expressed as a SEER. 
Heating efficiency is expressed as a HSPF. The most efficient 
technology presently available is a 3-ton 18 SEER central air 
conditioner. The Department has determined that at this time 18 SEER is 
the Max Tech level for cooling efficiency for all product classes and 
capacities in this analysis. The Max Tech level for heating efficiency, 
corresponding to the 18 SEER level, is 9.4 HSPF which is the highest 
HSPF rating currently available in residential heat pumps.

C. Energy Savings

1. Determination of Savings
    The Department estimated energy savings through the use of the NES 
spreadsheet, which forecasted energy savings over the period of 
analysis for candidate standards relative to the base case. The 
Department quantified the energy savings that would be attributable to 
a standard as the difference in energy consumption between the 
candidate standards case and the base case. The base case represents 
the forecast of energy consumption in the absence of amended mandatory 
efficiency standards.
    The NES spreadsheet model is described in Section IV.B of this 
notice, Appendix of the Technical Support Document and also in the 
Supplemental ANOPR. (64 FR 66306). The NES spreadsheet model calculates 
the energy savings in site energy or kilowatt-hours (kWh). Site energy 
is the energy directly consumed at building sites by the central air 
conditioner or heat pump. National energy savings are expressed in 
terms of the source energy savings which is the savings in energy used 
to generate and transmit the electricity consumed at the site. Chapter 
7 of the TSD contains a table of factors used to convert kWh to Btu. 
These conversion factors, which change with time, are derived from 
DOE's Energy Information Administration's (EIA) Annual Energy Outlook 
2000 (AEO2000).
2. Significance of Savings
    The Act prohibits the Department from adopting a standard for a 
product if that standard would not result in ``significant'' energy 
savings. EPCA section 325(o)(3)(B), 42 U.S.C. 6295(o)(3)(B). While the 
term ``significant'' is not defined in the Act, the U.S. Court of 
Appeals, in Natural Resources Defense Council v. Herrington, 768 F.2d 
1355, 1373 (D.C. Cir. 1985), indicated that Congress intended 
``significant'' energy savings in this context to be savings that were 
not ``genuinely trivial.'' The energy savings for all of the trial 
standard levels considered in this rulemaking are non-trivial and 
therefore we consider them ``significant'' within the meaning of 
section 325 of the Act.

D. Rebuttable Presumption

    The National Appliance Energy Conservation Act established new 
criteria for determining whether a standard level is economically 
justified. EPCA section 325(o)(2)(B)(iii) states:

    ``If the Secretary finds that the additional cost to the 
consumer of purchasing a product complying with an energy 
conservation standard level will be less than three times the value 
of the energy * * * savings during the first year that the consumer 
will receive as a result of the standard, as calculated under the 
applicable test procedure, there shall be a rebuttable presumption 
that such standard level is economically justified. A determination 
by the Secretary that such criterion is not met shall not be taken 
into consideration in the Secretary's determination of whether a 
standard is economically justified.''

    If the increase in initial price of an appliance due to a 
conservation standard would repay itself to the consumer in energy 
savings in less than three years, then we presume that such standard is 
economically justified.\6\ This presumption of economic justification 
can be rebutted upon a proper showing.
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    \6\ For this calculation, the Department calculated cost-of-
operation based on the DOE test procedure, with the test procedure 
assumed annual hours of operation. Consumers that use the central 
air conditioner or heat pump fewer hours will experience a longer 
payback while those that use them more will have a shorter payback.
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E. Economic Justification

    As noted earlier, section 325(o)(2)(B)(i) of the Act provides seven 
factors to be evaluated in determining whether a conservation standard 
is economically justified.
1. Economic Impact on Manufacturers and Consumers
    The Process Rule established procedures, interpretations and 
policies to guide the Department in the consideration of new or revised 
appliance efficiency standards. The provisions of the rule have direct 
bearing on the implementation of manufacturer impact analyses. First, 
the Department will use an annual cash flow approach in determining the 
quantitative impacts on manufacturers. This includes a short-term 
assessment based on the cost and capital requirements during the period 
between the announcement of a regulation and the time when the 
regulation comes into effect, and a long-term assessment. Impacts 
analyzed include industry net present value, cash flows by year, 
changes in revenue and income, and other measures of impact, as 
appropriate. Second, the Department will analyze and report the impacts 
on different types of manufacturers, with particular attention to 
impacts on small manufacturers. Third, the Department will consider the 
impact of standards on domestic manufacturer employment, manufacturing 
capacity, plant closures and loss of capital investment. Finally, the 
Department will take into account cumulative impacts of different DOE 
regulations on manufacturers.
    For consumers, measures of economic impact are the changes in 
installed cost and annual operating costs, i.e., LCC. The life-cycle 
cost of the product at each standard level are presented in Chapter

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5 of the TSD. Under section 325 of the Act, the life-cycle cost 
analysis is a separate factor to be considered in determining economic 
justification.
2. Life-Cycle Costs
    The life-cycle cost is the sum of the purchase price, including the 
installation, and the operating expense, including operating energy, 
maintenance, and repair expenditures, discounted over the lifetime of 
the appliance.
    For each central air conditioner and heat pump product class, we 
calculated both life-cycle costs and life cycle cost savings for the 
following space-cooling efficiency levels: 11, 12, 13, and 18 SEER. For 
heat pumps, the following space-heating efficiency levels correspond to 
the above SEER values: 7.1, 7.4, 7.7, and 8.8 HSPF, respectively. The 
calculated life-cycle cost savings is given as a distribution, with a 
mean value and a range. We used a distribution of real discount rates 
ranging from 0.1 to 18% for the calculations. The assumption is that 
the consumer purchases the central air conditioner and/or heat pump in 
2006. For the probability-based LCC analysis, a building-by-building 
analysis is performed for purposes of generating a distribution of 
life-cycle costs for each efficiency level analyzed. The building stock 
is composed of both residential and commercial buildings under the 
assumption that 90% of single-phase central air conditioners and heat 
pumps are utilized in residential buildings with the remaining 10% in 
commercial buildings. The 1997 Residential Energy Consumption Survey 
(RECS) is used to represent the residential building stock while 77 
commercial buildings are used to represent the commercial building 
stock based on assumptions consistent with those used in the process to 
update ASHRAE Standard 90.1-1999. Annual energy costs are based on 
marginal electricity prices which are developed for each residential 
and commercial building. Electricity price forecasts are taken from the 
AEO2000 (DOE/EIA-0383). The LCC calculations include markup structures 
developed for both the new construction and replacement/retrofit 
markets. Chapter 5 of the TSD contains the details of the LCC 
calculations including those considered under factor seven below.
3. Energy Savings
    While significant conservation of energy is a separate statutory 
requirement for imposing an energy conservation standard, the Act 
requires DOE, in determining the economic justification of a standard, 
to consider the total projected energy savings that are expected to 
result directly from revised standards. The Department used the NES 
spreadsheet results, discussed earlier, in its consideration of total 
projected savings. The savings are provided in section V of this 
notice.
4. Lessening, if Any, of Utility or Performance of Products
    This factor cannot be quantified. In establishing classes of 
products, and in evaluating design options and the impact of potential 
standard levels, the Department tried to eliminate any degradation of 
utility or performance in the products under consideration in this 
rulemaking. None of the proposed trial standard levels reduces the 
performance of central air conditioners and heat pumps.
5. Impact of Any Lessening of Competition
    The Act directs the Department to consider any lessening of 
competition that is likely to result from standards. It further directs 
the Attorney General to determine the impact, if any, of any lessening 
of competition likely to result from a proposed standard and transmit 
such determination to the Secretary, not later than 60 days after the 
publication of a proposed rule, together with an analysis of the nature 
and extent of such impact. Section 325(o)(2)(B)(i)(V) and (B)(ii), 42 
U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii).
    In order to assist the Attorney General in making such a 
determination, the Department has provided the Attorney General with 
copies of this notice and the Technical Support Document for review.
6. Need of the Nation To Conserve Energy
    We report the environmental effects from each standard level for 
each product under this factor in Section VI of this notice.
7. Other Factors
    During the extreme periods of heat and humidity that took place in 
the summer of 1999, electric power outages and other system 
disturbances disrupted the lives of millions of people and thousands of 
businesses in various regions of our country. In response to public 
concerns about this problem, the Secretary of Energy formed a team of 
experts to investigate the problem and to recommend actions that the 
Federal government can take to help avoid future power outages by 
improving the reliability of the U.S. electric power system. One of the 
actions proposed by the Secretary at that time was to accelerate the 
rulemaking process and advance the publication of a final rule for 
central air conditioners by six months.
    The Final Report \7\ by the team of experts, issued in March, 2000, 
included the recommendation to increase the energy efficiency of 
central air conditioners as one means for enhancing reliability. The 
report stated, ``Technologies and practices that reduce loads during 
times of peak demand, such as high-efficiency air conditioning and 
lighting equipment, are especially valuable.'' This was based on the 
finding that in several of the affected regions ``Retail customers have 
limited mechanisms and incentives to conserve energy or resort to 
alternatives during electricity shortages.'' Included in the federal 
activities that promote energy efficiency recommended to the Secretary 
was to promulgate standards for more efficient technologies.
---------------------------------------------------------------------------

    \7\ ``Report of the U.S. Department of Energy's Power Outage 
Study Team: Findings and Recommendations to Enhance Reliability from 
the Summer of 1999'', March 2000.
---------------------------------------------------------------------------

    As an additional element to consider under this factor, the 
Secretary has decided to evaluate the life-cycle cost impacts on those 
subgroups of consumers who are at or below the poverty line (e.g., for 
a family of four, this constitutes a household income of less than 
$16,036).

IV. Methodology

    The Process Rule outlines the procedural improvements identified by 
the interested parties. 61 FR 36974. The process improvement effort 
also included a review of the: (1) Economic models; (2) analytical 
tools; (3) methodologies; (4) non-regulatory approaches; and (5) 
prioritization of future rules.
    The Department continues to use two spreadsheet tools to meet the 
objectives of the Process Rule. The first spreadsheet calculates life-
cycle-costs and payback periods of potential new energy conservation 
standards. The second conducts shipments forecasts and then calculates 
national energy savings and net present value impacts of potential new 
energy conservation standards. The Department also completely revised 
the methodology used in assessing manufacturer impacts including the 
adoption of the GRIM.
    Additionally, DOE has estimated the impacts of central air 
conditioner and heat pump energy efficiency standards on electric 
utilities and the environment. The Department used a version of EIA's 
National Energy Modeling System (NEMS) for the utility

[[Page 59595]]

and environmental analyses. NEMS simulates the energy economy of the 
U.S. and has been developed over several years by the EIA primarily for 
the purpose of preparing the AEO. NEMS produces a widely-known baseline 
forecast for the U.S. through 2020 that is available in the public 
domain. The version of NEMS used for appliance standards analysis is 
called NEMS-BRS,\8\ and is based on the AEO2000 version with minor 
modifications. NEMS offers a sophisticated picture of the effect of 
standards since its scope allows it to measure the interactions between 
the various energy supply and demand sectors and the economy as a 
whole.
---------------------------------------------------------------------------

    \8\ EIA approves use of the name NEMS to describe only an AEO 
version of the model without any modification to code or data. 
Because our analysis entails some minor code modifications and the 
model is run under various policy scenarios that deviate from AEO 
assumptions, the name NEMS-BRS refers to the model as used here. For 
more information on NEMS, please refer to the National Energy 
Modeling System: An Overview 1998. DOE/EIA-0581 (98), February, 
1998. BRS is DOE's Office of Building Research and Standards.
---------------------------------------------------------------------------

A. Life-Cycle Cost and Payback Period Analysis

    This section describes the LCC and payback period analysis and the 
spreadsheet model used for analyzing the economic impacts of possible 
standards on individual residential and commercial consumers. Details 
of the spreadsheet model can be found in Chapters 5 in the TSD. We 
conduct the LCC and payback period analysis with a spreadsheet model 
developed in Microsoft Excel for Windows 95 or above. When combined 
with Crystal Ball (a commercially available software program), the LCC 
and payback period generates a Monte Carlo simulation to perform the 
analysis by incorporating uncertainty and variability considerations.
    The LCC is the total consumer expense over the life of the 
appliance, including purchase expense and operating costs (including 
energy expenditures). Future operating costs are discounted to the time 
of purchase and summed over the lifetime of the appliance. The payback 
period is the change in purchase expense due to an increased efficiency 
standard divided by the change in annual operating cost that results 
from the standard. For today's proposed rule, both the LCC and payback 
period are based on a building-by-building analysis of a nationally 
representative set of residential and commercial buildings.
    The set of residential buildings are taken from those households in 
the 1997 RECS equipped with either a central air conditioner or heat 
pump. Of the 5,900 households surveyed in the 1997 RECS, 2,003 
households representing 37.6% of the housing population have a central 
air conditioner while 579 households representing 11.1% of the housing 
population have heat pumps.\9\ RECS specifies the annual space-cooling 
energy consumption and, in the case of heat pumps, the annual space-
heating energy consumption associated with the space-conditioning 
equipment. Also provided is the age of the space-conditioning equipment 
which, when coupled with historical equipment efficiency data provided 
by the Air-Conditioning and Refrigeration Institute (ARI), allows for 
the imputation of the household's space-conditioning equipment 
efficiency (i.e., the SEER and, in the case of heat pumps, the HSPF). 
With both the annual energy use and the efficiency of the central air 
conditioner or heat pump specified, the annual energy use associated 
with equipment at higher efficiency levels is simply determined by 
multiplying the household's existing annual energy use by the ratio of 
the existing equipment efficiency divided by the efficiency of the more 
efficient equipment. Household utility billing data in RECS allows for 
the determination of average and marginal electricity prices. The 
electricity price data along with the annual energy use data allows for 
the determination of annual electricity cost savings for any efficiency 
level.
---------------------------------------------------------------------------

    \9\ The number of households actually used in the central air 
conditioner and heat pump LCC and Payback period analyses were 1218 
and 308, respectively. Some central air-conditioned households were 
dropped from the analysis for one or more of the following reasons: 
(1) The central air conditioner was not used, (2) a room air 
conditioner was present and used, or (3) marginal energy prices 
could not be determined for the household. With regard to households 
with heat pumps, they were dropped from the analysis for one or more 
of the following reasons: (1) The heat pump was not used or (2) 
marginal energy prices could not be determined for the household.
---------------------------------------------------------------------------

    The set of commercial buildings are based on assumptions consistent 
with those used to develop the American Society of Heating, 
Refrigerating, and Air-Conditioning Engineers' (ASHRAE) Standard 90.1-
1999. The commercial building data set consists of seven building types 
located in eleven different geographic regions yielding a total of 77 
buildings. An hourly simulation program is used to calculate the annual 
full-load equivalent operating hours (FLEOH) of the space-cooling and 
space-heating equipment in each building. The FLEOHs are used with the 
Department of Energy's test procedure equations for central air 
conditioners and heat pumps to obtain each building's annual space-
cooling and space-heating energy consumption. Similar to the analysis 
for residential buildings, the energy use associated with equipment at 
higher efficiency levels is simply determined by multiplying the 
building's simulated annual energy use by the ratio of the building's 
assumed equipment efficiency (i.e., 10 SEER) divided by the efficiency 
of the more efficient equipment. Average and marginal electricity 
prices for each commercial building are determined by applying a 
national sample of electric utility tariffs to the simulated load and 
demand. The electricity price data along with the annual energy use 
data allows for the determination of annual electricity cost savings 
for any efficiency level for each commercial building.
    The probability-based LCC and payback period analysis samples 
buildings from the residential and commercial building data set in 
order to produce a distribution of LCC results for a given standard 
level. The LCC and payback period analysis takes 10,000 samples to 
create a distribution of results based on the assumption that 90% of 
the single-phase central air conditioning and heat pump equipment stock 
are in residential buildings with the remaining 10% in commercial 
buildings.
    The spreadsheet model is organized so that ranges or distributions 
can be entered for each input variable needed to perform the 
calculations. The LCC and payback period output can be either a point 
value when we use the average value of the inputs or a distribution 
when we use distributions for some or all of the inputs. Inputs for 
determining the total installed cost include: Baseline manufacturer 
costs, manufacturer cost multipliers for each efficiency level, 
manufacturer markups, distributor or wholesaler markups, dealer or 
contractor markups, builder markups, sales taxes, and installation 
costs. Of the above total installed cost inputs, the manufacturer, 
dealer, distributor, and builder markups, as well as the sales tax and 
installation price are described with distributions. Inputs for 
determining operating expenses include: Annual energy consumption, 
average electricity prices, marginal electricity prices, electricity 
price projections, repair costs, maintenance costs, equipment lifetime, 
discount rates, and the year standards take effect. Of the above 
operating expense inputs, the discount rate and equipment lifetime are 
described with distributions (note that neither the discount rate nor 
lifetime are needed to determine the payback period). Operating 
expense, annual

[[Page 59596]]

energy use and electricity prices, although represented by point-values 
for each residential and commercial building, are highly variable when 
looking at the entire building data set. Chapter 5 of the TSD contains 
the details of all the inputs to the LCC and payback period analysis.
    In addition to determining payback periods with the spreadsheet 
model, the Act requires us to determine a rebuttable payback period. 
The Act requires the Department to examine payback periods to determine 
if the three year rebuttable presumption of economic justification 
applies. As prescribed by the Act, the rebuttable payback period is 
``calculated under the applicable test procedure, * * * .''
    The annual space-cooling and space-heating energy consumption 
calculated based on the Department's test procedure are on the order of 
50% greater than the weighted-average values from the LCC analysis 
(i.e., analyses based on the 1997 RECS for residential buildings and 
hourly simulations for commercial buildings). As will be shown in 
Section VI (Analytical Results), the payback value calculated from the 
Department's test procedure equations will be significantly lower than 
the average payback value calculated from the LCC analysis, for any 
standard level.

B. National Energy Savings and Net Present Value Analysis

    In order to make the analysis more accessible and transparent to 
all stakeholders, we continue to use an Excel spreadsheet model to 
calculate the energy savings and the national economic costs and 
savings from new standards. Various input quantities within the 
spreadsheet can be changed. Unlike the LCC analysis, the NES 
spreadsheet does not use distributions for inputs or outputs. We 
conduct sensitivities by running different scenarios.
    DOE uses the NES spreadsheet to perform calculations of energy 
savings and net present value (NPV) based on user inputs similar to 
those for the LCC spreadsheet. The energy savings, energy cost savings, 
equipment costs, and NPV of benefits for several product classes are 
forecast from the chosen start year through 2030. The forecasts provide 
annual and cumulative values for all four output parameters.
    The Department calculates the national energy savings by 
subtracting energy use under a standards scenario from energy use in a 
base case (no new standards scenario). Energy use is reduced when the 
baseline central air conditioner or heat pump (i.e, 10 SEER) is 
replaced by a more efficient piece of equipment. Unit energy savings 
for each product class are the same weighted-average values as 
calculated in the LCC and Payback period spreadsheet. Additional 
information about the NES spreadsheet can be found in Chapter 7 of the 
TSD.
    User inputs include: (1) A choice from among several electricity 
price projections: (2) effective date of the central air conditioners 
and heat pumps standard; (3) discount rate and discount year; (4) a 
standards case efficiency level; (5) an equipment price; (6) an 
equipment price and housing projection; and (7) an efficiency scenario. 
Additionally, we use a time series of conversion factors to change from 
site to source energy.
    The efficiency scenario specifies the equipment efficiency 
distribution after new standards would take effect. Three efficiency 
scenarios were used to forecast the impact new standards would have 
after they take effect: (1) National Appliance Energy Conservation Act 
(NAECA) scenario,\10\ (2) Roll-up scenario,\11\ and (3) Shift 
scenario.\12\ As opposed to the Supplemental ANOPR where weighted-
average equipment efficiencies were forecasted, an actual distribution 
of efficiencies (i.e., the percentage of shipments which occur in 
incremental SEER bins over the range from the minimum standard to 18 
SEER) were used in the analysis for the proposed rule.
---------------------------------------------------------------------------

    \10\ Under the NAECA scenario, equipment efficiencies after the 
adoption of new standards are forecasted to change in the same 
pattern as the efficiency changes that occurred in 1992 when minimum 
efficiency standards first took effect. This results in weighted 
average equipment efficiencies, based on minimum efficiency 
standards of 11, 12, and 13 SEER, of 11.6 SEER, 12.4 SEER, and 13.4 
SEER, respectively.
    \11\ Under the Roll-up scenario, equipment that in the base case 
were forecast to be less efficient than the trial standard level are 
assumed to move up to the standard level, and equipment forecasted 
in the base case to be at or above the trial standard level are 
assumed not to increase in efficiency. This results in weighted-
average equipment efficiencies, based on minimum efficiency 
standards of 11, 12, and 13 SEER, of 11.5 SEER, 12.3 SEER, and 13.3 
SEER, respectively.
    \12\ Under the Shift scenario, equipment efficiencies after the 
adoption of new standards are forecast to have the same pattern, at 
and above the standard levels, as the current distribution of 
efficiencies. This results in weighted-average equipment 
efficiencies, based on minimum efficiency standards of 11, 12, and 
13 SEER, of 11.7 SEER, 12.7 SEER, and 13.7 SEER, respectively.
---------------------------------------------------------------------------

    One of the more important components of any estimate of future 
impact is shipments. Forecasts of shipments for the base case and 
standards case are determined within the NES spreadsheet. The shipments 
portion of the spreadsheet forecasts central air conditioner and heat 
pump shipments from 2000 to 2030. Shipments forecasts are developed by 
accounting for: (1) The combined effects of equipment price, operating 
cost, and household income; (2) different market segments (e.g., new 
housing, replacement decisions, and non-owners adding a central air 
conditioner or heat pump); (3) decisions to repair rather than replace; 
and (4) different equipment age categories. Additional details on the 
various shipments forecasts are provided in Chapter 6 of the TSD.

C. Manufacturer Impact Analysis

    The MIA estimates the financial impact of standards on 
manufacturers and calculates impacts on employment and manufacturing 
capacity.
    The Department published the proposed MIA approach as part of the 
Federal Register publication of the Supplemental ANOPR, and received no 
comments suggesting substantive changes in the methodology. As 
proposed, the MIA was conducted in three phases. Phase 1, ``Industry 
Profile,'' consisted of the preparation of an industry 
characterization. Phase 2, ``Industry Cash Flow,'' focused on the 
industry as a whole, including both major and niche-product 
manufacturers. The GRIM was used to prepare an industry cash flow 
analysis. The Department used publicly available information developed 
in Phase 1 to adapt the GRIM structure to facilitate the analysis of 
new central air conditioner and central air conditioning heat pump 
standards.
    In Phase 3, ``Sub-Group Impact Analysis,'' the Department conducted 
interviews with several niche-product manufacturers to determine the 
financial impacts of revised standards. Phase 3 also entailed 
documenting additional impacts on employment and manufacturing capacity 
through a structured interview process.
1. Phase 1, Industry Profile
    Phase 1 of the MIA consisted of preparing an Industry Profile. 
Prior to initiating the detailed impact studies, DOE collected 
information on the present and past structure and market 
characteristics of the central air conditioning industry. This activity 
involved both quantitative and qualitative efforts to assess the 
industry and products to be analyzed. The information collected 
included manufacturer market shares and characteristics and financial 
information, market trends, and product characteristics.

[[Page 59597]]

    The industry profile included a top-down cost analysis of the 
central air conditioner manufacturing industry that was used to derive 
cost and financial inputs for the GRIM, e.g., revenues, and material, 
labor, overhead, depreciation, Sales General & Administration (SG&A), 
and Research & Development (R&D) expenses. The Department also utilized 
additional sources of information to further characterize the industry. 
These included company Securities and Exchange Commission (SEC) 10-K 
reports, Moody's company data reports, Standard & Poor's (S&P) stock 
reports, Value Line industry composites, and Dow Jones Financial 
Services.
2. Phase 2, Industry Cash Flow Analysis
    Phase 2 of the MIA focused on the financial impacts of new 
standards on the industry as a whole. The analytical tool used for 
calculating the financial impacts of standards on manufacturers is the 
GRIM. As part of the analysis, DOE interviewed several of the major 
manufacturers. For the Industry Cash Flow Analysis, DOE used the 
financial values determined during Phase 1 and the shipment scenarios 
used in the LCC and NES analyses.
3. Phase 3, Sub-Group Impact Analysis
    The Department has received many comments during workshops and 
interviews, and in writing, suggesting that manufacturers of niche 
products, representing less than 3% of industry shipments, could be 
more negatively impacted by new standards than major manufacturers. To 
assess the differential impacts, the Department interviewed two 
manufacturers of niche products, in addition to those conducted during 
the Engineering Analysis. The focus of the interviews was to determine 
which GRIM parameters differed for niche manufacturers by virtue of 
their smaller revenue base and more limited markets.
    From a financial standpoint, the common distinguishing 
characteristic of niche product manufacturers was their need to spread 
the costs of converting to new standards over smaller production 
volumes, as well as the product size constraints identified during the 
Engineering Analysis which make their shipments more sensitive to 
increases in product size. During the interviews, small manufacturers 
demonstrated that several of the costs necessary to meet any new 
regulation are largely independent of the product volume produced. The 
most apparent are the costs necessary to design a new product meeting 
the proposed energy standards. Other costs, such as plant engineering, 
some tooling, and other capital costs, have significant portions that 
are independent of final production volumes.
4. GRIM Analysis
    An increase in standards affects a manufacturer's cash flow in 
three distinct ways: (1) Increased investment; (2) higher production 
costs per unit; and (3) altered revenue by virtue of higher per unit 
prices and changes in sales volumes. As mentioned, the Department uses 
the GRIM to quantify the changes in cash flow that result in a higher 
or lower industry value.
    The GRIM analysis uses a number of inputs--annual shipments; 
prices; manufacturer costs such as materials and labor, selling and 
general administration costs, taxes, and capital expenditures--to 
arrive at a series of annual net cash flows beginning today and 
continuing ten years past the implementation of new standards. This 
information was collected from a number of sources, including 
publically available data, as well as interviews with of the major 
manufacturers and two specialty manufacturers. Industry net present 
values are calculated by discounting and summing the annual net cash 
flows. Additional information about the GRIM spreadsheet can be found 
in Chapter 8 of the TSD.

D. NEMS Environmental Analysis

    The environmental analysis provides estimates of changes in 
emissions of nitrogen oxides (NOX) and carbon from carbon 
dioxide (CO2). The Department used NEMS-BRS for central air 
conditioner and heat pump analyses (as well as the utility analyses). 
NEMS-BRS is run similar to the AEO2000 NEMS except that central air 
conditioner and heat pump energy usages are reduced by the amount of 
energy (electricity) saved due to the proposed trial standard levels. 
The input of energy savings are obtained from the NES spreadsheet. For 
the environmental analysis, the output is the forecasted physical 
emissions. The net benefits of the standard is the difference between 
emissions estimated by NEM-BRS and the AEO2000 Reference Case.
    The environmental analysis is relatively straightforward from NEMS-
BRS. Carbon emissions are tracked in NEMS-BRS using a detailed carbon 
module that provides robust results because of its broad coverage of 
all sectors and inclusion of interactive effects. The only form of 
carbon tracked by NEMS-BRS is CO2. However, in this report 
the carbon savings are reported as elemental carbon.
    The two airborne pollutant emissions that have been reported in 
past analyses, sulfur dioxide (SO2) and NOX, are 
reported by NEMS-BRS. NOX results are based on forecasts of 
compliance with existing legislation. In the case of SO2, 
the Clean Air Act Amendments of 1990 set an emissions cap on all power 
generation. The attainment of this target, however, is flexible among 
generators and is enforced by applying market forces, through the use 
of emissions allowances and tradable permits. As a result, accurate 
simulation of SO2 trading tends to imply that physical 
emissions effects will be zero because emissions will always be at, or 
near, the ceiling. This fact has caused considerable confusion in the 
past. There is virtually no real possible SO2 environmental 
benefit from electricity savings as long as there is enforcement of the 
emission ceilings. See the TSD, Environmental Assessment, for a 
discussion of this issue.
    Alternative price forecasts corresponding to the high and low 
economic growth side cases found in AEO 2000 have also been generated 
for use by NEMS-BRS, and were used as alternative scenarios, and are 
presented in the TSD. (See TSD, Environmental Assessment.)

V. Discussion of Comments

    As noted above, DOE published the Supplemental ANOPR regarding 
central air conditioners and heat pumps on November 24, 1999, and 
conducted a public workshop to present the analyses and to solicit 
comments on December 9, 1999. The Department requested comments on the 
following twelve issues:
    1. Differences between the industry and the reverse engineering 
cost data:
    2. The incorporation of emerging technologies into the Engineering 
Analysis;
    3. The assessment of the impacts on steady-state efficiency, i.e. 
EER, due to increases in the SEER;
    4. For heat pump systems, the relationship between SEER and HSPF;
    5. Additional product classes based on system capacity;
    6. Niche product classes
    (a) Ductless split
    (b) High-velocity, small-duct
    (c) Vertical-package, wall-mounted
    (d) Split, through-the-wall-condenser;
    7. The impact of alternative refrigerants for HCFC-22;
    8. Data on retail mark-up assumptions;
    9. Information relating to the determination of price and operating 
cost elasticities in conducting shipment forecasts;
    10. Data on the possible adverse affects of standards on 
identifiable groups of consumers that experience below-average utility 
or usage rates;

[[Page 59598]]

    11. Information on what non-regulatory alternatives to standards 
need to be reviewed; and
    12. Comments on the candidate standard levels and the alternative 
standard scenarios.
    Based on responses and comments received since that workshop, we 
provide the following discussion.

A. Engineering Cost Data

1. Reverse Engineering Cost Estimates
    The Department's reverse engineering analysis prepared as a basis 
for the Supplemental ANOPR received a broad range of comments, both 
supportive and critical. ARI and the Natural Resources Defense Council 
(NRDC) commented on the apparent accuracy of the split air conditioner 
cost estimates and the ease with which the results are able to be 
scrutinized by outside parties. (Wethje, ARI, Transcript, p. 42; ARI, 
No. 11 at 1; Goldstein, NRDC, Transcript, p. 94).
    The Department also received comments criticizing the reverse 
engineering results for split heat pumps and for packaged air 
conditioners and heat pumps, noting the lack of design detail and the 
aggregation of the results into an efficiency level-based analysis. 
(Hodges, ARI, Transcript, p. 85; Madera, York International (York), 
Transcript, pp. 90, 91, 93; Goldstein, NRDC, Transcript p. 96 and 
California Energy Commission (CEC) No. 47 at 7). The comments observed 
that the relative cost results for split heat pumps and packaged 
equipment differed significantly from those of split air conditioners, 
and that those analyses were less rigorous than the split air 
conditioner analysis. They also noted that the split heat pump and 
packaged equipment analysis was based on fewer equipment samples; did 
not include a detailed tear-down of a 10 SEER split heat pump or 
packaged air conditioner; and was based on questionable production 
volume assumptions.
    The Department agreed that those deficiencies were likely to cause 
some of the differences between the ARI cost and the reverse 
engineering cost estimates, and revised its analysis of split heat 
pumps and packaged equipment.
    In responding to the comment on sample size for split heat pumps 
and packaged equipment, the Department took guidance from a review of 
the engineering analysis performed by DOE consultant, Joseph Pietsch. 
Mr. Pietsch presented five guidelines for comparing the production cost 
of equipment for different product classes. (Pietsch, No 36 at 2-5).
     At each cooling capacity and SEER level, the same outside 
unit will likely be used for split air conditioners (fancoil) and split 
air conditioners (cased coil);
     At each cooling capacity and SEER level, the same fancoil 
will likely be used for split air conditioners (fancoil) and split heat 
pumps;
     At each cooling capacity and SEER level, the same cabinet 
will likely be used for packaged air conditioners and packaged heat 
pumps;
     There should be some degree of consistency in the cost to 
``convert'' an air conditioner into a heat pump; and
     Split systems with fan coils and single package units at 
the same cooling capacity and SEER level should have nearly identical 
costs for the major functional components.
    Based on the above guidelines, DOE revised the analysis of split 
heat pumps and packaged equipment. Table V.1 provides the original and 
the revised production dollar cost estimates resulting from this new 
approach. Table V.2 provides the same information, but in terms of 
relative costs. Revised production costs are generally lower than the 
original costs, particularly at the baseline 10 SEER level. The most 
significant change is that the new analysis includes nine additional 
estimates that were not presented originally.

                                      Table V.1.--Engineering Production Cost Estimates for 3-Ton Unitary Equipment
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Split air             Split air          Split heat pump        Packaged air       Packaged heat pump
                                             conditioner  (cased       conditioner     ----------------------      conditioner     ---------------------
         Efficiency level  (SEER)                   coil)               (fancoil)                            ----------------------
                                           --------------------------------------------  Original   Revised                          Original   Revised
                                             Original   Revised    Original   Revised                          Original   Revised
--------------------------------------------------------------------------------------------------------------------------------------------------------
10........................................       $367       $367       $456       $449       $622       $572       $552       $511       $643       $593
11........................................        412        412        550        519  .........        602  .........        555  .........        638
12........................................        468        468  .........        563        690        648        627        595        708        668
13........................................        529        529        756        637        840        743        809        730  .........        820
14........................................        588        588        802        815      1,011      1,023  .........        889  .........      1,029
15........................................  .........  .........        893        893      1,147      1,107  .........        955  .........      1,100
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The only significant departures are found in split air conditioners 
with fancoils, where the new estimates are lower, and in 14 SEER and 15 
SEER equipment where the new results are higher.

                                                   Table V.2.--Revised Reverse Engineering Production
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Split air             Split air          Split heat pump        Packaged air       Packaged heat pump
                                             conditioner (cased        conditioner     ----------------------      conditioner     ---------------------
          Efficiency leval (SEER)                   coil)               (fancoil)                            ----------------------
                                           --------------------------------------------  Original   Revised                          Original   Revised
                                             Original   Revised    Original   Revised                          Original   Revised
--------------------------------------------------------------------------------------------------------------------------------------------------------
10........................................       1.00       1.00       1.00       1.00       1.00       1.00       1.00       1.00       1.00       1.00
11........................................       1.12       1.12       1.21       1.16  .........       1.05  .........       1.09  .........       1.08
12........................................       1.28       1.28  .........       1.25       1.11       1.13       1.14       1.16       1.10       1.13
13........................................       1.44       1.44       1.66       1.42       1.35       1.30       1.47       1.43  .........       1.38
14........................................       1.60       1.60       1.76       1.82       1.63       1.79  .........       1.74  .........       1.74
15........................................  .........  .........       1.96       1.99       1.84       1.94  .........       1.87  .........       1.86
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In response to comments on its production volume assumptions prior 
to the publication of the Supplemental ANOPR, the Department had 
reduced its heat pump production volume from 125,000 units per year to 
25,000 units per year. However, since heat pumps and air conditioners 
are typically produced with the same plant

[[Page 59599]]

equipment, reducing the production volume significantly increases the 
overhead allocated to each heat pump produced. The higher overhead 
allocation raises the cost of the baseline heat pump, lowering the 
relative cost of producing equipment at higher efficiency levels. To 
compensate for this overestimate of overhead allocation, we set the 
split heat pump overhead allocation equal to that of the split air 
conditioner at each efficiency level.
    The Department believes that the revisions to the split heat pump 
and packaged equipment production costs have improved the cost 
estimates for those product classes and that no additional equipment 
samples need to be subjected to tear-down or reverse engineering 
analysis. The revised reverse engineering cost estimates were used in 
the analysis for today's proposed rule.
2. Productivity Efficiency Improvements
    According to the American Council for an Energy Efficient Economy 
(ACEEE), Census Bureau Current Industrial Report (CIR) data suggest 
that the unit price of equipment shipments below 65,000 Btu/hr fell in 
real terms between 1992 and 1997. (ACEEE, No. 43 at 4). ACEEE suggested 
that the Department apply an annual deflator of 1.7% to projected 
prices to account for this apparent productivity improvement.
    For other rulemakings, the Department has used production input 
costs and production technologies based on the best information 
available at the time. DOE has not made any assumptions about 
productivity improvements and material cost changes over time. The 
Department does not believe historical price trends for unitary air 
conditioners, or other products, can be applied to forecast equipment 
costs where there are no data to indicate the trends will continue. 
Therefore, without specific data on the likely costs to manufacture a 
product, the Department will not apply a productivity improvement 
factor in this rulemaking or other rulemakings.
3. Emerging Technologies
    Emerging technologies that are not established in the residential 
central air conditioning market have the potential to lower the cost of 
achieving higher efficiency. In the Supplemental ANOPR, we considered 
advances in variable speed and variable capacity compressors, and 
reductions in the cost of variable speed fan motors and parallel-flow, 
microchannel heat exchangers to be potentially viable methods for 
increasing the efficiency of equipment at a lower cost than currently 
established methods.
    Bard Manufacturing (Bard), Unico, Inc. (Unico) and NRDC disagreed 
with this approach, questioning whether some of the technologies 
considered were commercially and technically viable, but proposed no 
other technologies for consideration. (Bard Manufacturing, No. 28 at 4; 
Unico, No. 34 at 1; NRDC No. 35 at 11-12). ARI stated that they 
considered some compressor and motor advances but not microchannel heat 
exchangers in their relative production cost data. (ARI No. 48 at 3). 
The Trane Company (Trane) and Edison Electric Institute (EEI) also 
expressed concern over some apparent inconsistencies in the emerging 
technologies analysis presented in Table 4.16 and the use and 
calculation of the Carnot efficiency on page 4-27 of the Supplemental 
ANOPR TSD. (Trane, No. 23 at 2; and EEI No. 20 at 3).
    Pacific Gas and Electric (PG&E) voiced concern that new 
technologies, such as the Bristol modulating compressor, could reduce 
costs to the point that manufacturers may use them at lower SEER levels 
resulting in a negative impact on peak loads and electrical system 
reliability. (PG&E, No. 31 at 3).
    The emerging technology analysis based on reverse engineering 
information seems to confirm that, of the technologies considered, only 
variable capacity compressors and variable speed fan motors have the 
potential to be cost options for providing additional efficiency 
compared to today's established technologies. This provides evidence 
that ARI is justified in not considering the potential benefits of 
microchannel heat exchangers as part of its relative cost data 
submission. Therefore, we will apply emerging technologies only to the 
reverse engineering results and consider the ARI relative cost 
multipliers to already include the effects of emerging technologies.
    We do not believe our original emerging technology analysis was 
inconsistent, as expressed by Trane and EEI above, although we do 
recognize that combining the effects of component efficiency 
improvements does not necessarily lead to a cumulative improvement in 
the system. The intent of the analysis is not to provide a definitive 
estimate of the impact of any or all emerging technologies on system 
cost. It is to provide evidence as to the extent to which reverse 
engineering overestimates the cost of higher efficiency equipment by 
neglecting emerging technologies. Therefore, the method used previously 
for portraying and combining the potential effects of emerging 
technologies on system costs is carried forward into today's rule. 
Chapter 2 of the TSD provides the details of the revised emerging 
technologies analysis.
4. HFC-Based Engineering Analysis
    ARI and Trane supported the Department's decision not to explicitly 
examine the effects of the HCFC phaseout on equipment cost and 
efficiency. (Wethje, ARI, Transcript p. 145; Crawford, Trane, 
Transcript p. 143). The Oregon Energy Office (OEO) and NRDC urged the 
Department to reconsider, given that a large fraction of the equipment 
sold under the new efficiency standard will likely use a refrigerant 
other than HCFC-22, even prior to the 2010 phaseout date. (Stevens, 
OEO, Transcript, p. 144; NRDC, No. 35 at 11-12).
    To date, no data presented to the Department indicate that the 
incremental cost for increasing the efficiency of equipment using 
either HFC-407c or HFC-410a refrigerants will differ significantly from 
the incremental cost of increasing efficiency using HCFC-22 equipment. 
Although the base cost may differ somewhat, the incremental cost 
determines the life-cycle-cost savings. Furthermore, the Department 
continues to receive information that much of the market is changing to 
HFC-410a and that HFC-410a offers little, if any, efficiency benefit 
over HCFC-22 at the same equipment cost.
    For these reasons, the Department will not perform additional 
engineering analysis related to alternate refrigerants. The costs to 
manufacturers related to their conversion to the new refrigerant will 
be considered in the Manufacturer Impact Analysis.

B. Life-Cycle-Cost Parameters

1. Extended Warranty and Service Costs
    Energy Market and Policy Analysis, Inc. (EMPA) noted that the Life 
Cycle Cost analysis did not explicitly address extended warranty and 
service costs and asserted that they should be taken into account. 
(Schleede, EMPA, Transcript, p. 221). The Alliance to Save Energy (ASE) 
stated that the inclusion of extended warranty and service costs would 
have the impact of reducing repair and maintenance costs. (Prindle, 
ASE, Transcript, p. 222). Industry consultant Joseph Pietsch stated 
that manufacturers may provide longer-term warranties for high 
efficiency systems that cover a wider range of components, to alleviate 
customer concerns regarding possible future repair cost of the more

[[Page 59600]]

complex systems. (Pietsch, No. 36 at 22).
    Air conditioner manufacturers warranty their equipment against 
defects, and contractors typically guarantee performance and 
installation. Manufacturer warranties typically cover parts and labor 
for one year, with longer warranties applying to the compressor. Mr. 
Pietsch noted that compared to low-SEER products, high-SEER products 
have more components, many of which have a relatively short history. 
Reliability patterns of these new components are less known, so 
warranty accruals may be significantly higher for these products. 
(Pietsch, No. 36 at 22). Dealers also may offer extended warranties 
which are usually underwritten by the manufacturer or a third party.
    A product that is less reliable or contains more expensive 
components will have a higher cost of repair over its lifetime. Either 
the consumer or the warranty provider will bear that added cost 
directly through more frequent service calls or higher repair costs. If 
the cost is covered by warranty, however, the warranty provider passes 
it back to future warranty holders in the form of slightly higher 
warranty prices. DOE believes the incremental increase in the price of 
the warranty is equal to, or just slightly higher, than the discounted 
present value of the incremental repair costs over the life of the 
warranty. Over the long term then, the average consumer always incurs 
the cost of higher repair costs, either directly or through higher 
warranty prices. Since our analysis considers the present value of 
consumer life cycle costs on the average consumer, incremental repair 
costs and incremental warranty costs are the same, and interchangeable.
    Since consideration of repair costs is satisfied by considering 
either repair costs or extended warranties, we limited our 
consideration to repair costs, which are slightly easier to estimate, 
communicate, and incorporate into the analysis. Considering them both 
would require a much more rigorous analysis of service costs since we 
would have to estimate the service cost incurred on a year-by-year 
basis. That additional analysis would likely not produce significantly 
different results. Comments are welcome as to whether explicit 
consideration of extended warranties would produce significantly 
different results from those based on service costs alone which we have 
assumed rise in proportion to the price of the equipment. Since more 
efficient equipment is also more expensive, we have included the higher 
cost of repair, or equivalently, the higher warranty cost associated 
with more efficient equipment, as part of the lifecycle cost analysis.
2. Residential Energy Consumption Survey (RECS)
    Both NRDC and EMPA asserted that RECS'' method for estimating end-
use energy consumption (i.e., conditional demand analysis) yields 
unreliable and flawed results. NRDC added that conditional demand 
analysis methods inherently underestimate central air conditioner 
energy use due to its treatment of internal loads. EMPA stated that the 
RECS household sample size is too small to be used in the manner in 
which it is being treated in the life-cycle cost analysis. (NRDC, No. 
35 at 6-7; EMPA, No. 33 at 4-6; Schleede, EMPA, Transcript, pp. 160-
161). Virginia Power, EEI, and EMPA all requested that the analysis be 
updated to use RECS 1997 data rather than RECS 1993 data. EEI added 
that actual submetered end-use data should be used if possible rather 
than the end-use data in RECS. (Virgina Power, No. 27 at 2; EEI, No. 20 
at 5, Schleede, EMPA, Transcript, pp. 160-161).
    As part of the process to improve the new energy efficiency 
standards analysis, we are committed to use sensitivity analysis tools 
to evaluate the potential distribution of impacts among different 
subgroups of consumers. The Department believes that RECS provides a 
nationally representative household data set which is suited for 
conducting the type of sensitivity analyses suggested by the Process 
Rule. Limiting the RECS households to those equipped with either 
central air conditioners or heat pumps, the LCC analysis performs a 
household-by-household analysis that predicts the percentage of 
households that will incur net life-cycle cost savings or costs from an 
increased efficiency standard.
    End-use energy consumption data from past RECS surveys have been 
compared to submetered end-use data for purposes of validating their 
conditional demand analysis estimates. Central air conditioning and 
space-heating energy data from the 1990 RECS were shown to differ by 5% 
to 22% compared to submetered end-use data from five utility service 
areas. The Department believes that this range of difference is 
acceptable considering that the conditional demand analysis utilized by 
RECS is fully capable of estimating the energy consumption of equipment 
throughout the nation. Because RECS is a very well suited source of 
data for performing the analyses suggested by the Process Rule and RECS 
has been shown to provide reasonable estimates of end-use energy 
consumption, we will continue to rely on RECS for providing the annual 
energy consumption data necessary for conducting the life-cycle cost 
analysis.
    The analysis conducted in support of this proposed rule has been 
revised based on data from the 1997 RECS rather than the 1993 RECS.
3. Equipment Lifetime
    Virginia Power, EEI, ARI, Unico, Rheem Co., and Trane commented 
that the average equipment lifetime of 18.4 years assumed in the 
Supplemental ANOPR was incorrect, and suggested an actual lifetime 
between 12 and 15 years. (Virginia Power, No. 27 at 2; EEI, No. 20 at 
10; ARI, No. 48 at 3; Unico, No. 34 at 3; Lux, Rheem Co., Transcript, 
p. 165; Foster, EEI, Transcript, p. 170; Crawford, Trane, Transcript, 
p. 191; Wethje, ARI, Transcript, p. 193). EMPA asserted that the length 
of first ownership should be used as the basis for equipment lifetime. 
(EMPA, No. 33 at 3, Schleede, EMPA, Transcript, p. 162).
    NRDC, ACEEE, and the Vermont Energy Investment Corporation (VEIC) 
all believed that the 18.4 year equipment lifetime was reasonable. They 
reasoned that a shorter or longer average equipment lifetime would 
result in less accurate estimates of historical shipments. ACEEE added 
that unless manufacturers can provide new data, the 18.4 year average 
lifetime should be retained. (NRDC, No. 35 at 7-8; ACEEE, No. 43 at 6-
7; VEIC, No. 32 at 7).
    The Department notes that the basis of the 18.4 year equipment 
lifetime was a survey conducted on more than 2,100 heat pumps in a 
seven state region of the U.S.\13\ The survey determined not only the 
lifetime of a complete heat pump system, but the life of the original 
compressor as well. Although the system lifetime is on average over 18 
years, the survey also showed that the original compressor lifetime 
was, on average, 14 years. Thus, the survey indicated that essentially 
all heat pump owners replaced their original compressor once in the 
lifetime of system.
---------------------------------------------------------------------------

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

    In the LCC analysis conducted for the Supplemental ANOPR, we did 
not include any repair costs associated with replacing the compressor. 
But since the heat pump survey clearly indicates that the original 
compressor is replaced once in a system's life, the analysis was 
revised to include a repair cost for the

[[Page 59601]]

compressor. Conducting the analysis in this manner retains the average 
system lifetime of 18.4 years but explicitly addresses the replacement 
cost of the compressor, which is the most expensive component of a 
system. As indicated by the survey data, the compressor was assumed to 
be replaced in the 14th year of the system's life. In addition, because 
more efficient systems tend to use more efficient and, thus, more 
expensive compressors, the compressor replacement cost was assumed to 
vary with system efficiency.
    Although the revised LCC analysis assumed an 18.4 year average 
equipment life and one compressor replacement, a shorter equipment 
lifetime was investigated as an alternative scenario. In this 
alternative scenario, a retirement function yielding an average 
lifetime of 14 years was used and compressor replacement costs were not 
considered. The shorter equipment lifetime is plausible assuming that 
most, if not all, consumers when faced with replacing a failed 
compressor would choose to replace the entire system rather than 
replace the compressor in a relatively old system. LCC results based on 
both the 18.4 year and 14 year average equipment lifetimes are provided 
in Section VI as well as Chapter 5 of the TSD.
4. Commercial Applications
    NRDC, ACEEE, VEIC, CEC, and the Northwest Power Planning Council 
(NPPC) commented that DOE should analyze the application of residential 
central air conditioners and heat pumps (i.e., single-phase equipment) 
in commercial buildings. All stated that there is a significant portion 
of this type equipment being used in small commercial buildings. They 
argued that since the energy use patterns in commercial buildings are 
distinctly different than those in households, the analysis should 
include residential equipment use in commercial applications. (NRDC, 
No. 35 at 12-13; ACEEE, No. 43 at 2; VEIC, No. 32 at 6-7; CEC, No. 47 
at 8; Tom Eckman, NPPC, Transcript, p. 166).
    EEI requested clarification as to how the commercial application 
analysis was conducted for the Department's January 14, 2000, LCC 
Sensitivity Analysis. (EEI, No. 20 at 10).
    For today's proposed rule, the use of residential equipment in 
commercial buildings was analyzed assuming that 10% of all central air 
conditioners and heat pumps are used in commercial applications. This 
figure is based on ARI's estimate that approximately 10% of single-
phase air conditioning and heat pump shipments are used in commercial 
buildings. The annual energy consumption of commercially applied air-
conditioning and heat pump equipment was based on the simulation of 77 
nationally representative commercial buildings consistent with the 
approach and assumptions utilized to develop the American Society of 
Heating, Refrigerating and Air-Conditioning Engineers' (ASHRAE) 
Standard 90.1-1999. Both average and marginal electricity rates were 
developed by matching a set of commercial electric utility tariffs to 
the above simulated building loads and demands.
    The LCC spreadsheet models were modified so that commercial 
buildings with their corresponding annual energy consumption and 
marginal and average electricity costs represent 10% of the entire 
residential and commercial building population. Complete details on the 
procedure to incorporate commercial applications are included in 
Chapter 5 of the TSD.
5. Marginal Electricity Prices
    NRDC, ACEEE, CEC, PG&E, NPCC, and ASE commented that the 
Supplemental ANOPR analysis underestimated future marginal electricity 
prices. Several of the comments stated the belief that deregulation of 
the electric utility industry would result in greater volatility of 
electricity pricing that eventually would translate into higher 
electricity prices during peak power periods. (Goldstein, NRDC, 
Transcript, p. 175; ACEEE, No. 43 at 6; CEC, No. 47 at 8; PG&E, No. 31 
at 6-7; Eckman, NPPC, Transcript, pp. 167-168; Prindle, ASE, 
Transcript, p. 168).
    ARI and EEI were not convinced that a deregulated electric utility 
industry would result in higher electricity prices in the future. ARI 
noted that under a peak pricing scenario consumers may decline to 
operate their air-conditioning equipment to avoid incurring high 
electricity bills. EEI added that currently, there is no mechanism to 
capture utility capital costs for providing peak power in residential 
pricing. (Wethje, ARI, Transcript, pp. 168-169; Foster, EEI, 
Transcript, pp. 169, 175-176).
    The current method for establishing marginal electricity prices 
only allows for defining marginal prices for those years in which data 
are available. In the case of residential pricing, the data for 
establishing marginal prices (the 1997 RECS) was taken from the year 
1997. The same can be said for commercial buildings. The utility 
tariffs used to establish marginal prices (as described earlier) were 
collected in the year 1997. On average, residential marginal prices for 
households with central air conditioners are 3% lower than average 
rates while for households with heat pumps marginal prices are 7% 
lower. Space-cooling marginal prices in commercial buildings are on 
average 2% greater than average commercial rates. Future marginal 
prices were in turn based upon the Reference Case electricity price 
forecast from the AEO2000. The Reference Case forecasts declining 
electricity rates through the year 2020. Although it is certainly 
possible that future electricity rates may increase in a deregulated 
climate, the evidence to date (i.e., residential marginal prices are 
actually lower than average rates and AEO 2000 forecasts project 
declining electricity rates) convinces us that our current methods for 
establishing marginal prices are reasonable. To state that future 
prices may decrease or increase is speculative. Even in the case of 
commercial buildings where demand pricing already exists, marginal 
prices are only 2% greater than average electricity rates. This 
reenforces our conviction to keep our current methodology for 
establishing marginal prices. However, the Department seeks comments on 
its methodology and data for determining the appropriate marginal 
energy costs to use in future analysis.
6. Forecast of Future Electricity Prices
    EMPA asserted that the EIA's forecast of electricity prices as 
found in the Annual Energy Outlook underestimates the future drop in 
electricity rates. (EMPA, No. 33 at 2-3; Schleede, EMPA, Transcript, p. 
185). Don Dasher stated that any forecast of electricity prices should 
capture the future use of renewable energy and emerging technologies 
for generating power. (Dasher, Transcript, pp. 192-193).
    Future marginal prices are based upon the Reference Case 
electricity price forecast from the AEO 2000. The Reference Case 
forecasts declining electricity rates through the year 2020. Although 
it is certainly possible that future electricity rates may increase in 
a deregulated climate, the evidence to date (i.e., residential marginal 
prices are actually lower than average rates and current AEO forecasts 
project declining electricity rates) leads us to believe that our 
current methods for establishing future marginal prices are reasonable.
    In addition to the Reference Case, DOE analyzed the effects of two 
other energy price forecasts, the AEO 2000 High Growth and Low Growth 
cases. (See TSD, Chapter 5.)

[[Page 59602]]

7. Discount Rates
    NRDC, ACEEE, VEIC, PG&E, and CEC believe that the discount rate 
used in the Supplemental ANOPR analysis was too high. Their primary 
criticism pertained to the breakdown of finance methods which were 
assumed for establishing the discount rate. The Supplemental ANOPR 
analysis assumed that 35% of consumers purchasing a central air 
conditioner or heat pump used a credit card to finance their purchase. 
The comments argued for a much lower percentage and cited a recent PG&E 
survey that demonstrated that only 5% of consumers used credit cards. 
VEIC also cited a survey by Potomac Electric Power Company (PEPCO) that 
reported lower purchases with credit cards. (NRDC, No. 35 at 10-11; 
ACEEE, No. 43 at 3; VEIC, No. 32 at 3-4; Neme, VEIC, Transcript, pp. 
186-187; PG&E, No. 31 at 7; CEC, No. 47 at 7). Counter to the above 
assertion, Trane maintained that the Supplemental ANOPR's assumption 
regarding the percentage of consumers using credit cards to purchase 
equipment was correct, based on the number of consumers in the U.S. 
that carry credit card debt. (Crawford, Trane, Transcript, p. 191-192). 
EEI commented that the interest rates associated with credit card and 
cash purchases needed to be revisited. (EEI, No. 20 at 6). EMPA 
asserted that with higher cost air conditioners, consumers' after tax 
income would be reduced, requiring them to forego the purchase of 
various household necessities such as food, clothing, and shelter. 
(EMPA, No. 33 at 3).
    The Department performed an extensive review and revision to the 
methodology that determines consumer discount rate. The Supplemental 
ANOPR established the share of various finance methods used for 
purchasing air-conditioning equipment and determined the associated 
interest rates for each of the finance methods. For equipment obtained 
through the purchase of a new home, second mortgage, or home equity 
lines of credit, this approach is reasonable. But for purchases made to 
replace old or failed equipment where cash or some form of credit is 
used to finance the acquisition, we determined it more appropriate to 
establish how the purchase affects a consumer's overall household 
financial situation. For example, even though the purchase might be 
financed through a dealer loan or some other low interest financing 
vehicle, the more probable effect of the purchase is to either cause 
the consumer to incur additional credit card debt or forego their 
investment in some type of savings-related asset. Cash that was once 
available to either pay for household necessities or to invest in an 
asset like the stock market or a simple savings account now must be 
earmarked to pay off the equipment purchase loan, thus, either causing 
the consumer to incur additional credit card debt or to lose the 
opportunity to earn income from their assets. For today's proposed 
rule, we have decided to use the above methodology for defining the 
discount rate for central air conditioner and heat pump purchases. The 
1998 Survey of Consumer Finances (SCF) was used to estimate the 
percentage of households that used second mortgages to finance their 
equipment purchase as well as those households that either would incur 
more credit card debt or be forced to forgo their normal course of 
investing. Data from the Air Conditioning, Heating, and Refrigeration 
News (December 12, 1998) established the percentage of shipment going 
to new homes.
    After establishing the share captured by each finance method, the 
range of interest rates due to each method were developed. The 1998 SCF 
established the range of interest rates for new home mortgages, second 
mortgages, and credit cards. Rates of return on certificates of 
deposit, savings bonds, and bonds were based on historical interest 
rates. A weighted-average discount rate of 5.6% is calculated from the 
mean interest rates for each finance method. A more detailed discussion 
of the data sources and how the interest rates were derived is found in 
Chapter 5 of the TSD.
8. Percentage of Households With LCC Savings
    For the Supplemental ANOPR, all consumers having an LCC increase 
resulting from the standard were considered to be adversely impacted. 
Several comments expressed concern on how we would use this information 
on adverse consumer impacts in selecting minimum efficiency standards. 
ARI, Unico and EMPA asserted that a majority of households would need 
to benefit from the standard in order to justify its selection. (ARI, 
No. 48 at 5; Unico, No. 34 at 3; EMPA, No. 33 at 2). NRDC stated that 
the percentage of households with LCC savings or costs relative to the 
baseline level should not be a criterion in basing a standard's 
economic justification. NRDC stated that variations in electricity 
pricing make it nearly impossible to determine consumer costs on a 
disaggregated level. (NRDC, No. 35 at 12-15). PG&E commented that the 
percentage of households at any particular standard level with net LCC 
costs actually overstates the significance of the negative LCC impacts. 
Most consumers experience LCC increases of only a few dollars over the 
life of the equipment. (PG&E, No. 31 at 8).
    The Department agrees with PG&E's comment and in formulating 
today's proposed rule, DOE has redefined the criteria for determining 
negative impacts. Noting that the baseline LCC is approximately $5,000 
for central air conditioners and $10,000 for heat pumps, previously all 
consumers incurring an LCC increase as small as $10 were considered to 
be adversely impacted by an increase in the standard. In the revised 
LCC analysis, the Department defines consumers impacts as follows: 
consumers who achieve significant net LCC savings (i.e., LCC savings 
greater than 2% of the baseline LCC), consumers who are impacted in an 
insignificant manner by having either a small reduction or small 
increase in LCC (i.e., within 2% of the baseline LCC), or 
consumers who achieve a significant net LCC increase (i.e., an LCC 
increase exceeding 2% of the baseline LCC). Consequently, only 
consumers (both residential and commercial) having an LCC increase 
greater than 2% of the baseline are considered to be negatively 
impacted.
9. Regional Analysis
    At the December 9, 1999, public workshop, NRDC and CEC requested 
further information on regional distributions of households with net 
LCC savings or costs relative to the regional baseline level. 
(Goldstein, NRDC, Transcript, pp. 188-189; Martin, CEC, Transcript, p. 
274). The Department responded by conducting additional analysis, which 
was posted to our web site on January 14, 2000, and included LCC 
analysis disaggregated by region into census divisions. From this 
regional analysis it could be determined how different parts of the 
country would be impacted by an increase in the minimum efficiency 
standard.
10. Rebuttable Payback
    EEI asked why the rebuttable payback period is not determined with 
annual energy use data from RECS. They also requested clarification as 
to how rebuttable payback periods will factor into the decision to 
select a new minimum efficiency standard. (EEI, No. 20 at 7-8).
    As prescribed by section 325(o)(2)(B)(iii) of EPCA, the rebuttable 
payback period is calculated under the applicable test procedure. Thus, 
all rebuttable payback periods are based on an annual energy 
consumption that is determined through the current

[[Page 59603]]

Department of Energy test procedure for central air conditioners and 
heat pumps. The resulting annual energy use as determined by the test 
procedure is significantly greater than what is indicated by RECS. 
Thus, the rebuttable payback periods are significantly shorter than 
those based on the RECS annual energy consumption data.
    The rebuttable presumption test does not consider the full range of 
impacts of standards, including manufacturer impacts and energy 
savings. Therefore, the Department bases its decision primarily on the 
seven factors specified in section 325(o) of the Act.
11. Sensitivity Analyses
    ACEEE recommended that several sensitivity analyses be conducted to 
determine how the LCC varies with changes in certain input variables. 
(Nadel, ACEEE, Transcript, pp. 233-236; ACEEE, No. 43 at 10). NRDC also 
requested some of the sensitivity analyses described by ACEEE. (NRDC, 
No. 35 at 12-13). Trane went on the record as not endorsing all of 
ACEEE's requested sensitivities. (Crawford, Trane, Transcript, p. 237).
    We conducted several of the requested LCC sensitivity analyses, as 
well as the previously described regional analyses, and posted the 
results to our web site on January 14, 2000. The sensitivities examined 
how the LCCs for central air conditioners and heat pumps were impacted 
by changes in the following: dealer markups, builder markups, repair 
costs, lifetime, emerging technologies, and the use of single-phase 
central air conditioning and heat pump equipment in commercial 
applications. Of the sensitivities examined, the assumption of fixed 
margins (i.e., no variation in the difference between the equipment 
price to the consumer and the cost to manufacture with increased 
efficiency) had the largest impact on the LCC results. Changes in the 
lifetime had a noticeable affect but not the same order of magnitude as 
the fixed margin assumption. All other sensitivities had only minor 
impacts on the LCC results.
    In preparing the sensitivity analyses, we found reason to revise 
our assumptions regarding markups, compressor replacement, and 
commercial applications. Those revisions are incorporated into the 
analysis that supports today's proposed rule and are discussed 
elsewhere in this Section.

C. Shipments Analysis

1. Forecasted Housing Shifts
    Both the OEO and NPPC stated that there will likely be significant 
shifts in regional housing populations. For example, future housing 
shifts may result in more housing in warmer weather climates where 
central air conditioning is more prevalent and used more often, thus, 
impacting the nation's future space-conditioning energy use. Since the 
Shipment Analysis does not account for regional housing shifts, OEO and 
NPPC request that it be accounted for in the analysis. (Stephens, OEO, 
Transcript, pp. 171-172; and Eckman, NPPC, Transcript, pp. 216-217).
    Preliminary analysis of regional housing shifts has been examined 
and determined to have a relatively small effect (i.e., a maximum 
change of 2% in the cumulative amount of monetary energy savings). This 
is primarily due to the large size of the housing stock and the fact 
that changes in the housing stock occur over a long time scale 
resulting in slow changes in regional housing shifts. A preliminary 
analysis of historical housing data coupled with worst case forecasts 
of regional housing and air-conditioning market share shifts 
demonstrated the small impact on national NPV due to changes in 
regional housing.
    New housing starts are only about 2% of existing housing stock and 
this is forecast to decrease to about 1% of housing stock by 2030. 
Historical data over the period from 1980 to 1990 showed the shift in 
regional shares of housing stock changed by less than 2% (decreased by 
1.2% and 1.7% in the Northeast and Midwest, respectively, and increased 
by 1.7% and 1.2% in the South and West, respectively). If these changes 
continue at a steady rate, the housing share of the Northeast will 
decrease another 3.6% over three decades. This translates to a relative 
decrease of 17% in the Northeast's air-conditioning market share. If 
the entire loss in the Northeast's market share goes to that portion of 
the South with the highest annual energy use (Census Region 7), the 
absolute market share of this region would increase from 15.7% to 
17.7%. The result of this change is that the dollar value of energy 
savings at a 12 SEER standard level would increase from $5.73 billion 
to $5.85 billion, or about a 2% increase in the dollar energy savings. 
The actual impact on dollar savings would likely be less than half of 
this because the above housing shift was assumed to be immediate and to 
the highest energy use area of the South. As a result, the actual 
impact would likely be less than 1% on the dollar value of the energy 
savings. For these reasons, the Department has not revised its 
Shipments Analysis to account for shifts in regional housing 
populations.
2. Elasticities
    Both ACEEE and NRDC note that the purchase price elasticities are 
based on data from the 1970s and are likely no longer applicable to 
current market conditions. Both stated that price elasticities should 
be developed from more recent data. (ACEEE, No. 43 at 10; Nadel, ACEEE, 
Transcript, p. 211; Goldstein, NRDC, Transcript, pp.211-212).
    This has been corrected for in the analysis underlying today's 
proposed rule. We have calibrated elasticity for price relative to 
household income, with historical data from 1970 to 1996. It is worth 
noting that for forecasting future shipments, consumer purchase 
decisions are based upon sensitivities to changes in product life-cycle 
cost relative to income. Life-cycle cost changes are dependent on the 
purchase price and the present worth of operating cost savings. 
Operating cost savings are in turn dependent on electricity prices. As 
electricity prices are forecasted to decrease over time (based on the 
Annual Energy Outlook 2000), operating cost savings due to a particular 
increase in equipment efficiency will in turn decrease over time and 
have less of an impact on consumer purchase decisions.
    Usage elasticity expresses how changes in equipment efficiency 
resulting from higher standards changes consumer behavior regarding air 
conditioners and heat pumps usage. Because of lower operating costs, 
consumers may change thermostat settings and/or operate the systems for 
longer hours to achieve greater comfort. Direct evidence of the 
magnitude of this effect is limited and the Department is interested in 
receiving comments. One study \14\ indicated that in summer months 
consumers may take 1-2% of the cooling energy savings back in increased 
usage, and 9-13% in winter months. Usage elasticity has not been 
considered in the current analysis but will be considered in the Final 
Rule.
---------------------------------------------------------------------------

    \14\ Jeffrey A. Dubin, Allen K. Miedema, and Ram V. Chandran, 
1986. ``Price effects of energy-efficient technologies: a study of 
residential demand for heating and cooling,'' Rand Journal of 
Economics, Vol 17, No. 3, Autumn, pp 310-324.
---------------------------------------------------------------------------

3. Equipment Efficiency
    Several comments received questioned the use of a weighted-average 
equipment efficiency equaling the SEER of the standard level for

[[Page 59604]]

forecasting shipments and national energy savings. All asserted that in 
the event of an increase in the minimum efficiency standard, the actual 
weighted-average efficiency of equipment in the marketplace would be 
greater than the minimum efficiency standard. For example, if a 12 SEER 
standard was set as the new minimum, the weighted-average efficiency 
would be equal to a value which was greater than 12 SEER. (Neme, VEIC, 
Transcript, pp. 214, 226-227; Nadel, ACEEE, Transcript, p. 228; NRDC, 
No. 35 at 8-9; PG&E, No. 31 at 6-7).
    The Department has modified several assumptions with regard to 
future equipment efficiencies. The Shipments Model no longer simply 
forecasts a weighted-average equipment efficiency, but rather, an 
actual distribution of efficiencies i.e., the percentage of shipments 
which occur in incremental SEER bins over the range of the minimum 
standard 10 to 18 SEER). Also, as discussed in Section IV, three 
efficiency scenarios are provided to model future equipment 
efficiencies. The impact of the three different scenarios on national 
energy savings and national net present values are discussed in Section 
VI.
    EEI asked the reason for assuming the weighted-average efficiency 
remains fixed at the same SEER level from the year 1997 to the assumed 
effective date of standard (2006). (EEI, No. 20 at 7-8). Historical 
data from the years 1994 through 1997 indicate that shipment-weighted 
efficiencies have remained essentially flat. As a result, weighted-
average efficiencies were assumed to remain constant from 1997 through 
2006.
4. Fuel Switching
    EEI, York, Virginia Power and Southern Company stated that shipment 
forecasts must account for any fuel switching that might occur as a 
result of increased heat pump prices to the consumer. The concern is 
that an increase in the total installed price of a heat pump would 
cause some consumers to choose a gas-space heating appliance rather 
than an electric heat pump. (Foster, EEI, Transcript, p.263; Madera, 
York, Transcript, p.264; Virginia Power, No.27 at 2-3; Southern 
Company, No. 29 at 1-2). ACEEE stated that any incorporation of fuel 
switching into the Shipments Model must account for future changes in 
gas-fired space-heating minimum efficiency standards. (Nadel, ACEEE, 
Transcript, p.266).
    Our examination of the historical data tends to indicate that the 
relative installed price of heat pumps is not the primary driver in 
heat pump vs. gas furnace purchase decisions. The more important factor 
in these decisions seems to be the availability of gas service. In the 
middle 1980's, there was a large peak in gas prices relative to 
electricity, but only a small, delayed increase in the relative market 
share of heat pumps. Besides this one historical event, the relative 
market share of heat pumps has been relatively constant from 1977 to 
the present.

D. National Energy Savings Analysis

    Changes to the LCC assumptions impact the NES and the National Net 
Present Value (NPV) analyses directly as the NES analysis uses the same 
basic data as the LCC analysis for the energy use and cost of the 
central air-conditioning and heat pump equipment.
    As previously mentioned, estimates of NES and NPV also depend on 
the distribution of product efficiencies among units sold after a 
standard takes effect in the marketplace. For the Supplemental ANOPR, 
the assumed product efficiency distribution was based on a weighted-
average equipment efficiency equal to the SEER of the new standard 
level.
1. Uncertainty in NES Results
    EEI believes that due to the uncertainty in the electric utility 
industry and its impact on future electricity prices it is more 
appropriate to represent the NES results with some degree of 
uncertainty. (EEI, No. 20 at 8).
    Although NES results presented in the Supplemental ANOPR were based 
only on electricity price estimates from the Reference Case forecast 
from the 1999 Annual Energy Outlook, our NES spreadsheets have provided 
users with five different options for estimating future electricity 
prices; 1999 AEO Reference Case forecast, 1999 AEO High Growth Case 
forecast, 1999 AEO Low Growth Case forecast, 1998 Gas Research 
Institute (GRI) forecasts, and constant electricity prices. Providing a 
number of options for forecasting future prices recognizes the 
uncertainty in the electric utility industry and how that uncertainty 
can impact the NES results. The NES uses single point values rather 
than ranges as used in LCC; consequently, NES provided single point 
results rather than a range. However, in order to account for the 
uncertainty in electricity price forecasts, DOE evaluated three energy 
price scenarios in the NES. The NES Spreadsheets have been made 
available to all interested parties via our web site to facilitate 
analysis of sensitivities for assumptions different than those for the 
Supplemental ANOPR. For today's proposed rule, we continue to provide 
the same options for forecasting future electricity prices with the 
exception that AEO 1999 forecasts have been replaced with those from 
the AEO 2000 as well as the five options for energy prices as described 
above.
2. Site-to-Source Conversion
    Both the Southern Company and EEI questioned the validity of the 
site-to-source conversions used in the NES spreadsheet model. The 
Southern Company and EEI asserted that hydroelectric power and 
renewable forms of electric energy are assigned fossil fuel-fired power 
plant heat rates. (Southern Company, No. 29 at 4-5; EEI, No. 20 at 7).
    We estimated the effects of proposed central air conditioner and 
heat pump standard levels on both the gas and electric utility 
industries using a variant of DOE/EIA's NEMS-BRS, together with some 
exogenous calculations.\15\ NEMS-BRS is used to determine site-to-
source conversion factors and does not assign fossil-fuel-fired power 
plant heat rates to hydroelectric or renewable power plants. The site-
to-source conversion factors used in the Supplemental ANOPR are average 
annual values for the residential sector. The average conversion 
factors are based on all forms of electricity generation with their 
corresponding heat rates (e.g., heat rates are assigned to fossil-fuel 
fired power plants which are much different than those assigned to 
other types of power plants). As a result, the site-to-source 
conversion factors are significantly lower than if all power plants 
were assigned the heat rates associated with fossil fuel-fired power 
plants. For today's proposed rule, site-to-source conversion factors 
are based on recommendations of the Advisory Committee on Appliance 
Energy Efficiency Standards. In this analysis, heat rates are based on 
determining how a deviation in national energy consumption due to 
standards impacts the type of electricity generation. In other words, 
heat rates are based on those power plants which are avoided as a 
result of the standard.
---------------------------------------------------------------------------

    \15\ For more information on NEMS, please refer to the U.S. 
Department of Energy, Energy Information Administration 
documentation. A useful summary is National Energy Modeling System: 
An Overview 1998, DOE/EIA-0581(98), February, 1998. DOE/EIA approves 
use of the name NEMS to describe only an official version of the 
model without any modification to code or data. Because our analysis 
entails some minor code modifications and the model is run under 
various policy scenarios that are variations on DOE/EIA assumptions, 
the name NEMS-BRS refers to the model as used here (BRS is DOE's 
Building Research and Standards office, under whose aegis this work 
has been performed).

---------------------------------------------------------------------------

[[Page 59605]]

E. Consumer Sub-Group Analysis-Low Income Renters

    NRDC stated that impacts on low-income renters should be 
investigated, because such renters do not purchase their space-
conditioning equipment and they have no choice as to the efficiency of 
the equipment which is used to space-condition their home. (NRDC, No. 
35 at 9).
    We have investigated the economic impact of standards on low-income 
households, and have included such impacts in section VI.D.7 of today's 
proposed rule and in Chapter 10 of the TSD. But we have not 
investigated the impacts on low-income renters separately. Renters at 
each income level are considered to have the same choice in efficiency 
as new home purchasers at the same level. Regardless of whether a 
household is occupied by an owner or a renter, we implicitly assume 
that the occupant incurs all costs of ownership, either directly or 
through rent payments. Therefore, we believe that our consideration of 
low income households generally applies to renters as well as owners.

F. Utility and Environmental Analysis

1. Peak Power Impacts--Reliability
    The CEC raised concerns over peak power by stating that the western 
region of the U.S. will soon face a capacity shortfall which will 
necessitate reductions in peak demand (CEC, No. 47 at 2-4). Leon Neal, 
Advanced Energy Corporation (AEC), stated that because of a 
relationship between SEER, EER, and equipment capacity which is not 
captured by using only the ``nominal 3 ton'' unit and SEER analyses, 
there were important factors not addressed in the DOE analysis. They 
argued that with larger capacity units at higher SEER, it is economic 
for manufacturers to use multi-compressor units and multi-speed 
compressor units, which results in a penalty in EER. They noted major 
national trends, i.e., increasing average size of residential 
dwellings, the tendency to sell bigger systems to increase profits and 
compensate for poor installations, and the distrust of contractors for 
higher efficiency equipment. (AEC, No. 17 at 1). EEI stated that the 
consideration of peak power impacts in setting new efficiency standards 
departs from the Department's statutory mandate. (Foster, EEI, 
Transcript, p. 176).
    With regard to AEC's concern that an increase in the efficiency 
standard would be accompanied by an increased air-conditioning power 
demand, we are not convinced that this situation would occur. Over the 
last 20 years, while shipment-weighted efficiency has continually 
increased, usage has remained relatively constant. Therefore, we see no 
reason that a significant jump in system usage would occur in 
conjunction with higher efficiency standards.
    Regarding EEI's claim that the consideration of peak power impacts 
departs from the Department's statutory mandate, section 
325(o)(2)(B)(i)(VII) of the Act, 42 U.S.C. 6295(o)(2)(B)(i)(VII), 
allows the Secretary to consider other factors deemed relevant for 
updating minimum efficiency standards, including peak power impacts.
2. Quantitative Assessment of Impacts on Peak Demand
    For purposes of estimating peak demand impacts from an increase in 
the central air conditioner and heat pump energy efficiency standard, 
we are using a version of the NEMS, called NEMS-BRS. NEMS-BRS is run 
similar to the AEO2000 NEMS except that central air conditioner and 
heat pump energy usages are reduced by the amount of energy 
(electricity) saved due to the proposed trial standard levels. The 
input of energy savings are obtained from the NES spreadsheet.
    NEMS estimates peak power impacts by determining the reduction in 
installed generation capacity due to an increase in the minimum 
efficiency standard. For central air conditioners and heat pumps, NEMS 
uses a single nationally representative end-use load shape to estimate 
peak power impacts. The overall end-use load shape is reduced in 
proportion to the amount of energy savings achieved through an increase 
in the standard. The reduction in power demand achieved by shaving the 
end-use load shape is extrapolated to a national scale to come up with 
nationally representative peak power impacts. Thus, NEMS does not use 
the equipment's EER performance, per se, to estimate peak power 
impacts. Rather, because the load shape is shaved in proportion to the 
energy savings, the EER is implicitly assumed to increase in proportion 
to the SEER.
    The forecasted peak impacts using NEMS-BRS are presented in Section 
VI of today's proposed rule.
3. Qualitative Assessment of Air Conditioning Standards Impact on Power 
System Reliability
    We also recognize that reducing growth in electricity demand during 
peak periods may improve the reliability of the U.S. electric power 
system. But there are number of factors with the electric power system 
itself that may overwhelm any effect that an improvement in residential 
air conditioning efficiency might offer. First, investment in system 
expansion has fallen behind demand growth, and future development may 
be limited by siting constraints. Second, industry restructuring 
requires the development of new technologies, operating procedures, and 
regulatory structures to meet peak demands. And third, the strong 
demand expansion of recent years may well continue into the future. 
Within this environment, the potential benefits of a central air 
conditioner and heat pump standard that could lower growth in peak 
demand could be desirable. But, due to the existing problems with the 
electric power system described above, it is difficult to assess, in 
quantitative terms, the impact of an air conditioner standard on system 
reliability. Thus, in addition to the planned activities to improve 
NEMS to forecast more credible peak demand impacts, we plan to assess 
the reliability of the U.S. electric system to determine what 
connection exists between end-use peak demand reductions and system 
reliability. The assessment will focus on three areas: (1) Defining 
reliability, (2) historic performance of the utility system, and (3) 
analyzing near- and long-term utility changes and how they might impact 
reliability. In defining reliability, we will use typical threats 
(e.g., weather, tree falls, excess load, and inaccurate demand 
forecasts) to put system reliability into context. In addition, 
industry indices for the frequency of failures and the number of 
customers affected will be used. With regard to historic performance, 
we will attempt to analyze the history of system disturbances and 
estimate their economic consequences. Finally, we will look at the 
changes occurring in the utility industry such as restructuring and 
increasing demand growth to determine to try and assess how these 
future changes might impact reliability.
4. Competitive Residential Market
    EEI asked whether NEMS, the model which is used for forecasting 
utility and environmental impacts, will be adapted to model more 
accurately the deregulated electric utility industry. As part of the 
deregulated industry, EEI stated that consumers will have choice of 
electricity providers. In addition, the industry will likely build more 
merchant power plants. (EEI, No. 20 at 9).
    Although we recognize that NEMS may not be entirely accurate in its 
modeling of the changing electric utility industry, we believe it is 
still the best tool for forecasting the impacts due to increased 
central air conditioner and

[[Page 59606]]

heat pump standards. We also recognize the difficulty for any model or 
tool to forecast changes in the utility industry. Thus, the results 
from NEMS are used to provide a gross picture of the impacts that can 
be expected from the imposition of new efficiency standards for central 
air conditioners and heat pumps. Sensitivities are conducted with the 
AEO High Growth and Low Growth cases to capture the variability that 
could arise from changes in the electric utility industry.

G. Manufacturer Impact Analysis--Low Volume Manufacturers

    First Company (First Co.) and National Comfort Products commented 
that the assumptions used in the engineering analysis were not 
applicable for low volume manufacturers and urged the Department to 
consider the situations of all firms in the industry. (First Co., No. 
40 at 10; National Comfort Products, No. 30 at 1).
    Since the engineering analysis is used to assess the impacts on 
consumers and the nation, it is more appropriate to rely on assumptions 
reflective of larger manufacturers who control more than 95% of the 
market. However, we did consider the special circumstances of lower 
volume manufacturers as part of the manufacturer impact analysis. We 
interviewed the major manufacturers as well as two smaller 
manufacturers, and based on this information, estimated the impact of 
standards on both large and small manufacturers separately.

H. Markups

    The Supplemental ANOPR's engineering analysis estimated the cost of 
producing baseline air conditioners and heat pumps and also estimated 
the series of markups on that product cost that yield the price of the 
equipment to the consumer. Four markups were applied: Manufacturer 
markup (1.18), distributor/wholesaler markup (1.37), dealer/contractor 
markup (1.54), and sales tax (1.07). In general, these were based on 
financial reports for each group on a national basis.
    NRDC, ACEEE and VEIC commented that instead of applying average 
markups to the incremental increase in costs resulting from new 
standards, it was more reasonable to apply a lower markup to those 
incremental costs. Otherwise, companies would receive a windfall from 
the new standard, which would surely not be the case in a competitive 
industry such as heating, ventilation, and air conditioning. (NRDC, No. 
35 at 6, ACEEE, No. 43 at 2, VEIC, No. 32 at 2). NRDC also advocated 
the use of a fixed gross margin in dollars rather than a fixed 
percentage (NRDC, No. 35 at 6), while EEI stated that the fixed 
percentage assumption is unreasonable. (EEI, No. 20 at 10). ARI 
supported the markups the Department used. (ARI, No. 48 at 4).
    Department consultant Joseph Pietsch stated that at the distributor 
level, since no labor is involved to modify the product, the markup is 
applied to a well-documented material cost. However, the distributor's 
markup percentage may vary by product type. If the distributor's mark-
up prices to the installing trade are not competitive in the market 
served, the distributor might have to seek price adjustments from the 
manufacturer. Further, installing contractors typically use a markup 
procedure for labor that is most likely be at a different percentage 
than a markup for materials. (Pietsch, No. 36 at 23). Finally, prompted 
by comments we received, we now distinguish markups based on whether 
products are sold into new homes or as replacements or retrofits. 
(Nadel, ACEEE, Transcript pp. 122-123; and Eckman, NPPC, Transcript p. 
152-153; CEC, No. 47 at 7).
    After reviewing the comments and publishing an interim analysis 
with fixed dollar margin, the Department undertook a thorough review of 
its markup assumptions and made one minor and one major revision.
    First, at the manufacturer level, the markups were raised slightly 
(from 1.18 to 1.24) partially to reflect new financial data for a 
manufacturer who recently completed an initial public offering, and 
partially to incorporate results from the MIA. The MIA suggests that 
firms accrue a higher profit margin on baseline equipment than the 
conservative 1% assumed for the Supplemental ANOPR's Engineering 
Analysis.
    Second, at the distributor and dealer levels, analysis of U.S. 
Census Bureau data and recent industry financial reports suggest that 
markups on changes in the unit price of equipment are less than the 
average markups for those industries. In light of these new findings, 
the markups for the distributors and dealers on the incremental 
increase in equipment cost were lowered from 1.37 to 1.09 and 1.54 to 
1.27, respectively. For the distributor, the markup on the portion of 
equipment cost equal to the cost of the baseline equipment remains at 
1.37. For the dealer, the 1.27 markup is applied to the total cost. The 
original 1.54 assumption included the markup on the labor portion of 
installation, which is not appropriately applied to equipment. We 
increased our estimate of the markup on installation labor slightly to 
compensate for the lower markup on equipment price, keeping the overall 
installed price the same. The Department's pricing information 
indicates that the total installed price of baseline equipment is 
accurate as published in the Supplemental ANOPR. The overall effect of 
these changes is to slightly decrease distributor and dealer equipment 
markups as the standard level rises.
    We introduced a new builder markup of 1.27 for new construction 
markets only and applied the sales tax rate of 1.07 in only 
replacement/retrofit markets.
    Table V.3 summarizes the changes in markups. The Technical Support 
Document (Chapter 5) provides more details on the derivation of these 
new estimates.

Table V.3.--Comparison of Revised Markups and Supplemental ANOPR Markups
------------------------------------------------------------------------
                                    Revised analysis      Supplemental
              Type                       markup           ANOPR markup
------------------------------------------------------------------------
Manufacturer Markup.............  1.23...............               1.18
Wholesaler/Distributor Markups:
    10 SEER.....................  1.37...............               1.37
    11 SEER.....................  1.33...............  .................
    12 SEER.....................  1.30...............  .................
    13 SEER.....................  1.26...............  .................
Dealer/Contractor:
    Equipment Markup............  1.27...............               1.55
    Installation Labor: \a\
        Air Conditioner.........  $1,279/$1,367......             $1,190
        Heat Pump...............  $2,280/$2,160......             $2,035

[[Page 59607]]

 
Builder Markup..................  b 1.09.............             c 1.00
Sales Tax.......................  b 1.04.............             d 1.07
Overall Markup:
    10 SEER.....................  2.42...............               2.68
    11 SEER.....................  2.35...............               2.68
    12 SEER.....................  2.30...............               2.68
    13 SEER.....................  2.23...............              2.68
------------------------------------------------------------------------
a For revised analysis, first value pertains to split systems and second
  value pertains to single package systems.
b Weighted-average markups representing both the new construction and
  replacement markets.
c For the SANOPR, builder markups were not considered.
d For the Supplemental ANOPR, sales taxes representing only the
  replacement market were used.

I. EER-Based Efficiency Standard

    The Department received numerous comments on the relationship of 
steady state efficiency (EER) to increases in SEER. NRDC, ACEEE, VEIC, 
PG&E, CEC, OEO, Unico and Southern Company support the establishment of 
minimum efficiency standards based on EER at an outdoor temperature of 
95 deg.F, (EER(95 deg.F)) in lieu of, or in addition to, SEER, which is 
based largely on an outdoor temperature of 82 deg.F. (NRDC, No. 35 at 
15-16; ACEEE, No. 43 at 8-9; VEIC, No. 32 at 5; PG&E, No. 31 at 1-4; 
CEC, No. 47 at 5; OEO, No. 46 at 10-12; Unico, No. 34 at 2; Southern 
Company, No. 29 at 3).
    Their concern is that an increase in SEER does not necessarily 
correspond to an increase in EER, and that a 95 deg.F rating condition 
better represents the performance of an air conditioner on hot days 
when electricity demand is at its highest. They believe that 
residential air conditioners contribute significantly to this peak 
demand, particularly in warmer regions of the country. Since 
electricity generation, transmission, and distribution capacity is 
determined by the electrical load served during these peak demand 
times, products that demonstrate improved efficiency under peak 
conditions can reduce the need for added electrical system capacity. 
They also believe that reducing peak demand is an important component 
of any integrated plan to improve the reliability of the nation's 
electrical system. Recently there have been several well-publicized 
blackouts and brownouts following, or in the midst of, hot periods. 
Advocates of an EER-based standard believe that a SEER-only standard 
does not guarantee the desired improvement in peak-period performance.
1. Current Relationship Between SEER and EER
    It is certainly true that SEER is not an ideal indicator of system 
efficiency in very hot weather, and SEER may not be the best indicator 
of the seasonal efficiency for equipment operating in the warmest 
regions of the country. However, the relationship between efficiency at 
82 deg.F and at 95 deg.F is fairly close for single-speed, single-
capacity equipment, which represents the vast majority of unitary 
equipment in the marketplace. For other equipment, including variable 
or multi-speed equipment or equipment with modulating capacity, the 
82 deg.F test point is given a great deal of weight in determining the 
SEER rating. In these cases, the relationship between SEER and 
EER(95 deg.F) is less certain, and manufacturers have some flexibility 
and incentive to improve SEER without improving EER(95 deg.F).
    The SEER test, representing equipment performance over the entire 
cooling season, encourages manufacturers to design equipment that 
consumes less energy throughout the cooling season for the average 
user. The EER(95 deg.F) test, which is a measure of steady-state 
performance under only one set of climatic conditions, cannot provide 
insight into cyclical performance or cooling efficiency at cooler 
temperatures which represent the bulk of the cooling season nationwide. 
The Department, therefore, maintains that a SEER-based standard is 
essential to its effort to reduce national energy consumption. Further, 
we assume that peak demand savings would accompany any seasonal energy 
savings resulting from an increase in the required SEER level, because 
of the relationship between SEER and EER(95 deg.F), and the costs of 
increasing EER(95 deg.F) are already incorporated into the analysis.
    However, the Department is particularly interested in ensuring that 
the current relationship between EER(95 deg.F) and SEER will remain 
intact under new efficiency standards, resulting in reduction in growth 
of peak demand. This additional reduction in peak demand growth would 
benefit utilities through an eventual and incremental reduction in the 
need for new capacity. Maintaining higher EER(95 deg.F) would also 
benefit consumers. Since the cost of electricity is highest during 
periods of peak demand, any decrease in electricity consumption during 
peak-periods, could reduce the user's annual electricity bill, 
particularly if the user pays time-of-day or seasonal rates.
2. Options for Possible EER Standards
    The Department has at least four options for ensuring that 
EER(95 deg.F) performance is maintained under new SEER standards. 
First, the Department could rely on the physical relationship between 
EER(95 deg.F) and SEER to ensure that an increase in SEER would result 
in a corresponding increase in EER. The Department is not aware of any 
modulating, multi-speed, or variable speed air conditioners (hereafter 
referred to collectively as modulating equipment) being offered below 
13 SEER, and very few of the available 13 SEER products are modulating 
equipment. Therefore, SEER and EER are closely related in equipment 
currently available at the efficiency levels that, as discussed below, 
the Department is proposing today to adopt as minimum levels--12 SEER 
for air conditioners and 13 SEER for heat pumps. Assuming that 
relationship holds under such new standards, EER would increase as SEER 
increases.
    The second option would be to establish an EER(95 deg.F) floor that 
must be met by modulating equipment only or, alternately, all 
equipment.
    The third option would be to establish a minimum EER requirement at 
each SEER level, even for products exceeding the minimum SEER level. 
Again, this could be established for modulating equipment only or for 
all equipment.
    The fourth option would be to alter the SEER test procedure to rely 
more on 95 deg.F performance and less on performance at cooler 
temperatures. This would provide incentive for

[[Page 59608]]

manufacturers to optimize their designs to favor the warmer part of the 
cooling season and warmer regions of the country.
    We consider the second and third options to be the most attractive. 
While we believe that the first option, relying on the current 
relationship between EER and SEER, would satisfy our concerns in the 
foreseeable future, this option provides no assurance that 
manufacturers would not develop and promote equipment in the long term 
that would seriously reduce EER ratings. The fourth option, altering 
the SEER test procedure to favor higher temperatures, would require us 
to embark on a new rulemaking to establish those new procedures and 
then to redo this rule to incorporate the new SEER values. We would 
prefer to avoid those delays and the design uncertainty associated with 
altering the procedures.
    Both the second and third options, mandating minimum EER ratings, 
would guarantee that products under new standards would achieve the 
same EER ratings as they do today without altering the test procedures. 
The third option is more aggressive since it would require that 
products of higher SEER ratings must also meet increasingly stringent 
EER ratings.
    Within the second and third options, we could establish EER 
requirements of varying degrees of stringency. For example, we could 
select EER levels equivalent to the ratings of the minimum EER rating 
of available equipment today at the proposed standard level, the median 
EER rating, anywhere in between, or even higher.
    We prefer the second option, establishing an EER floor equal to the 
median EER ratings of equipment currently available at each standard 
level. That would result in a substantial improvement in the EER 
ratings of the typical product sold while still providing manufacturers 
with the flexibility to raise SEER ratings through modulation rather 
than EER improvements in higher efficiency products.
    The concern that prevents us from fully endorsing the third option 
is that it would discourage the development and sale of modulating 
capacity and variable speed equipment. Modulating equipment realizes a 
benefit in the SEER test, allowing manufacturers to reduce the cost of 
the core components compared to non-modulating equipment. This cost 
reduction partially offsets the cost of the modulation, making 
modulating equipment more affordable for consumers. Being required to 
meet the same EER standards as non-modulating equipment would negate 
this cost benefit.
    The Department wishes to encourage, not discourage, the development 
and sale of modulating equipment. Consumers value the added benefits of 
modulation, and manufacturers realize this value in the form of higher 
revenues. For consumers and the nation, modulation mitigates the 
inefficiencies caused by oversizing the system during installation. 
Oversizing is a widespread problem that causes frequent equipment 
cycling, increasing energy consumption. Furthermore, oversizing 
arguably contributes more to peak power demand than does any reduction 
in EER associated with modulating equipment.
    For DOE to require products to meet median EER values rather than 
less stringent EER values would also raise some concerns. First, the 
cost-efficiency relationships used in our analysis may underestimate 
costs of manufacturing such products, since we did not include the 
costs of a minimum EER. Second, if an EER standard increases product 
cost, it would discourage the development and sale of modulating 
equipment at the baseline levels. We expect any cost increases required 
to meet median EER levels, however, would be slight and would not 
significantly alter our analysis.
    To determine what the appropriate EER(95 deg.F) requirement might 
be, the Department assessed ARI performance data on residential unitary 
equipment certified as of February 1998. The median EERs available for 
each product class at the minimum SEER levels DOE proposes today, are 
identified in Table V.4 as the ``Median Available EER at Proposed 
Minimum SEER.'' In addition to the minimum SEER proposal contained in 
this notice, the Department is inclined to adopt in the Final Rule 
minimum EER(95 deg.F) requirements equal to these values. However, 
since there are very few packaged heat pumps available from which to 
draw a conclusion concerning EER, DOE believes the minimum EER 
requirement for packaged heat pumps should be the same as split heat 
pumps less the 0.3 EER offset seen between packaged and split air 
conditioners.

  Table V.4.--Median Available Energy Efficiency Ratings (EER) and Proposed Minimum EERs in Residential Unitary
                                                Equipment (1998)
----------------------------------------------------------------------------------------------------------------
                                                                               10th
                                                                 Lowest     percentile     Median
                                                   Proposed    available    available    available
                 Product class                     minimum       EER at       EER at       EER at      Proposed
                                                     SEER       proposed     proposed     proposed   minimum EER
                                                                minimum      minimum      minimum
                                                                  SEER         SEER         SEER
----------------------------------------------------------------------------------------------------------------
Split Air Conditioners.........................         12.0         10.1         10.5         10.8         10.8
Packaged Air Conditioners......................         12.0         10.1         10.3         10.5         10.5
Split Heat Pumps...............................         13.0         10.8         11.1         11.9         11.9
Packaged Heat Pumps............................         13.0         11.0         11.0         11.0         11.6
----------------------------------------------------------------------------------------------------------------

    We encourage comments regarding the burdens and benefits that would 
result from including an EER requirement in the final rule. Of 
particular interest are comments regarding burdens on manufacturers and 
benefits regarding reduction in peak electricity demand, including the 
effect of an EER minimum on costs, on availability and sales of 
modulating equipment, and on electrical system reliability. In 
addition, comments are welcome to discuss the pros and cons of any of 
the other options described above.

J. Niche Products

    Several types of central air conditioners and heat pumps are used 
in particular or unusual applications and have features that differ 
from those of the vast majority of products available in the 
marketplace. We refer to these as ``niche products.'' Included are 
single package units that are designed to be mounted within or 
immediately adjacent to a fixed-size opening in an outside wall of the 
structure and split systems where the outdoor unit is designed to be 
mounted in the same

[[Page 59609]]

manner. This would be comparable to the classes that have been 
established for room air conditioners that are defined as ``without 
louvered sides.'' Also included are non-ducted mini-split air 
conditioners and heat pumps, and high-velocity, small-duct systems. 
Typical applications for of niche products may include: existing single 
family buildings without air ducts and multi-family buildings with 
fixed-area wall openings and both new and existing manufactured homes.
    Several manufacturers have claimed that certain niche products 
would not be viable if required to meet higher efficiency standards, 
and have asked the Department to establish new classes for these 
products, with efficiency standards maintained at current levels. All 
these products serve relatively small niche markets and as such, the 
efficiency standards established for these products will have little 
effect on national energy savings. Further, each is a product with some 
unique utility. Earlier in this rulemaking the Department sought 
information on whether higher standards would eliminate these products 
from the marketplace because of the severity of their constraints.
1. Ductless Split Air Conditioners and Heat Pumps
    Ductless split systems, or mini-splits as they are commonly known, 
consist of a single outdoor unit and one or more indoor fan coil units, 
each located in the conditioned space. Since consumers may consider the 
interior units to be more intrusive than a ducted system, manufacturers 
strive to make them as compact as possible. This cabinet size 
constraint combined with efficiency losses due to heat transfer between 
refrigerant lines puts pressure on equipment efficiency.
    Mitsubishi and EnviroMaster International (EMI), manufacturers of 
ductless split systems, commented that ductless products should be 
assigned a separate product class with a lower standard. (Mitsubishi, 
No. 18 at 1 and EMI, No. 26 at 1). Their arguments for a separate class 
are:
     Ductless units are operated like room air conditioners, 
because the ``compressor delivering air conditioning to a particular 
room operates only when necessary rather than when a central thermostat 
calls for cooling in another area;'
     Ductless units do not have the duct losses of a central 
air conditioning system, and so have greater installed system 
efficiency. Mitsubishi claims that: ``a 10 SEER ductless unit may be 
virtually equivalent or even higher in efficiency than a 12 SEER ducted 
unit';
     The overwhelming portion of the market of ductless mini-
splits is in capacities of 18,000 Btu/hr and less. Making significant 
increases in the efficiency of motors and compressors used in these 
small units is difficult;
     Ductless air conditioners frequently employ variable speed 
control of the compressor motors. Mitsubishi claims: ``Controlling the 
speed of the compressor by inverter will not benefit the 100% capacity 
rating but it has a tremendous benefit when the compressor begins 
slowing down. During 50% capacity operation the SEER level would be 
several points above the 100% capacity SEER. This results in more 
energy savings, quieter operation, less peak load demands.'' Mitsubishi 
also argued that an EER rating, like a room air conditioner, would be 
more appropriate because of the inverter driven system's low cyclic 
losses; and
     Per ton, (of cooling capacity) a ductless air conditioning 
system is one of the most expensive HVAC systems in the U.S. today. 
Some of the reasons for high production costs are: low volumes in the 
United States, the indoor unit is a ``finished'' product fully visible 
to the customer so it requires additional cosmetic expenses, and the 
unit must be small, so complex design of coils is necessary.
    After review of the available information, the Department does not 
believe a separate class is warranted for these products. The evidence 
presented in the comments does not convince us that these products 
would not be able to meet the proposed standard level. The constraints 
on increasing the size of the indoor fan coil units are primarily 
esthetic, and the Department is unaware of technological limitations to 
increasing minimum efficiency standards for these products. The 
esthetic disadvantage of larger cabinet size would be compensated by 
higher efficiency and lower cost of operation. While the claim that the 
small capacities make increased efficiencies difficult is a reasonable 
one, the Department is aware that systems with capacities of up to 
44,000 Btu/h are available and believes that providing an exemption for 
all systems because of difficulty with smaller systems is not 
justified.
2. Small Duct High Velocity Air Conditioners
    Small-duct, high-velocity (SDHV) systems target primarily the 
retrofit market, where they are installed in attic or closet spaces and 
distribute conditioned pressurized air through round ducts small enough 
to fit inside stud walls. Compared with conventional air conditioners 
and heat pumps that use large ducts, the indoor coil section of an SDHV 
system is compactly designed to facilitate retrofit installation in 
tight spaces, resulting in smaller face area and more rows of tubing 
than conventional systems. The compact fan coil design and small ducts 
contribute to high static pressure loss that must be overcome by the 
blower, requiring greater fan power. Manufacturers claim the greater 
energy consumption of these blower motors and the limited space for 
installing the fan coils makes it more difficult for SDHV systems to 
increase energy efficiency. To mitigate the burden on the blowers, 
designers reduce the required air volume by cooling it more than a 
conventional air conditioner, which offers an associated benefit of 
enhanced humidity removal but increases cost. In order to meet the 
current 10 SEER standard, manufacturers of SDHV systems typically pair 
the fan coil with high efficiency condensing units (typically 13--14 
SEER).
    Unico described a number of alternatives to increase system 
efficiency for their product, including a larger heat exchanger, an 
improved blower design and a more efficient blower motor, and concluded 
that the burden of increased initial cost would outweigh the benefits 
of increased system efficiency. (Unico, No.60 at 5). Unico asked the 
Department to either: (1) Exempt them from any increase in standards; 
(2) allow a 15% SEER credit for reduced duct losses associated with 
their type of system; or (3) allow their system to be tested as a coil 
only (without a blower) at a conventional airflow, using the test 
procedure's default fan power to establish a SEER rating but allow them 
to install systems with a high pressure blower. (Unico, No. 61 at 3).
    SpacePak, another major manufacturer of this type of product, 
commented that they have made the investment to produce more efficient 
systems. (SpacePak, No. 39 at 1). SpacePak also provided ARI directory 
data indicating the higher efficiency of their designs. SpacePak 
claimed to offer many equipment combinations in the 11 to 12 SEER 
range, with only 17% of their ARI listings at the 10 SEER minimum. 
(Space Pak, No. 52 at 1).
    After review of the available information, the Department does not 
believe a separate class with an efficiency standard below 12 SEER or a 
15% SEER credit, is warranted for these products. Regarding Unico's 
third

[[Page 59610]]

alternative, i.e., revise the DOE test procedure to allow SDHV systems 
to be tested as coil-only products, the Department believes that such a 
change would recognize the improvements in delivered efficiency of the 
SDHV system because of reduced duct losses. We are therefore proposing 
to modify the DOE test procedure to allow small-duct high velocity 
system manufacturers to test their products as coil only products. We 
estimate that the impact of this allowance will be 1 to 2.5 SEER 
points; i.e., a 10 SEER system would become an 11 to 12.5 SEER system. 
The Department seeks comments on whether the test procedure revision or 
other proposed changes are needed to maintain the viability of the 
small-duct, high-velocity systems in the market place.
3. Vertical Packaged, Wall Mounted
    These products are factory-assembled single packaged vertical air-
conditioners and heat pumps using single phase power but intended for 
use in commercial and industrial heating and cooling applications. The 
difficult air flow configuration (each of the condenser and evaporator 
compartments takes air in and exhausts it through the same face) 
combined with the attempt to minimize size constrains the ability of 
these units to attain higher SEERs.
    The Department understands that single-package vertical air-
conditioners and heat pumps are not distributed for personal use or 
consumption by individuals, and therefore believes that at present they 
are commercial products covered by EPACT and not by residential energy 
efficiency standards. Accordingly, vertical packaged, wall mounted 
equipment would not be covered by today's proposed rule for residential 
products.
4. Through-the-Wall Condensers
    Through-the-wall (TTW) condensers were popular in new multistory 
residential construction in the 1960s and 1970s. Major manufacturers 
have since abandoned the replacement market, providing an opportunity 
for lower volume manufacturers. Most equipment is in the 1\1/2\ to 2\1/
2\ ton capacity range. These systems take in air through only one face 
and exhaust air through the same face resulting in reduced efficiency 
because of increased fan power consumption. Some short-circuiting of 
exhaust air into the intake may also occur.
    Replacements for through-the-wall condensers must fit within the 
same wall opening as the original units, even though original units may 
be half as efficient as the new units. Residents or building owners are 
particularly sensitive to any increase in price or to the cost of 
enlarging the wall opening to accommodate a larger condenser. Since 
repair is the only other cost effective alternative to replacement, a 
new standard that increases cabinet size or results in a significant 
price increase could be counterproductive, preventing the turnover of 
old, inefficient equipment.
    According to submitted data, 10 SEER TTW split condensing air-
conditioners with fan coils (when scaled up to 3-tons) are $206 more 
expensive (manufacturer price) than 10 SEER pad-mounted split systems. 
Under a 12 SEER standard for pad-mounted split air conditioners, the 
$206 differential would be maintained if TTW Condenser systems had to 
meet an 11 SEER rating (also based on submitted data). This 
differential increases when wall modifications are necessary. DOE 
believes 11 SEER is technologically feasible at this time for most 
configurations of TTW split equipment. TTW condensers come in three 
sizes (height  x  weight exterior to the building): 32"  x  24" (768 
sq. in.); 28"  x  26" (721 sq. in.); and 23"  x  30" (679 sq. in.). 
First Co. commented that imposing higher efficiency standards would 
eliminate through-the-wall products from the marketplace because of the 
significant increase in the price with a correspondingly small 
operating cost savings. (First Co., No. 40 at 1).
    TTW packaged systems are intended for both new construction and 
retrofit. First Co's dimensions (new construction) are 43"  x  28" 
(1,204 sq. in.). Skymark's retrofit unit is 15"  x  55" (825 sq. in.). 
TTW packaged equipment for new construction, which is not severely 
size-constrained, should be able to reach 12 SEER in its current 
configuration with component upgrades. The current manufacturer price 
differential (First Co.) between TTW packaged and conventional packaged 
equipment (scaled to 3-tons) is $430. According to First Co. data, that 
differential would be maintained under an 11 SEER standard for TTW 
packaged with a 12 SEER for conventional packaged.
    The Department proposes to establish a separate class for TTW 
equipment (including packaged and split, cooling only and heat pump) 
based on a maximum combined surface area of the air inlet and outlet of 
the condenser of 830 square inches, and a maximum capacity of 30,000 
Btu/hr. The purpose of the maximum capacity requirement is to ensure 
that if new technology reduces the size of the condenser, manufacturers 
will not offer 3-ton equipment that fits the definition but is intended 
for use in conventional applications. To maintain the price 
differential between this new class and conventional equipment, we 
propose a standard of 11 SEER. Because electric strip heat is popular 
in TTW equipment, the 11 SEER standard would also apply to TTW heat 
pumps.
5. Non-Weatherized Single-Package Unit, Mounted Entirely Within the 
Structure
    Another niche product, which was not discussed in the Supplemental 
ANOPR, is a non-weatherized single-package unit, mounted entirely 
within the structure (in an attic, basement, or closet), with outdoor 
air ducted to and from the unit. This unit is used in high-rise and 
garden apartments, manufactured homes, and other residential 
applications where locations for placement of outdoor units may be 
unavailable or too remote, where architectural aesthetics may be 
compromised by visible outdoor units, where vandalism or theft of 
outdoor units is a potential problem, or where compliance with local 
sound ordinances restricts the placement of outdoor air conditioning 
equipment.
    Consolidated Technologies, Inc., manufacturer of the INSIDER, 
commented, ``For the INSIDER to be used in Manufactured Housing and 
Modular housing it is important to have the smallest footprint 
possible.'' (Consolidated Technologies, Inc., No. 42 at 2).
    The Department recognizes that this product has space constraints, 
albeit not as severe as products that must fit a wall opening. Products 
at the 12 SEER level (the proposed air conditioning standard level) are 
currently on the market. A very difficult obstacle to establishing a 
separate class for this product is a definition that could not be used 
as a loophole to use its lower standard for conventional products. Its 
salient feature is its indoor location; product class definitions 
should be based on physical characteristics, and it is nearly 
impossible to define physical characteristics that would ensure 
products be installed in a particular location. No separate class is 
proposed for this product.
6. Request for Comments Regarding Niche Product Standards
    The Department encourages comments regarding whether the proposed 
standards concerning high-velocity, vertically-packaged wall-mounted 
equipment, and through-the-wall equipment provide a significant 
advantage to those products versus

[[Page 59611]]

competing products, whether they are sufficient to preserve the unique 
features of those products, and whether improvements in the definitions 
are needed to prevent loopholes. For ductless split equipment and non-
weatherized vertical packaged equipment, additional comment is welcome 
on the impacts that meeting the new standards would have on the 
availability of those products.

K. Thermostatic Expansion Valves

    VEIC, NRDC, ACEEE, and CEC requested that a design standard 
requiring the use of thermostatic expansion valves (TXVs) be adopted to 
ensure that energy savings expected from an increase in the minimum 
efficiency standard are realized in the field. Several of the comments 
cited studies which demonstrate that TXVs can mitigate adverse effects 
on efficiency due to field installation problems such as inadequate 
evaporator airflow and improper refrigerant charge. CEC suggested that 
separate classes be established for systems with and without TXVs and 
that more stringent minimum efficiency standards be established for 
classes not utilizing TXVs, and VEIC suggested mandating the use of 
TXVs in all new equipment. (VEIC, No. 32 at 4-5; Neme, VEIC, 
Transcript, pp. 187-189; NRDC, No. 35 at 11-12; ACEEE, No. 43 at 5-6; 
CEC, No. 47 at 5-6).
    At least two regulatory options exist for encouraging the use of 
TXVs. The first is to require that all equipment contain TXVs, 
hereafter called TXV requirement. The second is to establish a separate 
product class for TXV-bearing equipment and to reduce the minimum SEER 
requirements for those classes from the levels in today's proposed 
rule.
    The EPCA allows the Department to issue a requirement such as 
mandating the use of TXVs if the Secretary determines that such a 
requirement is necessary to ensure that the product meets its 
performance-based standard. In the case of TXVs, the Department's 
current opinion is that products can meet the proposed SEER 
requirements without TXVs. This is certainly true in the laboratory. In 
the field, although many installations could undoubtedly benefit from 
TXVs, it is unclear whether we could find that TXVs are needed for 
those systems to perform at their rated efficiencies.
    Regarding the second option, EPCA requires the Department to 
establish separate product classes for products based on a performance 
related feature (such as a TXV) if the Secretary determines that a 
higher or lower efficiency standard is justified for those products. 
Evidence indicates that TXVs maintain system efficiency better than do 
fixed orifices or capillary tube expansion devices in cases where split 
system equipment is over- or under-charged with refrigerant. This 
apparently includes most installations. To encourage the use of TXVs we 
could consider establishing lower SEER standards for products 
containing TXVs.
    While the evidence of the potential energy-saving benefits of TXVs 
is certainly persuasive, the current SEER test procedures already 
encourage their use. For rating a manufacturer's condenser with the 
evaporator of a different manufacturer, the SEER determination 
procedures provide a credit for systems that incorporate TXVs. For 
matched systems, the use of TXVs typically lowers the degradation 
coefficient, resulting in higher SEER results.
    We hesitate to provide stronger support for TXV-bearing equipment 
than that which is already granted through the test procedures. Unlike 
fixed orifices, TXVs are mechanical components. Some manufacturers 
avoid their usage because of reliability concerns, and the additional 
repair costs incurred by consumers could outweigh their energy-saving 
benefits. Furthermore, contractors are able to adjust the factory-set 
TXV in the field, and it is possible that alleviating problems due to 
over- or under-charging by encouraging the use of TXVs could create 
another problem--improperly set TXVs. Also, it is not clear that TXVs 
are the only, or even the best, option for maintaining equipment 
efficiency in the field. For example, technologies that could mitigate 
dirty coils or prevent improper charging and airflow may be more 
attractive options, and we would not want to discourage their 
development or use by mandating the use of TXVs.
    In any case, manufacturers may well find that the SEER benefits 
offered by TXVs are compelling enough under the new efficiency 
standards that they would offer TXVs in a substantial amount of 
baseline equipment without further encouragement by the Department. The 
Engineering Analysis suggests that manufacturers are currently more 
likely to incorporate TXVs into their 12 SEER and 13 SEER products than 
in their 10 SEER products. We would expect, therefore, that TXV use 
would be much more prevalent under higher efficiency standards.
    For these reasons, the Department feels that the current test 
procedure provides the proper encouragement for manufacturers to 
incorporate TXVs into their products, and that neither a TXV 
requirement nor a lower standard for TXV-bearing products are justified 
at this time. We welcome additional comments on this issue, 
particularly regarding whether our concerns regarding the perceived 
reliability problems and potential misuses associated with widespread 
use of TXVs are valid.

L. Other Comments

1. Latent Heat Removal
    The Southern Company, Virginia Power, and R.B. Stotz insisted that 
increased equipment efficiency impacts the equipment's ability to 
properly dehumidify (i.e., remove latent heat). Virginia Power 
specifically wants assurances that any increase in the standard will 
maintain current humidity control capabilities. In addition, it asserts 
that the costs of maintaining humidity control should be included in 
the analysis. (Virginia Power, No. 27 at 2). The Southern Company 
claims that higher SEER values will lead to larger indoor coils which 
in turn will result in higher air temperatures leaving the indoor coil. 
The higher the air temperature, the less dehumidification occurs. They 
also claim that while more efficient systems may dehumidify properly at 
rated test conditions, their ability to dehumidify under high indoor 
humidity conditions are worse than less efficient equipment. (Southern 
Company, No. 29 at 3-4; R.B. Stotz, No. 24 at 1). Trane counters the 
claims made by the Southern Company and Virginia Power by stating that 
there is absolutely no evidence to support the claim that more 
efficient equipment has less latent heat removal capability. (Crawford, 
Trane, Transcript, pp. 272-273).
    Trane's claim that there is no relationship between equipment 
efficiency and its ability to dehumidify is substantiated by research 
conducted by ARI. From this research, ARI 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). \16\ Not to dismiss the concerns of Virginia Power and 
the Southern Company, we recognize the humidity control problems that 
exist in the southern region of the U.S. For the excessive humidity 
conditions commonly experienced in the South, the equipment may very 
likely not provide adequate dehumidification. But rather than focusing 
on the equipment efficiency as the source of the problem,

[[Page 59612]]

proper installation and maintenance practices also likely play a large 
role in the equipment's performance. Other factors to consider are the 
duct system as well as the building shell characteristics. All these 
factors play a role in how a system dehumidifies. To lay blame only on 
the efficiency of the equipment ignores how other factors contribute to 
the system's ability to properly dehumidify.
---------------------------------------------------------------------------

    \16\ D. Godwin. 1998. ``Latent Capacity of Unitary Equipment.'' 
ASHRAE Transactions 98(2).
---------------------------------------------------------------------------

2. 3-Phase Equipment
    ACEEE asserted that if an identical standard is to be set for both 
single-phase and 3-phase central air conditioners and heat pumps under 
65,000 Btu/hr, then 3-phase equipment should be incorporated into the 
rulemaking analysis. Alternatively, if 3-phase equipment is excluded 
from the analysis, it should be made clear that a new standard on 3-
phase equipment will be set based on a new analysis covering 3-phase 
equipment.
    EPACT provides for DOE to amend the standards for these products 
when ASHRAE amends the standards found in ASHRAE Standard 90.1. When 
ASHRAE has completed its consideration of standards for these products, 
DOE will analyze 3-phase equipment under a separate rulemaking 
pertaining to commercial air-conditioning and heat pump equipment.
3. SEER-HSPF Relationship
    ARI supported the Department's HSPF-SEER standard pairings proposed 
in the Supplemental ANOPR. (ARI No. 48 at 4). Pietsch proposed 
maintaining the current minimum requirements for HSPF at 6.8 for future 
levels of minimum SEER, which would allow manufacturers to continue to 
place more emphasis on improving SEER. He based this recommendation on 
the strong competition that heat pumps face in the market place with 
electric resistance heat, noting that the increased first-cost of heat 
pumps that have higher minimum HSPFs makes it more difficult for heat 
pumps to compete against the much lower first-cost of electric 
resistance heating systems. (Pietsch No. 36 at 41). ACEEE, VEIC, and 
PG&E noted that the Department's definition of HSPF-SEER pairing for 
the standard levels it analyzed seemed arbitrary or too lenient and 
preferred that the Department establish higher HSPF levels. (ACEEE, No. 
43 at 5; VEIC, No. 32 at 6; PG&E, No. 31 at 4).
    The Department plotted the relationship between HSPF and SEER for 
all 3-ton split heat pumps listed in the Spring 1998 ARI Directory of 
Certified Unitary Equipment. At 10 SEER, the difference between the 
minimum HSPF (6.8) and the median (7.1) was 0.3 HSPF. The Department 
then determined the equation of the line that ran generally parallel 
with the median HSPF at each SEER level, while passing through the 10 
SEER, 6.8 HSPF point. Table V.5 reviews the derivation of the SEER-HSPF 
pairings.

               Table V.5.--Comparison of Proposed HSPF Standard Levels With Median HSPFs of Equipment Listed in the ARI Unitary Directory
--------------------------------------------------------------------------------------------------------------------------------------------------------
            Cooling efficiency (SEER)                  10           11           12           13           14           15           16           17
--------------------------------------------------------------------------------------------------------------------------------------------------------
Median Heating Efficiency (HSPF)................          7.1          7.4          7.9          7.9          7.9          8.9          8.2          8.4
Recommended Heating Efficiency Standard (HSPF)..          6.8          7.1          7.4          7.7          8.0          8.2          8.4          8.6
Offset from Median (HSPF).......................         -0.3         -0.3         -0.5         -0.2         +0.1         -0.7         +0.2         +0.2
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Even though the Department does not have information on the 
distribution of heat pump sales by HSPF at each SEER level, it is 
apparent that the market currently favors products that exceed the 
minimum allowable HSPF level. This is due both to the natural 
relationship between HSPF and SEER and the preference in the market for 
high HSPF heat pumps in cooler climates. The Department believes that 
establishing an HSPF standard equal to the current median at a given 
SEER level would impose an undue design constraint on manufacturers, 
adding to the cost and burden of designing, producing, testing, and 
qualifying the product without resulting in a significant increase in 
the average HSPF of equipment sold. Also, the Department does not want 
to encourage substitution of electric resistance heating systems for 
heat pumps. Without further information on the cost of attaining higher 
HSPFs or the shipments of heat pumps by HSPF level, the Department has 
no basis for modifying its current HSPF-SEER standard combinations.
4. Max Tech
    The Supplemental ANOPR analysis proposed a Max Tech level of 20 
SEER. ARI, Trane, and York commented that a prototype hasn't been built 
that has exceeded 18 SEER. (Wethje, ARI, Transcript p. 66; Crawford, 
Trane, Transcript p. 69; and Madera, York, Transcript p. 71). The 
Department also understands that 18 SEER is the highest efficiency 
level currently available for sale.
    While the Department believes improvements to the 18 SEER design 
are certainly possible, it agrees with the industry that any analysis 
based on a design higher than 18 SEER would be pure speculation. 
Therefore, the Department considers 18 SEER to be the Max Tech at this 
time for cooling performance. The Max Tech level for heating efficiency 
is 9.4 HSPF, which is the highest HSPF rating currently available in 
residential heat pumps. Any parties possessing knowledge of prototype 
central air conditioners or heat pumps that exceed 18 SEER or 9.4 HSPF 
levels are encourage to provide such information in comment on today's 
proposed rule.
    DOE does not have relative cost data for 18 SEER units as ARI did 
not provide the Department data for equipment exceeding 15 SEER. In 
lieu of performing a reverse engineering analysis on an 18 SEER design, 
the Department is proceeding as if the 18 SEER equipment cost and price 
were equal to those of the 15 SEER equipment. DOE believes the 18 SEER 
cost would be higher because the product is more complex.

VI. Analytical Results

A. Trial Standard Levels

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

[[Page 59613]]



             Table VI.1.--Trial Standards Levels for Central Air Conditioners and Heat Pumps (SEER)
----------------------------------------------------------------------------------------------------------------
                                                                          Packaged air
                   Trial standard level                       Split air                  Split heat    Packaged
                                                            conditioners  conditioners     pumps      heat 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
----------------------------------------------------------------------------------------------------------------

B. Significance of Energy Savings

    To estimate the energy savings through 2030 due to revised 
standards, we compared the energy consumption of central air 
conditioners and heat pumps under the base case to energy consumption 
of central air conditioners and heat pumps under the revised standard. 
We examined five standard levels. 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; (4) equipment lifetime; 
and (5) societal discount rate. Electricity price and housing 
projections were based on three different AEO 2000 forecasts: (1) 
Reference Case, (2) High Growth Case, and (3) Low Growth Case. We 
analyzed three efficiency scenarios, each of which assumed a different 
efficiency distribution after new standards would take effect: (1) 
NAECA scenario, (2) Roll-up scenario, and (3) Shift scenario. 
Manufacturer costs were based on ARI-provided mean cost data. Since 
several comments suggested that the industry-provided cost estimates 
were overstated, cost data from the reverse engineering analysis were 
analyzed as an alternative scenario. Equipment lifetime was based on a 
retirement function with an 18.4 year average lifetime coupled with the 
inclusion of compressor replacement costs. However, since several 
comments suggested that the equipment life is actually shorter, a 
retirement function yielding an average lifetime of 14 years without 
the inclusion of compressor replacement costs was analyzed as an 
alternative scenario.
    For calculating NPV, a societal discount rate of 7% was assumed. 
However, a 3% 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.
    Table VI.2 shows the range of energy savings for each of the three 
shipments scenarios for each trial standard level based on varying 
electricity and housing projections. The energy savings assume the ARI 
mean manufacturer cost estimate, an 18.4-year average lifetime with 
compressor replacement and a 7% societal discount rate. The electricity 
scenarios are the AEO 2000 Reference, High Growth, and Low Growth 
cases.

 Table VI.2.--Energy Savings Based on ARI Mean Manufacturer Costs, 18.4 year Retirement Function with Compressor
                                       Replacement, and a 7% Discount Rate
                                [Energy savings for units sold from 2006 to 2030]
----------------------------------------------------------------------------------------------------------------
                                                                 Energy savings (quads)
         Trial standard level         --------------------------------------------------------------------------
                                                 NAECA                   Roll-up                   Shift
----------------------------------------------------------------------------------------------------------------
1....................................  1.7 to 1.8..............  1.5 to 1.6.............  1.9 to 2.0
2....................................  2.9 to 3.2..............  2.8 to 3.0.............  3.4 to 3.6
3....................................  3.4 to 3.6..............  3.3 to 3.5.............  3.8 to 4.1
4....................................  4.2 to 4.5..............  4.1 to 4.4.............  4.6 to 4.9
5....................................  8.1 to 8.7..............  8.1 to 8.7.............  8.1 to 8.7
----------------------------------------------------------------------------------------------------------------

    Table VI.3 shows how each of the three scenarios described above 
(reverse engineering costs, 14 year average life, and 3% discount rate) 
impact the energy savings. The three scenarios were investigated only 
for the NAECA efficiency scenario and the AEO 2000 Reference Case 
electricity price and housing projection.

 Table VI.3.--Energy Savings based on the NAECA Efficiency Scenario and
                           AEO Reference Case
            [Energy savings for units sold from 2006 to 2030]
------------------------------------------------------------------------
                                          Energy savings (quads)
                                ----------------------------------------
                                    Reverse
      Trial standard level        engineering     14 year    3% discount
                                 manufacturing    lifetime       rate
                                      cost
------------------------------------------------------------------------
1..............................           1.7           1.7          1.7
2..............................           3.0           2.9          3.0
3..............................           3.5           3.4          3.5
4..............................           4.3           4.2          4.3
5..............................           8.7           8.2          8.3
------------------------------------------------------------------------


[[Page 59614]]

C. Payback Period

    As discussed above, the Act requires the Department to examine 
payback periods to determine if the three year rebuttable presumption 
of economic justification applies. As prescribed by the Act, the 
rebuttable payback period is ``calculated under the applicable test 
procedure, * * *''.
    The annual space-cooling and space-heating energy consumption 
calculated based on the hours of use in the test procedure are on the 
order of 50% greater than the weighted-average values from the LCC 
analysis (i.e., analyses based on the 1997 RECS for residential 
buildings and hourly simulations for commercial buildings). This means 
that, for any given standard level, the payback period calculated from 
the test procedure will be significantly shorter than the average 
payback value calculated from the LCC analysis which was based on the 
1997 RECS data.
    In Table VI.4a, we list the median payback periods for product 
classes and efficiency levels according to the methods employed by the 
LCC analysis. Table VI.4b is the rebuttable presumption payback period 
based on the Department of Energy's test procedure.

                                                   Table VI.4a.--Summary of LCC Payback Median Period
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Reverse engineering    14-year lifetime
                         Product class                              Efficiency level          ARI mean         manufacturing cost     scenario/ARI mean
                                                                                        manufacturing cost 1       scenario 1        manufacturing cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Split System Central Air Conditioner                     11                  10.6                   7.8                  10.5
                                                                                 12                  12.6                   9.8                  12.8
                                                                                 13                  16.0                  11.3                  16.2
                                                                                 18                  36.0                  19.6                  50.4
                                      Split System Heat Pump                     11                   5.5                   2.7                   5.5
                                                                                 12                   7.2                   3.9                   7.3
                                                                                 13                   9.3                   6.4                   9.5
                                                                                 18                  17.3                  14.0                  19.9
                              Single Package Air Conditioner                     11                   6.1                   7.7                  16.6
                                                                                 12                  14.0                   7.5                  14.2
                                                                                 13                  21.8                  14.5                  21.8
                                                                                 18                  48.8                  25.1                  88.1
                                    Single Package Heat Pump                     11                   8.1                   4.6                   8.1
                                                                                 12                   8.7                   4.0                   8.7
                                                                                 13                  13.2                   8.4                  13.4
                                                                                 18                  19.4                  12.8                 23.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 Assumes a 18.4-year lifetime with a compressor replacement at 14 years.


           Table VI.4b.--Summary of Rebuttable Payback Period
------------------------------------------------------------------------
                                                             ARI mean
              Product class                 Efficiency     manufacturing
                                               level          cost 1
------------------------------------------------------------------------
Split System Central Air Conditioner....              11             4.7
                                                      12             5.8
                                                      13             7.6
                                                      18            11.3
Split System Heat Pump..................              11             2.5
                                                      12             3.3
                                                      13             4.5
                                                      18             6.8
Single Package Air Conditioner..........              11             7.3
                                                      12             6.2
                                                      13             9.8
                                                      18            13.3
Single Package Heat Pump................              11             3.7
                                                      12             4.0
                                                      13             6.5
                                                      18            7.2
------------------------------------------------------------------------
1 Assumes a 18.4-year lifetime with a compressor replacement at 14
  years.

D. Economic Justification

1. Economic Impact on Manufacturers
    a. Background. We performed a Manufacturer Impact Analysis (MIA) to 
estimate the impact of higher efficiency standards on air conditioner 
manufacturers. The TSD explains the analysis in further detail. As part 
of the MIA, we discussed potential impacts with six major manufacturers 
responsible for approximately 90% of the residential air conditioner 
and heat pump sales. We also interviewed two niche manufacturers to 
understand how their financial situation differs from that of their 
larger counterparts. These interviews are in addition to those we 
conducted as part of the Supplemental ANOPR. The interviews provided 
valuable information used to evaluate the impacts of a new standard on 
manufacturers' cash flows, manufacturing capacities and employment 
levels.
    The MIA has both quantitative and qualitative aspects. Quantitative 
analysis primarily relies on the GRIM, an industry cash flow model 
customized for this rulemaking. The GRIM inputs

[[Page 59615]]

are assumptions regarding the industry cost structure, shipments, and 
revenues. The key output is the industry net present value (INPV). 
Different sets of assumptions (scenarios) produce different results as 
described below.
    In the GRIM we evaluated each of the shipment scenarios, i.e., 
``NAECA'', ``Rollup'', and ``Shift''. Changes in efficiency mix by 
efficiency standard level are a key driver of manufacturer finances 
since costs and revenues are both tied to shipments.
    Two cost scenarios, ``Industry Relative Cost'' and ``Reverse-
Engineering Relative Cost'', were also examined. These relative costs 
are also used as the basis for deriving the production costs of 
equipment above the minimum efficiency level. The ``Reverse-Engineering 
Relative Cost'' scenario was applied only to the ``NAECA'' product mix 
scenario in order to determine the effects of lower production costs on 
the MIA results.
    The equipment lifetime scenarios assumptions, ``18-year life'' and 
``14-year life'', were considered. The ``14-year life'' assumption 
applied only to the ``NAECA'' and ``Industry Relative Cost'' scenarios 
to isolate the effects of a shorter product life on the results.
    The interviews revealed that manufacturers use different pricing 
strategies and place different levels of emphasis on the sale of higher 
efficiency products. Manufacturers fall into two basic groups in this 
regard. The first group has lower operating and production costs than 
its competitors and targets such price-sensitive consumers as new home 
builders. This focus on low price limits the ability and desire of 
these manufacturers to sell premium equipment. Because they have a cost 
advantage over their competitors, the lower cost manufacturers can 
achieve a higher operating profit margin on their baseline equipment 
and still maintain a price advantage. They then apply a fairly 
consistent markup across efficiency levels.
    The higher cost manufacturers typically place more of an emphasis 
on marketing, service, and research than do their lower cost 
competitors. Faced with stiff price competition from the lower cost 
manufacturers in price-sensitive markets, the higher cost manufacturers 
are forced to reduce their price (and markup) on their baseline 
equipment to the minimum level sustainable. They then target less price 
sensitive customers by offering products with premium features and 
higher efficiency. These products carry higher markups.
    Since higher efficiency standards will affect each group of 
manufacturers differently, we set up two versions of the GRIM to model 
each group independently. To represent the lower cost manufacturers, we 
reduced the operating expense ratio and research and development 
expense ratio to below the industry averages. We also assumed that a 
single markup applies to products across all efficiency levels. To 
model higher cost manufacturers, we raised the operating expense ratio 
and research and development ratios to above the industry average. We 
then assumed that markups increase roughly linearly as the efficiency 
level increases. This represents two effects: selling a greater 
fraction of higher margin premium product as efficiency level rises, 
and being able to secure a higher profit margin on products by virtue 
of the higher efficiency.
    To represent the industry in aggregate, we combined the results of 
the two GRIM versions, giving 25% weight to the results of the lower-
operating-cost group and 75% weight to the results of the higher-
operating-cost group. This ratio reflects the prevalence of each 
strategy in the marketplace. Many companies may pursue both strategies 
simultaneously through different brands and divisions.
    b. Industry Cash Flow Analysis Results. Tables VI.5 through VI.7 
present the GRIM results for the unitary air conditioning industry for 
the three shipment scenarios based on the industry provided mean cost 
multipliers and an 18-year product life. The corporate discount rate 
used in the analysis is 6.2% based on an estimate of the weighted 
average cost of capital for the industry over a five-year period. 
Results assume that manufacturers with lower operating costs control 
25% of the market and those with higher operating costs control 75%. 
Since we did not collect information regarding the cost or investments 
involved in manufacturing product at 18 SEER, we did not assess impacts 
under Max Tech.

 Table VI.5.--Changes in Industry Net Present Value--Industry Relative Cost, 18 Year Life, NAECA Efficiency Mix
----------------------------------------------------------------------------------------------------------------
                                                                   Industry net    Change in INPV from base case
                         Standard level                            present value -------------------------------
                                                                    ($ million)      $ million        Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................           1,603  ..............  ..............
1...............................................................           1,566            (37)              -2
2...............................................................           1,417           (186)             -12
3...............................................................           1,406           (197)             -12
4...............................................................           1,420           (183)             -11
----------------------------------------------------------------------------------------------------------------


Table VI.6.--Changes in Industry Net Present Value--Industry Relative Cost, 18 Year Life, Roll-up Efficiency Mix
----------------------------------------------------------------------------------------------------------------
                                                                   Industry net    Change in INPV from base case
                         Standard level                            present value -------------------------------
                                                                    ($ million)      $ million        Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................           1,603  ..............  ..............
1...............................................................           1,422           (181)             -11
2...............................................................           1,241           (362)             -23
3...............................................................           1,236           (367)             -23
4...............................................................           1,268           (335)             -21
----------------------------------------------------------------------------------------------------------------


[[Page 59616]]


 Table VI.7.--Changes in Industry Net Present Value--Industry Relative Cost, 18 Year Life, Shift Efficiency Mix
----------------------------------------------------------------------------------------------------------------
                                                                   Industry net    Change in INPV from base case
                         Standard level                            present value -------------------------------
                                                                    ($ million)      $ million        Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................          $1,603  ..............  ..............
1...............................................................           1,740            $137               9
2...............................................................           1,825             222              14
3...............................................................           1,854             251              16
4...............................................................           1,914             311              19
----------------------------------------------------------------------------------------------------------------

    The NAECA and Roll-up scenarios reduce INPV while the Shift 
scenario increases INPV. This result occurs because we assume the 
higher-operating cost manufacturers accrue much of their profits from 
the sale of higher efficiency equipment. As the standard level 
increases, they earn lower profit margins on that equipment. The loss 
in profits can be offset by the combination of more sales and more 
expensive equipment. The Shift scenario provides a much more favorable 
projection of high-efficiency equipment sales than do the NAECA and 
Rollup scenarios.
    Tables VI.8 and VI.9 present the results for the 14-year life 
assumption and the Reverse Engineering Relative Cost scenario with the 
NAECA Efficiency Mix scenario.

 Table VI.8.--Changes in Industry Net Present Value--Industry Relative Cost, 14 Year Life, NAECA Efficiency Mix
----------------------------------------------------------------------------------------------------------------
                                                                   Industry net    Change in INPV from base case
                         Standard level                            present value -------------------------------
                                                                    ($ million)      $ million        Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................          $1,726  ..............  ..............
1...............................................................           1,701          $ (25)              -1
2...............................................................           1,558           (168)             -10
3...............................................................           1,555           (171)             -10
4...............................................................           1,598           (128)              -7
----------------------------------------------------------------------------------------------------------------


   Table VI.9.--Changes in Industry Net Present Value--Reverse Engineering Relative Cost, 18 Year Life, NAECA
                                                 Efficiency Mix
----------------------------------------------------------------------------------------------------------------
                                                                   Industry net    Change in INPV from base case
                         Standard level                            present value -------------------------------
                                                                    ($ million)      $ million        Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................          $1,539  ..............  ..............
1...............................................................           1,509          $ (30)              -2
2...............................................................           1,380           (159)             -10
3...............................................................           1,368           (171)             -11
4...............................................................           1,370           (169)             -11
----------------------------------------------------------------------------------------------------------------

    Table VI.10 presents the differential impacts between the groups of 
manufacturers with lower and higher operating costs. The lower 
operating cost manufacturers benefit under all scenarios and trial 
standard levels, and the higher operating cost manufacturers benefit 
only under the Shift scenario. The reason, again, is that we assume 
that lower operating cost manufacturers accrue the same profit margin 
regardless of the efficiency level, so as the cost of the product 
increases, profits also increase. The higher operating cost 
manufacturers, on the other hand, lose profits as the standard level 
rises and the products face pricing pressure from the lower cost 
manufacturers.

             Table VI.10.--Change in Industry Net Present Value (%) Relative to Base--Comparison Between Lower and Higher Cost Manufacturers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Industry relative cost 1                                   Reverse
                                                     --------------------------------------------------------------------------------     engineering
                                                             NAECA          NAECA--14 year          Roll-up              Shift           relative cost
                                                     --------------------        life        -----------------------------------------------------------
                   Standard level                                        --------------------                                                NAECA
                                                        Lower    Higher                         Lower    Higher     Lower    Higher  -------------------
                                                        cost      cost      Lower    Higher     cost      cost      cost      cost      Lower    Higher
                                                                            cost      cost                                              cost      cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...................................................         5        -5         6        -4         3       -16         7         9         5        -4
2...................................................         7       -17         9       -16         5       -31        12        14         7       -16

[[Page 59617]]

 
3...................................................         9       -19        11       -16         6       -32        14        16         8       -17
4...................................................        15       -19        19       -16        13       -31        21        19        12      -18
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 18-year lifetime unless otherwise noted.

    For the group most negatively impacted, i.e., the higher cost 
group, Table VI.11 presents the Return on Invested Capital (ROIC) 
associated with the base case, and with each new standard level for the 
NAECA and Roll-up efficiency mix scenarios, for industry relative costs 
and an 18-year lifetime. A reduction in ROIC increases the likelihood 
that the company will choose to exit the market or sell its assets 
rather than to make the investments required to move to the new 
efficiency level.

 Table VI.11.--Return on Invested Capital (ROIC) in 2011 for Higher Cost
                              Manufacturers
------------------------------------------------------------------------
                                            NAECA  (in     Roll-up  (in
             Standard level                  percent)        percent)
------------------------------------------------------------------------
Base....................................            13.3            13.3
1.......................................            12.3            10.7
2.......................................            10.2             8.4
3.......................................            10.0             8.3
4.......................................             9.6             8.3
------------------------------------------------------------------------

    Table VI.12 provides a summary of the total investment required for 
each trial standard level. Product conversion expenses include mostly 
product development and testing costs. Capital investments include new 
equipment, tooling, and floor space. Since these investments occur in 
the years leading up to the effective date of the new standard, larger 
investments equate to a more serious strain on cash flows in the near-
term.

          Table VI.12.--Manufacturer Expenditures Related to New Efficiency Standards (million 1999 $)
----------------------------------------------------------------------------------------------------------------
                                                                      Product
                      Trial standard level                          conversion        Capital          Total
                                                                     expenses       investments     investment
----------------------------------------------------------------------------------------------------------------
Base............................................................  ..............  ..............  ..............
1...............................................................            $ 31            $ 54            $ 85
2...............................................................              93             109             202
3...............................................................             110             138             248
4...............................................................             157             167             324
----------------------------------------------------------------------------------------------------------------

    The TSD which accompanies today's proposed rule provides more 
details on the MIA assumptions, methodology, results, and conclusions, 
including the assessments of impacts on lower volume equipment 
manufacturers and compressor manufacturers, which we estimate to be 
similar in proportion to the impacts described above.
    c. Impacts on Employment. Manufacturers stated uniformly that labor 
requirements track materials costs. Since a new standard will increase 
the amount and cost of material in each product, labor requirements are 
expected to rise proportionally. However, the industry has recently 
been experiencing rapid growth in sales volume and is now faced with 
production capacity constraints. Since new efficiency standards will 
increase the product's size and complexity, many manufacturers will 
need to add additional capacity to accommodate the new products and 
retain their sales volumes. It is possible that those companies will 
choose to add the new capacity outside of the United States. This 
effect could keep domestic employment levels flat or result in 
employment loss if companies choose to shift current production to new 
facilities in other countries.
    d. Impacts on Manufacturing Capacity. It is likely that a central 
air conditioner and heat pump standard would increase central air 
conditioner and heat pump production capacity in the United States. 
Since more efficient conventional heat exchangers are also larger, 
plants that now face capacity constraints will be unable to produce as 
many heat exchangers as they can under existing standards. Five of the 
six manufacturers we interviewed identified capacity constraints during 
peak production periods.
    e. Impact on Lower Volume Manufacturers. Converting from a 
company's current basic product line involves creating, testing, and 
moving a new design into production. These tasks have associated 
capital investments. Manufacturers of niche products and those who 
produce only coils and fancoils, because of their need to spread these 
investments over smaller

[[Page 59618]]

production volumes, may be affected more negatively than major 
manufacturers by an increase in efficiency standards. This is 
particularly true for those manufacturers that compete head-to-head 
with major manufacturers in some product lines, and less true for coil-
only manufacturers. These results occur separately from any technical 
considerations related to the manufacturer's ability to modify its 
products to bring them into compliance with a new standard. Technical 
considerations are typically more important for 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 are made in the standard for niche 
products that face severe technological constraints, we would not 
expect the impacts on lower-volume manufacturers as a group to be 
disproportionate with those of the industry as a whole.
2. Life-Cycle Cost
    More efficient central air conditioners and heat pumps would affect 
consumers in two ways: Annual operating expense would decrease and 
purchase price would increase. We analyzed the net effect by 
calculating the LCC. Inputs required for calculating LCC include total 
installed costs (i.e., equipment price plus installation costs), annual 
energy savings, average and marginal electricity rates, electricity 
price trends, repair costs, maintenance costs, equipment lifetime, and 
discount rates.
    The output of the LCC model is a mean LCC savings for each product 
class as well as a probability distribution or likelihood of LCC 
reduction or increase. The LCC analysis for today's proposed rule 
introduces a new concept with regard to the percentage of consumers 
(both residential and commercial) that are negatively impacted by an 
increase in the minimum efficiency standard. (For the Supplemental 
ANOPR, all consumers that would incur an LCC increase were considered 
to be adversely impacted by an increase in the standard. This included 
even consumers that would incur a relatively small LCC increase e.g., 
as small as $10, as compared to a relatively large baseline level total 
LCC. Note that the baseline LCC is approximately $5,000 for central air 
conditioners and $10,000 for heat pumps.)
    The revised analysis defines negative impacts by including in this 
category only those consumers which incur LCC increases greater than 2% 
of the baseline LCC. For central air conditioners, this translates to 
an LCC increase of approximately $100 or an annual expense of 
approximately $5 over the lifetime of the system. Table VI.13 
summarizes the baseline LCCs for split system and single package 
central air conditioners and heat pumps and also provides the 2% 
threshold at which consumers are considered to be adversely impacted.

    Table VI.13.--Baseline Life-Cycle Costs and Threshold for Adverse
                                 Impacts
------------------------------------------------------------------------
                                                           Threshold for
                                          Baseline life-      adverse
              Product class                 cycle cost    impacts: 2% of
                                                           Baseline LCC
------------------------------------------------------------------------
Split Air Conditioners..................          $5,170            $103
Split Heat Pumps........................           9,679             194
Single Package Air Conditioners.........           5,629             113
Single Package Heat Pumps...............           9,626             193
------------------------------------------------------------------------

    Table VI.14 depicts the LCC results for split system and single 
package central air conditioners and heat pumps. The table shows the 
average LCC values for the baseline and each Trial Standard Level. 
Since manufacturer cost data were not available for the 18 SEER 
efficiency levels, 15 SEER cost data were used for all 18 SEER 
calculations resulting in 18 SEER LCC results which underestimate their 
true cost level. Table VI.14 also provides for each product class the 
difference in LCC at each efficiency level relative to the baseline. 
The differences represent either an LCC savings or an LCC cost 
increase. In addition, the table shows the subset of consumers (both 
residential and commercial) at each efficiency level who are impacted 
in one of three ways: Consumers who achieve significant net LCC savings 
(i.e., LCC savings greater than 2% of the baseline LCC), consumers who 
are impacted in an insignificant manner by having either a small 
reduction or small increase in LCC (i.e., within 2% of the 
baseline LCC), or consumers who achieve a significant net LCC increase 
(i.e., an LCC increase exceeding 2% of the baseline LCC).

   Table VI.14.--Summary of LCC Results Based on ARI Mean Manufacturer Costs and a 18.4 Year Average Lifetime
----------------------------------------------------------------------------------------------------------------
                                                                                 Percent of consumers with
                                                              Average LCC --------------------------------------
          Product class             Efficiency  Average LCC    (savings)                     No
                                      level                      costs     Net savings  significant   Net costs
                                                                               (>2%)       impact       (>2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air                    10       $5,170  ............  ...........  ...........  ...........
 Conditioner.....................
                                            11        5,126         ($44)           23           68            9
                                            12        5,125          (45)           27           34           39
                                            13        5,199           29            25           17           58
                                            18        5,725          555            15            4           81
Split System Heat Pump...........           10        9,679  ............  ...........  ...........  ...........
                                            11        9,529         (150)           30           70            0
                                            12        9,437         (242)           42           55            3
                                            13        9,464         (215)           39           39           22
                                            18        9,955          276            23           11           66

[[Page 59619]]

 
Single Package Air Conditioner...           10        5,629  ............  ...........  ...........  ...........
                                            11        5,649           20            16           47           37
                                            12        5,600          (29)           26           30           44
                                            13        5,804          175            18           11           71
                                            18        6,370          741            12            4           84
Single Package Heat Pump.........           10        9,626  ............  ...........  ...........  ...........
                                            11        9,492         (134)           28           72            0
                                            12        9,372         (254)           44           49            7
                                            13        9,514         (112)           33           31           36
                                            18        9,922          296            24           10           66
----------------------------------------------------------------------------------------------------------------

    As discussed previously for the presentation of energy savings and 
payback period results, we have investigated two scenarios where lower 
estimates of the manufacturer costs (reverse engineering) and system 
lifetime (retirement function with 14 year average lifetime without 
compressor replacement costs) were analyzed. Table VI.15 presents the 
results for the manufacturer cost scenario while Table VI.16 presents 
the results for the lifetime scenario.

              Table VI.15.--Summary of LCC Results Based on Reverse Engineering Manufacturer Costs
----------------------------------------------------------------------------------------------------------------
                                                                                 Percent of consumers with
                                                              Average LCC --------------------------------------
          Product class             Efficiency  Average LCC    (savings)                     No
                                      level                      costs     Net savings  significant   Net costs
                                                                               (>2%)       impact       (>2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air                    10       $5,170  ............  ...........  ...........  ...........
 Conditioner.....................
                                            11        5,095         ($75)           28           70            2
                                            12        5,057         (113)           35           40           25
                                            13        5,057         (113)           34           27           39
                                            18        5,307          137            25            7           68
Split System Heat Pump...........           10        9,679  ............  ...........  ...........  ...........
                                            11        9,470         (209)           40           60            0
                                            12        9,314         (365)           58           42            0
                                            13        9,307         (372)           52           42            6
                                            18        9,720           41            28           15           57
Single Package Air Conditioner...           10        5,629  ............  ...........  ...........  ...........
                                            11        5,551          (78)           27           72            1
                                            12        5,466         (163)           40           51            9
                                            13        5,600          (29)           28           20           52
                                            18        5,905          276            21            6           73
Single Package Heat Pump.........           10        9,626  ............  ...........  ...........  ...........
                                            11        9,419         (207)           39           61            0
                                            12        9,205         (421)           66           34            0
                                            13        9,273         (353)           50           38           12
                                            18        9,460         (166)           37           15           48
----------------------------------------------------------------------------------------------------------------


       Table VI.16.--Summary of LCC Results Based on ARI Mean Manufacturer Cost and 14-Year Average Lifetime
----------------------------------------------------------------------------------------------------------------
                                                                                 Percent of consumers with
                                                              Average LCC --------------------------------------
           Product class             Efficiency  Average LCC   (savings)                     No
                                       level                   costs (in   Net savings  significant   Net costs
                                                                dollars)       (>2%)       impact       (>2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air                     10       $4,682  ...........  ...........  ...........  ...........
 Conditioner......................
                                             11        4,650        $(32)           22           69            9
                                             12        4,672         (10)           24           31           45
                                             13        4,769           87           21           15           64
                                             18        5,336          654           12            3           85
Split System Heat Pump............           10        8,747  ...........  ...........  ...........  ...........
                                             11        8,623        (124)           27           73            0
                                             12        8,587        (160)           35           58            7
                                             13        8,630        (117)           33           37           30
                                             18        9,184          437           18            9           73
Single Package Air Conditioner....           10        5,150  ...........  ...........  ...........  ...........
                                             11        5,182           32           14           46           40

[[Page 59620]]

 
                                             12        5,157            7           22           29           49
                                             13        5,378          228           14           10           76
                                             18        6,011          861            9            3           88
Single Package Heat Pump..........           10        8,747  ...........  ...........  ...........  ...........
                                             11        8,623        (124)           27           73            0
                                             12        8,587        (160)           35           58            7
                                             13        8,630        (117)           33           37           30
                                             18        9,184          437           18            9           73
----------------------------------------------------------------------------------------------------------------

3. Net Present Value and Net National Employment
    The net present value analysis is a measure of the cumulative 
benefit or cost to the Nation of standards. As with the determination 
of national energy savings, five different scenarios were analyzed for 
each trial standard level consisting of variations on: (1) Electricity 
price and housing projections; (2) equipment efficiency distributions; 
(3) manufacturer cost estimates; (4) equipment lifetime; and (5) 
societal discount rate. Electricity price and housing projections were 
based on three different AEO 2000 forecasts: (1) Reference Case, (2) 
High Growth Case, and (3) Low Growth Case. Three efficiency scenarios 
were analyzed which forecast the equipment efficiency distribution 
after new standards were assumed to take effect: (1) NAECA scenario, 
(2) Roll-up scenario, and (3) Shift scenario. Manufacturer costs were 
based on ARI mean cost estimates. Equipment lifetime was assumed to be 
18.4 years, coupled with the inclusion of compressor replacement costs. 
A societal discount rate of 7 was assumed. The range of NPVs are 
reported in Table VI.17.

            Table VI.17.--Net Present Value Variation With Electricity Price and Housing Projections
----------------------------------------------------------------------------------------------------------------
                                          Net present value for units sold from 2006 to 2030  (billion 98$) 1
         Trial standard level         --------------------------------------------------------------------------
                                                NAECA                   Roll-up                   Shift
----------------------------------------------------------------------------------------------------------------
1....................................  0......................  1......................  0 to -1.
2....................................  -1.....................  0 to 1.................  -3 to -4.
3....................................  -1 to -2...............  0 to -1................  -5.
4....................................  -5 to -6...............  -4.....................  -10.
5....................................  -22....................  -22....................  -22.
----------------------------------------------------------------------------------------------------------------
1 Based on ARI mean manufacturer costs, 18.4-year retirement function with compressor replacement, and a 7%
  discount rate.

    In order to show the significance of the NPVs in Table V.17 to the 
various input assumptions, Tables VI.18 through VI.21 report the range 
of NPV results for a range of assumptions and scenarios relative to the 
total national equipment and operating costs for all central air-
conditioning and heat pump equipment under the base case (i.e., in the 
absence of new efficiency standards). The results in Table VI.18 are 
based on the AEO 2000 Reference Case forecast of electricity prices and 
housing. The total costs are presented for the base case and each Trial 
Standard Level. In addition, the NPV (the difference in total costs 
between the base case and trial standard level), as well as the NPV as 
a percentage of the ``Base Case Total Costs,'' are calculated for each 
trial standard level.

                              Table VI.18.--Net Present Values Relative to Base Case Total Equipment and Operating Costs 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Efficiency scenario
                                             -----------------------------------------------------------------------------------------------------------
                                   Base case                 NAECA                              Roll-up                              Shift
                                     total   -----------------------------------------------------------------------------------------------------------
               TSL                   costs                          NPV                                 NPV                                 NPV
                                   (billion      Total   ------------------------    Total   ------------------------    Total   -----------------------
                                     98$)        costs                as percent     costs                as percent     costs                as percent
                                               (billion    (billion     of base    (billion    (billion     of base    (billion    (billion     of base
                                                 98$)        98$)     case total     98$)        98$)     case total     98$)        98$)     case total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................         381         381           0         0.0         381           1         0.2         385           0        -0.1
2...............................         381         382          -1        -0.3         381           0         0.0         388          -3        -0.9
3...............................         381         383          -2        -0.5         382          -1        -0.2         390          -5        -1.4
4...............................         381         387          -5        -1.4         386          -4        -1.1         395         -10        -2.5
5...............................         381         403         -22        -5.8         403         -22        -5.8         407         -22       -5.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 Based on AEO 2000 Reference Case, ARI mean manufacturer costs, 18.4-year retirement function with compressor replacement, and a 7% discount rate.
  Values rounded to the nearest $1 billion.


[[Page 59621]]

    Tables VI.19 through VI.21 show how the three scenarios, i.e., 
reverse engineering costs, 14-year average life, and 3% discount 
rate,\17\ impact the net present value. The three scenarios were 
investigated only for the NAECA efficiency scenario and the AEO 
Reference Case electricity price and housing projection.
---------------------------------------------------------------------------

    \17\ A societal discount rate of 3% value was investigated as a 
scenario in accordance with the Office of Management and Budget's 
(OMB) Guidelines to Standardize Measures of Costs and Benefits and 
the Format of Accounting Statements.

            Table V.19.--Net Present Values Results Based on Reverse Engineering Manufacturer Costs 1
----------------------------------------------------------------------------------------------------------------
                                                                               Trial standard level
                                                     Base case   -----------------------------------------------
              Trial standard level                  total costs                     Net present    As percent of
                                                   (billion 98$)    Total cost    value (billion     base case
                                                                   (billion 98$)       98$)         total costs
----------------------------------------------------------------------------------------------------------------
1...............................................             379             378               2             0.4
2...............................................             379             377               2             0.5
3...............................................             379             378               1             0.4
4...............................................             379             379               0             0.0
5...............................................             379             390             -10           -2.7
----------------------------------------------------------------------------------------------------------------
1 Based on AEO 2000 Reference Case, NAECA efficiency scenario, 18.4-year retirement function with compressor
  replacement, and a 7% discount rate. Values rounded to the nearest $1 billion.


                  Table V1.20.--Net Present Values Results Based on 14-Year Average Lifetime 1
----------------------------------------------------------------------------------------------------------------
                                                                               Trial standard level
                                                     Base case   -----------------------------------------------
              Trial standard level                  total costs                     Net present    As percent of
                                                   (billion 98$)    Total cost         value         base case
                                                                   (billion 98$)   (billion 98$)    total costs
----------------------------------------------------------------------------------------------------------------
1...............................................             363             364               0             0.0
2...............................................             363             365              -2            -0.5
3...............................................             363             366              -3            -0.8
4...............................................             363             370              -7            -1.9
5...............................................             363             389             -25           -6.9
----------------------------------------------------------------------------------------------------------------
1 Based on AEO 2000 Reference Case, NAECA efficiency scenrio, ARI mean manufacturer costs, and a 7% discount
  rate. Values rounded to the nearest $1 billion.


                      Table VI.21.--Net Present Values Results Based on 3% Discount Rate 1
----------------------------------------------------------------------------------------------------------------
                                                                               Trial standard level
                                                     Base case   -----------------------------------------------
              Trial standard level                  total costs                     Net present    As percent of
                                                   (billion 98$)    Total cost         value         base case
                                                                   (billion 98$)   (billion 98$)    total costs
----------------------------------------------------------------------------------------------------------------
1...............................................             712             708               3             0.5
2...............................................             712             708               4             0.5
3...............................................             712             708               3             0.4
4...............................................             712             714              -3            -0.4
5...............................................             712             746             -35           -4.9
----------------------------------------------------------------------------------------------------------------
1 Based on AEO 2000 Reference Case, NAECA efficiency scenario, ARI mean manufacturer costs, and 18.4-year
  retirement function with compressor replacement. Values rounded to the nearest $1 billion.

    The Department committed in its 1996 Process Improvement Rule to 
develop estimates of the employment impacts of proposed standards in 
the economy in general. 61 FR 36983.
    As discussed above, energy efficiency standards for central air 
conditioners and heat pumps are expected to reduce electricity bills 
for residential and commercial consumers. The resulting net savings are 
expected to be redirected to other forms of economic activity. These 
shifts in spending and economic activity are expected to affect the 
demand for labor, but there is no generally accepted method for 
estimating these effects.
    One method to assess the possible effects on the demand for labor 
of such shifts in economic activity is to compare sectoral employment 
statistics developed by the Labor Department's Bureau of Labor 
Statistics (BLS). The BLS regularly publishes its estimates of the 
number of jobs per million dollars of economic activity in different 
sectors of the economy, as well as the jobs created elsewhere in the 
economy by this same economic activity. BLS data indicate that 
expenditures in the electric sector generally are associated with fewer 
jobs (both directly and indirectly) than expenditures in other sectors 
of the economy. There are many reasons for these differences, including 
the capital-intensity of the utility sector and wage differences.
    In developing this proposed rule, the Department attempted a more 
precise analysis of the impacts on national labor demand using an 
input/output model of the U.S. economy. The model characterizes the 
interconnections among 35 economic sectors using the data from the 
Bureau of Labor Statistics. Since the electric utility sector is more 
capital-intensive and less labor-intensive than other sectors (see 
Bureau of Economic Analysis, Regional Multipliers: A User Handbook for 
the

[[Page 59622]]

Regional Input-Output Modeling System (RIMS II), Washington, D.C., U.S. 
Department of Commerce, 1992), a shift in spending away from energy 
bills into other sectors would be expected to increase overall 
employment. But for this analysis, since the increased manufacturing 
costs to the nation of meeting a new efficiency standard are relatively 
large, there is an overall decrease in national employment. The results 
of the Department's analysis are shown in Chapter 12 of the TSD.
    While this input/output model suggests the proposed central air 
conditioner and heat pump standards are likely to decrease the net 
demand for labor in the economy, the losses would most likely be very 
small relative to total national employment. For several reasons, 
however, even these modest losses are in doubt:
     Unemployment is now at the lowest rate in 30 years. If 
unemployment remains very low during the period when the proposed 
standards are put into effect, it is unlikely that the standards alone 
could result in any net decrease 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. One reason that the 
demand for labor decreases in the model may be that the jobs expected 
to be created pay more than the jobs being lost. The losses from any 
potential employment reduction would be offset if job quality and pay 
are increased.
     The net benefits from potential employment changes are a 
result of the estimated net present value of benefits or losses likely 
to result from the proposed standards. It may not be appropriate to 
separately identify and consider any employment impacts beyond the 
calculation of net present value.
    Taking into consideration these concerns regarding the 
interpretation and use of the employment impacts analysis, the 
Department concludes only that the proposed central air conditioner and 
heat pump standards are likely to result in no appreciable job losses 
to the nation.
    Public comments are solicited on the validity of the analytical 
methods used and the appropriate interpretation and use of the results 
of this analysis.
4. Impact on Utility or Performance of Products
    As detailed in Section V, in establishing classes of products we 
have tried to eliminate any degradation of utility or performance in 
the products under consideration in this rulemaking.
5. Impact of Any Lessening of Competition
    The Act directs the Department to consider any lessening of 
competition that is likely to result from standards. It further directs 
the Attorney General to determine the impact, if any, of any lessening 
of competition likely to result from a proposed standard and transmit 
such determination to the Secretary, not later than 60 days after the 
publication of a proposed rule, together with an analysis of the nature 
and extent of such impact. EPCA section 325(o)(2)(B)(i)(V) and (B)(ii), 
42 U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii).
    In order to assist the Attorney General in making such a 
determination, the Department has provided the Department of Justice 
(DOJ) with copies of this notice and the TSD for review. At DOE's 
request, the DOJ reviewed the manufacturer impact analysis interview 
questionnaire to ensure that it would provide insight concerning any 
lessening of competition due to any proposed trial standard levels.
6. Need of the Nation to Save Energy
    Enhanced energy efficiency improves the nation's energy security, 
and reduces the environmental impacts of energy production. Improved 
efficiency of central air conditioners and heat pumps is also likely to 
improve the reliability of the nation's electric system. The energy 
savings from central air conditioner and heat pump standards result in 
reduced emissions of carbon and NOX. Cumulative emissions 
savings over the 16-year period modeled are shown in Table VI.22. 
Emission savings are based on the use of: (1) The ARI mean manufacturer 
cost data and (2) an 18.4-year average lifetime. The results presented 
in Table VI.22 are based only on the AEO 2000 Reference Case for 
electricity price and housing projections and the NAECA efficiency 
scenario.

     Table VI.22.--Cumulative Emissions Reductions Based on AEO 2000
        Reference Case and NAECA Efficiency Scenario (2006-2020)
------------------------------------------------------------------------
                                               Emissions reductions
          Trial standard level           -------------------------------
                                            Carbon (Mt)      NOX (kt)
------------------------------------------------------------------------
1.......................................            13.4            37.2
2.......................................            23.7            67.9
3.......................................            27.4            78.8
4.......................................            33.6           102.5
5.......................................            63.7           193.7
------------------------------------------------------------------------

    The impact of varying electricity price and housing projections 
(i.e., different AEO cases) as well as different efficiency scenarios 
were considered only for the Trial Standard Level 3. Table VI.23 shows 
how carbon and NOX emissions are impacted by the different 
projections and scenarios.

  Table VI.23.--Cumulative Emissions Reductions for Proposed Standard (2006-2020) and the impact of Different Electricity Price/Housing Projections and
                                                                  Efficiency Scenarios
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                     Emission
           Electricity price and housing projection                                Efficiency scenario                   -------------------------------
                                                                                                                            Carbon (Mt)      NOX (kt)
--------------------------------------------------------------------------------------------------------------------------------------------------------
AEO Reference Case............................................                                                     NAECA            27.4            78.8
AEO Reference Case............................................                                                   Roll-up            26.2            77.8
AEO Reference Case............................................                                                     Shift            30.2            89.3
AEO Low Growth Case...........................................                                                     NAECA            23.4            80.8
AEO High Growth Case..........................................                                                     NAECA            34.1            75.8
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 59623]]

    The annual carbon emission reductions range up to 6.6 Mt in 2020 
and the NOX emissions reductions up to 24.5 kt in 2015.; 
\18\ \19\ Total carbon and NOX emissions for each trial 
standard level are reported in the Environmental Assessment, in the 
TSD.
---------------------------------------------------------------------------

    \18\ Million metric tons (Mt).
    \19\ Thousand metric tons (kt).
---------------------------------------------------------------------------

7. Other Factors
    This provision allows the Secretary of Energy, in determining 
whether a standard is economically justified, to consider any other 
factors that the Secretary deems to be relevant. EPCA Section 
325(o)(2)(B)(i)(VI), 42 U.S.C. 6295(o)(2)(B)(i)(VI). The Secretary has 
decided that the impacts of the proposed standards on peak power 
requirements and electric utility system reliability, the impacts of 
proposed standards on those subgroups of consumers who are at or below 
the poverty line, and the impacts of proposed standards on consumers 
and manufacturers which might be required by proposed environmental 
regulations to incorporate ozone reduction technologies in air 
conditioning and heat pump equipment, are relevant to the economic 
justification of the standards, and has decided to consider such 
impacts in this rulemaking.
    Peak power impacts are determined as part of the analysis to 
estimate impacts on electric utilities from increases in the central 
air conditioner and heat pump standard. NEMS-BRS is used to estimate 
peak power impacts by calculating the reduction in installed generation 
capacity due to an increase in the minimum efficiency standard. Table 
VI.24 shows the estimated reductions in installed generation capacity, 
in giga-watts (GW), in the year 2020 due to each of the trial standard 
levels. Of the installed generating capacity avoided, 13% would have 
been provided by coal power plants. The remaining percentage (87%) 
would have been supplied by either gas-fired, oil-fired, or dual-fired 
power plants. The results presented in Table VI.24 are based only on 
the AEO 2000 Reference Case for electricity price and housing 
projections and the NAECA efficiency scenario.

 Table VI.24.--Installed Generation Capacity Reductions in the Year 2020
     Based on AEO 2000 Reference Case and NAECA Efficiency Scenario
------------------------------------------------------------------------
                                                             Installed
                                                            generating
                  Trial standard level                       capacity
                                                          reduction (GW)
------------------------------------------------------------------------
1.......................................................             6.4
2.......................................................            10.6
3.......................................................            12.3
4.......................................................            15.4
5.......................................................            28.6
------------------------------------------------------------------------

    The impact of varying electricity price and housing projections 
(i.e., different AEO cases) as well as different efficiency scenarios 
were considered only for the proposed standard (trial standard level 
3). Table VI.25 shows how installed generation capacity is impacted by 
the different projections and scenarios.

   Table VI.25.--Installed Generation Capacity Reductions in the Year 2020 for Trial Standard Level 3 and the
               Impact of Different Electricity Price/Housing Projections and Efficiency Scenarios
----------------------------------------------------------------------------------------------------------------
                                                                                           Installed generating
    Electricity price and housing projection               Efficiency  scenario          capacity reduction (GW)
----------------------------------------------------------------------------------------------------------------
AEO Reference Case..............................  NAECA................................                     12.3
AEO Reference Case..............................  Roll-up..............................                     11.9
AEO Reference Case..............................  Shift................................                     13.6
AEO Low Growth Case.............................  NAECA................................                     11.4
AEO High Growth Case............................  NAECA................................                     12.5
----------------------------------------------------------------------------------------------------------------

    As discussed above, the impact of the peak power requirements of 
any single end-use on electric utility system reliability is highly 
uncertain. Thus, we plan on conducting further research to determine 
what connection, if any, exists between end-use peak demand reductions 
and system reliability. If such research is completed and applicable to 
this rulemaking, we will make it available for public review during the 
comment period on today's proposed rule.
    Consumer subgroup impacts have been estimated by determining the 
LCC impacts of the trial standard levels on those consumers who are at 
or below the poverty line (e.g., for a family of four, this constitutes 
a household income of less than $16,036). To perform this calculation, 
we used the subset of RECS 97 data for households that are considered 
low-income.\20\ Table VI.26 summarizes the LCC impacts on those low-
income consumers who utilize central air conditioners and heat pumps. 
The results in Table VI.26 are based on ARI mean manufacturer costs and 
an 18.4-year average lifetime.
---------------------------------------------------------------------------

    \20\ Approximately 7% of the RECS 97 households with central air 
conditioners and 9% of the households with heat pumps met this 
criteria.

  Table VI.26.--Summary of LCC Results on Low-Income Consumers Based on ARI Mean Manufacturer Costs and an 18.4-
                                              Year Average Lifetime
----------------------------------------------------------------------------------------------------------------
                                                                                 Percent of consumers with
                                                              Average LCC --------------------------------------
           Product class             Efficiency  Average LCC   (savings)                     No
                                       level                     costs     Net savings  significant   Net costs
                                                                              (>2 %)       impact       (>2 %)
----------------------------------------------------------------------------------------------------------------
Split System Central Air                     10       $4,906
 Conditioner......................
                                             11        4,887         (19)           17           66           17
                                             12        4,903          (3)           20           29           51
                                             13        5,007          101           17           14           69
                                             18        5,598          692           10            2           88
Split System Heat Pump............           10        8,965

[[Page 59624]]

 
                                             11        8,890         (75)           16           84            0
                                             12        8,862        (103)           27           64            9
                                             13        8,948         (17)           25           40           35
                                             18        9,610          645           11            8           81
Single Package Air Conditioner....           10        5,327
                                             11        5,283         (44)           11           42           47
                                             12        5,313         (14)           20           27           53
                                             13        5,568          241           12            9           79
                                             18        6,158          831           10            2           88
Single Package Heat Pump..........           10        9,149
                                             11        9,057         (92)           21           78            1
                                             12        8,973        (176)           35           53           12
                                             13        9,145          (4)           25           27           48
                                             18        9,619          470           18            8           74
----------------------------------------------------------------------------------------------------------------

    In comparing the LCC results on the subgroup of consumers who are 
low-income (Table V.26) versus all central air conditioner and heat 
pump consumers (Table V.14), it appears that low-income consumers have 
lower savings at the different trial standard levels than the general 
population of central air conditioner and heat pump consumers. Table 
V.27 directly compares the LCC impacts of the proposed standard on low-
income and all consumers.

   Table VI.27.--Comparison of LCC Impacts of the Proposed Standard on All Consumers vs. Low-Income Consumers
----------------------------------------------------------------------------------------------------------------
                                                    Average LCC (savings) costs    Percent of consumers with net
                                    Efficiency   --------------------------------  costs (>2 % of baseline LCC)
          Product class                level                                     -------------------------------
                                                   All consumers    Low-income     All consumers    Low-income
----------------------------------------------------------------------------------------------------------------
Split System Central Air                      12           ($45)            ($3)              39              51
 Conditioner....................
Split System Heat Pump..........              13           (215)            (17)              22              35
Single Package Air Conditioner..              12            (29)            (14)              44              53
Single Package Heat Pump........              13           (112)             (4)              36              48
----------------------------------------------------------------------------------------------------------------

    The U.S. Environmental Protection Agency (EPA) requires states to 
develop a state implementation plan (SIP) for most areas that are not 
in compliance with the National Ambient Air Quality Standards (NAAQS), 
or classified as nonattainment. In Texas, four areas are in 
nonattainment of the EPA's one-hour NAAQS for ozone: Beaumont-Port 
Arthur, El Paso, Dallas-Fort Worth, and Houston-Galveston. On August 9, 
2000, The Texas Natural Resource Conservation Commission (TNRCC), the 
lead environmental agency for the state of Texas, approved for 
publication and public hearing proposed revisions to the state 
implementation plan (SIP), in order to reduce ground-level ozone in the 
Houston/Galveston (HGA), Dallas/Fort Worth (DFW), and Beaumont/Port 
Arthur (BPA) ozone nonattainment areas, as well as in the 95-county 
central and eastern Texas. The proposed rules consist of 23 separate 
requirements applying to various regions of the state. One of the 
proposals mandates the use of a technology in the affected areas that 
will reduce ozone from ambient air that is drawn across the external 
heat exchanger units of air-cooled air conditioning units, including 
heat pumps. The proposed rule would require, after January 1, 2002, 
that all central air conditioners sold in the specified areas of Texas 
have ozone reduction technology installed.
    The ozone reduction technology is a proprietary catalyst called 
PremAir, manufactured by the Engelhard Corporation. The catalyst is 
incorporated in air conditioners in two ways: by coating the condenser 
coils, or by installing an insert next to the condenser coil. The 
Department is required, by the Process Rule, to understand the costs 
and benefits of standards, and the distribution of those costs among 
consumers, manufacturers and others, and the uncertainty associated 
with these costs and benefits. Any adverse impacts on significant 
subgroups and uncertainty concerning adverse impacts must be fully 
considered in selecting a standard. If the introduction of this 
technology in Texas, and possibly other jurisdictions, would create new 
consumer subgroups or would significantly change the ability of 
equipment manufacturers to meet the new efficiency standard or the cost 
required to do so, the Department would factor that information into 
its decision making for this rule.
    This technology has the potential for affecting the price and 
efficiency of central air conditioners. For example, DOE is aware of a 
range of estimates of what this technology would add to the cost of 
central air conditioners. The costs of this technology are estimated to 
range between $42 and $446 per 12,000 Btu/hr of air conditioner 
capacity. As to possible effects of the technology on the efficiency of 
central air conditioners, DOE understands several designs of catalyst-
treated air conditioners have been tested by Intertek Testing Services 
(ITS). DOE understands the test results show no impact on efficiency 
for coated condenser coils, and a roughly 2%

[[Page 59625]]

reduction in efficiency for the catalyst insert.
    Manufacturers could also be affected by the ozone reduction 
requirement. The higher purchase costs of new air conditioners could 
alter consumers' decisions on repairing or replacing equipment, which 
would affect air conditioner sales and impact manufacturers. If the 
effect applies to a significant fraction of units sold each year, the 
Department's current manufacturer impact analysis may underestimate the 
impact on manufacturers.
    After reviewing the available information, DOE is not certain as to 
the impacts of any ozone reduction requirements that the TNRCC may 
adopt. The proposal is one of 23 requirements TNRCC may adopt and it is 
uncertain whether this requirement will be included in their final 
rule. Even if the requirement is adopted, it is unclear what, if any, 
effect the requirement would have on efficiency. Finally, DOE believes 
such a requirement may have an impact on manufacturers. DOE estimates a 
potential impact on 800,000 central air conditioner shipments per year 
covered by the TNRCC proposal, or approximately 13% of total shipments. 
This potential requirement was not included in today's proposed rule 
because of uncertainty about whether the TNRCC will include the 
catalyst requirement in their SIP. DOE invites comments on the status 
of the TNRCC deliberations and whether this potential requirement 
should be considered.

E. Conclusion

    Section 325(o)(2)(A) of the Act, 42 U.S.C. 6295(o)(2)(A), specifies 
that any new or amended energy conservation standard for any type (or 
class) of covered product shall be designed to achieve the maximum 
improvement in energy efficiency which the Secretary determines is 
technologically feasible and economically justified. In determining 
whether a standard is economically justified, the Secretary must 
determine whether the benefits of the standard exceed its burdens. EPCA 
section 325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i). The amended 
standard must ``result in significant conservation of energy.'' EPCA 
section 325(o)(3)(B), 42 U.S.C. 6295(o)(3)(B).
    We consider the impacts of standards at each of five trial 
standards levels, beginning with the Max Tech Level, i.e., Trial 
Standard Level 5. We then consider less efficient levels. Trial 
Standard Level 3 is a combination of different efficiency levels for 
the different classes. It combines the SEER values for air conditioners 
from Trial Standard Level 2 (12 SEER) with the SEER values for heat 
pumps from Trial Standard Level 4 (13 SEER). By combining efficiency 
levels in this way, the Department is able to evaluate the impacts of 
different combinations of standard levels to make an informed decision 
on the merits of different efficiency combinations.
    To aid the reader as we discuss the benefits or burdens of the 
trial levels, we have included a summary of the analysis results in 
Tables VI.28 and VI.29.\21\ Table VI.28 presents a summary of analysis 
results based on ARI mean manufacturing costs, NAECA and Roll-up 
efficiency scenarios and 7% and 3% societal discount rate scenarios. 
Table VI.29 presents a summary of analysis results based on 
manufacturing costs obtained from the reverse engineering analysis for 
the NAECA efficiency scenario and 7% and 3% societal discount rate 
scenario. Both tables assume an 18.4-year equipment lifetime, including 
one compressor replacement. The reverse engineering scenario results in 
Table VI.29 are limited to single scenarios which highlight the impact 
of manufacturing costs on the consumer, manufacturers, national energy 
savings, and NPV.
---------------------------------------------------------------------------

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

               Table VI.28.--Summary of Analysis Results Based on ARI Mean Manufacturer Costs \1\
----------------------------------------------------------------------------------------------------------------
                                    Trial std 1     Trial std 2     Trial std 3     Trial std 4     Trial std 5
----------------------------------------------------------------------------------------------------------------
Total Quads Saved \2\...........         1.7-1.8         2.9-3.2         3.4-3.6         4.2-4.5         8.1-8.7
Generation Capacity Offset                   6.4            10.6            12.3            15.4            28.6
 (GW)\3\........................
NPV ($billion): \4\
    7% Discount Rate............               0              -1        -1 to -2        -5 to -6             -22
    3% Discount Rate............               3               4               3              -3             -35
Emissions: \5\
    Carbon Equivalent (Mt)......            13.4            23.7            27.4            33.6            63.7
    NOX (kt)....................            37.2            67.9            78.8           102.5           193.7
Cumulative Change in INPV ($
 million): \6\
    NAECA.......................            (37)           (186)           (197)           (183)
    Roll-up.....................           (181)           (362)           (367)           (335)
Life Cycle Cost ($):
    Split AC....................           ($44)           ($45)           ($45)             $29            $555
    Packaged AC.................             $20           ($29)           ($29)            $175            $741
    Split HP....................          ($150)          ($242)          ($215)          ($215)            $276
    Packaged HP.................          ($134)          ($254)          ($112)          ($112)            $296
Payback (years):
    Split AC....................            10.6            12.6            12.6              16              36
    Packaged AC.................            16.1              14              14            21.8            48.8
    Split HP....................             5.5             7.2             9.3             9.3            17.3
    Packaged Heat Pump..........             8.1             8.7            13.2            13.2            19.4
----------------------------------------------------------------------------------------------------------------
\1\ Estimates are based on 18.4-year lifetime.
\2\ Based on AEO 2000 reference, high and low growth cases, and NAECA efficiency distributions.
\3\ Reductions in installed generation capacity in the year 2020, based on AEO 2000 reference case, NAECA
  efficiency scenario.
\4\ Based on NAECA efficiency distribution and 7 % discount rate. Range reflects AEO 2000 reference, high and
  low growth cases.
\5\ Based on AEO 2000 reference case, NAECA efficiency scenario, and ARI mean manufacturing costs.
\6\ Not calculated at Trial Standard Level 5.


[[Page 59626]]


         Table VI.29.--Summary of Analysis Results Based on Reverse Engineering Manufacturing Costs) \1\
----------------------------------------------------------------------------------------------------------------
                                    Trial std 1     Trial std 2     Trial std 3     Trial std 4     Trial std 5
----------------------------------------------------------------------------------------------------------------
Total Quads Saved \2\...........         1.7-1.8         2.9-3.2         3.4-3.7         4.3-4.6         8.4-9.0
Generation Capacity Offset (GW)              6.4            10.6            12.3            15.4            28.6
 \3\............................
NPV ($billion):
    7% Discount Rate \2\........          1 to 2               2          1 to 2          0 to 1      -10 to -11
    3% Discount Rate............               6              10              10               9              -8
Emissions: \3\
    Carbon Equivalent (Mt)......            13.4            23.7            27.4            33.6            63.7
    NOX (kt)....................            37.2            67.9            78.8           102.5           193.7
Cumulative Change in INPV ($
 million):
    NAECA.......................            (30)           (159)           (171)           (169)
    Roll-up \3\.................           (181)           (362)           (367)           (335)
Life Cycle Cost ($):
    Split AC....................           ($75)          ($113)          ($113)          ($113)            $137
    Packaged AC.................           ($78)          ($163)          ($163)           ($29)            $276
    Split HP....................          ($209)          ($365)          ($372)          ($372)             $41
    Packaged HP.................          ($207)          ($421)          ($353)          ($353)          ($166)
Payback (years):
    Split AC....................             7.8             9.8            11.3            11.3            19.6
    Packaged AC.................             7.7             7.5             7.5            14.5            25.1
    Split HP....................             2.7             3.9             6.4             6.4            14.0
    Packaged Heat Pump..........             4.6             4.0             8.4             8.4          12.81
----------------------------------------------------------------------------------------------------------------
\1\ Based on 18 year lifetime, NAECA efficiency scenario and AEO 2000 reference case.
\2\ Variation based on AEO 2000 reference, low and high growth case.
\3\ Based on ARI mean manufacturer costs as reported in Table VI.28.

    First we considered Trial Standard Level 5, the most efficient 
level for each of four classes, representing uniform 18 SEER 
requirements. Trial Standard Level 5 saves between 8.1 and 8.7 Quads of 
energy, a significant amount. The estimated reduction in installed 
generating capacity is 28.6 GW, or roughly 73 large, 400 megawatt, 
power plants.\22\ The forecasted reduction in generating capacity is 
approximately 3.7% of current installed generating capacity and more 
than 13% of the anticipated growth in capacity needed by 2020. The 
emissions reductions of 63.7 Mt of carbon equivalent and 193.7 kt of 
NOX are also significant. However, at this level, the vast 
majority of consumers would experience an increase in LCC costs. 
Purchasers of split central air-conditioners, the predominate class of 
central air conditioner with 65% of the sales of central air 
conditioners and heat pumps, would lose $555 over the life of their 
appliance.\23\ Purchasers of split heat pumps, the predominate class of 
heat pump, would lose $276.\24\ Moreover, the Department believes these 
LCC results overstate the benefits of this trial standard level. 
Because we did not have equipment cost estimates at this level, we used 
instead the costs of 15 SEER equipment. DOE believes the costs of 18 
SEER equipment would be higher than the 15 SEER costs and that, as a 
result, the increase in life-cycle-costs would actually be greater than 
our LCC analysis indicates. For the nation as a whole Trial Standard 
Level 5 would have a net cost 22 billion dollars in NPV.\25\ The 
Department did not calculate manufacturer impacts at this trial 
standard level. The Department concludes that at this trial standard 
level, the benefits of energy savings, generating capacity reductions 
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, the Department concludes Trial Standard 
Level 5, the Max Tech Level, is not economically justified.
---------------------------------------------------------------------------

    \22\ DOE estimates 9 coal-fired power plants and 64 gas-fired 
power plants can be avoided. See TSD, Chapter 11 and Appendix H.
    \23\ Consumers would experience a $137 increase in life-cycle-
costs based on the Department's reverse engineering manufacturing 
costs.
    \24\ Consumers would experience a $41 increase in life-cycle-
costs based on the Department's reverse engineering manufacturing 
costs.
    \25\ At the 3% societal discount rate scenario, the nation would 
have a net cost of 35 billion dollars. With the reverse engineering 
equipment cost, the NPV is a net cost of 10 to 11 billion dollars at 
the 7% discount rate and 8 billion dollars at 3%.
---------------------------------------------------------------------------

    Next, we considered Trial Standard Level 4. This level specifies 13 
SEER equipment for all product classes and would save between 4.2 and 
4.5 Quads of energy, a significant amount. The estimated reduction in 
installed generating capacity is 15.4 GW, or roughly 39 large, 400 
megawatt, power plants.\26\ The forecasted reduction in generating 
capacity is approximately 2% of current installed generating capacity 
and more than 7% of the anticipated growth in capacity needed in 2020. 
The emissions reductions would also be significant: 33.6 Mt of carbon 
equivalent and 102.5 kt of NOX. The NPV of Trial Standard 
Level 4 would have a net cost of between 5 and 6 billion dollars.\27\ 
The average LCC savings for consumers with split heat pumps would be 
$215, based on ARI equipment costs.\28\ Owners of split air 
conditioners could see their LCC increase by $29, based on ARI 
costs.\29\
---------------------------------------------------------------------------

    \26\ DOE estimates 5 coal-fired power plants and 34 gas-fired 
power plants can be avoided. See TSD, Chapter 11 and Appendix H.
    \27\ At the 3% societal discount rate scenario, the nation would 
have a net cost of 3 billion dollars. With the reverse engineering 
equipment cost, the NPV has a no net cost at the 7% discount rate 
and a savings of 9 billion dollars at 3%.
    \28\ Consumers would experience a $372 savings in life-cycle-
costs based on the Department's reverse engineering costs.
    \29\ Consumers would experience a $133 savings in life-cycle-
costs based on the Department's reverse engineering manufacturing 
costs.
---------------------------------------------------------------------------

    Under Trial Standard Level 4, the air conditioning industry would 
experience a NPV loss of between 169 and 335 million dollars. The range 
of impacts is driven primarily by the assumption regarding the 
distribution of air conditioner and heat pump efficiencies in the 
market after implementation of the standard (NAECA or Roll-up). The 
Department recognizes that the ability to maintain a full product line 
is more difficult at higher standard levels and therefore places more 
weight on the Roll-up scenario at Trial Standard Level 4. The 
Department concludes that at Trial Standard Level 4 the benefits of 
energy savings, generating capacity

[[Page 59627]]

reductions and emission reductions and the reduction in LCC for some 
consumers are outweighed by the negative economic impacts on the 
nation, increase in LCC for most consumers and manufacturer loss in 
NPV. Consequently, the Department concludes Trial Standard Level 4 is 
not economically justified.
    Next, we considered Trial Standard Level 3. This level specifies 12 
SEER for air conditioners and 13 SEER for heat pumps. The energy 
savings are estimated to be between 3.4 and 3.6 quads, a significant 
amount. The estimated reduction in installed generating capacity is 
12.3 GW, or roughly 31 large, 400 megawatt, power plants.\30\ The 
forecasted reduction in generating capacity is approximately 1.6% of 
current installed generating capacity and more than 5% of the 
anticipated growth in capacity needed in 2020. The emissions reductions 
would also be significant: 27.4 Mt of carbon equivalent and 78.8 kt of 
NOX. The national NPV of this trial standard level has a 
range of net costs from 1 to 2 billion dollars, using ARI costs.\31\ 
\32\ All classes of product would have mean LCC savings. The average 
LCC savings for consumers with split air conditioners would be $45, 
using ARI costs.\33\ The average LCC savings for consumers with split 
heat pumps would be $215, using ARI costs.\34\ As an additional LCC 
analysis, DOE considered the effect of standards on low-income 
consumers. DOE expects low-income consumers will experience less 
savings than the population as a whole. (See TSD, Chapter 10). Under 
this trial standard level, the air conditioning industry would 
experience a NPV loss of between 171 and 367 million dollars depending 
on whether the Roll-up or NAECA efficiency distribution scenario is 
considered.
---------------------------------------------------------------------------

    \30\ DOE estimates 4 coal-fired power plants and 27 gas-fired 
power plants can be avoided. See TSD, Chapter 11 and Appendix H.
    \31\ At the 3% societal discount rate scenario, the nation would 
have a net savings of 3 billion dollars. With the reverse 
engineering equipment cost, the NPV has a net savings of 1 billion 
dollars at the 7% discount rate and 10 billion dollars at 3%.
    \32\ DOE observes that the average LCC savings for all classes 
at this trial standard level are positive and at the same time the 
NPV is negative. This is a counterintuitive result since the NPV can 
be described as a sum of individual consumer LCCs. The negative NPV 
is caused by a number of factors, including the assumption in the 
NES that some consumers will purchase more efficient products than 
is required by the standard, e.g., 14 SEER. Since the NES uses 
average usage rates and average marginal energy prices for these 
consumers, it may overstate the life-cycle-costs for consumers that 
voluntarily purchase products which, based on average values, would 
seem not to be cost-effective. Furthermore, the NES does not 
consider factors such as utility rebate programs which would have a 
effect on total discounted costs.
    \33\ Consumers would experience a $113 savings in life-cycle-
costs based on the Department's reverse engineering costs.
    \34\ Consumers would experience a $372 increase in life-cycle-
costs based on the Department's reverse engineering costs.
---------------------------------------------------------------------------

    Given the benefits and burdens of Trial Standard Level 3 as 
discussed above, and observing the reduction in NPV compared to Trial 
Standard Level 2, the Department compared the benefits and burdens of 
the two trial standard levels. Adopting Trial Standard Level 3, instead 
of Trial Level 2, would save the nation an additional 0.5 Quads of 
energy, and further reduce installed generating capacity by 1.7 GW, or 
roughly 5 large, 400 megawatt, power plants.\35\ The incremental 
emission reductions of carbon equivalent and NOX are 3.7 Mt 
and 10.9 kt, respectively. Trial Standard Level 3 would, however, 
reduce the national NPV by up to 1 billion dollars, depending on the 
cost estimates used.\36\ \37\ The consumer LCC savings are not changed 
for central air conditioners, but are reduced by $27 for split heat 
pumps using ARI costs.\38\
---------------------------------------------------------------------------

    \35\ DOE estimates one coal-fired power plants and four gas-
fired power plants can be avoided.
    \36\ At the 3% societal discount rate, the national NPV is 
reduced by 1 billion dollars. With the reverse engineering equipment 
cost, the NPV is not changed.
    \37\ The total national discounted cost of owning and operating 
central air conditioners and heat pumps at this Trial Standard Level 
3 is 382 billion dollars.
    \38\ Using the reverse engineering costs the savings are 
increased by $7.
---------------------------------------------------------------------------

    In determining the economic justification of Trial Standard Level 
3, the Department has weighed the benefits of energy savings, 
generating capacity reductions, reduced average consumer LCC, and 
emissions reductions against the burdens of a loss in manufacturer net 
present value, consumer LCC increases for some households and the 
potential loss in national NPV. We find the benefits to be substantial. 
Although the loss in manufacturer net present value is also 
substantial, the projected LCC increases and loss in national NPV are 
relatively small, and these burdens of Trial Standard Level 3 would be 
outweighed by its benefits. Moreover, in light of the reverse 
engineering analysis, we believe the equipment costs will be lower than 
the ARI estimates on which we have relied and that the loss in national 
NPV would be less than estimated.
    Comparing Trial Standard Level 3 to Trial Standard Level 2, DOE 
found the potential decrease in national NPV is outweighed by other 
factors not included in the national NPV calculations. For example, the 
national NPV calculation does not include quantitative estimates for 
the value of emission reductions.\39\ Furthermore, as an added benefit, 
the standard may improve the reliability of the electric distribution 
system. The Department finds that, compared with Trial Standard Level 
2, the incremental benefits of generating capacity reductions and 
emission reductions of Trial Standard Level 3 to be greater than the 
potential loss in national NPV and increase in life-cycle-costs to some 
consumers, including a relatively small number of low-income consumers.
---------------------------------------------------------------------------

    \39\ It is possible the NPV does not include the value of 
avoided power plants. It should be captured in the price of 
electricity, however, DOE used the same AEO 2000 prices forecasts in 
the base case projection as well as each trial standard level. It is 
entirely possible the average and marginal electricity prices do not 
change, however, DOE did not undertake an analysis to determine the 
effect, if any, of standards on electricity prices.
---------------------------------------------------------------------------

    After considering the benefits and burdens of Trial Standard Level 
3 and comparing the impacts of Trial Standard Levels 2 and 3, the 
Department finds Trial Standard Level 3 to be maximum improvement in 
efficiency that is technologically feasible and economically justified. 
Therefore, the Department today proposes to adopt the energy 
conservation standards for air conditioners and heat pumps at Trial 
Standard Level 3.

VII. Procedural Issues and Regulatory Review

A. Review Under the National Environmental Policy Act

    The Department is preparing an Environmental Assessment of the 
impacts of the proposed rule and DOE anticipates completing a Finding 
of No Significant Impact (FONSI) before publishing the final rule on 
Energy Conservation Standards for central air conditioners and heat 
pumps, 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 the Department's 
regulations for compliance with NEPA (10 CFR Part 1021).

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

    The Department has determined today's regulatory action is a 
significant regulatory action within the scope of section 3(f)(1) of 
Executive Order 12866, ``Regulatory Planning and Review.'' (58 FR 
51735, October 4, 1993). Therefore, this proposal requires a regulatory 
analysis. Such an analysis presents major alternatives to the proposed 
regulation that could achieve substantially the same goal, as well as a 
description of the cost and benefits

[[Page 59628]]

(including potential net benefits) of the proposed rule. Accordingly, 
the Office of Information and Regulatory Affairs (OIRA) reviewed 
today's action under the Executive Order.
    There were no substantive changes between the draft we submitted to 
OIRA and today's action. The draft and other documents we submitted to 
OIRA for review are a part of the rulemaking record and are available 
for public review in the Department's Freedom of Information Reading 
Room, 1000 Independence Avenue, SW., Washington, DC 20585, between the 
hours of 9:00 a.m. and 4:00 p.m., Monday through Friday, except Federal 
holidays, telephone (202) 586-3142.
    The following summary of the Regulatory Impact Analysis (RIA) 
focuses on the major alternatives considered in arriving at the 
proposed approach to improving the energy efficiency of consumer 
products. The reader is referred to the complete RIA, which is 
contained in the TSD, available as indicated at the beginning of 
today's proposed rule. The RIA consists of: (1) A statement of the 
problem addressed by this regulation, and the mandate for government 
action; (2) a description and analysis of the feasible policy 
alternatives to this regulation; (3) a quantitative comparison of the 
impacts of the alternatives; and (4) the economic impact of the 
proposed standard.
    The RIA calculates the effects of feasible policy alternatives to 
central air conditioner and heat pump energy efficiency standards, and 
provides a quantitative comparison of the impacts of the alternatives. 
We evaluate each alternative in terms of its ability to achieve 
significant energy savings at reasonable costs, and we compare it to 
the effectiveness of the proposed rule.
    We created the RIA using a series of regulatory scenarios (with 
various assumptions), which we used as input to the shipments model for 
central air conditioners and heat pumps. We used the results from the 
shipments model as inputs to the NES spreadsheet calculations.
    DOE identified the following seven major policy alternatives for 
achieving consumer product energy efficiency. These alternatives 
include:

 No New Regulatory Action
 Informational Action
  --Product Labeling
    --Consumer Education
 Prescriptive Standards
 Financial Incentives
    --Tax credits
    --Rebates
    --Low income and seniors subsidy
 Voluntary Energy Efficiency Targets (5 Years, 10 Years)
 Mass Government Purchases
 The Proposed Approach (Performance Standards)

    We have evaluated each alternative in terms of its ability to 
achieve significant energy savings at reasonable costs (Table VII.1), 
and have compared it to the effectiveness of the proposed rule. All of 
the results below have been determined with the AEO Reference Case and 
the NAECA efficiency scenario.

                  Table VII.1.--Alternatives Considered
------------------------------------------------------------------------
                                                              Energy
           Policy alternatives            NPV  (billions      Savings
                                               98$)           (Quads)
------------------------------------------------------------------------
Consumer Product Labeling...............               0             0.1
Consumer Education......................               0             0.1
Prescriptive Standards..................               0             1.1
Consumer Tax Credits....................               0             0.1
Consumer Rebates........................               0             0.2
Manufacturer Tax Credits................               0             0.0
Voluntary Efficiency Target (5 year                   -1             3.1
 delay).................................
Voluntary Efficiency Target (10 year                  -1             1.9
 delay).................................
Low Income Subsidy......................               0             0.1
Mass Government Purchases...............               0               0
Performance Standards...................              -2            4.4
------------------------------------------------------------------------
 NPV = Net Present Value (2006-2030, in billion 1998$) (does not include
  government expenses).
 Savings = Energy Savings (Source Quads).

    If we imposed no new regulatory action, then we would implement no 
new standards for this product. This is essentially the ``base case'' 
for central air conditioners and heat pumps. In this case, between the 
years 2006 and 2030, there would be an expected energy use of 39 Quads 
of primary energy, with no energy savings and a zero NPV.
    We grouped several alternatives to the base case under the heading 
of informational action. They include consumer product labeling and DOE 
public education and information programs. Both of these alternatives 
are already mandated by, and are being implemented under EPCA sections 
324 and 337, 42 U.S.C. 6294, 6297. One base case alternative would be 
to estimate the energy conservation potential of enhancing consumer 
product labeling. To model this possibility, the Department estimated 
that 5% of the consumers purchasing 10 SEER equipment and 5% of the 
consumers purchasing 12 SEER equipment would change their decisions and 
purchase 12 SEER and 13 SEER systems, respectively. It is assumed that 
the program would last six years and upon its expiration consumers 
would revert back to their prior purchase decisions. The consumer 
product labeling alternative resulted in 0.1 Quad of energy savings 
with no impact on the NPV.
    Another approach, called consumer education, is to consider an 
Energy Star program for 12 SEER and 13 SEER central air 
conditioners and heat pumps. We assume, under this program, there would 
be a 20% increase in the sales of both 12 SEER and 13 SEER systems. As 
with the consumer product labeling program, it is assumed that the 
education program would last six years and upon its expiration sales 
would drop back to their market share levels prior to the program's 
implementation. This consumer education program results in energy 
savings equal to 0.1 Quad with no impact on the NPV.
    Another method of setting standards would entail requiring that 
certain design options be used on each product, i.e., for DOE to impose 
prescriptive standards. For this approach, we assume that a 
prescriptive standard is implemented to ensure that all central air 
conditioners and heat pumps are equipped with thermostatic expansion 
valves (TXVs). The resulting efficiency increase is 0.5 SEER. That is, 
the

[[Page 59629]]

baseline efficiency of 10 SEER is assumed to increase to 10.5 SEER as a 
result of the prescriptive standard. Manufacturer costs associated with 
this standard were arrived by linearly interpolating between those 
costs associated with the baseline (i.e., 10 SEER) and 11 SEER 
efficiency levels. This resulted in energy savings of 1.1 Quad and no 
impact on the NPV.
    We tested various financial incentive alternatives. These included 
tax credits and rebates to consumers, as well as tax credits to 
manufacturers. We assumed the tax credits to consumers were 50% of the 
incremental purchase price for higher energy-efficiency equipment. The 
incremental price is based on the difference between the 2006 baseline 
price and the price of 12 SEER equipment. We estimate the impact of 
this policy would be to move 5% of the market share from the 2006 
baseline to 12 SEER models. These tax credits would start in 2006 and 
run for six years. We assume people stop buying these more efficient 
and more expensive central air conditioners and heat pumps when the tax 
credits stop. The tax credits to consumers showed a change from the 
base case, saving 0.1 Quad with no impact to the NPV.
    To estimate the impact of consumer rebates, we assumed rebates of 
35% of the incremental retail prices for higher energy-efficiency 
equipment. The incremental cost is based on the difference between the 
2006 baseline cost and the cost of 12 SEER equipment. We estimate the 
impact of this policy would be to move 10% of market share from the 
2006 baseline to the 12 SEER models. These rebates would start in 2006 
and run for six years. We assume people stop buying these more 
efficient and more expensive central air conditioners and heat pumps 
when the rebates stop. The rebates to consumers showed a change from 
the base case, would save 0.2 Quad with no impact to the NPV.
    Another financial incentive we considered was a tax credit to 
manufacturers for the production of energy-efficient models of central 
air conditioners and heat pumps. We assumed an investment tax credit of 
20%, applicable to the tooling and machinery costs of the 
manufacturers. These are tooling costs as they relate to producing 12 
SEER central air conditioners and heat pumps. We estimate the impact of 
this policy would be to move 1% of the market share from the 2006 
baseline to the 12 SEER models. These tax credits would start in 2006 
and run for six years. We assume no persistence in the market once they 
stop. Tax credits to manufacturers would save no energy and have no 
impact on the NPV. The impact of this scenario would be negligible 
because the investment tax credit was applicable only to the tooling 
and machinery costs of the firms. The firms' fixed costs and some of 
the design improvements that would likely be adopted to manufacture 
more efficient versions of this product would involve purchased parts. 
Expenses for purchased parts would not be eligible for an investment 
tax credit.
    We examined two scenarios of voluntary energy efficiency targets. 
In the first one, we assumed all the relevant manufacturers voluntarily 
adopted the proposed energy conservation standards in five years. In 
the second scenario, we assumed the proposed standards were adopted in 
10 years. In these scenarios, voluntary improvements having a five-year 
delay, compared to implementation of mandatory standards, would result 
in energy savings of 3.1 Quads and -$1 billion NPV; voluntary 
improvements having a 10-year delay would result in 1.9 Quads being 
saved and -$1 billion NPV. These scenarios assume that there would be 
universal voluntary adoption of the energy conservation standards by 
these appliance manufacturers, an assumption for which there is no 
assurance.
    One of the market barriers to higher efficiency central air 
conditioners and heat pumps is the expense to upgrading to a more 
efficient system. Since these expenses can be a particular burden on 
low income households, we considered a low income subsidy of $500 to 
make higher efficiency central air-conditioning and heat pump equipment 
available and cost effective for these households. We determined the 
number of low income households with central air-conditioning from the 
RECS public use data. We assumed that half of these households would 
take advantage of the program. The program would start in 2006 and run 
for six years. This subsidy would save 0.1 Quad with no impact to the 
NPV.
    Another policy alternative we reviewed was that of large purchases 
of high efficiency central air conditioners and heat pumps by Federal, 
State, and local governments. We modeled this policy by assuming these 
governmental entities (e.g., U.S. Department of Housing and Urban 
Development at the Federal level) purchased 12 SEER equipment for 5% of 
the low income, rented housing stock utilizing central air-conditioning 
and heat pump equipment. This policy alternative resulted in no energy 
savings with no impact to the NPV.
    Lastly, all of these alternatives must be gauged against the 
performance standards we are proposing in today's proposed rule. Such 
performance standards would result in energy savings under the AEO 
Reference Case and NAECA efficiency scenario of 3.5 Quads, and the NPV 
estimates range from an increase of $3 billion to a cost of $2 billion.
    As indicated in the paragraphs above, none of the alternatives we 
examined for these products would save as much energy as today's 
proposed rule. Also, several of the alternatives would require new 
enabling legislation, since authority to carry out those alternatives 
does not presently exist.

C. Review Under the Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980 (Pub. L. 96-354) requires an 
assessment of the impact of regulations on small businesses. For air 
conditioning and warm air heating equipment manufacturing, a ``firm'' 
is defined by the Small Business Administration as a small business if 
it (including affliates) has 750 or fewer employees.
    The residential air-conditioner industry is characterized by seven 
firms accounting for nearly 95% of sales. DOE understands that each of 
these firms, including its affiliates, has more than 750 employees. 
Smaller businesses and firms, which make specialty air-conditioning 
products and supply niche markets, share 5% of the market.
    In this industry, average production cost is inversely related to 
firm size. The industry displays economies of scale, and large firms 
(to the extent that their facilities are modernized) have lower average 
production costs than small firms. This fact, coupled with increasing 
competitiveness of the national market, probably accounts for the 
consolidation that has occurred for several decades. The fact that the 
consolidation has been producing larger firms strongly corroborates the 
finding that large firms have a cost advantage.
    A principal implication of consolidation is that the smaller of the 
firms will be, on average, more vulnerable to the financial impacts of 
higher efficiency standards. Any decrease in average profitability is 
more likely to mean the difference between success and failure for a 
smaller firm.
    The impact of higher efficiency standards on small firms is likely 
to be mixed. Those firms that face a large technological challenge in 
meeting the new standards may face a disproportionate burden, because 
smaller firms have more limited research and development capabilities

[[Page 59630]]

than their larger competitors. Some smaller manufacturers indicated the 
potential for a negative economic impact of any higher standard level 
on their firms. However, since these concerns apply primarily to small 
manufacturers of niche products, they benefit from the provisions 
proposed by the Department to somewhat protect those products from the 
new standards. For example, a separate product class is being proposed 
for through-the-wall equipment, many of which are manufactured by small 
manufacturers. Also, the Department has acknowledged that small 
manufacturers of high velocity distribution systems may potentially be 
adversely affected by the proposed standard level. The Department is 
considering modifications to the SEER test procedure, which would grant 
these manufacturers some relief. Vertical-packaged, wall-mounted 
equipment is another product manufactured by small firms, and, as 
stated in Section V.J.3 of this notice, the Department intends to 
consider those to be commercial products under EPACT. These provisions 
should eliminate any potential for significant economic impact on small 
manufacturers related to the proposed standard level.
    Many small manufacturers produce coils only. Since there are no 
intensive incremental technological or capital requirements for these 
companies to increase the efficiency of their products, we do not 
expect them to face any incremental burden as a result of the new 
standards.
    In view of these conclusions, the Department has determined and 
hereby certifies pursuant to section 605(b) of the Regulatory 
Flexibility Act that, for this particular industry, the proposed 
standard levels in today's proposed rule will not ``have a significant 
economic impact on a substantial number of small entities,'' and it is 
not necessary to prepare a regulatory flexibility analysis.

D. Review Under the Paperwork Reduction Act

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

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

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

F. ``Takings'' Assessment Review

    The Department has determined pursuant to Executive Order 12630, 
``Governmental Actions and Interference with Constitutionally Protected 
Property Rights,'' 53 FR 8859 (March 18, 1988), that this regulation 
would not result in any takings that might require compensation under 
the Fifth Amendment to the United States Constitution.

G. Review Under Executive Order 13132

    Executive Order 13132 (64 FR 43255, August 4, 1999) requires 
agencies to develop an accountable process to ensure meaningful and 
timely input by State and local officials in the development of 
regulatory policies 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. DOE has 
examined today's proposed 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 proposed rule were preempted by the Federal 
standards established in NAECA 1987. States can petition the Department 
for exemption from such preemption based on criteria set forth in EPCA. 
No further action is required by Executive Order 13132.

H. Review Under the Unfunded Mandates Reform Act

    With respect to a proposed regulatory action that may result in the 
expenditure by State, local, and tribal governments, in the aggregate, 
or by the private sector, of $100 million or more (adjusted annually 
for inflation) in any one year, section 202(a) of the Unfunded Mandates 
Reform Action of 1995 (UMRA), 2 U.S.C. 1531 et seq. requires a Federal 
agency to publish a written statement concerning estimates of the 
resulting costs, benefits and other effects on the national economy. 2 
U.S.C. 1532(a),(b). DOE estimates that the proposed standards, if 
adopted, would not result in the expenditure by the private sector of 
$100 million or more in a year, with the possible exception of one year 
in which industry expenditures could total approximately $110 million.
    Section 202 of UMRA authorizes an agency to respond to the content 
requirements of UMRA in any other statement or analysis that 
accompanies the proposed rule. 2 U.S.C. 1532(c). The content 
requirements of section 202(b) of UMRA relevant to a private sector 
mandate substantially overlap the economic analysis requirements that 
apply under section 325(o) of EPCA and Executive Order 12866. The 
Supplementary Information section of the Notice of Proposed Rulemaking 
and ``Regulatory Impact Analysis'' section of the TSD for today's 
proposed rule responds to those requirements.
    DOE is obligated by Section 205 of UMRA, 2 U.S.C. 1535, to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule for which a written statement under section 202 is 
required. From those alternatives, DOE must select the least costly, 
more cost-effective or least burdensome alternative that achieves the 
objectives of the rule, unless DOE publishes an explanation of why a 
different alternative is selected. As required by section 325(o) of the 
Energy Policy and Conservation Act (42 U.S.C. 6295(o)), this proposed 
rule would establish energy conservation standards for central air 
conditioners and heat pumps that are designed to

[[Page 59631]]

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 
this notice.

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

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

J. Review Under the Plain Language Directives

    Section 1(b)(12) of Executive Order 12866 requires that each agency 
draft its regulations to be simple and easy to understand, with the 
goal of minimizing the potential for uncertainty and litigation arising 
from such uncertainty. Similarly, the Presidential memorandum of June 
1, 1998 (63 FR 31883) directs the heads of executive departments and 
agencies to use, by January 1, 1999, plain language in all proposed and 
final rulemaking documents published in the Federal Register, unless 
the rule was proposed before that date.
    Today's proposed rule uses the following general techniques to 
abide by section 1(b)(12) of Executive Order 12866 and the Presidential 
memorandum of June 1, 1998 (63 FR 31883):
     Organization of the material to serve the needs of the 
readers (stakeholders).
     Use of common, everyday words in short sentences.
     Shorter sentences and sections.

We invite your comments on how to make this proposed rule easier to 
understand.

VIII. Public Comment

A. Written Comment Procedures

    The Department invites interested persons to participate in the 
proposed rulemaking by submitting data, comments, or information with 
respect to the proposed issues set forth in today's proposed rule to 
Ms. Brenda Edwards-Jones, at the address indicated at the beginning of 
this notice. We will consider all submittals received by the date 
specified at the beginning of this notice in developing the final rule.
    According to 10 CFR 1004.11, any person submitting information that 
he or she believes to be confidential and exempt by law from public 
disclosure should submit one complete copy of the document and ten (10) 
copies, if possible, from which the information believed to be 
confidential has been deleted. The Department of Energy will make its 
own determination with regard to the confidential status of the 
information and treat it according to its determination.
    Factors of interest to the Department when evaluating requests to 
treat as confidential information that has been submitted include: (1) 
A description of the items; (2) an indication as to whether and why 
such items are customarily treated as confidential within the industry; 
(3) whether the information is generally known by or available from 
other sources; (4) whether the information has previously been made 
available to others without obligation concerning its confidentiality; 
(5) an explanation of the competitive injury to the submitting person 
which would result from public disclosure; (6) an indication as to when 
such information might lose its confidential character due to the 
passage of time; and (7) whether disclosure of the information would be 
contrary to the public interest.

B. Public Workshop/Hearing

1. Procedure for Submitting Requests To Speak
    You will find the time and place of the public hearing listed at 
the beginning of this notice. We invite any person who has an interest 
in today's notice, or who is a representative of a group or class of 
persons that has an interest in these issues, to request an opportunity 
to make an oral presentation. If you would like to attend the public 
hearing, please notify Ms. Brenda Edwards-Jones at (202) 586-2945. You 
may hand deliver requests to speak to the address indicated at the 
beginning of this notice between the hours of 8 a.m. and 4 p.m., Monday 
through Friday, except Federal holidays. You may also send them by mail 
or E-mail to [email protected].
    The person making the request should state why he or she, either 
individually or as a representative of a group or class of persons, is 
an appropriate spokesperson, briefly describe the nature of the 
interest in the rulemaking, and provide a telephone number for contact. 
We request each person selected to be heard to submit an advance copy 
of his or her statement at least two weeks prior to the date of this 
hearing as indicated at the beginning of this notice. At our 
discretion, we may permit any person who cannot do this to participate 
if that person has made alternative arrangements with the Office of 
Building Research and Standards in advance. The request to give an oral 
presentation should ask for such alternative arrangements.
2. Conduct of Hearing
    The Department will designate a Department official to preside at 
the workshop and we may also use a professional facilitator to 
facilitate discussion. The workshop will not be a judicial or 
evidentiary-type hearing, but the Department will conduct it in 
accordance with 5 U.S.C. 553 and Section 336 of the Act and a court 
reporter will be present to record the transcript of the workshop. We 
reserve the right to schedule the presentations by workshop 
participants, and to establish the procedures governing the conduct of 
the workshop.
    The Department will permit each participant to make a prepared 
general statement, limited to five (5) minutes, prior to the discussion 
of specific topics. The general statement should not address these 
specific topics, but may cover any other issues pertinent to this 
rulemaking. The Department will permit other participants to briefly 
comment on any general statements. We will divide the remainder of the 
hearing into segments, with each segment consisting of one or more of 
the following specific topics covered by this notice:
     Engineering analysis, including mark-up;
     Life-Cycle-Cost and payback analysis;
     National Energy Savings and Net Present Value;
     Manufacturer impacts;
     Utility impacts;
     Proposed standards, including an EER-based standard and 
TXV considerations; and
     Other issues.
    The Department will introduce each topic with a brief summary of 
the relevant parts of our analysis and of the proposed rule, and the 
significant issues involved. We will then permit participants in the 
hearing to make a prepared statement limited to five (5) minutes on 
that topic. At the end of all prepared statements on a topic, the 
Department will permit each participant to briefly clarify his or her 
statement and comment on statements made by

[[Page 59632]]

others. Participants should be prepared to answer questions by us and 
by other participants concerning these issues. Our representatives may 
also ask questions of participants concerning other matters relevant to 
the hearing. The total cumulative amount of time allowed for each 
participant to make prepared statements will be 20 minutes.
    The official conducting the hearing will accept additional comments 
or questions from those attending, as time permits. The presiding 
official will announce any further procedural rules, or modification of 
the above procedures, needed for the proper conduct of the hearing.
    We will make the entire record of this rulemaking, including the 
transcript, available for inspection in the Department's Freedom of 
Information Reading Room. Any person may purchase a copy of the 
transcript from the transcribing reporter.

C. Issues for Which DOE Seeks Comment

    The Department is particularly interested in receiving comments and 
views of interested parties concerning:
    (1) Whether explicit consideration of extended warranties would 
produce significantly different results from those based on service 
costs alone;
    (2) The Department's methodology and data for determining the 
appropriate marginal energy costs;
    (3) The burdens and benefits that would result from including an 
EER requirement in the final rule. Of particular interest are comments 
regarding burdens on manufacturers, benefits regarding reduction in 
peak electricity demand, the effect of more stringent standards on the 
cost and availability of modulating equipment, and the effect that an 
EER floor would have on electrical system reliability. In addition, 
comments are welcome to discuss the pros and cons of any of the options 
described in Section V.I.2 above, as well as other approaches;
    (4) Whether the proposed standards concerning high-velocity, 
vertically-packaged wall-mounted equipment, and through-the-wall 
equipment provide a significant advantage to those products versus 
competing products and are sufficient to preserve the unique features 
of those products, and whether improvements in the definitions are 
needed to prevent loopholes. For ductless split equipment and non-
weatherized vertical packaged equipment, additional comment is welcome 
on the impacts that meeting the new standards would have on the 
availability of those products;
    (5) The issue of thermal expansion valves (TXV), particularly 
whether our concerns regarding the perceived reliability problems and 
potential misuses associated with widespread use of TXVs are valid;
    (6) The validity of the analytical methods used and the appropriate 
interpretation and use of the results of this analysis;
    (7) The Draft Environmental Assessment, which is printed within the 
TSD prepared for today's proposed rule; and
    (8) The impacts on manufacturers and consumers if the levels in 
today's proposed rule were applied to commercial three-phase unitary 
air conditioners less than 65K Btu/hr as well.

List of Subjects in 10 CFR Part 430

    Administrative practice and procedure, Energy conservation, 
Household appliances.

    Issued in Washington, DC, on September 27, 2000.
Dan W. Reicher,
Assistant Secretary, Energy Efficiency and Renewable Energy.
    For the reasons set forth in the preamble Part 430 of Chapter II of 
Title 10, Code of Federal Regulations, is proposed to be amended as set 
forth below.

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

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

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

    2. Section 430.2 is amended by adding a definition for ``through-
the-wall air conditioner and heat pump'' in alphabetical order to read 
as follows:


Sec. 430.2  Definitions.

* * * * *
    Through-the-wall air conditioner and heat pump means a central air 
conditioner or heat pump, having a rated capacity between 18,000 Btu/hr 
and 30,000 Btu/hr that is:
    (1) Designed to be installed partially within, or mounted against, 
a fixed-size opening in an exterior wall; and
    (2) Designed so that air for the outdoor coil is taken in and 
discharged at the same surface.
* * * * *
    3. Section 430.32 of Subpart C is amended by revising paragraph (c) 
to read as follows:


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

* * * * *
    (c) Central air conditioners and central air conditioning heat 
pumps. (1) Split system central air conditioners and central air 
conditioning heat pumps manufactured after January 1, 1992, and before 
January 1, 2006, and single package central air conditioners and 
central air conditioning heat pumps manufactured after January 1, 1993, 
and before January 1, 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
------------------------------------------------------------------------
 1. Split systems.............................         10.0          6.8
 2. Single package systems....................          9.7          6.6
------------------------------------------------------------------------

    (2) Central air conditioners and central air conditioning heat 
pumps manufactured on or after January 1, 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)
------------------------------------------------------------------------
 1. Split system air conditioners.............           12  ...........
 2. Split system heat pumps...................           13          7.7
 3. Single package air conditioners...........           12  ...........
 4. Single package heat pumps.................           13          7.7
 5. Through the wall air conditioners and heat           11          7.1
 pumps........................................
------------------------------------------------------------------------

* * * * *
[FR Doc. 00-25336 Filed 9-29-00; 9:42 am]
BILLING CODE 6450-01-P