[Federal Register Volume 66, Number 14 (Monday, January 22, 2001)]
[Rules and Regulations]
[Pages 7170-7200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1790]



[[Page 7169]]

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Part XII





Department of Energy





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Office of Energy Efficiency and Renewable Energy



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10 CFR Part 430



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



Finding of No Significant Impact Energy Conservation Program for 
Consumer Products; Notice

  Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Rules 
and Regulations  

[[Page 7170]]


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DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 430

[Docket Number EE-RM-98-440]
RIN 1904-AA77


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

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

ACTION: Final rule.

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SUMMARY: The Department of Energy (DOE or Department) has determined 
that revised energy conservation standards for central air conditioners 
and heat pumps 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 central air conditioners and heat pumps.

EFFECTIVE DATE: The effective date of this rule is February 21, 2001.

ADDRESSES: A copy of the Technical Support Document (TSD) may be read 
at the DOE Freedom of Information Reading Room, U.S. Department of 
Energy, Forrestal Building, Room 1E-190, 1000 Independence Avenue, SW., 
Washington, DC 20585, (202) 586-3142, between the hours of 9:00 a.m. 
and 4:00 p.m., Monday through Friday, except Federal holidays. Copies 
of the TSD may be obtained from: the Codes and Standards Internet site 
at: http://www.eren.doe.gov/buildings/codes_standards/applbrf/central_air_conditioner.html or from the U.S. Department of Energy, 
Office of Energy Efficiency and Renewable Energy, Forrestal Building, 
Mail Station EE-41, 1000 Independence Avenue, SW., Washington, DC 
20585-0121. (202) 586-9127.

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

SUPPLEMENTARY INFORMATION:

I. Introduction
    A. Consumer Overview
    1. Background
    2. Central Air Conditioner and Heat Pump Features
    3. Consumer Benefits
    4. National Benefits
    B. Authority
    C. Background
II. General Discussion
    A. Technological Feasibility
    1. General
    2. Maximum Technologically Feasible Levels
    B. Energy Savings
    1. Determination of Savings
    2. Significance of Savings
    C. Rebuttable Presumption
    D. Economic Justification
    1. Economic Impact on Manufacturers and Consumers
    2. Life-cycle-costs
    3. Energy Savings
    4. Lessening of Utility or Performance of Products
    5. Impact of Lessening of Competition
    6. Need of The Nation to Conserve Energy
    7. Other Factors
III. Methodology
IV. Discussion of Comments
    A. Burdens and Benefits
    1. Economic Impacts
    a. Economic Impacts on Manufacturers
    b. Economic Impacts on Consumers
    2. Life-Cycle Costs
    3. Energy Savings
    4. Lessening of Utility or Performance of Products
    5. Impact of Lessening of Competition
    6. Need of the Nation to Conserve Energy
    7. Other Factors
    B. Analysis and Assumptions
    1. Engineering Analysis
    a. Reliance on ARI and Reverse Engineering Cost Estimates
    b. Consideration of Emerging Technologies
    2. Life Cycle Cost (LCC) analysis
    a. Probability-based analysis
    b. Energy Use
    c. Electricity Prices
    d. Product Life
    e. Installation Cost
    f. Mark-ups
    3. Shipments/National Energy Savings
    a. Adjustments to NAECA Shipment Scenario
    b. Fuel Switching
    c. Drop in Shipments in New Construction Market
    4. Manufacturer Impact Analysis
    5. Utility Impacts
    a. Peak Demand Impacts
    6. Projection of Trends
    C. Other Comments
    1. HCFC Phaseout
    2. Ozone Reduction Catalyst Requirement
    D. Additional Standard Requirements
    1. EER Standard
    2. TXV Requirement
    3. HSPF Levels
V. Analytical Results and Conclusions
    A. Trial Standard Levels
    B. Significance of Energy Savings
    C. Payback Period
    D. Economic Justification
    1. Economic Impact on Manufacturers and Consumers
    2. Life-cycle-cost (LCC)
    3. Net Present Value and Net National Employment
    4. Impact on Utility or Performance of Products
    5. Impact of Any Lessening of Competition
    6. Need of the Nation to Save Energy
    7. Other Factors
    E. Conclusion
VI. Procedural Issues and Regulatory Review
    A. Review Under the National Environmental Policy Act
    B. Review Under Executive Order 12866, ``Regulatory Planning and 
Review'
    C. Review under the Regulatory Flexibility Act
    D. Review Under the Paperwork Reduction Act
    E. Review Under Executive Order 12988, ``Civil Justice Reform'
    F. ``Takings'' Assessment Review
    G. Review under Executive Order 13132
    H. Review Under the Unfunded Mandates Reform Act
    I. Review Under the Treasury and General Government 
Appropriations Act of 1999
    J. Review Under the Plain Language Directives
    K. Congressional Notification

I. Introduction

A. Consumer Overview

1. Background
    The Department of Energy (DOE or the Department) is directed by the 
Energy Policy and Conservation Act to consider establishing minimum 
efficiency standards for various consumer products, including central 
air conditioners and heat pumps. Today's final rule adopts standards 
that are consistent with these requirements of the law. The Department 
is amending the almost ten year old minimum efficiency standards for 
new central air conditioners and heat pumps. These amended standards 
take into account a decade of technological advancements and will save 
consumers and the nation money, significant amounts of energy, and have 
substantial environmental and economic benefits.
    When today's adopted standards go into effect, they will 
essentially raise the energy efficiency standards to 13 SEER for new 
central air conditioners and to 13 SEER/7.7 HSPF for new central air 
conditioning heat pumps (heat pumps). SEER, Seasonal Energy Efficiency 
Ratio, is the Department's measure of energy efficiency for the 
seasonal cooling performance of central air conditioners and heat 
pumps. HSPF, Heating Seasonal Performance Factor, is the Department's 
measure of energy efficiency for the seasonal heating performance of 
heat pumps. The standards will apply to products manufactured for sale 
in the United

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States, as of January 23, 2006. The standard for split-system air 
conditioners, the most common type of residential air conditioning 
equipment, represents a 30 percent improvement in energy efficiency. 
For split-system heat pumps, the new standard would represent a 30 
percent improvement in cooling efficiency and a 13 percent improvement 
in heating efficiency. The standard will also increase the cooling 
efficiency of single-package air conditioners and single-package heat 
pumps by 34 percent and the heating efficiency of single-package heat 
pumps by 17 percent. Finally, the Department is not yet adopting new 
standards for some products to ensure that more efficient versions 
remain available for niche applications. The Department has determined 
that the new standards are the highest efficiency levels that are 
technically feasible and economically justified as required by law. 
Therefore, the Department is amending the energy conservation standards 
for residential central air conditioners and heat pumps.
2. Central Air Conditioner and Heat Pump Features
    The amended efficiency levels can be met by central air conditioner 
and heat pump designs that are already available in the market. We 
fully expect variations of these models to exist under the new 
standards, offering all the features and utility that are found in 
currently available products.
3. Consumer Benefits
    Table I.1 summarizes the ``characteristics'' of today's typical 
central air conditioners and heat pumps. Table I.2 presents the 
implications for the average consumer of the standards becoming 
effective in 2006.

           Table I.1.--Characteristics of Today's Typical Central Air Conditioners and Heat Pumps \1\
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                                                   Split system                       Single          Single
                                                        air        Split system     package air    package heat
                                                    conditioner      heat pump      conditioner        pump
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Average Installed Price.........................          $2,236          $3,668          $2,607          $3,599
Annual Utility Bill \2\.........................            $189            $453            $189            $453
Life Expectancy (years).........................            18.4            18.4            18.4            18.4
Energy Consumption per year (kWh)...............           2,305           6,549           2,305          6,549
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\1\ ``Typical'' equipment have cooling and heating efficiencies of 10 SEER and 6.8 HSPF, respectively.
\2\ Utility bill pertains to the energy cost of operating the air conditioner or heat pump.


                       Table I.2.--Implications of New Standards for the Average Consumer
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                                                   Split system                       Single          Single
                                                        air        Split system     package air    package heat
                                                    conditioner      heat pump      conditioner        pump
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Year Standard Comes into Effect.................            2006            2006            2006            2006
New Average Installed Price.....................          $2,571          $4,000          $3,032          $4,034
Estimated Price Increase........................            $335            $332            $425            $435
Annual Utility Bill Savings.....................             $42             $70             $42             $70
Average Net Saving over Equipment Life..........            $113            $372             $29            $353
Energy Savings per Year (kWh)...................             532            1081             532            1081
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    The most typical air conditioner (i.e., split system air 
conditioners which comprise approximately 65 percent of today's central 
air conditioning and heat pump market) has an installed price of $2,236 
and an annual utility cost of $189. In order to meet the 2006 standard, 
the Department estimates that the installed price of a typical air 
conditioner will be $2,571, an increase of $335. This price increase 
will be offset by an annual energy savings of about $42 on the utility 
bills. The most typical heat pump (i.e., split system heat pump) 
currently has an installed price of $3,668 and an annual utility cost 
of $453. In order to meet the 2006 standard, the Department estimates 
that the installed price of a typical heat pump will be $4,000, an 
increase of $332. This price increase will be offset by an annual 
energy savings of about $70 on the utility bills.
    The Department recognizes that most consumers pay energy prices 
that are higher or lower than the ``typical'' consumer and operate 
their equipment more or less often. Consequently, the Department has 
investigated the effects of the different energy prices across the 
nation and different air-conditioning usage patterns. The Department 
estimates that 61 percent of all consumers purchasing a new typical air 
conditioner will either save money or will be negligibly impacted as a 
result of the 2006 standard. In the case of a new typical heat pump, 94 
percent of all consumers either save money or will be negligibly 
impacted.
    The Department also investigated how these standards might affect 
low income consumers. On average, the Department estimates that it is 
likely that low income air conditioner and heat pump consumers will 
also save money as a result of the standard.
4. National Benefits
    The standards will provide benefits to the nation. DOE estimates 
the standards will save approximately 4.2 quads of energy over 25 years 
(2006 through 2030). This is equivalent to all the energy consumed by 
nearly 26 million American households in a single year. We also 
estimate this standard will have a net benefit to the nation's 
consumers of $1 billion over the same period. In 2020, the standards 
will avoid the construction of five 400 megawatt coal-fired plants and 
thirty-four 400 megawatt gas-fired plants. These energy savings will 
result in cumulative greenhouse gas emission reductions of 
approximately 33 million metric tons (Mt) of carbon, or an amount equal 
to that produced by approximately 3 million cars every year. 
Additionally, air pollution will be reduced by the elimination of 
approximately 94 thousand metric tons of nitrous oxides ( 
NOX) from 2006 through 2020.

B. Authority

    Part B of Title III of the Energy Policy and Conservation Act 
(EPCA), Pub. L. 94-163, as amended by the National

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Energy Conservation Policy Act, Pub. L. 95-619, by the National 
Appliance Energy Conservation Act, Pub. L. 100-12, by the National 
Appliance Energy Conservation Amendments of 1988, Pub. L. 100-357, and 
by the Energy Policy Act of 1992, Pub. L. 102-486 \1\ created the 
Energy Conservation Program for Consumer Products other than 
Automobiles. The consumer products subject to this program (often 
referred to hereafter as ``covered products'') include central air 
conditioners and heat pumps.
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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 Appliance 
Energy Conservation Amendments of 1988, and the Energy Policy Act of 
1992, is referred to in this notice as EPCA, or 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 Policy and Conservation Act, as amended by the 
National Energy Conservation Policy Act only, is referred to in this 
notice as the National Energy Conservation Policy Act.
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    Under the Act, the program consists essentially of three parts: 
testing, labeling, and Federal energy conservation standards.
    The National Appliance Energy Conservation Act of 1987 (NAECA) 
prescribed initial Federal energy conservation standards for central 
air conditioners and heat pumps. EPCA Section 325(d), 42 U.S.C. 
6295(d). The Act specifies that the Department is to review the 
standards January 1, 1994. EPCA Section 325(d)(3)(A), 42 U.S.C. 
6295(d)(3)(A).
    Any new or amended standard must be designed so as to achieve the 
maximum improvement in energy efficiency that is technologically 
feasible and economically justified. EPCA Section 325(o)(2)(A), 42 
U.S.C. 6295(o)(2)(A).
    Section 325(o)(2)(B)(i) provides that before DOE determines whether 
a standard is economically justified, it must first solicit comments on 
a proposed standard. After reviewing comments on the proposal, and 
before it adopts a standard, DOE must then determine whether the 
benefits of the standard exceed its burdens, based, to the greatest 
extent practicable, on a weighing of the following seven factors:

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

    In addition, section 325(o)(2)(B)(iii) establishes a rebuttable 
presumption of economic justification in instances where the Secretary 
determines that ``the additional cost to the consumer of purchasing a 
product complying with an energy conservation standard level will be 
less than three times the value of the energy * * * savings during the 
first year that the consumer will receive as a result of the standard, 
as calculated under the applicable test procedure * * *.'' The 
rebuttable presumption test is an alternative path to establishing 
economic justification.

C. Background

    The existing standards for residential central air conditioners and 
heat pumps have been in effect since 1992. As described above, the 
descriptor for air conditioner and heat pump cooling efficiency is SEER 
and the descriptor for heat pump heating efficiency is HSPF. The 
current central air conditioner and heat pump efficiency standards are 
as follows:

--Split system air conditioners and heat pumps--10 SEER/6.8 HSPF
--Single package air conditioners and heat pumps--9.7 SEER/6.6 HSPF

    On September 8, 1993, DOE published an Advance Notice of Proposed 
Rulemaking (ANOPR) announcing the Department's intention to revise the 
existing central air conditioner and heat pump efficiency standard. 58 
FR 47326. During a workshop on June 30, 1998, we presented for comment 
an analytical framework for the central air conditioner and heat pump 
standards rulemaking. The analytical framework described the different 
analyses to be conducted, the method for conducting them, the use of 
new spreadsheets, and the relationship of the various analyses. On 
November 24, 1999, DOE published a Supplemental ANOPR. 64 FR 66306. On 
October 5, 2000, DOE published a Notice of Proposed Rulemaking (NOPR or 
proposed rule). 65 FR 59590. The energy efficiency standards proposed 
for residential central air conditioners and central air conditioning 
heat pumps (heat pumps) were as follows:

--Split system and single-package air conditioners--12 SEER
--Split system and single package heat pumps--13 SEER/7.7 HSPF
--Through-the-Wall air conditioners and heat pumps--11 SEER/7.1 HSPF.

    In addition to the increase proposed in SEER and HSPF, the 
Department requested comments on a proposal to adopt a standard for 
steady-state cooling efficiency, EER.\2\ The proposal on EER was 
designed to ensure more efficient operation at high outdoor 
temperature, during periods when electricity use by air conditioners is 
at its peak.
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    \2\ EER, Energy Efficiency Ratio, is a steady-state measure of 
energy efficiency which measures efficiency at a prescribed outdoor 
temperature (95  deg.F), and is one of the test conditions in the 
Department's test procedure used to develop the SEER.
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    The proposed rule provided additional background information on the 
current standards, the history of previous rulemakings and the 
procedures, interpretations and policies which guide the Department in 
developing new efficiency standards, which are set forth as the Process 
Improvement Rule. 61 FR 36974. A public hearing was held in Washington, 
DC on November 16, 2000, to hear oral views, data and arguments on the 
proposed rule.

II. General Discussion

A. Technological Feasibility

1. General
    There are central air conditioners and heat pumps in the market at 
all of the efficiency levels prescribed in today's final rule. The 
Department, therefore, believes all of the efficiency levels adopted by 
today's final rule are technologically feasible.
2. Maximum Technologically Feasible Levels
    Pursuant to section 325(p)(2) of the Act, and as discussed in the 
proposed rule, the Department determined that 18 SEER is the maximum 
technologically feasible (Max Tech) level for cooling efficiency for 
all product classes and capacities covered by this rulemaking. 65 FR 
59593. The Max Tech level for heating efficiency, is 9.4 HSPF which is 
the highest HSPF rating currently available in residential heat pumps.

B. Energy Savings

1. Determination of Savings
    The Department forecasted energy savings through the use of a 
national energy savings (NES) spreadsheet as discussed in the proposed 
rule. 65 FR 59590, 59593 (October 5, 2000). The

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spreadsheets and assumptions upon which the results of today's final 
rule is based are unchanged.
2. Significance of Savings
    As discussed in the proposed rule, section 325(o)(3)(B) of the Act 
prohibits the Department from adopting a standard for a product if that 
standard would not result in ``significant'' energy savings. The energy 
savings for the standard levels we are adopting today are non-trivial--
indeed they are substantial--and therefore we consider them 
``significant'' within the meaning of section 325 of the Act.

C. Rebuttable Presumption

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

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

    If, according to the test procedure, the increase in initial price 
of an appliance due to a conservation standard would repay itself to 
the consumer in energy savings in less than three years, then we 
presume that such standard is economically justified. This presumption 
of economic justification can be rebutted upon a proper showing.
    The standard levels we are adopting today do not satisfy the 
criteria set forth above. Therefore, we cannot presume them to be 
economically justified and have performed additional analysis to 
support the Secretary's determination that they are indeed economically 
justified.

D. Economic Justification

    As noted earlier, Section 325(o)(2)(B)(i) of the Act provides seven 
factors to be evaluated in determining whether a conservation standard 
is economically justified.
1. Economic Impact on Manufacturers and Consumers
    We considered the economic impact on manufacturers and consumers as 
discussed in the proposed rule. 65 FR 59590, 59593 (October 5, 2000).
2. Life-cycle-costs
    We considered life-cycle-costs as discussed in the proposed rule. 
65 FR 59590, 59594 (October 5, 2000). The installed price and operation 
and maintenance costs were calculated for a range of consumers around 
the nation to estimate the range in life cycle cost benefits that 
consumers would expect to achieve due to new standards.
3. Energy Savings
    While significant conservation of energy is a separate statutory 
requirement for establishing an energy conservation standard, the Act 
requires DOE, in determining the economic justification of a standard, 
to consider the total projected energy savings that are expected to 
result directly from revised standards.
4. Lessening of Utility or Performance of Products
    This factor cannot be quantified. In establishing classes of 
products, the Department has attempted to eliminate any degradation of 
utility or performance in the products covered by today's final rule. 
Attributes that affect utility include the product's ability to cool 
and dehumidify. In some applications, noise levels may also be an 
aspect of utility. Product size or configuration can also be considered 
utility if a change in size would cause the consumer to install the 
product in a location or in a manner inconsistent with the consumer's 
preferences.
5. Impact of Lessening of Competition
    It is important to note that this factor has two parts; on the one 
hand, it assumes that there could be some lessening of competition as a 
result of standards; and on the other hand, it directs the Attorney 
General to gauge the impact, if any, of that effect.
    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. The 
Attorney General's response is discussed in section V.D.5 below, and is 
reprinted at the end of the rule.
6. Need of the Nation To Conserve Energy
    The Secretary recognizes that energy conservation benefits the 
Nation in several important ways. Enhanced energy efficiency improves 
the Nation's energy security, strengthens the economy, and reduces the 
environmental impacts of energy production.
7. Other Factors
    This provision allows the Secretary of Energy, in determining 
whether a standard is economically justified, to consider any other 
factors that the Secretary deems to be relevant. EPCA Section 
325(o)(2)(B)(i)(VI), 42 U.S.C. 6295(o)(2)(B)(i)(VI).
    Under this factor, we considered the potential improvement to the 
reliability of the electrical system. Recent summertime electric power 
outages in various regions of our country resulted in disruption of 
many peoples' lives and businesses. The schedule contained in the Act 
called for the Department to revise the standards for central air 
conditioners and heat pumps by 1994, to be effective in 1999. For 
reasons explained in the proposed rule and ANOPR, promulgation of many 
standards including those for central air conditioners and heat pumps 
was delayed.
    While central air conditioning accounts for about 10 percent of 
residential electricity consumption, it can account for several times 
this amount during peak hours on hot summer days, when electricity 
reliability is most strained. A 30 percent improvement in air 
conditioner efficiency would reduce the nation's total annual 
electricity use by approximately 2 percent after it was fully phased 
in. However, the same efficiency improvement would provide a greater 
percentage reduction in peak loads, reducing the prospect of brownouts 
and price spikes. These peak load reductions are critical given that 
the conditions leading to grid instability can occur well before peak 
demand even equals supply.
    The Final Report \3\ by the team of experts convened by the 
Secretary to investigate the electric power problem included the 
recommendation to increase the energy efficiency of central air 
conditioners as one means for enhancing reliability. This 
recommendation led the Secretary to put this rulemaking on the fast 
track and to advance the publication of today's final rule for central 
air conditioners and heat pumps. Thus, the Department has considered 
effects of the rule on electric power system reliability.
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    \3\ ``Report of the U.S. Department of Energy's Power Outage 
Study Team: Findings and Recommendations to Enhance Reliability from 
the Summer of 1999'', March 2000.
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III. Methodology

    As discussed in the proposed rule, the Department developed new 
analytical tools for this and other recent rulemakings. The first tool 
was a

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spreadsheet that calculates life-cycle-cost (LCC) and payback period. 
The second calculates national energy savings and national net present 
value (NPV). The Department also completely revised the methodology 
used in assessing manufacturer impacts including the adoption of the 
Government Regulatory Impact Model (GRIM). Additionally, DOE developed 
a new approach using the National Energy Modeling System (NEMS) to 
estimate impacts of air conditioner energy efficiency standards on 
electric utilities and the environment.
    In order to estimate production costs for this rulemaking, we used 
an efficiency level approach, with cost data provided by the Air 
Conditioning and Refrigeration Institute (ARI) and through our own 
reverse engineering methods. The ARI cost data presented the minimum, 
mean, and maximum cost estimates for the sample of ARI members who 
participated. The data covered each product class at each efficiency 
level through 15 SEER, and was expressed relative to the base cost for 
each manufacturer. The reverse engineering methodology, conceived as a 
way to validate the ARI data, analyzed seventy-one samples, mostly 
selected by manufacturers, using design data provided by manufacturers. 
We physically examined three of these models. In refining our results, 
we reviewed our detailed cost estimates for split air conditioners with 
a major manufacturer.
    The benefits of reverse engineering include the transparency of the 
methods, data, and assumptions used to produce the estimates, and the 
insights gained into the design options used to achieve the different 
efficiency levels. The ARI data provides none of these benefits, but 
does draw on the considerable expertise of the manufacturers involved 
in producing the underlying estimates describing all of the products on 
the market. One benefit of the reverse engineering analysis is that 
results are expressed in absolute costs instead of relative costs. 
Absolute costs are needed to represent production costs at the minimum 
efficiency level and are helpful in representing the production costs 
at higher efficiency levels.
    Regarding the analytical methodology, the Department continues to 
use the spreadsheets and approaches explained in the proposed rule. 65 
FR at 59594-59597. We have applied them to develop the analysis further 
in this final rule. We added new analysis based on the manufacturing 
cost estimates that we had derived through reverse engineering 
techniques. Also, because its results were similar to those derived 
using our 18.4-year equipment life assumption, we are no longer 
considering the 14-year equipment lifetime scenarios in the economic 
analysis. Finally, the emissions reductions analysis now also estimates 
the discounted value of cumulative emission reductions.

IV. Discussion of Comments

    Since we opened the docket for this rulemaking, we have received 
over 800 comments from a diverse set of interested parties, including 
manufacturers and their representatives, states, energy conservation 
advocates, heating and air-conditioning contractors, consumers, 
electric utilities and others. The comments addressed the burdens and 
benefits associated with more stringent standards, aspects of our 
analysis, the merits of the different trial standard levels and 
standard options we considered, and the DOE rulemaking process. Many 
comments raised issues that we substantially addressed in the proposed 
rule and Supplementary ANOPR. Comments received during the most recent 
comment period are addressed below, and some previous comments are 
revisited.

A. Burdens and Benefits

    This section discusses comments we received on the burdens and 
benefits associated with more stringent minimum efficiency standards, 
organized into the seven factors that the Secretary considers as a 
basis for deciding whether a standard level is economically justified.
1. Economic Impacts
    a. Economic Impacts on Manufacturers. According to our manufacturer 
impact analysis, more stringent efficiency standards burden most 
manufacturers by causing them to make new investments in capacity, 
research and development, and testing. We also expect most 
manufacturers to experience lower profitability and sales volumes for 
several years after the adopted standards become effective. Some 
manufacturers in our analysis benefit under more stringent standards.
    ARI characterizes the financial burdens on the industry overall as 
severe. They also assert that the hydrochloroflourocarbons (HCFC) 
phaseout results in cumulative burdens. (ARI, No. 100 at pp. 6 and 13). 
Some manufacturers noted that EER and thermal expansion valve (TXV) 
requirements would add to the burden. (York, No. 90, at pp. 4-5). The 
Natural Resources Defense Council (NRDC) questions whether we 
considered that reverse engineering-based prices reduce impacts through 
price elasticity effects, but noted that industry impacts did not seem 
to change across trial standard levels, and the Oregon Office of Energy 
(OOE) believes that we have overstated manufacturer impacts since they 
are already making investments in new technologies to help them improve 
product efficiency. (NRDC, No. 88 at p. 15; and OOE, No. 84 at p.5).
    The reduction in industry net present value does increase with 
increasing standard levels, particularly since we consider it more 
likely that the Roll-up \4\ scenario will occur under higher standard 
levels. Individual manufacturers themselves discussed their situations 
with us at length, and we have incorporated the information they 
presented to us into our manufacturer impact analysis. In adopting this 
rule, we have assumed that the Roll-up scenario is the most likely 
outcome resulting from a new 13 SEER standard for all product classes. 
We did consider the change in sales volumes driven by changes in the 
underlying cost assumptions.
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    \4\ The Roll-up scenario assumes that the proportion of 
equipment with efficiency ratings above the new standard level will 
not increase compared to their proportion today.
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    Many comments described what they consider disproportionate impacts 
on manufacturers of niche products. Those comments are discussed in 
Section IV.4 below.
    The Department has considered the manufacturer burdens as described 
in the manufacturer impact analysis of the TSD in adopting the new 
standard. These include cumulative burdens. It also considers the 
extent to which the differences among efficiency scenarios change the 
implications of more stringent standards.
    b. Economic Impacts on Consumers. Many comments mention the 
economic burdens that more stringent efficiency standards can place on 
consumers who are sensitive to increases in first cost. Many noted that 
our decision should consider burdens on consumers caused by long median 
payback periods. Some comments emphasized that disproportionate impacts 
on low income consumers due to an expected increase in installed price 
would reduce the number of consumers who would be able to afford new 
air conditioners. Some comments suggested that this effect could 
increase health problems and deaths. The Mercatus Center stated that 
the Department believed consumers pass up energy efficient equipment 
because they are misinformed about

[[Page 7175]]

operating costs, therefore the Department should construct a program to 
correct this deficiency. (ARI, No. 100 at pp. 2 and 5; American Public 
Power Association (APPA), No. 113 at p. 2; Manufactured Home Institute 
(MHI), No. 99 at p. 1; Lennox, No. 91 at p. 3; Consumer Federation of 
America (CFA), No. 110 at p. 1; Nebraska Public Power District (NPPD), 
No. 109 at p. 2; National Association of Home Builders (NAHB), No. 94 
at p. 1; Nordyne, No. 101 at p. 2; Trane, No. 93 at p. 4; York, No. 90 
at pp. 4-5; and Mercatus Center, No. 115 at pp. 18-19).
    CFA considers lower energy bills a benefit and would support 
regional standards and public assistance programs to mitigate long 
payback periods and disproportionate impacts on consumers. (CFA, No. 
110 at p. 2).
    Many comments express the belief that, for various reasons, we 
either underestimated or overestimated economic impacts on consumers. 
Those comments are addressed in Section IV.B. below.
    We recognize that increases in first cost and long payback periods 
are generally considered burdens on consumers. Based on the reverse 
engineering derived manufacturing cost estimates, however, our analysis 
shows that, at the adopted standard levels, the payback period is 
shorter than the life of the equipment. This means that over the life 
of the product, any increase in price will be paid back to the average 
consumer. Thus, the new efficiency standards should provide the average 
consumer with a long term economic benefit. Also, we have examined 
impacts on low income consumers, and found them to benefit overall. 
Consumers concerned about potential health effects should note that 
assistance programs are already available to assist them with their air 
conditioning purchases, and that room air conditioners will continue to 
be available when cooling in individual rooms could mitigate their 
health concerns.
2. Life-Cycle Costs
    ARI, The Trane Company (Trane), American Electric Power (AEP), 
Mercatus Center, Southern Company, Dominion Virginia Power (Dominion), 
and Edison Electric Institute (EEI) asserted that the percent of 
consumers realizing life-cycle-cost savings at the standard levels 
issued in the proposed rule were too low and did not warrant an 
increase in the minimum efficiency standard. (ARI, No. 100 at p. 2; 
Trane, No. 93 at p. 4; AEP, No. 83 at p. 1; Mercatus Center, No. 115; 
Southern Company, No. 96 at p. 2; Dominion, No. 103 at p. 3 and 
Transcript No. 73 at pp. 50-51; and EEI, Transcript No. 73 at pp. 176-
178). Carrier Corp. asserted that there were too many consumers 
incurring life-cycle-cost increases at 12 SEER. (Carrier, No. 92 at p. 
5). In contrast, the American Council for an Energy-Efficient Economy 
(ACEEE), the Alliance to Save Energy (ASE), the Pacific Gas and 
Electric Company (PG&E), and NRDC argued that the percent of consumers 
realizing life-cycle-cost savings from a particular standard level is 
not the appropriate measure for establishing an updated efficiency 
standard. Because air-conditioning use is highly dependent on climatic 
conditions and because these are national standards, it is to be 
expected that some consumers in the Northern part of the U.S. will 
realize net costs from an increased standard but will be offset by 
consumers in the Southern part of the U.S. who will realize life-cycle 
cost savings from more efficient air-conditioning equipment. Due to 
this disparity, they argue it is better to base the standard on 
national average life-cycle-cost results. (ACEEE, No. 104 at p. 13; 
ASE, No. 81 at p.9; PG&E, No. 104 at p. 5; and NRDC, No. 88 at pp. 19-
21).
    EPCA requires the Department to consider life-cycle-cost as one of 
the seven factors in determining economic justification. In determining 
economic justification, the Secretary must 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 ACEEE. (EEI, Transcript No. 73 at p. 177; and ACEEE, Transcript No. 
73 at p. 182). The Department notes that under the standards in today's 
rule, consumers on average will have lower life-cycle costs. 
Furthermore, it appears that EPCA, 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, 
contemplated that the level of life cycle cost savings would vary among 
consumers.
    We have quantified the distribution of life cycle costs among 
consumers and have considered it, along with other information, in the 
weighing of the benefits and burdens of each standard level we 
assessed.
3. Energy Savings
    ARI states that the Department overestimated the energy savings 
realized from efficiency standards by basing the savings on source 
energy consumption at the power plant, rather than site energy 
consumption at the household or commercial building. (ARI, No. 100 at 
p. 11). While neither stating that the energy savings estimated by the 
Department were too great or too low, ASE claims that 70 billion kWh 
would be saved from a 13 SEER standard coupled with a minimum EER 
requirement of 11.6 and mandatory use of TXVs. (ASE, No. 81 at p. 12). 
ACEEE also claims that significant national energy savings will be 
realized from a 13 SEER standard, an 11.6 minimum EER requirement, 
mandatory use of TXVs, and an HSPF standard of 7.9.
    NAECA prescribes that consumer energy savings be evaluated based on 
site rather than source energy consumption. However, the Department 
believes national energy savings evaluated at the source reflects a 
more accurate representation of the energy consumption being avoided 
from a standard. Evaluating energy at the source takes into account the 
efficiency of the generation source as well as the transmission and 
distribution of the electricity. The Department accounts for site 
energy consumption in its analysis of consumer life-cycle-cost impacts. 
With regard to the magnitude of the energy being saved from a standard, 
the Department is confident in its National Energy Savings (NES) 
spreadsheet model to forecast the source energy savings realized from 
all standard levels, including a 13 SEER standard. Discussions with 
regard to minimum EER standards and TXV requirements are presented 
later in this Chapter.
4. Lessening of Utility or Performance of Products
    Comments regarding lessening of utility related mainly to the 
impacts that more stringent standards may have on the availability of 
niche products and some products that are not typically considered 
``niche''. Most comments stated that those products face size 
constraints that they will find difficult, if not impossible, to 
conform to under more stringent standards. That result could lead to 
the removal of the products from the market, or to equipment prices 
that are higher than the market would be able to sustain. (Friedrich, 
No. 116 at p. 1; Unico, No. 117 at pp. 1-2; Carrier, No. 92 at p. 8; 
Lennox, No. 91 at p. 7; Trane, No. 93 at p. 18; Mitsubishi, No. 87 at 
p. 1; Armstrong, No. 86 at pp. 1-3; and Fujitsu, No. 85 at p. 1).
    We recognize that contractors and consumers do take product size 
into account when making a purchase, and that size constraints can make 
it more

[[Page 7176]]

difficult for manufacturers to offer equipment meeting performance 
needs. This is true for niche products, which we discuss elsewhere, as 
well as for conventional products. The same was the case when the 10 
SEER minimum standards were agreed upon and established in 1987. 
Manufacturers can attempt to prevent size constraints from degrading 
performance or utility by offering smaller 13 SEER equipment than they 
typically offer today. The technical options for achieving that 
objective include existing and emerging technologies. Therefore, we do 
not consider it likely that products will be unavailable that meet the 
new 13 SEER standard, and have substantially the same capacities, 
performance and range of sizes as today's products.
    If the size of 13 SEER equipment does not generally decrease under 
new standards, some consumers may be required to incur additional 
installation expense to accommodate the larger equipment. We discuss 
this in more depth in Section IV.B.2.e. The Department did consider 
that possibility when adopting today's standards.
    Along a separate line, Southern Company is concerned that higher 
efficiency equipment will reduce dehumidification, which is an 
important attribute in moderate, humid, climates. (Southern Company, 
No. 96 at pp. 4-5). The equipment's ability to dehumidify is a function 
of its design and not necessarily its efficiency. As we stated in the 
proposed rule, evidence indicates that sensible heat ratios in high 
efficiency equipment are similar to those at the baseline. We trust 
that under a more stringent standard, manufacturers will seek to serve 
the needs of the market with products that dehumidify properly.
5. Impact of Lessening of Competition
    The Department of Justice (DOJ) and others commented that the more 
stringent standards contained in the proposed rule could lessen 
competition. (DOJ, No. 112; Trane, No. 93 at p. 12; and EEI, No. 80 at 
p. 8). Aspects of our manufacturer impact analysis support that 
conclusion. We discuss the DOJ concerns in more depth in Section V.D.5. 
The letter from the Department of Justice is attached in the Appendix 
of this rulemaking. We recognize that the standard levels we are 
adopting could accelerate the consolidation trend among major 
manufacturers. However, as discussed in the manufacturer impact 
analysis, we do not expect that any manufacturer or group of 
manufacturers will be able to use the standards as an opportunity to 
consolidate their market power. (See TSD, Chapter 8). Therefore, we 
believe that competition will remain vigorous under the adopted 
standard, and any lessening of competition that does occur will not 
result in price increases or loss of choice and utility for consumers.
    Other comments note that a large fraction of today's models would 
not be able to meet more stringent standards. (AEP, No. 83 at p. 1; 
Dominion, No. 68 at p. 2; ARI, No. 100 at p. 11; and EEI, No. 80 at p. 
8). In the manufacturer impact analysis, we considered that 
manufacturers will have to design new products to meet any increased 
standard level. Furthermore, products are technologically feasible 
through 18 SEER. So, while many of today's models may not be available 
under more stringent standards, we fully expect variations of those 
models to be available, offering all the features and utility of 
currently available products.
6. Need of the Nation To Conserve Energy
    Of the approximately 800 comments we have received, the vast 
majority were from individuals and organizations who made similar 
claims regarding the benefits that would be associated with a 13 SEER 
standard and an EER standard for air conditioners and heat pumps. These 
benefits included savings for consumers, avoided emissions and 
electrical capacity, and the reduced occurrence of brownouts and 
blackouts. Although our analysis is not able to substantiate many of 
these claims, all of these issues relate to the need of our nation to 
conserve energy. We recognize that a broad cross-section of citizens 
and organizations are concerned about these issues and in the potential 
for more stringent standards to address them.
    We discuss more specific comments related to economic benefits and 
electric system capacity in other sections of this chapter. In this 
section, we discuss the comments we received regarding environmental 
benefits.
    ASE claims that a 13 SEER standard coupled with an 11.6 EER minimum 
standard and a mandatory TXV requirement would yield environmental 
benefits in the form of the following air-borne emission reductions: 15 
million metric tons of carbon, 40,000 tons of nitrous oxides, and 
200,000 tons of sulfur dioxide in 2020. Northeast Energy Efficiency 
Partnership (NEEP) also states that significant carbon dioxide emission 
reductions could be achieved with a 13 SEER standard relative to a 12 
SEER standard. (ASE, No. 81 at p. 12; and NEEP, No. 118 at p. 2). The 
Northwest Power Planning Council (NWPPC) states that the Department 
used the average heat rate of avoided plants rather than the heat rate 
of operating plants displaced by the efficiency standards when 
determining emission reductions. As a result, NWPPC claims that the 
emissions mitigated by the standards were underestimated (NWPPC, No. 76 
at p. 6).
    National energy savings realized from central air conditioner and 
heat pump efficiency standards are directly translated into reduced 
air-borne emissions at electric power plants. The magnitude of the 
emission reductions are determined through the use of NEMS-BRS \5\, a 
version of NEMS used for appliance standards analyses. NEMS-BRS is 
based on the AEO2000 version with minor modifications. NEMS offers a 
sophisticated picture of the effect of standards since its scope allows 
it to measure the interactions between the various energy supply and 
demand sectors and the economy as a whole. Thus, although the 
Department agrees with ASE that emissions will be avoided from new air 
conditioner and heat pump efficiency standards, the Department believes 
that the magnitude of those emission reductions are best estimated with 
NEMS-BRS. In the case of SO2, the Clean Air Act Amendments 
of 1990 set an emissions cap on all power generation. The attainment of 
this target, however, is flexible among generators and is enforced by 
applying market forces, through the use of emissions allowances and 
tradable permits. As a result, accurate simulation of SO2 
trading tends to imply that physical emissions effects will be zero 
because emissions will always be at, or near, the ceiling. This fact 
has caused considerable confusion in the past. We do not believe there 
is a potential benefit in reductions in SO2 emissions from 
electricity savings as long as emissions of SO2 are at or 
near the emission ceilings. With regard to the issue of heat rates, 
contrary to NWPPC's assertion, the Department did use the heat rates of 
displaced power plants in determining the emission reductions resulting 
from efficiency standards.
---------------------------------------------------------------------------

    \5\ EIA approves use of the name NEMS to describe only an AEO 
version of the model without any modification to code or data. 
Because our analysis entails some minor code modifications and the 
model is run under various policy scenarios that deviate from AEO 
assumptions, the name NEMS-BRS refers to the model as used here. For 
more information on NEMS, please refer to the National Energy 
Modelling System: An Overview 1998. DOE/EIA-0581 (98), February, 
1998. BRS is DOE's Office of Building Research and Standards.
---------------------------------------------------------------------------

7. Other Factors
    With regard to other factors, the issue of electric system 
reliability attracted numerous comments. EEI, AEP, and

[[Page 7177]]

Dominion Virginia Power stated many changes are occurring in the 
electric utility industry at the same time electric load is continuing 
to grow. As a result, the overall effect of any end-use efficiency 
measure, such as an air conditioner and heat pump standard, is likely 
small. (EEI, Transcript, No. 73 at p. 224; AEP, No. 83 at p. 4; and 
Dominion, No. 103 at p. 4). Southern Company argued that once a 
standard is established, new load growth forecasts incorporating its 
effects will likely be made and investment decisions will be 
accordingly adjusted. In other words, since the effects of this rule do 
not become noticeable until five or more years after its 2006 effective 
date, utilities will have ample time to plan and construct capacity in 
response to expectations of load growth, reserve margin, and, where 
competition has become normal practice, to prices. (Southern Company, 
Transcript No. 73 at p. 241). Synapse Energy Economics (Synapse), along 
with ACEEE, NWPPC, NRDC, ASE, and PG&E noted that there is a real issue 
in meeting increased demand, due in large part to increased air 
conditioner usage. Synapse also notes that conventional assumptions 
about the ability of the power system to meet growing load are 
increasingly coming into question as the barriers to system expansion 
are not inadequate price incentives or unwillingness to invest, but 
rather siting (of generation, transmission, and distribution 
capability), environmental, and other constraints. (Synapse, Transcript 
No. 73 at p. 243; ACEEE, No. 104 at pp. 13-15; NWPPC, Transcript No. 73 
at p. 253; NRDC, No. 88 at pp. 4 and 6; ASE, No. 81 at pp. 7 and, 10; 
and PG&E, Transcript No. 73 at p. 251).
    In a March 2000 final report, the DOE Power Outage Study Team 
described several power outages that occurred in the summer of 1999. 
During early July, a heat storm affected much of the East from New 
England down past the Mid-Atlantic causing many problems. From July 3 
through 8, service was interrupted to a total of 110,000 Long Island 
Power Authority (LIPA) customers for varying periods. During that 
period, two new system peak loads were set and LIPA activated its 
Commercial Peak Reduction Program, appealed to its other large 
customers to voluntarily curtail their use of electricity and reduced 
system-wide voltage by five percent. Many organizations and government 
offices responded by closing early or cutting back on their electricity 
use. On July 6, the eastern half of the Pennsylvania, New Jersey, 
Maryland Interconnection grid experienced sudden and steep voltage 
declines as an all-time-high peak load was recorded. The integrity of 
the system was maintained by reducing voltage, curtailing contractually 
interruptible customers and appealing for voluntary load reductions. On 
that same day, Delmarva Power and Light had a capacity shortfall that 
resulted in rotating outages from 10:30 a.m. until 7:30 p.m. affecting 
138,000 customers. In the Chicago area on July 30, Commonwealth Edison 
set all-time-peak demand during a period of intense heat and humidity. 
Resulting system failures caused more than 100,000 customers temporary 
losses of power for up to several hours. The summer of 2000 has seen 
similar types of problems in the state of California.
    Outages such as these can cost millions of dollars per hour 
depending on which and how many customers are affected. Although we 
recognize that system adequacy may only play a small part in ensuring 
system reliability, the Department is convinced, especially due to 
recent expansion shortfalls in the Western part of the U.S., that 
system reliability is an important issue which can be addressed, to 
some degree, by increased air conditioner and heat pump standards. The 
impacts of standards could be potentially beneficial in lowering 
overall system stress and postponing necessary investment. This is 
especially important since annual investment in transmission has 
roughly halved since the levels of the 1970's \6\. The potential 
benefit of air conditioner and heat pump efficiency improvements is a 
factor in establishing the standards being issued today. In addition, 
the Department is continuing to establish national equipment standards 
in the form of the current efficiency descriptors (i.e., SEER and 
HSPF), as discussed below, it will examine ways to provide additional 
credit in the test procedure for EER rather than using such additional 
measures as minimum EER standards and mandatory TXV requirements.
---------------------------------------------------------------------------

    \6\ ``Hirst, E., ``Expanding U.S. Transmission Capacity.'' Paper 
prepared for Edison Electric Institute, Washington D.C., July 2000: 
p. 8-9.
---------------------------------------------------------------------------

B. Analysis and Assumptions

1. Engineering Analysis
    a. Reliance on ARI and Reverse Engineering Cost Estimates. The 
Department considered primarily two sets of data for relating the 
manufacturing costs of current baseline (minimum SEER) equipment to the 
manufacturing costs of higher efficiency equipment which would become 
baseline equipment under new standards: one source provided by the 
industry through ARI and the other source determined from the 
Department's reverse engineering analysis. In the proposed rule, our 
analyses and conclusions relied heavily on the ARI manufacturing cost 
estimates, and less on the reverse engineering cost estimates.
    However, several comments questioned the validity of the ARI 
results and recommended we rely more heavily, if not exclusively, on 
the reverse engineering estimates. They cited various reasons, 
including retail price information that matched the ARI Mean, the 
greater transparency of the reverse engineering process and results, 
and the natural tendencies of manufacturers to overestimate the costs 
of complying with more stringent standards. The same comments even 
suggest that the reverse engineering cost estimates may themselves be 
overestimates. (OOE, No. 84 at p. 3; NRDC, No. 88 at pp. 3-15; ASE, No. 
81 at p. 11; and NEEP, No. 188 at p. 3).
    Other comments supported the use of the ARI data, citing the 
experience of the manufacturers and apparent flaws in the assumptions 
and methodology used in the reverse engineering analysis, which was 
designed as a validation tool. These perceived flaws included the small 
number of tear-downs performed. However, ARI and some of its members 
recognize that the reverse engineering results fall within their range 
and seem to validate their data to some extent. (ARI, Transcript No. 14 
at p. 42, No. 48 at p. 2 and No. 100 at p. 9; Carrier, No. 92; Trane, 
No. 93; and Lennox, No. 91 at p. 4).
    While we recognize the expertise of ARI's members related to 
projecting the cost of producing central air conditioning equipment, we 
have several concerns with the ARI data. First, ARI has not 
satisfactorily explained why their cost data at 12 SEER and higher 
levels display such a large range between the minimum and maximum 
values. We are convinced that, in order to remain competitive, 
manufacturers will have to adopt relatively similar paths to increase 
the efficiency of their baseline products to meet the new minimum 
standards. This will tend to result in actual costs that are closer to 
the ARI Minimum values than to the ARI Mean values.
    We are also concerned with how closely the data on recent Wisconsin 
retail prices, submitted by ACEEE, agrees with the ARI Mean cost 
estimates. Once we adopt a higher minimum efficiency level, we believe 
that the retail prices of baseline equipment that must meet that level

[[Page 7178]]

will decline below the price of equipment currently at that level. York 
International Corporation (York) and ARI confirmed, for example, that 
their markups generally increase on higher efficiency equipment, and 
Star Supply Company seemed to imply that distributor markups increase 
with increasing efficiency. (Star Supply Co., No. 95 at p. 2; York, 
Transcript No. 73 at p. 117; and ARI, No. 100 at p. 3). Those markups 
are reflected in the current retail prices of those products. Due to 
competitive pressures at the baseline level, today's markups would not 
be sustainable for baseline equipment that meets, but does not exceed, 
a new standard. In addition, as noted by John Compton of Home 
Excellence, Inc. (HEI), a heating and air-conditioning contractor, the 
new, more efficient, baseline equipment would likely possess fewer of 
the premium features found in today's high efficiency equipment. (HEI, 
Transcript No. 73 at p. 123). For those reasons, current retail price 
data would overestimate the relative cost of high efficiency products 
under new standards. The agreement between ARI's mean cost data and the 
Wisconsin retail price data suggests that the ARI cost data correspond 
to today's costs of producing high efficiency equipment rather than to 
the lower production costs we would expect under new standards.
    The reverse engineering analysis, on the other hand, is transparent 
and the results fall within the ARI range and nearer to the ARI Minimum 
where we expect competitive pressure to drive manufacturing costs. 
Seventy-one samples were analyzed using bills-of-materials provided 
manufacturers, supplemented with three physical teardowns, and detailed 
estimates for split air conditioners were reviewed with a major 
manufacturer. Our reverse engineering methodology, though originally 
conceived as a validation exercise, is itself a valid method of 
estimating equipment production costs, and is well suited for use in 
this rulemaking as an indicator of the most likely production costs 
under new standards.
    Based on a consideration of the above, we conclude that the reverse 
engineering cost estimates are more representative of what actual 
production costs will be under new standards and that the ARI Mean cost 
data very likely overestimate those costs. For that reason, we are 
weighing the reverse engineering cost estimates heavily in our 
decision-making. We continue to provide the results based on the ARI 
Mean data cost to illustrate an upper bound, which we believe will be 
quite an unlikely outcome.
    b. Consideration of Emerging Technologies. ACEEE and others 
commented we should have included the savings that could result from 
the use of emerging technologies rather than presenting them 
separately. The Oregon Energy Office and Thermalex, Inc. also expressed 
more optimism regarding the applicability and probability of adoption 
for microchannel heat exchangers than we had expressed in the TSD. 
(ACEEE, Transcript No. 73 at p. 88; ASE, No. 81 at pp. 8, 9 and 12; 
OOE, No. 84 at p. 5; and Thermalex, No. 89 at pp. 1-2).
    Trane and York dispute some of the claims regarding the potential 
of emerging technologies. (Trane, No. 93 at p. 7; and York, No. 90 at 
p.4).
    According to our engineering analysis described in Section 4.5 of 
the TSD, on a system basis, emerging technologies cannot make a 
significant cost impact below 14 SEER. That explains why they are not 
in widespread use today. At 14 SEER and above, some emerging 
technologies could compete quite favorably with the technologies that 
currently dominate in some applications. We did not analyze standard 
levels at 14 SEER, instead we examined 13 SEER and 18 SEER, the Max 
Tech level. ACEEE contends that, had we evaluated life-cycle-costs 
using reverse engineering analysis combined with emerging technology 
impacts, a standard level as high as 14 SEER may have been justified 
after all, and should have been considered. (ACEEE, Transcript No. 73 
at p. 171, and No. 101 at p. 7).
    From our ANOPR analysis based on ARI mean costs, we concluded that 
standard levels between 13 SEER and 18 SEER did not warrant further 
consideration. York had stated that ARI's cost data already included 
the benefits of emerging technologies although we could not verify the 
methods they used to incorporate them. (York, Transcript No. 14 at p. 
116; and ARI, Transcript No. 14 at p. 115). Economic impact results 
based on reverse engineering were more favorable, but still were far 
from compelling. For example, the impact on national net present value 
was negative $8.4 billion for 14 SEER split air conditioners. We 
believe that incorporating the modest reduction in cost due to the most 
likely impact of emerging technologies (about 10 percent for split air 
conditioners) would not have resulted in a 14 SEER level being 
economically justified.
    Overall, we considered the potential of emerging technologies to 
penetrate the market in 13 SEER products under a 13 SEER standard to be 
higher than under lower standard levels. Partially for that reason, we 
believe that the burdens that could accrue from increases in the size 
of baseline equipment under a 13 SEER standard can be somewhat 
mitigated by the use of emerging technologies.
2. Life Cycle Cost (LCC) Analysis
    a. Probability-based analysis. Trane questioned the use of a Monte 
Carlo probability-based analysis because they claim that several of the 
distributions used to characterize the inputs to the analysis are 
erroneous. (Trane, No. 93 at pp. 4-5).
    As part of the process to improve the energy efficiency standards 
analysis, the Department uses a probability-based analysis to determine 
a distribution of life-cycle cost impacts for consumers utilizing 
central air conditioners and heat pumps. Most of the inputs to the 
analysis are characterized with distributions. While some of the input 
distributions are based on limited data, no other data have been 
offered to recharacterize the distributions. Therefore, the Department 
sees no compelling reason to alter its assumptions regarding the input 
distributions.
    b. Energy Use. Trane claimed that the 1997 Residential Energy 
Consumption Survey (RECS) sample is too small and may not accurately 
represent the population of central air conditioner and heat pump 
consumers. In addition, they claimed that the Department is not 
accurately representing the saturation of air-conditioned households. 
Trane stated that the saturation reported by the Department (37.6 
percent) is inconsistent with the saturation reported by RECS (47 
percent). (Trane, No. 93 at pp. 4-5).
    As part of the process to improve the energy efficiency standards 
analysis, the Department is committed to use sensitivity analysis tools 
to evaluate the potential distribution of impacts among different 
subgroups of consumers. The Department believes that RECS provides a 
nationally representative household data set which is suited for 
conducting the type of sensitivity analyses suggested by the Process 
Rule. Limiting the RECS households to those equipped with either 
central air conditioners or heat pumps, the LCC analysis performs a 
household-by-household analysis that predicts the percentage of 
households that will incur net life-cycle cost savings or costs from an 
increased efficiency standard. With regard to apparent discrepancies 
between air-conditioned household saturations, the 37.6 percent

[[Page 7179]]

saturation value cited by Trane represents only those households with 
central air conditioners. When including homes with central air-
conditioning heat pumps, the household saturation used by the 
Department in its LCC analysis matches the 47 percent saturation level 
reported by RECS.
    c. Electricity Prices. Wholesale electricity cost data for the 
period of 1998 through October, 2000, presented by experts on behalf of 
the Appliance Standards Awareness Project (ASAP), demonstrated dramatic 
variations in seasonal wholesale electricity costs for regions of the 
country (i.e., California, New England, New York, and the Pennsylvania-
New Jersey-Maryland region) that have recently deregulated their 
electric utility industry. In particular, wholesale costs during summer 
months and especially certain summer day hours were significantly 
greater than annual average wholesale costs. Wholesale electricity cost 
data for the period spanning 1998 through 1999 for six regulated North 
American Electric Reliability Council (NERC) regions were also 
presented showing that summer costs were also significantly greater 
than average annual costs. (Synapse, Transcript, No. 73 at pp.127-137 
and No. 108 at p. 5). Asserting that DOE's marginal prices based on 
1996 and 1997 data are regulated and do not reflect the marginal cost 
of electricity under a deregulated market, ASAP, ACEEE, NWPPC, and 
Synapse argued that based on recent wholesale electricity cost data, 
marginal costs will significantly exceed average costs during periods 
when air conditioners are operating.\7\ Future marginal electricity 
prices are also likely to increase as electricity markets through out 
the U.S. are deregulated. (ASAP, No. 108 at p. 1; ACEEE, Transcript No. 
73 at pp. 154-158; NWPPC, No. 76 at pp. 3-4; and Synapse, Transcript 
No. 73 at pp. 152-153).
---------------------------------------------------------------------------

    \7\ Marginal prices exclude fixed charges, average prices 
include fixed charges.
---------------------------------------------------------------------------

    Dominion Virginia Power (Dominion), The Southern Company 
(Southern), and EEI all disagree with the assertion that higher 
marginal costs will result from higher wholesale electricity costs. 
Dominion stated that recent deregulation pilot programs in Virginia 
revealed that residential consumers are not being offered rates that 
reflect the costs of generation (e.g., time of use rates). Southern 
warned that it is premature to draw conclusions from wholesale 
electricity costs this early into the deregulation process. Extremely 
high wholesale prices now may not be an indicator as what will happen 
to retail prices in the future. Southern also warned that the specific 
problems facing California with regard to wholesale electricity costs 
are not representative of the current situation in the Southeast where 
peak prices were considerably lower in the summer of 2000 on pooled 
prices than they were the previous summer because of greater supply 
availability. EEI argued that flat rate retail pricing will likely 
continue into the future even under a deregulated market. Electricity 
suppliers will hedge against any probable summer price spikes by 
offering high enough flat rates so that financial losses incurred 
during times of high summer wholesale costs will be more than offset by 
the profits earned during times when wholesale costs are low (e.g., off 
peak summer hours or the winter season). (EEI, Transcript No. 73 at pp. 
148-150; Dominion, Transcript No. 73 at pp. 158-160; and Southern 
Company, No. 96 at pp. 6-7).
    As was stated in the proposed rule, the method for establishing 
marginal electricity prices only allows for defining marginal prices 
for those years in which data are available. In the case of residential 
pricing, the data for establishing marginal prices (the 1997 RECS \8\) 
was taken from the years 1996 and 1997. For commercial buildings, 
utility tariffs used to establish marginal prices were collected in the 
year 1997. On average, residential marginal prices for households with 
central air conditioners are 3 percent lower than average rates while 
for households with heat pumps marginal prices are 7 percent lower. 
Space-cooling marginal prices in commercial buildings are on average 2 
percent greater than average commercial rates. Our method for 
determining marginal prices provides a snapshot of recent retail rates 
and may or may not accurately reflect what marginal prices will be like 
in the future. Although wholesale electricity costs for four 
deregulated electricity markets demonstrate higher wholesale 
electricity costs during times when air conditioners are likely to be 
used, we cannot speculate as to how wholesale electricity prices will 
be translated into retail prices to residential consumers. Thus, rather 
than speculating as to how electricity deregulation may impact marginal 
electricity prices, we are retaining our existing method for 
establishing marginal prices.
---------------------------------------------------------------------------

    \8\ Residential Energy Consumption Survey.
---------------------------------------------------------------------------

    With the above said, the Department investigated the sensitivity of 
consumer life-cycle costs (aggregated to a national level in the form 
of a net present value (NPV)) to increases in the marginal electricity 
price. As will be reported in Chapter V, Analytical Results, the NPV of 
a 13 SEER standard based on Reverse Engineering manufacturing costs is 
a savings to the nation of $1 billion. An increase in the marginal 
electricity price of 3 cents/kWh yields a further increase in the 
operating cost savings so that the NPV equals $5 billion. Although the 
Department will continue to rely on its existing method for 
establishing marginal electricity prices, we recognize that future 
changes in the electric utility industry due to deregulation could 
significantly change future electricity prices and, as a result, 
improve the economic benefits of the standards being issued today.
    d. Product Life. ARI, Carrier Corp., and The Trane Company all 
asserted that the 18.4-year average equipment lifetime assumed by the 
Department is not representative of actual central air conditioner and 
heat pump life. Both Carrier and Trane believed the lifetime is 15 
years while ARI stated that the lifetime is even lower at 13 years. 
(ARI, No. 100 at p. 4; Carrier, No. 92 at p. 5; and Trane, No. 93 at p. 
8).
    The basis of the 18.4-year equipment lifetime was a survey 
conducted on more than 2,100 heat pumps in a seven state region of the 
U.S.\9\. The survey determined not only the lifetime of a complete heat 
pump system, but the life of the original compressor as well. Although 
the system lifetime is on average over 18 years, the survey also showed 
that the original compressor lifetime was, on average, 14 years. Thus, 
the survey indicated that essentially all heat pump owners replaced 
their original compressor once in the lifetime of system. Since the 
heat pump survey clearly indicates that the original compressor is 
replaced once in a system's life, DOE's analysis was based on the 
inclusion of a repair cost for the compressor. Conducting the analysis 
in this manner retains the average system lifetime of 18.4 years but 
explicitly addresses the replacement cost of the compressor, which is 
the most expensive component of a system. As indicated by the survey 
data, the compressor was assumed to be replaced in the 14th year of the 
system's life. Although a shorter equipment lifetime is possible, the 
Department has not been provided with more substantive data to support 
discontinuing its use of the above mentioned survey data. The 
Department believes that the survey

[[Page 7180]]

data provides an accurate representation of central air conditioner and 
heat pump life. In addition, an average lifetime of 14 years was run as 
a scenario for the analyses conducted for the proposed rulemaking 
showing that the resulting consumer economics were very close to the 
results generated with the 18.4-year average life coupled with 
compressor replacement costs.
---------------------------------------------------------------------------

    \9\ ``Bucher, M.E., Grastataro, C.M., and Coleman, W.R., ``Heat 
Pump Life and Compressor Longevity in 'Diverse Climates.'' ASHRAE 
Transacitons, 1990, 96(1): p. 1567-1571.
---------------------------------------------------------------------------

    e. Installation Cost. International Comfort Products (ICP) and HEI 
stated that the consumer's installation costs, e.g, labor and materials 
costs, exclusive of equipment cost, for installing a central air 
conditioner or heat pump will increase with product efficiency. (ICP, 
Transcript No. 73 at pp. 126-127; and HEI, Transcript No. 73 at pp. 92-
93). ICP specifically voiced concerns over the installation cost 
differences between baseline (10 SEER) and 14 SEER equipment stating 
that the more efficient equipment, due its increased physical size, 
would incur higher labor expenses as a result of needing extra 
personnel to install the equipment. Other comments claimed that 
installation costs would be impacted by larger and more efficient units 
for those installations with size constraints such as equipment closets 
in manufactured homes and certain replacement installations in single-
family homes. (MHI, No. 99 at p. 4; York, No. 90 at p. 5; and Lennox, 
No. 91 at p. 7).
    Throughout the analysis we have assumed that installation costs 
would remain constant as efficiency increased. We remain unconvinced 
based on the comments we have received that our assumption is 
necessarily incorrect. Even if installation costs do generally rise as 
the size and weight of equipment increases, manufacturers will have the 
incentive under new standards to reduce the size of 13 SEER equipment 
using various approaches at their disposal. These include existing 
design options that we have mentioned, such as adopting variable speed 
and modulating capacity technologies, converting to microchannel heat 
exchangers, increasing the size of the unconstrained outdoor unit or 
indoor unit only, or changing the footprint or elevation of the unit. 
These possible solutions are applicable to manufactured homes as well 
as site-built homes.
    For those reasons, we are retaining our assumption that 
installation costs remain constant as efficiency levels rise.
    f. Markups. ARI, York, Carrier and Trane commented that we had 
apparently assumed that markups decreased as efficiency levels 
increased, and provided evidence to the contrary. (ARI, No. 100 at p. 
3; York, No. 90 at p. 4; Carrier, No. 92 at p. 5; and Trane, No. 93 at 
p. 12).
    In fact, we did assume for the Manufacturer Impact Analysis that 
markups increase with increasing efficiency under a given standard 
level. This agrees with the comments. However, for the consumer 
economic analyses, as the minimum standard level increases, we assumed 
that some of the markups on the baseline product do decrease. Comments 
did not address that issue, and we believe our assumption is correct. 
Appendix D of the TSD provides more information on this issue.
3. Shipments/National Energy Savings
    a. Adjustments to NAECA Shipment Scenario. ACEEE and the NEEP 
assert that the NAECA efficiency scenario we developed is not at all 
representative of the effect of the NAECA standard as we claim. (ACEEE; 
Transcript No. 73 at p. 213 and No. 118 at p. 4). They point out that 
the distribution of equipment higher than 10 SEER in 1993 was 18 
percent, and that our NAECA scenarios apply much smaller fractions of 
shipments than 18 percent.
    As we mentioned in the TSD for the proposed rule (section 8.3.5), 
the NAECA scenario represents the effect that NAECA had on equipment 
efficiency in the market. A further explanation is warranted. While 
sales of equipment rated higher than 10 SEER was indeed 18 percent in 
1993, it was 10 percent in 1992, 7 percent in 1991, 5 percent in 1990 
and 3 percent in 1989. A trend of improving efficiency had already been 
in place since the late 1970's. NAECA, which became effective in 1992, 
clearly did not cause all the high efficiency shipments that existed in 
1993. However, NAECA did seem to stimulate more high efficiency 
shipments than could have been explained by the ongoing trend. It is 
that enhancement to the status quo that our NAECA scenario attempts to 
reproduce. Thus, under our NAECA scenario, shipments above the 13 SEER 
level increase from 1 percent under the base case to 7 percent with a 
13 SEER standard. Expecting them to increase from 1 percent to 18 
percent as ACEEE and NEEP seem to assert is not at all representative 
of the NAECA experience and is more in line with the Shift scenario 
that we developed.
    b. Fuel Switching. Several comments noted the potential for fuel- 
or equipment-switching from heat pumps to either gas-fired or electric 
resistance heating equipment due to the disparity in the standards 
proposed for central air conditioners (12 SEER) and heat pumps (13 
SEER). The comments stated that the incremental purchase price of a 13 
SEER heat pump relative to a 12 SEER air conditioner with either a gas-
fired or electric resistance heating system is great enough to drive 
heat pump consumers to an alternative space-conditioning system. (ARI, 
No. 100 at p. 10; Southern Company, No. 96 at p. 3; AEP, No. 83 at p. 
2; Carrier, No. 92 at p. 4; EEI, No. 80 at p. 8; York, No. 90 at p. 7; 
and Lennox, No. 91 at pp. 4-6).
    Acknowledging the potential for fuel-or equipment-switching, both 
ASE and ACEEE recommended setting both air conditioner and heat pump 
standards to 13 SEER. (ASE, Transcript No. 73 at p. 197; and ACEEE, 
Transcript No. 73 at pp. 202-203).
    From the perspective of saving the maximum amount of energy that is 
economically justifiable, the biggest ``fuel'' switching concern is 
from heat pumps to a combination of central air conditioners and 
electric resistance heating. This may occur in households that have 
only electric service and where the incremental purchase price of heat 
pumps is too great. Such a price increase might occur if the standard 
on heat pumps is significantly higher than the standard for central air 
conditioners.
    Based on data from the 1997 RECS, a little over 14 percent of 
households have either baseboard or forced air electric resistance 
heating with room or central air conditioning compared to almost 10 
percent of households which have heat pumps. Because there are already 
such a large percentage of households that utilize a combination of 
central or room air-conditioning with resistance heat to meet their 
space-conditioning needs, this supports the possibility that some 
purchasers would choose to switch to resistance heat from heat pumps.
    Compared to heat pumps meeting the standards issued in the proposed 
rule (i.e., 13 SEER and 7.7 HSPF), electric resistance heating uses 
over 225 percent of the energy for the same amount of heating. 
Therefore, if a standard of 13 SEER and 7.7 HSPF is issued for heat 
pumps while a 12 SEER standard is set for central air conditioners, a 
mere 4 percent of heat pump households would need to switch to central 
air conditioners and electric resistance heating to negate the energy 
savings achieved from increasing the heat pump standard from 12 SEER/
7.4 HSPF to 13 SEER/7.7 HSPF.
    If heat pump and air conditioner standards were set at different 
levels, the price differential between the two would increase on the 
order of $200. Under those conditions, we consider it likely that at 
least 4 percent of prospective heat pump owners would

[[Page 7181]]

switch to lower-priced resistance heat. Therefore, we have weighed this 
concern in adopting today's standard levels, which require air 
conditioners and heat pumps to meet the same minimum efficiency 
standard so as to reduce the likelihood of switching to resistance 
heating.
    A larger price differential between heat pumps and air conditioners 
will also tend to encourage switching to gas or oil fired furnaces. It 
is not our objective to encourage or discourage that type of fuel 
switching. Therefore, we also considered this potential effect in our 
decision to establish air conditioner and heat pump efficiency 
standards at the same SEER level.
    c. Drop in Shipments in New Construction Market. ACEEE argued that 
DOE's forecasts for more efficient air-conditioning equipment estimated 
too large of a drop in shipments to the new construction market. They 
state that because the new construction market already has an 80 
percent saturation rate it is unlikely that this market will forego the 
installation of more efficient air-conditioning equipment due to its 
associated increased purchase price. (ACEEE, Transcript No. 73 at pp. 
219-221). This is effectively an argument that the price elasticity of 
air conditioners and heat pumps in the new construction market should 
be much lower than we have assumed.
    Historical saturation data, however, seems to confirm that the 
price elasticity in the new construction market is closer to what was 
derived for the Shipments Analysis, which is already much lower than 
the elasticity we assumed in the replacement market, for example. As 
the price of air conditioners and heat pumps has dropped over time 
relative to household income, the saturation of air-conditioning and 
heat pump equipment has increased in the new housing market to its 
current value of 80 percent. Because of the high saturation in the new 
construction market, the purchase price elasticity for the new housing 
market is small relative to the replacement market. But although the 
price elasticity is small, a decrease in shipments to the new 
construction market will still be likely when equipment prices increase 
(as we expect to occur under a new efficiency standard). As a result, 
for the case of a 13 SEER standard for split system air conditioners 
for example, shipments to the new construction market drop by 
approximately 3 percent based on reverse engineering manufacturing cost 
data. For comparison purposes, shipments to the early replacement 
market drop much more significantly (approximately 15 percent) as this 
market is far less saturated and the resulting purchase price 
elasticity is much more elastic. For those reasons, we retained our 
assumed price elasticity in the analysis.
4. Manufacturer Impact Analysis
    A few comments addressed the manufacturer impact analysis. Trane 
disputes our assumed manufacturer markups. ARI commented that a survey 
of their members revealed that our markup assumptions are grossly 
underestimated, but the TSD (Table 8.7) reveals that, in fact, their 
survey data agrees with the markups we used in the GRIM analysis to 
estimate manufacturer impacts. (Trane, No. 93 at pp. 12 and 22; and 
ARI, No. 100 at p. 3).
    Trane also pointed out several oversights and simplifications 
relating to our characterization of manufacturers and our apparent 
failure to present cash flow results and other important indicators of 
financial strength. (Trane, No. 93 at pp. 6, 11-13 and 23). We believe 
that Chapter 8 of the TSD addresses most of Trane's concerns. No 
evidence cited in the comments suggest that our assumptions contain 
errors that would warrant significant change in our conclusions 
regarding manufacturing impacts.
5. Utility Impacts
    a. Peak Demand Impacts. ACEEE asserts that the peak power impacts 
presented in the proposed rule underestimate the true peak generation 
impacts due to central air conditioner and heat pump standards. ACEEE's 
assertion is based on what they consider as more accurate and 
significantly greater peak impacts as estimated by the Appliance 
Standards Awareness Project (ASAP).\10\ (ACEEE, No. 104 at pp. 5-6). 
APPA warned that excessively high SEER standards could increase peak 
demand. (APPA, No. 113 at p. 1).
---------------------------------------------------------------------------

    \10\ Staying cool: How Energy-Efficient Air Conditioners Can 
Prevent Blackouts, Cut Pollution and Save Money, Appliance Standards 
Awareness Project, July 2000, Authors: J. Thone, T. Kubo, and S. 
Nadel.
---------------------------------------------------------------------------

    For purposes of comparing the estimated peak impacts from the 
Department's analysis based on the use of NEMS-BRS and those from ASAP, 
it is helpful to consider the concept of a conservation load factor 
(CLF). The CLF was first introduced by researchers at Lawrence Berkeley 
National Laboratory to allow for the straightforward calculation of the 
peak demand avoided from a given amount of energy savings.\11\ The CLF 
is defined as:
---------------------------------------------------------------------------

    \11\ Conservation Screening Curves to Compare Efficiency 
Investments to Power Plants: Applications to Commercial Sector 
Conservation Programs, Lawrence Berkeley National Laboratory, 
Berkeley, CA, August 1990, published in the Proceedings of the 1990 
ACEEE Summer Study on Energy Efficiency in Buildings, Authors: J. 
Koomey, A. Rosenfeld, and A. Gadgil.
[GRAPHIC] [TIFF OMITTED] TR22JA01.169

    Thus, a conservation technology that saves a constant amount of 
power on a continuous basis has a CLF of 1.0. Because air conditioning 
use occurs most often during times of peak demand, the CLF is 
significantly lower. The lower the CLF, the greater the amount of peak 
load savings achieved for a given amount of annual energy savings.
    For a 13 SEER central air conditioner and heat pump standard, NEMS-
BRS forecasts peak demand savings which result in a nationally 
representative CLF of 0.22. In contrast, for the same 13 SEER standard, 
ASAP forecasts energy and peak demand savings which result in CLFs 
ranging from 0.08 to 0.14. Based on the above discrepancy in the CLF, 
ACEEE asserts that the peak demand savings forecasted by NEMS-BRS are 
too low. The Department disagrees with ACEEE's position for two 
reasons: (1) ASAP's peak savings estimates rely on suspect air 
conditioner demand data, and (2) metered end-use data from air-
conditioned households in California and Florida indicate that the 
NEMS-BRS-based CLF value of 0.22 is reasonable.
    With regard to ASAP's peak demand estimates, regional calculations 
are based on peak demand data from a single 1988 study by the 
Narragansett Electric Co. (an electric utility in the Northeast).\12\ 
Although ASAP increased

[[Page 7182]]

the Northeast peak demand data by 25 percent for the two Southern 
divisions and decreased it by 25 percent for the Pacific division, no 
basis for these adjustments are provided. Because of ASAP's reliance on 
peak demand data from only one region of the country, we do not place 
much confidence in the peak generation savings provided by ASAP.
---------------------------------------------------------------------------

    \12\ Personal communication with Steve Nadel, ACEEE, October, 
2000.
---------------------------------------------------------------------------

    As opposed to the ASAP results, metered end-use data from Southern 
California and Florida indicate that climate has a much larger affect 
on the CLF than reported by ASAP. In Southern California, a metered 
end-use study conducted on 132 air-conditioned households in Southern 
California Edison's service area revealed that the CLF for this region 
is likely 0.08.\13\ In Homestead, Florida, a metered end-use study 
conducted on ten air-conditioned homes indicated that the CLF is likely 
0.42.\14\ Although strong conclusions cannot be drawn from only two 
studies, the metered end-use results do provide the Department with 
some confidence that the NEMS-BRS CLF estimate of 0.22 is reasonable 
since it falls between the CLF range provided by the two metered end-
use studies. Therefore, we have reason to believe that our assumption 
is more valid than ASAP's.
---------------------------------------------------------------------------

    \13\ Residential Appliance End-Use Survey; Collection of 
Residential Appliance Time-of-Use Energy Load Profiles; 1991 
Results, prepared by Quantum Consulting Inc., Berkeley, CA for 
Southern California Edison Co., San Dimas, CA, November, 1992.
    \14\ Monitored Energy Use Patterns in Low-Income Housing (FSEC-
PF-300), Florida Solar Energy Center, Cocoa, FL, 1996, Authors: D. 
S. Parker, M. D. Mazzara, and J. R. Sherwin.
---------------------------------------------------------------------------

    Obviously more research needs to be conducted in the area of peak 
demand impacts due to increased air conditioner efficiency. But until 
such extensive research is conducted, the Department sees no reason to 
discontinue its use of NEMS-BRS to estimate peak demand savings.
6. Projection of Trends
    Several comments suggested or asserted that we should project 
historical trends that they believe exist. These include price 
reductions or productivity improvements in manufacturing. (ACEEE, 
Transcript No. 73 at pp. 64 and 88-90; and NRDC, Transcript No. 73 at 
pp. 105 and 115), post-standard product efficiencies (ACEEE, Transcript 
No. 73 at p. 210), and electricity prices. (ASAP, No. 108 at p. 1; 
ACEEE, Transcript No. 73 at pp. 154-158; NWPPC, No. 76 at pp. 3-4; and 
Synapse, Transcript No. 73 at pp. 152-153).
    Other comments responded to some of these suggestions. With regard 
to the issue of price reductions or productivity improvements, some 
contend that reductions are due to declining commodity metals prices 
rather than any increases in production efficiency. (Lennox, No. 91 at 
pp. 4-5). On the issue of efficiency trends, EEI claims that rather 
than post-standard efficiency increases, the Department neglected to 
account for pre-standard efficiency increases. (EEI, Transcript No. 73 
at pp. 206-208). Counter to claims that electricity prices will 
increase in the future due to the deregulation of the electric utility 
industry, others state that the future path of deregulation is so 
uncertain that it is unknown as to whether prices will decline or 
increase. (EEI, Transcript No. 73 at pp. 148-150; Dominion, Transcript 
No. 73 at pp. 158-160; and Southern Company, No. 96 at pp. 6-7).
    In these instances where we have conflicting opinions about what is 
responsible for creating a trend, we have no basis for changing our 
initial assumption. Usually, we rely on the most recent set of data we 
have available to us to make projections into the future. In the case 
of efficiency trends, we rely on existing trends that seem to indicate 
that efficiency will remain static after a new standard becomes 
effective. In the case of electricity prices, we rely on the 
projections provided in the Annual Energy Outlook, which is publicly 
and readily available, and which we assume is unbiased with respect to 
parties interested in the outcome of this rulemaking. Since this is the 
case for all the supposed trends listed above, we have not changed any 
of our projections.

C. Other Comments

1. HCFC Phaseout
    Comments noted that as efficiency increases, refrigerant charge may 
increase also. This could cause the United States to reach its cap on 
HCFC-22 use earlier, resulting in higher prices for HCFC-22 than we 
have considered. (Carrier, No. 92 at p. 4). We would point out that 
occurrence would likely accelerate the transition to HCFC-free 
refrigerants. There are also other options available for manufacturers 
to improve equipment efficiency without increasing equipment size or 
charge. Both of these factors will have the effect of suppressing 
increases in refrigerant prices over the long term.
2. Ozone Reduction Catalyst Requirement
    ARI and its members remind us to consider the potential impact on 
the industry of Texas' proposed requirement to mandate the application 
of ozone reduction technology in its most severe non-attainment areas. 
(ARI, No. 100 at p. 13; and Carrier, No. 92 at p. 4).
    We understand that Texas has since withdrawn its proposal. However, 
the TSD does include a preliminary estimate of the burden of this 
requirement on the industry and, to the extent that other states may 
pursue the same course of action, included that in our consideration of 
cumulative burden. We consider that widespread requirements for this 
technology will not be likely, due to its apparently high cost, 
questionable efficacy, and possible reduction in energy efficiency.

D. Additional Standard Requirements

1. EER Standard
    In the proposed rule, we discussed including a requirement for a 
new standard based on a system's energy efficiency ratio (EER) in 
addition to its seasonal energy efficiency ratio (SEER). That new 
standard was to be established at the median of available EER ratings 
at a particular SEER level. Our objective was to ensure that any 
increase in the SEER standard also resulted in an increase in equipment 
efficiency under the warmer conditions best measured by EER. That 
resulting drop in peak power demand would then help avoid the need for 
new power plants and, in the view of many stakeholders, improve power 
system reliability. We asked whether an EER standard would impose a 
significant burden on manufacturers, would significantly affect the 
cost of equipment considered in our analysis, would negatively impact 
the sale of modulating equipment, or would significantly improve power 
system reliability.
    Several comments, including those of environmental advocacy groups 
and some utilities, supported adding an EER standard and urged us to 
adopt the median EER standards we proposed. They cited potential 
benefits that would accrue from avoidance of new power plant capacity 
and a reduction in the occurrence of blackouts. NRDC believes that the 
Act requires us to adopt an EER-based standard. Underlying these 
comments is a belief that SEER standards alone cannot guarantee those 
benefits. Carrier supports an EER-based standard only in lieu of a 
SEER-based standard because it would harmonize with International 
Standards Organization testing requirements. (ACEEE, Transcript No. 73 
at p. 62; NWPPC, Transcript No. 73 at p. 161; ASE, No. 81 at p. 1; 
NPPD, No. 109 at p. 1; OOE, No. 84 at p. 2; NRDC, No. 88

[[Page 7183]]

at p. 3; Omaha Public Power District (OPPD), No. 111 at p. 2; and 
Carrier, No. 92 at p. 8).
    Other comments took an opposing position on the grounds that 
including an EER standard would impede the application of modulating 
components; that we are not permitted to adopt a standard other than 
SEER and have not sufficiently analyzed the validity of an EER-based 
standard; that an EER standard would eliminate products from the 
market; that an EER standard will not improve electric system 
reliability, particularly nationwide; and that there are burdens 
associated with testing and certifying EER. (National Comfort Products 
(NCP), No. 77 at p. 3; EEI, Transcript No. 73 at p. 327 and No. 80 at 
pp. 3 and 9; Dominion, Transcript No. 73 at p. 264 and No. 68 at p. 2; 
Trane, No. 93 at p. 14; York, No. 90 at pp. 1-4; ARI, Transcript No. 73 
at p. 320 and No. 100 at p. 16; Goodman, Transcript No. 73 at p. 302; 
and Southern, Transcript No. 73 at p. 243).
    It is true that under the efficiency level approach, we assume that 
all equipment at the same SEER level costs the same to produce 
regardless of the combination of design options chosen to achieve that 
SEER level. These options include those that raise EER, including 
compressor and heat exchanger upgrades, as well as those that do not 
raise EER, such as thermostatic expansion valves. For any given SEER 
and HSPF levels, the efficiency level approach cannot differentiate 
equipment cost based on different EER choices.
    Underlying the efficiency level approach, however, is the 
assumption that manufacturers make cost-optimal choices based on their 
own unique situations. Therefore, a manufacturer who was required to 
raise the EER of its equipment from the 10th percentile to the 50th 
percentile (median) would indeed incur added costs since its design 
choices would no longer be cost-optimal for its own circumstances. 
Since efficiency levels are expressed in terms of SEER and HSPF only, 
we would have to depart from the efficiency level approach in order to 
quantify those costs.
    We are still convinced that the stringent physical relationship 
between EER and SEER in equipment rated through 12 SEER, which is 
comprised exclusively of non-modulating equipment, would remain intact 
under new standards and for the foreseeable future. Under the adopted 
13 SEER standard, we have less certainty since there are counteracting 
incentives. On the one hand, to reduce warranty claims, manufacturers 
have a strong incentive to simplify the design of baseline equipment. 
This suggests they will favor heat exchanger or compressor improvements 
that improve EER.
    On the other hand, manufacturers will have a strong incentive to 
reduce the size of 13 SEER baseline equipment. Although microchannel 
heat exchangers could reduce size and improve EER, manufacturers could 
also choose to introduce variable speed or capacity modulation 
technologies that can induce them to lower EER at a given SEER level. 
As the cost of power electronics and control technologies come down, 
this possibility becomes more likely.
    However, even if variable speed or modulating technologies 
eventually predominate, and thereby reduce EERs in typical equipment, 
they would still reduce peak demand compared to today's 10 SEER 
baseline equipment. Furthermore, because variable speed and modulating 
equipment mitigate the cyclic losses that are due to widespread over 
sizing, the aggregated peak demand of a group of modulating air 
conditioners with lower EERs will likely be lower than that of a 
similar group of non-modulating air conditioners with higher EERs at 
the same SEER level. Also, utilities have the opportunity with 
modulating equipment to offer customers the option to allow the utility 
to ``lock'' the equipment into low-capacity operation in return for a 
lower electricity price.
    Finally, although the Department is interested in reducing peak 
demand, the primary purpose of appliance efficiency standards is to 
save energy. An EER standard could be counterproductive by discouraging 
variable speed and modulation, which can save substantial amounts of 
energy over the cooling season while providing consumers with 
additional benefits not found in single speed and non-modulating 
equipment.
    Although the Department believes that EPCA permits adoption of an 
EER standard, for the foregoing reasons, we do not believe that the Act 
requires or suggests that we establish such a standard under the 
circumstances here. Given the adopted standard levels, a national EER 
standard is both unnecessary and undesirable. Most benefits accruing 
from an EER standard will likely accrue from the SEER standards alone, 
without the associated burdens on manufacturers and the disincentives 
to apply energy-saving modulating technologies. Therefore, we have not 
adopted an EER standard in this rule.
2. TXV Requirement
    In the proposed rule, we discussed the issues associated with 
mandating thermostatic expansion valves, or TXVs. We did not propose 
such a requirement, but we recognized that such a requirement may be 
capable of saving a great deal of energy. We discussed our options for 
encouraging their use.
    Many comments continue to express strong support for a TXV 
requirement. Many cite a report submitted by Proctor Engineering 
(Proctor) that describes the results of a field study covering 4,000 
units in California. The study concluded that 62 percent of equipment 
is mischarged by more than 5 percent, and that TXVs, which perform 
better than fixed orifices in undercharged conditions, could save 11 
percent of the energy used by that equipment. (Proctor No. 105; OOE, 
No. 84 at p. 2; NRDC, No. 88; California Energy Commission (CEC), No. 
98 at p. 1; ACEEE, No. 101 at p. 8; PG&E No. 104 at p. 1; and ASAP, 
Transcript No. 73 at p. 4).
    Other comments expressed some resistance to a TXV requirement, 
particularly regarding our authority to establish one. Some also 
express concerns about problems associated with TXVs. (NCP, No. 77 at 
p. 4; Trane, No. 93 at p. 19; York, No. 90 at pp. 4-5; Lennox, No. 91 
at p. 3; EEI No. 80 at p. 3; and Carrier, No. 92 at p. 10).
    In response to our concern that mandating TXVs would stifle the 
development of other, perhaps preferable, technologies, Proctor and 
ACEEE suggested performance tests that could be applied in lieu of a 
TXV requirement. They would reward equipment that possessed a TXV or 
performed as well while undercharged or when airflow is restricted. 
This approach is at least partially endorsed by others. (NRDC No. 88 at 
p. 17; CEC No. 199 at p. 1; and OOE, No. 84 at p. 8). Some of the 
commenters preferred that we initially specify TXVs but then phase out 
that requirement in favor of a performance-based approach.
    As we alluded to in the proposed rule, a performance-based approach 
is also our preference and is certainly in the spirit of EPCA. As such, 
the SEER test procedure, not a TXV requirement, appears to be the most 
appropriate vehicle for assuring that an equipment's efficiency rating 
is based on its performance characteristics. In fact, TXVs already 
receive credit in the test procedure because of their superior cyclic 
performance. We are not eager to circumvent the test procedure, 
particularly when the key data either are not available or have not 
been thoroughly reviewed by all interested

[[Page 7184]]

parties. That said, we favor a SEER test procedure that fairly 
evaluates equipment performance under conditions that represent those 
encountered in the field. We would prefer to encourage correct charging 
or proper airflow, but we recognize that practical barriers exist, and 
we will take steps to evaluate whether the SEER test procedure can and 
should be amended to better reflect equipment performance under 
improper charge or airflow.
    In sum, we are not adopting a TXV requirement in this rulemaking. 
Any alterations in the SEER test procedure to further encourage the use 
of TXVs will be undertaken in a separate process. In addition to 
pursuing modifications to the test procedure, we encourage parties 
interested in encouraging the broader application of TXVs to pursue 
other avenues. These include voluntary programs like Energy Star, tax 
incentives, and other state and local initiatives, which can all be 
tied to the presence of a device like a TXV. States also have the 
opportunity to apply to us for an exemption from preemption that would 
allow them to implement their own requirements based on their own 
unique circumstances.
3. HSPF Levels
    Some comments urged us to reconsider our proposed HSPF levels, 
particularly to reflect differences among the HSPF-SEER relationships 
across capacity ratings. Trane commented that HSPF-SEER factors for 
heat pumps are lower with 410A refrigerant than with HCFC-22, and that 
the current proposal for HSPF is too high for 410A by as much as 3 to 5 
percent. (ARI, No. 100 at p. 11; Carrier, No. 92 at p. 7; and Trane, 
No. 93 at p. 8). Others urged us to adopt HSPF levels at the median for 
each SEER level we considered. (OOE, No. 84 at p. 11; and ACEEE, No. 
104 at p. 12).
    As we explained in the proposed rule, we established the HSPF 
levels corresponding to SEER levels in an attempt to maintain the 
existing offset between the minimum HSPF and the minimum SEER. Heating 
energy is a large fraction of total heat pump energy consumption, so we 
prefer not to relax that relationship without sound evidence regarding 
the burdens that would be mitigated. We are reluctant to adopt a more 
stringent level since we are aware that heat pump design is difficult 
and costly, and that improvements in HSPF typically are associated with 
a reduction in SEER. Too stringent a standard would impose considerable 
design and testing burdens on manufacturers, could result in the 
permanent loss of heat pump market share to electric resistance heat, 
and could encourage fuel switching.
    For those reasons, we are retaining our proposed minimum HSPF 
levels in the standards adopted today.

V. Analytical Results and Conclusions

A. Trial Standard Levels

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

              Table V.1.--Trial Standards Levels for Central Air Conditioners and Heat Pumps (SEER)
----------------------------------------------------------------------------------------------------------------
                                                     Split air     Packaged air     Split heat     Packaged heat
              Trial standard level                 conditioners    conditioners        pumps           pumps
----------------------------------------------------------------------------------------------------------------
1...............................................              11              11              11              11
2...............................................              12              12              12              12
3...............................................              12              12              13              13
4...............................................              13              13              13              13
5...............................................              18              18              18              18
----------------------------------------------------------------------------------------------------------------

    For each trial standard level examined, several different scenarios 
were analyzed consisting of variations on: (1) Electricity price and 
housing projections; (2) equipment efficiency distributions; (3) 
manufacturer cost estimates; and (4) societal discount rate. 
Electricity price and housing projections were based on three different 
AEO 2000 forecasts: (1) Reference Case, (2) High Growth Case, and (3) 
Low Growth Case. We analyzed three efficiency scenarios, each of which 
assumed a different efficiency distribution after new standards would 
take effect: (1) NAECA scenario, (2) Roll-up scenario, and (3) Shift 
scenario. Under the standard levels we are adopting, we believe that 
the Roll-up scenario most closely represents the most likely impact of 
the new standards, as explained in Chapter 8 of the TSD. We analyzed 
two manufacturer cost scenarios: (1) Based on reverse engineering data, 
and (2) based on ARI-provided mean cost data. For the reasons expressed 
in Parts III and IV of this document, we believe that the reverse 
engineering data most closely represents the costs as they will 
actually be under the new standards. We assumed a societal discount 
rate of 7 percent for calculating net present value (NPV). However, a 3 
percent value was investigated as an alternative scenario in accordance 
with the Office of Management and Budget's (OMB) Guidelines to 
Standardize Measures of Costs and Benefits and the Format of Accounting 
Statements.
    Our decision on today's final rule was arrived at by placing more 
emphasis on some scenarios rather than others. Our estimates of 
electricity price and housing projections relied primarily on the 
AEO2000 reference case. We considered primarily the NAECA and Roll-up 
efficiency scenarios with an increasing expectation of the Roll-up 
scenario occurring for more stringent trial standard levels. Finally, 
we expect manufacturer costs to lie closer to the reverse engineering 
estimates (which lie between the ARI minimum and ARI mean values).
    The results presented in this chapter include only those that are 
needed to supplement or replace the results we presented in the 
proposed rule, which still form a basis for our decision with the 
exception that we are no longer considering the 14-year life scenarios. 
We believe that the 18.4-year life with a compressor replacement in the 
14th year addresses the concerns of those who believe that actual 
equipment life is closer to 14 years and achieves substantially the 
same analytical results. Therefore, all analyses below assume an 18.4-
year average equipment lifetime with a compressor replacement in the 
14th year.

B. Significance of Energy Savings

    To estimate the energy savings through 2030 due to revised 
standards, we compared the energy consumption of central air 
conditioners and heat pumps under the base case to energy consumption 
of central air conditioners and heat pumps under the revised standard.

[[Page 7185]]

    Table V.2 shows the range of cumulative energy savings based on the 
AEO 2000 Reference, High Growth, and Low Growth cases for each trial 
standard level. The parameters shown are the two manufacturing costs 
and the three equipment shipment efficiency scenarios.

                                                              Table V.2.--Range of National Energy Savings With AEO Price Forecast
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Range of national energy savings for units sold from 2006 to 2030 (quads)
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Reverse engineering costs                                                            ARI mean costs
       Trial standard level       --------------------------------------------------------------------------------------------------------------------------------------------------------------
                                             NAECA                     Roll-up                     Shift                      NAECA                    Roll-up                    Shift
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1................................  1.7 to 1.8...............  1.5 to 1.6...............  1.9 to 2.0...............  1.7 to 1.8..............  1.5 to 1.6..............  1.9 to 20
2................................  2.9 to 3.2...............  2.8 to 3.0...............  3.4 to 3.6...............  2.9 to 3.2..............  2.8 to 3.0..............  3.4 to 3.6
3................................  3.4 to 3.7...............  3.3 to 3.5...............  3.8 to 4.1...............  3.4 to 3.6..............  3.3 to 3.5..............  3.8 to 4.1
4................................  4.3 to 4.6...............  4.1 to 4.4...............  4.7 to 5.0...............  4.2 to 4.5..............  4.1 to 4.4..............  4.6 to 4.9
5................................  8.4 to 9.0...............  8.4 to 9.0...............  8.4 to 9.0...............  8.1 to 8.7..............  8.1 to 8.7..............  8.1 to 8.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C. Payback Period

    As discussed above, the Act requires the Department to examine 
payback periods to determine if the three-year rebuttable presumption 
of economic justification applies. As prescribed by the Act, the 
rebuttable payback period is ``calculated under the applicable test 
procedure * * *''.
    The annual space-cooling and space-heating energy consumption 
calculated based on the hours of use in the test procedure are on the 
order of 50 percent greater than the weighted-average energy 
consumption data used in the life-cycle-cost (LCC) analysis. The LCC 
data are based on the 1997 RECS for residential buildings and hourly 
simulations for commercial buildings. Since the test procedure assumes 
higher annual operating hours than the RECS data implied, the use of 
test procedure energy consumption results in rebuttable payback periods 
which are shorter than median payback periods calculated from the LCC 
analysis.
    In Table V.3, we list the rebuttable payback periods versus SEER 
efficiency level for the four product classes, using the 1997 RECS 
energy consumption data. This information shows that both classes of 
heat pumps are presumed to be economically justified up to a 12 SEER 
efficiency level, using the reverse engineering cost estimates.

        Table V.3.--Summary of Rebuttable Payback Period (Years)
------------------------------------------------------------------------
                                              Reverse
     Product class/efficiency level         engineering   ARI mean costs
                                               costs
------------------------------------------------------------------------
Split System Central Air Conditioner:
    11..................................             3.5             4.7
    12..................................             4.5             5.8
    13..................................             5.2             7.6
    18..................................             7.3            11.3
Split System Heat Pump:
    11..................................             1.3             2.5
    12..................................             1.8             3.3
    13..................................             3.2             4.5
    18..................................             5.8             6.8
Single Package Air Conditioner:
    11..................................             3.5             7.3
    12..................................             3.3             6.2
    13..................................             6.8             9.8
    18..................................             8.6            13.3
Single Package Heat Pump:
    11..................................             2.1             3.7
    12..................................             1.8             4.0
    13..................................             4.3             6.5
    18..................................             5.4             7.2
------------------------------------------------------------------------

D. Economic Justification

1. Economic Impact on Manufacturers and Consumers
    Estimated economic impacts of standards on manufacturers are based 
on the methodology described in the proposed rule; however, in today's 
final rule the manufacturer impact analysis has been expanded to 
include impacts based on reverse engineering cost estimates as well as 
ARI manufacturing cost data. The economic impacts on manufacturers are 
presented in terms of industry net present value (INPV) as well as 
change in INPV. INPV is calculated by summing the stream of annual 
discounted cash flows beginning from the base year of the analysis 
(2000) and continuing explicitly for ten years after the implementation 
of the standard and adding the discounted value of the industry at the 
end of the ten-year period (see TSD Section 8.4.4 and Appendix G). The 
discount rate is based on the industry's weighted average cost of 
capital. This method of calculating INPV provides one measure of the 
fair value of the industry in today's dollars. The impact of new 
standards on INPV is then the difference between the INPV in the base 
case (no new standards) and the INPV is the standards case (with new 
standards).
    Data are presented for the base case and for trial standard levels 
1 through 4, in Tables V.4 through V.9. As can be observed, 
manufacturer impacts are relatively insensitive between the

[[Page 7186]]

manufacturing cost estimates, but sensitive to the shipment scenarios. 
The proposed rule provides additional information on the methodology, 
assumptions and results.

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


  Table V.5.--Changes in Industry Net Present Value--Reverse Engineering Relative Cost, Roll-up Efficiency Mix
----------------------------------------------------------------------------------------------------------------
                                                                   Industry net    Change in INPV from base case
                         Standard level                            present value -------------------------------
                                                                    ($ million)      $ million        Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................           1,539  ..............  ..............
1...............................................................           1,379           (160)             -10
2...............................................................           1,226           (313)             -20
3...............................................................           1,220           (319)             -21
4...............................................................           1,236           (303)             -20
----------------------------------------------------------------------------------------------------------------


   Table V.6.--Changes in Industry Net Present Value--Reverse Engineering Relative Cost, Shift Efficiency Mix
----------------------------------------------------------------------------------------------------------------
                                                                   Industry net    Change in INPV from base case
                         Standard level                            present value -------------------------------
                                                                    ($ million)      $ million        Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................           1,539  ..............  ..............
1...............................................................           1,658             119               8
2...............................................................           1,772             233              15
3...............................................................           1,776             237              15
4...............................................................           1,824             285              19
----------------------------------------------------------------------------------------------------------------


      Table V.7.--Changes in Industry Net Present Value--ARI Mean Manufacturing Cost, NAECA Efficiency Mix
----------------------------------------------------------------------------------------------------------------
                                                                   Industry net    Change in INPV from base case
                         Standard level                            present value -------------------------------
                                                                    ($ million)      $ million        Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................           1,603  ..............  ..............
1...............................................................           1,566            (37)              -2
2...............................................................           1,417           (186)             -12
3...............................................................           1,406           (197)             -12
4...............................................................           1,420           (183)             -11
----------------------------------------------------------------------------------------------------------------


     Table V.8.--Changes in Industry Net Present Value--ARI Mean Manufacturing Cost, Roll-up Efficiency Mix
----------------------------------------------------------------------------------------------------------------
                                                                   Industry net    Change in INPV from base case
                         Standard level                            present value -------------------------------
                                                                    ($ million)      $ million        Percent
----------------------------------------------------------------------------------------------------------------
Base............................................................           1,603  ..............  ..............
1...............................................................           1,422           (181)             -11
2...............................................................           1,241           (362)             -23
3...............................................................           1,236           (367)             -23
4...............................................................           1,268           (335)             -21
----------------------------------------------------------------------------------------------------------------


[[Page 7187]]


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

    Table V.10 provides the change in INPV relative to the base case 
(with no change in standards) for trial standard levels 1 through 4. 
Data are presented for two industry segments (lower cost manufacturers 
and higher cost manufacturers), and for the three shipment efficiency 
scenarios.

      Table V.10.--Change in Industry Net Present Value (percent) Relative to Base--Comparison Between Lower (L) and Higher (H) Cost Manufacturers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Reverse engineering relative cost (in percent)                 ARI mean manufacturing cost (in percent)
                                 -----------------------------------------------------------------------------------------------------------------------
         Standard level                  NAECA              Roll-up              Shift               NAECA              Roll-up              Shift
                                 -----------------------------------------------------------------------------------------------------------------------
                                      L         H         L         H         L         H         L         H         L         H         L         H
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................         5        -4         3       -15         6         8         5        -5         3       -16         7         9
2...............................         7       -16         5       -28        13        16         7       -17         5       -31        12        14
3...............................         8       -17         6       -29        14        16         9       -19         6       -32        14        16
4...............................        12       -18        10       -29        19        18        15       -19        13       -31        21        19
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For the group most negatively impacted, i.e., the higher cost 
group, Table V.11 presents the Return on Invested Capital (ROIC) in 
year 2011 associated with the base case, and with each new standard 
level for the NAECA and Roll-up shipment efficiency scenarios.

              Table V.11.--Return on Invested Capital (ROIC) in 2011 for Higher Cost Manufacturers
----------------------------------------------------------------------------------------------------------------
                                                     Reverse engineering  (in      ARI manufacturing costs  (in
                                                             percent)                        percent)
                 Standard level                  ---------------------------------------------------------------
                                                       NAECA          Roll-up          NAECA          Roll-up
----------------------------------------------------------------------------------------------------------------
Base............................................            13.0            13.0            13.3            13.3
1...............................................            12.2            10.7            12.3            10.7
2...............................................            10.2             8.5             0.2             8.4
3...............................................            10.0             8.4            10.0             8.3
4...............................................             9.7             8.4             9.6             8.3
----------------------------------------------------------------------------------------------------------------

    Consumers will also be affected by increased efficiency standards 
in that they will experience higher purchase prices and lower operating 
costs. These impacts are best captured by changes in life cycle costs 
which are discussed below.
2. Life-Cycle-Cost (LCC)
    We analyzed the net effect by calculating the LCC. Inputs required 
for calculating LCC include total installed costs (i.e., equipment 
price plus installation costs), annual energy savings, average and 
marginal electricity prices, electricity price trends, repair costs, 
maintenance costs, equipment lifetime, and discount rates.
    The output of the LCC model is the mean LCC savings for each 
product class as well as a probability distribution or likelihood of 
LCC reduction or increase. The LCC analysis for today's final rule 
employs a concept described in the proposed rule with regard to the 
percentage of consumers (both residential and commercial) that are 
impacted to a substantial degree by an increase in the minimum 
efficiency standard.
    Table V.12 summarizes the LCCs for baseline split systems and 
single package central air conditioners and heat pumps and also shows a 
2 percent threshold which helped us identify those consumers who are 
impacted to a more substantial degree.

                 Table V.12.--Baseline Life-Cycle-Costs
------------------------------------------------------------------------
                                                         2% of Baseline
           Product Class               Baseline LCC           LCC
------------------------------------------------------------------------
Split Air Conditioners............             $5,170               $103
Split Heat Pumps..................              9,679                194
Single Package Air Conditioners...              5,629                113
Single Package Heat Pumps.........              9,626                193
------------------------------------------------------------------------


[[Page 7188]]

    Tables V.13 and V.14 depict the LCC results for split system and 
single package central air conditioners and heat pumps. The tables show 
the average LCC values for the baseline and each trial standard level. 
Since manufacturer cost data were not available for the 18 SEER 
efficiency levels, 15 SEER cost data were used for all 18 SEER 
calculations resulting in 18 SEER LCC results which underestimate their 
true cost level. The data in Tables V.13 and V.14 also present the 
difference in LCC at each efficiency level relative to the baseline. 
The differences represent either an LCC savings or an LCC cost 
increase. In addition, the tables show the subset of consumers (both 
residential and commercial) at each efficiency level who are impacted 
in one of three ways: consumers who achieve net LCC savings in excess 
of 2 percent of the baseline LCC, consumers whose change in LCC is 
within 2 percent of the baseline LCC, and consumers who 
achieve a net LCC increase exceeding 2 percent of the baseline LCC.

              Table V.13.--Summary of LCC Results based on Reverse Engineering Manufacturing Costs
----------------------------------------------------------------------------------------------------------------
                                                                            Percent of consumers with
                                                  Average LCC  -------------------------------------------------
Product Class/Efficiency Level    Average LCC       Savings                      Net Savings or
                                                    (Costs)       Net Savings    Costs  (2
                                                                    (>2 %)          minus>2%)           %)
----------------------------------------------------------------------------------------------------------------
Split System Central Air
 Conditioner:
    10........................          $5,170  ..............  ..............  ................  ..............
    11........................           5,095             $75              28               70               2%
    12........................           5,057             113              35               40              25%
    13........................           5,057             113              34               27              39%
    18........................           5,307           (137)              25                7              68%
Split System Heat Pump:
    10........................           9,679  ..............  ..............  ................  ..............
    11........................           9,470             209              40               60               0%
    12........................           9,314             365              58               42               0%
    13........................           9,307             372              52               42               6%
    18........................           9,720            (41)              28               15              57%
Single Package Air
 Conditioner:
    10........................           5,629  ..............  ..............  ................  ..............
    11........................           5,551              78              27               72               1%
    12........................           5,466             163              40               51               9%
    13........................           5,600              29              28               20              52%
    18........................           5,905           (276)              21                6              73%
Single Package Heat Pump:
    10........................           9,626  ..............  ..............  ................  ..............
    11........................           9,419             207              39               61                0
    12........................           9,205             421              66               34                0
    13........................           9,273             353              50               38               12
    18........................           9,460             166              37               15               48
----------------------------------------------------------------------------------------------------------------


                    Table V.14.--Summary of LCC Results Based on ARI Mean Manufacturing Costs
----------------------------------------------------------------------------------------------------------------
                                                                             Percent of consumers with
                                                                 -----------------------------------------------
                                                    Average LCC                   Net savings or
 Product class/efficiency level     Average LCC       savings       Net savings       (costs)      Net costs  (>
                                                      (costs)         (> 2%)       (        2%)
                                                                                        2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air
 Conditioner:
    10..........................          $5,170  ..............  ..............  ..............  ..............
    11..........................           5,126             $44              23              68               9
    12..........................           5,125              45              27              34              39
    13..........................           5,199            (29)              25              17              58
    18..........................           5,725           (555)              15               4              81
Split System Heat Pump:
    10..........................           9,679  ..............  ..............  ..............  ..............
    11..........................           9,529             150              30              70               0
    12..........................           9,437             242              42              55               3
    13..........................           9,464             215              39              39              22
    18..........................           9,955           (276)              23              11              66
Single Package Air Conditioner:
    10..........................           5,629  ..............  ..............  ..............  ..............
    11..........................           5,649            (20)              16              47              37
    12..........................           5,600              29              26              30              44
    13..........................           5,804           (175)              18              11              71
    18..........................           6,370           (741)              12               4              84
Single Package Heat Pump:
    10..........................           9,626  ..............  ..............  ..............  ..............
    11..........................           9,492             134              28              72               0
    12..........................           9,372             254              44              49               7
    13..........................           9,514             112              33              31              36

[[Page 7189]]

 
    18..........................           9,922           (296)              24              10              66
----------------------------------------------------------------------------------------------------------------

    Consumer subgroup impacts have been estimated by determining the 
LCC impacts of the trial standard levels on those consumers who are 
below the poverty line (e.g., for a family of four, this constitutes a 
household income of less than $16,036). To perform this calculation, we 
used the subset of RECS 97 data for households that are considered low-
income.\15\ Table V.15 and V.16 summarize the impacts on low-income 
consumers who utilize central air conditioners and heat pumps.
---------------------------------------------------------------------------

    \15\ Approximately 7 percent of the RECS 97 households with 
central air conditioners and 9 percent of the households with heat 
pumps met this criteria.

  Table V.15.--Summary of LCC Results on Low-Income Consumers Based on Reverse Engineering Manufacturing Costs
----------------------------------------------------------------------------------------------------------------
                                                                             Percent of consumers with
                                                                 -----------------------------------------------
                                                    Average LCC                   Net Savings or
 Product class/efficiency level     Average LCC       savings       Net savings       (costs)      Net costs  (>
                                                      (costs)         (> 2%)       (        2%)
                                                                                        2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air
 Conditioner:
    10..........................          $4,906  ..............  ..............  ..............  ..............
    11..........................           4,855             $51              21              74               5
    12..........................           4,841              65              28              38              34
    13..........................           4,863              43              26              24              50
    18..........................           5,176           (270)              17               6              77
Split System Heat Pump:
    10..........................           8,965  ..............  ..............  ..............  ..............
    11..........................           8,836             129              26              74               0
    12..........................           8,742             223              44              56               0
    13..........................           8,780             185              39              49              12
    18..........................           9,389           (424)              15              10              75
Single Package Air Conditioner:
    10..........................           5,327  ..............  ..............  ..............  ..............
    11..........................           5,272              55              21              77               2
    12..........................           5,202             125              34              52              14
    13..........................           5,364            (37)              21              18              61
    18..........................           5,704           (377)              15               5              80
Single Package Heat Pump:
    10..........................           9,149  ..............  ..............  ..............  ..............
    11..........................           9,057             118              24              76               0
    12..........................           8,973             265              53              47               0
    13..........................           9,145             148              36              44              20
    18..........................           9,619           (284)              20              14              66
----------------------------------------------------------------------------------------------------------------


        Table V.16.--Summary of LCC Results on Low-Income Consumers Based on ARI Mean Manufacturing Costs
----------------------------------------------------------------------------------------------------------------
                                                                             Percent of consumers with
                                                    Average LCC  -----------------------------------------------
 Product class/efficiency level     Average LCC       savings                      Savings/costs
                                                      (costs)       Net savings    (   Net costs  (>
                                                                      (> 2%)            2%)             2%)
----------------------------------------------------------------------------------------------------------------
Split System Central Air
 Conditioner:
    10..........................          $4,906  ..............  ..............  ..............  ..............
    11..........................           4,887             $19              17              66              17
    12..........................           4,903               3              20              29              51
    13..........................           5,007           (101)              17              14              69
    18..........................           5,598           (692)              10               2              88
Split System Heat Pump:
    10..........................           8,965  ..............  ..............  ..............  ..............
    11..........................           8,890              75              16              84               0
    12..........................           8,862             103              27              64               9
    13..........................           8,948              17              25              40              35
    18..........................           9,610           (645)              11               8              81
Single Package Air Conditioner:
    10..........................           5,327  ..............  ..............  ..............  ..............

[[Page 7190]]

 
    11..........................           5,283              44              11              42              47
    12..........................           5,313              14              20              27              53
    13..........................           5,568           (241)              12               9              79
    18..........................           6,158           (831)              10               2              88
Single Package Heat Pump:
    10..........................           9,149  ..............  ..............  ..............  ..............
    11..........................           9,057              92              21              78               1
    12..........................           8,973             176              35              53              12
    13..........................           9,145               4              25              27              48
    18..........................           9,619           (470)              18               8              74
----------------------------------------------------------------------------------------------------------------

    In comparing the LCC results on the subgroup of consumers who are 
low-income (Tables V.15 and V.16) versus all central air conditioner 
and heat pump consumers (Tables V.13 and V.14), it appears that low-
income consumers have lower savings at the different trial standard 
levels than the general population of central air conditioner and heat 
pump consumers. Table V.17 directly compares the LCC impacts of the 
final rule on both the low-income subgroup and all consumers.

                           Table V.17.--Comparison of LCC Impacts of the Final Rule on All Consumers vs. Low-Income Consumers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Reverse engineering costs                        ARI mean costs
                                                                 ---------------------------------------------------------------------------------------
                                                                   Average LCC savings  Percent of consumers   Average LCC savings  Percent of consumers
                                                                         (costs)         with net costs (>2%         (costs)         with net costs (>2%
                      Product class                        SEER  ----------------------   of baseline LCC)   ----------------------   of baseline LCC)
                                                                                       ----------------------                      ---------------------
                                                                     All        Low-       All        Low-       All        Low-       All        Low-
                                                                  consumers    income   consumers    income   consumers    income   consumers    income
--------------------------------------------------------------------------------------------------------------------------------------------------------
Split System A/C........................................      13       $113        $43         39         50      ($29)     ($101)         58         69
Split System HP.........................................      13        372        185          6         12        215         17         22         35
Single Package A/C......................................      13         29       (37)         52         61      (175)      (241)         71         79
Single Package HP.......................................      13        353        148         12         20        112          4         36         48
--------------------------------------------------------------------------------------------------------------------------------------------------------

3. Net Present Value and Net National Employment
    The net present value analysis is a measure of the cumulative 
benefit or cost to the Nation that would result from more stringent 
standards. As with the determination of national energy savings, four 
different scenarios were analyzed for each trial standard level 
consisting of variations on: (1) Electricity price and housing 
projections; (2) shipment efficiency distributions; (3) manufacturer 
cost estimates; and (4) societal discount rate. Electricity price and 
housing projections were based on three different AEO 2000 forecasts: 
(1) Reference Case, (2) High Growth Case, and (3) Low Growth Case. 
Three efficiency scenarios were analyzed which forecast the shipment 
efficiency distribution after new standards: (1) NAECA scenario, (2) 
Roll-up scenario, and (3) Shift scenario. For these results the 
equipment lifetime was assumed to be 18.4 years, coupled with the 
inclusion of compressor replacement costs and an assumed societal 
discount rate of 7 percent. The range of NPVs are reported in Table 
V.18.

                                  Table V.18: Range of Net Present Value With Electricity Price and Housing Projections
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Net present value for unites sold from 2006 to 2030 (billion 98$)
                                ------------------------------------------------------------------------------------------------------------------------
      Trial standard level                        Reverse engineering costs                                         ARI mean costs
                                ------------------------------------------------------------------------------------------------------------------------
                                        NAECA               Rool-up              Shift               NAECA              Roll-up              Shift
--------------------------------------------------------------------------------------------------------------------------------------------------------
1..............................  1 to 2.............  2.................  1 to 2............  0.................  1.................  0 to -1
2..............................  2..................  2 to 3............  0 to -1...........  -1................  0 to 1............  -3 to -4
3..............................  1 to 2.............  2 to 3............  -1 to -2..........  -1 to -2..........  0 to -1...........  -5
4..............................  0 to 1.............  1 to 2............  -3 to -4..........  -5 to -6..........  -4................  -10
5..............................  -10 to -11.........  -10 to -11........  -10 to -11........  -22...............  -22...............  -22
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In order to show the sensitivity of the NPVs in Table V.18 to the 
various input assumptions, Tables V.19 through V.22 report the range of 
NPV results for a range of assumptions and scenarios relative to the 
base case national equipment and operating costs for all central air-
conditioning and heat pump equipment. By the ``base case'' we mean the 
case of no new efficiency standards. The results in Table V.19 and V.20 
are the AEO 2000 Reference Case forecast of

[[Page 7191]]

electricity prices and housing. The total costs are presented for the 
base case and each trial standard level. The discount rate is 7 
percent. In addition, the NPV (the difference in total costs between 
the base case and trial standard level), as well as the NPV as a 
percentage of the ``Base Case Total Costs,'' are calculated for each 
trial standard level.

   Table V.19.--Net Present Values Results Relative to Base Case Total Equipment and Operating Costs Based on Reverse Engineering Manufacturing Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Efficiency scenario
                                                      --------------------------------------------------------------------------------------------------
                                                                    NAECA                           Roll-up                           Shift
                                            Base case --------------------------------------------------------------------------------------------------
                                              total                        NPV                              NPV                              NPV
                    TSL                       costs              ----------------------           ----------------------           ---------------------
                                             billion     Total                   As       Total                   As       Total                   As
                                               98$       costs                percent     costs                percent     costs                percent
                                                        billion    Billion    of base    billion    Billion    of base    billion    Billion    of base
                                                          98$        98$        case       98$        98$        case       98$        98$        case
                                                                               total                            total                            total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.........................................        379        378          2        0.4        377          2        0.5        378          1        0.4
2.........................................        379        377          2        0.5        377          3        0.7        380        (1)        0.2
3.........................................        379        378          1        0.4        377          2        0.6        381        (2)        0.5
4.........................................        379        379          0        0.0        378          1        0.3        383        (4)        0.9
5.........................................        379        390       (10)       -2.7        390       (10)       -2.7        390       (10)       -2.7
--------------------------------------------------------------------------------------------------------------------------------------------------------


             Table V.20.--Net Present Values Relative to Base Case Total Equipment and Operating Costs Based on ARI Mean Manufacturing Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Efficiency scenario
                                                      --------------------------------------------------------------------------------------------------
                                                                    NAECA                           Roll-up                           Shift
                                            Base case --------------------------------------------------------------------------------------------------
                                              total                        NPV                              NPV                              NPV
                    TSL                       costs              ----------------------           ----------------------           ---------------------
                                             billion     Total                   As       Total                   As       Total                   as
                                               98$       costs                percent     costs                percent     costs                percent
                                                        billion    Billion    of base    billion    Billion    of base    billion    billion    of base
                                                          98$        98$        case       98$        98$        case       98$        98$        case
                                                                               total                            total                            total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.........................................        381        381          0        0.0        381          1        0.2        385          0       -0.1
2.........................................        381        382        (1)       -0.3        381          0        0.0        388        (3)       -0.9
3.........................................        381        383        (2)       -0.5        382        (1)       -0.2        390        (5)       -1.4
4.........................................        381        387        (5)       -1.4        386        (4)       -1.1        395       (10)       -2.5
5.........................................        381        403       (22)       -5.8        403       (22)       -5.8        407       (22)       -5.8
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table V.21 shows how a 3 percent discount rate\16\ impacts the net 
present value. Only the Roll-up efficiency scenario and the AEO 
Reference Case electricity price and housing projection were considered 
in analyzing the impacts from a 3 percent discount rate.
---------------------------------------------------------------------------

    \16\ A societal discount rate of 3 percent value was 
investigated as a scenario in accordance with the Office of 
Management and Budget's (OMB) Guidelines to Standardize Measures of 
Costs and Benefits and the Format of Accounting Statements.

                                         Table V.21: Net Present Values Results Based on 3-Percent Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Reverse engineering costs                            ARI mean costs
                                                         -----------------------------------------------------------------------------------------------
                                                                             Trial standard level                            Trial standard level
                                                           Base case ------------------------------------  Base case -----------------------------------
                           TSL                               total                                           total                    Net
                                                             costs    Total cost      Net     As percent     costs    Total cost    present   As percent
                                                            billion     billion     present     of base     billion     billion      value      of base
                                                              98$         98$      value 98$  case total      98$         98$       billion   cast total
                                                                                                 costs                                98$        costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................         708         701           7         0.9         712         707           4         0.6
2.......................................................         708         697          11         1.6         712         705           6         0.9
3.......................................................         708         697          11         1.6         712         706           6         0.8
4.......................................................         708         697          11         1.5         712         711           0         0.0
5.......................................................         708         716         (8)        -1.2         712         746        (35)        -4.9
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The proposed rule also estimated the national employment impacts 
due to each of the five trial standard levels. As discussed in the 
proposed rule, the energy efficiency standards for central air 
conditioners and heat pumps are expected to reduce electricity bills 
for residential and commercial consumers and the resulting net savings 
are expected to be redirected to other forms of economic activity. 
These shifts in

[[Page 7192]]

spending and economic activity are expected to affect the demand for 
labor.
    As we did for the proposed rule, the Department estimated the 
impacts of the new standards on national labor demand using an input/
output model of the U.S. economy. The model characterizes the 
interconnections among 35 economic sectors using data from the Bureau 
of Labor Statistics. For some years after the new standards go into 
effect, new consumer expenditure on air conditioners and heat pumps 
each year outpaces their annual energy savings. This activity redirects 
expenditures into the manufacturing sector, which is less labor 
intensive than other sectors of the economy,\17\ producing a loss of 
jobs in those sectors that is larger than the gain of jobs in 
manufacturing. Also, a loss of jobs results in the utility sector due 
to its loss of revenues. As annual consumer energy savings begin to 
exceed annual new expenditures on air conditioners, eventually the new 
standards will produce a net gain in national employment.
---------------------------------------------------------------------------

    \17\ Bureau of Economic Analysis, Regional Multipliers: A User 
Handbook for the Regional Input-Output Modeling System (RIMS II)
---------------------------------------------------------------------------

    The increases or decreases in the net demand for labor in the 
economy estimated by the input/output model due to air conditioner and 
heat pumps standards are likely to be very small relative to total 
national employment. For the following reasons any modest changes in 
employment are in doubt:
     Unemployment is now at the lowest rate in 30 years. If 
unemployment remains very low during the period when the standards are 
put into effect, it is unlikely that the standards alone could result 
in any change in national employment levels;
     Neither the BLS data nor the input-output model used by 
DOE include the quality or wage level of the jobs. The losses or gains 
from any potential employment change may be offset if job quality and 
pay also change; and
     The net benefits or losses from potential employment 
changes are a result of the estimated net present value of benefits or 
losses likely to result from air conditioner and heat pump standards. 
It may not be appropriate to 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 central air conditioner and 
heat pump standards are likely to result in no appreciable job losses 
to the nation.
4. Impact on Utility or Performance of Products
    As detailed in Section V of the proposed rule, in establishing 
classes of products we believe the adopted standards will not result in 
any degradation of utility or performance in the covered products.
5. Impact of Any Lessening of Competition
    The Act directs the Department to consider any lessening of 
competition that is likely to result from standards. It further directs 
the Attorney General to determine the impact, if any, of any lessening 
of competition likely to result from a proposed standard and transmit 
such determination to the Secretary, not later than 60 days after the 
publication of a proposed rule, together with an analysis of the nature 
and extent of such impact. EPCA Section 325(o)(2)(B)(i)(V) and (B)(ii), 
42 U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii).
    In order to assist the Attorney General in making such a 
determination, the Department provided the Department of Justice (DOJ) 
with copies of the proposed rule and the TSD for review. At DOE's 
request, the DOJ reviewed the manufacturer impact analysis interview 
questionnaire to ensure that it would provide insight concerning any 
lessening of competition due to any proposed trial standard levels.
    As previously discussed in section II.D.4 above, the Department of 
Justice concluded that the residential central air conditioner and heat 
pump standards contained in the proposed rule could have an adverse 
impact on competition. The proposed standards would have changed the 
current central air conditioner and heat pump efficiency standards of 
10 SEER/6.8 HSPF for split system air conditioners and heat pumps and 
9.7 SEER/6.6 HSPF for single package air conditioners and heat pumps to 
12 SEER for air conditioners and 13 SEER/7.7 HSPF for heat pumps. 
Through-the-wall equipment was the only exception. We proposed an 11 
SEER standard for that class.
    DOJ identified three possible competitive problems presented by the 
proposed standards. First, DOJ stated that the proposed 13 SEER heat 
pump standard would have a disproportionate impact on smaller 
manufacturers. They stated that currently less than 20 percent of the 
total current product lines meet the proposed standards, but for some 
small manufacturers, 100 percent of their product lines fail to satisfy 
the proposed standard.
    Second, DOJ stated that the proposed standard for heat pumps, and 
in some instances for air conditioners, would have an adverse impact on 
some manufacturers of products (including those products referred to in 
the proposed rule as ``niche products'') used to retrofit existing 
housing and used in manufactured housing. These manufacturers could 
not, according to DOJ, make units that comply with the rule and fit 
into the available space.
    Third, DOJ expressed concern that the proposed heat pump standard 
of 13 SEER could make heat pumps less competitive with alternative 
heating and cooling systems. Because the standard would result in 
increases in the size and cost of heat pumps, it is possible that 
purchasers would shift away from heat pumps to other systems that 
inc1ude electric resistance heat, reducing the competition that 
presently exists between heat pumps and those other systems.\18\
---------------------------------------------------------------------------

    \18\ DOJ also wrote about our request for comments on a proposal 
to adopt a standard for steady-state cooling efficiency (EER). The 
regulation language in the proposed rule did not include a provision 
regarding an EER standard, and DOJ limited its views to the 
standards set forth in the proposed regulation language, indicating 
that if the Department proposes rule language in the future 
incorporating an EER standard, DOJ would address the competitive 
impact of that standard.
---------------------------------------------------------------------------

    The Department of Justice urged the Department of Energy to take 
into account these possible impacts on competition in determining its 
final energy efficiency standard for air conditioners and heat pumps. 
DOJ wrote that the Department of Energy should consider setting a lower 
SEER standard for heat pumps, such as the standard included in Trial 
Standard Level 2, and a lower SEER standard for air conditioners for 
retrofit markets where there are space constraints (such as markets 
served by niche products) and for manufactured housing.
    As we noted in the Supplementary ANOPR and proposed rule, nearly 
all small manufacturers produce only niche products. DOJ's first 
concern relates to disproportionate impacts on small manufacturers, 
which are substantially the same group as the niche product 
manufacturers. Furthermore, niche products almost exclusively serve 
applications with severe space constraints. Today's final rule 
prescribes standards only for those products that are not severely 
space-constrained, and therefore substantially eliminates their first 
concern regarding the impact of more stringent standards on small 
manufacturers.

[[Page 7193]]

    DOJ's second concern about products intended for space constrained 
markets are more difficult to address since the standards apply to 
products at the point of manufacture and not the point of installation. 
We have removed one element of this concern by not specifying new 
standards for niche products, primarily due to our concern over their 
continued viability in replacement applications. However, we recognize 
that larger conventional equipment also poses problems in replacement 
applications and that these problems may be more complex in 
manufactured homes. Nevertheless, air conditioner and heat pump 
manufacturers do have options for increasing the efficiency of 
equipment without increasing the size of both the indoor and outdoor 
units, and we expect products utilizing those options to be available 
to consumers during the time when the standards we are adopting today 
are in effect.
    As to DOJ's third concern regarding possible shifting in the market 
from heat pumps to resistance heaters, we have adopted the same minimum 
SEER requirement for heat pumps as we have for air conditioners. That 
action substantially reduces the incentive for consumers to switch, 
thereby addressing that concern.
    In summary, the standards we are adopting should effectively 
eliminate most of DOJ's concerns regarding the lessening of 
competition, even under TSL 4. To the extent that we have not fully 
eliminated all their concerns, however, we have considered the 
remaining possibility for lessening of competition as we weighed the 
burdens of today's adopted standards.
6. Need of the Nation To Save Energy
    The Secretary recognizes the need of the Nation to save energy. 
Enhanced energy efficiency improves the nation's energy security, and 
reduces the environmental impacts of energy production. Improved 
efficiency of central air conditioners and heat pumps is also likely to 
improve the reliability of the nation's electric system. The energy 
savings from central air conditioner and heat pump standards result in 
reduced emissions of carbon and NOX. Cumulative emissions 
savings over the 15-year period modeled are shown in Table V.22. The 
results presented in Table V.22 are based only on the AEO 2000 
Reference Case for electricity price and housing projections and the 
NAECA efficiency scenario.

   Table V.22.--Cumulative Emissions Reductions Based on AEO 2000 Reference Case and NAECA Efficiency Scenario
                                                   (2006-2020)
----------------------------------------------------------------------------------------------------------------
                                                     Reverse engineering costs            ARI mean costs
              Trial standard level               ---------------------------------------------------------------
                                                    Carbon (Mt)      NOX (kt)       Carbon (Mt)      NOX (kt)
----------------------------------------------------------------------------------------------------------------
1...............................................            13.2            36.7            13.4            37.2
2...............................................            23.8            72.7            23.7            67.9
3...............................................            27.7            84.4            27.4            78.8
4...............................................            32.6            85.8            33.6           102.5
5...............................................            63.0           184.2            63.7           193.7
----------------------------------------------------------------------------------------------------------------

    The impact of varying electricity price and housing projections 
(i.e., different AEO cases) as well as different efficiency scenarios 
were considered for the Trial Standard Level 4. Table V.23 shows how 
carbon and NOX emissions are impacted by the different 
projections and scenarios.

     Table V.23.--Cumulative Emissions Reductions for Final Standard (2006-2020) and the Impact of Different
                         Electricity Price/Housing Projections and Efficiency Scenarios
----------------------------------------------------------------------------------------------------------------
                                                     Reverse engineering costs            ARI mean costs
 Electricity price and housing     Efficiency    ---------------------------------------------------------------
          projection                scenario        Carbon (Mt)      NOX (kt)       Carbon (Mt)      NOX (kt)
----------------------------------------------------------------------------------------------------------------
AEO reference case............  NAECA...........            32.6            85.8            33.6           102.5
AEO reference case............  Roll-up.........            32.7            93.8            31.3            87.5
AEO reference case............  Shift...........            36.0           107.1            34.9            97.9
AEO low growth case...........  NAECA...........            28.5            97.2            27.5            95.8
AEO high growth case..........  NAECA...........            42.2            92.4            42.8           103.1
----------------------------------------------------------------------------------------------------------------

    The annual carbon emission reductions range up to 6.8 Mt in 2020 
and the NOX emissions reductions up to 27.0 kt in 
2015.19 20 Total carbon and NOX emissions for 
each trial standard level are reported in the Environmental Assessment, 
in the TSD.
---------------------------------------------------------------------------

    \19\ Million metric tons (Mt).
    \20\ Thousand metric tons (kt).
---------------------------------------------------------------------------

    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. 
These calculations were done using the same seven percent discount rate 
as was used for discounting monetized benefits. We show discounted 
cumulative emission savings from 2006 through 2030 in Table V.24.

[[Page 7194]]



  Table V.24.--Cumulative Discounted Emissions Reductions Based on AEO 2000 Reference Case and NAECA Efficiency
                                              Scenario (2006-2020)
----------------------------------------------------------------------------------------------------------------
                                                     Reverse engineering costs            ARI mean costs
              Trial standard level               ---------------------------------------------------------------
                                                    Carbon (Mt)      NOX (kt)       Carbon (Mt)      NOX (kt)
----------------------------------------------------------------------------------------------------------------
1...............................................             4.7            15.7             4.8            15.7
2...............................................             8.5            30.3             8.5            29.2
3...............................................             9.8            35.2             9.8            33.8
4...............................................            11.6            36.7            12.0            43.3
5...............................................            22.3            77.1            22.7            81.1
----------------------------------------------------------------------------------------------------------------

7. Other Factors
    This provision allows the Secretary of Energy, in determining 
whether a standard is economically justified, to consider any other 
factors that the Secretary deems to be relevant. EPCA Section 
325(o)(2)(B)(i)(VI), 42 U.S.C. 6295(o)(2)(B)(i)(VI). The Secretary has 
decided to consider the impact on peak power requirements and electric 
utility system reliability.
    Peak power impacts on electric utilities from increases in the 
central air conditioner and heat pump standard are calculated using the 
NEMS-BRS model. NEMS-BRS is used to estimate peak power impacts by 
calculating the reduction in planned generation capacity due to an 
increase in the minimum efficiency standard. Table V.25 shows the 
estimated reductions in installed generation capacity, in giga-watts 
(GW), in the year 2020, due to each of the trial standard levels. Of 
the installed generating capacity avoided, 13 percent would have been 
provided by coal power plants. The remaining percentage (87 percent) 
would have been supplied by either gas-fired, oil-fired, or dual-fired 
power plants. The results presented in Table V.25 are based only on the 
AEO 2000 Reference Case for electricity price and housing projections 
and the NAECA efficiency scenario.

 Table V.25.--Installed Generation Capacity Reductions in the Year 2020
     Based on AEO 2000 Reference Case and NAECA Efficiency Scenario
------------------------------------------------------------------------
                                              Reverse     ARI mean costs
                                            engineering  ---------------
                                               costs
                                         ----------------    Installed
          Trial standard level               Installed      generating
                                            generating       capacity
                                             capacity     reduction (GW)
                                          reduction (GW)
------------------------------------------------------------------------
1.......................................             6.5             6.4
2.......................................            10.6            10.6
3.......................................            12.4            12.3
4.......................................            15.5            15.4
5.......................................            28.8            28.6
------------------------------------------------------------------------

    The impact of varying electricity price and housing projections 
(i.e., different AEO cases) as well as different efficiency scenarios 
were considered only for the final standard (trial standard level 4). 
Table V.26 shows how installed generation capacity is impacted by the 
different projections and scenarios.

   Table V.26.--Installed Generation Capacity Reductions in the Year 2020 for Final Standard and the Impact of
                    Different Electricity Price/Housing Projections and Efficiency Scenarios
----------------------------------------------------------------------------------------------------------------
                                                                                      Reverse     ARI mean costs
                                                                                    engineering  ---------------
                                                                                       costs
    Electricity price and housing                                                ----------------    Installed
              projection                          Efficiency scenario                Installed      generating
                                                                                    generating       capacity
                                                                                     capacity     reduction (GW)
                                                                                  reduction (GW)
----------------------------------------------------------------------------------------------------------------
AEO reference case...................  NAECA....................................            15.5            15.4
AEO reference case...................  Roll-up..................................            15.5            15.0
AEO reference case...................  Shift....................................            16.6            16.4
AEO low growth case..................  NAECA....................................            14.5            13.9
AEO high growth case.................  NAECA....................................            16.0            15.6
----------------------------------------------------------------------------------------------------------------

E. Conclusion

    Section 325(o)(2)(A) of the Act, 42 U.S.C. 6295(o)(2)(A), specifies 
that any new or amended energy conservation standard for any type (or 
class) of covered product shall be designed to achieve the maximum 
improvement in energy efficiency which the Secretary determines is 
technologically feasible

[[Page 7195]]

and economically justified. In determining whether a standard is 
economically justified, the Secretary must determine whether the 
benefits of the standard exceed its burdens. EPCA Section 
325(o)(2)(B)(i), 42 U.S.C. 6295(o)(2)(B)(i). The amended standard must 
``result in significant conservation of energy.'' EPCA Section 
325(o)(3)(B), 42 U.S.C. 6295(o)(3)(B).
    We consider the impacts of standards beginning with the max tech 
level, i.e., Trial Standard Level 5. We then consider less efficient 
levels until we reach the level which is technologically feasible and 
economically justified.
    To aid the reader as we discuss the benefits or burdens of the 
trial levels, we have included a summary of the analysis results in 
Table V.27.\21\ Table V.27 presents a summary of quantitative analysis 
results for each Trial Standard Level based on the assumptions we 
consider most plausible. These include manufacturing cost estimates 
from the reverse engineering, an 18.4-year equipment lifetime with one 
compressor replacement at 14 years, and electricity prices based on the 
AEO2000 Reference Case.
---------------------------------------------------------------------------

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

                                                    Table V.27.--Summary of Quantitative Results \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Trial std 1     Trial std 2     Trial std 3     Trial std 4     Trial std 5
------------------------------------------------------------------------------------------------------------------------------------------
Primary energy saved (quads)\2\...........................             1.5             2.9             3.4             4.2             8.6
Generation capacity offset (GW)\3\........................             6.5            10.6            12.4            15.5            28.8
NPV ($billion):...........................................
    7% Discount rate, roll-up.............................               2               3               2               1            (10)
    7% Discount rate, NAECA...............................               2               2               1               0            (10)
    3% Discount rate, roll-up.............................               7              11              11              11             (8)
Cumulative emissions reductions through 2020:
    Carbon equivalent (Mt)\3\.............................            13.2            23.8            27.7            32.7            63.0
     NOX (kt)\3\..........................................            36.7            72.7            84.4            93.8           184.2
Cumulative change in INPV ($ million)\4\:
    Roll-up...............................................           (160)           (313)           (319)           (303)  ..............
    NAECA.................................................            (30)           (159)           (171)           (169)  ..............
Life cycle cost savings ($)\5\:
    Split AC..............................................              75             113             113             113           (137)
    Packaged AC...........................................              78             163             163              29           (276)
    Split HP..............................................             209             365             372             372            (41)
    Packaged HP...........................................             207             421             353             353             166
Payback (years)\6\:
    Split AC..............................................             7.8             9.8             9.8            11.3            19.6
    Packaged AC...........................................             7.7             7.5             7.5            14.5            25.1
    Split HP..............................................             2.7             3.9             6.4             6.4            14.0
    Packaged heat pump....................................             4.6             4.0             8.4             8.4           12.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Parentheses indicate negative (-) values.
\2\ Energy savings based on Roll-up efficiency scenario.
\3\ Values based on NAECA efficiency scenario with the exception of TSL 4 which is based on the Roll-up scenario.
\4\ Not calculated at Trial Standard Level 5.
\5\ Negative values indicate LCC increases.
\6\ Payback periods are median values.

    In addition to the quantitative results, we also consider other 
burdens and benefits that affect economic justification. The potential 
to improve the reliability of the electricity system is the major 
benefit we have not quantified explicitly. In areas where the 
occurrence of blackouts (and brownouts) can be reduced through 
expansion of system capacity, the economic value of avoided blackouts 
associated with reductions in peak load cannot exceed the value of the 
avoided capacity expansion. That value is already captured in our 
analysis as savings in consumer utility bills. However, in areas that 
do not expect to be able to maintain adequate capacity reserves, the 
value of avoided blackouts associated with reductions in peak demand 
can far exceed the normal costs of capacity expansion.\22\
---------------------------------------------------------------------------

    \22\ For instance, if capacity-related blackouts cost a region 
$1 billion, society would be willing to pay up to $1 billion to 
prevent them. If those blackouts can be prevented through either a 
capacity expansion or a reduction in peak demand, and the new 
capacity would cost $100 million, the value of the reduction in peak 
demand can be no more than $100 million, If the region is short on 
capacity and cannot add new capacity quickly, however, the same 
reduction in peak demand then can equal the value of the avoided 
blackout ($1 billion) since there is no feasible alternative.
---------------------------------------------------------------------------

    We also recognize that the adopted standards could result in 
additional burdens. These include a possible increase in health 
problems caused by consumers forgoing air conditioner purchases, a 
possible reduction in the ability of the product to dehumidify, a 
possible lessening of competition, and possible difficulty in 
installing the new baseline products into replacement applications. 
However, we generally believe that these burdens are capable of being 
mitigated at any standard level, except possibly Trial Standard Level 
5. Section IV discusses our response to comments regarding benefits and 
burdens and explains our viewpoints on those issues.
    First we considered Trial Standard Level 5, the maximum 
technologically achievable efficiency level for each of four classes, 
representing uniform 18 SEER requirements. The manufacturing cost we 
assume for Trial Standard Level 5 is equal to 15 SEER equipment, 
although we would expect that assumption to understate the cost and 
price of the product. Trial Standard Level 5 will likely save 8.6 quads 
of energy which the Department considers significant. These savings 
will result in the avoidance of approximately 29 GW of installed 
generation capacity. For comparison, the generating capacity is 
equivalent to roughly 75 large, 400 megawatt, power plants,\23\ 
approximately 3.7 percent of current installed generating capacity 
nationwide

[[Page 7196]]

and more than 13 percent of the anticipated growth in capacity needed 
by 2020. The emissions reductions are 63.0 Mt of carbon equivalent and 
184.2 kt of NOX.
---------------------------------------------------------------------------

    \23\ DOE estimates 9 coal-fired power plants and 66 gas-fired 
power plants can be avoided. See TSD, Chapter 11 and Appendix H.
---------------------------------------------------------------------------

    At Trial Standard Level 5, the average consumer would experience an 
increase in LCC. Purchasers of split central air-conditioners, the 
predominant class of central air conditioner with 65 percent of the 
sales of central air conditioners and heat pumps, would lose on average 
$137 over the life of the appliance. Purchasers of split heat pumps, 
the predominant class of heat pump, would lose on average $41. Again, 
these results do not include the additional price the consumer would 
pay over the price of a 15 SEER product, which would increase the life 
cycle cost considerably. Furthermore, for the nation as a whole, Trial 
Standard Level 5 would result in a net cost of $10 billion in NPV. We 
did not calculate manufacturer impacts at this trial standard level, 
determining based on preliminary evaluation that they would be severe 
and unacceptable.
    The Secretary concludes that at Trial Standard Level 5, the 
benefits of energy savings, generating capacity reductions and emission 
reductions would be outweighed by the burdens of negative economic 
impacts to the nation, to the vast majority of consumers and to the 
manufacturers. Consequently, the Secretary has concluded that Trial 
Standard Level 5, the Max Tech Level, is not economically justified.
    Next, we considered Trial Standard Level 4. This level specifies 13 
SEER equipment for all product classes. In considering Trial Standard 
Level 4 the Roll-up efficiency scenario and reverse engineering cost 
data are the assumptions we consider to be the most probable as 
discussed in Part V.A, Trial Standard Levels. Primary energy savings 
would likely be 4.2 quads which the Department considers significant. 
The estimated reduction in installed generating capacity is 
approximately 15 GW, and reduced emissions would range up to 32.7 Mt of 
carbon equivalent and up to 93.8 kt of NOX.
    The average air conditioner owner would save $113 over the life of 
a split air conditioner and $29 over the life of a packaged air 
conditioner. These equate to median payback periods of 11.3 years and 
14.5 years, respectively. Low income consumers of split air 
conditioners and split heat pumps also incur LCC savings ($43 for split 
air conditioner owners and $185 savings for split heat pump owners). In 
addition, the average heat pump owner would benefit, saving $372 over 
the life of a split heat pump and $353 over the life of a packaged heat 
pump. These equate to median payback periods between 6.4 and 8.4 years, 
respectively. Trial Standard Level 4 will lower peak electricity demand 
compared to the base case. That will allow utility service areas to 
either avoid new capacity or, to the extent that peak loads contribute 
to reliability problems, improve system reliability. The increase in 
national net present value is expected to be $1 billion. The decrease 
in the net present value of the air conditioning and heat pump 
manufacturing industry is expected to be $300 million.
    After carefully considering the analysis, comments, and benefits 
versus burdens, the Department is amending the energy conservation 
standards for central air conditioners and central air conditioning 
heat pumps at Trial Standard Level 4. The Department concludes this 
standard saves a significant amount of energy and is technologically 
feasible and economically justified. In determining economic 
justification, the Department finds that the benefits of energy 
savings, the projected amount of avoided power plant capacity or 
improvement in system reliability that accompanies expected reduction 
in peak demand, consumer life cycle cost savings, national net present 
value increase and emission reductions resulting from the standards 
outweigh the burdens. The burdens include the loss of manufacturer net 
present value, increases in consumer life cycle cost for some users of 
products covered by today's final rule, any possible increase in health 
problems caused by consumers forgoing air conditioner purchases, any 
possible reduction in the ability of the product to dehumidify, any 
possible lessening of competition, and any possible difficulty in 
installing the new baseline products into replacement applications.
    In the proposed rule, we proposed to adopt Trial Standard Level 3. 
The Department's decision to instead adopt the more stringent standards 
represented by Trial Standard Level 4 was influenced by comments we 
received during the intervening comment period. First, comments we 
received regarding the prices and markups applied to today's equipment 
persuaded us that the reverse engineering cost data are much more 
likely than the ARI Mean cost data to represent the actual costs of 
producing equipment under more stringent standards. Placing more weight 
on the costs represented by the reverse engineering data substantially 
improved the economic benefits to air conditioner owners, demonstrating 
that the benefits of Trial Standard Level 4 outweigh the burdens. 
Second, many comments expressed concern that adopting heat pump 
standards that were more stringent than air conditioner standards would 
encourage more consumers to purchase electric resistance furnaces and 
air conditioners instead of heat pumps. In response to those comments, 
we verified that the energy savings from the more efficient heat pumps 
would be eliminated if only a small fraction of heat pump owners (4 
percent) switched to resistance heating. That possibility provided 
added justification for adopting the same minimum standards for heat 
pumps as for air conditioners.
    Given our decision to adopt a 13 SEER standard for both central air 
conditioners and central air conditioning heat pumps, we believe 
further evaluation is needed before we can issue final standards for 
air conditioners or heat pumps that currently are intended to serve 
applications with severe space constraints, exemplified by what we have 
referred to as ``niche'' products. Based on our preliminary assessment 
of ``highest viable efficiency levels'' we identified for these 
products in the TSD (Table 4.23), the comments stating that these 
products would have difficulty in meeting the standards proposed in the 
proposed rule, and the concerns expressed by the Department of Justice, 
we have serious concerns about whether 13 SEER is an appropriate 
standard for most such products. On the other hand, we are uncertain 
whether it would be prudent for us to apply the standards contained in 
the proposed rule to niche products in light of the 13 SEER standard we 
are adopting today for other products. Doing so may create a strong 
tendency for niche products, with lower minimum efficiency standards 
than conventional products, to be applied in conventional applications.
    Therefore, today's final rule provides efficiency standards for all 
residential central air conditioners and heat pumps, except the niche 
products. We are referring to these products more generally as ``space-
constrained products'', since they are specifically intended for 
severely space-constrained applications. We define them as having the 
following characteristics:
    (1) Rated cooling capacities no greater than 30,000 BTU/hr
    (2) An outdoor or indoor unit having at least two overall exterior 
dimensions or an overall displacement that:
    (a) are (is) substantially smaller than those of other units that 
are (i) currently usually installed in site-built single family homes, 
and (ii) of a similar cooling, and, if a heat pump, heating, capacity, 
and

[[Page 7197]]

    (b) if increased, would certainly result in a considerable increase 
in the cost of installation or would certainly result in a significant 
loss in the utility of the product to the consumer.
    (3) Of a product type that was available for purchase in the United 
States as of December 1, 2000.
    Based on the information we have gathered thus far in this 
rulemaking, we believe space-constrained products would include 
equipment described as:
     through-the-wall packaged and split
     ductless split
     single package and non-weatherized
    Small duct, high velocity equipment is covered by today's 
standards. As discussed in the proposed rule (65 FR at 59609-10), DOE 
addressed the concerns for that equipment by modifying the test 
procedure to allow those products to be tested as coil-only equipment. 
Also, the standards in today's rule will clearly apply to the types of 
central air conditioners and heat pumps normally installed in site-
built single family homes.
    The Department will re-open the comment period in this rulemaking 
to address standards for space-constrained products, and plans to 
publish a final rule in the Federal Register no later than eighteen 
(18) months from the date of publication of today's rule. The rule 
covering space-constrained products will establish new product classes, 
to the extent necessary, and minimum efficiency standards for these 
products. It will also contain an assessment of technical feasibility 
and economic justification in accordance with the requirements of the 
Act. The Department intends to make the rule for space-constrained 
products effective on January 23, 2006.
    Before reopening the comment period, we will initially identify 
those product types we believe should be treated as space-constrained 
products, and will begin to assess the impact of a rulemaking for these 
products on small businesses. To aid in this process, we will seek 
shortly the following information from each manufacturer of those 
products that we believe may meet the definition of space-constrained 
products:
    (1) the number of employees employed by the company as of December 
31, 2000 (to assist us in determining whether we should consider the 
company to be a small business entity);
    (2) a list of proposed space-constrained products, providing for 
each type of product:
    (a) a description of its intended applications
    (b) a description based on physical characteristics, manufacturing 
characteristics, capacity, and performance attributes that would 
distinguish it from other types of products, and which would be 
enforceable at the point of manufacture
    (c) a list of models produced of that product type by the 
manufacturer, containing for each model: Physical dimensions, rated 
capacities, and range of efficiency ratings available;
    (3) a statement of whether the number of units produced by the 
manufacturer was less than or greater than 100,000 units in the year 
2000; and
    (4) an estimate of the percentage of units produced by the 
manufacturer that the manufacturer estimates are installed as 
replacements for similar units.
    The Department encourages companies that believe they manufacture 
space-constrained products to immediately submit this information, 
without awaiting a request from DOE, to Ms. Geraldine Paige at the 
address indicated at the beginning of this notice.
    We will make the information we obtain publicly available 
(excluding confidential information) through a Federal Register notice. 
A comment period will follow during which time the public will have an 
opportunity to review the published information and respond to the 
Department. Following the close of the comment period, we will issue in 
the Federal Register our determination of which of the published 
products we believe are space-constrained products and which we believe 
are not. We expect these steps to proceed simultaneously with the other 
activities to set standards for such products.

VI. Procedural Issues and Regulatory Review

A. Review Under the National Environmental Policy Act

    The Department prepared an Environmental Assessment (EA) (DOE/EA-
1352) available from: U.S. Department of Energy, Office of Energy 
Efficiency and Renewable Energy, Forrestal Building, Mail Station EE-
41, 1000 Independence Avenue, SW, Washington, DC 20585-0121, (202) 586-
0854. We found the environmental effects associated with various 
standard efficiency levels for central air conditioners and heat pumps 
to be not significant, and therefore we are publishing, elsewhere in 
this issue of the Federal Register, a Finding of No Significant Impact 
(FONSI) pursuant to the National Environmental Policy Act of 1969 
(NEPA), 42 U.S.C. 4321 et seq., the regulations of the Council of 
Environmental Quality (40 CFR Parts 1500-1508), and the Department's 
regulations for compliance with NEPA (10 CFR Part 1021).

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

    Today's regulatory action has been determined to be an 
``economically significant regulatory action'' under Executive Order 
12866, ``Regulatory Planning and Review.'' 58 FR 51735 (October 4, 
1993). Accordingly, today's action was subject to review under the 
Executive Order by the Office of Information and Regulatory Affairs 
(OIRA) of the Office of Management and Budget.
    The draft submitted to OIRA and other documents submitted to OIRA 
for review have been made a part of the rulemaking record and are 
available for public review in 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, 
telephone (202) 586-3142.
    The proposed rule contained a summary of the Regulatory Analysis 
which focused on the major alternatives considered in arriving at the 
approach to improving the energy efficiency of consumer products. The 
reader is referred to the complete draft ``Regulatory Impact 
Analysis,'' 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 national economic impacts of 
the proposed standard.

C. Review Under the Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., requires an 
assessment of the impact of regulations on small businesses. To be 
categorized as a ``small'' air conditioning and warm air heating 
equipment manufacturer, a firm must employ no more than 750 employees.
    The Department prepared a manufacturing impact analysis which was 
made public and available to all residential central air conditioner 
and heat pump manufacturers. Other impacts on small businesses were 
previously discussed in the proposed rule. 65 FR 59590, 59629-30 
(October 5, 2000). The Department reaffirms its certification in the 
proposed rule.

[[Page 7198]]

Today's rule will not have a significant impact on a substantial number 
of small entities, and preparation of a regulatory flexibility analysis 
is unnecessary.
    Most small businesses engaged in the manufacture of central air 
conditioners and heat pumps produce products that we have called 
``niche'' products. To address the concerns of the Department of 
Justice and many commenters regarding the impacts of more stringent 
standards on small manufacturers, we are continuing our evaluation of 
standards for those products and have not issued new standards for them 
as part of this rule.

D. Review Under the Paperwork Reduction Act

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

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

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

    DOE has determined pursuant to Executive Order 12630, 
``Governmental Actions and Interference with Constitutionally Protected 
Property Rights,'' 52 FR 8859 (March 18, 1988), that this regulation 
would not result in any takings that might require compensation under 
the Fifth Amendment to the United States Constitution.

G. Review Under Executive Order 13132

    Executive Order 13132 (64 FR 43255, August 4, 1999) imposes certain 
requirements on agencies formulating and implementing policies or 
regulations that preempt State law or that have federalism 
implications. Agencies are required to examine the constitutional and 
statutory authority supporting any action that would limit the 
policymaking discretion of the States and carefully assess the 
necessity for such actions. Agencies also must have an accountable 
process to ensure meaningful and timely input by State and local 
officials in the development of regulatory policies that have 
federalism implications. DOE published its intergovernmental 
consultation policy on March 14, 2000. 65 FR 13735. DOE has examined 
today's final rule and has determined that it would not have a 
substantial direct effect on the States, on the relationship between 
the national government and the States, or on the distribution of power 
and responsibilities among the various levels of government. State 
regulations that may have existed on the products that are the subject 
of today's final rule were preempted by the Federal standards 
established in NAECA. States can petition the Department for exemption 
from such preemption to the extent, and based on criteria, set forth in 
EPCA.

H. Review Under the Unfunded Mandates Reform Act

    With respect to a proposed regulatory action that may result in the 
expenditure by State, local and tribal governments, in the aggregate, 
or by the private sector of $100 million or more (adjusted annually for 
inflation), section 202 of the Unfunded Mandates Reform Act of 1995 
(UMRA) requires a Federal agency to publish estimates of the resulting 
costs, benefits and other effects on the national economy. 2 U.S.C. 
1532(a), (b). UMRA also requires each Federal agency to develop an 
effective process to permit timely input by state, local, and tribal 
governments on a proposed significant intergovernmental mandate. The 
Department's consultation process is described in a notice published in 
the Federal Register on March 18, 1997 (62 FR 12820). Today's final 
rule may impose expenditures of $100 million or more on the private 
sector. It does not contain a Federal intergovernmental mandate.
    Section 202 of UMRA authorizes an agency to respond to the content 
requirements of UMRA in any other statement or analysis that 
accompanies the proposed rule. 2 U.S.C. 1532(c). The content 
requirements of section 202(b) of UMRA relevant to a private sector 
mandate substantially overlap the economic analysis requirements that 
apply under section 325(o) of EPCA and Executive Order 12866. The 
Supplementary Information section of the Notice of Final Rulemaking and 
``Regulatory Impact Analysis'' section of the TSD for this Final Rule 
responds to those requirements.
    Under section 205 of UMRA, the Department is obligated to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule for which a written statement under section 202 is 
required. DOE is required to select from those alternatives the most 
cost-effective and least burdensome alternative that achieves the 
objectives of the rule unless DOE publishes an explanation for doing 
otherwise or the selection of such an alternative is inconsistent with 
law. As required by section 325(o) of the Energy Policy and 
Conservation Act (42 U.S.C. 6295(o)), today's final rule establishes 
energy conservation standards for central air conditioners and heat 
pumps that are designed to achieve the maximum improvement in energy 
efficiency that DOE has determined to be both technologically feasible 
and economically justified. A full discussion of the alternatives 
considered by DOE is presented in the ``Regulatory Impact Analysis'' 
section of the TSD for today's 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.

[[Page 7199]]

J. Review Under the Plain Language Directives

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

    Issued in Washington, DC, on January 16, 2001.
Dan W. Reicher,
Assistant Secretary, Energy Efficiency and Renewable Energy.

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

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

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

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

    2. Section 430.2 is amended by adding a definition for ``space-
constrained products'' in alphabetical order to read as follows:


Sec. 430.2  Definitions.

* * * * *
    Space constrained product means a central air conditioner or heat 
pump:
    (1) That has rated cooling capacities no greater than 30,000 BTU/
hr;
    (2) That has an outdoor or indoor unit having at least two overall 
exterior dimensions or an overall displacement that:
    (i) Are (is) substantially smaller than those of other units that 
are (i) currently usually installed in site-built single family homes, 
and (ii) of a similar cooling, and, if a heat pump, heating, capacity, 
and
    (ii) If increased, would certainly result in a considerable 
increase in the usual cost of installation or would certainly result in 
a significant loss in the utility of the product to the consumer; and
    (3) Of a product type that was available for purchase in the United 
States as of December 1, 2000.
* * * * *

    3. Section 430.32 of Subpart C is amended by revising paragraph (c) 
to read as follows:


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

* * * * *
    (c) Central air conditioners and central air conditioning heat 
pumps. (1) Split system central air conditioners and central air 
conditioning heat pumps manufactured after January 1, 1992, and before 
January 23, 2006, and single package central air conditioners and 
central air conditioning heat pumps manufactured after January 1, 1993, 
and before January 23, 2006, shall have Seasonal Energy Efficiency 
Ratio and Heating Seasonal Performance Factor no less than:

------------------------------------------------------------------------
                                                  Seasonal     Heating
                                                   energy      seasonal
                 Product class                   efficiency  performance
                                                    ratio       factor
------------------------------------------------------------------------
(i) Split systems..............................        10.0         6.8
(ii) Single package systems....................         9.7         6.6
------------------------------------------------------------------------

    (2) Central air conditioners and central air conditioning heat 
pumps manufactured on or after January 23, 2006, shall have Seasonal 
Energy Efficiency Ratio and Heating Seasonal Performance Factor no less 
than:

------------------------------------------------------------------------
                                                  Seasonal     Heating
                                                   energy      seasonal
                 Product class                   efficiency  performance
                                                    ratio       factor
                                                   (SEER)       (HSPF)
------------------------------------------------------------------------
(i) Split system air conditioners..............          13  ...........
(ii) Split system heat pumps...................          13         7.7
(iii) Single package air conditioners..........          13  ...........
(iv) Single package heat pumps.................          13         7.7
(v) Space constrained products.................  [reserved]  [reserved]
------------------------------------------------------------------------

* * * * *

Appendix

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

DEPARTMENT OF JUSTICE,

Antitrust Division, Main Justice Building, 950 Pennsylvania Avenue 
NW., Washington, DC 20530-0001, (202) 514-2401/(202) 616-2645 (f), 
[email protected] (internet), 
http://www.usdoj.gov (World Wide Web).
December 4, 2000.
Mary Anne Sullivan, General Counsel, Department of Energy, 
Washington, DC 20585.
Dear General Counsel Sullivan:
    I am responding to your October 16, 2000 letter seeking the 
views of the Attorney General about the potential impact on 
competition of two proposed energy efficiency standards: one for 
clothes washers and the other for residential central air 
conditioners and heat pumps. Your request was submitted pursuant to 
Section 325(o)(2)(B)(i) of the Energy Policy and Conservation Act, 
42 U.S.C. Sec. 6291, 6295 (``EPCA''), which requires the Attorney 
General to make a determination of the impact of any lessening of 
competition that is likely to result from the imposition of proposed 
energy efficiency standards. The Attorney General's responsibility 
for responding to requests from other departments about the effect 
of a program on competition has been delegated to the Assistant 
Attorney General for the Antitrust Division in 28 CFR Sec. 0.40(g).
    We have reviewed the proposed standards and the supplementary 
information published in the Federal Register notices and submitted 
to the Attorney General, which include information provided to the 
Department of Energy by manufacturers. We have additionally 
conducted interviews with members of the industries.
    We have concluded that the proposed clothes washer standard 
would not adversely affect competition. In reaching this conclusion, 
we note that the proposed standard is based on a joint 
recommendation submitted to the Department of Energy by 
manufacturers and energy conservation advocates. That recommendation 
states that virtually all manufacturers of clothes washers who sell 
in the United States participated in arriving at the recommendation 
through their trade association, that the recommendation

[[Page 7200]]

was developed in consultation with small manufacturers, and that the 
manufacturers believe the new standard would not likely reduce 
competition. We note further that, as the industry recommended, the 
proposed standard will be phased in over six years, which will allow 
companies that do not already have products that meet the proposed 
standard sufficient time to redesign their product lines.
    With respect to the proposed residential central air conditioner 
and heat pump standard, we have concluded that there could be an 
adverse impact on competition. The proposed standard, Trial Standard 
Level 3, is expressed in terms of two industry measurements: SEER 
(Seasonal Energy Efficiency Ratio) and HSPF (Heating Seasonal 
Performance Factor).\1\ These standards would change from the 
current central air conditioner and heat pump efficiency standards 
of 10 SEER/6.8 HSPF for split system air conditioners and heat pumps 
and 9.7 SEER/6.6 HPSF for single package air conditioners and heat 
pumps to 12 SEER for air conditioners and 13 SEER/7.7 HPSF for heat 
pumps.
---------------------------------------------------------------------------

    \1\ The Federal Register notice also requested comments on a 
proposal to adopt a standard for steady-state cooling efficiency 
(EER) and discussed several options the Department of Energy is 
considering. The proposed rule set forth in the notice does not, 
however, include a provision regarding an EER standard, and the 
views of the Department of Justice expressed in this letter are 
limited to the impact of any lessening of competition * * * that is 
likely to result from the imposition of the [proposed] standard,'' 
as required by EPCA. If the Department of Energy proposes a rule in 
the future incorporating an EER standard, the Department will then 
evaluate that proposed rule and express its views about the 
competitive impact of that standard.
---------------------------------------------------------------------------

    We have identified three possible competitive problems presented 
by the proposed standards. First, the proposed 13 SEER heat pump 
standard would have a disproportionate impact on smaller 
manufacturers. Currently less than 20% of the total current product 
lines meet the proposed standards, but for some small manufacturers, 
100% of their product lines fail to satisfy the proposed standard.
    Second, the proposed standard for heat pumps, and in some 
instances for air conditioners, would have an adverse impact on some 
manufacturers of these products (including those products referred 
to in the Federal Register notice as ``niche products'') used to 
retrofit existing housing and used in manufactured housing. These 
manufacturers could not make units that comply with the rule and fit 
into the available space.
    Third, the proposed heat pump standard of 13 SEER could make 
heat pumps less competitive with alternative heating and cooling 
systems. Because the standard will result in increases in the size 
and cost of heat pumps, it is possible that purchasers will shift 
away from heat pumps to other systems that include electric 
resistance heat, reducing the competition that presently exists 
between heat pumps and those other systems.
    The Department of Justice urges the Department of Energy to take 
into account these possible impacts on competition in determining 
its final energy efficiency standard for air conditioners and heat 
pumps. The Department of Energy should consider setting a lower SEER 
standard for heat pumps, such as the standard included in Trial 
Standard Level 2, and a lower SEER standard for air conditioners for 
retrofit markets where there are space constraints (such as markets 
served by niche products) and for manufactured housing.

    Sincerely,
A. Douglas Melamed,
Acting Assistant Attorney General.

[FR Doc. 01-1790 Filed 1-18-01; 11:30 am]
BILLING CODE 6450-01-P