[Federal Register Volume 69, Number 145 (Thursday, July 29, 2004)]
[Proposed Rules]
[Pages 45460-45503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16575]



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Part IV





Department of Energy





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Office of Energy Efficiency and Renewable Energy



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10 CFR Part 431



Energy Conservation Program for Commercial and Industrial Equipment: 
Energy Conservation Standards for Commercial Unitary Air Conditioners 
and Heat Pumps; 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 431

[Docket No. EE-RM/STD-01-375]
RIN 1904-AB09


Energy Conservation Program for Commercial and Industrial 
Equipment: Energy Conservation Standards for Commercial Unitary Air 
Conditioners and Heat Pumps

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

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

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SUMMARY: The Energy Policy and Conservation Act (EPCA) directs the 
Department of Energy (DOE or the Department) to consider whether to 
adopt the amended energy efficiency levels in the American Society of 
Heating, Refrigerating and Air-Conditioning Engineers, Inc. (ASHRAE)/
Illuminating Engineering Society of North America (IESNA) Standard 
90.1-1999, or more stringent levels, for certain commercial unitary air 
conditioners and heat pumps with rated cooling capacities of 65,000 
British thermal units per hour (Btu/h) and greater, but less than 
240,000 Btu/h. The Department publishes this Advance Notice of Proposed 
Rulemaking (ANOPR) to solicit public comments on its preliminary 
analyses for this equipment.

DATES: The Department will hold a webcast on Thursday, August 12, 2004, 
from 1 p.m. to 4 p.m. If you are interested in participating in this 
event, please inform James Raba at (202) 586-8654.
    The Department will hold a public meeting on Thursday, September 
30, 2004, from 9 a.m. to 5 p.m., in Washington, DC. The Department must 
receive requests to speak at the meeting before 4 p.m., Thursday, 
September 16, 2004. The Department must receive a signed original and 
an electronic copy of statements to be given at the public meeting 
before 4 p.m., Thursday, September 23, 2004.
    The Department will accept comments, data, and information 
regarding the ANOPR before or after the public meeting, but no later 
than Friday, November 12, 2004. See section IV, ``Public 
Participation,'' of this ANOPR for details.

ADDRESSES: You may submit comments, identified by docket number EE-RM/
STD-01-375 and/or RIN number 1904-AB09, by any of the following 
methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: commercial [email protected]">aircon[email protected]. 
Include EE-RM/STD-01-375 and/or RIN 1904-AB09 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 Commercial 
Unitary Air Conditioners and Heat Pumps, EE-RM/STD-01-375 and/or RIN 
1904-AB09, 1000 Independence Avenue, SW., Washington, DC, 20585-0121. 
Telephone: (202) 586-2945. Please submit one signed paper original.
     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 
(formerly Room 1E-190 at the Forrestal Building) is no longer housing 
rulemaking materials.

FOR FURTHER INFORMATION CONTACT: James Raba, U.S. Department of Energy, 
Office of Energy Efficiency and Renewable Energy, Building 
Technologies, EE-2J, 1000 Independence Avenue, SW., Washington, D.C. 
20585-0121, (202) 586-8654. E-mail: [email protected]. Francine 
Pinto, U.S. Department of Energy, Office of General Counsel, GC-72, 
1000 Independence Avenue, SW., Washington, DC 20585, (202) 586-9507. E-
mail: [email protected].

SUPPLEMENTARY INFORMATION: 

I. Introduction
    A. Summary of the Analysis
    1. Engineering Analysis
    2. Building Energy Use and End-Use Load Characterization
    3. Markups to Determine Equipment Prices
    4. Life-Cycle Cost (LCC) and Payback Period (PBP) Analysis
    5. National Impact Analysis
    B. Authority
    C. Background
    1. History
    2. Rulemaking Process
    3. Equipment Definitions
    4. Efficiency Levels
    5. Test Procedure
II. Commercial Unitary Air Conditioner and Heat Pump Analyses
    A. Market and Technology Assessment
    1. Manufacturers
    2. Equipment Efficiency
    3. Equipment Shipments
    B. Screening Analysis
    C. Engineering Analysis
    1. Baseline Equipment
    a. Efficiency Level
    b. Maximum Technologically Feasible Design
    c. Representative Capacities
    2. Methodology
    3. Cost Assessment Approach
    a. Teardown Analysis
    b. Cost Model
    c. Cost/Efficiency Curves
    4. Supplemental Design Option Analysis
    5. Alternative Refrigerant Analysis
    D. Building Energy Use and End-Use Load Characterization
    1. Approach
    2. Preliminary Results
    E. Markups to Determine Equipment Price
    1. Approach
    2. Estimated Markups
    F. Life-Cycle Cost and Payback Period Analysis
    1. Inputs to LCC Analysis
    a. Total Installed Cost Inputs
    b. Operating Cost Inputs
    (1) Use of Whole-Building Simulations
    (2) Electricity Price Analysis
    (a) Tariff-Based Approach
    (b) Hourly Based Approach
    (c) Comparison of Tariff-Based and Hourly Based Prices
    (3) Electricity Price Trend
    (4) Repair Cost
    (5) Maintenance Cost
    (6) Lifetime
    (7) Discount Rate
    (8) Effective Date
    2. Inputs to the Payback Period Analysis
    3. Preliminary Results
    a. Life-Cycle Cost Results
    b. Payback Period Results
    G. National Impact Analysis
    1. National Energy Savings (NES)
    a. National Energy Savings Inputs
    (1) Annual Energy Consumption Per Unit
    (2) Shipments
    (3) Equipment Stock
    (4) National Annual Energy Consumption
    (5) Electricity Site-to-Source Conversion Factor
    2. National Net Present Value
    a. National Net Present Value Calculations

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    b. Net Present Value Inputs
    (1) Total Annual Installed Cost
    (2) Total Annual Operating Cost Savings
    (3) Discount Factor
    (4) Present Value of Costs
    (5) Present Value of Savings
    3. Shipments Model
    a. Ownership Categories
    b. Market Segments
    c. Logit Probability Model
    4. Preliminary Results
    H. LCC Sub-Group Analysis
    I. 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
    J. Utility Impact Analysis
    K. Environmental Assessment
    L. Employment Impact Analysis
    M. 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. Approaches to Analyses for Split Systems, Heat Pumps, and 
Niche Equipment
    2. Alternative Refrigerant Analysis
    3. Candidate Standards Levels
    4. Design-Option Analysis and Maximum Energy Efficiency Levels
    5. Industrial Buildings
    6. Economizer Performance
    7. Fan Energy Consumption
    8. Equipment Markups
    9. Hourly Based Electricity Prices
    10. Forecasts of Electricity Prices
    11. Equipment Lifetime
    12. Maximum Market Share of Commercial Unitary Air Conditioning 
Equipment
    13. Future Building Types Using Commercial Unitary Equipment
    14. Customer Sub-Groups
    15. Effective Date of New Standards and Phaseout Date of R-22 
Refrigerant
    16. Independent Expert Third-Party Reviews
    a. Sample of Buildings
    b. Building Loads and System Thermodynamics Simulation and 
Commercial Buildings Energy Consumption Survey Estimates of Energy 
Use
    c. Supply Fan Energy Use While Ventilating
    d. Incremental Markups
    17. Effect of Income Taxes on Life-Cycle Cost
    18. Technologies that Affect Full-or Part-Load Performance
    19. Environmental Assessment
    20. Rebound Effect
V. Regulatory Review and Procedural Requirements
VI. Approval of the Office of the Secretary

I. Introduction

A. Summary of the Analysis

    The Energy Policy and Conservation Act (42 U.S.C. 6311 et seq.) 
establishes minimum energy conservation standards for certain 
industrial and commercial equipment, including the commercial unitary 
air conditioners and heat pumps under consideration in this rulemaking. 
The EPCA further requires that, if certain industry standards are 
amended after the date of enactment of the Energy Policy Act of 1992, 
DOE must establish a new energy efficiency standard at that amended 
level, or at a more stringent level if DOE determines, ``by rule 
published in the Federal Register and supported by clear and convincing 
evidence, that adoption of a uniform national standard more stringent 
than such amended ASHRAE/IESNA Standard 90.1 for such product would 
result in significant additional conservation of energy and is 
technologically feasible and economically justified.'' (42 U.S.C. 
6313(a)(6)(A))
    The Department conducted in-depth technical analyses for this ANOPR 
in the following areas: (1) Engineering, (2) building energy use and 
end-use load characterization, (3) markups to determine equipment 
prices, (4) life-cycle cost (LCC) and payback periods (PBP), and (5) 
national impacts.
1. Engineering Analysis
    The engineering analysis establishes the relationship between the 
cost and efficiency of commercial unitary air conditioners and heat 
pumps. This relationship serves as the basis for cost/benefit 
calculations in terms of individual consumers, manufacturers, and the 
Nation. The engineering analysis identifies the representative baseline 
equipment (using R-22 as the refrigerant), develops the bill of 
materials and determines the costs, constructs the industry cost/
efficiency curves, and evaluates the impact of using an alternative to 
R-22 refrigerant on the cost/efficiency relationship of certain 
commercial unitary air conditioners and heat pumps. (See section II.C. 
of this ANOPR for further details.)
2. Building Energy Use and End-Use Load Characterization
    The building energy use and end-use load characterization analysis 
uses building simulations to estimate the energy consumption of 
commercial unitary air conditioning equipment at specified candidate 
standards levels. The 1995 Commercial Buildings Energy Consumption 
Survey (CBECS 95) data set was the primary source of the data used to 
develop the building set and its associated characteristics. The 
Department modeled each building in the set using the Building Loads 
and System Thermodynamics (BLAST) software. (See section II.D of this 
ANOPR for further details.)
3. Markups To Determine Equipment Prices
    The equipment price analysis derives end-user or customer prices 
for more energy efficient commercial unitary air-conditioning 
equipment. To derive those prices, the Department differentiates 
between a baseline (manufacturer's) markup and an incremental 
(wholesaler's, general contractor's, and mechanical contractor's) 
markup, based on the distribution channel that the customer uses to 
purchase such equipment. (See section II.E of this ANOPR for further 
details.)
4. Life-Cycle Cost (LCC) and Payback Period (PBP) Analysis
    When the Department is determining whether an energy efficiency 
standard for commercial unitary air-conditioning equipment is 
economically justified, EPCA directs DOE to consider, in part, the 
economic impact of potential standards on consumers. (42 U.S.C. 
6313(a)(6)(B)(i)(I)) To assess that impact, the Department calculated 
the changes in LCCs which are likely to result from a candidate 
standard, as well as a distribution of PBPs. The foundation of the LCC 
and PBP analyses is the building set defined by the building energy use 
and end-use load characterization analysis. The Department created a 
representative sample from the building set, and determined the LCC and 
PBP for a given energy efficiency standard level for each building in 
the sample. Probability distributions characterize most other inputs to 
the LCC and PBP analysis. The input probability distributions combined 
with the building sample enabled the Department to generate LCC and PBP 
results as probability distributions using a simulation based on Monte 
Carlo statistical analysis methods. One of the most critical inputs to 
the LCC and PBP analysis is electricity price. The Department derived 
two sets of electricity prices to estimate annual energy expenses: A 
tariff-based estimate and an hourly based estimate. Although the 
Department used these two sets of electricity prices, it designated the 
tariff-based prices as the primary approach. In combination with the 
hourly electrical loads from the building simulations, the

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tariff-based approach estimates the annual energy expense using 
electricity prices determined from electric utility tariffs collected 
in the year 2002. (See section II.F of this ANOPR for further details.)
5. National Impact Analysis
    The national impact analysis assesses the national energy savings 
(NES) and the net present value (NPV) of total customer LCC and NES. 
The Department calculated both NES and NPV for a given energy 
efficiency standard level as the difference between a base case 
(without new standards, i.e., EPCA levels) and the standards case (with 
new standards). The Department determined national annual energy 
consumption by multiplying the number of units or stock of commercial 
unitary air conditioners (by vintage) by the unit energy consumption 
(also by vintage). Cumulative energy cost savings is the sum of the 
annual NES determined over specified time periods. The national NPV is 
the sum over time of discounted net cost savings due to the energy 
savings. The Department calculated net savings each year as the 
difference between total operating cost savings (including electricity, 
repair, and maintenance cost savings) and increases in total installed 
costs (including equipment price and installation cost). As with the 
NES, cumulative cost savings is the sum of the annual NPV determined 
over specified time periods. One of the most critical inputs to this 
analysis is shipments data. The Department developed shipments 
projections under a base case and certain candidate standards cases. It 
determined that shipment projections under the standards cases were 
lower than those from the base case projection, due to the higher 
installed cost of the more energy-efficient unitary air conditioning 
equipment. Higher installed costs caused some customers to forego 
equipment purchases. As a result, the Department used the standards 
case shipments projection and, in turn, the standards case stock of 
commercial unitary air conditioners to determine the NES and NPV to 
avoid the inclusion of savings due to displaced shipments.
    Table I.1 summarizes the key inputs, assumptions, and methodologies 
for each analysis area, and provides general references for finding the 
corresponding analyses in the Technical Support Document (TSD), a 
``stand-alone'' report that provides the technical analyses and results 
in support of the information presented in this ANOPR. The ANOPR and 
TSD are available to interested parties on the Department's website at 
http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html. 
Also, Table I.1 provides references for finding the results of each 
analysis in this ANOPR.

                         Table I.1.--In-Depth Technical Analyses Conducted for the ANOPR
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                                                                                             ANOPR section for
         Analysis area              Methodology         Key inputs      Key assumptions           results
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Engineering (TSD Chapter 5)....  Tear Down          Component cost     Maximum            Section II.C.3.c.
                                  Analysis           data.              Technologically
                                  supplemented                          Feasible
                                  with Design                           efficiency
                                  Option Analysis.                      equals 12 EER.
Building Energy Use and End-Use  Whole-Building     1997 Commercial    (1) BLAST          (2) Ventilation rates
 Load Characterization (TSD       simulations        Building Energy    characterization   set equal to ASHRAE
 Chapter 6).                      using Building     Consumption        of part-load       62 requirements; and
                                  Loads and System   Survey (CBECS)     equipment         (3) Fan power
                                  Thermodynamics     to identify and    performance;       consumption included
                                  (BLAST) software.  characterize the                      during times of
                                                     type of building                      ventilation and
                                                     using unitary                         heating
                                                     air conditioners.
Markups to Determine Equipment   Assessment of      (1)                Differentiation    Section II.E.2.
 Price (TSD chapter 7).           financial          Characterization   between a
                                  reports to         of distribution    baseline markup
                                  develop markups    channels and       and an
                                  to transform       markets; and (2)   incremental
                                  manufacturer       Financial          markup to relate
                                  prices into        reports            manufacturer
                                  customer prices.   characterizing     price to
                                                     firm costs,        customer price.
                                                     expenses, and
                                                     profits.
LCC and Payback Period (TSD      Building-by-       (1) Output from    Sample of          Section II.F.3.
 Chapter 8).                      building           the Engineering,   commercial
                                  analysis of a      Building           buildings
                                  representative     Simulation, and    representative
                                  sample of          Equipment Price    of all unitary
                                  commercial         analyses; and      air conditioner
                                  building          (2) Electricity     users
                                  customers          prices based on    (industrial
                                  (customers are     current electric   users have been
                                  appropriately      utility tariffs.   excluded).
                                  weighted).
National Impact (TSD Chapter     Forecasts of       (1) Average        Responsiveness of  Section II.G.4.
 10).                             unitary air        values from the    shipments
                                  conditioner        LCC analysis;      forecasts to
                                  costs and energy  (2) Historical      total installed
                                  consumption to     shipment data;     cost, operating
                                  the year 2035.     and.               costs, and
                                                    (3) Commercial      business income.
                                                     building stock
                                                     and forecasts of
                                                     commercial
                                                     building starts.
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    The Department consulted with interested parties while developing 
the above analyses to make clear the sources of data and analytical 
processes it used. The Department continues to seek input from all 
interested parties on the methodologies, inputs, and assumptions used 
to develop the analyses. In addition, certain analyses were very 
complex and questions raised by stakeholders led the Department to 
engage independent, third-party experts to review the Department's 
assumptions, approaches, data, and analytical methods used in 
particular for: (1) The sample of buildings used to represent 
commercial unitary air conditioning equipment; (2) the BLAST and CBECS 
estimates of energy use in these buildings; (3) supply fan energy use 
while ventilating; and (4)

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incremental markup of commercial unitary air conditioning equipment 
prices. The third-party reviews are available to interested parties on 
the Department's website at http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html. The Department is requesting 
stakeholder comments about the third-party reviews concerning the 
subjects described in Issue 16, found in section IV.E., ``Issues on 
Which DOE Seeks Comment,'' of this ANOPR.

B. Authority

    Title III of EPCA sets forth a variety of provisions designed to 
improve energy efficiency. Part C of title III (42 U.S.C. 6311-6317) 
establishes an energy conservation program for ``Certain Industrial 
Equipment'' and includes commercial air conditioning equipment, the 
subject of this proceeding. Part C provides definitions, test 
procedures, labeling provisions, energy efficiency standards, and 
authority to require information and reports from manufacturers.
    EPCA established efficiency requirements that correspond to the 
levels in ASHRAE/IESNA Standard 90.1-1989, that went into effect on 
October 24, 1992. EPCA further provides that if the efficiency levels 
in ASHRAE/IESNA Standard 90.1 are amended after that date for certain 
covered commercial equipment, including commercial unitary air 
conditioners and heat pumps, the Department must establish an amended 
uniform national standard for such equipment at the new minimum level 
for each effective date specified in the amended ASHRAE/IESNA Standard 
90.1, unless the Department determines, through a rulemaking supported 
by clear and convincing evidence, that a more stringent standard is 
technologically feasible and economically justified and would result in 
significant additional energy conservation. (42 U.S.C. 6313(a)(6)(A))
    Under EPCA, if DOE adopts a more stringent standard, DOE must 
determine whether the benefits of the standard exceed its burdens to 
the greatest extent practicable, by considering the following seven 
factors (42 U.S.C. 6313(a)(6)(B)(i)):
    (1) The economic impact of the standard on the manufacturers and 
consumers of the affected products;
    (2) The savings in operating costs throughout the estimated average 
life of the product compared to any increases in the initial cost, or 
maintenance expense;
    (3) The total projected amount of energy savings likely to result 
directly from the imposition of the standard;
    (4) Any lessening of the utility or the performance of the products 
likely to result from the imposition of the standard;
    (5) The impact of any lessening of competition, as determined in 
writing by the Attorney General, that is likely to result from the 
imposition of the standard;
    (6) The need for national energy conservation; and
    (7) Other factors the Secretary considers relevant.
    Other statutory requirements are set forth in 42 U.S.C. 
6313(a)(6)(B)(ii).

C. Background

1. History
    On October 29, 1999, ASHRAE/IESNA adopted the energy efficiency 
standards for certain commercial heating and air conditioning 
equipment, including commercial unitary air conditioners and heat 
pumps, in ASHRAE/IESNA Standard 90.1-1999. On March 1, 2000, the 
Department published a notice of preliminary screening analysis to 
decide which of the ASHRAE/IESNA Standard 90.1-1999 standards to adopt 
immediately and which to analyze further. 65 FR 10984 (March 1, 2000). 
On January 12, 2001, the Department published a final rule adopting the 
energy efficiency levels in ASHRAE/IESNA Standard 90.1-1999 for 18 
product categories and made a decision to further evaluate other 
products. 66 FR 3336 (January 12, 2001). In the final rule, DOE 
determined that further analysis was warranted for commercial unitary 
air conditioners and heat pumps with rated cooling capacities of 65,000 
Btu/h and greater, but less than 240,000 Btu/h. This conclusion was 
based on DOE's screening analysis. As a result, the Department has 
conducted further analysis and is considering more stringent standards 
than those in ASHRAE/IESNA Standard 90.1-1999 for this equipment.
2. Rulemaking Process
    The Procedures, Interpretations and Policies for Consideration of 
New or Revised Energy Conservation Standards for Consumer Products (the 
``Process Rule''), 10 CFR Part 430, Subpart C, Appendix A, applies to 
the development of energy efficiency standards for consumer products. 
DOE has decided, however, to apply its procedures to the development of 
energy conservation standards for industrial equipment as well, 
including commercial unitary air conditioners and heat pumps standards, 
as appropriate. 62 FR 54817.
    On June 13, 2001, the Department published a Framework Document for 
Commercial Air Conditioner and Heat Pump Standards Rulemaking 
(Framework Document) that describes the procedural and analytical 
approaches available to evaluate energy conservation standards for 
commercial unitary air conditioners and heat pumps. This document is 
available at http://www.eere.energy.gov/buildings/appliance_standards/commercial/ac_hp.html. The Department held a Framework Workshop on 
October 1, 2001, to discuss the procedural and analytical approaches 
for use in the rulemaking, and to inform and facilitate stakeholders' 
involvement in the rulemaking process. The analytical framework 
presented at the workshop described different analyses, such as LCC and 
PBP, the methods proposed for conducting them, and the relationships 
among the various analyses (see Table I.2). The ANOPR TSD describes the 
analytical framework in detail.
    Statements received after publication of the Framework Document and 
at the October 1, 2001, Framework Workshop helped identify issues 
involved in this rulemaking, and provided information that has 
contributed to DOE's proposed resolution of these issues. Many of the 
statements are quoted and summarized in this ANOPR. A parenthetical 
reference at the end of a quotation or passage provides the location 
index in the public record.

     Table I.2.--Commercial Unitary Air Conditioners and Heat Pumps
            Rulemaking Analyses Pursuant to the Process Rule
------------------------------------------------------------------------
            ANOPR                    NOPR              Final rule
------------------------------------------------------------------------
Market and technology          Revised ANOPR    Revised analyses.
 assessment.                    analyses.
Screening analysis...........  Life-cycle cost
                                sub-group
                                analysis.
Engineering analysis.........  Manufacturer
                                impact
                                analysis.
Building energy use and end-   Utility impact
 use load characterization.     analysis.

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Markups to determine           Environmental
 equipment price.               assessment.
Life-cycle cost and payback    Employment
 period analyses.               impact
                                analysis.
Shipments analysis...........  Regulatory
                                impact
                                analysis.
National impact analysis.
------------------------------------------------------------------------

    On one hand, many stakeholders commented that DOE should 
immediately adopt the minimum efficiency requirements in ASHRAE/IESNA 
Standard 90.1-1999 for commercial unitary air conditioners and heat 
pumps, rather than pursue a formal rulemaking, on grounds that ASHRAE's 
``continuous maintenance'' process for Standard 90.1-1999 allows for 
faster adoption of any necessary revisions to the commercial unitary 
equipment standards than does a formal DOE rulemaking process. 
``Continuous maintenance'' is an industry term for ASHRAE's current 
process for maintaining standards. Under this process, ASHRAE accepts a 
continual flow of proposals from the public for changes to its 
standards, which in turn can result in multiple proposed addenda to an 
ASHRAE standard on a regular basis. The ASHRAE continuous maintenance 
process contrasts with the previous periodic maintenance process that 
updated a standard at fixed, predetermined intervals. These same 
stakeholders commented that DOE's preliminary screening analysis did 
not demonstrate that more-cost-effective efficiency standards were 
feasible for commercial unitary equipment. In addition, by not 
immediately adopting the efficiency requirements in ASHRAE/IESNA 
Standard 90.1-1999, the Department would forego the national energy 
savings that would otherwise be realized in the next six to ten years 
before a DOE final rule becomes effective. Finally, many of these 
stakeholders commented that market confusion would ensue over which 
standards requirements are applicable if DOE adopts ASHRAE/IESNA 
Standard 90.1-1999 for some equipment and not for other equipment. 
(Air-Conditioning and Refrigeration Institute (ARI), No. 11 at pp. 2-4; 
Edison Electric Institute (EEI), No. 4 at pp. 1-2; Lennox International 
Inc. (Lennox), No. 7 at pp. 1 and 4; Public Workshop Tr., No. 2EE at p. 
46; National Rural Electric Cooperative Association (NRECA), No. 3 at 
pp. 1-2; Southern Company Services (Southern Company), No. 5 at p. 
1).\1\
---------------------------------------------------------------------------

    \1\ Example: ``(ARI, No. 11 at pp. 2-4)'' refers to a written 
statement that was submitted by the Air-Conditioning & Refrigeration 
Institute and is recorded in the Resource Room of the Building 
Technologies Program in the Docket under ``Commercial Central Air 
Conditioners and Heat Pumps'' as comment number 11, and the passage 
appears on pages 2 through 4 of that statement. Likewise, ``(Public 
Workshop Tr., No. 2EE at p. 46)'' refers to the page number of the 
transcript of the ``Framework Workshop'' held in Washington, DC, 
October 1, 2001.
---------------------------------------------------------------------------

    In contrast to the above comments, many other stakeholders 
commented that DOE should abandon the ASHRAE/IESNA Standard 90.1-1999 
continuous maintenance process and pursue a formal rulemaking. Many of 
them participated in the ASHRAE/IESNA Standard 90.1-1999 process and 
asserted that it was fundamentally flawed. These stakeholders also 
challenged the technical merits of the analysis used to update ASHRAE/
IESNA Standard 90.1-1999, stating that: (1) Manufacturing cost 
estimates for more efficient equipment were not representative, i.e., 
too high; (2) electricity prices did not capture the variability 
associated with an industry moving toward economic deregulation; and 
(3) the ASHRAE process used high discount rates and short payback 
periods to evaluate energy efficiency measures instead of a carefully 
constructed life-cycle cost analysis. (Alliance to Save Energy (ASE), 
No. 9 at pp. 1-2; American Council for an Energy-Efficient Economy 
(ACEEE), No. 10 at pp. 3, 6-7, and 10; Natural Resources Defense 
Council (NRDC), No. 6 at pp. 2-6; Public Workshop Tr., No. 2EE at p. 
77).
    The Department intends to make its findings available to the 
ASHRAE/IESNA Standard 90.1-1999 committee and other stakeholders to 
inform ASHRAE's ``continuous maintenance'' process. Furthermore, 
consistent with the approach outlined in the Department's January 12, 
2001, final rule (66 FR 3348), DOE may engage in the ASHRAE continuous 
maintenance process by proposing an addendum to the commercial unitary 
air conditioner efficiency levels in ASHRAE/IESNA Standard 90.1-1999 
based on its analysis as part of this rulemaking.
    Also, if during the rulemaking process the Department concludes 
that the EPCA criteria for a more stringent energy conservation 
standard are not likely to be satisfied, then the Department may either 
adopt the energy efficiency levels in ASHRAE/IESNA Standard 90.1-1999 
or any new addendum to ASHRAE/IESNA Standard 90.1 that establishes 
higher levels.
3. Equipment Definitions
    Unitary package air conditioning units represent the heating, 
ventilating, and air conditioning (HVAC) equipment class with the 
greatest energy use in the commercial building sector in the United 
States. Equipment covered under this rulemaking--air-cooled package air 
conditioning and heating equipment with rated cooling capacities of 
65,000 British thermal units per hour (Btu/h) and greater, but less 
than 240,000 Btu/h--accounts for the majority of the total shipped 
tonnage of unitary HVAC equipment for commercial building applications.
    Under EPCA, the term ``small commercial package air conditioning 
and heating equipment'' means ``air-cooled, water-cooled, 
evaporatively-cooled, or water source (not including ground water 
source) electrically operated, unitary central air conditioners and 
central air conditioning heat pumps for commercial application which 
are rated below 135,000 Btu per hour (cooling capacity).'' (42 U.S.C. 
6311(8)) The term ``large commercial package air conditioning and 
heating equipment'' means ``air-cooled, water-cooled, evaporatively-
cooled, or water source (not including ground water source) 
electrically operated, unitary central air conditioners and central air 
conditioning heat pumps for commercial application which are rated at 
or above 135,000 Btu per hour and below 240,000 Btu per hour (cooling 
capacity).'' (42 U.S.C. 6311(9)) These definitions parallel the 
categories of equipment outlined in ASHRAE/IESNA Standard 90.1-1999. 
The standards for the product subcategories of water-cooled unitary 
central air conditioners rated <=240,000 Btu/h, evaporatively cooled 
unitary central air conditioners, and water-source unitary central heat 
pumps rated <=240,000 Btu/h were covered under a separate standards

[[Page 45465]]

rulemaking (66 FR 3336 (January 12, 2001)) and currently appear under 
10 CFR Part 431 Subpart Q. In this rulemaking, the Department will 
limit its analysis to air-cooled equipment, which is the largest subset 
of the small and large unitary air conditioners and heat pumps covered 
by EPCA.
    Based on data from EIA's 1995 Commercial Buildings Energy 
Consumption Survey (CBECS 95), the Department estimates that a 
significant part of the unitary package air conditioning market has gas 
heating rather than either air conditioning only or electric resistance 
heating. Hence, the Department has elected to base the engineering 
analysis on equipment with a gas heating section.
    Several comments questioned whether the Department planned to 
consider engine-driven units, units operating with 100 percent outside 
air, and split systems as unique categories. (Public Workshop Tr., No. 
2EE at p. 82; Public Workshop Tr., No. 2EE at p. 148) The Department 
has decided not to analyze engine-driven units or units operating with 
100 percent outside air because they represent very specialized or 
niche applications, but may analyze them if necessary for the Notice of 
Proposed Rulemaking (NOPR) in this rulemaking proceeding. The 
Department did not analyze split systems explicitly because they are 
similar in technology and application to packaged units, which 
represent 77 percent of the combined sales of the commercial unitary 
air-conditioning market. (See Market Assessment section (Chapter 3) of 
the ANOPR TSD.) While the size constraints (i.e., cabinet requirements) 
may be different for the two types of systems, the technologies and 
design choices required to increase the efficiency are similar. The 
Department intends to apply the results of the single package air-
conditioning equipment analysis, and the resulting efficiency levels, 
to both single package and split system equipment. This method is 
consistent with the residential central air-conditioner rulemaking 
where DOE applied the analysis results from split system air 
conditioners (the most common residential central air conditioner 
configuration) to packaged air conditioners. This method is also 
consistent with the current efficiency levels in EPCA and ASHRAE/IESNA 
Standard 90.1-1999, which are the same for single package and split 
system equipment. This is identified as Issue 1 under ``Issues on Which 
DOE Seeks Comment'' in section IV.E of this ANOPR.
4. Efficiency Levels
    The language of 42 U.S.C. 6313(a)(6)(A) requires DOE to establish 
an amended uniform national standard for commercial unitary air 
conditioners and heat pumps at the minimum levels for each date 
specified in the amended ASHRAE/IESNA Standard 90.1-1999, unless DOE 
determines, by rule and supported by clear and convincing evidence, 
that a more stringent standard is technologically feasible and 
economically justified and would result in significant additional 
energy conservation. Because the Department cannot consider levels 
lower than that of the most recent ASHRAE/IESNA Standard 90.1, the 
Department will consider the baseline efficiency to be the minimum 
level specified in ASHRAE/IESNA Standard 90.1-1999, which is the most 
recent amendment to ASHRAE/IESNA 90.1 that changed efficiency levels. 
Table I.3 presents the ASHRAE/IESNA Standard 90.1-1999 minimum 
efficiency levels.

           Table I.3.--ASHRAE/IESNA Standard 90.1-1999 Minimum EER Requirements* for Unitary Equipment
----------------------------------------------------------------------------------------------------------------
                                                         Heating section                            Minimum
         Equipment type              Size category            type            Sub-category         efficiency
----------------------------------------------------------------------------------------------------------------
Air Conditioners, Air Cooled....  >=65,000 Btu/h and   Electric            Split System and    10.3 EER
                                   <135,000 Btu/h.      Resistance (or      Single Package.    10.1 EER
                                                        None).             Split System and
                                                       All Other.........   Single Package.
                                  >=135,000 Btu/h and  Electric            Split System and    9.7 EER
                                   <240,000 Btu/h.      Resistance (or      Single Package.    9.5 EER
                                                        None).             Split System and
                                                       All Other.........   Single Package.
Heat Pumps, Air Cooled (Cooling   >=65,000 Btu/h and   Electric            Split System and    10.1 EER
 Mode).                            <135,000 Btu/h.      Resistance (or      Single Package.    9.9 EER
                                                        None).             Split System and
                                                       All Other.........   Single Package.
                                  >=135,000 Btu/h and  Electric            Split System and    9.3 EER
                                   <240,000 Btu/h.      Resistance (or      Single Package.    9.1 EER
                                                        None).             Split System and
                                                       All Other.........   Single Package.
Heat Pumps, Air Cooled (Cooling   >=65,000 Btu/h and                       47[deg]F db/        3.2 COP
 Mode).                            <135,000 Btu/h.                          43[deg]F wb        2.2 COP
                                  (Cooling Capacity).                       Outdoor Air.
                                                                           17[deg]F db/
                                                                            15[deg]F wb
                                                                            Outdoor Air.
                                  >=135,000 Btu/h....                      47[deg]F db/        3.1 COP
                                  (Cooling Capacity).                       43[deg]F wb        2.0 COP
                                                                            Outdoor Air.
                                                                           17[deg]F db/
                                                                            15[deg]F wb
                                                                            Outdoor Air.
----------------------------------------------------------------------------------------------------------------
* The current version of ASHRAE/IESNA Standard 90.1 is the 2001 version, which contains identical minimum
  efficiency levels to the 1999 version of the standard.

    The ASHRAE/IESNA Standard 90.1-1999 rates the cooling performance 
of commercial unitary air conditioners and heat pumps using the energy 
efficiency ratio (EER) and heating coefficient of performance (COP). 
(These are the same energy efficiency descriptors used in EPCA for this 
type of equipment.) The Department received comments that it should 
consider part-load performance as part of the screening process and a 
part-load descriptor in addition to EER in the present rulemaking. 
(ACEEE, No. 10 at p. 3; Lennox, No. 7 at p. 3; NRDC, No. 6 at p. 7) The 
ACEEE provided several comments about the efficiency level used in the 
performance standards. Specifically, it advocates that the performance 
standard include efficiency ratings for both full-load and part-load 
conditions, reflecting that equipment operates for many more hours at 
part-load conditions than at full-load conditions. Further, ACEEE 
suggests

[[Page 45466]]

that the performance standard incorporate integrated part-load value 
(IPLV) levels for commercial unitary air conditioning equipment. 
(ACEEE, No. 10 at pp. 3-4, and 7)
    The Department understands that there are potential energy savings 
associated with technologies and techniques that operate under full- or 
part-load conditions and that can improve the net annual energy 
performance of a system, but which generally reduce the EER of 
commercial unitary air-conditioning equipment, or have no effect on 
EER. However, because the EPCA energy descriptor for commercial unitary 
air conditioners and air source heat pumps is an EER, and the test 
procedure does not account for part-load operation, DOE will not 
include a part-load performance descriptor.
    Although this rulemaking covers both commercial unitary air 
conditioners and heat pumps, this ANOPR and the detailed analyses in 
the accompanying TSD cover only unitary air conditioners. The 
Department did not collect the necessary data for conducting the 
detailed technical analyses for unitary heat pumps for this ANOPR 
because unitary heat pumps represent only 9 percent of the total market 
for commercial unitary air conditioning and heat pump equipment above 
65,000 Btu/h. Instead, the Department proposes to streamline the 
analysis for commercial unitary heat pumps and use a method similar to 
the ASHRAE committee's method to establish the minimum EER and COP 
levels for heat pumps. The Department understands that ASHRAE 
determined the minimum efficiency level for air conditioners and then 
agreed to a minimum heat pump EER after reviewing ARI's industry data. 
The minimum heat efficiency of the heat pump, defined by the heat pump 
COP, was set to correspond to the minimum EER using ARI data that 
correlated the heat pump COP to the heat pump EER. In section IV.E, 
``Issues on Which DOE Seeks Comment,'' the Department requests input 
from interested parties on the need for conducting analyses specific to 
commercial unitary heat pumps.
5. Test Procedure
    The Department began development of test procedures for commercial 
unitary air conditioners and heat pumps on April 14 and 15, 1998, when 
it held a public workshop to solicit views and information from 
interested parties. The Department held a second public workshop on 
October 18, 1998. The Department published a NOPR on August 9, 2000, 
and held a public workshop on September 21, 2000. 65 FR 48828. The 
Department intends to publish the test procedure final rule as soon as 
possible.
    On June 12, 2001, the Department published a Framework Document 
that described procedural and analytical approaches to evaluate energy 
conservation standards for commercial unitary air conditioners and heat 
pumps, and presented this analytical framework to stakeholders during 
the workshop held on October 1, 2001. In response to DOE's Framework 
Document and within the context of this standards rulemaking 
proceeding, ACEEE filed comments on the test procedure used to assess 
equipment EER levels. The ACEEE believes that the temperature used for 
testing current EER levels represents the lowest outside temperature 
possible for properly evaluating peak performance, and that a higher 
temperature would more accurately represent peak conditions encountered 
in many parts of the United States. It also commented that the test 
procedure should include a maximum sensible heat ratio (SHR) to ensure 
that all equipment provides sufficient dehumidification capacity and 
prevents manufacturers from sacrificing dehumidification performance to 
satisfy minimum EER levels. (ACEEE, No. 10 at pp. 3-4, and 7)
    The Department acknowledges that the test procedure for EER 
reflects equipment performance under a single condition and that this 
condition does not represent actual equipment performance under part-
load conditions nor necessarily at the peak design condition, nor does 
it specify a maximum SHR. Furthermore, the Department understands that 
there are potential energy savings associated with technologies and 
techniques that improve the part-load performance of the equipment. 
However, because the Department believes that the test procedure 
referenced by the ASHRAE/IESNA Standard 90.1-1999 is widely accepted 
and well established, the Department has elected to follow the 
conventions of the ASHRAE/IESNA Standard 90.1-1999 and use the EER as 
the only descriptor for efficiency.

II. Commercial Unitary Air Conditioner and Heat Pump Analyses

    This section includes a general introduction to each analysis 
section and a discussion of relevant issues addressed in comments 
received from interested parties.

A. Market and Technology Assessment

    The Department reviewed existing marketing materials and 
literature, and interviewed manufacturers to get an overall picture of 
the market in the United States for commercial unitary air conditioners 
and heat pumps. Industry publications and trade journals, government 
agencies, and trade organizations provided most of the information, 
including: (1) Manufacturer market share, (2) equipment efficiency, and 
(3) shipments by capacity and efficiency level. This ANOPR discusses 
the information in the appropriate sections.
    The Department has used the most reliable and accurate data 
available at the time of the analysis. All data are available for 
public review in the TSD that accompanies this ANOPR. The TSD is 
available to interested parties on the Department's Web site at http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html. The 
Department welcomes and will consider any recommendations of additional 
data.
1. Manufacturers
    There are six major domestic manufacturers of the equipment covered 
under this rulemaking. Four companies, Carrier Corporation (Carrier), 
The Trane Company (Trane), Lennox International, Inc. (Lennox), and 
York International Corporation (York) each hold a major share of the 
market for commercial unitary air conditioners and heat pumps. Two 
other manufacturers, AAON, Inc. (AAON) and Rheem Manufacturing Company 
(Rheem), hold significant niche market shares. The AAON corporation 
manufactures and sells high efficiency, air-cooled equipment almost 
exclusively to large corporate accounts. Rheem produces mostly smaller-
capacity models in all the categories. Among the six major 
manufacturers, Carrier and Trane command a majority of the market for 
commercial unitary air conditioning equipment, followed by Lennox, 
York, AAON, and Rheem. For more detail on major manufacturers and 
market share, refer to the market assessment section (Chapter 3) of the 
ANOPR TSD.
2. Equipment Efficiency
    In its analysis of the equipment efficiency data from ARI's Unitary 
Large Equipment Directory, January 2002, the Department found that most 
models of equipment manufactured by the six major domestic 
manufacturers met or exceeded the ASHRAE/IESNA Standard 90.1-1999 
energy efficiency levels.
    Also, in its analysis of the ARI Unitary Large Equipment Directory, 
January 2002, the Department found it could be easy to misinterpret the 
number of base models for each parent

[[Page 45467]]

company because each parent company manufactures similar models under 
different ``brands'' or manufactures base models with relatively 
superficial design changes around a base model. Consequently, the 
Department estimated the number of actual base models listed for each 
parent company in the ARI Directory. (See Market and Technology 
Assessment (Chapter 3, section 3.7.3) of the ANOPR TSD.)
3. Equipment Shipments
    The Department extracted and documented information related to 
equipment shipments by domestic manufacturers from U.S. Census Bureau 
Current Industrial Reports. The United States (U.S.) Census Bureau data 
expresses cooling capacity ranges in a slightly different way from the 
DOE rulemaking equipment classifications. The major classifications 
presented in the U.S. Census Bureau data for single and split system 
air conditioners are for cooling capacity ratings 65,000 Btu/h to 
134,999 Btu/h and 135,000 Btu/h to 249,999 Btu/h. (See U.S. Census 
Bureau Current Industrial Report for ``Refrigeration, Air Conditioning, 
and Warm Air Heating Equipment: 2001,'' (MA333M(01)-1), at http://www.census.gov/industry/1/ma333m01.pdf.) For heat pumps, the U.S. 
Census Bureau data list shipments for capacities rated greater than 
65,000 Btu/h. In section II.G below, ``National Impact Analysis,'' the 
Department used the shipments data in its development of a Shipments 
Model for forecasting future equipment shipments.

B. Screening Analysis

    This section describes the technology/design options and a process 
for screening these options as part of the DOE rulemaking. Screening 
eliminates certain design options from further consideration in the 
engineering analysis phase of the rule development. The Process Rule 
established four factors DOE uses for screening design options: (1) 
Technological feasibility; (2) practicability to manufacture, install, 
and service; (3) adverse impacts on equipment utility or equipment 
availability; and (4) adverse impacts on health and/or safety. 10 CFR 
Part 430, subpart C, Appendix A, under paragraph 5(b). In view of these 
factors, the technology/design options DOE considered as part of this 
rulemaking fall into two categories based on their development status 
and on their impacts on EER: emerging technologies that can enhance EER 
and commercial technologies that can enhance EER. For more detail on 
how the Department developed the technology options and the process for 
screening these options, refer to the technology and screening section 
(Chapter 4) of the ANOPR TSD.
    First, the Department considered emerging technologies that 
encompass design options currently not available on the commercial 
market but that are being examined in the laboratory as possible means 
to enhance efficiency. These are:
     Electro-hydrodynamic enhanced heat transfer;
     Copper rotor motor with improved efficiency; and
     Non-hydrofluorocarbon/hydrochlorofluorocarbon (HFC/HCFC) 
refrigerants (e.g., ammonia, hydrocarbons, carbon dioxide).
    Second, the Department considered commercial technologies that are 
currently available for unitary air conditioners or similar equipment, 
and which have an impact on the EER (nominal full-load) rating under 
DOE's test conditions. These are:
     Evaporator coil area (keeping the number of coil rows the 
same);
     Condenser coil area (keeping the number of coil rows the 
same);
     Coil rows (keeping face area the same);
     Condenser fan diameters;
     Evaporator fan diameters;
     Air leakage paths within unit;
     Coil rows (keeping coil heat transfer performance the 
same);
     Microchannel heat exchangers;
     Deep coil heat exchangers;
     Low-pressure-loss filters;
     High efficiency fan motors;
     High efficiency compressors;
     Air foil centrifugal fans;
     Backward-curved centrifugal fans;
     Synchronous (toothed) belts;
     Direct-drive fans; and
     High efficiency propeller condenser fans.
    Several of these technologies have penetrated the commercial 
equipment market and raised the available EER range. Because the EPCA 
energy descriptor for commercial unitary air conditioners and air 
source heat pumps is an EER, only those design options that improve the 
EER (nominal full-load) rating under DOE's test procedures were viable 
for consideration in the engineering analysis. DOE addresses matters 
with respect to other technologies that can improve the net annual 
energy performance of a system, but which generally reduce or have no 
effect on EER, as Issue 18 under ``Issues on Which DOE Seeks Comment'' 
in section IV.E of this ANOPR.

C. Engineering Analysis

    The engineering analysis establishes the relationship between the 
cost and efficiency of commercial unitary air conditioners and heat 
pumps. This relationship serves as the basis for cost/benefit 
calculations in terms of individual consumers, manufacturers, and the 
Nation. The engineering analysis identifies the representative baseline 
equipment (using R-22 as the refrigerant), develops the bill of 
materials and determines the costs, constructs the industry cost/
efficiency curves, and evaluates the impact of using an alternative to 
R-22 refrigerant on the cost/efficiency relationship of certain 
commercial air conditioners and heat pumps. The R-22 refrigerant is in 
current use and will phase out of new equipment in 2010 in compliance 
with the Environmental Protection Agency's (EPA's) requirements under 
the Clean Air Act of 1990, as amended (42 U.S.C. 7401 et seq.).
1. Baseline Equipment
    As discussed above, the engineering analysis considered only single 
package commercial unitary air conditioning equipment with gas heat in 
the estimate of the cost/efficiency relationship for the equipment 
classes under consideration. The Department analyzed single package 
commercial unitary air conditioning equipment with gas heat rather than 
single package units with electric heat or no heating section, because 
the gas heat units represent about 77 percent of the air conditioners 
covered in this rulemaking. (See the Market and Technology Assessment, 
section 3.6.1 of the ANOPR TSD, that provides information on historical 
shipments and efficiencies.) Although the Department did not explicitly 
analyze split air conditioning systems in the engineering analysis, the 
Department believes that the results of the unitary air conditioning 
equipment analysis apply to the split systems and that both unitary and 
split systems have equivalent cost/efficiency relationships. (See the 
engineering analysis, section 5.2 of the ANOPR TSD.) The Department 
discussed this approach during the initial interviews with 
manufacturers, and it is consistent with the ASHRAE methodology used to 
set the ASHRAE/IESNA Standard 90.1-1999.
    The Department proposes to address the energy efficiency of 
commercial unitary heat pump equipment in a way that is consistent with 
the ASHRAE methodology used to set the ASHRAE/IESNA Standard 90.1-1999 
levels for unitary air conditioning systems with heat pump heating, 
rather than conduct an explicit analysis of the unitary and split heat 
pump systems. According to Census Bureau data, commercial unitary

[[Page 45468]]

heat pumps with a capacity greater than 65,000 Btu/h represent about 10 
percent of products covered under this rulemaking. Although the census 
data do not specify the quantity, the Department believes that most of 
these units have less cooling capacity and are within the 65,000 Btu/h 
to 135,000 Btu/h size range. (See the Market and Technology Assessment, 
section 3.6.1 of the ANOPR TSD, that provides information on historical 
shipments and efficiencies.) Under the ASHRAE process, the ASHRAE 90.1 
committee worked with ARI to develop new efficiency levels for 
inclusion in ASHRAE/IESNA Standard 90.1-1999. For heat pumps in these 
capacity ranges, ARI supplied the ASHRAE 90.1 committee with curves 
relating the COP as a function of EER. The committee then set the 
minimum COP levels based on EER. The Department used a similar process 
in the residential central air conditioner and heat pump rulemaking, 
where it established minimum Heating Seasonal Performance Factors 
(HSPF) for heat pumps using functions relating the HSPF to the Seasonal 
Energy Efficiency Ratio (SEER). The Department intends to do the same 
for the NOPR analysis for commercial unitary air conditioning and heat 
pump equipment.
    For more detail on baseline equipment, refer to the engineering 
analysis, section 5.3 of the ANOPR TSD. The Department requests 
comments from interested parties about this proposed approach to the 
engineering analysis, and has identified it as Issue 1 under ``Issues 
on Which DOE Seeks Comment'' in section IV.E. of this ANOPR.
    Identification of the baseline for commercial unitary air 
conditioning equipment requires both establishing a baseline efficiency 
level and selecting a size typical of that equipment to represent the 
different capacity ranges of commercial, unitary, air conditioning 
equipment classes: [gteqt]65,000 Btu/h to <135,000 Btu/h; and 
[gteqt]135,000 Btu/h to <240,000 Btu/h.
a. Efficiency Level
    As described above, the Department selected ASHRAE/IESNA Standard 
90.1-1999 for the baseline efficiency levels both for [gteqt]65,000 
Btu/h to <135,000 Btu/h and [gteqt]135,000 Btu/h to <240,000 Btu/h 
classes of commercial unitary air conditioning equipment. To aid in 
analyzing the economic impact of increasing standard levels, DOE 
examined the costs associated with moving from EPCA levels to the 
ASHRAE Standard 90.1-1999 levels. Additionally, to provide a reasonable 
span of efficiency levels to evaluate, DOE limited the efficiency 
levels under consideration to those that are commercially available.
    In some cases, manufacturers' product lines span efficiency ranges 
from levels below the baseline to levels above the baseline. To 
properly assess the incremental cost of increasing the efficiency level 
beyond the baseline level, DOE evaluated the manufacturing costs of the 
equipment with efficiency levels below the baseline and included these 
data in the industry cost/efficiency curves. The Department determined 
the manufacturing costs of this lower efficiency equipment in the same 
way as it did for the equipment above the baseline efficiency level. 
For more detail on efficiency levels, refer to the discussion of 
efficiency levels in section 5.3.1 of the ANOPR TSD.
b. Maximum Technologically Feasible Design
    In previous rulemakings, the Department relied on the maximum 
technologically feasible design to define the highest level of energy 
efficiency it would evaluate. The maximum energy efficiency level that 
is technologically feasible is often referred to as ``max tech.'' 
Technological feasibility requires that a system be not only 
theoretically possible, but also capable of being designed, 
constructed, and operated. At the time the engineering analysis was 
conducted, the highest efficiency level for commercial unitary air 
conditioners in the [gteqt]65,000 Btu/h to <240,000 Btu/h range 
available on the market was 11.5 EER. The engineering analysis used 
reverse engineering on this existing equipment to develop a cost-
efficiency curve up to 11.5 EER. Extending the curve beyond 11.5 EER 
required extrapolation and then verification using design-option 
analysis modeling. The Department's modeling indicated that with some 
additional conventional-type design modifications, such as increases to 
the size of heat exchangers and modification of the airflow paths (both 
of which may need new and larger cabinets), the highest practical 
efficiency level was about 12.0 EER. To limit uncertainty associated 
with the extrapolated curve beyond 11.5 EER, the maximum efficiency 
level that DOE evaluated in the engineering analysis was 12.0 EER. The 
Department verified the extrapolated cost-efficiency curve using 
design-option modeling between 11.5 and 12.0 EER. Beyond the 12.0 EER 
level, the Department would need to consider technologies that are not 
currently available or non-conventional technologies that are not 
typically in use by the industry.
    The Department seeks comments on commercial unitary air-
conditioning equipment designs that are currently used in the 
engineering analysis. The Department will review public comments after 
the ANOPR meeting and during the NOPR phase of the rulemaking to 
further evaluate design options, including the following, which could 
achieve higher technologically feasible efficiency levels.
     Larger heat transfer surface area for the tube and fin 
condensers accomplished by increasing the number of rows or by 
increasing the face area of the condenser (or some combination of 
both), while limiting the minimum condensing temperature to 110 [deg]F 
with 10 [deg]F of subcooling capability.
     Larger heat transfer surface area for the tube and fin 
evaporators accomplished by increasing the number of rows or by 
increasing the face area of the evaporator (or some combination of 
both), but limiting the maximum evaporating temperature to 52 [deg]F 
and the sensible heat ratio to 0.75.
     Use of premium efficiency motors with compressors, 
condenser fans, and evaporator blowers.
     Use of larger diameter airfoil or backward-curved blade 
blowers for evaporators.
     Use of larger diameter airfoil fans for condensers.
    Since the time the engineering analysis was completed in late 2002, 
several new commercial unitary air conditioners, with rated efficiency 
levels greater that 12.0 EER, have become available on the market. The 
Department requests comments from stakeholders on any commercial 
unitary air conditioners with rated efficiency levels above 12.0 EER. 
This is identified as Issue 4 under ``Issues on Which DOE Seeks 
Comment'' in section IV.E of this ANOPR.
c. Representative Capacities
    After reviewing the available single package equipment and 
interviewing four major commercial air-conditioning equipment 
manufacturers and two niche manufacturers, the Department set the 
representative capacity (i.e., the equipment capacity to be analyzed in 
detail for this capacity range) for the [gteqt]65,000 to <135,000 Btu/h 
capacity range at 7.5 tons and the representative capacity of the 
[gteqt]135,000 to <240,000 Btu/h capacity range at 15 tons. An air 
conditioning ton is equivalent to 12,000 Btu/h of cooling capacity. 
Also, for consistency with the ASHRAE standards development process, 
DOE chose the same equipment capacities of 7.5 tons and 15 tons to 
represent these commercial unitary air conditioning

[[Page 45469]]

equipment classes. These nominal capacities represent units which, 
according to the industry, are volume shipment points in the capacity 
range. Because manufacturers do not necessarily manufacture commercial 
unitary air conditioning equipment with the exact capacity of these 
units (90,000 Btu/h and 180,000 Btu/h), the Department uses the 
industry standard terminology of nominal ``tons'' for consistency with 
the current equipment catalogs.
    Similarly, during the development of the ASHRAE 90.1-1999 standard, 
ASHRAE chose the 7.5- and 15-ton capacities as representative 
capacities for its analysis. In addition, these capacities fall close 
to the middle of the capacity range. For some manufacturers, these 
sizes represent their optimum design, i.e., where they have optimized 
the ratio of cooling capacity to manufacturing cost. Increasing the 
efficiency of these models would generally be very difficult and 
expensive because the manufacturers have packed as much component 
equipment as possible into the smallest possible cabinet size. On the 
other hand, some manufacturers may have optimized their equipment at a 
higher capacity and, therefore, may initially use a larger cabinet for 
the evaluated equipment. Increasing the efficiency of this equipment 
would be less expensive because there intrinsically is more room in the 
cabinet to increase coil size and add other types of energy-saving 
devices without moving to the next larger cabinet.
    After DOE reviewed available products in each equipment class and 
interviewed several manufacturers, it found that a majority of the 
manufacturers who were interviewed agreed that the 7.5-ton and 15-ton 
capacities adequately represent the [gteqt]65,000 to <135,000 Btu/h and 
[gteqt]135,000 to <240,000 Btu/h equipment classes, respectively, and 
the wide array of design constraints. Lennox, however, suggested that 
10-ton and 20-ton units would provide a better representation of the 
baseline, because larger capacity units are generally the hardest to 
upgrade and are, therefore, the units that would force design changes 
in a specific line of commercial unitary air-conditioning equipment. 
Also, Lennox stated that 7.5-ton units are generally built off of 10-
ton cabinets and 15-ton units are generally built off of 20-ton 
cabinets. (Public Workshop Tr., No. 2EE at pp. 87 and 88)
    The Department believes that the 7.5-ton and 15-ton capacities are 
appropriate for the following reasons: (1) They are near the middle of 
the capacity range; (2) a majority of the manufacturers interviewed 
agreed that these capacities adequately represented the equipment 
classes; (3) they are consistent with the capacities chosen for the 
ASHRAE standards development process; and (4) these capacities 
represent both equipment that was cost-optimized (cabinet-size 
constrained), as well as equipment that was not constrained within the 
cabinet, to account for variations among manufacturers. In addition, 
data regarding commercial unitary air-conditioning system shipments by 
capacity, while not precise, suggest that shipments of 7.5-ton and 15-
ton units are significantly higher than those of 10- and 20-ton 
systems, respectively. Therefore, it is more appropriate to select 7.5- 
and 15-ton units as representative capacities for their respective 
capacity ranges. Finally, the Department reviewed cabinet sizes and 
capacities for commercial unitary air conditioners and found a wide 
variation of cabinet sizes, and an equally wide variation of 
corresponding capacities within each cabinet size. Many 7.5-ton units 
are built off of 7.5-, 8.5-, 10-, 12-, and 12.5-ton cabinet sizes; and 
many 15-ton units are built off of 15-, 20-, and 25-ton cabinet sizes. 
Therefore, using 7.5- and 15-ton capacity sizes for several different 
manufacturers and aggregating the results will capture the diversity of 
cabinet sizes and space constraints for the industry. The Department 
will consider manufacturer-specific cabinet sizes and conversion costs 
when it conducts the MIA. For more detail on representative capacities, 
refer to the Engineering Analysis, section 5.3.2 of the ANOPR TSD.
2. Methodology
    At the October 1, 2001, Framework Workshop, the Department 
solicited stakeholder comments on the most appropriate approach for the 
engineering analysis. However, there was no clear consensus among the 
respondents for a particular approach. The Northwest Power Planning 
Council (NWPPC) expressed the view that transparency should be the 
primary criterion for selecting one approach or another. (Public 
Workshop Tr., No. 2EE at p. 132) The Natural Resources Defense Council 
also commented on the need for a transparent approach. (NRDC, No. 6 at 
p. 6)
    The ACEEE and NRDC commented that DOE should not use the 
efficiency-level approach because of concerns about the lack of 
transparency of data and the accuracy of cost estimates that could 
result from this approach. (ACEEE, No. 10 at p. 4; NRDC, No. 6 at p. 4) 
The ACEEE commented that developing estimates of uncertainty, i.e., 
confidence intervals, for manufacturing cost estimates is irrelevant in 
the case of an efficiency-level analysis, due to the inability to 
validate the accuracy of those costs. It also noted that the 
incremental values ARI provided in the past were much greater than 
those the Northeast Energy Efficiency Partnerships (NEEP) and the 
Consortium for Energy Efficiency (CEE) found empirically. (ACEEE, No. 
10 at pp. 8-10)
    On a related issue, ACEEE, ASE, and NRDC argued that the Department 
should not use cost data that represent the 90th percentile of 
equipment cost used during the development of the ASHRAE/IESNA Standard 
90.1-1999, because these costs are not representative of most equipment 
and would bias any life-cycle cost analysis away from higher standards. 
(ACEEE, No. 10 at p. 6; ASE, No. 9 at p. 2; NRDC, No. 6 at pp. 4-7) The 
NRDC further criticized the 90th percentile approach because it used 
the costs of the most expensive manufacturer, those costs could not be 
verified independently, and one erroneous data point could skew the 
cost data. Instead, NRDC recommended using third-party cost estimates 
and presenting them to the public for evaluation, even though NRDC 
believed that third-party estimates tended to be high because of the 
difficulty associated with anticipating innovation. (NRDC, No. 6 at p. 
7) The ACEEE also noted that ``revealed costs,'' i.e., the cost 
differential between high and low efficiency equipment in regions where 
high efficiency units have appreciable sales volumes, can provide 
insight into cost differentials. (Public Workshop Tr., No. 2EE at p. 
65) Along these lines, NEEP submitted equipment incremental cost data 
related to the CEE efficiency levels. (NEEP, No. 8 at p. 3) The 
Alliance to Save Energy recommended applying reverse engineering 
analysis, particularly teardowns, to estimate future costs of different 
efficiency levels and supplementing this information with cost data 
obtained from market surveys performed in regions where products at 
higher efficiency levels have higher market shares. (ASE, No. 9 at p. 
3)
    As a result of the above comments from stakeholders, the Department 
used a cost assessment approach and supplemented the data with a design 
option analysis to develop incremental cost/efficiency curves for the 
two representative capacities described above. The reverse engineering 
analysis relied on creating bills of materials

[[Page 45470]]

(BOMs) for a sample of existing equipment that uses R-22 refrigerant. 
The Department developed the BOMs through the reverse engineering of 
either physical teardowns or catalog teardowns. The Department then 
entered the BOMs into a cost model and used that model to estimate the 
manufactured cost for each piece of equipment. The Department then 
aggregated the costs of the equipment and their associated efficiencies 
and fit them to a curve to represent the cost/efficiency behavior of 
the industry. In addition, the Department derived confidence intervals 
that described the accuracy of the curve, based on the variability of 
the estimated manufacturer costs. The Department then used the design 
option analysis to validate the accuracy of the curve between 11.5 and 
12.0 EER, where there are no existing equipment data points, by using 
the cost model and a performance model to simulate equipment at higher 
efficiency levels. The last step in the process--the alternative 
refrigerant analysis--compared the cost/efficiency behavior of R-410a 
products to the R-22 cost/efficiency curve by using the cost model and 
the performance model to simulate R-410a products. For more detail on 
the Department's methodology, refer to the Engineering Analysis, 
section 5.4 of the ANOPR TSD.
3. Cost Assessment Approach
    The use of the cost assessment (reverse engineering) approach 
provides useful information, including the identification of potential 
technology paths manufacturers use to increase efficiency. Under this 
type of analysis, the Department physically analyzes actual equipment 
on the market (i.e., dismantles them component-by-component) or 
generates BOMs from publicly available manufacturer catalogs and 
specifications. This enables the Department to determine what 
technologies and designs manufacturers employ to increase efficiency. 
The Department then uses independent costing methods or manufacturer 
and component supplier data to estimate the costs of the components. 
This approach has the distinct advantage of using ``real'' market 
equipment to ascertain the technologies that manufacturers use as the 
bases for estimating the costs of reaching higher efficiencies.
    The primary disadvantage of reverse engineering is the time and 
effort required to analyze the existing equipment. The Department needs 
several models of commercial unitary air conditioning equipment from 
various manufacturers to ensure that it identifies a broad 
representation of technological paths for increasing efficiency. In 
addition, because the Department only analyzes equipment in the market, 
the analysis might not capture prototypical designs, thus making it 
difficult to establish the maximum technologically feasible designs. 
Therefore, the Department has supplemented the reverse engineering 
process with a design option analysis that considers the technologies 
required to increase efficiency beyond what is currently available.
a. Teardown Analysis
    The Department used a teardown analysis (or physical teardown) to 
determine the production cost of a piece of equipment by disassembling 
the equipment ``piece-by-piece'' and estimating the material and labor 
cost of each component. A supplementary method called a catalog 
teardown uses published manufacturer catalogs and supplementary 
component data to estimate the major physical differences between a 
piece of equipment that has been physically disassembled and another 
piece of similar equipment. The teardown analysis that DOE performed 
for the engineering analysis includes four physical teardowns and 14 
catalog teardowns, for a total of 18 equipment teardowns. Tables II.1 
and II.2 show the distribution of equipment teardown analyses that DOE 
performed for the 7.5-ton and 15-ton commercial unitary air 
conditioning equipment. The Department selected the equipment to 
provide a full range of efficiency levels and included equipment from 
similar product lines that had both higher and lower energy efficiency 
ratings. For more detail on the teardown analysis, refer to the 
Engineering Analysis, section 5.5 of the ANOPR TSD.

    Table II.1.--Number of Commercial Unitary Air Conditioners Selected for Teardown Analysis in the >=65,000 Btu/h to <135,000 Btu/h Equipment Class
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        EER Range                             8.6-9.0         9.1-9.5        9.6-10.0        10.1-10.5       10.6-11.0       11.1-11.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Equipment, Physical Teardown............................               0               0               0               1               1               0
Equipment, Catalog Teardown.............................               2               0               0               2               0               3
--------------------------------------------------------------------------------------------------------------------------------------------------------


   Table II.2.--Number of Commercial Unitary Air Conditioners Selected for Teardown Analysis in the >=135,000 Btu/h to <240,000 Btu/h Equipment Class
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        EER Range                             8.6-9.0         9.1-9.5        9.6-10.0        10.1-10.5       10.6-11.0       11.1-11.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Equipment, Physical Teardown............................               0               0               1               0               0               1
Equipment, Catalog Teardown.............................               1               3               0               1               0               2
--------------------------------------------------------------------------------------------------------------------------------------------------------

b. Cost Model
    The cost model analysis created cost estimates for each of the 18 
commercial unitary air conditioners, including all direct manufacturing 
costs and a manufacturer's markup, which covers corporate overhead 
expenses. This is the price at which DOE estimates a manufacturer sells 
the equipment to distributors, resellers, and similar parties; it is 
not the final cost to the end-user because it does not include the 
distribution markups and contractor installation costs.
    In converting physical information about the equipment into cost 
information, the Department reconstructed manufacturing processes for 
each component, using internal expertise and knowledge of the methods 
used by the industry. The Department used assumptions regarding the 
manufacturing process parameters, e.g., equipment use, labor rates, 
tooling depreciation, and cost of purchased raw materials, to determine 
the value of each component. It then summed the values of the 
components into assembly costs and, finally, the total equipment cost. 
The equipment cost includes the

[[Page 45471]]

material, labor, and overhead costs associated with the manufacturing 
facility. The material costs include both direct and indirect 
materials. The labor rates include fabrication, assembly, and indirect 
and overhead (burdened) labor rates. The overhead costs include 
equipment depreciation, tooling depreciation, building depreciation, 
utilities, equipment maintenance, and rework. The Department also 
applied a manufacturer markup of 1.23 to the equipment cost to arrive 
at a final manufacturer cost. The markup accounts for the corporate 
overhead that DOE believes to include sales and general administration, 
research and development, and profit.
    Both ACEEE and NRDC commented that the actual, retrospective cost 
of compliance with appliance energy efficiency standards has been 
substantially less than forecast by industry, and suggested analyzing 
earlier cost-impact data to derive an appropriate discount for current 
cost projections. (ACEEE, No. 10 at p. 9; Public Workshop Tr., No. 2EE 
at p. 65; NRDC, No. 6 at p. 7) In response, Trane commented that 
although actual future equipment costs may or may not have approached 
predicted future equipment costs, these changes in costs reflect 
improvements in manufacturing efficiency and, because they apply to all 
equipment, do not necessarily result in a change in the marginal cost 
between equipment. ( Public Workshop Tr., No. 2EE at pp. 65-66) Lennox 
commented on the importance of understanding costs for both standard 
equipment and custom-built equipment because they have different cost 
structures. (Lennox, No. 7 at p. 7) Lastly, NWPPC commented that the 
cost basis for equipment meeting the ASHRAE Standard 90.1-1999 levels 
should not include retooling costs because manufacturers already have 
had to retool to manufacture equipment satisfying this level. (Public 
Workshop Tr., No. 2EE at p. 132)
    The Department acknowledges that manufacturing efficiency evolves 
over time, but notes that earlier trends do not necessarily reflect 
future trends and that the incremental cost impact is the cost metric 
for evaluating appliance energy efficiency standards via LCC analysis. 
Thus, the Department believes that thorough and rigorous manufacturing 
cost analysis based on actual equipment at all efficiency levels 
represents the most effective and appropriate way to estimate current 
and near term incremental manufacturing costs.
    After deriving production cost estimates from the reverse 
engineering analysis, the Department solicited detailed feedback on the 
cost estimates from specific manufacturers of individual products. The 
industry feedback resulted in revisions to the reverse engineering 
production costs of specific components including: Controls equipment, 
materials (sheet metal, refrigerant), labor, and buildings/capital. For 
more detail on how the Department developed the manufacturing costs, 
refer to the engineering analysis section (Chapter 5) of the ANOPR TSD.
    Regarding the manufacturer markup, ARI believes that a value of 
1.23 is not representative of what industry uses. Specifically, a value 
of 1.23 does not produce an acceptable financial return on investment, 
i.e., it underestimates manufacturers' operating expenses and 
profitability. (ARI, No. 14 at p. 1)
    The Department included the following expenses in the determination 
of the manufacturer markup: Research and development, net profit, 
general and administrative expenses, warranty expenses, taxes, and 
sales and marketing. The Department based the value of 1.23 on its 
analysis of industry corporate financial records and excluded shipping 
expenses (out-bound) because these expenses were included in the 
equipment cost. The Department determined research and development 
expenses by assuming reallocation of engineering budgets from value-
engineering and new-feature development to product development and 
redesign. The incremental cost of the equipment captures additional 
capital outlays and re-tooling investments. For more detail on how the 
Department developed the cost model, refer to the Engineering Analysis, 
section 5.6 of the ANOPR TSD.
c. Cost/Efficiency Curves
    Creating the cost/efficiency curves involved a three-step process: 
Plotting raw data points as cost versus efficiency, normalizing the 
cost data to go from absolute costs to incremental costs, and using a 
linear regression analysis using the least-squares fitting technique to 
determine the empirical equation and corresponding 95 percent 
confidence interval that best defines the normalized data. This process 
gives industry average cost/efficiency curves with a predicted range of 
accuracy.
    The Department refers to the manufacturer cost--what the cost model 
directly provides as output--as the ``absolute cost'' in this section. 
The Department correlated the absolute costs from the model as a 
function of each commercial unitary air conditioner's rated EER. Each 
manufacturer publishes the rated EER of its air conditioners according 
to ARI specifications. The resulting two curves of absolute cost versus 
efficiency--one for the >=65,000 Btu/h to <135,000 Btu/h equipment 
class and one for the >=135,000 Btu/h to <240,000 Btu/h equipment 
class--each has nine data points.
    The absolute costs, represented as output by the cost model, are 
not central to the rulemaking process and DOE does not present them in 
this document (nor in the TSD) to avoid the possibility of exposing 
sensitive information about individual manufacturers' equipment. 
Different manufacturers might have substantially different costs for 
their equipment at the same efficiency level, but this fact on its own 
does not provide the required insight. To determine the relationship of 
incremental cost versus EER for each of the 18 teardown commercial 
unitary air conditioners, DOE normalized the absolute cost data for 
every manufacturer. That is, DOE adjusted the costs of every 
manufacturer's equipment so that the cost of its equipment was zero at 
the baseline ASHRAE/IESNA Standard 90.1-1999 EER levels (10.1 EER for 
the >=65,000 Btu/h to <135,000 Btu/h equipment class and 9.5 EER for 
the >=135,000 Btu/h to <240,000 Btu/h equipment class). To do this, DOE 
first fit an exponential curve to each manufacturer's data points 
separately. Then, DOE shifted each curve until the incremental cost 
equaled zero at the baseline efficiency. The Department shifted all 
data points for a given manufacturer by the same amount as the entire 
curve, so that the resulting data points represent incremental cost 
versus EER. The Department then discarded individual manufacturer 
curve-fits and continued the analysis with the normalized cost data 
points. The engineering analysis section (Chapter 5) of the ANOPR TSD 
provides more explanation and details of the normalization process.
    After establishing the normalized data points, the Department used 
a least-squares regression analysis to fit curves to the data and 
established two cost/efficiency curves--one for each equipment class--
that represent the average incremental cost of increasing efficiency 
above the ASHRAE/IESNA Standard 90.1-1999 levels. The curves do not 
represent any single manufacturer, nor do they describe any variance 
among manufacturers. The curves simply represent the industry's cost to 
increase the efficiency of the equipment.
    The Department also produced confidence intervals from the 
regression analysis which describe the accuracy of the cost/efficiency 
curves representing the mean value of the industry. The

[[Page 45472]]

Department selected a confidence interval of 95 percent to define the 
probability that the actual industry average is within these bounds. 
The LCC analysis (see section II.F of this ANOPR) uses the cost/
efficiency curves and confidence intervals to compute the mean, 
minimum, and maximum cost cases.
    At the time the engineering analysis was conducted, the highest 
efficiency level available in the equipment's representative capacities 
was 11.5 EER. Because the engineering analysis relies on reverse 
engineering of existing equipment, extending the curve beyond 11.5 EER 
required extrapolation and then verification using design/option 
analysis. To limit the uncertainty associated with the part of the 
curve that was extrapolated, the maximum efficiency level that DOE 
evaluated was 12.0 EER.
    Tables II.3 and II.4 show the incremental manufacturer costs and 
confidence intervals for the systems with cooling capacities of about 
7.5 and 15 tons.

  Table II.3.--The >=65,000 Btu/h to <135,000 Btu/h (7.5-ton) Equipment
Class Incremental Cost/Efficiency Relationship and 95 Percent Confidence
                                Interval
------------------------------------------------------------------------
                                                                95%
                                            Incremental     Confidence
                   EER                         cost          interval
                                                          []
------------------------------------------------------------------------
10.1....................................              $0              $0
10.5....................................              47              14
11.0....................................             139              41
11.5....................................             292              85
12.0....................................             543             159
------------------------------------------------------------------------


  Table II.4--The >=135,000 Btu/h to <240,000 Btu/h (15-ton) Equipment
Class Incremental Cost/Efficiency Relationship and 95 Percent Confidence
                                Interval
------------------------------------------------------------------------
                                                                95%
                                            Incremental     Confidence
                   EER                         cost          interval
                                                          []
------------------------------------------------------------------------
9.5.....................................              $0              $0
10.0....................................              62              35
10.5....................................             165              94
11.0....................................             334             191
11.5....................................             613             351
12.0....................................           1,072             615
------------------------------------------------------------------------

    For more detail on how the Department developed the industry cost 
efficiency curves, refer to the engineering analysis, section 5.7 of 
the ANOPR TSD.
4. Supplemental Design Option Analysis
    The Department used the design option approach to validate the 
accuracy of the cost efficiency curves at efficiency levels between 
11.5 and 12.0 EER. As noted earlier, DOE did not evaluate any existing 
equipment in that EER range during the teardown analysis, so there were 
no data points available for the curve-fit. Therefore, DOE did not know 
the level of accuracy of the cost/efficiency curves in this range. The 
design option analysis simulates equipment with efficiency levels above 
11.5 EER to compare their costs with the costs that the extrapolated 
curve predicts.
    The Department received comments from ACEEE and Trane about using 
the design option approach. The ACEEE recommended using the design 
option approach because it can consider technologies with limited 
market share and take into account their cost impact at higher 
production volumes. (ACEEE, No. 10 at p. 4; Public Workshop Tr., No. 
2EE at p. 136) At the Framework Workshop, Trane commented that all 
design options the Department considered were mature technologies'at 
least 20 years old'and that the pricing for the options also is mature. 
Consequently, development of costs for mature technologies should be 
straightforward. (Public Workshop Tr., No. 2EE at pp. 133-34)
    For the equipment simulation, DOE used a combination of modeling 
tools and techniques. For more detail on the Department's approach to 
the design option analysis and equipment simulation, refer to the 
engineering analysis, section 5.8 of the ANOPR TSD. The Department 
performed the refrigerant-side heat-transfer and balance calculations 
with a simulation model called the Oak Ridge National Laboratory (ORNL) 
Heat Pump Design Model using compressor map data from commercially 
available compressors. A custom heat-exchanger software program 
provided estimates of the air-side heat transfer and pressure-drops 
associated with the equipment variations. The Department used a 
combination of manufacturer data, test data, fan curves, and motor 
curves to determine fan power and airflow.
    To validate the accuracy of the simulations, the Department 
simulated the performance of the four existing, physically torn down, 
unitary air conditioners. In addition, DOE had a third-party testing 
laboratory test and measure the specific performance limits of one of 
the air conditioners. The Department then used the test data generated 
from the tests to calibrate the performance model.
    After constructing and calibrating the performance model, DOE 
analyzed various combinations of design options to simulate equipment 
with increased efficiencies. Then, through discussions with 
manufacturers and reliance on sound engineering judgment, the 
Department established guidelines to limit the design option 
simulations.
    The Department requests stakeholder comments regarding its design 
option analysis. This concern is identified as Issue 4 under ``Issues 
on Which DOE Seeks Comment'' in section IV.E. of this ANOPR.
5. Alternative Refrigerant Analysis
    The ACEEE, ARI, and Lennox noted that the engineering analysis 
should consider alternative refrigerants because R-22 refrigerant will 
phaseout in 2010 in compliance with EPA requirements and this will 
affect equipment component costs. (ACEEE, No. 10 at pp. 9-10; ARI, No. 
11 at p. 4; Lennox, No. 7 at p. 1) Both ARI and Lennox stated that 
significant uncertainty exists concerning what refrigerant will be the 
likely replacement for R-22 in commercial unitary air conditioner and 
heat pump equipment, thereby complicating analyses. (ARI, No. 11 at p. 
4; Lennox, No. 7 at p. 1) During the October 1, 2001, Framework 
Workshop, Trane commented that alternative refrigerants can behave 
differently than R-22 at higher temperatures. (Public Workshop Tr., No. 
2EE at p. 160) The ACEEE commented that DOE should base the cost impact 
of alternative refrigerants on a least-cost strategy incorporating 
efficiency and refrigerant re-designs in a single design cycle, along 
with changes in assembly processes. (ACEEE, No. 10 at p. 9)
    The Department acknowledges that the phaseout of R-22 will occur 
shortly after the effective date of any new standards and therefore it 
is important to consider the impact of new refrigerants on incremental 
cost/efficiency relationships. In addition, the Department recognizes 
that it is not certain that R-410a will be the ultimate replacement for 
R-22 in future unitary air conditioner and heat pump equipment. Two 
refrigerants, R-410a and R-407c, are currently under serious 
consideration as substitutes for R-22. While R-407c has similar 
pressure/temperature characteristics as R-22 and thus easily adapts to 
existing R-22 designs, it is less efficient. By contrast, R-410a 
operates at higher pressures than R-22, thus requiring redesign of R-22 
equipment. However, R-410a offers efficiency benefits relative to R-
407c.

[[Page 45473]]

During the rulemaking process, the Department contacted manufacturers 
and the consensus was that R-410a would be the most likely replacement 
for R-22 in new commercial unitary equipment as the phaseout of R-22 
approaches.
    Although some unitary air conditioners using R-410a are 
commercially available, none were available in the >=65,000 Btu/h to 
<240,000 Btu/h range when the engineering analysis was conducted. 
However, since the analysis was conducted, the Department has learned 
that there is one R-410a commercial unitary air conditioner now 
available on the market in the 15-ton representative capacity. Most air 
conditioners that use R-410a are sold primarily for residential 
applications. Consequently, the Department's analysis compared the 
design differences between R-22 and R-410a equipment in smaller 
packaged units (i.e., <65,000 Btu/h units) to gain general engineering 
insight. In addition, the Department used performance information from 
manufacturers of R-410a compressors to develop engineering models of 
the larger R-410a systems.
    The Department carried out preliminary performance analyses to 
simulate R-410a equipment using the same performance models applied to 
the R-22 equipment, and calculated the R-410a equipment costs using the 
same cost model applied to the R-22 equipment. The engineering analysis 
section (Chapter 5) of the ANOPR TSD presents additional details of the 
R-410a analyses. The Department generated cost/efficiency curves that 
represented the R-410a equipment using the performance analysis and 
estimated equipment costs.
    The Department realizes that the absolute costs of R-410a equipment 
differ from those of the R-22 equipment. However, the analysis focuses 
on the difference in the incremental costs between the two curves. The 
Department intends to consider the absolute costs of the R-22 phaseout 
in the manufacturer impact analysis. The alternative refrigerant 
analysis provided no evidence to suggest that the incremental cost/
efficiency behavior of R-410a equipment in the >=65,000 Btu/h to 
<135,000 Btu/h and >=135,000 Btu/h to <240,000 Btu/h equipment classes 
differs substantially from the R-22 cost/efficiency behavior. For more 
detail on the alternative refrigerant analysis, refer to the 
engineering analysis, section 5.9 of the ANOPR TSD.
    The Department requests comments from interested parties about its 
proposed approach to the alternative refrigerant analysis, and has 
identified it as Issue 2 under ``Issues on Which DOE Seeks Comment'' in 
section IV.E. of this ANOPR.

D. Building Energy Use and End-Use Load Characterization

    Energy savings from commercial unitary air conditioning equipment 
vary according to the rated efficiency level of the equipment and a 
number of other factors, including: Climate, building-type, and 
building occupation schedule and use. Operating cost savings are a 
result of reduced electricity consumption and a decrease in the peak 
electric demand charge. The Department conducted building simulations 
to estimate the energy use of the commercial unitary air conditioning 
equipment at candidate standard levels for various combinations of the 
above-mentioned factors. The simulations yielded hourly estimates of 
the buildings' electric loads that included lighting, plug, and air 
conditioning equipment. The Department uses these estimates in the 
life-cycle cost analysis to assess the cost savings that the air 
conditioning equipment provides at each of the efficiency levels 
analyzed. For more detail on the building energy use and end-use load 
characterization analysis, refer to Chapter 6 of the ANOPR TSD.
1. Approach
    The 1995 CBECS (CBECS 95) data set was the primary source of the 
data used to develop the building characteristics. The Department 
considered the use of the 1999 CBECS (CBECS 99), but the entire 
microdata set was not available in time for this analysis. In addition, 
the sampling procedure for CBECS 99 specifically excluded new buildings 
of less than 10,000 square feet, which is the type of building that 
uses commercial unitary air conditioners. Using the CBECS 99 data would 
have resulted in a biased data set. The Department used a subset of the 
CBECS 95 representative building types to characterize the energy use 
and loads for this analysis. It selected six building types that 
included most of the top eight, energy-using building types in the 
commercial sector based on CBECS data.
    The Department did not explicitly include health care buildings. 
Instead, because of similarities in modeling the outpatient segment of 
a health care building and an office building, the Department added the 
outpatient segment of a health care building into the office-building 
category. However, the Department did not include the inpatient segment 
of the health care building type, because there are insufficient data 
to characterize the buildings for the purpose of energy simulations. 
The Department did not consider the lodging building type because the 
number of observations nationwide in the CBECS data set was small and 
because these buildings do not typically use unitary packaged air 
conditioning equipment for most of their conditioned spaces. For more 
details on the engineering approach to building energy use, 
representative building types, modeling methodology, climate and 
building locations, and annual building energy use, refer to Chapter 6 
of the ANOPR TSD.
    Lennox provided comments indicating that industrial and light 
manufacturing applications use a large fraction of unitary equipment, 
which the DOE omitted from the building sample. (Lennox, No. 15 at p. 
1) The CBECS data set excludes manufacturing facilities from its 
sample. The Manufacturing Energy Consumption Survey (MECS) includes 
manufacturing facilities, but the detailed data on building 
characteristics and operation are not available in the MECS data set. 
The lack of such data, including the square footage cooled by 
commercial unitary air conditioning equipment, makes it difficult to 
establish how significant this building category would be in the 
analysis. The Department believes that, in the case of office space 
attached to industrial or light manufacturing buildings, its analytical 
approach provides a reasonable representation of the cooling loads 
experienced by these building spaces. This issue is also discussed 
later with regard to the development of electricity prices from utility 
tariffs for the LCC analysis (see section II.F.1.b.(2)(a) of this 
ANOPR). This concern is identified as Issue 5 under ``Issues on Which 
DOE Seeks Comment'' in section IV.E of this ANOPR.
    The Department further screened the individual CBECS buildings 
within the six building types to include only buildings with at least 
70 percent of their total floor space cooled by unitary packaged 
equipment. The Department based the 70 percent value on the need to 
keep the sample size reasonable, yet still representative of the 
building stock that uses packaged cooling equipment. Using an 80 
percent value would be too restrictive and using a 60 percent value 
would be too extensive and make the sample size too large. The total 
number of observations in the six building types meeting the 70 percent 
threshold was 1033. These buildings accounted for over 73 percent of 
the annual cooling energy use and 67 percent of the square

[[Page 45474]]

footage of commercial buildings with at least part of their floor space 
being cooled with packaged equipment.
    The Department modeled each CBECS sample building using the BLAST 
software. The Department computed the building loads by simulating a 
prototypical three-story, 48,000-square-foot building with five thermal 
zones per floor with schedule and envelope characteristics chosen to 
represent each building sampled. The Department used the ventilation 
requirements of ASHRAE Standard 62.1-1999 as the basis for the 
ventilation rates in the building simulations. The Department scaled 
the results of that prototype's simulation to match the specific 
geometry of the CBECS building being represented, e.g., conditioned 
floor area, aspect ratio (defined as the ratio of the length to the 
width of a building), number of floors, and number of thermal zones per 
floor. The Department simulated the buildings with equipment at ten 
different EER levels to determine the annual energy impacts of changes 
in EER.
    Lennox commented that the default part-load performance curve in 
the BLAST simulation tool appears to be representative of equipment 
that uses cylinder unloading at part-load, instead of multi-compressor 
staging that is common in commercial unitary air conditioners. The 
impact of using the BLAST default part-load performance curve is some 
overestimation of the energy use of the compressors when lightly 
loaded. (Lennox, No. 15 at p. 1) Due to the lack of available published 
data on part-load performance of commercial unitary air conditioners, 
the Department requests data on the part-load operating characteristics 
to adjust the BLAST part-load performance curve.
    Also, in view of the complexity of the BLAST analysis, and Lennox's 
comments concerning the selection, characterization, and simulation of 
the building set used for the building energy use and end-use load 
characterization analysis (Lennox, No. 15 at p. 1), the Department had 
an independent third-party expert review its analysis. The results of 
the third-party review are available to interested parties on the 
Department's website at http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html. This third-party review is addressed as issue 16 
under ``Issues on Which DOE Seeks Comment'' in section IV.E, of this 
ANOPR.
    Also, Lennox provided comments on the ventilation rates used in the 
DOE building simulation analysis. (Lennox, No. 15 at p. 1) Lennox and 
ARI asserted that the DOE analysis overstates the ventilation load for 
most buildings by assuming all commercial buildings typically operate 
at ASHRAE Standard 62-1989 ventilation levels (15 cfm/person typical). 
Lennox wrote that most existing building applications as well as half 
of the new building applications of unitary air conditioning equipment 
operate at pre-ASHRAE Standard 62-1989 ventilation levels (5 to 7.5 
cfm/person typical), which accounts for nearly 85 percent of the total 
shipments of commercial unitary air conditioning equipment. (Lennox, 
No. 15 at p. 1; ARI, No. 18 at pp. 1-8) Consultation between the 
Department and designers suggests that designers use ASHRAE Standard 
62.1-1999 for establishing design ventilation rates, particularly since 
many designers wish to avoid potential litigation arising from adverse 
health effects attributable to low ventilation rates. (See the 
discussion of building energy use and end-use load characterization 
that addresses ventilation rates in section 6.2.5.5, ``Ventilation and 
Infiltration,'' of the ANOPR TSD.) For commercial unitary air-
conditioning equipment, the ventilation rate is typically established 
by an outside air damper setting on the installed equipment. It is not 
a function of the age of the building, but rather is set at the time of 
installation. Concern over the health effects of low ventilation rates 
are the same regardless of the age of the building or the minimum 
ventilation rates in effect at the time the building was constructed.
    Consequently, the Department believes that the use of ASHRAE 
Standard 62.1-1999 for setting ventilation requirements is the approach 
most representative of that used in the construction industry today. 
The Department is unaware of any field studies that would support use 
of a different ventilation rate than that required by ASHRAE Standard 
62.1-1999, and thus is inclined to use this as the basis for the 
analysis for the ANOPR. However, in view of the complexity of the 
analysis and issues concerning ventilation rates that Lennox addresses, 
the Department had an independent third-party expert review its 
analysis. The results of the third party review are available to 
interested parties on the Department's website at http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html. This 
concern is addressed as Issue 16 under ``Issues on Which DOE Seeks 
Comment'' in section IV.E. of this ANOPR.
    The Department received several comments that expressed concern 
about whether the higher efficiency equipment provided adequate 
humidity control while meeting ASHRAE Standard 62.1-1999 ventilation 
requirements. (ACEEE, No. 10 at p. 5; Public Workshop Tr., No. 2EE at 
p. 72; Lennox, No. 7 at p. 3; Public Workshop Tr., No. 2EE at p. 71) 
The Department established maximum sensible heat ratios for equipment 
analyzed via the design option process in the engineering analysis, 
indicating that there could be high EER equipment designs that provide 
acceptable humidity control (or adequate sensible heat ratio 
performance) under ARI Standard Rating Conditions for cooling.
    In addition, DOE received several comments concerning the 
simulation of economizers. Lennox and the Oregon Office of Energy (OOE) 
commented that economizer operation or failure to operate is difficult 
to capture in a building simulation analysis. (Lennox, No. 7 at p. 4; 
Public Workshop Tr., No. 2EE at p. 163) The Department agrees with 
Lennox and OOE. However, for this ANOPR analysis, DOE assumed that if 
CBECS data indicated the use of an economizer then it was a fully 
functioning economizer. This might result in some underestimation of 
the actual cooling loads in the buildings.
    The Department requests comments from interested parties regarding 
its proposed approach to economizers. This matter is identified as 
Issue 6 under ``Issues on Which DOE Seeks Comment'' in section IV.E. of 
this ANOPR.
    Fan power in the energy analysis was raised as one of the issues in 
the Framework Workshop. A written comment from ACEEE proposed (in 
addition to the EER requirement) establishing a second requirement for 
fan power as a function of flow rate in Watts per cubic feet per minute 
(Watts/cfm) using the existing fan static pressures. (ACEEE, No. 10 at 
p. 9) The Department notes that the current EER performance metric 
includes fan power and has incorporated annual fan energy use in its 
estimate of total system energy use for the simulations. Because DOE is 
not planning to amend the test procedure at this time to extract the 
fan power measurement, it does not anticipate adding a requirement for 
fan efficiency (Watts/cfm).
    In a related comment on the fan power issue, Lennox raised the 
issue of the inclusion of supply fan energy during all operational 
modes of the air conditioner (cooling, heating, and ventilating) in the 
energy analysis. (Lennox, No. 15 at p. 1) The Department understands 
that the supply fan is an integral part of a unitary air conditioner 
and its operation contributes to the energy use of the equipment. 
Including supply fan energy during hours when a commercial unitary air 
conditioner is

[[Page 45475]]

operating in the heating or ventilating mode will increase the energy 
use of that equipment, in comparison to including supply fan energy 
only when the equipment is providing cooling. For the purposes of the 
ANOPR analysis, the Department has included all energy from the supply 
fan and welcomes public comments on this approach. This concern is 
addressed in Issue 7 under ``Issues on Which DOE Seeks Comment'' in 
section IV.E of this ANOPR.
    Furthermore, in view of the complexity of the analysis concerning 
fan energy and the issues addressed by Lennox, the Department had an 
independent third party review its analysis. The results of the third-
party review are available to interested parties on the Department's 
Web site at http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html. Also, this concern is addressed as Issue 16 under ``Issues on 
Which DOE Seeks Comment'' in section IV.E of this ANOPR.
    The end result of the simulation analysis was an hourly end-use 
energy stream of data for the following end-use categories:

 Cooling package equipment;
 Heating (gas);
 Lights;
 Plug and miscellaneous loads;
 Package-equipment fan;
 Nnon-package cooling; and
 Non-package fan.
2. Preliminary Results
    The distribution of cooling energy use intensity (EUI) for all 
buildings simulated at the 8.9 EER efficiency level shows that EUI 
varies widely, from 0.33 kBtu/square-foot/year to a maximum of 63.3 
kBtu/square-foot/year. However, the vast majority of the buildings fall 
into the 5 to 20 kBtu/square-foot/year range. Chapter 6 of the ANOPR 
TSD provides a comparison of the simulated cooling EUI for each 
building with the calculated cooling EUI using the CBECS estimated 
cooling energy use. On a square-footage-weighted basis, the BLAST 
simulation cooling EUIs agree reasonably well with the CBECS estimated 
EUIs. The CBECS estimated EUIs are higher for two of the building types 
(Office and Food Service), while the BLAST simulation cooling EUIs are 
higher for the four remaining building types (Retail, Education, 
Assembly, Warehouse). The square-footage-weighted cooling EUI for this 
set of buildings was 10.5 kBtu/square-foot/year for the BLAST 
simulations compared to 9.6 kBtu/square-foot/year for the CBECS 
estimates.
    The hourly cooling energy use is only one of the energy inputs to 
the LCC analysis. All the electric energy end-uses play some part in 
determining which rate structure applies and where end-users are in the 
rate structure for any given hour. The electric energy use of the 
cooling equipment relative to the other electric energy use within a 
building is a strong function of the building type, climate, and time 
of use (seasonal as well as hourly). The peak hourly energy use becomes 
particularly important when analyzing the marginal cost of energy saved 
by higher EER levels.
    In the progression to higher EER levels, the simulation runs 
indicated reduced cooling and fan energy consumption. The Department 
made a comparison of the change in cooling EUI (not including the fan 
energy) for two buildings from the representative building set as the 
equipment efficiency progressed from an EER of 8.5 to 12.0. As 
expected, the cooling EUI decreases with each incremental EER increase, 
but with a declining EUI benefit at higher EERs. This trend is the same 
for all buildings, even though the base EUI is different for each of 
them. The change in total fan energy use from the simulation as a 
function of EER is less pronounced. This is because, while the 
simulation model assumes that fan energy during the EER rating test is 
reduced, a substantial fraction of the fan energy consumption is a 
function of the external fan static pressure, which is assumed not to 
change between efficiency levels. The Department used the hourly 
simulated building electric-energy loads directly as inputs to the 
detailed LCC analysis discussed in the next section of this ANOPR. See 
Chapter 6 of the TSD for more details on this building load simulation 
analysis.
    In determining the reduction in cooling and fan energy consumption 
due to higher EER levels, the Department did not take into account a 
rebound effect. The rebound effect occurs when a piece of equipment 
that is made more efficient is used more intensively, so that the 
expected energy savings from the efficiency improvement do not fully 
materialize. Because unitary air conditioners are a commercial 
appliance, the person owning the equipment (i.e., the building owner) 
is often not the person operating the equipment (i.e., the renter). 
Because the operator does not own the equipment, they will not have the 
information necessary to influence their operation of the equipment. In 
other words, a rebound effect would appear to be unlikely. 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. This matter is identified as Issue 
20 under ``Issues on Which DOE Seeks Comment'' in section IV.E. of this 
ANOPR.

E. Markups To Determine Equipment Price

    The Department understands that the price of a commercial unitary 
air conditioner depends on how the customer purchases such equipment. 
Because the customer price of such equipment is not generally known, 
the Department used the manufacturers' costs developed from the 
engineering analysis and applied multipliers called ``markups'' to 
arrive at the final equipment price. The derivation of the equipment 
price depends on the distribution channel the customer uses to purchase 
the equipment. Typical distribution channels consist of wholesalers, 
mechanical contractors, and general contractors. The Department based 
the wholesale and contractor markups on a combination of firm balance 
sheet data and U.S. Census Bureau data. For each of the markups, DOE 
further differentiated between a baseline markup and an incremental 
markup. The Department defines baseline markups as coefficients that 
relate the manufacturer's price of baseline equipment to the 
wholesaler's or contractor's sales price of such equipment. Incremental 
markups are coefficients that relate changes in the manufacturer's 
price of baseline equipment to changes in the wholesaler's or 
contractor's sales price. For more detail on equipment prices and 
markups, refer to Chapter 7 of the ANOPR TSD.
1. Approach
    To carry out the LCC calculations, DOE needed to determine the cost 
to the customer of a baseline commercial unitary air conditioning unit 
and the cost of more efficient units. The customer price of such units 
is not generally known. However, by applying a multiplier called a 
``markup'' to the manufacturer's prices that DOE derived, DOE could 
estimate customer prices both for baseline and more-efficient 
equipment.
    Both Lennox and Trane noted the importance of the methodology used 
to determine markups and equipment prices. Lennox stated that markups 
are dependent on how commercial equipment is sold and involve complex 
distribution channels that include distributors (also known as 
wholesalers), installing contractors, and business or building owners. 
(Lennox,

[[Page 45476]]

No. 2 at p. 3; Public Workshop Tr., No. 2EE at p. 142) Trane also noted 
that any publicly available price lists are not useful for estimating 
equipment prices. (Public Workshop Tr., No. 2EE at p. 125) In response 
to Trane, OOE commented that invoices are available for estimating the 
installed cost of commercial unitary air conditioners. (Public Workshop 
Tr., No. 2EE at p. 126)
    The Department understands that the equipment price to the customer 
depends on how the customer purchases the equipment. Based on 
manufacturer input, DOE defined two types of distribution channels to 
describe how the equipment passes from manufacturer to customer. In the 
first distribution channel, the manufacturer sells the equipment to a 
wholesaler, who in turn sells it to a mechanical contractor, who in 
turn sells it (and its installation) to a general contractor, who in 
turn sells it to the customer. In the second distribution channel, the 
manufacturer sells the equipment directly to the customer through a 
national account. The Department further subdivided the first 
distribution channel by mechanical contractor size (as measured in 
annual revenues). In its methodology for estimating equipment prices, 
the Department relied solely on the above approach, i.e., defining 
distribution channels and determining markups at each point in the 
distribution channel. The Department could not collect any price lists 
or invoices to assist in its determination of equipment prices. For 
more detail on the distribution channels for commercial air 
conditioners, refer to the introduction to Chapter 7, figure 7.1.1, and 
section 7.7 of the ANOPR TSD.
    Based on information provided by equipment manufacturers through 
informal interviews, as well as the judgment of individuals familiar 
with how commercial unitary air conditioning equipment is distributed 
to commercial customers, the Department assumes that end use customers 
purchase 50 percent of equipment through small mechanical contractors, 
32.5 percent through large mechanical contractors, and the remaining 
17.5 percent through national accounts. In addition, the Department 
understands that 30 percent of commercial unitary air conditioning 
equipment is purchased for the new construction market, while the 
remaining 70 percent serves the replacement market. In the case of the 
replacement market, where equipment is purchased through a mechanical 
contractor, the mechanical contractor generally purchases equipment 
directly from the wholesaler (i.e., a general contractor is not 
involved in the distribution of equipment). The mechanical contractor 
markup is a function of contractor size and whether the contractor 
serves primarily the new construction or the replacement market. For 
more detail on the new construction and replacement markets and their 
effects on the mechanical contractor markups, refer to section 7.4.1 of 
the ANOPR TSD.
    For each of the markups, DOE further differentiated between a 
baseline markup and an incremental markup. The Department defines 
baseline markups as coefficients that relate the manufacturer price of 
baseline equipment to the wholesale or contractor sales price of such 
equipment. Incremental markups are coefficients that relate changes in 
the manufacturer price of baseline equipment to changes in the 
wholesale or contractor sales price. For more detail on the methodology 
the Department used to determine baseline, incremental, and overall 
markups, refer to sections 7.1.1 through 7.1.3 of the ANOPR TSD.
    The Department based the wholesale and mechanical contractor 
markups on firm balance sheet data, while it based the general 
contractor markups on U.S. Census Bureau data for the commercial and 
institutional building construction industry. The Department obtained 
balance sheets from the trade associations representing wholesalers and 
mechanical contractors. The Department put the building construction 
industry data into the same format as the balance sheet data for 
wholesalers and mechanical contractors to derive the markups for 
general contractors. The key assumptions used to estimate markups using 
this financial data are:
     The firm balance sheets faithfully represent the various 
average costs incurred by firms distributing and installing commercial 
air conditioning.
     There are two categories of costs: (1) Costs that vary in 
proportion to the manufacturer price of commercial air conditioners 
(variable costs); and (2) costs that do not vary with the manufacturer 
price of commercial air conditioners (fixed costs).
     Commercial air conditioner wholesale and contractor prices 
across different efficiency levels vary in proportion to commercial air 
conditioner wholesaler and contractor costs included in the balance 
sheets.
    For more detail on the basic assumptions the Department used to 
estimate markups, wholesale markups, and mechanical contractor markups, 
refer to sections 7.2 through 7.5 of the ANOPR TSD.
    Commercial unitary air conditioning equipment purchased through 
national accounts is an exception to the usual distribution of HVAC 
equipment to end users. Large customers of HVAC equipment, such as 
national retail chains, use national accounts to circumvent the typical 
chain of distribution. Due to the large volume of equipment purchased, 
large customers can purchase equipment directly from the manufacturer 
at significantly lower prices than could be obtained through the 
typical distribution chain.
    To derive a national account markup, the Department considered 
costs that are added to the manufacturer price as additional markups 
and costs that are subtracted from the customer price as markups that 
are avoided in a more typical manufacturer-to-wholesaler-to-mechanical-
contractor-to-general-contractor-to-customer distribution system. Costs 
that are added include:
     Freight charges (less-than-a-truck-load rates are higher 
than trailer-load rates);
     Account management and administration expenses (billing, 
collections and warranty issues); and
     Cost-of-sale increases (technical support and personalized 
service).

Costs that are deducted include:
     Wholesaler account management and administration expenses;
     Wholesaler warehousing and handling expenses;
     Mechanical contractor markup on equipment sale (profit, 
labor warranty, and service reserve);
     Mechanical contractor account management and 
administration expenses;
     Mechanical contractor warehousing and handling expenses;
     General contractor account management and administration 
expenses; and
     General contractor project oversight markup.
    In view of these additions and deductions, the Department derived a 
national account markup assuming that the resulting equipment price 
increase was one-half of that realized from a typical chain of 
distribution. In other words, if the price increase resulting from the 
multiplicative product of the wholesale, mechanical contractor, and 
general contractor markups is $100, the national account markup is such 
that the price increase is one-half of that, or $50. The Department 
assumed that the resulting national account markup must fall somewhere 
between the manufacturer price (i.e., a markup of 1.0) and the customer 
price under a typical chain of distribution. Because

[[Page 45477]]

DOE did not know precise values (between zero and one for the markups) 
for the actual national account equipment price, DOE used 0.5 to 
represent a mid-point value between manufacturer price and customer 
price. For more detail on national account markups, refer to section 
7.7 of the ANOPR TSD.
    As a final step, DOE applied a sales tax, which represents state 
and local sales taxes that are applied to the customer price of the 
equipment. The Department derived sales taxes representative of both 
state and local sales taxes from 1997 state sales tax data and 1997 
local sales tax data. Using state unitary air conditioner shipment data 
from 1994, DOE weighted the state and local sales tax data by the 
percentage of unitary air conditioners shipped to each state. The sales 
tax has a mean value of 6.7 percent. The Department updated its 
calculation of sales taxes based on 2003 state and local sales tax data 
from the Sales Tax Clearinghouse (http://thestc.com/STrates.stm). 
Although the updated mean sales tax value is 6.6 percent, virtually 
unchanged from the value based on 1997 data, the Department intends to 
update the sales tax data in its analysis for the NOPR. The Department 
applied sales taxes to the customer equipment price irrespective of the 
distribution channel and the market in which the customer is located. 
The Department assumes the state and local sales tax rate is the same 
for residential products and commercial/industrial equipment.
    For more detail on the Department's approach to state and local 
sales taxes, refer to section 7.6 of the ANOPR TSD. The Department 
invites comments and data from interested parties on its assumption. 
Also, the Department was not able to gather more recent state-by-state 
shipments of >65,000 Btu/h to <240,000 Btu/h commercial unitary air 
conditioners. The Department requests more recent data from interested 
parties.
2. Estimated Markups
    The Department multiplied the wholesale and contractor markups 
described above by the sales tax to get the overall baseline and 
incremental markups shown in Tables II.5 and II.6, respectively. 
Overall markups are based on one of three assumed distribution channels 
as well as whether the commercial unitary air conditioning equipment is 
purchased for the new construction or the replacement market. The 
Department based the distribution channel on whether such equipment is 
purchased through small mechanical contractors, large mechanical 
contractors, or national accounts. The tables show a weighted-average 
overall markup, assuming that: (1) The new construction and replacement 
markets represent 30 percent and 70 percent of the market, 
respectively; and (2) end-use customers purchase 50 percent of 
equipment through small mechanical contractors, 32.5 percent through 
large mechanical contractors, and the remaining 17.5 percent through 
national accounts. The weighted-average overall baseline markup equals 
2.31, while the weighted-average overall incremental markup equals 
1.56. For more details on how the Department derived overall markups, 
refer to section 7.8 of the ANOPR TSD.
    The Department used the overall markup to estimate the customer 
price of baseline equipment, using the manufacturer price of baseline 
equipment. For example, if the manufacturer price of a baseline 
commercial air conditioner is $100, DOE multiplied this by the 
weighted-average overall baseline markup to estimate the baseline 
customer price of the equipment as $231. Similarly, DOE used the 
overall incremental markup to estimate changes in the customer price, 
in view of changes in the manufacturer price above the baseline price 
resulting from a standard to raise equipment efficiency. For example, 
if a standard increases the commercial air conditioner manufacturer 
price by $25, DOE multiplied this by the weighted-average overall 
incremental markup to estimate that the customer price will increase by 
$39.

                                      Table II.5.--Overall Baseline Markups
----------------------------------------------------------------------------------------------------------------
                                       New construction                       Replacement
                             ------------------------------------------------------------------------  Weighted-
        Market sector            Small       Large     National      Small       Large     National     average
                                 mech.       mech.      account      mech.       mech.      account
----------------------------------------------------------------------------------------------------------------
Wholesale...................        1.36        1.36  ..........        1.36        1.36
Mechanical Contractor.......        1.48        1.35        1.69        1.70        1.55        1.60
General Contractor..........        1.24        1.24  ..........          NA          NA
Sales Tax...................        1.07        1.07        1.07        1.07        1.07        1.07
Overall.....................        2.66        2.42        1.80        2.47        2.24        1.71        2.31
----------------------------------------------------------------------------------------------------------------


                                    Table II.6.--Overall Incremental Markups
----------------------------------------------------------------------------------------------------------------
                                       New construction                       Replacement
                             ------------------------------------------------------------------------  Weighted-
        Market sector            Small       Large     National      Small       Large     National     average
                                 mech.       mech.      account      mech.       mech.      account
----------------------------------------------------------------------------------------------------------------
Wholesale...................        1.11        1.11  ..........        1.11        1.11
Mechanical Contractor.......        1.26        1.18        1.27        1.37        1.29        1.24
General Contractor..........        1.13        1.13  ..........          NA          NA
Sales Tax...................        1.07        1.07        1.07        1.07        1.07        1.07
Overall.....................        1.68        1.59        1.35        1.63        1.53        1.32        1.56
----------------------------------------------------------------------------------------------------------------

    Referring specifically to the above wholesaler baseline and 
incremental markups of 1.36 and 1.11, respectively, ARI's comments 
reject the assumption that incremental markups should be less than 
baseline markups. ARI states that these correspond to margins of 27 
percent and 9 percent respectively, and that the underlying assumption 
is that ``the wholesaler will accept one-third the margin on the 
incremental cost that he receives on the baseline.'' (ARI, No. 14 at 
pp. 1 and 2) According to ARI, this is saying that the wholesaler is 
expected to sell premium goods for a lower

[[Page 45478]]

markup than commodity goods, which is counter to the trends in all 
industries. Also, ARI states that ``premium goods demand premium 
markups.'' By using incremental markups, the effect of any increase in 
the standard would be to decrease the profit margins of the wholesalers 
and all others in the distribution chain. Further, ARI states that, 
over a period of time, ``this is a sure formula for bankruptcy and 
collapse of an industry.'' (ARI, No. 14 at p. 1)
    As ARI notes, the wholesale incremental markups are one-third of 
the wholesale baseline markups. (ARI, No. 14 at p. 1) However, the 
Department does not agree with ARI's characterization of these 
estimates as counter to industry trends and ``a formula for 
bankruptcy.'' Rather, the Department believes that the above 
incremental markups are consistent with industry trends and sufficient 
to maintain industry profits. There appears to be some fundamental 
disagreement between ARI and the Department on whether growth in cost 
of goods sold (CGS) must always be matched by a proportionate growth in 
sales revenue. While this may be true within the context of a general 
business expansion, the Department believes that it is not an 
appropriate assumption within the context of an increase in equipment 
price due to an increase in the minimum efficiency standard. To develop 
markups, energy efficiency standards involve little or no change in the 
number of units sold or in the labor needed to handle those units. This 
situation is quite different from a market trend where both the number 
of units sold and CGS increase. The following example illustrates this 
case.
    The Department uses a simple hypothetical example of a firm setting 
prices before and after implementation of an efficiency standard (see 
Table II.7). For illustration, the hypothetical standard is assumed to 
raise equipment cost by 25 percent, from $5 million CGS in the Baseline 
to $6.25 million CGS with the New Standard. For simplicity, the number 
of units sold in this example is assumed to remain constant. The DOE 
analyses of national energy savings and manufacturer impact takes into 
account changes in sales as a result of energy efficiency standards. 
Consequently, with the New Standards, labor and occupancy costs remain 
constant and other overhead costs and profit are assumed to rise in 
proportion to changes in CGS.

                          Table II.7.--Example Illustrating Impact of Profit on Markup
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                   Baseline            New standard (proportional
                                                 profit)
                                       New standard (fixed markup)
----------------------------------------------
Total CGS ($thousand).............     $5,000  Total CGS ($thousand)     $6,250  Total CGS                $6,250
                                                                                  ($thousand).
-----------------------------------
Labor and Occupancy ($thousand)...       $659  Labor and Occupancy         $659  Labor and Occupancy        $659
                                                ($thousand).                      ($thousand).
Other Overhead ($thousand)........       $659  Other Overhead              $824  Other Overhead             $824
                                                ($thousand).                      ($thousand).
Profit ($thousand)................       $333  Profit ($thousand)...       $416  Profit ($thousand)..       $580
                                   ------------
    Total Revenue ($thousand).....     $6,650  Total Revenue             $8,150  Total Revenue            $8,313
                                                ($thousand).                      ($thousand).
-----------------------------------
Markup............................       1.33  Markup...............       1.30  Markup..............       1.33
----------------------------------------------------------------------------------------------------------------

    The New Standard (proportional profit) shown in the middle column 
of Table II.7 illustrates what would happen if the Department assumes 
profits are proportional to CGS. Even though baseline profit rises from 
$333,000 to $416,000, the apparent markup declines, compared to 
Baseline. The apparent decline is the result of an arithmetic change in 
the ratio of Total Revenue to Total CGS. In other words, if 
profitability increases proportionally with CGS from $333,000 to 
$416,000, then the markup declines from 1.33 to 1.30.
    The New Standards (fixed markup) case illustrates the implications 
if instead the Department were to assume a fixed markup. The results 
(right column in Table II.7) show that if the markup is fixed at the 
pre-standard level of 1.33, then firm profits will rise after the 
standard becomes effective. In other words, with a fixed markup, 
revenue after the standard becomes effective would be 1.33 multiplied 
by the CGS, or $8,313,000. The profit that is consistent with this 
amount is the revenue minus the sum of CGS, labor and occupancy, and 
other overhead. This provides a profit of $580,000 after the standard, 
or a 74 percent increase in profit.
    The Department does not believe that it is possible for firms to 
increase profits in this manner simply as a result of an increase in 
equipment efficiency. In a competitive market, DOE believes increases 
in profits do not persist because high profits attract competing firms 
which results in an increase in equipment supply and lower prices. The 
Department believes that a firm that used an efficiency standard as an 
opportunity to increase profits would eventually lose market share to 
firms that maintain profitability nearer to the pre-standard levels.
    All this indicates that markups on goods sold after an energy 
efficiency standard becomes effective would be lower than the baseline 
markups. Thus, the Department believes that, due to implementation of 
an energy efficiency standard, CGS would increase but the number of 
units sold and associated labor costs would not increase.
    Two sources of industry data support the Department's finding 
concerning incremental markups. First, the incremental markup the 
Department calculated is consistent with incremental markups calculated 
from a statistical analysis of U.S. Census Bureau data covering the 
HVAC sector. (See Wholesalers: U.S. Census Bureau, Gross Profit, 
Employment and Gross Margin for Merchant Wholesalers for NAICS 42173. 
By State: 1997. Refer to section 7.3 of the ANOPR TSD for details on 
the derivation of incremental markups based on the use of U.S. Census 
Bureau data.) Second, there are empirical observations of instances 
where industry growth in revenue exceeds growth in profits. For 
example, net sales of firms in the refrigeration and service industry 
grew at 18.6 percent over a period of five years while operating income 
grew by 12.6 percent. (See Ibbotson: 2001 Cost of Capital Yearbook. 
Statistics for SIC Code 358. Medium firm growth rates.) The Department 
concludes that many factors influence the relationship between CGS and 
operating profits.
    The Department believes that the use of incremental markups is the 
most appropriate methodology for developing equipment prices for more 
energy efficient equipment. Because fewer

[[Page 45479]]

expenses need to be covered by an incremental markup, it has a lower 
value than its corresponding baseline markup. Nevertheless, the 
Department understands that identifying expenses that need to be 
covered by the incremental markup is essential to deriving its value. 
Therefore, the Department seeks comments on whether the wholesale, 
general contractor, and mechanical contractor incremental markups 
should cover more or fewer expenses. This is addressed as Issue 8 under 
``Issues on Which DOE Seeks Comment'' in section IV.E of this ANOPR.
    In addition, in view of the complexity of the analysis and issues 
addressed by ARI concerning markups (ARI, No. 14 at pp. 1 and 2), the 
Department had an independent third-party expert review and comment on 
its analysis. The results of the third-party review are available to 
interested parties on the Department's Web site at http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html. This 
subject is addressed as Issue 16 under ``Issues on Which DOE Seeks 
Comment'' in section IV.E of this ANOPR.
    Concerning the Department's characterization of distribution 
channels, ARI states that replacement installations often need a 
general contractor. (ARI, No. 14 at pp. 1 and 2) Specifically, ARI 
states that replacements are divided between those due to equipment 
failures and those required as part of a major building renovation. In 
the latter case, ARI states that a general contractor is almost always 
involved and estimates that 50 percent of the replacement market 
includes a general contractor markup. (ARI, No. 14 at pp. 1 and 2)
    As noted earlier, the Department developed the distribution 
channels based on data collected from manufacturers as well as the 
judgment of individuals familiar with how air conditioning equipment is 
distributed to commercial customers. Based on ARI's input, and any 
future comments from other interested parties in response to this 
ANOPR, the Department may change the distribution channels for the NOPR 
to be more reflective of how equipment is actually distributed.
    For equipment purchased through national accounts, ARI states that 
general and mechanical contractors remain involved in the distribution 
and installation of the equipment. However, it adds that the 
contractors may use a slightly lower effective markup if they do not 
have to cover expenses associated with the cost of the equipment. Thus, 
national accounts are more similar to a typical distribution channel 
than not. ARI comments that the principal advantage of a national 
account to a manufacturer is volume reduction of incremental selling 
cost. The result is that some savings are shared with the customer in 
the form of reduced cost for the installed equipment. Although there 
are customer savings, ARI states that the large difference between 
baseline and incremental markups is not representative of actual market 
dynamics, and that national account markups should be 0.2 to 0.25 
greater than the values shown in chart 13. (ARI, No. 14 at pp. 1 and 2) 
The Department understands that ARI is referring to chart 13 (Image 14) 
in the ``Life Cycle Cost Analysis Presentation: Inputs and Results,'' 
on the DOE Web site at http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html. In this case, chart 13 (Image 14) presents the 
same information as Tables II.5 and II.6 in this ANOPR.
    As noted earlier, the Department derived a national account markup 
under the assumption that the resulting equipment price increase was 
one-half of that realized from a typical chain of distribution. In view 
of ARI's comments, and any future comments received from other 
interested parties in response to this ANOPR, the Department may change 
the national account markups for the NOPR to better reflect the actual 
distribution of commercial unitary air conditioning equipment.
    The ACEEE and ASE commented that DOE should extrapolate future 
equipment prices from historical producer price trends for commercial 
unitary air conditioners published by the U.S. Census Bureau. (ACEEE, 
No. 10 at pp. 9 and 10; ASE, No. 9 at p. 4)
    For other rulemakings, the Department used production input costs 
and production technologies based on the best information available at 
the time. The Department has not made any assumptions about 
productivity improvements and material cost changes over time. The 
Department believes historical price trends for commercial unitary air 
conditioners (or other related equipment) do not apply to forecast 
equipment prices where there are no data to show that the trends will 
continue. Therefore, without specific data on the likely costs to 
manufacture a piece of equipment, the Department does not plan to apply 
a productivity improvement factor in this rulemaking.

F. Life-Cycle Cost and Payback Period Analysis

    The LCC and PBP analysis determines the impact of potential 
standards on consumers. The effects of standards on individual 
commercial 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 LCCs compared to a base case. The LCC calculation considers 
total installed cost (equipment purchase price plus installation cost), 
operating expenses (energy, repair, and maintenance costs), equipment 
lifetime, and discount rate. The Department performed the LCC analysis 
from the perspective of the user of commercial unitary air conditioning 
equipment.
    The Department also determined the economic impact of potential 
standards on consumers by calculating the PBP of potential standards 
relative to a base case. The PBP measures the amount of time it takes 
the commercial consumer to recover the assumed higher purchase expense 
of more-energy-efficient equipment through lowering operating costs. 
Similar to the LCC, the PBP is based on the total installed cost and 
the operating expenses. But unlike the LCC, only the first year's 
operating expenses are considered in the calculation of the PBP. 
Because the PBP 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. For more detail on the life-cycle cost and 
payback period analysis, refer to Chapter 8 of the ANOPR TSD.
    The Department generated LCC and PBP results as probability 
distributions using a simulation based on Monte Carlo statistical 
analysis methods, in which inputs to the analysis consist of 
probability distributions rather than single-point values. As a result, 
the Monte Carlo analysis produces a range of LCC and PBP results. A 
distinct advantage of this type of approach is that the Department can 
identify the percentage of users achieving LCC savings or attaining 
certain PBP values due to an increased efficiency standard, in addition 
to the average LCC savings or average PBP for that standard. Because 
DOE conducted the analysis in this way, it can express the 
uncertainties associated with the various input variables as 
probability distributions. During the post-ANOPR consumer analysis, the 
Department may evaluate additional parameters and prepare a 
comprehensive assessment of the impacts on sub-groups of users.
    Lennox and NRDC had some general concerns regarding the LCC 
analysis. Lennox commented that the technical analysis of the 
commercial air conditioner market, building loads, and equipment 
operation are much more

[[Page 45480]]

complex than past analyses conducted for residential central air 
conditioners. (Lennox, No. 7 at p. 1) The NRDC stated that the analysis 
must be credible and transparent. (NRDC, No. 6 at p. 3)
    To make the analysis transparent, the Department developed a 
spreadsheet model in Microsoft Excel. An add-on to Microsoft Excel 
called Crystal Ball (a commercially available software program) allows 
a user to characterize input variables with probability distributions. 
Past LCC analyses conducted for residential central air conditioners 
also used Microsoft Excel spreadsheets with Crystal Ball. Although the 
residential and commercial air conditioner analyses are similar in this 
respect, the commercial analysis is more complicated in that it 
requires conducting whole-building simulations to derive equipment 
energy use and demand.
    In addition, the Department derived two sets of electricity prices 
to estimate annual energy expenses: A tariff-based estimate and an 
hourly based estimate. The tariff-based approach estimates an annual 
energy expense using electricity prices determined from electric 
utility tariffs collected in the year 2002. The hourly based approach 
estimates annual energy expense using electricity prices that may 
exist, assuming all electricity markets are deregulated. Under this 
approach, the Department collected electricity production prices that 
vary on an hourly basis and used them to model a scenario in which 
customers are directly charged for the costs incurred by an electricity 
provider to supply energy for air conditioning. For electricity markets 
that are already deregulated, the Department collected actual wholesale 
hourly electricity prices. For markets that are still regulated, it 
collected hourly system load and generation cost data and used them as 
a proxy for wholesale prices that might exist if those markets were 
deregulated.
1. Inputs to LCC Analysis
    For each efficiency level analyzed, the LCC analysis requires input 
data for the total installed cost of the equipment and the operating 
cost. Table II.8 summarizes the inputs used to calculate the customer 
economic impacts of various energy efficiency levels. A more detailed 
discussion of the inputs follows.

         Table II.8. Summary of Inputs Used in the LCC Analysis
------------------------------------------------------------------------
               Input                             Description
------------------------------------------------------------------------
Equipment Price...................  Derived by multiplying manufacturer
                                     cost by manufacturer, distributor,
                                     mechanical contractor, and general
                                     contractor markups and sales tax.
                                     Manufacturer costs and markup
                                     discussed in section II.C. and
                                     summarized in Tables II.3 and II.4.
                                     Other markups and sales tax
                                     discussed in section II.E and
                                     summarized in Tables II.5 and II.6.
Installation Cost.................  >=65,000 Btu/h to <135,000 Btu/h--
                                     $1585; >=135,000 Btu/h to <240,000
                                     Btu/h--$2142. Installation costs
                                     vary as a function of equipment
                                     weight.
Annual Energy Use and Demand......  Derived through whole-building
                                     energy use simulations. Discussed
                                     in section II.D.
Annual Energy Expenses............  Derived from tariff-based and hourly
                                     based electricity prices. Average
                                     marginal tariff-based electricity
                                     price--10.0[cent] per kilowatt/hour
                                     (kWh). Average marginal hourly
                                     based electricity price--9.9[cent]/
                                     kWh.
Repair Costs......................  >=65,000 Btu/h to <135,000 Btu/h
                                     annual repair cost--$151; >=135,000
                                     Btu/h and <240,000 Btu/h annual
                                     repair cost--$279. Annual repair
                                     costs vary as a function of
                                     manufacturer price.
Maintenance Costs.................  Annual maintenance cost equals $200;
                                     does not vary as a function of
                                     cooling capacity or efficiency.
Lifetime..........................  Mean lifetime equals 15.4 years.
Discount Rate.....................  Mean discount rate equals 6.1
                                     percent.
Effective Date*...................  2008.
------------------------------------------------------------------------
* Refer to section II.F.1.b.(8).

    As noted by its absence in Table II.8, the Department chose not to 
include the impact of income taxes in the LCC analysis for this ANOPR. 
The Department understands that there are two ways in which taxes 
affect the net impacts attributed to purchasing more energy efficient 
equipment compared to baseline equipment: (1) Energy efficient 
equipment typically costs more to purchase than baseline equipment, 
which in turn lowers net income and may lower company taxes; and (2) 
efficient equipment typically costs less to operate than baseline 
equipment, which in turn increases net income and may increase company 
taxes. In general, the Department believes that the net impact of taxes 
on the LCC analysis depends on firm profitability and expense practices 
(how firms expense the purchase cost of equipment). For more detail on 
the inputs to the life-cycle cost analysis, refer to section 8.2 of the 
ANOPR TSD. The Department seeks input on whether income tax effects are 
significant enough to warrant inclusion in the LCC analysis for the 
NOPR. The Department specifically requests information on how many 
firms that purchase commercial unitary air conditioners actually pay 
taxes and, if they do, what expense-accounting practices they use to 
depreciate the purchase costs. This is addressed as Issue 17 under 
``Issues on Which DOE Seeks Comment'' in section IV.E of this ANOPR.
a. Total Installed Cost Inputs
    The total installed cost is the sum of the equipment price and the 
installation cost. The equipment price includes the distribution 
markups (as determined in section II.E) that are applied to the 
manufacturer costs estimated in the engineering analysis (section 
II.C).
    The Department derived installation costs for commercial air 
conditioners from data in RS Means Mechanical Cost Data, 2002. The 
Department decided that data for 7.5-ton and 15-ton rooftop air 
conditioners are representative of installation costs for the >=65,000 
Btu/h to <135,000 Btu/h and >=135,000 Btu/h to <240,000 Btu/h air 
conditioning equipment classes, respectively. The Department derived 
nationally representative installation costs of $1,585 and $2,142 for 
7.5-ton and 15-ton commercial unitary air conditioners, respectively. 
Because labor rates vary significantly in each region of the country, 
DOE used data from RS Means Mechanical Cost Data, 2002 to identify how 
installation costs vary from state to state and incorporated these 
costs into the analysis.
    Lennox, Trane, and ARI stated that installation costs will increase 
with efficiency because of the increased

[[Page 45481]]

weight and size of more efficient equipment. (Lennox, No. 7 at p. 3; 
Public Workshop Tr., No. 2EE at p. 146-148; ARI, No. 14 at p. 2 and No. 
17 at p. 2) Lennox added that installation costs for the replacement 
market would increase substantially if larger and heavier equipment 
requires new roof mounting frames or structural modifications. (Lennox, 
No. 7 at p. 3) Regarding replacements, ARI stated that most of the 
equipment being replaced is likely to be older and rated 8.0 EER or 
lower. The ARI stated that the more efficient equipment will be larger 
and heavier, and is likely to need an adapter curb or rebooting and 
perhaps structural modifications to carry the weight. Retrofit 
installations use adapter curbs. An adapter curb consists of structural 
members that provide a transition or alignment between existing roof 
curbs and new equipment with a different size or configuration. Also, 
ARI stated that the cost of adaptation may be significantly greater if 
parapets must be increased (to meet building codes) to hide a unit 
sitting on a tall adapter. The ARI provided rough estimates of $2500 
for a 7.5-ton adapter curb and $3500 for a 15-ton adapter curb (parts 
and labor included). (ARI, No. 14 at p. 2)
    The Department could not find data that explicitly showed how 
installation costs vary with equipment efficiency. As a result, the 
Department considered varying installation costs in direct proportion 
to the weight of the equipment. The Department developed linear 
relationships of operating weight as a function of equipment efficiency 
for 7.5-ton and 15-ton commercial unitary air conditioners and assumed 
the installation cost increased in the same proportion. The Department 
does not believe the weight increases are great enough to warrant 
structural modifications and so it has excluded the cost of adaptor 
curbs and increased parapets. Therefore, DOE did not develop a separate 
set of installation costs for the replacement market. Spreadsheets used 
in evaluating the LCC and PBP can also be used to evaluate LCC and PBP 
based on a constant installation cost.
    The Department will review the engineering analysis data for the 
NOPR to determine when manufacturers increase box size and in what 
direction (height, footprint, or both). Based on that review, the 
Department will determine whether the current installation cost 
analysis captures all the associated costs of installing more efficient 
equipment. The Department did not include in the analysis the 
incremental cost of replacing older equipment (i.e., equipment rated 
8.0 EER or lower). This is because the analysis establishes the 
incremental cost of installations exceeding the baseline efficiency 
levels (i.e., the ASHRAE/IESNA 90.1-1999 efficiency levels of 10.1 EER 
for the >=65,000 Btu/h to <135,000 Btu/h equipment class, and 9.5 EER 
for the >=135,000 Btu/h to <240,000 Btu/h class), not the cost of 
upgrading older equipment to baseline EER levels. Therefore, if 
baseline equipment requires adaptor curbs or increased parapets to 
replace older equipment, but upgrading baseline equipment to more 
efficient equipment does not need further curb adaption or parapet 
increases, then the analysis would not include the costs of adaptor 
curbs or increased parapets. For more detail on the total installed 
cost inputs, refer to section 8.2.2 of the ANOPR TSD.
b. Operating Cost Inputs
    The operating costs consist of a series of discounted cash flows 
that capture the cost of the electricity needed to operate the 
equipment, the repair costs, and the maintenance costs over the 
lifetime of the equipment beginning at the effective date of the 
standard. The Department calculated the annual electricity expense from 
the energy use data supplied by the whole-building simulations and 
electricity prices. As discussed above, the Department used two 
approaches to estimate electricity prices: A tariff-based approach and 
an hourly based approach. Because data were not available to indicate 
how repair costs (i.e., those costs associated with the repair or 
replacement of failed components) vary with equipment efficiency, the 
Department assumed that repair costs vary directly with the cost of the 
equipment. Because equipment costs increase with efficiency and, to a 
large extent, equipment replacement costs drive repair costs, the 
Department reasonably assumes that repair costs will vary directly with 
the cost of the equipment. On the other hand, the Department assumed 
that maintenance costs remain constant regardless of equipment cost. 
Because maintenance costs correspond to the upkeep of equipment 
operation (e.g., cleaning heat-exchanger coils and recharging 
refrigerant) and are not associated with repair or replacement of 
system components, the Department reasonably assumed that maintenance 
costs are not part of the cost of the equipment and, therefore, will 
not vary with the equipment cost. Also, the Department used a survival 
function to define the probable lifetime of the equipment with the mean 
being 15.4 years. For the analyses conducted for this ANOPR, the 
Department assumed that an energy efficiency standard for commercial 
unitary air conditioning equipment would become effective in 2008. (42 
U.S.C. 6313(a)(6)(C)) For more detail on operating cost inputs to the 
life-cycle cost analysis, refer to section 8.2.3 of the ANOPR TSD.
(1) Use of Whole-Building Simulations
    As discussed in the building energy use and end-use load 
characterization analysis (section II.C of this ANOPR), the whole-
building simulation analysis generates building energy consumption data 
for each hour of a typical meteorological year. For each of the 1,033 
records in the building sample, DOE disaggregated the hourly whole-
building energy consumption into the air conditioning energy 
consumption (i.e., the consumption due to the compressor and condenser 
fan), the supply or ventilation fan energy consumption, and the energy 
consumption due to all other electric end-uses in the building. Since 
the supply fan is integral to commercial unitary air conditioning 
equipment, DOE included energy consumption for ventilation even during 
periods where mechanical cooling is not required for space-conditioning 
(i.e., when the compressor is not operating).
(2) Electricity Price Analysis
    The electric power industry is currently in a state of transition 
between two different business models, from regulated monopoly 
utilities providing bundled service to all customers in their service 
area, to a system of deregulated independent suppliers who compete for 
customers. While it is unclear when this transition will be finished, 
it is possible that in the future customers will see a very different 
pricing structure for electricity. To account for the impacts of this 
change on the LCC, DOE used two different electricity price models in 
this analysis. The first analysis uses information on utility tariffs 
for commercial customers collected in 2002. The Department based the 
second analysis on electricity production prices that vary on an hourly 
basis and used them to model a scenario in which customers are directly 
charged for the costs incurred by an electricity provider to supply 
energy for air conditioning. The Department refers to the two analyses 
as tariff-based and hourly based, respectively.
    To account for the wide regional variation in electricity usage 
patterns, wholesale costs, and retail rates across the country, the 
Department divided the continental U.S. into 17 subdivisions. The 
breakdown started with the nine census divisions, which were further

[[Page 45482]]

subdivided to take into account significant climate variation and the 
existence of different electricity market or grid structures. The 
Department based climate divisions on the nine climate regions defined 
for the continental U.S. by the National Climatic Data Center. It 
separated out Texas, Florida, New York, and California because their 
electric grids operate independently. Finally, it assigned each record 
from the 1,033 building sample to one of the 17 subdivisions. Both the 
tariff-based and hourly based approaches used the complete set of 1033 
buildings to develop electricity prices.
(a) Tariff-Based Approach
    The tariff-based analysis uses tariffs for commercial customers 
collected for a sample of 90 utilities across the country. The 
Department used three main criteria in developing the utility sample: 
(1) The sample of utilities should reflect the distribution of 
population across the country, with more utilities drawn from more 
populated areas; (2) the sample should reflect the proportion of 
customers served by privately owned utilities (investor-owned utilities 
(IOUs) and power marketers) versus publicly owned utilities 
(municipals, cooperatives, State, and Federal); and (3) the sample 
should cover as many customers as possible. The Department used data 
from DOE's Energy Information Administration (EIA) Form 861 filings for 
the year 2000 to determine the number of customers served by utilities 
of different types. The Department determined the representativeness of 
the sample by the percentage of the total number of commercial and 
industrial (C&I) customers who were covered. The sampled utilities 
serve 60 percent of the C&I customers of private utilities, and 14.4 
percent of C&I customers for public utilities. The combined total for 
the U.S. is 48.5 percent of all C&I customers. For more detail on the 
tariff-based approach, refer to subsection 8.2.3.1 of the ANOPR TSD.
    Pacific Gas and Electric (PG&E), ACEEE, NRDC, OOE, and NWPPC stated 
that electricity prices should reflect actual rates faced by customers. 
(Public Workshop Tr., No. 2EE at p. 202; ACEEE, No. 10 at p. 4; NRDC, 
No. 6 at pp. 4-5; Public Workshop Tr., No. 2EE at pp. 197 and 210; 
Public Workshop Tr., No. 2EE at p. 195) All but PG&E commented that 
electricity rates used in the LCC analysis must reflect demand or peak 
load pricing as well as time-of-use (TOU) or time-of-day (TOD) pricing. 
(ACEEE, No. 10 at p. 4; NRDC, No. 6 at pp. 4-5; Public Workshop Tr., 
No. 2EE at pp. 197 and 210; Public Workshop Tr., No. 2EE at p. 195) The 
OOE also stated that electricity prices should be based on marginal 
rates. (Public Workshop Tr., No. 2EE at pp. 194 and 195) Counter to the 
above comments, Southern Company stated that pricing strategies will be 
much more simple in a deregulated electricity market, so [DOE] should 
not consider real-time or TOU pricing in the analysis. (Public Workshop 
Tr., No. 2EE at p. 194)
    The Department collected tariff documents for the 90 utilities in 
the sample to establish the actual electricity prices paid by 
commercial air conditioner customers. The tariff documents encompassed 
a variety of pricing strategies, including TOU rates. Because the 
Department did not want to speculate whether TOU rates would exist in a 
partially or fully deregulated market, DOE kept TOU rates in the 
tariff-based analysis. As will be described below, based on the 
electricity prices described in the tariffs, marginal pricing is the 
basis for establishing electricity expenses in the LCC analysis. For 
most of the utilities in the sample, the Department collected tariff 
documents directly from their web sites. When web documents were not 
available, the Department contacted the utilities directly. An archive 
of the tariff documents is available at: http://eetd.lbl.gov/ea/ees/tariffs/index.php. The tariff documents reflect actual rates that 
customers pay for electricity.
    Utility companies have many tariffs separated into residential, 
non-residential, and special-use, such as public street-lighting or 
agricultural uses. Typically, a specific tariff is assigned to a 
particular customer based on that customer's annual peak demand. 
Following common utility practice, in the tariff analysis the 
Department combined commercial and industrial customers into one 
category. The Department's sampling strategy was to take the default 
tariff for each customer type, including TOU tariffs where appropriate. 
The Department assigned every building in the 1033 building simulation 
sample to one of the 17 subdivisions, and treated each building as a 
single customer. To increase the sample size and avoid bias in the 
electricity bill calculations, the Department assigned each customer to 
each utility in its subdivision. In other words, if the Department 
assigns six utilities to a particular subdivision, it then assigns the 
default tariff from each of the six utilities to each customer residing 
in that subdivision. Then the Department calculates an electric utility 
bill from each tariff assigned to the customer (the calculation of 
customer bills is explained below). Because the Department assigned, on 
average, almost six utilities to each of the 17 subdivisions, the above 
customer assignment method enabled the Department to effectively expand 
its building sample from 1033 to 6178 buildings. The particular tariff 
assigned to each customer was based on the annual peak demand for the 
base case EER level. The Department kept the customer on the same 
tariff for all standard levels.
    For each of the 1033 buildings simulated, the Department processed 
the hourly simulation data for each standard level to compute the peak 
demand and total energy consumption for the 12 calendar months. For 
buildings assigned to TOU tariffs, DOE re-processed the hourly data to 
compute the peak demand and total energy consumption for the 12 
calendar months during the peak, off-peak, and shoulder hours as 
defined by the utility. The Department entered into a bill-calculating 
spreadsheet tool that estimated the total customer bill in each month. 
The Department repeated the calculation for each standard level and 
then totaled the monthly bills to arrive at an annual electricity bill. 
The difference between the annual bills for each standard level gave 
the associated operating cost savings. To compute the base case air 
conditioning expense, DOE took the annual bill and multiplied it by the 
ratio of the total air conditioning energy use to the total building 
electricity use. It calculated customer marginal prices as the net 
change in the total bill divided by the net change in energy 
consumption between two standard levels. The Department implemented a 
version of the ``Bill Calculator'' in a spreadsheet that includes 
customer data for a set of representative buildings. Interested parties 
can get the Bill Calculator spreadsheet at http://eetd.lbl.gov/ea/ees/tariffs/index.php.
    Lennox commented that the energy analysis does not include the 
effect of units operating on industrial tariffs. In particular, Lennox 
stated that: (1) The building set analyzed is a subset of the CBECS 
data set for commercial buildings; (2) the exclusion of manufacturing 
sites excludes 30 percent of the electricity used for cooling; and (3) 
the average rate for electricity in buildings specified in the MECS is 
40 percent less than in CBECS buildings. As a result, Lennox commented 
that the energy analysis overstates the cost of energy consumption by 
10 to 15 percent and has the effect of biasing the life-cycle cost and 
payback period analyses

[[Page 45483]]

so that higher efficiency levels would look more favorable to 
customers. (Lennox, No. 15 at p. 1)
    Overall, while the Department agrees that the analysis would be 
improved by explicitly considering industrial buildings, it does not 
believe that this will result in a meaningful change to the LCC 
results.
    First, the tariff data collection and analysis do, in fact, include 
the effect of units operating on industrial tariffs. Through its 
research, DOE found that utilities typically do not distinguish between 
commercial and industrial customers in their tariffs. Instead, 
utilities assign customers General Service tariffs where customer 
classes are based on annual peak load. The Department's analysis for 
this ANOPR included only tariffs for customers taking electrical 
service at secondary voltage, which represents the largest non-
residential customer sub-class. The Department understands that 
utilities could charge different rates to customers taking service at 
primary voltage and plans to expand its database to include them, 
although only about 10 percent of utility customers are on primary 
voltage tariffs.
    Concerning the issue of industrial electricity rates, Lennox cited 
EIA data on estimates of U.S. electric utility average revenue per kWh 
as the basis for its statement that the average electricity rate for 
industrial/manufacturing buildings is 40 percent less than that for 
commercial buildings. (Lennox, No. 15 at p. 1) The Department's 
analysis for this ANOPR confirms the Lennox observations and shows that 
the average revenues per kWh for the commercial and industrial 
categories are 7.4 cents/kWh and 4.6 cents/kWh, respectively. However, 
because of ambiguities in the definition of customer type and the 
weighting of customer electricity bills, the Department believes that 
4.6 cents/kWh cannot be a proxy for the marginal price charged to 
customers in industrial buildings. For example, EIA calculates average 
electricity rates by dividing total electricity revenues by total 
sales, which is equivalent to assigning equal weight to each kWh sold 
and giving much greater weight to large consumers. Since most consumers 
in the Department's analysis are relatively small, DOE believes that 
EIA's weighting greatly exaggerates the effect of any difference in the 
per-kWh average price paid by industrial and commercial customers. 
Also, the Department believes that the average electricity rate is not 
appropriate for an LCC analysis because energy savings are priced at 
marginal rates that are heavily dependent on both the building load and 
the marginal load for a particular end use. The Department's analysis, 
as detailed in the LCC section (Chapter 8) of the ANOPR TSD, found no 
clear dependence of the marginal price on the size of the customer. As 
a result, the Department sees no reason that customers with large peak 
loads will automatically see significantly lower marginal prices.
    Lennox commented that excluding manufacturing sites from the DOE 
analysis excludes 30 percent of the energy used for cooling. (Lennox, 
No. 15 at p. 1) According to Manufacturing Energy Consumption Survey 
(MECS) of 1998, the industrial contribution to the total of commercial 
and industrial buildings facility heating, ventilating, and air 
conditioning energy use is about 30 percent. It is likely that 
manufacturers ship a much smaller percentage of the commercial unitary 
air conditioning equipment within the scope of this rulemaking to 
industrial buildings because, on average, industrial buildings are 
larger than commercial buildings and there is some correlation between 
building size and equipment size. Therefore, it is not expected that 
industrial buildings will use a large fraction of unitary air 
conditioners in the >65,000 Btu/h to <240,000 Btu/h range for their air 
conditioning needs.
    Section II.D.1 addresses the impact of industrial/manufacturing 
facilities on the Department's analysis and is addressed as Issue 5 
under the list of ``Issues on Which DOE Seeks Comment'' in section IV.E 
of this ANOPR. Also, in view of the above issues concerning industrial 
tariffs and their impact on electricity prices, the Department had an 
independent third-party expert review its analysis for this ANOPR. The 
results of the third-party review are available to interested parties 
on the Department's website at http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html. The Department intends to make the 
results of that review available for public comments concurrently with 
this ANOPR.
    In summary, the Department made approximations that led both to 
over- and under-estimations of electricity prices. Moreover, the 
Department believes that the results are uncertain but not biased. In 
making further refinements to the LCC and PBP analyses, the Department 
believes that it is important not to introduce bias by including only 
refinements that lower the electricity price. Issues such as primary 
voltage tariffs, de-correlation between the hour of building peak load 
and air conditioning peak load, putting small buildings on large-
building tariffs, using a distribution of fan power ratio, and so forth 
are second-order effects that tend to lower the energy cost savings. 
There are other second-order effects, such as sales taxes, seasonal 
ratchets, and additional riders (particularly fuel cost adjustments) 
that, when included, tend to raise the energy cost savings. The 
Department believes that all these effects have roughly the same order 
of magnitude and the net effect of their inclusion in the calculation 
of the LCC will be to reduce uncertainty but leave the results 
essentially unchanged.
(b) Hourly Based Approach
    The goal of the hourly based electricity price analysis was to 
estimate the real cost of meeting air conditioning loads for each 
building in each subdivision, and to translate these to cost savings 
that result from a given standard level. In this analysis, the 
Department treated each subdivision as if it were a single electricity 
system or control area, with a single hourly varying marginal 
generation price. The dependence of system load on weather, and system 
price on load, creates a correlation between the weather-sensitive air 
conditioning load in each building and the time-varying generation 
marginal price. This substantially increases the cost of meeting air 
conditioning loads relative to base loads. Because DOE carried out the 
building simulations using Typical Meteorological Year (TMY) weather 
data to represent the correlations correctly, the Department had to 
produce a set of corresponding TMY system loads and prices for each 
subdivision. This was done by constructing a model for the load/
temperature relationship, and a model for the price/load relationship, 
from historical data.
    The analysis required hourly data for customer loads, local 
temperatures, system loads, and system prices. The Department took 
customer loads from the building simulations described above. 
Historical data on hourly loads are available to the public from the 
Federal Energy Regulatory Commission (FERC) website through Form 714 
filings. See http://www.ferc.gov/docs-filing/eforms-elec.asp#714. 
Historical data on hourly prices come from two sources: Annual data 
submitted to FERC from regulated utilities and data developed from 
independent system operator websites. The FERC requires that each year 
a regulated utility submit FERC Form 714, which includes the ``control 
area hourly system lambda'' for each hour of the year in dollars per 
megawatt. A system lambda is the price of generating one additional 
unit of

[[Page 45484]]

electricity. In the FERC Form 714, the system lambda represents the 
cost to meet the next kilowatt of load, as computed for the local 
control area of a particular utility using FERC's automatic dispatch 
methodology. For areas in which there is substantial wholesale 
electricity market competition, e.g., New England, New York, 
California, and Pennsylvania-New Jersey-Maryland (PJM), DOE collected 
load data and day-ahead market clearing prices directly from the 
independent system operator (ISO) websites. The analysis used data from 
2000 for New York, PJM, and New England, and from 1999 for all other 
areas. The analysis required two types of weather data: Historical and 
year-typical data. The Department purchased historical data used to 
construct the models for the years 1999 and 2000 from the National 
Climatic Data Center. Refer to ANOPR TSD section 8.2.3.1.3 for more 
information.
    The Department computed the energy-cost savings due to a given 
standard level, assuming that the electricity provider passed all 
savings on to the customer. The savings have two components: Avoided 
generation costs and avoided capacity costs. The Department computed 
avoided generation costs as the sum over each hour of the customer's 
marginal energy savings times the hourly marginal price, multiplied by 
factors accounting for additional costs that scale with generation 
(such as ancillary services) and energy losses. The Department computed 
the total avoided capacity costs as a total cost per kilowatt of 
capacity times the customer's load reduction during the hour of the 
system peak. The total cost per kilowatt for capacity included 
generation, transmission, and distribution capacity, and factors that 
account for losses and reserve margins. The Department converted the 
electricity provider's avoided capacity costs to annual customer 
savings by applying a fixed charge rate (FCR). The FCR is a factor that 
converts a given capacity investment to the annual revenue requirement 
needed to cover all costs associated with the investment. In 
deregulated wholesale markets, hourly prices are assumed to include a 
margin to cover generation capacity investments, so DOE did not include 
these costs in the model. Instead, the Department computed reductions 
to the electricity provider's annual installed capacity payments that 
result from the standard. For more detail on the hourly based approach, 
refer to subsection 8.2.3.1.3 of the ANOPR TSD. The computation of the 
hourly price is Issue 9 under ``Issues on Which DOE Seeks Comment'' in 
section IV.E of this ANOPR.
(c) Comparison of Tariff-Based and Hourly Based Prices
    Table II.9 summarizes the results for the Department's electricity 
price analysis for both the tariff-based and hourly based 
methodologies. The Department computed the marginal price associated 
with air conditioning loads in each subdivision by taking the ratio for 
each building of the total cost savings to the total energy-savings 
between standard levels 9.5 EER and 11.0 EER. The Department then 
computed the weighted-average value for each subdivision. The table 
also includes the percentage of the marginal price attributable to 
demand charges for the tariff-based analysis and to capacity charges 
for the hourly based analysis.

      Table II.9.--Marginal Prices Computed From Air Conditioning Load Reductions Using the Tariff-based and Hourly Based Electricity Price Models
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Tariff-based            Hourly based
                                                                                                         -----------------------------------------------
              Subdivision                 Weight         Census division                 Region            Marginal                Marginal        %
                                                                                                          [cent]/kWh   %  Demand  [cent]/kWh   Capacity
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.....................................         4.7  New England..............  New England..............         9.5          53        10.7          43
2.1...................................         7.4  Middle Atlantic..........  New York.................        14.6          53        10.5          35
2.2...................................         5.6  Middle Atlantic..........  PA, NJ...................        10.5          27         8.7          48
3.....................................        13.7  East North Central.......  WI, IL, IN, OH, MI.......        10.8          46        11.0          65
4.1...................................         0.8  West North Central.......  MN, IA, MO...............         6.2          44         8.4          60
4.2...................................         4.7  West North Central.......  ND, SD, NE, KS...........         7.1          30         9.8          60
5.1...................................         5.6  South Atlantic...........  DE, MD, VA, WV...........         7.9          41         9.9          63
5.2...................................         7.9  South Atlantic...........  NC, SC, GA...............         7.3          22         7.4          68
5.3...................................         6.6  South Atlantic...........  Florida..................         8.0          36        11.0          66
6.1...................................         5.1  East South Central.......  KY, TN...................         6.5          38         8.0          68
6.2...................................         5.4  East South Central.......  MS, AL...................         6.1          39        12.8          70
7.1...................................         5.3  West South Central.......  OK, AR, LA...............         5.8          26        11.6          76
7.2...................................         9.5  West South Central.......  Texas....................        10.0          23        10.8          75
8.1...................................         0.6  Mountain.................  MT, ID, WY...............         6.1          20         4.5          43
8.2...................................         4.2  Mountain.................  NV, UT, CO, AZ, NM.......         8.8          35         9.5          69
9.1...................................         1.7  Pacific..................  WA, OR...................         4.5          33         5.4          24
9.2...................................        11.2  Pacific..................  California...............        18.5          21         8.5          46
USA...................................       100.0  .........................  USA......................        10.0          35         9.9          60
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As Table II.9 shows, the national average effective marginal prices 
computed from the two approaches are relatively close (within one 
percent). Thus, on a national basis, the estimated marginal electricity 
price a provider would charge customers to supply electricity for an 
air conditioning end use is not substantially different from the price 
a customer currently pays under today's tariffs. As a result, the LCC 
results from the two different approaches are not significantly 
different. The LCC results are discussed later in this section. Also, 
for more detail on the results of the tariff-based and hourly based 
electricity price analysis, refer to subsection 8.2.3.1.4 of the ANOPR 
TSD.
(3) Electricity Price Trend
    The electricity price trend in this ANOPR provides the relative 
change in electricity prices for future years out to the year 2035. The 
ACEEE and ASE commented that future electricity prices will be 
difficult to forecast during a period of electricity price 
restructuring and early indications show that there will be greater 
price volatility under

[[Page 45485]]

deregulated markets. To substantiate its assertion of higher 
electricity rates in deregulated electricity markets, ACEEE referred to 
a report by Synapse Energy Economics, ``Marginal Price Assumptions for 
Estimating Customer Benefits of Air Conditioner Efficiency Standards,'' 
December 4, 2000, which demonstrates that summer, daytime, wholesale 
electric prices exceeded average prices by 2.5 [cent]/kWh more than 
annual average wholesale prices and, as markets restructure, suppliers 
will increasingly pass these higher summer prices on to consumers as 
higher rates. Refer to http://www.synapse-energy.com/publications.htm#repo. The ACEEE also commented that price projections 
from EIA would not, at this time, be a good indicator of future 
electricity prices. (ACEEE, No. 10 at pp. 4 and 10; ASE, No. 9 at p. 2)
    Rather than speculate on how current volatility in energy markets 
will affect future electricity prices, DOE has consistently relied on 
EIA energy price forecasts and has used other forecasts, including the 
various EIA scenarios, to delimit the energy prices used in standards 
analyses. For this commercial unitary air conditioner analysis, DOE 
applied a projected trend in national average electricity prices to 
each customer's marginal energy expenses. The default electricity price 
trend scenario used in the LCC analysis is the trend from EIA's Annual 
Energy Outlook (AEO) 2003 Reference Case, which presents forecasts or 
energy supply, demand, and prices through 2005. Spreadsheets used in 
determining the LCC can be useful tools in evaluating other electricity 
price trend scenarios, namely, the AEO 2003 High and Low Growth price 
trends and constant energy prices. The high economic growth case 
incorporates higher population, labor force, and productivity growth 
rates than the reference case. Due to the higher productivity gains, 
inflation and interest rates are lower compared to the reference case. 
Investment, disposable income, and industrial production are increased. 
Projections indicate that economic output will increase by 3.5 percent 
per year. The low economic growth case assumes lower population, labor 
force, and productivity gains, with resulting higher prices and 
interest rates and lower industrial output growth. In the low economic 
growth case, projections indicate that economic output will increase by 
2.4 percent per year over the forecast horizon. The Department will 
update the analyses conducted for the NOPR to reflect the most recently 
available AEO.
    The AEO 2003 recognizes that, over the past few years, energy 
markets have been extremely volatile. (See U.S. Department of Energy-
Energy Information Administration (EIA), Annual Energy Outlook 2003 
with Projections to 2025, DOE-EIA-0383(2003), January 2003. EIA 
website: http://www.eia.doe.gov/oiaf/aeo/pdf/0383(2003).pdf.) As a 
result, AEO 2003 incorporates recent energy market volatility in its 
short-term projections. The impact of recent energy market volatility 
is evidenced from the average commercial electricity price estimated by 
AEO 2003 for the year 2001. The average rate estimated by AEO 2003 for 
2001 is 5.7 percent greater (or 0.4 [cent]/kWh) than that estimated by 
the AEO 2000.\2\ Although the AEO 2003 short-term projections took into 
account recent events, EIA expects that long term volatility in energy 
markets will not occur from such future events as supply disruptions or 
political actions. In other words, EIA estimates that recent 
electricity market volatility will not impact long term electricity 
price trends.
---------------------------------------------------------------------------

    \2\ In the AEO 2003, EIA reports 2001 electricity prices from 
their ``Annual Energy Review 2001.''
---------------------------------------------------------------------------

    Concerning Synapse Energy Economics' wholesale electricity price 
analysis, DOE does recognize that wholesale summertime electricity 
costs are on average 2\1/2\ [cent]/kWh greater than average wholesale 
costs. The Department's own analysis of hourly based electricity prices 
showed that marginal generation costs for commercial air conditioning 
ranged from 0.4 to 3.2[cent]/kWh greater than average generation costs, 
depending on regional location. Although generation costs associated 
with supplying electricity to commercial air conditioning are higher 
than average generation costs, the national average of resulting 
customer marginal electricity rates (based on the Department's 
methodology for converting generation costs into customer rates) is no 
greater than the national average of those marginal rates derived from 
current electric utility tariffs. Although the marginal electricity 
rates can be higher than average rates, the Department sees no reason 
to adjust EIA's projections of future electricity prices. For more 
detail on electricity price trend, refer to subsection 8.2.3.2 of the 
ANOPR TSD. The Department's reliance on EIA's electricity price 
projections is addressed as Issue 10 under ``Issues on Which DOE Seeks 
Comment'' in section IV.E of this ANOPR.
(4) Repair Cost
    The repair cost is the cost to the consumer for replacing or 
repairing components in the air conditioning equipment that have 
failed. The Department estimated the annualized repair cost for 
baseline efficiency commercial unitary central air conditioning 
equipment (i.e., the cost the customer pays annually for repairing the 
equipment) as half of the equipment price divided by the average 
lifetime of the equipment. Because data were not available to show how 
repair costs vary with equipment efficiency, the Department considered 
two scenarios: repair costs that varied in direct proportion with the 
manufacturer price of the equipment, and repair costs that remained 
flat (i.e., did not increase with efficiency).
    The Department used repair costs that vary with manufacturer price 
as the default annualized repair cost scenario in the LCC and PBP 
analysis. The resulting weighted-average annualized repair cost is $151 
and $279 for 7.5-ton and 15-ton commercial unitary central air 
conditioners, respectively. The repair cost increases with weight and 
efficiency. Because equipment prices are a function of distribution 
variables rather than single point-values (i.e., manufacturer price, 
markups, and sales tax), repair costs reflect a distribution of values. 
For more detail on repair cost, refer to subsection 8.2.3.3 of the 
ANOPR TSD.
(5) Maintenance Cost
    Maintenance cost is the cost to the commercial consumer of 
maintaining equipment operation. It is not the cost associated with the 
replacement or repair of components that have failed (this is covered 
by the repair cost discussed above). Rather, the maintenance cost is 
associated with general maintenance (e.g., checking and maintaining 
refrigerant charge levels and cleaning heat-exchanger coils).
    The Department took annualized maintenance costs for commercial air 
conditioners from data in RS Means Facilities Maintenance & Repair Cost 
Data, 1995 (RS Means '95). These data provide estimates of person-
hours, labor rates, and materials required to maintain commercial air 
conditioning equipment. Because data were not available to show how 
maintenance costs vary with equipment efficiency, the Department 
decided to use costs that stayed constant as equipment efficiency 
increased. The estimated, nationally representative, annualized 
maintenance cost for a commercial unitary air conditioner rated between 
36,000 Btu/h and 288,000

[[Page 45486]]

Btu/h is $200. For more detail on maintenance cost, refer to subsection 
8.2.3.4 of the ANOPR TSD.
    ARI believes that the annual maintenance cost that the Department 
developed is too low. ARI states that commercial air conditioning units 
need servicing not less than four times per year for filter check/
replacement and general cleanliness. As a result, the annual cost is 
closer to $800 per unit rather than $200. (ARI, No. 14 at p. 3)
    As noted above, the Department based the annualized maintenance 
costs for commercial air conditioners on RS Means '95 data. In addition 
to providing estimates of person-hours, labor rates, and materials 
required to maintain commercial air conditioning equipment, RS Means 
'95 specifies eleven actions that constitute required annual 
maintenance, including a thorough check of all components in the unit. 
Because RS Means '95 provides an explicit accounting of the actions and 
costs of maintaining commercial unitary central air conditioning 
equipment, and no commenter has done so, the Department will retain its 
use of $200 annual maintenance cost in its analysis.
(6) Lifetime
    The Department defines lifetime as the age at which a commercial 
unitary air conditioner is retired from service. It based the median 
lifetime of commercial unitary air conditioners on data from the 1999 
ASHRAE HVAC Applications Handbook, which estimates a median lifetime of 
15 years for commercial unitary air conditioners. The Department found 
no other data to show a different median lifetime for commercial 
unitary air conditioning equipment. Because a range of values rather 
than a single-point value more accurately represents the lifetime of 
such equipment, DOE created a survival function for commercial unitary 
air conditioners based on data for residential heat pump systems. 
Although residential heat pump systems are smaller in cooling capacity 
than commercial air conditioners, they are vapor compression systems 
that have components and designs that are similar to those of 
commercial systems. Thus, DOE believes that residential heat pumps 
provide a valid basis from which to construct a survival function for 
commercial unitary air conditioners. The Department created a Weibull 
distribution to approximate the actual survival function for 
residential heat pumps. The Department then modified the approximated 
residential-heat-pump-based survival function to yield a median 
lifetime equal to that for commercial air conditioners. The mean 
lifetime from the derived Weibull-based commercial air conditioner 
survival function is 15.4 years. For more detail on the lifetime 
analysis, refer to subsection 8.2.3.5 of the ANOPR TSD.
    ARI provided an analysis of EIA's 2001 Residential Energy 
Consumption Survey (RECS) to show that the median life of air 
conditioning equipment is 7 years, as opposed to 15 years. 
Acknowledging the difficulty in getting lifetime data for commercial 
unitary air conditioning equipment, ARI stated that, although the RECS 
data are based on residential equipment, they are the best available 
surrogate data for commercial air conditioning. (ARI, No. 14 at p. 2)
    After reviewing ARI's analysis, the Department determined that the 
data in RECS represent the age of the equipment, not the age at which 
the equipment was retired from service (i.e., the equipment lifetime). 
In view of this important distinction, the equipment lifetime required 
for the commercial unitary air conditioner analysis is the operational 
life of the equipment. The RECS data do not represent the lifetime, 
rather, they simply represent the age of the equipment at the time of 
the survey. Thus, even if DOE assumes that the residential equipment 
data are a surrogate for commercial unitary air conditioning, the RECS 
data are not useful for establishing equipment lifetime. The Department 
continues to seek input from interested parties concerning equipment 
lifetime. This concern is addressed in Issue 11 under ``Issues on Which 
DOE Seeks Comment'' in section IV.E of this ANOPR.
(7) Discount Rate
    The discount rate is the rate at which DOE discounted future 
expenditures to establish their present value. Both ACEEE and NRDC 
commented that DOE should use the weighted-average cost of capital (or 
the avoided return on capital) as the basis for estimating discount 
rates. (ACEEE, No. 10 at p. 6; NRDC, No. 6 at pp. 8 and 9) In stating 
that there is a wide range of expected payback periods for investments 
made in the commercial sector, Southern Company also appeared to imply 
that discount rates should be based on the weighted-average cost of 
capital. (Public Workshop Tr., No. 2EE at p. 119) The NRDC added that a 
valid estimate of market rates of return on capital investments 
requires a long-term perspective to factor out risk and short-term 
market volatility. It also noted that, when adjusting for survivorship 
biases and transaction costs, real rates of return on investments 
should range from zero to five percent, even for risky corporate 
investments. (NRDC, No. 6 at pp. 8-9) Advocating an approach based on 
the cost of capital, ACEEE also stated that discount rates used in the 
process of setting equipment standards for the ASHRAE/IESNA Standard 
90.1-1999 were too high. (ACEEE, No. 10 at pp. 6 and 11) The Alliance 
to Save Energy concurred with ACEEE about the discount rates used in 
the process to update the ASHRAE/IESNA Standard 90.1-1999 equipment 
standards. (ASE, No. 9 at p. 2) Although not advocating a specific 
approach for developing discount rates, Trane stated that discount 
rates in the range of 12-15 percent are appropriate for users of 
commercial unitary air conditioning. Trane also noted that the 
Department should consider income tax effects if it intends to include 
them in the development of discount rates. (Public Workshop Tr., No. 
2EE at pp. 189-190)
    The Department believes the most accurate method for estimating the 
discount rate is by evaluating the cost of capital of companies that 
purchase commercial unitary air conditioning equipment. Most companies 
use both debt and equity capital to fund investments. Therefore, for 
most companies, the discount rate is the weighted average cost of debt 
and equity financing, or the weighted-average cost of capital (WACC), 
less the expected inflation. The Department calculated the expected 
inflation (2.3 percent) from the average of the last five quarters' 
change in gross domestic product (GDP) prices.
    Because the WACC method is specific to commercial firms, the 
technique is specific to commercial equipment and, therefore, was not 
applied in past rulemakings covering residential products. However, 
recent residential product rulemakings, specifically central air 
conditioners and heat pumps, use a discount rate technique that is 
conceptually similar to the WACC methodology. The technique for 
residential products determines how an air conditioner or heat pump 
purchase would affect a household's financial situation, which is 
similar to what the WACC method attempts to do for commercial firms. 
(See U.S. Department of Energy, Energy Efficiency and Renewable Energy: 
Technical Support Document: Energy Efficiency Standards for Consumer 
Products: Residential Central Air Conditioners and Heat Pumps 
(Including: Regulatory Impact Analysis), May, 2002, Washington, DC, 
Chapter 5, p. 5-71, at http://www.eere.energy.gov/buildings/appliance_standards/residential/ac_central.html.) For more detail on the 
discount rate for future expenditures,

[[Page 45487]]

refer to subsection 8.2.3.6 of the ANOPR TSD.
    Lennox questioned who the consumer is and who would benefit from a 
life-cycle cost analysis: The person that owns the commercial unitary 
air conditioner, the person that owns the building, or the person that 
leases the building? Lennox then stated that consumers more often lease 
this equipment, which needs to be factored into the analysis. (Public 
Workshop Tr., No. 2EE at pp. 118 and 199) Trane and NRDC also addressed 
the issue of the user's identity. Trane noted that the analysis should 
encompass all users, whether they are building owners or occupants. The 
NRDC stated that a split incentive exists between building lessees and 
owners, i.e., there is no incentive for building owners to purchase 
more efficient equipment because the lessee is paying the electricity 
bill. As a result, the market fails to encourage the use of more 
efficient air conditioning equipment, and standards are a way to 
correct this market failure. (Public Workshop Tr., No. 2EE at p. 215; 
NRDC, No. 6 at p. 5)
    In addressing the user's identity, the Department included both 
building owners and lessors in its development of discount rates, 
established a sample of companies that use commercial air conditioning 
according to ownership categories, and collected pertinent financial 
data from those companies to derive an appropriate set of discount 
rates. Ownership here is defined by the building occupant. Included in 
these ownership categories are the owners of commercial buildings 
(property owners), retail firms, medical service and hospital 
companies, industrial firms, hotels, and food service companies 
(restaurants and grocery stores). The Department determined ownership 
shares by building square footage from the 1999 CBECS data. According 
to CBECS, about 60 percent of buildings are owner-occupied and the 
remaining 40 percent either are non-owner-occupied or leased by 
property owners. Of the 40 percent of buildings that are leased, half 
realized a WACC based on the building's occupancy, and the other half 
realized discount rates based on the WACC of the property owner. 
Pertinent financial data from companies using commercial air 
conditioning equipment were taken from Damodaran Online. (See Damodaran 
Online at http://pages.stern.nyu.edu/adamodar/New--Home--Page/data.html 
and the ``compfirm.xls'' spreadsheet.)
    The NRDC commented that values of 0 to 5 percent were appropriate, 
while Trane maintained that DOE should use values ranging from 12 to 15 
percent. (NRDC, No. 6 at pp. 8 and 9; Public Workshop Tr., No. 2EE at 
pp. 189 and 190) Deducting expected inflation from the cost of capital 
provides estimates of the real discount rate by ownership category, 
shown in Table II.10. The mean real discount rate for these companies 
varies between 3.0 percent (public for-profit) and 7.3 percent (public 
not-for-profit). The weighted-average or mean discount rate across all 
companies is 6.1 percent. The Department's approach for estimating the 
cost of capital provides a measure of the discount rate spread as well 
as the average discount rate. The discount rate spread by ownership 
category represented by the standard deviation ranges between 0.7 
percent and 3.2 percent. Thus, the variability in the discount rate is 
as low as less than 1 percent and as high as 14 percent. By 
characterizing the discount rates with probability distributions based 
on a standard deviation, the range of discount rates used in the 
analysis captures almost the full breadth of values suggested by the 
interested parties.

                            Table II.10.--Real Discount Rates by Ownership Category*
----------------------------------------------------------------------------------------------------------------
                                                                         Mean real
                                     Standard industrial    Ownership     discount     Standard
        Ownership category          classification  (SIC)     shares        rate      deviation       Number
                                             code           (percent)      (WACC)     (percent)    observations
                                                                         (percent)
----------------------------------------------------------------------------------------------------------------
Retail stores.....................  53, 54, 56...........         16.5          7.1          2.1             218
Property owners and managers......  6720.................         21.2          5.2          0.7              11
Medical services..................  8000.................          6.7          7.0          1.7             115
Industrial companies..............  1000-4000............          4.9          6.9          3.2             253
Hotels............................  7000.................          4.0          5.6          1.5              51
Food service companies............  5400, 5812...........          5.3          6.1          1.4              88
Office/Service sector.............  5910-9913............         19.4          6.9          2.1             128
Public for profit.................  N.A..................         11.0          3.0          0.7              41
Public not for profit.............  7950, 8299...........         11.0          7.3          1.8              68
Weighted Average..................  .....................          N.A          6.1          1.6           N.A.
----------------------------------------------------------------------------------------------------------------
*Sources: CBECS (1999), Damodaran Online (2002) and LBNL calculations.

(8) 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 
covered equipment. (See 10 CFR 430.2.) In accordance with 42 U.S.C. 
6313(a)(6)(C), the effective date of any new energy efficiency standard 
for commercial unitary air conditioners and heat pumps that is 
established by rule and that is more stringent than the amended ASHRAE/
IESNA Standard 90.1, is four years after the final rule is published in 
the Federal Register. Consistent with its published regulatory agenda, 
the Department assumed that the final rule would be issued in 2004 and 
that, therefore, the new standards would take effect in 2008 and used 
these dates in the ANOPR analyses. For the NOPR analyses, the 
Department will adjust these dates to accurately reflect then-current 
expectations for the timing of the issuance of a final rule. The 
Department calculated the LCC for customers as if each new commercial 
unitary air conditioner or heat pump purchase occurs in the year the 
standard takes effect. For purposes of conducting the analyses for this 
ANOPR, it based the cost of the equipment on year 2008; however, 
because the Department collected manufacturing cost data for the ANOPR 
engineering analysis in 2001, it expresses all dollar values as year 
2001 dollars. Also, the effective date of a standard is addressed in 
subsection 8.2.3.7 of the ANOPR TSD.
2. Inputs to the Payback Period Analysis
    The data inputs to the PBP analysis are the total installed cost of 
the equipment to the customer for each efficiency level and the annual 
(first

[[Page 45488]]

year) operating expenditures for each efficiency level. The PBP 
analysis uses the same inputs as the LCC analysis, except that the PBP 
analysis does not need electricity price trends and discount rates. 
Because the PBP is a ``simple'' payback, the required electricity rate 
is only for the year in which a new standard is to take effect, in the 
case of this ANOPR the year 2008. The electricity rate that DOE used in 
the PBP calculation was the price projected for that year. For more 
detail on payback period inputs, refer to section 8.3 of the ANOPR TSD.
3. Preliminary Results
    The preliminary results of the LCC and PBP analyses are based on: 
(1) A sample of commercial buildings that represent all unitary air 
conditioner users; (2) output from the engineering, building 
simulation, and equipment price analyses; and (3) on current electric 
utility tariffs.
a. Life-Cycle Cost Results
    This section presents LCC results for the efficiency-improvement 
levels specified in the engineering analysis. It provides only the LCC 
results from the tariff-based approach because the national average 
tariff-based and hourly based marginal electricity prices are so 
similar (refer to Table II.9). The hourly based approach provides 
important information because today's electric utility tariffs reflect, 
to some extent, the prices an electricity provider might charge a 
commercial customer for supplying electricity to operate a unitary air 
conditioner under an hourly based pricing structure. However, the 
hourly based prices are still an estimate and are not the actual 
electricity prices that commercial customers pay. As a result, the 
Department is designating the tariff-based approach as the primary 
analysis approach because it is based on electricity prices that 
commercial customers must actually pay for operating air conditioning 
equipment. The Department will use the hourly based approach as 
supplemental information that indicates what electricity pricing might 
be like under an hourly regime. The hourly based LCC results are very 
similar to the results from the tariff-based LCC analysis. For more 
detail on the results of the tariff-based and hourly based approaches 
to electricity prices, refer to sections 8.4 and 8.5 of the ANOPR TSD.
    Most of the inputs to the LCC analysis are uncertain and are 
therefore represented by a distribution of values rather than a single-
point value. As a result, the LCC analysis generates a distribution of 
results to represent the LCC for any given efficiency level.
    The Department's first step in developing LCC results was to 
establish the baseline LCC for each of the two commercial air 
conditioner equipment classes. As noted earlier, DOE selected the 
ASHRAE/IESNA Standard 90.1-1999 levels as the baseline efficiency 
levels for the present rulemaking. Table II.11 summarizes the baseline 
distributions by showing the mean, median, minimum, and maximum LCCs.

                                           Table II.11.--Baseline LCC
----------------------------------------------------------------------------------------------------------------
                       Equipment class                          Minimum       Median        Mean       Maximum
----------------------------------------------------------------------------------------------------------------
>=65,000 to <135,000 Btu/h..................................       $6,667      $18,605      $20,514      $93,747
>=135,000 to <240,000 Btu/h.................................       11,395       34,876       39,044      197,535
----------------------------------------------------------------------------------------------------------------

    The Department presents the differences in the LCC of standard-
level equipment relative to the baseline commercial unitary air 
conditioner design. The LCC differences are depicted as a distribution 
of values. Tables II.12 and II.13 show the mean and the percent of 
units with LCC savings for each standard level.

   Table II.12.--Summary of LCC Results for >=65,000 to <135,000 Btu/h
                   Commercial Unitary Air Conditioners
------------------------------------------------------------------------
                                         Mean decrease
                                          in LCC from       Percent of
                  EER                   baseline  (10.1  units with  LCC
                                         EER)  (2001$)       savings
------------------------------------------------------------------------
10.5..................................             $290               98
11.0..................................              533               93
11.5..................................              598               81
12.0..................................              399               59
------------------------------------------------------------------------


  Table II.13.--Summary of LCC Results for >=135,000 to <240,000 Btu/h
                   Commercial Unitary Air Conditioners
------------------------------------------------------------------------
                                         Mean decrease
                                          in LCC from       Percent of
                  EER                    baseline  (9.5  units with  LCC
                                         EER)  (2001$)       savings
------------------------------------------------------------------------
10.0..................................             $959              100
10.5..................................            1,704               99
11.0..................................            2,199               97
11.5..................................            2,359               91
12.0..................................            2,027               77
------------------------------------------------------------------------

b. Payback Period Results
    This section presents PBP results based on annual operating costs 
calculated from tariff-based electricity prices. Similar to the LCC 
differences, the Department depicts PBP results as a distribution of 
values. Tables II.14 and II.15 summarize the PBP results for each of 
the two commercial unitary air conditioner equipment classes.

 Table II.14.--Summary of PBP Results in Years for >=65,000 to <135,000
                Btu/h Commercial Unitary Air Conditioners
------------------------------------------------------------------------
                  EER                        Median            Mean
------------------------------------------------------------------------
10.5..................................              2.3              2.6
11.0..................................              3.1              3.5
11.5..................................              4.3              5.1
12.0..................................              6.4              8.1
------------------------------------------------------------------------


 Table II.15.--Summary of PBP Results in Years for >=135,000 to <240,000
                Btu/h Commercial Unitary Air Conditioners
------------------------------------------------------------------------
                  EER                        Median            Mean
------------------------------------------------------------------------
10.0..................................              1.5              1.6
10.5..................................              1.8              2.0
11.0..................................              2.4              2.7
11.5..................................              3.2              3.7
12.0..................................              4.5              5.5
------------------------------------------------------------------------

G. National Impact Analysis

    The national impacts analysis assesses the NPV of total customer 
LCC and NES. Assuming an effective date of 2008, the Department 
determined both the NPV and NES for all of the energy

[[Page 45489]]

efficiency levels considered for the two equipment classes of 
commercial unitary air conditioners. ARI requested a quick adoption of 
the ASHRAE/IESNA Standard 90.1-1999 energy efficiency levels. (ARI, No. 
14 at p. 3). The Department defined quick adoption to mean an effective 
date of 2004, instead of 2008. In this way, the Department can evaluate 
the national benefits of adopting more stringent standards at a later 
effective date compared to adopting the ASHRAE/IESNA 90.1-1999 standard 
levels almost immediately.
    To make the analysis more accessible and transparent to all 
stakeholders, the Department prepared a user-friendly NES Spreadsheet 
Model in Microsoft Excel to forecast energy savings and the national 
economic costs and savings resulting from new standards. Consequently, 
a stakeholder can change certain input quantities to assess any impacts 
of possible new standards on the NES and NPV. Unlike the LCC Analysis, 
the NES Spreadsheet Model does not use probability distributions for 
inputs or outputs. To assess the impact of input uncertainty on the NES 
and NPV results, the DOE can conduct sensitivity analyses as needed for 
future analyses by running scenarios on input variables that are of 
interest to stakeholders. The Department conducted a preliminary 
assessment of the aggregate impacts at the national level for this 
ANOPR. For more detail on the NES and NPV, refer to Chapter 10 of the 
ANOPR TSD.
    Table II.16 summarizes the inputs used to calculate the NES and NPV 
of the various energy efficiency levels. Chapter 10 of the ANOPR TSD 
provides a more detailed discussion of these inputs.

               Table II.16.--Summary of NES and NPV Inputs
------------------------------------------------------------------------
             Parameter                        Data description
------------------------------------------------------------------------
Annual Energy Consumption per Unit  Annual weighted-average values are a
                                     function of efficiency level
                                     (established from the Building
                                     Simulation Analysis, section II.C)
                                     and efficiency trend (base case and
                                     standards case efficiencies as
                                     noted below).
Base Case Efficiencies............  Annual shipment-weighted
                                     efficiencies are based on
                                     historical residential central air
                                     conditioner shipment-weighted
                                     efficiency trends and limited
                                     commercial air conditioner shipment-
                                     weighted efficiencies. Before 1993:
                                     Efficiency trend growth rate
                                     equivalent to 1982-1991 residential
                                     equipment efficiency trend. 1993-
                                     1994: Efficiency jump equivalent to
                                     1991 to 1992 residential equipment
                                     efficiency jump. 1994-1998:
                                     Efficiency trend growth rate
                                     equivalent to 1992-1999 residential
                                     equipment efficiency trend. 1999-
                                     2001: Actual shipment-weighted
                                     efficiencies from ARI. 2002-2035:
                                     Efficiency trend growth rate
                                     equivalent to \1/2\ of 1992-1999
                                     residential equipment efficiency
                                     trend.
Standards Case Efficiencies (2008-  Annual shipment-weighted
 2035).                              efficiencies are based on a roll-up
                                     efficiency scenario and parallel
                                     growth trend.
Shipments.........................  Annual shipments from shipments
                                     model (see details in section
                                     II.G.3).
Equipment Stock...................  Number of air conditioning units of
                                     each vintage (age). Based on annual
                                     shipments and the age of the
                                     equipment. The age of the equipment
                                     is characterized with a retirement
                                     function with an average lifetime
                                     of 15.4 years.
National Energy Consumption.......  Product of the annual energy
                                     consumption per unit and the stock
                                     (i.e., the number of air
                                     conditioning units of each vintage.
Electricity Site-to-Source          Conversion varies yearly and is
 Conversion Factors.                 generated by DOE/EIA's National
                                     Energy Modeling System (NEMS)
                                     program (a time series conversion
                                     factor; includes electric
                                     generation, transmission, and
                                     distribution losses).
Total Annual Installed Cost.......  Annual per unit weighted-average
                                     values are a function of efficiency
                                     level (established from the Life-
                                     Cycle Cost Analysis, section II.F).
                                     Total annual costs are the per unit
                                     cost multiplied by the shipments
                                     forecasted.
Total Annual Operating Cost         Annual per unit savings consist of
 Savings.                            the per unit electricity cost
                                     savings, the per unit repair costs,
                                     and the per unit maintenance costs
                                     (as noted below). Total annual
                                     costs are the per unit cost
                                     multiplied by the shipments
                                     forecasted.
Annual Electricity Cost Savings...  Annual per unit weighted-average
                                     values are a function of the annual
                                     energy consumption, electricity
                                     prices (established from the Life-
                                     Cycle Cost Analysis, section II.F),
                                     and electricity price trends. Only
                                     expenses based on tariff-based
                                     electricity prices are used in the
                                     NES spreadsheet model.
Electricity Price Trends..........  2003 EIA Annual Energy Outlook
                                     forecasts (to 2025) and
                                     extrapolation for 2025 and beyond
                                     (see the Life-Cycle Cost Analysis,
                                     section II.F).
Annual Repair Costs...............  Annual per unit weighted-average
                                     values are a function of efficiency
                                     level (established from the Life-
                                     Cycle Cost Analysis, section II.F).
Annual Maintenance Costs..........  Annual per unit weighted-average
                                     value equals $200 (established from
                                     the Life-Cycle Cost Analysis,
                                     section II.F).
Discount Factor...................  Based on both a 3 percent and 7
                                     percent real discount rate and the
                                     year in which the present value of
                                     costs and savings are being
                                     determined.
Present Value of Costs............  Annual total installed cost in each
                                     year discounted to the present
                                     using the discount rate.
Present Value of Savings..........  Annual operating cost savings in
                                     each year discounted to the present
                                     using the discount rate.
Present Year......................  Future expenses are discounted to
                                     year 2001.
Effective Date of Standard........  2008 (2004 for ASHRAE/IESNA 90.1-
                                     1999 efficiency levels).
------------------------------------------------------------------------

1. National Energy Savings (NES)
    The Department calculated the national energy consumption by 
multiplying the number or stock of commercial unitary air conditioners 
(by vintage) by the unit energy consumption (also by vintage). Vintage 
is the age of the equipment (varying from one to about 30 years). The 
Department calculated annual NES from the difference between national 
energy consumption in the base case (without new standards) and each 
standards case (with standards). Cumulative energy savings are the 
undiscounted sum of the

[[Page 45490]]

annual NES that DOE determined over specified time periods. The NES 
analysis which will accompany the NOPR will include both discounted and 
undiscounted values for future energy savings to account for their 
timing. For more detail on NES and consumer impacts, refer to Chapter 
10 of the ANOPR TSD.
    The stock of commercial unitary air conditioning equipment is 
dependent on annual shipments and the lifetime of the equipment. The 
Department developed shipments projections under a base case and 
standards cases for a variety of possible equipment efficiency 
scenarios and equipment efficiency trends. It determined that shipment 
projections under the standards cases were lower than those from the 
base case projection, due to the higher installed cost of the more 
efficient equipment. Higher installed costs caused some customers to 
forego equipment purchases. As a result, the Department used the 
standards case shipments projection and, in turn, the standards case 
stock to determine the NES and to avoid the inclusion of savings due to 
displaced shipments.
a. National Energy Savings Inputs
    As summarized in Table II.16 above, the inputs for the 
determination of NES are: (1) Annual energy consumption per unit, (2) 
shipments, (3) equipment stock, (4) national energy consumption, and 
(5) electricity site-to-source conversion factors.
(1) Annual Energy Consumption per Unit
    The annual energy consumption per unit is the energy consumed by a 
commercial unitary air conditioning unit per year. The annual energy 
consumption is directly tied to the efficiency of the unit. Thus, 
knowing the efficiency of a commercial unitary air conditioning unit 
allows for the determination of the corresponding annual energy 
consumption. As described below, the Department determined annual 
historical and forecasted shipment-weighted average equipment 
efficiencies which, in turn, allowed for the determination of shipment-
weighted, annual, energy-consumption values.
    The Department based historical, shipment-weighted, average 
efficiency trends for commercial air conditioners on a combination of 
commercial air conditioner efficiency data from 1999 through 2001 and 
residential central air conditioner efficiency trends. Once DOE 
established historical efficiency trends, it established future trends 
of equipment efficiency and, in turn, annual energy consumption by 
extrapolating it from the historical trend. The Department forecasted 
future trends of equipment efficiency for a base case and for standards 
cases. The difference in equipment efficiency between the base and 
standards cases was the basis for determining the reduction in per-unit 
annual energy consumption due to new standards. For more detail on 
annual energy consumption per unit, refer to subsection 10.2.2.1 of the 
ANOPR TSD.
    The Department chose a growth rate for its forecasted, base-case 
efficiency trends of one-half the observed growth rate of the 
historical residential air conditioner efficiency trend during the 
1990s. The Department made this decision based on observed trends in 
the historical commercial air conditioner efficiency data. The three 
years of commercial air conditioner efficiency data revealed a 
significant shift to higher equipment efficiencies from the year 2000 
to 2001. Although the ASHRAE/IESNA 90.1-1999 standards are not 
mandatory, it appears that their effect has been to move the commercial 
air conditioner market to higher equipment efficiencies. Historical 
efficiency trends for residential central air conditioners indicate 
that the most significant effect of ASHRAE/IESNA 90.1-1999 standards on 
transforming the market is in the short term. In the case of 
residential central air conditioners, for years immediately after a new 
minimum standard became effective the shipment-weighted efficiencies 
grew at an annual rate of less than one percent. Therefore, if 
historical efficiency trends for related products and equipment are any 
indication, the growth rate of the commercial unitary air conditioner 
efficiency trend in the long term (i.e., for years after 2001) should 
be much lower than the shift in equipment efficiencies observed between 
2000 and 2001.
    The Department based its standards case forecasts (i.e., forecasts 
of efficiency trends after standards take effect) on a roll-up 
efficiency scenario and parallel growth trend. The roll-up scenario 
moves or rolls-up all equipment efficiency levels from below a 
prospective standard to the minimum efficiency level allowed under the 
new standard. The distribution of equipment at efficiency levels above 
the prospective standards is unaffected (i.e., this equipment remains 
at its pre-standard efficiency levels). The roll-up efficiency scenario 
dictates how DOE determined efficiency distributions in the first year 
a new standard takes effect, but does not define future distribution of 
equipment efficiencies. Under the parallel growth trend, the Department 
assumes that the standards case efficiency trend parallels the base 
case efficiency trend. In other words, the initial jump in shipment-
weighted efficiency that occurs when the standard first becomes 
effective carries on throughout the forecast.
    The 11.5 EER and 12.0 EER standards-case efficiency trends are 
notable exceptions to the use of the parallel growth trend for the 
entire time span of the forecast (i.e., through 2035). Because the 
maximum technologically feasible design is 12.0 EER, the maximum 
shipment-weighted efficiency for any given year is 12.0 EER. As a 
result, because the efficiency trend for the 11.5 EER standards case 
achieves a shipment-weighted efficiency of 12.0 EER in the year 2023, 
the forecasted efficiency trend remains flat from the year 2023 through 
2035. In the case of the 12.0 EER standards case, there is a shipment-
weighted efficiency of 12.0 EER immediately after the standard becomes 
effective. Thus, the efficiency trend is flat (i.e., stays fixed at 
12.0 EER) throughout the entire forecast.
(2) Shipments
    The Department forecasted shipments for the base case and all 
standards cases. Forecasted shipments are addressed in subsection 
10.2.2.2 of the TSD ANOPR. The Shipments Model is discussed in more 
detail in section II.G.3 of this ANOPR.
(3) Equipment Stock
    The commercial unitary air conditioner stock is the number of 
unitary air conditioners purchased or shipped in a particular year that 
survive in a later year. The NES Spreadsheet Model keeps track of the 
number of commercial unitary air conditioners shipped each year. The 
Department assumes that commercial unitary air conditioners have an 
increasing probability of retiring as they age. The probability of 
survival, as a function of years after purchase, is the survival 
function. Commercial unitary air conditioner lifetimes, otherwise 
called the vintage, range from one to about 30 years, with an average 
value of 15.4 years. Note that the resulting stock of commercial 
unitary air conditioners under all standards cases is less than that 
under the base case due to the smaller number of shipments forecasted 
for the standards cases. For more detail on equipment stock, refer to 
subsection 10.2.2.3 of the ANOPR TSD.

[[Page 45491]]

(4) National Annual Energy Consumption
    The national annual energy consumption is the annual energy 
consumption per commercial unitary air conditioner multiplied by the 
number of commercial unitary air conditioners of each vintage. This 
approach accounts for differences in unit energy consumption from year 
to year.
    In determining national annual energy consumption, DOE initially 
calculated the annual energy consumption at the site (i.e., electricity 
in kWh consumed by the commercial unitary air conditioning unit inside 
the building it is serving). The Department then calculated primary 
energy consumption from site energy consumption by applying a 
conversion factor to account for losses, such as those losses 
associated with the generation, transmission, and distribution of 
electricity. For more detail on national annual energy consumption, 
refer to subsection 10.2.2.4 of the ANOPR TSD.
(5) Electricity Site-to-Source Conversion Factors
    To transform site energy savings into source energy savings, DOE 
uses electricity site-to-source energy conversion factors that vary 
from year to year. The Department based the annual source conversion 
factors used for the analysis conducted for this ANOPR on U.S. average 
values from the commercial sector, calculated from the AEO 2003. For 
analyses conducted in the future, the Department plans to use marginal 
conversion factors specific to the type of generation sources (i.e., 
power plants) displaced from decreases in national energy consumption 
resulting from the use of more efficient commercial unitary air 
conditioners. The resulting conversion factors will change over time. 
For more information on electricity site-to-source conversion factors, 
refer to subsection 10.2.2.5 of the ANOPR TSD.
2. National Net Present Value
    The NPV is the sum over time of discounted net savings. The 
national NPV of each candidate standards level is the difference 
between the base case national average LCC and the national average LCC 
in the standards case. For more detail on national net present value, 
refer to section 10.3 of the ANOPR TSD.
a. National Net Present Value Calculations
    The Department calculated net savings each year as the difference 
between total operating cost savings (including electricity, repair, 
and maintenance cost savings) and increases in total installed costs 
(including equipment price and installation cost). The Department 
calculated savings over the life of the equipment, which accounts for 
the differences in yearly energy rates. The Department calculated the 
NPV as the difference between the present value of operating cost 
savings and the present value of increased total installed costs. It 
discounted future costs and savings to the present with a discount 
factor. The Department calculated the discount factor from the discount 
rate and the number of years between 2001 (the year to which DOE 
discounted the sum) and the year in which the costs and savings occur. 
An NPV greater than zero shows net savings (i.e., the energy efficiency 
standard reduces customer expenditures in the standards case relative 
to the base case). An NPV that is less than zero indicates that the 
energy efficiency standard incurs net costs.
    The elements of the NPV can be expressed in another form, as the 
benefit/cost ratio. The benefit is the savings in decreased operating 
cost (including electricity, repair, and maintenance), while the cost 
is the increase in the total installed cost (including equipment price 
and installation cost) due to standards, relative to the base case. 
When the NPV is greater than zero, the benefit/cost ratio is greater 
than one.
    In the determination of the NPV, the Department calculated costs as 
the product of the difference in the total installed cost between the 
base case and standards case, and the annual sales volume or number of 
shipments in the standards case. Because costs of the more efficient 
equipment purchased in the standards case are higher than those of 
equipment purchased in the base case, price increases appear as 
negative values in the NPV.
    The Department depicted monetary savings as decreases in operating 
costs associated with the higher energy efficiency of equipment 
purchased in the standards case compared to the base case. Total 
operating cost savings are the product of savings per unit and the 
number of units of each vintage surviving in a particular year. Savings 
appear as positive values in the NPV.
    As noted earlier, the Department determined that shipment 
projections under the standards cases were lower than those from the 
base case projection, due to the higher installed cost of the more 
efficient equipment. As a result, DOE used the standards case shipments 
projection and, in turn, the standards case stock, to determine the 
NPV, to avoid the inclusion of operating cost savings and increased 
total installed costs due to displaced shipments.
b. Net Present Value Inputs
    The inputs for the determination of NPV are: (1) Total annual 
installed cost, (2) total annual operating cost savings, (3) discount 
factor, (4) present value of costs, and (5) present value of savings. 
Net present value inputs are discussed below. Also, for more detail on 
net present value inputs, refer to subsection 10.3.2 of the ANOPR TSD.
(1) Total Annual Installed Cost
    An increase in the total annual installed cost to the Nation is the 
annual change in the per-unit total installed cost (the difference 
between the base case and the standards case) multiplied by the 
shipments forecasted in the standards case. As noted earlier concerning 
the national energy savings, DOE used the standards case shipments 
forecast to avoid miscounting the reduction in shipments as a reduction 
in total installed costs.
    The total installed cost includes both the equipment cost and the 
installation price, and is a function of equipment efficiency. The 
equipment cost includes the distribution markups (as determined in 
section II.E of this ANOPR) that are applied to the manufacturer costs 
estimated in the engineering analysis (section II.C of this ANOPR). The 
resultant equipment prices increase with equipment efficiency. The 
Department based average per-unit equipment costs on average 
manufacturer prices, multiplied by average overall markup values. With 
regard to installation prices, the Department varies installation 
prices in direct proportion to the weight of the equipment (section 
II.F.1.a of this ANOPR). The Department developed linear relationships 
of operating weight as a function of equipment efficiency for 7.5-ton 
and 15-ton commercial unitary air conditioners and assumed the 
installation price increased in the same proportion. It based average 
per-unit installation prices on nationally representative values for 
each of the two commercial unitary air conditioner equipment classes. 
Because DOE calculated the total installed cost as a function of 
equipment efficiency, it could determine historical and forecasted 
total installed costs based on the annual shipment-weighted efficiency 
levels specified in the base case and standards case efficiency trends.
(2) Total Annual Operating Cost Savings
    The annual operating cost savings to the Nation is the annual 
change in the

[[Page 45492]]

per-unit annual operating costs (the difference between base case and 
standards case) multiplied by the shipments forecasted in the standards 
case. As just noted earlier concerning the total annual installed cost, 
DOE used the standards case forecast to avoid miscounting the reduction 
in shipments as an operating cost savings. The annual operating cost 
includes the electricity, repair, and maintenance costs.
    As described in the discussion of the LCC Analysis, the Department 
calculated annual electricity expenses based on two approaches: A 
tariff-based approach and an hourly based approach. The hourly based 
approach resulted in annual energy expenses which were, on average, 
less than one percent different from those in the tariff-based 
analysis. As discussed in section II.F.3.b. (LCC results), because the 
resulting national customer economic impacts from the two approaches 
would not be significantly different, the Department designated the 
tariff-based analysis as the primary analysis approach. Thus, the NPV 
calculations are based only on the results from the tariff-based 
approach.
    The Department determined weighted-average per-unit annual energy 
expenses as a function of equipment efficiency. As discussed in the 
Building Simulation Analysis, Chapter 6 of the ANOPR TSD, DOE conducted 
whole-building simulations on a representative sample of commercial 
buildings that use commercial unitary air conditioning equipment. The 
Department assigned tariff-based electricity rates to each building to 
determine the annual energy expense for air conditioning in that 
building. Using the representative set of buildings, DOE performed a 
weighted-average calculation to arrive at the net present values as a 
function of equipment efficiency. The Department based the weighting 
not only on the representativeness of the building, but also on the 
representativeness of the electric utility to which the building was 
assigned, as well as the number of air conditioning units that were 
required to meet the simulated cooling load.
    As discussed in the LCC Analysis, Chapter 8 of the ANOPR TSD, the 
Department based the average annual repair costs on the weight of the 
equipment, and in turn, the equipment efficiency, while it determined 
average annual maintenance costs to be $200 regardless of cooling 
capacity or efficiency level. Thus, annual maintenance costs did not 
factor into the determination of the total operating cost savings.
    Because the Department calculated the annual energy expense and 
repair costs as a function of equipment efficiency, it could determine 
historical and forecasted annual energy expenses and repair costs based 
on the annual shipment-weighted efficiency levels specified in the base 
case and standards case efficiency trends. Further, the Department 
characterized each standards case with three efficiency scenarios and 
three growth trends, and from them it developed annual energy expense 
and repair cost trends for a total of nine standards cases for each 
possible new standard.
(3) Discount Factor
    The discount factor is the factor by which DOE multiplied monetary 
values in one year to determine the present value in a different year. 
The discount factor is a function of the discount rate, the year of the 
monetary value, and the year in which the present value is being 
determined. For example, assuming a discount rate of seven percent, to 
discount monetary values in the year 2010 to values in the year 2001, 
DOE would use a discount factor of 1/(1.07)9 or 0.544.
    The ACEEE commented that long-term social discount rates are 
appropriate for assessing the national impacts of standards. (Public 
Workshop Tr., No. 2EE at p. 201) Consistent with the Process Rule, the 
Department estimated national impacts with both a three-percent and a 
seven-percent real discount rate as the average real rate of return on 
private investment in the U.S. economy. These discount rates are used 
in accordance with the Office of Management and Budget's (OMB) 
guidelines on Regulatory Analysis. (OMB Circular A-4, section E, 
September 17, 2003) See Chapter 10 of the TSD for more details on 
national impacts based on three-percent and seven-percent discount 
rates. The Department defines the present year as 2001 for consistency 
with the year in which the Department collected manufacturer cost data.
(4) Present Value of Costs
    The present value of increased total installed costs is the total 
installed cost increase (i.e., the difference between the standards 
case and base case) discounted to the present, and summed over the time 
period for which DOE evaluated the impact of standards (i.e., from the 
effective date of standards for this ANOPR in year 2008 to the year 
2035).
    Costs are increases in total installed cost (including both 
equipment cost and installation price) associated with the higher 
energy efficiency of commercial unitary air conditioners purchased in 
the standards case compared to the base case. The Department calculated 
total equipment costs as the difference in total installed cost for new 
equipment purchased each year, multiplied by the shipments in the 
standards case.
(5) Present Value of Savings
    The present value of operating cost savings is the annual operating 
cost savings (i.e., the difference between the base case and standards 
case) discounted to the present, and summed.
    Savings are decreases in operating costs (including electricity, 
repair, and maintenance) associated with the higher energy efficiency 
of commercial unitary air conditioners purchased in the standards case 
compared to the base case. Total operating cost savings are the savings 
per unit multiplied by the number of units of each vintage surviving in 
a particular year. Equipment consumes energy over its entire lifetime, 
and for units purchased in 2035 the present value of savings includes 
energy expenses incurred until the unit is retired from service.
3. Shipments Model
    The Department chose an accounting model to prepare shipment 
scenarios for the baseline and the various standard levels considered 
for commercial unitary air conditioners. The model tracks the stocks 
(inventory of installed equipment) and purchases of equipment in the 
two equipment classes of commercial unitary air conditioners. Events 
and customer decisions influence how the stock and supply of commercial 
air conditioners flow from one category to another. The Department 
modeled decisions that are influenced by economic parameters (i.e., 
total installed cost, operating cost, and income) with a logit 
probability model. The logit probability model is described later in 
this section.
    The Department organized the model into three classes of elements: 
Stocks, events, and decisions. It divided stocks of commercial unitary 
air conditioners into ownership categories, and units are assigned to 
age categories. Events are things that happen to stocks independent of 
economic conditions, i.e., breakdowns requiring repair or replacement. 
Decisions are customer reactions to market conditions, e.g., whether to 
repair or replace equipment, or purchase an air conditioner for a 
building which does not have one. The model characterizes customer 
purchase decisions by market segments. The model uses decision trees to 
describe customer choices for purchases and

[[Page 45493]]

repairs. A logit probability model simulates customer purchase 
decisions that are based on equipment price, operating costs, and 
business income level. A logit model allows a person to pinpoint 
variables that affect the probability of purchase. For more detail on 
the shipments model, refer to Chapter 9 of the ANOPR TSD.
a. Ownership Categories
    The Department first divided buildings into commercial air 
conditioner markets, then further divided the two markets into four 
different ownership categories, including: (1) New buildings; (2) 
existing buildings with a commercial unitary air conditioner; (3) 
buildings without a commercial unitary air conditioner; and (4) 
buildings with an extended-life commercial unitary air conditioner 
(i.e., equipment repaired to extend its life). The Department refers to 
the population of commercial unitary air conditioner units in each 
ownership category as the stock of commercial unitary air conditioner 
units of that category. Accounting equations relate annual changes in 
stocks to activities in the various market segments.
b. Market Segments
    The Department divided commercial unitary air conditioner purchases 
into four market segments:
     Net New Building Market: Net increases in the building 
stock that force the purchase of new commercial unitary air 
conditioners.
     Regular Replacement Market: Most commercial unitary air 
conditioner purchases are to replace an existing system that has broken 
down after completion of its useful life.
     Extra Repair Market: Because replacement of commercial 
unitary air conditioners is costly, a few customers will rebuild or 
repair a malfunctioning system (thus extending its lifetime), rather 
than purchasing a new system. Eventually, even extended-life commercial 
unitary air conditioners are replaced.
     Buildings Without a Commercial Air Conditioner: Owners of 
some buildings without a commercial air conditioner will purchase and 
become new users of commercial unitary air conditioners.
    The Department modeled events and decisions (e.g., the probability 
that an existing commercial unitary air conditioner has a problem and 
the customer's course of action) separately for each market segment.
    Trane stated that large increases in energy efficiency standards 
levels for commercial unitary air conditioners will cause users to 
repair their equipment rather than replace it, thereby decreasing 
shipments. (Public Workshop Tr., No. 2EE at p. 226) As noted above, the 
Department explicitly accounts for those customers that choose to 
repair their equipment rather than purchase a new system. Due to the 
increased equipment purchase price from higher efficiency standards, 
the shipments model estimates that some existing commercial unitary air 
conditioner customers, when faced with a replacement decision, will 
forego the purchase of a new piece of equipment and, instead, extend 
its normal life by repairing it. As a result, DOE estimated shipment 
projections under any standards case to be lower than those from the 
base case projection. Also, the shipments model forecasted that a 
greater number of existing customers would defer the purchase of a new 
system and extend the life of their equipment as the purchase price 
increased due to higher minimum efficiency standards.
c. Logit Probability Model
    The Department used the logit probability-of-purchase model to 
estimate the impact of standards-induced price and features changes on 
customer decisions. The model accounts for customer responsiveness to 
total installed cost, operating costs, and business income to capture 
the effect of these three variables on future shipments. The Department 
developed a coefficient of elasticity for the responsiveness to these 
three factors for each of the market segments. The elasticity was 
established by calibrating equipment forecasts to historical shipments. 
This ensured that estimates were consistent with the recent history of 
commercial unitary air conditioner shipments, market structure, and 
customer preferences.
    However, the Department understands that there are certain 
drawbacks to this method which include: (1) The need to forecast 
saturation of units in new and stock buildings; (2) the need to 
forecast building starts (although the AEO does provide readily 
available forecasts); and (3) the need to make assumptions concerning 
the lifetime of a unit to determine its retirement date. Concerning 
equipment saturation, the Department estimates that a maximum of ten 
percent of the total commercial floor space is eligible to receive 
equipment of the type covered by this rulemaking. Concerning building 
starts, the Department believes that unitary air conditioners would 
continue to be installed in the same types of buildings in which they 
are currently being used, and future equipment installations of 
commercial unitary air conditioners would not be preferentially 
installed in particular building types (e.g., retail or office). 
Although the Department believes its estimates for equipment 
saturations and building starts are reasonable, the Department invites 
comments from interested parties on the reasonableness of these 
estimates. The equipment saturation and building start issues are 
addressed as Issues 12 and 13 under ``Issues on Which DOE Seeks 
Comment'' in section IV.E of this ANOPR.
    Table II.17 summarizes the various inputs and sources of the 
commercial unitary air conditioner shipments model.

             Table II.17.--Summary of Shipments Model Inputs
------------------------------------------------------------------------
               Parameter                         Data description
------------------------------------------------------------------------
New Commercial Building Starts.........  DOE-Energy Information
                                          Administration, Annual Energy
                                          Outlook 2003.
Historical Commercial Building Starts..  U.S. Census Bureau, Statistical
                                          Abstract of the United States:
                                          2002.
Regular Replacement Market.............  Based on a survival function
                                          constructed from a Weibull
                                          distribution function
                                          normalized to produce a 15-
                                          year median lifetime. DOE
                                          based the 15-year median
                                          lifetime on data from the 1999
                                          ASHRAE HVAC Applications
                                          Handbook.
Extra Repair Market....................  Same survival function as used
                                          for regular replacement market
                                          but with a six-year extended
                                          life.
Buildings Without an Air Conditioner...  This is a function of shipments
                                          going to new commercial
                                          buildings and existing floor
                                          space.
Business Income........................  Building Owners and Managers
                                          Association (BOMA)
                                          International, Historical
                                          Experience Exchange Reports.

[[Page 45494]]

 
Total Installed Cost...................  Average values from LCC and PBP
                                          Analysis.
Operating Cost.........................  Average values from LCC and PBP
                                          Analysis.
Elasticities...........................  Developed by calibrating logit
                                          probability model to
                                          historical shipments.
Historical Shipments...................  U.S. Census Bureau, Current
                                          Industrial Reports,
                                          Refrigeration, Air
                                          Conditioning and Warm Air
                                          Heating Equipment (MA333M
                                          series 1970 through 2000).
------------------------------------------------------------------------

    Unlike the LCC Analysis, the shipments model does not use 
probability distributions of values for inputs. As noted in the above 
discussion of the NES spreadsheet model, the shipments model uses the 
same basic input data as the LCC model for energy use and cost of 
equipment, but uses shipment-weighted average values instead of 
probability distributions.
4. Preliminary Results
    Tables II.18 and II.19 show the forecasted NES for the two primary 
equipment classes at each of the candidate standard levels. Note that 
in the case of both equipment classes, although the ASHRAE/IESNA 
Standard 90.1-1999 energy efficiency levels allow for four additional 
years of energy savings over the other standards cases, the amount is 
not great enough to offset the additional energy savings realized from 
adopting more stringent standards.

Table II.18.--Summary of Cumulative NES Impacts (Quads) Through the Year
     2035 for >=65,000 to <135,000 Btu/h Commercial Air Conditioners
------------------------------------------------------------------------
                                                 Effective
           Candidate standard level               date of        NES
                                                  standard     (quads)
------------------------------------------------------------------------
ASHRAE 90.1--1999.............................         2004         0.31
10.5 EER......................................         2008         0.39
11.0 EER......................................         2008         0.70
11.5 EER......................................         2008         0.98
12.0 EER......................................         2008         1.08
------------------------------------------------------------------------


Table II.19.--Summary of Cumulative NES Impacts (Quads) Through the Year
    2035 for >=135,000 to <240,000 Btu/h Commercial Air Conditioners
------------------------------------------------------------------------
                                                 Effective
           Candidate standard level               date of        NES
                                                  standard     (quads)
------------------------------------------------------------------------
ASHRAE 90.1--1999.............................         2004         0.20
10.0 EER......................................         2008         0.31
10.5 EER......................................         2008         0.53
11.0 EER......................................         2008         0.79
11.5 EER......................................         2008         1.02
12.0 EER......................................         2008         1.09
------------------------------------------------------------------------

    Tables II.20 and II.21 show the national NPVs for the two primary 
equipment classes for each of the candidate standard levels evaluated 
at discount rates of three-percent and seven-percent real per OMB's 
guidelines contained in Circular A-4, Regulatory Analysis, September 
17, 2003. Based on the use of a seven-percent real discount rate, note 
that the NPV increases with the stringency of the standard level until 
the 12.0 EER standards case. Although the 12.0 EER standards case 
provides additional operating cost savings, the higher equipment 
purchase costs incurred under the standard result in an NPV that is 
lower than that realized under the 11.5 EER standards case. Use of a 
three-percent discount rate, as called for by OMB guidelines, increases 
both future equipment purchase costs and operating cost savings. But 
because future annual operating cost savings in latter years grow at a 
faster rate than annual equipment purchase costs, use of a three-
percent discount rate dramatically increases the NPV at all standard 
levels for both equipment classes. For example, in the 11.5 EER 
standard level scenario for the >=65,000 Btu/h to <135,000 Btu/h 
commercial unitary air conditioning equipment class, the $1.08 billion 
NPV based on a seven-percent discount rate becomes $3.06 billion under 
a three-percent discount rate. Chapter 10 of the ANOPR TSD also 
provides the full set of NPV results.

Table II.20.--Summary of Cumulative Net Present Value Impacts (in billion 2001 dollars) for >=65,000 to <135,000
     Btu/h Commercial Air Conditioners Calculated with a Seven-Percent and Three-Percent Real Discount Rate
----------------------------------------------------------------------------------------------------------------
                                                                                        NPV (billion 2001$)
                                                                     Effective   -------------------------------
                    Candidate standard level                          date of      7%  discount    3%  discount
                                                                     standard          rate            rate
----------------------------------------------------------------------------------------------------------------
ASHRAE 90.1-1999................................................            2004            0.52            1.25
10.5 EER........................................................            2008            0.57            1.52
11.0 EER........................................................            2008            0.93            2.53
11.5 EER........................................................            2008            1.08            3.06
12.0 EER........................................................            2008            1.02            3.05
----------------------------------------------------------------------------------------------------------------


[[Page 45495]]


    Table II.21.--Summary of Cumulative Net Present Value Impacts (in billion 2001 dollars) for >=135,000 to
 <240,000 Btu/h Commercial Air Conditioners Calculated with a Seven-Percent and Three-Percent Real Discount Rate
----------------------------------------------------------------------------------------------------------------
                                                                                        NPV (billion 2001$)
                                                                     Effective   -------------------------------
                    Candidate standard level                          date of      7%  discount    3%  discount
                                                                     standard          rate            rate
----------------------------------------------------------------------------------------------------------------
ASHRAE 90.1-1999................................................            2004            0.38            0.90
10.0 EER........................................................            2008            0.51            1.33
10.5 EER........................................................            2008            0.83            2.19
11.0 EER........................................................            2008            1.12            3.02
11.5 EER........................................................            2008            1.24            3.44
12.0 EER........................................................            2008            1.20            3.44
----------------------------------------------------------------------------------------------------------------

    The engineering analysis, section II.C of the ANOPR, established a 
maximum technologically feasible (i.e., ``max tech'') efficiency level 
of 12.0 EER. However, the engineering analysis also described a process 
(to be used for the NOPR) to ascertain whether the max tech level is 
actually greater than 12 EER. In anticipation that a greater max tech 
level could exist beyond 12.0 EER, the Department ran a sensitivity 
analysis to determine the effect on NES and NPV of a max tech 
efficiency level greater than 12.0 EER. For purposes of conducting the 
sensitivity analysis, the Department assumed that the max tech 
efficiency level would be 2 EER rating points beyond a given candidate 
standard level. This means that under the ASHRAE/IESNA Standard 90.1-
1999 and 10.0 EER standards cases, the max tech level remains unchanged 
at 12.0 EER. But for all other standards cases, the max tech level is 
greater than 12.0 EER (i.e., 12.5 EER for the 10.5 EER standards case, 
13.0 EER for the 11.0 EER standards case, 13.5 EER for the 11.5 EER 
standards case, and 14.0 EER for the 12.0 EER standards case). Although 
under these standards cases the max tech level is allowed to go beyond 
12.0 EER, equipment with efficiencies equal to the max tech level are 
assumed to be gradually phased in over time. As a result, the 
forecasted efficiency trends for these candidate standards are not very 
different from those developed with a max tech level of 12.0 EER. As a 
result, only the NES and NPV results for the 11.5 EER and 12.0 EER 
standards cases are significantly different from those results based on 
a max tech level of 12.0 EER. For more details on the NES and NPV 
results for the max tech sensitivity analysis, refer to subsection 
10.4.5 of the ANOPR TSD.

H. LCC Sub-Group Analysis

    The LCC sub-group analysis evaluates impacts on identifiable groups 
of customers, such as customers of different business types, who may be 
disproportionately affected by any national energy efficiency standard 
level. The Department will accomplish this, in part, by analyzing the 
LCC and PBPs for those customers that fall into those identifiable 
groups.
    Also, the Department plans to evaluate variations in energy prices 
and variations in energy use that might affect the NPV of a standard to 
customer sub-populations. To the extent possible, the Department will 
get estimates of the variability of each input parameter and consider 
this variability in its calculation of customer impacts. Variations in 
energy use for a particular equipment type depend on factors such as 
climate, building type, and type of business. The Department plans to 
perform sensitivity analyses to consider how differences in energy use 
will affect sub-groups of customers.
    The Department will then determine the effect on customer sub-
groups using the LCC spreadsheet model. The standard LCC analysis 
includes various commercial building types that use unitary air 
conditioners. Where different data points are input to the spreadsheet 
model, the Department can analyze the LCC for any sub-group, such as 
office buildings in the U.S., by sampling only that sub-group. For more 
detail on the LCC sub-group analysis, refer to Chapter 11 of the ANOPR 
TSD.
    The Department will be especially sensitive to purchase price 
increases (``first cost'' increases) to avoid negative impacts on 
identifiable population groups such as small businesses (i.e., those 
with low annual revenues) which may not be able to afford a significant 
increase in the price of commercial unitary air conditioning equipment. 
Increased first costs to commercial customers which result from 
standards are especially important to smaller businesses because this 
group is most sensitive to price increases. For these types of 
customers, an increase in first cost for a piece of unitary air 
conditioning equipment might preclude the purchase of a new model of 
that equipment. As a result, some commercial customers may keep a 
unitary air conditioner past its anticipated useful life. An older 
unitary air conditioner is generally less efficient than a new one and 
its efficiency may further deteriorate if it keeps operating beyond 
that useful life. Further, an increase in first cost might altogether 
preclude the purchase and use of new equipment and potentially result 
in a great loss of utility.
    Although the Department does not know the actual business income 
and annual revenues for the buildings analyzed in the LCC analysis, the 
Department will attempt to identify a building characteristic that 
correlates to annual income (e.g., floor space). If a characteristic 
can be found, the Department will be able to perform sub-group analyses 
on smaller businesses. If the Department cannot identify a building 
characteristic that correlates with income, then the Department may not 
be able to perform sub-group analyses on smaller businesses. The issue 
of business income and how it might relate to a particular building 
characteristic is addressed as Issue 14 under ``Issues on Which DOE 
Seeks Comment'' in section IV.E of this ANOPR.
    The ACEEE stated that a sub-group analysis is unnecessary, stating 
that analyzing customer sub-groups will lead to an analytical quagmire. 
(ACEEE, No. 10 at p. 11) The Department understands ACEEE's concerns 
because the LCC analysis of numerous sub-groups could require an 
inordinate amount of time and resources. However, as long as there are 
valid reasons for analyzing certain sub-groups, such as those 
businesses that may be affected more severely than the general 
population by increases in purchase

[[Page 45496]]

price, the Department will analyze the LCC impacts on those sub-groups.

I. Manufacturer Impact Analysis

    The purpose of the manufacturer analysis is to identify the likely 
impacts of efficiency standards on manufacturers. Consistent with the 
policies outlined in the Department's Process Rule, 10 CFR Part 430, 
Subpart C, Appendix A, the Department will analyze the impact of 
standards on manufacturers with substantial input from manufacturers 
and other interested parties. The use of quantitative models will be 
supplemented by qualitative assessments by industry experts.
    The Department intends to conduct the manufacturer impact analysis 
in three phases, and further tailor the analytical framework based on 
stakeholder comments. In Phase I, an industry profile is created to 
characterize the industry, and identify important issues that require 
consideration. In Phase II, an industry cash flow model and an 
interview questionnaire are prepared to guide subsequent discussions. 
In Phase III, manufacturers are interviewed, and the impacts of 
standards are assessed both quantitatively and qualitatively. First, 
industry and sub-group cash flow and net present value are assessed 
through use of the government regulatory impact model (GRIM). Second, 
impacts on competition, manufacturing capacity, employment, and 
regulatory burden are assessed based on manufacturer interview feedback 
and discussions. For more detail on the manufacturer impact analysis, 
refer to Chapter 12 of the ANOPR TSD.
1. Sources of Information for the Manufacturer Impact Analysis
    Many of the analyses described above provide important information 
concerning the manufacturer impact analysis. Such information includes 
manufacturing costs (section II.C), shipments forecasts (section 
II.G.3), and price forecasts (section II.E). The Department 
supplemented this information with information gathered during 
interviews with manufacturers. The interview process has a key role in 
the manufacturer impact analysis because it allows interested parties 
to privately express their views on important issues, and allows DOE to 
consider confidential or sensitive information in the rulemaking 
decision.
    The Department intends to conduct detailed interviews with as many 
manufacturers as necessary to gain insight into the range of potential 
impacts of standards. Typically during the interviews, DOE solicits 
information on the possible impacts of potential efficiency levels on 
sales, direct employment, capital assets, and industry competitiveness. 
Both qualitative and quantitative information is valuable. The 
Department intends to schedule interviews well in advance to provide 
every opportunity for key individuals to be available for comment. 
Although a written response to a questionnaire would otherwise be 
acceptable, DOE prefers an interactive interview process because it 
helps clarify responses and identify additional issues.
    Before the interviews, the Department will prepare and distribute 
to the manufacturers estimates of the financial parameters that it 
plans to use in the manufacturer impact analysis. During the 
interviews, the Department will seek comment and suggestions regarding 
the values selected for those parameters.
    The Department will ask interview participants to give, either in 
writing or orally, notice of any confidential information that is being 
provided. The Department will consider all relevant information in its 
decision-making process. However, DOE will not 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 and whether they want it to be presented 
with, or without, attribution.
    The Department will review the results of the interviews and 
prepare a summary of the major issues and outcomes. For more detail on 
the methodology used in the manufacturer impact analysis, refer to 
section 12.2 of the ANOPR TSD.
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.
    The GRIM analysis uses several factors to determine annual cash 
flows beginning with the first public announcement of a new standard 
and for the several years after its implementation: Annual expected 
revenues; manufacturer costs such as costs of sales, selling, and 
general administration costs; taxes; and capital expenditures related 
to depreciation, new standards, and maintenance. The Department 
compares the results against baseline 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. For more information on the industry cash flow analysis, 
refer to subsection 12.2.2.1 of the ANOPR TSD.
3. Manufacturer Sub-Group Analysis
    Industry cost estimates are not adequate to assess differential 
effects among sub-groups of manufacturers. For example, there could be 
greater negative effects on smaller manufacturers, niche players, or 
manufacturers exhibiting a cost structure that differs largely from the 
industry average. Ideally, the Department would consider the impact on 
every firm individually; however, it typically uses the results of the 
industry characterization to group manufacturers exhibiting similar 
characteristics.
    During the interview process, DOE will discuss the potential sub-
groups and sub-group members that it has identified for the analysis. 
The Department will encourage the manufacturers to suggest what sub-
groups or characteristics are most appropriate for the analysis. For 
more detail on the manufacturer sub-group analysis, refer to subsection 
12.2.3 the ANOPR TSD.
4. Competitive Impacts Assessment
    The Department must examine whether any lessening of competition is 
likely to result if a standard is set above the levels established in 
the ASHRAE/IESNA Standard 90.1-1999 and the Attorney General must 
determine the impacts, if any, of any lessening of competition. (42 
U.S.C. 6313(6)(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 
manufacturers. The Department 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 asymmetrical 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 the Department's 
Process Rule, 10 CFR Part 430, Subpart C, Appendix A, sections 
4(d)(7)(ii) and (vi), and 5(e)(3)(i)(B).

[[Page 45497]]

    The Department understands that the phaseout in 2010 of R-22 
refrigerant may occur shortly after the effective date of any new 
standards for commercial unitary air-conditioning equipment. Two 
refrigerants, R-410a and R-407c, are currently under consideration as 
substitutes for R-22. In either case, the Department understands that 
there may be additional capital conversion and production conversion 
costs associated with the phaseout. The firms that manufacture the 
commercial equipment, for the most part, also manufacture residential 
central air conditioners and will face that conversion expense in 2010.

J. Utility Impact Analysis

    To estimate the effects of candidate commercial unitary air 
conditioner standard levels on the electric utility industry, the 
Department intends to use a variant of DOE/EIA's National Energy 
Modeling System (NEMS).\3\ The DOE/EIA used this model to produce the 
Annual Energy Outlook. The Department will use a variant known as NEMS-
Building Technologies (BT) to provide key inputs to the analysis. The 
utility impact analysis is a comparison between model results for the 
base case and candidate standards cases. The analysis will consist of 
forecasted differences between the base and standards cases for 
electricity generation, installed capacity, sales, and prices. Because 
the Department attempts to use a variant of the latest version of NEMS, 
the NOPR analyses will use the most recently available version of NEMS, 
which in all likelihood will be the version used to generate the AEO 
2004.
---------------------------------------------------------------------------

    \3\ For more information on NEMS, 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 program 
that performs this work).
---------------------------------------------------------------------------

    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. This model 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 for each trial standard level, as 
well as changes in electricity sales to the commercial sector.
    The Department conducts the utility analysis as a policy deviation 
from the AEO, applying the same basic set of assumptions. For example, 
the utility analysis uses the operating characteristics (e.g., energy 
conversion efficiency, emissions rates) of future electricity 
generating plants and the prospects for natural gas supply as specified 
in the AEO reference case.
    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 the 
AEO. The AEO reference case projects that the U.S. economy, as measured 
by gross domestic product (GDP), will grow at an average rate of three 
percent from 2001 to 2025. The high economic 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.
    This model provides reference case load shapes for several end uses 
by census division, including commercial space cooling. The Department 
uses predicted growth in demand for each end use to project the total 
electric system load growth for each region, which in turn DOE uses to 
predict the necessary additions to capacity. The NEMS-BT model accounts 
for the implementation of efficiency standards by decreasing the value 
of certain variables in the appropriate reference case load shape. The 
Department determines the amount of decrease in a variable by using 
data for the per-unit energy savings developed in the LCC and PBP 
analyses and the shipments forecast developed for the NES analysis. For 
more detail on the utility impact analysis, refer to Chapter 13 of the 
ANOPR TSD.
    The Southern Company stated that in conducting the utility 
analysis, it is important to consider the effect on utilities from 
changes that affect load factor and peak demand. (Public Workshop Tr., 
No. 2EE at p. 246) The Department recognizes the Southern Company's 
concerns, and because the predicted reduction in capacity additions is 
very sensitive to the peak load impacts of the standard, the Department 
will also use the hourly load data from the building simulations to 
provide an independent estimate of the total system load reduction that 
results from a given trial standard level.
    Because the current AEO (AEO 2003) version of NEMS forecasts only 
to the year 2025, DOE must extrapolate results to 2035. The Department 
will use the approach which the EIA uses to forecast fuel prices for 
the Federal Energy Management Program (FEMP).\4\ The Federal Energy 
Management Program uses these prices to estimate LCC of federal 
equipment procurements. For petroleum products, FEMP uses the average 
growth rate for the world oil price over the years 2010 to 2025, in 
combination with the refinery and distribution markups from the year 
2025, to determine the regional price forecasts. Similarly, FEMP 
derives natural gas prices from an average growth rate figure in 
combination with regional price margins from the year 2025.
---------------------------------------------------------------------------

    \4\ Memorandum from the Office of Integrated Analysis and 
Forecasting, Energy Information Administration, to the Federal 
Energy Management Program Office, dated January 23, 2003, ``Energy 
Price Projections for Federal Life Cycle Cost Analysis.''
---------------------------------------------------------------------------

    Results of the analysis will include changes in commercial 
electricity sales, and installed capacity and generation by fuel type, 
for each trial standard level, in five-year forecasted increments 
extrapolated to the year 2035. The Natural Resources Defense Council 
stated that increases in the commercial unitary air conditioner 
standards will protect lives by reducing electricity blackouts. (NRDC, 
No. 6 at p. 5) Although the Department recognizes the possibility that 
a reduction in installed capacity could reduce the likelihood of 
blackouts, the Department does not intend to correlate reductions in 
installed capacity to possible reductions in electricity outages.

K. Environmental Assessment

    The Department will conduct an assessment of the impacts of 
candidate commercial unitary air conditioner standard levels on certain 
environmental indicators using NEMS-BT to provide key inputs to the 
analysis. Results of the environmental assessment are similar to those 
provided in the AEO. Because the Department attempts to use a variant 
of the latest version of NEMS, the analyses conducted for the NOPR will 
use the most recently available version of NEMS, which in all 
likelihood will be the version used to generate the AEO 2004.

[[Page 45498]]

    The Department intends the environmental assessment to provide 
emissions results to policymakers and stakeholders, and to fulfill 
relevant legal requirements concerning the evaluation of environmental 
effects of new rules. The environmental assessment considers only two 
pollutants, sulfur dioxide (SO2) and nitrogen oxides 
(NOX), and one emission, carbon. The only form of carbon 
NEMS-BT tracks is carbon dioxide (CO2), so the carbon 
discussed in this report is only in the form of CO2. For 
each of the standard levels, DOE will calculate total undiscounted and 
discounted emissions using NEMS-BT and will use 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. The 
Southern Company stated that the environmental impacts calculated from 
a standards increase must consider other factors that may also be 
affecting power plant emissions. (Public Workshop Tr., No. 2EE at p. 
254) 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.
    The NEMS-BT model tracks carbon emissions using a detailed carbon 
module. This gives 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.
    The NEMS-BT model 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. The NEMS-BT model 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. The Department reports the outcome of the analysis 
for each trial standard level as a deviation from the AEO reference 
cases. The Natural Resources Defense Council stated that increases in 
the commercial unitary air conditioner standards will protect lives by 
reducing airborne emissions. (NRDC, No. 6 at p. 5) Although the 
Department recognizes the possibility that a reduction in airborne 
emissions could result in improved health benefits, the Department has 
not correlated reductions in installed capacity to possible 
improvements in public health for appliance standards rulemakings. The 
Department requests data from stakeholders that identify specific 
health benefits from reductions in installed generation capacity. For 
more detail on the environmental assessment, refer to the environmental 
assessment report in Chapter 14 of the ANOPR TSD. Also, see ``Issues on 
Which DOE Seeks Comment'' in section IV.E of this ANOPR.''

L. Employment Impact Analysis

    The Process Rule includes employment impacts among the factors to 
be considered in selecting a proposed standard. The Department usually 
would not issue any proposed standard level that would cause 
significant plant closures or losses of domestic employment. See the 
Department's Process Rule, 10 CFR Part 430, Subpart C, Appendix A, 
sections 4.(d)(7)(ii) and (vi), and 10.
    The Department estimates the impacts of standards on employment for 
equipment manufacturers, relevant service industries, energy suppliers, 
and the economy in general. The estimates cover both the indirect and 
direct effects on employment. 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. The discussion of the 
manufacturer sub-group analysis in section II.I.3 of this ANOPR covers 
estimates of the direct effects on employment.
    Indirect impacts are impacts on the national economy other than in 
the manufacturing sector being regulated. Indirect impacts may result 
both from expenditures shifting among goods (substitution effect) and 
changes in income which lead to a change in overall expenditure levels 
(income effect). The Department 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.
    The Department expects new commercial unitary air conditioner 
standards to increase the total installed cost of equipment (customer 
purchase price plus sales tax, and installation). It expects the new 
standards to decrease energy consumption, and therefore to reduce 
customer expenditures for energy. Over time, the energy savings will 
pay back the increased total installed cost. Customers that benefit 
from the savings in energy expenditures may spend those savings on new 
commercial investments 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 impact on jobs. The Department will 
estimate national impacts for major sectors of the U.S. economy in the 
NOPR. Public and commercially available data sources and software will 
be used to estimate employment impacts. The Department will make all 
methods and documentation available for review.
    In recent energy efficiency standards rulemakings, the Department 
has used the Impact of Building Energy Efficiency Programs (IMBUILD) 
spreadsheet model to analyze indirect employment impacts. The 
Department's Building Technologies program office developed

[[Page 45499]]

IMBUILD, which is a special-purpose version of the Impact Analysis for 
Planning (IMPLAN) national input/output model. IMPLAN specifically 
estimates the employment and income effects of building energy 
technologies. The IMBUILD model 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 
using data from the Bureau of Labor Statistics (BLS). The IMBUILD model 
estimates changes in employment, industry output, and wage income in 
the overall U.S. economy resulting from changes in expenditures in the 
various sectors of the economy. Changes in expenditures due to 
commercial air conditioning standards are modeled by IMBUILD as changes 
to economic flows (e.g., increased equipment prices and increased 
commercial sector investment). The economic flow changes provide 
IMBUILD with the means to estimate the net national effect on 
employment by sector.
    While ACEEE generally supports the inclusion of a net national 
employment impacts analysis, it stated that any model or tool used to 
estimate employment impacts must be robust and sensitive enough to 
reveal effects as small as those that can be foreseen. ACEEE commented 
that DOE must show that any direct employment impacts differ 
significantly from productivity-related employment changes. (ACEEE, No. 
10 at p. 15) The IMBUILD model estimates standards-induced impacts on 
the economy while holding constant all other economic factors that can 
affect national employment (such as recessions, government stimulus 
packages, and government budget deficits). While this approach to 
estimating employment impacts cannot determine the impacts due to small 
changes (such as productivity gains) on any particular industry, it 
does provide an approximation of the impact that equipment standards 
have on employment, barring any significant changes to the U.S. 
economy. Nevertheless, increases or decreases in the net demand for 
labor in the economy estimated by the input/output model due to 
commercial unitary air conditioners and heat pump standards are likely 
to be very small relative to total national employment. For the 
following reasons, it is doubtful that even modest changes in 
employment will be predicted in the NOPR.
     Although unemployment has increased over the past few 
years, it is still at a relatively low rate. If unemployment remains 
low during the period when amended energy efficiency standards go into 
effect, it is unlikely that the efficiency standards alone would cause 
any change in national employment levels;
     Neither the BLS data nor the input/output model used by 
DOE include the quality or wage level of the jobs. The losses or gains 
from any potential employment change might be offset if job quality and 
pay also change; and
     The net benefits or losses from potential employment 
changes are a result of the estimated net present value of benefits or 
losses that are likely to result from amended commercial unitary air 
conditioner and heat pump energy efficiency standards. It may not be 
appropriate to separately identify and consider any employment impacts 
beyond the calculation of NPV.
    Taking into consideration these legitimate concerns regarding the 
interpretation and use of the employment impact analysis, the 
Department expects that any energy efficiency standards for commercial 
unitary air conditioners and heat pumps are likely to produce 
employment benefits that are sufficient to offset fully any adverse 
impacts on employment in the commercial air conditioning equipment or 
energy industries. Employment impact analyses for products that have 
recently gone through a standards rulemaking for energy efficiency, 
such as residential water heaters and clothes washers, have 
demonstrated that losses in the appliance and energy industries have 
been offset by gains in other sectors of the economy.
    Although the Department intends on using IMBUILD for its analysis 
of employment impacts, the Department welcomes any input on tools that 
might be better than IMBUILD. For more information on the net national 
employment impacts analysis, refer to Chapter 14 of the ANOPR TSD.

M. Regulatory Impact Analysis

    The Department will prepare a draft regulatory impact analysis 
under Executive Order 12866, ``Regulatory Planning and Review,'' (58 FR 
51735 (October 4, 1993)) which will be subject to review under the 
Executive Order by the Office of Information and Regulatory Affairs 
(OIRA).
    As part of the regulatory analysis, the Department will identify 
and seek to mitigate the overlapping effects on manufacturers of 
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 commercial unitary air conditioners 
(e.g., HCFC refrigerant phaseout) and other equipment (e.g., non-
unitary commercial air conditioners). Northeast Energy Efficiency 
Partnerships (NEEP) stated that existing incentive programs have 
demonstrated that commercial consumers need modest incentives to select 
equipment with efficiencies that are greater than the minimum standard 
requirements in ASHRAE Standard 90.1-1999. (NEEP, No. 8 at p. 3) The 
Department takes note of NEEP's comment and intends to address its 
concerns in the regulatory impact analysis discussion. The Department 
also seeks input from other stakeholders regarding other regulations 
that it should consider.
    The NOPR will include a complete quantitative analysis of 
alternatives to the proposed energy 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 
conservation standards. For more information on the regulatory impact 
analysis, refer to the regulatory impact analysis report in Chapter 16 
of the ANOPR TSD.

III. Candidate Energy Conservation Standards Levels

    The Process Rule requires 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). These 
candidate levels appear in Tables II.18 through II.21 of today's ANOPR. 
The Department intends to review the public comments received during 
the public comment period following the ANOPR public meeting and to 
update the analyses appropriately for each equipment class, before 
issuing the NOPR.
    Also, the Department requests comments from interested parties 
about the phaseout of R-22 refrigerant, and has identified it as Issue 
15 under ``Issues on Which DOE Seeks Comment'' in section IV.E. of this 
ANOPR.

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. The 
public meeting will be held at the U.S. Department of Energy, Forrestal 
Building, Room 1E-245, 1000 Independence Avenue, SW.,

[[Page 45500]]

Washington, DC, 20585. Those stakeholders who want to attend the public 
meeting should notify Ms. Brenda Edwards-Jones at (202) 586-2945. 
Foreign nationals visiting DOE Headquarters are subject to advance 
security screening procedures, requiring a 30-day advance notice. A 
foreign national who wishes to participate in the meeting, must tell 
DOE of this fact as soon as possible by contacting Ms. Brenda Edwards-
Jones to initiate the necessary procedures.

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. 
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 be submitted by mail or e-
mail to: [email protected].
    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 persons who cannot 
supply an advance copy of their 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 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 the 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: 
commercial[email protected]">aircon[email protected]. 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-01-375, 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 particularly interested in receiving comments 
(including data) concerning:
1. Approaches to Analyses for Split Systems, Heat Pumps, and Niche 
Equipment
    The Department assumes that the cost/efficiency relationship for 
commercial single-package unitary air-conditioning equipment in the 
ANOPR is similar to that of commercial split air-conditioning systems. 
Is this a reasonable assumption for the DOE to make in its approach to 
developing the cost/efficiency curves? (See section II.C.1 of this 
ANOPR for details.)
    This ANOPR and the analyses detailed in the accompanying TSD 
address only commercial unitary air conditioning equipment. The 
Department proposes to address energy efficiency standards for 
commercial unitary heat pump equipment in a way that is consistent with 
the ASHRAE methodology used to set the ASHRAE/IESNA Standard 90.1-1999 
levels for unitary air conditioning systems with

[[Page 45501]]

heat pump heating. The Department requests comments on this proposed 
approach. (See section II.C.1 of this ANOPR for details.)
    The Department did not consider any niche equipment classes in the 
engineering analysis. Should the Department consider any niche classes 
of commercial unitary air conditioning equipment (e.g., portable units 
and explosion-proof/hazardous-duty units) that would fall under the 
definitions of either small unitary air conditioner, large unitary air 
conditioner, small unitary heat pump, or large unitary heat pump, in 
section I.C.3. of this ANOPR, apart from these general classes of 
commercial unitary air-conditioning equipment?
2. Alternative Refrigerant Analysis
    The Department based its alternative refrigerant analysis on the 
use of R-410a refrigerant. The Department concluded that the 
incremental manufacturing cost and efficiency relationship derived for 
equipment using R-22 refrigerant would not be substantially different 
for equipment using R-410a. The Department requests data concerning the 
incremental cost/efficiency relationship associated with the use of R-
410a in commercial unitary air conditioners. Also, the Department 
requests stakeholders to identify and provide similar information for 
any other alternative refrigerants DOE should consider. (See section 
II.C.5 of this ANOPR for details.)
3. Candidate Standards Levels
    The Department has identified candidate energy efficiency standards 
levels ranging from 10.0 to 12.0 EER. The Department seeks comments on 
these efficiency standards levels and any other alternatives it should 
consider. (See sections III. and II.G.4 of this ANOPR for details.)
4. Design-Option Analysis and Maximum Energy Efficiency Levels
    Because there were no commercial unitary air conditioners that had 
efficiencies beyond 11.5 EER when the Department conducted its 
engineering analysis for commercial unitary air conditioners rated 
>=65,000 Btu/h through <240,000 Btu/h, the Department had to rely on 
its design-option analysis modeling to estimate the manufacturing cost 
and efficiency relationship beyond 11.5 EER. The Department requests 
comments from stakeholders on: (1) Whether the design options presented 
in the engineering analysis accurately estimate cost and efficiency 
trends beyond 11.5 EER, (2) whether the Department's assumptions for 
evaluating a maximum technologically feasible design were appropriate, 
and (3) what other design options should the Department consider in its 
analysis.
    Since the Department completed its engineering analysis in late 
2002, several new commercial unitary air conditioners, with rated 
efficiency levels greater than 12.0 EER, have become available on the 
market. The Department requests comments from stakeholders on any 
commercial unitary air-conditioning equipment with rated efficiency 
levels above 12.0 EER. (See sections II.C.1.a and II.C.4 of this ANOPR 
for details.)
5. Industrial Buildings
    The Department's analysis relies on simulations of electric loads 
in commercial buildings to determine the relative impact of the 
standard. The analysis is also intended to cover equipment installed in 
light-manufacturing buildings. Light-manufacturing buildings are those 
engaged in the process of making, assembling, altering, converting, 
fabricating, finishing, processing or treatment of a manufactured 
product utilizing a relatively clean and quiet process which does not 
include or generate significant objectionable or hazardous elements 
such as smoke, odor, vibration, water pollution or dust. As such, 
commercial unitary air-conditioning equipment covered under this 
rulemaking could serve to provide space conditioning to light-
manufacturing buildings. If the electric load shapes and magnitudes, 
and in particular the degree of correlation between the hour of the 
peak air conditioning load and the hour of the peak building load, are 
substantially different for light-manufacturing buildings, a separate 
analysis for these buildings might be necessary. The Department seeks 
comments about whether adding light-manufacturing buildings to its 
analysis is necessary and what, if any, impact it would have on the 
results. (See sections II.D.1 and II.F.1.b.(2)(a) of this ANOPR for 
details.)
6. Economizer Performance
    In its building simulation analysis, the Department assumed that 
the economizers operated flawlessly where economizer presence was 
indicated by CBECS data. This might result in some underestimation of 
the actual cooling loads in the buildings. Should the Department revise 
this assumption, and if so, what assumptions are appropriate? (See 
section II.D.1 of this ANOPR for details.)
7. Fan Energy Consumption
    The Department included fan energy consumption as part of the total 
energy consumption of the commercial unitary air-conditioning equipment 
in the ANOPR analysis. This analysis includes fan energy consumption 
that occurs whenever the fan is in operation (i.e., during cooling, 
heating, and ventilation). Should the Department revise this approach 
in the NOPR analysis, and if so, what approach is appropriate? (See 
section II.D.1 of this ANOPR for details.)
8. Equipment Markups
    For purposes of deriving customer prices for more efficient 
equipment, the Department differentiated between a baseline markup and 
an incremental markup for wholesalers, general contractors, and 
mechanical contractors. The incremental markup covers only those 
expenses associated with a change in the manufacturer price and is used 
to derive the incremental change in customer equipment price due to 
higher EER levels. Because the incremental markup covers fewer 
expenses, it has a lower value than its corresponding baseline markup. 
Nevertheless, it is essential to identify all expenses the incremental 
markup should cover. Therefore, the Department seeks comments on 
whether more or fewer expenses should be covered by the wholesale, 
general contractor, and mechanical contractor incremental markups. (See 
section II.E.2 of this ANOPR for details.)
9. Hourly Based Electricity Prices
    The Department's hourly based electricity price analysis uses 
extensive data to develop estimates of generation and coincident peak 
load savings due to the standard for each building in the sample. The 
Department enters these savings estimates into a customer price model 
to compute annual energy bill savings as an input to the LCC. The 
Department's price model is based on the avoided-cost methodologies 
traditionally used to value demand reduction programs. Should the 
Department consider price models other than those based on avoided-cost 
methodologies? (See section II.F.1.b.(2)(b) of this ANOPR for details.)
10. Forecasts of Electricity Prices
    The Department has relied on EIA energy price forecasts, including 
the various EIA scenarios, to bound projected energy prices used in the 
standards analyses. The Department applied EIA's projected trend in 
national average electricity prices to each customer's marginal energy

[[Page 45502]]

expenses. Although the Department believes the EIA forecasts are the 
most credible projections available, the Department is open to using 
other sources of credible information. Are there alternative 
electricity price forecasts that are credible and warrant consideration 
by the Department? (See section II.F.1.b.(3) of this ANOPR for 
details.)
11. Equipment Lifetime
    The Department based its equipment lifetime assumption on data from 
the 1999 ASHRAE HVAC Applications Handbook, which gives a median 
lifetime of 15 years for commercial unitary air conditioners. The 
Department found no other data to indicate a different median or mean 
lifetime for commercial unitary air conditioning equipment. The 
Department seeks data concerning whether a 15-year median lifetime is 
appropriate for commercial unitary air conditioners and heat pumps. 
(See section II.F.1.b.(6) of this ANOPR for details.)
12. Maximum Market Share of Commercial Unitary Air Conditioning 
Equipment
    The shipments model uses a logit decision model to represent the 
probability that a new building will have unitary air conditioning 
equipment installed. Even if all eligible commercial customers decided 
to acquire a unitary air conditioner, there is still only a finite 
fraction of floor space that would contain the particular equipment 
covered by the standard (due, for example, to the climate, the building 
size or type, etc.). The Department estimates that the maximum fraction 
of floor space that is eligible to receive the unitary air conditioning 
equipment covered by the standard is about 10 percent for each 
equipment category. The Department seeks data to determine whether it 
should revise its estimate. (See section II.G.3.c of this ANOPR for 
details.)
13. Future Building Types Using Commercial Unitary Equipment
    Future shipments of unitary air conditioning equipment depend in 
part on the rate of growth of commercial floor space. The Department 
uses the average growth rate for all commercial buildings as provided 
by AEO. The shipments model should cover the effects of any commercial 
unitary air conditioning equipment that is preferentially installed in 
particular types of buildings (e.g., retail or office) and any growth 
rate of floor space for these building types that is substantially 
different from the average. The Department seeks comments concerning 
whether to base floor space growth rate on specific building types 
rather than the average growth rate. (See section II.G.3.c. of this 
ANOPR for details.)
14. Customer Sub-Groups
    The Department has identified smaller businesses, as measured by 
annual revenue, as a possible sub-group in which to conduct a separate 
LCC analysis. Although the Department does not know the annual revenues 
for the businesses in the buildings analyzed in the LCC analysis, the 
Department hopes to identify a building characteristic that is an 
indicator of annual revenues. The Department seeks comments from 
interested parties on whether there is any building characteristic that 
correlates to business income. (See section II.H. of this ANOPR for 
details.)
15. Effective Date of New Standards and Phaseout Date of R-22 
Refrigerant
    For purposes of conducting the shipments and manufacturer impact 
analyses, should the Department assume that manufacturers will change 
over to a new refrigerant (R-410a) at the same time new standards 
levels become effective? (See section III. of this ANOPR for details.)
16. Independent Expert Third-Party Reviews
    ARI and Lennox raised the following issues: (a) Sample of 
buildings, (b) BLAST simulation and CBECS data, (c) supply fan energy 
use while ventilating, and (d) incremental markups. (ARI, Nos. 14, 17, 
18, and 19; Lennox, No. 15; and Memo to the File: Meeting with ARI/
Lennox, March 12, 2003, No. 16) The Department engaged independent 
third-party experts to review the approaches, assumptions, data, and 
analytical methods used for the ANOPR analyses for these four issues. 
The results of these third-party reviews are available to interested 
parties on the Department's website at http://www.eere.doe.gov/buildings/appliance_standards/ac_hp.html. The Department seeks 
comments about each of these issues and the third-party review of these 
issues. (See sections I.A.5, II.D.1 and II.E.2 of this ANOPR and below 
discussion for more details.)
a. Sample of Buildings
    The Department's economic analysis examined energy-use estimates in 
a sample of buildings from the EIA's CBECS database. The sample 
represents a diversity of cooling loads where commercial unitary air 
conditioning equipment is installed in six building types: assembly, 
education, food services, office, retail, and warehouse (non-
refrigerated). Because of the complexity of this analysis, the 
Department also obtained an independent third-party expert review to 
ensure that the sample of buildings represented the operating 
conditions associated with the population of commercial unitary air 
conditioning equipment with rated cooling capacities of >=65,000 Btu/h 
to <240,000 Btu/h. The Department seeks comments from interested 
parties about this third-party review.
b. Building Loads and System Thermodynamics Simulation and Commercial 
Buildings Energy Consumption Survey Estimates of Energy Use
    The Department simulated load shapes for each of the above-sampled 
buildings at various efficiency levels by using the Building Loads and 
System Thermodynamics (BLAST) software. In doing so, the Department 
found that cooling energy use intensity (EUI) predicted by BLAST is 
higher than the cooling EUI estimated by CBECS for buildings with 
commercial unitary air conditioning equipment, although both the BLAST 
and CBECS calculations of energy end uses for cooling and ventilation 
are derived from modeled data. In view of these findings, the 
Department used a third party to examine the differences between the 
BLAST simulation EUI and the CBECS estimated EUI. The Department seeks 
comments from interested parties about the third-party review of the 
BLAST simulation and CBECS estimates of energy use. (See section II.D.1 
of this ANOPR for details.)
c. Supply Fan Energy Use While Ventilating
    The Department's analysis examines the total energy impact of 
commercial unitary air conditioning equipment on building energy 
consumption and therefore includes both the energy use and savings 
associated with the supply fan during non-cooling hours. The Department 
presumes that the fan is an integral component of a commercial unitary 
air conditioner and operates continuously to provide fresh air and air 
circulation at established ASHRAE Standard 62-1989 air quality levels 
when the building is occupied. The Department seeks comments from 
interested parties about the third-party review of fan energy use in 
the Department's ANOPR analysis. (See section II.D.1 of this ANOPR for 
details.)

[[Page 45503]]

d. Incremental Markups
    To determine customer prices for more efficient commercial unitary 
air conditioning equipment, the ANOPR analysis addresses both the 
manufacturer's baseline markup and incremental markups for wholesalers, 
general contractors, and mechanical contractors. It addresses those 
overhead expenses that may vary with an increase in equipment 
efficiency for each step of the distribution channel, and in particular 
those overhead expenses that can be attributed to higher EER levels. 
The Department seeks comments from interested parties about the third-
party review of incremental markups in the ANOPR analysis. (See section 
II.E.2 of this ANOPR for details.)
17. Effect of Income Taxes on Life-Cycle Cost
    The Department did not include the effect of income taxes in the 
LCC analysis for this ANOPR because it believes the net impact of taxes 
on the LCC analysis depends upon how a firm's accounting procedures 
expense the purchase cost of commercial equipment and measure 
profitability. The Department requests comments as to whether DOE 
should perform such an analysis. The Department also requests 
information from interested parties on the number of firms that 
purchase commercial unitary air conditioning equipment and actually pay 
taxes, and for those that pay taxes, how the purchase of such equipment 
is expensed and subsequently depreciated over time. (See section II.F.1 
of this ANOPR for details.)
18. Technologies That Affect Full- or Part-Load Performance
    The Department understands that there are other technologies that 
operate under full- or part-load conditions and that can improve the 
net annual energy performance of a system, but which generally reduce 
the EER of commercial unitary air-conditioning equipment, or, at best, 
have no effect on EER. Such technologies include, for example, multiple 
compressors, economizers, inverter-driven variable-speed fans, and 
exhaust air enthalpy recovery devices. The Department did not examine 
such technologies because EPCA requires the commercial unitary air 
conditioners that are under consideration in this rulemaking meet 
certain energy levels measured in terms of EER. Moreover, EPCA 
establishes minimum EER levels for these air-cooled commercial unitary 
air conditioners and any amended national standard for that equipment 
must be more stringent--in other words, have an increased EER. 
Nevertheless, the Department understands that part-load and seasonal 
performance of a commercial unitary air conditioner is important 
because of the impact on national energy consumption. Therefore, the 
Department seeks comments and recommendations from interested 
stakeholders on how best to analyze the effects of those technologies 
that can reduce EER or are EER-neutral, and the implications both on 
national energy savings and consumer life cycle costs. (See section 
II.B of this ANOPR for details.)
19. Environmental Assessment
    The Department recognizes the possibility that a reduction in 
airborne emissions may result from energy efficient commercial unitary 
air conditioners and heat pumps which, in turn, could result in 
improved health benefits. The Department has not correlated reductions 
in installed generation capacity to possible improvements in public 
health for this ANOPR. Nevertheless, the Department requests data from 
stakeholders which identify specific health benefits from reductions 
airborne emissions. (See section II.K of this ANOPR for details.)
20. Rebound Effect
    As part of the building energy use and end-use load 
characterization, the Department did not take into account a rebound 
effect in determining the reduction in cooling and fan energy 
consumption due to higher EER levels. The rebound effect occurs when a 
piece of equipment 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 on which to base the calculation of the rebound 
effect. (See section II.D.2 of this ANOPR for details.)

V. Regulatory Review and Procedural Requirements

    This advance notice of proposed rulemaking was submitted for review 
to the Office of Information and Regulatory Affairs (OIRA) in the 
Office of Management and Budget under Executive Order 12866, 
``Regulatory Planning and Review,'' 58 FR 51735 (October 4, 1993). If 
DOE later proposes amended energy conservation standards for certain 
air-cooled, electrically operated, unitary central air conditioners and 
heat pumps for commercial applications, 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 other 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.

    Issued in Washington, DC, on July 13, 2004.
David K. Garman,
Assistant Secretary, Energy Efficiency and Renewable Energy.
[FR Doc. 04-16575 Filed 7-28-04; 8:45 am]
BILLING CODE 6450-01-U