[Federal Register Volume 66, Number 11 (Wednesday, January 17, 2001)]
[Rules and Regulations]
[Pages 4474-4497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1081]



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Part VIII





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: Energy Conservation 
Standards for Water Heaters; Final Rule

  Federal Register / Vol. 66, No. 11 / Wednesday January 17, 2001 / 
Rules and Regulations  

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DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 430

[Docket Number EE-RM-97-900]
RIN 1904-AA76


Energy Conservation Program for Consumer Products: Energy 
Conservation Standards for Water Heaters

AGENCY: Office of Energy Efficiency and Renewable Energy, Department of 
Energy (DOE).

ACTION: Final rule.

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

EFFECTIVE DATES: The effective date of this rule and standard is 
January 20, 2004.

ADDRESSES: You may read copies of the Technical Support Document (TSD) 
at the DOE Freedom of Information Reading Room, U.S. Department of 
Energy, Forrestal Building, 1000 Independence Avenue, S.W., Washington, 
DC. 20585, (202) 586-3142, between the hours of 9:00 a.m. and 4:00 
p.m., Monday through Friday, except Federal holidays. You may obtain 
copies of the TSD from the Codes and Standards Internet site at: http:/
/www.eren.doe.gov/buildings/codes--standards/applbrf/waterheater.htm or 
from the U.S. Department of Energy, Office of Energy Efficiency and 
Renewable Energy, Forrestal Building, Mail Station EE-41, 1000 
Independence Avenue, S.W., Washington, D.C. 20585. (202) 586-9127.

FOR FURTHER INFORMATION CONTACT: Terry Logee, U.S. Department of 
Energy, EE-41, 1000 Independence Avenue, S.W., Washington, DC 20585-
0121, (202) 586-9127, email: [email protected] or Francine Pinto, 
Esq., U.S. Department of Energy, Office of General Counsel, GC-72, 1000 
Independence Avenue, S.W., Washington, DC 20585, (202) 586-7432, email: 
[email protected] or Eugene Margolis, Deputy Assistant General 
Counsel, GC-72, at the same address, (202) 586-9507, email: 
[email protected].

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Consumer Overview
    B. Authority
    C. Background
II. General Discussion
    A. Test Procedures
    B. Technological Feasibility
    C. Lessening of Utility or Performance of Products
    D. Impact of Lessening of Competition
    E. Economic Justification
    F. Other Factors
III. Methodology
    A. Engineering
    B. Life-Cycle Costs (LCC)
    C. Manufacturing Impact
    D. Energy Savings and Net Present Value
    IV. Discussion of Comments
    A. Venting of Gas Water Heaters
    B. Electric Water Heater Ratings
    C. Measured vs. Rated Volume
    D. Effective Date of Standards
    E. Water Heater Models Affected
    F. Instantaneous Water Heaters
    G. Fuel Switching
V. Analytical Results and Conclusion
    A. Economic Impacts on Consumers
    B. Significance of Energy Savings
    C. Lessening of Utility or Performance of Products
    D. Impact of Lessening of Competition
    E. Need of the Nation to Save Energy and Net National Employment
    F. Conclusion
VI. Procedural Issues and Regulatory Reviews
    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, ``Federalism'
    H. Review Under the Unfunded Mandates Reform Act of 1995
    I. Review Under the Treasury and General Government 
Appropriations Act of 1999
    J. Review Under the Plain Language Directives
    K. Congressional Notification

I. Introduction

    The Energy Policy and Conservation Act, as amended (hereinafter 
referred to as EPCA or the Act), specifies that any new or amended 
energy conservation standard the Department of Energy (DOE) prescribes 
shall be designed to ``achieve the maximum improvement in energy 
efficiency * * * which the Secretary determines is technologically 
feasible and economically justified.'' Section 325(o)(2)(A), 42 U.S.C. 
6295(o)(2)(A). Furthermore, the amended standard must ``result in 
significant conservation of energy.'' Section 325(o)(3)(B), 42 U.S.C. 
6295(o)(3)(B).
    In accordance with the statutory criteria discussed in this notice, 
DOE is amending the water heater energy efficiency standards, to go 
into effect on January 20, 2004.

A. Consumer Overview

    The Table below summarizes the ``vital statistics'' of today's 
typical gas and electric water heater, as well as presenting the cost 
implications for the average consumer of water heaters after the 2004 
water heater standards take effect.

            Vital Statistics of Today's Typical Water Heaters
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        Current statistics                 Gas              Electric
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Average Price....................  $383..............  $380
Annual Utility Bill..............  $160..............  $256
Life Expectance..................  9 years...........  14 years
Energy Consumption...............  234 Therms/year...  3,459 kWh/year
Statistics In Year 2004:
Average New Water Heater Price*..  $501..............  $486
Estimated Price Increase           $58...............  $101
 (Efficiency Only).
Annual Utility Bill Savings......  $12.74............  $13.05
Simple Payback Period............  3.6 years.........  7.4 years
Average Net Saving Over Appliance  $30...............  $23
 Life.
Energy Saving per Year...........  22 therms.........  188 kWh
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*Includes expected price increases for non-energy efficiency
  regulations.


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    Currently, the average typical water heater costs, $380 for 
electric and $383 for gas. The average annual utility bill for an 
electric water heater is $256, while a gas water heater costs $160 a 
year to operate.
    The water heater energy efficiency standards we are adopting today 
will have a positive impact on consumers. Consumers with electric water 
heaters would save $13.05 per year while those with natural gas water 
heaters would save about $12.74 per year on average. Of course these 
savings are not free, consumers will have to pay an average increase of 
$101 for electric and $58 for gas water heaters. Note that the total 
average increased cost for electric and gas water heaters are $105 and 
$118, respectively, due to the phase out of the current insulating foam 
blowing agent HCFC-141b and the compliance to resist ignition of 
flammable vapors on gas water heaters voluntarily agreed to between the 
manufacturers and the Consumer Product Safety Commission. The simple 
payback for cost increases due to efficiency standards is 7.4 years for 
electric and 3.6 years for gas water heaters. The lifetime owning cost 
or life-cycle costs are lower than life-cycle costs on current water 
heaters by $23 for electric and by $30 for gas water heaters.
    The design improvements the Department considered are thicker 
insulation and heat traps on both gas and electric water heaters and an 
improved heat exchanger (flue baffle) on gas water heaters. These 
improvements result in a four percent increase in energy efficiency for 
electric and an eight percent increase in energy efficiency for gas 
water heaters. These kinds of improvements are already available on 26 
percent of all water heater models. In energy terms, households with 
electric water heaters will save on average 188 kWh per year and 
households with gas water heaters will save 22 therms per year of 
natural gas or propane gas.
    The benefits to the nation from this revised energy efficiency 
standard are also significant with energy savings of 4.6 quads of 
energy over 26 years. This is equivalent to the total energy 
consumption of all U.S. homes over a period of 2.8 months. By 2020, the 
standards will avoid the construction of nine 400 megawatt electric 
generating plants.
    The amended standards in today's rule can be achieved by using HFC-
134a, cyclopentane, or HFC-245fa as the blowing agent in the 
insulation. The 4.6 quads of energy savings will result in cumulative 
greenhouse gas emission reductions of 152 million metric tons (Mt) of 
carbon dioxide (CO2) equivalent, or an amount equal to that 
produced by 3.9 million cars per year. Additionally, there will be a 
cumulative reduction of 273 thousand metric tons of nitrogen oxides ( 
NOX). In total, we estimate the national energy savings to 
have a positive net present value to American business and industry of 
$2.02 billion over 26 years.

B. Authority

    Part B of Title III of the Energy Policy and Conservation Act, Pub. 
L. 94-163, as amended by the National Energy Conservation Policy Act, 
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,\1\ 
created the Energy Conservation Program for Consumer Products other 
than Automobiles. Water heaters are one of the consumer products 
subject to this program. Section 322(a)(4), 42 U.S.C. 6292(a)(4).
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    \1\ Part B of Title III of the Energy Policy and Conservation 
Act, as amended by the National Energy Conservation Policy Act, the 
National Appliance Energy Conservation Act, the National Applicance 
Energy Conservation Amendments of 1988, and the Energy Policy Act of 
1992 is referred to in this notice as the ``Act.'' Part B of title 
III is codified at 42 U.S.C. 6291 et seq. Part B of Title III of the 
Energy Polciy and Conservation Act, as amended by the National 
Energy Conservation Policy Act only, is referred to in this notice 
as the National Energy Conservation Policy Act.
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    Under the Act, the program consists essentially of three parts: 
testing, labeling, and Federal energy conservation standards. The 
Department, with assistance from the National Institute of Standards 
and Technology (NIST), may amend or establish test procedures for each 
of the covered products. Section 323(b)(1)(A)-(B), 42 U.S.C. 
6293(b)(1)(A)-(B). The test procedures measure the energy efficiency, 
energy use, or estimated annual operating cost of a covered product 
during a representative average use cycle or period of use. They must 
not be unduly burdensome to conduct. Section 323(b)(3), 42 U.S.C. 
6929(b)(3). The water heater test procedure appears at Title 10 Code of 
Federal Regulations (CFR) Part 430, Subpart B, Appendix E.
    The Federal Trade Commission (FTC) prescribes rules governing the 
labeling of covered products after DOE publishes test procedures. 
Section 324(a). At the present time, there are FTC rules requiring 
labels for water heaters.
    The National Appliance Energy Conservation Act of 1987 prescribed 
Federal energy conservation standards for water heaters. Section 
325(e). The Act provides that the Department shall determine whether 
amended standards to the existing requirements in Section 325(e) for 
water heaters are warranted, and issue a Final Rule. Such amendment 
shall apply to products manufactured three years on or after the date 
of this Final Rule. Section 325(e)(4)(A).
    Any new or amended standard must be designed to achieve the maximum 
improvement in energy efficiency that is technologically feasible and 
economically justified. Section 325(o)(2)(A), 42 U.S.C. 6295(o)(2)(A).
    Section 325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i) provides that 
before DOE determines whether a standard is economically justified, it 
must first ask for comments on a proposed standard. After reviewing 
comments on the proposal, DOE must determine that 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 on 
the consumers of the products subject to the 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 or water 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 and water conservation; and
    (7) Other factors the Secretary considers relevant.
    In addition, Section 325(o)(2)(B)(iii), 42 U.S.C. 
6295(o)(2)(b)(iii), establishes a rebuttable presumption of economic 
justification in instances where the Secretary determines that ``the 
additional cost to the consumer of purchasing a product complying with 
an energy conservation standard level will be less than three times the 
value of the energy, and as applicable, water, 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

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alternative path to establishing economic justification.
    Section 327 of the Act, 42 U.S.C. 6297, addresses the effect of 
Federal rules on State laws or regulations concerning testing, 
labeling, and standards. Generally, all such State laws or regulations 
are superseded by the Act, unless specifically exempted in Section 327. 
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).

C. Background

    1. Current Standards. The existing water heater efficiency 
standards have been in effect since 1991. Energy efficiency is measured 
in terms of an energy factor (EF), which measures overall water heater 
efficiency and is determined by the DOE test procedure. 10 CFR, Part 
430, Subpart B, Appendix E. The current water heater efficiency 
standards are as follows:
 Electric: EF = 0.93-(0.00132 x rated volume)
 Gas-fired: EF = 0.62-(0.0019 x rated volume)
 Oil-fired: EF = 0.59-(0.0019 x rated volume)

where rated volume is the water storage capacity of a water heater in 
gallons, as specified by the manufacturer.
    2. History of Previous Rulemakings. On September 28, 1990, DOE 
published an Advance Notice of Proposed Rulemaking announcing the 
Department's intention to revise the existing water heater efficiency 
standard. 55 FR 39624 (September 28, 1990). On March 4, 1994, DOE 
proposed a rule to revise the energy conservation standards for water 
heaters, as well as a variety of other consumer products. 59 FR 10464 
(March 4, 1994). On January 31, 1995, we published a determination that 
we would issue a revised notice of proposed rulemaking (NOPR) for water 
heaters. 60 FR 5880 (January 31, 1995).
    The Department of Interior and Related Agencies Appropriations Act 
for Fiscal Year 1996 included a moratorium on proposing or issuing 
Final Rules for appliance efficiency standards for the remainder of 
Fiscal Year 1996. See 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 (July 
15, 1996), codified at 10 CFR Part 430, Subpart C, Appendix A.
    The Process Rule states that for products, such as water heaters, 
for which DOE issued a proposed rule prior to August 14, 1996, DOE will 
conduct a review to decide whether any of the analytical or procedural 
steps already completed should be repeated. 61 FR 36974, 36982 (July 
15, 1996). DOE completed this review and decided to use the Process 
Rule, to the extent possible, in the development of the revised water 
heater standards.
    We developed an analytical framework for the water heater standards 
rulemaking for our stakeholders, which we presented during a water 
heater workshop on June 24, 1997. The analytical framework described 
the different analyses (e.g., life-cycle costs (LCC), payback, and 
manufacturing impact analyses (MIA)) to be conducted, the method for 
conducting them, the use of new LCC and national energy savings (NES) 
spreadsheets, and the relationship between the various analyses.
    We held a workshop on November 9 and 10, 1998, to share the 
preliminary analysis results. We discussed our methodology for 
analyzing national energy savings, environmental inputs, consumer sub-
group impacts and impacts on utilities including fuel switching. There 
was also a presentation of the water heater insulation testing by NIST. 
On July 23, 1999 we held another workshop to present the full results 
of our engineering and economic analysis. We discussed the comments 
from the November 1998 workshop and changes we made in our analysis as 
a result of these comments. On April 28, 2000 we published the notice 
of proposed rulemaking to amend water heater energy efficiency 
standards. 65 FR 25042 (April 28, 2000). We held the hearing/workshop 
to discuss comments to the proposed rule on June 20, 2000.

II. General Discussion

A. Test Procedures

    The Act does not allow DOE to set energy standards for a product 
unless there is a test procedure in place for that product. The 
Department published a test procedure on May 11, 1998, that revised the 
first-hour rating of storage-type water heaters, added a new rating for 
electric and gas-fired instantaneous water heaters and amended the 
definition of a heat pump water heater. 63 FR 25996 (May 11, 1998). 
This revision did not change the test method for determining energy 
efficiency standards.
    No one has petitioned DOE indicating the Department's test 
procedures are inadequate for testing water heaters. Accordingly the 
Department considers the current Federal test procedures applicable and 
appropriate for today's Final Rule.\2\
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    \2\ In August and September 2000, DOE conducted a certification 
review of high efficiency electric water heaters at five 
manufacturers. Based on the review of these manufacturers' 
laboratory procedures, we believe some clarifications to the water 
heater test procedure may be needed. We are planning to join GAMA 
and the manufacturers in their water heater test program to 
determine what needs to be clarified in the water heater test 
procedure.
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B. Technological Feasibility

    The Act requires the Department, in considering any new or amended 
standards, to consider those that ``shall be designed to achieve the 
maximum improvement in energy efficiency * * * which the Secretary 
determines is technologically feasible and economically justified.'' 
(Section 325 (o)(2)(A)). Accordingly, for each class of product 
considered in this rulemaking, a maximum technologically feasible (max 
tech) design option was identified and considered as discussed in the 
Proposed Rule. 65 FR 25042, 24045 (April 28, 2000).
    However, DOE eliminated the heat pump water heater due to issues 
concerning the practicability to manufacture, install, and service on 
the scale necessary to serve the relevant market at the time of the 
effective date of the standard and product utility of these units. We 
eliminated heat pump water heaters after careful consideration of the 
current electric resistance and heat pump water heater markets and 
manufacturing technology, and after applying the factors to be 
considered in screening design options contained in the Process Rule. 
We also eliminated gas condensing water heaters because we determined 
they are not technologically feasible. 10 CFR 430, Subpart C, Appendix 
A(4)(a)(4) and (5)(b). There is a complete discussion of these 
conclusions in the proposed rule. 65 FR 25042, 25047-49 (April 28, 
2000).
    The Department has determined that the electric and gas water 
heaters considered in today's notice are technologically feasible as 
required by Section 325(o)(2)(A) of EPCA, as amended. There are some 
models of these water heaters in the market that

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meet the new standard levels. Thus, the design options DOE considered 
are technologically feasible.

C. Lessening of Utility or Performance of Products

    This factor is not easily quantified. However, DOE has considered 
the effect of thicker insulation which might result in smaller capacity 
water heaters to be used in small existing spaces which could cause a 
reduction in first hour rating. A loss of first hour rating would 
reduce consumer utility. The discussion in the comments on size 
constraints explains how DOE dealt with this issue. Furthermore, if a 
certain type of water heater would no longer fit in spaces that it was 
designed for, we have considered a new class of products. We have 
included a discussion on new product classes to address this.
    1. Size Constraints. We addressed size constraints in the proposed 
rule by estimating approximately 32 percent of electric water heating 
households and 27 percent of gas water heating households would need to 
remove the closet door for water heaters with 3 inch thick insulation. 
Then, we added a cost adjustment of $160 to install new water heaters 
in these households. Several stakeholders have commented on our 
estimates of costs and the number of households affected.
    The American Gas Association (AGA) requests that DOE address size 
constraints consistently across electric and gas water heaters. It 
requested DOE to include the costs shown in the Battelle report that 
addresses space constraints. (AGA, No. 150 at 5). The Gas Appliance 
Manufacturers Association (GAMA) supports the Battelle analysis. (GAMA, 
No. 160 at 4). Battelle provided detailed comments on space constraints 
associated with larger gas water heaters. Based on a survey of 15 
companies, covering areas within 24 states, it determined a range of 
space impacts on costs and the percentages of homes affected. 
(Battelle, No. 127 at C-1 to C-5).
    Southern Gas Association stated that a survey of its members 
revealed that 18 percent of single family homes would be unable to fit 
a 2 inch larger diameter water heater into the existing space. 
(Southern Gas Association, No. 152 at 4). Alagasco indicated that many 
of its customers are renters in mid to low-income brackets. The 
proposed gas water heaters would cause space constraints in many of 
these homes. (Alagasco, No. 152 at 2). The National Propane Gas 
Association and Atlanta Gas Light Co. stated that an increase in 
storage tank size will cause significant and costly installation 
problems in water heater replacements. (National Propane Gas 
Association, No. 165 at 2 and Atlanta Gas Light Co., No. 178 at 1). The 
Oregon Office of Energy (OOE) claims that after installing tens of 
thousands of high efficiency water heaters in the Pacific Northwest, 
physically larger tanks do not impose higher installation costs. Drip 
pans are sized for the larger tanks and water connections are almost 
universally made with flexible copper tubing that easily accommodates a 
wide range of tank heights and alignments. (OOE, No. 174 at 3).
    To account for size constraints in our revised analysis, we assume 
space constraints would only apply in those cases where the water 
heater is installed in a conditioned space, e.g., not in a garage or an 
unconditioned basement or attic. We also assume this will only apply to 
small houses or apartments. Therefore, we have excluded houses or 
apartments with a floor area of more than 1000 square feet. These 
assumptions are not intended to accurately identify every individual 
household that would face space constraints when replacing their water 
heater. Rather this estimate should roughly identify the number of 
households affected. Since this is based on the Residential Energy 
Consumption Survey (RECS) '97 data, we have a representative national 
sample of households. We believe using the RECS '97 database and the 
assumptions above will give us the best estimate of the impacts of 
increased water heater size.
    In its comments, Battelle also assumed a large fraction of closets 
are smaller than 22  x  22 inches. Discussions with installers report 
this is a rare occurrence; they come upon this situation approximately 
once per month. We also checked the areas served by the gas utilities 
in the Battelle survey. We found that although 24 states are 
represented, usually the area served by the utility covered only a very 
small part of the state. Therefore, we do not believe that this survey 
is really representative of the entire United States. Consequently, we 
did not add any extra costs for small closets for gas water heaters. We 
assumed extra costs for removing and replacing closet doors and door 
frames for 32 percent of households with electric and 27 percent of 
households with gas water heaters with 3 inch insulation. See Chapter 9 
of the TSD.
    In the proposed rule, DOE asked for comments or suggestions to 
minimize the effects of smaller tanks either by increasing the electric 
element size from 4.5 kW to 6 kW or by increasing the thermostat 
setpoint. Several stakeholders opposed larger electric elements. There 
were no comments on increasing the thermostat setpoint.
    The Electric Power Research Institute (EPRI) claims using 6 kW 
elements is not an option for smaller tanks to provide the consumer 
utility of larger tanks since these elements are only used in 
commercial water heaters. They state that it is generally not possible 
to use 6 kW elements in ``residential'' water heaters because standard 
household wiring circuits usually used for water heaters cannot carry a 
6 kW continuous load with sufficient safety margin as required by the 
National Electrical Code. (EPRI, No. 104 at 3). Dominion concurs with 
EPRI, and states further that there are currently only two models 
listed in the latest GAMA directory with elements above 4.5 kW, and 
none greater than 5.5 kW. (Dominion, No. 145 at 4). The National Rural 
Electric Cooperative Association (NRECA) also opposes the use of larger 
heating elements. (NRECA, No. 126 at 1-2). Southern Co. and Dominion 
claim that increased element size will increase peak electric demand on 
electric utilities and could require new wiring and circuit breakers or 
electric panels in homes. (Southern Co., No. 142 at 3 and Dominion, 
No.145 at 3).
    We are not including 6 kW elements as a means of compensating for 
downsized electric water heaters in today's Final Rule. Instead, we 
have increased the thermostat setpoint to meet the load in those cases 
where the downsized water heater would be too small to meet the 
particular requirements of a RECS '97 home. In addition to increasing 
the thermostat setpoint, we added $106 for the costs of tempering 
valves and check valves for about fifteen percent of electric and eight 
percent of the gas water heaters where we had to increase the 
thermostat setpoint above 140 deg.F. (Generally, water temperatures 
above 140 deg.F have the potential to cause scalding.) The detailed 
computer algorithm we used to determine when a tempering valve is 
needed can be found in the TSD in Chapter 9.
    2. New Product Classes. During the hearing and in the comments, 
several comments claimed that tabletop and lowboy water heaters would 
be unable to fit into existing spaces if their size increased 
substantially beyond current dimensions. These comments suggested DOE 
create separate product classes for these water heaters.
    GAMA requests DOE to establish a separate product class for lowboy 
and tabletop water heaters and not to increase the efficiency standards 
for these products. GAMA states that

[[Page 4478]]

lowboy water heaters must be able to fit under a 36 inch high counter. 
Therefore, they are 34 inches high or shorter and have a jacket 
diameter less than 26 inches. GAMA defines tabletop water heaters as 
having typical dimensions of 36 inches high, 25 inches deep and 24 
inches wide. Tabletop water heaters are designed to slide into a 
kitchen countertop space and provide additional countertop surface 
area. (GAMA, No. 160 at 4-5). Bradford White supports GAMA's request 
stating that elimination of these products will cost consumers 
substantial capital to convert and will impact the replacement market 
negatively. Lowboy electric models are limited to 34 inches in height 
and to 26 inches in diameter. (Bradford White, No.175 at 2 and No. 138 
at 3). A.O. Smith also recommends a new product class for countertop-
type (also known as tabletop) electric water heaters. (A.O. Smith, 
No.179 at 1). The American Council for an Energy-Efficient Economy 
(ACEEE) commented that it is not opposed to a new product class for 
tabletops and lowboys but recommended limiting these classes to a 30 
gallon size. (ACEEE, No.170 at 7)
    DOE has decided to establish a separate product class for tabletop 
water heaters due to strict size limitations for these products. 
However, we have concluded that lowboy water heaters do not have as 
stringent limitations on geometry as tabletop water heaters. For 
example, the diameter of the lowboys can be increased. We addressed 
these size constrained lowboy water heaters by adding extra 
installation costs, see Section II, General Discussion, Lessening of 
Utility or Performance of Products, ``Size Constraints'' in today's 
rule. GAMA data shows that lowboys make up 18 percent of the electric 
water heater market and that 38 percent of lowboy shipments are 30 
gallon, 48 percent are 40 gallon, and 14 percent are 50 gallon tanks. 
(GAMA, No. 176 at 3).
    In establishing classes of products and accounting for cost 
increases for a percentage of products which will require space 
modification, the Department does not believe any model of water heater 
will become unavailable as a result of thicker insulation. Therefore, 
DOE has eliminated any degradation of utility or performance in the 
products in today's Final Rule. In the application for tabletop water 
heaters, we established a new class with no change in standards because 
these models cannot be made any larger. In all other applications, we 
have determined from the GAMA directory, GAMA data on shipments, and 
from the RECS '97 data that sufficient types and sizes of water heaters 
exist in the market to satisfy any size constraints encountered.

D. Impact of Lessening of Competition

    This factor seeks the views of the Attorney General to determine 
the potential impacts on competition resulting from the imposition of 
the proposed energy efficiency standards.
    In order to assist the Attorney General in making such a 
determination, the Department provided the Attorney General with copies 
of the Proposed Rule and the Technical Support Document for review. In 
a letter responding to the Proposed Rule, the Department of Justice 
(DOJ) found only one area of concern regarding any lessening of 
competition. The area of concern involves the blowing agent for the 
foam insulation and the possibility that only one chemical, HFC-245fa, 
could be used and that it is a patented product with only one supplier. 
This situation led DOJ to conclude ``that the proposed standards could 
have an adverse affect on competition because water heater 
manufacturers may have to use an input that will be produced by only 
one source.'' (DOJ, No. 143 at 1). The DOJ letter is printed at the end 
of today's rule.
    To reduce heat loss from the stored reservoir of hot water, water 
heaters must have insulation. The choice of insulation is critical to 
achieving high water heater efficiency at a reasonable cost and 
essentially all water heaters use foam insulation. A blowing agent is 
needed to produce the foam insulation and currently all manufacturers 
are using the chemical HCFC-141b. Unfortunately, HCFC-141b is an ozone 
depleting chemical and will be phased out in January, 2003. Therefore, 
the water heater industry, like all other industries that use this 
chemical, must find and use a replacement chemical.
    Options for non-ozone depleting blowing agents include HFC-245fa, 
HFC-134a, carbon dioxide (CO2)/Water, pentane/cyclopentane 
and HFC 365mfc, as well as potential blends, or combinations, of these 
blowing agents. The U.S. Environmental Protection Agency's (EPA) Clean 
Air Act guides the U.S. appliance industry on replacement of HCFC/CFC 
blowing agents. The EPA's Significant New Alternatives Program (SNAP) 
approves chemicals and technologies that can be used to replace ozone 
depleting chemicals. Of the options listed above, all except HFC-365mfc 
have been approved by the EPA/SNAP.
    Initially, the appliance industry, including water heater 
manufacturers, had leaned toward adopting HFC-245fa, which performs 
similarly to HCFC-141b but at a much higher material cost. HFC-245fa 
has a lower manufacturing conversion cost than some of the other 
alternatives, such as pentane/cyclopentane. Given the likelihood HFC-
245fa would be adopted by manufacturers, the Department used the 
performance characteristics and increased material and manufacturing 
costs associated with HFC-245fa to estimate the impact the new blowing 
agent would have on consumers and manufacturers. This was not to imply 
HFC-245fa was the only path to meeting the standard and DOE believes 
that at least three alternative blowing agents are available to use in 
meeting the standards adopted in today's Final Rule. See the following 
section for the analysis we used to support our conclusion.
    1. Increased Costs Due to a Single Source of Supply for HFC-245fa. 
In addition to the Attorney General's letter on the anti-competitive 
effects of the proposed rule, we received several comments from 
stakeholders. They were concerned about cost increases due to a single 
source supplier for HFC-245fa and about the unavailability of the 
material until July, 2002 or later.
    The AGA position is that DOE should only consider water blown foams 
for its analytical baseline and standard level analysis. AGA pointed 
out that the blowing agent HFC-245fa has not yet been demonstrated in 
manufacture of water heaters in the U.S. AGA claimed that, due to 
uncertainty in availability to manufacturers and a sole source U.S. 
supplier, DOE should consider only those blowing agents that are 
available and proven for water heater manufacture. (AGA, No. 150 at 5-
7).
    To address concerns about the performance of alternative blowing 
agents, we tested three sets of four electric water heaters with 
different foam insulations. The purpose of these tests was to compare 
the performance of the current foam insulation, HCFC-141b, with water 
blown and HFC-245fa blown foam insulation. The results of the NIST 
tests showed that water heaters insulated with HFC-245fa had the same 
energy factors as those insulated with HCFC-141b. Water heaters 
insulated with water blown foam insulation had energy factors about two 
percent lower than tanks insulated with HCFC-141b. We believe the 
results of these tests demonstrate that the blowing agents HFC-245fa 
and water can be used to insulate water heaters and that the insulation 
performance is the same with HFC-245fa and only slightly reduced with 
water blown foam. (Performance Testing of Alternative Blowing Agents 
for Foam

[[Page 4479]]

Insulation of Residential Water Heaters, Fanney et al., Proceedings of 
the AMC, 1999).
    The DOJ urges DOE to account for the impact of a single source 
supplier on competition, and to consider altering the standard so 
manufacturers may meet the standard for all affected models using other 
blowing agents. DOJ further noted that some manufacturers have 
suggested that DOE underestimated the performance capabilities of 
alternative blowing agents. If this is true, manufacturers may in fact 
be able to comply with the proposed standard while using water-based 
blowing agents. (DOJ, No. 143 at 1-2).
    Stepan is concerned that the proposed standards would require foam 
suppliers to use HFC-245fa as the blowing agent. This raises an issue 
about relying on a sole source supplier for an efficiency standard, 
since Honeywell maintains the exclusive North American rights to its 
manufacture and sale. (Stepan, No. 123 at 1-2). APGA claims the 
reliance on insulation technology licensed to a single company raises 
new issues and antitrust concerns and may be contrary to the statute. 
(APGA, No. 167 at 2).
    To address these comments, we conducted additional engineering cost 
analyses with HFC-245fa, HFC-134a and cyclopentane as the blowing agent 
in the insulation. An April 7, 2000, Bayer press release states most 
appliance manufacturers in North America are considering either HFC-
245fa or HFC-134a. Cyclopentane is not considered favorably because of 
the capital investment required to handle cyclopentane safely 
(cyclopentane is highly flammable). There are also high costs because 
the factory cannot produce water heaters while converting factory 
equipment to a cyclopentane system. However, appliance manufacturers 
are independently deciding which blowing agent to select. Switching to 
either HFC-245fa or HFC-134a involves capital costs. According to 
industry and Bayer research, HFC-245fa exhibits the best insulation 
value of the two blowing agents--roughly equal to HCFC-141b--though it 
is more costly per pound. HFC-134a demonstrates an insulation value 
approximately ten percent lower than HCFC-141b but has a lower per-
pound cost than HFC-245fa.
    We have examined, through the engineering analysis, the impact on 
product design and costs using two of the other blowing agent options, 
HFC-134a and cyclopentane, to achieve a similar energy factor as the 
proposed levels for HFC-245fa. See Table 1 below. We included the ten 
percent performance reduction for HFC-134a and an estimate of $7 per 
unit for the capitalization costs of cyclopentane in our engineering 
analyses. These analyses show that energy factors are the same for the 
three blowing agents. Costs for all design options are within a few 
dollars for HFC-245fa, HFC-134a and cyclopentane. While we have not 
examined every possible blowing agent option, we conclude that at least 
two additional options to HFC-245fa can be used to achieve similar 
performance for similar costs. The blowing agent performance 
characteristics and test results using HFC-245fa, HFC-134a and 
cyclopentane blown foam to evaluate design options can be found in 
Chapter 3.4.1 of the TSD.
    Table 1 shows the trial standard levels, design options, energy 
factor and installed costs for the three alternative blowing agents, 
HFC-245fa, HFC-134a and cyclopentane. Note the energy factors are the 
same for all trial standard levels and all blowing agents. There are 
small differences in costs; HFC-245fa is the cheapest blowing agent, 
HFC-134a costs about $2/unit more than HFC-245fa, while cyclopentane is 
the most expensive blowing agent costing about $9 more per installed 
electric and $11 more per installed gas water heater.

                          Table 1.--Engineering Results for Alternative Blowing Agents
----------------------------------------------------------------------------------------------------------------
                                                                                                     Installed
           Trial standard level                        Design options              Energy factor       costs
----------------------------------------------------------------------------------------------------------------
HFC-245fa:
    1.....................................  Electric: Heat Traps + Tank Bottom              0.88          367.52
                                             Insulation.
                                            Natural Gas: Heat Traps + Flue                  0.59          431.57
                                             Baffles (78% RE) + 2 Inch
                                             Insulation.
    2.....................................  Electric: Heat Traps + Tank Bottom              0.89          403.69
                                             Insulation + 2 Inch Insulation.
                                            Gas: Heat Traps + Flue Baffles (78%             0.60          456.79
                                             RE) + 2.5 Inch Insulation.
    3.....................................  Electric: Heat Traps + Tank Bottom              0.90          440.69
                                             Insulation + 2.5 Inch Insulation.
                                            Gas: Heat Traps + Flue Baffles (78%             0.59          431.57
                                             RE) + 2 Inch Insulation.
    4.....................................  Electric: Heat Traps + 3 Inch                   0.91          547.04
                                             Insulation + Plastic Tank.
                                            Gas: Heat Traps + Flue Baffles (80%             0.71          751.31
                                             RE) + 3 Inch Insulation + Side Arm
                                             Heater + Plastic Tank + IID.
HFC-134a:
    1.....................................  Electric: Heat Traps + Tank Bottom              0.87          363.06
                                             Insulation.
                                            Natural Gas: Heat Traps + Flue                  0.59          428.65
                                             Baffles (78% RE) + 2 Inch
                                             Insulation.
    2.....................................  Electric: Heat Traps + Tank Bottom              0.89          391.60
                                             Insulation + 2 Inch Insulation.
                                            Gas: Heat Traps + Flue Baffles (78%             0.60          454.39
                                             RE) + 2.5 Inch Insulation.
    3.....................................  Electric: Heat Traps + Tank Bottom              0.90          428.01
                                             Insulation + 2.5 Inch Insulation.
                                            Gas: Heat Traps + Flue Baffles (78%             0.59          428.65
                                             RE) + 2 Inch Insulation.
    4.....................................  Electric: Heat Traps + 3 Inch                   0.91          531.45
                                             Insulation + Plastic Tank.
                                            Gas: Heat Traps + Flue Baffles (80%             0.71          749.41
                                             RE) + 3 Inch Insulation + Side Arm
                                             Heater + Plastic Tank + IID.
Cyclopentane:
    1.....................................  Electric: Heat Traps + Tank Bottom              0.88          368.11
                                             Insulation.
                                            Natural Gas: Heat Traps + Flue                  0.59          432.14
                                             Baffles (78% RE) + 2 Inch
                                             Insulation.
    2.....................................  Electric: Heat Traps + Tank Bottom              0.89          394.70
                                             Insulation + 2 Inch Insulation.
                                            Gas: Heat Traps + Flue Baffles (78%             0.60          456.10
                                             RE) + 2.5 Inch Insulation.
    3.....................................  Electric: Heat Traps + Tank Bottom              0.90          428.79
                                             Insulation + 2.5 Inch Insulation.
                                            Gas: Heat Traps + Flue Baffles (78%             0.59          432.14
                                             RE) + 2 Inch Insulation.
    4.....................................  Electric: Heat Traps + 3 Inch                   0.91          529.79
                                             Insulation + Plastic Tank.
                                            Gas: Heat Traps + Flue Baffles (80%             0.72          749.25
                                             RE) + 3 Inch Insulation + Side Arm
                                             Heater + Plastic Tank + IID.
----------------------------------------------------------------------------------------------------------------


[[Page 4480]]

    2. Availability of HFC-245fa. Bradford White said it has given 
careful consideration to all of the options available for blowing 
agents. However, since HCFC-141b may be in limited supply early in 2002 
because of facility phase-outs and with the uncertainty in availability 
of HFC-245fa, Bradford White has no alternative but to pursue water 
blown insulation. (Bradford White, No. 175 at 1-2). Stepan has concerns 
about the overall availability of HFC-245fa. (Stepan, No. 123 at 1-2).
    Honeywell indicated that over six years and $30 million has been 
invested in the development of HFC-245a. Honeywell has received all the 
necessary U.S. regulatory approvals and is constructing a commercial 
manufacturing facility at its Geismar, Louisiana location. The facility 
is expected to be online by July 1, 2002. Honeywell expects ample 
capacity to be available to water heater manufacturers. (Honeywell, No. 
114 at 2).
    The OOE claims adequate quantities of HFC-245fa are available now 
for optimizing production processes. (OOE, No. 174 at 3). The ACEEE 
states DOE has previously decided, in the refrigerator standard 
rulemaking, that HFC-245fa will be available and can be an energy-
efficient and cost effective blowing agent. DOE should make the same 
decision here. ACEEE suggests DOE provide for manufacturers to petition 
for relief if HFC-245fa does not become available. (ACEEE, No. 170 at 
8). Southern Company also asks why DOE made no provisions for an 
alternative if the blowing agent does not become available. (Southern 
Company, No. 142 at 3).
    DOE has investigated the issue of the availability of HFC-245fa. 
Announcements in The Advocate, a Baton Rouge, LA newspaper (May 11, 
2000 and October 6, 2000), indicate that Honeywell is proceeding to 
secure the necessary permits to build the HFC-245fa plant. Furthermore, 
Vulcan Chemicals is also planning to build a plant in Geismar, LA to 
make pentachloropropane, one of the chemicals used in the manufacture 
of HFC-245fa. DOE concludes that HFC-245fa will be available as planned 
and therefore does not believe it needs to make any provision in 
today's rule in the event of HFC-245fa unavailability. If Honeywell 
does not build its plant or if the plant is delayed, DOE believes there 
are still three or more alternative blowing agents for water heater 
manufacturers to use, i.e., water, cyclopentane, HFC-134a or blends of 
these three.

E. Economic Justification

    As noted earlier, Section 325(o)(2)(B)(i) of the Act provides seven 
factors to be evaluated in determining whether an energy conservation 
standard is economically justified. Since there were significant 
comments from the June 20, 2000, hearing, and new data from RECS `97 
and AEO 2000, DOE has developed a revised water heater analysis. 
Specific revisions to our analysis methods are discussed in Section 
III, Methodology.

F. 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. Section 
325(o)(2)(B)(i)(VI), 42 U.S.C. 6295(o)(2)(B)(i)(VI). The Secretary has 
decided that no other factors need to be considered in this rulemaking.

III. Methodology

    DOE has made some minor changes to the engineering and LCC analysis 
for this Final Rule. We discuss these changes below in response to the 
comments on markup, the WATSIM computer model, blowing agents and 
blended fuel prices. Additionally, the household characteristics data 
used in the analysis were updated from the 1993 RECS data to the 1997 
RECS data (except for oil-fired water heaters). We used the energy 
price projections from the AEO 2000 as well.

A. Engineering

    DOE is continuing to use the WATSIM and TANK computer models in its 
analysis to evaluate the energy factor of water heaters with various 
design options. These models were discussed in the engineering 
methodology section of the proposed rule. 65 FR 25042, 25052-53 (April 
28, 2000). We adjusted the manufacturers' costs and the installation 
costs to account for comments to the proposed rule. These changes 
resulted in reduced manufacturers' costs for gas water heaters and 
slightly higher retail costs for electric water heaters.
    Further testing at NIST and reverse engineering of a water heater 
at the Lawrence Berkeley National Laboratory (LBNL) allowed DOE to 
fully validate WATSIM. These tests revealed that WATSIM and NIST 
results for the energy factor of a high efficiency electric water 
heater were the same. See the TSD, Chapter 8.2.4
    1. Water Heater Markup. DOE's calculation of gas water heater 
markup was a major concern to stakeholders. There was wide spread 
criticism that the markup for gas water heaters we derived in the 
proposed rule was too low to support any manufacturer's production of 
that product.
    The AGA claims DOE's approach to calculating markups has been 
roundly criticized by stakeholders throughout the development of the 
TSD and supporting analysis, and is unaware of any comments supporting 
DOE's analysis. AGA claims that DOE has provided no consistency checks 
for this and other markups to determine their validity, in spite of 
criticism it has received on its analytical results, and has failed to 
postulate a market mechanism or economic model to justify its numbers. 
Furthermore, AGA commented that manufactured cost and retail price are 
not independent random variables, and that DOE did not correlate its 
cost and price data. This resulted in 21 percent of the RECS `93 
households being constrained to 0 markup. AGA believes DOE should adopt 
the Battelle markups. (AGA, No. 150 at 8-9). Laclede Gas claims DOE 
should not limit the markup algorithm to prevent negative markups. 
(Laclede Gas, No. 148 at 9).
    To address the comments about correlating prices and costs, DOE has 
changed its LCC analysis to use correlated retail prices and 
manufacturer costs, i.e., high prices correlate with high costs. This 
has eliminated the negative values of markup which occurred in the 
analysis for the proposed rule.
    GAMA and Bradford White claim the markup for gas water heaters 
combines 4-inch flue model costs with 3-inch flue model prices. 
According to GAMA, using the DOE database and only 4-inch flue models, 
the markup increases from 1.22 to 1.5. (GAMA, No. 117 at 2-3 and 
Bradford White, No. 108 at 7). Dominion Virginia Power states that the 
DOE gas water heater base line assumes a 4 inch flue yet the typical 40 
gallon gas water heater uses a 3 inch flue. (Dominion Virginia Power, 
No. 145 at 6).
    We separated the retail prices for 3 inch and 4-inch flues on gas 
water heaters. We had our consultant estimate the incremental cost 
difference between manufacturing water heaters with 3 inch and 4 inch 
flues. We then subtracted this cost from the manufacturer cost supplied 
by GAMA for water heaters with 4 inch flues. Our analysis now accounts 
for these price and cost differences as recommended. Since the retail 
prices were not changed, this increased the markup on the baseline 
units in the LCC, as well as the markup applied to the various design 
options.
    Southern Company and the Energy Market and Policy Analysis group 
claim

[[Page 4481]]

the price database is too limited for the type of analysis conducted by 
DOE. Specifically, Southern Company claims the database has a 
geographic bias, citing the high number of sample points from 
Washington and Oregon. It claims that over 23 percent of the sample 
points are from these two states, which represent slightly more than 
three percent of the U.S. population. Southern Company suggests using a 
combined markup for gas and electric water heaters. (Southern Company, 
No. 142 at 1-2 and Energy Market and Policy Analysis, No.151, at 5-6).
    DOE's retail price database uses data points broadly distributed 
over the 10 Census regions of the U.S., and DOE does not believe the 
database has a geographic bias. Only 10.9 percent of the water heaters 
in the database are from the Pacific Region (see Table 5.3 in the TSD). 
The Department used a slightly higher proportion of water heaters from 
the northwest to ensure an adequate representation of high-efficiency 
units. DOE will not be using a combined markup, since each fuel type 
must be evaluated individually. The design option approach requires 
distinct costs for each fuel type.
    Battelle estimated the cost of materials and labor for the design 
options under consideration and applied standard industry markup 
factors to determine the cost to the consumer. Battelle assumed 
standard industry markup factors were 1.5 for the manufacturer, 1.2 for 
the distributor, and 1.4 for the retailer. Thus, the overall markup 
factor is 2.52 (1.5 x 1.2 x 1.4 = 2.52). Therefore, to determine the 
cost to the consumer, the manufacturer's materials and labor costs for 
a design option are multiplied by 2.52.
    To validate this standard approach for gas water heaters, Battelle 
conducted a tear down analysis on six water heaters varying in size 
among 30, 40, 50, and 75-gallon capacities. BDI Design for Manufacture 
software was used to catalog the components and estimate materials and 
labor costs for each water heater. The materials and labor costs for 
the 30, 40, 50, and 75-gallon baseline gas water heaters were $80.83, 
$86.06, $90.95, and $139.77, respectively. The 40-gallon gas water 
heater cost of $86.06 is in excellent agreement with the value of 
$87.51 supplied by GAMA to DOE. (Battelle, No. 106 at 1-2).
    DOE compared its manufacturer markup to Battelle's standard markup 
factor. This is the total manufacturer cost divided by the sum of the 
materials and labor costs for 40 gallon gas-fired water heaters.

Battelle: $133.78/$86.06 = 1.55
DOE: $133.78/($75.07 + $10.74) = 1.56

    Therefore the manufacturing markup is essentially identical.
    The ACEEE claims the Battelle markups applied to the GAMA 
manufacturing costs yield incredibly high retail prices. ACEEE 
concludes the manufacturers' costs are too high and the markups may be 
too low on some water heaters. (ACEEE, No. 170 at 9). The OOE and the 
Northwest Power Planning Council (NWPPC) do not accept GAMA's 
manufacturing costs because the typical margins in the Pacific 
Northwest are $30-$40 for high efficiency water heaters. (OOE, No.174, 
at 2 and NWPPC, No.163, at 2).
    In order to address the concerns about manufacturers' costs, DOE 
adjusted the higher range of the manufacturer's cost distribution, to 
match the average of the low range of the manufacturers' cost 
distribution. We also applied this correction to the incremental 
manufacturer costs for heat traps and increased insulation. We did this 
to bring manufacturers' costs in line with known appliance 
manufacturing costs, derived from publicly available SEC reports. It 
also ensures consistency within the data. Since the overall retail 
prices remain constant, the change eliminates the occurrences of 
unreasonably low markups on the baseline gas and electric water 
heaters. This reduced the average values of baseline costs for electric 
and gas water heaters by $9.55 and $6.22 respectively.
    Battelle claims that when its baseline materials and labor costs 
were used in conjunction with the DOE database of retail water heater 
prices, the average overall markup factor for gas water heaters came 
out to be 2.44. This is in excellent agreement with the assumed 
standard markup factor of 2.52 stated previously. (Battelle, No. 106 at 
1-2). Southern California Gas Co. agrees with Battelle's markup factor 
of 2.52. (Southern California Gas, No. 181, at 2). The American Public 
Gas Association (APGA) claims there is an obvious problem with the 
markup analysis. It suggests DOE approach this matter with real-world 
prices and manufacturers' costs. (APGA, No. 167 at 2).
    In the DOE analysis, the overall markup factor consists of 
manufacturer markup and distributor/retailer markup. From the LCC 
analysis, we have an overall markup of 1.59 for gas and 1.94 for 
electric water heaters. These markups differ from the Battelle markups 
in an important respect. Battelle assumes that the water heater market 
is characterized by large distributors selling to retailers or 
plumbers. DOE has determined that less than 50 percent of the water 
heater market operates that way. Many water heaters are sold directly 
to retail by large cash and carry distributors or they are sold to 
builders or large plumbing companies by large distributors. Therefore, 
the standard markup factors are not correct for the residential water 
heater market.
    2. WATSIM Computer Model for Electric Water Heaters. DOE received 
several comments about the WATSIM computer model for electric water 
heaters. Most comments stated that WATSIM does not predict the energy 
factor of electric water heaters accurately. Other comments asserted 
that DOE needed to test water heaters to compare actual performance to 
WATSIM predictions.
    GAMA claims it has no confidence that WATSIM is properly predicting 
the energy factors resulting from the various insulation options. 
(GAMA, No.160 at 1-3). Dominion states that DOE should verify the 
accuracy of calculated energy factors for design options with results 
from commercially available products. (Dominion, No. 145 at 3). EPRI 
claims WATSIM can predict energy consumption of electric water heaters 
typically within 3-6 percent accuracy. For the type of analysis 
represented by DOE energy factor tests, the accuracy would typically be 
around the 3-4 percent range. (EPRI, No.104 at 1). Southern Company 
supports EPRI's remarks. (Southern Company, No. 142 at 2).
    At the June 2, 1997, Water Heater Workshop, the Department sought 
comments on the selection of appropriate engineering models such as 
WATSIM and TANK to use in the Engineering Analysis. Most of the 
stakeholders' comments indicated no objections related to the use of 
the simulation models for the analysis. The following participants 
supported the use of WATSIM and TANK: C. Hiller (EPRI), J. Ranfone 
(AGA), J. Langmead (Water Heater Consortium), S. Nadel (ACEEE), R. 
Hemphill (Gas Technology Institute (GTI)). There were no comments that 
indicated WATSIM and TANK were incorrect to use.
    Bradford White says DOE must test products to understand the actual 
performance of cavity increases and new blowing agents. (Bradford 
White, No.108 at 2-6). GAMA concurs, saying DOE has relied too heavily 
on computer modeling to establish insulation performance when actual 
testing of water heaters would have provided more precise results. GAMA 
further states that, ``DOE is expected to test water heaters to exclude 
the energy-saving benefits of design options when

[[Page 4482]]

the agency can do so at reasonable cost, rather then rely on computer 
modeling,'' 998 F. 2d 1041 (D.C. Cir. 1993). Bradford White further 
comments that DOE must test at least three storage capacities affected 
by the standard. (Bradford White, No.138 at 1).
    We reviewed the court case that GAMA cited in its comments. The 
Court acknowledges that computer modeling is ``a useful and often 
essential tool for performing the `Herculean labors''' imposed by 
Congress. Gas Appliance Manufacturers Association v. Department of 
Energy, 998 F. 2d 1041, 1045 (D.C. Cir. 1993). The Court also stated 
that when computer modeling is used, an agency must sufficiently 
explain the assumptions and methodology so that there is a rational 
connection between the factual inputs, modeling assumptions, modeling 
results and conclusions drawn from these results. Id. at 1046. (GAMA, 
No. 160 at 1)
    DOE provided a detailed explanation of the model, its assumptions, 
and its results in the proposed rule and accompanying Technical Support 
document. In the proposed rule, we stated that comparisons of the 
WATSIM prediction to the NIST test result for an electric water heater 
with an efficiency at the level proposed was within 0.002 EF. 65 FR 
25042, 25053 (April 28, 2000). The detailed description of the WATSIM 
model and the assumptions DOE used to model electric water heaters are 
provided in the TSD for the proposed rule in Chapter 8.2.4.1.
    In response to these comments on the proposed rule, LBNL tore down 
(reverse engineered) one of the American Water Heater Company's 
(American) 0.93 EF products to assess what design options were used. In 
addition, NIST tested the two units of the American model that LBNL 
tore down. Using the reverse engineering data in the WATSIM model and 
comparing to the NIST test results, we obtained results from WATSIM 
that were within 0.006 EF of the NIST results. Therefore, WATSIM has 
been validated at the efficiency levels and with the types of design 
options that our analysis is using. See Chapter 8.2.4.1 in the TSD. 
Consequently, we believe WATSIM correctly predicts the efficiency of 
electric water heaters.
    DOE did not rely on computer modeling alone to demonstrate the 
performance of higher efficiency electric water heaters. In the fall of 
1999, NIST tested five higher efficiency electric water heaters, one 
model from each manufacturer. In the fall of 2000, NIST tested six 
tanks, a sample of two tanks of three models of electric water heaters. 
None of these models achieved their rated efficiency as shown in the 
GAMA directory. However, several of these models performed at or above 
the standard level adopted in today's rule. Therefore, at this time, 
and while we are still examining this issue, we have concluded that the 
WATSIM model correctly accounts for the maximum technically feasible 
design options for electric resistance water heaters and continue to 
use it, without modification for this rulemaking. Furthermore, we 
believe we have performed sufficient testing to demonstrate that the 
minimum efficiency levels can be met.
    3. Pipe Insulation. In our proposed rule, the Department did not 
consider insulation on water heater inlet and outlet pipes. In recent 
visits to the five water heater manufacturers, we discovered that four 
manufacturers ship the tanks with pipe insulation for their high 
efficiency water heaters. The DOE water heater test procedure allows 
water heaters to be tested with pipe insulation if the manufacturer 
ships the tank with pipe insulation. To determine the impact of pipe 
insulation on our analysis, we modeled water heaters with and without 
pipe insulation in WATSIM. These results showed that pipe insulation in 
combination with heat traps improves the energy factor by 0.005 EF. We 
performed tests at NIST with and without pipe insulation on three 
different models of electric water heaters equipped with heat traps, 
and the average increase in the energy factor with pipe insulation was 
0.007. Since both the WATSIM computer model and NIST testing indicate 
the effects of pipe insulation combined with heat traps is small, we 
have not included the effects of pipe insulation in our analysis. 
Furthermore, since pipe insulation must be applied during water heater 
installation, we are not sure how often it is used. Information from a 
small survey of installers indicated that about 50 percent do not 
install the pipe insulation.
    4. Blowing Agent Conductivity. Stepan believes HFC-245fa may not 
achieve the energy performance results predicted in the proposed rule, 
and that water blown foams may actually exceed modeled predictions. 
Stepan claims it measured initial k-factors for water blown foam as low 
as 0.175 BTU/hr- deg.F-in. (Stepan, No. 123 at 2-3). The NWPPC suggests 
DOE recalculate the LCC using the water blown foam k-factors given at 
the workshop. (NWPPC, No. 163 at 3-4).
    For cost information, Honeywell, the licensee to manufacture HFC-
245fa in the U.S., provided estimates of HFC-245fa costs. For 
efficiency data, we used published laboratory measurements of physical 
parameters but we derated these conductivities by eleven percent to 
account for losses of insulation effectiveness due to the foaming 
process and modeling assumptions. In order to keep the baseline 
efficiency (those with HCFC-141b insulation) and the energy use 
characteristics of water heaters with HFC-245fa insulation the same, we 
modeled them with appropriately thicker insulation. We also increased 
the amount and cost of steel used for the water heater jacket in 
addition to adding the extra volume and cost of insulation.
    5. Analytic Baseline. The current baseline is for water heaters 
insulated with HCFC-141b and without any design to prevent the ignition 
of flammable vapors on gas water heaters. In order to analyze 
separately the effects of energy efficiency standards from the effects 
of EPA actions to phase out the HCFC-141b blowing agent or of the CPSC 
actions to make gas water heaters more resistant to ignition of 
flammable vapors, DOE has developed an ``analytic baseline'' concept. 
This concept assumes that by 2003 and before the energy efficiency 
standards become effective, the actions of these other Federal agencies 
will have taken effect. To meet these other agency's requirements, 
manufacturers will have created new designs and made other changes to 
the production of water heaters. The cost estimates of these production 
and design changes are included in the analytic baseline. Several 
comments state that DOE should have included different designs or 
production changes in its analytic baseline. The analytic baseline is 
used in the engineering and LCC analyses.
    APGA claims manufacturers would use heat traps to meet the baseline 
standards in 2003. Furthermore, the DOE analytic baseline overstates 
the value of raising the standard. (APGA, No. 21 at 2 and No. 167 at 
2). AGA suggests DOE should only consider water blown foam for its 
analytical baseline. AGA suggests that manufacturers will use heat 
traps to add the 0.01 EF needed to meet the current standards with 
water blown insulation after 2003. (AGA, No. 150 at 5). GTI claims DOE 
has defined a virtual baseline water heater that makes it easier to 
justify added insulation. (GTI, No. 141 at 4). The Southern Gas 
Association's experience with noisy heat traps led them to discontinue 
using heat traps when installers began removing the heat traps during 
water heater installation. (Southern Gas Association, No. 152 at 3).
    DOE does not believe heat traps would be the only design option 
manufacturers might use to meet the current standard when the HCFC

[[Page 4483]]

blowing agent is phased out. When asked, during the manufacturer 
interviews, none of the manufacturers indicated they were limited to 
heat traps as the only design option.
    DOE also does not know what blowing agent any particular 
manufacturer would use. We believe that manufacturers will likely 
choose different blowing agents or use mixtures of blowing agents based 
on what they believe to be the best business decisions for them.

B. Life-Cycle Costs

    As discussed in the proposed rule, DOE used new analytical tools in 
this rulemaking. We used a spreadsheet model to calculate LCC and 
payback. 65 FR 25042, 25059-64 (April 28, 2000). In the LCC spreadsheet 
model, we use Microsoft Excel for Windows 95, combined with Crystal 
Ball (a commercially available software program) so we can use actual 
distributions of input variables. The LCC outputs from this program are 
a range of LCCs and the fraction of the population that will benefit 
from energy efficiency standards.
    1. Blended Natural Gas and Propane Fuel Costs. In the LCC analysis 
for the proposed rule, DOE used a gas price composed of approximately 
ten percent propane and 90 percent natural gas. Many gas utilities and 
a gas utility association objected to this approach.
    AGA and GTI insist that we use natural gas costs when evaluating 
gas water heaters, not the blended fuel costs, because our blended fuel 
costs make natural gas prices ten percent higher. (AGA, No. 150 at 7 
and GTI, No. 141 at 4). ACEEE claims a blended price is appropriate if 
the standard applies equally to both fuels. (ACEEE, No. 170 at 10). 
Dominion stated that a blended propane and natural gas price will 
artificially increase savings for natural gas equipment because propane 
has a higher price. (Dominion, No. 145 at 7).
    DOE agrees that use of blended fuel costs is inappropriate when 
calculating gas water heater life-cycle-costs and national net present 
value, therefore, DOE has separated natural gas and propane water 
heaters and has considered each of these fuels separately in the LCC. 
To do this, DOE asked its consultant to develop a manufacturing cost 
for propane water heaters from the GAMA manufacturing cost data for 
natural gas water heaters. We estimated the retail price distribution 
for liquid petroleum gas water heaters from the manufacturers' costs 
and the markup for natural gas since there were not enough propane gas 
water heater prices in the price database.
    During the time from the water heater hearing/workshop on the 
proposed rule until publication of this Final Rule, natural gas prices 
have risen dramatically for many consumers. DOE has investigated this 
increase to determine if these price increases might continue into the 
near future because increased gas prices would mean larger LCC savings 
and earlier paybacks for more energy efficient water heaters. The EIA 
has determined natural gas demand has increased in 2000 due to several 
factors including new gas-fired electric generators and new home 
construction. Natural gas prices will continue at higher levels than 
recent years but will return to more normal levels after the winter of 
2000-2001 because the new gas wells should be in production by then. 
The AEO 2000 does not forecast any long term increase in gas prices.
    2. Percent of Consumers Benefitting from Standards. EEI and 
Dominion claim the fraction of consumers benefitting from the standard 
level (74 percent for electric, 87 percent for natural gas) is too low 
for minimum efficiency standards. EEI and Dominion recommend DOE accept 
only those standard levels that will provide benefits to at least 90 
percent of the population. (EEI, No.124 at 2 and Dominion, No. 145 at 
2). Energy Market and Policy Analysis states that DOE overestimates the 
percentage of winners and underestimates the losers because it ignores 
some costs, uses high estimates of future electricity prices, and uses 
low discount rates. (Energy Market and Policy Analysis, No. 151 at 2).
    Although ACEEE admits the two percent band of insignificance is 
arbitrary, it claims this is a very useful concept. ACEEE claims that 
life cycle costs probably must differ by $100 or $10/year before they 
are significant. (ACEEE, No. 170 at 11).
    The Act requires the Department to consider life-cycle-cost as one 
of the seven factors in determining economic justification. In 
determining economic justification, the Secretary shall determine 
whether the benefits of a standard exceed the burdens. Life-cycle-cost 
is just one of the factors to be considered and there is no 
mathematical formula for weighing the benefits and burdens of the 
various factors. There are also no mathematical thresholds for life 
cycle cost as implied by EEI and the Energy Market and Policy Analysis. 
Furthermore, it can be argued that the Act, in requiring DOE to set 
national standards that maximize energy savings for appliances where 
there will obviously be regional differences in usage and energy costs, 
expected there would be some consumers with higher life cycle costs. 
Based on these arguments, the Department strongly disagrees with EEI 
and the Energy Market and Policy Analysis comments.
    The Department has used the two percent band of insignificance as 
an indicator of the levels of LCC savings or costs where consumers 
could appreciate savings or suffer real loss. DOE uses the percent of 
households benefitting and the band of insignificance to help it weigh 
the LCC effects and in its consideration of the benefits and burdens of 
these amended standards.

C. Manufacturing Impact

    We use the Government Regulatory Impact Model (GRIM) to determine 
the manufacturing impacts. The analysis methodology is discussed in the 
proposed rule and the TSD. 65 FR 25045, 25069-71 (April 28, 2000). The 
manufacturing impact analysis estimates the financial impact of 
standards on manufacturers, as well as the impacts on competition, 
employment, and manufacturing capacity. We used the GRIM spreadsheet 
model to perform an industry cash flow analysis.

D. Energy Savings and Net Present Value

    DOE uses a variant of the Energy Information Administration (EIA)'s 
National Energy Modeling System, the National Energy Modeling System-
Building Research and Standards, called NEMS-BRS, for the utility and 
environmental analyses, together with some scaling and interpolation 
calculations.\3\ The NEMS-BRS permits the modeling of interactions 
among the various energy supply and demand sectors and the economy as a 
whole, so it produces a sophisticated picture of the effects of 
appliance standards. EEI claimed that DOE does not account for the 
effects of electricity deregulation in its analysis. (EEI, No. 124 at 
2). The effects of deregulation are built into the NEMS-BRS 2000 model.
---------------------------------------------------------------------------

    \3\ For more information on NEMS, please refer to the 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.
---------------------------------------------------------------------------

IV. Discussion of Comments

    We received numerous comments from gas utilities and other gas

[[Page 4484]]

consumers, supporting the AGA position and the Battelle analyses. We 
appreciate these comments and we believe we have covered their concerns 
in our responses to the comments from the Gas Technology Institute 
(GTI; formerly GRI), AGA, Battelle, and others in our responses to 
comments on markups, venting, and size constraints.

A. Venting of Gas Water Heaters

    Venting of gas water heaters has been an issue throughout the water 
heater rulemaking. In our proposed rule, we advocated a standard level 
that included an increase in the recovery efficiency (RE) to 78 percent 
from the current 76 percent. Most gas utilities and manufacturers are 
concerned about the reduction in the margin of safety regarding venting 
system corrosion with this two percent increase in RE. To make this 
discussion about venting easier to follow, we have separated the issue 
into the following subtopics: safety, the National Fuel Gas Code (NFGC) 
venting tables, Type B vent connectors, costs, and direct vent 
applications.
    1. Safety. AGA believes DOE is incorrect in its analysis concerning 
venting systems for water heaters with RE above 76 percent. AGA states 
DOE can resolve this issue of vent system modification by one of the 
following:
     By fully accounting for the vent system costs as reflected 
in the Battelle analysis;
     By determining that the comments concerning venting 
integrity and safety beyond its current analysis approach are without 
merit; and
     By determining that safety concerns are insignificant or 
the expected benefits of the standard outweigh this safety 
consideration as required under the process rule.
    AGA further requests DOE to explicitly state its determination and 
its underlying rationale if the second or third option is chosen. AGA 
reiterates its position that DOE should not promulgate a standard that 
subjects consumers to a potential increase in safety risk. (AGA, No. 
150 at 3-5). AGA and the Atlanta Gas Light Co. believe that DOE has not 
considered the retail cash and carry market where needed vent system 
upgrades are unlikely to occur. (AGA, No 150 at 4 and Atlanta Gas Light 
Co., No. 178 at 2).
    Alagasco stated that the ability of gas water heaters to deliver 
outstanding economy, performance and environmental benefits is 
dependent on adequate margins of error in critical subsystems like 
venting, gas piping, combustion air and clearances. The overall utility 
of gas water heating is a function of proper installation. (Alagasco, 
No. 162 at 1). The New England Gas Association and Atlanta Gas Light 
Co. believe increased gas water heater efficiency from improved flue 
loss efficiency can lead to increased condensation and chimney 
degradation. (New England Gas Association, No. 139 at 2-3 and Atlanta 
Gas Light Co., No. 178 at 2). The NYSEB, National Propane Gas 
Association, Atlanta Gas Light Co, and Southern California Gas Co. 
state that DOE's proposal reduces the margin of error for installations 
of gas water heaters in retrofits. The National Propane Gas Association 
adds that existing vent systems are more likely to develop condensate 
problems and vent failures. (NYSEB, No. 164 at 1, National Propane Gas 
Association, No. 165 at 2, Atlanta Gas Light Co., No. 178 at 1; and 
Southern California Gas Co., No. 181 at 2).
    ACEEE and OOE claim that there should be no safety concern at 78 
percent RE because the Talbert study for GTI found that a single walled 
vent connector is acceptable at flue-loss efficiencies (FLE) up to 80 
percent and 78 percent RE is equivalent to 79.75 percent FLE. (ACEEE, 
No. 170 at 3 and OOE, No. 174 at 2).
    DOE did not raise the RE enough to create a safety concern if the 
venting system is correctly installed. DOE used the data from the GTI 
reports to estimate the impacts of 78 percent RE gas water heaters on 
venting systems. At 78 percent RE the flue loss efficiency is still 
below 80 percent, the level at which condensation begins. Since the 
increased RE may reduce the margin of error, DOE's analysis accounts 
for the cost of Type B vent connectors in eleven percent of households 
and for chimney relining in eight percent of households. Type B vent 
connector is a double walled vent connector that reduces cooling of the 
flue gasses and is more corrosion resistant than steel vent pipe.
    Additionally, the California Energy Commission (CEC) in its 
comments, provided data about the number of models of gas water heaters 
that have energy factors at 76 percent RE and above that would comply 
with the gas water heater standards in the proposed rule. (The CEC 
maintains its own database of gas water heaters.) There are 170 
distinct models of gas water heaters in the CEC database. A distinct 
model is a ``discreet combination of manufacturer, input, volume, 
energy factor and recovery efficiency.'' Of these, 51 models or 30 
percent of all distinct models have a RE of 76 or 77 percent. 
Furthermore, there are nearly an equal number of natural gas and 
propane gas water heaters in this category. (CEC, No. 171 at 3 and 
Attachment A). Since gas water heaters with a RE below 78 percent do 
not pose any safety threat and 30 percent of the models that can meet 
the standard are in this group, installers will have choices among 
lower RE models in those applications where there may be safety 
concerns. Therefore, DOE does not believe there is any application that 
will have a safety problem if the correct type of water heater and the 
proper installation procedures are followed.
    2. NFGC Venting Tables. Bradford White claims the venting tables 
were developed around water heaters with a RE of approximately 75 
percent. (Bradford White, No. 108 at 1-2). Southern Gas Association 
believes increasing RE to 78 percent would require retesting water 
heaters and rewriting the current venting tables because it claims the 
tables were based on 76 percent RE. (Southern Gas Association, No. 152 
at 4). Battelle claims increasing RE to 78 percent will require a 
revision to the current venting tables. (Battelle, No. 127 at 26-27). 
GTI and Southern California Gas Company believe that DOE cannot make 
accurate cost estimates until venting codes are revised. (GTI, No. 141 
at 3 and Southern California Gas Company, No. 181 at 2).
    The NFGC does not limit its venting tables to any specific gas 
water heater recovery efficiency. The NFGC venting tables are based on 
specific conditions for each application such as water heater location 
and common venting with a furnace. We do agree with Battelle that the 
NFGC should revisit its venting tables and make whatever revisions are 
necessary to account for potential increases in recovery efficiencies. 
We also note that there are 37 models of gas water heaters with a 
recovery efficiency of 76 percent listed in the GAMA directory which 
can meet the standard levels adopted in today's rule. On that basis, we 
conclude there will be designs which can meet the new standard with 76 
percent RE.
    3. Type B Vent Connectors. GAMA and Bradford White claim each water 
heater manufacturer will change the installation instructions to 
require Type B vent connectors for all installations. Bradford White 
claims manufacturers will design to 80 percent RE in order to satisfy a 
78 percent RE level. (GAMA, No. 117 at 2 and Bradford White, No. 108 at 
1-2). Dominion claims DOE does not completely incorporate the 
additional cost for Type B vent connectors. (Dominion, No. 145 at 6). 
GTI states that DOE relied too heavily on data from an area of the 
country with atypical weather conditions. (GTI, No. 141 at 3) Battelle 
claims that increasing

[[Page 4485]]

RE to 78 percent will require Type B vent connectors in the 75 percent 
of installations that currently do not have them, which will add to the 
installed cost. (Battelle, No. 127 at 26-27) The New England Gas 
Association claims a majority of homes in New England are older with 
masonry chimneys which could require Type B vent connectors and chimney 
relining costing as much as $800. (New England Gas Association, No. 139 
at 2-3).
    ACEEE claims DOE overestimated the number of homes needing Type B 
vents at 78 percent RE because the AVISTA data applies to climates with 
7000 heating degree days (HDDs) and the NFGC requires Type B vents in 
unconditioned spaces. (ACEEE, No. 170 at 2). The CEC summarizes its 
database of gas water heaters to show the number of models of gas water 
heaters with recovery efficiencies from 76 percent to 85 percent. There 
are 170 models which currently meet the standards. CEC also shows 
whether a vent connection modification or masonry chimney relining is 
needed. This data summary shows that a Type B vent connector is not 
needed until RE gets above 83 percent, and chimney relining is 
sometimes needed when RE gets above 78 percent. It is interesting to 
note there are 66 models or 39 percent of gas water heaters with 
recovery efficiencies at or below 78 percent which currently meet the 
standard and which do not need Type B vent connectors or chimney 
relining. (CEC, No. 171 at 3).
    DOE does not agree manufacturers will specify that all 
installations with 78 percent RE gas water heaters will require Type B 
vent connectors. This is not current practice with gas water heaters 
with RE greater than 76 percent. Manufacturers have relied on the NFGC 
venting tables, and we believe they will continue to do so. We believe 
manufacturers should advise installers to use Type B vent connectors in 
climates where there are more than 5,000 HDD or some reasonably 
conservative level of heating degree days, and otherwise follow local 
codes and the NFGC requirements.
    DOE uses HDD as an indicator for determining where venting systems 
may be subject to damage from the amount of time vent connectors may 
have condensate on their inside surfaces. This indicator considers both 
the effect of time and temperature. We use 5,000 HDD as a conservative 
approach since no incidence of vent system failures is associated with 
the installation of high efficiency gas water heaters in the Northwest, 
even in climates as cold as or colder than 7,000 HDD.
    Given that there are 66 models of gas water heaters with RE at or 
below 78 percent, DOE believes a consumer has a choice between a lower 
RE and a higher RE with a Type B vent connector. At the lower RE, the 
consumer can continue to use a single wall vent connector whereas, at 
the higher RE levels, a consumer would be advised to use a Type B vent 
connector and/or chimney relining in those climate areas where 
condensation in the venting system is a concern.
    4. Vent System Costs. AGA commented that DOE has underestimated the 
frequency of needed venting system upgrades. (AGA, No. 150 at 3). APGA 
claims DOE has underestimated venting costs. (APGA, No. 167 at 2). 
ACEEE claims DOE's cost for vent installations should not include a 
factor for the fraction of homes with gas water heaters. (ACEEE, No. 
170 at 2).
    DOE believes we have accounted for the installation costs 
associated with higher RE gas water heaters. We used installers' 
estimates to calculate the cost of installing Type-B vent connectors 
and to determine the cost to reline masonry chimneys. These estimates 
are slightly higher than the GTI estimates. Using information from 
comments and from an AGA survey in a GTI report, we estimated that 
eleven percent of households with gas-fired water heaters in regions 
with over 5,000 HDDs would need Type-B vent connectors for 78 percent 
RE gas-fired water heaters. (GRI-91/0298). DOE determined a cost of 
$134 for Type-B vent connectors based on the replacement market and 
installers' cost estimates for a typical installation. We also 
estimated that masonry chimney relining would cost $795 for eight 
percent of the households. This is nearly the same cost ($800) for 
chimney relining given by the New England Gas Association in its 
comments. See Appendix D-3 in the TSD.
    DOE did not include a factor for the fraction of homes with gas 
water heaters in the vent installation cost calculation. The factor 
used in the vent installation cost calculation included the fraction of 
all homes with gas water heaters in the U.S. that are in the Northeast 
or Midwest. DOE was not double counting the number of gas water heaters 
as ACEEE states.
    5. Direct Vent Applications. Dominion claims DOE does not account 
for the decreased vent length a 78 percent RE gas water heater will 
have for direct vent equipment. (Dominion, No. 145 at 6).
    Dominion is correct; however, DOE notes this equipment accounts for 
less than two percent of the market. Only a small fraction of this 
market would be installed at the maximum length of vent allowed. This 
tiny fraction of the market could be served by a product that has not 
used the improved flue baffle to meet the standard or by a power vented 
unit.

B. Electric Water Heater Ratings

    Issues concerning the efficiency ratings of electric water heaters 
with energy factors greater than 0.91 were raised in the workshops that 
the Department conducted prior to the proposed rule. Based on the 
Department's review of the GAMA certification test program, the 
Department noted the possibility that high efficiency electric water 
heaters, i.e., with manufacturer rated energy factors greater than 0.91 
EF, were overrated. Several stakeholders have requested that DOE take 
specific actions to avoid any future overrating.
    ACEEE is concerned that manufacturers may be overrating electric 
water heaters and if this practice continues, some of the energy 
savings of the new standard will be lost. ACEEE stated that the 
apparent overrating affects not only the standards program, but also 
the efficacy of utility demand side management programs. (ACEEE, No. 
170 at 1).
    DOE has conducted a certification review of the five major water 
heater manufacturers and has found that there are incorrect energy 
factor ratings reported in the GAMA directory. All five major 
manufacturers use GAMA as their third party representative. Therefore, 
the GAMA directory contains manufacturers' certified ratings. We also 
found violations of DOE's record keeping requirements at several 
manufacturers. The Department has requested these manufacturers correct 
their ratings on these high efficiency electric water heaters, and the 
manufacturers have agreed. The corrected ratings will be published in 
the December, 2000 GAMA directory.
    Some manufacturers' testing appears to show that some 50 gallon 
electric water heaters reach a 0.93 EF level. DOE acknowledges that 
recent tests of high efficiency electric water heaters at Intertek 
Testing Services (ITS) have shown several models with 0.92 or 0.93 EF. 
This testing was ordered by GAMA on a sample of four electric water 
heaters for each model. However, NIST has tested several of these 
models and has not been able to replicate the ITS test results.
    Testing of 11 high efficiency electric water heaters at NIST has 
not demonstrated that electric water heaters can achieve a 0.93 EF. The 
difference

[[Page 4486]]

between efficiency ratings listed in the GAMA Directory and NIST 
measured efficiencies ranged from 0.012 EF to 0.052 EF for an average 
difference of 0.029 EF. In other words, the average of the 11 tanks 
NIST tested was nearly 0.03 EF below the rated values from the 
manufacturer. We are continuing to evaluate additional units and the 
testing performed to understand why the NIST and ITS test results do 
not agree.
    There may be numerous reasons why we cannot confirm the higher 
ratings. There could be an improper application of the DOE test 
procedure due to differences in interpretation of the requirements or 
due to selection of a different option for making some of the 
measurements. There could be problems in the sampling procedures used 
by GAMA or the manufacturers to obtain their sample tanks for testing. 
(The test procedure requires tanks for testing be representative of 
production.) There could be some design improvements in some of these 
high efficiency models that DOE did not consider in its analysis. 
Therefore, at this time we cannot determine if the difference in our 
testing and the manufacturers' rating is real or not.

C. Measured vs. Rated Volume

    CEC, NWPPC, and ACEEE commented that DOE should use the measured 
volume of water heaters because manufacturers, by using the rated 
volume, can gain a 0.01 EF improvement by maximizing the tolerances 
allowed by UL (+/-10 percent for electric) or by ANSI Z21.10.1 (+/-5 
percent for gas). (CEC, No. 171 at 4-5; NWPPC, No. 163 at 3; and ACEEE, 
No. 170 at 16-17). GAMA referred to its July 18, 1994, comments on the 
1994 proposed rule, where it addressed this same issue, and suggested 
that DOE should continue to use rated volume because that is the basis 
of the extant standards set by NAECA. (GAMA, No. 160 at 5).
    EPCA, as amended, by the 1987 NAECA amendment, uses the rated 
volume as the coefficient in the standard levels. Our analysis uses the 
rated tank volume to determine the performance of the design options. 
Therefore, DOE will continue to use the rated volume in its water 
heater standards.

D. Effective Date of Standards

    Several stakeholders have taken the position that the effective 
date of today's rule should be five years from its publication. EPCA 
prescribes efficiency standards for water heaters manufactured on or 
after January 1, 1990, and requires two subsequent rulemakings to 
consider amendments to the water heater efficiency standards. The 
statute provides in effect that any amendment to the standards that 
results from the first rulemaking shall be effective three years after 
publication. For the second rulemaking cycle, to amend the standards 
then in effect, the statute provides an effective date five years after 
publication.
    GAMA claims today's Final Rule should be effective 5 years after 
publication. GAMA believes the three year lead-time for the effective 
date applies only to a Final Rule published by January 1, 1992. (GAMA, 
No.113 at 2). Southern Co. and Dominion state that NAECA requires a 5 
year implementation time. Southern Co. also suggests that refrigerant 
availability will become more manageable with two additional years. 
(Southern Co., No. 142 at 3 and Dominion, No. 145 at 3). On the other 
hand, ACEEE asserts the first revision has a three year effective date 
and since today's rule is the first amended standard, the three year 
effective date applies. ACEEE states this is the way the NAECA 
revisions have been interpreted. (ACEEE, No. 170 at 10-11).
    DOE interprets the language in EPCA at 42 U.S.C. 6295(e)(4)(A) to 
mean that, where the schedule specified in the statute for the two 
required rulemakings has not been met, the first amendment to the 
standards should be effective three years after publication, and the 
second amendment to the standards, five years after publication. We 
believe that this interpretation is the one most consistent with the 
statutory scheme. DOE has the authority and responsibility to complete 
the two cycles of rulemakings mandated by Congress in the statute. We 
recognize that DOE has failed to implement the rulemaking schedule in 
EPCA, but we see no reason why such failure would justify a departure 
from the time periods the statute contemplates for an amendment to the 
standards to become effective. We believe we are adhering to the 
statutory scheme by making the effective date of today's rule, the 
first amended standard, conform to the amount of time the statute 
designates for the effective date after publication of the final rule. 
As ACEEE pointed out at the public hearing on June 20, 2000, in all the 
rulemakings where DOE has missed dates, it has used such an approach. 
(Transcript, No. 120FF at 295-296).
    Moreover, the statute contemplated that the original efficiency 
standards specified in EPCA could be in effect for only five years 
before an amended standard would take effect. To date, the original 
standards have been in effect for 11 years. By making today's new 
standards effective in three years, it will be 14 years, not 5 years, 
before amended standards become effective. A five-year effective date 
would lengthen this period to 16 years, further delaying the benefits 
new standards will provide to consumers and the nation. Furthermore, 
the water heater industry never had an expectation that the original 
standards would be in effect so long. The original standards will have 
been in place 9 years longer than envisioned by the statute. For these 
reasons as well, a three-year effective date for today's rule is more 
consistent with the statutory scheme than the five-year period 
advocated by some commenters.
    Accordingly, today's rule will become effective three years after 
the date of publication as originally proposed.

E. Water Heater Models Affected

    GAMA commented that if the proposed standard levels were adopted, 
few current models listed in the GAMA directory would survive, and only 
a small percentage of current residential water heater shipments meet 
the proposed levels. (GAMA, No. 160 at 5). GAMA stated that 26 percent 
of the current models of gas and electric water heaters can meet the 
proposed standard. This number drops to 18 percent if only 30, 40 and 
50 gallon models are considered. (GAMA, No. 176 at 1). Dominion 
suggests DOE should identify existing equipment that will meet the 
revised standards and designs it uses. Additionally, Dominion claims 
DOE should evaluate these models and provide data verifying the 
achievability of the proposed minimum efficiency standards using design 
options identified for the recommended standard level. (Dominion, 
No.145 at 3). The CEC claims that, based on its directory of certified 
water heaters, of the 170 models of gas water heaters listed, 51 meet 
the proposed standard. (CEC, No. 171 at 2). DOE's review of the April, 
2000 GAMA Directory shows 37 gas-fired water heater models that could 
meet the proposed standards.
    DOE recognizes that standards will eliminate current manufacturers' 
offerings which would affect the individual firms and industry's net 
present value. These effects are captured in the Manufacturer Impact 
Analysis. Furthermore, DOE rejects Dominion's comment that the 
Department should identify technologies that can be used to meet the 
standard. The standard is a performance standard, not a design 
standard. DOE's analysis identified a path, with different insulation 
blowing agents, which could be used to meet the standard. However, DOE 
believes there

[[Page 4487]]

are a number of approaches individual manufacturers may elect to pursue 
to meet the standard. It is not up to the Department to mandate any one 
approach.

F. Instantaneous Water Heaters

    Controlled Energy Corporation (Controlled Energy) claims 
instantaneous water heaters should not be included in the Final Rule 
without further analysis. (Controlled Energy, No. 125 at 1). The CEC 
claims NAECA clearly includes both storage and instantaneous water 
heaters, and DOE does not have any option to exempt this type of water 
heater since that would be equivalent to a reduction of energy 
efficiency. (CEC, No. 171 at 4). GAMA claims DOE should clearly state 
the proposed standards do not apply to instantaneous water heaters. 
GAMA claims the minimum energy factor for instantaneous water heaters 
has been inadvertently raised without any discussion or any analysis. 
Currently, instantaneous water heaters must meet a minimum of 0.62 EF. 
(GAMA, Transcript, No. 120 at 38 and 177-178.).
    Since instantaneous water heaters make up a very small fraction of 
one percent of the water heater shipments, DOE did not include them in 
its analysis. Although the statutory definition includes instantaneous 
water heaters within the general definition of water heater, the 
statute does distinguish between storage and instantaneous water 
heaters based on input rate. The DOE regulations at 10 CFR 430 Subpart 
B, Appendix E(1.7), distinguish between the definition of storage water 
heaters and instantaneous gas water heaters by BTU input rates and 
storage capacity. However, EPCA, as amended, provides the same 
standards for instantaneous and storage water heaters. There is, 
moreover, a provision in EPCA, as amended, in Section 325(q), 42 U.S.C. 
6295(q) for establishing a new class if the capacity or performance 
related features of a product justifies it. The volume ranges of 
storage water heaters are much larger and do not include the volumes of 
instantaneous water heaters as defined in DOE's regulation. Since DOE's 
current regulations use the capacity and input rate to define 
instantaneous water heaters, DOE is establishing a new class for 
instantaneous gas and electric water heaters and we will leave the 
standards at the current levels.

G. Fuel Switching

    The New England Gas Association (NEGA) and Laclede Gas claim higher 
first costs for gas water heaters will encourage builders in new homes 
and consumers replacing gas water heaters to switch to electric water 
heaters. Laclede claims this is especially true when a consumer faces a 
$433 chimney relining cost. (NEGA, No. 139 at 3 and Laclede Gas, No. 
148 at 3). AGA claims DOE needs to include a detailed analysis of fuel 
switching among gas and electric utilities in the environmental impacts 
analysis. (AGA, No. 150 at 10). OOE claims that the incremental costs 
for a 0.62 EF gas water heater are trivial compared to the costs of 
acquiring natural gas service where it does not exist, to buy a gas 
furnace, and in some cases to install a duct system where one does not 
exist. (OOE, No. 174 at 2).
    The LCC analysis is one of the seven factors DOE is required by 
statute to consider when it makes its decision on standard levels. 
Included in the LCC analysis are the installed costs of electric and 
gas water heaters. These costs provide an indication of whether a 
particular standard level would cause fuel switching. Furthermore, in 
the NES, DOE estimates the shipments of each fuel type. These results 
are shown in Chapter 11 of the TSD. For example, DOE estimates that the 
standards adopted today will increase the total shipments of gas water 
heaters by 8 million and decrease the total shipments of electric water 
heaters by 7 million over the next 26 years. DOE has taken fuel 
switching into account in reaching its final decision. No further 
analysis is required.

V. Analytical Results and Conclusion

    The choice of insulation blowing agent is critical to achieving 
high water heater efficiency at a reasonable cost. In the proposed 
rule, DOE based its analysis on HFC-245fa and water blown insulation. 
There were many comments from manufacturers, utilities and the DOJ that 
a standard based on HFC-245fa alone could be anti-competitive due to 
its single source of supply. There were also issues about venting 
system margin of error, size constraints for water heaters with thicker 
insulation, and the energy factor overrating of high efficiency 
electric water heaters. To determine whether there are alternative 
approaches to meet the standard level adopted by today's Final Rule, we 
evaluated two other blowing agents, HFC-134a and cyclopentane, that the 
proposed rule identified as potential alternatives for the HCFC-141.65 
FR 25042, 25049-50 (April 28, 2000). This issue is briefly described in 
Section II, General Discussion, ``Impact of Lessening of Competition'' 
in today's rule.
    We performed an engineering analysis on both of these alternative 
insulation blowing agents to determine if the standard could be met 
with these blowing agents and to estimate the relative manufacturer and 
consumer cost impacts. HFC-134a is a blowing agent that is less 
expensive per pound than HFC-245fa, but it also is ten percent less 
effective as an insulation material. Cyclopentane is a very inexpensive 
blowing agent, has similar insulation effectiveness to HFC-245fa, but 
it is flammable and would require expensive modifications to production 
facilities to meet the OSHA safety regulations. The engineering 
analyses for HFC-134a and cyclopentane show that water heater cost and 
performance is within two percent of the results for HFC-245fa. See 
Table 1 in Section II, General Discussion, ``Impact of Lessening of 
Competition.'' Therefore, DOE believes that manufacturers have a choice 
among at least three blowing agents, water, HFC-134a and cyclopentane. 
When designing products to meet the new standard, manufacturers will be 
faced with a range of choices to consider. For example, water heaters 
with cyclopentane-blown foam insulation have lower material costs, as 
compared to HFC-245fa, however, the capital investment is significantly 
greater. In this scenario, they may weigh the investment costs and 
material costs to determine the approach that is cost-effective for 
them. Similarly, they may weigh either HFC-245fa and HFC-134a with 
water-blown foam. The HFC-blown foams have higher material costs, 
compared to water, but better insulation performance. Alternatively, at 
the standard levels adopted today, some manufacturers may find a design 
using other blowing agents or blends of these materials to be more cost 
effective. In summary, DOE believes there are a number of insulation 
blowing agents to meet today's standards. Manufacturers will, DOE 
believes, weigh the cost and efficiency trade-offs, as well as other 
factors, in selecting the insulation blowing material to use.

A. Economic Impacts on Consumers

    1. Life-Cycle-Cost. To evaluate the economic impact on consumers, 
we conducted an LCC analysis for gas and electric water heaters. We 
included data and information from comments pertaining to installation 
costs for size constraints on fourteen percent of electric water 
heaters. This accounts for extra costs that consumers in small 
apartments and homes may have to pay for water heaters with thicker 
insulation. We also included

[[Page 4488]]

information and costs for drip pans from the comments on gas water 
heaters. Table 2 shows the average LCC savings and percent of 
households benefitting for each of the trial standard levels for each 
fuel class. The average LCC savings for trial standard levels one, two 
and three are positive for gas-fired and electric water heaters with 
the HFC-245fa blowing agent. We do not show oil-fired water heaters 
because we are not making any revisions to the standards for that 
class.
    Where LCC savings are positive for electric and gas-fired water 
heaters, the percent of households benefitting ranges from 59 percent 
to 90 percent for the trial standard levels analyzed. At trial standard 
level four, where the LCC savings are negative, 18-26 percent of 
households with electric or gas-fired water heaters will benefit.

                            Table 2.--Life-Cycle-Cost Savings and Percent Benefitting
                                          [HFC-245fa blown insulation]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Life-cycle
         Trial standard level                          Design options                    Percent    cost savings
                                                                                       benefitting       ($)
----------------------------------------------------------------------------------------------------------------
1.....................................  Electric: Heat Traps + Tank Bottom                      90            36
                                         Insulation.
                                        Natural Gas: Heat Traps + Flue Baffles (78 %            78            30
                                         RE) + 2 Inch Insulation.
                                        LP Gas: Heat Traps + Flue Baffles (78 % RE)             89            97
                                         + 2 Inch Insulation.
2.....................................  Electric: Heat Traps + Tank Bottom                      68            32
                                         Insulation + 2 Inch Insulation.
                                        Natural Gas: Heat Traps + Flue Baffles (78 %            64            11
                                         RE) + 2.5 Inch Insulation.
                                        LP Gas: Heat Traps + Flue Baffles (78 % RE)             78            77
                                         + 2.5 Inch Insulation.
3.....................................  Electric: Heat Traps + Tank Bottom                      59            23
                                         Insulation + 2.5 Inch Insulation.
                                        Natural Gas: Heat Traps + Flue Baffles (78 %            78            30
                                         RE) + 2 Inch Insulation.
                                        LP Gas: Heat Traps + Flue Baffles (78 % RE)             89            97
                                         + 2 Inch Insulation.
4.....................................  Electric: Heat Traps + 3 Inch Insulation +              26           -82
                                         Plastic Tank.
                                        Natural Gas: Heat Traps + Flue Baffles (80 %            18          -244
                                         RE) + 3 Inch Insulation + Side Arm Heater +
                                         Plastic Tank + IID.
                                        LP Gas: Heat Traps + Flue Baffles (80 % RE)             37          -122
                                         + 3 Inch Insulation + Side Arm Heater +
                                         Plastic Tank + IID.
----------------------------------------------------------------------------------------------------------------

    Another LCC analysis we conducted is the Consumer Subgroup 
analysis. This analysis examines the economic impacts on different 
groups of consumers by estimating the average change in LCC and by 
calculating the fraction of households that would benefit. We analyzed 
the potential effect of standards for households with low income levels 
and for senior-only households, two consumer subgroups of interest 
identified by DOE and supported by stakeholders. We present the results 
of the analysis in Table 3.

                                      Table 3.--Consumer Subgroup LCC Savings and Percent of Households Benefitting
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Total sample Delta LCC         Low-income Delta LCC          Senior-only Delta LCC
                                                               -----------------------------------------------------------------------------------------
                                                       Trial                     Fraction of                   Fraction of                   Fraction of
                   Product class                      standard                   population                    population                    population
                                                       level     Ave. (1998$)    benefitting   Ave. (1998$)    benefitting   Ave. (1998$)    benefitting
                                                                                     (%)                           (%)                           (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Electric...........................................          1              36            90              35            90              39            92
                                                             2              32            68              28            67              39            72
                                                             3              23            59               7            54              33            64
                                                             4             -82            26            -105            22             -60            31
Natural Gas........................................          1              30            78              30            78              34            82
                                                             2              11            64              -1            55              17            68
                                                             3              30            78              30            78              34            82
                                                             4            -244            18            -268            15            -194            20
LPG................................................          1              97            89             110            93             108            92
                                                             2              77            78              88            80              87            80
                                                             3              97            89             110            93             108            92
                                                             4            -122            37             -53            37             -34            38
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The two consumer subgroups show a similar trend in average LCC 
savings and percent of sample households benefitting as the total 
sample of households. In the case of electric water heaters, the low 
income consumer group has less benefit at all trial standard levels 
than the total sample of households while the senior-only consumer 
group has greater benefit at all trial standard levels than the total 
sample of households. In households with natural gas-fired water 
heaters, low income households have the same benefit for trial standard 
levels 1 and 3 and less benefit for trial standard levels 2 and 4 than 
the total sample of households. The senior-only households with natural 
gas water heaters have greater benefits at all trial standard levels 
than the total sample of households. Both low income and senior-only 
households have greater benefits at all trial standard levels with 
propane gas.
    We have noted the LCC savings for the senior-only subgroup are 
similar to those of the general population. Since the elderly use 30 
percent less hot water on average than the general population, one 
would expect their costs to be lower, and as a result, the LCC effect 
to be different. However, the standby

[[Page 4489]]

losses of water heaters, which are not affected by hot water usage, are 
the same for the elderly and the general population. Therefore, since 
most of the design options considered affect standby losses and not 
water heating efficiency, we expect the distribution of LCC impacts for 
the elderly to be similar to the general population, which they were.
    2. Median Payback. A part of the LCC analysis is the payback 
analysis. The LCC payback analysis considers all of the design option 
combinations for each fuel type and calculates a payback for each RECS 
household. We report the median payback from the distribution of 
paybacks for each trial standard level in Table 4. The median payback 
is the median number of years required to recover, in energy savings, 
the increased costs of the efficiency improvements.

           Table 4.--Median and Test Procedure Payback (Years)
                      [HFC-245fa blown insulation]
------------------------------------------------------------------------
                                                                 Test
 Trial standard            Design options            Median    procedure
      level                                          payback    payback
------------------------------------------------------------------\1\---
1...............  Electric: Heat Traps + Tank            2.9         1.5
                   Bottom Insulation.
                  Natural Gas: Heat Traps + Flue         3.6         3.4
                   Baffles (78 % RE) + 2 Inch
                   Insulation.
                  LP Gas: Heat Traps + Flue              2.8
                   Baffles (78 % RE) + 2 Inch
                   Insulation.
2...............  Electric: Heat Traps + Tank            6.5         3.7
                   Bottom Insulation + 2 Inch
                   Insulation.
                  Natural Gas: Heat Traps + Flue         5.0         4.9
                   Baffles (78 % RE) + 2.5 Inch
                   Insulation.
                  LP Gas: Heat Traps + Flue              4.0
                   Baffles (78 % RE) + 2.5 Inch
                   Insulation.
3...............  Electric: Heat Traps + Tank            7.4         5.2
                   Bottom Insulation + 2.5 Inch
                   Insulation.
                  Natural Gas: Heat Traps + Flue         3.6         3.4
                   Baffles (78 % RE) + 2 Inch
                   Insulation.
 
                  LP Gas: Heat Traps + Flue              2.8
                   Baffles (78 % RE) + 2 Inch
                   Insulation.
4...............  Electric: Heat Traps + 3 Inch         14.4         9.8
                   Insulation + Plastic Tank.
                  Natural Gas: Heat Traps + Flue        12.1        10.5
                   Baffles (80 % RE) + 3 Inch
                   Insulation + Side Arm Heater +
                   Plastic Tank + IID.
                  LP Gas: Heat Traps + Flue             8.3
                   Baffles (80 % RE) + 3 Inch
                   Insulation + Side Arm Heater +
                   Plastic Tank + IID.
------------------------------------------------------------------------
\1\Electric--50 gallon; Gas--40 gallon

    3. Rebuttable Presumption. The Act states that if the Department 
determines that the payback period is less than three years, as 
calculated with the DOE test procedure, there shall be a rebuttable 
presumption that such trial standard level is economically justified. 
In Table 4, we list the payback periods by fuel type (product class) 
and trial standard levels. The Act further states that if this three 
year payback is not met, this determination shall not be taken into 
consideration in deciding whether a standard is economically justified. 
Section 325(o)(2)(B)(iii), 42 U.S.C. 6295(o)(2)(B)(iii).
    Only electric water heaters at trial standard level one satisfy the 
rebuttable presumption. Electric water heaters with heat traps and 
insulated tank bottoms have a 1.9 year payback calculated under the 
test procedure. There are no trial standard levels for natural gas 
water heaters that have a payback of three years or less.
    4. Economic Impact on Manufacturers. We performed an MIA to 
determine the impact of standards on manufacturers. The complete 
analysis is in Chapter 13 of the TSD. In general, manufacturers stated 
they would be able to manufacture any of the design options with heat 
traps, thicker insulation, tank bottom insulation on electric and 
improved flue baffles on gas-fired water heaters. None of the 
manufacturers indicated they would leave the industry or go out of 
business as a result of standard levels that would require energy 
factors below plastic tanks or side-arm heaters (i.e., trial standard 
levels one through three).
    We conducted detailed interviews with four of the five major water 
heater manufacturers. (The fifth manufacturer declined to participate 
in our second interviews.) The five together supply more than 99 
percent of the U.S. residential water heater market. The interviews 
provided valuable information used to evaluate the impacts of an 
amended standard on manufacturers' cash flows, manufacturing capacities 
and employment levels.
    We analyzed the water heater industry using two business scenarios. 
The standards scenario represents the investments needed to meet the 
energy efficiency level of a trial standard level. The cumulative 
scenario includes the investments required for energy efficiency 
improvement, changes to a new blowing agent and the development and 
manufacture of a gas-fired water heater resistant to ignition of 
flammable vapors. Additionally, we examined the ability of 
manufacturers to recover the investments required for each of the 
scenarios and trial standard levels.
    The potential value of the water heater industry, represented by 
the Industry Net Present Value (INPV) ($325 million in 1998 dollars), 
is directly related to the manufacturers' price to the dealer/
distributor. Since all five of the major manufacturers produce both 
gas-fired and electric water heaters, the industry is highly 
competitive in terms of manufacturer's pricing. Manufacturer prices are 
expected to increase from the current average cost to the dealer/
distributor of $157 to a range of $187-292 for trial standard levels 
one through four. Based on comments from the interviews, we assume 
manufacturers will raise prices enough to recover the costs of 
materials, labor and transportation and 75 percent of their investment. 
If manufacturers increased water heater distributor prices slightly 
more, from $0.13 for trial standard level one to $2.00 for trial 
standard level four, they would recover all of their investment. Table 
5 shows the results of the cash flow analysis with these assumptions.

[[Page 4490]]



                                     Table 5.--Manufacturer Impact Analysis
----------------------------------------------------------------------------------------------------------------
                                                                              Change in INPV        Investment
                    Trial std level                          INPV ($    -------------------------   required ($
                                                            millions)      (%)     ($ millions)      millions)
----------------------------------------------------------------------------------------------------------------
                                  Standard Scenario, HFC-245fa blown insulation
----------------------------------------------------------------------------------------------------------------
Base Case..............................................             325        0               0               0
1......................................................             317       -3              -8              33
2......................................................             310       -5             -15              60
3......................................................             310       -5             -15              59
4......................................................             268      -18             -57             229
----------------------------------------------------------------------------------------------------------------
                                 Cumulative Scenario, HFC-245fa blown insulation
----------------------------------------------------------------------------------------------------------------
Base Case..............................................             325        0               0               0
1......................................................             288      -12             -37             149
2......................................................             281      -14             -44             176
3......................................................             281      -14             -44             176
4......................................................             239      -27             -86             345
----------------------------------------------------------------------------------------------------------------

    From Table 5, we note energy efficiency standards could result in 
losses of industry net present value from about $8 million to $57 
million (3-18%), while requiring investments of $33 million to $229 
million. However, even if DOE did not revise energy efficiency 
standards, other Federal regulatory actions that will take effect on or 
before January 1, 2003, will result in a $29 million loss (9%) in 
industry NPV. This loss exceeds any of DOE's trial standard levels 
except level four. As required by the Process Rule, 10 CFR Part 430, 
Subpart C, Appendix A 10(g)(1), DOE considered the cumulative impacts 
of other Federal regulatory actions on the trial standard levels, 
including the phase out of HCFC-141b and the CPSC initiative to prevent 
the ignition of flammable vapors on gas-fired water heaters. These 
cumulative losses range from $37 million to 86 million. The investments 
to prevent ignition of flammable vapors and for new blowing agents are 
$116 million. The investments for cumulative regulations are 
potentially large given the current after tax profitability of the 
water heater industry, estimated to be $45 million (1998) on revenues 
of $1.5 billion.
    Based on DOE's interviews, manufacturers expect little impact on 
manufacturing capacity and expect to meet future demand since the 
revised standards are not based on side-arm gas-fired water heaters and 
plastic tank electric units. Currently, the U.S. industry has far more 
manufacturing capacity than the domestic market can absorb. 
Manufacturers estimated the industry is operating at approximately 80 
percent of total capacity. Due to the phase-out of HCFC-141b insulation 
blowing agent and a requirement for a gas-fired water heater resistant 
to ignition of flammable vapors, it is likely that nearly every product 
line would have to be redesigned, retested and re-certified. Several 
manufacturers indicated a preference to retool for new blowing agents, 
energy-efficiency standards and flammable vapor-resistant designs at 
the same time, to avoid redundant efforts and limit costs.
    We also used the manufacturers' interviews to assess employment 
impacts due to an amended energy efficiency standard. Manufacturers 
expected the impact of new blowing agents and flammable vapor resistant 
designs on labor to be minimal, neither increasing nor reducing 
employment levels by more than a few employees. Since the revised 
efficiency levels do not require the adoption of side arm heaters or 
plastic tanks, manufacturers do not anticipate significant changes in 
employment levels or training requirements. Additionally, we believe 
market growth of 2.5 percent per year for new homes and modest 
productivity gains ensure current employment levels for the foreseeable 
future. In our analysis, yearly water heater shipments range from 9.7 
million in 2000 to 19.2 in 2030. Furthermore, a replacement market that 
increases by about 1/10th of the new home market each year ensures 
future demand.

B. Significance of Energy Savings

    The Act prohibits the Department from adopting a standard for a 
product if that standard would not result in ``significant'' energy 
savings. 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), concluded that Congressional intent in using the word 
``significant'' was to mean ``non-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.
    1. National Energy Savings. To estimate the energy savings through 
the year 2030 due to amended standards, we compared the energy 
consumption of water heaters in the 2004 base case to the energy 
consumption of water heaters complying with the trial standard levels. 
DOE calculates these energy savings at the source using the NEMS-BRS 
distribution and generation losses. Table 6 shows these results for 
water heaters with HFC-245fa blown insulation.

                     Table 6.--Source Energy Savings With HFC-245fa Blown Insulation (Quads)
----------------------------------------------------------------------------------------------------------------
                                                    Trial std 1     Trial std 2     Trial std 3     Trial std 4
----------------------------------------------------------------------------------------------------------------
Total quads saved...............................            3.33            4.47            4.61           11.46
Total exajoules saved...........................            3.51            4.72            4.86           12.09
----------------------------------------------------------------------------------------------------------------


[[Page 4491]]

    All of the trial standard levels considered in this rulemaking have 
significant energy savings, ranging from 3.3 quads (3.5 Exajoules (EJ)) 
to 11.5 quads (12.1 EJ), depending on the trial standard level.
    2. National Net Present Value (NPV). Additionally, we analyzed the 
economic impact on the nation to the year 2030. This is an NPV analysis 
using the AEO 2000 reference energy prices. Table 7 lists the NPV for 
HFC-245fa blown insulation. The NPV considers the combined discounted 
energy savings minus increased consumer costs of the four fuel types of 
equipment at a particular trial standard level. We base this 
calculation on all expenses and savings occurring between 2004 and 
2030.

                  Table 7.--National Net Present Value
------------------------------------------------------------------------
        Trial standard level             NPV--HFC-245fa  ($ billions)
------------------------------------------------------------------------
1...................................                                1.20
2...................................                               -0.13
3...................................                                2.02
4...................................                              -24.94
------------------------------------------------------------------------

    The national NPV is positive for trial standard levels one and 
three and essentially 0 for trial standard level 2. In this analysis, a 
positive NPV means that the estimated energy savings are greater than 
the increased costs due to standards. Among the trial standard levels 
analyzed, trial standard level three has the highest NPV.

C. Lessening of Utility or Performance of Products

    None of the trial standard levels reduces the performance of water 
heaters. Generally, the trial standard levels reduce heat losses and 
improve heat exchanger effectiveness. These changes improve energy and 
water heating performance and may increase the amount of water 
available in one hour, i.e., the first hour rating.
    However, to reduce heat losses, it may be necessary to use thicker 
insulation. At the trial standard level adopted in today's rule, DOE 
contemplates insulation thicknesses of 2-2.5 inches versus the 1-2 
inches in common use today. This extra thickness of insulation will 
make water heaters larger and more difficult to squeeze into tight 
spaces when replacing a water heater. DOE added costs for tempering 
valves for a number of gas and electric water heaters where we believed 
there could be some loss of utility due to the need to downsize a water 
heater. Tempering valves allow the consumer to increase the setpoint, 
thus increasing the amount of cold water used to provide a comfortable 
and safe usable water temperature. The addition of cold water increases 
the first hour rating. Therefore, the consumer will not lose any 
utility or performance.
    To eliminate the possibility of any water heater models becoming 
unavailable as a result of thicker insulation, we created a new class 
for tabletop water heaters based on the criteria in Section 325(q), 42 
U.S.C. 6295(q) in the Act. These issues are discussed in Section II. 
General Discussion, ``Lessening of Utility or Performance of 
Products.''

D. Impact of 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, on competition 
likely to result from such standard and transmit such determination, 
not later than 60 days after the publication of a proposed rule to the 
Secretary, together with an analysis of the nature and extent of such 
impact. Section 325(o)(2)(B)(i)(V), 42 U.S.C. 6295(o)(2)(B)(i)(V).
    In order to assist the Attorney General in making such a 
determination, the Department provided the Attorney General with copies 
of the Proposed Rule and the Technical Support Document for review. In 
a letter responding to the Proposed Rule, the Department of Justice 
(DOJ) found only one area of concern regarding any lessening of 
competition. The area of concern involves the blowing agent for the 
foam insulation and the possibility that only one blowing agent, HFC-
245fa, could be used and that it is a patented product with only one 
supplier. This situation led DOJ to conclude ``that the proposed 
standards could have an adverse affect on competition because water 
heater manufacturers may have to use an input that will be produced by 
only one source.'' (DOJ, No. 143 at 1).
    DOE examined other possible blowing agents and concluded that at 
least four blowing agents are available to use in meeting the standards 
adopted in today's Final Rule. Therefore, the Department concludes 
there will be little to no impact on competition. See Section II, 
General Discussion, ``Impact of Lessening of Competition'' for the 
complete discussion of this topic.

E. Need of the Nation to Save Energy and Net National Employment

    1. Environmental Impacts. Enhanced energy efficiency improves the 
Nation's energy security, strengthens the economy and reduces the 
environmental impacts of energy production. The energy savings from 
water heater standards result in reduced emissions of CO2 
and NOX and aids in addressing global climate change and 
reducing air pollution. At the standard levels analyzed, the actual 
cumulative emission reductions to 2030 range from 149-354 Mt for carbon 
equivalent, 175-459 thousand metric tons (kt) for NOX, and 
-3 to -64 kt for SO2. The large reductions in CO2 
and NOX at all standard levels are a positive benefit to the 
nation. The small increases (negative reductions) in SO2 are 
due to small increases in the number of oil-fired water heaters from 
our shipment forecasts. We show actual cumulative emissions savings 
from 2004-2030 in Table 8.

                          Table 8.--Actual Cumulative Emissions Reductions Through 2030
----------------------------------------------------------------------------------------------------------------
                                                     Trial std       Trial std       Trial std       Trial std
                    Emission                          level 1         level 2         level 3         level 4
----------------------------------------------------------------------------------------------------------------
Carbon (Mt).....................................             149             139             152             354

[[Page 4492]]

 
NOX (kt)........................................             175             215             273             459
SO2 (kt)........................................            **-3           **-11           **-13          **-64
----------------------------------------------------------------------------------------------------------------
** Results only include household SO2 emissions reductions because SO2 emissions from power plants are capped by
  clean air legislation. Thus, SO2 emissions will only be negligibly affected by water heater standards.

    The Department makes no effort to monetize the benefits of the 
actual emission reductions, but there may be time-related differences 
in the perceived value of the emissions depending on when they occur, 
as with monetized benefits that accumulate over time. Emission 
reductions that occur sooner are often more desirable than equivalent 
reductions that occur later. Like monetary benefits, the health, 
recreational and ecosystem benefits that result from emission 
reductions are often perceived to have a greater value if they occur 
sooner, rather than later. To the extent that the different trial 
standard levels have slightly different shipment distributions over 
time, some trial standard levels might have a slightly higher 
proportion of earlier emission reductions than another trial standard 
level.
    To show the possible effect of the different timing patterns of the 
emissions, the Department is also presenting discounted emissions. We 
used the same seven percent discount rate for these calculations that 
we used for discounting monetized benefits. Since the discounted 
emission reductions in carbon shift slightly from trial standard level 
3 to trial standard level 1, this indicates trial standard level 1 has 
a slight timing improvement in emission reductions. There is no similar 
shift in either the NOX or SO2 levels. We show 
the discounted cumulative emission savings from 2004-2030 in Table 9.

                        Table 9.--Discounted Cumulative Emissions Reductions Through 2030
----------------------------------------------------------------------------------------------------------------
                                                     Trial std       Trial std       Trial std       Trial std
                    Emission                          level 1         level 2         level 3         level 4
----------------------------------------------------------------------------------------------------------------
Carbon (Mt).....................................              51              46              50             118
NOX (kt)........................................              53              67              90             131
SO2 (kt)........................................            **-1            **-3            **-4          **-17
----------------------------------------------------------------------------------------------------------------
** Results only include household SO2 emissions reductions because SO2 emissions from power plants are capped by
  clean air legislation. Thus, SO2 emissions will only be negligibly affected by water heater standards.

    2. Net National Employment. In the Process Rule, DOE committed to 
develop estimates of the employment impacts of revised standards in the 
economy in general. The standard adopted in today's rule will have a 
positive impact on employment. The results of the Department's analysis 
are shown in Chapter 15 of the TSD.
    While both this input/output model and the direct use of Bureau of 
Labor Statistics (BLS) employment data suggest the revised water heater 
standards could increase the net demand for labor in the economy, the 
gains would most likely be very small relative to total national 
employment. For several reasons, however, even these modest benefits 
for national employment are in doubt:
     Unemployment is now at the lowest rate in 30 years. If 
unemployment remains very low during the period when the revised 
standards are put into effect, it is unlikely that the standards could 
result in any net increase 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 increases in the model may be that the jobs expected 
to be created pay less than the jobs being lost. The benefits from any 
potential employment gains would be reduced if job quality and pay are 
reduced.
     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 revised standards; it may not be appropriate to 
separately identify and consider any employment impacts beyond the 
calculation of net present value.
    Taking into consideration these legitimate concerns regarding the 
interpretation and use of the employment impacts analysis, the 
Department concludes only that the proposed water heater standards are 
likely to produce employment benefits that are sufficient to offset 
fully any adverse impacts on employment in the water heater or energy 
industries.

F. Conclusion

    1. Comments on Standard Levels. Several stakeholders made specific 
recommendations for standard levels during the workshops held prior to 
publication of the proposed rule or after publication of the proposed 
rule. We list these below to show the range of standard levels 
stakeholders believe are economically justified and technically 
feasible. In the formula for water heater standards, the letter ``V'' 
stands for rated volume as given in the statute.
    The American Gas Association recommended EF =0.64--0.0019V for gas 
water heaters. (AGA, No. 110 at 2) ACEEE recommended EF =0.98--0.00132V 
for electric and EF =0.69--0.0019V for gas water heaters. (ACEEE, No. 
71 at 9). The water heater manufacturer Bradford White recommended EF 
=0.94--0.0013V for electric, EF =0.65--0.0019V for gas and no change 
for oil-fired water heaters. (Bradford White, No. 108 at 7) The City of 
Palo Alto recommended EF =0.64--0.0019V for gas water heaters. (City of 
Palo Alto, No. 136 at 2) The Edison Electric Institute recommended EF 
=0.66--0.0019V for gas water heaters. (EEI, No. 105 at 3). The Electric 
Power Research Institute recommended EF =0.95--0.00132V for electric 
water heaters. (EPRI, No. 104 at 3). GAMA recommended EF =0.95--
0.00132V for electric and EF =0.65--0.0019V for gas water heaters. 
(GAMA, No. 71 at 3 & 4). The Northwest Power Planning Council 
recommended EF =0.97--0.00132V for electric and EF =0.68--0.0019V for 
gas water heaters. (NWPPC, No. 163 at 4). The efficiency standards 
recommended in these comments are based on the

[[Page 4493]]

analysis for the proposed rule and other information available to these 
organizations making recommendations.
    2. Proposed Revised Standard. Section 325(o)(2)(A), 42 U.S.C. 
6295(o)(2)(A), of the Act 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. 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.'' Section 325(o)(2(B)(iii)(3)(B), 
42 U.S.C. 6295(o)(B)(iii)(3)(B). The Secretary has eliminated the 
maximum technologically feasible levels for electric and gas-fired 
water heaters and has eliminated any revised standard levels for oil-
fired water heaters based on the analysis in the proposed rule. All of 
the design options included in our analysis are technologically 
feasible since they are commercially available.
    We consider the impacts of standards on gas and electric water 
heaters at each of four standard levels, beginning with the most 
efficient level, i.e., standard level four. We then consider less 
efficient levels. Standard levels two and three are different 
combinations of efficiency levels for electric and gas water heater 
classes. For gas-fired water heaters, standard levels one and three are 
the same, though at lower efficiency than that found in standard level 
two. For electric water heaters, no standard levels are repeated and 
the efficiency of each succeeding standard level is higher. For oil 
fired water heaters, there are no changes from the current levels so 
this class is not shown but they were included in the analysis. 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 standard levels we have included a summary of the analysis 
results in Table 10.

                     Table 10.--Summary Analysis Results Based on HFC-245fa Blown Insulation
----------------------------------------------------------------------------------------------------------------
                                                   Trial Std  1    Trial Std  2    Trial Std  3    Trial Std  4
----------------------------------------------------------------------------------------------------------------
Total Quads Saved...............................              3.             4.5             4.6            11.5
NPV ($Billion)..................................             1.2            -0.1             2.0           -24.9
Emissions:
    Carbon Equivalent (Mt)......................             149             139             152             354
    NOX (kt)....................................             175             215             273             459
    SO2 (kt)....................................            **-3           **-11           **-13           **-64
    Cumulative Change in INPV ($ Million).......              -8             -15             -15             -57
Life Cycle Cost ($):
    Electric....................................              36              32              23             -82
    Natural Gas.................................              30              11              30            -244
    Propane Gas.................................              97              77              97           -122
----------------------------------------------------------------------------------------------------------------
** Results only include household SO2 emissions reductions because SO2 emissions from power plants are capped by
  clean air legislation. Thus, SO2 emissions will only be negligibly affected by possible water heater
  standards.

    We first considered trial standard level four, the most efficient 
level for the two classes. Trial standard level four saves about 11.5 
quads of energy, a significant amount. The emissions reductions of 354 
Mt of carbon equivalent and 459 kt of NOX are significant. 
There is a 64 kt increase in household emissions of SO2 due 
to increased shipments of oil-fired water heaters. However, at this 
level, consumers experience negative LCC impacts. They would lose $82 
with electric water heaters, $244 with natural gas water heaters and 
$122 with propane gas water heaters. Furthermore, the water heater 
industry would lose 27 percent of its value and the nation would have a 
loss in NPV of nearly $25 billion. The Department concludes the 
resulting energy savings and emission reductions at this level are 
outweighed by the negative economic impacts on the nation, consumers 
and manufacturers. Consequently, the Department concludes trial 
standard level four is not economically justified.
    Next, we considered trial standard level three. This trial standard 
level saves about 4.6 quads of energy, a significant amount. The 
emissions reductions are significant: 152 Mt of carbon equivalent and 
273 kt of NOX. There is a 13 kt increase in household 
emissions of SO2 due to a slight increase in shipments of 
oil-fired water heaters. The national NPV of trial standard level three 
is $2.0 billion from 2004-2030.
    The economic benefits to consumers are significant. The average LCC 
savings for consumers with electric, natural gas and propane gas water 
heaters are $23, $30 and $97, respectively. In trial standard level 
three, 78 percent of households with natural gas-fired water heaters 
have LCC savings, for an average savings of $55, while 22 percent 
experience LCC losses, for an average loss of $54. In households with 
propane gas water heaters, the average LCC savings are $117 for 89 
percent of the households while only eleven percent experience an 
average loss of $61. For households with electric water heaters, 59 
percent have average LCC savings of $80, while 41 percent experience an 
average LCC loss of $59.
    For electric water heaters, the analysis predicts that 41 percent 
of all consumers would experience no change or some net cost with more 
efficient electric water heaters. However, we believe that there are 
costs or savings near the point of zero change in LCC that consumers 
would be unable to distinguish in their yearly expenses. We have chosen 
2 percent of average baseline LCC as the band of no 
consumer impact. We believe this small percentage, regardless of the 
actual total LCC, is insignificant to the consumer because these LCC 
costs or savings are spread over monthly utility bills for the life of 
the water heater. By applying a two percent band of average LCC, we can 
clearly show the significant net savings and net costs associated with 
a trial standard level. This permits a more informed decision based on 
weighing the significant benefits and burdens in terms of consumer 
impact. The resulting ranges are shown in Figure 9.6.2 in the TSD.

[[Page 4494]]

    We will use 2 percent of baseline LCC to indicate no 
impact, positively or negatively, on consumers. Therefore, only fifteen 
percent of consumers with electric water heaters or twelve percent of 
consumers with natural gas water heaters or five percent of consumers 
with propane gas water heaters sustain any significant net costs under 
standard level 3. Similarly, 30 percent of consumers with electric 
water heaters or 52 percent of consumers with natural gas water heaters 
or 69 percent of consumers with propane gas water heaters have 
significant net savings.
    Two percent of average baseline LCC equals $56 for electric water 
heaters. Over the average life of 14 years for an electric water 
heater, this is less than $4 per year. For consumers with natural gas 
and propane gas water heaters, two percent of average baseline LCC is 
$31 and $47, respectively. Over the average life of 9 years for gas 
water heaters, this is less than $4 per year for natural gas and less 
than $6 per year for propane gas. We believe this is a small amount in 
terms of yearly expenditures and will not adversely impact consumers' 
purchase decisions about water heaters, or their financial positions. 
Additionally, low-income and senior-only consumer subgroups exhibit 
similar distributions of costs and savings. A similar small percentage 
of low-income or senior only consumers are affected by higher costs.
    The industry will lose about five percent ($15 million) of its INPV 
due to energy efficiency standards. These losses are more than balanced 
by NPV gains to the nation of $2.0 billion, or 135 times the industry 
losses. Industry losses for trial standard level three due to all 
Federal actions (CPSC, EPA and DOE) are fourteen percent of its INP, or 
$44 million. Even this level of losses is offset by gains to the nation 
that are 46 times the industry losses.\4\ Based on the manufacturer 
interviews, DOE believes there will not be any plant closures or 
employee layoffs.
---------------------------------------------------------------------------

    \4\ As DOE has determined, the benefits of today's final rule 
outweigh the $15 million loss to the industry. To review the support 
for this determination, see the TSD at Chapters 12.5 and Table 12.1, 
13.3.3.5 and Table 13.8, 13.3.4, and 13.3.5.
---------------------------------------------------------------------------

    In determining the economic justification of trial standard level 
three, the Department has weighed the benefits of energy savings, 
reduced average consumer LCC, significant and positive NPV, and 
emissions reductions and the burdens of a loss in manufacturer net 
present value, and consumer LCC increases for some households. After 
carefully considering the results of the analysis, DOE has determined 
the benefits of trial standard level three outweigh its burdens and is 
economically justified. The Department also concludes trial standard 
level three saves a significant amount of energy and is technologically 
feasible.\5\ Therefore, the Department today adopts amended energy 
conservation standards for water heaters at trial standard level three.
---------------------------------------------------------------------------

    \5\ The final standard is based on insulation blown with HFC-
245fa. We also compared the engineering cost and performance for two 
alternative blowing agents, HFC-134a and cyclopentane. All three 
blowing agents are EPA-SNAP approved but there are concerns about 
availability and a single source supplier with HFC-245fa. However, 
since engineering results are within two percent of HFC-245fa, we 
conclude that the use of either of these alternative blowing agents 
would not change our decision.
---------------------------------------------------------------------------

VI.Procedural Issues and Regulatory Reviews

A. Review Under the National Environmental Policy Act

    In issuing the March 4, 1994, Proposed Rule for energy efficiency 
standards for eight products, one of which was water heaters, the 
Department prepared an Environmental Assessment (DOE/EA-0819) that was 
published within the TSD for that Proposed Rule. (DOE/EE-0009, November 
1993). We found the environmental effects associated with various 
standard levels for water heaters, as well as the other seven products, 
to be not significant, and we published a Finding of No Significant 
Impact (FONSI). 59 FR 15868 (April 5, 1994).
    In conducting the analysis for the Proposed Rule upon which today's 
Final Rule is based, the DOE evaluated several design options suggested 
in comments to the screening document. As a result, the energy savings 
estimates and resulting environmental effects from revised energy 
efficiency standards for water heaters in that analysis differ somewhat 
from those presented for water heaters in the 1994 Proposed Rule. 
Nevertheless, the environmental effects expected from today's Final 
Rule fall within the ranges of environmental impacts from the revised 
energy efficiency standards for water heaters that DOE found in the 
1994 FONSI not to be significant.

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

    The Department has determined today's regulatory action is an 
``economically significant regulatory action'' under Executive Order 
12866, ``Regulatory Planning and Review.'' 58 FR 51735 (October 4, 
1993). Accordingly, today's action was subject to review under the 
Executive Order by the Office of Information and Regulatory Affairs 
(OIRA) of the Office of Management and Budget.
    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 proposed rule contained a summary of the Regulatory Impact 
Analysis (RIA), which focused on the major alternatives considered in 
arriving at the approach to improving the energy efficiency of consumer 
products. The reader is referred to the complete RIA, which is 
contained in the TSD, available as indicated at the beginning of this 
notice. It consists of: (1) a statement of the problem addressed by 
this regulation, and the mandate for government action; (2) a 
description and analysis of the feasible policy alternatives to this 
regulation; (3) a quantitative comparison of the impacts of the 
alternatives; and (4) the economic impact of the proposed standard.
    The RIA calculates the effects of feasible policy alternatives to 
water heater 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 
trial standard level 3 adopted by today's Final Rule.
    We created the RIA using a series of regulatory scenarios (with 
various assumptions), which we used as input to the shipments model for 
water heaters. 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.

[[Page 4495]]

     The Proposed Approach (Performance Standards).
    We have evaluated each alternative in terms of its ability to 
achieve significant energy savings at reasonable costs (Table 11), and 
have compared it to the effectiveness of this Final Rule.

                                       Table 11.--Alternatives Considered
----------------------------------------------------------------------------------------------------------------
                                                                                  NPV  $ in      Energy savings
                             Policy alternatives                                   billions           quads
----------------------------------------------------------------------------------------------------------------
Consumer Product Labeling....................................................          -$0.003              0.08
Consumer Education...........................................................            0.40               0.49
Prescriptive Standards.......................................................            0.99               0.74
Consumer Tax Credits.........................................................            0.18               0.14
Consumer Rebates High Efficiency.............................................            0.18               0.14
Consumer Rebates Heat Pump...................................................            0.85               0.50
Low Income and Seniors Subsidy...............................................            0.05               0.37
Manufacturer Tax Credits.....................................................            0.04               0.03
Voluntary Efficiency Target (5 year delay)...................................            0.92               2.8
Voluntary Efficiency Target (10 year delay)..................................            0.47               2.1
Mass Government Purchases....................................................            0.01               0.06
Performance Standards........................................................            2.0                4.6
----------------------------------------------------------------------------------------------------------------
NPV = Net Present Value (2003-2030, in billion 1998 $) (does not include government expenses)
Savings = Energy Savings (Source Quads)

    For a complete discussion of the assumptions used to develop the 
alternative regulatory impacts, see the proposed rule. 65 FR 25042, 
25080-25081 (April 28, 2000). All of these alternatives must be gauged 
against the performance standards in this Final Rule. The results in 
Table 11 above show that none of the alternative regulatory approaches 
meet or exceed the estimated national cost and energy savings from 
revised energy efficiency standards. Additionally, several of the 
alternatives would require new enabling legislation, since authority to 
carry out those alternatives does not exist presently.

C. Review Under the Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612 requires 
an assessment of the impact of regulations on small businesses. The 
Small Business Administration's definition for a small business in the 
water heater industry is one that employs 500 or fewer employees.
    The water heater industry is characterized by five firms accounting 
for nearly 99 percent of sales. Smaller businesses and firms, which 
make specialty water heaters and supply niche markets, share one 
percent of the market. We are aware of three small firms: Bock Water 
Heaters, Heat Transfer Products, and Vaughn.
    Of the three small firms, Bock manufactures oil-fired water heaters 
that have not been affected by this rule. Therefore, Bock will not 
suffer any adverse impacts due to the rule. The other two firms, Heat 
Transfer and Vaughn, both make electric water heaters that are affected 
by this rule. In the GAMA directory, these firms only list electric 
water heaters that meet or exceed the standard level in this rule. 
Although the rule raises the standard level enough to impact their 
niche market for high efficiency electric water heaters, these 
manufacturers also manufacture very long life products that incorporate 
other features which will help them preserve their niche market. The 
Department has taken this into consideration in this rulemaking.
    The Department prepared a manufacturing impact analysis that it 
shared with all the water heater manufacturers. The smaller 
manufacturers did not choose to discuss the impacts of the trial 
standard levels on their firms.
    In view of the information discussed above, the Department has 
determined and hereby certifies pursuant to Section 605(b) of the 
Regulatory Flexibility Act that, for this particular industry, the 
standard levels in today's Final 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 imposed by 
this rulemaking that would require Office of Management and Budget 
clearance 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; (3) provide a clear legal standard 
for affected conduct rather than a general standard; and (4) promote 
simplification and burden reduction.
    With regard to the review required by Section 3(a), Section 3(b) of 
Executive Order 12988 specifically requires that Executive agencies 
make every reasonable effort to ensure that the regulation: (1) Clearly 
specifies the preemptive effect, if any; (2) clearly specifies any 
effect on existing Federal law or regulation; (3) provides a clear 
legal standard for affected conduct while promoting simplification and 
burden reduction; (4) specifies the retroactive effect, if any; (5) 
adequately defines key terms; and (6) addresses other important issues 
affecting clarity and general draftsmanship under any guidelines issued 
by the Attorney General. Section 3(c) of Executive Order 12988 requires 
Executive agencies to review regulations in light of applicable 
standards in Section 3(a) and Section 3(b) to determine whether they 
are met or it is unreasonable to meet one or more of them. DOE reviewed 
today's Final Rule under the standards of Section 3 of the Executive 
Order and determined that, to the extent permitted by law, the final 
regulations meet the relevant standards.

F. ``Takings'' Assessment Review

    The Department has determined pursuant to Executive Order 12630, 
``Governmental Actions and Interference with Constitutionally Protected 
Property

[[Page 4496]]

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, `` Federalism''

    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.'' Policies 
that have federalism implications are defined in the Executive Order to 
include regulations that have ``substantial direct effects 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.'' Under Executive Order 13132, DOE may 
not issue a regulation that has federalism implications, that imposes 
substantial direct costs, and that is not required by statute, unless 
the Federal government provides the funds necessary to pay the direct 
compliance costs incurred by the State and local governments, or DOE 
consults with State and local officials early in the process of 
developing the proposed regulation. DOE also may not issue a regulation 
that has federalism implications and that preempts State law unless it 
consults with State and local officials early in the process of 
developing the proposed regulations.
    The statutory authority under which this Final Rule is being 
promulgated specifically addresses the effect of Federal rules on State 
laws or regulations concerning testing, labeling and standards. Section 
327 of EPCA, as amended, 42 U.S.C. 6297. Generally all such State laws 
or regulations are superceded by EPCA, unless specifically exempted in 
Section 327. The Department can grant a waiver of preemption in 
accordance with the procedures and other provisions of Section 327(d) 
of the Act, as amended. 42 U.S.C. 6297(d). States can file petitions 
for exemption from preemption with the Secretary and have their request 
reviewed on a case-by-case basis.
    DOE has examined today's Final Rule and has determined that 
although revised water heater standards would preempt State laws in 
this area, they 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. No further action is required by 
Executive Order 13132.

H. Review Under the Unfunded Mandates Reform Act of 1995

    With respect to a proposed regulatory action that may result in the 
expenditure by State, local, and tribal governments, in the aggregate, 
or by the private sector, of $100 million or more (adjusted annually 
for inflation) in any one year, Section 202(a) of the Unfunded Mandates 
Reform Act 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). UMRA also requires each Federal agency to develop 
an effective process to permit timely input by state, local, and tribal 
governments on a proposed significant intergovernmental mandate. The 
Department's consultation process is described in a notice published in 
the Federal Register. 62 FR 12820 (March 18, 1997). Today's Final Rule 
may impose expenditures of $100 million or more in a year in the 
private sector. It does not contain a Federal intergovernmental 
mandate.
    Section 202 of UMRA authorizes an agency to respond to the content 
requirements of UMRA in any other statement or analysis that 
accompanies this Final Rule. 2 U.S.C. 1532(c). The content requirements 
of Section 202(b) of UMRA relevant to the private sector mandate 
substantially overlap the economic analysis requirements that apply 
under Section 325(o) of EPCA, as amended, and Executive Order 12866. 
The Supplementary Information section of the Notice of Final Rulemaking 
and the analysis contained in the ``Regulatory Impact Analysis'' 
section of the TSD for this Final Rule respond 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, 
most 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 or the selection of such an 
alternative is inconsistent with law. As required by Section 325(o) of 
EPCA, as amended, 42 U.S.C. 6295(o), today's Final Rule establishes 
energy conservation standards for water heaters that are designed to 
achieve the maximum improvement in energy efficiency that DOE has 
determined is 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 Final 
Rule.

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

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

J. Review Under the Plain Language Directives

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

K. Congressional Notification

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

List of Subjects in 10 CFR Part 430

    Administrative practice and procedure, Energy conservation, 
Household appliances.


[[Page 4497]]


    Issued in Washington, DC, on December 26, 2000.
Dan Reicher,
Assistant Secretary, Energy Efficiency and Renewable Energy.

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

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

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

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


    2. Section 430, Appendix E to Subpart B of Part 430 is amended in 
Section 1 by adding paragraph 1.16 to read as follows:

Appendix E to subpart B of Part 430--Uniform Test Method for 
Measuring the Energy Consumption of Water Heaters

    1. Definitions
* * * * *
    1.16 Tabletop water heater means a water heater in a rectangular 
box enclosure designed to slide into a kitchen countertop space with 
typical dimensions of 36 inches high, 25 inches deep and 24 inches 
wide.
* * * * *

    3. Section 430.32(d) of subpart C is amended by revising paragraph 
(d) to read as follows:
    Sec. 430.32 Energy and water conservation standards and effective 
dates.
* * * * *
    (d) Water heaters.
    The energy factor of water heaters shall not be less than the 
following for products manufactured on or after the indicated dates.

----------------------------------------------------------------------------------------------------------------
                                         Energy factor as of     Energy factor as of of    Energy factor as of
            Product class                  January 1, 1990           April 15, 1991          January 20, 2004
----------------------------------------------------------------------------------------------------------------
1. Gas-fired Water Heater............  0.62 - (.0019  x  Rated  0.62 - (.0019  x  Rated  0.67 - (0.0019  x
                                        Storage Volume in        Storage Volume in        Rated Storage Volume
                                        gallons).                gallons).                in gallons).
2. Oil-fired Water Heater............  0.59 - (.0019  x  Rated  0.59 - (.0019  x  rated  0.59-(0.0019  x  Rated
                                        Storage Volume in        Storage Volume in        Storage Volume in
                                        gallons).                gallons).                gallons).
3. Electric Water Heater.............  0.95 - (0.00132  x       0.93 - (0.00132  x       0.97-(0.00132  x  Rated
                                        Rated Storage Volume     Rated Storage Volume     Storage Volume in
                                        in gallons).             in gallons.              gallons).
4. Tabletop Water Heater.............  0.95 - (0.00132  x       0.93 - (0.00132  x       0.93 - (0.00132  x
                                        Rated Storage Volume     Rated Storage Volume     Rated Storage Volume
                                        in gallons).             in gallons).             in gallons).
5. Instantaneous Gas-fire Water        0.62 - (0.0019  x        0.62 - (0.0019  x        0.62 - (0.0019  x
 Heater.                                Rated Storage Volume     Rated Storage Volume     Rated Storage Volume
                                        in gallons).             in gallons).             in gallons).
6. Instantaneous Electric Water        0.95 - (0.00132  x       0.93 - (0.00132  x       0.93 - (0.00132  x
 Heater.                                Rated Storage Volume     Rated Storage Volume     Rated Storage Volume
                                        in gallons).             in gallons).             in gallons).
----------------------------------------------------------------------------------------------------------------
Note: The Rated Storage Volume equals the water storage capacity of a water heater, in gallons, as specified by
  the manufacturer.

* * * * *

Appendix

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

Department of Justice,
Antitrust Division, Joel I. Klein Assistant Attorney General

Main Justice Building, 950 Pennsylvania Avenue, NW, Washington, DC 
20530-0001, (202) 514-2401/(202) 616-2645 (f), 
[email protected]

    July 10, 2000.

Mary Anne Sullivan,
General Counsel, Department of Energy, Washington, DC 20585

    Dear General Counsel Sullivan: I am responding to your May 10, 
2000 letter seeking the views of the Attorney General about the 
potential impact on competition of the proposed energy efficiency 
standards for water heaters, Docket No. EE-RM-97-900. Your request 
was submitted pursuant to Section 325(o)(2)(B)(i) of the Energy 
Policy and Conservation Act, 42 U.S.C. 6291, 6295, which requires 
the Attorney General to make a determination of the impact of any 
lessening of competition that is likely to result from the 
imposition of proposed energy efficiency standards. The Attorney 
General's responsibility for responding to requests from other 
departments about the effect of a program on competition has been 
delegated to the Assistant Attorney General for the Antitrust 
Division in 28 CFR 0.40 (g).
    We have reviewed the proposed standards, the supplementary 
information published in the Federal Register notice, the Technical 
Support Document, and information from water heater manufacturers, 
their suppliers, and other interested parties. The Antitrust 
Division has concluded that the proposed standards could have an 
adverse effect on competition because water heater manufacturers may 
have to use an input that will be produced by only one source. We do 
not anticipate that the proposed standard will affect competition 
among water heater manufacturers. Rather, competition to provide 
heater manufacturers with blowing agents could be adversely 
affected, with resulting cost increases to consumers.
    In the analysis of the proposed standard that the Department of 
Energy published in the Federal Register, the only design options 
for affected electric water heaters that meet the DOE's proposed 
standard require use of HFC-245fa as a blowing agent for insulation. 
Insulation is an essential part of a water heater, and HFC-245fa is 
a patented product that has only one supplier. DOE's published 
analysis further concludes that gas-fired water heaters have design 
options that would eliminate the need for HFC-245fa, but at 
significant added costs.
    Water heater manufacturers have objected to the proposed 
standard on the grounds that their need to rely on a sole source 
will make them vulnerable to supply disruptions and monopoly 
pricing. Based on the analysis that DOE published, the concerns of 
water heater manufacturers regarding HFC-245fa, and our interviews 
with industry participants, the Antitrust Division has concluded 
that competition could be adversely affected by the adoption of the 
proposed standard.\1\ The Department urges the Department of Energy 
to take into account this impact on competition in determining its 
final energy efficiency standard for water heaters and to consider 
altering the standard so that manufacturers may meet the standard 
for all affected models using blowing agents for insulation other 
than HFC-245fa without adding significantly to the costs of 
manufacturing water heaters.

    Sincerely,

 Joel I. Klein

    \1\ We note that some manufacturers have suggested that DOE 
underestimated the performance capabilities of alternative blowing 
agents. If these suggestions prove correct, water heater 
manufacturers may in fact be able to comply with the proposed 
standard for more models, while using water-based blowing agents. We 
also note that it's possible that manufacturers may in fact be able 
to engineer design options using water-based blowing agents with a 
greater performance capability or lower cost than they now 
anticipate.
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[FR Doc. 01-1081 Filed 1-16-01; 8:45 am]
BILLING CODE 6450-01-P