[Federal Register Volume 69, Number 145 (Thursday, July 29, 2004)]
[Proposed Rules]
[Pages 45420-45457]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16574]



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Part III





Department of Energy





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Office of Energy Efficiency and Renewable Energy



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10 CFR Part 430



Energy Conservation Program for Consumer Products: Energy Conservation 
Standards for Residential Furnaces and Boilers; Proposed Rule

  Federal Register / Vol. 69, No. 145 / Thursday, July 29, 2004 / 
Proposed Rules  

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DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 430

[Docket No. EE-RM/STD-01-350]
RIN 1904-AA78


Energy Conservation Program for Consumer Products: Energy 
Conservation Standards for Residential Furnaces and Boilers

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

ACTION: Advance notice of proposed rulemaking, public meeting and 
webcast.

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SUMMARY: The Energy Policy and Conservation Act (EPCA or the Act) 
authorizes the Department of Energy (DOE or the Department) to 
establish energy conservation standards for various consumer products 
and commercial and industrial equipment, including residential furnaces 
and boilers, if DOE determines that energy conservation standards would 
be technologically feasible and economically justified, and would 
result in significant energy savings. The Department publishes this 
Advance Notice of Proposed Rulemaking (ANOPR) to consider establishing 
energy conservation standards for residential furnaces and boilers and 
to announce a public meeting to receive comments on a variety of 
issues.

DATES: The Department will hold a webcast on Tuesday, August 17, 2004 
from 1 p.m. to 4 p.m. If you are interested in participating in this 
event, please inform Mohammed Khan at (202) 586-7892.
    The Department will hold a public meeting on Wednesday, September 
29, 2004, starting at 9 a.m., in Washington, DC. The Department must 
receive requests to speak at the meeting before 4 p.m., Wednesday, 
September 15, 2004. The Department must receive a signed original and 
an electronic copy of statements to be given at the public meeting no 
later than 4 p.m. Wednesday, September 22, 2004.
    The Department will accept comments, data, and information 
regarding the ANOPR before or after the public meeting, but no later 
than Wednesday, November 10, 2004. See section IV, ``Public 
Participation,'' of this ANOPR for details.

ADDRESSES: The public meeting will be held at the Ronald Reagan 
Building and International Trade Center, Polaris Room, 1300 
Pennsylvania Avenue, NW., Washington, DC 20004. A photo ID is required 
to enter the building.
    You may submit comments, identified by docket number EE-RM/STD-01-
350 and/or RIN number 1904-AA78, by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: ee.doe.gov">ResidentialFBANOPRComments@ee.doe.gov. Include 
EE-RM/STD-01-350 and/or RIN number 1904-AA78 in the subject line of the 
message.
     Mail: Ms. Brenda Edwards-Jones, U.S. Department of Energy, 
Building Technologies Program, Mailstop EE-2J, ANOPR for Residential 
Furnaces and Boilers, docket number EE-RM/STD-01-350 and/or RIN number 
1904-AA78, 1000 Independence Avenue, SW., Washington, DC 20585-0121. 
Please submit one signed original paper copy.
     Hand Delivery/Courier: Ms. Brenda Edwards-Jones, U.S. 
Department of Energy, Building Technologies Program, Room 1J-018, 1000 
Independence Avenue, SW., Washington, DC 20585.
    Instructions: All submissions received must include the agency name 
and docket number or Regulatory Information Number (RIN) for this 
rulemaking. For detailed instructions on submitting comments and 
additional information on the rulemaking process, see section IV of 
this document (Public Participation).
    Docket: For access to the docket to read background documents or 
comments received, go to the U.S. Department of Energy, Forrestal 
Building, Room 1J-018 (Resource Room of the Building Technologies 
Program), 1000 Independence Avenue, SW., Washington, DC, (202) 586-
9127, between 9 a.m. and 4 p.m., Monday through Friday, except Federal 
holidays. Please call Ms. Brenda Edwards-Jones at the above telephone 
number for additional information regarding visiting the Resource Room. 
Please note: The Department's Freedom of Information Reading Room (Room 
1E-190 at the Forrestal Building) is no longer housing rulemaking 
materials.

FOR FURTHER INFORMATION CONTACT: Mohammed Khan, Project Manager, Energy 
Conservation Standards for Residential Furnaces and Boilers, Docket No. 
EE-RM/STD-01-350, EE-2J/Forrestal Building, U.S. Department of Energy, 
Office of Building Technologies, EE-2J, 1000 Independence Avenue, SW., 
Washington, DC 20585-0121, (202) 586-7892. E-mail: Mohammed.Khan 
commat;ee.doe.gov.
    Thomas B. DePriest, Esq., U.S. Department of Energy, Office of 
General Counsel, Forrestal Building, Mail Station GC-72, 1000 
Independence Avenue, SW., Washington, DC 20585, (202) 586-9507. E-mail: 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Introduction
    A. Purpose of the ANOPR
    B. Summary of the Analysis
    1. Engineering Analysis
    2. Life-Cycle Cost (LCC) and Payback Period (PBP) Analysis
    3. National Impacts Analysis
    C. Authority
    D. Background
    1. History of Standards Rulemaking for Residential Furnaces and 
Boilers
    2. Current Rulemaking Process
    3. Miscellaneous Rulemaking Issues
    a. Separate Efficiency Standards for Different Regions
    b. Separate Efficiency Standards for New Construction and 
Replacement Markets
    c. Treatment of Mobile Home Furnaces
    d. Potential Market Share Shifts due to Standards
    e. Inclusion of Electric Furnaces in the Rulemaking
    f. Transparency of the Analysis
    g. Data Used in the Analysis
    h. Regulation of Furnace and Boiler Electricity Consumption
    4. Test Procedure
II. Residential Furnace and Boiler Analyses
    A. Market Assessment and Technology Assessment
    1. Definition of Product Classes
    B. Screening Analysis
    C. Engineering Analysis
    1. Approach
    2. Baseline Models
    3. Design Option Selection
    4. Manufacturing Cost Analysis
    5. Markup Analysis
    6. Installation Cost
    a. Non-Weatherized Gas Furnaces
    b. Other Product Classes
    c. Safety and Reliability Issues Related to Installation
    7. Maintenance Costs
    8. Summary of Inputs
    9. Rebuttable Payback Periods
    D. Life-Cycle Cost (LCC) and Payback Period (PBP) Analysis
    1. Approach
    2. First-Cost Inputs
    a. Equipment Prices
    b. Installation Costs
    3. Operating-Cost Inputs
    a. Annual Energy Use
    b. Energy Prices
    c. Maintenance Costs
    4. Equipment Lifetime
    5. Discount Rate
    6. Effective Date
    7. Inputs to Payback Period Analysis
    8. Summary of Inputs
    9. LCC and PBP Results
    E. National Impact Analysis
    1. Approach
    2. Inputs
    a. Shipments
    i. Replacement and Conversions
    ii. Shipments to New Housing
    iii. Total Projected Shipments

[[Page 45421]]

    b. Annual Unit Energy Consumption
    c. Site-to-Source Conversion Factors
    d. Installed Equipment Costs
    e. Energy Prices
    f. Discount Rate
    g. Summary of Inputs
    3. National Impact Analysis Results
    F. Life-Cycle Cost (LCC) Sub-group Analysis
    G. Manufacturer Impact Analysis
    1. Sources of Information for the Manufacturer Impact Analysis
    2. Industry Cash Flow Analysis
    3. Manufacturer Sub-Group Analysis
    4. Competitive Impacts Assessment
    5. Cumulative Regulatory Burden
    H. Utility Impacts Analysis
    I. Environmental Assessment
    J. Employment Impact Analysis
    K. Regulatory Impact Analysis
III. Candidate Energy Conservation Standards Levels
IV. Public Participation
    A. Attendance at Public Meeting
    B. Procedure for Submitting Requests to Speak
    C. Conduct of Public Meeting
    D. Submission of Comments
    E. Issues on Which DOE Seeks Comment
    1. Installation Model
    2. Venting Issues
    3. Efficiency Distribution of Weatherized Gas Furnaces
    4. 81 percent AFUE Furnaces with and without Two-stage 
Modulating Controls
    5. Regulation of Furnace Electricity Consumption
V. Regulatory Review and Procedural Requirements
VI. Approval of the Office of the Secretary

I. Introduction

A. Purpose of the ANOPR

    The purpose of this ANOPR is to provide interested persons with an 
opportunity to comment on:
    (i) The product classes that the Department is planning to analyze;
    (ii) the analytical framework, models, and tools (e.g., life-cycle 
cost (LCC) and national energy savings (NES) spreadsheets) that the 
Department has been using in performing analyses of the impacts of 
energy conservation standards;
    (iii) the results of preliminary analyses for the engineering, LCC, 
payback, and NES contained in the ANOPR Technical Support Document 
(TSD): Energy Efficiency Standards for Residential Furnaces and Boilers 
and summarized in this ANOPR; and
    (iv) the candidate energy conservation standard levels that the 
Department has developed from these analyses.

B. Summary of the Analysis

    The Energy Policy and Conservation Act, as amended (EPCA or Act), 
authorizes the Department of Energy (DOE or Department) to establish 
minimum energy conservation standards for certain major household 
appliances. The Act established efficiency standards for certain 
residential furnaces and boilers, with an effective date of January 1, 
1992. (42 U.S.C. 6295(f)) In addition, the Act requires the Department 
to determine whether the standards should be amended.
    The Department began the preliminary work for this rulemaking in 
2001 and conducted a series of analyses. The Department conducted in-
depth technical analyses in the following areas: engineering, life-
cycle cost (LCC) and payback periods (PBP), and national energy savings 
(NES) and economic impacts. This ANOPR discusses the methodologies and 
assumptions for each of these analyses. Table I.1 provides a summary of 
the key inputs, assumptions, and methods employed for each analysis 
area. Table I.1 also shows where to find the results in this ANOPR. It 
is important to note that the analysis results presented in this ANOPR 
are subject to revision following review and input from stakeholders 
and other interested parties. The final rule publication will contain 
the final analysis results.

                              Table I.1--In-Depth Technical Analyses for the ANOPR
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                                                                                              ANOPR section for
         Analysis area               Methodology         Key inputs        Key assumptions         results
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Engineering: equipment           Teardown analysis   Component cost      Industry average    Section II.E
 manufacturing costs, markups,    supplemented with   data; financial     ``Greenfield
 and installation costs.          design option       reports of firm     Plant;''
                                  analysis; RS-       costs, expenses,    Production
                                  Means based cost-   and profits;        volumes; updated
                                  weighted averages   installation        GRI venting
                                  of many             configuration       survey weights;
                                  configurations.     weights;            labor costs from
                                                      component and       RS Means;
                                                      labor cost.         material costs
                                                                          from distributors.
LCC and PBP....................  Building-by-        First costs from    1997 RECS database  Section II.G
                                  building analysis   engineering         subsets are
                                  of a                analysis; AEO       nationally
                                  representative      2003 energy price   representative.
                                  weighted sample     forecasts; RECS
                                  of residential      97 houses;
                                  consumers; energy   virtual models
                                  consumption         from product
                                  according to        literature with
                                  field use.          size-related
                                                      parameters.
National impacts...............  Forecasts of        Historical and      Responsiveness of   Section II.H
                                  national furnace    projected           shipments
                                  and boiler costs    shipments;          forecasts to
                                  and energy          average installed   installed cost;
                                  consumption.        cost and energy     share of
                                                      consumption from    condensing gas
                                                      the LCC analysis;   furnaces in base
                                                      and AEO 2003        case forecast;
                                                      energy price        future trends in
                                                      forecasts.          equipment costs.
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    During the development of the above analyses, the Department 
consulted with interested parties to provide as much detail as possible 
on the development of the analyses. The Department continues to seek 
input from all interested parties on the methodologies, inputs, and 
assumptions used to develop the analyses. Obtaining that input is a 
primary purpose of this ANOPR.
1. Engineering Analysis
    The engineering analysis establishes the relationship between the 
cost and efficiency of residential furnaces and boilers. This 
relationship serves as the basis for cost/benefit calculations for 
individual consumers, manufacturers, and the Nation.
    The baseline model for each product class is the starting point for 
analyzing technologies that provide energy-efficiency improvements. The 
Department defines a baseline model as an appliance having commonplace, 
cost-effective features and technologies while still meeting the 
current standard.

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After defining the baseline models, the Department estimated total 
installed cost to the consumer through an analysis of (1) manufacturer 
costs, (2) markups, which are the multiplier used to determine consumer 
price based on manufacturing cost, and (3) installation costs. DOE 
estimated annual average operating costs by calculating energy 
consumption using the DOE test procedure, applying average energy 
prices, and adding annual average maintenance costs.
    The Department developed manufacturing and installation costs 
through the use of tear-down analysis and cost modeling techniques and 
calibrated them to industry data sources. The Department determined all 
distribution markups through use of firm balance sheet data, U.S. 
Census Bureau data, and data from the Manufacturing Housing Institute 
for mobile home furnaces (use of the term ``mobile home furnace'' is 
discussed in section I.C.3.c, ``Treatment of Mobile Home Furnaces'' of 
this document).
    Using the above inputs and calculation of energy consumption based 
on the DOE test procedure, the Department calculated payback periods 
for various design options to improve efficiency. The payback period 
represents the time needed for the increase in average, total installed 
equipment cost to be offset by annual, average operating cost savings. 
The Department presents these payback periods to address the legally 
established ``rebuttable'' presumption that an energy conservation 
standard is ``economically justified'' if the additional cost to a 
consumer purchasing the more efficient product is less than three times 
the value of the energy savings during the first year of the product's 
use. (42 U.S.C. 6295(o)(2)(B)(iii))
2. Life-Cycle Cost (LCC) and Payback Period (PBP) Analysis
    The LCC and PBP analysis determines the economic impact of 
potential standards on consumers. The LCC that DOE calculated expresses 
the costs of installing and operating a furnace or boiler for its 
expected lifetime starting in the year 2012--the expected effective 
date for any new furnace standard, at the time the analysis occurred. 
The analysis compares the LCC of equipment with efficiency improvements 
designed to meet possible energy-efficiency standards with the LCC of 
the equipment likely to be installed in the absence of standards. The 
PBP represents the number of years of operation needed to achieve 
savings sufficient to pay for the increased installed cost of higher-
efficiency equipment. It is the change in total installed cost due to 
increased efficiency divided by the change in annual operating cost 
from increased efficiency.
    The LCC calculation considers total installed cost (equipment cost 
plus installation cost), operating expenses (energy use and 
maintenance), equipment lifetime, and the discount rate. The Department 
performed the LCC analysis from the perspective of the users of 
residential furnaces and boilers. DOE calculated the energy consumption 
of furnace and boilers using data from the 1997 Residential Energy 
Consumption Survey (RECS97) conducted by the Energy Information 
Administration (EIA).\1\ DOE calculated future energy costs using 
energy price forecasts from EIA's Annual Energy Outlook 2003 (AEO 
2003).\2\
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    \1\ U.S. Department of Energy--Energy Information 
Administration, Residential Energy Consumption Survey: Household 
Energy Consumption and Expenditures 1997, 1999. Washington, DC. 
Report No. DOE/EIA-0321(97). <http://www.eia.doe.gov/emeu/recs/recs97/publicusefiles.html>
    \2\ U.S. Department of Energy--Energy Information 
Administration, Annual Energy Outlook 2003: With Projections Through 
2025, January, 2003. Washington, DC. Report No. DOE/EIA-0383 (2003). 
<http://www.eia.doe.gov/oiaf/aeo>
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    The LCC analysis uses a distribution of values to account for 
uncertainty and variability in the inputs to the LCC calculation. For 
each input, there is a distribution of values with probabilities 
attached to each value. As a result, the analysis produces a range of 
LCC results. An advantage of this approach is that DOE can identify the 
percentage of consumers achieving LCC savings or attaining certain 
payback values due to an increased efficiency standard, in addition to 
the average LCC savings or payback period for that standard.
3. National Impacts Analysis
    The national impacts analysis estimates the national energy savings 
(NES) and the net present value (NPV) of total customer costs and 
savings expected to result from new standards at specific efficiency 
levels. The Department calculated NES and NPV for a given standard 
level as the difference between a base case forecast (without new 
standards) and the standards case forecast (with standards). The 
Department determined national annual energy consumption by multiplying 
the number of units in the stock of residential furnaces and boilers 
(by vintage) by the unit energy consumption (also by vintage). 
Cumulative energy savings are the sum of the annual NES determined over 
a specified time period. The Department calculated net savings each 
year as the difference between total operating cost savings and 
increases in total installed costs. Cumulative savings are the sum of 
the annual NPV determined over a specified time period. Critical inputs 
to this analysis include shipments projections (based in part on data 
provided by the Gas Appliance Manufacturers Association (GAMA)), 
retirement rates (based on estimated equipment lifetimes), and 
estimates of change in equipment purchase patterns in response to 
change in equipment costs due to standards (based on historical 
parameters).
C. Authority
    Part B of Title III of EPCA established the Energy Conservation 
Program for Consumer Products other than Automobiles (Program). The 
consumer products currently subject to this Program (referred to as 
``covered products'') include residential furnaces and boilers, the 
subject of this ANOPR. (42 U.S.C. 6291 et seq.)
    The Act authorizes the Department to prescribe new or amended 
standards for furnaces and boilers. (42 U.S.C. 6295(a), (f)) Any new or 
amended standard must be designed to achieve the maximum improvement in 
energy efficiency that is technologically feasible and economically 
justified and must result in significant conservation of energy. (42 
U.S.C. 6295(o)(2)(A), (o)(3)) To determine whether the proposed 
standard is economically justified, the Department must determine that 
the benefits of the proposed standard exceed its burdens to the 
greatest extent practicable, weighing the following seven factors:
    (1) The economic impact of the standard on the manufacturers and on 
the consumers of the products subject to such standard;
    (2) The savings in operating costs throughout the estimated average 
life of the covered products which are likely to result from the 
standard;
    (3) The total projected amount of energy savings likely to result 
directly from the standard;
    (4) Any lessening of the utility or the performance of the covered 
products likely to result from the standard;
    (5) The impact of any lessening of competition, as determined in 
writing by the Attorney General, that is likely to result from the 
standard;
    (6) The need for national energy conservation; and
    (7) Other factors the Secretary considers relevant. (42 U.S.C. 
6295(o)(2)(B)(i)).

[[Page 45423]]

D. Background

1. History of Standards Rulemaking for Residential Furnaces and Boilers
    EPCA established efficiency standards for residential furnaces and 
boilers. It set the standard in terms of the Annual Fuel Utilization 
Efficiency (AFUE) descriptor at a minimum value of 78 percent for most 
furnaces.\3\ EPCA set the minimum AFUE at 75 percent for gas steam 
boilers and 80 percent for other boilers. For mobile home furnaces, 
EPCA set the minimum AFUE at 75 percent. The effective date for these 
standards was January 1, 1992. (42 U.S.C. 6295(f)(1))
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    \3\ EPCA states that a ``furnace'' includes forced-air and 
gravity central furnaces and low-pressure steam and hot water 
boilers, and that it must have a heat input rate of less than 
225,000 Btu/h for forced-air and gravity central furnaces, and less 
than 300,000 Btu/h for boilers. (42 U.S.C. 6291(23)) However, in 
this ANOPR, DOE has adopted the terminology used in the HVAC 
(Heating, Ventilation and Air Conditioning) industry, which 
considers furnaces and boilers as separate categories.
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    For ``small'' furnaces (those having an input rate of less than 
45,000 British thermal units (Btu) per hour), the Act required the 
Department to publish a final rule by January 1, 1989, and to set a 
minimum AFUE at a specific percent not less than 71 percent and not 
more than 78 percent. (42 U.S.C 6295(f)(1)(B)) For these products, the 
Department published an Advance Notice of Proposed Rulemaking (ANOPR) 
(52 FR 46367, December 7, 1987), followed by a Notice of Proposed 
Rulemaking (NOPR) (53 FR 48798, December 2, 1988), in which the 
Department proposed to establish an energy conservation standard of 78 
percent AFUE for small gas furnaces. In a final rule (54 FR 47916, 
November 17, 1989), the Department set the minimum AFUE for these 
products at 78 percent, with an effective date of January 1, 1992.
    For mobile home furnaces, the Act directed the Department to 
publish a final rule before January 1, 1992, to determine whether the 
standard should be amended. (42 U.S.C. 6295 (f)(3)(A)) The Act required 
the effective date for amendments to be January 1, 1994. The Department 
started this activity and issued an ANOPR (55 FR 39624, September 28, 
1990), followed by a NOPR (59 FR 10464, March 4, 1994). As part of this 
activity, the Department proposed a new energy descriptor that accounts 
for both natural gas and electricity use in a furnace. DOE rejected 
this approach because ``energy use'' is defined in 42 U.S.C. 6291(4) as 
``the quantity of energy directly consumed by a consumer product at 
point of use,'' and therefore, furnace energy conservation standards 
must be based on consumption of energy at the site of the appliance, 
but DOE had difficulty in accounting for the source energy associated 
with electricity use. (61 FR 36983, July 15, 1996) Several events, 
including a fiscal year 1996 moratorium on proposing or issuing new or 
amended appliance energy conservation standards and the development of 
an improved process for the Department's energy efficiency standards 
rulemakings, interrupted further activities on this rulemaking. No 
final rule for mobile home furnace standards was published.
    The Act also required the Department to publish a final rule to 
determine for all furnaces and boilers whether the standards should be 
amended. (42 U.S.C. 6295(f)(3)(B)) The Act required that DOE publish 
this final rule before January 1, 1994, and, if the Department 
determined that the standards should be amended, the Act required that 
those amendments be effective on January 1, 2002. The Department 
started this activity and, in September 1993, published an ANOPR in 
which it presented the product classes for furnaces that it planned to 
analyze, and a detailed discussion of the analytical methodology and 
models that it expected to use in this rulemaking. (58 FR 47326, 
September 8, 1993) The Department invited comments and data on the 
accuracy and feasibility of the planned methodology and encouraged 
interested persons to recommend improvements or alternatives to DOE's 
approach.
    In its fiscal year 1998 Priority Setting for the Appliance 
Rulemaking Process, the Department assigned a low priority level to 
residential furnaces and boilers, which meant it did not plan to 
actively pursue the rulemaking over the next two years. The Department 
thus limited its work on these products to basic technology 
investigation.
    In the fiscal year 2001 Priority Setting for the Appliance 
Rulemaking Process, DOE assigned a high level of priority to 
residential furnaces and boilers, including mobile home furnaces, which 
meant the Department planned to pursue the rulemaking actively through 
meetings, workshops, and published notices (See section I.C.2).
    Table I.2 summarizes the history of the standards for furnaces and 
boilers.

                               Table I.2--History of Furnace and Boiler Standards
----------------------------------------------------------------------------------------------------------------
                                           Furnaces/boilers          Small furnaces        Mobile home furnaces
----------------------------------------------------------------------------------------------------------------
Original standard....................  78% (boilers 80%, gas    78%....................  75%.
                                        steam boilers 75%).
Standard Requirement Source..........  NAECA* **..............  Final Rule.............  NAECA.
Publication year.....................  1987...................  1989...................  1987.
ANOPR................................  1993*..................  1993*..................  1993* and 1994*.
Current Rulemaking...................  Furnace Rulemaking       Defined as part of       Included as a separate
                                        beginning date FY2001.   Furnace Product Class    Product Class.
                                                                 as of 1989.
----------------------------------------------------------------------------------------------------------------
* Rulemaking initiated but not finished.
** National Appliance Energy Conservation Act.

2. Current Rulemaking Process
    The framework presented in this ANOPR reflects the improvements and 
steps detailed in Procedures, Interpretations and Policies for 
Consideration of New or Revised Energy Conservation Standards for 
Consumer Products (Process Rule) 10 CFR 430, Subpart C, Appendix A, 
which elaborates on the procedures, interpretations, and policies that 
will guide the Department in establishing new or revised energy 
efficiency standards for consumer products. The rulemaking process is 
dynamic. If timely new data, models, or tools that enhance the 
development of standards become available, the Department will 
incorporate them into the rulemaking.
    The Department held a workshop on July 17, 2001, to discuss the 
proposed analytical framework for conducting this rulemaking. The 
framework presented at the workshop described the

[[Page 45424]]

different analyses to be conducted (see Table I.3), the methods 
proposed for conducting them, and the relationships among the various 
analyses.

                               Table I.3.--Residential Furnace and Boiler Analysis
----------------------------------------------------------------------------------------------------------------
                  ANOPR                                  NOPR                             Final rule
----------------------------------------------------------------------------------------------------------------
Market and technology assessment.........  Revised ANOPR Analyses..........  Revised analyses.
Screening analysis.......................  Life-cycle cost sub-group
                                            analysis.
Markups for equipment price determination  Manufacturer impact analysis....
Engineering analysis.....................  Utility impact analysis.........
Energy Consumption.......................  Environmental assessment........
Life-cycle cost and payback period         Employment impact analysis......
 analyses.
Shipments analysis.......................  Regulatory impact analysis......
National impact analysis.................
----------------------------------------------------------------------------------------------------------------

    The Department held a public workshop on May 8, 2002, to receive 
and discuss comments on issues related to venting installations for 
residential furnaces and boilers and to discuss the Department's 
research concerning venting systems.
    Statements received after publication of the framework document for 
the Residential Furnace and Boiler Standards Rulemaking and at 
workshops mentioned above helped identify issues involved in this 
rulemaking, and provided information that has contributed to DOE's 
proposed resolution of these issues. This ANOPR quotes and summarizes 
many of the statements. A parenthetical reference at the end of a 
quotation or paraphrase provides the location of the item in the public 
record.
    In June 2002, DOE asked GAMA to review DOE's analysis of 
manufacturing costs. GAMA provided comments which the Department 
considered in its further analysis.
    In August 2002, GAMA convened a meeting to discuss approaches for 
analyzing electricity use in furnaces. The Department, GAMA, and the 
American Council for an Energy-Efficient Economy (ACEEE) presented 
their ideas about this issue. In December 2002, DOE reconsidered its 
authority to impose a standard that limits electricity consumption in 
residential furnaces and boilers (See section I.D.3.h of this ANOPR).
    In September 2002, the Department posted the engineering analysis 
for furnaces and boilers on its website and asked for comments. GAMA, 
ACEEE and Natural Resources Canada (NRCanada) provided comments which 
DOE considered in its further analysis.
    In response to stakeholder comment, the Department developed a 
detailed installation cost model to determine venting costs for 
residential furnaces and boilers. This ANOPR document (and accompanying 
TSD and spreadsheets) presents this ``Installation Model'' for 
stakeholder review and comment. Subsequently, in the spring and summer 
of 2003, the Department finished its analysis which is described in 
this ANOPR.
    According to the proposed rulemaking timeline, as published in the 
December 22, 2003, Regulatory Agenda, DOE expects to issue a Final Rule 
in September 2005. The effective date for any new standards for 
furnaces and boilers will be eight years after its publication as a 
final rule in the Federal Register. (42 U.S.C. 6295 (f)(3)(B))
    The Department received a number of comments concerning the 
rulemaking timeline. Several stakeholders commented that DOE should 
accelerate the rulemaking and implementation, while others thought the 
existing schedule was satisfactory. Those favoring an accelerated 
schedule include ACEEE, the Alliance to Save Energy (ASE), the 
California Energy Commission (CEC), Edison Electric Institute (EEI), 
Natural Resources Defense Council (NRDC), Oregon Department of Energy 
(ODOE), and Southern Company. ACEEE commented that DOE should commit to 
an effective date several years earlier than 2012. (ACEEE, No. 15 at p. 
1) \4\ ASE also believes that an eight-year lag in implementation of 
the standard is too long, and recommends a three-year lag, or, if the 
efficiency standard is a substantial increase, a five-year lag. (ASE, 
No. 18 at pp. 1 and 2) CEC commented that the eight-year lag is too 
long, and believes the standards should take effect in January 2007. 
(CEC, No. 19 at p. 3) EEI commented that DOE should accelerate the 
rulemaking for furnaces and boilers to maximize energy savings and 
avoid affecting market shares of natural gas and electric heating. 
(EEI, No. 6 at p. 1) NRDC commented that the proceeding is very late, 
and therefore DOE should accelerate the final rule. NRDC also commented 
that DOE has demonstrated it can go from the ANOPR through a final rule 
in a year, and should have this as a goal in this proceeding. (NRDC, 
No. 21 at pp. 1 and 2) ODOE commented that DOE should change the lead 
time to a three-year interval. (ODOE, No. 10 at p. 4) Southern Company 
commented that DOE should minimize the time between the effective dates 
of the air conditioner and the furnace rulemakings and stated that DOE 
should not give longer than a five-year lead time. (Southern, No. 14 at 
p. 2)
---------------------------------------------------------------------------

    \4\ Example: ``(GAMA, No. 8 at pp. 2-4)'' refers to a written 
statement that was submitted by the Gas Appliance Manufacturers 
Association and is recorded in the DOE Building Technologies Program 
Resource Room in the Docket under ``Residential Furnaces and 
Boilers'', as comment number 8, and the passage appears on pages 2 
through 4 of that statement. Likewise, ``(Public Workshop Tr., No. 
25JJ at p. 245)'' refers to an oral statement which appears on page 
245 of the transcript of the Furnace and Boiler Venting Workshop 
held in Washington, DC, May 8, 2002.
---------------------------------------------------------------------------

    In contrast, Trane commented that DOE should keep the current time 
line. (Trane, No. 9 at p. 1) GAMA also supported a 2012 effective date 
for compliance. (GAMA, No. 8 at p. 1)
    The Department intends to follow the relative timeline outlined in 
the National Appliance Conservation Act (NAECA). Section 325(f)(3)(B) 
provides the same lead time between publication of amended standards 
for furnaces (including mobile home furnaces) and the effective date of 
such standards. Therefore, DOE is using the same effective date for all 
furnaces including mobile home furnaces.
    The American Gas Association (AGA) recommended scheduling follow-up 
workshops to discuss specific work as finished. (AGA, No. 11 at p. 5) 
The Department will document its assumptions, methods, and results, and 
will make these available for public review.
    GAMA commented that DOE's accounting of national benefits should 
consider not only the net benefit to consumers, but also the net 
benefits or costs to manufacturers, utilities, and the net affect on 
the whole U.S. economy. (GAMA, No. 41 at p. 5) DOE's LCC

[[Page 45425]]

analysis accounts for net benefits to consumers. Other analyses that 
DOE will perform for the NOPR stage of this rulemaking consider impacts 
on manufacturers (MIA), utilities in the utility and environmental 
analyses, and national employment impacts in the employment analysis.
    AGA encouraged DOE to monetize and include indirect societal costs 
and environmental benefits to the extent possible. (AGA, No. 11 at p. 
5) The Department will consider all the benefits and costs, both 
qualitative and quantitative, including the results of the consumer, 
environmental, employment, utility, and manufacturer impact analyses 
when deciding what standard level to select. DOE believes that 
attaching a monetary value to many impacts involves a high level of 
uncertainty and is not always practical.
3. Miscellaneous Rulemaking Issues
a. Separate Efficiency Standards for Different Regions
    Because the cost-effectiveness of a furnace design is highly 
dependent on its heating load, which is affected by climate, some 
stakeholders suggested that DOE allow for a standard that varies by 
region of the country. ACEEE commented that the standard should allow 
individual states to require condensing furnaces and boilers whenever 
they are cost-effective or required for safety reasons. (ACEEE, No. 15 
at p. 2) It suggested that DOE could establish a furnace and boiler 
standard at an efficiency level that requires condensing technology, 
and could allow individual states where such a level might not be cost-
effective to receive an automatic exemption from the standard upon 
petition. (ACEEE, No. 15 at p. 2) CEC would like the Department to set 
a standard that requires condensing furnaces in states with cold 
climates and believes that individual states where such a standard 
might not be cost-effective should be able to use DOE data to justify 
petitions for waivers from preemption. (CEC, No. 19 at p. 5) Similarly, 
NRDC commented that the Department should issue a standard that allows 
individual states where such a standard might not be cost-effective to 
get waivers from preemption for a standard at 90 percent or higher 
AFUE. (NRDC, No. 21 at p. 3) GAMA said that a state option on 
condensing furnaces would be illegal under EPCA. (GAMA, No. 31 at p. 9) 
Southern believes that manufacturers should be allowed maximum 
flexibility in designing systems to meet varying climatic conditions. 
(Southern, No. 14 at p. 4) EEI said that regional standards would 
destroy national standards. (Public Workshop Tr., No. 25JJ at p. 251)
    The Department recognizes that regional climatic effects may be 
important in the assessment of proposed energy efficiency standards for 
heating equipment because the energy demand and financial impacts to 
consumers can vary significantly with variations in climate. The life-
cycle cost analysis considers regional impacts. However, DOE believes 
that the Act does not authorize the adoption of regional standards. See 
42 U.S.C. 6291(6)(A).
b. Separate Efficiency Standards for New Construction and Replacement 
Markets
    ASE commented that the Department should allow different efficiency 
levels for products installed in new versus replacement applications. 
ASE stated that the Department's treatment of fluorescent lamp 
ballasts, where the efficiency standard is different for new 
construction and replacement applications, is a precedent for this 
approach. (ASE, No. 18 at p. 2) ASE also would like the Department to 
grant states the option of a separate standard for equipment used in 
new construction. (ASE, No. 18 at p. 2)
    EPCA does not allow DOE to set more than one efficiency standard 
for the same base model of a covered product. See 42 U.S.C. 6291(6)(A). 
See also 10 C.F.R. 430.62. The efficiency standard for fluorescent lamp 
ballasts is different for new construction and replacement applications 
because the products have different design characteristics and are 
marketed and shipped as different products. When manufacturers ship 
these products, they label them explicitly to show whether they are 
intended for new construction or for replacements. In the case of 
furnaces and boilers, the Department is not aware of any products 
separately marketed, labeled, and shipped either for new construction 
installations or for the replacement market. Therefore, the Department 
does not plan to permit the states the option of a separate standard 
for equipment used in new construction.
    The Department received comments on products to include or exclude 
from the rulemaking. Both the CEC and ODOE recommended that DOE include 
units designed for three-phase electricity. (CEC, No. 19 at p. 2; ODOE, 
No. 10 at p. 2) EPCA explicitly states at 42 U.S.C. 6291 (a)(23) that 
the only furnace products that are covered products under the statute 
are those that use single-phase or DC (direct current) electricity in 
conjunction with natural gas, propane or home heating oil; and the 
Department must therefore exclude models that use three-phase 
electricity.
c. Treatment of Mobile Home Furnaces
    Carrier and Trane believe that DOE should treat mobile home 
furnaces the same as other gas furnaces, and Trane suggested that the 
gas furnace product class should include mobile home furnaces. 
(Carrier, No. 7 at p. 2; and Trane, No. 9 at p. 1) GAMA commented that 
there should be no extra review or different lead time for amending the 
energy efficiency standard for mobile home furnaces. (GAMA, No. 8 at p. 
1) The Manufactured Housing Institute (MHI) suggested that the 
Department use the term ``manufactured home'' instead of ``mobile 
home.'' (MHI, No. 13 at p. 1)
    Because of their distinct market channels and installation 
restrictions, the Department decided to analyze mobile home furnaces as 
a separate product class. DOE currently plans to make the effective 
date for this product class the same as for other types of furnaces: 
January 1, 2012. Regarding the terminology for this product class, the 
Act uses the term ``mobile home furnace.'' The Department understands 
that the manufactured home market includes non-mobile/modular homes as 
well as mobile homes. Under the statute (42 U.S.C. 6295(f)(2) and (3)), 
the Department can only regulate the efficiency of mobile home 
furnaces, so it will use the term ``mobile home furnace'' until such 
time as Congress may amend the statutory language.
d. Potential Market Share Shifts Due to Standards
    Several stakeholders, including AGA, the National Propane Gas 
Association (NPGA), and Trane, expressed concern that standards on gas 
furnaces could lead to increased purchase of electric furnaces: (1) Any 
standards should be fuel neutral and avoid distortion of market factors 
(AGA, No. 11 at p. 1); (2) if standard level efficiency is too high, 
consumers forced to change the venting system could choose an electric 
unit rather than replacing the gas-fired unit with a similar one (NPGA, 
No. 4 at p. 3); (3) a gas furnace standard requiring AFUE > 90 percent 
could encourage a shift to electric heat pumps and/or combination 
systems if the latter are not comparably regulated (Trane, No. 9 at p. 
3); and (4) a high standard on LPG furnaces could increase the market 
share of electric units. (NPGA, No. 4 at p. 2) DOE's analysis accounts 
for potential market shifts to electric heating that may follow from a 
higher standard on gas furnaces. DOE's analysis is designed to 
determine the

[[Page 45426]]

extent of the market shift among fuel types.
    This information is used in the manufacturer impact analysis (MIA) 
which examines financial impacts on manufacturers and manufacturer 
subgroups. The MIA is provided to the Department of Justice (DOJ) to 
facilitate its determination of the impact of any lessening of 
competition that is likely to result from the imposition of proposed 
energy efficiency standards.
e. Inclusion of Electric Furnaces in the Rulemaking
    CEC, NPGA, and ODOE all supported the inclusion of electric 
furnaces in the rulemaking. (CEC, No. 19 at p. 2; NPGA, No. 4 at p. 2; 
ODOE, No. 10 at p. 2) According to the American Society of Heating, 
Refrigerating and Air-Conditioning Engineers (ASHRAE), however, the 
AFUE rating for an electric furnace is already generally greater than 
98 percent, and if the furnace is located within the heated space, the 
AFUE is 100 percent. No person has submitted to DOE any data or 
information to the contrary. Therefore, because of the limited 
opportunity for any improvement in energy efficiency as measured by 
AFUE and energy directly consumed by the product at the point of use, 
DOE decided not to include electric furnaces in this rulemaking.
f. Transparency of the Analysis
    The Gas Technology Institute (GTI) would like the Department to use 
simple spreadsheet analyses whenever possible. (GTI, No. 5 at p. 3) The 
Department uses well-documented spreadsheets in its analyses. Most 
spreadsheets and other models used in this rulemaking are available to 
stakeholders for review and comment, and DOE is prepared to provide 
interested stakeholders explanations and some technical support in the 
use of the spreadsheets. To ensure the confidentiality of proprietary 
cost data, teardown cost model details will remain private. Methodology 
and aggregate industry assumptions and results are available for public 
comment. DOE welcomes any questions or comments on how to further 
simplify the analytical methods it has used in this rulemaking.
g. Data Used in the Analysis
    EEI commented that DOE should use the most recent information 
available and recommended that DOE use the next version of the RECS 
when it is published. (EEI, No. 6 at p. 2) DOE makes every effort to 
use the most current version of RECS that is available at the time of 
each analysis. The analysis reflects the 1997 RECS and will be updated 
as a new RECS becomes available.
    GTI stressed the verification of all data. (GTI, No. 5 at p. 3) The 
Department uses the most reliable and accurate data available at the 
time of each analysis in this rulemaking. All data will be available 
for public review, and DOE welcomes any additional data for 
verification.
h. Regulation of Furnace and Boiler Electricity Consumption
    Furnaces and boilers use a significant amount of electricity. The 
Department's analytical framework described an approach to regulate the 
electricity use of residential furnaces and boilers that would involve 
specifying a maximum annual electrical consumption. The current DOE 
test procedure (10 CFR 430, subpart B, Appendix N) provides a means for 
determining electrical consumption. During the Framework Workshop, DOE 
asked for comments concerning whether and how to regulate electricity 
consumption of furnaces and boilers.
    In 1995, the Department considered development of a single 
descriptor that combines electricity use and a measure of fuel 
efficiency, AFUE. At the time, the approach considered the source 
energy input associated with the electricity use of a furnace or boiler 
and was rejected in 1997 because EPCA and NAECA do not permit the 
regulation of source energy. EPCA and NAECA specify that efficiency 
must be based on the energy consumption at the point of use. (42 U.S.C. 
6291 (4))
    In comments on DOE's Framework, ACEEE, CEC, and NRDC supported a 
standard for electric efficiency. (ACEEE, No. 15 at p. 3; CEC, No. 19 
at p. 3; and NRDC, No. 21 at p. 3) ODOE supported setting a standard 
for electricity consumption of fuel-fired furnaces and boilers. (ODOE, 
No. 10 at p. 2)
    EEI recommended that DOE not spend any effort on electricity 
consumption. EEI drew a parallel to a previous rulemaking, stating that 
since DOE did not analyze evaporator fan energy use for central air 
conditioners and heat pumps because it does not affect the seasonal 
energy efficiency ratio (SEER), DOE should not analyze furnace fan 
electricity use because it does not affect AFUE. (EEI, No. 6 at p. 4)
    AGA and GTI also recommended avoiding electricity consumption in 
this rulemaking, and suggested that DOE could address it in an electric 
motor rulemaking. (AGA, No. 11 at p. 3; and GTI, No. 5 at p. 3) EEI 
commented that DOE should not consider design options to increase fan 
and motor efficiencies, since furnace motors may be regulated as a 
separate product. (EEI, No. 6 at p. 4) NRDC said that DOE should not 
wait to see what Congress does in terms of regulating furnace fan 
energy use, as it is authorized and required to consider this issue on 
its own initiative. (NRDC, No. 21 at p. 3)
    AGA recommended that DOE not limit a standard for electricity use 
to fuel-fired furnaces and boilers. (AGA, No. 11 at p. 2). Southern 
commented that the efficiency of fans in electric resistance furnaces 
makes no difference to the overall electricity use because the heat 
from the fan contributes to heating. (Southern, No. 14 at p. 3)
    Lochinvar recommended against putting an electricity requirement on 
boilers, since the installation configuration determines the capacity 
of the pump. (Lochinvar, No. 17 at p. 2)
    GAMA commented that any electricity consumption regulation should 
be based on parameters that exist in the current test procedure. (GAMA, 
No. 8 at p. 4) Lennox commented that EAE, a descriptor of 
furnace and boiler electricity consumption that is currently described 
in the test procedure and is reported by manufacturers, is the best 
choice for an electrical energy descriptor. (Lennox, No. 16 at p. 2)
    ACEEE supported measuring electric efficiency in terms of watts of 
electricity per cubic feet per minute (CFM) of airflow of a furnace 
blower and encouraged DOE to use realistic static pressures. (ACEEE, 
No. 15 at p. 3) NRDC recommends setting efficiency standards on fans in 
similar terms and believes DOE should set standards under standardized 
testing conditions at a fixed static pressure. (NRDC, No. 21 at pp. 3 
and 2)
    ACEEE, CEC, and ODOE would like to see electricity consumption 
regulated separately from AFUE. (ACEEE, No. 15 at p. 5; CEC, No. 19 at 
p. 3; and ODOE, No. 10 at p. 4) EEI stated that DOE should not include 
furnace fan energy use in AFUE calculations, since electricity is 
consumed throughout the year and AFUE is only for the heating season. 
(EEI, No. 6 at p. 2) Southern agrees that AFUE should not include 
electricity. (Southern, No. 14 at p. 3) Trane commented that AFUE does 
not include electric consumption and a new descriptor would delay the 
rulemaking process. (Trane, No. 9 at p. 2) Energy Kinetics commented 
that an efficiency rating should include annual electric consumption. 
(Energy Kinetics, No. 3 at p. 4)
    In August 2002, GAMA convened a meeting to discuss the above issues 
at which the Department, GAMA, and ACEEE presented their ideas. In the 
fall of 2002, the Department considered

[[Page 45427]]

whether it had the legal authority to regulate electricity consumption 
in residential furnaces and boilers. Title 42 of the United States Code 
provides in section 6291(6) that an ``energy conservation standard'' is 
either (A) ``a * * * level of energy efficiency'' or ``a * * * quantity 
of energy use,'' or (B) ``a design requirement for the products 
specified * * *'' Item (A) above seems to say that a single ``energy 
conservation standard'' cannot have measures or descriptions for both 
energy efficiency and energy use. A standard that includes both a level 
of energy efficiency and a quantity of energy use (kWh, thousands of 
watt-hours) would appear to conflict with the statutory language. 
Moreover, the Act, 42 U.S.C. 6291(20), states that ``the term `annual 
fuel utilization efficiency' means the efficiency descriptor for 
furnaces and boilers, determined using test procedures prescribed under 
section 323 * * *'' The statute also requires DOE to use AFUE as the 
efficiency descriptor for furnaces and boilers. (42 U.S.C. 6295(f)(1)) 
Thus, DOE believes that the statute would have to be amended to include 
electricity use in the AFUE before DOE could regulate electricity use 
in furnaces and boilers. Based on the approaches DOE considered and the 
statutory language, the Department believes it cannot set energy 
conservation standards for electricity use in conjunction with energy 
efficiency standards for residential furnaces and boilers at the 
present time.
    For informational purposes only, the Department did investigate a 
way to define an electricity use standard that would involve measuring 
electricity use as a function of furnace input capacity and the 
airflow. The details of this approach are given in Appendix 8.5 of the 
TSD.
4. Test Procedure
    Section 7 of the Process Rule recommends that the Department 
identify and propose necessary modifications to relevant test 
procedures before issuing an ANOPR for energy conservation standards. 
There is an existing DOE test procedure for all furnace and boiler 
product classes, which DOE last revised in 1996. (10 CFR part 430, 
Appendix N to Subpart B, Uniform Test Method for Measuring the Energy 
Consumption of Furnaces and Boilers) To a large extent, the DOE test 
procedure references ANSI/ASHRAE 103-1993, Method of Testing for Annual 
Efficiency of Residential Central Furnaces and Boilers.
    The DOE test procedure includes a measurement of electricity 
consumption, Average Annual Auxiliary Electrical Energy Consumption 
(EAE). The furnace fan accounts for about 85 percent of 
total furnace electricity consumption. To allow proper selection of 
blower capacity, manufacturers rate furnace models in nominal cubic 
feet per minute (CFM) of cooling airflow at 0.5 inches external static 
pressure; however, they do not report this as part of the test 
procedure.
    DOE received several comments on the existing test procedure for 
furnaces and boilers. Energy Kinetics recommended using the same 
operating conditions for boilers as for furnaces and said that the 
existing test procedure does not fully capture the differences in 
characteristics between boilers and furnaces. (Energy Kinetics, No. 3 
at p. 1 and p. 3, respectively) The analyses in this rulemaking are 
based on the existing test procedure. However, DOE is interested in 
additional data that would help the Department consider whether to 
update the existing test procedure to more accurately reflect actual 
boiler energy use.
    The Oilheat Manufacturers Association (OMA) commented that accurate 
evaluation of fuel savings from jacket insulation may need changes to 
the AFUE test. (OMA, No. 20 at p. 3) At this point, DOE believes the 
test procedure adequately deals with jacket insulation issues. DOE is 
aware that as a part of the regular update of the ASHRAE Standard 103 
test procedure, ASHRAE is looking at several areas of the test 
procedure, including the effect of jacket insulation. Depending on 
ASHRAE's findings, DOE may consider amending this part of the test 
procedure.
    Lochinvar Corporation commented that the test procedure for boilers 
does not properly reflect normal residential operation, as the 
temperature differential range of 10[deg]F to 40[deg]F found in normal 
operation is more accurate than the range in the test procedure. 
(Lochinvar, No. 17 at p. 1) Lochinvar also commented that DOE should 
use the thermal efficiency as the descriptor for boilers. (Lochinvar, 
No. 17 at p. 2) DOE uses AFUE for the energy descriptor because EPCA 
mandates it.
    OMA commented that DOE may need to revise its testing and rating 
procedures to evaluate electricity savings for oil-fired equipment. 
(OMA, No. 20 at p. 2) The current test procedure calculates the average 
annual auxiliary electrical energy consumption for oil furnaces using 
the same approach as for gas furnaces. The Department is not aware of 
any problems with using the existing procedure for oil-fired equipment 
and asks stakeholders that are aware of such problems to provide 
specific comments.
    The Department will continue to use the assumptions and conditions 
in the current test procedure. However, DOE is interested in high-
quality field data so it can consider whether updating the existing 
test procedure is warranted.
    DOE received several comments regarding a test procedure for 
combined water and space heating appliances (combination appliances). 
Carrier and Southern Company commented that DOE should establish a test 
procedure for combined appliances. (Carrier, No. 7 at p. 1; and 
Southern, No. 14 at p. 3) Trane commented that DOE should include 
combination systems in the rulemaking using standard water heaters, and 
that a test procedure should start with ASHRAE 124-1991. (Trane, No. 9 
at p. 1) ODOE also commented that the test procedure should reference 
ASHRAE 124-1991. (ODOE, No. 10 at p. 2) CEC commented that DOE should 
adopt the ASHRAE 124-1991 test procedure and not wait for ASHRAE 
revisions because the current edition of ASHRAE 124-1991 is widely 
approved and is adequate for this rulemaking. (CEC, No. 19 at p. 3) 
First Company commented that ASHRAE 124 is not a true consensus 
standard and that manufacturers strongly oppose it because it burdens 
combined appliance manufacturers. (First, No. 12 at p. 1)
    The National Institute of Standards and Technology (NIST) is 
developing a DOE test procedure for combined water heating and space 
heating equipment based on the ASHRAE 124-1991 test procedure standard. 
DOE's process for adopting this test procedure has not yet been 
completed. Therefore, DOE did not analyze combined water heating and 
space heating equipment in the ANOPR stage of the furnace and boiler 
rulemaking.

II. Residential Furnace and Boiler Analyses

A. Market Assessment and Technology Assessment

    The Department reviewed existing literature and interviewed 
manufacturers to characterize the market for residential furnaces and 
boilers in the United States. Industry publications and trade journals, 
government agencies, and trade organizations provided the bulk of the 
information, including: (1) Historic shipments by product class, (2) 
number of models by capacity and efficiency level, (3) manufacturers of 
various products, and (4) product distribution patterns.

[[Page 45428]]

    GAMA provided extensive historical shipment data to the Department. 
Where the data from GAMA were insufficient, DOE estimated historical 
shipments for each of the product classes through consultations with 
industry experts. The GAMA data give shipments for gas furnaces, 
including mobile home furnaces, as a group. Thus, to estimate mobile 
home gas furnace shipments, the Department used data on total mobile 
home placements (from the Census Bureau) and data from the American 
Housing Survey that give the share of gas in existing mobile homes of 
various vintages.
    The Department found no separate data on shipments for weatherized 
(outdoor) furnaces. It estimated shipments of weatherized gas furnaces 
based on estimated 1990-1997 shipments of packaged air-conditioning 
equipment, since the latter are typically coupled with a weatherized 
gas furnace. These data suggest that weatherized gas furnaces account 
for 12 percent of total gas furnace shipments (not including mobile 
home gas furnaces). The remaining gas furnaces are classified as non-
weatherized (indoor) gas furnaces. Since there are few weatherized oil-
fired furnaces, DOE assumed that all oil-furnace shipments are non-
weatherized.
    The GAMA data provide total shipments by fuel type for boilers. For 
each fuel, DOE estimated the split between hot water and steam types, 
based on estimates GAMA made in the early 1990's.
    Table II.1 shows the estimated annual shipments in 2000 and the 
number of models in each of the product classes. Non-weatherized gas 
furnaces are by far the largest category.

Table II.1.--Market Statistics for Furnaces and Boilers by Product Class
------------------------------------------------------------------------
                                                             Number of
                                             Estimated    models in GAMA
              Product class                shipments in      directory
                                               2000           (2001)
------------------------------------------------------------------------
Non-weatherized gas furnaces............       2,645,000            6907
Weatherized gas furnaces................         325,000            4476
Non-weatherized oil-fired furnaces......         120,000             868
Weatherized oil-fired furnaces..........           (\1\)              13
Mobile home gas furnaces................         130,000              70
Mobile home oil-fired furnaces..........           (\1\)              16
Hot water gas boilers...................         190,000             990
Hot water oil-fired boilers.............         100,000             640
Steam gas boilers.......................          36,000             254
Steam oil-fired boilers.................          13,000            140
------------------------------------------------------------------------
\1\ Few.

    Most of the non-weatherized gas furnaces on the market have an 
efficiency of 80 percent AFUE. Only a few 78 percent AFUE models are 
still on the market. Roughly one-quarter of current sales of non-
weatherized furnaces are condensing models, which range mostly between 
90 percent and 92 percent AFUE.
    The efficiency distribution of weatherized gas furnace models is 
similar to that of non-weatherized gas furnaces, except that no 
condensing units exist due to problems with condensate freezing. The 
efficiency of mobile home gas furnaces is generally either 75 percent 
or 80 percent AFUE, but there are a few condensing models with an 
efficiency of 90 to 94 percent AFUE.
    There are no gas furnaces currently on the market in the 83 to 89 
percent AFUE range. In this range, condensate problems begin to occur, 
and yet the temperature of the flue is still too high to allow the use 
of polyvinyl chloride (PVC) for the venting system. These problems make 
proper venting of such a furnace difficult, requiring the use of 
higher-quality stainless steel to vent wet flue gases to the outdoors.
    In contrast to the available AFUE range of gas furnaces, oil-fired 
furnace models with an AFUE in the 82 to 86 percent range are available 
but unavailable in the condensing (90 percent AFUE and above) range. 
Because of the lower hydrogen content of fuel oil compared to natural 
gas or propane, condensate problems with oil-fired furnaces at the 82 
to 86 percent AFUE range levels are reduced. Condensing oil-fired 
furnaces are not currently available in the U.S. because the 
complexities associated with the maintenance of a secondary heat 
exchanger for oil-fired furnaces make production of high-efficiency 
oil-fired furnaces impractical.
    Most hot-water gas boilers have an AFUE in the 80 to 84 percent 
range. Gas boilers with higher AFUEs are vented with gas-tight 
stainless-steel venting systems to avoid condensate problems, until an 
AFUE of 90 percent is reached and PVC can be used. The AFUE for hot-
water oil boilers ranges from 80 to 88 percent. Gas steam boiler models 
have an AFUE in the 78 to 83 percent range; the range for oil-fired 
models is 79 to 86 percent AFUE.
    A furnace or boiler is composed of a number of components--e.g., 
heat exchanger, fan and controls. For each of these components, 
manufacturers can make different choices; each of these choices is 
called a ``design option.'' For instance, a heat exchanger can be 
tubular, clamshell, or cylindrical in its design. Any individual 
furnace or boiler, which can be characterized by an efficiency level 
according to the DOE test procedure, is composed of an aggregate of 
design options.
    The Department based its list of technically feasible design 
options on options included in the previous ANOPR. (58 FR 47326, 
September 8, 1993) The Department then updated the list through 
consultation with manufacturers of components and systems, trade 
publications, and technical papers. Since many options for improving 
product efficiency are available in existing equipment, product 
literature and direct examination provided additional information.
1. Definition of Product Classes
    In general, the Department defines product classes based on 
information from discussions with appliance manufacturers, trade 
associations, and other interested parties. For this rulemaking, the 
Department developed product classes based on the type of energy used 
and performance-related features that affect utility to the consumers. 
Based on comments from

[[Page 45429]]

stakeholders and the market assessment, the product classes considered 
in this rulemaking are:
 Gas furnaces
    --Non-weatherized
    --Weatherized
 Oil-fired furnaces
    --Non-weatherized
    --Weatherized
 Mobile home furnaces
    --Gas
    --Oil
 Electric resistance furnaces
 Hot water boilers
    --Gas
    --Oil
 Steam boilers
    --Gas
    --Oil
 Combination space/water-heating appliances
    --Water-heater/fancoil combination units
    --Boiler/tankless coil combination units
    The Department received comments on whether to include combination 
appliances that provide both space heating and domestic water heating 
as a product class. CEC and Carrier favored including combination 
appliances in the rulemaking. (CEC, No. 19 at p. 2; and Carrier, No. 7 
at p. 1) EEI and Energy Kinetics want the Department to consider 
combination systems as a separate product category after the 
finalization of a test procedure. (EEI, No. 6 at p. 1; and Energy 
Kinetics, No. 3 at p. 2) First Company opposed the inclusion of 
combination appliances in the rulemaking, stating that separate 
standards for combination systems are not warranted as they are already 
regulated as water heaters and boilers, and that including combination 
appliances will not result in significant energy savings. (First, No. 
12 at p. 1) At this time, the Department has decided not to include 
combination heating and water heating appliances in the current 
rulemaking. DOE is working on adoption of the existing version of ANSI/
ASHRAE 124-1991 ``Methods of Testing for Rating Combination Space-
Heating and Water-Heating Appliances'' as a test procedure for these 
products.
    ASE suggested separate product classes for condensing and non-
condensing furnaces and boilers. (ASE, No. 18 at p. 2) Condensing 
furnace and boiler designs are more efficient but otherwise differ very 
little from non-condensing designs. The difference is the addition of a 
second heat exchanger; this added component represents a feature that 
does not change utility to the consumer. Therefore, the Department 
included condensing and non-condensing designs in a single product 
class.
    Based on the market assessment and stakeholder comments, the 
Department grouped the product classes into four categories.
    The first category consists of the most widely used product class: 
Non-Weatherized gas furnaces. The Department's analyses considered this 
product class in depth.
    The second category consists of those classes that have shipments 
that are typically more than 100,000 per year: weatherized gas 
furnaces, mobile home gas furnaces, non-weatherized oil-fired furnaces, 
hot-water gas boilers, and hot-water oil-fired boilers. The analysis of 
these product classes is similar to that of the first category, but DOE 
considered a smaller number of design options.
    The third category includes product classes that have a low level 
of shipments: Steam gas boilers and steam oil-fired boilers. For these 
classes, DOE applied the results of the analyses of the hot-water 
boiler product classes.
    The Department did not conduct analyses on the fourth category, 
which includes weatherized oil-fired furnaces, mobile home oil-fired 
furnaces, and electric furnaces. The first two classes in this category 
have very low (essentially zero) shipments. The Department did not 
consider electric furnaces because they have limited energy-savings 
potential.
    Lochinvar commented that DOE should separate hot water boilers into 
low-mass and high-mass product classes. (Lochinvar, No. 17 at p. 1) 
Although they use different construction materials (cast iron vs. 
copper or aluminum), high- and low-mass boilers are essentially the 
same equipment and provide the same utility to the consumer. See 42 
U.S.C. 6295 (q)(1). Therefore, the Department included them in one 
product class.
    Lochinvar also commented that DOE should study boilers to the same 
extent as furnaces. (Lochinvar, No. 17 at p. 1) DOE used separate 
analytic tools to separately assess the boilers product class.

B. Screening Analysis

    The screening analysis eliminated certain design options from 
further consideration in the engineering analysis phase. Section 4 of 
the Process Rule lists four factors to take into account in screening 
design options:
    1. Technological feasibility;
    2. Practicability to manufacture, install, and service;
    3. Adverse impacts on utility or availability to consumers; and
    4. Adverse impacts on health or safety.
    GAMA made a general comment that safety must always take priority 
over efficiency. (GAMA, No. 8 at p. 1) As the Process Rule recommends, 
the Department will screen out any design options that have adverse 
affects on the safety of consumers.
    The Department received a number of specific comments regarding 
design options. In considering these comments and its own analysis, the 
Department screened out a number of options for certain product 
classes, as shown in Table II.2. The options eliminated include:
    (1) Use of condensing secondary heat exchangers for oil-fired 
furnaces (sulfur content of fuel oil, soot, and heat exchanger fouling 
may have adverse impacts on health or safety);
    (2) Fuel-driven heat pumps (the practicality to manufacture, 
install, and service is uncertain);
    (3) Oil-fired pulse combustion (the practicality to manufacture, 
install, and service is not certain);
    (4) Self-generation of electricity using thermo-photovoltaics (not 
considered technologically feasible);
    (5) Smart valve for oil-fired furnaces and boilers (the 
practicality to manufacture, install, and service is not certain); and
    (6) Flue-gas recirculation (has not yet been shown to be 
technologically feasible in residential-sized equipment, and it has 
little energy-saving potential).
    For outdoor weatherized gas furnaces, the use of a condensing 
secondary heat exchanger that produces flue gas temperatures below the 
dew point temperature is not considered because condensate freezing may 
have adverse impacts on safety.
    Some options are not applicable for certain product classes. For 
example, improved or increased insulation is not applicable for boilers 
because boilers are tested as indoor appliances according to the DOE 
test procedure.
    The design options listed in Table II.2 with a ``Y'' (for ``yes'') 
pass all screening criteria, so DOE initially included them in the 
engineering analysis. Chapter 4 in the TSD provides more detail on the 
design options.

[[Page 45430]]



                       Table II.2.--Screening Results for Design Options by Product Class
----------------------------------------------------------------------------------------------------------------
                                  Gas furnaces                                                      Hot water
                    ----------------------------------------                      Mobile home        boilers
   Design option                                             Oil-fired furnaces   gas-furnaces -----------------
                       Non-weatherized       Weatherized                                            Gas      Oil
----------------------------------------------------------------------------------------------------------------
Improved Heat        Y                   Y                   Y                   Y              Y             Y
 Exchanger
 Effectiveness
Modulating           Y                   Y                   Y                   Y              Y             Y
 Operation
Improved or          Y                   Y                   Y                   Y              N/A          N/A
 Increased
 Insulation
Condensing           Y                   N                   N                   Y              Y             Y
 Secondary Heat
 Exchanger
Electronic Ignition  b                   b                   b                   Y              Y             b
Induced or Forced    b                   b                   b                   Y              Y             b
 Draft
Infrared Burner      Y                   Y                   Y                   Y              Y             Y
Direct Vent          Y                   Y                   Y                   Y              Y             Y
Smart Valve          N/A                 N/A                 N                   N/A            N/A           N
Fuel Filtration      N/A                 N/A                 Y                   N/A            N/A           Y
Pulse Combustion     Y                   Y                   N                   Y              Y             N
Air-Atomized Burner  N/A                 N/A                 Y                   N/A            N/A           Y
 with Modulation
Delayed Action Oil   N/A                 N/A                 Y                   N/A            N/A           Y
 Pump Solenoid
 Valve
Increased Motor      Y                   Y                   Y                   Y              Y             Y
 Efficiency
Increased Blower     Y                   Y                   Y                   Y              N/A          N/A
 Impeller
 Efficiency
Self-Generation of   N                   N                   N                   N              N             N
 Electricity
Fuel-Driven Heat     N                   N                   N                   N              N             N
 Pumps
Flue Gas             N                   N                   N                   N              N            N
 Recirculation
----------------------------------------------------------------------------------------------------------------
Y The design option is applicable to this product class and passes screening.
N The design option has been screened out from further analysis for this product class.
N/A The design option is not applicable to this product class.
b Already included in the baseline model design (see section C.2)

C. Engineering Analysis

    The purpose of the engineering analysis is to estimate according to 
the DOE test procedure the energy savings potential from increased 
equipment efficiency levels, and to determine the incremental equipment 
and installation cost of achieving those levels, compared to the 
baseline model in each product class. The engineering analysis 
estimates the payback period for each of the design options in order 
for DOE to address the legally required ``rebuttable'' payback 
consideration. The Department uses the costs developed in the 
engineering analysis in the LCC analysis.
1. Approach
    There are a large number of ways to combine design options in 
furnaces and boilers to attain a particular efficiency level. To 
explore how manufacturers would likely design products to meet a 
standard and to thoroughly understand the relationships between 
different equipment configurations and efficiency, the Department 
considered several design options that could meet a given efficiency 
level. For the engineering analysis, DOE selected the design options 
considered most likely to be implemented.
    The baseline model for each product class is the starting point for 
analyzing technologies that provide energy-efficiency improvement. The 
Department defined a baseline model as an appliance having the commonly 
available, most-cost-effective features and technologies while meeting 
the current efficiency standard. The Department defined a baseline 
model for each of the product classes in the first and second 
categories described above.
    After identifying the baseline models, the Department estimated the 
total cost of higher-efficiency units to the consumer through an 
analysis of manufacturer costs, markups, and installation costs. Costs 
for equipment design options are determined through tear-downs. Markups 
are estimated using publicly available corporate and industry data, 
supplemented by data from the Manufacturing Housing Institute. The 
Department created an ``Installation Model'' to assess venting costs, 
and verified it against known existing data.
2. Baseline Models
    Identification of the baseline for an equipment product class 
requires establishing a baseline efficiency level and selecting a size 
typical of that equipment. For furnace and boilers, the analysis also 
requires defining major design features, such as the configuration 
(which refers to the design of the supply air pathways), heat exchanger 
type, ignition type, and the means of heating fluid delivery (draft 
type).
    Several stakeholders submitted comments on recommended furnace and 
boiler baseline model characteristics. ACEEE commented that the 
Department should use the sales-weighted median size as the baseline 
model size in each product class. (ACEEE, No. 15 at p. 5) AGA commented 
that the Department should

[[Page 45431]]

consider baseline models that include a range of building loads, 
airflows, regional heat demands, ignition system alternatives, and 
other technical variables. (AGA, No. 11 at p. 6)
    For each product class, GAMA provided specific recommendations for 
the features of the baseline model. For example, for the baseline non-
weatherized gas furnace, GAMA recommended that the baseline should have 
an AFUE of 78 percent (the statutory minimum efficiency), 75 kBtu/h 
(thousand Btu per hour) input, an induced draft combustion system, 
electric (hot surface) ignition, and a blower for three-ton cooling. 
(GAMA, No. 8 at p. 1) Trane commented that the baseline gas furnace 
should have electronic ignition, an induced draft, a 75 kBtu/h input, 
1200 CFM at 0.5'' static pressure, and a three-ton air-conditioning 
capacity. (Trane, No. 9 at p. 1)
    For the baseline oil-fired furnace, Lennox suggested that DOE use a 
120 kBtu/h size. (Lennox, No. 16 at p. 1) GAMA recommended that the 
baseline have an input of 105 kBtu/h, which is the most common in the 
current market. (GAMA, No. 8 at p. 3)
    MHI suggested that the baseline model for mobile home furnaces 
should have sealed combustion, a downflow configuration, and an inside 
thermal envelope footprint of less than 20 inches by 24 inches. (MHI, 
No. 13 at p. 1)
    GAMA recommended that the gas boiler baseline model should have an 
atmospheric burner, a standing pilot, and an electro-mechanical vent 
damper and an input of 105 kBtu/h. (GAMA, No. 8 at p. 3) For the oil-
fired boiler baseline model, GAMA recommended a boiler with a power 
burner and an input of 140 kBtu/h. (GAMA, No. 8 at p. 3)
    In defining the baseline models, the Department took into account 
the above comments, as well as the technical description of the covered 
equipment, the definition of the product classes, and the results of 
the market assessment. DOE used the product features suggested by GAMA 
in the baseline definition, since they were consistent with most of the 
relevant stakeholder comments. Table II.3 summarizes the main features 
of the baseline models. For more detail on baseline equipment, refer to 
the Engineering Analysis, section 6.3 of the ANOPR TSD.

                           Table II.3.--Features of Furnace and Boiler Baseline Models
----------------------------------------------------------------------------------------------------------------
                                 Input
        Product class           capacity    AFUE    Configuration    Heat exchanger      Ignition        Draft
                                (Btu/h)     (%)                           type
----------------------------------------------------------------------------------------------------------------
Non-weatherized Gas Furnaces.     75,000       78  Upflow.........  Clam Shell/      Hot Surface....  Induced.
                                                                     Tubular.
Weatherized Gas Furnaces.....     75,000       78  Horizontal.....  Clam Shell/      Hot Surface....  Induced.
                                                                     Tubular.
 Mobile Home Gas Furnaces....     70,000       75  Downflow.......  Drum...........  Standing Pilot.  Natural.
Non-weatherized Oil-Fired        105,000       78  Upflow.........  Drum...........  Intermittent     Forced.
 Furnaces.                                                                            Ignition.
Hot Water Gas Boilers........    105,000       80  N/A............  Sectional, Dry-  Standing Pilot.  Natural.
                                                                     base, Cast-
                                                                     iron.
Hot Water Oil-Fired Boilers..    140,000       80  N/A............  Sectional, Wet-  Intermittent     Forced.
                                                                     base, Cast-      Ignition.
                                                                     iron.
----------------------------------------------------------------------------------------------------------------

    In addition to the above features, the baseline models have a 
blower or pump driven by a standard permanent split capacitor (PSC) 
induction motor.
3. Design Option Selection
    From the list of options that passed the screening analysis, DOE 
selected those design options considered most likely to be implemented. 
The Department assumed that manufacturers will incorporate design 
options that have the least cost to attain a given efficiency level. 
Cost and efficiency estimates were available for a broad array of 
design options. The Department used the relationship between cost and 
percent efficiency improvement to rank all the fuel-related design 
options. Two options were most favorable: increasing the heat exchanger 
area and increasing the heat exchanger transfer coefficient. In 
interviews with manufacturers, the Department confirmed that these 
choices were the most promising design options.
    The Department also included modulation technology as another 
design option that can provide an AFUE improvement for some of the 
product classes. Based on currently available products in the market, 
DOE applied two-stage modulation to non-condensing and condensing 
equipment and applied step modulation only to condensing furnaces.
    The Department also included consideration of the following design 
options:
    1. Improved heat exchanger effectiveness through 
electrohydrodynamic enhancement of heat exchangers;
    2. Condensate venting and disposal;
    3. Atomizing oil burner with two-stage modulation; and
    4. Heat exchanger size optimization for oil-fired equipment.
    Section 6.4 of the ANOPR TSD further discusses the above design 
options.
4. Manufacturing Cost Analysis
    There are three ways to estimate manufacturing costs: (1) The 
design option approach, reporting the incremental costs of adding 
specific design options to a baseline model; (2) the efficiency level 
approach, reporting incremental costs of achieving each level of energy 
efficiency improvement; and (3) the reverse engineering or cost-
assessment approach, which requires a ``bottom-up'' cost assessment 
based on a detailed bill of materials for models that operate at 
particular efficiency levels.
    The Department received a variety of recommendations on generating 
manufacturer cost estimates. ACEEE recommended using reverse 
engineering analysis. (ACEEE, No. 15 at p. 5) ASE commented that 
industry cost data lack transparency and credibility and suggested that 
the Department use reverse engineering as the primary data source. 
(ASE, No. 18 at p. 2) ODOE stated that manufacturer-supplied costs have 
been consistently (sometimes significantly) high, and suggested that 
DOE not rely on this single source. (ODOE, No. 10 at p. 4) EEI 
recommended that DOE not disregard industry cost data. (EEI, No. 6 at 
p. 2) Southern Co. supported the use of industry cost data rather than 
reverse engineering numbers. (Southern, No. 14

[[Page 45432]]

at p. 4) Trane recommended the efficiency level approach because: (1) 
There is no good simulation model available for all designs; (2) 
feasible design options are limited; (3) DOE should specify a 
performance standard, not a design standard; and (4) GAMA can gather 
accurate cost data. (Trane, No. 9 at p. 2) GAMA commented that if DOE 
gets manufacturer cost information directly from manufacturers, it 
should provide draft aggregate cost data so GAMA can confirm the 
reasonableness of the data. (GAMA, No. 8 at p. 1)
    Several comments suggested that DOE should consider historical 
trends or forces in estimating the retail price of equipment that would 
meet standards in the future. NRDC said DOE should include the 
``learning curve'' effect that would come from greater cumulative 
production of higher-efficiency models. (NRDC, No. 21 at p. 2) ACEEE 
said that given historical trends and significant cost-reduction 
accomplishments of manufacturers, it is conceivable that they can 
produce higher equipment efficiency without significant increase in 
retail prices. (ACEEE, No. 15 at p. 5) NRDC, ACEEE, and CEC commented 
that actual equipment price increases have been lower than DOE's 
projected increases in past rulemakings. (NRDC, No. 21 at p. 3; ACEEE, 
No. 15 at p. 4; CEC, No. 19 at p. 4) ACEEE urged DOE to review the 
accuracy of past price impact projections for regulated products. 
(ACEEE, No. 15 at p. 4) Trane suggested that the best way to understand 
retail prices is to get several hundred quotes covering a variety of 
regions, installation types, efficiency levels, and ranges of 
capacities. (Trane, No. 9 at p. 2)
    For other rulemakings, the Department has used production input 
costs and production technologies based on the best information 
available at the time. DOE has not made any assumptions about 
productivity improvements and material cost changes that may occur over 
time. The Department does not believe it can apply historical trends 
for residential furnaces or other products to forecast equipment costs 
where there are no data to show that the trends will continue. 
Therefore, the Department will not assume a productivity improvement 
factor in this rulemaking.
    After assessing the available methods and taking stakeholder 
comments into account, the Department used reverse engineering of 
existing products to estimate the manufacturing cost of the baseline 
model and the considered design options. The Department believes that 
the reverse engineering approach, which is based on a detailed bill of 
materials (BOM) for the various models, is the best way to accurately 
and cost-effectively assess manufacturing costs. The Department 
supplemented this approach with a review of relevant literature, 
computer simulation, and other analytical techniques, as well as 
industry-supplied data. Throughout the analysis period, the Department 
provided GAMA, manufacturers, and other stakeholders several 
opportunities to review and comment on the cost estimates to ensure 
accuracy and completeness. The Department considered these comments in 
its analysis. Refer to section 6.4 of the ANOPR TSD for further 
discussion of the method used for analysis of manufacturing costs.
    In estimating production costs for each potential efficiency (AFUE) 
level above the baseline model, the Department considered several 
design options that can be used to reach a given AFUE level. The 
Department also considered additional options that provide electrical 
power savings. The Department determined the efficiency levels 
corresponding to various design option combinations using manufacturer 
data submittals and DOE engineering calculations.
    The Department generated the BOM by examining and disassembling 
(through teardown analysis) some current-market units and/or simulating 
design options using numerical models and creating ``hypothetical'' 
units that it costed as if they were real units. (In the context of 
this study, the terms ``reverse engineering'' and ``teardown analysis'' 
solely describe the estimation of production costs by examining actual 
equipment or designs.) The availability of a large number of 
residential products with a wide range of efficiency allowed DOE to 
consider all potential design options in a reverse-engineering approach 
in order to establish an accurate estimate for production costs. The 
Department purchased and disassembled by hand the selected units and 
measured, weighed, and analyzed each part. Additionally, DOE studied 
and reconstructed all the steps of the manufacturing processes to 
finish the teardown analysis. The result was detailed BOMs that DOE 
used as input to the cost model.
    The analysis required the Department to perform teardowns at a 
number of efficiency levels. Multiple teardowns per point were needed 
to capture major design approaches. To reduce the number of possible 
teardowns to a manageable level, the Department focused on 
representative sample units sold in high volumes. Thus, the sample 
units included in the teardown analysis do not represent all possible 
efficiency levels of each product class. DOE took the following steps 
in creating BOMs for additional efficiency levels: (1) Identify 
efficiency gaps; (2) Select the most promising design options; (3) 
Identify possible design modifications of existing units and create a 
written description of ``hypothetical'' (or ``theoretical'') units; (4) 
Perform simulations to correlate design modifications with efficiency 
levels; and (5) Create BOMs for ``hypothetical'' units.
    The cost model is based on production activities and divides 
factory costs into the following categories: (1) Material (direct and 
indirect materials); (2) Labor (fabrication, assembly, indirect and 
overhead burdened labor); and (3) Overhead (equipment depreciation, 
tooling depreciation, building depreciation, utilities, equipment 
maintenance, rework).
    The Department used the cost data from all BOMs--whether obtained 
through teardowns or numerical simulations--in the cost model, which 
makes use of specific assumptions to provide cost estimates. These 
assumptions include industry averages for site-specific inputs (e.g., 
labor rates), assuming the production facility is a ``greenfield'' 
plant (as if a new manufacturing plant were built) and assuming 
production volumes similar to current levels for each product class.
    Even after completion of both the tear-down analysis on 
representative units and the numerical simulations, the Department 
still needed information for condensing boilers (both gas- and oil-
fired) and condensing mobile home furnaces. For these categories, DOE 
identified possible design options but did not have a methodology or a 
simulation tool in place to estimate the production costs. Therefore, 
the Department used a cost-per-pound estimation methodology for these 
products.
    In summary, the Department took the following steps in establishing 
manufacturing costs as a function of fuel efficiency:
    (1) Generate BOMs for products at different efficiency levels using 
teardown analysis and numerical simulations;
    (2) Enter BOMs into a cost model, incorporating assumptions 
obtained through available industry data, internal expertise, visits to 
manufacturers, and stakeholders' input;
    (3) Perform sensitivity analysis and cost-per-pound estimates; and
    (4) Generate cost-efficiency data for each efficiency level.

[[Page 45433]]

    Tables II.4a-f show the estimated incremental manufacturing costs 
of increasing AFUE for each product class. The reported efficiency 
levels are generally achieved by increasing heat exchanger area or 
improving the heat transfer coefficient. The incremental costs in the 
tables are relative to the baseline model for each product class.
    For the modulation design option, the Department considered a 
design approach currently in the market that uses a multiple-tap, 
multiple-speed PSC blower motor; a two-stage gas valve; and a multiple-
tap, two-speed PSC inducer motor to achieve two-stage modulation 
operation. For this design, DOE estimated that an additional $23 would 
be added to the production cost of the furnace to account for the 
component changes. The Department estimated that the AFUE improvement 
for adding two-stage modulation to a furnace would be 1 percent, based 
on a survey of units with and without modulation in the GAMA directory. 
Therefore, to estimate the cost of a modulating furnace at 81 percent 
AFUE, DOE added $23 to the production cost of a 80 percent AFUE 
furnace. An amendment to the current test procedure may be necessary to 
more completely characterize the energy savings from modulation. See 
Chapter 6 of the TSD for further details.

  Table II.4a.--Incremental Manufacturing Cost for Non-Weatherized Gas
                                Furnaces
------------------------------------------------------------------------
                                                            Incremental
                Efficiency level (AFUE) %                      cost
------------------------------------------------------------------------
78 Baseline Model.......................................               0
80......................................................              $3
81......................................................               6
82......................................................               9
90......................................................             146
92......................................................             213
96......................................................             570
------------------------------------------------------------------------


    Table II.4b.--Incremental Manufacturing Cost for Weatherized Gas
                                Furnaces
------------------------------------------------------------------------
                                                            Incremental
                Efficiency level (AFUE) %                      cost
------------------------------------------------------------------------
78 Baseline Model.......................................               0
80......................................................              $3
81......................................................               6
82......................................................               9
------------------------------------------------------------------------


    Table II.4c.--Incremental Manufacturing Cost for Mobile Home Gas
                                Furnaces
------------------------------------------------------------------------
                                                            Incremental
                Efficiency level (AFUE) %                      cost
------------------------------------------------------------------------
75 Baseline Model.......................................               0
80......................................................             $29
81......................................................              36
82......................................................              46
90......................................................             140
------------------------------------------------------------------------


   Table II.4d.--Incremental Manufacturing Cost for Oil-Fired Furnaces
------------------------------------------------------------------------
                                                            Incremental
                Efficiency level (AFUE) %                      cost
------------------------------------------------------------------------
78 Baseline Model.......................................               0
80......................................................              $2
81......................................................               5
82......................................................               7
84......................................................              10
85......................................................              15
------------------------------------------------------------------------


 Table II.4e.--Incremental Manufacturing Cost for Hot-Water Gas Boilers
------------------------------------------------------------------------
                                                            Incremental
                Efficiency level (AFUE) %                      cost
------------------------------------------------------------------------
80 Baseline Model.......................................               0
81......................................................             $29
82......................................................              39
83......................................................              47
84......................................................              55
88......................................................             128
91......................................................             379
99......................................................             816
------------------------------------------------------------------------


  Table II.4f.--Incremental Manufacturing Cost for Hot-Water Oil-Fired
                                 Boilers
------------------------------------------------------------------------
                                                            Incremental
                Efficiency level (AFUE) %                      cost
------------------------------------------------------------------------
80 Baseline Model.......................................               0
81......................................................              $4
82......................................................               7
83......................................................              11
84......................................................              15
86......................................................              22
90......................................................             434
95......................................................             836
------------------------------------------------------------------------

    The Department also identified options that decrease electricity 
consumption in furnaces and boilers. The details are described in 
Appendix 8.5 of the TSD.
5. Markup Analysis
    Completing the equipment cost calculations in the engineering 
analysis requires determination of the cost to the customer of a 
baseline model furnace or boiler and the cost of more efficient units. 
The average customer price of such units is not generally known. To 
estimate the equipment costs to the customer, DOE determined typical 
markups on each stage of the distribution chain from the manufacturer 
to the consumer. The markup approach makes it possible to estimate a 
retail price from the manufacturing cost. In addition to estimating 
average markups, the Department also characterized the markups with 
probability distributions through a statistical analysis of U.S. Census 
data and used these distributions in the LCC analysis.
    The Department included the following expenses in the determination 
of the manufacturer markup: Research and development, net profit, 
general and administrative, warranty expenses, taxes, and sales and 
marketing. The estimated average markup of 1.26 was based on analysis 
of corporate financial records. The Department excluded shipping 
expenses (out-bound) because these expenses were included in the 
manufacturing cost. Research and development expenses were determined 
by assuming that engineering budgets would be reallocated from value-
engineering and new-feature development to product development and 
redesign. The additional capital outlays and re-tooling investments are 
captured in the incremental cost of the equipment.
    The Department based the wholesale and contractor markups on firm 
balance sheet data. Builder markup (applied to new construction 
installations only) was estimated from U.S. Census data for the 
residential and commercial building construction industry and from HVAC 
industry data. Recent state and local sales tax data were used to 
estimate sales taxes (applied to replacement installations only).
    An exception to the above procedure was the case of mobile home 
furnaces, where the distribution chain is shorter; the heating 
equipment manufacturer sells to the mobile home maker, who installs the 
furnace at the factory. In this case, the Department estimated markups 
using information from the Manufacturing Housing Institute.
    The estimated average markups are listed in Table II.5. The markup 
on incremental costs (relative to a baseline model) is lower than the 
markup on the baseline model cost for wholesalers and

[[Page 45434]]

contractors because only profits and other operating costs typically 
scale with the manufacturer price or (for contractors) the cost of 
goods sold. The overall markups are lower for new construction 
installations than for replacement installations, since different 
markups apply. For more detail on how the Department developed the 
markups, refer to Chapter 5 of the ANOPR TSD.

    Table II.5.--Average Markups on Costs of Residential Furnaces and
                                 Boilers
------------------------------------------------------------------------
                                                  Baseline   Incremental
                                                 model cost      cost
------------------------------------------------------------------------
Manufacturer..................................         1.26         1.26
Wholesaler....................................         1.36         1.11
Contractor (new/replacement)..................    1.41/1.62    1.22/1.33
Builder (new construction only)...............         1.43         1.33
Sales tax (replacements only).................         1.07         1.07
-----------------------------------------------
                  Total markup (on manufacturing cost)
------------------------------------------------------------------------
Non-weatherized gas furnace...................         3.12         2.07
Weatherized gas furnace.......................         3.12         2.07
Oil-fired furnace.............................         2.97         1.99
Hot-water gas boiler..........................         2.97         1.99
Hot-water oil-fired boiler....................         2.97         1.99
Mobile home gas furnace.......................         2.22         2.22
------------------------------------------------------------------------

6. Installation Cost
    The installation cost is the cost to the consumer for installing a 
furnace or a boiler; it is usually not part of the retail price. The 
cost of installation covers all labor and material costs associated 
with the installation of a new unit or the replacement of an existing 
one. For furnaces and boilers, the installation cost is the largest 
single component of the total cost to the consumer. It is even larger 
than the equipment cost.
    The predominant part of the installation cost is the venting 
system. The American National Standards Institute (ANSI) standard 
Z21.47-1993 defines four Categories (I-IV) for furnace or boiler 
venting systems. The categories are defined based on the operating 
pressure and temperature in the vent. Most non-condensing equipment 
operates with a Category I (high temperature, low pressure) venting 
system. Most condensing equipment operates with a Category IV (low 
temperature, high pressure) venting system, but some condensing boilers 
use a Category III (high temperature, high pressure) system. For a 
Category I venting system only, the 2002 National Fuel Gas Code (NFGC) 
Venting Tables 13.1 through 13.5 define the requirements for 
installation.
    DOE devoted considerable effort to identifying appropriate costs to 
use in its analysis. In the process, DOE found that there is no 
complete data source for installation costs for the product classes 
under consideration. ACEEE suggested that DOE collect data from the 
field to help in estimating the cost of various types of installations. 
(ACEEE, No. 32 at p. 3) The Department concurs that this would be 
beneficial and will consider this approach if appropriate data are 
available. The Department hereby requests submittal of field 
installation cost data.
    One source of data is a 1994 GRI report, which GAMA supplemented in 
2002 with an updated summary version of the data. The installation 
costs in the GRI report were developed from the results of a field 
survey which several gas utilities conducted in 1992. These data are 
relatively old and, particularly for condensing furnaces, may not 
represent a well-established market. Differences between new and 
replacement installation costs may be underestimated. Further, no 
detailed cost breakdowns are available from the report for independent 
verification of the results.
    A second source is a 1999 Natural Resources Canada (NRCanada) study 
that developed installation cost data for non-weatherized gas furnaces 
for four Canadian areas. A company that provides cost estimates for 
building contractors conducted the study. The NRCanada study provides 
the most current data set available, and the data are used by Canadian 
government agencies and are well documented. However, for condensing 
furnaces, there are indications that these data are applicable only to 
new-construction installations.
    The Department looked at other possible sources of installation 
costs, including data from Wisconsin from a 1999 survey of HVAC 
contractors. The Department did not use these data because of the very 
small size of the sample.
    Because of the shortcomings of the above sets of data, DOE 
performed its own study to determine installation costs for non-
weatherized gas furnaces, referred to henceforth as the ``Installation 
Model.'' The Department has posted the Installation Model spreadsheets 
for furnaces and boilers on its Web site: http://www.eere.doe.gov/buildings/appliance_standards/furnaces_boilers.html.
    The Department used RS Means, a well-known and respected 
construction-cost-estimation method, to develop labor costs, and got 
quotes from national distributors to develop material costs. The 
Installation Model weight-averages the detailed costs for a large 
variety of typical installations in the field, including both new 
construction and retrofit installations; single and multifamily 
housing; plastic, metal and masonry chimney vents; single- and double-
wall vent connectors; and common venting with other appliances. Chimney 
relining practices and orphaned water heaters are explicitly modeled. 
The Department validated the Installation Model results by comparing 
them with the preceding three data sets under equivalent assumptions; 
the incremental costs agree within 15 percent. The Department is 
requesting comments about the Installation Model (see Issue 1 under 
``Issues for Public Participation'' in section IV.E of this ANOPR).
a. Non-Weatherized Gas Furnaces
    For non-weatherized gas furnaces, DOE considers the data derived 
with the Installation Model as the most current and comprehensive 
available for the analysis. It used a sensitivity analysis based on 
variations of installation size. The GAMA and NRCanada data sets also 
provide a basis for upper and lower bounds for installation cost.
    The Department determined that there is a small additional average 
installation cost for an 80 percent AFUE furnace relative to a baseline 
(78 percent AFUE) furnace. This cost involves the need to reline some 
masonry chimneys and applies to single-stage, as well as modulating, 
furnaces.
    When efficiency increases above 80 percent AFUE, additional costs 
associated with venting system modifications may be necessary.
    At the DOE Venting workshop in May 2002, the differences between 
steady-state efficiency (SSE) and AFUE were discussed in detail. Lennox 
and GAMA commented that installations in accordance with NFGC Venting 
Table rules may sometimes exceed the expected SSE, and recommended DOE 
apply a margin of safety to the SSE/AFUE relationship. (Lennox, No. 35 
at p. 2; and GAMA, No. 31 at p. 2) Lennox also said that some 
installation locations will yield operating conditions that differ 
substantially from test conditions. (Lennox, No. 35 at p. 2) Reflecting 
these concerns, DOE's approach to determining the SSE/AFUE relationship 
includes an uncertainty range for the

[[Page 45435]]

fraction of installations at each efficiency level that would likely 
need a Category III venting system. DOE used the GAMA directory to 
develop data on the AFUE/SSE relationship.
    Several stakeholders commented that the SSE/AFUE relationship is 
not affected by differences in the type of furnace heat exchanger 
(tubular vs. clamshell). (Public Workshop Tr., No. 25JJ at p. 68; GAMA, 
No. 31 at p. 6; and York, No. 33 at p. 3) DOE did not consider the type 
of furnace heat exchanger when evaluating the SSE/AFUE relationship.
    For the 81 percent AFUE level, DOE considered two cases for 
installation cost. The first assumes the use of two-stage modulation 
technology. At present, two major manufacturers produce furnaces with 
81 percent AFUE using modulation technology that allows use of a 
Category I venting system. By investigating existing models and 
manufacturers' installation manuals, the Department determined that 
these furnaces must use Type B double-wall vent connectors in the 
venting system.
    The second case considers only the use of single-stage furnace 
models. The Department determined that at an energy efficiency of 81 
percent AFUE, about 8 percent of the existing single-stage furnace 
models would have an SSE above 83 percent. At this SSE level, 
condensation in the venting system may occur, possibly leading to 
corrosion and carbon monoxide leakage. In this case, DOE assumed that 8 
percent of installations would need a Category III stainless steel vent 
to allow safe operation. The remaining 92 percent would need to use 
Type B double-wall vent connectors in the venting system. For the 82 
percent and 83 percent AFUE levels, DOE determined that 35 percent and 
100 percent of units, respectively, could be above 83 percent SSE, and 
these units would need a Category III venting system for safe 
operation.
    Condensing furnaces at 90 percent AFUE use a Category IV venting 
system, which is mostly composed of a side-wall venting system with 
plastic vent pipes. For condensing furnaces, the Installation Model 
accounts for the installation of a new vent system, resizing of the 
remaining common system, condensate neutralization, and condensate 
pumping for disposal. The Department assumed that installation costs 
for all condensing furnaces are similar, since available information 
suggests that efficiency levels higher than 90 percent do not 
appreciably affect the installation cost for condensing gas furnaces.
    Simpson and GAMA commented that DOE should account for costs of 
handling the condensate disposal. (Simpson, No. 30 at p. 3; and GAMA, 
No. 8 at p. 1) The installation cost for condensing furnaces includes 
the cost of condensate disposal.
    The Department's installation cost estimates are shown in Table 
II.6a. The cost data are presented in 2001 dollars to coincide with the 
manufacturing cost estimates.

                        Table II.6a.--Installation Cost for Non-Weatherized Gas Furnaces
----------------------------------------------------------------------------------------------------------------
                                                                   NRCanada  (US   Installation
               Efficiency level  (AFUE)  (percent)                      $)         Model  (US $)    GRI  (US $)
----------------------------------------------------------------------------------------------------------------
78--Baseline Model..............................................             382             727             773
80..............................................................             382             731             965
81--two-stage, no Category III..................................             382             760             965
81--single-stage, 8 Category III................................             432             810           1,104
82..............................................................             634           1,012           1,671
83..............................................................           1,012           1,356           2,732
90..............................................................             411             980           1,239
93 and above....................................................             411             980           1,268
----------------------------------------------------------------------------------------------------------------

b. Other Product Classes
    For weatherized gas furnaces, the location of the equipment 
(outdoors) influences the installation cost. Based on RS Means, the 
Department estimated a mean of $1,123 for the installation cost of the 
baseline model. Since limited data were available, DOE assumed that 
installation cost remains mostly constant as efficiency is increased. 
This assumption seems reasonable for single-package systems, as the 
increases in size and weight for more efficient, single-package systems 
are small relative to the large size and weight of the baseline model.
    For mobile home gas furnaces, common installation costs are part of 
the equipment cost because mobile home gas furnaces are assembled in 
the factory rather than in the field. The manufacturer's markup 
includes these factory assembly costs. For 90 percent and over AFUE 
condensing furnaces, there is an additional installation cost in the 
field to account for condensate disposal systems.
    DOE modified the Installation Model to estimate venting costs for 
oil-fired furnaces, hot-water gas boilers, and oil-fired boilers (see 
Chapter 6 of the TSD for details). For gas boilers, NFPA 54 provides 
Category I venting guidelines; for oil-fired appliances, the applicable 
venting guideline is NFPA 31. However, the efficiency level at which 
the use of higher-cost Category III venting becomes necessary is not 
defined by these codes. For the analysis of gas boilers, DOE assumed 
that 20 percent of installations include Category III horizontal vents 
for construction-related reasons for efficiencies up to 84 percent 
AFUE. At 85 percent AFUE, DOE assumes Category III venting must be used 
100 percent of the time. For oil-fired equipment, type L stainless 
venting is required at all AFUE levels. DOE assumes that the vent 
system must be upgraded to stainless AL-4C at 85 percent and 84 percent 
AFUE for oil-fired boilers and oil-fired furnaces, respectively.
    The Department's installation cost estimates are shown in Table 
II.6b through II.6f. The cost data are presented in 2001 dollars to 
coincide with the manufacturing cost estimates.

      Table II.6b.--Installation Cost for Weatherized Gas Furnaces
------------------------------------------------------------------------
                                           Average cost     Incremental
             AFUE  (percent)                    ($)          cost  ($)
------------------------------------------------------------------------
78......................................           1,123              --
80......................................           1,123               0
81......................................           1,123               0
82......................................           1,123               0
------------------------------------------------------------------------


[[Page 45436]]


      Table II.6c.--Installation Cost for Mobile Home Gas Furnaces
------------------------------------------------------------------------
                                           Average cost     Incremental
             AFUE  (percent)                    ($)          cost  ($)
------------------------------------------------------------------------
75......................................               0              --
80......................................               0               0
81......................................               0               0
82......................................               0               0
90......................................             181             181
------------------------------------------------------------------------


         Table II.6d.--Installation Cost for Oil-Fired Furnaces
------------------------------------------------------------------------
                                             Weighted
             AFUE  (percent)               average cost     Incremental
                                                ($)          cost  ($)
------------------------------------------------------------------------
80......................................             751              --
82......................................             751               0
83......................................             751               0
84......................................           1,641             890
85......................................           1,641             890
------------------------------------------------------------------------


        Table II.6e.--Installation Cost for Hot-Water Gas Boilers
------------------------------------------------------------------------
                                             Weighted
             AFUE  (percent)               average cost     Incremental
                                                ($)          cost  ($)
------------------------------------------------------------------------
80......................................           1,679              --
82......................................           1,679               0
83......................................           1,679               0
84......................................           1,679               0
85......................................           2,833           1,154
90+.....................................           2,091             412
------------------------------------------------------------------------


     Table II.6f.--Installation Cost for Hot-Water Oil-Fired Boilers
------------------------------------------------------------------------
                                             Weighted       Incremental
             AFUE (Percent)                average cost        cost
------------------------------------------------------------------------
80......................................          $1,631              --
84......................................           1,631               0
85......................................           2,556            $925
86......................................           2,556             925
90......................................           2,091             460
------------------------------------------------------------------------

c. Safety and Reliability Issues Related to Installation
    Several stakeholders expressed concerns about safety and 
reliability issues associated with condensation problems that may arise 
with higher-efficiency furnaces and boilers. For non-weatherized gas 
furnaces, GAMA and NPGA stated that 83 percent SSE, which corresponds 
to an AFUE of 80-82.5 percent, is recognized as the threshold above 
which condensation may occur. (Public Workshop Tr., No. 25JJ at p. 162; 
and NPGA, No. 29 at p. 2) Lennox said that safety and reliability 
prevent manufacturers from selling products with an AFUE between 81 
percent and 90 percent, and even 81 percent AFUE furnaces are not sold 
in all geographic regions. ((Public Workshop Tr., No. 25JJ at p. 97) 
The few non-condensing furnaces sold with an AFUE over 81 percent are 
intended for specialized applications. (Public Workshop Tr., No. 25JJ 
at p. 97) Carrier commented that furnaces with an AFUE of 81 to 82 
percent were widely available in the 1980's and experienced numerous 
venting and corrosion problems. (Carrier, No. 7 at p. 1) Lennox 
recommended that the Department's analysis should not consider gas-
fired equipment between 81 percent and 90 percent AFUE because of the 
difficulties in ensuring the safe operation of furnace and venting 
systems for the maximum useful life of the equipment. (Lennox, No. 16 
at p. 1) Trane said that the fact that there are no available products 
with AFUE values between 82 percent and 90 percent is a very important 
indicator of the existing efficiency range that allows for satisfactory 
margins of safety. (Trane, No. 34 at p. 1) ACEEE maintains that 83 
percent AFUE is technically feasible without significant risk of 
corroding the heat exchanger. (ACEEE, No. 15 at p. 2)
    For furnaces with an AFUE in the range of 81-83 percent, the 
Department evaluated the impact of condensate on vent systems. Based on 
the common practice with higher efficiency gas boilers, the Department 
determined that the use of Category III venting systems can adequately 
address safety concerns at these AFUE levels. The Department included 
costs for installing Category III venting systems where the analysis 
determined they would be needed. Refer to section 6.5 of the ANOPR TSD 
for further discussion.
    Battelle urged DOE to take into account the increased liabilities 
that may arise with higher efficiency. (Public Workshop Tr., No. 25JJ 
at p. 215) GAMA said that DOE must consider the risks and costs 
associated with venting and corrosion problems. (GAMA, No. 31 at p. 2) 
Trane said that increasing the AFUE above 81 percent would place an 
undue burden on manufacturers to protect customer safety. (Trane, No. 
33 at p. 1) DOE addressed this issue by assigning Category III venting 
systems to an appropriate fraction of installations, thus capturing the 
costs associated with ensuring safe operation of higher-efficiency 
furnaces.
    For condensing furnaces, GAMA recommended that the Department 
consider in its analyses regional and local building code requirements 
concerning venting materials and practices. GAMA also mentioned the 
problems with less expensive plastic materials, such as high 
temperature plastic vents (HTPV), to vent exhaust gases, which resulted 
in a recall by the U.S. Consumer Product Safety Commission, and 
cautioned DOE about the appropriate use of materials and approaches to 
reduce condensation problems (e.g., vent coating, vent pre-heating, new 
materials, improved vent-connectors). (Public Workshop Tr., No. 25JJ at 
p. 174) The Department used the appropriate venting practices for 
condensing furnaces in its analysis and only considered materials 
commonly used in existing equipment designs.
    Several stakeholders commented about including in DOE's analysis 
the cost of upgrading the venting system due to increased efficiency. 
ACEEE recommended that the Department include costs to address the 
risks to the venting system. (ACEEE, No. 15 at p. 2) GAMA commented 
that costs must reflect installation in complete compliance with all 
manufacturer instructions and code requirements, including extra 
installation costs for relining or resizing non-compliant venting 
systems for orphaned water heaters. (GAMA, No. 8 at p. 3) GAMA also 
said that DOE needs to consider costs of upgrade or repair when the 
furnace is no longer vented using a Category I system. (Public Workshop 
Tr., No. 25JJ at p. 87) York said DOE should consider that a large 
percentage of replacement furnaces are installed where masonry chimneys 
are used (thereby requiring chimney upgrade), and another large segment 
of installations use common venting with water heaters. (York, No. 33 
at p. 3) GAMA and NPGA commented that the new efficiency standards for 
water heaters will contribute to the condensation problem because many 
furnaces and water heaters are vented in a common system. (Public 
Workshop Tr., No. 25JJ at p. 174; and NPGA, No. 35 at p. 2) ACEEE urged 
DOE to improve the understanding of this issue. (ACEEE, No. 32 at p.4)
    The Department included all costs for installations that are in 
complete compliance with manufacturer instructions and code 
requirements. This includes upgrades when the furnace is no longer 
vented using a Category I system, and changes to common venting 
systems. See Chapter 6 of the TSD for more details on assumptions 
regarding orphaned water heaters and common venting systems.
    During the Framework Workshop, the Department proposed to 
investigate controls and sensors that prevent the development of 
condensation in the venting system. In its response, GAMA said that by 
the time a sensor or CO detector works, it is too late to prevent 
condensation. (Public Workshop Tr.,

[[Page 45437]]

No. 25JJ at p. 171) AGA said that some control strategies would have 
adverse safety and health impacts. (Public Workshop Tr., No. 25JJ at p. 
177) DOE agrees with the above comments but did not evaluate different 
control strategies in this analysis because of the potential for 
adverse impacts on the safety and health of consumers.
    York said that venting applications for mobile home heating 
equipment have their own special requirements and standards, which must 
be considered when determining the impact of efficiency requirements on 
venting issues. (York, No. 33 at p. 3) The venting system of mobile 
home heating equipment is assembled in the factory as part of the 
mobile home construction, and its cost is included in DOE's markup 
analysis for this product class.
    GAMA said that DOE should investigate corrosion and venting issues 
related to boilers. (GAMA, No. 31 at p. 4) DOE included in this 
analysis the cost of appropriate venting of higher-efficiency equipment 
for boiler product classes.
    As this brief discussion makes clear, several stakeholders have 
expressed concerns that requiring higher-efficiency furnaces and 
boilers could result in situations where condensation could create 
safety problems for consumers. In addition, stakeholders have expressed 
concern about the use of special non-corrosive materials as well as 
controls and sensors to prevent condensation in the vent system. DOE 
believes that it has adequately addressed the safety issue by assigning 
Category III venting systems to an appropriate fraction of the 
installations in its analysis. This approach captures the costs 
associated with ensuring safe operation of higher-efficiency furnaces. 
DOE has also accounted for the effectiveness of materials as applicable 
to this analysis. As noted above, the Department did not consider 
controls and sensors to prevent condensation because of the adverse 
safety and health impacts on consumers.
7. Maintenance Costs
    Maintenance costs include regular maintenance and repair of a 
furnace or a boiler when it fails. They cover all associated labor and 
material costs. For the discussion of the analysis of maintenance 
costs, refer to section 6.6 of the ANOPR TSD.
    For non-weatherized and weatherized gas furnaces and gas boilers, 
DOE used maintenance cost data from a 1994 GRI report. The data came 
from a field survey sponsored by several gas utilities that repair and 
service furnace and boiler equipment. The survey methodology estimated 
the average cost per service call as the average total service charge.
    The GRI study also developed the maintenance frequency as a 
function of the equipment efficiency level: once every four years for 
80 to 81 percent AFUE equipment and once every three years for 82 to 83 
percent AFUE equipment. For 90 percent and 92 percent AFUE equipment, 
the maintenance value represents a service contract that includes a 
specified set of routine repairs. The 96 percent AFUE furnace also 
includes a service contract that provides for regular annual 
maintenance. The Department annualized the costs over the estimated 
lifetime of the furnace (see Table II.7).

  Table II.7.--Annualized Maintenance Cost for Gas Furnaces and Boilers
------------------------------------------------------------------------
                          AFUE                             Mean cost ($)
------------------------------------------------------------------------
81% and less............................................              35
82-83%..................................................              58
90% and 92%.............................................              61
96%.....................................................             102
------------------------------------------------------------------------

    For oil-fired furnaces and oil-fired boilers, DOE applied the 
results of a survey performed for the water heater rulemaking. This 
survey identifies the typical cost of annual service contracts applied 
to all oil equipment in a house. These contracts are very common in the 
Northeast, where most of the oil heating equipment is located. The mean 
cost of an annual service contract for all considered efficiency levels 
is $104.
    For mobile home furnaces, DOE used the data from the 1993 
rulemaking for this product class. It also identified an additional 
maintenance cost needed for the design options considered in this 
analysis.
    GAMA commented that the added components and complexity of modern 
furnaces bring increased maintenance and repair costs. (GAMA, No. 8 at 
p. 3) ACEEE commented that continuing pressures to increase quality and 
reduce time and training for maintenance should be able to check 
increases in such costs. (ACEEE, No. 15 at p. 6) DOE believes that the 
maintenance costs used in the analysis reflect the best currently 
available data.
8. Summary of Inputs
    Table II.8 summarizes the inputs used to calculate rebuttable 
payback periods for various energy efficiency levels.

     Table II.8.--Summary of Inputs Used in the Engineering Analysis
------------------------------------------------------------------------
               Input                             Description
------------------------------------------------------------------------
Equipment Cost....................  Uses a cost model of baseline model
                                     manufacturing costs created by tear-
                                     down analysis; design option
                                     analysis was used to fill gaps.
                                     Industry feedback from GAMA and
                                     individual manufacturers was
                                     incorporated to generate
                                     manufacturing cost versus
                                     efficiency curves for primary and
                                     secondary classes.
Markups...........................  Markups are derived from an analysis
                                     of corporate financial data.
                                     Manufacturing costs are multiplied
                                     by manufacturer, distributor,
                                     contractor, and builder markups,
                                     and sales tax, as appropriate, to
                                     get equipment price.
Installation Cost.................  Uses a distribution of weighted-
                                     average installation costs from the
                                     ``Installation Model.''
                                     Installation configurations are
                                     weight-averaged by frequency of
                                     occurrence in the field, and vary
                                     by installation size. The
                                     Installation Model is RS Means-
                                     based, and comparable to available
                                     known data.
Maintenance Costs.................  Uses GRI data for gas furnaces and
                                     boilers, water heater rulemaking
                                     survey results for oil-fired
                                     equipment, and data from the 1993
                                     rulemaking for mobile home
                                     furnaces.
Annual Energy Use.................  Energy use is calculated using the
                                     DOE test procedure.
Energy Prices.....................  AEO 2003 forecast prices for year
                                     2012.
------------------------------------------------------------------------

9. Rebuttable Payback Periods
    Section 325(o)(2)(B)(iii) of the Act, 42 U.S.C. 6295(o)(2)(B)(iii), 
establishes a rebuttable presumption that a standard is economically 
justified if the Secretary finds that ``the additional cost to the 
consumer of purchasing a product complying with an energy conservation 
standard level will be less than three times the value of the energy * 
* * savings during the first year that the consumer will receive as a 
result of the

[[Page 45438]]

standard, as calculated under the applicable test procedure * * * ''
    Using the cost inputs described above, combined with energy 
calculations under the DOE test procedure, the Department calculated 
simple payback periods for each efficiency level using the ratio of 
incremental total installed cost to the change in the annual operating 
cost (see Table II.9). Refer to section 6.7 of the ANOPR TSD for 
further discussion of the calculation methods. As can be observed in 
Table II.9 a number of efficiency levels higher than current standards 
have paybacks of less than three years. However, payback periods 
calculated based on energy consumption in actual field conditions may 
differ significantly. The LCC and Payback Period Analysis described in 
the following section reflects field conditions and is therefore a more 
accurate depiction of consumer impacts. The Department does not make a 
determination of economic justification based on the rebuttable payback 
presumption. Economic justification is based on a weighing of the seven 
factors described in section I.C of this ANOPR. A number of efficiency 
levels higher than current standards are economically justified by this 
metric. Payback periods calculated based on energy consumption in 
actual field conditions may differ significantly; the LCC analysis 
considers such conditions. Note that in the process of setting a 
standard, the Department weighs many factors in addition to the 
economic justification, as listed in section I.B of this ANOPR.

   Table II.9.--Efficiency Levels with Less Than 3-year Payback Period
                        Using DOE Test Procedure
------------------------------------------------------------------------
                                            Efficiency
              Product Class                Level (AFUE)       Payback
                                             (Percent)        (years)
------------------------------------------------------------------------
Non-weatherized Gas Furnace.............              80             1.0
Weatherized Gas Furnaces................              80             0.6
                                                      81             0.8
                                                      82             0.9
Mobile Home Furnaces....................              80             2.8
Oil-fired Furnaces......................              80             0.2
                                                      81             0.2
                                                      82             0.2
                                                      83             0.3
Hot-Water Oil-fired Boilers.............              81             0.4
                                                      82             0.4
                                                      83             0.4
                                                      84             0.4
------------------------------------------------------------------------

    D. Life-Cycle Cost (LCC) and Payback Period (PBP) Analysis
    When DOE is determining whether an energy efficiency standard is 
economically justified, EPCA directs DOE to consider the economic 
impact of potential standards on consumers. (42 U.S.C. 6295 
(o)(2)(B)(i)(I)) To address that impact, the Department calculated 
changes in equipment life-cycle cost (LCC) for consumers that are 
likely to result from each candidate standard, as well as payback 
periods. The effects of standards on individual consumers include 
changes in operating expenses (usually lower) and changes in total 
installed cost (usually higher). The Department analyzed the net effect 
of these changes by calculating the changes in LCC compared to a base 
case forecast. The LCC calculation considers total installed cost 
(equipment purchase price plus installation cost), operating expenses 
(energy and maintenance costs), equipment lifetime, and discount rate. 
The Department performed the analysis from the perspective of the user 
of residential furnace and boiler products.
    The LCC and PBP results are presented to facilitate stakeholder 
review of the LCC analysis. Similar to the LCC analysis, the PBP is 
based on the total cost and operating expenses. But unlike the LCC 
analysis, only the first year's operating expenses are considered in 
the calculation of PBP. Because the PBP analysis does not take into 
account changes in operating expense over time or the time value of 
money, it is also referred to as a ``simple'' payback period.
    Trane commented that the LCC analysis does not reflect consumer 
purchasing behavior, which exhibits a preference for a simple payback 
of less than 3 years. (Trane, No. 9 at p. 3) As mentioned above, the 
Department calculated payback periods as well as LCCs, and takes both 
factors into account in determining the economic justification for each 
possible energy efficiency standard.
    AGA commented that the LCC analysis should be the primary basis for 
economic justification. (AGA, No. 11 at p. 5) The Department will weigh 
all costs and benefits, including the LCC.
1. Approach
    The LCC analysis estimates the LCC for representative equipment in 
houses that are representative of the segment of the U.S. population 
that is buying furnaces and boilers. The calculation of LCC is done for 
a representative sample of houses, one house at a time, using 
appropriate values for the inputs each time. To account for uncertainty 
and variability in specific inputs such as lifetime and discount rate, 
there is a distribution of values with probabilities attached to each 
value. For each house, DOE samples the values of these inputs from the 
probability distributions. As a result, the analysis produces a range 
of LCCs. A distinct advantage of this approach is that DOE can identify 
the percentage of consumers achieving LCC savings or attaining certain 
payback values due to an increased efficiency standard, in addition to 
the average LCC savings or average payback for that standard. Refer to 
section 8.1 of the ANOPR TSD for further discussion of the LCC analysis 
method.
    The Department based the payback period calculations in the 
engineering analysis on the DOE test procedure. The test procedure uses 
specific, carefully prescribed values to calculate annual energy 
consumption. When the test procedure was written, these values were 
considered to be relatively typical of conditions in U.S. homes. In 
contrast, the LCC analysis estimates furnace and boiler energy 
consumption under field conditions for a sample of houses that is 
representative of U.S. homes. These conditions include the outdoor 
climates during the heating and cooling season,

[[Page 45439]]

which influence the operating hours of the equipment.
    For each product class, the LCC analysis considers all candidate 
standard efficiency levels, as well as the maximum-efficiency 
technology available. To estimate the impact of improved efficiency 
across a wide range of households that use furnaces and boilers, DOE 
selected a sample of households from the 1997 Residential Energy 
Consumption Survey (RECS97). For each sampled household, DOE estimated 
the energy consumption of furnaces and boilers with baseline model 
design characteristics and design options that yield higher 
efficiencies. DOE then calculated the LCC for all design options.
    To account for the uncertainty and variability in the inputs to the 
LCC calculation for a given household and between different households, 
the Department used a Monte Carlo simulation. A Monte Carlo simulation 
uses a distribution of values to allow for variability and/or 
uncertainty on inputs for complex calculations. For each input, there 
is a distribution of values, with probabilities (weighting) attached to 
each value. Monte Carlo simulations sample input values randomly from 
the probability distributions.
    For each product class, DOE calculated the LCC and payback period 
10,000 times per Monte Carlo simulation run. For some variables, such 
as energy price and climate, each calculation used the values 
associated with the sampled RECS house. The RECS houses were sampled 
according to the weighting each received from the Energy Information 
Administration (EIA). This weighting reflects the prevalence of various 
features in the national population of houses. Sampling according to 
the weighting means that some of the RECS houses are sampled more than 
once and others may not be sampled at all. The Department used 
Microsoft Excel spreadsheets with Crystal Ball, an add-on software, to 
perform the Monte Carlo analysis.
    GAMA commented that the cost of using Crystal Ball to perform the 
Monte Carlo analysis makes it difficult for stakeholders to use. (GAMA, 
No. 41 at p. 7) DOE seeks to minimize the hardware and software 
necessary to duplicate its analysis. At the same time, it wishes to 
handle the issues of variability among impacts and uncertainty in data 
and projections as comprehensively and rigorously as possible. Changing 
to another tool at this time for the current analysis would entail 
significant costs and delays since the LCC analysis tool using Crystal 
Ball is finished. DOE will explore the suitability of other, less 
expensive, analysis tools for future rulemakings.
    In addition, DOE has established a process for making the analysis 
results available to the public, including providing extensive 
documentation, posting the documentation and the LCC spreadsheet on the 
DOE Web site, holding informal meetings with stakeholders to walk them 
through the data and methods, publishing Technical Support Documents 
(TSDs), holding workshops, and receiving and responding to verbal and 
written comments.
    GAMA commented that DOE's use of Monte Carlo analysis to select 
households at random from the RECS database has no statistical validity 
and is potentially misleading from a policy standpoint. It noted that 
the sampling method: (1) Ensures that not every RECS household is 
represented in the analysis and that many are represented more than 
once; and (2) subjects each household that is selected to only one 
combination of variables instead of the hundreds or thousands that are 
needed to fully characterize the uncertainty surrounding that 
household. (GAMA, No. 41 at p. 3)
    GAMA's comment seems to directly criticize the use of the Monte 
Carlo methodology in general, rather than the correctness of DOE's 
particular application of it. The Monte Carlo method gives an adequate 
picture of the average policy affect on households, the variation in 
impacts over the housing stock, and the fraction of households likely 
to benefit from the standard. The systematic accuracy of the analysis 
for which the Monte Carlo simulation is used depends on the available 
data for each variable. Statistically, the degree to which the results 
of the simulation represent the full range of possible outcomes depends 
only on the sample size and can be judged using standard statistical 
techniques.
    GAMA said that DOE should evaluate each RECS household 
independently and expose each household to the full range of 
uncertainty and variability expected in that household. GAMA said that 
DOE should calculate the distribution of possible financial impacts for 
each RECS sample household to identify a ``most likely'' financial 
result for that household as well as a distribution of results, 
expressed within confidence intervals, on either side of the most 
likely result. To determine the most likely financial affect on the 
typical U.S. household, DOE must then compute a weighted average of all 
most likely financial results from each individual distribution. (GAMA, 
No. 41 at p. 3)
    It appears that GAMA is asking the Department to estimate the 
probability distribution of possible economic impacts on the specific 
households surveyed in RECS. DOE designed the LCC analysis to answer 
the question of what is the variation of economic impacts of a standard 
for a representative national sample of consumer households. The 
current analysis is not designed to evaluate specific impacts on 
individual households that were surveyed in RECS. DOE assumes a 
representative national distribution of households is selected when the 
Monte Carlo simulation samples a statistical distribution of households 
from the RECS data according to the EIA assigned weights. Many of the 
characteristics are attached to the households in the RECS database, 
e.g., energy prices, size of house, vintage of existing heating 
equipment, and type of fuel. GAMA does not provide clear evidence that 
the national distribution of household characteristics constructed 
using this method is incorrect. Overall, DOE believes that the current 
method is appropriate because it uses parameters for each household 
that have a basis in measured or sampled data from that household.
    For each product class, the base case forecast assumes that the 
purchase of equipment in the absence of new standards reflects current 
patterns with respect to efficiency. The Department sampled the AFUE of 
the base case forecast equipment assigned to each house from a 
distribution of AFUEs that is representative of current shipments. 
Thus, the sample houses vary in terms of their base case forecast 
equipment. The Department assigned to some houses base case forecast 
equipment that is more efficient than some of the design options. For 
those design options, DOE considered those houses as not being affected 
by the standard, since there would be no energy savings.
    For a given set of design options, the LCC analysis provides a 
distribution of households that can be divided into those for whom the 
LCC will decrease compared to the base case forecast (positive 
benefit), those for whom the LCC will increase compared to the base 
case forecast (negative impact), and those for whom the LCC will not 
change because the design option is less efficient than the base case 
forecast for that house.
    The Department received comments on regional issues that affect the 
LCC analysis. GAMA stated that DOE should examine whether costs for 
higher efficiency furnaces and boilers vary by region and consider 
regional differences in product use. (GAMA, No. 8 at p. 1)

[[Page 45440]]

AGA and EEI stated that the LCC analysis should consider regional 
differences among consumer populations. (AGA, No. 11 at p. 5; and EEI, 
No. 6 at p. 5) GRI stated that the Department should not extrapolate 
atypical regional data across all segments of the U.S. (GRI, No. 5 at 
p. 3) The Department recognizes that regional factors are important in 
the assessment of energy efficiency standards for heating equipment, 
and it evaluated the impact of regional variations as part of the LCC 
analysis.
    Many consumers purchase heating equipment using some type of 
financing. GAMA commented that DOE has been deducting rather than 
adding financing costs in its analyses. (GAMA, No. 41 at p. 4) DOE's 
method accounts for the fact that purchases financed by credit card, 
mortgage, or other means are paid over time--not all at once. It 
discounts the value of those payments in the LCC calculation. Because 
DOE uses the financing cost interest rate as the discount rate, the 
present value of payments (including principal and financing costs) for 
consumers purchasing equipment over time is exactly the value of the 
equipment costs as if paid all at once.
2. First-Cost Inputs
    For each efficiency level analyzed, the LCC analysis needs input 
data for the total installed cost of the equipment.
a. Equipment Prices
    DOE derived equipment prices by multiplying manufacturer cost by 
manufacturer, distributor, contractor, and builder markups and sales 
tax, as appropriate. The LCC analysis draws on the engineering analysis 
for estimating manufacturing costs.
    For non-weatherized gas furnaces, to represent the majority of 
combinations of input capacity and maximum-rated airflow, the 
Department developed conceptual (``virtual'') furnace models \5\ to 
represent 26 different combinations of those two variables. Each 
virtual model had its own cost and energy characteristics. (Refer to 
Chapter 7 of the ANOPR TSD for more details about virtual models.) To 
develop the cost for each virtual model, DOE reverse-engineered one 
model size (input capacity = 75kBTU/h and airflow capacity = 3 tons) 
and assigned costs for the different components. The Department scaled 
the cost for other input capacities from the basic model cost for both 
non-condensing and condensing models. A cost adder adjusted costs for 
furnaces of different maximum nominal airflow capacity. The virtual 
models include models with the most commonly occurring input 
capacities, with corresponding maximum nominal airflow rates.
    For weatherized gas furnaces, DOE used the same virtual models as 
in the analysis of non-weatherized gas furnaces. For mobile home 
furnaces and oil-fired furnaces, the Department used a subset of the 26 
virtual furnace models because the market in those product classes is 
limited to a smaller number of sizes of furnaces. For the boiler 
product classes, DOE used the sizes of the virtual models for non-
weatherized gas furnaces, weighted to match the boiler sizes in the 
shipments data from GAMA.
b. Installation Costs
---------------------------------------------------------------------------

    \5\ The Department intends these virtual furnace models to 
represent typical furnaces with basic features, but not to describe 
specific, existing furnaces. The Department derived the 
characteristics of the virtual furnace models from existing basic 
furnace models, after examining directories and product literature 
for existing furnaces.
---------------------------------------------------------------------------

    The LCC analysis draws on the engineering analysis for estimating 
installation costs. DOE assigned each household an installation cost 
from a distribution of weighted-average values. For non-weatherized gas 
furnaces, oil-fired furnaces, and gas and oil boilers, the distribution 
was calculated with the Installation Model. For weatherized gas 
furnaces, DOE used calculations based on the RS Means' approach to 
calculate a mean value and assigned a triangular distribution of 15 percent around the mean. For mobile home furnaces, which are 
installed at the mobile home factory, the installation cost is included 
in the markup.
3. Operating-Cost Inputs
a. Annual Energy Use
    Energy consumption consists of the fossil fuel and electricity used 
to operate a furnace or boiler year-round. While the primary focus of 
this rulemaking is on fossil fuel consumption, design options that save 
on fossil fuels may also change electricity consumption. To take this 
effect into account, it is necessary to model electricity consumption 
in detail. If the house has air conditioning, the energy consumption 
includes the electricity used by the furnace blower to distribute 
conditioned air during the cooling season.
    In determining the reduction in annual energy use due to more 
efficient furnace and boiler designs, the Department did not take into 
account a rebound effect. The rebound effect occurs when an appliance 
that is made more efficient is used more intensively, so that the 
expected energy savings from the efficiency improvement do not fully 
materialize. The Department seeks comments on whether a rebound effect 
should be included in the determination of annual energy savings. If a 
rebound effect should be included, the Department seeks data for basing 
the calculation of the rebound effect.
    For non-weatherized gas furnaces, DOE chose 26 generic 
(``virtual'') models to represent the range of input capacity and 
airflow capacity of models currently available on the market. The 
number of real models with every possible combination of 
characteristics is too unwieldy to model. The Department used 
specifications from actual models to select the specifications for each 
virtual model. These specifications included blower size, motor size, 
supply-air outlet area, power consumption of the draft inducer and the 
igniter, several delay times, and fan curves. The Department assigned 
one virtual model to each of the sample housing records. The particular 
virtual model assigned to each house depended on the location and 
characteristics of the house.
    To simulate fossil fuel and electrical energy use by furnaces, DOE 
used the 1997 RECS to get a representative sample of houses. RECS97 is 
based on a sample of 5900 households that EIA surveyed for information 
on energy consumption and expenditures, stock of energy-consuming 
appliances, and energy-related behavior. The information collected 
represents all households nationwide--about 101 million.
    The heating and cooling loads are the amount of heating and cooling 
that a given house needs to keep it comfortable over an entire year. 
Determination of annual heating and cooling loads for the house 
requires making certain assumptions about its size and construction, 
thermal efficiency, and geographical location. Determination of the 
energy consumption of the system installed to satisfy the heating and 
cooling loads requires estimating the input capacity and the efficiency 
of the existing furnace and the size and seasonal energy-efficiency of 
the existing air conditioner.
    The final element of the energy use calculations involved 
calculating how much energy furnaces of various designs would need to 
meet the heating and cooling load of each sample house. At this stage, 
DOE calculated the energy use of the virtual model furnace assigned to 
each house, incorporating all design options. Each house has several 
dozen different energy use

[[Page 45441]]

values, each one reflecting the furnace's gas and electricity use with 
a different combination of design options. Chapter 7 of the ANOPR TSD 
provides more information about these calculations.
    The Department based the energy calculations for the other product 
classes on the energy calculations for non-weatherized gas furnaces, 
with appropriate changes to the calculations to account for the 
different energy-consuming characteristics of the other product 
classes.
    EEI commented that the Department should compare conditional demand 
analysis of heating loads to simulation-based modeling. (EEI, No. 6 at 
p. 5) DOE did not use simulation-based modeling to estimate heat loads. 
The analysis used heating loads from RECS that are gotten with 
conditional demand analysis. Detailed simulation-based modeling that 
considers specific equipment designs is outside the scope of the 
analysis for this rulemaking.
    Several stakeholders pointed out that furnace blower capacity is 
typically sized to meet air conditioning requirements and there is no 
tight relationship between blower electricity use and the furnace 
output. (NRDC, No. 21 at p. 4; GAMA, No. 8 at p. 4; and Trane, No. 9 at 
p. 2) The Department is aware that the furnace blower capacity is 
determined by the cooling capacity of the air conditioner that the 
furnace is designed to accompany, and takes this into account in its 
analysis.
    EEI commented that DOE should account for the duct system in 
analyzing electricity use of fan motors. (EEI, No. 6 at p. 4) DOE 
accounts for duct system performance in the analysis by assigning 
system curve coefficients to each house selected from a set of 
distributions appropriate for a house with that size air conditioner.
    An issue regarding electricity use of furnace fans concerns whether 
DOE should consider fan operation in the heating season only, or year-
round, since many furnaces are combined with split-system air 
conditioners and use the same circulating air fan during the heating 
and cooling modes. EEI recommended that DOE not include cooling season 
impacts because measures to reduce fan energy in the heating season may 
increase energy use for the air conditioning system during the cooling 
season. (EEI, No. 6 at p. 3 and 5) Trane commented that DOE should not 
consider electricity use in the cooling mode since fan electric use for 
cooling is already covered by air conditioning standards. (Trane, No. 9 
at p. 2) Because the fan is an integral part of a furnace, DOE 
accounted for year-round furnace electricity use, but it does not 
intend to regulate furnace electricity use.
b. Energy Prices
    The LCC analysis requires information on the price of natural gas 
or heating oil, as well as the price of electricity used by electrical 
components. A furnace fan operates during the heating season and the 
cooling season. Since electricity prices vary by season in much of the 
country, DOE separately estimated winter and summer electricity prices. 
Boilers do not use electricity in the summer. Refer to section 8.3 of 
the ANOPR TSD for further discussion of the derivation of energy 
prices.
    For all product classes, the Department used average energy prices 
to calculate the energy costs of the base case equipment. DOE used 
marginal energy prices for the cost of saved energy associated with 
higher-efficiency equipment. Marginal energy prices are the prices 
consumers pay for the last unit of energy used. Since marginal prices 
reflect a change in a consumer's bill associated with a change in 
energy consumed, such prices are appropriate for determining energy 
cost savings associated with efficiency standards.
    For oil-fired furnaces and boilers, as well as gas furnaces using 
LPG, the Department used average prices for both base case and higher-
efficiency equipment, as the data necessary for estimating marginal 
prices were not available.
    For each household sampled from the RECS database, DOE identified 
the average electricity and gas prices either from that household's 
data, if available, or from another household in the same census 
division for which both prices were available. The Department estimated 
marginal energy prices from the RECS monthly billing data. The results 
show that the marginal prices are very close to average prices for the 
RECS households.
    As in past rulemakings, the Department used price forecasts by the 
EIA to estimate the trend in average natural gas and oil prices and 
average and marginal electricity prices. To arrive at prices in 2012 
and beyond, it multiplied the average and marginal price for 1998 by 
the forecasted annual price changes in the Reference Case forecast in 
EIA's Annual Energy Outlook 2003 (AEO 2003).
    AGA supported DOE's use of EIA energy price forecasts. (AGA, No. 11 
at p. 5) ASE suggested that the Department allow for price increases 
beyond EIA forecasts and that DOE modify EIA forecasts by reviewing 
industry forecasts. (ASE, No. 18 at p. 3) It is the policy of the 
Department to use forecasts provided by the EIA about future trends in 
energy prices. Since there is uncertainty in price forecasting, the 
Department also evaluated the sensitivity of financial impacts to 
alternative energy price forecasts in AEO 2003. In addition, the 
Department will make available to stakeholders the ability to conduct a 
scenario analysis to examine the results under different energy-price 
conditions.
c. Maintenance Costs
    For the LCC analysis, DOE drew on the maintenance cost data derived 
in the engineering analysis. DOE assumed a triangular distribution for 
maintenance costs in order to capture the variability of these costs 
among homes. The Department was not aware of any recent data that 
provide a distribution of maintenance costs. However, based on a 
sensitivity analysis in the 1994 GRI report, which increased 
maintenance costs by 20 percent, and based on engineering judgement the 
Department assumed that a 15 percent range is most appropriate for a 
distribution. Thus, the DOE assigned the minimum maintenance cost to be 
15 percent below the average maintenance cost and the maximum to be 15 
percent above the average.
4. Equipment Lifetime
    The equipment lifetime is the age at which furnaces or boilers are 
retired from service. Based on industry data, DOE used lifetimes as 
shown in Table II.9. DOE used a triangular probability distribution to 
assign a lifetime to individual furnaces in the sample houses from a 
range for each product class. Because none of the available data on 
equipment lifetime shows a clear relationship between efficiency and 
lifetime, the Department assumed that equipment lifetime is independent 
of efficiency.

[[Page 45442]]



                                    Table II.9.--Expected Equipment Lifetime
                                                     [years]
----------------------------------------------------------------------------------------------------------------
                                                  Oil-fired                 Oil-fired                  Electric
                                    Gas furnace    furnace     Gas boiler     boiler     Heat pump     furnace
----------------------------------------------------------------------------------------------------------------
Minimum...........................           10           10           13           12            6           11
Mean..............................           20           15           17           15           14           17
Maximum...........................           30           20           22           19           21           23
----------------------------------------------------------------------------------------------------------------

    GAMA said that because models are becoming more complex and more 
expensive to repair, owners may be likely to replace rather than repair 
equipment, which would lower the average life of equipment. (GAMA, No. 
8 at p. 4) The Department believes that the probability distribution of 
equipment lifetimes used in the analysis is appropriate, given 
available evidence of past performance and recent trends.
5. Discount Rate
    The Department derived the discount rates for this analysis from 
estimates of the interest or ``finance'' cost to purchase furnaces or 
boilers. Following financial theory, the ``finance'' cost of raising 
funds to purchase furnaces or boilers can be interpreted as: (1) The 
financial cost of any debt incurred to purchase equipment, principally 
interest charges on debt, or (2) the opportunity cost of any assets 
used to purchase equipment, principally interest earnings on household 
equity.
    The purchase of equipment for new homes entails different finance 
costs for consumers than those from a purchase of replacement 
equipment. Thus, the Department used different discount rates 
corresponding to the finance cost of new construction and replacement 
installations. Refer to section 8.3 of the ANOPR TSD for further 
discussion of the method used to estimate discount rates.
    Furnaces or boilers purchased in new homes are financed with home 
mortgages. For purchases made to replace equipment, where cash or some 
form of credit is used to finance the acquisition, it is appropriate to 
establish how the purchase affects a consumer's overall household 
financial situation. It is assumed that consumers maintain a balance of 
debt and equity in their portfolio that is not likely to change as a 
result of the purchase of a furnace or boiler. The Department assumed 
that households draw on equity and debt in proportion to the shares of 
the different types of equity and debt holdings in U.S. households. The 
Department estimated the average household equity and debt portfolio 
based on 1995 and 1998 Survey of Consumer Finances (SCF) data, which 
show that the types of equity and debt include second mortgages, credit 
cards, transaction accounts, certificates of deposit, U.S. savings 
bonds, stocks, and mutual funds. For each type of equity and debt, DOE 
estimated an interest/return rate using time-series data, wherever 
possible. For each house, the Department selected a type of equity or 
debt and then selected a discount rate for that house from a 
distribution of rates. The weighted-average real interest rate across 
all types of household debt and equity (based on the share of each type 
in the average portfolio in 1995 and 1998) is 6.7 percent.
    ASE suggested that, for replacement purchases, DOE should survey 
consumer financing patterns to determine the shares of cash, home 
equity credit, unsecured loans, and other credit in furnace and boiler 
purchases. (ASE, No. 18 at p. 3) DOE is not aware of any statistically 
representative data that show how households use debt and equity to 
purchase a replacement furnace or boiler.
    Trane commented that households have a large amount of debt on 
credit cards, so additional expenses for higher-efficiency heating 
equipment will reduce funds available to pay off such high-interest 
debt. (Trane, No. 9 at p. 3) DOE believes that its approach accounts 
for the role of credit card debt in household financial portfolios.
    For equipment installed in new homes, the Department estimated the 
discount rate based on mortgage interest rate data provided in the SCF. 
This survey shows that mortgage rates carried by homeowners in 1998 
averaged 7.9 percent. After adjusting for inflation and interest tax 
deduction, real after-tax interest rates on mortgages averaged 4.2 
percent. ASE suggested that DOE use current mortgage interest rates as 
a discount rate for products sold in new homes. (ASE, No. 18 at p. 3) 
Since current rates may not be representative of rates in effect in 
2012, DOE used mortgage interest rates that are representative of 
historical rates. The Department's method uses data that provide a 
distribution of mortgage rates among consumers and uses the most 
current data available at the time of analysis which was for 1998.
    To account for variation in discount rates among consumers, DOE got 
information about the distribution of rates of interest or return on 
debt and equity among households from the data sources mentioned above. 
The Department calculated the real, after-tax rates as described above. 
The Department believes that this method allows for establishing a 
valid distribution of discount rates over the full range of discount 
rates relevant to most purchasers of the products covered by this 
rulemaking.
    GAMA commented that: (1) The discount rate used should reflect 
opportunity cost, which is independent of financing methods; and (2) 
the opportunity cost should be based on a distribution of returns on 
consumer portfolios, regardless of their choice of equipment purchase 
financing. (GAMA, No. 41 at p. 6) DOE used a distribution of discount 
rates for replacement furnaces to reflect the suggestions made by GAMA.
    GAMA suggested that implicit discount rates, while not a financial 
calculation, are a valid way to evaluate consumer decision making. 
(GAMA, No. 41 at p. 6 ) Because the LCC analysis is a financial 
analysis, DOE does not use implicit discount rates. In addition, DOE 
finds it difficult to measure implicit discount rates because of market 
imperfections, such as the cost of getting information about efficient 
appliances.
6. Effective Date
    The effective date is the date on and after which a manufacturer 
must comply with an energy conservation standard in the manufacture of 
a covered product. (10 C.F.R. Sec.  430.2) DOE had anticipated that the 
effective date for any new energy efficiency standard for residential 
furnaces and boilers would be January 1, 2012. This date was based on 
the assumption that a final rule would be published by January 1, 2004. 
Thus, the Department calculated the LCC for all consumers as if each 
one purchased a new residential furnace or boiler in 2012, the year it 
assumed the standard would take effect.

[[Page 45443]]

For purposes of conducting the analyses for this ANOPR, DOE based the 
cost of the equipment on year 2012; however, because the Department 
collected manufacturing cost data for the ANOPR engineering analysis in 
2001, it expresses all dollar values as year 2001 dollars. Under 42 
U.S.C. 6295 (f)(3)(B), any revised energy standards for these products 
will become effective eight years after its publication as a final rule 
in the Federal Register.
7. Inputs to Payback Period Analysis
    The payback period (PBP) is the amount of time it takes the 
consumer to recover the assumed higher purchase expense of more energy 
efficient equipment through lower operating costs. This type of 
calculation is known as a ``simple'' payback period because it does not 
take into account changes in operating expense over time or the time 
value of money.
    The inputs to the calculation of the PBP are the total installed 
cost of the equipment to the customer for each efficiency level and the 
annual (first year) operating expenditures for each efficiency level. 
The PBP calculation uses the same inputs as the LCC analysis, except 
that electricity price trends and discount rates are not needed. The 
calculation needs energy prices only for the year in which a new 
standard is expected to take effect, in this case the year 2012.
8. Summary of Inputs
    Table II.10 summarizes the inputs used to calculate the customer 
economic impacts of various energy efficiency levels.

  Table II.10.--Summary of Inputs Used in the LCC and Payback Analysis
------------------------------------------------------------------------
               Input                             Description
------------------------------------------------------------------------
Equipment Price...................  Derived by multiplying manufacturer
                                     cost by manufacturer, distributor,
                                     contractor, and builder markups and
                                     sales tax, as appropriate.
Installation Cost.................  Uses a distribution of weighted-
                                     average installation costs from the
                                     ``Installation Model.''
                                     Installation configurations are
                                     weight-averaged by frequency of
                                     occurrence in the field, and vary
                                     by installation size. The
                                     Installation Model is RS Means-
                                     based, and comparable to available
                                     known data.
Maintenance Costs.................  Uses GRI data for gas furnaces and
                                     boilers, water heater rulemaking
                                     survey results for oil-fired
                                     equipment, and data from the 1993
                                     rulemaking for mobile home
                                     furnaces.
Annual Heating Cooling Load.......  Heating and cooling loads calculated
                                     using 1997 RECS data. The furnace
                                     input capacity versus airflow
                                     capacity is assumed based on the
                                     vintage of the equipment and
                                     characteristics of each house.
Annual Energy Use.................  26 virtual models based on actual
                                     furnace characteristics capture the
                                     range of common furnace sizes.
                                     Energy calculations reflect actual
                                     house characteristics.
Energy Prices.....................  1997 average and marginal energy
                                     prices are calculated for each
                                     house. AEO 2003 forecasts are used
                                     to estimate future average and
                                     marginal energy prices.
Lifetime..........................  Uses Appliance Magazine survey
                                     results.
Discount Rate.....................  Data from Survey of Consumer Finance
                                     and other sources were applied to
                                     estimate a discount rate for each
                                     house.
------------------------------------------------------------------------

9. LCC and PBP Results
    For each set of sample houses using equipment in a given product 
class, DOE calculated the average LCC savings and the median PBP for 
various ways of achieving each efficiency level. The Department 
calculated the average LCC savings relative to the base case forecast 
in each product class. As mentioned above, the base case forecast 
assumes that equipment purchases in the absence of new standards will 
reflect current purchasing patterns, with respect to efficiency. 
Therefore, the base case forecast is not limited to baseline model 
equipment.
    Tables II.11a-f show the percentage of households that have a net 
cost and a net benefit for each design option. EEI commented that a 
minimum criterion for a standard level should be that at least 90 
percent of affected consumers should receive a benefit, and that if DOE 
chooses not to use 90 percent, then it should use the same criterion as 
it used for central air conditioners (CAC) and heat pumps.\6\ (EEI, No. 
6 at p. 2) Southern also suggested that the Department use the same 
criteria as it did in the CAC rulemaking. (Southern, No. 14 at p. 1) 
EEI also recommended that the Department show the overall percentage of 
consumers who would gain and lose from a given standard level. (EEI, 
No. 6 at p. 3) NRDC believes that ``winners'' and ``losers'' should be 
analyzed on a state-by-state basis so these results can be compared to 
a national standard. NRDC also commented that DOE should accept a 
higher proportion of losers for climate-sensitive products such as 
furnaces than it does for other products. (NRDC, No. 21 at p. 3)
---------------------------------------------------------------------------

    \6\ In the analysis of standards for CAC and heat pumps, the 
Department considered the share of consumers that would receive a 
net LCC benefit, among other factors. However, it did not use a 
specific criterion with respect to the percent of consumers that 
would receive a net benefit.
---------------------------------------------------------------------------

    DOE will consider the overall percent of consumers with net benefit 
and with net cost in the course of this rulemaking. The economic impact 
of a standard level on consumers is one of several factors that the 
Department weighs in determining whether economic justification exists 
for energy efficiency standards. As part of the consumer subgroup 
analysis, DOE will report fractions of households with net benefit or 
net cost at a regional level. The available data are not sufficient to 
produce statistically significant results at a state-by-state level.
    For non-weatherized gas furnaces (Table II.11a), the 81 percent 
AFUE level using single-stage (8 percent Category III venting system) 
shows a slightly negative LCC impact (-$3), but the 81 percent AFUE 
level using two-stage modulation (no Category III systems required) has 
a positive LCC savings of $72. The positive LCC savings for the 81 
percent two-stage modulation design are due, in part, to its having 
lower energy consumption than the single-stage furnace of the same 
AFUE. To estimate the energy use of this furnace under field 
conditions, DOE adopted the assumptions for two-stage modulation that 
appear in the DOE test procedure (see Appendix 6.3 of the TSD). DOE is 
requesting comments on this issue; see section IV.E.4 of this ANOPR. 
The 90 percent AFUE condensing level has a negative average LCC impact.

[[Page 45444]]



                                           Table II.11a.--LCC and PBP Results for Non-Weatherized Gas Furnaces
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                LCC                                                   Payback
                                         ---------------------------------------------------------------------------------------------------------------
           AFUE: design option                                Average
                                             Average $       savings $      Net cost %      No impact %    Net benefit %   Median years    Average years
--------------------------------------------------------------------------------------------------------------------------------------------------------
78%.....................................           9,966  ..............  ..............  ..............  ..............  ..............  ..............
80%.....................................           9,795               0               0              99               1             2.1            37.8
80% 2-stage modulation..................           9,718              41              33              27              40             8.6            13.5
81% 8% Cat. III.........................           9,789              -3              32              27              41             8.8            27.8
81% 2-stage modul., no Cat. III.........           9,680              63              29              27              45             7.6            17.0
82%.....................................          10,170            -292              70              26               4            28.7            84.6
82% 2-stage modulation..................          10,103            -256              65              26               9            18.5            60.2
83%.....................................          10,400            -468              73              26               1            63.3           121.3
90%.....................................           9,917            -154              56              26              18            17.9            42.5
92% Incr. HX Area.......................           9,924            -166              60              15              25            16.1            41.7
96% Step Mod ECM........................          10,723            -954              89               2               9            32.3            88.9
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For weatherized gas furnaces (Table II.11b), the results show 
positive average LCC savings for AFUE levels through 82 percent. The 
exception is the 80 percent Improved Heat Transfer Coefficient design 
option due to the higher cost of this design.

                                             Table II.11b.--LCC and PBP Results for Weatherized Gas Furnaces
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                LCC                                                   Payback
                                         ---------------------------------------------------------------------------------------------------------------
           AFUE: design option                                Average
                                             Average $       savings $      Net cost %      No impact %    Net benefit %   Median years    Average years
--------------------------------------------------------------------------------------------------------------------------------------------------------
78% Baseline Model......................           8,545  ..............  ..............  ..............  ..............  ..............  ..............
80% Incr. HX Area.......................           8,457               2               0              98               2             1.1             1.5
80% Improved Insulation.................           8,454               4              26              46              28             9.0             8.2
80% Improved Heat Xfer..................           8,467              -4              52              46               2             2.8             3.7
81% Incr. HX Area.......................           8,418              23               2              46              52             2.0             2.6
81% Improved Insulation.................           8,415              25              20              20              60             5.2             6.4
81% Improved Heat Xfer..................           8,424              18              32              20              48             3.8             5.1
82% Incr. HX Area.......................           8,380              53               3              20              77             2.1             2.9
82% Improved Insulation.................           8,377              56              18               0              82             4.3             5.6
82% Improved Heat Xfer..................           8,382              51              24               0              76             2.5             3.4
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For mobile home gas furnaces (Table II.11c), the results show 
positive average LCC savings for the 80 to 82 percent AFUE levels using 
single-stage technology. The 90 percent AFUE condensing level shows an 
average LCC saving of $192, but 45 percent of the households are 
negatively impacted.

                         Table II.11c.--LCC and PBP Results for Mobile Home Gas Furnaces
----------------------------------------------------------------------------------------------------------------
                                                              LCC                                  Payback
                                    ----------------------------------------------------------------------------
        AFUE: design option           Average    Average    Net cost  No impact     Net       Median    Average
                                       LCC $    savings $      %          %      benefit %    years      years
----------------------------------------------------------------------------------------------------------------
75% Baseline Model.................      7,904  .........  .........  .........  .........  .........  .........
80%................................      7,480         64          1         85         14        2.4        4.7
80% 2-stage........................      7,718       -163         80          5         15       26.0       60.5
81%................................      7,428        112         10          5         85        4.4        6.3
81% 2-stage Modulation.............      7,670       -117         75          5         20       24.9       60.3
82%................................      7,385        153         14          5         81        5.1        7.5
82% 2-stage Modulation.............      7,630        -80         70          5         25       22.9       56.3
90%................................      7,352        184         46          5         49       12.1       22.7
----------------------------------------------------------------------------------------------------------------


[[Page 45445]]

    For oil-fired furnaces (Table II.11d), the results show positive 
average LCC savings for AFUE levels from 80 percent through 83 percent.

                                                Table II.11d.--LCC and PBP Results for Oil-Fired Furnaces
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                LCC                                                   Payback
                                         ---------------------------------------------------------------------------------------------------------------
           AFUE: design option                                Average
                                            Average  $       savings $      Net cost  %    No Impact  %   Net benefit  %    Median years   Average years
--------------------------------------------------------------------------------------------------------------------------------------------------------
78% Baseline Model......................          16,194  ..............  ..............  ..............  ..............  ..............  ..............
80%.....................................          15,900              11               0              96               4             0.2             0.2
81%.....................................          15,762              95               2              39              59             0.4             0.5
81% Atom Burner 2-stage Mod.............          15,885               8              42              30              28            11.7            19.4
82%.....................................          15,625             190               2              30              68             0.3             0.4
82% Atom Burner 2-stage Mod.............          15,753              89              35              22              42             8.5            13.8
83%.....................................          15,492             293               3              22              75             0.3             0.4
83% Atom Burner 2-stage Mod.............          15,626             178              31              15              54             6.8            11.2
84%.....................................          15,967            -111              58              15              27            13.7            20.8
84% Atom Burner 2-stage Mod.............          16,106            -240              71               7              22            16.3            25.1
85%.....................................          15,845               1              49               7              44            10.0            13.8
85% Atom Burner 2-stage Mod.............          15,989            -143              69               0              31            13.7            20.1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For hot-water gas boilers (Table II.11e), the results show positive 
average LCC savings for the AFUE levels from 81 percent through 84 
percent using single-stage technology.

                                              Table II.11e.--LCC and PBP Results for Hot-Water Gas Boilers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                LCC                                                   Payback
                                         ---------------------------------------------------------------------------------------------------------------
           AFUE: design option                                Average                                      Net  benefit
                                          Average LCC  $    savings  $      Net cost  %    No  impact  %         %         Median years    Average years
--------------------------------------------------------------------------------------------------------------------------------------------------------
80% Baseline Model......................          10,635  ..............  ..............  ..............  ..............  ..............  ..............
81%.....................................          10,371              93               0              65              35             2.1             2.4
81% 2-stage Modulation..................          10,599             -36              38              44              18             9.9            14.8
82%.....................................          10,314             125               3              44              53             2.5             3.3
82% 2-stage Modulation..................          10,542             -36              48              30              22             9.3            19.6
83%.....................................          10,256             166               5              30              66             2.5             3.3
83% 2-stage Modulation..................          10,483             -29              59              15              27             9.9            23.3
84%.....................................          10,199             215               6              15              79             2.5             3.4
84% 2-stage Modulation..................          10,426               0              62               6              32            10.5            22.7
88%.....................................          10,741            -294              67               6              27            17.5            29.8
91%.....................................          10,823            -372              75               3              22            19.3            43.0
99%.....................................          11,304            -853              85               0              15            21.7            46.1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For hot-water oil-fired boilers (Table II.11f), the AFUE levels 
through 84 percent (without use of atomized burner) have positive 
average LCC savings.

                                           Table II.11f.--LCC and PBP Results for Hot-Water Oil-Fired Boilers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                LCC                                                   Payback
                                         ---------------------------------------------------------------------------------------------------------------
           AFUE: design option                                Average                                      Net  benefit
                                            Average  $      savings  $      Net cost  %    No  impact  %         %         Median years    Average years
--------------------------------------------------------------------------------------------------------------------------------------------------------
80%.....................................          14,890  ..............  ..............  ..............  ..............  ..............  ..............
81%.....................................          14,772               6               0              95               5             0.6             0.8
81% Atomized Burner.....................          15,166             -36              11              89               0            70.4           104.9
82%.....................................          14,657              18               0              89              11             0.7             0.8

[[Page 45446]]

 
82% Atomized Burner.....................          15,051             -45              16              84               0            35.0            64.3
83%.....................................          14,545              36               0              84              16             0.7             0.8
83% Atomized Burner.....................          14,939            -119              37              61               2            23.0            45.0
84%.....................................          14,435              79               0              61              39             0.7             0.8
84% Atomized Burner.....................          14,830            -169              58              37               5            26.7            57.6
86%.....................................          14,943            -234              52              37              11            23.0            31.6
86% Atomized Burner.....................          15,338            -602              91               7               2            53.0            98.1
90%.....................................          15,260            -527              81               7              12            19.6            23.8
95%.....................................          15,561            -829              88               0              12            19.1            23.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The Department seeks information and comments relevant to the 
assumptions, methodology, and results for the LCC and PBP analyses.

E. National Impact Analysis

    The national energy savings and economic impacts anlaysis assesses 
the national energy savings (NES) and the net present value (NPV) of 
total customer costs and savings expected to result from new standards 
at specific efficiency levels. The Department calculated the NES and 
NPV for a given standard level as the difference between a base case 
forecast (without new standards) and the standards case (with 
standards). National annual energy consumption is determined by 
multiplying the number of units in the stock of residential furnaces 
and boilers (by vintage) by the unit energy consumption (also by 
vintage). Cumulative energy savings are the undiscounted sum of the 
annual NES determined over a specified time period. The Department 
calculated net savings each year as the difference between total 
operating cost savings and increases in total installed cost. 
Cumulative savings are the sum of the annual NPV determined over a 
specified time period. The NES analysis which will accompany the NOPR 
will include both discounted and undiscounted values for future energy 
savings to account for their timing.
    The Department assessed the NES and NPV using the NES Spreadsheet 
Model. DOE developed this method for standards rulemakings and tailors 
it for each specific rulemaking. The Department posts NES spreadsheets 
for furnaces and boilers on its Web site to make the analysis more 
accessible and transparent to all stakeholders. See http://www.eere.doe.gov/buildings/appliance_standards/furnaces_boilers.html.
1. Approach
    The Department calculated national energy consumption for each 
year, beginning with the expected effective date of the standards 
(2012), for the base case forecast and for each candidate efficiency 
level. For each product class, DOE calculated the site energy 
consumption for the base case forecast and each considered efficiency 
level by summing the energy consumption of equipment operating in each 
year. The survival fraction of equipment shipped in previous years is 
equivalent to the percentage not replaced. The Department aggregated 
the differences in annual energy consumption between the base case 
forecast and standards cases forecast to arrive at the cumulative 
national energy savings in the 2012-2035 period for each candidate 
efficiency level.
    The shipments forecast accounts for shifts in market share from gas 
to electric equipment as a result of an increase in gas equipment 
price. Projected shipments of gas equipment, and hence gas consumption, 
are lower in the higher-efficiency cases, but there is an increase in 
electricity consumption by electric heating equipment, for which the 
model also accounts.
    The Department calculated the NPV to the Nation of new efficiency 
standards from the incremental costs of higher-efficiency equipment 
minus the change in associated operating costs over the period 
considered. The Department accounted for operating cost savings until 
all the equipment installed through 2035 is retired.
    GAMA commented that the NES analysis should be based on an 
aggregation of individual consumer life-cycle cost results. (GAMA, No. 
41 at p. 4) The NES and the LCC analyses are intended to answer 
different questions, so they use different methods. The LCC analysis 
provides a snapshot of the impact of standards on individual consumers 
purchasing new equipment in the first year the standards take effect. 
It analyzes the effect on a wide range of consumers and is designed to 
reflect the diversity of the situation for a cross-section of all the 
households in the U.S. In contrast, the NES calculates the impacts of 
potential standard levels for the entire Nation over a period of many 
years, using the average energy consumption and average total installed 
price from the LCC analysis for each considered efficiency level. In 
the NES, only a fraction of U.S. households is assumed to purchase new 
equipment each year.
    GAMA commented that there has been almost no consideration of 
uncertainty or variability in the National Benefits analysis in DOE's 
rulemakings. (GAMA, No. 41 at p. 5) The Department's NES analysis uses 
a scenario approach to address uncertainty in key variables. The 
Department conducts sensitivity analyses as needed by running 
alternative scenarios for input variables that are of interest to 
stakeholders.
2. Inputs
a. Shipments
    Furnace and boiler shipments comprise units used for (1) 
replacements of retired units with the same type, (2) conversions at 
retirement to another fuel type, and (3) installations in new homes. 
Almost all new construction has central heating equipment and most 
equipment is replaced at retirement.
    The Department estimated the number of replacements based on past 
shipments and expected retirement rates. Forecasting future 
replacements requires estimates of shipments to new housing, since the 
replacements 20-30 years from now will replace the equipment shipped in 
the next few years. Consumers most commonly replace equipment with 
equipment in the same product class (replacement-in-kind). Some 
fraction of households

[[Page 45447]]

switch fuels, retiring an oil or electric unit and replacing it with a 
gas system (conversion away from natural gas is rare). The Department 
estimated future conversions based on historical data from AGA.
    The Department estimated the total number of shipments to new 
housing based on projections of new housing construction. Market shares 
of heating equipment in newly constructed homes reflect a choice that 
is influenced by fuel costs and equipment prices. For gas furnaces, the 
Department modeled this choice as described below.
i. Replacement and Conversions
    The replacement model estimates what fraction of the historically 
shipped units are still in service and how many will be replaced each 
year. The replacement model uses estimates of how long each type of 
equipment is expected to operate before it is replaced. Depending on 
the age of a piece of heating equipment, there is a certain probability 
of its being replaced. The model uses a replacement probability 
distribution based on distributions of expected equipment lifetimes. 
Two basic assumptions generated the probability distribution. First, 
DOE expects equipment to have a maximum probability of being replaced 
at the mean lifetime. Second, replacement probability goes to zero in 
the minimum and maximum lifetime years. Assuming a linear slope in 
probability produces a triangular distribution.
    Given the probability of replacement as a function of equipment age 
or vintage, the calculation of expected replacements in any given year 
follows directly from past shipments. In a given year, the number of 
replacements is equal to the portion of the previous year's shipments 
expected to retire plus the number of shipments from two years ago 
expected to retire, etc.
    GAMA suggested that the retirement function should be applied 
randomly in the NES analysis, as DOE does in the LCC analysis. (GAMA, 
No. 41 at p. 4) In the NES analysis, DOE tracks shipments year by year 
and applies the retirement function to all equipment installed in each 
year. The Department does not apply the retirement function randomly to 
keep the NES model transparent and to avoid the need to use Monte Carlo 
calculation methodology (which uses a distribution of values to allow 
for variability and/or uncertainty on the inputs).
    AGA commented that standards that are not cost-effective will 
encourage consumers to defer replacement of equipment. (AGA, No. 11 at 
p. 2) DOE developed and applied modeling of equipment retirement and 
replacement that reflects the available information on market behavior.
    To estimate future conversions, DOE used data from the annual 
house-heating survey conducted by the AGA, which reports the numbers of 
households that converted to natural gas space heating from 1990 to 
1995. On average, about 100,000 oil-heating households and 75,000 
electricity-heating households converted to natural gas annually. 
Nearly a third of oil-heating customers and more than a quarter of 
electricity-heating households decided to convert to natural gas 
instead of replacing their old system with the same fuel type. The 
number of conversions from gas to oil or electricity is negligible.
    The conversion rate is the fraction of oil or electric equipment 
retirements in which the consumer decides to change to gas heating. 
Based on available information, DOE assumed that there is no early 
replacement (i.e., before end of useful life) for conversion. The 
Department assumed that the conversion rates estimated from the AGA 
data, 33 percent for oil equipment (furnaces and boilers) and 26 
percent for electric heating equipment will continue in the future. 
Since the oil-fired furnace and boiler markets are mostly replacements, 
oil-to-gas conversions will have a significant negative affect on 
shipments of these product classes in the future.
ii. Shipments to New Housing
    New housing includes single- and multi-family units, referred to as 
``new housing completions,'' and mobile home placements. For new 
housing completions and mobile home placements, DOE adopted separate 
projections for the South and non-South regions from AEO 2002 for the 
2002-2020 period. The Department assumed that completions grow at 0.5 
percent per year (the projected average annual growth rate in the 2000-
2020 period) for the 2021-2035 period. For mobile home placements, DOE 
extrapolated the trend of flat growth in 2010-2020 out to 2035.
    In DOE's method, the number of annual shipments of each product 
class going to new housing units is equal to housing completions for 
that year, multiplied by the market share estimated for each product 
class. The Department expects changes in equipment cost or operating 
expense associated with a particular product class to affect relative 
market shares in new construction much more significantly than in the 
replacement market. Evidence suggests that changes in first cost and 
operating cost have had an effect in the past on the choice of 
installing either a gas furnace or an electric central heating system 
in a new home.
    For non-weatherized and weatherized gas furnaces and mobile home 
gas furnaces, the shipments model takes into account possible market-
shift effects from changes in fuel prices and equipment price increases 
related to efficiency standards. The Department estimated future market 
shares using historical relationships between gas and electricity 
prices, gas and electric heating equipment prices, and gas furnace 
market shares, combined with estimated increases in equipment cost 
associated with higher efficiency. The model predicts changes in market 
share produced by a proportional change in the energy and equipment 
price variables. For a given heating load, gas furnaces are less 
expensive to operate than electric heating equipment, and forecasts of 
fuel prices predict that this will continue to be the case. Therefore, 
the Department does not expect a large shift from gas to electric 
heating due to increased cost of gas-fired equipment. This is 
especially true of colder regions, where electric heating is 
prohibitively expensive. In the Southern census region and in mobile 
homes, however, operating cost is less of a factor relative to the 
first cost of equipment. Purchasers of mobile housing often have 
relatively low incomes and therefore may be more sensitive to first 
costs than other households. For the above reasons, DOE estimated gas 
furnace market share independently for three groups: Single-family and 
multi-family homes in regions other than the Southern census region, 
single-family and multi-family homes within the Southern census region, 
and mobile homes in all census regions.
    DOE received several comments on the issue of market share shift 
due to standards. AGA called for better, more self-consistent estimates 
of future market shares, with cross-elasticities that do not vary 
across product classes. (AGA, No. 11 at p. 6) As described above, DOE 
used historical data to develop consistent market share estimates and 
it does not make use of cross-elasticities. EEI said that DOE should 
use the same type of parameters for its analysis of fuel-switching in 
furnaces as for its analysis of electric heat pumps. (EEI, No. 6 at p. 
5) AGA commented that standards on electricity use of fuel-fired 
furnaces would encourage fuel-switching to electric resistance 
furnaces, especially in manufactured housing. (AGA, No. 11 at p. 3) 
DOE's analysis accounts for market shifts to electric heating and 
considers

[[Page 45448]]

mobile housing separately. Market share shifts are reflected in the 
MIA, which is provided to the Department of Justice (DOJ) to facilitate 
its determination of the impact of any lessening of competition that is 
likely to result from the imposition of proposed energy efficiency 
standards.
    The analysis projects the market share of gas furnaces to fall 
slightly by 2012 due to somewhat higher growth in natural gas prices 
relative to electricity prices. The Department expects the relationship 
between gas and electricity prices to be relatively stable beyond 2012. 
The analysis does not project a significant market share shift due to 
operating cost changes, which were historically the dominant driver of 
market shares.
    The Department based its estimate of future market share shifts on 
the equipment costs estimated in the engineering analysis and on the 
Installation Model data. Since equipment cost varies with the 
efficiency level, the projected market share of gas furnaces is 
different for each efficiency level. The Department assumed that all 
shipments will incur the equipment price increase after the date of the 
standard implementation, but that prices will not rise further nor 
decline over time in real terms.
    The model estimates the combined market share of non-weatherized 
and weatherized gas furnaces in new housing completions in the South 
and non-South regions based on the historical parameters and their 
projected values. Table II.12 shows that the higher equipment prices 
associated with higher AFUE slightly decrease the share of gas furnaces 
in total new housing completions. The Department estimated shipments of 
weatherized gas furnaces by assuming that the latter have the same 
share of total gas furnace shipments in future years as estimated for 
year 2000.

 Table II.12.--Shipments of Non-Weatherized and Weatherized Gas Furnaces to New Housing for Different Efficiency
                                                     Levels
----------------------------------------------------------------------------------------------------------------
                                                                       Total                        Gas furnace
                              Year                                  completions     Gas furnace      shipments
                                                                     (million)      share  (%)       (million)
----------------------------------------------------------------------------------------------------------------
2010............................................................            1.62            54.6            0.88
2020............................................................            1.72  ..............  ..............
Base............................................................  ..............            54.9            0.94
80%.............................................................  ..............            54.9            0.94
81%*............................................................  ..............            54.7            0.94
90%.............................................................  ..............            54.4            0.92
92%.............................................................  ..............            53.0            0.91
----------------------------------------------------------------------------------------------------------------
* The values are about the same for the single-stage and modulating furnaces.

    For mobile home gas furnaces, DOE used an approach similar to that 
used for non-weatherized gas furnaces. In this case, however, the 
impact of higher equipment cost associated with higher efficiency is 
greater than for non-weatherized gas furnaces. The historical data show 
a relatively large shift away from gas furnaces associated with the 
increase in the price of gas relative to electricity.
    The Department estimated the future market shares of oil-fired 
furnaces and gas and oil-fired boilers in total new housing completions 
based on the average shares in homes built in 1997-1999. The Department 
assumed that these market shares will not be affected by changes in 
equipment price due to standards implementation. They remain constant 
after 2012.
iii. Total Projected Shipments
    The Department calculated total shipments in each class by adding 
new housing shipments in each year to replacements-in-kind and 
conversions. Table II.13a shows that efficiency levels up to 90 percent 
AFUE have little effect on total non-weatherized gas furnace shipments. 
Table II.13b shows the total shipment projection for selected years for 
all other product classes. For mobile home furnaces, higher efficiency 
levels up to 82 percent AFUE have a small effect on shipments.

         Table II.13a.--Total Shipments of Non-Weatherized Gas Furnaces for Different Efficiency Levels
                                                    [Million]
----------------------------------------------------------------------------------------------------------------
                                                                   Replacements-  Conversions to
                      Year                          New housing       in-kind           gas            Total
----------------------------------------------------------------------------------------------------------------
2010............................................            0.78            1.72            0.14            2.64
2020............................................  ..............  ..............  ..............  ..............
    Base........................................            0.83            2.30            0.16            3.28
    80%.........................................            0.83            2.30            0.16            3.28
    81%*........................................            0.83            2.30            0.16            3.28
    90%.........................................            0.80            2.30            0.16            3.26
    92%.........................................            0.76            2.30            0.16            3.21
----------------------------------------------------------------------------------------------------------------
* The values are about the same for the single-stage and modulating furnaces.


         Table II.13b.--Total Shipments in Other Product Classes
                                [Million]
------------------------------------------------------------------------
          Product Class                2012         2020         2030
------------------------------------------------------------------------
Weatherized gas furnaces.........        0.369        0.429        0.469

[[Page 45449]]

 
Mobile home gas furnaces:
    Base Case Forecast...........        0.082        0.080        0.075
    81% AFUE.....................        0.080        0.078        0.073
Oil-fired furnaces...............        0.102        0.093        0.079
Hot-water gas boilers............        0.105        0.113        0.117
Hot-water oil-fired boilers......        0.135        0.113        0.118
------------------------------------------------------------------------

b. Annual Unit Energy Consumption
    The annual unit energy consumption (UEC) for the base case forecast 
and each efficiency level come from the LCC analysis. It includes a 
value for gas (or oil) consumption and a value for electricity 
consumption.
    The base case forecast reflects the expected pattern of equipment 
purchase in the absence of any new standards. For non-weatherized gas 
furnaces, DOE forecasted the share of condensing furnaces in total 
shipments based on historic trends. The projected share rises from 23 
percent in 2000 to 37 percent in 2035. For each of these two types, the 
base case forecast assumes that the average AFUE in 2012 is equal to 
the estimated current average AFUE (based on data from GAMA). These 
average values are 80 percent for non-condensing furnaces and 93 
percent for condensing types. The base case forecast assumes that these 
values remain constant through 2035.
    For other product classes, there is little evidence of change in 
recent years in the average AFUE, so DOE used the current averages for 
the base case forecast. These are 80.6 percent AFUE for weatherized gas 
furnaces, 79.8 percent AFUE for mobile home gas furnaces, 81.1 percent 
AFUE for oil-fired furnaces, 81.9 percent AFUE for hot-water gas 
boilers, and 83.9 percent AFUE for hot-water oil-fired boilers.
    AGA commented that data from GAMA suggest market movement toward 
higher efficiency without standards, and DOE should take these data 
into account. (AGA, No. 11 at p. 4) As mentioned above, DOE used the 
base case forecast which incorporates continued growth in the market 
share of high-efficiency condensing furnaces.
c. Site-to-Source Conversion Factors
    Primary energy consumption includes energy used in the production 
and transmission of the energy consumed at the site. For natural gas 
and electricity, the Department used annual site-to-source conversion 
factors based on the LBNL version of NEMS, which corresponds to EIA's 
Annual Energy Outlook 2002 (AEO 2002). The factors used are marginal 
values, which represent the response of the system to an incremental 
decrease in consumption. Natural gas losses include pipeline leakage, 
pumping energy, and transportation fuel. AEO 2002 forecasts losses of 
about 7 percent for the natural gas used on site for the period 2000-
2020, with only slight variation from year to year. For electricity, 
the conversion factors vary over time due to projected changes in 
generation sources (i.e., the power plant types projected to provide 
electricity to the country). The Department assumed that conversion 
factors remain constant at 2020 values through 2035. The Department 
assumed no losses for delivery of site heating oil.
    AGA said that DOE should account for energy consumption over the 
full fuel cycle. (AGA, No.11 at p. 1) DOE considers the complete 
primary energy consumption impacts of standards, including changes in 
consumption associated with market shifts induced by the standard.
d. Installed Equipment Costs
    The Department calculated the potential effect on consumers of 
higher-efficiency standards based on the incremental costs of higher-
efficiency equipment minus the change in operating costs over the 
period considered. The Department took average equipment costs for the 
base case forecast and each efficiency level from the LCC analysis. 
Total equipment costs for each efficiency level equal the average cost 
multiplied by shipments in each year. The Department assumed no change 
in real equipment costs at each level after 2012. In cases where a 
market shift away from gas furnaces is projected, DOE accounted for the 
equipment costs of the electric heating equipment.
e. Energy Prices
    For a given efficiency level, total operating cost in each year is 
the product of total site energy consumption by type and the 
appropriate energy prices. The calculation uses marginal energy prices, 
which represent the cost of the last unit of energy used, and thus the 
savings on a consumer's energy bill from consuming one fewer unit of 
energy. The Department determined 1998 marginal gas and electricity 
prices in the LCC analysis. To project prices out to 2025, DOE used 
energy price projections from AEO 2003. For the years after 2025, DOE 
applied the average annual growth rate in 2010-2025 for gas and heating 
oil prices and the average annual growth rate in 2015-2025 for 
electricity prices.
f. Discount Rate
    A final step in assessing financial impacts of standards is to 
discount future monetary impacts using an appropriate discount rate. 
The Department used both a discount rate of seven percent and three 
percent real rate of return, in accordance with the Office of 
Management and Budget's (OMB) guidelines contained in Circular A-4, 
Regulatory Analysis, September 17, 2003 (see Chapter 10 of the TSD). 
(OMB Circular A-4, section E (September 17, 2003)) The Department 
defines the present year as 2001 for consistency with the year in which 
the Department collected manufacturer cost data.
g. Summary of Inputs
    Table II.14 summarizes the inputs used to calculate the NES and NPV 
values.

 Table II.14.--Summary of National Energy Savings and Net Present Value
                                 Inputs
------------------------------------------------------------------------
             Parameter                        Data description
------------------------------------------------------------------------
Shipments.........................  Annual shipments from shipments
                                     model.
Effective Date of Standard........  2012.

[[Page 45450]]

 
Annual Unit Energy Consumption....  Annual weighted-average values are a
                                     function of efficiency level via an
                                     assumed correlation of RECS data.
Installed Cost per Unit...........  Annual weighted-average values are a
                                     function of efficiency level
                                     (established from the LCC
                                     analysis).
Maintenance Cost per Unit.........  Annual weighted-average values are a
                                     function of efficiency level
                                     (established from the LCC
                                     analysis).
Energy Prices.....................  EIA Annual Energy Outlook 2003
                                     forecasts to 2025 and extrapolation
                                     beyond 2025.
Energy Site-to-Source Conversion..  Generated by DOE/EIA's National
                                     Energy Modeling System (NEMS)
                                     program (includes electric
                                     generation, transmission, and
                                     distribution losses) .
Discount Rate.....................  7 percent and 3 percent real.
Present Year......................  Future expenses are discounted to
                                     year 2001.
------------------------------------------------------------------------

3. National Impact Analysis Results
    The cumulative national energy savings (NES) in the 2012-2035 
period, and the net present value (NPV) for equipment installed in the 
2012-2035 period, are shown in Tables II.15 a-f for the various product 
classes.

                 Table II.15a.--Cumulative NES and Consumer NPV for Non-Weatherized Gas Furnaces
----------------------------------------------------------------------------------------------------------------
                                                                                       NPV (billion 2001 $)
                                                                                 -------------------------------
                     Efficiency level (AFUE)                        NES (Quads)     7% Discount     3% Discount
                                                                                       rate            rate
----------------------------------------------------------------------------------------------------------------
80%.............................................................            0.03            0.05            0.15
81%, 2-stage mod., no Cat. III..................................            1.12            0.75            3.22
81%, single-stage, 8% Cat. III..................................            0.44           -0.29            0.06
82%.............................................................            0.82           -2.03           -3.08
90%.............................................................            4.10           -0.56            5.11
92%.............................................................            4.83           -1.66            3.36
96%.............................................................            7.16          -11.59          -14.48
----------------------------------------------------------------------------------------------------------------


                   Table II.15b.--Cumulative NES and Consumer NPV for Weatherized Gas Furnaces
----------------------------------------------------------------------------------------------------------------
                                                                                       NPV (billion 2001 $)
                                                                                 -------------------------------
               Efficiency level (AFUE)  (Percent)                   NES (Quads)     7% Discount     3% Discount
                                                                                       rate            rate
----------------------------------------------------------------------------------------------------------------
80..............................................................            0.01            0.02            0.05
81..............................................................            0.08            0.07            0.21
82..............................................................            0.18            0.14            0.43
----------------------------------------------------------------------------------------------------------------


                   Table II.15c.--Cumulative NES and Consumer NPV for Mobile Home Gas Furnaces
----------------------------------------------------------------------------------------------------------------
                                                                                       NPV (billion 2001 $)
                                                                                 -------------------------------
               Efficiency level (AFUE)  (percent)                   NES (quads)     7% Discount     3% Discount
                                                                                       rate            rate
----------------------------------------------------------------------------------------------------------------
80..............................................................            0.01            0.01            0.05
81..............................................................            0.02            0.01            0.03
82..............................................................            0.02           -0.01           -0.01
90..............................................................           -0.09           -0.38           -1.00
----------------------------------------------------------------------------------------------------------------


                 Table II.15d.--Cumulative NES and Consumer NPV for Non-Weatherized Oil Furnaces
----------------------------------------------------------------------------------------------------------------
                                                                                       NPV (billion 2001 $)
                                                                                 -------------------------------
                Efficiency level (AFUE) (percent)                   NES (quads)     7% Discount     3% Discount
                                                                                       rate            rate
----------------------------------------------------------------------------------------------------------------
80..............................................................           0.005            0.01            0.03
81..............................................................            0.02            0.04            0.10
82..............................................................            0.04            0.07            0.19
83..............................................................            0.05            0.11            0.29
84..............................................................            0.07           -0.15           -0.20

[[Page 45451]]

 
85..............................................................            0.09           -0.11           -0.10
----------------------------------------------------------------------------------------------------------------


                    Table II.15e.--Cumulative NES and Consumer NPV for Hot-Water Gas Boilers
----------------------------------------------------------------------------------------------------------------
                                                                                       NPV (billion 2001 $)
                                                                                 -------------------------------
                Efficiency level (AFUE) (percent)                   NES (quads)     7% Discount     3% Discount
                                                                                       rate            rate
----------------------------------------------------------------------------------------------------------------
81..............................................................            0.03            0.02            0.09
82..............................................................            0.09            0.10            0.37
83..............................................................            0.16            0.20            0.70
84..............................................................            0.24            0.33            1.10
88..............................................................            0.57           -0.65           -0.42
99..............................................................            1.43           -1.00            0.25
----------------------------------------------------------------------------------------------------------------


                 Table II.15f.--Cumulative NES and Consumer NPV for Hot-Water Oil-Fired Boilers
----------------------------------------------------------------------------------------------------------------
                                                                                       NPV (billion 2001 $)
                                                                                 -------------------------------
                Efficiency level (AFUE) (percent)                   NES (quads)     7% Discount     3% Discount
                                                                                       rate            rate
----------------------------------------------------------------------------------------------------------------
81..............................................................           0.003           0.007            0.02
82..............................................................            0.01            0.02            0.05
83..............................................................            0.02            0.03            0.10
84..............................................................            0.03            0.07            0.20
86..............................................................            0.09           -0.28           -0.40
90..............................................................            0.25           -0.53           -0.62
----------------------------------------------------------------------------------------------------------------

    The Department seeks information and comments relevant to the 
assumptions, methodology, and results for the national energy savings 
and economics impacts analysis (see section IV.E of this ANOPR).

F. Life-Cycle Cost (LCC) Sub-Group Analysis

    The life-cycle cost sub-group analysis examines the economic 
impacts from possible revisions to U.S. residential furnace and boiler 
energy-efficiency standards on different population groups of 
consumers. The analysis determines whether or not a particular segment 
of consumers would be adversely affected by different trial standard 
levels in terms of increased LCC of equipment. DOE also calculated the 
fraction of the population that would have net benefits (reduced LCC) 
or net costs (increased LCC) from particular trial standard levels.
    Stakeholders said DOE should: (1) Conduct consumer sub-group 
analyses by region (ACEEE, No. 15 at p. 6); (2) provide stakeholders 
with a list of consumer sub-groups, reach consensus on major subgroups, 
and identify consumer subgroups expected to experience distinct levels 
of impacts (AGA, No. 11 at p. 5); and (3) segment householders into 
owners and renters, and ensure that renters (a majority of low income 
households) are not disadvantaged by standards. (ASE, No. 18 at p. 3) 
In the NOPR phase, DOE will examine three consumer sub-groups: low-
income households, senior-only residences, and renters.

G. Manufacturer Impact Analysis

    The policies outlined in the Department's Process Rule called for 
substantial revisions to the analytical framework of the manufacturer 
impact analysis. The Department held a public meeting on March 11 and 
12, 1997, to describe and get comment on a new generic methodology to 
be used in performing future manufacturing impact analyses of products 
covered under NAECA. The Department intends to apply this methodology 
to other EPCA-related efficiency standards as well, tailoring the 
methodology for each rule on the basis of stakeholder comments.
    During the NOPR phase, DOE intends to assess the impacts of new 
energy efficiency standards on residential furnace and boiler 
manufacturers. In addition to the more obvious financial impacts, a 
wide range of quantitative and qualitative effects may occur following 
adoption of a standard that may require changes to the manufacturing 
practices for these products. The Department will identify these 
effects through interviews with manufacturers and other stakeholders.
1. Sources of Information for the Manufacturer Impact Analysis
    Many of the analyses described earlier provide important 
information for the manufacturer impact analysis. Information includes 
manufacturing costs, shipments forecasts, and price forecasts. DOE will 
supplement this information with company financial data, and other 
information gathered during interviews with manufacturers. The 
interview process has a key role in the manufacturer impact analysis, 
since it allows DOE to consider confidential or sensitive information 
in the rulemaking decision.
    The Department and/or contractors will conduct detailed interviews 
with as many manufacturers as is necessary to gain insight into the 
range of potential impacts of new standards. During the interviews, the 
Department solicits information on the possible impacts of potential 
efficiency levels on sales, direct employment, capital assets, and 
industry competitiveness. Both qualitative and quantitative information

[[Page 45452]]

is valuable. DOE will schedule interviews well in advance, to provide 
every opportunity for key individuals to be available for comment. 
Although a written response to the questionnaire is acceptable, DOE 
prefers an interactive interview process, because it helps clarify 
responses and provides the opportunity for DOE to identify additional 
issues.
    Before the interviews, the Department will prepare and distribute 
to the manufacturers estimates of the financial parameters that DOE 
plans to use in the impact analysis. During the interviews, the 
Department will seek comment and suggestions regarding the values 
selected for the parameters.
    The Department will ask interview participants to identify all 
confidential information that they have provided, either in writing or 
orally. DOE will consider all information collected, as appropriate, in 
its decision-making process. However, DOE cannot make confidential 
information available in the public record. The Department also will 
ask participants to identify all information that they wish to have 
included in the public record, but that they do not want to have 
associated with their interview. DOE will incorporate this information 
into the public record, but will report it without attribution.
    The Department and/or contractors will collate the completed 
interview questionnaires and prepare a summary of the major issues.
2. Industry Cash Flow Analysis
    The industry cash flow analysis relies primarily on the Government 
Regulatory Impact Model (GRIM). The Department uses the GRIM to analyze 
the financial impacts of more stringent energy efficiency standards on 
the industry that produces the products covered by the standard.
    The GRIM analysis uses a number of factors to determine annual cash 
flows from a new standard: Annual expected revenues; manufacturer costs 
(including cost of goods, capital depreciation, R&D (research and 
development), selling, and general administrative costs); taxes; and 
conversion expenditures. DOE compares the results against baseline 
model projections that involve no new standards. The financial impact 
of new standards is the difference between the two sets of discounted 
annual cash flows. Other performance metrics, such as return on 
invested capital, also are available from the GRIM.
    ACEEE would like to see inter-annual variability of cash flows or 
profitability forecasts, for context and perspective. (ACEEE, No. 15 at 
p. 6) DOE uses the GRIM which is based on multi-year forecasts, and 
does not analyze intra-year variability directly. Collecting this 
information would impose a large data-gathering burden on 
manufacturers.
3. Manufacturer Sub-Group Analysis
    Using industry cost estimates is not adequate for assessing 
differential impacts among sub-groups of manufacturers. Smaller 
manufacturers, niche players, or manufacturers exhibiting a cost 
structure that differs significantly from the industry average, could 
experience a more negative impact. Ideally, the Department would 
consider the effect on every firm individually; however, it typically 
uses the results of the industry characterization to group 
manufacturers exhibiting similar characteristics.
    During the interview process, the Department will discuss the 
potential sub-groups and sub-group members that it has identified for 
the analysis. DOE will look to the manufacturers to suggest what sub-
groups or characteristics are most appropriate for the analysis.
4. Competitive Impacts Assessment
    Southern Co. commented that DOE should make sure competition is not 
reduced as a result of the rulemaking. (Southern Co., No. 14 at p. 4) 
ACEEE was concerned that DOE should show how standards would change the 
historical trend to consolidation. (ACEEE, No. 15 at p. 6) EPCA directs 
the Department to consider any lessening of competition, as determined 
in writing by the Attorney General, that is likely to result from 
imposition of standards. (42 U.S.C. 6295 (o)(2)(B)(i)(V)) The 
Department will make a determined effort to gather and report firm-
specific financial information and impacts. The competitive analysis 
will focus on assessing the impacts to smaller, yet significant, 
manufacturers. DOE will base the assessment on manufacturing cost data 
and on information collected from interviews with manufacturers. The 
manufacturer interviews will focus on gathering information that will 
help in assessing greater-than-average cost increases to some 
manufacturers, increased proportions of fixed costs that could 
potentially increase business risks, and potential barriers to market 
entry (e.g., proprietary technologies).
5. Cumulative Regulatory Burden
    The Department recognizes and seeks to mitigate the overlapping 
effects on manufacturers of amended DOE standards and other regulatory 
actions affecting the same equipment or companies. See 10 CFR part 430, 
subpart C, Appendix A, 10(g)(1). The Department is not aware of any 
other regulations pending or planned that will increase the regulatory 
burden resulting from this rulemaking on furnace and boiler 
manufacturers.

H. Utility Impact Analysis

    To estimate the effects of proposed furnace and boiler standard 
levels on the electric utility industry, the Department intends to use 
a variant of DOE/EIA's National Energy Modeling System (NEMS \7\). DOE/
EIA uses NEMS to produce its Annual Energy Outlook (AEO). The 
Department will use a variant, known as NEMS-BT, to provide key inputs 
to the analysis. Utility impact analysis is a comparison between model 
results for the base case forecast and policy cases in which proposed 
standards forecast are in place. The analysis will consist of 
forecasted differences between the base and standards cases for 
electricity generation, installed capacity, sales, and prices.
---------------------------------------------------------------------------

    \7\ For more information on NEMS, please refer to the U.S. 
Department of Energy, Energy Information Administration 
documentation. A useful summary is National Energy Modeling System: 
An Overview 2000, DOE/EIA-0581 (2000), March, 2000. DOE/EIA approves 
use of the name NEMS to describe only an official version of the 
model without any modification to code or data. Because this 
analysis entails some minor code modifications and the model is run 
under various policy scenarios that are variations on DOE/EIA 
assumptions, DOE refers to it by the name NEMS-BT (BT is DOE's 
Building Technologies office, under whose aegis this work has been 
performed previously named NEMS-BRS).
---------------------------------------------------------------------------

    The use of NEMS for the utility analysis offers several advantages. 
As the official DOE energy forecasting model, it relies on a set of 
assumptions that are transparent and have received wide exposure and 
commentary. NEMS allows an estimate of the interactions between the 
various energy supply and demand sectors and the economy as a whole. 
The utility analysis will report the changes in installed capacity and 
generation by fuel type which result for each trial standard level.
    DOE conducts the utility analysis as a policy deviation from the 
AEO, applying the same basic set of assumptions. For example, the 
operating characteristics (e.g., energy conversion efficiency, 
emissions rates) of future electricity generating plants are as 
specified in the AEO reference case, as are the prospects for natural 
gas supply.
    The Department also will explore deviations from some of the 
reference case assumptions to represent alternative futures. Two 
alternative scenarios use the high and low economic growth cases of AEO 
2003 (The reference case corresponds to medium growth). The high 
economic

[[Page 45453]]

growth case assumes higher projected growth rates for population, labor 
force, and labor productivity, resulting in lower predicted inflation 
and interest rates relative to the reference case and higher overall 
aggregate economic growth. The opposite is true for the low-growth 
case. While supply-side growth determinants are varied in these cases, 
AEO assumes the same reference case energy prices for all three 
economic growth cases. Different economic growth scenarios will affect 
the rate of growth of electricity demand.
    Because the current (AEO 2003) version of NEMS forecasts only to 
the year 2025, DOE must extrapolate results to 2035. The Department 
will use the approach developed by EIA to forecast fuel prices for the 
Federal Energy Management Program (FEMP). FEMP uses these prices to 
estimate the LCC of Federal equipment procurements. For petroleum 
products, the average growth rate for the world oil price over the 
years 2010-2025 is used in combination with the refinery and 
distribution markups from the year 2025 to determine the regional price 
forecasts. Similarly, natural gas prices are derived from an average 
growth rate figure in combination with regional price margins from the 
year 2025. Results of the analysis will include changes in residential 
electricity sales and installed capacity and generation by fuel type 
for each trial standard level, in five-year increments extrapolated to 
the year 2035.
    AGA commented that DOE should consider AGA's analytical approach to 
assess impacts on utilities and should provide a venue to discuss power 
plant heat rates and emission factors. (AGA, No. 11 at pp. 6-7) DOE 
plans to use the NEMS model for analysis of affect on utilities. In 
past rulemakings, DOE has used NEMS to evaluate the impact on utilities 
because NEMS is a comprehensive and transparent model which provides 
estimates for the interactions between the various supply and demand 
sectors and the economy as a whole. The Department routinely updates 
the power plant heat rates to reflect the latest available version of 
NEMS, the model used to generate the utility and environmental results. 
This tool, which is available to stakeholders, uses national-average, 
power-plant-heat-rate forecasts that can be replaced or modified by 
users to conduct sensitivity analysis.
    ACEEE commented that DOE should evaluate the impact of new 
standards on winter and summer peak loads. (ACEEE, No. 15 at p. 6) 
During the NOPR stage of the rulemaking, the Department will consider 
in its analysis impacts of standards on electricity system loads.

I. Environmental Assessment

    DOE will conduct an assessment of the impacts of proposed furnace 
and boiler standard levels on certain environmental indicators, using 
NEMS-BT to provide key inputs to the analysis, as well as some 
exogenous calculations. Results of the environmental assessment are 
similar to those provided in AEO.
    The environmental assessment provides emissions results to 
policymakers and interveners and fulfills requirements that the 
environmental effects of all new Federal rules be properly quantified 
and considered. The environmental assessment considers only two 
pollutants, sulfur dioxide (SO2) and nitrogen oxides 
(NOX), and one emission, carbon dioxide (CO2). 
The only form of carbon tracked by NEMS-BT is CO2, so the 
analysis will discuss carbon only in the form of CO2. For 
each of the standard levels, DOE will calculate total emissions using 
NEMS-BT in part and using external analysis as needed.
    The Department will conduct the environmental assessment as a 
policy deviation from the AEO, applying the same basic set of 
assumptions. For example, the emissions characteristics of an 
electricity generating plant will be exactly those used in AEO. 
Forecasts conducted with NEMS-BT also take into consideration the 
supply-side and demand-side effects on the electric utility industry. 
Thus, the Department's analysis takes into account any factors 
affecting the type of electricity generation and, in turn, the type and 
amount of airborne emissions the utility industry generates.
    NEMS-BT tracks carbon emissions using a detailed carbon module 
which provides good results because of its broad coverage of all 
sectors and inclusion of interactive effects. Past experience with 
carbon results from NEMS suggests that emissions estimates are somewhat 
lower than emissions estimates based on simple average factors. One of 
the reasons for this divergence is that NEMS tends to predict that 
conservation displaces renewable generating capacity in the out years. 
On the whole, NEMS-BT provides carbon emissions results of reasonable 
accuracy at a level consistent with other Federal published results.
    NEMS-BT also reports the two airborne pollutant emissions that DOE 
has reported in past analyses, SO2 and NOX. The 
Clean Air Act Amendments of 1990 set an SO2 emissions cap on 
all power generation. The attainment of this target, however, is 
flexible among generators through the use of emissions allowances and 
tradable permits. NEMS includes a module for SO2 allowance 
trading and delivers a forecast of SO2 allowance prices. 
Accurate simulation of SO2 trading tends to imply that 
physical emissions effects will be zero as long as emissions are at the 
ceiling. This fact has caused considerable confusion in the past. 
However, there is an SO2 benefit from conservation in the 
form of a lower allowance price as a result of additional allowances 
from this rule, and, if it is big enough to be calculable by NEMS-BT, 
DOE will report this value. The NEMS-BT model also has an algorithm for 
estimating NOX emissions from power generation. Two recent 
regulatory actions proposed by the EPA regarding regulations and 
guidelines for best available retrofit technology determinations and 
the reduction of interstate transport of fine particulate matter and 
ozone are tending towards further NOX reductions and likely 
to an eventual emissions cap on nation-wide NOX. 69 FR 25184 
(May 5, 2004) and 69 FR 32684 (June 10, 2004). As with SO2 
emissions, a cap on NOX emissions will likely result in no 
physical emissions effects from equipment efficiency standards.
    The results for the environmental assessment are similar to a 
complete NEMS run as published in the AEO. These include power sector 
emissions for SO2, NOX, and carbon, and 
SO2 prices, in five-year-forecasted increments extrapolated 
to the year 2035. DOE reports the outcome of the analysis for each 
trial standard level as a deviation from the AEO reference cases.
    AGA commented that DOE should use full fuel-cycle emissions from 
the EPA's E-GRID system, and the Department should consider using AGA 
information on emission characteristics. (AGA, No. 11 at p. 7) DOE will 
consider these comments in conducting the environmental assessment in 
the NOPR phase of the rulemaking.
    GAMA commented that residential furnaces and boilers are not vented 
in-house, so the Department may need to consider in-house emissions in 
the environmental assessment. (GAMA, No. 8 at p. 4) The Department will 
analyze environmental impacts of potential standards on furnaces and 
boilers, including in-house emissions (the local emissions from 
combustion in the furnace or boiler) in the NOPR phase of the 
rulemaking. The Department will use the same approach as it applied 
during the residential water heating rulemaking.

[[Page 45454]]

    EEI commented that a primary output of NEMS should be impacts on 
oil and gas production, refining, transportation and delivery systems 
and asked how DOE will handle emissions impacts on domestic and foreign 
oil refining and impacts on oil imports. (EEI, No. 6 at p. 3) The NEMS 
model takes into consideration impacts on domestic oil and gas 
production, refining, transportation and delivery systems, as well as 
the imports of various petroleum products from outside the United 
States. It does not consider the emissions impacts from domestic or 
foreign oil refining. Thus, DOE will not be considering these 
emissions.

J. Employment Impact Analysis

    The July 1996 Process Rule, 10 CFR part 430, subpart C, Appendix 
A4(7)(vi) includes employment impacts among the factors the Department 
should consider in selecting a proposed standard. The Process Rule 
states if the Department determines that a candidate standard level 
would be the direct cause of plant closures or significant losses in 
domestic manufacturer employment, that standard level will be presumed 
not to be economically justified. (10 CFR part 430, subpart C, Appendix 
A5(e)(3)(i)(B))
    The Department estimates the impacts of standards on employment for 
equipment manufacturers, relevant service industries, energy suppliers, 
and the economy in general. DOE separates employment impacts into 
indirect and direct impacts. Direct employment impacts would result if 
standards led to a change in the number of employees at manufacturing 
plants and related supply and service firms. DOE estimated direct 
impacts in the manufacturer sub-group analysis.
    Indirect impacts are impacts on the national economy other than in 
the manufacturing sector being regulated. Indirect impacts may result 
from both expenditures shifting among goods (substitution effect) and 
changes in income, which lead to a change in overall expenditure levels 
(income effect). DOE defines indirect employment impacts from standards 
as net jobs eliminated or created in the general economy as a result of 
increased spending on the purchase price of equipment and reduced 
customer spending on energy.
    DOE expects new furnace and boiler standards to increase the total 
installed cost of equipment. DOE expects the same standards to decrease 
energy consumption, and therefore to reduce customer expenditures for 
energy. Over time, the increased total installed cost is paid back 
through energy savings. The savings in energy expenditures may be spent 
on new commercial investment and other items. Using an input/output 
model of the U.S. economy, this analysis seeks to estimate the effects 
on different sectors, and the net affect on jobs. DOE will estimate 
national impacts for major sectors of the U.S. economy in the NOPR. DOE 
will use public and commercially available data sources and software to 
estimate employment impacts. DOE will make all methods and 
documentation available for review.
    BT has developed a spreadsheet model, Impact of Building Energy 
Efficiency Programs (IMBUILD), that it could use to analyze indirect 
employment impacts. IMBUILD is a special-purpose version of the Impact 
Analysis for Planning (IMPLAN) national input-output model which 
specifically estimates the employment and income effects of building 
energy technologies. IMBUILD is an economic analysis system that 
focuses on those sectors most relevant to buildings, and characterizes 
the interconnections among 35 sectors as national input-output 
matrices. The IMBUILD output includes employment, industry output, and 
wage income. One can introduce changes in expenditures due to appliance 
standards to IMBUILD as changes to existing economic flows, allowing 
estimation of the resulting net national impact on jobs by sector.
    ACEEE commented that DOE should carefully consider impacts on 
service providers and the manufacturer employment impact analysis 
should include the employment impacts of consumer energy cost savings. 
(ACEEE, No. 15 at p. 6) The Department will consider these comments in 
its analysis during the NOPR stage of the employment impacts of furnace 
and boiler standards.
    DOE believes increases or decreases in the net demand for labor in 
the economy estimated by the input/output model due to standards are 
likely to be very small relative to total national employment. It is 
difficult to project changes in employment for the following reasons:
    (1) If unemployment is 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;
    (2) Neither the Bureau of Labor Statistics (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
    (3) The net benefits or losses from potential employment changes 
are a result of the estimated NPV of benefits or losses likely to 
result from standards. It may not be appropriate to separately identify 
and consider any employment impacts beyond the calculation of NPV.
    The Department invites comments on the appropriate methodology that 
DOE should use in its employment impacts analysis.

K. Regulatory Impact Analysis

    DOE will prepare a draft regulatory analysis under Executive Order 
12866, ``Regulatory Planning and Review,'' which will be subject to 
review under the Executive Order by the Office of Information and 
Regulatory Affairs (OIRA). 58 FR 51735 (October 4, 1993).
    As part of the regulatory analysis, the Department will identify 
and seek to mitigate the overlapping effects on manufacturers of new or 
revised DOE standards and other regulatory actions affecting the same 
equipment. Through manufacturer interviews and literature searches, the 
Department will compile information on burdens from existing and 
impending regulations affecting furnaces and boilers.
    DOE's NOPR will include a complete quantitative analysis of 
alternatives to the proposed conservation standards. The Department 
plans to use the NES Spreadsheet Model (as discussed earlier in the 
section on the national impact analysis) to calculate the NES and the 
NPV corresponding to specified alternatives to the proposed 
conversation standards.

III. Candidate Energy Conservation Standards Levels

    The Process Rule gives guidance to the Department to specify 
candidate standards levels in the ANOPR, but not to propose a 
particular standard. 10 CFR part 430, subpart C, appendix A, 4(c)(1). 
The Department intends to review the public comments received during 
the public comment period following the ANOPR public meeting and update 
the analyses appropriately for each equipment class before issuing the 
NOPR.

IV. Public Participation

A. Attendance at Public Meeting

    The time and date of the public meeting are listed in the DATES 
section at the beginning of this notice of proposed rulemaking. Anyone 
who wants to attend the public meeting must notify Ms. Brenda Edwards-
Jones at (202) 586-2945. As stated in the Addresses section of this 
document, a photo ID is required to enter the Ronald Reagan Building 
and International Trade Center.

[[Page 45455]]

B. Procedure for Submitting Requests To Speak

    Any person who has an interest in today's notice, or who is a 
representative of a group or class of persons that has an interest in 
these issues, may request an opportunity to make an oral presentation. 
Please hand-deliver requests to speak, along with a computer diskette 
or CD in WordPerfect, Microsoft Word, PDF, or text (ASCII) file format 
to the address shown at the beginning of this advance notice of 
proposed rulemaking between the hours of 9 a.m. and 4 p.m., Monday 
through Friday, except Federal holidays. They may also be sent by mail 
or e-mail them to: ee.doe.gov">Brenda.Edwards-Jones@ee.doe.gov.
    Persons requesting to speak should briefly describe the nature of 
their interest in this rulemaking and provide a telephone number for 
contact. The Department requests persons selected to be heard to submit 
an advance copy of their statements at least two weeks before the 
public meeting. At its discretion, DOE may permit any person who cannot 
supply an advance copy of his or her statement to participate, if that 
person has made advance alternative arrangements with the Building 
Technologies Program. The request to give an oral presentation should 
ask for such alternative arrangements.

C. Conduct of Public Meeting

    The Department will designate a DOE official to preside at the 
public meeting and may also use a professional facilitator to aid 
discussion. The meeting will not be a judicial or evidentiary-type 
public hearing, but DOE will conduct it in accordance with 5 U.S.C. 553 
and section 336 of EPCA. (42 U.S.C. 6306) A court reporter will be 
present to record the transcript of the proceedings. The Department 
reserves the right to schedule the order of presentations and to 
establish the procedures governing the conduct of the public meeting. 
After the public meeting, interested parties may submit further 
comments on the proceedings as well as on any aspect of the rulemaking 
until the end of the comment period.
    The public meeting will be conducted in an informal, conference 
style. The Department will present summaries of comments received 
before the public meeting, allow time for presentations by 
participants, and encourage all interested parties to share their views 
on issues affecting this rulemaking. Each participant will be allowed 
to make a prepared general statement (within time limits determined by 
DOE) before the discussion of specific topics. The Department will 
permit other participants to comment briefly on any general statements.
    At the end of all prepared statements on a topic, DOE will permit 
participants to clarify their statements briefly and comment on 
statements made by others. Participants should be prepared to answer 
questions by DOE and by other participants concerning these issues. 
Department representatives may also ask questions of participants 
concerning other matters relevant to the public meeting. The official 
conducting the public meeting will accept additional comments or 
questions from those attending, as time permits. The presiding official 
will announce any further procedural rules or modification of the above 
procedures that may be needed for the proper conduct of the public 
meeting.
    The Department will make the entire record of this ANOPR 
rulemaking, including the transcript from the public meeting, available 
for inspection at the U.S. Department of Energy, Forrestal Building, 
Room 1J-018 (Resource Room of the Building Technologies Program), 1000 
Independence Avenue, SW., Washington, DC, (202) 586-9127, between 9 
a.m. and 4 p.m., Monday through Friday, except Federal holidays. Any 
person may buy a copy of the transcript from the transcribing reporter.

D. Submission of Comments

    The Department will accept comments, data, and information 
regarding all aspects of this ANOPR before or after the public meeting, 
but no later than the date provided at the beginning of this advance 
notice of proposed rulemaking. Please submit comments, data, and 
information electronically. Send them to the following e-mail address: 
ee.doe.gov">ResidentialFBANOPRComments@ee.doe.gov. Submit electronic comments in 
WordPerfect, Microsoft Word, PDF, or text (ASCII) file format and avoid 
the use of special characters or any form of encryption. Comments in 
electronic format should be identified by the docket number EE-RM/STD-
00-550, and wherever possible carry the electronic signature of the 
author. Absent an electronic signature, comments submitted 
electronically must be followed and authenticated by submitting the 
signed original paper document. No telefacsimiles (faxes) will be 
accepted.
    Pursuant to 10 CFR 1004.11, any person submitting information that 
he or she believes to be confidential and exempt by law from public 
disclosure should submit two copies: one copy of the document including 
all the information believed to be confidential, and one copy of the 
document with the information believed to be confidential deleted. The 
Department of Energy will make its own determination about the 
confidential status of the information and treat it according to its 
determination.
    Factors of interest to the Department when evaluating requests to 
treat submitted information as confidential include: (1) A description 
of the items; (2) whether and why such items are customarily treated as 
confidential within the industry; (3) whether the information is 
generally known by, or available from, other sources; (4) whether the 
information has previously been made available to others without 
obligation concerning its confidentiality; (5) an explanation of the 
competitive injury to the submitting person which would result from 
public disclosure; (6) when such information might lose its 
confidential character due to the passage of time; and (7) why 
disclosure of the information would be contrary to the public interest.

E. Issues on Which DOE Seeks Comment

    The Department is interested in receiving comments and/or data to 
improve its analysis. The Department has asked for comments in a number 
of areas throughout this ANOPR. The Department is particularly 
interested in responses to the following questions and/or concerns:
1. Installation Model
    Installation costs are a major part of the total consumer cost of a 
furnace or boiler and hence are a factor in the LCC analysis of 
potential standard levels. Due to the shortcomings of existing 
installation cost data, the Department developed an Installation Model 
to estimate installation costs (see section II.C.6 of this ANOPR). The 
Installation Model assumptions, methodology, and results regarding 
installation costs of residential furnaces and boilers are a recent 
development that stakeholders have not reviewed. In particular, the 
Department seeks information relevant to venting categories, markets, 
installation sizes, and the application of these components to 
establish installation costs for product classes under consideration in 
this rulemaking.
2. Venting Issues
    Proper selection of vent materials and correct configuration of 
vent systems are essential for safe operation of any combustion 
appliance (see section II.C.6.c of this ANOPR). For gas boilers, NFPA 
54 provides Category I venting guidelines; and for oil-fired 
appliances,

[[Page 45456]]

the applicable venting guideline is NFPA 31. However, the efficiency 
level at which the use of higher-cost Category III venting becomes 
necessary is not defined by these codes. For the analysis of gas 
boilers, DOE assumes that 20 percent of installations include Category 
III horizontal vents for construction-related reasons for efficiencies 
up to 84 percent AFUE. At 85 percent AFUE, DOE assumes Category III 
venting must be used 100 percent of the time. For oil-fired equipment, 
type L venting is required at all AFUE levels up to 84 percent. DOE 
assumes that at 85 percent and 84 percent AFUE for oil-fired boilers 
and oil-fired furnaces, respectively, the vent system must be upgraded 
to stainless AL-4C.
    The Department seeks further data and comment relevant to the above 
assumptions. In particular, the Department is interested in getting 
data regarding: (1) The fraction of total gas boiler installations at 
each efficiency rating that use Category III horizontal venting; and 
(2) the fraction of total oil boiler and total oil furnace 
installations at each efficiency level that use stainless AL-4C (as 
opposed to type L).
3. Efficiency Distribution of Weatherized Gas Furnaces
    For weatherized gas furnaces, estimates of national energy savings 
depend on the baseline model efficiency level. The Department has 
limited data on the efficiency distribution of current sales of this 
product class, and has estimated the baseline model efficiency level 
using historical data. The Department seeks information on the 
efficiency distribution of current sales of weatherized gas furnaces 
from manufacturers of packaged air conditioners (which incorporate 
weatherized gas furnaces), or others.
4. 81 Percent AFUE Furnaces With and Without Two-Stage Modulating 
Controls
    Two-stage modulation is used in both condensing and non-condensing, 
non-weatherized gas furnaces. Because there are at least two major 
manufacturers that market a series of 81 percent AFUE, two-stage 
modulating furnace models and specify, for these furnaces, Category I 
vent systems incorporating Type B vent and Type B vent connectors, it 
appears that 81 percent AFUE, two-stage modulating furnaces do not pose 
vent safety issues associated with premature corrosion. For non-
modulating 81 percent AFUE furnaces, the Department established that 
special venting treatments such as the use of Category III systems/
components may be needed for many installations, and estimated the cost 
for these vent systems.
    Because of the higher initial venting costs and increased safety 
concerns associated with non-modulating furnaces, DOE assumes that 
manufacturers would choose to manufacture two-stage modulating furnaces 
if DOE established a minimum standard of 81 percent AFUE. This 
assumption seems to be supported by recent developments in the 
marketplace. Based on information available to DOE, it appears that 
manufacturers have ceased to produce non-modulating models with AFUE of 
81 percent or higher, and that at least two manufacturers are offering 
81 percent AFUE modulating furnaces.
    The current DOE test procedure incorporates an adjustment factor 
for two-stage modulating furnaces to reflect the impact of their 
different operation (``time on/time off'') compared to single-stage 
furnaces. The presence of this adjustment in the test procedure results 
in a national energy savings estimate for two-stage modulating furnaces 
that is nearly three times as great as the savings for 81 percent AFUE 
furnaces using non-modulating technology. DOE is uncertain whether the 
adjustment for modulating furnaces that is included in the test 
procedure yields an accurate estimate of the expected energy use of the 
product and solicits public comment on this issue. Even if the test 
procedure presents an accurate representation of this product's energy 
use, DOE solicits public comment on whether the test procedure should 
be modified to provide modulating furnaces with an AFUE rating that is 
a better reflection of its expected energy use. Based on the current 
test procedure, estimates for a two-stage modulating furnace with an 
AFUE rating of 81 percent is likely to show annual gas consumption in 
line with a non-modulating furnace with a higher AFUE rating.
    The Department also wishes to receive data on venting installation 
practices/guidelines and any additional information/data on vent safety 
issues for all 81 percent AFUE non-weatherized gas furnaces.
5. Regulation of Furnace Electricity Consumption
    The Department's analytical framework for the current rulemaking 
described an approach to regulate the electricity use of furnaces and 
boilers that would involve specifying a maximum annual electrical 
consumption. The current DOE test procedure provides a means to 
determine electrical consumption (kWh). However, 42 U.S.C. 6291(6) 
states that an ``energy conservation standard'' is either (A) ``a * * * 
level of energy efficiency'' or ``a * * * quantity of energy use,'' or 
(B) ``a design requirement for the products specified * * *. '' Item 
(A) above strongly suggests that a single ``energy conservation 
standard'' cannot have measures or descriptions for both energy 
efficiency and energy use. A standard that includes both a level of 
energy efficiency and a quantity of energy use (kWh of electricity) 
conflicts with the statutory language. 42 U.S.C. 6291(20) states that 
``the term `annual fuel utilization efficiency' means the efficiency 
descriptor for furnaces and boilers, determined using test procedures 
prescribed under section 323 * * *.'' Since the AFUE descriptor does 
not include electricity use, DOE cannot regulate the use of electricity 
by furnaces and boilers.
    Based on the considered approaches and the statutory language, the 
Department has decided not to regulate electricity consumption of 
residential furnaces and boilers at this time using the above-mentioned 
descriptor approaches. The Department seeks comment on the above 
methods and information on any other method for developing a standard 
that would be consistent with the existing statutory authority.

V. Regulatory Review and Procedural Requirements

    This advance notice of proposed rulemaking was submitted for review 
to OIRA in the Office of Management and Budget under Executive Order 
12866, ``Regulatory Planning and Review.'' 58 FR 51735. If DOE later 
proposes amended energy conservation standards for residential furnaces 
and boilers, the rulemaking would likely constitute a significant 
regulatory action, and DOE would prepare and submit to OIRA for review 
the assessment of costs and benefits required by section 6(a)(3) of the 
Executive Order. In addition, various other analyses and procedures may 
apply to such future rulemaking action, including those required by the 
National Environmental Policy Act, 42 U.S.C. 4321 et seq.; the Unfunded 
Mandates Act of 1995, Public Law 104-4; the Paperwork Reduction Act, 44 
U.S.C. 3501 et seq.; the Regulatory Flexibility Act, 5 U.S.C. 601 et 
seq.; and certain Executive Orders.

VI. Approval of the Office of the Secretary

    The Secretary of Energy has approved publication of today's Advance 
Notice of Proposed Rulemaking.


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    Issued in Washington, DC, on July 13, 2004.
David K. Garman,
Assistant Secretary, Energy Efficiency and Renewable Energy.
[FR Doc. 04-16574 Filed 7-28-04; 8:45 am]
BILLING CODE 6450-01-P