[Federal Register Volume 67, Number 100 (Thursday, May 23, 2002)]
[Rules and Regulations]
[Pages 36368-36408]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12680]



[[Page 36367]]

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

Part III





Department of Energy





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



Office of Energy Efficiency and Renewable Energy



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



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. 67 , No. 100 / Thursday, May 23, 2002 / Rules 
and Regulations  

[[Page 36368]]


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

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, Department of 
Energy.

ACTION: Final rule.

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

SUMMARY: The Department of Energy (DOE) today amends the existing 
energy conservation standards for central air conditioners and heat 
pumps by raising the minimum energy efficiency levels by 20 percent for 
most central air conditioners and heat pumps, with somewhat lower 
levels for certain space-constrained products. DOE also today withdraws 
a final rule, published on January 22, 2001, that would have 
established even higher standards. DOE has determined that the 
standards in the January 22 final rule, which never became effective, 
are not economically justified under the Energy Policy and Conservation 
Act (EPCA). Finally, DOE adopts provisions that clarify the point in 
time at which DOE's discretion to amend standards becomes limited under 
EPCA.

DATES: The final rule amending 10 CFR part 430 published January 22, 
2001 (66 FR 7170) is withdrawn as of May 23, 2002. The effective date 
of the amendments to the Code of Federal Regulations in this rule is 
August 6, 2002.

ADDRESSES: You may read copies of the public comments, the Technical 
Support Document for Energy Efficiency Standards for Consumer Products: 
Central Air Conditioners and Heat Pumps (TSD), the transcript of the 
public hearing, workshop transcripts in this proceeding, the petition 
for reconsideration submitted by the Air-Conditioning and Refrigeration 
Institute, and other post-promulgation submissions at the DOE Freedom 
of Information (FOI) Reading Room, U.S. Department of Energy, Forrestal 
Building, Room 1E-190, 1000 Independence Avenue, SW., Washington, DC 
20585, (202-586-3142), between the hours of 9 a.m. and 4 p.m., Monday 
through Friday, except Federal holidays. You may obtain copies of the 
TSD and analysis spreadsheets from the Office of Energy Efficiency and 
Renewable Energy's (EERE) Web site at: http://www.eren.doe.gov/buildings/codes_standards/applbrf/central_air_conditioner.html.

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

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Rulemaking History
III. Authority of DOE to Reconsider and Withdraw the January 22, 
2001 Final Rule and Adopt a 12 SEER Standard for Central Air 
Conditioners
    A. DOE's Analysis of EPCA's Anti-Backsliding Provision
    B. Discussion of Public Comments on the Anti-Backsliding 
Provision
    1. Environmental Advocates' Views
    2. ARI's Views
IV. Basis for DOE's Decision to Withdraw the January 22, 2001 Final 
Rule
    A. Legal Issues
    B. Policy Issues
V. Amended Energy Conservation Standards
    A. Overview
    1. Central Air Conditioner and Heat Pump Features
    2. Consumer Benefits
    3. National Benefits
    B. Statutory Framework
    C. Methodology Used in DOE Analyses
    D. General Discussion of DOE's Consideration of Statutory 
Criteria
    1. Technological Feasibility
    2. Economic Justification Factors
    a. Economic Impact on Manufacturers and Consumers
    b. Life-cycle Costs and Rebuttable Presumption
    c. Energy Savings
    d. Lessening of Utility or Performance of Products
    e. Impact of Lessening of Competition
    f. Need of the Nation to Conserve Energy
    g. Other Factors
VI. Discussion of Comments
    A. Impact on Consumers
    1. Low-Income Consumers
    2. Electricity Prices
    3. Installation Costs
    4. Manufactured Housing Owners
    B. Life-Cycle Cost and Payback Period
    1. Product Lifetime
    2. Warranty, Maintenance, and Service Costs
    3. Markups
    4. Energy Use
    a. Residential Energy Consumption Survey
    b. Rebound Effect
    5. Rebuttable Payback Period
    C. Shipments/National Energy Savings
    1. Shipments Forecasts
    2. Heat Rates
    3. Fuel Switching
    D. Impact on Manufacturers
    1. Cumulative Regulatory Burden
    2. Financial Burdens Associated with New Efficiency Standards
    3. Small Manufacturers
    4. Manufacturer Cost Estimates
    E. Effect on Competition
    F. Effect on Utility or Performance
    1. Dehumidification
    G. Electric System Reliability/Peak Power
    1. Peak Power
    2. Reliability
    H. Other Issues
    1. Minimum EER Requirement
    2. TXV Requirement
    3. State Exemption From DOE Standards
    4. Effective Date
    5. Environmental Impacts
    6. Employment Impacts
    7. Space-Constrained Products
    a. Through-the-Wall Products
    b. Small Duct, High Velocity Systems
    8. Basis for HSPF Level
    9. Non-Regulatory Approaches
    10. Energy Policy
VII. Analytical Results and Conclusions
    A. Overview of Analytical Results
    1. General
    2. Through-the-Wall Products
    3. Small Duct, High Velocity Systems
    B. Conclusions Regarding Conventional Products
    C. Conclusions Regarding Space-Constrained Products
    1. Through-the-Wall Products
    2. Small Duct, High Velocity Systems
VIII. Procedural Issues and Regulatory Review
    A. Review Under the National Environmental Policy Act
    B. Review Under Executive Order 12866
    C. Review Under the Regulatory Flexibility Act
    D. Review Under the Paperwork Reduction Act
    E. Review Under Executive Order 12988
    F. Review Under Executive Order 12630
    G. Review Under Executive Order 13132
    H. Review Under the Unfunded Mandates Reform Act of 1995
    I. Review Under the Treasury and General Government 
Appropriations Act, 1999
    J. Review Under Executive Order 13211
    K. Congressional Notification

I. Introduction

    DOE today publishes three final rulemaking determinations with 
respect to amended central air conditioner and heat pump energy 
conservation standards under section 325 of the Energy Policy and 
Conservation Act (42 U.S. Code (U.S.C.) Section 6295). First, for 
reasons described in detail in Section IV of this Supplementary 
Information, DOE hereby withdraws the January 22, 2001 final rule that 
would have established 13 as the mandatory Seasonal Energy Efficiency 
Rating

[[Page 36369]]

(SEER) \1\ for most central air conditioners and central air 
conditioning heat pumps (heat pumps). DOE withdraws the final rule 
because it: (1) Was promulgated without consulting with the Attorney 
General on potential anti-competitive effects, (2) contained a material 
defect in the statement of basis and purpose required by the 
Administrative Procedure Act (APA), (3) contained an effective date in 
conflict with the Congressional Review Act's lie-before-the-Congress 
requirement for major rules, and (4) was based on an assessment of 
benefits and burdens that resulted in an erroneous conclusion that a 13 
SEER standard for both central air conditioners and central air 
conditioning heat pumps would be economically justified under title 
III, part B of the Energy Policy and Conservation Act (EPCA) (42 U.S.C. 
6291 et seq.). Second, DOE adopts regulatory provisions that implement 
section 325(o)(1) of EPCA, including definitions of the statutory terms 
''maximum allowable energy use'' and ''minimum required energy 
efficiency,'' and thereby pinpoints the point in time at which DOE's 
discretion to alter an amended standard becomes limited. The basis for 
this determination is discussed in Section III of this Supplementary 
Information. Third, DOE finalizes 12 SEER and 7.4 Heating System 
Performance Factor (HSPF) \2\ as the amended energy conservation 
standard for most central air conditioners and central air conditioning 
heat pumps and adopts lower standards for certain space-constrained 
products. The basis for these determinations is discussed in Sections V 
through VII of this Supplementary Information
---------------------------------------------------------------------------

    \1\ The Seasonal Energy Efficiency Ratio or SEER is DOE's 
measure of energy efficiency for the seasonal cooling performance of 
central air conditioners and central air conditioning heat pumps.
    \2\ The Heating Seasonal Performance Factor is DOE's measure of 
energy efficiency for the seasonal heating performance of heat 
pumps.
---------------------------------------------------------------------------

II. Rulemaking History

    The existing standards for residential central air conditioners and 
heat pumps were prescribed by the National Appliance Energy 
Conservation Act of 1987 (NAECA) (Pub. L. 100-12) and have been in 
effect since 1992. 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 DOE's intention to revise the existing 
central air conditioner and heat pump efficiency standard pursuant to 
section 325(d) of EPCA, as amended by NAECA. 58 FR 47326. The fiscal 
year (FY) 1996 appropriations legislation for DOE imposed a moratorium 
on proposed and final energy conservation standards. Public Law 104-
134. During the moratorium, DOE responded to congressional concern 
about how the appliance standards program was working by consulting 
with a broad spectrum of interested persons on possible improvements. 
As a result, on July 15, 1996, DOE published a new policy on how it 
would conduct appliance standards rulemaking (61 FR 36974). The new 
policy, ''Procedures for Consideration of New or Revised Energy 
Conservation Standards for Consumer Products,'' is commonly referred to 
as the Process Improvement Rule and is codified at 10 CFR part 430, 
subpart C, Appendix A. Under this new policy, DOE presented for comment 
an analytical framework for the central air conditioner and heat pump 
standards rulemaking during a workshop on June 30, 1998. The analytical 
framework described the different analyses that DOE would conduct, the 
methods for conducting them, the use of new spreadsheets, and the 
relationship of the various analyses. On November 24, 1999, DOE 
published a Supplemental ANOPR for central air conditioners and heat 
pumps and invited additional comment on issues raised following 
publication of the original ANOPR. 64 FR 66306.
    DOE published a notice of proposed rulemaking on October 5, 2000 
(October 5, 2000 NOPR). 65 FR 59590. The energy efficiency standards 
that DOE proposed for residential central air conditioners and 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, DOE 
requested comments on a proposal to adopt a standard for steady-state 
cooling efficiency, denominated EER (or Energy Efficiency Ratio). The 
proposal of an EER was designed to ensure more efficient operation at 
high outdoor temperatures, during periods when electricity use by air 
conditioners is at its peak. A public hearing was held in Washington, 
D.C. on November 16, 2000, to hear oral views, data and arguments on 
the proposed rule.
    On January 22, 2001, at the close of the Clinton Administration, 
DOE published a final rule that would have required a SEER of 13 for 
all classes of central air conditioners, except for ''niche'' products 
which were omitted from the rule, and a corresponding HSPF of 7.7 for 
central air conditioning heat pumps (Final Rule, ''Energy Conservation 
Program for Consumer Products; Central Air Conditioners and Heat Pump 
Energy Conservation Standards,'' 61 FR 7170).
    Pursuant to President Bush's Regulatory Review Plan,\3\ DOE 
conducted an internal review of the final, not-yet-effective rules 
issued under section 325 of EPCA that DOE published at the end of the 
Clinton Administration, including final rules concerning energy 
conservation standards for clothes washers, water heaters, and central 
air conditioners and central air conditioning heat pumps. Consistent 
with the EPCA criteria for determining whether a standard level is 
economically justified under section 325 (42 U.S.C. 6295(o)(2)(B)), DOE 
examined each of these three rules to determine, among other things, 
whether the rulemaking record was complete and whether the affirmative 
determination of economic justification was based on adequate findings 
with regard to the statutorily required considerations that make up the 
test of economic justification.
---------------------------------------------------------------------------

    \3\ This Plan was set forth in a memorandum from Assistant to 
the President and Chief of Staff Andrew H. Card, dated January 20, 
2001, and published in the Federal Register on January 24, 2001 (66 
FR 7702).
---------------------------------------------------------------------------

    While DOE examined the three appliance energy conservation 
standards rulemakings under the President's Regulatory Review Plan, DOE 
received petitions for reconsideration for each final rule. In 
addition, DOE received notice that the Gas Appliance Manufacturers 
Association (with regard to the water heater rule) and the Air-
Conditioning and Refrigeration Institute (ARI) and certain 
manufacturers (with regard to the central air conditioner rule) had 
filed petitions for review in the United States Court of Appeals for 
the Fourth Circuit.
    Ultimately, DOE decided that neither the clothes washer rule nor 
the water heater rule warranted further rulemaking action and denied 
the related petitions for reconsideration. See 66 FR 19714 (April 17, 
2001). With regard to central air conditioners and central air 
conditioning heat pumps, DOE concluded that ARI had raised

[[Page 36370]]

substantial questions as to the legal sufficiency of and basis for the 
January 22, 2001 final rule and that the interests of justice therefore 
dictated that DOE further postpone the rule's effective date in light 
of the pendency of ARI's petition for judicial review in the Fourth 
Circuit and its related petition for reconsideration. 66 FR 20191 
(April 20, 2001). At that time DOE indicated that it would likely 
resolve these issues through supplemental rulemaking that would be 
forthcoming shortly.
    On June 19, 2001, the State of New York, several other states, the 
Natural Resources Defense Council, Consumer Federation of America, and 
the Public Utility Law Project sued DOE in Federal court challenging 
its actions delaying the effective date of the January 22 final rule. 
The cases were consolidated, with the states of California, 
Connecticut, Vermont, Maine, New Jersey and Nevada joining the lawsuit 
(State of New York et al. v. Abraham, 01 Civ. 5499 (LTS) and 01 Civ. 
5500(LTS)(SDNY); \4\ a petition for review was also filed with the 
Court of Appeals for the Second Circuit (Docket No. 01-4103).
---------------------------------------------------------------------------

    \4\ On April 25, 2002, the district court dismissed the 
consolidated actions on the ground that the court lacked subject 
matter jurisdiction to consider the matters raised by the 
plaintiffs.
---------------------------------------------------------------------------

    On July 25, 2001, DOE granted ARI's petition and published a three 
part supplemental proposal with regard to energy conservation standards 
for central air conditioners and central air conditioning heat pumps. 
66 FR 38822. First, DOE proposed regulatory provisions to clarify that 
section 325(o)(1), which qualifies DOE's rulemaking authority to 
prescribe amended energy conservation standards, applies as of an 
effective date for modifying the Code of Federal Regulations (CFR) set 
forth in the notice of final rulemaking and established consistent with 
the Congressional Review Act (5 U.S.C. 801-804). Second, in order to 
correct arguable legal errors and policy shortcomings, DOE proposed to 
withdraw the January 22 final rule. Third, based on a re-assessment of 
factual information and analyses already in the record, DOE proposed to 
determine that elevation of the currently enforceable central air 
conditioner and central air conditioning heat pump energy conservation 
standards by 20 percent is the maximum increase that is economically 
justified. For product classes other than through-the-wall products, 
DOE proposed a SEER of 12 with a corresponding HSPF of 7.4 which would 
apply to products manufactured in 2006. With respect to through-the-
wall product classes, DOE proposed somewhat lower standards. DOE 
conducted a public hearing in Washington, D.C. on October 2, 2001, to 
hear oral views, data and arguments on the proposed rule.

III. Authority of DOE To Reconsider and Withdraw the January 22, 2001 
Final Rule and Adopt a 12 SEER Standard for Central Air Conditioners

    The issue of DOE's authority to withdraw the January 22 final rule 
and propose a 12 SEER standard was first raised in ARI's March 23, 2001 
petition for reconsideration (ARI, No. 138) and in a responding letter 
submitted to Secretary Abraham by various environmental organizations 
on April 6, 2001 (Alliance to Save Energy (ASE), et al., ASE, No. 183). 
ARI contended that section 325(o)(1) of EPCA, which prohibits DOE from 
decreasing the maximum allowable energy use or minimum required energy 
efficiency of covered products, did not apply to reconsideration of the 
January 22 final rule because DOE had suspended the effective date of 
the rule (ARI, No. 138 at p. 3, n. 2). This provision has been referred 
to in the rulemaking as EPCA's ''anti-backsliding provision.'' The 
environmental advocates took a contrary position, arguing that the 
anti-backsliding provision did apply and, thus, that DOE was precluded 
from reconsidering the rule and proposing a less stringent standard 
(ASE et al., No. 183 at p. 5). In the April 20, 2001, notice postponing 
the effective date of the January 22 final rule, DOE stated its 
intention to issue a further notice of proposed rulemaking that would 
propose a 12 SEER/7.4 HSPF standard for central air conditioners and 
heat pumps, and stated that it would invite public comment on its 
explanation of the statutory authority to make such a proposal upon 
reconsideration of the January 22 final rule (66 FR 20101). 
Subsequently in the notice of supplemental proposed rulemaking 
published on July 25, 2001 (July 25 SNOPR), DOE included a detailed 
explanation of its interpretation of section 325(o)(1) of EPCA. We 
repeat much of the July 25 SNOPR explanation here as a preface to a 
discussion of public comments received on this issue. (Repeating DOE's 
analysis of section 325(o)(1) here also will assist readers who 
otherwise would have to look back at a copy of the July 25 SNOPR.)

A. DOE's Analysis of EPCA's Anti-Backsliding Provision

    The starting point for the analysis of DOE's authority to 
reconsider the January 22 final rule and propose 12 SEER standards is 
the text of the statute. Section 325(o)(1) of EPCA provides as follows:

    The Secretary may not prescribe any amended standard which 
increases the maximum allowable energy use, or, in the case of 
showerheads, faucets, water closets, or urinals, water use, or 
decreases the minimum required energy efficiency, of a covered 
product.

42 U.S.C. 6295(o)(1).

    The critical term in section 325(o)(1), as it relates to the 
rulemaking on central air conditioners and heat pumps, is ''minimum 
required energy efficiency.'' EPCA does not define this term. However, 
in context, it is clear that a SEER and an HSPF are benchmarks of 
''minimum required energy efficiency'' for central air conditioners and 
heat pumps. See 42 U.S.C. 6295(d)(1) and (d)(2). The key question, 
however, is which SEER and HSPF represent the ''minimum required energy 
efficiency'' for central air conditioners and heat pumps that may not 
be decreased by an amended standard.
    Had the new SEER and HSPF set out in the January 22, 2001, final 
rule been allowed to take effect, but (as the rule set forth) been made 
applicable only to appliances manufactured on or after January 23, 
2006, we think this would be a close question. A reasonable argument 
could be made that the new SEER and HSPF became ''required'' 
immediately as to such appliances provided they were manufactured on or 
after January 23, 2006. A reasonable argument could also be made that 
the new SEER and HSPF would not be ''required'' until January 23, 2006, 
when appliances manufactured after that date would have had to comply 
with them. We address this question, and other considerations bearing 
on the answer to it, at greater length below.
    In fact, however, the January 22, 2001 final rule expressly stated 
that the amendments it set out to existing standards in the Code of 
Federal Regulations would not take effect until 30 days after 
publication in the Federal Register. Well before that date arrived, on 
February 2, 2001, DOE postponed that effective date for an additional 
60 days. Before that 60-day period had passed, on April 18, 2001, DOE 
further postponed the amendments' effective date pending the outcome of 
petitions by ARI for reconsideration and for judicial review.
    As a result, the new SEER and HSPF, though set out in a final rule, 
never in any sense achieved the status of being the ''required'' 
''minimum energy efficiency'' benchmarks. There has never been a single 
moment under any

[[Page 36371]]

understanding of the word ''required'' at which any central air 
conditioner or heat pump, including one manufactured after January 23, 
2006, could even arguably have been legally required to be manufactured 
in conformity with them. Hence, whatever might have been the case had 
the January 22 final rule been allowed to take effect, we do not see 
how the publication of a final rule that would have changed those 
standards, but was prevented by later agency action from doing so, 
could possibly establish ''minimum required energy efficiency'' 
benchmarks.
    This interpretation of ''minimum required energy efficiency'' is 
reinforced by the rest of the sentence in section 325(o)(1) of which 
the phrase is a part. That sentence establishes a limitation on the 
''amended standards'' the Secretary may prescribe. That wording 
strongly suggests that the ''minimum required energy efficiency'' 
levels below which the Secretary may not go are the ones established by 
the standards being amended. Because of the various actions postponing 
the effective date of the amendments to the standards it proposed, the 
January 22, 2001 rule never actually effectuated any amendment to the 
prior standards. Therefore, the standards that DOE proposed to amend 
are not the ones that would have been in place had the amendments set 
out in the January 22 rule actually been made. Rather, they are the 
standards prescribed by NAECA (SEER of 10.0 and HSPF of 6.8 for split 
systems manufactured after January 1, 1992, SEER of 9.7 and HSPF of 6.6 
for single package systems manufactured after January 1, 1993), 
unamended until now by anything, including the never-made-effective 
amendments set out in the January 22, 2001 rule.
    Notwithstanding public comments (discussed below), DOE continues to 
believe the foregoing analysis establishes that EPCA is unambiguous on 
the question of whether standards that are published in the Federal 
Register, but not yet effective, represent the ''minimum required 
energy efficiency'' benchmarks for central air conditioners and heat 
pumps for purposes of section 325(o)(1). We think it is clear from the 
statutory text that such standards do not represent the benchmarks for 
''minimum required energy efficiency.'' We also believe that even if 
the statute were found to be ambiguous, for the reasons set out in the 
discussion that follows, that would not be the interpretation that we 
should select as a matter of policy.
    If published but not yet effective standards are not the benchmarks 
for ''minimum required energy efficiency'' in section 325(o)(1), the 
question remains whether DOE should construe the term ''minimum 
required energy efficiency'' to mean (A) energy efficiency standards 
that are not yet enforceable against the manufacturers, but that have 
been prescribed in a final rule amending prior standards, which 
amendments have been made to the CFR pursuant to an effective date that 
has passed; or (B) energy efficiency standards that are currently 
enforceable against the manufacturers if they manufacture and sell a 
non-compliant product.
    DOE believes that alternative (A) is the preferable construction of 
the term, but only if the effective date selected for the final rule is 
consistent with other applicable laws and regulations and allows the 
Secretary an opportunity promptly to correct legal and policy errors 
that may have been contained in the final rule. If that precondition is 
satisfied, DOE believes alternative (A) will better advance the 
relevant statutory and policy considerations underlying section 
325(o)(1): To promote greater energy efficiency while providing greater 
certainty to manufacturers who must plan and make the expenditures 
necessary to comply with an amended energy conservation standard-which 
is often a multi-year endeavor with substantial costs. We note that the 
relative certainty the interpretation set out in alternative (A) 
produces for manufacturers, which is a key comparative advantage of 
this interpretation over the competing one, is intimately tied to a 
proper effective date choice that facilitates prompt error correction, 
thereby potentially avoiding litigation that would seriously undermine 
the certainty sought to be achieved.
    DOE believes that this resolution of the ambiguities in the statute 
is consistent with the statute's text, structure, legislative history, 
and the fundamental policy choices it makes. We believe that on balance 
this approach better accomplishes the statute's objectives than either 
adopting alternative (A) without the qualification set out above, 
thereby establishing a set of procedures that could have the effect of 
preventing the Secretary, within a short period after publication of a 
final rule that would modify such standards, from correcting defects in 
them that come to his attention; or adopting alternative (B), thereby 
reading the phrase ''minimum required energy efficiency'' to encompass 
only energy efficiency standards as of the date upon which 
manufacturers have to comply with those standards. Although at least 
the latter approach may well be a permissible interpretation of section 
325(o)(1), DOE believes that the view set out in our proposed rule is 
the better one.
    The latter view-that a standard is only covered by section 
325(o)(1) after manufacturers are required to comply with it-does at 
first blush appear to be the most natural reading of the phrase. This 
view, however, is in tension with the rest of the sentence, which, as 
explained above, suggests that the relevant point of comparison is the 
standard being amended, regardless of whether manufacturers actually 
have to comply with it. Moreover, if adopted, this view would allow the 
Secretary to change the energy efficiency standards right up to the 
minute before the compliance date. This seems to slight important 
reliance interests given significant weight in other respects by EPCA's 
provisions on central air conditioner standards. For example, section 
325(d) provides that with respect to central air conditioners, any 
amended standard contained in a final rule published on January 1, 
1994, can apply only to products manufactured on or after January 1, 
1999. It similarly provides that any amended standard contained in a 
final rule published between January 1, 1994, and January 1, 2001, can 
apply only to products manufactured on or after January 1, 2006. The 
purpose of these delays is plainly to give manufacturers a significant 
amount of time to develop and manufacture new products after a new 
standard is adopted but before it becomes enforceable. These delays 
also suggest that a change of standard on the eve of the manufacture of 
a product would be quite disruptive-which stands to reason given the 
lead-time necessary to be in a position to manufacture a compliant 
product. Thus, to allow a standard to be blocked at the last minute 
before the compliance deadline would potentially leave a rather large 
residual uncertainty difficult to reconcile with the central purpose of 
establishing a climate of regulatory stability served by these closely 
related portions of EPCA.
    The legislative history of section 325(o)(1), although sparse, also 
suggests that this interpretation may not be the one best suited to 
accomplish the statute's objectives. In discussing this provision in 
the House bill, the House report states:

    DOE may not prescribe an amended standard that increases the 
maximum allowable energy use or decreases the minimum required 
energy efficiency of a covered product. The purpose of this 
requirement is to prevent the Secretary from weakening any energy 
conservation standard

[[Page 36372]]

for a covered product, whether established in this Act or 
subsequently adopted. This serves to maintain a climate of relative 
stability with respect to future planning by all interested parties 
* * *

House Report No. 100-11 at p. 22 (emphasis added).

    This language suggest that section 325(o)(1) was specifically 
expected, at least in the view of the House Committee, to act 
harmoniously with the other provisions of EPCA discussed above in 
facilitating regulatory certainty. The latter purpose is better 
accomplished by construing the provision to become applicable at a 
point well before the compliance date.
    On the other hand, the reliance interests at stake also are not 
best served in the long run by taking the opposite course and adopting 
the view that section 325(o)(1) becomes applicable at the earliest 
possible moment. Let us imagine, for example, that DOE were routinely 
to make final rules containing standards potentially subject to section 
325(o)(1) effective as soon as possible under the Administrative 
Procedure Act (APA). This would likely result in its making such rules 
effective 30 days after publication. DOE also could refuse to 
reconsider any aspect of such a rule relevant to the standard (unless 
it could complete its consideration and correct any errors within that 
30-day time period), no matter how serious or legitimate a question 
might be raised, since to do so effectively, it would have to prevent 
the standard from going into effect.
    This approach, however, would not be the best way for DOE to 
promote regulatory certainty either. It is common for agencies to 
entertain petitions for reconsideration at least for a short period 
after issuance of a final rule as well as to correct errors on their 
own motion during that time. Moreover, there is good reason why 
agencies follow this course, since otherwise such errors would have to 
await the completion of judicial review before they could be corrected, 
thereby creating substantial delay and uncertainty. Accordingly, this 
approach too, in addition to running counter to ordinary administrative 
practices that there is no reason to believe section 325(o)(1) was 
intended to abrogate, is not the best way to advance the regulatory 
stability sought by section 325(o)(1) and the other related EPCA 
provisions discussed above.
    With respect to major rules, this approach also would create 
unnecessary conflict between section 325(o)(1) and the Congressional 
Review Act (CRA) (5 U.S.C. 801-804) enacted in 1996. Under the CRA, 
before a final rule can become ''effective,'' DOE must send a report to 
Congress (5 U.S.C. 801(a)(1)(A) and (B)). With respect to a ''major 
rule'' within the meaning of 5 U.S.C. 804(2), the CRA provides for the 
passing of a 60-calendar-day-lie-before-the-Congress period, after 
submission of the agency report, at the end of which a final rule could 
become effective in the absence of a Congressional resolution of 
disapproval (5 U.S.C. 801(a)(3)). CRA allows for an exception to the 
60-day-lie-before requirement only if the President determines that a 
major rule should take effect before the end of that period because of 
an imminent health or safety threat or other emergency; because it is 
necessary to the enforcement of criminal laws or national security; or 
if it is issued pursuant to a statute implementing an international 
trade agreement (5 U.S.C. 801(c)).
    In DOE's view, this last set of considerations also points the way 
to the answer to the question of at what time amendments to an energy-
efficiency-setting-standard should best be viewed as having set 
''minimum required energy efficiency'' benchmarks. For the reasons 
explained at the beginning of this section, that time must be after the 
final rulemaking the amendments to the standard is in effect. But, 
consistent with the objective of section 325(o)(1) and the other 
closely related EPCA provisions of promoting regulatory certainty, and 
to harmonize section 325(o)(1) with common administrative practice and 
the CRA, such final rules should ordinarily be made effective only 
after a reasonable hiatus after the date of publication has elapsed, 
allowing for prompt use of ordinary administrative error correction 
procedures and completion of congressional review under CRA. This is 
the earliest that manufacturer planning in reliance on a final major 
rule to amend appliance energy conservation standards can realistically 
be expected to begin. The certainty of the regulatory regime sought to 
be achieved therefore cannot occur until that time.
    Accordingly, DOE believes it should construe section 325(o)(1) as 
applying to standards designed to set ''minimum required energy 
efficiency'' benchmarks at the point in time a final rule containing 
such a standard becomes effective. It also believes, however, that it 
should take care to select effective dates for final rules containing 
such standards that are consistent with the CRA and any other 
applicable law. This approach will best promote the regulatory 
certainty sought by section 325(o)(1) and its companion provisions and 
also comports well with the ordinary understanding of when a rule 
containing such standards has established ''require[ments].''
    DOE's decision to exercise its discretion to adopt this 
interpretation of section 325(o)(1) is not meant to intimate a view 
with respect to or suggest how anti-backsliding provisions in other 
statutes should be interpreted. Decisions of that type would of course 
turn on the specific language and policy of those provisions, just as 
today's decision did here.
    Based on this consideration of the meaning of section 325(o)(1), 
DOE proposed to adopt a series of amendments to the EPCA rules intended 
to address these general issues. First, it proposed definitions of the 
terms ''maximum allowable energy use'' and ''minimum required energy 
efficiency'' as energy conservation standards established by a final 
rule that has become effective in the sense that it has modified the 
Code of Federal Regulations. It further proposed to include in its 
definition that to qualify, the final rule has to have made that 
modification on a date selected consistent with the CRA and other 
applicable law. Finally, in order to avoid confusion, it proposed a 
technical amendment adding a definition of the EPCA term ''effective 
date,'' which EPCA, inconsistently with the Office of Federal Register 
guidance, treats as synonymous with ''compliance date.''

B. Discussion of Public Comments on the Anti-Backsliding Provision

    DOE's analysis of section 325(o)(1) and related proposals were the 
subject of comment by the environmental advocates and by ARI. Their 
comments elaborated upon the basic positions each had taken in 
connection with ARI's petition for reconsideration. The environmental 
advocates prefaced their comments with the observation that ultimately 
the question whether the anti-backsliding provision prevents DOE from 
withdrawing the January 22 final rule and proposing a 12 SEER standard 
would likely be resolved in the Federal litigation previously mentioned 
(see ''Rulemaking History.'').
1. Environmental Advocates'' Views
    The environmental advocates, led by the Natural Resources Defense 
Council (NRDC) and several states, argue that EPCA's anti-backsliding 
provision applies upon publication of final standards in the Federal 
Register, and that DOE is powerless thereafter to entertain and grant a 
petition for reconsideration that requests lower

[[Page 36373]]

amended standards. (NRDC, No. 250; Attorneys General of New York and 
Massachusetts, No. 277; State of Vermont, No. 268; Attorney General of 
California, No. 249).
    The NRDC commented that the APA contains no provision for 
''withdrawing'' a final rule, and that if DOE wishes to change the 
rule, it may propose to ''amend, revise or revoke'' the rule consistent 
with the APA. NRDC also states there is no statutory or regulatory 
provision allowing interested persons to ''petition for 
reconsideration'' of a final rule. DOE does not believe these arguments 
have merit. DOE chose to use the word ''withdraw'' at the suggestion of 
staff in the Office of the Federal Register. ''Withdraw'' is the term 
that Office uses to describe the action of an agency in pulling back a 
rule document before it is officially filed and published in the 
Federal Register. (Document Drafting Handbook, Chapter 4, p. 4-2 (Oct. 
1998)). The Office of the Federal Register decided that the word 
''withdraw'' also is apt when an agency proposes to rescind a published 
final rule before it becomes effective, thus pulling it back before it 
modifies the Code of Federal Regulations. (Document Drafting Handbook, 
Chapter 2, p. 2-33 (Oct. 1998)). By proposing to withdraw the January 
22 final rule and proposing a 12 SEER standard, DOE was proposing 
actions that, if adopted and implemented in a future final rule, would 
rescind or repeal the January 22 final rule. This course of action is 
entirely consistent with the APA. While an agency generally has 
inherent authority to reconsider its decisions, as the comments of ARI 
state (ARI, No. 259, at p. 6), the APA specifically gives interested 
persons the right to petition for rulemaking (5 U.S.C. 553(e)).
    NRDC further believes DOE has misconstrued section 325(o)(1) by 
placing undue weight on the word ''required'' in the term ''minimum 
required energy efficiency.'' (Several state officials submitted 
comments similar in most respects to the NRDC views summarized here and 
in the discussion that follows.) NRDC faults DOE for ignoring the terms 
''maximum allowable energy use'' and ''maximum water use'' in the same 
provision. All of these terms, NRDC argues, are simply measurements of 
energy conservation and do not refer in any way to compliance dates or 
requirements for manufacturers. NRDC, therefore, concludes that the 
word ''require'' is ambiguous and that one needs to look to the entire 
statutory scheme to determine when the anti-backsliding provision 
applies.
    NRDC argues that the key word in section 325(o)(1) is 
''prescribe,'' which it states occurs when a final rule is published in 
the Federal Register, and that it is the act of ''prescribing'' a final 
rule that triggers application of the anti-backsliding provision. NRDC 
finds supports for this interpretation of ''prescribe'' in section 
325(p), which includes publication of a final rule as the last step in 
the procedure for prescribing a new or amended standard, and in the 
deadlines for various amendments of product standards that are 
determined by reference to the date of publication of the previous 
standard. NRDC also points to House Report language stating that 
section 325(o)(1) prevents DOE from weakening any energy conservation 
standard for a product ''whether established in this Act or 
subsequently adopted,'' and states that use of the word ''adopted'' 
confirms its view that the anti-backsliding provision applies when a 
rule is published in the Federal Register. Thus, under NRDC's 
interpretation, once DOE published the January 22 final rule, it was 
powerless to reconsider it and propose a lower energy conservation 
standard.
    DOE agrees that the term ''minimum required energy efficiency'' is 
not the only descriptor of energy or water efficiency used in section 
325(o)(1), but it is the only descriptor that applies to standards for 
central air conditioners and heat pumps. That is why DOE's analysis 
focuses on the word ''required.'' It is true that for other covered 
products, the applicable descriptor would be ''maximum allowable energy 
use'' or ''maximum allowable water use.'' For those products, the key 
word would be ''allowable.'' But for the same reasons why, as explained 
in DOE's analysis above, the SEER and HSPF levels set out in the 
January 22 final rule never in any sense achieved the status of being 
the ''required'' ''minimum energy efficiency'' benchmarks, it is not 
much easier to see how a rule that never became effective could set 
''maximum allowable'' amounts of water or energy use. At least until a 
new rule establishing maximum allowable energy or water use became 
effective, the ''maximum allowable energy'' or ''maximum allowable 
water use'' for a product subject to one of these standards would 
remain the preexisting standard. Accordingly, today's rule contains 
definitions of ''maximum allowable energy use'' and ''maximum allowable 
water use'' that parallel the definition of ''maximum required energy 
efficiency'' that DOE adopts.
    DOE also thinks NRDC's view of the importance of the word 
''prescribe'' in section 325(o)(1) is wrong. The word ''prescribe'' is 
nowhere defined in EPCA, but it does not necessarily mean 
''publication.'' For example, section 325(p), concerning the procedure 
for prescribing any new or amended standard, provides that ''[a] final 
rule prescribing an amended or new energy conservation standard or 
prescribing no amended or new standard for a type (or class) of covered 
products shall be published as soon as practicable * * *'' 42 U.S.C. 
6295(p)(4). The use of the word ''prescribe'' in the same provision in 
which the word ''publish'' is used is a clear indication that Congress 
may have considered the two words to have different meanings. It is not 
necessary to resolve the question of the meaning to the word 
''prescribe'' because it begs the critical question of what DOE may not 
prescribe under section 325(o)(1). With respect to central air 
conditioners and heat pumps, the what that DOE may not prescribe under 
section 325(o)(1) is any amended standard ''which increases the * * * 
minimum required energy efficiency'' of a central air conditioner or 
heat pump. We continue to believe that standards in a published rule 
that have never become effective are in no sense ''required'' energy 
efficiency levels, and therefore cannot be the baseline for determining 
whether the amended standards increase the minimum required energy 
efficiency.
    Finally, DOE disagrees with NRDC's conclusion that the structure 
and language of EPCA point to the date of publication of amended 
standards as the time at which section 325(o)(1) applies. More 
specifically, DOE does not think the statutory intervals for issuance 
of amended standards, which reference to the date the previous 
amendment is published, are relevant to the question of when the anti-
backsliding provision applies. The fact that Congress required DOE to 
periodically review and publish amendments to standards does not seem 
to have any bearing on the question of what point in time standards are 
required for purposes of section 325(o)(1).
    The Attorneys General of the States of New York and Massachusetts 
attacked the legality of DOE's February 2, 2001, and April 20, 2001, 
notices delaying the effective date of the January 22 final rule 
(Attorneys General of New York and Massachusetts, No. 277). In their 
view, DOE lacked good cause for not proposing the delays for public 
comment. They dismiss DOE's analysis of, and provisions for, 
implementing the anti-backsliding provision as a post hoc attempt to 
justify its allegedly illegal

[[Page 36374]]

delays of the January 22 final rule. Implicit in their comment is the 
view that the January 22 final rule actually became effective and, 
thus, became the required standards for purposes of section 325(o)(1). 
Based on this understanding of the anti-backsliding provision, the 
States of New York and Massachusetts consider DOE's action to withdraw 
the January 22 final rule and adopt 12 SEER standards to be a 
''rollback'' of established standards.
    As explained in the February 2, 2001, notice, DOE temporarily 
delayed the effective date of the January 22 final rule in conjunction 
with Executive branch wide direction from the Assistant to the 
President and Chief of Staff. DOE explained that seeking public comment 
would be impracticable and contrary to the public interest, and further 
that the imminence of the effective date in the rule constituted good 
cause for making the temporary delay effective upon publication. 66 FR 
8745-46. The further postponement of the effective date on April 20, 
2001, was based in part on several reasons why seeking public comment 
and delaying the effective date of the action were impracticable, 
unnecessary, and contrary to the public interest. 66 FR 20191. These 
reasons are not repeated in full here, but DOE explained why in light 
of ARI's petition for reconsideration and its lawsuit in the Court of 
Appeals for the Fourth Circuit, DOE concluded there was good cause for 
further delaying the January 22 final rule's effective date pending 
consideration of ARI's petition and judicial review. Thus, DOE thinks 
the short-term delays of the January 22 final rule's effective date to 
deal with substantial legal questions were lawful, and it rejects the 
characterization of DOE's proposals as a ''rollback'' of the energy 
conservation standards.
    The Attorneys General of the States of New York and Massachusetts 
and the American Council for an Energy-Efficient Economy (ACEEE) argued 
that choosing an effective date for purposes of section 325(o)(1) other 
than the date of publication of amended standards would lead to delay 
and cause uncertainty with respect to when manufacturers must make 
investments needed to comply with amended standards. (Attorneys General 
of New York and Massachusetts, No. 277 at p. 9; ACEEE, No. 284 at p. 
3). The Northeast Energy Efficiency Partnerships, Inc. (NEEP) argued 
DOE's proposed approach would give stakeholders another opportunity to 
try to influence decision makers and would ''politicize'' the standard 
setting process. (NEEP, No. 273 at p. 3). As explained above, DOE does 
not believe section 325(o)(1) can be reasonably interpreted to apply 
upon the publication of final standards in the Federal Register. 
However, assuming DOE had the discretion to adopt such an 
interpretation, DOE would not choose the date of publication as the 
date for purposes of section 325(o)(1). As explained previously, a 
practice of routinely making published standards effective in the 
shortest time after publication (normally 30 days after publication 
under the APA) is not likely to provide greater certainty about the 
point in time when standards would take effect. If DOE were unable to 
respond to legitimate requests for reconsideration and correction of 
errors, then the only avenues available to aggrieved stakeholders would 
be lawsuits in Federal courts or efforts to obtain a legislative 
reversal under the CRA. This would not lead to expeditious correction 
of errors or resolution of issues and would not advance the goal of 
regulatory certainty. Such a practice also would create needless 
conflict with the CRA's 60-day lie-before-the-Congress provision for 
major rules.
2. ARI's Views
    ARI agrees with DOE that the existing ''minimum required energy 
efficiency'' levels for central air conditioners and heat pumps, which 
DOE may not lower, are the standards established by NAECA, effective on 
January 1, 1992 (i.e., 10 SEER/6.8 HSPF for split systems and 9.7 SEER/
6.6 HSPF for single package systems). However, ARI believes the term 
''minimum required energy efficiency'' should be understood to mean the 
existing efficiency standard as of the effective date under EPCA, i.e., 
the date on which the standard is required to be complied with (ARI, 
No. 259 at p. 19). ARI believes its interpretation would avoid the risk 
of having the anti-backsliding provision apply unreasonably early, 
which could prevent DOE from taking appropriate administrative action 
to correct a promulgated standard or to respond to extraordinarily 
changed circumstances.
    DOE acknowledged in its analysis of section 325(o)(1) that the view 
that a standard is only covered by the anti-backsliding provision after 
manufacturers are required to comply with it is an arguable one. This 
view, however, is in tension with the rest of the sentence, which 
suggests that the relevant point of comparison is the standard being 
amended, regardless of whether manufacturers actually have to comply 
with it. Moreover, by allowing the Secretary to change the energy 
efficiency standards at any point in time before the compliance date, 
this view would slight important reliance interests that, as DOE 
explained in its analysis, are given significant weight by other 
provisions and the legislative history of EPCA. For these reasons, DOE 
continues to believe that section 325(o)(1) should be construed as 
applying to standards designed to set ''minimum required energy 
efficiency'' benchmarks at the point in time a final rule containing 
such a standard becomes effective for purposes of revising the Code of 
Federal Regulations, as long as the effective date that is selected is 
consistent with the CRA and any other applicable law. In today's rule, 
DOE adopts provisions that implement this approach.
    ARI stated that if DOE adopted the approach it proposed in the July 
25 SNOPR, then it would like the definitions of ''minimum required 
energy efficiency'' and ''maximum allowable energy use'' revised to 
ensure that DOE has sufficient time to complete any administrative 
action it takes in response to a petition for reconsideration. ARI 
recommended adding to each definition the words ''or the date on which 
DOE completes action on any timely-initiated administrative 
reconsideration, whichever is later.'' (ARI, No. 259 at pp. 20-21). We 
think ARI's suggested language is a useful addition to the definitions. 
Therefore, we have revised the proposed definitions of ''maximum 
allowable energy use'' and ''minimum required energy efficiency,'' to 
be added to section 430.2, accordingly. In addition, DOE adds a similar 
definition of ''maximum allowable water use,'' which was inadvertently 
omitted in the July 25 SNOPR.
    Under the provisions adopted in today's final rule, DOE will select 
a date for the ''Effective Date'' line of the notice of final 
rulemaking that in most instances will be 60 to 80 days after the date 
of publication. (DOE has chosen 75 days after the date of publication 
for the effective date of today's rule.) DOE would expect that any 
petition for reconsideration, to be considered timely, ordinarily would 
be submitted to DOE before the effective date specified in the notice 
of final rulemaking.
    DOE did not receive any public comments on the proposed definition 
of the term ''effective date'' as used in EPCA and 10 CFR 430.32. This 
definition clarifies that for purposes of construing the term under 
EPCA (but not for purposes of determining the point at which amendments 
to a standard qualify for protection under section 325(o)(1)), the 
''effective date'' is

[[Page 36375]]

the date on which an amended energy conservation standard becomes 
enforceable. DOE also did not receive comments on proposed section 
430.34, which tracks the language of section 325(o)(1). Therefore, DOE 
today adopts these provisions without substantive change.

IV. Basis for DOE's Decision To Withdraw the January 22, 2001, Final 
Rule

    In the July 25 SNOPR, DOE discussed possible legal errors in the 
promulgation of the January 22 final rule and economic issues that DOE 
believed had not been adequately considered in determining the energy 
efficiency levels that are the maximum technologically feasible and 
economically justified (66 FR 38827-29). On the basis of these possible 
legal and policy errors, DOE proposed to withdraw the January 22 final 
rule and proposed to adopt a 12 SEER standard for most central air 
conditioners and heat pumps, rather than the 13 SEER standard in the 
January 22 final rule (66 FR 38842). DOE today finally withdraws the 
January 22 final rule and amends the energy conservation standards for 
central air conditioners and heat pumps at the 12 SEER level except for 
two types of space-constrained products (through-the-wall products and 
small duct, high velocity systems) that are subject to lower standards. 
In taking this action, DOE corrects the legal and policy errors that 
were the basis for DOE's decision to withdraw the January 22 final 
rule.

A. Legal Issues

    In the July 25 SNOPR, DOE acknowledged that to comply with section 
325(o)(2)(B)(i) of EPCA, DOE arguably should have invited the 
Department of Justice to submit a supplemental statement of its views 
on the potential anti-competitive impact of a 13 SEER standard for both 
central air conditioners and heat pumps which was included in the 
January 22 final rule (66 FR 38827-28).
    Section 325(o)(2)(B)(i) requires DOE to determine whether the 
benefits of a new or amended energy conservation standard exceed its 
burdens by considering ''to the greatest extent practicable'' seven 
factors, including: ''(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'' (42 U.S.C. 
6295(o)(2)(B)(i)). Section 325(o) also provides that:

    For purposes of clause (i)(V), the Attorney General shall make a 
determination of the impact, if any, of any lessening of competition 
likely to result from such standard and shall transmit such 
determination, not later than 60 days after the publication of a 
proposed rule prescribing or amending an energy conservation 
standard, in writing to the Secretary, together with an analysis of 
the nature and extent of such impact. Any such determination and 
analysis shall be published by the Secretary in the Federal 
Register.

42 U.S.C. 6295(o)(2)(B)(ii).

    In context, it is clear that the term ''the standard'' in section 
325(o)(2)(B)(i) refers to any new or amended energy conservation 
standard finally prescribed by DOE under section 325(o) of EPCA. 
Because the Department of Justice must transmit its determination to 
DOE within 60 days after the publication of a proposed rule, EPCA 
contemplates that the Department of Justice's determination on the 
anti-competitive effects of a proposed rule usually will enable DOE to 
fulfill its substantive obligation to consider the Department's expert 
opinion on the anti-competitive impact of a final standard. However, as 
the following discussion shows, this will not always be the case.
    DOE submitted the October 5, 2000, NOPR to the Attorney General for 
review pursuant to the foregoing provisions. The NOPR described the 
range of potential trial standards considered by DOE, and proposed 
adoption of Trial Standard Level 3, i.e., a minimum SEER of 12 for 
central air conditioner product classes and a SEER of 13, with a 
corresponding HSPF of 7.7, for central air conditioning heat pumps. The 
Department of Justice, consistent with its past practice, confined its 
response to the proposed standards, corresponding to Trial Standard 
Level 3.
    The Department of Justice had several concerns about the proposed 
rule's potential impact on competition (see December 4, 2000, letter in 
the Appendix to this notice). First, the Department of Justice was 
concerned the proposed rule would have a disproportionate impact on 
small manufacturers. Second, it was concerned that the proposed 
standard for heat pumps, and in some instances the standard for air 
conditioners, would have an adverse impact on some manufacturers of 
equipment to be used to retrofit existing housing and used in 
manufactured housing. Third, it was concerned that the proposed 13 SEER 
for central air conditioning heat pumps could cause consumers to shift 
from heat pumps to other systems that include resistance heat systems, 
reducing the competition that presently exists between manufacturers of 
heat pumps and manufacturers of those other heating systems. The 
Department of Justice urged DOE to take these concerns into account and 
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 and for manufactured housing.'' 66 FR 7200.
    DOE published a final rule on January 22, 2001, that adopted 
standards that corresponded to Trial Standard Level 4 (the next higher 
level) and prescribed a minimum SEER of 13 for all the product classes, 
except for niche products, with a corresponding 7.7 HSPF. While the 
preamble to the final rule addressed the Department of Justice's 
specific concerns about the proposed 12 SEER standards for central air 
conditioners/13 SEER/7.7 HSPF standard for central air conditioning 
heat pump systems (66 FR 7192-93), DOE did not have the benefit of the 
Department of Justice's views on the potential anti-competitive impact 
of the final 13 SEER standards for both air conditioners and heat 
pumps. This is particularly of concern in light of information in the 
TSD indicating that standards at Trial Standard Level 4 (uniform 13 
SEER standards) could cause several major manufacturers to consider 
selling their production assets rather than make the investment 
required to meet the new standard or face the loss of profits caused by 
the absence of premium products in the marketplace (see July 25 SNOPR 
at 38827). Therefore, DOE believes the Department of Justice's views on 
the potential of the standards in the January 22 final rule to 
accelerate consolidation in the industry should have been obtained.
    As part of its review of the January 22 final rule pursuant to the 
President's Regulatory Review Plan, DOE on March 20, 2001, requested 
the views of the Department of Justice on the 13 standards for central 
air conditioners and heat pumps. The Department of Justice's letter 
responding to our request is published in the Appendix to this notice. 
While some commenters were critical of the substance of the Department 
of Justice's determinations about the anti-competitive impact of 13 
SEER standards (see Section VI below), none of the comments disputed 
DOE's view that it should have obtained the Department of Justice's 
views on 13 SEER standards for both central air conditioners and heat 
pumps.
    A second legal error that DOE considered in deciding to propose 
withdrawal of the January 22 final rule was the absence of any 
discussion of cumulative regulatory burden in the

[[Page 36376]]

statement of basis and purpose for the January 22 final rule. One 
aspect of the assessment of manufacturer burden required by EPCA (42 
U.S.C. 6295(o)(2)(B)(i)(I)) is the cumulative impact of multiple DOE 
standards and the regulatory actions of other Federal agencies and 
States that affect the manufacture of a covered product. The preamble 
to the January 22 final rule contained an assertion that DOE considered 
cumulative burdens, but it did not discuss the magnitude of the burden 
or how DOE took it into account in evaluating manufacturer impact (see 
66 FR 7174). In light of the evidence of cumulative regulatory burdens 
on manufacturers documented in the TSD, DOE thinks the mere assertion 
that DOE considered the cumulative burdens on manufacturers was not an 
adequate statement of basis and purpose for DOE's determination on 
manufacturer impact resulting from a 13 SEER standard. See July 25 
SNOPR at 38828.
    Finally, as explained in DOE's analysis of EPCA's anti-backsliding 
provision, the effective date included in the January 22 final rule 
(i.e., the date 30 days after the date of publication of the notice) 
was in direct conflict with the CRA requirement that a major rule may 
not take effect until the later of the date occurring 60 days after the 
date Congress receives the agency's report under 5 U.S.C. 801 or the 
date the rule is published in the Federal Register. 5 U.S.C. 
801(a)(3)(A)).

B. Policy Issues

    DOE also based its decision to propose withdrawal of the January 22 
final rule and to propose 12 SEER standards on its review of the 
analysis of benefits and burdens that underpinned the January 22 
determination that 13 SEER is the maximum efficiency level that is 
technologically feasible and economically justified. As a result of its 
review of the January 22 rule, DOE tentatively concluded that a 13 SEER 
standard was not economically justified, and therefore DOE proposed to 
withdraw the January 22 final rule and proposed to adopt a 12 SEER 
standard (66 FR 38828-29).
    As explained in the July 25 SNOPR (66 FR 38828) DOE believed that 
in issuing the January 22 final rule, the previous Administration had 
given inadequate consideration to the fraction of consumers, and 
especially low income consumers, who would incur significant increases 
in life-cycle cost as a result of the 13 SEER standard. DOE decided to 
propose a 12 SEER standard, instead of 13 SEER, because the analysis 
showed it would result in a lower fraction of consumers who would incur 
significant life-cycle cost increases (25 percent and 34 percent of 
average and low income consumers, respectively, at 12 SEER versus 39 
percent and 50 percent, respectively, at 13 SEER).
    DOE also based its decision to propose the withdrawal of the 
January 22 final rule on its conclusion that DOE, in determining 
whether 13 SEER was economically justified, had not adequately assessed 
the potential regulatory burden and financial impacts on manufacturers 
of central air conditioners and heat pumps. See July 25 SNOPR at 38828-
29. First, DOE concluded that the cumulative regulatory burden on 
manufacturers was not given sufficient weight in the determination of 
economic justification. As discussed previously, the statement of basis 
and purpose for the final rule did not explain how DOE considered the 
cumulative impact on manufacturers of the costs of complying with 
various new regulatory actions. DOE also concluded that inadequate 
consideration was given in the January 22 determination to the effect 
of 13 SEER standards on industry net cash flow and the maldistribution 
of regulatory burden on the two major types of manufacturers (66 FR 
38829).
    DOE's tentative conclusions in the July 25 SNOPR about the 
appropriate weight to give to the benefits and burdens of 13 SEER 
versus 12 SEER standards, and the resulting conclusion about which 
level is economically justified, were the subject of extensive public 
comment. These comments are discussed in Section VI of this 
Supplementary Information, and the analysis that supports DOE's 
determination that 12 SEER is the maximum efficiency level that is 
technologically feasible and economically justified is set forth in 
Section VII.

V. Amended Energy Conservation Standards

A. Overview

    The amended standards in today's rule 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 they go into effect, the 
amended standards will raise the energy efficiency standards to 12 SEER 
for new central air conditioners and to 12 SEER/7.4 HSPF for new 
central air conditioning heat pumps. The standards will apply to 
products manufactured for sale in the United States, as of January 23, 
2006. The standard for split-system air conditioners, the most common 
type of residential air conditioning equipment, represents a 20 percent 
improvement in energy efficiency. For split-system heat pumps, the new 
standard represents a 20 percent improvement in cooling efficiency and 
a 9 percent improvement in heating efficiency. The standard will 
increase the cooling efficiency of single-package air conditioners and 
single-package heat pumps by 24 percent and the heating efficiency of 
single-package heat pumps by 12 percent. DOE has determined that the 
new standards are the highest efficiency levels that are 
technologically feasible and economically justified as required by law.
    DOE adopts somewhat lower amended standards for through-the-wall 
central air conditioner and heat pump products to ensure that more 
efficient versions remain available for this application. DOE 
establishes 10.9 SEER and 7.1 HSPF as the standard for through-the-wall 
split systems, and 10.6 SEER and 7.0 HSPF for through-the-wall single 
package systems.
    Finally, DOE creates a new class for small duct, high velocity 
central air conditioners and heat pumps. These products are designed 
for retrofit applications and have special requirements that make it 
unlikely they can meet the efficiency standards that DOE today 
establishes for conventional equipment. As discussed in Section VI, DOE 
received public comments that supported creation of a separate class 
for these products. While DOE includes a definition of ''small duct, 
high velocity system'' in the final rule and creates a separate class 
for them, DOE retains the NAECA prescribed standard levels for small 
duct, high velocity products in today's final rule because DOE has not 
yet conducted the analysis required to determine whether higher levels 
are technologically feasible and economically justified. DOE in the 
near future intends to begin a rulemaking to determine if a higher 
standard is warranted.
    Several aspects of today's standards warrant highlighting, as 
follows.
1. Central Air Conditioner and Heat Pump Features
    The efficiency levels in today's final rule can be met by central 
air conditioner and heat pump designs that are already available in the 
market. DOE fully expects variations of these models to exist under the 
new standards, offering all the features and utility that are found in 
currently available products.

[[Page 36377]]

2. Consumer Benefits
    Table 1 summarizes the ''characteristics'' of today's typical 
central air conditioners and heat pumps. Table 2 presents the 
implications for the average consumer of the standards becoming 
effective in 2006.

                                 Table 1.-Characteristics of Today's Typical Central Air Conditioners and Heat Pumps \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Single package air
                                     Split system air conditioner     Split system heat pump            conditioner            Single package heat pump
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average Installed Price............  $2,236......................  $3,668.....................  $2,607.....................  $3,599
Annual Utility Bill \2\............  189.........................  453........................  189........................  453
Life Expectancy....................  18.4 years..................  18.4 years.................  18.4 years.................  18.4 years
Energy Consumption per year........  2,305 kWh...................  6,549 kWh..................  2,305 kWh..................  6,549 kWh
--------------------------------------------------------------------------------------------------------------------------------------------------------
 \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 2.-Implications of New Standards for the Average Consumer
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Single package air
                                     Split system air conditioner     Split system heat pump            conditioner            Single package heat pump
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year Standard Comes into Effect....  2006........................  2006.......................  2006.......................  2006
New Average Installed Price........  $2,449......................  $3,812.....................  $2,765.....................  $3,748
Estimated Price Increase...........  213.........................  144........................  158........................  149
Annual Utility Bill Savings........  31..........................  50.........................  31.........................  50
Average Net Saving over Equipment    113.........................  365........................  163........................  421
 Life.
Energy Savings per Year............  384 kWh.....................  768 kWh....................  384 kWh....................  768 kWh
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The most typical air conditioner (i.e., split system air 
conditioner which comprises approximately 65 percent of today's central 
air conditioning and heat pump market) has an installed price of $2,236 
and an annual utility costs of $189. In order to meet the 2006 
standard, DOE estimates that the installed price of a typical air 
conditioner would be $2,449, an increase of $213.\5\ This price 
increase would be offset by an annual energy savings of about $31 on 
the utility bills. The most typical heat pump (i.e., split system heat 
pump) currently has an installed price of $3,668 and annual utility 
costs of $453. In order to meet the 2006 standard, DOE estimates that 
the installed price of a typical heat pump would be $3,812, an increase 
of $144.\6\ This price increase would be offset by an annual energy 
savings of about $50 on the utility bills.
---------------------------------------------------------------------------

    \5\ Based on estimates supplied by the industry trade 
association, the Air-Conditioning and Refrigeration Institute (ARI), 
the installed price is estimated to be $2,510, an increase of $274.
    \6\ Based on estimates supplied by ARI, the installed price is 
estimated to be $3,933, an increase of $265.
---------------------------------------------------------------------------

    DOE 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, DOE has investigated the 
effects of the different energy prices across the nation and different 
air-conditioning usage patterns. DOE estimates that 75 percent of all 
consumers purchasing a new typical air conditioner would either save 
money or would be negligibly impacted as a result of the 2006 
standard.\7\ In the case of a new typical heat pump, all consumers 
either would save money or be negligibly impacted.\8\
---------------------------------------------------------------------------

    \7\ Based on estimates supplied by ARI, 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.
    \8\ Based on estimates supplied by ARI, 97 percent of all 
consumers purchasing a new typical heat pump will either save money 
or will be negligibly impacted as a result of the 2006 standard.
---------------------------------------------------------------------------

    DOE also investigated how these standards might affect low income 
consumers. On average, DOE estimates that it is likely that low income 
air conditioner and heat pump consumers would also save money over the 
life of the equipment as a result of the standard.
3. National Benefits
    The standards in today's rule will provide benefits to the nation. 
DOE estimates the standards will save approximately 3 quads of energy 
over 25 years (2006 through 2030). This is equivalent to all the energy 
consumed by nearly 17 million American households in a single year. In 
2020, the standards will avoid the construction of three 400 megawatt 
coal-fired plants and nineteen 400 megawatt gas-fired plants. These 
energy savings would result in cumulative greenhouse gas emission 
reductions of approximately 24 million metric tons (Mt) of carbon, or 
an amount equal to that produced by approximately 2 million cars every 
year. Additionally, air pollution would be reduced by the elimination 
of approximately 80 thousand metric tons (kt) of nitrous oxides 
(NOX) from 2006 through 2020. In total, DOE estimates this 
standard will have a net benefit to the nation's consumers of $2 
billion over the period 2006 through 2030.\9\
---------------------------------------------------------------------------

    \9\ Net benefit assumes NAECA efficiency scenario. Net benefit 
would be $3 billion for Roll-up efficiency scenario.
---------------------------------------------------------------------------

B. Statutory Framework

    Part B of Title III of EPCA provides for the Energy Conservation 
Program for Consumer Products other than Automobiles (42 U.S.C. 6291 et 
seq.). The consumer products subject to this program include central 
air conditioners and heat pumps. Under the Act, the program consists 
essentially of three parts: testing, labeling, and Federal energy 
conservation standards.
    As previously stated, NAECA prescribed initial Federal energy 
conservation standards for central air conditioners and heat pumps (42 
U.S.C. 6295(d)). NAECA further specified that DOE is to review and 
publish amended standards by January 1, 1994 (42 U.S.C. 6295(d)(3)(A)). 
Under EPCA, 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 (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

[[Page 36378]]

proposed standard (42 U.S.C. 6295(o)(2)(B)(i)). That section further 
provides that, after reviewing the comments, DOE must 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 * * * .'' (42 U.S.C. 
6295(o)(2)(B)(iii)). The rebuttable presumption test is an alternative 
path to establishing economic justification.

C. Methodology Used in DOE Analyses

    For this final rule, the methodologies used to evaluate the seven 
factors described above are unchanged from those used in the analyses 
that DOE relied on for the October 5 proposed rule and the January 22 
final rule. DOE's methodology is discussed in the October 5, 2000 NOPR 
(65 FR 59594-97) and the January 22 final rule (66 FR 7173-74). 
Additionally, the TSD that accompanies this rulemaking provides a 
detailed description of every aspect of the various analytical 
methodologies used.

D. General Discussion of DOE's Consideration of Statutory Criteria

1. Technological Feasibility
    Pursuant to section 325(p)(2) of EPCA, and as discussed in the 
October 5, 2000 NOPR (65 FR 59593, 59612) and January 22 final rule (66 
FR 7172), DOE determined that 18 SEER is the maximum technologically 
feasible level (Max Tech Level) for cooling efficiency for all product 
classes and capacities covered by this rulemaking. The Max Tech Level 
for heating efficiency is 9.4 HSPF, which is the highest HSPF rating 
currently available in residential heat pumps. DOE's determinations of 
technological feasibility for central air conditioners and heat pumps 
have not been disputed in the written and oral comments of interested 
persons in the rulemaking.
2. Economic Justification Factors
    DOE has considered the seven statutory factors for determining 
whether a conservation standard is economically justified. This section 
briefly summarizes DOE's consideration of these factors. More detailed 
consideration of these factors is provided in the discussion of 
comments in Section VI and the discussion of analytical results in 
Section VII of this Supplementary Information.
a. Economic Impact on Manufacturers and Consumers
    The record for this rulemaking contains several discussions of the 
economic impact on manufacturers and consumers See 66 FR 7174-78, 7185-
7191, and 66 FR 38828-29, 38834-35. In the July 25 SNOPR, DOE 
identified deficiencies in the assessment of manufacturer and consumer 
impacts that was the basis for adoption of the January 22 final rule. 
Later sections of this Supplementary Information address the public 
comments received and DOE's conclusions on these subjects.
b. Life-Cycle Costs and Rebuttable Presumption
    DOE considered life-cycle costs, as discussed in the January 22 
final rule. 66 FR 7173, 7175, 7187-90. DOE calculated the installed 
price and operation and maintenance costs for a range of consumers 
around the nation to estimate the range in life-cycle cost benefits 
that consumers would expect to receive due to new standards. DOE has 
made no change in its assumptions and analysis of life-cycle costs in 
making the determinations in today's notice of final rulemaking.
    Section 325(o)(2)(B)(iii) of EPCA provides that if, according to 
the applicable 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 DOE is to 
presume that such standard is economically justified. This presumption 
of economic justification can be rebutted upon a proper showing.
    Using the reverse engineering manufacturing costs, the standards 
DOE adopts today for split heat pumps and packaged heat pumps can be 
shown to have satisfied the rebuttable presumption requirements in 
section 325(o)(2)(B)(iii).\10\ Therefore, DOE presumes that the 
standards adopted for split system and single package heat pumps are 
economically justified. The analysis, however, shows that split system 
air conditioners and single package air conditioners do not meet the 
standard for use of the rebuttable presumption of economic 
justification. Therefore, DOE does not presume them to be economically 
justified. If the rebuttable presumption does not apply, DOE must 
perform additional analysis to determine economic justification. As 
discussed in Section VII, DOE has performed an analysis for all classes 
of central air conditioner and heat pump products that shows the 
standards in today's rule are indeed economically justified.
---------------------------------------------------------------------------

    \10\ To avoid confusion, DOE points out that the statute 
requires DOE to use ''the applicable test procedure'' to calculate 
the payback periods for purposes of the rebuttable presumption. As 
explained in the October 5, 2000 NOPR (65 FR 59596), the annual 
cooling and heating energy consumption calculations based on DOE's 
test procedure are significantly greater than the weighted-average 
values from DOE's life-cycle cost analyses based on the 1997 
Residential Energy Consumption Survey, used in other DOE analyses. 
For this reason, the payback periods presented in Section VII of 
this portion of the preamble, entitled ''Analytical Results and 
Conclusions,'' are significantly longer than those calculated to 
determine whether the rebuttable presumption applies to these 
products.
---------------------------------------------------------------------------

c. Energy Savings
    EPCA 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. DOE forecasted 
energy savings through the use of a national energy savings (NES) 
spreadsheet, as discussed in the October 5, 2000 NOPR (65 FR 59590, 
59593). DOE relies on the same spreadsheets and assumptions for its 
estimate of the NES that would result from implementation of today's 
standards.
    As discussed in the October 5, 2000 NOPR, section 325(o)(3)(B) of 
EPCA prohibits DOE from adopting a standard for a product if that 
standard would not result in ''significant'' energy savings. The energy 
savings for the standard levels DOE is adopting today are non-trivial-
indeed they are substantial-and therefore we consider them 
''significant'' within the meaning of

[[Page 36379]]

section 325 of the Act as construed by the court in Natural Resources 
Defense Council v. Herrington, 768 F.2d 1355 (D.C. Cir. 1985).
d. Lessening of Utility or Performance of Products
    This factor cannot be quantified. In establishing classes of 
products, DOE has attempted to eliminate any degradation of utility or 
performance in the products covered by today's 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. 
The separate treatment of through-the-wall products and small duct, 
high velocity systems in today's rule is based in part on utility and 
performance considerations.
e. Impact of Lessening of Competition
    This economic justification factor has two aspects: On the one 
hand, it assumes that there could be some lessening of competition as a 
result of standards; on the other hand, it directs the Attorney General 
to gauge the impact, if any, of that effect and DOE must consider the 
Attorney General's views in determining whether an efficiency level is 
economically justified.
    In order to assist the Attorney General in making such a 
determination, DOE provided the Attorney General with copies of the 
October 5, 2000, NOPR and the TSD for review. The Attorney General's 
determination, in a letter dated December 4, 2000, was discussed in the 
preamble to the January 22 final rule. 66 FR 7176, 7199-200. The 
Attorney General's December 4, 2000, determination is included in the 
Appendix to this notice of final rulemaking.
    During the review conducted pursuant to the President's Regulatory 
Review Plan, DOE invited the Attorney General to submit supplemental 
views on the January 22 final rule. The Department of Justice, in a 
letter dated April 5, 2001, provided comments on whether the final rule 
effectively removed its concerns regarding possible lessening of 
competition that could result from the October 5 proposed standards. 
The Department of Justice's April 5, 2001, letter is also included in 
the Appendix to this notice. The Department of Justice concluded that 
the 13 SEER standards for heat pumps and air conditioners in the 
January 22 final rule still presented anti-competitive concerns. More 
specifically, the Department of Justice concluded that while the final 
rule's exclusion of niche products might alleviate competitive problems 
for manufacturers of those products, the Department of Justice remained 
concerned about the impact of the final rule on manufacturers of 
standard equipment who could not make 13 SEER equipment that would fit 
into space-constrained sites. The Department of Justice also concluded 
the January 22 final rule would have a disproportionate impact on 
smaller manufacturers of heat pumps. Finally, the Department of Justice 
was of the view that the 13 SEER standard for air conditioners presents 
the same kinds of anti-competitive problems as the 13 SEER standard for 
heat pumps, and urged DOE to adopt a 12 SEER standard for all products 
covered by the rule.
    DOE submitted the July 25, 2001, supplemental proposed rule to the 
Department of Justice for comment. The Assistant Attorney General, 
Antitrust Division, responded in a letter dated October 19, 2001, (see 
Appendix to this notice) that the Department of Justice had concluded 
that the proposed 12 SEER standards would not adversely affect 
competition. This factor is discussed further in Section VI.E of this 
Supplementary Information.
f. Need of the Nation To Conserve Energy
    DOE 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. As part of the analysis 
supporting today's rule, DOE estimated energy savings and the national 
consumer benefits and estimated reduction in emissions of pollutants 
and greenhouse gases resulting from those energy savings. See the 
October 5, 2000 NOPR for a qualitative discussion of how these 
standards affect energy savings and those benefits. 65 FR 59622-3. The 
amount of energy savings ultimately associated with a particular 
standard level is also affected by the effect of a given standard on 
competition and consumer cost. Selecting a standard level should take 
into account manufacturer-and therefore inevitably consumer-costs, in 
order to encourage robust competition and heightened introduction of 
newer, more efficient units into the inventory of units available for 
purchase and use by consumers.
g. Other Factors
    Section 325(o) of EPCA 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 (42 U.S.C. 
6295(o)(2)(B)(i)(VI)). Under this provision, DOE considered the 
potential improvement to the reliability of the electrical system and 
health effects caused by foregone air conditioner purchases. These 
issues are discussed in the October 5, 2000 NOPR (65 FR 59605); the 
January 22 final rule (66 FR 7195); and in the Discussion of Comments 
that follows. The Utility Impacts Analysis in Chapter 11 of the TSD 
describes the technical analysis used in estimating the effects of 
adopting new efficiency standards on installed generation capacity. As 
will be described in the Discussion of Comments, the Utility Impacts 
Analysis has been revised. Updated results are provided in Appendix M 
of the TSD.

VI. Discussion of Comments

A. Impact on Consumers

    The record for this rulemaking includes numerous discussions of the 
distributions, extent, and type of burdens on the typical consumer as 
well as on low-income consumers. See 65 FR 59623-59624, 66 FR 7189-
7190, and 66 FR 38834. In the January 22 notice of final rulemaking, 
DOE determined that most consumers, including low-income consumers, 
would likely benefit financially over the life of the equipment, but 
that all consumers would bear higher initial costs, and many consumers, 
though not the majority, would never recover the higher first costs in 
the form of savings in their utility bills. However, the previous 
Administration concluded that the national energy savings and the 
slight financial benefit to the typical consumer overrode any negative 
and maldistributed consumer impacts. Upon review undertaken in 
conjunction with President Bush's Regulatory Review Plan, DOE focused 
on analytical results showing that the benefits of the standards 
adopted in the January 22 final rule would accrue to a much smaller 
fraction of consumers, particularly low-income consumers, than is the 
case for recent standards for other products. Therefore, DOE sought to 
mitigate those burdens by proposing on July 25 a 12 SEER standard, 
which would reduce the increase in equipment cost compared to the 13 
SEER requirements issued on January 22. See July 25 SNOPR, 66 FR 38828, 
38834. DOE received extensive public

[[Page 36380]]

comments on this subject in response to the July 25 SNOPR.
1. Low-Income Consumers
    As stated in the July 25 SNOPR, DOE is particularly concerned that 
new standards be designed to distribute their burdens and benefits as 
fairly as practical. Although some disparity is expected in any 
national standard, the disparity in impacts between low-income and 
typical consumers is of greater concern at more stringent efficiency 
standards because increases in first cost and increases in life cycle 
costs are felt more sharply by lower income consumers.
    Many advocates of a 13 SEER standard argued that because a majority 
of low-income central air conditioner and heat pump consumers are 
renters, most would not bear the first cost increases associated with 
more efficient equipment. These comments asserted that landlords would 
have to absorb any first cost increase because rental prices are 
dictated by housing availability, real estate prices, and a number of 
other market forces as opposed to first cost increases in any single 
appliance. The comments also asserted that because landlords typically 
purchase the least expensive, and in turn, the least efficient 
equipment, stringent efficiency standards are one of the few options 
provided to renters to protect them from unduly high energy bills. 
(ACEEE, No. 284 at p. 3; Appliance Standards Awareness Project (ASAP), 
No. 244 at pp. 1-2; Austin Energy, No. 243 at p. 2; Consumer Federation 
of America (CFA), No. 246 at p. 2; NEEP, No. 273 at p. 3; State of 
Vermont, No. 268 at p. 3; Goodman Global Holdings (Goodman), No. 269 at 
p. 4; ASE, No. 282 at p. 4; California Energy Commission (CEC), No. 263 
at p. 2; NRDC, No. 250 at pp. 17-18; Environmental Ministries of 
Southern California, No. 263 at p. 4; Texas Ratepayers' Organization to 
Save Energy (Texas ROSE), No. 241-SS at pp. 15-16; National Consumer 
Law Center (NCLC), No. 241-NN at p. 1; Texas Natural Resource 
Conservation Commission (TNRCC), No. 286 at pp. 1-2; American 
Geothermal DX, No. 241-HH at p. 1; EPA, No. 276 at p. 5). Goodman, 
Oregon Office of Energy (OOE), National Grid, and Texas ROSE stated 
that low-income consumers in general would benefit from stringent 
efficiency standards. Goodman argued that any first cost increase would 
be made up through lower energy bills, while Texas ROSE asserted that 
the stringency of the efficiency standard is immaterial as most low-
income households would find buying a new central air conditioning unit 
a prohibitive expense at any efficiency level. (OOE, No. 275 at pp. 4-
5; Goodman, No. 269 at p. 4; National Grid, No. 241-OO at p. 2; Texas 
ROSE, No. 241-SS at pp. 12-16).
    Countering the above comments, York International (York), Trane 
Company and American Standard Heating and Air Conditioning (Trane), 
Southern Company, ARI, Edison Electric Institute (EEI), Rheem 
Manufacturing (Rheem), Carrier Corporation (Carrier), and George Mason 
University Mercatus Center (Mercatus Center) all argued that the 
increased cost of more efficient air-conditioning equipment cannot be 
afforded by those consumers living on fixed or low incomes. For those 
low-income consumers that are elderly or of ill-health, Carrier and 
Mercatus Center stated that the increased first cost associated with 
more efficient equipment could cause these consumers to forego the 
purchase of new equipment leading to potential adverse health effects 
for this sub-population. With regard to low-income renters, both Trane 
and Southern Company maintained that landlords will pass on the higher 
first costs associated with more efficient equipment to renters. 
Southern Company elaborated by stating the ''renters get it free'' 
argument only has validity in the very short-term. In the long term, 
higher costs experienced by landlords will inevitably result in higher 
costs to their tenants. Southern Company asserts that DOE would be 
better served looking at cost-effectiveness from a direct-cost, 
societal viewpoint, and avoid speculating on changes in landlord profit 
margins decades from now. (York, No. 270 at pp. 2-3; Trane, No. 262 at 
pp. 4-5; Southern Company, No. 257 at p. 2; ARI, No. 259 at p. 2; EEI, 
No. 253 at p. 4; Rheem, No. 248 at p. 2; Carrier, No. 280 at p. 2; 
Mercatus Center, No. 242 at p. 11).
    DOE believes roughly half of low income households are renters. The 
1997 Residential Energy Consumption Survey (RECS) that was used as the 
basis for determining the impacts of increased efficiency standards on 
households estimates that 49.8 percent of low-income households with 
central air-conditioners or heat pumps are renters. What is at issue is 
the extent to which increased equipment costs will be borne by 
occupants of these households or by the building owners.
    DOE examined existing literature on the economics of rental markets 
to determine whether any previous analyses might help resolve the 
disagreements on this issue.\11\ The literature provides expressions 
for determining the renter and landlord pass-through-fractions as a 
function of elasticities for long-run housing supply and demand. The 
renter pass-through-fraction defines that portion of a landlord's 
investment cost (such as the cost associated with more efficient air-
conditioning equipment) that gets passed through to the renter in the 
form of an increased rental price. The renter pass-through-fraction is 
defined by the following expression:
---------------------------------------------------------------------------

    \11\ Pindykck, R. and D. Rubinfeld, Microeconomic Theory, 2001, 
provides equations for renter and landlord pass-through fractions as 
a function of elasticities for long-run housing supply and demand. 
Typical supply elasticities can be found in Pindykck, R. and D. 
Rubinfeld, Microeconomics, 2001, Prentice Hall (citing de Leeuw, F. 
and N. Ekanen, ''The Supply of Rental Housing'', AER, Vol. 61, 1971, 
pp. 806-817). Typical demand elasticities can be found in Hanushek, 
E.A. and J.M. Quigley, ''The Determinants of Housing Demand'', 
Research in Urban Economics, Vol. 2, 1982, pp. 221-242.
---------------------------------------------------------------------------

    Where,

    [GRAPHIC] [TIFF OMITTED] TR23MY02.000
    
es = elasticity of long-run housing supply and
ed = elasticity of long-run housing demand.

The landlord pass-through-fraction defines that portion of a renter's 
benefit due to a landlord's investment (such as utility bill savings 
associated with more efficient air-conditioning equipment) that get 
passed back through to the landlord in the form of an increased rental 
price. The landlord pass-through-fraction is defined by the following 
expression:
[GRAPHIC] [TIFF OMITTED] TR23MY02.001

The existing literature provides a range of elasticities for long-run 
housing supply (0.3 to 0.7) and demand (-0.1 to -1.0). The literature 
suggests that there will always be some form of renter pass-though but 
not necessarily some form of landlord pass-through. As a result, the 
minimum and maximum pass-through-fractions are 23 percent and 121 
percent, respectively, of a landlord's investment cost. As shown above, 
the literature suggests that it is possible that some landlords will 
not be able to pass on all investment costs, while other landlords may 
actually pass on more than 100 percent of these costs. Those landlords 
who are unable to pass on all of these added costs will, of course, be 
adversely affected by this rulemaking (unless they are directly 
responsible for the utility bills associated with air conditioning 
use), although their renters are much more likely to benefit. Landlords 
that would be adversely

[[Page 36381]]

affected may be more likely to seek alternatives, such as small 
capacity units or even delayed replacement of failed units. Those 
landlords that pass on more than 100 percent of the costs of new 
equipment could benefit from efficiency standards, but their renters 
are much more likely to be adversely affected. Since no study could be 
found that addressed the specific population of renters likely to be 
affected by this rulemaking, DOE believes there is insufficient basis 
to change its analytical methods or conclusions regarding the likely 
effects of central air conditioner and heat pump standards on low-
income renters.

2. Electricity Prices

    In proposing a 12 SEER standard in the July 25 SNOPR, DOE stated 
that a lower fraction of consumers would be negatively impacted in 
terms of life-cycle cost than under a 13 SEER standard. See 66 FR 
28828.
    Several comments disagreed with DOE's life-cycle cost conclusions, 
claiming that DOE's analysis significantly underestimates the benefits 
of the 13 SEER rule due to its failure to account for recent increases 
in electricity prices. The comments note that DOE based its seasonal 
price forecasts on electricity price data from 1996-97 that were 
adjusted downward using Energy Information Administration (EIA) 
projections of future annual electricity prices. Citing recent 
residential rate data from areas of the country that have undergone 
some form of electricity deregulation (e.g., Massachusetts, California, 
and the Northwest), the comments assert that DOE's electricity cost 
projections fail to recognize the significant summertime consumer price 
increases that are accompanying restructuring of the electric utility 
industry. For additional support, some comments refer to an analysis 
conducted by Synapse Energy Economics that demonstrated that summer 
daytime wholesale electric prices across the country averaged 
approximately 2\1/2\ #/kWh (kilowatt-hour) more than annual average 
wholesale prices. These comments conclude that if DOE's analysis were 
revised to include more recent electricity prices, the results would 
indicate that a 13 SEER standard represents a better choice for 
consumers and the Nation. (ACEEE, No. 284 at pp. 8-11; CFA, No. 246 at 
p. 2; Attorneys General of New York and Massachusetts, No. 277 at pp. 
15-16; OOE, No. 275 at p. 3; Pacific Gas & Electric Company (PG&E), No. 
274 at pp. 1-2; ASE, No. 282 at p. 4; Goodman, No. 269 at p. 2; 
National Rural Electric Cooperative Association (NRECA), No. 278 at pp. 
1-2; Environmental Ministries of Southern California, No. 236 at pp. 2-
3; Texas ROSE, No. 241-SS at pp. 7-8; NCLC, No. 255 at pp. 2-4; 
Northwest Power Planning Council (NWPPC), No. 287 at pp. 1-3; 
Environmental Protection Agency (EPA), No. 276 at p. 4). Some comments 
further argue that the costs of electricity price increases due to air-
conditioning are passed, in the form of higher rates, onto all 
consumers for all end uses, regardless of the importance of their role 
in creating the price increase. Thus, DOE's analysis should account for 
how lower air-conditioning consumption lowers electricity bills for all 
consumers and not only those that utilize air conditioners. (NEEP, No. 
273 at pp. 2-3; NRDC, No. 250 at pp. 14-17).
    Trane, ARI, and EEI all disagree that recent price increases due to 
electricity deregulation will lead to higher electricity rates in the 
long-term. For example, Trane asserts that competition will cause 
energy prices to consumers to remain stable. EEI adds that price 
collapses have recently occurred in some of the same regional markets 
which experienced rate increases. EEI also states that retail price 
caps have been instituted in many areas of the country that have been 
deregulated in order to shield residential consumers from the price 
fluctuations in the wholesale market. (Trane, No. 262 at pp. 14-16; 
ARI, No. 259 at pp. 33-34; EEI, No. 253 at p. 3).
    Rather than speculate on how current volatility in energy markets 
will impact future electricity prices, DOE has consistently relied on 
EIA energy price forecasts and has used other forecasts, including the 
various EIA scenarios, to bound the energy prices used in the standards 
analysis. EIA's most recent Annual Energy Outlook (AEO) for the year 
2002 recognizes that over the past year energy markets have been 
extremely volatile.\12\ Recent energy market volatility as well as the 
economic slowdown and lower prices following the September 2001 
terrorists' attacks in the United States have been incorporated in the 
short-term projections of the AEO2002. To be more specific regarding 
the AEO2002 assumptions, its projections assume a transition to full 
competitive pricing of electricity in States with specific deregulation 
plans. Other States are assumed to continue cost-of-service pricing. 
Price projections include the contracts entered into by California to 
guarantee electricity supplies in the State. Increased competition in 
electricity markets is also represented through changes in the 
financial structure of the industry and efficiency and operating 
improvement. The impact of EIA's assumptions are evidenced from the 
average residential electricity price estimated by AEO2002 for the year 
2001. The average rate estimated by AEO2002 for 2001 is 4.2 percent 
greater (or 0.3 #/kWh) than that estimated by the AEO2000. Although the 
AEO2002 short-term projections have taken into account recent events, 
EIA estimates that long-term volatility in energy markets will not 
occur from recent events or from the impacts of such future events as 
supply disruptions or severe weather. Again, this is evidenced from the 
average residential electricity price forecasts from the AEO2002. 
Starting in the year 2003 average rates are projected to drop below 
those forecasted by the AEO2000 and remain that way until 2010. After 
2010 the rates forecasted by both the AEO2002 and AEO2000 are 
essentially the same. In terms of the consumer analysis, this means 
that the life-cycle results based on the AEO2000 price projections 
would remain virtually unchanged if the AEO2002 projections were to be 
substituted in their place.
---------------------------------------------------------------------------

    \12\ U.S. Department of Energy-Energy Information Administration 
(EIA), Early Release of the Annual Energy Outlook 2002. EIA website: 
www.eia.doe.gov/oiaf/aeo/.
---------------------------------------------------------------------------

    With regard to Synapse Energy Economics' wholesale electricity 
price analysis, DOE does recognize that wholesale summertime 
electricity prices are on average 2\1/2\ #/kWh greater than average 
wholesale rates. But as was stated in the January 22 final rule, DOE 
cannot speculate as to how wholesale prices will be translated into 
retail prices to residential consumers. It is possible that this 
difference in wholesale rates will ultimately result in higher marginal 
energy prices for the operation of central air conditioners. However, 
several other assumptions about future electricity prices are equally 
reasonable. It is possible that increased competition will result in 
higher fixed charges for utility service and higher fixed charges would 
lower marginal rates. That is, under competition, utilities may recover 
more of their costs of supplying electricity to consumers from fixed 
charges on utility bills, thereby reducing the cost consumers have to 
pay for electricity being supplied at the margin. It is also possible 
that higher peak load prices for electricity would cause consumers to 
significantly alter the times at which they use air conditioning, thus 
reducing projected electricity costs (and cost savings). Finally, it is 
possible that the

[[Page 36382]]

recent trend toward increased retail level competition will slow or 
even stop. DOE recognizes that the Nation's electric utility systems 
are in the midst of major regulatory, structural and technological 
changes which are likely to have important effects on the marginal 
prices for electricity use that are charged to residential customers 
and that these effects may be particularly pronounced during periods of 
especially high (or low) electricity demand. However, given the many 
possible scenarios affecting the costs of operating central air 
conditioners, DOE has decided to retain for this rulemaking the 
existing method for estimating future marginal electricity prices. This 
analysis method utilizes the most current, comprehensive data available 
on the actual marginal rates paid by consumers and uses price forecasts 
that closely parallel the most current assessment published by DOE.
    During the coming years, DOE intends to monitor carefully the 
actual changes in the marginal electricity rates being paid by 
consumers and other electricity users, and to look for any trends in 
these changes that could help improve DOE's analysis. For future 
efficiency standards rulemakings, DOE intends to use the most recent 
data available on marginal rates, considering emerging trends in such 
rates that result from significant changes in electricity rate design 
(such as fixed and variable charges, or time-of-use rates), metering 
and demand management technologies, equipment use load shapes, or in 
the allocations of costs among sectors.
    Within approximately five years of the current rulemaking, DOE 
expects to complete another review of the efficiency standards for 
central air conditioners and heat pumps. During this period DOE hopes 
that sufficient data will become available to enable it to forecast 
with greater confidence the marginal rates for residential electricity 
users. If available, DOE expects to use such rates to support modified 
standards.
3. Installation Costs
    The potential increase in installation costs associated with 13 
SEER equipment was cited by DOE as one of the reasons for not proposing 
a 13 SEER standard in its July 25 SNOPR. See 66 FR 38836. Several 
comments disagreed with DOE's conclusion that installation costs could 
be significantly different between 12 and 13 SEER equipment. Goodman 
claims that because their 12 and 13 SEER equipment are similar in size, 
there is almost no difference in the installation costs associated with 
their 12 and 13 SEER systems. (Goodman, No. 269 at p. 3). American 
Geothermal DX, an HVAC contractor, asserts that, based on its 
experience, any cost difference between installing a 13 SEER unit over 
a 12 SEER unit would be minimal. (American Geothermal DX, No. 241-HH at 
pp. 1-2). Several other comments, in particular those from ACEEE, 
assert that DOE's treatment of the ''footprint'' issue is speculative, 
i.e., DOE provides no evidence that installation costs will actually 
increase for 13 SEER equipment. With regard to space-constrained 
equipment, ACEEE adds that because DOE has already moved to isolate 
this type of equipment as separate product classes, it effectively 
dismisses any arguments asserting that the impact of space constraints 
would result in higher installation costs for ''mainstream'' 13 SEER 
equipment. (ACEEE, No. 284 at pp. 13-14; ASE, No. 282 at p. 5; NRDC, 
No. 250 at p. 23; National Grid, No. 241-OO at p. 2).
    Trane, ARI, and Rheem all argue that 13 SEER equipment is 
significantly larger than 12 SEER systems. As a result, installation 
costs are significantly greater for 13 SEER units than for 12 SEER 
units. In particular, they state there will be many instances where it 
will be very difficult to physically fit larger indoor coils, needed to 
match outdoor 13 SEER condensing units, without retrofitting the air 
handler originally designed for a smaller, lower SEER indoor coil. 
(ARI, No. 259 at pp. 25-26; Trane, No. 262 at pp. 5-9; Rheem, No. 248 
at p. 3).
    Throughout the analysis DOE has assumed that installation costs 
would remain constant as efficiency increased. As stated in the January 
22 final rule, DOE believes that 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, 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. See January 22 final rule, 66 FR 7180. Although 
DOE still maintains that installation costs generally are unlikely to 
increase due to the above reason, as stated in the July 25 SNOPR, there 
is the possibility that substantial increases in installation costs due 
to larger and heavier 13 SEER systems may materialize for some 
consumers, especially for those replacing 10 SEER systems. See July 25 
SNOPR, 66 FR 38836. As a result, DOE continues to believe the 
possibility of increased installation costs is a factor that supports 
adopting the less costly 12 SEER standard.
4. Manufactured Housing Owners
    York, ARI, and Nordyne Inc. (Nordyne) stated that consumers living 
in manufactured homes are especially vulnerable to the increased first 
costs associated with more efficient equipment. They asserted that 
manufactured homes are typically ''starter'' homes for low-to-middle 
income families where any increases in household expenses, including 
those associated with more efficient space-conditioning equipment, are 
difficult to afford. Because the life-cycle cost analysis made no 
explicit mention of this sub-population, they are concerned that DOE 
did not consider manufactured-home owners in its analysis. (York, No. 
270 at pp. 2-3; ARI, No. 259 at p. 9; Nordyne, No. 264 at pp. 1-2).
    DOE considered all household types utilizing central air 
conditioners or heat pumps in its consumer life-cycle cost analysis, 
including manufactured homes. Of the households with central air 
conditioners analyzed in the consumer life-cycle analysis, 4.5 percent 
were manufactured homes. For households with heat pumps, 6.1 percent 
were manufactured homes.
    In its decision to propose 12 SEER standards for conventional 
products, DOE took into consideration the first cost impacts of higher 
efficiency standards to manufactured home owners. In particular, DOE 
was concerned that the 13 SEER standards issued in the January 22 final 
rule could cause manufactured home consumers to shift from heat pumps 
to other systems that include resistance heat systems. See July 25 
SNOPR, 66 FR 38836.

B. Life-Cycle Cost and Payback Period

    Although a majority of the comments concerning consumer impacts 
addressed either low-income impacts or the effect that electricity 
prices have on the number of consumers either benefitting or being 
burdened by increased standards, several comments expressed concerns 
over other elements of the consumer life-cycle cost analysis.
1. Product Lifetime
    Energy Market & Policy Analysis, Inc. (EMPA) stated that DOE 
incorrectly used estimates of the full lifetime of the equipment rather 
than the time that the equipment may remain in the ownership and use of 
the initial owner. (EMPA, No. 241-LL at pp. 5-6).
    In analyzing increases in efficiency standards, DOE is required by 
section

[[Page 36383]]

325(o)(2)(B)(i) of EPCA to use the full lifetime of the equipment for 
establishing the operating cost savings resulting from higher 
efficiency standards. The second factor in section 325 to be considered 
for determining whether the benefits of the standard exceed its burdens 
is ''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.'' 42 U.S.C, 6295(o)(2)(B)(i)(II).
    A retirement function with an average 18.4-year equipment lifetime 
was used in the life-cycle cost analysis for central air conditioners 
and heat pumps. As stated in the January 22 final rule, the basis of 
the 18.4-year equipment lifetime was a survey conducted on more than 
2,100 heat pumps in a seven state region of the U.S.\13\ See 66 FR 
7179-7180.
---------------------------------------------------------------------------

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

    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, DOE has not been provided with more substantive data to 
support discontinuing its use of the above mentioned survey data. DOE 
believes that the survey data provides an accurate representation of 
central air conditioner and heat pump life. Although the survey was 
conducted only on heat pumps, the retirement function was also used as 
the basis for estimating central air conditioner product lifetime. 
Because heat pumps are used during both the cooling and heating 
seasons, they generally incur more operating hours and more wear during 
the course of a year than air conditioners. Thus, the use of a heat 
pump retirement function for air conditioners likely underestimates 
their lifetime. Although heat pump and air conditioner lifetimes likely 
differ, DOE was unable to obtain any well substantiated data to 
determine whether air conditioner lifetimes are longer than those for 
heat pumps. Without such data, the heat pump retirement function was 
assumed valid for air conditioners.
2. Warranty, Maintenance, and Service Costs
    EMPA stated that DOE made no attempt to collect or include 
warranty, maintenance, and service costs in the consumer analysis. 
(EMPA, No. 241-LL at pp. 5-6). On the issue of warranty costs, Mercatus 
Center adds that the reliability patterns of new components that are 
part of high efficiency products are less known, so warranty accruals 
may be significantly higher for these products (i.e., 12 to 13 SEER 
equipment). (Mercatus Center, No. 242 at p. 8).
    With regard to maintenance and service (or repair) costs, DOE did 
collect data or make reasonable assumptions to establish both types of 
costs.
    Maintenance costs are costs to the consumer of maintaining 
equipment operation such as checking and maintaining refrigerant charge 
levels and cleaning heat exchanger coils. For the life-cycle cost 
analysis, maintenance costs were based on data from Service Experts, an 
HVAC service company. See TSD, Chapter 5. Maintenance costs were 
assumed not to change with increased efficiency, the rationale being 
that the general maintenance of more efficient products would not be 
impacted by the more sophisticated components that they contain.
    Service or repair costs are costs to the consumer for replacing or 
repairing components which have failed. For baseline equipment (i.e., 
10 SEER) and equipment with efficiencies greater than 13 SEER, 
annualized repair costs were assumed to equal one-half the equipment 
price divided by the average lifetime (18.4 years). Equipment with 
efficiencies of 11 through 13 SEER were assumed to incur a one percent 
increase in repair cost over the baseline level. Because systems with 
efficiencies up to and including 13 SEER generally do not include 
sophisticated electronic components, repair costs were assumed to 
remain essentially flat from 10 to 13 SEER. As noted above in the 
discussion of equipment lifetime, compressor replacement costs were 
also included in the analysis.
    With regard to warranty costs, these costs were essentially 
considered by incorporating repair costs into the analysis. As noted 
above, a product that is less reliable or contains more expensive 
components was assumed to have a higher cost of repair over its 
lifetime. As stated in the October 5, 2000 NOPR, either the consumer or 
the warranty provider will bear that added cost directly through more 
frequent service calls or higher repair costs. See 65 FR 59599-59600. 
If the cost is covered by warranty, however, the warranty provider 
passes it back to future warranty holders in the form of slightly 
higher warranty prices. DOE believes the incremental increase in the 
price of the warranty is equal to, or just slightly higher, than the 
discounted present value of the incremental repair costs over the life 
of the warranty. Over the long term then, the average consumer always 
incurs higher repair costs, either directly or through higher warranty 
prices. Since the life-cycle cost analysis considers the present value 
of consumer life cycle costs on the average consumer, incremental 
repair costs and incremental warranty costs are the same, and 
interchangeable.
3. Markups
    ARI, Trane, and York all believe that DOE greatly underestimated 
the manufacturer, distributor, and contractor markups used to derive 
consumer purchase prices. ARI maintains that the manufacturer markup 
should be approximately 1.35, as verified by a survey ARI conducted in 
the fall of 2000. Furthermore, ARI continues to believe that the 
distributor and contractor markups should be approximately 1.37, as 
determined by DOE in the 1999 Supplemental Advance Notice of Proposed 
Rulemaking (SANOPR). (ARI, No. 259 at pp. 23-25; Trane, No. 262 at pp. 
10-11; York, No. 270 at p. 3).
    As stated in the January 22 final rule, DOE did assume for the 
Manufacturer Impact Analysis that markups increase with increasing 
efficiency under a given standard level. However, for the consumer 
economic analyses, as the minimum standard level increases, DOE 
determined that the distributor and contractor markups on more 
efficient products do decrease. See January 22 final rule, 66 FR 7180.
    DOE's analysis of distributor cost data revealed a measurable 
difference between the average aggregate markup on the entire set of 
direct business costs and the incremental markup on only

[[Page 36384]]

direct equipment costs. In other words, for an incremental increase in 
the cost of the equipment, the markup required to cover the incremental 
cost increase is distinctly different than the average markup required 
to cover all business costs. The average aggregate distributor markup 
was determined to be 1.36 and is assumed to cover the direct business 
costs that are present at the current baseline (i.e., 10 SEER) level. 
Note that the average aggregate distributor markup of 1.36 is 
approximately equal to the value used in DOE's analysis for the SANOPR. 
The incremental distributor markup was determined to be 1.11 and is 
assumed to cover incremental equipment cost increases, such as those 
associated with increases in equipment efficiency.
    DOE's analysis of contractor cost data revealed a significant 
difference between the markup required for covering labor and equipment 
expenses and the markup required for covering only equipment expenses. 
The markup covering all business expenses was determined to be 1.53 
while the markup for only equipment expenses was determined to have a 
mean value of 1.27. The 1.53 markup value covering all business 
expenses is approximately equal to the value used in DOE's analysis for 
the SANOPR. Because the life-cycle cost analysis breaks out the 
contractor's installation cost (i.e., the cost to install the 
equipment) from the cost which is charged for the equipment, only the 
markup value of 1.27 is applicable for marking up the equipment. As 
with the distributor markup, a contractor markup associated only with 
an incremental increase in equipment cost was also determined. Since 
the incremental markup was shown to be close to the average value of 
1.27, only the average markup value was used in the analysis.
    As a result of determining lower distributor and contractor markups 
on incremental equipment cost increases, such as those associated with 
more efficient equipment, the overall markups decrease as efficiency 
increases. Although comments argued that overall distributor and 
contractor markups should not decrease, no data was offered to counter 
DOE's approach. Thus, DOE has retained its methodology for estimating 
both distributor and contractor markups. Appendix D of the TSD provides 
more detailed information on this issue.
4. Energy Use
a. Residential Energy Consumption Survey
    EMPA asserted that DOE violated well-established statistical 
principles by basing the proposed standards on small subsets of data 
from EIA's Residential Energy Consumption Survey (RECS). As a result, 
EMPA concludes that DOE simply has no reasonable claim of validity for 
either the calculations or its analytical conclusions. (EMPA, No. 241-
LL at pp. 2-4).
    As stated in the January 22 final rule, as part of the process to 
improve the energy efficiency standards analysis, DOE is committed to 
use of sensitivity analysis tools to evaluate the potential 
distribution of impacts among different subgroups of consumers. DOE 
believes that RECS provides a nationally representative household data 
set which is suited for conducting the type of sensitivity analyses 
suggested by the Process Improvement Rule. Limiting the RECS households 
to those equipped with either central air conditioners or heat pumps, 
the life-cycle cost 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. See 
January 22 final rule, 66 FR 7178-7179.
b. Rebound Effect
    Mercatus Center alludes to what it termed the ''rebound effect'' 
when stating that more efficient air-conditioning due to higher SEER 
standards would cause consumers to use their equipment more often, 
thereby negating some of the energy savings realized from the more 
efficient equipment. (Mercatus Center, No. 242 at pp. 9-10). Assumed 
under the rebound effect is that consumers will use more efficient 
equipment more often because of the greater utility bill savings they 
will realize relative to less efficient equipment.
    Although DOE recognizes that consumers may utilize more efficient 
equipment more often, the LCC analysis did not attempt to account for 
the possible reduction in energy savings due to a rebound effect. As a 
result, the LCC impacts detailed in today's final rule may overestimate 
actual consumer cost and energy savings that result from an increase in 
the minimum energy efficiency standards for central air conditioners 
and heat pumps.
5. Rebuttable Payback Period
    NWPPC asserts that 13 SEER, at least for split system heat pumps, 
is economically justified. NWPPC states the DOE has not justified why 
it should not adopt the HSPF 7.7 and SEER 13 standards for split system 
heat pumps since this level of efficiency satisfies the ''rebuttable 
presumption'' requirements of the law. (NWPPC, No. 287 at p. 3).
    As noted in the July 25 SNOPR, DOE recognizes some standard levels 
for some product classes satisfy the rebuttable presumption 
requirements in section 325(o)(2)(B)(iii). But DOE points out that the 
statute requires DOE to use ''the applicable test procedure'' to 
calculate the payback periods for purposes of the rebuttable 
presumption. As explained in the October 5, 2000 NOPR, the annual 
cooling and heating energy consumption calculations based on DOE's test 
procedure are significantly greater than the weighted-average values 
from DOE's life-cycle cost analyses based on the 1997 Residential 
Energy Consumption Survey, used in other DOE analyses, including 
evaluation of consumer impacts. 65 FR 59596. For this reason, the 
payback periods presented in Section VII of this portion of the 
preamble, entitled ''Analytical Results and Conclusions,'' are 
significantly longer than those calculated to determine whether the 
rebuttable presumption applies to these products. More importantly, 
DOE's economic justification analysis for a particular class of covered 
product involves consideration of factors other than the payback 
period. For example, as discussed in the July 25 SNOPR (66 FR 38837), 
one reason DOE did not propose Trial Standard Level 3 (12 SEER for air 
conditioners and 13 SEER for heat pumps) was the potential of those 
standards to cause heat pump owners to switch to resistance heating, 
and possibly adversely affect competition.

C. Shipments/National Energy Savings

1. Shipments Forecasts
    Mercatus Center asserts that DOE's shipment model does not account 
for the reduced equipment sales that occur when consumers forego 
purchases due to the increased equipment prices resulting from higher 
efficiency standards. As a result of delayed consumer purchases, the 
energy savings to the nation would build up more slowly than forecasted 
by DOE. (Mercatus Center, No. 245 at p. 5). This is effectively an 
argument that the price elasticity for the air conditioner and heat 
pump market should be higher than what was assumed.
    DOE has used historical saturation trends to establish price 
elasticities for the overall air conditioner and heat pump market. 
Higher saturation levels

[[Page 36385]]

are assumed to decrease price elasticity, which makes sales volume less 
sensitive to price increases. Over the past twenty years household 
saturation levels of central air-conditioning have increased, primarily 
due to the steady increase in real household incomes. In order to 
capture the effect that increased equipment price and household income 
have on equipment sales, the shipments model breaks the air conditioner 
market into the following segments: New construction, early 
(discretionary) replacements, regular replacements, extra repairs, and 
remodels. In the new construction market, the price of air conditioning 
has dropped over time relative to household income resulting in a 
corresponding increase in saturation to its current value of 
approximately 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 early 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. 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 is much more elastic. With regard to the other market 
segments, the regular replacement and extra repair market price 
elasticities are dependent on the age of the equipment in addition to 
price. Thus, the price elasticity for a relatively new air conditioner 
is much more elastic than that for a relatively old air conditioner. 
With regard to the remodel market (otherwise known as the market of 
stock homes without air-conditioning), historical data reveals that a 
relatively low number of non-air conditioned households purchase new 
air-conditioning equipment. Thus, like the early replacement market, 
the remodel market's price elasticity is relatively sensitive to first 
cost increases.
    Because the price elasticities in the shipments model are based on 
actual historical data, DOE has retained the price elasticities 
developed for the central air conditioner and heat pump standards 
analysis.
2. Heat Rates
    ACEEE asserts that DOE has severely underestimated the national 
energy savings resulting from more efficient standards due to the 
marginal heat rates which were used to convert electrical energy 
savings at the site (i.e., at the household or commercial building) 
into fuel savings at the source (i.e., at the power plant). ACEEE 
contends that the value assumed by DOE in 2018 and beyond (5519 Btu/
kWh) is well below the heat rate estimates provided by EIA (e.g., 9617 
Btu/kWh in 2020). Using the EIA heat rate estimate would lead to about 
a 2-fold increase in energy savings and reduction in pollution for 
2020, with progressively smaller differences earlier. (ACEEE, No. 284 
at pp. 9-10).
    The standards analysis has used marginal heat rates calculated by 
using a version of EIA's National Energy Modeling System (NEMS-BRS) 
\14\ to translate end use electricity savings to primary energy 
savings. The marginal heat rate is calculated by imposing a load 
reduction to the appliance end-use being analyzed in NEMS-BRS and 
observing the change in primary energy use. As noted by ACEEE, the 
marginal heat rates used in the central air-conditioning analysis are 
lower than expected. One would expect the central air-conditioning 
marginal heat rate to be higher than those of more base load appliances 
(like clothes washers or electric water heaters) because this peak-use 
appliance displaces more expensive, less efficient generation. Further, 
this marginal displaced plant should be not unlike the inefficient 
plant in place today because most rapid technological change occurs in 
the base load. The key to understanding this apparent paradox is that 
this conversion rate does not represent a specific marginal generator 
or combination of generators, but is actually a conversion factor that 
incorporates several simulated effects resulting from the standard.
---------------------------------------------------------------------------

    \14\ 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.
---------------------------------------------------------------------------

    The primary reason as to why the marginal heat rate is lower than 
expected is that the overall rate of efficiency improvement of the 
power system with the standard in place is slower than estimated by EIA 
in the AEO Reference Case. While there are many effects of the 
standard, DOE's analysis shows the two major components of the 
standard's impact on the power sector are: (1) The direct reduction in 
fuel burned in power plants and (2) the indirect effect whereby the 
slowing of electricity demand growth slows new investment, thereby 
impeding the rate of overall improvement in power sector efficiency. 
While this latter effect would seem to be trivial relative to the 
first, it grows significantly over time because fewer and fewer of more 
efficient generating plants are added to the power system. By the end 
of the forecast period, this effect becomes a significant drag on the 
primary energy savings of the standard, which explains why the marginal 
heat rate is less than that attributed to new technology. Further, it 
is a bigger drag on the benefits of peaking end-use efficiency 
improvements. These reduce peak demand more and slow investment more 
because the rate of new construction is heavily dependent on growth in 
peak demand. A more detailed discussion of this effect can be found in 
Appendix M of the TSD.
3. Fuel Switching
    As discussed in the July 25 SNOPR, potential equipment switching 
from heat pumps to electric resistance heating due to high heat pump 
prices was cited as one of the reasons for not proposing a 13 SEER 
standard. The energy savings resulting from 13 SEER heat pumps would be 
eliminated if only a small fraction of heat pump owners (4 percent) 
switched to electric resistance heating. See July 25 SNOPR, 66 FR 
38836.
    ACEEE, NRDC, and NWPPC all disagreed that more efficient heat pump 
standards would cause consumers to switch to electric resistance 
heating. Both ACEEE and NRDC stated that if equipment switching was 
truly a concern, DOE should prevent such action not by lowering heat 
pump efficiency standards, but by promoting revisions to building 
energy codes to minimize the use of resistive heat. (ACEEE, No. 284 at 
p. 14; NRDC, No. 250 at pp. 18-20). ACEEE adds that DOE failed to 
account for the impact that electric resistance heating has on consumer 
energy bills (nearly doubling average annual heating bills) in their 
assessment of the potential of equipment switching. NWPPC claims that 
DOE overstated the potential of equipment switching if split system 
heat pump SEER standards were set higher than those for split system 
air conditioners. NWPPC states that the price difference between a heat 
pump and an air conditioner at the same SEER level is already very high 
(approximately $1400). The extra price associated with a more efficient 
heat pump (approximately $150 between 13

[[Page 36386]]

and 12 SEER) is not enough to alter consumer purchase decisions. 
(NWPPC, No. 287 at p. 3).
    York agrees with DOE that there is potential for equipment 
switching if the standards for heat pumps are set too high. York states 
that the higher price associated with more efficient heat pumps would 
force consumers to choose either resistance heat and the resulting 
higher utility bills, or fossil fuel furnaces that may have to operate 
on higher cost fuels with more volatile prices such as oil or propane. 
(York, No. 270 at pp. 3-4).
    As stated in the January 22 final rule, a significant number of 
households use electric resistance heat, indicating the potential for 
equipment switching from heat pumps to resistance heat. See 66 FR 7180. 
Based on data from the 1997 RECS, a little over 14 percent of 
households with room or central air conditioning have either baseboard 
or forced air electric resistance heating compared to almost 10 percent 
of households which have heat pumps. The fact that such a large 
percentage of households currently use a combination of central or room 
air-conditioning with resistance heat to meet their space-conditioning 
needs supports DOE's view that there is a real possibility that some 
purchasers would choose to switch to resistance heat from heat pumps 
rather than pay the consumer prices associated with 13 SEER heat pumps. 
DOE has not attempted to estimate the number of consumers that might 
actually switch from heat pumps to resistance heating. Rather, DOE has 
determined that 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. Because such a 
small fraction of heat pump owners would need to switch to electric 
resistance heating to negate the energy savings realized from 13 SEER 
heat pumps, DOE believes the possibility of equipment switching is real 
enough to warrant its inclusion as a factor supporting a 12 SEER/7.4 
HSPF standard.

D. Impact on Manufacturers

1. Cumulative Regulatory Burden
    DOE considers that a standard level is not economically justified 
if it contributes to an unacceptable cumulative regulatory burden. The 
TSD contains information on cumulative regulatory burden (section 8.6 
of the TSD), although as previously discussed, DOE did not explain how 
it considered this information in promulgating the 13 SEER standard on 
January 22, 2001. The TSD shows that the burden on manufacturers due to 
all other recent or imminent Federal regulations exceeds $479 million. 
DOE estimates the 13 SEER amendments to the standards for central air 
conditioners and heat pumps would contribute up to an additional $303 
million in manufacturer costs, bringing the total cumulative regulatory 
burden to as high as $782 million. In light of that heavy burden, the 
July 25 SNOPR proposed 12 SEER standards that DOE estimates will reduce 
the expected financial burden on manufacturers from all new Federal and 
State regulations by $144 million compared to the 13 SEER final rule of 
January 22.
    ACEEE, NRDC, and EPA all argued that DOE overestimated the impacts 
to the industry due to cumulative regulatory burden. EPA focused on the 
impacts due to the phase out of HCFC-22 (the hydrochlorofluorocarbon 
used as a refrigerant) and cited its own analysis as well as an 
estimate from Goodman Manufacturing to claim that DOE's estimate of $50 
million per company is at least twice as high as warranted based on 
prior industry transitions and more recent trends. Referring to the 
costs incurred by the refrigerator industry in the mid-1980's to 
convert from CFCs to HCFCs, EPA suggests that a more reasonable 
estimate to phase out HCFC-22 is $20 to $30 million per company. EPA 
also cites Goodman's estimate that the combined cost of meeting a 13 
SEER standard and transitioning from HCFC-22 is approximately $25 
million per company, half of DOE's $50 million estimate for just 
converting to a new refrigerant. (EPA, No. 276 at pp. 2-4).
    Because the industry has known for well over a decade of the 
impending phase out of HCFC-22, both ACEEE and NRDC claim that the 
costs for converting to a new refrigerant should be lower than DOE's 
estimate. ACEEE states that DOE seems to treat the costs of redesign 
for efficiency and redesign for refrigerants as additive, as though 
manufacturers would first redesign for efficiency (2006) and then for 
replacement refrigerants (2010). ACEEE believes this assumption would 
be demonstrably false as there is every reason to accomplish the two 
goals with a single re-engineering effort, both saving capital and 
improving time-to-market. ACEEE adds that since there is already fairly 
widespread use of an alternative refrigerant, R-410A, this strongly 
suggests that component manufacturers of compressors, coils, valves, 
lubricants, and all other critical components are already geared up and 
supplying the manufacturers with the necessary pieces to assemble non-
HCFC-based heat pumps and air conditioners. With regard to the costs to 
be incurred by the industry to comply with Clean Air Act amendments for 
coating large appliances, ACEEE asserts that much more data are needed 
before any definitive estimates can be made. (ACEEE, No. 284 at pp. 11-
13; NRDC, No. 250 at pp. 13-14).
    Counter to the above arguments, ARI states that DOE is correct to 
give greater weight to cumulative burden. ARI asserts that the cost 
impacts due to cumulative regulatory burdens will exceed DOE's estimate 
of $479 million. ARI notes that various additional burdens to the 
industry were not quantified by DOE including: (1) Recently revised DOE 
efficiency standards for room air conditioners; (2) on-going DOE review 
of possible new minimum efficiency standards for residential furnaces; 
(3) DOE's adoption of standard levels related to ASHRAE 90.1-1999 
(American Society of Heating, Refrigerating and Air-Conditioning 
Engineers, Inc., Standard 90.1 as revised in October 1999); (4) EPA's 
Metal Products and Machinery (MP&M) effluent guidelines and standards; 
and (5) EPA's allowance system for controlling production, import, and 
export of HCFCs. ARI states that DOE's own estimate that a 12 SEER 
standard would have $144 million less cumulative burden than a 13 SEER 
standard warrants adoption of a 12 SEER standard. (ARI, No. 259 at pp. 
10-13).
    In reaching its conclusion on manufacturer impacts, DOE considered 
the cumulative regulatory cost imposed on air conditioner manufacturers 
under the various standards scenarios, including manufacturers' 
investment to meet the new standard. As noted above, DOE estimated the 
cumulative regulatory impacts on manufacturers to likely exceed $782 
million if a 13 SEER standard were adopted. This includes the $303 
million reduction in industry value due to a 13 SEER standard and $479 
million in other regulatory burdens, including costs associated with 
the HCFC phase out. It does not include other major Federal and State 
regulations that we listed but did not quantify.
    The comments submitted by ACEEE, NRDC, and, in particular, EPA do 
not address the cumulative manufacturer impacts. Rather, the comments 
were limited to manufacturer's investment required to transition away 
from HCFC refrigerant. DOE's estimated $50 million per company 
investment to comply with the HCFC phase out was based on

[[Page 36387]]

interviews with all seven major air conditioner manufacturers during 
1998 and 1999 when the firms were asked specific questions regarding 
the costs of replacing HCFCs in their equipment. In contrast, ICF 
Consulting, in its analysis for the EPA, refers to mid-1980's estimated 
costs associated with phasing CFCs out of the refrigerator industry, 
without explaining the link between those costs estimates and ICF's 
estimated $20 to $30 million per company to phase HCFCs out of the air 
conditioner industry.
    DOE believes that the cost to convert from CFC refrigerants used in 
residential refrigerators is substantially less than the cost to 
convert from HCFC-22 refrigerant used in central air conditioners and 
heat pumps. For example, compressor capacity and power input for 
central air conditioners and heat pumps is an order of magnitude larger 
than compressor capacity and power input needed for home refrigerators 
(2 to 5 horsepower for central air conditioners versus one-quarter 
horsepower for home refrigerators). For this reason alone, 
significantly higher conversion costs would be expected. Further, 
central air conditioner or heat pump components (compressors, coils and 
air handlers) comprise almost the entire product cost. In contrast, 
over 50 percent of the cost of a home refrigerator is embodied in such 
non-refrigerant components as the insulated cabinet, shelves and other 
storage components, and other accessories such as icemakers and through 
the door ice and drink dispensers.
    DOE also believes refrigerant related design changes will result in 
greater impact on the overall product cost and competitive position for 
air conditioner manufacturers than will be the case for refrigerator 
manufacturers. Since HFC-410A refrigerant operates at substantially 
higher operating pressures than HCFC-22 refrigerant, a major system 
redesign is necessary with HFC-410A refrigerant to take advantage of 
the beneficial aspects of the 40 to 50 percent higher pressure and to 
minimize any deleterious effects. With the alternative replacement 
refrigerant HFC-407C, system efficiency is reduced by 5 to 10 percent 
compared to use of HCFC-22 refrigerant in the same system. Significant 
resizing and reconfiguring of components is required to restore 
efficiency levels.
    Replacing CFC-12 refrigerant in refrigerators with HFC-134a 
refrigerant reduces system efficiency by only 1 to 2 percent, which is 
easily offset by higher the higher efficiency compressors available at 
the time of CFC to HFC conversion. In contrast, replacing air 
conditioner compressors, whose efficiencies are already close to 
thermodynamic limits, with higher efficiency units to offset the impact 
of refrigerant related efficiency loss is not a viable option. Finally, 
there are fewer models in a typical appliance manufacturer's 
refrigerator product line than the number of residential central air 
conditioner and heat pump models (multiple efficiency level products) 
produced by a typical unitary air conditioner manufacturer. As a 
result, significantly more redesign and product validation is necessary 
for the unitary air conditioner manufacturers to convert their product 
lines and production from R-22 to either of the HFC blends.
    ACEEE states that the rational approach to meeting the two 
regulatory requirements-new efficiency levels in 2006 and the phase out 
of HCFCs in 2010-is to do so simultaneously, rather than sequentially, 
3 to 4 years apart. If both changes could be accomplished 
simultaneously, the investment would indeed be less than the cost of 
making the two changes separately. Although the characteristics of the 
new refrigerant, with significantly higher operating pressures, will 
add to the scope and cost of the development effort for the increased 
efficiency product families, in principle, product validation testing 
and retooling would occur only once, saving substantial resources.
    The difficulty with this scenario is the competitive reality of the 
industry. Competition in the U.S. air conditioning industry is 
especially vigorous, with seven major manufacturers competing for 
business. Consumers have benefitted significantly from this, with real 
(inflation adjusted) prices having fallen steadily over the past 20 
years, even during periods of rapid market growth. In addition, this 
level of competition in the domestic industry has provided no 
opportunity for foreign competition to displace main line HVAC 
products, preserving traditional manufacturing jobs in the U.S.
    In 2006, in this environment of vigorous competition, each 
manufacturer will be faced with the choice of producing a cost 
optimized product line using HCFC-22 refrigerant or of also making the 
additional investment to convert to an HFC refrigerant, combined with 
meeting the increased efficiency standard level. It is clear that 
either HFC blend (R-407C or R-410A) will result in increased product 
cost (at comparable efficiency and performance level). If HFC 
refrigerant use would result in lower cost compared to HCFC-22, it is 
likely that manufacturers would already have voluntarily converted. In 
fact, hardware cost increases are readily identifiable and the higher 
cost HFC refrigerant alone will add $20 to $30 to the direct 
manufacturing cost of each unit. Therefore, it is highly likely that 
one or more manufacturers will opt to use HCFC-22 in the majority of 
their product line between 2006 and 2009. In that situation, the 
resulting cost advantage will force the other manufacturers to follow 
suit to remain competitive and avoid market share loss. While most 
manufacturers produce 12 and 13 SEER HFC air conditioners, they are 
typically low volume products and the tooling for full scale mass 
production does not exist. To increase production of 12 SEER or 13 SEER 
units, manufacturers will need expanded tooling to produce those 
models. To obtain the least cost, manufacturers will need to use 
designs that are better optimized for mass production. Consequently, 
DOE believes that much of the redesign, validation, and retooling 
effort faced by the industry is likely to happen once for efficiency 
standards in 2006 and a second time for the HCFC phase out in 2010.
2. Financial Burdens Associated With New Efficiency Standards
    As explained in the July 25 SNOPR (66 FR 38829), the 13 SEER 
standards in the January 22 final rule were projected by the TSD to 
result in a negative cash flow for the industry in the year preceding 
the new standards' enforcement. Moreover, DOE's analysis shows that 13 
SEER standards would impose far greater financial burdens on 
manufacturers whose operating costs exceed the industry average. Those 
manufacturers typically engage in more research and development or 
provide additional sales or service support than do their lower 
operating cost competitors. Consequently, DOE proposed the 12 SEER 
standard to reduce the maldistribution of financial impacts on 
manufacturers and allow manufacturers to maintain a positive cash flow.
    Trane concurred with DOE's action to reduce the maldistribution of 
financial impacts on manufacturers. Trane asserted that as efficiency 
is increased, a larger commodity market is created. This in turn 
reduces the market opportunities for companies that focus on value-
added systems and services. Thus, the ''volume'' manufacturers (i.e., 
lower operating cost manufacturers) benefit disproportionately. Trane 
also noted that under a 13 SEER standard, manufacturers who invest 
heavily in

[[Page 36388]]

research and development (R&D) would dedicate less funding to 
innovative programs, resulting in the entire industry focusing on the 
development of designs that address the absolute lowest commodity 
product. Trane's opinion was shared by Equipment Distributors. (Trane, 
No. 262 at pp. 2-4, 13-14; Equipment Distributors, Inc., No. 266 at p. 
1).
    NRDC disputed DOE's interpretation of the financial impacts to 
manufacturers by pointing out that DOE's own analysis undercuts the 
contention that the industry is impacted more severely under a 13 SEER 
standard. Referring to the TSD, NRDC notes that under two different 
scenarios (NAECA and Roll-up) lowering the standard from 13 to 12 SEER 
actually increases the burden to the industry (as measured by the 
industry net present value). (NRDC, No. 250 at pp. 20-22).
    DOE disagrees with this comment. In its interpretation of 
manufacturer impacts, NRDC overlooks the important role that the 
efficiency mix assumptions play in the financial projections. In 
Section 8.4.8 of the TSD, we described the dynamics by which the 
profits of manufacturers with higher operating costs depend on the sale 
of premium products, and how those products are differentiable only at 
efficiency levels higher than the baseline. The closer the baseline 
unit is to the technological limit, the fewer consumers will ''buy up'' 
to a higher efficiency. For more and more consumers, the baseline will 
be the cost-effective option, and those consumers who wish to ''buy 
up'' will have fewer options and less financial incentive to do so. For 
these reasons, DOE assumed the Roll-up efficiency scenario to be the 
most probable for 13 SEER standard levels and the NAECA efficiency 
scenario most probable at 12 SEER standard levels. The resulting 
cumulative change in industry net present value (NPV) is negative $300 
million at 13 SEER levels compared to negative $199 million at 12 SEER 
levels.
    NRDC's interpretation of manufacturer impacts also overlooks short-
run cash flow impacts of the standards. While NPV is useful for 
evaluating the long-term effects of new standards, short-term changes 
in cash flow are also important indicators of the industry's financial 
situation. The annual cash flow impacts at 13 SEER are $31 million more 
than at 12 SEER and turn the absolute cash flow negative. Depressed 
cash flow can strain the industry's access to capital or cause 
investors to flee.
    OOE, Goodman, and ACEEE all claim that the industry impacts due to 
13 SEER standards cannot be too severe as the technologies required to 
comply with the standard are conventional and well known. (OOE, No. 275 
at p. 3; Goodman, No. 269 at p. 3; ACEEE, No. 284 at p. 7). Goodman 
specifically states that the only difference between a 10 SEER, 12 
SEER, and 13 SEER units is a little more copper and aluminum used in 
manufacturing different sized coils.
    DOE believes it is erroneous to conclude from the fact that 
technologies required to comply with standards are conventional and 
well known that it is a trivial exercise to increase production volumes 
to a level capable of satisfying the entire U.S. demand for air 
conditioners. Sales of 13 SEER equipment and higher are only 3 percent 
of all equipment sold and large investments would be required to 
convert all production to these levels. Furthermore, as previously 
described, much of the industry's financial health today depends on 
sales of 12 SEER equipment.
3. Small Manufacturers
    The issue of how higher efficiency standards impact small 
manufacturers also drew several comments. The Department of Justice's 
April 5, 2001, letter to DOE regarding the potential effect on 
competition of new central air conditioner and heat pump efficiency 
standards stated that some small manufacturers would be 
disproportionately impacted under a 13 SEER standard, and noted that 
100 percent of their current product line would fail to comply with the 
new efficiency requirement. The Department of Justice also stated that 
manufacturers of equipment for space-constrained installation sites 
(such as manufactured housing) would also be disproportionately 
impacted by a 13 SEER standard (DOJ, No. 285 printed in Appendix of 
this notice).
    Goodman asserted that moving to a 13 SEER would not be a hardship 
to small manufacturers. Goodman claims that 13 SEER technology has been 
available to both large and small manufacturers for approximately 15 
years. Goodman also points to the fact that Goettl Air Conditioning, a 
small manufacturer based in Arizona, supports the 13 SEER standard. 
(Goodman, No. 269 at p. 3). PG&E concurs with Goodman's statements. 
(PG&E, No. 274 at p. 4). NRDC asserts that higher efficiency standards 
encourage competition by shaking up the cozy arrangements that the 
bigger companies have drifted into, requiring manufacturers either to 
invest in building new components or to purchase new components from 
other suppliers. They claim that this provides smaller, nimble 
manufacturers an opportunity to unseat large but slow-adapting 
competitors. (NRDC, No. 250 at p. 31).
    Both ARI and Rheem agree with the Department of Justice's 
statements regarding small manufacturers. Rheem states that small 
manufacturers will most likely not be able to afford the redesign and 
retooling of their equipment and manufacturing facilities to meet the 
13 SEER standard. ARI quotes DOE's TSD in stating that ''small 
manufacturers engaged in the production of conventional equipment would 
find it difficult to overcome the financial and technical burdens 
associated with the transition, and could decide to exit the market.'' 
(ARI, No. 259 at pp. 10-11; Rheem, No. 248 at p. 3).
    With regard to the manufacturers of equipment for the manufactured 
housing industry, both ARI and Goodman agree that products for markets 
like manufactured housing, where space constraints limit efficiency 
gains achieved with conventional technology, should be granted an 
exemption from higher efficiency standards. (ARI, No. 259 at p. 8; 
Goodman, No. 269 at p. 3).
    The Department of Justice's concerns relate to disproportionate 
impacts on small manufacturers. Most small manufacturers produce only 
indoor coils or niche product lines. For small manufacturers who 
produce coils only, there are no intensive incremental technological or 
capital requirements for them to increase the efficiency of their 
products and DOE does not expect them to face any incremental burden as 
a result of the new standards. However, DOE has documented that 
manufacturers of niche air conditioning products, such as through-the-
wall equipment and small duct, high velocity systems, face special 
technological and financial considerations compared to those faced by 
the major air conditioner producers. Consequently, new efficiency 
standards could be more detrimental to the financial situation of niche 
product manufacturers than of major manufacturers. Technical 
considerations are typically more important for certain niche 
manufacturers than for major manufacturers and have more severe 
consequences related to increased production costs or loss of sales 
volume due to increased price. Overall, if provisions were not made in 
the standard for niche products that face severe technological 
constraints, we would expect their impacts to be disproportionate to 
those on the industry as a whole. In today's rule, DOE is establishing 
separate product

[[Page 36389]]

classes for through-the-wall equipment and small duct, high velocity 
systems, which will be required to meet a lower SEER. DOE believes this 
meets the Department of Justice's concern regarding the impact of more 
stringent standards on small manufacturers.
    DOE recognizes that products used for manufactured housing and 
modular housing also face space constraints. In its decision to propose 
12 SEER standards for conventional products, DOE took into 
consideration the impacts of higher efficiency standards on the 
manufacturers of manufactured housing and modular housing products. For 
these applications, products at the 12 SEER level are currently on the 
market. DOE has concluded that, at the 12 SEER level, there is no need 
for a separate class for products used mainly in manufactured or 
modular housing.
4. Manufacturer Cost Estimates
    Several comments asserted that DOE's manufacturing cost estimates 
derived from the reverse engineering analysis were too high. The 
comments stated that economies of scale in production and competitive 
forces will result in lower costs for the more efficient equipment as 
compared to pre-implementation estimates. (ACEEE, No. 284 at p. 2; CFA, 
No. 246 at p. 1; NCLC, No. 241-NN at p. 1). OOE specifically states 
that the cost of the commodity product at a minimum standard level 
cannot be appropriately characterized by looking at the mean or median 
manufacturer cost estimates from the reverse engineering analysis. 
(OOE, No. 275 at p. 3). Goodman states that their incremental cost for 
producing a 13 SEER unit is $100 and is comparable to DOE's estimate. 
(Goodman, No. 269 at pp. 3-4).
    The reverse engineering analysis does in fact take into account 
economies of scale by considering larger production volumes for more 
efficient products after implementation of the new standards. In its 
production modeling, DOE also considered that manufacturers would cost-
optimize their production at the new level because of more intense 
competition at that level. We expect this competitive pressure to drive 
manufacturing costs and this is illustrated by the results of the 
reverse engineering analysis which fall within the ARI range and nearer 
to the ARI minimum.
    ARI, Trane, York, and EEI disagree with the above comments and 
assert that DOE's manufacturing cost estimates are too low. Trane 
states that the reverse engineering analysis was based on too small of 
a sample of units and eliminated units which fell out of the range of 
costs bounded by the manufacturers' submission. Trane nevertheless 
thinks that, despite its shortcomings, the reverse engineering analysis 
essentially confirmed cost levels submitted by ARI. However, Trane 
recommends that DOE utilize the cost data submitted by ARI. EEI concurs 
with this conclusion. (Trane, No. 262 at 9-10; EEI, No. 253 at p. 2). 
ARI states that it surveyed its manufacturer members after DOE issued 
its January 22 final rule. The results of the survey indicate that: (1) 
DOE has underestimated the baseline manufacturer costs by approximately 
30 percent and (2) the additional cost of a 13 SEER split air 
conditioner over a 12 SEER is not $122 as estimated by DOE, but is at 
least approximately $305. ARI also refutes Goodman's claim that the 
amount of copper and aluminum needed for a 13 SEER unit is 
insignificant. In reviewing Goodman's current technical literature, ARI 
states that on average a Goodman 13 SEER split air conditioner weighs 
44 pounds (18 percent) more than a 12 SEER system. More specifically, 
Goodman's 13 SEER condenser and evaporator coils are on average 20.2 
percent and 11.5 percent heavier than the condenser and evaporator 
coils from their 12 SEER unit, respectively. (ARI, No. 259 at pp. 23-
25). York states that the reverse engineering analysis is flawed 
because it focused on one size of equipment, a 3-ton unit and they 
believe that the whole range of equipment should have been analyzed, as 
size becomes much more problematic and costly at higher capacities. 
(York, No. 270 at p. 3).
    DOE believes that the reverse engineering analysis is based on a 
sufficient equipment sample size to capture variability in design, 
manufacturing practices and costs across the range of products that 
would be subject to new standards. The equipment models were selected 
to be representative of the costs to manufacture existing baseline 
models and to capture the costs to manufacture products at potential 
new standards levels. To select representative equipment samples for 
the reverse engineering analysis, DOE requested that manufacturers 
identify equipment in their product lines most appropriate for this 
purpose. Four major manufacturers submitted design data for split 
cooling-only equipment, and three of those submitted design data for 
the other classes as well. This submission process yielded information 
on 62 models. DOE selected an additional nine models from catalogs of 
those and other manufacturers and also used the ARI Product Attribute 
Database and technical literature to describe the efficiency-related 
attributes of those products. Additionally, from the group of 
manufacturer submittals, three units were purchased for extensive 
disassembly and inspection. In their comment ARI does not explain how 
it derived baseline costs (estimation method, models included, product 
features, etc.), making an assessment or comparison to DOE's costs 
impossible. In contrast, the reverse engineering derivation method and 
resulting disaggregated baseline data are transparent and have been 
reviewed extensively by stakeholders.
    Several comments also focused on the issue of productivity gains 
and asserted that these gains would lower manufacturing costs below the 
levels estimated by DOE. ACEEE, ASE, and OOE all refer to historic 
changes as shown by the U.S. Census Bureau's Current Industrial Reports 
series and state that air conditioner costs to the manufacturer have 
declined at a rate of 1.7 percent annually over the 1994-1998 period. 
They assert that DOE should include this rate of cost reductions in its 
analysis. They add that the Census figures are probably conservative as 
they ignore the fact that manufacturers tend to find ways to 
substantially increase productivity when standards take effect in order 
to reduce the impact of standards-induced cost increases. In making 
this claim, the comments cite DOE's cost estimates from the 1980's for 
meeting the 10 SEER standards that took effect in 1992. Rather than 
having any cost impacts, they assert that the 1992 standards resulted 
in essentially no change in product costs. (ACEEE, No. 284 at pp. 4-8; 
OOE, No. 275 at p. 3; ASE, No. 282 at pp. 3-4).
    Although NRDC recognizes that the reverse engineering model 
accounts for economies of scale, it states that it does not account for 
any ''learning-curve'' effect. Thus, as cumulative production of high 
efficiency units increases, the reverse engineering model merely scales 
up the costs rather than factoring the downward effect that 
''learning'' has on production costs. (NRDC, No. 250 at pp. 31-32). 
Goodman also alludes to the ''learning-curve'' when it states that when 
a unit meeting a new standard is produced in volume, it allows the 
manufacturer to run its plant more efficiently and pass the resulting 
cost savings on to the consumer. (Goodman, No. 269 at pp. 4-5). Trane, 
Rheem, and Lennox International, Inc. (Lennox)) all refute the 
contention that productivity gains will materialize. Trane asserts that 
earlier hard won productivity gains

[[Page 36390]]

were produced by the industry through untold millions spent on R&D. 
These expenditures reduced the cost to produce the entire product line, 
but did little to reduce the material-driven incremental costs of 
efficiency upgrades. Likewise, any cost reductions likely to occur in 
the next decade will have significantly greater impact on the overall 
consumer cost structure than on the cost and price increment between 
successively higher efficiency levels. Rheem states that under a 13 
SEER standard only industry profits will be reduced, lessening the 
money available for research and design of new products to meet other 
upcoming standards, i.e., HCFC phase-out, new commercial standards, new 
gas and oil furnace standards. (Trane, No. 262 at pp. 10-11; Rheem, No. 
248 at p. 3; Lennox, No. 272 at p. 2).
    DOE has not included unspecified productivity improvements or 
''learning-curve'' cost reductions in its analysis. DOE does not 
believe historical price trends for unitary air conditioners, or other 
products, can be applied to forecast equipment costs where there are no 
data to indicate what factors resulted in the observed trends or that 
the trends will continue. Furthermore, without specific cost 
information, it is impossible to tell if productivity improvements 
would apply equally to baseline costs and standards induced incremental 
costs. Therefore, without specific data on the nature and magnitude of 
cost impacts, DOE will not apply a productivity improvement factor in 
this rulemaking or other rulemakings.

E. Effect on Competition

    Several comments argued that DOE was unduly concerned that 13 SEER 
standards would lead to industry consolidation. NRDC claimed that the 
13 SEER standards would actually enhance competition relative to the 
existing 10 SEER standards because economic losses imposed on higher-
cost producers would force them to be more competitive. (NRDC, No. 250 
at pp. 20-22). OOE adds that industry consolidation occurs regularly in 
all sectors of the economy. In the context of the various factors that 
influence industry consolidation, OOE asserts that it is unreasonable 
for DOE to claim that the incremental effects of efficiency standards 
can have any measurable effect on the industry. (OOE, No. 275 at pp. 3-
4). PG&E cites third party coil manufacturers' response to PG&E's high 
efficiency rebate programs as support for the view that these small 
coil manufacturers can supply the efficiency combinations needed to 
meet new standards. By extension, PG&E asserts that 13 SEER standards 
would foster manufacturing diversity by providing the coil 
manufacturers more business. (PG&E, No. 274 at p. 3).
    Countering the above claims, ARI, Trane, and the U.S. Small 
Business Administration (U.S. SBA) asserted that a 12 SEER standard 
would have less of an anti-competitive impact than the 13 SEER 
standard. (ARI, No. 259 at pp. 3-4, 25; Trane, No. 262 at pp. 2-4, 13-
14; U.S. SBA, No. 234 at p. 1). Both ARI and Trane cited the Department 
of Justice's April 5, 2001 letter to DOE regarding the anti-competitive 
impacts of 13 SEER standards in claiming that the industry impacts due 
to 13 SEER standards are too severe. ARI additionally stated that DOE's 
failure to obtain a determination by the Attorney General of the anti-
competitive impact of the 13 SEER standard prior to issuing the January 
22 final rule is an appropriate basis to withdraw the 13 SEER decision. 
The Department of Justice (DOJ) submitted comments on DOE's July 25, 
2001 SNOPR which concluded that the 12 SEER proposal would not 
adversely affect competition. (DOJ, No. 285 printed in the Appendix to 
this notice).
    In establishing the new standards, DOE considered several factors 
which have a potential bearing on industry competition and 
consolidation. For each trial standard level DOE considered: Changes in 
manufacturer net present value; cumulative regulatory burden; and 
changes in annual cash flow. To further capture competitive effects, 
DOE considered differential impacts on three sub-groups of 
manufacturers, since higher efficiency standards will affect each group 
of manufacturers differently. ''Low Operating Cost Manufacturers'' 
observe a low cost, commodity-product strategy and achieve a higher 
operating profit margin on their baseline equipment. DOE's analysis 
indicates that this group of manufacturers will likely benefit from 
higher standards. ''High Operating Cost'' manufacturers typically place 
more of an emphasis on product differentiation than cost leadership. 
For this group of manufacturers, higher standards reduce opportunities 
for product differentiation and lower profitability. Finally ''Small 
Manufacturers'' fall into two groups; manufacturers of equipment for 
niche markets and manufactures of indoor coils and fancoil units. As 
previously stated in Section VI (D) (3), we do not expect coil 
manufacturers to face any incremental burden as a result of new 
standards. Also we stated that impacts on niche manufacturers have been 
largely addressed through the creation of separate product classes for 
products used in space contained applications.
    In arriving at today's decision to adopt a 12 SEER standard, DOE 
relied on the Department of Justice's expert opinion that a 13 SEER air 
conditioner and heat pump standard raises competitive concerns (April 
5, 2001 letter), and that a 12 SEER standard would not adversely affect 
competition (October 19, 2001 letter). DOE also factored into 
consideration the serious concerns regarding potential anti-competitive 
effects at higher trial standard levels presented in the TSD. DOE's 
analysis demonstrates that both High and Low Operating Cost 
Manufacturer groups would experience negative cash flows in the years 
leading up to the new standard under TSL3 and TSL4, but only the higher 
operating cost group is expected to suffer a long term decline in 
value, cash flow, and return on invested capital. Since Low Operating 
Cost Manufacturers would likely benefit from 13 SEER standards, most of 
the total financial burden due to the standards would need to be borne 
by High Operating Cost Manufacturers. The differential impact between 
the subgroups is $238 million at 12 SEER and rises to $429 million at 
13 SEER. Due to this probable maldistribution of industry impacts at 13 
SEER, DOE was particularly concerned that either accelerated industry 
consolidation (i.e., less competitive market) or the stifling of 
innovation could occur.

F. Effect on Utility or Performance

1. Dehumidification
    The only comments regarding product utility pertained to the 
impacts that more stringent standards may have on the ability of air-
conditioning equipment to properly dehumidify. Both Southern Company 
and Mercatus Center claim that the lower latent cooling capacity 
inherent in larger, more efficient single speed equipment would result 
in dehumidification problems in humid climates. (Southern Company, No. 
257 at pp. 3-4; Mercatus Center, No. 242 at p. 8).
    As stated in the October 5, 2000 NOPR, ARI research has 
demonstrated for hundreds of systems that latent heat removal is not 
obviously impacted by increases in equipment efficiency at rated 
conditions (i.e., 95xF outdoor temperature).\15\ See 65 FR 59611-59612. 
Nonetheless, DOE recognizes the humidity control problems that exist in 
the southern region of the U.S. For the excessive humidity conditions 
commonly experienced in the South,

[[Page 36391]]

the equipment may very likely not provide adequate dehumidification. 
Equipment efficiency should not be viewed as the sole source of the 
problem, however. Proper installation and maintenance practices also 
likely play a large role in the equipment's performance, as well as 
other factors, such as the duct system and the building shell 
characteristics. All these factors play a role in how a system 
dehumidifies. For these reasons, DOE does not believe the 12 SEER 
standard adopted today will have an appreciable effect on the 
performance of central air conditioners, and any problem with 
dehumidification can be dealt with in a variety of ways other than 
lowering the energy efficiency standard.
---------------------------------------------------------------------------

    \15\ D. Godwin. 1998. ''Latent Capacity of Unitary Equipment.'' 
ASHRAE Transactions 98(2).
---------------------------------------------------------------------------

G. Electric System Reliability/Peak Power

1. Peak Power
    As part of its analysis to determine the impacts of amended 
efficiency standards, DOE quantified how increased standards affected 
installed generation capacity, i.e., reduction in electrical power 
demand. In response to DOE's proposal to withdraw the January 22 final 
rule, several comments expressed concern that the 12 SEER standard 
would have less of an impact on peak power demand than the 13 SEER 
standard. (Austin Energy, No. 243 at p. 1; State of Connecticut, No. 
279 at p. 1; Attorneys General of New York and Massachusetts, No. 277 
at pp. 15-16; New York State Energy Research and Development Authority 
(NYSERDA), No. 252 at p. 1; State of Vermont, No. 268 at p. 3; PG&E, 
No. 274 at p. 3; State of Nevada, No. 271 at p. 2; National Grid, No. 
241-OO at p. 3).
    Regardless of SEER level, ACEEE asserted that DOE significantly 
underestimated the peak demand impacts of more efficient air 
conditioners. Specifically, ACEEE states that DOE's model to estimate 
peak power impacts, NEMS-BRS, uses load shapes that underestimate the 
effect that residential central air conditioners have on peak power by 
a factor of more than two. To correct this problem, ACEEE recommends 
correcting NEMS-BRS with load shape data that is more nationally 
representative of central air conditioner power consumption. ACEEE 
specifically recommends load shape data that has a Conservation Load 
Factor (CLF) of 0.104. (ACEEE, No. 284 at pp. 8-11).
    Both EEI and Southern Company assert that a 13 SEER standard could 
actually increase peak power demand. EEI states that for units rated at 
13 SEER and higher, there is no correlation between SEER and EER.\16\ 
So if the standard was raised to 13 SEER, EEI believes it is likely 
that the manufacturers would use technologies to raise SEER values and 
lower EER values, assuming it would lower their production costs. Thus, 
the higher SEER values could very easily lead to lower EER values, 
resulting in reduced energy savings in warmer climates, increased peak 
demands associated with residential systems in all climates, and 
increased need for peaking power plants. (EEI, No. 253 at pp. 2-3). 
Southern Company adds that the reduction in peak demand from higher 
efficiency standards is so long-term as to have no bearing on current 
problems. Thus, it is entirely possible that the higher efficiency 
levels could exacerbate a supply glut in the regions now experiencing 
shortages ten to fifteen years from now. (Southern Company, No. 257 at 
p. 3). Mercatus Center believes that higher SEER standards would cause 
more people to use their air conditioners more due to their lower 
operating costs. The result during a heat wave could increase overall 
air conditioning usage, increasing peak demand and the risk of a 
blackout, and leaving everyone without air conditioning. (Mercatus 
Center, No. 242 at pp. 9-10).
---------------------------------------------------------------------------

    \16\ EER, Energy Efficiency Ratio, is a steady-state measure of 
energy efficiency which determines efficiency at a prescribed 
outdoor temperature (95xF), and is one of the test conditions in the 
DOE test procedure used to develop the SEER. EER is generally 
thought of as an efficiency descriptor that indicates the level of 
performance during periods when electricity use by air conditioners 
is at its peak.
---------------------------------------------------------------------------

    First, in response to the comments submitted by EEI and Southern 
Company, DOE has demonstrated in its technical analysis (See TSD, 
Chapter 4) that in the efficiency range of 10 to 13 SEER, the EER, on 
average, increases proportionally to the SEER. Thus, DOE maintains that 
higher standards of up through 13 SEER will yield progressively greater 
peak demand reductions. Mercatus Center's claims regarding increased 
equipment sales leading to higher overall air conditioner use are not 
substantiated. As presented earlier in the shipments forecasts 
discussion, due to higher consumer purchase prices, DOE's shipments 
model forecasts declining rather than increasing sales due to more 
efficient standards. Thus, DOE concludes that there is a very low 
probability that increased standards could actually lead to an increase 
in peak demand.
    As stated in the January 22 final rule regarding peak demand 
impacts, DOE recognized that more research was needed to resolve the 
issue of whether NEMS-BRS accurately estimates the peak demand 
reductions resulting from air conditioner efficiency standards. See 66 
FR 7182. To resolve this outstanding issue as well as address those 
comments submitted by ACEEE in response to the July 25 SNOPR, DOE 
conducted a comprehensive review of the end-use load shapes used by 
NEMS-BRS, not only for the residential sector, but for the commercial, 
industrial, and transportation sectors as well.\17\ DOE discovered a 
number of problems associated with the specific load shapes. In the 
case of the residential air-conditioning end-use, DOE determined that a 
non-representative load shape was assigned to it. This non-
representative load shape peaks in October and has a correspondingly 
high CLF. As discussed in the January 22 final rule, 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.\18\ The CLF is defined as:
---------------------------------------------------------------------------

    \17\ Alternative Sectoral Load Shapes for NEMS, Department of 
Energy-Energy Information Administration, Washington, D.C., August 
2001.
    \18\ 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] TR23MY02.002

    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

[[Page 36392]]

for a given amount of annual energy savings. See 66 FR 7181.
    As a result of discovering several problems with the load shapes 
within NEMS-BRS, an alternative set of sectoral end-use load shapes 
were assigned to the 2002 version of NEMS-BRS that were distinctly 
different than the load shapes used in prior versions of the model 
(including the 2000 and 2001 versions). For example, in the case of the 
residential air-conditioning end-use, the alternative version consists 
of thirteen regional load shapes based on regions defined by the North 
American Electric Reliability Council (NERC) as compared to the single 
national load shape used in prior versions. Depending on the region of 
the country, the thirteen air-conditioning load shapes have CLFs 
ranging from 0.063 to 0.183 and generally peak in either July or 
August. Although the alternative load shapes specific to the 
residential air-conditioning end-use are more representative (e.g., the 
loads peak during the summer months), switching to the entire set of 
alternative sectoral end-use load shapes results in smaller peak-to-
average system loads. As a consequence, the overall built-up system 
load shapes using the alternative sectoral end-use load shapes have 
less pronounced peaks than those that are used in prior versions of 
NEMS-BRS. Because the built-up system loads within the 2002 version of 
NEMS-BRS have less pronounced peaks, the impact of reducing the energy 
use on a relatively peaky end-use like residential air-conditioning 
(such as through increased efficiency standards) will have less of an 
affect on overall system capacity.
    New NEMS-BRS standard case runs were conducted with the entire set 
of alternative sectoral end-use load shapes, including the updated 
residential air-conditioning load shapes, to determine their impact on 
system capacity. These new runs were conducted with the 2000 version of 
NEMS-BRS by replacing the existing set of sectoral load shapes with the 
alternative versions. As expected, the installed generation capacity 
reductions based on the new NEMS-BRS runs are lower than those produced 
for the January 22 final rule. In the case of today's final rule, the 
installed generation capacity reduction is now estimated to be 8.7 GW 
as opposed to the 10.6 GW provided in the January 22 final rule. A 
complete set of updated installed generation capacity reduction impacts 
can be found in Appendix M of the TSD.
2. Reliability
    As stated in the July 25 SNOPR, DOE has considered as a benefit the 
potential of the proposed standards to improve the reliability of the 
electric generation and distribution system by reducing the need for 
installed generation capacity. See July 25 SNOPR, 66 FR 38841.
    Several comments, while not disputing DOE's conclusion that air 
conditioner standards would improve electric system reliability, argued 
that the potential for improving reliability would be reduced by going 
forward with the proposed standards (12 SEER) instead of those 
standards issued in the January 22 final rule (13 SEER). (ACEEE, No. 
284 at p. 2; NRDC, No. 250 at p. 23; NEEP, No. 273 at p. 1; ASE, No. 
282 at p. 2; CEC, No. 263 at p. 1; National Association of Regulatory 
Utility Commissioners (NARUC), No. 260 at p. 2).
    Southern Company, which states that raising the standard from 12 to 
13 SEER will have minimal effect on peak demand growth, believes this 
efficiency increase will have even less effect on reliability, because 
there is not a direct relationship between peak demand growth and 
reduced electric system reliability. The Southern Company claims that 
the reduction in peak demand from higher efficiency standards is so 
long-term as to have no bearing on current problems. It is entirely 
possible that the higher efficiency levels could exacerbate a supply 
glut in the regions now experiencing shortages ten to fifteen years 
from now. (Southern Company, No. 257 at p. 3). For different reasons, 
Mercatus Center also argues that higher efficiency standards would not 
improve and could possibly reduce electric system reliability. As 
stated in their arguments pertaining to peak demand impacts, they 
believe higher standards could lead to increased use of air-
conditioning products due their lower operating costs. During periods 
of peak demand this could lead to an overall increase in air-
conditioning. The resulting increase in peak demand heightens the risk 
of blackouts. (Mercatus Center, No. 242 at pp. 9-10).
    DOE agrees with the assertion of the Southern Company that the 
primary effects of the proposed efficiency standards are so long term 
(more than 10 years in the future) that they are very unlikely to have 
any significant effect on electric system reliability. While DOE still 
believes that near term improvements in energy efficiency can help 
improve the reliability of systems that now have inadequate generating 
or transmission capacity (e.g., California), the primary effect of 
energy efficiency standards is likely beyond the long-term planning 
horizon of most electric systems. This means that long term electric 
system reliability is determined primarily by how well system planners 
(generators, utilities, regulators) anticipate future loads, not by how 
large those loads will be. In other words, planners in most areas of 
the country generally do not attempt to provide enough generating 
capacity to satisfy peak loads as the marginal cost for satisfying peak 
loads is generally cheaper using means other than the construction of 
large generating facilities (e.g., the use of relatively small 
''peaker'' plants or the purchase of supply from outside the planning 
region). DOE knows of no analysis which has found a correlation between 
system load factor and system reliability over the long term. Nor is 
DOE aware of any analysis that found a correlation between the long 
term rate of growth of electricity demand and system reliability.
    Higher efficiency standards for central air conditioners and heat 
pumps are expected to reduce significantly the peak loads of electric 
systems in the future, thus enabling a reduction in the number of new 
power plants and transmission lines required to meet future demand. 
Electric system planners will take these efficiency improvements and 
other factors affecting future electricity demand into account when 
estimating how many new plants and transmission lines will be required 
to meet future demand, while maintaining or improving system 
reliability. Long term system reliability will be determined by how 
accurately system planners anticipate electricity demand and whether 
they take steps to ensure the addition of sufficient electricity 
generating, transmission and distribution capacity to meet this 
expected demand, while maintaining adequate reserve margins. For 
example, EIA's Annual Energy Outlook 2001 forecast that the cumulative 
requirements for additional electricity generating capacity by 2020 
might range from roughly 350 gigawatts, assuming a low rate of economic 
growth, to nearly 500 gigawatts, assuming a comparatively high rate of 
economic growth. This compares to a difference of approximately 4 
gigawatts between the estimated effects on capacity requirements of a 
SEER 12 standard and those of a SEER 13 standard. The range of 
estimated requirements for additional electricity generating capacity 
that result from varying assumptions about the rate of change in end-
use technology

[[Page 36393]]

(in all sectors) and the rate of economic growth is even greater.

H. Other Issues

1. Minimum EER Requirement
    Several comments were in support of a minimum EER requirement to 
ensure more efficient operation at high outdoor temperatures during 
periods when electricity use by air conditioners is at its peak. 
(ACEEE, No. 284 at p. 3; Austin Energy, No. 243 at p. 1; PG&E, No. 274 
at p. 1). NARUC passed a resolution in July, 2000, urging DOE to raise 
the standard by 30 percent (i.e., to 13 SEER) with a minimum peak 
efficiency performance requirement. (NARUC, No. 260 at p. 2). NEEP also 
supports a standard of at least 13 SEER with a corresponding minimum 
EER of 11.6. (NEEP, No. 273 at p. 2). NRDC believes that DOE cannot set 
a standard at the highest level that is technologically feasible and 
economically justified if it does not include in that standard a 
minimum EER requirement. NRDC adds that this recommendation does not 
mean that EER would drop as SEER increases; it simply reflects NRDC's 
concern that EER might not rise as quickly without a separate 
regulation than it would with one. (NRDC, No. 250 at p. 32).
    York and Southern Company are both opposed to a minimum EER 
requirement. York asserts that an EER standard could be counter-
productive by discouraging variable speed and modulating equipment, 
which could save consumers substantial amounts of money over the 
cooling season. (York, No. 270 at p. 4). Southern Company believes 
that, regardless of cost-effectiveness, DOE does not possess regulatory 
authority to specify performance measures necessary to insure cost 
savings to consumers (SEER) and peak demand benefits to electricity 
suppliers (EER). (Southern Company, No. 257 at p. 4).
    As stated in the January 22 final rule, DOE is still convinced that 
the stringent physical relationship between EER and SEER in equipment 
rated through the adopted standard of 12 SEER, which is comprised 
exclusively of non-modulating equipment, will remain intact for the 
foreseeable future. Thus, there is no strong need for a minimum EER 
requirement in addition to a minimum SEER standard. See January 22 
final rule, 66 FR 7183.
    With regard to the use of variable speed or modulating 
technologies, even if these 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 oversizing, 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.
    Although DOE 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.
    Finally, although DOE 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
    ACEEE and PG&E were both in support of a prescriptive requirement 
for adaptive expansion devices such as thermostatic expansion valves 
(TXV). (ACEEE, No. 284 at p. 3; PG&E, No. 274 at p. 1). NEEP was more 
expansive on the topic by stating that the evidence in the record 
supports a TXV requirement. NEEP claims that TXVs provide additional 
efficiency benefits, over and above the benefits captured in the SEER 
rating procedure. They assert that central air conditioners with TXVs 
suffer lower efficiency degradation when a unit is improperly 
installed. The result is that TXVs can provide 12 percent energy 
savings over and above the energy savings associated with increasing 
SEERs. (NEEP, No. 273 at pp. 2, 4).
    York agrees with DOE's decision in the both the January 22 final 
rule and the July 25 SNOPR not to impose a TXV requirement. York claims 
that imposing a TXV requirement in this rule would circumvent the test 
procedure. Also, it asserts that key data for evaluating the impacts of 
TXVs on system performance have not been thoroughly reviewed by all 
interested parties. (York, No. 270 at p. 4).
    As stated in the January 22 final rule, a performance-based 
approach is also our preference and is certainly in the spirit of EPCA. 
See 66 FR 7183-7184. 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. DOE is 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 parties. That said, DOE favors a SEER test procedure that 
fairly evaluates equipment performance under conditions that represent 
those encountered in the field. DOE prefers to encourage correct 
charging or proper airflow but recognizes that practical barriers 
exist. Although no immediate action will be taken to address field 
equipment performance in the test procedure currently under revision, 
attempts may be made in future test procedure revisions to evaluate 
whether the SEER test procedure can and should be amended to better 
reflect equipment performance under improper charge or airflow.
    In sum, this rulemaking does not adopt a TXV requirement. Any 
alterations in the SEER test procedure further to encourage the use of 
TXVs may be undertaken in a separate rulemaking process after proposed 
revisions to the test procedure have been finalized. We also 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. State Exemption From DOE Standards
    The Council of State Governments, Eastern Regional Conference (ERC) 
states that if DOE fails to implement a 13 SEER standard, then ERC 
member States will seek a waiver from the Federal standard and 
implement the

[[Page 36394]]

higher standard at the State level, as the States of California and 
Oregon are currently doing. ERC goes on to quote 42 U.S.C. 6297(d) 
''Waiver of Federal Preemption'' where it states that ''Any state * * * 
which provides for any energy conservation standard for any type of 
covered product for which there is a Federal energy conservation 
standard * * * may file a petition with the Secretary (of Energy) 
requesting that such State regulation become effective with respect to 
such covered product.'' (ERC, No. 241-JJ at p. 1).
    DOE will promptly act upon any petition for waiver that may be 
submitted by a State pursuant to section 327(d) of EPCA (42 U.S.C. 
6297(d)). Section 327(d) provides that DOE must prescribe a rule 
granting a waiver from Federal preemption if the State establishes by a 
preponderance of the evidence that a State regulation is needed to meet 
''unusual and compelling State or local energy or water interests,'' as 
that phrase is defined by the statute (42 U.S.C. 6297(d)(1)(B)). 
Section 327(d) further provides that DOE may not grant a waiver if 
interested persons establish by a preponderance of the evidence that 
the State regulation would significantly burden manufacturing, 
marketing, distribution, sale, or servicing of the covered product on a 
national basis (42 U.S.C. 6297(d)(3)). Finally, section 327(d) 
establishes the timetable and procedure that must be followed for 
acting upon petitions for waiver from Federal preemption.
4. Effective Date
    DOE received written and oral comments with regard to DOE's 
proposed effective date (i.e., the date when the covered products must 
comply with the new standards for the proposed amended standards 
contained in the July 25 SNOPR). In written comments, NRDC notes that 
the proposed effective date in the July 25 SNOPR is approximately six 
months later than that in the January 22 final rule, and claims that 
any delay in the effective date of new standards would reduce their 
benefits. NRDC adds that section 325(d) of EPCA (42 U.S.C. 6295(d)) 
does not require DOE to provide a five-year lead time for compliance by 
manufacturers after publication of a final rule. (NRDC, No. 250 at p. 
34). TNRCC recommends that rather than making the proposed standards 
effective in 2006, DOE should accelerate the effective date of the 
standards from the year 2006 to 2004, thereby providing improved energy 
efficiency and resultant air quality benefits as soon as reasonably 
practicable. (TNRCC, No. 286 at p. 2). At the public hearing on the 
July 25 SNOPR, representatives of the California Energy Commission, 
PG&E, and Goodman also urged DOE to establish an earlier effective date 
if a 12 SEER standard was adopted. (Hearing Transcript, at pp. 142-144 
and 164-165). In initial written comments, ARI stated a willingness to 
consent to the proposed 5-years-from-date-of-publication effective date 
for the proposed 12 SEER standard. (ARI, No. 259 at p. 36). In 
supplemental comments submitted after the close of the comment period, 
ARI responded to the comments that requested an earlier effective date 
by stating that ARI would accept a compliance date of January 23, 2006, 
the same effective date as provided in the January 22 final rule (ARI, 
No. 289). ARI stated that any agreement on its part to an earlier 
effective date should not be deemed as a precedent by DOE or concession 
by ARI with respect to future rulemaking proceedings.
    Although section 325(d) of EPCA does not specifically state that 
initial amended standards become applicable to the manufacture of 
covered products after a certain number of years elapse following 
publication of a notice of final rulemaking, it provides a schedule of 
specific dates for the promulgation of a final rule and of specific 
dates on which an initial amended SEER and an initial amended HSPF 
established by a final rule would apply to the manufacture of new 
central air conditioners and new central air conditioning heat pumps. 
In the past, in circumstances where DOE was unable to publish a final 
rule by a deadline date established by a statute with scheduled 
compliance dates, DOE has had a practice of adjusting the statutorily 
scheduled date such a rule becomes enforceable to allow for the same 
amount of lead time as provided in the original statutory schedule. 
However, the application of this practice in any particular rulemaking 
is subject to public comment and to exceptions in special 
circumstances. See, e.g., 61 FR 10622, 10625 (March 14, 1996) (final 
rule establishing the Alternative Fuel Vehicle Acquisition Program with 
a compliance schedule that varied from the statutory schedule 
established by the Energy Policy Act of 1992 and that was subject to 
case-by-case exceptions). In this rulemaking, all interested persons 
who have an interest in the date that the final rule becomes 
enforceable-including representatives of all of the manufacturers who 
would have to comply with that rule-agree that the full amount of time 
between date of publication and the dates on which the rule applies in 
the statutory schedule is not needed for central air conditioner and 
central air conditioning heat pump manufacturers to come into 
compliance with a 12 SEER standard. Moreover, if, as a result of 
unforeseen circumstances, a particular manufacturer can show hardship, 
inequity, or unfair distributions of burdens, the standard would be 
subject to case-by-case exception pursuant to the authority of the DOE 
Office of Hearing and Appeals under section 504 of the DOE Organization 
Act (42 U.S.C. 7194), as implemented at subpart B of 10 CFR part 1003. 
On the basis of the foregoing, DOE has decided to fix January 23, 2006, 
as the date on which the amended standards set forth in today's final 
rule apply to the manufacture of central air conditioners and central 
air conditioning heat pumps.
5. Environmental Impacts
    Several comments stated that there would be greater environmental 
benefits under a 13 SEER standard. (Goodman, No. 269 at p. 2; Austin 
Energy, No. 243 at p. 1; State of Connecticut, No. 279 at p. 2; State 
of Maine, No. 254 at pp. 1-2). The Attorneys General from the States of 
New York and Massachusetts asserted that DOE's assessment of 
environmental impact used the wrong ''no action'' scenario; in their 
view, the correct ''no action'' scenario or baseline for measuring 
impacts is the SEER 13 standard in the January 22 rule (Attorneys 
General of New York and Massachusetts, No. 277 at p. 11). In addition 
to the carbon and NOX emissions, the Attorneys General state 
that coal-fired power plants are dominant sources of mercury and 
particulate pollution nationwide and that by ignoring these impacts of 
its SNOPR, DOE violated the National Environmental Policy Act (NEPA). 
(Attorneys General of New York and Massachusetts, No. 277 at pp. 14-
15).
    DOE disagrees with the comment that DOE failed to comply with NEPA 
in proposing 12 SEER standards in the July 25 SNOPR. As previously 
discussed, DOE does not believe the standards in the January 22 final 
rule constitute the baseline for assessing the impact of today's final 
rule because those standards never became effective. The correct 
baseline, and the one used for the ''no action'' alternative in the EA, 
are the currently effective NAECA standards.
    DOE's environmental assessment (EA) examined the environmental 
impacts of all trial standard levels being considered. See Section 
VIII.A. of this

[[Page 36395]]

Supplementary Information. All of the alternatives considered in DOE's 
analysis were found to have beneficial environmental impacts compared 
to the ''no action'' alternative. Under the ''no-action'' or base case 
alternative, the minimum efficiency requirements would remain at their 
current levels: a cooling efficiency of 10 SEER for split system air 
conditioners and heat pumps, a cooling efficiency of 9.7 SEER for 
single package system air conditioners and heat pumps, a heating 
efficiency of 6.8 HSPF for split system heat pumps, and a heating 
efficiency of 6.6 HSPF for single package system heat pumps. The 
primary focus of the EA is the effect of alternative efficiency 
standards on air resources resulting from decreased emissions from 
fossil-fueled electricity generation. For each of the trial standard 
levels, DOE used the NEMS-BRS model to calculate total power sector 
emissions of nitrogen oxide, sulfur dioxide, and carbon. As explained 
in Section VIII.A. of this Supplementary Information, on the basis of 
the EA, DOE determined that the environmental effects associated with 
the standard levels in today's final rule are not significant.
    DOE has corrected an error that DOE discovered in the NEMS-BRS, the 
model used by DOE to estimate both peak power and power plant emission 
impacts due to appliance standards. As discussed earlier (see Peak 
Power), DOE conducted a comprehensive review of the end-use load shapes 
used by NEMS-BRS, not only for the residential sector and, 
specifically, the air-conditioning end-use, but for the commercial, 
industrial, and transportation sectors as well. Several problems were 
discovered with the load shapes and, as a result, an alternative set of 
sectoral end-use load shapes were assigned to NEMS-BRS. By implementing 
a new set of sectoral load shapes, NEMS-BRS estimates greater power 
plant emission impacts (in the form of reduced CO2 and 
NOX emissions) from increased central air conditioner and 
heat pump standards. With regard to NOX emissions, the 
actual reductions that result from more stringent efficiency standards 
are likely to be less than the original DOE estimates because some 
provisions of the Clean Air Act (CAA) were not explicitly modeled in 
the version of NEMS-BRS used for this analysis (AEO2000). Some of these 
provisions have been incorporated in subsequent AEOs. In addition, EPA 
is expected to promulgate regulations during the analytic period in 
question that are likely to further constrain NOX emissions 
and reduce the impact that efficiency standards would have on 
NOX and other environmental emissions. Appendix M of the TSD 
includes an updated set of power plant emission impacts. The changes 
resulting from this NEMS-BRS error correction do not affect DOE's 
finding of no significant impact.
6. Employment Impacts
    With regard to the impact that amended central air conditioner and 
heat pump standards have on national employment, both ARI and Rheem are 
concerned that high efficiency standards can lead to job losses in the 
air-conditioning industry's manufacturing sector. Rheem states that 
fewer units will be sold due to the higher purchase prices associated 
with more efficient equipment. Fewer equipment sales will in turn 
reduce the need for personnel in manufacturing facilities and design 
groups. (Rheem, No. 248 at p. 3). ARI states that DOE's decision to 
issue 13 SEER standards in its January 22 final rule was in part based 
on the fact that unemployment was then at the lowest rate in 30 years. 
Because the current state of the national economy is certainly worse 
than when DOE issued its January 22 final rule, ARI claims that 13 SEER 
standards would have a much worse impact on the air-conditioning 
industry than initially forecasted by DOE. In any case, ARI points out 
that DOE's analysis demonstrates that 12 SEER standards would have 
approximately 50 percent fewer job losses compared to 13 SEER 
standards. ARI asserts that this difference in job losses is 
significant and demonstrates that the proposed 12 SEER standards are a 
much better choice. (ARI, No. 259 at pp. 11-12, 31-32).
    OOE has a much different perspective on DOE's employment impact 
analysis. OOE states that it is purely speculative to claim that there 
is a distinguishable difference between the impacts that 12 SEER and 13 
SEER standards have on the national economy. The accuracy of the 
macroeconomic model used by DOE to estimate employment impacts does not 
allow for such a distinction. (OOE, No. 275 at pp. 3-4).
    As stated in the January 22 final rule, DOE estimated the impacts 
of the new standards on national labor demand using an input/output 
model of the U.S. economy. See 66 FR 7192. The model characterizes the 
interconnections between 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,\19\ producing a gain of 
jobs in the manufacturing sector that is less than the loss of jobs in 
other sectors of the economy. 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.
---------------------------------------------------------------------------

    \19\ 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. The following reasons were given in the January 22 
final rule for the conclusion that any modest changes in employment 
were in doubt (66 FR 7192):
    z 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;
    z 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
    z 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 identify and consider separately any employment 
impacts beyond the calculation of net present value.
    Although, as noted by ARI, unemployment is no longer as low as it 
was at the time the January 22 final rule was issued, the annual 
unemployment rate in 2001, (4.8 percent) is only slightly higher than 
the annual rates for 1998, 1999, and 2000 and still less than the 
annual rates for all other years in the 1990's.\20\ Thus, after 
discounting the first factor cited above, and considering the other two 
legitimate concerns regarding the interpretation and use of the 
employment impacts analysis, DOE cannot conclude that the central air 
conditioner and heat pump standards issued in today's final rule are 
likely to

[[Page 36396]]

result in appreciable job losses to the nation.
---------------------------------------------------------------------------

    \20\ U.S. Department of Labor-Bureau of Labor Statistics (BLS), 
Labor Force Statistics from the Current Population Survey. BLS Web 
site http://stats.bls.gov:80/cps/home.htm.
---------------------------------------------------------------------------

7. Space-Constrained Products
a. Through-the-Wall Products
    All parties commenting on DOE's proposed standards for through-the-
wall products supported the proposed standards-10.9 SEER and 7.1 HSPF 
for split system air conditioners and heat pumps and 10.6 SEER and 7.0 
HSPF for single package air conditioners and heat pumps. (Austin 
Energy, No. 243 at p. 3; OOE, No. 275 at p. 4; Lennox, No. 272 at p. 3; 
ASE, No. 282 at p. 4; ACEEE, No. 284 at pp. 13-14).
    Thus, DOE is adopting as minimum efficiency standards for the 
through-the-wall products the standards proposed in the July 25 SNOPR.
b. Small Duct, High Velocity Systems
    DOE received information in the rulemaking that indicated that the 
special characteristics of small duct, high velocity (SDHV) air 
conditioner and heat pump systems make it unlikely such systems could 
meet the 12 SEER/7.4 HSPF standard established for conventional 
products. Spacepak, Unico, and ARI all support the creation of a 
separate product class for SDHV systems and the development of 
technologically feasible and economically justified standards for this 
product. Although all three comments are in agreement with regard to 
the establishment of a new product class for SDHV systems, Unico and 
ARI are in disagreement over how these systems should be tested. While 
ARI recommends that no special consideration be given for SDHV systems 
and, therefore, no changes be made to the test procedures for central 
air conditioners and heat pumps, Unico proposes three options for 
amending the test procedure to rate SDHV systems. The three options 
include: (1) A coil-only test with a higher allowable coil pressure 
drop and use of a default fan power; (2) coil and blower tested with a 
1.2 inch minimum external static pressure; and (3) coil-only testing 
with existing coil pressure drop allowance and default fan power 
without mention of the blower. (Spacepak, No. 267 at p. 1; Unico, No. 
251 at pp. 3-4; ARI, No. 259 at p. 35).
    While DOE agrees with public comments stating that these systems 
should not be subject to the standards set for conventional products, 
DOE does not currently have an analytical basis for setting a new 
standard for SDHV systems. DOE is currently in the process of amending 
the test procedure for rating the performance of central air 
conditioners and heat pumps and will take the above comments into 
consideration when determining the appropriate testing requirements for 
SDHV systems. DOE has started the research needed to propose amended 
standards for SDHV systems and it intends to initiate a rulemaking 
shortly for this product class.
8. Basis for HSPF Level
    ARI stated in its comments that if a 12 SEER standard is adopted 
for central air conditioning heat pumps, the HSPF should be no higher 
than 7.3. ARI believes the HSPF should be based on an analysis of the 
SEER-HSPF relationships across equipment of varying capacity ratings. 
It faults DOE's analysis for relying on an analysis of only 3-ton 
equipment to determine the HSPF. (ARI, No. 259 at p. 4).
    As DOE explained in the preamble to the January 22 final rule, DOE 
established the SEER-HSPF pairings in order to maintain the offset 
between the minimum SEER and the minimum HSPF in the current standards. 
Because heating energy is a large fraction of total heat pump energy 
consumption, DOE stated it would not relax the HSPF level in the 
absence of sound evidence regarding the burdens that would be mitigated 
(66 FR 7184). DOE continues to think an HSPF of 7.4 is the appropriate 
level for 12 SEER, and today adopts that level. DOE's decision is 
supported by data discussed in the TSD (Section 4.6.2.1) which shows 
that most models of equipment below 3-tons meet or exceed an HSPF of 
7.4, and almost a third of models available below 20,000 BTU/hr meet or 
exceed an HSPF of 7.4.
9. Non-Regulatory Approaches
    ARI, Carrier, and Mercatus Center contended that DOE did not 
adequately evaluate the national impacts of non-regulatory programs for 
improving the efficiency of central air conditioners and heat pumps. 
ARI claimed that by combining several non-regulatory alternatives, such 
as consumer tax credits, consumer rebates and low-income subsidies, the 
amount of energy saved could increase to 3.5 quads while the net 
present value would remain relatively unchanged. (ARI, No. 259 at pp. 
15-16). Carrier points out that DOE overlooked the energy saving 
benefits due to the proper installation and maintenance of air-
conditioning equipment. Carrier claims that the total energy savings 
from these actions far exceed those limited to increasing the SEER of 
the equipment. In stating the proposed 12 SEER standards represent an 
appropriate level for the entire nation, Carrier recognizes that there 
are some regions of the country that could benefit from higher 
efficiency for unique climate or electrical supply reasons. In these 
instances, government agencies and utilities should provide incentives 
to encourage the use of higher efficiency equipment. (Carrier, No. 280 
at p. 3). Mercatus Center states that DOE does not evaluate non-
regulatory programs adequately because it assumes their effects rather 
than estimating them based on any credible data or evidence. (Mercatus 
Center, No. 242 at p. 13).
    DOE disagrees with this comment. In determining the base case for 
the analysis of the highest efficiency standards that are 
technologically feasible and economically justified (i.e., the energy 
consumption likely to occur in the absence of amended standards), DOE 
gave adequate consideration to all non-regulatory market forces likely 
to occur in the absence of amended standards. Additionally, the 
Regulatory Impact Analysis estimated the national energy savings and 
net present value that would result from non-regulatory approaches 
including: (1) Consumer product labeling, (2) public education, (3) 
prescriptive standards, (4) consumer tax credits, (5) manufacturer tax 
credits, (6) consumer rebates, (7) low income subsidies, (8) voluntary 
efficiency targets, and (9) mass government purchases. The analysis 
found that none of them would save an equivalent amount of energy as 
energy conservation standards.
10. Energy Policy
    On the issue of energy policy, several comments claimed that DOE's 
action of withdrawing the 13 SEER standards issued in the January 22 
final rule is not consistent with the current Administration's own 
National Energy Policy. ASAP, ASE, CEC, and NRDC all note that the 
Administration calls for appliance standards as way to moderate growth 
in electricity demand and limit consumer energy bills. (ASAP, No. 244 
at p. 1; ASE, No. 282 at p. 2; CEC, No. 263 at p. 2; NRDC, No. 250 at 
p. 28). NRDC also states that the relaxation of the 13 SEER standard is 
inconsistent with the obligations of the United States under the United 
Nations Framework Convention on Climate Change (UNFCCC), to which our 
country became a Party with the advice and consent of the Senate in 
1992. (NRDC, No. 250 at pp. 29-30).
    DOE disagrees that its action to finalize 12 SEER standards for 
central air conditioners and heat pumps is inconsistent with either the 
Administration's National Energy Policy or with the United States' 
obligations under the UNFCCC. The 12 SEER

[[Page 36397]]

standards being finalized today significantly increase the minimum 
efficiency requirements for central air conditioners and heat pumps. 
Thus, the policy to amend the standards is consistent with the 
Administration's call to use appliance standards as a method to 
moderate growth in electricity demand and limit consumer energy bills.

VII. Analytical Results and Conclusions

A. Overview of Analytical Results

1. General
    Although DOE reassessed the benefits and burdens of the trial 
standard levels in arriving at the determinations in today's rule, the 
underlying analyses are unchanged from those presented in the January 
22 final rule except for additional analysis of through-the-wall 
product classes included as Appendix L to the TSD. Briefly, DOE 
examined five standard levels. Table 3 presents the trial standards 
levels analyzed and the corresponding efficiency level for each class 
of product. Trial Standard Level 5 is the Max Tech Level for each class 
of product. Trial Standard Level 4 was the one DOE adopted for the 
standards set forth in the January 22 final rule. Trial Standard Level 
2 is the one DOE today determines to be the maximum efficiency that is 
technologically feasible and economically justified.

               Table 3.-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 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 forecasts from the 
Energy Information Agency's 2000 Annual Energy Outlook (AEO): (1) 
Reference Case, (2) High Growth Case, and (3) Low Growth Case. DOE 
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. See 
October 5, 2000 NOPR for an explanation of the three scenarios (65 FR 
59596, notes 10 through 12 and accompanying text). Under the standard 
levels in today's rule, DOE believes that the NAECA scenario most 
closely represents the likeliest impact of the new standards, as 
explained in Chapter 8 of the TSD. DOE analyzed two manufacturer cost 
scenarios: (1) Based on reverse engineering estimates, and (2) based on 
ARI-provided mean cost estimates. For the reasons given in the preamble 
to the January 22 final rule (66 FR 7177-78), DOE expects manufacturer 
costs under the amended standards will lie closer to the estimates 
produced through DOE's reverse engineering analysis, which lie between 
ARI's minimum and ARI's mean cost values. DOE 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.
2. Through-the-Wall Products
    In response to comments on the October 5, 2000 NOPR, DOE conducted 
additional analysis on the cost and technical issues related to 
through-the-wall air conditioner and heat pump products. The analysis 
is described in detail in Appendix L of the TSD and is summarized here.
    DOE performed a design assessment on two split through-the-wall 
systems and one packaged through-the-wall system. All systems are 
designed primarily for the replacement market and fit the physical 
definition of through-the-wall equipment proposed in the October 5, 
2000 NOPR and July 25 SNOPR. The design assessment sought to identify 
the cost and efficiency impacts of employing commonly applied 
techniques to improve efficiency including reduction of air leakage and 
improvement in airflow, utilizing more efficient compression and fan 
motors, and increasing heat exchanger surface area. Emerging 
technologies and modulating technologies were not considered since they 
are not likely to be applied in conventional baseline equipment.
    The cost estimation for the analysis was based on a modified 
version of the reverse engineering cost models developed as part of 
this rulemaking for conventional products. The performance impacts of 
employing various design options were estimated utilizing a spreadsheet 
model populated with actual performance data and engineering 
guidelines.
    The analysis concluded that utilizing commonly applied technologies 
and designs, the most constrained through-the-wall split-system 
analysis could increase its SEER rating from 10.0 SEER to as high as 
11.4 SEER, and the packaged system analysis could increase its SEER 
rating from 9.7 SEER to 10.6 SEER. Employing all improvements would add 
$106 and $129 to the retail price of the equipment, respectively, 
comparable to the increases expected in conventional equipment moving 
to a 12 SEER standard.
    To explore the effects that more stringent standards for through-
the-wall products would have on consumers, DOE performed a life-cycle 
cost analysis. The life-cycle cost analysis for through-the-wall 
consumers used a subset of consumers identified as living in multi-
family dwellings, which are the predominate application for through-
the-wall products.
    In the July 25 SNOPR, DOE proposed, based on its analysis, a 10.9 
SEER/7.1 HSPF standard for through-the-wall split systems and a 10.6 
SEER/7.0 HSPF standard for through-the-wall single package system 
products. After considering public comments, all of which supported the 
proposed levels, DOE today adopts those levels as final standards for 
through-the-wall products.
3. Small Duct, High Velocity Systems
    In response to comments on the July 25, 2001 SNOPR, DOE has 
determined that additional analysis on the cost and technical issues 
related to SDHV air conditioner and heat pump products are

[[Page 36398]]

needed to determine appropriate minimum efficiency standards for this 
class of product. The analysis plan for establishing the manufacturing 
cost and efficiency relationship for SDHV systems has yet to be 
developed, but DOE intends to involve the manufacturers that produce 
these products (Spacepak and Unico) in the planning process.
    To explore the effects that more stringent standards for SDHV 
systems have on consumers, DOE intends to perform a life-cycle cost 
analysis. The life-cycle cost analysis for SDHV consumers will use a 
subset of consumers identified as probable candidates for the 
application of SDHV products.
    Although DOE has concluded that SDHV systems warrant their own 
product class, it has yet to determine an appropriate minimum 
efficiency standard for them. Therefore, this final rule provides that 
the NAECA-prescribed minimum efficiency standards covering all product 
types (e.g., 10 SEER/6.8 HSPF for split system air conditioners) will 
remain applicable to SDHV systems. DOE intends to conduct a separate 
rulemaking for SDHV systems to establish appropriate minimum efficiency 
standards for this class of product.

B. Conclusions Regarding Conventional Products

    EPCA specifies that any new or amended energy conservation standard 
for any type (or class) of covered product shall be designed to achieve 
the maximum improvement in energy efficiency which the Secretary 
determines is technologically feasible and economically justified (42 
U.S.C. 6295(o)(2)(A)). In determining whether a standard is 
economically justified, the Secretary must determine whether the 
benefits of the standard exceed its burdens (42 U.S.C. 
6295(o)(2)(B)(i)). The amended standard must ''result in significant 
conservation of energy'' (42 U.S.C. 6295(o)(3)(B)).
    In conducting its analysis, DOE considers the impacts of standards 
beginning with the Max Tech Level, i.e., Trial Standard Level 5 in this 
rulemaking. DOE then considers less efficient levels until it reaches 
the level which is both technologically feasible and economically 
justified.
    To aid the reader in the discussion of the benefits and burdens of 
the trial standard levels, DOE includes a summary of the analysis 
results for all of the levels in Table 4.\21\ Table 4 presents a 
summary of quantitative analysis results for each trial standard level 
based on the assumptions DOE considers 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 effectgs are discounted to 1998 dollars.

                                  Table 4.-Summary of Quantitative Results \1\
----------------------------------------------------------------------------------------------------------------
                                      Trial Std 1     Trial Std 2     Trial Std 3    Trial Std 4    Trial Std 5
----------------------------------------------------------------------------------------------------------------
SEER levels for most products.....  11............  12............  12 for CAC/13   13...........  18
                                                                     for HP.
Primary Energy Saved (quads)......  1.7...........  3.0...........  3.5...........  4.2..........  8.8
Generation Capacity Offset (GW)...  4.4...........  8.7...........  10.1..........  12.6.........  21.9
-----------------------------------
          NPV ($billion)
-----------------------------------
7% Discount Rate..................  2.............  2.............  1.............  1............  (10)
-----------------------------------
 Industry Impacts (million $) \2\
-----------------------------------
Cumulative Change in Industry NPV.  (30)..........  (159).........  (171).........  (303)........  -
Differential impact between         75............  238...........  261...........  429..........  -
 Industry Sub-groups \3\.
Cumulative Regulatory Burden on     (50  (63  (65  (7  -
 Industry.                           9).             8).             0).             82).
Minimum net cash flow.............  62............  31............  18............  (3)..........  -
-----------------------------------
  Life-Cycle Cost Savings ($) \4\
-----------------------------------
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
-----------------------------------
   Equipment Price Increase ($)
-----------------------------------
Split AC..........................  91............  213...........  213...........  335..........  754
Packaged AC.......................  89............  158...........  158...........  425..........  859
Split HP..........................  55............  144...........  332...........  332..........  1039
Packaged Heat Pump................  92............  149...........  435...........  435..........  985
-----------------------------------
Fraction of all Consumers with Net
   LCC Losses 2% (%)
-----------------------------------
Split AC..........................  2.............  25............  25............  39...........  68
Packaged AC.......................  1.............  9.............  9.............  52...........  73
Split HP..........................  0.............  0.............  6.............  6............  57

[[Page 36399]]

 
Packaged Heat Pump................  0.............  0.............  12............  12...........  48
-----------------------------------
 Fraction of Low Income Consumers
 with Net LCC Losses 2%
                (%)
-----------------------------------
Split AC..........................  5.............  34............  34............  50...........  77
Packaged AC.......................  2.............  14............  14............  61...........  80
Split HP..........................  0.............  0.............  12............  12...........  75
Packaged Heat Pump................  0.............  0.............  20............  20...........  66
----------------------------------------------------------------------------------------------------------------
\1\ Parentheses indicate negative (-) values. Unless otherwise noted, Trial Standard Levels 1-3 refer to the
  NAECA efficiency scenario, and Trial Standard Levels 4 and 5 refer to the Roll-up efficiency scenario.
\2\ Not calculated at Trial Standard Level 5.
\3\ The benefit accruing to the Higher Operating Cost subgroup compared to the Lower Operating Cost subgroup.
\4\ Negative values indicate LCC increases.

    In addition to the quantitative results, DOE also considers other 
burdens and benefits that might affect the economic justification.
    The potential to improve the reliability of the electricity system 
is considered by some to be the major benefit that DOE had 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 DOE's analysis as savings in consumer 
utility bills. However, in areas that are unable to maintain adequate 
capacity reserves, the value of avoided blackouts associated with 
reductions in peak demand often far exceed the normal costs of capacity 
expansion.\22\ DOE has reexamined claims that the energy efficiency 
standards under consideration could improve significantly electric 
system reliability over the long term (see discussion at Section 
VI.G.2).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    DOE also recognizes that the adopted standards could result in 
additional unquantifiable benefits and burdens. These include the 
avoidance of environmental impacts associated with the siting of some 
powerplants, a possible increase in health problems caused by consumers 
foregoing 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.
    First DOE considered Trial Standard Level 5, the Max Tech Level for 
each of four classes of products, representing uniform 18 SEER 
requirements. The manufacturing cost DOE assumes for Trial Standard 
Level 5 is equal to the cost of 15 SEER equipment, rather than the cost 
of 18 SEER equipment, since manufacturer cost data were not available 
for the 18 SEER efficiency levels. Because of that assumption, DOE 
expects that its estimate of the cost and price of the product at Trial 
Standard Level 5 are understated. Trial Standard Level 5 would likely 
save 8.8 quads of energy between 2006 and 2030 which DOE considers 
significant. The energy savings through 2020 would result in the 
avoidance of approximately 22 gigawatts (GW) of installed generation 
capacity in 2020. For comparison, the generating capacity is equivalent 
to roughly 55 large, 400 megawatt, power plants, and reduced emissions 
would range up to 73 Mt of carbon equivalent and up to 279 kt of 
NOX.\23\ Furthermore, for the nation as a whole, Trial 
Standard Level 5 is estimated to result in a net cost in excess of $10 
billion. DOE did not calculate manufacturer impacts at this trial 
standard level, determining based on preliminary evaluation that they 
would be severe and unacceptable.
---------------------------------------------------------------------------

    \23\ Generating capacity, carbon, and NOX reductions 
are based on Roll-up efficiency scenario.
---------------------------------------------------------------------------

    At Trial Standard Level 5, the average consumer would experience an 
increase in life-cycle cost. Compared to today's standards, purchasers 
of split central air-conditioners, the predominate class of central air 
conditioner with 65 percent of the sales of central air conditioners 
and heat pumps, would most likely lose in excess of $137 over the life 
of the appliance. Purchasers of split heat pumps, the predominant class 
of heat pump, would most likely lose in excess of $41. These life-cycle 
cost estimates represent lower bounds to the actual costs because they 
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.
    DOE concludes that at Trial Standard Level 5, the benefits of 
energy and energy cost savings, and emission reductions would be 
outweighed by the negative economic impacts to the nation, to the vast 
majority of consumers and to the manufacturers. Consequently, DOE has 
determined that Trial Standard Level 5, the Max Tech Level, is not 
economically justified.
    Next, DOE considered Trial Standard Level 4, the level that the 
previous Administration determined to be economically justified in the 
January 22 final rule. This level specifies 13 SEER equipment for all 
product classes. In considering Trial Standard Level 4, DOE assumed the 
Roll-up efficiency scenario and reverse engineering cost estimates to 
be the most probable. Under the Roll-up scenario, equipment that in the 
base case was forecast to be less efficient than the trial standard 
level is assumed to move up to the standard level, and equipment 
forecasted to be at or above the trial standard level is assumed not to 
increase in efficiency. (See Section 8.4.8 of the TSD for the reasons 
DOE considers the Roll-up efficiency scenario most probable above Trial 
Standard Level 3 and the NAECA efficiency scenario most probable at 
Trial Standard Levels 1, 2, and 3; see Section 7.2.2.5 of the TSD for 
the current efficiency distribution for each product class and for the 
assumed efficiency distributions after new standards.)
    Primary energy savings between 2006 and 2030 is estimated to be 4.2 
quads, which DOE considers significant. The estimated energy savings 
through 2020 would result in avoidance of approximately 12.6 GW in 
installed

[[Page 36400]]

generating capacity in 2020. For comparison, the generating capacity is 
equivalent to avoiding the need for 32 large 400 megawatt power plants, 
and reduced emissions would range up to 33 Mt of carbon equivalent and 
up to 111 kt of NOX.\24\ Trial Standard Level 4 would lower 
peak electricity demand compared to the base case. That would allow 
utility service areas to build less new capacity, with attendant 
environmental benefits.
---------------------------------------------------------------------------

    \24\ Generating capacity, carbon, and NOX reductions 
are based on Roll-up efficiency scenario.
---------------------------------------------------------------------------

    A measure of an efficiency standard's economic benefit to the 
nation is the increase in net present value, which is the difference in 
total cost, both initial cost and discounted operating cost, between 
the base case (without a new standard) and the case with a new 
standard. For Trial Standard Level 4, the increase in national net 
present value is estimated to be $1 billion.\25\
---------------------------------------------------------------------------

    \25\ Under the NAECA efficiency scenario, the increase in 
national net present value would be zero.
---------------------------------------------------------------------------

    Since DOE expects the Roll-up efficiency scenario to result from 
standards adopted at Trial Standard Level 4, the burdens of Trial 
Standard Level 4 on manufacturers are likely to be severe. Not only 
does DOE expect the average loss in industry NPV to be around 20 
percent, but impacts on most manufacturers would reach almost 30 
percent. Their long term drop in return on investment and short term 
drop in cash flow suggest that standards adopted at Trial Standard 
Level 4 could accelerate the consolidation trend, possibly resulting in 
fewer choices for consumers and in a slowing of the pace of innovation 
well into the future. Furthermore, the cumulative impact on the 
industry of all new Federal and State regulations is estimated to 
exceed $782 million.
    For Trial Standard level 4, the average purchaser of a split system 
air conditioner, the predominant class with 65 percent of all 
shipments, would see the installed price of $2236 rise to $2571, an 
increase of $335. Lower utility bills from the energy savings would 
repay this increase in 11.3 years and produce a total saving with a net 
present value of $113 over the 18.4 year life of the product. The 
average purchaser of a single package air conditioner, which represents 
10 percent of all shipments, would see the average installed price of 
$2607 rise to $3032, an increase of $425. Lower utility bills from the 
energy savings would repay this increase in 14.5 years and produce a 
total saving with a net present value of $29 over the 18.4 year life of 
the product.
    The average purchaser of a split system heat pump, which represents 
22 percent of all shipments, would see the average installed price of 
$3668 rise to $4000, an increase of $332. Lower utility bills from the 
energy savings would repay this increase in 6.4 years and produce a 
total saving with a net present value of $372 over the 18.4 year life 
of the product. The average purchaser of a single package heat pump, 
which represents 4 percent of all shipments, would see the average 
installed price of $3599 rise to $4034, an increase of $435. Lower 
utility bills from the energy savings would repay this increase in 8.4 
years and produce a total saving with a net present value of $353 over 
the 18.4 year life of the product. While the average consumer 
purchasing a 13 SEER air conditioner or heat pump would experience a 
net saving over the lifetime of the product, a substantial fraction of 
all households would experience net costs exceeding 2 percent of the 
total life-cycle cost of today's baseline units. Thirty-nine percent of 
the households with split system air conditioners, 52 percent with 
single package air conditioners, 6 percent with split system heat pumps 
and 12 percent with single package heat pumps would experience a net 
cost. The percentage of low-income consumers who would experience net 
costs exceeding 2 percent of the total life-cycle cost of today's 
baseline units is greater than that of the average household; 50 
percent of low-income households with split system air conditioners, 61 
percent with single package air conditioners, 12 percent with split 
system heat pumps and 20 percent with single package heat pumps. Also, 
the possibility that many consumers would incur substantial 
installation costs is great because 13 SEER equipment often will not 
fit in the same space as current 10 SEER equipment. In light of the 
higher purchase cost increase experienced by all consumers and the 
percentage of households that experience life-cycle cost increases, in 
particular low-income households, which experience life-cycle cost 
increases, consumer burdens are particularly acute under Trial Standard 
Level 4.
    DOE concludes that at Trial Standard Level 4, the benefits of 
energy savings, generating capacity and emission avoidance, and net 
benefit to the nation's consumers would be outweighed by the 
maldistribution of consumer benefits, the potential increase in 
installation costs for some consumers related to installing potentially 
larger equipment, and the cost to manufacturers taking into account the 
cumulative regulatory burden. Trial Standard Level 4 introduces the 
serious concern that prospective owners of air conditioning heat pump 
systems would instead purchase less costly air conditioner resistance 
heater combinations because of the substantial purchase price 
differential between heat pumps and air conditioners. As discussed in 
the January 22 notice of final rulemaking (66 FR 7196), 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. Those households residing in manufactured housing, which is 
often shipped from the factory without an air conditioning system but 
with a resistance furnace, might be inclined to simply add a lower cost 
air conditioner and retain the resistance furnace instead of replacing 
the resistance furnace with a heat pump. In short, the large financial 
burdens of Trial Standard Level 4 are not outweighed by the expected 
financial benefits. Other potential burdens include possible health 
effects caused indirectly by foregone air conditioning purchases and 
possible lessening of competition, as determined by DOJ in its letter 
of April 5, 2001 to DOE regarding the January 2001 final rule. 
Consequently, DOE determines that Trial Standard Level 4 is not 
economically justified.
    Next, DOE considered Trial Standard Level 3. This level specifies 
12 SEER equipment for air conditioners and 13 SEER equipment for heat 
pumps. In considering Trial Standard Level 3, DOE assumed the NAECA 
efficiency scenario and reverse engineering cost estimates to be the 
most probable. (See Section 8.4.8 of the TSD for the reasons DOE 
considers the Roll-up efficiency scenario most probable at Trial 
Standard Levels 4 and 5 and the NAECA efficiency scenario most probable 
at Trial Standard Levels 1, 2 and 3.)
    For Trial Standard Level 3, primary energy savings between 2006 and 
2030 are estimated to be 3.5 quads, which DOE considers significant. 
The energy savings through 2020 would result in avoidance of 
approximately 10.1 GW in installed generating capacity in 2020. For 
comparison, the generating capacity is equivalent to avoiding the need 
for 25 large 400 megawatt power plants, and reduced emissions would 
range up to 28 Mt of carbon equivalent and up to 97 kt of 
NOX.\26\ Trial Standard Level 3 would

[[Page 36401]]

lower peak electricity demand compared to the base case. That would 
allow utility service areas to build less new capacity, with attendant 
environmental benefits.
---------------------------------------------------------------------------

    \26\ Generating capacity, carbon, and NOX reductions 
are based on NAECA efficiency scenario.
---------------------------------------------------------------------------

    For Trial Standard Level 3, the increase in national net present 
value is estimated to be $1 billion.\27\ Since DOE expects the NAECA 
efficiency scenario to result from standards adopted at Trial Standard 
Level 3, the burdens of Trial Standard Level 3 on manufacturers are 
likely to be less severe than at Trial Standard Level 4. DOE expects 
the average loss in industry NPV to be around 11 percent, but impacts 
on most manufacturers would be around 17 percent. Their long term drop 
in return on investment and short term drop in cash flow suggest that 
standards adopted at Trial Standard Level 3 could accelerate the 
consolidation trend, possibly resulting in fewer choices for consumers 
and in a slowing of the pace of innovation well into the future. 
Furthermore, the cumulative impact of all new Federal and State 
regulations would exceed $650 million.
---------------------------------------------------------------------------

    \27\ Under the Roll-up efficiency scenario, the increase in 
national net present value would be $2 billion.
---------------------------------------------------------------------------

    At Trial Standard Level 3, the average purchaser of a split system 
air conditioner, the predominant class with 65 percent of all 
shipments, would see the installed price of $2236 rise to $2449, an 
increase of $213. Lower utility bills from the energy savings would 
repay this increase in 9.8 years and produce a total saving with a net 
present value of $113 over the 18.4 year life of the product. The 
average purchaser of a single package air conditioner, which represents 
10 percent of all shipments, would see the average installed price of 
$2607 rise to $2765, an increase of $158. Lower utility bills from the 
energy savings would repay this increase in 7.5 years and produce a 
total saving with a net present value of $163 over the 18.4 year life 
of the product.
    The average purchaser of a split system heat pump, which represents 
22 percent of all shipments, would see the average installed price of 
$3668 rise to $4000, an increase of $332. Lower utility bills from the 
energy savings would repay this increase in 6.4 years and produce a 
total saving with a net present value of $372 over the 18.4 year life 
of the product. The average purchaser of a single package heat pump, 
which represents 4 percent of all shipments, would see the average 
installed price of $3599 rise to $4034, an increase of $435. Lower 
utility bills from the energy savings would repay this increase in 8.4 
years and produce a total saving with a net present value of $353 over 
the 18.4 year life of the product.
    Like Trial Standard Level 4, Trial Standard Level 3 raises the 
serious concern that prospective owners of air conditioning heat pump 
systems would purchase less costly air conditioner resistance heater 
combinations. In this case there is a potential loss of energy savings 
because of the lower standards for air conditioners compared to heat 
pumps, which could eliminate all energy savings from the more efficient 
heat pumps if only a small fraction of heat pump owners (4 percent) 
switched to resistance heating. Trial Standard Level 3 poses a serious 
concern regarding potential anti-competitive effects because the size 
and cost of the higher efficiency heat pumps could reduce competition 
between manufacturers of heat pumps and manufacturers of resistance 
heating and other lower cost heating systems.
    DOE concludes that, at Trial Standard Level 3, the benefits of 
energy savings, generating capacity and emission avoidance, and net 
benefit to the nation's consumers would be outweighed by the 
maldistribution of consumer benefits and manufacturer costs, the 
likelihood of higher installation costs resulting from potentially 
larger equipment, and the net impact on the industry in light of the 
cumulative regulatory burden. The most serious concern is the 
possibility of equipment switching that would likely substantially 
reduce the calculated energy savings, drastically reducing the 
potential benefits. Other possible burdens include lessening of 
competition, as determined by DOJ in its April 5, 2001 letter to DOE 
regarding the January 2001 final rule, and adverse health effects 
caused by forgone air conditioner purchases. Consequently, DOE 
determines that Trial Standard Level 3 is not economically justified.
    Next, DOE considered Trial Standard Level 2. This level specifies 
12 SEER equipment for all product classes, and this is the level that 
DOE has determined is the maximum efficiency level that is economically 
justified. In considering Trial Standard Level 2, DOE assumed the NAECA 
efficiency scenario and reverse engineering cost estimates to be the 
most probable. Primary energy savings between 2006 and 2030 is 
estimated to be 3 quads, which DOE considers significant. The energy 
savings through 2020 would result in avoidance of approximately 8.7 GW 
in installed generating capacity in 2020. For comparison, the 
generating capacity is equivalent to avoiding the need for 22 large 400 
megawatt power plants, and reduced emissions would range up to 24 Mt of 
carbon equivalent and up to 83 kt of NOX.\28\ Trial Standard 
Level 2 would lower peak electricity demand compared to the base case. 
That would allow utility service areas to either avoid build less new 
capacity, with attendant environmental benefits. For Trial Standard 
level 2, the increase in national net present value is estimated to be 
$2 billion, which represents the highest level for all the standard 
levels considered.\29\
---------------------------------------------------------------------------

    \28\ Generating capacity, carbon, and NOX reductions 
are based on NAECA efficiency scenario.
    \29\ Under the Roll-up efficiency scenario, the increase in 
national net present value would be $3 billion.
---------------------------------------------------------------------------

    Since DOE expects the NAECA efficiency scenario to result from 
standards adopted at Trial Standard Level 2, the burdens of Trial 
Standard Level 2 on manufacturers are likely to be moderate. DOE 
expects the average loss in industry NPV to be around 10 percent, with 
impacts on most manufacturers around 16 percent. Their long term drop 
in return on investment and short term drop in cash flow are moderate, 
suggesting that standards adopted at Trial Standard Level 2 would not 
accelerate the consolidation trend, and could result in more choices 
for consumers and raise the pace of innovation. Furthermore, the 
cumulative impact of all new Federal and State regulations is estimated 
to exceed $638 million.
    For Trial Standard Level 2, the average purchaser of a split system 
air conditioner, the predominant class with 65 percent of all 
shipments, would see the installed price of $2236 rise to $2449, an 
increase of $213. Lower utility bills from the energy savings would 
repay this increase in 9.8 years and produce a total saving with a net 
present value of $113 over the 18.4 year life of the product. The 
average purchaser of a single package air conditioner, which represents 
10 percent of all shipments, would see the average installed price of 
$2607 rise to $2765, an increase of $158. Lower utility bills from the 
energy savings would repay this increase in 7.5 years and produce a 
total saving with a net present value of $163 over the 18.4 year life 
of the product.
    The average purchaser of a split system heat pump, which represents 
22 percent of all shipments, would see the average installed price of 
$3668 rise to $3812, an increase of $144. Lower utility bills from the 
energy savings would repay this increase in 3.9 years and produce a 
total saving with a net

[[Page 36402]]

present value of $365 over the 18.4 year life of the product. The 
average purchaser of a single package heat pump, which represents 4 
percent of all shipments, would see the average installed price of 
$3599 rise to $3748, an increase of $149. Lower utility bills from the 
energy savings would repay this increase in 4 years and produce a total 
saving with a net present value of $421 over the 18.4 year life of the 
product.
    While the average consumer purchasing a 12 SEER air conditioner or 
heat pump would experience a net saving over the lifetime of the 
product, some households would experience net costs exceeding 2 percent 
of the total life-cycle cost of today's baseline units. Thus, 25 
percent of the households with split system air conditioners and 9 
percent with single package air conditioners would experience a net 
cost. No households with heat pumps would experience a net cost. The 
percentage of low-income consumers who would experience net costs 
exceeding 2 percent of the total life-cycle cost of today's baseline 
units is greater than that for an average household. Thus, 34 percent 
of low-income households with split system air conditioners and 14 
percent with single package air conditioners would experience a net 
cost. No low-income households with heat pumps would experience a net 
cost. Also, the possibility that consumers would incur substantial 
installation costs is less than that with a 13 SEER standard because 12 
SEER equipment is more likely to fit in the same space as current 10 
SEER equipment. In light of the moderate purchase cost increase 
experienced by all consumers, the percentage of households, in 
particular low-income households, which experience life-cycle cost 
increases, consumer burdens are substantially less severe under Trial 
Standard Level 2 than Trial Standard Level 4.
    After carefully reconsidering the analyses and comments, and giving 
appropriate weight to consumer impacts and cumulative regulatory burden 
in the assessment of the benefits and burdens, DOE today amends the 
energy conservation standards for central air conditioners and central 
air conditioning heat pumps at Trial Standard Level 2. DOE concludes 
this standard saves a significant amount of energy and is 
technologically feasible and economically justified. In determining 
economic justification, DOE concludes that the benefits of energy 
savings, the projected amount of avoided power plant capacity, 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, taking 
into account the cumulative regulatory burden and annual cash flow, 
increases in life-cycle cost for some users of products covered by 
today's rule, any possible increase in health problems caused by 
consumers foregoing air conditioner purchases, any possible reduction 
in the ability of the product to dehumidify, any possible effect on 
competition (addressed by DOJ in its October 19, 2001 letter to DOE), 
and any possible difficulty in installing the new baseline products 
into replacement applications.

C. Conclusions Regarding Space-Constrained Products

    If a 12 SEER minimum requirement for air conditioners and heat 
pumps is implemented, DOE's analysis shows that of all potential space-
constrained products, only those with through-the-wall condensers and 
small duct, high velocity systems need special consideration.
1. Through-the-Wall Products
    The TSD contains a new Appendix L describing the results of our 
recent re-evaluation of those products. They demonstrate that split 
through-the-wall equipment can attain 10.9 SEER using designs and 
technologies that are commonly applied or available, with price impacts 
similar to those that conventional equipment would experience in 
meeting the proposed 12 SEER standard. The packaged equipment analyzed 
was demonstrated to be capable of attaining only a 10.6 SEER rating, 
although comments received indicate that one manufacturer of packaged 
through-the-wall equipment, Armstrong, expects their equipment to be 
capable of attaining 11 SEER.
    Based on this evaluation, DOE adopts new product classes for 
products that have through-the-wall condensers and are intended for 
replacement applications. The new classes are required to meet minimum 
efficiencies lower than those of the other classes: 10.9 SEER and 7.1 
HSPF for through-the-wall air conditioner and heat pump split-systems, 
and 10.6 SEER and 7.0 HSPF for through-the-wall air conditioner single-
package systems. DOE's analysis suggests those products can attain 
these levels without substantial redesign or price increases that would 
result in a loss of market share to conventional products. Also, the 
life-cycle cost analysis confirms that, on average, consumers of split 
through-the-wall equipment would not incur an increase in life-cycle 
cost, and that consumers of packaged through-the-wall equipment would 
incur an increase of $52 over the life of the equipment. In no case 
would any consumer of split through-the-wall products be expected to 
incur life-cycle costs greater than 2 percent of the total life-cycle 
cost, and only 17 percent of consumers of packaged through-the-wall 
equipment would be expected to incur cost increases greater than 2 
percent of the total life-cycle cost.
    DOE concludes that standard levels higher than 10.9 SEER (split 
through-the-wall) and 10.6 SEER (packaged through-the-wall) are 
technologically feasible, but are not economically justified. DOE's 
analysis on three through-the-wall models suggests that those products 
could attain efficiencies as high as 11.4 SEER, but the results are not 
conclusive and cannot be confidently applied to all through-the-wall 
products. DOE's analysis does not provide enough evidence to convince 
us that levels higher than 10.9 SEER (10.6 SEER for packaged through-
the-wall) will be technologically feasible during the five year period 
during which manufacturers would prepare to meet the new requirements. 
DOE's analysis does indicate that opportunities for efficiency 
improvement do exist, and that manufacturers of those products should 
continue to investigate those opportunities.
    A serious concern that DOE has considered is that the lower 
through-the-wall standards might encourage purchasers of conventional 
equipment to shift to through-the-wall products, undermining the 
benefits of the 12 SEER standard for conventional products. DOE is 
therefore limiting the new through-the-wall classes to products 
manufactured before January 23, 2010. See definition of ''through-the-
wall air conditioner and heat pump.'' Thus, these classes will exist 
only for a period of four years following the compliance date 
established for the new standards for conventional products. During 
that time, the availability of suitable high-efficiency components will 
likely increase and the manufacturers of through-the-wall products will 
be able to investigate options for meeting the more stringent 12 SEER 
level. Both will make it easier for through-the-wall products to attain 
the 12 SEER minimum efficiency required of other products, thereby 
making 12 SEER a technologically feasible and economically justified 
level. The sunset provision will help to ensure that other 
manufacturers will not make the investment required to market through-

[[Page 36403]]

the-wall products heavily for conventional applications during the four 
year period. It will also limit the time during which lower efficiency 
through-the-wall equipment is installed, ensuring that additional 
energy savings associated with the 12 SEER level are realized in a 
certain time period.
    To further limit the application of the through-the-wall class, 
products in these classes may not exceed 30,000 BTU/hr in cooling 
capacity, may not contain special weatherization features that would 
allow them to be installed totally outdoors, and must be marked for 
installation only through an exterior wall. DOE also limits the size of 
the area used for condenser air exchange in order to limit these 
classes to those products intended primarily for replacement 
applications.
2. Small Duct, High Velocity Systems
    In today's final rule, DOE establishes a separate product class for 
SDHV systems and retains the NAECA standards for these products pending 
further study to establish appropriate higher standard levels. DOE 
intends to publish a final rule for the test procedure in the near 
future. Any future work to establish appropriate minimum efficiency 
standards for SDHV systems will be based on the testing requirements 
developed for SDHV systems in the test procedure revision currently 
being finalized, or in a future revision specifically aimed at SDHV 
products.

VIII. Procedural Issues and Regulatory Review

A. Review Under the National Environmental Policy Act

    DOE 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. DOE 
found the environmental effects associated with various standard 
efficiency levels for central air conditioners and heat pumps, 
including 12 SEER, to be not significant. Therefore DOE is 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 on Environmental Quality (40 CFR Parts 1500-1508), and 
DOE's regulations for compliance with NEPA (10 CFR Part 1021).
    As previously discussed (Section VI.G.1, ''Peak Power''), the model 
used by DOE to estimate both peak power and power plant emission 
impacts due to appliance standards was updated to include a more 
representative set of end-use load shapes for the residential, 
commercial, industrial, and transportation sectors. As a result of this 
update, NEMS-BRS estimates somewhat greater power plant emission 
impacts (in the form of reduced CO2 and NOX 
emissions) from increased central air conditioner and heat pump 
standards. Appendix M of the TSD includes an updated set of power plant 
emission impacts. These changes, which are discussed in the FONSI, do 
not affect DOE's finding of no significant impact.
    The comments of some environmental advocates argue that DOE is 
required to prepare an environmental impact statement for today's final 
rule because, in their view, DOE is ''rolling back'' 13 SEER standards, 
and that constitutes a major agency action significantly affecting the 
quality of the environment. As explained in Section VI.H.5 of this 
Supplementary Information, DOE believes these comments are based on an 
erroneous premise, namely, that the January 22 final rule attained 
permanent status even though the rule never became effective. Instead, 
the correct baseline for assessing the impacts of today's rule, in 
DOE's view, are the existing energy conservation standards established 
by NAECA (i.e, SEER of 10.0 and HSPF of 6.8 for split systems 
manufactured after January 1, 1992, SEER of 9.7 and HSPF of 6.6 for 
single package systems manufactured after January 1, 1993). The 12 SEER 
standard in today's rule will increase the energy efficiency of the 
most common type of central air conditioners by approximately 20 
percent.

B. Review Under Executive Order 12866

    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 DOE's Freedom of Information Reading 
Room, 1000 Independence Avenue, SW., Washington, DC 20585, between the 
hours of 9 a.m. and 4 p.m., Monday through Friday, telephone (202) 586-
3142.
    The October 5, 2000 NOPR 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. 65 FR 59627-29. The alternatives considered in DOE's analysis 
are consumer product labeling, consumer education, prescriptive 
standards, consumer tax credits, consumer rebates, manufacturer tax 
credits, voluntary efficiency targets, low income subsidy, mass 
government purchases, and performance standards. The reader is referred 
to the complete ''Regulatory Impact Analysis,'' which is contained in 
the TSD, available as indicated at the beginning of this notice or from 
the contact person named at the beginning of this notice. The TSD 
provides: (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 that 
a Federal agency prepare a regulatory flexibility analysis for any rule 
for which the agency is required to publish a general notice of 
proposed rulemaking. Such an assessment of the impact of regulations on 
small businesses is not required if the agency certifies that the rule 
would not, if promulgated, have a significant economic impact on a 
substantial number of small entities (5 U.S.C. 605(b)). To be 
categorized as a ''small'' air conditioning and warm air heating 
equipment manufacturer, a firm must employ no more than 750 employees.
    In the October 5, 2000 NOPR, DOE discussed the potential impacts on 
small businesses of the October 5 proposed rule (corresponding to Trial 
Standard Level 3), and certified that the proposed standard levels 
would not have a significant economic impact on a substantial number of 
small entities. 65 FR 59629-30. DOE reported that nearly all small 
businesses engaged in the manufacture of central air conditioners and 
heat pumps produce products that DOE has called ''niche'' products. To 
avoid adversely impacting manufacturers of niche products, DOE proposed 
a separate product class for through-the-wall equipment, much of which 
is manufactured by small

[[Page 36404]]

manufacturers. See 65 FR 59609-11. In the preamble to the January 22 
final rule, DOE addressed comments regarding the impacts more stringent 
standards might have on the availability of niche products, and 
although the final rule adopted the higher Trial Standard Level 4 
standards, DOE deferred setting an amended standard for niche products. 
66 FR 7175, 7196-97. The omission of niche products from the January 22 
final rule also addressed the concern expressed by the Department of 
Justice about the impact of the October 5, 2000, proposed rule on small 
manufacturers (see preamble to January 22 final rule at 66 FR 7192). 
Because the final rule excluded most products made by small 
manufacturers, DOE affirmed its certification.
    Today DOE publishes energy conservation standards for central air 
conditioners and heat pumps that correspond to Trial Standard Level 2. 
Primarily because of severe size constraints, DOE is establishing 
separate product classes for through-the-wall equipment and small duct, 
high velocity systems, which will be required to meet a lower SEER and 
HSPF. In light of these product class exceptions and after considering 
the information in the TSD and public comments, including the views of 
the Department of Justice (see October 19, 2001, letter in the Appendix 
to this notice), DOE has concluded that the 12 SEER standards in 
today's final rule will not have a disproportionate adverse impact on a 
substantial number of small entities. In its comments, the Office of 
Advocacy of the U.S. Small Business Administration stated that the 
proposed 12 SEER standard would substantially improve energy efficiency 
while preserving competition, innovation and jobs, and, therefore, it 
strongly supports the 12 SEER standard. On this basis, DOE certifies 
that today's rule will not have a significant impact on a substantial 
number of small entities. Accordingly, DOE has not prepared a 
regulatory flexibility analysis.
    DOE's certification is based on an assessment of the impact the 
standards will have on small entities that would be directly affected 
by their implementation, which is all the Regulatory Flexibility Act 
requires. The assertion by ARI, in its petition for consideration (ARI, 
No. 138, at section m), that DOE is required to assess the indirect 
effects of proposed standards is contrary to established case law 
interpreting the Act.

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

    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 rule 
under the standards of section 3 of the Executive Order and determined 
that, to the extent permitted by law, this rule meets the relevant 
standards.

F. Review Under Executive Order 12630

    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 rule will 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, ''Federalism,'' 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 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 rule were preempted by the Federal standards established in 
NAECA. As discussed in Section VI.H.3, States can petition DOE for 
exemption from such preemption to the extent, and based on criteria, 
set forth in section 327 of EPCA (42 U.S.C. 6297).

H. Review Under the Unfunded Mandates Reform Act of 1995

    With respect to a proposed regulatory action that may result in the 
expenditure by State, local and tribal governments, in the aggregate, 
or by the private sector of $100 million or more, 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. DOE's consultation process is described in a 
notice published in the Federal Register on March 18, 1997. 62 FR 
12820. Today's rule will 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 
''Regulatory

[[Page 36405]]

Impact Analysis'' section of the TSD for this rule responds to those 
requirements.
    Under section 205 of UMRA, DOE 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 rule would establish 
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 rule.

I. Review Under the Treasury and General Government Appropriations Act, 
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 rule would not have any impact on the 
autonomy or integrity of the family as an institution. Accordingly, DOE 
did not prepare a Family Policymaking Assessment.

J. Review Under Executive Order 13211

    Executive Order 13211, ''Actions Concerning Regulations That 
Significantly Affect Energy Supply, Distribution, or Use,'' (66 FR 
28355, May 22, 2001) requires Federal agencies to prepare and submit to 
the Office of Information and Regulatory Affairs (OIRA), Office of 
Management and Budget, a Statement of Energy Effects for any 
significant energy action. A ''significant energy action'' is defined 
as any action by an agency that promulgates or is expected to lead to 
the promulgation of a final rule, and that: (1) Is a significant 
regulatory action under Executive Order 12866, or any successor order; 
and (2) is likely to have a significant adverse effect on the supply, 
distribution, or use of energy; or (3) is designated by the 
Administrator of OIRA as a significant energy action. For any proposed 
significant energy action, the agency must give a detailed statement of 
any adverse effects on energy supply, distribution, or use should the 
proposed action be implemented, and of reasonable alternatives to the 
action and their expected benefits on energy supply, distribution, and 
use.
    Today's rule would not have any adverse effects on the supply, 
distribution, or use of energy in the near term because it would not 
have any effect on the manufacture of central air conditioners and heat 
pumps until 2006. In the longer term, beginning in 2006, the standards 
in this rule would have a small positive impact on the electricity 
supply in the United States. The standards that DOE is adopting would 
represent a 20 percent improvement in the energy efficiency of split-
system central air conditioners, and a 9 percent improvement in heating 
efficiency for heat pumps. The standards would improve the cooling 
efficiency of single-package heat pumps by 24 percent and the heating 
efficiency of single-package heat pumps by 12 percent.
    As explained in Section VII of this Supplementary Information, DOE 
estimates the standards would save approximately 3 quads of energy over 
25 years (2006 through 2030). Also, in determining whether these 
standards are economically justified, DOE considered as a benefit the 
potential of the standards to improve the reliability of the electric 
generation and distribution system or to reduce the environmental 
impacts associated with new power plants and transmission lines. See 
Section VI.G. of this Supplementary Information. DOE's analysis 
predicts today's standards would result in an estimated reduction in 
installed generation capacity in the year 2020 of approximately 8.7 
gigawatts. This would be the equivalent of three 400 megawatt coal-
fired plants and nineteen 400 megawatt gas-fired plants.
    DOE disagrees with the NRDC's view that the levels in the January 
22 final rule are the appropriate baseline for determining whether 
today's rule is likely to have a significant adverse effect on the 
supply, distribution, or use of energy and, thus, subject to the 
Executive Order's analysis requirement. (NRDC, No. 250 at p. 9). For 
reasons stated in Section III, we think the proper baseline is the 
currently effective standards (i.e., the standards prescribed by 
NAECA). In any case, section 325 of EPCA requires DOE to weigh all of 
the significant costs and benefits associated with standard levels that 
are being considered and not just avoided electricity costs. DOE has 
set forth its evaluation of costs and benefits elsewhere in this notice 
(see Section VII). DOE has also considered various regulatory and non-
regulatory alternatives to today's proposed standard (see Section 
VIII.B., ''Review Under Executive Order 12866,'' and the Regulatory 
Impact Analysis portion of the TSD). DOE has concluded that the costs 
associated with elevating the current standard to the standard level 
set forth in the January 22, 2001, final rule exceed the associated 
benefits, including the benefit of avoided electricity consumption.

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, D.C., on May 14, 2002.
David K. Garman,
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. The final rule amending 10 CFR part 430 published January 22, 
2001 (66 FR 7170) is withdrawn.

    3. Section 430.2 is amended by adding definitions for ''effective 
date,'' ''maximum allowable energy use,'' ''maximum allowable water 
use,'' ''minimum required energy efficiency,'' ''small duct, high 
velocity system,'' and ''through-the-wall air conditioner and heat 
pump'' in alphabetical order to read as follows:

[[Page 36406]]

 430.2  Definitions.

* * * * *
    Effective date means the date on and after which a manufacturer 
must comply with an energy conservation standard in the manufacture of 
a covered product.
* * * * *
    Maximum allowable energy use means an energy conservation standard 
for a covered product, expressed in terms of a maximum amount of energy 
that may be consumed, which is established by statute or by a final 
rule that has modified this part pursuant to a date DOE has selected 
consistent with the Congressional Review Act (5 U.S.C. 801-804) and any 
other applicable law, or the date on which DOE completes action on any 
timely-initiated administrative reconsideration, whichever is later.
* * * * *
    Maximum allowable water use means an energy conservation standard 
for a covered product, expressed in terms of a maximum amount of water 
that may be consumed, which is established by statute or by a final 
rule that has modified this part pursuant to a date DOE has selected 
consistent with the Congressional Review Act (5 U.S.C. 801-804) and any 
other applicable law, or the date on which DOE completes action on any 
timely-initiated administrative reconsideration, whichever is later.
* * * * *
    Minimum required energy efficiency means an energy conservation 
standard for a covered product, expressed in terms of a minimum 
efficiency quotient, which is established by statute or by a final rule 
that has modified this part pursuant to a date DOE has selected 
consistent with the Congressional Review Act (5 U.S.C. 801-804) and any 
other applicable law, or the date on which DOE completes action on any 
timely-initiated administrative reconsideration, whichever is later.
* * * * *
    Small duct, high velocity system means a heating and cooling 
product that contains a blower and indoor coil combination that:
    (1) Is designed for, and produces, at least 1.2 inches of external 
static pressure when operated at the certified air volume rate of 220-
350 CFM per rated ton of cooling; and
    (2) When applied in the field, uses high velocity room outlets 
generally greater than 1000 fpm which have less than 6.0 square inches 
of free area.
* * * * *
    Through-the-wall air conditioner and heat pump means a central air 
conditioner or heat pump that is designed to be installed totally or 
partially within a fixed-size opening in an exterior wall, and:
    (1) Is manufactured prior to January 23, 2010;
    (2) Is not weatherized;
    (3) Is clearly and permanently marked for installation only through 
an exterior wall;
    (4) Has a rated cooling capacity no greater than 30,000 Btu/hr;
    (5) Exchanges all of its outdoor air across a single surface of the 
equipment cabinet; and
    (6) Has a combined outdoor air exchange area of less than 800 
square inches (split systems) or less than 1,210 square inches (single 
packaged systems) as measured on the surface described in paragraph (5) 
of this definition.
* * * * *

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


 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..............          12            -
(ii) Split system heat pumps...................          12          7.4
(iii) Single package air conditioners..........          12            -
(iv) Single package heat pumps.................          12          7.4
(v)(A) Through-the-wall air conditioners and           10.9          7.1
 heat pumps-split system.......................
(v)(B) Through-the-wall air conditioners and           10.6          7.0
 heat pumps-single package.....................
(vi) Small duct, high velocity systems.........        10.0     \1\ 6.8
------------------------------------------------------------------------
\1\ NAECA-prescribed value subject to amendment.

* * * * *
    5. Section 430.34 is added to Subpart C to read as follows:


 430.34  Energy and water conservation standards amendments

    The Department of Energy may not prescribe any amended standard 
which increases the maximum allowable energy use or, in the case of 
showerheads, faucets, water closets or urinals, the maximum allowable 
water use, or which decreases the minimum required energy efficiency of 
a covered product.

Appendix

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

Department of Justice

Antitrust Division
A. Douglas Melamed
Acting Assistant Attorney General, 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, D.C. 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. 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

[[Page 36407]]

responding to requests from other departments about the effect of a 
program on competition has been delegated to the Assistant Attorney 
General for the Antitrust Division in 28 CFR  0.40(g).
    We have reviewed the proposed standards 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 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 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, DOE 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 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, 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.
    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

Department of Justice

Antitrust Division
John M. Nannes
Acting Assistant Attorney General,
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)
April 5, 2001.
Eric J. Fygi,
Acting General Counsel, Department of Energy, Washington, DC 20585
    Dear Acting General Counsel Fygi: I am responding to your letter 
dated March 20, 2001, seeking the views of the Attorney General 
about the potential effect on competition of the final rule 
published on January 22, 2001, setting forth new energy efficiency 
standards for central air conditioners and heat pumps. You 
specifically asked for our views about the impact on competition of 
the rule's prescription of a 13 SEER (Seasonal Energy Efficiency 
Rating) standard for all product classes, except for niche products, 
and the desirability of reducing the standard to a 12 SEER level for 
all subcategories. Your letter requested our views by March 30, but 
your staff agreed to extend the response date to Apri1 6.
    As you noted in your letter to the Attorney General, the 
Antitrust Division had earlier expressed its views on the proposed 
rule, which provided for a 12 SEER standard for air conditioners and 
a 13 SEER standard for heat pumps. The Division had concluded that 
the 13 SEER standard for heat pumps could have an adverse effect on 
competition and urged the Department of Energy to adopt a 12 SEER 
standard for heat pumps. We noted only minor concerns about the 
proposed 12 SEER standard for air conditioners.
    We have reviewed the final rule and determined that the 13 SEER 
heat pump standard still raises competitive problems. We have 
further determined that the 13 SEER standard for air conditioners 
also raises competitive concerns.
    In our earlier letter, we identified and described three 
competitive problems resulting from the proposed 13 SEER standard 
for heat pumps, including a disproportionate impact on smaller 
manufacturers \2\ and an adverse effect on manufacturers of 
specialized equipment (the niche product manufacturers) and 
manufacturers of equipment for space-constrained installation sites 
(such as manufactured housing, which accounts for a significant 
percentage of the country's housing starts). The exception made in 
the final rule for niche product manufacturers may alleviate 
competitive problems for their products, but the exception does not 
eliminate the difficulties for manufacturers of standard equipment 
who could not make equipment that complied with the 13 SEER standard 
and still fit into space-constrained sites. The final rule also 
continues to have a disproportionate impact on smaller manufacturers 
of heat pumps. The 13 SEER standard for air conditioners raises the 
same kinds of competitive problems as the 13 SEER standard does for 
heat pumps.
---------------------------------------------------------------------------

    \2\ We noted in our previous letter that less than 20 percent of 
the total current heat pump product lines meet the new standard, but 
for some small manufacturers, 100 percent of their product lines 
failed to satisfy the standard. The same is true for air conditioner 
manufacturers when the standard is 13 SEER.
---------------------------------------------------------------------------

    We urge the Department of Energy to consider the impact on 
competition and to adopt a 12 SEER standard for all products covered 
by the rule.
 Sincerely,
John M. Nannes

Department of Justice

Antitrust Division
Charles A. James
Assistant Attorney General,
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)
October 19, 2001
Lee Liberman Otis,
General Counsel, Department of Energy, Washington, DC 20585
    Dear General Counsel Otis: I am responding to your August 15, 
2001 letter seeking the views of the Attorney General about the 
potential impact on competition of proposed energy efficiency 
standards for residential central air conditioners and central air 
conditioning 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. 6291, 6295 (''EPCA''), which requires the Attorney General 
to make a determination of the impact of any lessening of 
competition that

[[Page 36408]]

is likely to result from the imposition of proposed energy 
efficiency standards. The Attorney General's responsibility for 
responding to requests from other departments about the effect of a 
program on competition has been delegated to the Assistant Attorney 
General for the Antitrust Division in 28 CFR 0.40(g).
    The proposal provides for 12 SEER standards for all types of 
residential central air conditioners and central air conditioning 
heat pumps, except those that are installed through an exterior 
wall. We have reviewed the materials that accompanied your August 15 
letter, the materials that you previously provided, and the comments 
submitted to DOE, as well as the results of our industry interviews. 
Based on that review, we have concluded that the proposal would not 
adversely affect competition.
 Sincerely,
Charles A. James

[FR Doc. 02-12680 Filed 5-22-02; 8:45 am]
BILLING CODE 6450-01-P